Exhibit 10.1
SECURITIES PURCHASE AGREEMENT
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LAURUS MASTER FUND, LTD.
and
eLEC Communications Corp.
Dated: May 31, 2006
TABLE OF CONTENTS
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Page
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1. Agreement to Sell and Purchase. .........................................1
2. Fees and Warrant. On the Closing Date:..................................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..................................7
4.8 Changes.........................................................7
4.9 Title to Properties and Assets; Liens, Etc......................8
4.10 Intellectual Property...........................................9
4.11 Compliance with Other Instruments...............................9
4.12 Litigation.....................................................10
4.13 Tax Returns and Payments.......................................10
4.14 Employees......................................................10
4.15 Registration Rights and Voting Rights. ........................11
4.16 Compliance with Laws; Permits..................................11
4.17 Environmental and Safety Laws..................................12
4.18 Valid Offering.................................................12
4.19 Full Disclosure................................................12
4.20 Insurance. ....................................................13
4.21 SEC Reports....................................................13
4.22 Listing........................................................13
4.23 No Integrated Offering.........................................13
4.24 Stop Transfer..................................................13
4.25 Dilution.......................................................13
4.26 Patriot Act....................................................14
4.27 ERISA..........................................................14
5. Representations and Warranties of the Purchaser.........................15
5.1 No Shorting....................................................15
5.2 Requisite Power and Authority. ................................15
5.3 Investment Representations. ...................................15
5.4 The Purchaser Bears Economic Risk..............................15
5.5 Acquisition for Own Account. ..................................16
5.6 The Purchaser Can Protect Its Interest.........................16
5.7 Accredited Investor............................................16
5.8 Legends........................................................16
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Page(s)
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6. Covenants of the Company..............................................17
6.1 Stop-Orders. .................................................17
6.2 Listing.......................................................17
6.3 Market Regulations............................................17
6.4 Reporting Requirements........................................17
6.5 Use of Funds..................................................18
6.6 Access to Facilities..........................................19
6.7 Taxes.........................................................19
6.8 Insurance.....................................................19
6.9 Intellectual Property.........................................21
6.10 Properties....................................................21
6.11 Confidentiality...............................................21
6.12 Required Approvals............................................21
6.13 Reissuance of Securities. ....................................23
6.14 Opinion. .....................................................23
6.15 Margin Stock..................................................23
6.16 Restricted Cash Disclosure. ..................................24
6.17 No Restrictions on Additional Financing.......................24
6.18 Authorization and Reservation of Shares.......................24
7. Covenants of the Purchaser............................................24
7.1 Confidentiality...............................................24
7.2 Non-Public Information........................................24
7.3 Limitation on Acquisition of Common Stock of the Company......24
8. Covenants of the Company and the Purchaser Regarding Indemnification..25
8.1 Company Indemnification. .....................................25
8.2 Purchaser's Indemnification...................................25
9. Exercise of Warrant...................................................25
9.1 Mechanics of Exercise.........................................25
11. Miscellaneous.........................................................26
11.1 Governing Law, Jurisdiction and Waiver of Jury Trial..........26
11.2 Severability. ................................................28
11.3 Survival......................................................28
11.4 Successors....................................................28
11.5 Entire Agreement; Maximum Interest............................28
11.6 Amendment and Waiver..........................................28
11.7 Delays or Omissions...........................................29
11.8 Notices.......................................................29
11.9 Attorneys' Fees...............................................30
11.10 Titles and Subtitles..........................................30
11.11 Facsimile Signatures; Counterparts............................30
11.12 Broker's Fees.................................................30
11.13 Construction..................................................30
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LIST OF EXHIBITS
Form of Secured 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 May 31, 2006, 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
Secured Term Note in the aggregate principal amount of One Million Seven Hundred
Thousand Dollars ($1,700,000) in the form of Exhibit A hereto (as amended,
modified and/or supplemented from time to time, the "Note");
WHEREAS, the Company wishes to issue to the Purchaser a warrant in the
form of Exhibit B hereto (as amended, modified and/or supplemented from time to
time, the "Warrant") to purchase up to 1,687,928 shares of the Company's Common
Stock (subject to adjustment as set forth therein) in connection with the
Purchaser's purchase of the Note;
WHEREAS, the Purchaser desires to purchase the Note and the Warrant on
the terms and conditions set forth herein; and
WHEREAS, the Company desires to issue and sell the Note and Warrant to
the 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
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set forth in this Agreement, on the Closing Date (as defined in Section 3), the
Company shall sell to the Purchaser, and the Purchaser shall purchase from the
Company, the Note. The sale of the Note on the Closing Date shall be known as
the "Offering." The Note will mature on the Maturity Date (as defined in the
Note). Collectively, the Note and the Warrant and the Common Stock issuable upon
exercise of the Warrant are referred to as the "Securities."
2. Fees and Warrant. On the Closing Date:
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(a) The Company will issue and deliver to the Purchaser the
Warrant to purchase up to 1,687,928 shares of Common Stock (subject to
adjustment as set forth therein) in connection with the Offering,
pursuant to Section 1 hereof. All the representations, covenants,
warranties, undertakings, and indemnifications, and other rights made
or granted to or for the benefit of the Purchaser by the Company are
hereby also made and granted for the benefit of the holder of the
Warrant and shares of the
Company's Common Stock issuable upon exercise of the Warrant (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 $54,400. 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 be $5,000 for such expenses referred
to in this Section 2(c).
(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
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of the transactions contemplated hereby (the "Closing"), shall take place on the
date hereof, at such time or place as the Company and the Purchaser may mutually
agree (such date is hereinafter referred to as the "Closing Date").
3.2 Delivery. Pursuant to the Escrow Agreement, at the Closing on
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the Closing Date, the Company will deliver to the Purchaser, among other things,
the Note and the Warrant and the Purchaser will deliver to the Company, among
other things, the amounts set forth in the Disbursement Letter by certified
funds or wire transfer (it being understood that $1,050,000 of the proceeds of
the Note shall be placed in the Restricted Account (as defined in the Restricted
Account Agreement referred to below)). The Company hereby acknowledges and
agrees that Purchaser's obligation to purchase the Note from the Company on the
Closing Date shall be contingent upon the satisfaction (or waiver by the
Purchaser in its sole discretion) of the items and matters set forth in the
closing checklist provided by the Purchaser to the Company on or prior to the
Closing Date.
4. Representations and Warranties of the Company. The Company hereby
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represents and warrants to the Purchaser as follows:
4.1 Organization, Good Standing and Qualification. Each of the
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Company and each of its Subsidiaries is a corporation, partnership or limited
liability company, as the case may be, duly organized, validly existing and in
good standing under the laws of its jurisdiction of organization. Each of the
Company and each of its Subsidiaries has the corporate, limited liability
company or partnership, as the case may be, power and authority to own and
operate its properties and assets and, insofar as it is or shall be a party
thereto, to (1) execute and deliver (i) this Agreement, (ii) the Note and the
Warrant to be issued in connection with this Agreement,
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(iii) the Reaffirmation Agreement dated as of the date hereof between the
Company, certain Subsidiaries of the Company and the Purchaser (as amended,
modified and/or supplemented from time to time, the "Reaffirmation Agreement"),
(iv) 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 and/or supplemented from time to
time, the "Escrow Agreement"), (v) the Restricted Account Agreement dated as of
the date hereof among the Company, the Purchaser and North Fork Bank (as
amended, modified or supplemented from time to time, the "Restricted Account
Agreement"), (vi) the Restricted Account Side Letter related to the Restricted
Account Agreement dated as of the date hereof between the Company and the
Purchaser (as amended, modified or supplemented from time to time, the
"Restricted Account Side Letter") and (vii) all other documents, instruments and
agreements entered into in connection with the transactions contemplated hereby
and thereby (the preceding clauses (ii) through (vii), collectively, the
"Related Agreements")(the preceding clauses (iii), (v) and (vi), together with
each other security agreement, mortgage, cash collateral deposit letter, pledge
and other similar agreements which are executed by the Company or any of its
Subsidiaries in favor of the Purchaser, collectively, the "Security Documents");
(2) issue and sell the Note; (3) issue and sell the Warrant and the Warrant
Shares; and (4) carry out the provisions of this Agreement and the Related
Agreements and to carry on its business as presently conducted. 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 or location of its activities and of its properties (both owned and
leased) makes such qualification necessary, except for those jurisdictions in
which failure to do so has not, 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
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Company, the direct owner of such Subsidiary and its percentage ownership
thereof, is set forth on Schedule 4.2. For the purpose of this Agreement, (x) 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 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
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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
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otherwise applicable to Subsidiaries under this Agreement and the Related
Agreements and (y) a "Credit Party" means, the Company and each direct or
indirect Subsidiary of the Company to the extent party to the Master Security
Agreement (as defined in the Reaffirmation Agreement), the Subsidiary Guaranty
(as defined in the Reaffirmation Agreement), the Stock Pledge Agreement (as
defined in the Reaffirmation Agreement) and such other security documentation
required by the Purchaser to grant to the Purchaser a first priority perfected
security interest in substantially all of such Subsidiary's assets to secure the
Obligations (as defined in the Master Security Agreement).
4.3 Capitalization; Voting Rights.
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(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, 16,879,282 shares of
which are issued and outstanding, and 1,000,000 are shares of preferred
stock, par value $0.10 per share, no shares of which are issued and
outstanding. The authorized, issued and outstanding 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 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 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
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or limited liability company, as the case may be, action on the part of the
Company and each of its Subsidiaries (including their respective officers and
directors) necessary for the authorization of
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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 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
or entity 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 is 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
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any liabilities, except current liabilities incurred in the ordinary course of
business and liabilities disclosed in any of the Company's filings under the
Securities Exchange Act of 1934 ("Exchange Act") made prior to the date of this
Agreement (collectively, the "Exchange Act Filings"), copies of which have been
provided to the Purchaser.
4.6 Agreements; Action. Except as set forth on Schedule 4.6 or as
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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 or any of its Subsidiaries
in excess of $50,000 (other than obligations of, or payments to, the
Company or any of its Subsidiaries arising from purchase or sale
agreements entered into in the ordinary course of business); or (ii)
the transfer or license of any patent, copyright, trade secret or other
proprietary right to or from the Company or any of its Subsidiaries
(other than licenses arising from the purchase of "off the shelf" or
other standard products); or (iii) provisions restricting the
development, manufacture or distribution of the Company's or any of its
Subsidiaries products or services; or (iv) indemnification by the
Company or any of its Subsidiaries with respect to infringements of
proprietary rights.
(b) Since November 30, 2005 (the "Balance Sheet Date"),
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
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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 or entity not in excess, individually or in the
aggregate, of $100,000, other than ordinary course advances for travel
expenses; or (iv) sold, exchanged or otherwise disposed of any of its
assets or rights, other than the sale of its inventory in the ordinary
course of business.
(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 or any Subsidiary of 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.
(d) The Company maintains disclosure controls and procedures
("Disclosure Controls") designed to ensure that information required to
be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized, and
reported, within the time periods specified in the rules and forms of
the Securities and Exchange Commission ("SEC").
(e) The Company makes and keeps books, records, and accounts
that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the Company's assets. The Company
maintains internal control over financial reporting ("Financial
Reporting Controls") designed by, or under the supervision of, the
Company's principal executive and principal financial officers, and
effected by the Company's board of directors, management, and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles ("GAAP"), including that:
(i) transactions are executed in accordance with
management's general or specific authorization;
(ii) unauthorized acquisition, use or disposition of
the Company's assets that could have a material effect on the
financial statements are prevented or timely detected;
(iii) transactions are recorded as necessary to
permit preparation of financial statements in accordance with
GAAP, and that the Company's receipts and expenditures are
being made only in accordance with authorizations of the
Company's management and board of directors;
(iv) transactions are recorded as necessary to
maintain accountability for assets; and
(v) the recorded accountability for assets is
compared with the existing assets at reasonable intervals, and
appropriate action is taken with respect to any differences.
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(f) There is no weakness in any of the Company's Disclosure
Controls or Financial Reporting Controls that is required to be
disclosed in any of the Exchange Act Filings, except as so disclosed.
4.7 Obligations to Related Parties. Except as set forth on Schedule
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4.7, there are no obligations of the Company or any of its Subsidiaries to
officers, directors, stockholders 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 each Subsidiary of the Company, as
applicable); and
(d) obligations listed in the Company's and each of its
Subsidiary's financial statements or disclosed in any of the Company's
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 of its Subsidiaries or any members of their
immediate families, are indebted to the Company or any of its Subsidiaries,
individually or in the aggregate, in excess of $50,000 or have any direct or
indirect ownership interest in any firm or corporation with which the Company or
any of its Subsidiaries is affiliated or with which the Company or any of its
Subsidiaries has a business relationship, or any firm or corporation which
competes with the Company or any of its Subsidiaries, other than passive
investments in publicly traded companies (representing less than one percent
(1%) of such company) which may compete with the Company or any of its
Subsidiaries. Except as described above, no officer, director or stockholder of
the Company or any of its Subsidiaries, or any member of their immediate
families, is, directly or indirectly, interested in any material contract with
the Company or any of its Subsidiaries and no agreements, understandings or
proposed transactions are contemplated between the Company or any of its
Subsidiaries and any such person. Except as set forth on Schedule 4.7, neither
the Company nor any of its Subsidiaries is a guarantor or indemnitor of any
indebtedness of any other person or entity.
4.8 Changes. Since the Balance Sheet Date, except as disclosed in
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any Exchange Act Filing or in any Schedule to this Agreement or to any of the
Related Agreements, there has not been:
(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;
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(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
(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
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on Schedule 4.9, each of the Company and each of its Subsidiaries has good and
marketable title to
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its properties and assets, and good title to its leasehold interests, 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, so
long as in each such case, such liens and encumbrances have no effect
on the lien priority of the Purchaser in such property; and
(c) those that have otherwise arisen in the ordinary course of
business, so long as they have no effect on the lien priority of the
Purchaser therein.
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 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.
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(a) Except as set forth on Schedule 4.10, 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) Except as set forth on Schedule 4.10, 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.
4.11 Compliance with Other Instruments. Neither the Company nor any
---------------------------------
of its Subsidiaries is in violation or default of (x) any term of its Charter or
Bylaws, or (y) any
9
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 to
or subject to the provisions of any order, writ, injunction, judgment or decree
of any court or government agency or instrumentality. There is no action, suit,
proceeding or investigation by 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 adjustment, deficiency, assessment or court
decision in respect of 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.
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
10
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 and its Subsidiaries of their
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 provision of the Sarbanes-Oxley Act of
2002 or any SEC related regulation or rule or any rule of the Principal Market
(as hereafter defined) promulgated thereunder or any other applicable statute,
rule, regulation, order or restriction of any domestic or foreign government or
any instrumentality or agency thereof in respect of the conduct of its business
or the ownership of its properties which has had, or could reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect. No governmental orders, permissions, consents, approvals or
authorizations are required to be obtained and no registrations or declarations
are required to be filed in connection with the execution and delivery of this
Agreement or any other Related Agreement and the issuance of any of the
Securities,
11
except such as have 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, 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.
12
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 copies of: (i) its Annual Reports on
Form 10-K for its fiscal years ended November 30, 2005; and (ii) its Quarterly
Reports on Form 10-Q for its fiscal quarter ended February 28, 2006, and the
Form 8-K filings which it has made during the fiscal year ending November 30,
2006 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 or quoted, as
-------
applicable, on a Principal Market (as hereafter defined) and satisfies and at
all times hereafter will satisfy, all requirements for the continuation of such
listing or quotation, as applicable. The Company has not received any notice
that its Common Stock will be delisted from, or no longer quoted on, as
applicable, the Principal Market or that its Common Stock does not meet all
requirements for such listing or quotation, as applicable. For purposes hereof,
the term "Principal Market" means the NASD Over The Counter Bulletin Board,
NASDAQ Capital Market, NASDAQ National Markets System, American Stock Exchange
or New York Stock Exchange (whichever of the foregoing is at the time the
principal trading exchange or market for the Common Stock).
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 exercise of the Warrant is
binding upon the Company
13
and enforceable regardless of the dilution such issuance may have on the
ownership interests of other shareholders of the Company.
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, nor is or shall be 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 covenants 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, warranties or covenants ceases to be true and accurate
regarding the Company or any of its Subsidiaries. The Company shall provide the
Purchaser all 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, warranties or covenants
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.
4.27 ERISA. Based upon the Employee Retirement Income Security Act
-----
of 1974 ("ERISA"), and the regulations and published interpretations thereunder:
-----
(i) neither the Company nor any of its Subsidiaries has engaged in any
Prohibited Transactions (as defined in Section 406 of ERISA and Section 4975 of
the Internal Revenue Code of 1986, as amended (the "Code")); (ii) each of the
----
Company and each of its Subsidiaries has met all applicable minimum funding
requirements under Section 302 of ERISA in respect of its plans; (iii) neither
the Company nor any of its Subsidiaries has any knowledge of any event or
occurrence which would cause the Pension Benefit Guaranty Corporation to
institute proceedings under Title IV of ERISA to terminate any employee benefit
plan(s); (iv) neither the Company nor any of its Subsidiaries has any fiduciary
responsibility for investments with respect to any plan existing for the benefit
of persons other than the Company's or such Subsidiary's employees; and (v)
neither the Company nor any of its Subsidiaries has withdrawn, completely or
partially, from any multi-employer pension plan so as to incur liability under
the Multiemployer Pension Plan Amendments Act of 1980.
14
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,
to directly engage in "short sales" of 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 the 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 the Purchaser, enforceable in accordance with their terms,
except:
(a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application
affecting enforcement of creditors' rights; and
(b) as limited by general principles of equity that restrict
the availability of equitable and legal remedies.
5.3 Investment Representations. The 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 the Purchaser's
representations contained in this Agreement, including, without limitation, that
the Purchaser is an "accredited investor" within the meaning of Regulation D
under 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 Warrant Shares acquired by it upon
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 Warrant Shares 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 The 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.
15
5.5 Acquisition for Own Account. The Purchaser is acquiring the Note
---------------------------
and Warrant 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 The 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 Warrant Shares and to protect
its own interests in connection with the transactions contemplated in this
Agreement and the Related Agreements. Further, the 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. The Purchaser represents that it is an
--------------------
accredited investor within the meaning of Regulation D under the Securities Act.
5.8 Legends.
-------
(a) 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."
(b) 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
COMMUNICATIONS CORP. THAT SUCH REGISTRATION IS NOT REQUIRED."
16
6. Covenants of the Company. The Company covenants and agrees with the
------------------------
Purchaser as follows:
6.1 Stop-Orders. The Company will advise the Purchaser, promptly
-----------
after it receives notice of issuance by 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 Listing. The Company shall promptly secure the listing or
-------
quotation, as applicable, of the shares of Common Stock issuable upon the
exercise of the Warrant on the Principal Market upon which shares of Common
Stock are listed or quoted for trading, as applicable (subject to official
notice of issuance) and shall maintain such listing or quotation, as applicable,
so long as any other shares of Common Stock shall be so listed or quoted, as
applicable. The Company will maintain the listing or quotation, as applicable,
of its Common Stock on the Principal Market, and 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, the NASD
-------------------
and applicable state authorities, in accordance with their requirements, of the
transactions contemplated by this Agreement, and shall take all other necessary
action and proceedings as may be required and permitted by applicable law, rule
and regulation, for the legal and valid issuance of the Securities to the
Purchaser and promptly provide copies thereof to the Purchaser.
6.4 Reporting Requirements. The Company will deliver, or cause to be
----------------------
delivered, to the Purchaser each of the following, which shall be in form and
detail acceptable to the Purchaser:
(a) As soon as available, and in any event within ninety (90)
days after the end of each fiscal year of the Company, each of the
Company's and each of its Subsidiaries' audited financial statements
with a report of independent registered public accounting firm of
recognized standing selected by the Company and acceptable to the
Purchaser (the "Accountants"), which annual financial statements shall
-----------
include each of the Company's and each of its Subsidiaries' balance
sheet as at the end of such fiscal year and the related statements of
each of the Company's and each of its Subsidiaries' income, retained
earnings and cash flows for the fiscal year then ended, prepared on a
consolidated basis to include the Company, each Subsidiary of the
Company and each of their respective affiliates, all in reasonable
detail and prepared in accordance with GAAP, together with (i) if and
when available, copies of any management letters prepared by the
Accountants; and (ii) a certificate of the Company's President, Chief
Executive Officer or Chief Financial Officer stating that such
financial statements have been prepared in accordance with GAAP and
whether or not such officer has knowledge of the occurrence of any
Event of Default (as defined in the Note) and, if so, stating in
reasonable detail the facts with respect thereto;
17
(b) As soon as available and in any event within forty five
(45) days after the end of each fiscal quarter of the Company, an
unaudited/internal balance sheet and statements of income, retained
earnings and cash flows of the Company and each of its Subsidiaries as
at the end of and for such quarter and for the year to date period then
ended, prepared on a consolidating and consolidated basis to include
all the Company, each Subsidiary of the Company and each of their
respective affiliates, in reasonable detail and stating in comparative
form the figures for the corresponding date and periods in the previous
year, all prepared in accordance with GAAP, subject to year-end
adjustments and accompanied by a certificate of the Company's
President, Chief Executive Officer or Chief Financial Officer, stating
(i) that such financial statements have been prepared in accordance
with GAAP, subject to year-end audit adjustments, and (ii) whether or
not such officer has knowledge of the occurrence of any Event of
Default (as defined in the Note) not theretofore reported and remedied
and, if so, stating in reasonable detail the facts with respect
thereto;
(c) As soon as available and in any event within twenty (20)
days after the end of each calendar month, an unaudited/internal
balance sheet and statements of income, retained earnings and cash
flows of each of the Company and its Subsidiaries as at the end of and
for such month and for the year to date period then ended, prepared on
a consolidating and consolidated basis to include the Company, each
Subsidiary of the Company and each of their respective affiliates, in
reasonable detail and stating in comparative form the figures for the
corresponding date and periods in the previous year, all prepared in
accordance with GAAP, subject to year-end adjustments and accompanied
by a certificate of the Company's President, Chief Executive Officer or
Chief Financial Officer, stating (i) that such financial statements
have been prepared in accordance with GAAP, subject to year-end audit
adjustments, and (ii) whether or not such officer has knowledge of the
occurrence of any Event of Default (as defined in the Note) not
theretofore reported and remedied and, if so, stating in reasonable
detail the facts with respect thereto;
(d) The Company shall timely file with the SEC all reports
required to be filed pursuant to the Exchange Act and refrain from
terminating its status as an issuer required by the Exchange Act to
file reports thereunder even if the Exchange Act or the rules or
regulations thereunder would permit such termination. Promptly after
(i) the filing thereof, copies of the Company's most recent
registration statements and annual, quarterly, monthly or other regular
reports which the Company files with the SEC, and (ii) the issuance
thereof, copies of such financial statements, reports and proxy
statements as the Company shall send to its stockholders; and
(e) The Company shall deliver, or cause the applicable
Subsidiary of the Company to deliver, such other information as the
Purchaser shall reasonably request.
6.5 Use of Funds. The Company shall use the proceeds of the sale of
------------
the Note and the Warrant for the acquisition of all of the capital stock of
Liberty Bell Telecom LLC and for general working capital purposes only (it being
understood that $1,050,000 of the proceeds of the Note will be deposited in the
Restricted Account on the Closing Date and shall be subject to
18
the terms and conditions of the Restricted Account Agreement and the Restricted
Account Side Letter).
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 or any Subsidiary (provided that no such prior notice shall be required
to be given and no such representative of the Company or any Subsidiary shall be
required to accompany the Purchaser, except in the case of access to switching
facilities, in the event the Purchaser believes such access is necessary to
preserve or protect the Collateral (as defined in the Master Security Agreement)
or following the occurrence and during the continuance of an Event of Default
(as defined in the Note)), to:
(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 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 currently if (i) the validity thereof shall currently and diligently be
contested in good faith by appropriate proceedings, (ii) such tax, assessment,
charge or levy shall have no effect on the lien priority of the Purchaser in any
property of the Company or any of its Subsidiaries and (iii) if the Company
and/or such Subsidiary shall have set aside on its books adequate reserves with
respect thereto in accordance with GAAP; 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. Notwithstanding the foregoing, all state and
local telecom taxes need only be paid in accordance with industry practices.
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
19
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 their respective 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
the Purchaser, each of 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
Company or any of its Subsidiaries either directly or through governmental
authority to draw upon such funds or to direct generally the disposition of such
assets; (iii) maintain public and product liability insurance against claims for
personal injury, death or property damage suffered by others; (iv) maintain all
such worker's compensation or similar insurance as may be required under the
laws of any state or jurisdiction in which the Company or the respective
Subsidiary is engaged in business; and (v) furnish the 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 the Purchaser as
"co-insured" or "additional insured" and appropriate loss payable endorsements
in form and substance satisfactory to the Purchaser, naming the Purchaser as
loss payee, and (z) evidence that as to the 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 the 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 the 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 the Purchaser's security
interest pursuant to the Master Security Agreement or such other security
agreement as shall be required by the Purchaser, with any surplus funds to be
applied toward payment of the obligations of the Company to the Purchaser. In
the event that the 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 the 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 the Purchaser) shall be paid by the
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 the Purchaser, on demand.
20
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 will not, and will not permit any
---------------
of its Subsidiaries to, 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 disclose the Purchaser's identity and the terms of
this Agreement to its current and prospective debt and equity financing sources.
6.12 Required Approvals. (I) 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 Company or any of its wholly-owned
Subsidiaries, (ii) issue any preferred stock that is manditorily
redeemable prior to the one year anniversary of the Maturity Date (as
defined in the Note) 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 or any of its
Subsidiaries dissolve, liquidate or merge with any other person or
entity (unless, in the case of such a merger, the Company or, in the
case of merger not involving the Company, such Subsidiary, as
applicable, 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; or
(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;
21
provided that, not withstanding the forgoing, capitalized leases and/or
financing to purchase equipment in connection with the Company's Voice
Over IP Point-of-Presence system shall be permitted to the extent not
in excess of, when aggregated with all other debt incurred to finance
the purchase of equipment, twenty-five percent (25%) of the fair market
value of the Company's and its Subsidiaries' assets)) whether secured
or unsecured other than (x) the Company's obligations owed 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 indebtedness
incurred in connection with the purchase of assets (other than
equipment) 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, so long as any lien
relating thereto shall only encumber the fixed assets so purchased and
no other assets of the Company or any of its Subsidiaries; (ii) cancel
any indebtedness 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 or entity, except the endorsement of
negotiable instruments by the Company or any Credit Party 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);
(f) purchase or hold beneficially any Stock or other
securities or evidences of indebtedness of, make or permit to exist any
loans or advances to, or make any investment or acquire any interest
whatsoever in, any other Person, including any partnership or joint
venture, except (x) travel advances, (y) loans to its and its
Subsidiaries' officers and employees not exceeding at any one time an
aggregate of $10,000, and (z) loans or advances to any Credit Parties
(as used herein, "Stock" means all certificated and uncertificated
shares, options, warrants, membership interests, general or limited
partnership interests, participation or other equivalents (regardless
of how designated) of or in a corporation, partnership, limited
liability company or equivalent entity whether voting or nonvoting,
including common stock, preferred stock, or any other "equity security"
(as such term is defined in Rule 3a11-1 of the General Rules and
Regulations promulgated by the SEC under the Exchange Act);
(g) enter into any transaction with any employee, director or
Affiliate, except in the ordinary course on arms-length terms (as used
herein (x) "Affiliate" means, with respect to any Person, (a) any other
---------
Person (other than a Subsidiary) which, directly or indirectly, is in
control of, is controlled by, or is under common control with such
Person or (b) any other Person who is a director or officer (i) of such
Person, (ii) of any Subsidiary of such Person or (iii) of any Person
described in clause (a) above. For the purposes of this definition,
control of a Person shall mean the power (direct or indirect) to direct
or cause the direction of the management and policies of such Person
whether by contract or otherwise and (y) "Person" means any individual,
------
sole proprietorship, partnership, limited liability partnership, joint
venture, trust, unincorporated organization, association, corporation,
limited liability company, institution, public benefit corporation,
entity or government (whether federal, state, county, city, municipal
or otherwise,
22
including any instrumentality, division, agency, body or department
thereof), and shall include such Person's successors and assigns); and
(h) sell, lease, transfer or otherwise dispose of any of its
properties or assets, or any of the properties or assets of its
Subsidiaries, except for (1) sales, leases, transfer or dispositions by
any Credit Party to any other Credit Party, (2) the sale of Inventory
(as defined in the Master Security Agreement) in the ordinary course of
business and (3) the disposition or transfer in the ordinary course of
business during any fiscal year of obsolete and worn-out Equipment (as
defined in the Master Security Agreement) and only to the extent that
(x) the proceeds of any such disposition are used to acquire
replacement Equipment which is subject to the Purchaser's first
priority security interest or are used to repay the Purchaser or to pay
general corporate expenses, or (y) following the occurrence of an Event
of Default (as defined in the Note) which continues to exist, the
proceeds of which are remitted to the Purchaser to be held as cash
collateral for the Obligations (as defined in the Master Security
Agreement).
(II) The Company, without the prior written consent of the Purchaser,
shall not, and shall not permit any of its Subsidiaries to, 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 a 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,
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 Purchaser and broker, if any.
6.14 Opinion. On the Closing Date, the Company will deliver to the
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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 acceptable to the Purchaser) in connection with the 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
23
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 Restricted Cash Disclosure. The Company agrees that, in
----------------------------
connection with its filing of its 8-K Report with the SEC concerning the
transactions contemplated by this Agreement and the Related Agreements (such
report, the "Laurus Transaction 8-K") in a timely manner after the date hereof,
it will disclose in such Laurus Transaction 8-K the amount of the proceeds of
the Note issued to the Purchaser that has been placed in a restricted cash
account and is subject to the terms and conditions of this Agreement and the
Related Agreements. Furthermore, the Company agrees to disclose in all public
filings required by the SEC (where appropriate) following the filing of the
Laurus Transaction 8-K, the existence of the restricted cash referred to in the
immediately preceding sentence, together with the amount thereof.
6.17 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.
6.18 Authorization and Reservation of Shares. The Company shall at
---------------------------------------
all times have authorized and reserved a sufficient number of shares of Common
Stock to provide for the exercise of the Warrant.
7. Covenants of the Purchaser. The Purchaser covenants and agrees with
--------------------------
the Company as follows:
7.1 Confidentiality. The Purchaser 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 will not 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.
7.3 Limitation on Acquisition of Common Stock of the Company.
--------------------------------------------------------------
Notwithstanding anything to the contrary contained in this Agreement, any
Related Agreement or any document, instrument or agreement entered into in
connection with any other transactions between the Purchaser and the Company,
the Purchaser may 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
contracts, options, warrants, conversion or other rights shall not be
enforceable or 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 Code, by reason of Section 881(c)(3) of the Code, taking into
account the constructive ownership rules under
24
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) the existence of an Event of Default (as defined in the Note) at a time when
the average closing price of the Company's Common Stock as reported by
Bloomberg, L.P. on the Principal Market for the immediately preceding five
trading days is greater than or equal to 150% of the Exercise Price (as defined
in the Warrant).
8. Covenants of the Company and the 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 all claims, costs, expenses, liabilities, obligations, losses or damages
(including reasonable legal fees) of any nature, incurred by or imposed upon the
Purchaser which result, arise out of or are 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 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 the Purchaser
relating hereto or thereto.
8.2 Purchaser's Indemnification. The 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 claims, costs, expenses, liabilities,
obligations, losses or damages (including reasonable legal fees) of any nature,
incurred by or imposed upon the Company which result, arise out of or are based
upon: (i) any misrepresentation by the Purchaser or breach of any warranty by
the Purchaser in this Agreement or in any exhibits or schedules attached hereto
or any Related Agreement; or (ii) any breach or default in performance by the
Purchaser of any covenant or undertaking to be performed by the Purchaser
hereunder, or any other agreement entered into by the Company and the Purchaser
relating hereto.
9. Exercise of Warrant.
-------------------
9.1 Mechanics of Exercise.
---------------------
(a) Provided the Purchaser has notified the Company of the
Purchaser's intention to sell the Warrant Shares and the Warrant Shares
are included in an effective registration statement or are otherwise
exempt from registration when sold: (i) upon the exercise of the
Warrant 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
25
specified representing the number of Warrant Shares issuable upon such
exercise; 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.
(b) The Purchaser will give notice of its decision to exercise
its right to exercise the Warrant or part thereof by telecopying or
otherwise delivering an executed and completed notice of the number of
shares to be exercised to the Company (the "Form of Subscription") and
by remitting payment to the Company for the purchase of the Warrant
Shares. The Purchaser will not be required to surrender the Warrant
until the Purchaser receives a credit to the account of the Purchaser's
prime broker through the DWAC system (as defined below), representing
all the Warrant Shares issuable under the Warrant. Each date on which a
Form of Subscription is telecopied or delivered to the Company in
accordance with the provisions hereof shall be deemed an "Exercise
Date." Pursuant to the terms of the Form of Subscription, the Company
will issue instructions to the transfer agent accompanied by an opinion
of counsel within one (1) business day of the date of the delivery to
the Company of the Form of Subscription and shall cause the transfer
agent to transmit the certificates representing the Warrant Shares set
forth in the applicable Form of Subscription 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 Form of Subscription (the "Delivery Date").
(c) The Company understands that a delay in the delivery of
the Warrant 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 Warrant Shares to the Purchaser via the DWAC
system within the time frame set forth in Section 9.1(b) above and the
Warrant 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 Warrant
Shares in the form required pursuant to Section 9 hereof upon exercise
of the Warrant in 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. 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 exercise, 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 exercise price of the Warrant,
for which such Form of Subscription was not timely honored.
10. Miscellaneous.
-------------
10.1 Governing Law, Jurisdiction and Waiver of Jury Trial.
----------------------------------------------------
26
(a) THIS AGREEMENT AND THE OTHER RELATED AGREEMENTS SHALL BE
GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN
SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
(b) THE COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR
FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK
SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR
DISPUTES BETWEEN THE COMPANY, ON THE ONE HAND, AND THE PURCHASER, ON
THE OTHER HAND, PERTAINING TO THIS AGREEMENT OR ANY OF THE RELATED
AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT
OR ANY OF THE OTHER RELATED AGREEMENTS; PROVIDED, THAT THE PURCHASER
--------
AND THE COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE
TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE
OF NEW YORK; AND FURTHER PROVIDED, THAT, NOTHING IN THIS AGREEMENT
------- -------- ----
SHALL BE DEEMED OR OPERATE TO PRECLUDE THE PURCHASER FROM BRINGING SUIT
OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE
OBLIGATIONS, TO REALIZE ON THE COLLATERAL (AS DEFINED IN THE MASTER
SECURITY AGREEMENT) OR ANY OTHER SECURITY FOR THE OBLIGATIONS (AS
DEFINED IN THE MASTER SECURITY AGREEMENT), OR TO ENFORCE A JUDGMENT OR
OTHER COURT ORDER IN FAVOR OF THE PURCHASER. THE COMPANY EXPRESSLY
SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR
SUIT COMMENCED IN ANY SUCH COURT, AND THE COMPANY HEREBY WAIVES ANY
OBJECTION THAT IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION,
IMPROPER VENUE OR FORUM NON CONVENIENS. THE COMPANY HEREBY WAIVES
---------------------
PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN
ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS,
COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL
ADDRESSED TO THE COMPANY AT THE ADDRESS SET FORTH IN SECTION 11.9 AND
THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF THE
COMPANY'S ACTUAL RECEIPT THEREOF.
(c) THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A
JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST
COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION,
THE PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION,
SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN
CONTRACT, TORT, OR OTHERWISE BETWEEN THE PURCHASER AND/OR THE COMPANY
ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS
AGREEMENT,
27
ANY OTHER RELATED AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR
THERETO.
10.2 Severability. Wherever possible each provision of this
------------
Agreement and the Related Agreements shall be interpreted in such manner as to
be effective and valid under applicable law, but if any provision of this
Agreement or any Related Agreement shall be prohibited by or invalid or illegal
under applicable law such provision shall be ineffective to the extent of such
prohibition or invalidity or illegality, without invalidating the remainder of
such provision or the remaining provisions thereof which shall not in any way be
affected or impaired thereby.
10.3 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. All indemnities set forth herein shall survive
the execution, delivery and termination of this Agreement and the Note and the
making and repayment of the obligations arising hereunder, under the Note and
under the other Related Agreements.
10.4 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 or entity which 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. The Purchaser shall not be permitted to assign
its rights hereunder or under any Related Agreement to a competitor of the
Company unless an Event of Default (as defined in the Note) has occurred and is
continuing.
10.5 Entire Agreement; Maximum Interest. 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. Nothing contained in this Agreement, any Related
Agreement or in any document referred to herein or delivered in connection
herewith shall be deemed to establish or require the payment of a rate of
interest or other charges in excess of the maximum rate permitted by applicable
law. In the event that the rate of interest or dividends required to be paid or
other charges hereunder exceed the maximum rate permitted by such law, any
payments in excess of such maximum shall be credited against amounts owed by the
Company to the Purchaser and thus refunded to the Company.
10.6 Amendment and Waiver.
--------------------
(a) This Agreement may be amended or modified only upon the
written consent of the Company and the Purchaser.
28
(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.
(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.
10.7 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.
10.8 Notices. All notices required or permitted hereunder shall be
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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:
eLEC Communications Corp.
If to the Company, to: 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
29
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.
10.9 Attorneys' Fees. In the event that any suit or action is
----------------
instituted to enforce any provision in this Agreement or any Related 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 and/or such Related
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.
10.10 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.
10.11 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
agreement.
10.12 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 10.12 being untrue.
10.13 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 or any Related Agreement to favor any party
against the other.
30
11. Grant of Irrevocable Proxy.
--------------------------
For good and valuable consideration, receipt of which is hereby
acknowledged, Purchaser, hereby appoints the Company (the "Proxy Holder"), with
a mailing address set forth in Section 10.8, with full power of substitution, as
proxy, to vote all shares of Common Stock of the Company, now or in the future
owned by Purchaser (including shares acquired upon conversion of any convertible
security or exercise of any option or warrant (other than the Warrant)) but not
including the Warrant Shares.
This proxy is irrevocable and coupled with an interest. Upon the
sale or other transfer of the Warrant Shares, in whole or in part, this proxy
shall automatically terminate with respect to such sold or transferred Warrant
Shares at the time of such sale and/or transfer without any further action
required by any Person.
Purchaser shall use its best efforts to forward to Proxy Holder
within two (2) business days following Purchaser's receipt thereof, at the
address for Proxy Holder set forth in Section 10.8 , copies of all materials
received by Purchaser relating, in each case, to the solicitation of the vote of
shareholders of the Company.
This proxy shall remain in effect with respect to the Shares of the
Company during the period commencing on the date hereof and continuing until the
earlier of (a) payment in full of all obligations and liabilities owing by the
Company to Purchaser (as the same may be amended, restated, extended or modified
from time to time) and (b) the occurrence and continuance of a default or event
of default under any document, instrument or agreement between the Company and,
or made by the Company in favor of, Purchaser.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK
31
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
------------------------------ ---------------------------
EXHIBIT A
FORM OF SECURED TERM NOTE
A-1
EXHIBIT B
FORM OF WARRANT
B-1
EXHIBIT C
FORM OF OPINION
C-1
EXHIBIT D
FORM OF ESCROW AGREEMENT
D-1