Exhibit 10.1
eLEC COMMUNICATIONS CORP.
SECURITIES PURCHASE AGREEMENT
February 8, 2005
TABLE OF CONTENTS
Page
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1. Agreement to Sell and Purchase.............................................1
2. Fees and Warrant...........................................................1
3. Closing, Delivery and Payment..............................................2
3.1 Closing.........................................................2
3.2 Delivery........................................................2
4. Representations and Warranties of the Company..............................2
4.1 Organization, Good Standing and Qualification...................2
4.2 Subsidiaries....................................................3
4.3 Capitalization; Voting Rights...................................4
4.4 Authorization; Binding Obligations..............................4
4.5 Liabilities.....................................................5
4.6 Agreements; Action..............................................5
4.7 Obligations to Related Parties..................................6
4.8 Changes.........................................................6
4.9 Title to Properties and Assets; Liens, Etc......................8
4.10 Intellectual Property...........................................8
4.11 Compliance with Other Instruments...............................9
4.12 Litigation......................................................9
4.13 Tax Returns and Payments........................................9
4.14 Employees......................................................10
4.15 Registration Rights and Voting Rights..........................10
4.16 Compliance with Laws; Permits..................................10
4.17 Environmental and Safety Laws..................................11
4.18 Valid Offering.................................................11
4.19 Full Disclosure................................................11
4.20 Insurance......................................................12
4.21 SEC Reports....................................................12
4.22 Listing........................................................12
4.23 No Integrated Offering.........................................12
4.24 Stop Transfer..................................................12
4.25 Dilution.......................................................12
5. Representations and Warranties of the Purchaser...........................13
5.1 No Shorting....................................................13
5.2 Requisite Power and Authority..................................13
5.3 Investment Representations.....................................14
5.4 Purchaser Bears Economic Risk..................................14
5.5 Acquisition for Own Account....................................14
5.6 Purchaser Can Protect Its Interest.............................14
5.7 Accredited Investor............................................14
5.8 Legends........................................................15
6. Covenants of the Company..................................................16
6.1 Stop-Orders....................................................16
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6.2 Trading........................................................16
6.3 Market Regulations.............................................16
6.4 Reporting Requirements.........................................16
6.5 Use of Funds...................................................16
6.6 Access to Facilities...........................................16
6.7 Taxes..........................................................17
6.8 Insurance......................................................17
6.9 Intellectual Property..........................................18
6.10 Properties.....................................................18
6.11 Confidentiality................................................18
6.12 Required Approvals.............................................19
6.13 Reissuance of Securities.......................................20
6.14 Opinion........................................................20
6.15 Margin Stock...................................................20
6.16 No Restrictions on Additional Financing........................20
7. Covenants of the Purchaser................................................20
7.1 Confidentiality................................................20
7.2 Non-Public Information.........................................20
8. Covenants of the Company and Purchaser Regarding Indemnification..........21
8.1 Company Indemnification........................................21
8.2 Purchaser's Indemnification....................................21
9. Conversion of Convertible Note............................................22
9.1 Mechanics of Conversion........................................22
10. Registration Rights.......................................................23
10.1 Registration Rights Granted....................................23
10.2 Offering Restrictions..........................................23
11. Miscellaneous.............................................................23
11.1 Governing Law..................................................23
11.2 Survival.......................................................24
11.3 Successors.....................................................24
11.4 Entire Agreement...............................................24
11.5 Severability...................................................24
11.6 Amendment and Waiver...........................................24
11.7 Delays or Omissions............................................25
11.8 Notices........................................................25
11.9 Attorneys' Fees................................................26
11.10 Titles and Subtitles...........................................26
11.11 Facsimile Signatures; Counterparts.............................26
11.12 Broker's Fees..................................................26
11.13 Construction...................................................26
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LIST OF EXHIBITS
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Form of Convertible Term Note....................................... Exhibit A
Form of Warrant..................................................... Exhibit B
Form of Opinion..................................................... Exhibit C
Form of Escrow Agreement............................................ Exhibit D
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SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement") is made and entered
into as of February 8, 2005, by and between eLEC Communications Corp., a New
York corporation (the "Company"), and Laurus Master Fund, Ltd., a Cayman Islands
company (the "Purchaser").
RECITALS
WHEREAS, the Company has authorized the sale to the Purchaser of a
Convertible Term Note in the aggregate principal amount of Two Million Dollars
($2,000,000) (as amended, modified or supplemented from time to time, the
"Note"), which Note is convertible into shares of the Company's common stock,
$0.10 par value per share (the "Common Stock"), at an initial fixed conversion
price of $ 0.63 per share of Common Stock ("Fixed Conversion Price");
WHEREAS, the Company wishes to issue a warrant to the Purchaser to
purchase up to 793,650 shares of the Company's Common Stock (subject to
adjustment as set forth therein) in connection with Purchaser's purchase of the
Note;
WHEREAS, Purchaser desires to purchase the Note and the Warrant (as
defined in Section 2) on the terms and conditions set forth herein; and
WHEREAS, the Company desires to issue and sell the Note and Warrant to
Purchaser on the terms and conditions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises, representations, warranties and covenants hereinafter set forth and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. Agreement to Sell and Purchase. Pursuant to the terms and conditions
set forth in this Agreement, on the Closing Date (as defined in Section 3), the
Company agrees to sell to the Purchaser, and the Purchaser hereby agrees to
purchase from the Company, a Note in the aggregate principal amount of
$2,000,000 convertible in accordance with the terms thereof into shares of the
Company's Common Stock in accordance with the terms of the Note and this
Agreement. The offering of the Note purchased on the Closing Date shall be known
as the "Offering." A form of the Note is annexed hereto as Exhibit A. The Note
will mature on the Maturity Date (as defined in the Note). The Note, the Warrant
and the shares of Common Stock issuable in payment of the Note, upon conversion
of the Note and upon exercise of the Warrant are collectively referred to as the
"Securities."
2. Fees and Warrant. On the Closing Date:
(a) The Company will issue and deliver to the Purchaser a Warrant to
purchase up to 793,650 shares of Common Stock in connection with the Offering
(as amended, modified or supplemented from time to time, the "Warrant") pursuant
to Section 1 hereof. The
Warrant must be delivered on the Closing Date. A form of Warrant is annexed
hereto as Exhibit B. All the representations, covenants, warranties,
undertakings, and indemnification, and other rights made or granted to or for
the benefit of the Purchaser by the Company are hereby also made for the benefit
of the holder of the Warrant and the shares of Common Stock issuable thereunder
and upon conversion of the Note. The shares of Common Stock issuable upon
exercise of the Warrant are hereinafter referred to as the "Warrant Shares".
(b) Subject to the terms of Section 2(d) below, the Company shall
pay to Laurus Capital Management, LLC, the manager of the Purchaser, a closing
payment in an amount equal to three and one half percent (3.50%) of the
aggregate principal amount of the Note. The foregoing fee is referred to herein
as the "Closing Payment."
(c) The Company shall reimburse the Purchaser for its reasonable
expenses (including legal fees and expenses) incurred in connection with the
preparation and negotiation of this Agreement and the Related Agreements (as
hereinafter defined), and expenses incurred in connection with the Purchaser's
due diligence review of the Company and its Subsidiaries (as defined in Section
4.2) and all related matters. Amounts required to be paid under this Section
2(c) will be paid on the Closing Date and shall not exceed $37,500 less any
deposit paid by the Company prior to closing.
(d) The Closing Payment and the expenses referred to in the
preceding clause (c) (net of deposits previously paid by the Company) shall be
paid at closing out of funds held pursuant to the Escrow Agreement (as defined
below) and a disbursement letter (the "Disbursement Letter").
3. Closing, Delivery and Payment.
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3.1 Closing. Subject to the terms and conditions herein, the closing of
the transactions contemplated hereby (the "Closing"), shall take place on the
date hereof, at such time and place as the Company and Purchaser may mutually
agree (such date is hereinafter referred to as the "Closing Date").
3.2 Delivery. Pursuant to the Escrow Agreement (as hereinafter defined),
at the Closing on the Closing Date, the Company will deliver to the Purchaser,
among other things, a Note in the form attached as Exhibit A in the principal
amount of $2,000,000 and a Warrant in the form attached as Exhibit B in the
Purchaser's name representing 793,650 Warrant Shares and the Purchaser will
deliver to the Company, among other things, the amounts set forth in the
Disbursement Letter by or wire transfer of immediately available funds to such
account of the Company as the Company shall direct.
4. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Purchaser as follows (which representations and
warranties are supplemented where indicated by the information set forth in the
Company's filings under the Securities Exchange Act of 1934 made prior to the
date of this Agreement (collectively, the "Exchange Act Filings"), copies of
which have been provided to the Purchaser):
4.1 Organization, Good Standing and Qualification. Each of the Company and
each of its Subsidiaries is a corporation, partnership or limited liability
company, as the case may be,
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duly organized, validly existing and in good standing under the laws of its
jurisdiction of organization. Each of the Company and each of its Subsidiaries
has the corporate power and authority to own and operate its properties and
assets, to execute and deliver, in each case, to the extent party thereto (i)
this Agreement, (ii) the Note and the Warrant to be issued in connection with
this Agreement, (iii) the Master Security Agreement dated as of the date hereof
between the Company, certain Subsidiaries of the Company and the Purchaser (as
amended, modified or supplemented from time to time, the "Master Security
Agreement"), (iv) the Registration Rights Agreement relating to the Securities
dated as of the date hereof between the Company and the Purchaser (as amended,
modified or supplemented from time to time, the "Registration Rights
Agreement"), (v) the Subsidiary Guaranty dated as of the date hereof made by
certain Subsidiaries of the Company (as amended, modified or supplemented from
time to time, the "Subsidiary Guaranty"), (vi) the Stock Pledge Agreement dated
as of the date hereof among the Company, certain Subsidiaries of the Company and
the Purchaser (as amended, modified or supplemented from time to time, the
"Stock Pledge Agreement"), (vii) the Funds Escrow Agreement dated as of the date
hereof among the Company, the Purchaser and the escrow agent referred to
therein, substantially in the form of Exhibit D hereto (as amended, modified or
supplemented from time to time, the "Escrow Agreement") and (viii) all other
agreements related to this Agreement and the Note and referred to herein (the
preceding clauses (ii) through (viii), collectively, the "Related Agreements"),
to carry out the provisions of this Agreement and the Related Agreements and to
carry on its business as presently conducted, and in the case of the Company
only, to issue and sell the Note and the shares of Common Stock issuable upon
conversion of the Note (the "Note Shares") and to issue and sell the Warrant and
the Warrant Shares. Each of the Company and each of its Subsidiaries is duly
qualified and is authorized to do business and is in good standing as a foreign
corporation, partnership or limited liability company, as the case may be, in
all jurisdictions in which the nature of its activities and of its properties
(both owned and leased) makes such qualification necessary, except for those
jurisdictions in which failure to do so has not, or could not reasonably be
expected to have, individually or in the aggregate, a material adverse effect on
the business, assets, liabilities, condition (financial or otherwise),
properties, operations or prospects of the Company and its Subsidiaries, taken
individually and as a whole (a "Material Adverse Effect").
4.2 Subsidiaries. Each direct and indirect Subsidiary of the Company, each
Inactive Subsidiary (as defined below), the direct owner of such Subsidiary and
Inactive Subsidiary and its percentage ownership thereof, is set forth on
Schedule 4.2 hereto. For the purpose of this Agreement and the Related
Agreements, a "Subsidiary" of any person or entity means (i) a corporation or
other entity whose shares of stock or other ownership interests having ordinary
voting power (other than stock or other ownership interests having such power
only by reason of the happening of a contingency) to elect a majority of the
directors of such corporation, or other persons or entities performing similar
functions for such person or entity, are owned, directly or indirectly, by such
person or entity or (ii) a corporation or other entity in which such person or
entity owns, directly or indirectly, more than 50% of the equity interests at
such time; provided that, for so long as each of AVI Holding Corp., a Texas
corporation ("AVI Holdings"), Line One, Inc., a New York corporation ("Line
One") and TelcoSoftware.com Corp., a Delaware corporation ("TelcoSoftware" and
together with AVI Holdings and Line One, the "Inactive Subsidiaries" and each,
an "Inactive Subsidiary") hold no significant assets or liabilities (other than
in respect of AVI Holdings, capitalized lease obligations not to exceed $35,000,
and in respect of Line One, liabilities not to exceed $50,000) and do not engage
in any business
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activities, the defined term "Subsidiary" as used in this Agreement and the
Related Agreements shall not include such Inactive Subsidiary; provided,
further, that if any Inactive Subsidiary shall at any time after the date hereof
hold significant assets or liabilities or engage in any business activities,
such Inactive Subsidiary shall thereafter be deemed a Subsidiary hereunder and
shall otherwise be subject to all terms, agreements, representations, warranties
and covenants otherwise applicable to Subsidiaries under this Agreement and the
Related Agreements.
4.3 Capitalization; Voting Rights.
(a) The authorized capital stock of the Company, as of the date
hereof consists of 51,000,000 shares, of which 50,000,000 are shares of
Common Stock, par value $0.10 per share, 16,759,282 shares of which are
issued and outstanding, and 1,000,000 of which are shares of Preferred
Stock, par value $0.10 per share, no shares of which are issued and
outstanding. The authorized capital stock of each Subsidiary of the
Company is set forth on Schedule 4.3.
(b) Except as disclosed on Schedule 4.3, other than: (i) the shares
reserved for issuance under the Company's stock option plans; and (ii)
shares which may be granted pursuant to this Agreement and the Related
Agreements, there are no outstanding options, warrants, rights (including
conversion or preemptive rights and rights of first refusal), proxy or
stockholder agreements, or arrangements or agreements of any kind for the
purchase or acquisition from the Company of any of its securities. Except
as disclosed on Schedule 4.3, neither the offer, issuance or sale of any
of the Note or the Warrant, or the issuance of any of the Note Shares or
Warrant Shares, nor the consummation of any transaction contemplated
hereby will result in a change in the price or number of any securities of
the Company outstanding, under anti-dilution or other similar provisions
contained in or affecting any such securities.
(c) All issued and outstanding shares of the Company's Common Stock:
(i) have been duly authorized and validly issued and are fully paid and
nonassessable; and (ii) were issued in compliance with all applicable
state and federal laws concerning the issuance of securities.
(d) The rights, preferences, privileges and restrictions of the
shares of the Common Stock are as stated in the Company's Certificate of
Incorporation (the "Charter"). The Note Shares and Warrant Shares have
been duly and validly reserved for issuance. When issued in compliance
with the provisions of this Agreement and the Company's Charter, the
Securities will be validly issued, fully paid and nonassessable, and will
be free of any liens or encumbrances; provided, however, that the
Securities may be subject to restrictions on transfer under state and/or
federal securities laws as set forth herein or as otherwise required by
such laws at the time a transfer is proposed.
4.4 Authorization; Binding Obligations. All corporate, partnership or
limited liability company, as the case may be, action on the part of the Company
and each of its Subsidiaries (including the respective officers and directors)
necessary for the authorization of this Agreement and the Related Agreements,
the performance of all obligations of the Company and its Subsidiaries hereunder
and under the other Related Agreements at the Closing and, the
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authorization, sale, issuance and delivery of the Note and Warrant has been
taken or will be taken prior to the Closing. This Agreement and the Related
Agreements, when executed and delivered and to the extent it is a party thereto,
will be valid and binding obligations of each of the Company and each of its
Subsidiaries, enforceable against each such person in accordance with their
terms, except:
(a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general
application affecting enforcement of creditors' rights; and
(b) general principles of equity that restrict the availability of
equitable or legal remedies.
The sale of the Note and the subsequent conversion of the Note into Note Shares
are not and will not be subject to any preemptive rights or rights of first
refusal that have not been properly waived or complied with. The issuance of the
Warrant and the subsequent exercise of the Warrant for Warrant Shares are not
and will not be subject to any preemptive rights or rights of first refusal that
have not been properly waived or complied with.
4.5 Liabilities. Neither the Company nor any of its Subsidiaries has any
contingent liabilities in excess of $10,000 in the aggregate, except current
liabilities incurred in the ordinary course of business and liabilities
disclosed in any Exchange Act Filings.
4.6 Agreements; Action. Except as set forth on Schedule 4.6 or as
disclosed in any Exchange Act Filings:
(a) there are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees to which the
Company or any of its Subsidiaries is a party or by which it is bound
which may involve: (i) obligations (contingent or otherwise) of, or
payments to, the Company in excess of $50,000 (other than obligations of,
or payments to, the Company arising from purchase or sale agreements
entered into in the ordinary course of business); or (ii) the transfer or
license of any patent, copyright, trade secret or other proprietary right
to or from the Company (other than licenses arising from the purchase of
"off the shelf" or other standard products); or (iii) provisions
restricting the development, manufacture or distribution of the Company's
products or services; or (iv) indemnification by the Company with respect
to infringements of proprietary rights.
(b) Since November 30, 2003, neither the Company nor any of its
Subsidiaries has: (i) declared or paid any dividends, or authorized or
made any distribution upon or with respect to any class or series of its
capital stock; (ii) incurred any indebtedness for money borrowed or any
other liabilities (other than ordinary course obligations) individually in
excess of $50,000 or, in the case of indebtedness and/or liabilities
individually less than $50,000, in excess of $100,000 in the aggregate;
(iii) made any loans or advances to any person not in excess, individually
or in the aggregate, of $100,000, other than ordinary course advances for
travel expenses; or (iv) sold,
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exchanged or otherwise disposed of any of its assets or rights, other than
the sale of its inventory in the ordinary course of business.
(c) For the purposes of subsections (a) and (b) above, all
indebtedness, liabilities, agreements, understandings, instruments,
contracts and proposed transactions involving the same person or entity
(including persons or entities the Company has reason to believe are
affiliated therewith) shall be aggregated for the purpose of meeting the
individual minimum dollar amounts of such subsections.
4.7 Obligations to Related Parties. Except as set forth on Schedule 4.7,
there are no obligations of the Company or any of its Subsidiaries to officers,
directors, stockholders directly or indirectly holding more than 5% of any class
of the voting securities or capital stock of or equity interests in the Company
or employees of the Company or any of its Subsidiaries other than:
(a) for payment of salary for services rendered and for bonus
payments;
(b) reimbursement for reasonable expenses incurred on behalf of the
Company and its Subsidiaries;
(c) for other standard employee benefits made generally available to
all employees (including stock option agreements outstanding under any
stock option plan approved by the Board of Directors of the Company); and
(d) obligations listed in the Company's financial statements or
disclosed in any of its Exchange Act Filings.
Except as described above or set forth on Schedule 4.7, none of the officers,
directors or, to the best of the Company's knowledge, key employees or
stockholders of the Company or any members of their immediate families, are
indebted to the Company, individually or in the aggregate, in excess of $50,000
or have any direct or indirect ownership interest (representing more than a one
percent (1%) interest) in any firm or corporation with which the Company is
affiliated or with which the Company has a business relationship, or any firm or
corporation which competes with the Company, other than passive investments in
publicly traded companies (representing less than one percent (1%) of such
company) which may compete with the Company. Except as described above, no
officer, director or stockholder directly or indirectly holding more than 5% of
any class of the voting securities or capital stock of or equity interests in
the Company, or any member of their immediate families, is, directly or
indirectly, interested in any material contract with the Company and no
agreements, understandings or proposed transactions are contemplated between the
Company and any such person. Except as set forth on Schedule 4.7, the Company is
not a guarantor or indemnitor of any indebtedness of any other person, firm or
corporation.
4.8 Changes. Since November 30, 2003, except as disclosed in any Exchange
Act Filing or in any Schedule to this Agreement or to any of the Related
Agreements, there has not been:
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(a) any change in the business, assets, liabilities, condition
(financial or otherwise), properties, operations or prospects of the
Company or any of its Subsidiaries, which individually or in the aggregate
has had, or could reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect;
(b) any resignation or termination of any officer, key employee or
group of employees of the Company or any of its Subsidiaries;
(c) any material change, except in the ordinary course of business,
in the contingent obligations of the Company or any of its Subsidiaries by
way of guaranty, endorsement, indemnity, warranty or otherwise;
(d) any damage, destruction or loss, whether or not covered by
insurance, which has had, or could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect;
(e) any waiver by the Company or any of its Subsidiaries of a
valuable right or of a material debt owed to it;
(f) any direct or indirect loans made by the Company or any of its
Subsidiaries to any stockholder, employee, officer or director of the
Company or any of its Subsidiaries, other than advances made in the
ordinary course of business;
(g) any material change in any compensation arrangement or agreement
with any employee, officer, director or stockholder of the Company or any
of its Subsidiaries;
(h) any declaration or payment of any dividend or other distribution
of the assets of the Company or any of its Subsidiaries;
(i) any labor organization activity related to the Company or any of
its Subsidiaries;
(j) any debt, obligation or liability incurred, assumed or
guaranteed by the Company or any of its Subsidiaries, except those for
immaterial amounts and for current liabilities incurred in the ordinary
course of business;
(k) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets owned by the Company
or any of its Subsidiaries;
(l) any change in any material agreement to which the Company or any
of its Subsidiaries is a party or by which either the Company or any of
its Subsidiaries is bound which either individually or in the aggregate
has had, or could reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect;
(m) any other event or condition of any character that, either
individually or in the aggregate, has had, or could reasonably be expected
to have, individually or in the aggregate, a Material Adverse Effect; or
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(n) any arrangement or commitment by the Company or any of its
Subsidiaries to do any of the acts described in subsection (a) through (m)
above.
4.9 Title to Properties and Assets; Liens, Etc. Except as set forth on
Schedule 4.9, each of the Company and each of its Subsidiaries has good and
marketable title to its properties and assets, and good title to its leasehold
estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance
or charge, other than:
(a) those resulting from taxes which have not yet become delinquent;
(b) minor liens and encumbrances which do not materially detract
from the value of the property subject thereto or materially impair the
operations of the Company or any of its Subsidiaries; and
(c) those that have otherwise arisen in the ordinary course of
business.
All facilities, machinery, equipment, fixtures, vehicles and other properties
owned, leased or used by the Company and its Subsidiaries are in good operating
condition and repair (ordinary wear and tear excepted) and are reasonably fit
and usable for the purposes for which they are being used. Except as set forth
on Schedule 4.9, the Company and its Subsidiaries are in compliance with all
material terms of each lease to which it is a party or is otherwise bound.
4.10 Intellectual Property.
(a) Each of the Company and each of its Subsidiaries owns or
possesses sufficient legal rights to all patents, trademarks, service
marks, trade names, copyrights, trade secrets, licenses, information and
other proprietary rights and processes necessary for its business as now
conducted and to the Company's knowledge, as presently proposed to be
conducted (the "Intellectual Property"), without any known infringement of
the rights of others. There are no outstanding options, licenses or
agreements of any kind relating to the foregoing proprietary rights, nor
is the Company or any of its Subsidiaries bound by or a party to any
options, licenses or agreements of any kind with respect to the patents,
trademarks, service marks, trade names, copyrights, trade secrets,
licenses, information and other proprietary rights and processes of any
other person or entity other than such licenses or agreements arising from
the purchase of "off the shelf" or standard products.
(b) Neither the Company nor any of its Subsidiaries has received any
communications alleging that the Company or any of its Subsidiaries has
violated any of the patents, trademarks, service marks, trade names,
copyrights or trade secrets or other proprietary rights of any other
person or entity, nor is the Company or any of its Subsidiaries aware of
any basis therefor.
(c) The Company does not believe it is or will be necessary to
utilize any inventions, trade secrets or proprietary information of any of
its employees made prior to their employment by the Company or any of its
Subsidiaries, except for inventions, trade secrets or proprietary
information that have been rightfully assigned to the Company or any of
its Subsidiaries.
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4.11 Compliance with Other Instruments. Except as set forth on Schedule
4.11, neither the Company nor any of its Subsidiaries is in violation or default
of (x) any term of its Charter or Bylaws, or (y) of any provision of any
indebtedness, mortgage, indenture, contract, agreement or instrument to which it
is party or by which it is bound or of any judgment, decree, order or writ,
which violation or default, in the case of this clause (y), has had, or could
reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect. The execution, delivery and performance of and
compliance with this Agreement and the Related Agreements to which it is a
party, and the issuance and sale of the Note by the Company and the other
Securities by the Company, each pursuant hereto and thereto, will not, with or
without the passage of time or giving of notice, result in any such material
violation, or be in conflict with or constitute a default under any such term or
provision, or result in the creation of any mortgage, pledge, lien, encumbrance
or charge upon any of the properties or assets of the Company or any of its
Subsidiaries or the suspension, revocation, impairment, forfeiture or nonrenewal
of any permit, license, authorization or approval applicable to the Company, its
business or operations or any of its assets or properties.
4.12 Litigation. Except as set forth on Schedule 4.12 hereto, there is no
action, suit, proceeding or investigation pending or, to the Company's
knowledge, currently threatened against the Company or any of its Subsidiaries
that prevents the Company or any of its Subsidiaries from entering into this
Agreement or the other Related Agreements, or from consummating the transactions
contemplated hereby or thereby, or which has had, or could reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect or any change in the current equity ownership of the Company or any of
its Subsidiaries, nor is the Company aware that there is any basis to assert any
of the foregoing. Neither the Company nor any of its Subsidiaries is a party or
subject to the provisions of any order, writ, injunction, judgment or decree of
any court or government agency or instrumentality. There is no action, suit,
proceeding or investigation by the Company or any of its Subsidiaries currently
pending or which the Company or any of its Subsidiaries intends to initiate.
4.13 Tax Returns and Payments. Each of the Company and each of its
Subsidiaries has timely filed all federal, state and, to the extent consistent
and in accordance with industry practice, local tax returns required to be filed
by it. All taxes shown to be due and payable on such returns, any assessments
imposed, and all other taxes due and payable by the Company or any of its
Subsidiaries on or before the Closing, have been paid or will be paid prior to
the time they become delinquent. Except as set forth on Schedule 4.13, neither
the Company nor any of its Subsidiaries has been advised:
(a) that any of its returns, federal, state or other, have
been or are being audited as of the date hereof; or
(b) of any deficiency in assessment or proposed judgment to
its federal, state or other taxes.
The Company has no knowledge of any liability for any tax to be imposed upon its
properties or assets as of the date of this Agreement that is not adequately
provided for.
9
4.14 Employees. Except as set forth on Schedule 4.14, neither the Company
nor any of its Subsidiaries has any collective bargaining agreements with any of
its employees. There is no labor union organizing activity pending or, to the
Company's knowledge, threatened with respect to the Company or any of its
Subsidiaries. Except as disclosed in the Exchange Act Filings or on Schedule
4.14, neither the Company nor any of its Subsidiaries is a party to or bound by
any currently effective employment contract, deferred compensation arrangement,
bonus plan, incentive plan, profit sharing plan, retirement agreement or other
employee compensation plan or agreement. To the Company's knowledge, no employee
of the Company or any of its Subsidiaries, nor any consultant with whom the
Company or any of its Subsidiaries has contracted, is in violation of any term
of any employment contract, proprietary information agreement or any other
agreement relating to the right of any such individual to be employed by, or to
contract with, the Company or any of its Subsidiaries because of the nature of
the business to be conducted by the Company or any of its Subsidiaries; and to
the Company's knowledge the continued employment by the Company or any of its
Subsidiaries of its present employees, and the performance of the Company's and
its Subsidiaries' contracts with its independent contractors, will not result in
any such violation. Neither the Company nor any of its Subsidiaries is aware
that any of its employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with their duties to the Company or any of its Subsidiaries. Neither
the Company nor any of its Subsidiaries has received any notice alleging that
any such violation has occurred. Except for employees who have a current
effective employment agreement with the Company or any of its Subsidiaries, no
employee of the Company or any of its Subsidiaries has been granted the right to
continued employment by the Company or any of its Subsidiaries or to any
material compensation following termination of employment with the Company or
any of its Subsidiaries. Except as set forth on Schedule 4.14, the Company is
not aware that any officer, key employee or group of employees intends to
terminate his, her or their employment with the Company or any of its
Subsidiaries, nor does the Company or any of its Subsidiaries have a present
intention to terminate the employment of any officer, key employee or group of
employees.
4.15 Registration Rights and Voting Rights. Except as set forth on
Schedule 4.15 and except as disclosed in Exchange Act Filings, neither the
Company nor any of its Subsidiaries is presently under any obligation, and
neither the Company nor any of its Subsidiaries has granted any rights, to
register any of the Company's or its Subsidiaries' presently outstanding
securities or any of its securities that may hereafter be issued. Except as set
forth on Schedule 4.15 and except as disclosed in Exchange Act Filings, to the
Company's knowledge, no stockholder of the Company or any of its Subsidiaries
has entered into any agreement with respect to the voting of equity securities
of the Company or any of its Subsidiaries.
4.16 Compliance with Laws; Permits. Neither the Company nor any of its
Subsidiaries is in violation of any applicable statute, rule, regulation, order
or restriction of any domestic or foreign government or any instrumentality or
agency thereof in respect of the conduct of its business or the ownership of its
properties which has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect. No governmental
orders, permissions, consents, approvals or authorizations are required to be
obtained and no registrations or declarations are required to be filed in
connection with the execution and delivery of this Agreement or any other
Related Agreement and the issuance of any of the Securities,
10
except such as has been duly and validly obtained or filed, or with respect to
any filings that must be made after the Closing, as will be filed in a timely
manner. Each of the Company and its Subsidiaries has all material franchises,
permits, licenses and any similar authority necessary for the conduct of its
business as now being conducted by it, the lack of which could, either
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
4.17 Environmental and Safety Laws. Neither the Company nor any of its
Subsidiaries is in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety which has had, or
could reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect, and to its knowledge, no material expenditures are or
will be required in order to comply with any such existing statute, law or
regulation. Except as set forth on Schedule 4.17, no Hazardous Materials (as
defined below) are used or have been used, stored, or disposed of by the Company
or any of its Subsidiaries or, to the Company's knowledge, by any other person
or entity on any property owned, leased or used by the Company or any of its
Subsidiaries. For the purposes of the preceding sentence, "Hazardous Materials"
shall mean:
(a) materials which are listed or otherwise defined as "hazardous"
or "toxic" under any applicable local, state, federal and/or foreign laws
and regulations that govern the existence and/or remedy of contamination
on property, the protection of the environment from contamination, the
control of hazardous wastes, or other activities involving hazardous
substances, including building materials; or
(b) any petroleum products or nuclear materials.
4.18 Valid Offering. Assuming the accuracy of the representations and
warranties of the Purchaser contained in this Agreement, the offer, sale and
issuance of the Securities will be exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Securities Act"), and will have
been registered or qualified (or are exempt from registration and qualification)
under the registration, permit or qualification requirements of all applicable
state securities laws.
4.19 Full Disclosure. Each of the Company and each of its Subsidiaries has
provided the Purchaser with all information requested by the Purchaser in
connection with its decision to purchase the Note and Warrant, including all
information the Company and its Subsidiaries believe is reasonably necessary to
make such investment decision. Neither this Agreement, the Related Agreements,
the exhibits and schedules hereto and thereto nor any other document delivered
by the Company or any of its Subsidiaries to Purchaser or its attorneys or
agents in connection herewith or therewith or with the transactions contemplated
hereby or thereby, contain any untrue statement of a material fact nor omit to
state a material fact necessary in order to make the statements contained herein
or therein, in light of the circumstances in which they are made, not
misleading. Any financial projections and other estimates provided to the
Purchaser by the Company or any of its Subsidiaries were based on the Company's
and its Subsidiaries' experience in the industry and on assumptions of fact and
opinion as to future events which the Company or any of its Subsidiaries, at the
date of the issuance of such projections or estimates, believed to be
reasonable.
11
4.20 Insurance. Each of the Company and each of its Subsidiaries has
general commercial, product liability, fire and casualty insurance policies with
coverages which the Company believes are customary for companies similarly
situated to the Company and its Subsidiaries in the same or similar business.
4.21 SEC Reports. Except as set forth on Schedule 4.21, the Company has
filed all proxy statements, reports and other documents required to be filed by
it under the Securities Exchange Act 1934, as amended (the "Exchange Act"). The
Company has furnished the Purchaser with, or otherwise made available to the
Purchaser, copies of: (i) its Annual Report on Form 10-KSB for its fiscal year
ended November 30, 2003; and (ii) its Quarterly Report on Form 10-QSB for its
fiscal quarter ended August 31, 2004, and the Form 8-K filings which it has made
during the fiscal year 2004 to date (collectively, the "SEC Reports"). Except as
set forth on Schedule 4.21, each SEC Report was, at the time of its filing, in
substantial compliance with the requirements of its respective form and none of
the SEC Reports, nor the financial statements (and the notes thereto) included
in the SEC Reports, as of their respective filing dates, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
4.22 Listing. The Company's Common Stock is listed for trading on the NASD
OTC Bulletin Board ("OTC BB") and satisfies all requirements for the
continuation of such listing. The Company has not received any notice that its
Common Stock will be delisted from the OTC BB or that its Common Stock does not
meet all requirements for listing.
4.23 No Integrated Offering. Neither the Company, nor any of its
Subsidiaries or affiliates, nor any person acting on its or their behalf, has
directly or indirectly made any offers or sales of any security or solicited any
offers to buy any security under circumstances that would cause the offering of
the Securities pursuant to this Agreement or any of the Related Agreements to be
integrated with prior offerings by the Company for purposes of the Securities
Act which would prevent the Company from selling the Securities pursuant to Rule
506 under the Securities Act, or any applicable exchange-related stockholder
approval provisions, nor will the Company or any of its affiliates or
Subsidiaries take any action or steps that would cause the offering of the
Securities to be integrated with other offerings.
4.24 Stop Transfer. The Securities are restricted securities as of the
date of this Agreement. Neither the Company nor any of its Subsidiaries will
issue any stop transfer order or other order impeding the sale and delivery of
any of the Securities at such time as the Securities are registered for public
sale or an exemption from registration is available, except as required by state
and federal securities laws.
4.25 Dilution. The Company specifically acknowledges that its obligation
to issue the shares of Common Stock upon conversion of the Note and
exercise of the Warrant is binding upon the Company and enforceable
regardless of the dilution such issuance may have on the ownership
interests of other shareholders of the Company.
12
4.26 Patriot Act. The Company certifies that, to the best of
Company's knowledge, neither the Company nor any of its Subsidiaries has been
designated, and is not owned or controlled, by a "suspected terrorist" as
defined in Executive Order 13224. The Company hereby acknowledges that the
Purchaser seeks to comply with all applicable laws concerning money laundering
and related activities. In furtherance of those efforts, the Company hereby
represents, warrants and agrees that: (i) none of the cash or property that the
Company or any of its Subsidiaries will pay or will contribute to the Purchaser
has been or shall be derived from, or related to, any activity that is deemed
criminal under United States law; and (ii) no contribution or payment by the
Company or any of its Subsidiaries to the Purchaser, to the extent that they are
within the Company's and/or its Subsidiaries' control shall cause the Purchaser
to be in violation of the United States Bank Secrecy Act, the United States
International Money Laundering Control Act of 1986 or the United States
International Money Laundering Abatement and Anti-Terrorist Financing Act of
2001. The Company shall promptly notify the Purchaser if any of these
representations ceases to be true and accurate regarding the Company or any of
its Subsidiaries. The Company agrees to provide the Purchaser any additional
information regarding the Company or any of its Subsidiaries that the Purchaser
deems necessary or convenient to ensure compliance with all applicable laws
concerning money laundering and similar activities. The Company understands and
agrees that if at any time it is discovered that any of the foregoing
representations are incorrect, or if otherwise required by applicable law or
regulation related to money laundering or similar activities, the Purchaser may
undertake appropriate actions to ensure compliance with applicable law or
regulation, including but not limited to segregation and/or redemption of the
Purchaser's investment in the Company. The Company further understands that the
Purchaser may release confidential information about the Company and its
Subsidiaries and, if applicable, any underlying beneficial owners, to proper
authorities if the Purchaser, in its sole discretion, determines that it is in
the best interests of the Purchaser in light of relevant rules and regulations
under the laws set forth in subsection (ii) above.
5. Representations and Warranties of the Purchaser. The Purchaser hereby
represents and warrants to the Company as follows (such representations and
warranties do not lessen or obviate the representations and warranties of the
Company set forth in this Agreement):
5.1 No Shorting. The Purchaser or any of its affiliates and investment
partners has not, will not and will not cause any person or entity, directly or
indirectly, to engage in "short sales" of the Company's Common Stock, or any
other hedging strategies utilizing the Company's Common Stock, as long as the
Note shall be outstanding.
5.2 Requisite Power and Authority. The Purchaser has all necessary power
and authority under all applicable provisions of law to execute and deliver this
Agreement and the Related Agreements and to carry out their provisions. All
corporate action on Purchaser's part required for the lawful execution and
delivery of this Agreement and the Related Agreements have been or will be
effectively taken prior to the Closing. Upon their execution and delivery, this
Agreement and the Related Agreements will be valid and binding obligations of
Purchaser, enforceable in accordance with their terms, except:
13
(a) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting enforcement of
creditors' rights; and
(b) as limited by general principles of equity that restrict the
availability of equitable and legal remedies.
5.3 Investment Representations. Purchaser understands that the Securities
are being offered and sold pursuant to an exemption from registration contained
in the Securities Act based in part upon Purchaser's representations contained
in the Agreement, including, without limitation, that the Purchaser is an
"accredited investor" within the meaning of Regulation D under the Securities
Act of 1933, as amended (the "Securities Act"). The Purchaser confirms that it
has received or has had full access to all the information it considers
necessary or appropriate to make an informed investment decision with respect to
the Note and the Warrant to be purchased by it under this Agreement and the Note
Shares and the Warrant Shares acquired by it upon the conversion of the Note and
the exercise of the Warrant, respectively. The Purchaser further confirms that
it has had an opportunity to ask questions and receive answers from the Company
regarding the Company's and its Subsidiaries' business, management and financial
affairs and the terms and conditions of the Offering, the Note, the Warrant and
the Securities and to obtain additional information (to the extent the Company
possessed such information or could acquire it without unreasonable effort or
expense) necessary to verify any information furnished to the Purchaser or to
which the Purchaser had access.
5.4 Purchaser Bears Economic Risk. The Purchaser has substantial
experience in evaluating and investing in private placement transactions of
securities in companies similar to the Company so that it is capable of
evaluating the merits and risks of its investment in the Company and has the
capacity to protect its own interests. The Purchaser must bear the economic risk
of this investment until the Securities are sold pursuant to: (i) an effective
registration statement under the Securities Act; or (ii) an exemption from
registration is available with respect to such sale.
5.5 Acquisition for Own Account. The Purchaser is acquiring the Note and
Warrant and the Note Shares and the Warrant Shares for the Purchaser's own
account for investment only, and not as a nominee or agent and not with a view
towards or for resale in connection with their distribution.
5.6 Purchaser Can Protect Its Interest. The Purchaser represents that by
reason of its, or of its management's, business and financial experience, the
Purchaser has the capacity to evaluate the merits and risks of its investment in
the Note, the Warrant and the Securities and to protect its own interests in
connection with the transactions contemplated in this Agreement and the Related
Agreements. Further, Purchaser is aware of no publication of any advertisement
in connection with the transactions contemplated in the Agreement or the Related
Agreements.
5.7 Accredited Investor. Purchaser represents that it is an accredited
investor within the meaning of Regulation D under the Securities Act.
14
5.8 Legends.
--------
(a) The Note shall bear substantially the following legend:
"THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS
NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS NOTE AND THE
COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES
UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO eLEC COMMUNICATIONS CORP. THAT
SUCH REGISTRATION IS NOT REQUIRED."
(b) The Note Shares and the Warrant Shares, if not issued by DWAC
system (as hereinafter defined), shall bear a legend which shall be in
substantially the following form until such shares are covered by an
effective registration statement filed with the SEC:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES LAWS. THESE SHARES MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND APPLICABLE
STATE LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO eLEC
COMMUNICATIONS CORP. THAT SUCH REGISTRATION IS NOT REQUIRED."
(c) The Warrant shall bear substantially the following legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT
AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE
UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO eLEC
15
COMMUNICATIONS CORP. THAT SUCH REGISTRATION IS NOT REQUIRED."
6. Covenants of the Company. The Company covenants and agrees with the
Purchaser that, so long as the Note and, in respect of the covenants set forth
in Sections 6.1, 6.2, 6.3, 6.4(a), 6.13, 6.14 and 6.16, the Warrant remains
outstanding:
6.1 Stop-Orders. The Company will advise the Purchaser, promptly after it
receives notice of issuance by the Securities and Exchange Commission (the
"SEC"), any state securities commission or any other regulatory authority of any
stop order or of any order preventing or suspending any offering of any
securities of the Company, or of the suspension of the qualification of the
Common Stock of the Company for offering or sale in any jurisdiction, or the
initiation of any proceeding for any such purpose.
6.2 Trading. The Company shall promptly secure the trading of the shares
of Common Stock issuable upon conversion of the Note and upon the exercise of
the Warrant on the OTC BB (the "Principal Market") upon which shares of Common
Stock are traded and shall maintain such trading so long as any other shares of
Common Stock shall be so traded. The Company will maintain the listing of its
Common Stock on the Principal Market or on Nasdaq or any securities exchange
(not including the "pink sheets" electronic quotations system), and, to the
extent applicable to the Company, will comply in all material respects with the
Company's reporting, filing and other obligations under the bylaws or rules of
the National Association of Securities Dealers ("NASD") and such exchanges, as
applicable.
6.3 Market Regulations. The Company shall notify the SEC, NASD and
applicable state authorities, in accordance with their requirements, to the
extent applicable to the Company, of the transactions contemplated by this
Agreement, and shall take all other necessary action and proceedings as may be
required and permitted by applicable law, rule and regulation, for the legal and
valid issuance of the Securities to the Purchaser and promptly provide copies
thereof to the Purchaser.
6.4 Reporting Requirements. (a) The Company will timely file with the SEC
all reports required to be filed pursuant to the Exchange Act and refrain from
terminating its status as an issuer required by the Exchange Act to file reports
thereunder even if the Exchange Act or the rules or regulations thereunder would
permit such termination.
(b) The Company shall provide to the Purchaser no later than the
15th of each month, an electronic file containing a list of the legal names and
mailing addresses of all customers of the Company and its Subsidiaries as of the
last day of the prior month, as well as the respective aggregate billing amounts
for such customers for such prior month.
6.5 Use of Funds. The Company agrees that it will use the proceeds of the
sale of the Note and the Warrant only for marketing, general working capital and
general business purposes.
6.6 Access to Facilities. Each of the Company and each of its Subsidiaries
will permit any representatives designated by the Purchaser (or any successor of
the Purchaser), upon reasonable notice and during normal business hours, at such
person's expense and accompanied by a representative of the Company, to:
16
(a) visit and inspect any of the properties of the Company or any of
its Subsidiaries;
(b) examine the corporate and financial records of the Company or
any of its Subsidiaries (unless such examination is not permitted by
federal, state or local law or by contract) and make copies thereof or
extracts therefrom; and
(c) discuss the affairs, finances and accounts of the Company or any
of its Subsidiaries with the directors, officers and independent
accountants of the Company or any of its Subsidiaries.
Notwithstanding the foregoing, neither the Company nor any of its Subsidiaries
will provide any material, non-public information to the Purchaser unless the
Purchaser signs a confidentiality agreement and otherwise complies with
Regulation FD, under the federal securities laws.
6.7 Taxes. Each of the Company and each of its Subsidiaries will promptly
pay and discharge, or cause to be paid and discharged, when due and payable, all
lawful taxes, assessments and governmental charges or levies imposed upon the
income, profits, property or business of the Company and its Subsidiaries;
provided, however, that any such tax, assessment, charge or levy need not be
paid if the validity thereof shall currently be contested in good faith by
appropriate proceedings and if the Company and/or such Subsidiary shall have set
aside on its books adequate reserves with respect thereto, and provided,
further, that the Company and its Subsidiaries will pay all such taxes,
assessments, charges or levies forthwith upon the commencement of proceedings to
foreclose any lien which may have attached as security therefor.
6.8 Insurance. Each of the Company and its Subsidiaries will keep its
assets which are of an insurable character insured by financially sound and
reputable insurers against loss or damage by fire, explosion and other risks
customarily insured against by companies in similar business similarly situated
as the Company and its Subsidiaries; and the Company and its Subsidiaries will
maintain, with financially sound and reputable insurers, insurance against other
hazards and risks and liability to persons and property to the extent and in the
manner which the Company reasonably believes is customary for companies in
similar business similarly situated as the Company and its Subsidiaries and to
the extent available on commercially reasonable terms. The Company, and each of
its Subsidiaries will jointly and severally bear the full risk of loss from any
loss of any nature whatsoever with respect to the assets pledged to the
Purchaser as security for its obligations hereunder and under the Related
Agreements. At the Company's and each of its Subsidiaries' joint and several
cost and expense in amounts and with carriers reasonably acceptable to
Purchaser, the Company and each of its Subsidiaries shall (i) keep all its
insurable properties and properties in which it has an interest insured against
the hazards of fire, flood, sprinkler leakage, those hazards covered by extended
coverage insurance and such other hazards, and for such amounts, as is customary
in the case of companies engaged in businesses similar to the Company's or the
respective Subsidiary's including business interruption insurance; (ii) maintain
a bond in such amounts as is customary in the case of companies engaged in
businesses similar to the Company's or the respective Subsidiary's insuring
against larceny, embezzlement or other criminal misappropriation of insured's
officers and employees who may either singly or jointly with others at any time
have access to the assets or funds of the
17
Company or any of its Subsidiaries either directly or through governmental
authority to draw upon such funds or to direct generally the disposition of such
assets; (iii) maintain public and product liability insurance against claims for
personal injury, death or property damage suffered by others, in each case in
such amounts as is consistent and in accordance with industry practice; (iv)
maintain all such worker's compensation or similar insurance as may be required
under the laws of any state or jurisdiction in which the Company or the
respective Subsidiary is engaged in business; and (v) furnish Purchaser with (x)
copies of all policies and evidence of the maintenance of such policies at least
thirty (30) days before any expiration date, (y) excepting the Company's
workers' compensation policy, endorsements to such policies naming Purchaser as
"co-insured" or "additional insured" and appropriate loss payable endorsements
in form and substance satisfactory to Purchaser, naming Purchaser as loss payee,
and (z) evidence that as to Purchaser the insurance coverage shall not be
impaired or invalidated by any act or neglect of the Company or any Subsidiary
and the insurer will provide Purchaser with at least thirty (30) days notice
prior to cancellation. The Company and each Subsidiary shall instruct the
insurance carriers that in the event of any loss thereunder, the carriers shall
make payment for such loss to the Company and/or the Subsidiary and Purchaser
jointly. In the event that as of the date of receipt of each loss recovery upon
any such insurance, the Purchaser has not declared an event of default with
respect to this Agreement or any of the Related Agreements, then the Company
and/or such Subsidiary shall be permitted to direct the application of such loss
recovery proceeds toward investment in property, plant and equipment that would
comprise "Collateral" secured by Purchaser's security interest pursuant to its
security agreement, with any surplus funds to be applied toward payment of the
obligations of the Company to Purchaser. In the event that Purchaser has
properly declared an event of default with respect to this Agreement or any of
the Related Agreements, then all loss recoveries received by Purchaser upon any
such insurance thereafter may be applied to the obligations of the Company
hereunder and under the Related Agreements, in such order as the Purchaser may
determine. Any surplus (following satisfaction of all Company obligations to
Purchaser) shall be paid by Purchaser to the Company or applied as may be
otherwise required by law. Any deficiency thereon shall be paid by the Company
or the Subsidiary, as applicable, to Purchaser, on demand.
6.9 Intellectual Property. Each of the Company and each of its
Subsidiaries shall maintain in full force and effect its existence, rights and
franchises and all licenses and other rights to use Intellectual Property owned
or possessed by it and reasonably deemed to be necessary to the conduct of its
business.
6.10 Properties. Each of the Company and each of its Subsidiaries will
keep its properties in good repair, working order and condition, reasonable wear
and tear excepted, and from time to time make all needful and proper repairs,
renewals, replacements, additions and improvements thereto; and each of the
Company and each of its Subsidiaries will at all times comply with each
provision of all leases to which it is a party or under which it occupies
property if the breach of such provision could, either individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.
6.11 Confidentiality. The Company agrees that it will not disclose, and
will not include in any public announcement, the name of the Purchaser, unless
expressly agreed to by the Purchaser or unless and until such disclosure is
required by law or applicable regulation, and then only to the extent of such
requirement. Notwithstanding the foregoing, the Company may
18
disclose Purchaser's identity and the terms of this Agreement to its current and
prospective debt and equity financing sources.
6.12 Required Approvals. For so long as twenty-five percent (25%) of the
principal amount of the Note is outstanding, the Company, without the prior
written consent of the Purchaser, shall not, and shall not permit any of its
Subsidiaries to:
(a) (i) directly or indirectly declare or pay any dividends, other
than dividends paid to the Parent or any of its wholly-owned Subsidiaries,
(ii) issue any preferred stock that is manditorily redeemable prior to
February 8, 2009 or (iii) redeem any of its preferred stock or other
equity interests;
(b) liquidate, dissolve or effect a material reorganization (it
being understood that in no event shall the Company dissolve, liquidate or
merge with any other person or entity (unless the Company is the surviving
entity);
(c) become subject to (including, without limitation, by way of
amendment to or modification of) any agreement or instrument which by its
terms would (under any circumstances) restrict the Company's or any of its
Subsidiaries right to perform the provisions of this Agreement, any
Related Agreement or any of the agreements contemplated hereby or thereby;
(d) materially alter or change the scope of the business of the
Company and its Subsidiaries taken as a whole;
(e) (i) create, incur, assume or suffer to exist any indebtedness
(exclusive of trade debt and debt incurred to finance the purchase of
equipment (not in excess of five percent (5%) of the fair market value of
the Company's and its Subsidiaries' assets)) whether secured or unsecured
other than (x) the Company's indebtedness to the Purchaser, (y)
indebtedness set forth on Schedule 6.12(e) attached hereto and made a part
hereof and any refinancings or replacements thereof on terms no less
favorable to the Purchaser than the indebtedness being refinanced or
replaced, and (z) any debt incurred in connection with the purchase of
assets in the ordinary course of business, or any refinancings or
replacements thereof on terms no less favorable to the Purchaser than the
indebtedness being refinanced or replaced; (ii) cancel any debt (other
than uncollectible customer receivables) owing to it in excess of $50,000
in the aggregate during any 12 month period; (iii) assume, guarantee,
endorse or otherwise become directly or contingently liable in connection
with any obligations of any other Person, except the endorsement of
negotiable instruments by the Company for deposit or collection or similar
transactions in the ordinary course of business or guarantees of
indebtedness otherwise permitted to be outstanding pursuant to this clause
(e); and
(f) create or acquire any Subsidiary after the date hereof unless
(i) such Subsidiary is a wholly-owned Subsidiary of the Company and (ii)
such Subsidiary becomes party to the Master Security Agreement, the Stock
Pledge Agreement and the Subsidiary Guaranty (either by executing a
counterpart thereof or an assumption or joinder agreement in respect
thereof) and, to the extent required by the Purchaser,
19
satisfies each condition of this Agreement and the Related Agreements as
if such Subsidiary were a Subsidiary on the Closing Date.
6.13 Reissuance of Securities. The Company agrees to reissue certificates
representing the Securities without the legends set forth in Section 5.8 above
at such time as:
(a) the holder thereof is permitted to dispose of such Securities
pursuant to Rule 144(k) under the Securities Act; or
(b) upon resale subject to an effective registration statement after
such Securities are registered under the Securities Act.
The Company agrees to cooperate with the Purchaser in connection with all
resales pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions
necessary to allow such resales provided the Company and its counsel receive
reasonably requested representations from the selling Purchaser and broker, if
any.
6.14 Opinion. On the Closing Date, the Company will deliver to the
Purchaser an opinion acceptable to the Purchaser from the Company's external
legal counsel. The Company will provide, at the Company's expense, such other
legal opinions in the future as are deemed reasonably necessary by the Purchaser
(and reasonably acceptable to the Purchaser) in connection with the conversion
of the Note and exercise of the Warrant.
6.15 Margin Stock. The Company will not permit any of the proceeds of the
Note or the Warrant to be used directly or indirectly to "purchase" or "carry"
"margin stock" or to repay indebtedness incurred to "purchase" or "carry"
"margin stock" within the respective meanings of each of the quoted terms under
Regulation U of the Board of Governors of the Federal Reserve System as now and
from time to time hereafter in effect.
6.16 No Restrictions on Additional Financing. The Company will not, and
will not permit its Subsidiaries to, agree, directly or indirectly, to any
restriction with any person or entity which limits the ability of the Purchaser
to extend any additional indebtedness to the Company or any of its Subsidiaries
and/or the ability of the Company or any of its Subsidiaries to sell or issue
any equity interests of the Company or any of its Subsidiaries to the Purchaser.
7. Covenants of the Purchaser. The Purchaser covenants and agrees with the
Company as follows:
7.1 Confidentiality. The Purchaser agrees that it will not disclose, and
will not include in any public announcement, the name of the Company, unless
expressly agreed to by the Company or unless and until such disclosure is
required by law or applicable regulation, and then only to the extent of such
requirement.
7.2 Non-Public Information. The Purchaser agrees not to effect any sales
in the shares of the Company's Common Stock while in possession of material,
non-public information regarding the Company if such sales would violate
applicable securities law.
20
7.3 Limitation on Acquisition of Common Stock of the Company.
Notwithstanding anything to the contrary contained in this Agreement, any
Related Agreement, any document, instrument or agreement entered into in
connection with the transactions contemplated hereby or any document, instrument
or agreement entered into in connection with any other transaction entered into
by and between the Purchaser and the Company (and/or subsidiaries or affiliates
of the Company), the Purchaser shall not acquire stock in the Company
(including, without limitation, pursuant to a contract to purchase, by
exercising an option or warrant, by converting any other security or instrument,
by acquiring or exercising any other right to acquire, shares of stock or other
security convertible into shares of stock in the Company, or otherwise, and such
options, warrants, conversion or other rights shall not be exercisable) to the
extent such stock acquisition would cause any interest (including any original
issue discount) payable by the Company to the Purchaser not to qualify as
portfolio interest, within the meaning of Section 881(c)(2) of the Internal
Revenue Code of 1986, as amended (the "Code"), by reason of Section 881(c)(3) of
the Code, taking into account the constructive ownership rules under Section
871(h)(3)(C) of the Code (the "Stock Acquisition Limitation"). The Stock
Acquisition Limitation shall automatically become null and void without any
notice to the Company upon the earlier to occur of either (a) the Company's
delivery to the Purchaser of a Notice of Redemption (as defined in the Note) or
(b) an Event of Default under, and as defined in, the Note, so long as, at the
time of the occurrence of such Event of Default, the average closing price of
Company's Common Stock as reported by Bloomberg, L.P. on the Principal Market
for the immediately preceding five (5) trading days is greater than or equal to
150% of the Fixed Conversion Price (as defined in the Note) at such time.
8. Covenants of the Company and Purchaser Regarding Indemnification.
-----------------------------------------------------------------
8.1 Company Indemnification. The Company agrees to indemnify, hold
harmless, reimburse and defend the Purchaser, each of the Purchaser's officers,
directors, agents, affiliates, control persons, and principal shareholders,
against any claim, cost, expense, liability, obligation, loss or damage
(including reasonable legal fees) of any nature, incurred by or imposed upon the
Purchaser which results, arises out of or is based upon: (i) any
misrepresentation by the Company or any of its Subsidiaries or breach of any
warranty by the Company or any of its Subsidiaries in this Agreement, any other
Related Agreement or in any exhibits or schedules attached hereto or thereto; or
(ii) any breach or default in performance by Company or any of its Subsidiaries
of any covenant or undertaking to be performed by the Company or any of its
Subsidiaries hereunder, under any other Related Agreement or any other agreement
entered into by the Company and/or any of its Subsidiaries and Purchaser
relating hereto or thereto.
8.2 Purchaser's Indemnification. Purchaser agrees to indemnify, hold
harmless, reimburse and defend the Company and each of the Company's officers,
directors, agents, affiliates, control persons and principal shareholders, at
all times against any claim, cost, expense, liability, obligation, loss or
damage (including reasonable legal fees) of any nature, incurred by or imposed
upon the Company which results, arises out of or is based upon: (i) any
misrepresentation by Purchaser or breach of any warranty by Purchaser in this
Agreement or any Related Agreement or in any exhibits or schedules attached
hereto thereto; or (ii) any breach or default in performance by Purchaser of any
covenant or undertaking to be performed by Purchaser hereunder, under any
Related Agreement or any other agreement entered into by the Company and
Purchaser relating hereto.
21
9. Conversion of Convertible Note.
-------------------------------
9.1 Mechanics of Conversion.
-------------------------
(a) Provided the Purchaser has notified the Company in writing of
the Purchaser's intention to sell the Note Shares and the Note Shares are
included in an effective registration statement or are otherwise exempt
from registration when sold: (i) upon the conversion of the Note or part
thereof, the Company shall, at its own cost and expense, take all
necessary action (including the issuance of an opinion of counsel
reasonably acceptable to the Purchaser following a request by the
Purchaser) to assure that the Company's transfer agent shall issue shares
of the Company's Common Stock in the name of the Purchaser (or its
nominee) or such other persons as designated by the Purchaser in
accordance with Section 9.1(b) hereof and in such denominations to be
specified representing the number of Note Shares issuable upon such
conversion; and (ii) the Company warrants that no instructions other than
these instructions have been or will be given to the transfer agent of the
Company's Common Stock and that, subject to Section 7(d) of the
Registration Rights Agreement, after the Effectiveness Date (as defined in
the Registration Rights Agreement) the Note Shares issued will be freely
transferable subject to the prospectus delivery requirements of the
Securities Act and the provisions of this Agreement, and will not contain
a legend restricting the resale or transferability of the Note Shares.
(b) Purchaser will give notice of its decision to exercise its right
to convert the Note or part thereof by telecopying or otherwise delivering
an executed and completed notice of the number of shares to be converted
to the Company (the "Notice of Conversion"). The Purchaser will not be
required to surrender the Note until the Purchaser receives a credit to
the account of the Purchaser's prime broker through the DWAC system (as
defined below), representing the Note Shares or until the Note has been
fully satisfied. Each date on which a Notice of Conversion is telecopied
or delivered to the Company in accordance with the provisions hereof shall
be deemed a "Conversion Date." Pursuant to the terms of the Notice of
Conversion, the Company will issue instructions to the transfer agent
accompanied by an opinion of counsel (if required) within two (2) business
days of the date of the delivery to the Company of the Notice of
Conversion and shall cause the transfer agent to transmit the certificates
representing the Conversion Shares to the Holder by crediting the account
of the Purchaser's prime broker with the Depository Trust Company ("DTC")
through its Deposit Withdrawal Agent Commission ("DWAC") system within
three (3) business days after receipt by the Company of the Notice of
Conversion (the "Delivery Date").
(c) The Company understands that a delay in the delivery of the Note
Shares in the form required pursuant to Section 9 hereof beyond the
Delivery Date could result in economic loss to the Purchaser. In the event
that the Company fails to direct its transfer agent to deliver the Note
Shares to the Purchaser via the DWAC system within the time frame set
forth in Section 9.1(b) above and the Note Shares are not delivered to the
Purchaser by the Delivery Date, as compensation to the Purchaser for such
loss, the Company agrees to pay late payments to the Purchaser for late
issuance of the Note Shares in the form required pursuant to Section 9
hereof upon conversion of the Note in
22
the amount equal to the greater of: (i) $500 per business day after the
Delivery Date; or (ii) the Purchaser's actual damages from such delayed
delivery. Notwithstanding the foregoing, the Company will not owe the
Purchaser any late payments if the delay in the delivery of the Note
Shares beyond the Delivery Date is solely out of the control of the
Company and the Company is actively trying to cure the cause of the delay.
The Company shall pay any payments incurred under this Section in
immediately available funds upon demand and, in the case of actual
damages, accompanied by reasonable documentation of the amount of such
damages. Such documentation shall show the number of shares of Common
Stock the Purchaser is forced to purchase (in an open market transaction)
which the Purchaser anticipated receiving upon such conversion, and shall
be calculated as the amount by which (A) the Purchaser's total purchase
price (including customary brokerage commissions, if any) for the shares
of Common Stock so purchased exceeds (B) the aggregate principal and/or
interest amount of the Note, for which such Conversion Notice was not
timely honored.
Nothing contained herein or in any document referred to herein or delivered in
connection herewith shall be deemed to establish or require the payment of a
rate of interest or other charges in excess of the maximum permitted by
applicable law. In the event that the rate of interest or dividends required to
be paid or other charges hereunder exceed the maximum amount permitted by such
law, any payments in excess of such maximum shall be credited against amounts
owed by the Company to a Purchaser and thus refunded to the Company.
10. Registration Rights.
--------------------
10.1 Registration Rights Granted. The Company hereby grants registration
rights to the Purchaser pursuant to a Registration Rights Agreement dated as of
even date herewith between the Company and the Purchaser.
10.2 Offering Restrictions. Except as previously disclosed in the SEC
Reports or in the Exchange Act Filings, or stock or stock options granted to
employees, directors or consultants of the Company (these exceptions hereinafter
referred to as the "Excepted Issuances"), neither the Company nor any of its
Subsidiaries will, prior to the full repayment or conversion of the Note
(together with all accrued and unpaid interest and fees related thereto), (x)
enter into any equity line of credit agreement or similar agreement or (y)
issue, or enter into any agreement to issue, any securities with a
variable/floating conversion and/or pricing feature which are or could be (by
conversion or registration) free-trading securities (i.e. common stock subject
to a registration statement).
11. Miscellaneous.
--------------
11.1 Governing Law. THIS AGREEMENT AND EACH RELATED AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. ANY ACTION BROUGHT BY EITHER
PARTY AGAINST THE OTHER CONCERNING THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT AND EACH RELATED AGREEMENT SHALL BE BROUGHT ONLY IN THE STATE COURTS
OF NEW YORK OR IN THE FEDERAL COURTS LOCATED IN THE STATE OF NEW
23
YORK. BOTH PARTIES AND THE INDIVIDUALS EXECUTING THIS AGREEMENT AND THE RELATED
AGREEMENTS ON BEHALF OF THE COMPANY AGREE TO SUBMIT TO THE JURISDICTION OF SUCH
COURTS AND WAIVE TRIAL BY JURY. IN THE EVENT THAT ANY PROVISION OF THIS
AGREEMENT OR ANY RELATED AGREEMENT DELIVERED IN CONNECTION HEREWITH IS INVALID
OR UNENFORCEABLE UNDER ANY APPLICABLE STATUTE OR RULE OF LAW, THEN SUCH
PROVISION SHALL BE DEEMED INOPERATIVE TO THE EXTENT THAT IT MAY CONFLICT
THEREWITH AND SHALL BE DEEMED MODIFIED TO CONFORM WITH SUCH STATUTE OR RULE OF
LAW. ANY SUCH PROVISION WHICH MAY PROVE INVALID OR UNENFORCEABLE UNDER ANY LAW
SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF ANY OTHER PROVISION OF THIS
AGREEMENT OR ANY RELATED AGREEMENT.
11.2 Survival. The representations, warranties, covenants and agreements
made herein shall survive any investigation made by the Purchaser and the
closing of the transactions contemplated hereby to the extent provided therein.
All statements as to factual matters contained in any certificate or other
instrument delivered by or on behalf of the Company pursuant hereto in
connection with the transactions contemplated hereby shall be deemed to be
representations and warranties by the Company hereunder solely as of the date of
such certificate or instrument.
11.3 Successors. Except as otherwise expressly provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, heirs, executors and administrators of the parties hereto and shall
inure to the benefit of and be enforceable by each person who shall be a holder
of the Securities from time to time, other than the holders of Common Stock
which has been sold by the Purchaser pursuant to Rule 144 or an effective
registration statement. Purchaser may not assign its rights hereunder to a
competitor of the Company.
11.4 Entire Agreement. This Agreement, the Related Agreements, the
exhibits and schedules hereto and thereto and the other documents delivered
pursuant hereto constitute the full and entire understanding and agreement
between the parties with regard to the subjects hereof and no party shall be
liable or bound to any other in any manner by any representations, warranties,
covenants and agreements except as specifically set forth herein and therein.
11.5 Severability. In case any provision of the Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
11.6 Amendment and Waiver.
---------------------
(a) This Agreement may be amended or modified only upon the written
consent of the Company and the Purchaser.
(b) The obligations of the Company and the rights of the Purchaser
under this Agreement may be waived only with the written consent of the
Purchaser.
24
(c) The obligations of the Purchaser and the rights of the Company
under this Agreement may be waived only with the written consent of the
Company.
11.7 Delays or Omissions. It is agreed that no delay or omission to
exercise any right, power or remedy accruing to any party, upon any breach,
default or noncompliance by another party under this Agreement or the Related
Agreements, shall impair any such right, power or remedy, nor shall it be
construed to be a waiver of any such breach, default or noncompliance, or any
acquiescence therein, or of or in any similar breach, default or noncompliance
thereafter occurring. All remedies, either under this Agreement or the Related
Agreements, by law or otherwise afforded to any party, shall be cumulative and
not alternative.
11.8 Notices. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given:
(a) upon personal delivery to the party to be notified;
(b) when sent by confirmed facsimile if sent during normal business
hours of the recipient, if not, then on the next business day;
(c) three (3) business days after having been sent by registered or
certified mail, return receipt requested, postage prepaid; or
(d) one (1) day after deposit with a nationally recognized overnight
courier, specifying next day delivery, with written verification of
receipt.
All communications shall be sent as follows:
If to the Company, to: eLEC Communications Corp.
75 South Broadway, Suite 302
White Plains, NY 10601
Attention: Chief Executive Officer
Facsimile: 914-682-0820
with a copy to: Pryor Cashman Sherman & Flynn LLP
410 Park Avenue
New York, NY 10022
Attention: Eric M. Hellige, Esq.
Facsimile: 212-798-6380
25
If to the Purchaser, to: Laurus Master Fund, Ltd.
c/o M&C Corporate Services Limited
P.O. Box 309 GT
Ugland House
George Town
South Church Street
Grand Cayman, Cayman Islands
Facsimile: 345-949-8080
with a copy to: John E. Tucker, Esq.
825 Third Avenue 14th Floor
New York, NY 10022
Facsimile: 212-541-4434
or at such other address as the Company or the Purchaser may designate by
written notice to the other parties hereto given in accordance herewith.
11.9 Attorneys' Fees. In the event that any suit or action is instituted
to enforce any provision in this Agreement, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including, without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
11.10 Titles and Subtitles. The titles of the sections and subsections of
this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
11.11 Facsimile Signatures; Counterparts. This Agreement may be executed
by facsimile signatures and in any number of counterparts, each of which shall
be an original, but all of which together shall constitute one instrument.
11.12 Broker's Fees. Except as set forth on Schedule 11.12 hereof, each
party hereto represents and warrants that no agent, broker, investment banker,
person or firm acting on behalf of or under the authority of such party hereto
is or will be entitled to any broker's or finder's fee or any other commission
directly or indirectly in connection with the transactions contemplated herein.
Each party hereto further agrees to indemnify each other party for any claims,
losses or expenses incurred by such other party as a result of the
representation in this Section 11.12 being untrue.
11.13 Construction. Each party acknowledges that its legal counsel
participated in the preparation of this Agreement and the Related Agreements
and, therefore, stipulates that the rule of construction that ambiguities are to
be resolved against the drafting party shall not be applied in the
interpretation of this Agreement to favor any party against the other.
26
IN WITNESS WHEREOF, the parties hereto have executed the SECURITIES
PURCHASE AGREEMENT as of the date set forth in the first paragraph hereof.
COMPANY: PURCHASER:
eLEC COMMUNICATIONS CORP. LAURUS MASTER FUND, LTD.
By: /s/Paul H. Riss By: /s/Eugene Grin
---------------------------- ---------------------------
Name: Paul H. Riss Name: Eugene Grin
---------------------------- ---------------------------
Title: Chief Executive Officer Title: Director
---------------------------- ---------------------------
27
EXHIBIT A
FORM OF CONVERTIBLE NOTE
A-1
EXHIBIT B
FORM OF WARRANT
B-1
EXHIBIT C
FORM OF OPINION
1. Each of the Company and each of its Subsidiaries is a corporation duly
incorporated, validly existing and in good standing under the laws of the [State
of New York], [State of Delaware], [State of Texas] [break out for each
jurisdiction] and has all requisite corporate power and authority to own,
operate and lease its properties and to carry on its business as it is now being
conducted.
2. Each of the Company and each of its Subsidiaries has the requisite
corporate power and authority to execute, deliver and perform its obligations
under the Agreement and the Related Agreements. All corporate action on the part
of the Company and each of its Subsidiaries and its officers, directors and
stockholders necessary has been taken for: (i) the authorization of the
Agreement and the Related Agreements and the performance of all obligations of
the Company and each of its Subsidiaries thereunder; and (ii) the authorization,
sale, issuance and delivery of the Securities pursuant to the Agreement and the
Related Agreements. The Note Shares and the Warrant Shares, when issued pursuant
to and in accordance with the terms of the Agreement and the Related Agreements
and upon delivery shall be validly issued and outstanding, fully paid and non
assessable.
3. The execution, delivery and performance by each of the Company and each
of its Subsidiaries of the Agreement and the Related Agreements to which it is a
party and the consummation of the transactions on its part contemplated by any
thereof, will not, with or without the giving of notice or the passage of time
or both:
(a) Violate the provisions of their respective Charter or bylaws; or
(b) Violate any judgment, decree, order or award of any court
binding upon the Company or any of its Subsidiaries; or
(c) Violate any [insert jurisdictions in which counsel is qualified]
or federal law
4. The Agreement and the Related Agreements will constitute, valid and
legally binding obligations of each of the Company and each of its Subsidiaries
(to the extent such person is a party thereto), and are enforceable against each
of the Company and each of its Subsidiaries in accordance with their respective
terms, except:
(a) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting enforcement of
creditors' rights; and
(b) general principles of equity that restrict the availability of
equitable or legal remedies.
5. To such counsel's knowledge, the sale of the Note and the subsequent
conversion of the Note into Note Shares are not subject to any preemptive rights
or rights of first refusal that have not been properly waived or complied with.
To such counsel's knowledge, the sale of the
C-1
Warrant and the subsequent exercise of the Warrant for Warrant Shares are not
subject to any preemptive rights or, to such counsel's knowledge, rights of
first refusal that have not been properly waived or complied with.
6. Assuming the accuracy of the representations and warranties of the
Purchaser contained in the Agreement, the offer, sale and issuance of the
Securities on the Closing Date will be exempt from the registration requirements
of the Securities Act. To such counsel's knowledge, 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 and security under circumstances that would cause the offering of the
Securities pursuant to the Agreement or any Related Agreement to be integrated
with prior offerings by the Company for purposes of the Securities Act which
would prevent the Company from selling the Securities pursuant to Rule 506 under
the Securities Act, or any applicable exchange-related stockholder approval
provisions.
7. There is no action, suit, proceeding or investigation pending or, to
such counsel's knowledge, currently threatened against the Company or any of its
Subsidiaries that prevents the right of the Company or any of its Subsidiaries
to enter into this Agreement or any of the Related Agreements, or to consummate
the transactions contemplated thereby. To such counsel's knowledge, the Company
is not a party or subject to the provisions of any order, writ, injunction,
judgment or decree of any court or government agency or instrumentality; nor is
there any action, suit, proceeding or investigation by the Company currently
pending or which the Company intends to initiate.
8. The terms and provisions of the Master Security Agreement and the Stock
Pledge Agreement create a valid security interest in favor of Laurus, in the
respective rights, title and interests of the Company and its Subsidiaries in
and to the Collateral (as defined in each of the Master Security Agreement and
the Stock Pledge Agreement). Each UCC-1 Financing Statement naming the Company
or any Subsidiary thereof as debtor and Laurus as secured party are in proper
form for filing and assuming that such UCC-1 Financing Statements have been
filed with the Secretary of State of New York, the Secretary of State of
Delaware and the Secretary of State of Texas, as the case may be, the security
interest created under the Master Security Agreement will constitute a perfected
security interest under the Uniform Commercial Code in favor of Laurus in
respect of the Collateral that can be perfected by filing a financing statement.
After giving effect to the delivery to Laurus of the stock certificates
representing the ownership interests of each Subsidiary of the Company (together
with effective endorsements) and assuming the continued possession by Laurus of
such stock certificates in the State of New York, the security interest created
in favor of Laurus under the Stock Pledge Agreement constitutes a valid and
enforceable first perfected security interest in such ownership interests (and
the proceeds thereof) in favor of Laurus, subject to no other security interest.
No filings, registrations or recordings are required in order to perfect (or
maintain the perfection or priority of) the security interest created under the
Stock Pledge Agreement in respect of such ownership interests.
C-2
EXHIBIT D
FORM OF ESCROW AGREEMENT
D-1