EXHIBIT 10.1
SECURITY AGREEMENT
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LAURUS MASTER FUND, LTD.
INCENTRA SOLUTIONS, INC.
PWI TECHNOLOGIES, INC.
and
STAR SOLUTIONS OF DELAWARE, INC.
Dated: June 30, 2005
TABLE OF CONTENTS
PAGE
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1. General Definitions and Terms; Rules of Construction...................................................4
2. Loan Facility..........................................................................................5
3. Repayment of the Loans.................................................................................7
4. Procedure for Loans....................................................................................8
5. Interest and Payments..................................................................................8
6. Security Interest......................................................................................9
7. Representations, Warranties and Covenants Concerning the Collateral...................................10
8. Payment of Accounts...................................................................................13
9. Collection and Maintenance of Collateral..............................................................13
10. Inspections and Appraisals............................................................................14
11. Financial Reporting...................................................................................14
12. Additional Representations and Warranties.............................................................15
13. Covenants.............................................................................................26
14. Further Assurances....................................................................................32
15. Representations, Warranties and Covenants of Laurus...................................................32
16. Power of Attorney.....................................................................................34
17. Term of Agreement.....................................................................................35
18. Termination of Lien...................................................................................35
19. Events of Default.....................................................................................35
20. Remedies..............................................................................................38
21. Waivers...............................................................................................39
22. Expenses..............................................................................................39
23. Assignment By Laurus..................................................................................40
24. No Waiver; Cumulative Remedies........................................................................40
25. Application of Payments...............................................................................40
PAGE
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26. Indemnity.............................................................................................40
27. Revival...............................................................................................41
28. Borrowing Agency Provisions...........................................................................41
29. Notices...............................................................................................42
30. Governing Law, Jurisdiction and Waiver of Jury Trial..................................................43
31. Limitation of Liability...............................................................................44
32. Entire Understanding..................................................................................44
33. Severability..........................................................................................44
34. Survival .............................................................................................45
35. Captions..............................................................................................45
35. Counterparts; Telecopier Signatures...................................................................45
36. Construction..........................................................................................45
37. Publicity.............................................................................................45
38. Joinder...............................................................................................45
39. Legends...............................................................................................45
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SECURITY AGREEMENT
This Security Agreement is made as of June 30, 2005 by and
among LAURUS MASTER FUND, LTD., a Cayman Islands corporation ("LAURUS"),
INCENTRA SOLUTIONS (f/k/a Front Porch Digital, Inc.) a Nevada corporation ("THE
PARENT"), and each party listed on EXHIBIT A attached hereto (each an "ELIGIBLE
SUBSIDIARY" and collectively, the "ELIGIBLE SUBSIDIARIES") the Parent and each
Eligible Subsidiary, each a "Company" and collectively, the "Companies").
BACKGROUND
The Companies have requested that Laurus make advances
available to the Companies; and
Laurus has agreed to make such advances on the terms and
conditions set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings and the terms and conditions contained herein, the parties hereto
agree as follows:
1. GENERAL DEFINITIONS AND TERMS; RULES OF CONSTRUCTION.
(a) GENERAL DEFINITIONS. Capitalized terms used in this
Agreement shall have the meanings assigned to them in ANNEX A.
(b) ACCOUNTING TERMS. Any accounting terms used in this
Agreement which are not specifically defined shall have the meanings customarily
given them in accordance with GAAP and all financial computations shall be
computed, unless specifically provided herein, in accordance with GAAP
consistently applied.
(c) OTHER TERMS. All other terms used in this Agreement and
defined in the UCC, shall have the meaning given therein unless otherwise
defined herein.
(d) RULES OF CONSTRUCTION. All Schedules, Addenda, Annexes and
Exhibits hereto or expressly identified to this Agreement are incorporated
herein by reference and taken together with this Agreement constitute but a
single agreement. The words "herein", "hereof" and "hereunder" or other words of
similar import refer to this Agreement as a whole, including the Exhibits,
Addenda, Annexes and Schedules thereto, as the same may be from time to time
amended, modified, restated or supplemented, and not to any particular section,
subsection or clause contained in this Agreement. Wherever from the context it
appears appropriate, each term stated in either the singular or plural shall
include the singular and the plural, and pronouns stated in the masculine,
feminine or neuter gender shall include the masculine, the feminine and the
neuter. The term "or" is not exclusive. The term "including" (or any form
thereof) shall not
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be limiting or exclusive. All references to statutes and related regulations
shall include any amendments of same and any successor statutes and regulations.
All references in this Agreement or in the Schedules, Addenda, Annexes and
Exhibits to this Agreement to sections, schedules, disclosure schedules,
exhibits, and attachments shall refer to the corresponding sections, schedules,
disclosure schedules, exhibits, and attachments of or to this Agreement. All
references to any instruments or agreements, including references to any of this
Agreement or the Ancillary Agreements shall include any and all modifications or
amendments thereto and any and all extensions or renewals thereof.
2. LOAN FACILITY.
(a) LOANS.
Subject to the terms and conditions set forth herein and in the
Ancillary Agreements, Laurus may make loans (the "LOANS") to Companies from time
to time during the Term which, in the aggregate at any time outstanding, will
not exceed the lesser of (x) (I) the Capital Availability Amount minus (II) such
reserves as Laurus may reasonably in its good faith judgment deem proper and
necessary from time to time (the "RESERVES") and (y) an amount equal to (I) the
Accounts Availability minus (II) the Reserves. The amount derived at any time
from Section 2(a)(y)(I) minus 2(a)(y)(II) shall be referred to as the "FORMULA
AMOUNT." The Companies shall, jointly and severally, execute and deliver to
Laurus on the Closing Date the Revolving Note and a Minimum Borrowing Note
evidencing the Loans funded on the Closing Date. From time to time thereafter,
the Companies shall jointly and severally execute and deliver to Laurus
immediately prior to the final funding of each additional $3,000,000 tranche of
Loans allocated to any Minimum Borrowing Note issued after the date hereof
(calculated on a cumulative basis for each such tranche) an additional Minimum
Borrowing Note evidencing such tranche, substantially in the form of the Minimum
Borrowing Note delivered by the Companies to Laurus on the Closing Date.
Notwithstanding anything herein to the contrary, whenever during the Term the
outstanding balance on the Minimum Borrowing Note shall be less than the Minimum
Borrowing Amount (such amount being referred to herein as the "TRANSFERABLE
AMOUNT") to the extent that the outstanding balance on the Revolving Note should
equal or exceed $1,000,000, that portion of the balance of the Revolving Note
that exceeds $1,000,000, but does not exceed the Transferable Amount, shall be
segregated from the outstanding balance under the Revolving Note and allocated
to and aggregated with the then existing balance of the next unissued serialized
Minimum Borrowing Note (the "UNISSUED SERIALIZED NOTE"); provided that such
segregated amount shall remain subject to the terms and conditions of such
Revolving Note until a new serialized Minimum Borrowing Note is issued as set
forth below. The next Unissued Serialized Note shall remain in book entry form
until the balance thereunder shall equal the Minimum Borrowing Amount, at which
time a new serialized Minimum Borrowing Note in the face amount equal to the
Minimum Borrowing Amount will be issued and registered as set forth in the
Registration Rights Agreement (and the outstanding balance under the Revolving
Note shall at such time be correspondingly reduced in the amount equal to the
Minimum Borrowing Amount as a result of the issuance of such new serialized
Minimum Borrowing Note). The fixed conversion price of each Unissued Serialized
Note shall be set at the greater of the fixed conversion price applicable to the
note principal being transferred to this Unissued Serialized Note or one hundred
fifteen percent (115%) of the average closing price of the Common Stock for the
ten (10) trading days immediately prior to the date of issuance of such
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new Serialized Minimum Borrowing Note. Notwithstanding the foregoing, in no
event shall the Company be required to register more than an aggregate of two
(2) Minimum Borrowing Notes without its express prior written consent.
(i) Notwithstanding the limitations set forth above,
if requested by any Company, Laurus retains the right to lend to such Company
from time to time such amounts in excess of such limitations as Laurus may
determine in its sole discretion.
(ii) The Companies acknowledge that the exercise of
Laurus' discretionary rights hereunder may result during the Term in one or more
increases or decreases in the advance percentages used in determining Accounts
Availability and each of the Companies hereby consent to any such increases or
decreases which may limit or restrict advances requested by the Companies.
(iii) If any interest, fees, costs or charges payable
to Laurus hereunder are not paid when due, each of the Companies shall thereby
be deemed to have requested, and Laurus is hereby authorized at its discretion
to make and charge to the Companies' account, a Loan as of such date in an
amount equal to such unpaid interest, fees, costs or charges.
(iv) If any Company at any time fails to perform or
observe any of the covenants contained in this Agreement or any Ancillary
Agreement, Laurus may, but need not, perform or observe such covenant on behalf
and in the name, place and stead of such Company (or, at Laurus' option, in
Laurus' name) and may, but need not, take any and all other actions which Laurus
may deem necessary to cure or correct such failure (including the payment of
taxes, the satisfaction of Liens, the performance of obligations owed to Account
Debtors, lessors or other obligors, the procurement and maintenance of
insurance, the execution of assignments, security agreements and financing
statements, and the endorsement of instruments). The amount of all monies
expended and all costs and expenses (including attorneys' fees and legal
expenses) incurred by Laurus in connection with or as a result of the
performance or observance of such agreements or the taking of such action by
Laurus shall be charged to the Companies' account as a Loan and added to the
Obligations. To facilitate Laurus' performance or observance of such covenants
by each Company, each Company hereby irrevocably appoints Laurus, or Laurus'
delegate, acting alone, as such Company's attorney in fact (which appointment is
coupled with an interest) with the right (but not the duty) from time to time to
create, prepare, complete, execute, deliver, endorse or file in the name and on
behalf of such Company any and all instruments, documents, assignments, security
agreements, financing statements, applications for insurance and other
agreements and writings required to be obtained, executed, delivered or endorsed
by such Company.
(v) Laurus will account to Company Agent monthly with
a statement of all Loans and other advances, charges and payments made pursuant
to this Agreement, and such account rendered by Laurus shall be deemed final,
binding and conclusive unless Laurus is notified by Company Agent in writing to
the contrary within thirty (30) days of the date each account was rendered
specifying the item or items to which objection is made.
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(vi) During the Term, the Companies may borrow and
prepay Loans in accordance with the terms and conditions hereof.
(vii) If any Eligible Account is not paid by the
Account Debtor within one hundred (100) days after the date that such Eligible
Account was invoiced or if any Account Debtor asserts a deduction, dispute,
contingency, set-off, or counterclaim with respect to any Eligible Account, (a
"DELINQUENT ACCOUNT"), the Companies shall jointly and severally (i) reimburse
Laurus for the amount of the Loans made with respect to such Delinquent Account
plus an adjustment fee in an amount equal to one-fifth of one percent (0.20%) of
the gross face amount of such Eligible Account or (ii) immediately replace such
Delinquent Account with an otherwise Eligible Account.
(b) RECEIVABLES PURCHASE. Following the occurrence and during
the continuance of an Event of Default, Laurus may, at its option, elect to
convert the credit facility contemplated hereby to an accounts receivable
purchase facility. Upon such election by Laurus (subsequent notice of which
Laurus shall provide to Company Agent), the Companies shall be deemed to hereby
have sold, assigned, transferred, conveyed and delivered to Laurus, and Laurus
shall be deemed to have purchased and received from the Companies, all right,
title and interest of the Companies in and to all Accounts which shall at any
time constitute Eligible Accounts (the "RECEIVABLES PURCHASE"). All outstanding
Loans hereunder shall be deemed obligations under such accounts receivable
purchase facility. The conversion to an accounts receivable purchase facility in
accordance with the terms hereof shall not be deemed an exercise by Laurus of
its secured creditor rights under Article 9 of the UCC. Immediately following
Laurus' request, the Companies shall execute all such further documentation as
may be required by Laurus to more fully set forth the accounts receivable
purchase facility herein contemplated, including, without limitation, Laurus'
standard form of accounts receivable purchase agreement and account debtor
notification letters, but any Company's failure to enter into any such
documentation shall not impair or affect the Receivables Purchase in any manner
whatsoever.
(c) MINIMUM BORROWING AMOUNT. After a registration statement
registering the Registrable Securities has been declared effective by the SEC,
conversions of the Minimum Borrowing Amount into the Common Stock may be
initiated as set forth in the respective Minimum Borrowing Note. From and after
the date upon which any outstanding principal of the Minimum Borrowing Amount
(as evidenced by the first Minimum Borrowing Note) is converted into Common
Stock (the "FIRST CONVERSION DATE"), (i) corresponding amounts of all
outstanding Loans (not attributable to the then outstanding Minimum Borrowing
Amount) existing on or made after the First Conversion Date will be aggregated
in accordance with Section 2(a)(i) and (ii) the Companies will issue a new
(serialized) Minimum Borrowing Note to Laurus in accordance with Section
2(a)(i), and (iii) the Parent shall prepare and file a subsequent registration
statement with the SEC to register such subsequent Minimum Borrowing Note as set
forth in the Registration Rights Agreement.
3. REPAYMENT OF THE LOANS. The Companies (a) may prepay the
Obligations from time to time in accordance with the terms and provisions of the
Notes (and Section 17 hereof if such prepayment is due to a termination of this
Agreement); (b) shall repay on the expiration of the Term (i) the then aggregate
outstanding principal balance of the Loans together
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with accrued and unpaid interest, fees and charges and; (ii) all other amounts
owed Laurus under this Agreement and the Ancillary Agreements; and (c) subject
to Section 2(a)(ii), shall repay on any day on which the then aggregate
outstanding principal balance of the Loans are in excess of the Formula Amount
at such time, Loans in an amount equal to such excess. Any payments of
principal, interest, fees or any other amounts payable hereunder or under any
Ancillary Agreement shall be made prior to 12:00 noon (New York time) on the due
date thereof in immediately available funds.
4. PROCEDURE FOR LOANS. Company Agent may by written notice
request a borrowing of Loans prior to 12:00 noon (New York time) on the Business
Day of its request to incur, on the next Business Day, a Loan. Together with
each request for a Loan (or at such other intervals as Laurus may request),
Company Agent shall deliver to Laurus a Borrowing Base Certificate in the form
of EXHIBIT B attached hereto, which shall be certified as true and correct by
the Chief Executive Officer or Chief Financial Officer of Company Agent together
with all supporting documentation relating thereto. All Loans shall be disbursed
from whichever office or other place Laurus may designate from time to time and
shall be charged to the Companies' account on Laurus' books. The proceeds of
each Loan made by Laurus shall be made available to Company Agent on the
Business Day following the Business Day so requested in accordance with the
terms of this Section 4 by way of credit to the applicable Company's operating
account maintained with such bank as Company Agent designated to Laurus. Any and
all Obligations due and owing hereunder may be charged to the Companies' account
and shall constitute Loans.
5. INTEREST AND PAYMENTS.
(a) INTEREST.
(i) Except as modified by Section 5(a)(iii) below,
the Companies shall jointly and severally pay interest at the Contract Rate on
the unpaid principal balance of each Loan until such time as such Loan is
collected in full in good funds in dollars of the United States of America.
(ii) Interest and payments shall be computed on the
basis of actual days elapsed in a year of 360 days. At Laurus' option, Laurus
may charge the Companies' account for said interest.
(iii) Effective upon the occurrence of any Event of
Default and for so long as any Event of Default shall be continuing, the
Contract Rate shall automatically be increased as set forth in the Notes (such
increased rate, the "DEFAULT RATE"), and all outstanding Obligations, including
unpaid interest, shall continue to accrue interest from the date of such Event
of Default at the Default Rate applicable to such Obligations.
(iv) In no event shall the aggregate interest payable
hereunder exceed the maximum rate permitted under any applicable law or
regulation, as in effect from time to time (the "MAXIMUM LEGAL RATE"), and if
any provision of this Agreement or any Ancillary Agreement is in contravention
of any such law or regulation, interest payable under this
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Agreement and each Ancillary Agreement shall be computed on the basis of the
Maximum Legal Rate (so that such interest will not exceed the Maximum Legal
Rate).
(v) The Companies shall jointly and severally pay
principal, interest and all other amounts payable hereunder, or under any
Ancillary Agreement, without any deduction whatsoever, including any deduction
for any set-off or counterclaim.
(b) PAYMENTS; CERTAIN CLOSING CONDITIONS.
(i) CLOSING/ANNUAL PAYMENTS. Upon execution of this
Agreement by each Company and Laurus, the Companies shall jointly and severally
pay to Laurus Capital Management, LLC a closing payment in an amount equal to
three and six-tenths percent (3.60%) of the Capital Availability Amount. Such
payment shall be deemed fully earned on the Closing Date and shall not be
subject to rebate or proration for any reason.
(ii) OVERADVANCE PAYMENT. Without affecting Laurus'
rights hereunder in the event the Loans exceed the Formula Amount (each such
event, an "OVERADVANCE"), all such Overadvances, other than the Overadvance made
on the date hereof , shall bear additional interest at a rate equal to one and
one half percent (1.5%) per month of the amount of such Overadvances for all
times such amounts shall be in excess of the Formula Amount. All amounts that
are incurred pursuant to this Section 5(b)(iii) shall be due and payable by the
Companies monthly, in arrears, on the first business day of each calendar month
and upon expiration of the Term.
(iii) FINANCIAL INFORMATION DEFAULT. Without
affecting Laurus' other rights and remedies, in the event any Company fails to
deliver the financial information required by Section 11 on or before the date
required by this Agreement, the Companies shall jointly and severally pay Laurus
an aggregate fee in the amount of $150.00 per week (or portion thereof) for each
such failure until such failure is cured to Laurus' satisfaction or waived in
writing by Laurus. All amounts that are incurred pursuant to this Section
5(b)(iv) shall be due and payable by the Companies monthly, in arrears, on the
first business of each calendar month and upon expiration of the Term.
(iv) EXPENSES. The Companies shall jointly and
severally reimburse Laurus for its expenses (including reasonable legal fees and
expenses) incurred in connection with the preparation and negotiation of this
Agreement and the Ancillary Agreements, and expenses incurred in connection with
Laurus' due diligence review of each Company and its Subsidiaries and all
related matters. Amounts required to be paid under this Section 5(b)(v) will be
paid on the Closing Date and shall be $35,000, less any such expenses paid prior
to Closing, for such expenses referred to in this Section 5(b)(v).
6. SECURITY INTEREST.
(a) To secure the prompt payment to Laurus of the Obligations,
each Company hereby assigns, pledges and grants to Laurus a continuing security
interest in and Lien upon all of the Collateral. All of each Company's Books and
Records relating to the Collateral shall, until delivered to or removed by
Laurus, be kept by such Company in trust for Laurus until
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all Obligations have been paid in full. Each confirmatory assignment schedule or
other form of assignment hereafter executed by each Company shall be deemed to
include the foregoing grant, whether or not the same appears therein.
(b) Each Company hereby (i) authorizes Laurus to file any
financing statements, continuation statements or amendments thereto that (x)
indicate the Collateral (1) as all assets and personal property of such Company
or words of similar effect, regardless of whether any particular asset comprised
in the Collateral falls within the scope of Article 9 of the UCC of such
jurisdiction, or (2) as being of an equal or lesser scope or with greater
detail, and (y) contain any other information required by Part 5 of Article 9 of
the UCC for the sufficiency or filing office acceptance of any financing
statement, continuation statement or amendment and (ii) ratifies its
authorization for Laurus to have filed any initial financial statements, or
amendments thereto if filed prior to the date hereof. Each Company acknowledges
that it is not authorized to file any financing statement or amendment or
termination statement with respect to any financing statement without the prior
written consent of Laurus and agrees that it will not do so without the prior
written consent of Laurus, subject to such Company's rights under Section
9-509(d)(2) of the UCC.
(c) Each Company hereby grants to Laurus an irrevocable,
non-exclusive license (exercisable upon the termination of this Agreement due to
an occurrence and during the continuance of an Event of Default without payment
of royalty or other compensation to such Company) to use, transfer, license or
sublicense any Intellectual Property now owned, licensed to, or hereafter
acquired by such Company, and wherever the same may be located, and including in
such license access to all media in which any of the licensed items may be
recorded or stored and to all computer and automatic machinery software and
programs used for the compilation or printout thereof, and represents, promises
and agrees that any such license or sublicense is not and will not be in
conflict with the contractual or commercial rights of any third Person;
provided, that such license will terminate on the termination of this Agreement
and the payment in full of all Obligations.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS CONCERNING THE
COLLATERAL. Each Company represents, warrants (each of which such
representations and warranties shall be deemed repeated upon the making of each
request for a Loan and made as of the time of each and every Loan hereunder) and
covenants as follows:
(a) all of the Collateral (i) is owned by it free and clear of
all Liens (including any claims of infringement) except those in Laurus' favor
and Permitted Liens and (ii) is not subject to any agreement prohibiting the
granting of a Lien or requiring notice of or consent to the granting of a Lien.
(b) it shall not encumber, mortgage, pledge, assign or grant
any Lien in any Collateral or any other assets to anyone other than Laurus and
except for Permitted Liens.
(c) the Liens granted pursuant to this Agreement, upon
completion of the filings and other actions listed on SCHEDULE 7(c) (which, in
the case of all filings and other documents referred to in said Schedule, have
been delivered to Laurus in duly executed form)
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constitute valid perfected security interests in all of the Collateral in favor
of Laurus as security for the prompt and complete payment and performance of the
Obligations, enforceable in accordance with the terms hereof against any and all
of its creditors and purchasers and such security interest is prior to all other
Liens in existence on the date hereof.
(d) no effective security agreement, mortgage, deed of trust,
financing statement, equivalent security or Lien instrument or continuation
statement covering all or any part of the Collateral is or will be on file or of
record in any public office, except those relating to Permitted Liens.
(e) it shall not dispose of any of the Collateral whether by
sale, lease or otherwise except for the sale of Inventory in the ordinary course
of business and for the disposition or transfer in the ordinary course of
business during any fiscal year of obsolete and worn-out Equipment having an
aggregate fair market value of not more than $100,000 and only to the extent
that (i) the proceeds of any such disposition are used to acquire replacement
Equipment which is subject to Laurus' first priority security interest or are
used to repay Loans or to pay general corporate expenses, or (ii) following the
occurrence of an Event of Default which continues to exist the proceeds of which
are remitted to Laurus to be held as cash collateral for the Obligations.
(f) it shall defend the right, title and interest of Laurus in
and to the Collateral against the claims and demands of all Persons whomsoever,
and take such actions, including (i) all actions necessary to grant Laurus
"control" of any Investment Property, Deposit Accounts, Letter-of-Credit Rights
or electronic Chattel Paper owned by it, with any agreements establishing
control to be in form and substance satisfactory to Laurus, (ii) the prompt (but
in no event later than five (5) Business Days following Laurus' request
therefor) delivery to Laurus of all original Instruments, Chattel Paper,
negotiable Documents and certificated Stock owned by it (in each case,
accompanied by stock powers, allonges or other instruments of transfer executed
in blank), (iii) notification of Laurus' interest in Collateral at Laurus'
request, and (iv) the institution of litigation against third parties as shall
be prudent in order to protect and preserve its and/or Laurus' respective and
several interests in the Collateral.
(g) it shall promptly, and in any event within five (5)
Business Days after the same is acquired by it, notify Laurus of any commercial
tort claim (as defined in the UCC) acquired by it and unless otherwise consented
by Laurus, it shall enter into a supplement to this Agreement granting to Laurus
a Lien in such commercial tort claim.
(h) it shall place notations upon its Books and Records and
any of its financial statements to disclose Laurus' Lien in the Collateral.
(i) if it retains possession of any Chattel Paper or
Instrument with Laurus' consent, upon Laurus' request such Chattel Paper and
Instruments shall be marked with the following legend: "This writing and
obligations evidenced or secured hereby are subject to the security interest of
Laurus Master Fund, Ltd." Notwithstanding the foregoing, upon the reasonable
request of Laurus, such Chattel Paper and Instruments shall be delivered to
Laurus.
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(j) it shall perform in a reasonable time all other steps
requested by Laurus to create and maintain in Laurus' favor a valid perfected
first Lien in all Collateral subject only to Permitted Liens.
(k) it shall notify Laurus promptly and in any event within
three (3) Business Days after obtaining knowledge thereof (i) of any event or
circumstance that, to its knowledge, would cause Laurus to consider any then
existing Account as no longer constituting an Eligible Account; (ii) of any
material delay in its performance of any of its obligations to any Account
Debtor; (iii) of any assertion by any Account Debtor of any material claims,
offsets or counterclaims; (iv) of any allowances, credits and/or monies granted
by it to any Account Debtor; (v) of all material adverse information relating to
the financial condition of an Account Debtor; (vi) of any material return of
goods; and (vii) of any loss, damage or destruction of any of the Collateral.
(l) all Eligible Accounts (i) represent complete bona fide
transactions which require no further act under any circumstances on its part to
make such Accounts payable by the Account Debtors, (ii) are not subject to any
present, future contingent offsets or counterclaims, and (iii) do not represent
bill and hold sales, consignment sales, guaranteed sales, sale or return or
other similar understandings or obligations of any Affiliate or Subsidiary of
such Company. It has not made, nor will it make, any agreement with any Account
Debtor for any extension of time for the payment of any Account, any compromise
or settlement for less than the full amount thereof, any release of any Account
Debtor from liability therefor, or any deduction therefrom except a discount or
allowance for prompt or early payment allowed by it in the ordinary course of
its business consistent with historical practice and as previously disclosed to
Laurus in writing.
(m) it shall keep and maintain its Equipment in good operating
condition, except for ordinary wear and tear, and shall make all necessary
repairs and replacements thereof so that the value and operating efficiency
shall at all times be maintained and preserved. It shall not permit any such
items to become a Fixture to real estate or accessions to other personal
property.
(n) it shall maintain and keep all of its Books and Records
concerning the Collateral at its executive offices listed in SCHEDULE 12(aa).
(o) it shall maintain and keep the tangible Collateral at the
addresses listed in SCHEDULE 12(bb), provided, that it may change such locations
or open a new location, provided that it provides Laurus at least thirty (30)
days prior written notice of such changes or new location and (ii) prior to such
change or opening of a new location where Collateral having a value of more than
$100,000 will be located, it executes and delivers to Laurus such agreements
deemed reasonably necessary or prudent by Laurus, including landlord agreements,
mortgagee agreements and warehouse agreements, each in form and substance
satisfactory to Laurus, to adequately protect and maintain Laurus' security
interest in such Collateral.
(p) SCHEDULE 7(p) lists all banks and other financial
institutions at which it maintains deposits and/or other accounts, and such
Schedule correctly identifies the name,
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address and telephone number of each such depository, the name in which the
account is held, a description of the purpose of the account, and the complete
account number. It shall not establish any depository or other bank account with
any financial institution (other than the accounts set forth on SCHEDULE 7(p))
without Laurus' prior written consent.
8. PAYMENT OF ACCOUNTS.
(a) Each Company will irrevocably direct all of its present
and future Account Debtors and other Persons obligated to make payments
constituting Collateral to make such payments directly to the lockboxes
maintained by such Company (the "LOCKBOXES") with Wells Fargo Bank or such other
financial institution accepted by Laurus in writing as may be selected by such
Company (the "LOCKBOX BANK") pursuant to the terms of the certain agreements
among one or more Companies, Laurus and/or the Lockbox Bank dated as of July 5,
2005. On or prior to the Closing Date, each Company shall and shall cause the
Lockbox Bank to enter into all such documentation acceptable to Laurus pursuant
to which, among other things, the Lockbox Bank agrees to: (a) sweep the Lockbox
on a daily basis and deposit all checks received therein to an account
designated by Laurus in writing and (b) comply only with the instructions or
other directions of Laurus concerning the Lockbox. All of each Company's
invoices, account statements and other written or oral communications directing,
instructing, demanding or requesting payment of any Account of any Company or
any other amount constituting Collateral shall conspicuously direct that all
payments be made to the Lockbox or such other address as Laurus may direct in
writing. If, notwithstanding the instructions to Account Debtors, any Company
receives any payments, such Company shall immediately remit such payments to
Laurus in their original form with all necessary endorsements. Until so
remitted, such Company shall hold all such payments in trust for and as the
property of Laurus and shall not commingle such payments with any of its other
funds or property.
(b) At Laurus' election, following the occurrence of an Event
of Default which is continuing, Laurus may notify each Company's Account Debtors
of Laurus' security interest in the Accounts, collect them directly and charge
the collection costs and expenses thereof to Company's and the Eligible
Subsidiaries joint and several account.
9. COLLECTION AND MAINTENANCE OF COLLATERAL.
(a) Laurus may verify each Company's Accounts from time to
time, but not more often than once every three (3) months, unless an Event of
Default has occurred and is continuing, utilizing an audit control company or
any other agent of Laurus.
(b) Proceeds of Accounts received by Laurus will be deemed
received on the Business Day after Laurus' receipt of such proceeds in good
funds in dollars of the United States of America to an account designated by
Laurus. Any amount received by Laurus after 12:00 noon (New York time) on any
Business Day shall be deemed received on the next Business Day.
(c) As Laurus receives the proceeds of Accounts of any
Company, it shall (i) apply such proceeds, as required, to amounts outstanding
under the Notes, and (ii) remit all
13
such remaining proceeds (net of interest, fees and other amounts then due and
owing to Laurus hereunder) to Company Agent (for the benefit of the applicable
Companies) upon request (but no more often than twice a week). Notwithstanding
the foregoing, following the occurrence and during the continuance of an Event
of Default, Laurus, at its option, may (a) apply such proceeds to the
Obligations in such order as Laurus shall elect, (b) hold all such proceeds as
cash collateral for the Obligations and each Company hereby grants to Laurus a
security interest in such cash collateral amounts as security for the
Obligations and/or (c) do any combination of the foregoing.
10. INSPECTIONS AND APPRAISALS. At all times during normal
business hours, Laurus, and/or any agent of Laurus shall have the right to (a)
have access to, visit, inspect, review, evaluate and make physical verification
and appraisals of each Company's properties and the Collateral, (b) inspect,
audit and copy (or take originals if necessary) and make extracts from each
Company's Books and Records, including management letters prepared by the
Accountants, and (c) discuss with each Company's directors, principal officers,
and independent accountants, each Company's business, assets, liabilities,
financial condition, results of operations and business prospects. Each Company
will deliver to Laurus any instrument necessary for Laurus to obtain records
from any service bureau maintaining records for such Company. If any internally
prepared financial information, including that required under this Section is
unsatisfactory in any manner to Laurus, Laurus may request that the Accountants
review the same.
11. FINANCIAL REPORTING. Company Agent will deliver, or cause
to be delivered, to Laurus each of the following, which shall be in form and
detail acceptable to Laurus:
(a) As soon as available, and in any event within ninety (90)
days after the end of each fiscal year of the Parent, or within the maximum time
period for filing with the SEC allowable by law (whichever is greater) each
Company's audited financial statements with a report of independent certified
public accountants of recognized standing selected by the Parent and acceptable
to Laurus (the "ACCOUNTANTS"), which annual financial statements shall be
without qualification and shall include each Company's balance sheet as at the
end of such fiscal year and the related statements of each Company's income,
retained earnings and cash flows for the fiscal year then ended, prepared, if
Laurus so requests, on a consolidating and consolidated basis to include all
Subsidiaries and Affiliates of each Company, 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 Parent's President, Chief Executive Officer or Chief
Financial Officer stating that such financial statements have been prepared in
accordance with GAAP and whether or not such officer has knowledge of the
occurrence of any Default or Event of Default hereunder and, if so, stating in
reasonable detail the facts with respect thereto;
(b) As soon as available and in any event within forty five
(45) days after the end of each quarter, or within the maximum time period for
filing with the SEC allowable by law (whichever is greater) an
unaudited/internal balance sheet and statements of income, retained earnings and
cash flows of each Company as at the end of and for such quarter and for the
year to date period then ended, prepared, if Laurus so requests, on a
consolidating and consolidated
14
basis to include all Subsidiaries and Affiliates of each Company, 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 Parent's
President, Chief Executive Officer or Chief Financial Officer, stating (i) that
such financial statements have been prepared in accordance with GAAP, subject to
year-end audit adjustments, and (ii) whether or not such officer has knowledge
of the occurrence of any Default or Event of Default hereunder not theretofore
reported and remedied and, if so, stating in reasonable detail the facts with
respect thereto;
(c) Within thirty (30) days after the end of each month (or
more frequently if Laurus, in the exercise of its reasonable discretion so
requests), agings of each Company's Accounts, unaudited trial balances and their
accounts payable and a calculation of each Company's Accounts, Eligible Accounts
and each Company's monthly unaudited financial statements, provided, however,
that if Laurus shall request the foregoing information more often than as set
forth in the immediately preceding clause, each Company shall have thirty (30)
days from each such request to comply with Laurus' demand; and
(d) Promptly after (i) the filing thereof, copies of the
Parent's most recent registration statements and annual, quarterly, monthly or
other regular reports which the Parent files with the Securities and Exchange
Commission (the "SEC"), and (ii) the issuance thereof, copies of such financial
statements, reports and proxy statements as the Parent shall send to its
stockholders.
12. ADDITIONAL REPRESENTATIONS AND WARRANTIES. Each Company
hereby represents and warrants to Laurus as follows:
(a) ORGANIZATION, GOOD STANDING AND QUALIFICATION. It 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. It 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 (i) execute and deliver this Agreement and
the Ancillary Agreements, (ii) to issue the Notes and the shares of Common Stock
issuable upon conversion of the Notes (the "NOTE SHARES"), (iii) to issue the
Warrants and the shares of Common Stock issuable upon conversion of the Warrants
(the "WARRANT SHARES"), and to (iv) carry out the provisions of this Agreement
and the Ancillary Agreements and to carry on its business as presently
conducted. It 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 had, or could not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect.
(b) SUBSIDIARIES. Each of its direct and indirect
Subsidiaries, the direct owner of each such Subsidiary and its percentage
ownership thereof, is set forth on SCHEDULE 12(b).
15
(c) CAPITALIZATION; VOTING RIGHTS.
(i) The authorized capital stock of the Parent, as of
the date hereof consists of 205,000,000 shares, of which 200,000,000 are shares
of Common Stock, par value $.001 per share, 12,887,226 shares of which are
issued and outstanding, 1,433,639 shares of which are held in the treasury and
5,000,000 are shares of preferred stock, of which 2,500,000 have been designated
as Series A, par value $.001 per share of which 2,466,971 shares are issued and
outstanding. The remaining 2,500,000 shares of preferred stock have not been
designated. The authorized, issued and outstanding capital stock of each
Subsidiary of each Company is set forth on SCHEDULE 12(c).
(ii) Except as disclosed on SCHEDULE 12(c), other
than: (i) the shares reserved for issuance under the Parent's stock option
plans; and (ii) shares which may be issued pursuant to this Agreement and the
Ancillary Agreements, there are no outstanding options, warrants, rights
(including conversion or preemptive rights and rights of first refusal), proxy
or stockholder agreements, or arrangements or agreements of any kind for the
purchase or acquisition from the Parent of any of its securities. Except as
disclosed on SCHEDULE 12(C), neither the offer or issuance of any of the Notes
or the Warrants, or the issuance of any of the Note Shares or the Warrant
Shares, nor the consummation of any transaction contemplated hereby will result
in a change in the price or number of any securities of the Parent outstanding,
under anti-dilution or other similar provisions contained in or affecting any
such securities.
(iii) All issued and outstanding shares of the
Parent'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.
(iv) The rights, preferences, privileges and
restrictions of the shares of the Common Stock are as stated in the Parent's
Certificate of Incorporation (the "CHARTER"). The Note Shares and the Warrant
Shares have been duly and validly reserved for issuance. When issued in
compliance with the provisions of this Agreement and the Parent's Charter, the
Securities will be validly issued, fully paid and nonassessable, and will be
free of any liens or encumbrances; PROVIDED, HOWEVER, that the Securities may be
subject to restrictions on transfer under state and/or federal securities laws
as set forth herein or as otherwise required by such laws at the time a transfer
is proposed.
(d) AUTHORIZATION; BINDING OBLIGATIONS. All corporate,
partnership or limited liability company, as the case may be, action on its and
its Subsidiaries' part (including their respective officers and directors)
necessary for the authorization of this Agreement and the Ancillary Agreements,
the performance of all of its and its Subsidiaries' obligations hereunder and
under the Ancillary Agreements on the Closing Date and, the authorization,
issuance and delivery of the Notes and the Warrant has been taken or will be
taken prior to the Closing Date. This Agreement and the Ancillary Agreements,
when executed and delivered and to the extent it is a party thereto, will be its
and its Subsidiaries' valid and binding obligations enforceable against each
such Person in accordance with their terms, except:
16
(i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights; and
(ii) general principles of equity that restrict the
availability of equitable or legal remedies.
The issuance of the Notes and the subsequent conversion of the Notes into Note
Shares are not and will not be subject to any preemptive rights or rights of
first refusal that have not been properly waived or complied with. The issuance
of the Warrants and the subsequent exercise of the Warrants for Warrant Shares
are not and will not be subject to any preemptive rights or rights of first
refusal that have not been properly waived or complied with.
(e) LIABILITIES. Neither it nor any of its Subsidiaries has
any liabilities, except current liabilities incurred in the ordinary course of
business and liabilities disclosed in any Exchange Act Filings.
(f) AGREEMENTS; ACTION. Except as set forth on SCHEDULE 12(f)
or as disclosed in any Exchange Act Filings:
(i) There are no agreements, understandings,
instruments, contracts, proposed transactions, judgments, orders, writs or
decrees to which it or any of its Subsidiaries is a party or to its knowledge by
which it is bound which may involve: (i) obligations (contingent or otherwise)
of, or payments to, it or any of its Subsidiaries in excess of $100,000 (other
than obligations of, or payments to, it 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 it (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 its or any of its Subsidiaries'
products or services; or (iv) indemnification by it or any of its Subsidiaries
with respect to infringements of proprietary rights.
(ii) Since December 31, 2004 (the "BALANCE SHEET
DATE") neither it 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) other than the Company's debts to
Wells Fargo Bank and Alfred Curmi, incurred any indebtedness for money borrowed
or any other liabilities (other than ordinary course obligations) individually
in excess of $100,000 or, in the case of indebtedness and/or liabilities
individually less than $100,000, in excess of $100,000 in the aggregate; (iii)
made any loans or advances to any Person not in excess, individually or in the
aggregate, of $100,000, other than ordinary advances for travel expenses; or
(iv) sold, exchanged or otherwise disposed of any of its assets or rights, other
than the sale of its Inventory in the ordinary course of business.
(iii) For the purposes of subsections (i) and (ii) of
this Section 12(f), all indebtedness, liabilities, agreements, understandings,
instruments, contracts and proposed transactions involving the same Person
(including Persons it or any of its applicable Subsidiaries
17
has reason to believe are affiliated therewith or with any Subsidiary thereof)
shall be aggregated for the purpose of meeting the individual minimum dollar
amounts of such subsections.
(iv) the Parent maintains disclosure controls and
procedures ("DISCLOSURE CONTROLS") designed to ensure that information required
to be disclosed by the Parent 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 SEC.
(v) The Parent makes and keeps books, records, and
accounts, that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of its assets. It maintains internal control over
financial reporting ("FINANCIAL REPORTING CONTROLS") designed by, or under the
supervision of, its principal executive and principal financial officers, and
effected by its 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
GAAP, including that:
(1) transactions are executed in accordance
with management's general or specific authorization;
(2) unauthorized acquisition, use, or
disposition of the Parent's assets that could have a material effect on the
financial statements are prevented or timely detected;
(3) transactions are recorded as necessary
to permit preparation of financial statements in accordance with GAAP, and that
its receipts and expenditures are being made only in accordance with
authorizations of the Parent's management and board of directors;
(4) transactions are recorded as necessary
to maintain accountability for assets; and
(5) the recorded accountability for assets
is compared with the existing assets at reasonable intervals, and appropriate
action is taken with respect to any differences.
(vi) There is no weakness in any of its Disclosure
Controls or Financial Reporting Controls that is required to be disclosed in any
of the Exchange Act Filings, except as so disclosed.
(g) OBLIGATIONS TO RELATED PARTIES. Except as set forth on
SCHEDULE 12(g), neither it nor any of its Subsidiaries has any obligations to
their respective officers, directors, stockholders or employees other than:
(i) for payment of salary for services rendered and
for bonus payments;
18
(ii) reimbursement for reasonable expenses incurred
on its or its Subsidiaries' behalf;
(iii) for other standard employee benefits made
generally available to all employees (including stock option agreements
outstanding under any stock option plan approved by its and its Subsidiaries'
Board of Directors, as applicable); and
(iv) obligations listed in its and each of its
Subsidiary's financial statements or disclosed in any of the Parent's Exchange
Act Filings.
Except as described above or set forth on SCHEDULE 12(g), none of its officers,
directors or, to the best of its knowledge, key employees or stockholders, any
of its Subsidiaries or any members of their immediate families, are indebted to
it or any of its Subsidiaries, individually or in the aggregate, in excess of
$100,000 or have any direct or indirect ownership interest in any Person with
which it or any of its Subsidiaries is affiliated or with which it or any of its
Subsidiaries has a business relationship, or any Person which competes with it
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 it or any of its Subsidiaries. Except as described above, none of
its officers, directors or stockholders, or any member of their immediate
families, is, directly or indirectly, interested in any material contract with
it or any of its Subsidiaries and no agreements, understandings or proposed
transactions are contemplated between it or any of its Subsidiaries and any such
Person. Except as set forth on SCHEDULE 12(g), neither it nor any of its
Subsidiaries is a guarantor or indemnitor of any indebtedness of any other
Person.
(h) CHANGES. Since the Balance Sheet Date, except as disclosed
in any Exchange Act Filing or in any Schedule to this Agreement or to any of the
Ancillary Agreements, there has not been:
(i) any change in its or any of its Subsidiaries'
business, assets, liabilities, condition (financial or otherwise), properties,
operations or prospects, which, individually or in the aggregate, has had, or
could reasonably be expected to have, a Material Adverse Effect;
(ii) any resignation or termination of any of its or
its Subsidiaries' officers, key employees or groups of employees;
(iii) any material change, except in the ordinary
course of business, in its or any of its Subsidiaries' contingent obligations by
way of guaranty, endorsement, indemnity, warranty or otherwise;
(iv) any damage, destruction or loss, whether or not
covered by insurance, which has had, or could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect;
(v) any waiver by it or any of its Subsidiaries of a
valuable right or of a material debt owed to it;
19
(vi) any direct or indirect material loans made by it
or any of its Subsidiaries to any of its or any of its Subsidiaries'
stockholders, employees, officers or directors, other than advances made in the
ordinary course of business;
(vii) any material change in any compensation
arrangement or agreement with any employee, officer, director or stockholder;
(viii) any declaration or payment of any dividend or
other distribution of its or any of its Subsidiaries' assets;
(ix) any labor organization activity related to it or
any of its Subsidiaries;
(x) any debt, obligation or liability incurred,
assumed or guaranteed by it or any of its Subsidiaries, except those for
immaterial amounts and for current liabilities incurred in the ordinary course
of business;
(xi) any sale, assignment or transfer of any
Intellectual Property or other intangible assets;
(xii) any change in any material agreement to which
it or any of its Subsidiaries is a party or by which either it 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;
(xiii) any other event or condition of any character
that, either individually or in the aggregate, has had, or could reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect;
or
(xiv) any arrangement or commitment by it or any of
its Subsidiaries to do any of the acts described in subsection (i) through
(xiii) of this Section 12(h).
(i) TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. Except as set
forth on SCHEDULE 12(i), it and each of its Subsidiaries has good and marketable
title to their respective properties and assets, and good title to its leasehold
interests, in each case subject to no Lien, other than Permitted Liens.
All facilities, Equipment, Fixtures, vehicles and other properties owned, leased
or used by it or any of its Subsidiaries are in good operating condition and
repair and are reasonably fit and usable for the purposes for which they are
being used. Except as set forth on SCHEDULE 12(I), it and each of its
Subsidiaries is in compliance with all material terms of each lease to which it
is a party or is otherwise bound.
(j) INTELLECTUAL PROPERTY.
(i) It and each of its Subsidiaries owns or possesses
sufficient legal rights to all Intellectual Property necessary for their
respective businesses as now conducted and,
20
to its knowledge as presently proposed to be conducted, without any known
infringement of the rights of others. There are no outstanding options, licenses
or agreements of any kind relating to its or any of its Subsidiary's
Intellectual Property, nor is it or any of its Subsidiaries bound by or a party
to any options, licenses or agreements of any kind with respect to the
Intellectual Property of any other Person other than such licenses or agreements
arising from the purchase of "off the shelf" or standard products.
(ii) Neither it nor any of its Subsidiaries has
received any communications alleging that it or any of its Subsidiaries has
violated any of the Intellectual Property or other proprietary rights of any
other Person, nor is it or any of its Subsidiaries aware of any basis therefor.
(iii) Neither it nor any of its Subsidiaries believes
it is or will be necessary to utilize any inventions, trade secrets or
proprietary information of any of its employees made prior to their employment
by it or any of its Subsidiaries, except for inventions, trade secrets or
proprietary information that have been rightfully assigned to it or any of its
Subsidiaries.
(k) COMPLIANCE WITH OTHER INSTRUMENTS. Neither it nor any of
its Subsidiaries is in violation or default of (x) any term of its Charter or
Bylaws, or (y) any provision of any indebtedness, mortgage, indenture, contract,
agreement or instrument to which it is party or by which it is bound or of any
judgment, decree, order or writ, which violation or default, in the case of this
clause (y), has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect. The execution,
delivery and performance of and compliance with this Agreement and the Ancillary
Agreements to which it is a party, and the issuance of the Notes and the other
Securities 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 Lien upon any of its or any of its Subsidiary's
properties or assets or the suspension, revocation, impairment, forfeiture or
nonrenewal of any permit, license, authorization or approval applicable to it or
any of its Subsidiaries, their businesses or operations or any of their assets
or properties.
(l) LITIGATION. Except as set forth on SCHEDULE 12(l), there
is no action, suit, proceeding or investigation pending or, to its knowledge,
currently threatened against it or any of its Subsidiaries that prevents it or
any of its Subsidiaries from entering into this Agreement or the Ancillary
Agreements, or from consummating the transactions contemplated hereby or
thereby, or which has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect, or could result in
any change in its or any of its Subsidiaries' current equity ownership, nor is
it aware that there is any basis to assert any of the foregoing. Neither it 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 it or
any of its Subsidiaries currently pending or which it or any of its Subsidiaries
intends to initiate.
21
(m) TAX RETURNS AND PAYMENTS. It and each of its Subsidiaries
has timely filed all tax returns (federal, state and local) required to be filed
by it. All taxes shown to be due and payable on such returns, any assessments
imposed, and all other taxes due and payable by it and each of its Subsidiaries
on or before the Closing Date, have been paid or will be paid prior to the time
they become delinquent. Except as set forth on SCHEDULE 12(m), neither it nor
any of its Subsidiaries has been advised:
(i) that any of its returns, federal, state or other,
have been or are being audited as of the date hereof; or
(ii) of any adjustment, deficiency, assessment or
court decision in respect of its federal, state or other taxes.
Neither it nor any of its Subsidiaries has any knowledge of any liability of any
tax to be imposed upon its properties or assets as of the date of this Agreement
that is not adequately provided for.
(n) EMPLOYEES. Except as set forth on SCHEDULE 12(n), neither
it 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 its
knowledge, threatened with respect to it or any of its Subsidiaries. Except as
disclosed in the Exchange Act Filings or on SCHEDULE 12(n), neither it nor any
of its Subsidiaries is a party to or bound by any currently effective material
employment contract, deferred compensation arrangement, bonus plan, incentive
plan, profit sharing plan, retirement agreement or other employee compensation
plan or agreement. To its knowledge, none of its or any of its Subsidiaries'
employees, nor any consultant with whom it 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, it or any of its Subsidiaries
because of the nature of the business to be conducted by it or any of its
Subsidiaries; and to its knowledge the continued employment by it and its
Subsidiaries of their present employees, and the performance of its and its
Subsidiaries contracts with its independent contractors, will not result in any
such violation. Neither it nor any of its Subsidiaries is aware that any of its
or any of its Subsidiaries' employees is obligated under any contract (including
licenses, covenants or commitments of any nature) or other agreement, or subject
to any judgment, decree or order of any court or administrative agency that
would interfere with their duties to it or any of its Subsidiaries. Neither it
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 it or any of its Subsidiaries, none of its or any of
its Subsidiaries' employees has been granted the right to continued employment
by it or any of its Subsidiaries or to any material compensation following
termination of employment with it or any of its Subsidiaries. Except as set
forth on SCHEDULE 12(n), neither it nor any of its Subsidiaries is aware that
any officer, key employee or group of employees intends to terminate his, her or
their employment with it or any of its Subsidiaries, as applicable, nor does it
or any of its Subsidiaries have a present intention to terminate the employment
of any officer, key employee or group of employees.
(o) REGISTRATION RIGHTS AND VOTING RIGHTS. Except as set forth
on SCHEDULE 12(o) and except as disclosed in Exchange Act Filings, neither it
nor any of its
22
Subsidiaries is presently under any obligation, and neither it nor any of its
Subsidiaries has granted any rights, to register any of its or any of its
Subsidiaries' presently outstanding securities or any of its securities that may
hereafter be issued. Except as set forth on SCHEDULE 12(o) and except as
disclosed in Exchange Act Filings, to its knowledge, none of its or any of its
Subsidiaries' stockholders has entered into any agreement with respect to its or
any of its Subsidiaries' voting of equity securities.
(p) COMPLIANCE WITH LAWS; PERMITS. Neither it nor any of its
Subsidiaries is in violation of the Sarbanes-Oxley Act of 2002 or any SEC
related regulation or rule or any rule of the Principal Market 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 Ancillary
Agreement and the issuance of any of the Securities, except such as have been
duly and validly obtained or filed, or with respect to any filings that must be
made after the Closing Date, as will be filed in a timely manner. It and each of
its Subsidiaries has all material franchises, permits, licenses and any similar
authority necessary for the conduct of its business as now being conducted by
it, the lack of which could, either individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect.
(q) ENVIRONMENTAL AND SAFETY LAWS. Neither it nor any of its
Subsidiaries is in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety, and to its
knowledge, no material expenditures are or will be required in order to comply
with any such existing statute, law or regulation. Except as set forth on
SCHEDULE 12(q), no Hazardous Materials (as defined below) are used or have been
used, stored, or disposed of by it or any of its Subsidiaries or, to its
knowledge, by any other Person on any property owned, leased or used by it or
any of its Subsidiaries. For the purposes of the preceding sentence, "HAZARDOUS
MATERIALS" shall mean:
(i) materials which are listed or otherwise defined
as "hazardous" or "toxic" under any applicable local, state, federal and/or
foreign laws and regulations that govern the existence and/or remedy of
contamination on property, the protection of the environment from contamination,
the control of hazardous wastes, or other activities involving hazardous
substances, including building materials; and
(ii) any petroleum products or nuclear materials.
(r) VALID OFFERING. Assuming the accuracy of the
representations and warranties of Laurus contained in this Agreement, the offer
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.
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(s) FULL DISCLOSURE. It and each of its Subsidiaries has
provided Laurus with all information requested by Laurus in connection with
Laurus' decision to enter into this Agreement, including all information each
Company and its Subsidiaries believe is reasonably necessary to make such
investment decision. Neither this Agreement, the Ancillary Agreements nor the
exhibits and schedules hereto and thereto nor any other document delivered by it
or any of its Subsidiaries to Laurus or its attorneys or agents in connection
herewith or therewith or with the transactions contemplated hereby or thereby,
contain any untrue statement of a material fact nor omit to state a material
fact necessary in order to make the statements contained herein or therein, in
light of the circumstances in which they are made, not misleading. Any financial
projections and other estimates provided to Laurus by it or any of its
Subsidiaries were based on its and its Subsidiaries' experience in the industry
and on assumptions of fact and opinion as to future events which it or any of
its Subsidiaries, at the date of the issuance of such projections or estimates,
believed to be reasonable.
(t) INSURANCE. It and each of its Subsidiaries has general
commercial, product liability, fire and casualty insurance policies with
coverages which it believes are customary for companies similarly situated to it
and its Subsidiaries in the same or similar business.
(u) SEC REPORTS AND FINANCIAL STATEMENTS. Except as set forth
on SCHEDULE 12(u), it and each of its Subsidiaries has filed all proxy
statements, reports and other documents required to be filed by it under the
Exchange Act. The Parent has made available to Laurus: (i) its Annual Report on
Form 10-KSB for its fiscal years ended December 31, 2004; and (ii) its Quarterly
Reports on Form 10-QSB for its fiscal quarters ended June 30, 2004, September
30, 2004 and March 31, 2005 and the Form 8-K filings which it has made during
its fiscal year 2004 to date (collectively, the "SEC REPORTS"). Except as set
forth on SCHEDULE 12(u), each SEC Report was, at the time of its filing, in
substantial compliance with the requirements of its respective form and none of
the SEC Reports, nor the financial statements (and the notes thereto) included
in the SEC Reports, as of their respective filing dates, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Such financial
statements have been prepared in accordance with GAAP applied on a consistent
basis during the periods involved (except (i) as may be otherwise indicated in
such financial statements or the notes thereto or (ii) in the case of unaudited
interim statements, to the extent they may not include footnotes or may be
condensed) and fairly present in all material respects the financial condition,
the results of operations and cash flows of the Parent and its Subsidiaries, on
a consolidated basis, as of, and for, the periods presented in each such SEC
Report.
(v) LISTING. The Parent's Common Stock is listed or quoted, as
applicable, on the Principal Market and satisfies all requirements for the
continuation of such listing or quotation, as applicable, and the Parent shall
do all things necessary for the continuation of such listing or quotation, as
applicable. The Parent 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.
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(w) NO INTEGRATED OFFERING. Neither it, nor any of its
Subsidiaries nor any of its Affiliates, nor any Person acting on its or their
behalf, has directly or indirectly made any offers or sales of any security or
solicited any offers to buy any security under circumstances that would cause
the offering of the Securities pursuant to this Agreement or any Ancillary
Agreement to be integrated with prior offerings by it for purposes of the
Securities Act which would prevent it from issuing the Securities pursuant to
Rule 506 under the Securities Act, or any applicable exchange-related
stockholder approval provisions, nor will it or any of its Affiliates or
Subsidiaries take any action or steps that would cause the offering of the
Securities to be integrated with other offerings.
(x) STOP TRANSFER. The Securities are restricted securities as
of the date of this Agreement. Neither it 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.
(y) DILUTION. It specifically acknowledges that the Parent's
obligation to issue the shares of Common Stock upon conversion of the Notes and
exercise of the Warrants is binding upon the Parent and enforceable regardless
of the dilution such issuance may have on the ownership interests of other
shareholders of the Parent.
(z) PATRIOT ACT. It certifies that, to the best of its
knowledge, neither it 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. It hereby acknowledges that Laurus seeks to comply with all
applicable laws concerning money laundering and related activities. In
furtherance of those efforts, it hereby represents, warrants and covenants that:
(i) none of the cash or property that it or any of its Subsidiaries will pay or
will contribute to Laurus has been or shall be derived from, or related to, any
activity that is deemed criminal under United States law; and (ii) no
contribution or payment by it or any of its Subsidiaries to Laurus, to the
extent that they are within its or any such Subsidiary's control shall cause
Laurus to be in violation of the United States Bank Secrecy Act, the United
States International Money Laundering Control Act of 1986 or the United States
International Money Laundering Abatement and Anti-Terrorist Financing Act of
2001. It shall promptly notify Laurus if any of these representations,
warranties and covenants ceases to be true and accurate regarding it or any of
its Subsidiaries. It shall provide Laurus with any additional information
regarding it and each Subsidiary thereof that Laurus deems necessary or
convenient to ensure compliance with all applicable laws concerning money
laundering and similar activities. It understands and agrees that if at any time
it is discovered that any of the foregoing representations, warranties and
covenants are incorrect, or if otherwise required by applicable law or
regulation related to money laundering or similar activities, Laurus may
undertake appropriate actions to ensure compliance with applicable law or
regulation, including but not limited to segregation and/or redemption of
Laurus' investment in it. It further understands that Laurus may release
confidential information about it and its Subsidiaries and, if applicable, any
underlying beneficial owners, to proper authorities if Laurus, in its sole
discretion, determines that it is in the best interests of Laurus in light of
relevant rules and regulations under the laws set forth in subsection (ii)
above.
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(aa) COMPANY NAME; LOCATIONS OF OFFICES, RECORDS AND
COLLATERAL. SCHEDULE 12(aa) sets forth each Company's name as it appears in
official filings in the state of its organization, the type of entity of each
Company, the organizational identification number issued by each Company's state
of organization or a statement that no such number has been issued, each
Company's state of organization, and the location of each Company's chief
executive office, corporate offices, warehouses, other locations of Collateral
and locations where records with respect to Collateral are kept (including in
each case the county of such locations) and, except as set forth in such
SCHEDULE 12(aa), such locations have not changed during the preceding twelve
months. As of the Closing Date, during the prior five years, except as set forth
in SCHEDULE 12(aa), no Company has been known as or conducted business in any
other name (including trade names). Each Company has only one state of
organization.
(bb) ERISA. Based upon the Employee Retirement Income Security
Act of 1974 ("ERISA"), and the regulations and published interpretations
thereunder: (i) neither it nor any of its Subsidiaries has engaged in any
Prohibited Transactions (as defined in Section 406 of ERISA and Section 4975 of
the Code); (ii) it and each of its Subsidiaries has met all applicable minimum
funding requirements under Section 302 of ERISA in respect of its plans; (iii)
neither it 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 it nor any of its Subsidiaries has any fiduciary
responsibility for investments with respect to any plan existing for the benefit
of persons other than its or such Subsidiary's employees; and (v) neither it 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.
13. COVENANTS. Each Company, as applicable, covenants and
agrees with Laurus as follows:
(a) STOP-ORDERS. It shall advise Laurus, 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 Parent, or of the suspension of
the qualification of the Common Stock of the Parent for offering or sale in any
jurisdiction, or the initiation of any proceeding for any such purpose.
(b) LISTING. It shall promptly secure the listing or
quotation, as applicable, of the shares of Common Stock issuable upon conversion
of the Notes and exercise of the Warrants on the Principal Market upon which
shares of Common Stock are listed or quoted, 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 Parent shall maintain the listing or quotation, as applicable,
of its Common Stock on the Principal Market, and will comply in all material
respects with the Parent's reporting, filing and other obligations under the
bylaws or rules of the National Association of Securities Dealers ("NASD") and
such exchanges, as applicable.
(c) MARKET REGULATIONS. It shall notify the SEC, NASD and
applicable state authorities, in accordance with their requirements, of the
transactions contemplated by this
26
Agreement, and shall take all other necessary action and proceedings as may be
required and permitted by applicable law, rule and regulation, for the legal and
valid issuance of the Securities to Laurus and promptly provide copies thereof
to Laurus.
(d) REPORTING REQUIREMENTS. It 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.
(e) USE OF FUNDS. It shall use the proceeds of the Loans to
repay Wells Fargo Bank in full in an amount not to exceed $4,425,000 and for
general working capital purposes only.
(f) ACCESS TO FACILITIES. It shall, and shall cause each of
its Subsidiaries to, permit any representatives designated by Laurus (or any
successor of Laurus), upon reasonable notice and during normal business hours,
at Company's expense and accompanied by a representative of Company Agent
(provided that no such prior notice shall be required to be given and no such
representative shall be required to accompany Laurus in the event Laurus
believes such access is necessary to preserve or protect the Collateral or
following the occurrence and during the continuance of an Event of Default), to:
(i) visit and inspect any of its or any such
Subsidiary's properties;
(ii) examine its or any such Subsidiary's corporate
and financial records (unless such examination is not permitted by federal,
state or local law or by contract) and make copies thereof or extracts
therefrom; and
(iii) discuss its or any such Subsidiary's affairs,
finances and accounts with its or any such Subsidiary's directors, officers and
Accountants.
Notwithstanding the foregoing, neither it nor any of its Subsidiaries shall
provide any material, non-public information to Laurus unless Laurus signs a
confidentiality agreement and otherwise complies with Regulation FD, under the
federal securities laws.
(g) TAXES. It shall, and shall cause each of its Subsidiaries
to, promptly pay and discharge, or cause to be paid and discharged, when due and
payable, all lawful taxes, assessments and governmental charges or levies
imposed upon it and its Subsidiaries' income, profits, property or business, as
the case may be; provided, however, that any such tax, assessment, charge or
levy need not be paid 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 Laurus
in the Collateral, and (iii) if it and/or such Subsidiary, as applicable, shall
have set aside on its and/or such Subsidiary's books adequate reserves with
respect thereto in accordance with GAAP; and provided, further, that it shall,
and shall cause each of its Subsidiaries to, pay all such taxes, assessments,
charges or levies forthwith upon the commencement of proceedings to foreclose
any lien which may have attached as security therefor.
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(h) INSURANCE. It shall bear the full risk of loss from any
loss of any nature whatsoever with respect to the Collateral. It and each of its
Subsidiaries shall 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 it and its Subsidiaries; and it and its
Subsidiaries shall maintain, with financially sound and reputable insurers,
insurance against other hazards and risks and liability to persons and property
to the extent and in the manner which it and/or such Subsidiary thereof
reasonably believes is customary for companies in similar business similarly
situated as it and its Subsidiaries and to the extent available on commercially
reasonable terms. It 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 Laurus as security for its obligations hereunder and
under the Ancillary Agreements. At its own cost and expense in amounts and with
carriers reasonably acceptable to Laurus, it and each of its Subsidiaries shall
(i) keep all their insurable properties and properties in which they have 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 it 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 it and its Subsidiaries' 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 its or any of its Subsidiaries assets or funds 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 it or any
of its Subsidiaries is engaged in business; and (v) furnish Laurus with (x)
copies of all policies and evidence of the maintenance of such policies at least
thirty (30) days before any expiration date, (y) excepting its and its
Subsidiaries' workers' compensation policy, endorsements to such policies naming
Laurus as "co-insured" or "additional insured" and appropriate loss payable
endorsements in form and substance satisfactory to Laurus, naming Laurus as
lenders loss payee, and (z) evidence that as to Laurus the insurance coverage
shall not be impaired or invalidated by any act or neglect of any Company or any
of its Subsidiaries and the insurer will provide Laurus with at least thirty
(30) days notice prior to cancellation. It shall instruct the insurance carriers
that in the event of any loss thereunder, the carriers shall make payment for
such loss to Laurus and not to any Company or any of its Subsidiaries and Laurus
jointly. If any insurance losses are paid by check, draft or other instrument
payable to any Company and/or any of its Subsidiaries and Laurus jointly, Laurus
may endorse, as applicable, such Company's and/or any of its Subsidiaries' name
thereon and do such other things as Laurus may deem advisable to reduce the same
to cash. Laurus is hereby authorized to adjust and compromise claims. All loss
recoveries received by Laurus upon any such insurance may be applied to the
Obligations, in such order as Laurus in its sole discretion shall determine or
shall otherwise be delivered to Company Agent for the benefit of the applicable
Company and/or its Subsidiaries. Any surplus shall be paid by Laurus to Company
Agent for the benefit of the applicable Company and/or its Subsidiaries, or
applied as may be otherwise required by law.
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Any deficiency thereon shall be paid, as applicable, by Companies and their
Subsidiaries to Laurus, on demand.
(i) INTELLECTUAL PROPERTY. It shall, and shall cause each of
its Subsidiaries to, maintain in full force and effect its corporate existence,
rights and franchises and all licenses and other rights to use Intellectual
Property owned or possessed by it and reasonably deemed to be necessary to the
conduct of its business.
(j) PROPERTIES. It shall, and shall cause each of its
Subsidiaries to, keep its properties in good repair, working order and
condition, reasonable wear and tear excepted, and from time to time make all
needful and proper repairs, renewals, replacements, additions and improvements
thereto; and it shall, and shall cause each of its Subsidiaries to, at all times
comply with each provision of all leases to which it is a party or under which
it occupies property if the breach of such provision could reasonably be
expected to have a Material Adverse Effect.
(k) CONFIDENTIALITY. It shall not, and shall not permit any of
its Subsidiaries to, disclose, and will not include in any public announcement,
the name of Laurus, unless expressly agreed to by Laurus or unless and until
such disclosure is required by law or applicable regulation, and then only to
the extent of such requirement. Notwithstanding the foregoing, each Company and
its Subsidiaries may disclose Laurus' identity and the terms of this Agreement
to its current and prospective debt and equity financing sources.
(l) REQUIRED APPROVALS. It shall not, and shall not permit any
of its Subsidiaries to, without the prior written consent of Laurus, (i) create,
incur, assume or suffer to exist any indebtedness (exclusive of trade debt)
whether secured or unsecured, in excess of $100,000 in the aggregate, other than
each Company's indebtedness to Laurus and as set forth on SCHEDULE 13(l)(i)
attached hereto and made a part hereof; (ii) cancel any debt owing to it in
excess of $100,000 in the aggregate during any 12 month period; (iii) assume,
guarantee, endorse or otherwise become directly or contingently liable in
connection with any obligations of any other Person, except the endorsement of
negotiable instruments by it or its Subsidiaries for deposit or collection or
similar transactions in the ordinary course of business; (iv) directly or
indirectly declare, pay or make any dividend or distribution on any class of its
Stock or apply any of its funds, property or assets to the purchase, redemption
or other retirement of any of its or its Subsidiaries' Stock outstanding on the
date hereof, or issue any preferred stock; (v) purchase or hold beneficially any
Stock or other securities or evidences of indebtedness of, make or permit to
exist any loans or advances to, or make any investment or acquire any interest
whatsoever in, any other Person, including any partnership or joint venture,
except (x) travel advances, (y) loans to its and its Subsidiaries' officers and
employees not exceeding at any one time an aggregate of $10,000, and (z) loans
to its existing Subsidiaries so long as such Subsidiaries are designated as
either a co-borrower hereunder or has entered into such guaranty and security
documentation required by Laurus, including, without limitation, to grant to
Laurus a first priority perfected security interest in substantially all of such
Subsidiary's assets to secure the Obligations; (vi) create or permit to exist
any Subsidiary, other than any Subsidiary in existence on the date hereof and
listed in SCHEDULE 12(b) unless such new Subsidiary is a wholly-owned Subsidiary
and is designated by Laurus as either a co-borrower or guarantor hereunder and
such Subsidiary shall have entered into all such documentation required by
Laurus, including, without limitation, to
29
grant to Laurus a first priority perfected security interest in substantially
all of such Subsidiary's assets to secure the Obligations; (vii) directly or
indirectly, prepay any indebtedness (other than to Laurus and in the ordinary
course of business), or repurchase, redeem, retire or otherwise acquire any
indebtedness (other than to Laurus and in the ordinary course of business)
except to make scheduled payments of principal and interest thereof; (viii)
enter into any merger, consolidation or other reorganization with or into any
other Person or acquire all or a portion of the assets or Stock of any Person or
permit any other Person to consolidate with or merge with it, unless (1) such
Company is the surviving entity of such merger or consolidation, (2) no Event of
Default shall exist immediately prior to and after giving effect to such merger
or consolidation, (3) such Company shall have provided Laurus copies of all
documentation relating to such merger or consolidation and (4) such Company
shall have provided Laurus with at least thirty (30) days' prior written notice
of such merger or consolidation; (ix) materially change the nature of the
business in which it is presently engaged; (x) become subject to (including,
without limitation, by way of amendment to or modification of) any agreement or
instrument which by its terms would (under any circumstances) restrict its or
any of its Subsidiaries' right to perform the provisions of this Agreement or
any of the Ancillary Agreements; (xi) change its fiscal year or make any changes
in accounting treatment and reporting practices without prior written notice to
Laurus except as required by GAAP or in the tax reporting treatment or except as
required by law; (xii) enter into any transaction with any employee, director or
Affiliate, except in the ordinary course on arms-length terms; (xiii) bill
Accounts under any name except the present name of such Company; or (xiv) sell,
lease, transfer or otherwise dispose of any of its properties or assets, or any
of the properties or assets of its Subsidiaries, except for (1) the sale of
Inventory in the ordinary course of business and (2) the disposition or transfer
in the ordinary course of business during any fiscal year of obsolete and
worn-out Equipment and only to the extent that (x) the proceeds of any such
disposition are used to acquire replacement Equipment which is subject to
Laurus' first priority security interest or are used to repay Loans or to pay
general corporate expenses, or (y) following the occurrence of an Event of
Default which continues to exist, the proceeds of which are remitted to Laurus
to be held as cash collateral for the Obligations.
(m) REISSUANCE OF SECURITIES. The Parent shall reissue
certificates representing the Securities without the legends set forth in
Section 39 below at such time as:
(i) the holder thereof is permitted to dispose of
such Securities pursuant to Rule 144(k) under the Securities Act; or
(ii) upon resale subject to an effective registration
statement after such Securities are registered under the Securities Act.
The Parent agrees to cooperate with Laurus in connection with all resales
pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions necessary to
allow such resales provided the Parent and its counsel receive reasonably
requested representations from Laurus and broker, if any.
(n) OPINION. On the Closing Date, it shall deliver to Laurus
an opinion acceptable to Laurus from each Company's legal counsel. Each Company
will provide, at the
30
Companies' joint and several expense, such other legal opinions in the future as
are reasonably necessary for the conversion of the Notes and the exercise of the
Warrants.
(o) LEGAL NAME, ETC. It shall not, without providing Laurus
with 30 days prior written notice, change (i) its name as it appears in the
official filings in the state of its organization, (ii) the type of legal entity
it is, (iii) its organization identification number, if any, issued by its state
of organization, (iv) its state of organization or (v) amend its certificate of
incorporation, by-laws or other organizational document.
(p) COMPLIANCE WITH LAWS. The operation of each of its and
each of its Subsidiaries' business is and shall continue to be in compliance in
all material respects with all applicable federal, state and local laws, rules
and ordinances, including to all laws, rules, regulations and orders relating to
taxes, payment and withholding of payroll taxes, employer and employee
contributions and similar items, securities, employee retirement and welfare
benefits, employee health and safety and environmental matters.
(q) NOTICES. It and each of its Subsidiaries shall promptly
inform Laurus in writing of: (i) the commencement of all proceedings and
investigations by or before and/or the receipt of any notices from, any
governmental or nongovernmental body and all actions and proceedings in any
court or before any arbitrator against or in any way concerning any event which
could reasonably be expected to have singly or in the aggregate, a Material
Adverse Effect; (ii) any change which has had, or could reasonably be expected
to have, a Material Adverse Effect; (iii) any Event of Default or Default; and
(iv) any default or any event which with the passage of time or giving of notice
or both would constitute a default under any agreement for the payment of money
to which it or any of its Subsidiaries is a party or by which it or any of its
Subsidiaries or any of its or any such Subsidiary's properties may be bound the
breach of which would have a Material Adverse Effect.
(r) MARGIN STOCK. It shall not permit any of the proceeds of
the Loans made hereunder to be used directly or indirectly to "purchase" or
"carry" "margin stock" or to repay indebtedness incurred to "purchase" or
"carry" "margin stock" within the respective meanings of each of the quoted
terms under Regulation U of the Board of Governors of the Federal Reserve System
as now and from time to time hereafter in effect.
(s) OFFERING RESTRICTIONS. Except as previously disclosed in
the SEC Reports or in the Exchange Act Filings, or stock or stock options
granted to its employees or directors, neither it nor any of its Subsidiaries
shall, prior to the full repayment or conversion of the Notes (together with all
accrued and unpaid interest and fees related thereto), (x) enter into any equity
line of credit agreement or similar agreement or (y) issue, or enter into any
agreement to issue, any securities with a variable/floating conversion and/or
pricing feature which are or could be (by conversion or registration)
free-trading securities (i.e. common stock subject to a registration statement).
(t) AUTHORIZATION AND RESERVATION OF SHARES. The Parent shall
at all times have authorized and reserved a sufficient number of shares of
Common Stock to provide for the conversion of the Notes and exercise of the
Warrants.
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(u) FINANCING RIGHT OF FIRST REFUSAL.
(i) It hereby grants to Laurus a right of first
refusal to provide any Additional Financing (as defined below) to be issued by
any Company and/or any of its Subsidiaries (the "ADDITIONAL FINANCING PARTIES"),
subject to the following terms and conditions. From and after the date hereof,
prior to the incurrence of any additional indebtedness and/or the sale or
issuance of any equity interests of the Additional Financing Parties (an
"ADDITIONAL FINANCING"), Company Agent shall notify Laurus of such Additional
Financing. In connection therewith, Company Agent shall submit a fully executed
term sheet (a "PROPOSED TERM SHEET") to Laurus setting forth the terms,
conditions and pricing of any such Additional Financing (such financing to be
negotiated on "arm's length" terms and the terms thereof to be negotiated in
good faith) proposed to be entered into by the Additional Financing Parties.
Laurus shall have the right, but not the obligation, to deliver to Company Agent
its own proposed term sheet (the "LAURUS TERM SHEET") setting forth the terms
and conditions upon which Laurus would be willing to provide such Additional
Financing to the Additional Financing Parties. The Laurus Term Sheet shall
contain terms no less favorable to the Additional Financing Parties than those
outlined in Proposed Term Sheet. Laurus shall deliver to Company Agent the
Laurus Term Sheet within ten Business Days of receipt of each such Proposed Term
Sheet. If the provisions of the Laurus Term Sheet are at least as favorable to
the Additional Financing Parties as the provisions of the Proposed Term Sheet,
the Additional Financing Parties shall enter into and consummate the Additional
Financing transaction outlined in the Laurus Term Sheet.
(ii) It shall not, and shall not permit its
Subsidiaries to, agree, directly or indirectly, to any restriction with any
Person which limits the ability of Laurus to consummate an Additional Financing
with it or any of its Subsidiaries.
14. FURTHER ASSURANCES. At any time and from time to time,
upon the written request of Laurus and at the sole expense of Companies, each
Company shall promptly and duly execute and deliver any and all such further
instruments and documents and take such further action as Laurus may request (a)
to obtain the full benefits of this Agreement and the Ancillary Agreements, (b)
to protect, preserve and maintain Laurus' rights in the Collateral and under
this Agreement or any Ancillary Agreement, and/or (c) to enable Laurus to
exercise all or any of the rights and powers herein granted or any Ancillary
Agreement.
15. REPRESENTATIONS, WARRANTIES AND COVENANTS OF LAURUS.
Laurus hereby represents, warrants and covenants to each Company as follows:
(a) REQUISITE POWER AND AUTHORITY. Laurus has all necessary
power and authority under all applicable provisions of law to execute and
deliver this Agreement and the Ancillary Agreements and to carry out their
provisions. All corporate action on Laurus' part required for the lawful
execution and delivery of this Agreement and the Ancillary Agreements have been
or will be effectively taken prior to the Closing Date. Upon their execution and
delivery, this Agreement and the Ancillary Agreements shall be valid and binding
obligations of Laurus, enforceable in accordance with their terms, except (a) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application
32
affecting enforcement of creditors' rights, and (b) as limited by general
principles of equity that restrict the availability of equitable and legal
remedies.
(b) INVESTMENT REPRESENTATIONS. Laurus understands that the
Securities are being offered pursuant to an exemption from registration
contained in the Securities Act based in part upon Laurus' representations
contained in this Agreement, including, without limitation, that Laurus is an
"accredited investor" within the meaning of Regulation D under the Securities
Act. Laurus has received or has had full access to all the information it
considers necessary or appropriate to make an informed investment decision with
respect to the Notes to be issued to it under this Agreement and the Securities
acquired by it upon the conversion of the Notes.
(c) LAURUS BEARS ECONOMIC RISK. Laurus has substantial
experience in evaluating and investing in private placement transactions of
securities in companies similar to the Parent so that it is capable of
evaluating the merits and risks of its investment in the Parent and has the
capacity to protect its own interests. Laurus must bear the economic risk of
this investment until the Securities are sold pursuant to (i) an effective
registration statement under the Securities Act, or (ii) an exemption from
registration is available.
(d) INVESTMENT FOR OWN ACCOUNT. The Securities are being
issued to Laurus for its own account for investment only, and not as a nominee
or agent and not with a view towards or for resale in connection with their
distribution.
(e) LAURUS CAN PROTECT ITS INTEREST. Laurus represents that by
reason of its, or of its management's, business and financial experience, Laurus
has the capacity to evaluate the merits and risks of its investment in the
Notes, and the Securities and to protect its own interests in connection with
the transactions contemplated in this Agreement, and the Ancillary Agreements.
Further, Laurus is aware of no publication of any advertisement in connection
with the transactions contemplated in the Agreement or the Ancillary Agreements.
(f) ACCREDITED INVESTOR. Laurus represents that it is an
accredited investor within the meaning of Regulation D under the Securities Act.
(g) SHORTING. Neither Laurus nor any of its Affiliates or
investment partners has, will, or will cause any Person, to directly engage in
"short sales" of the Parent's Common Stock as long as any Minimum Borrowing Note
shall be outstanding.
(h) PATRIOT ACT. Laurus certifies that, to the best of Laurus'
knowledge, Laurus has not been designated, and is not owned or controlled, by a
"suspected terrorist" as defined in Executive Order 13224. Laurus seeks to
comply with all applicable laws concerning money laundering and related
activities. In furtherance of those efforts, Laurus hereby represents, warrants
and covenants that: (i) none of the cash or property that Laurus will use to
make the Loans has been or shall be derived from, or related to, any activity
that is deemed criminal under United States law; and (ii) no disbursement by
Laurus to any Company to the extent within Laurus' control, shall cause Laurus
to be in violation of the United States Bank Secrecy Act, the United States
International Money Laundering Control Act of 1986 or the United States
International Money Laundering Abatement and Anti-Terrorist Financing Act of
33
2001. Laurus shall promptly notify the Company Agent if any of these
representations ceases to be true and accurate regarding Laurus. Laurus agrees
to provide the Company any additional information regarding Laurus that the
Company deems necessary or convenient to ensure compliance with all applicable
laws concerning money laundering and similar activities. Laurus understands and
agrees that if at any time it is discovered that any of the foregoing
representations are incorrect, or if otherwise required by applicable law or
regulation related to money laundering similar activities, Laurus may undertake
appropriate actions to ensure compliance with applicable law or regulation,
including but not limited to segregation and/or redemption of Laurus' investment
in the Parent. Laurus further understands that the Parent may release
information about Laurus and, if applicable, any underlying beneficial owners,
to proper authorities if the Parent, in its sole discretion, determines that it
is in the best interests of the Parent in light of relevant rules and
regulations under the laws set forth in subsection (ii) above.
(i) LIMITATION ON ACQUISITION OF COMMON STOCK. Notwithstanding
anything to the contrary contained in this Agreement, any Ancillary Agreement,
or any document, instrument or agreement entered into in connection with any
other transaction entered into by and between Laurus and any Company (and/or
Subsidiaries or Affiliates of any Company), Laurus shall not acquire stock in
the Parent (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 Parent, or
otherwise, and such options, warrants, conversion or other rights shall not be
exercisable) to the extent such stock acquisition would cause any interest
(including any original issue discount) payable by any Company to Laurus not to
qualify as portfolio interest, within the meaning of Section 881(c)(2) of the
Internal Revenue Code of 1986, as amended (the "CODE") by reason of Section
881(c)(3) of the Code, taking into account the constructive ownership rules
under Section 871(h)(3)(C) of the Code (the "STOCK ACQUISITION LIMITATION"). The
Stock Acquisition Limitation shall automatically become null and void without
any notice to any Company upon the earlier to occur of either (a) the Parent's
delivery to Laurus of a Notice of Redemption (as defined in the Notes) or (b)
the existence of an Event of Default at a time when the average closing price of
the 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
Fixed Conversion Price (as defined in the Notes).
16. POWER OF ATTORNEY. Each Company hereby appoints Laurus, or
any other Person whom Laurus may designate as such Company's attorney, with
power to: (i) endorse such Company's name on any checks, notes, acceptances,
money orders, drafts or other forms of payment or security that may come into
Laurus' possession; (ii) sign such Company's name on any invoice or bill of
lading relating to any Accounts, drafts against Account Debtors, schedules and
assignments of Accounts, notices of assignment, financing statements and other
public records, verifications of Account and notices to or from Account Debtors;
(iii) verify the validity, amount or any other matter relating to any Account by
mail, telephone, telegraph or otherwise with Account Debtors; (iv) do all things
necessary to carry out this Agreement, any Ancillary Agreement and all related
documents; and (v) on or after the occurrence and during the continuation of an
Event of Default, notify the post office authorities to change the address for
delivery of such Company's mail to an address designated by Laurus, and to
receive, open and dispose of all mail addressed to such Company. Each Company
hereby ratifies and approves all
34
acts of the attorney. Neither Laurus, nor the attorney will be liable for any
acts or omissions or for any error of judgment or mistake of fact or law, except
for gross negligence or willful misconduct. This power, being coupled with an
interest, is irrevocable so long as Laurus has a security interest and until the
Obligations have been fully satisfied.
17. TERM OF AGREEMENT. Laurus' agreement to make Loans and
extend financial accommodations under and in accordance with the terms of this
Agreement or any Ancillary Agreement shall continue in full force and effect
until the expiration of the Term. At Laurus' election following the occurrence
of an Event of Default, Laurus may terminate this Agreement. The termination of
the Agreement shall not affect any of Laurus' rights hereunder or any Ancillary
Agreement and the provisions hereof and thereof shall continue to be fully
operative until all transactions entered into, rights or interests created and
the Obligations have been irrevocably disposed of, concluded or liquidated.
Notwithstanding the foregoing, Laurus shall release its security interests at
any time after thirty (30) days notice upon irrevocable payment to it of all
Obligations if each Company shall have (i) provided Laurus with an executed
release of any and all claims which such Company may have or thereafter have
under this Agreement and all Ancillary Agreements and (ii) paid to Laurus an
early payment fee in an amount equal to (1) three percent (3.0%) of the Capital
Availability Amount if such payment occurs prior to the first anniversary of the
Closing Date, (2) two percent (2.0%) of the Capital Availability Amount if such
payment occurs on or after the first anniversary of the Closing Date and prior
to the second anniversary of the Closing Date and (3) one percent (1.0%) of the
Capital Availability Amount if such termination occurs thereafter during the
Term; such fee being intended to compensate Laurus for its costs and expenses
incurred in initially approving this Agreement or extending same. Such early
payment fee shall be due and payable jointly and severally by the Companies to
Laurus upon termination by acceleration of this Agreement by Laurus due to the
occurrence and continuance of an Event of Default.
18. TERMINATION OF LIEN. The Liens and rights granted to
Laurus hereunder and any Ancillary Agreements and the financing statements filed
in connection herewith or therewith shall continue in full force and effect,
notwithstanding the termination of this Agreement or the fact that any Company's
account may from time to time be temporarily in a zero or credit position, until
all of the Obligations have been indefeasibly paid or performed in full after
the termination of this Agreement. Laurus shall not be required to send
termination statements to any Company, or to file them with any filing office,
unless and until this Agreement and the Ancillary Agreements shall have been
terminated in accordance with their terms and all Obligations indefeasibly paid
in full in immediately available funds.
19. EVENTS OF DEFAULT. The occurrence of any of the following
shall constitute an "EVENT OF DEFAULT":
(a) failure to make payment of any of the Obligations when
required hereunder, and, in any such case, such failure shall continue for a
period of three (3) days following the date upon which any such payment was due;
(b) failure by any Company or any of its Subsidiaries to pay
any taxes when due unless such taxes are being contested in good faith by
appropriate proceedings and with
35
respect to which adequate reserves have been provided on such Company's and/or
such Subsidiary's books;
(c) failure to perform under, and/or committing any breach of,
in any material respect, this Agreement or any covenant contained herein, which
failure or breach shall continue without remedy for a period of fifteen (15)
days after the occurrence thereof;
(d) any representation, warranty or statement made by any
Company or any of its Subsidiaries hereunder, in any Ancillary Agreement, any
certificate, statement or document delivered pursuant to the terms hereof, or in
connection with the transactions contemplated by this Agreement should prove to
be false or misleading in any material respect on the date as of which made or
deemed made;
(e) the occurrence of any default (or similar term) in the
observance or performance of any other agreement or condition relating to any
indebtedness or contingent obligation of any Company or any of its Subsidiaries
(including, without limitation, the indebtedness evidenced by the Purchase
Agreement and the Related Agreements) beyond the period of grace (if any), the
effect of which default is to cause, or permit the holder or holders of such
indebtedness or beneficiary or beneficiaries of such contingent obligation to
cause, such indebtedness to become due prior to its stated maturity or such
contingent obligation to become payable;
(f) attachments or levies in excess of $100,000 in the
aggregate are made upon any Company's assets or a judgment is rendered against
any Company's property involving a liability of more than $100,000 which shall
not have been vacated, discharged, stayed or bonded within thirty (30) days from
the entry thereof;
(g) any change in any Company's or any of its Subsidiary's
condition or affairs (financial or otherwise) which in Laurus' reasonable, good
faith opinion, could reasonably be expected to have a Material Adverse Effect;
(h) any Lien created hereunder or under any Ancillary
Agreement for any reason ceases to be or is not a valid and perfected Lien
having a first priority interest;
(i) any Company or any of its Subsidiaries shall (i) apply
for, consent to or suffer to exist the appointment of, or the taking of
possession by, a receiver, custodian, trustee or liquidator of itself or of all
or a substantial part of its property, (ii) make a general assignment for the
benefit of creditors, (iii) commence a voluntary case under the federal
bankruptcy laws (as now or hereafter in effect), (iv) be adjudicated a bankrupt
or insolvent, (v) file a petition seeking to take advantage of any other law
providing for the relief of debtors, (vi) acquiesce to without challenge within
ten (10) days of the filing thereof, or failure to have dismissed within thirty
(30) days, any petition filed against it in any involuntary case under such
bankruptcy laws, or (vii) take any action for the purpose of effecting any of
the foregoing;
(j) any Company or any of its Subsidiaries shall admit in
writing its inability, or be generally unable, to pay its debts as they become
due or cease operations of its present business;
36
(k) any Company or any of its Subsidiaries directly or
indirectly sells, assigns, transfers, conveys, or suffers or permits to occur
any sale, assignment, transfer or conveyance of any assets of such Company or
any interest therein, except as permitted herein;
(l) (i) any "Person" or "group" (as such terms are defined in
Sections 13(d) and 14(d) of the Exchange Act, as in effect on the date hereof),
other than the Holder, is or becomes the "beneficial owner" (as defined in Rules
13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of 35% or
more on a fully diluted basis of the then outstanding voting equity interest of
any Company (other than a "Person" or "group" that beneficially owns 35% or more
of such outstanding voting equity interests of the respective Company on the
date hereof), (ii) the Board of Directors of the Parent shall cease to consist
of a majority of the Board of Directors of the Parent on the date hereof (or
directors appointed by a majority of the board of directors in effect
immediately prior to such appointment) or (iii) the Parent or any of its
Subsidiaries merges or consolidates with, unless the Parent of such Subsidiary
is the surviving entity, or sells all or substantially all of its assets to, any
other person or entity;
(m) the indictment or threatened indictment of any Company or
any of its Subsidiaries or any executive officer of any Company or any of its
Subsidiaries under any criminal statute, or commencement or threatened
commencement of criminal or civil proceeding against any Company or any of its
Subsidiaries or any executive officer of any Company or any of its Subsidiaries
pursuant to which statute or proceeding penalties or remedies sought or
available include forfeiture of any of the property of any Company or any of its
Subsidiaries;
(n) an Event of Default shall occur under and as defined in
any Note or in any other Ancillary Agreement;
(o) any Company or any of its Subsidiaries shall breach any
term or provision of any Ancillary Agreement to which it is a party, in any
material respect which breach is not cured within any applicable cure or grace
period provided in respect thereof (if any);
(p) any Company or any of its Subsidiaries attempts to
terminate, challenges the validity of, or its liability under this Agreement or
any Ancillary Agreement, or any proceeding shall be brought to challenge the
validity, binding effect of any Ancillary Agreement or any Ancillary Agreement
ceases to be a valid, binding and enforceable obligation of such Company or any
of its Subsidiaries (to the extent such Persons are a party thereto);
(q) an SEC stop trade order or Principal Market trading
suspension of the Common Stock shall be in effect for five (5) consecutive days
or five (5) days during a period of ten (10) consecutive days, excluding in all
cases a suspension of all trading on a Principal Market, provided that the
Parent shall not have been able to cure such trading suspension within thirty
(30) days of the notice thereof or list the Common Stock on another Principal
Market within sixty (60) days of such notice; or
(r) The Parent's failure to deliver Common Stock to Laurus
pursuant to and in the form required by the Notes and this Agreement, if such
failure to deliver Common Stock shall not be cured within two (2) Business Days
or any Company is required to issue a
37
replacement Note to Laurus and such Company shall fail to deliver such
replacement Note within seven (7) Business Days.
20. REMEDIES. Following the occurrence of an Event of Default,
Laurus shall have the right to demand repayment in full of all Obligations,
whether or not otherwise due. Until all Obligations have been fully and
indefeasibly satisfied, Laurus shall retain its Lien in all Collateral. Laurus
shall have, in addition to all other rights provided herein and in each
Ancillary Agreement, the rights and remedies of a secured party under the UCC,
and under other applicable law, all other legal and equitable rights to which
Laurus may be entitled, including the right to take immediate possession of the
Collateral, to require each Company to assemble the Collateral, at Companies'
joint and several expense, and to make it available to Laurus at a place
designated by Laurus which is reasonably convenient to both parties and to enter
any of the premises of any Company or wherever the Collateral shall be located,
with or without force or process of law, and to keep and store the same on said
premises until sold (and if said premises be the property of any Company, such
Company agrees not to charge Laurus for storage thereof), and the right to apply
for the appointment of a receiver for such Company's property. Further, Laurus
may, at any time or times after the occurrence of an Event of Default, sell and
deliver all Collateral held by or for Laurus at public or private sale for cash,
upon credit or otherwise, at such prices and upon such terms as Laurus, in
Laurus' sole discretion, deems advisable or Laurus may otherwise recover upon
the Collateral in any commercially reasonable manner as Laurus, in its sole
discretion, deems advisable. The requirement of reasonable notice shall be met
if such notice is mailed postage prepaid to Company Agent at Company Agent's
address as shown in Laurus' records, at least ten (10) days before the time of
the event of which notice is being given. Laurus may be the purchaser at any
sale, if it is public. In connection with the exercise of the foregoing
remedies, Laurus is granted permission to use all of each Company's Intellectual
Property. The proceeds of sale shall be applied first to all costs and expenses
of sale, including attorneys' fees, and second to the payment (in whatever order
Laurus elects) of all Obligations. After the indefeasible payment and
satisfaction in full of all of the Obligations, and after the payment by Laurus
of any other amount required by any provision of law, including Section
9-608(a)(1) of the UCC (but only after Laurus has received what Laurus considers
reasonable proof of a subordinate party's security interest), the surplus, if
any, shall be paid to Company Agent (for the benefit of the applicable
Companies) or its representatives or to whosoever may be lawfully entitled to
receive the same, or as a court of competent jurisdiction may direct. The
Companies shall remain jointly and severally liable to Laurus for any
deficiency. In addition, the Companies shall jointly and severally pay Laurus a
liquidation fee ("LIQUIDATION FEE") in the amount of five percent (5%) of the
actual amount collected in respect of each Account outstanding at any time
during a Liquidation Period". For purposes hereof, "LIQUIDATION PERIOD" means a
period: (i) beginning on the earliest date of (x) an event referred to in
Section 19(i) or 19(j), or (y) the cessation of any Company's business; and (ii)
ending on the date on which Laurus has actually received all Obligations due and
owing it under this Agreement and the Ancillary Agreements. The Liquidation Fee
shall be paid on the date on which Laurus collects the applicable Account by
deduction from the proceeds thereof. Each Company and Laurus acknowledge that
the actual damages that would be incurred by Laurus after the occurrence of an
Event of Default would be difficult to quantify and that such Company and Laurus
have agreed that the fees and obligations set forth in this Section and in this
38
Agreement would constitute fair and appropriate liquidated damages in the event
of any such termination.
21. WAIVERS. To the full extent permitted by applicable law,
each Company hereby waives (a) presentment, demand and protest, and notice of
presentment, dishonor, intent to accelerate, acceleration, protest, default,
nonpayment, maturity, release, compromise, settlement, extension or renewal of
any or all of this Agreement and the Ancillary Agreements or any other notes,
commercial paper, Accounts, contracts, Documents, Instruments, Chattel Paper and
guaranties at any time held by Laurus on which such Company may in any way be
liable, and hereby ratifies and confirms whatever Laurus may do in this regard;
(b) all rights to notice and a hearing prior to Laurus' taking possession or
control of, or to Laurus' replevy, attachment or levy upon, any Collateral or
any bond or security that might be required by any court prior to allowing
Laurus to exercise any of its remedies; and (c) the benefit of all valuation,
appraisal and exemption laws. Each Company acknowledges that it has been advised
by counsel of its choices and decisions with respect to this Agreement, the
Ancillary Agreements and the transactions evidenced hereby and thereby.
22. EXPENSES. The Companies shall jointly and severally pay
all of Laurus' out-of-pocket costs and expenses, including reasonable fees and
disbursements of in-house or outside counsel and appraisers, in connection with
the preparation, execution and delivery of this Agreement and the Ancillary
Agreements, and in connection with the prosecution or defense of any action,
contest, dispute, suit or proceeding concerning any matter in any way arising
out of, related to or connected with this Agreement or any Ancillary Agreement.
The Companies shall also jointly and severally pay all of Laurus' reasonable
fees, charges, out-of-pocket costs and expenses, including fees and
disbursements of counsel and appraisers, in connection with (a) the preparation,
execution and delivery of any waiver, any amendment thereto or consent proposed
or executed in connection with the transactions contemplated by this Agreement
or the Ancillary Agreements, (b) Laurus' obtaining performance of the
Obligations under this Agreement and any Ancillary Agreements, including, but
not limited to, the enforcement or defense of Laurus' security interests,
assignments of rights and Liens hereunder as valid perfected security interests,
(c) any attempt to inspect, verify, protect, collect, sell, liquidate or
otherwise dispose of any Collateral, (d) any appraisals or re-appraisals of any
property (real or personal) pledged to Laurus by any Company or any of its
Subsidiaries as Collateral for, or any other Person as security for, the
Obligations hereunder and (e) any consultations in connection with any of the
foregoing. The Companies shall also jointly and severally pay Laurus' customary
bank charges for all bank services (including wire transfers) performed or
caused to be performed by Laurus for any Company or any of its Subsidiaries at
any Company's or such Subsidiary's request or in connection with any Company's
loan account with Laurus. All such costs and expenses together with all filing,
recording and search fees, taxes and interest payable by the Companies to Laurus
shall be payable on demand and shall be secured by the Collateral. If any tax by
any Governmental Authority is or may be imposed on or as a result of any
transaction between any Company and/or any Subsidiary thereof, on the one hand,
and Laurus on the other hand, which Laurus is or may be required to withhold or
pay, the Companies hereby jointly and severally indemnifies and holds Laurus
harmless in respect of such taxes, and the Companies will repay to Laurus the
amount of any such taxes which shall be charged to the Companies' account; and
until the Companies shall furnish Laurus with indemnity therefor (or supply
Laurus with
39
evidence satisfactory to it that due provision for the payment thereof has been
made), Laurus may hold without interest any balance standing to each Company's
credit and Laurus shall retain its Liens in any and all Collateral.
23. ASSIGNMENT BY LAURUS. Laurus may assign any or all of the
Obligations together with any or all of the security therefor to any Person and
any such assignee shall succeed to all of Laurus' rights with respect thereto;
provided that Laurus shall not be permitted to effect any such assignment to a
competitor of any Company unless an Event of Default has occurred and is
continuing. Upon such assignment, Laurus shall be released from all
responsibility for the Collateral to the extent same is assigned to any
transferee. Laurus may from time to time sell or otherwise grant participations
in any of the Obligations and the holder of any such participation shall,
subject to the terms of any agreement between Laurus and such holder, be
entitled to the same benefits as Laurus with respect to any security for the
Obligations in which such holder is a participant. Each Company agrees that each
such holder may exercise any and all rights of banker's lien, set-off and
counterclaim with respect to its participation in the Obligations as fully as
though such Company were directly indebted to such holder in the amount of such
participation.
24. NO WAIVER; CUMULATIVE REMEDIES. Failure by Laurus to
exercise any right, remedy or option under this Agreement, any Ancillary
Agreement or any supplement hereto or thereto or any other agreement between or
among any Company and Laurus or delay by Laurus in exercising the same, will not
operate as a waiver; no waiver by Laurus will be effective unless it is in
writing and then only to the extent specifically stated. Laurus' rights and
remedies under this Agreement and the Ancillary Agreements will be cumulative
and not exclusive of any other right or remedy which Laurus may have.
25. APPLICATION OF PAYMENTS. Each Company irrevocably waives
the right to direct the application of any and all payments at any time or times
hereafter received by Laurus from or on such Company's behalf and each Company
hereby irrevocably agrees that Laurus shall have the continuing exclusive right
to apply and reapply any and all payments received at any time or times
hereafter against the Obligations hereunder in such manner as Laurus may deem
advisable notwithstanding any entry by Laurus upon any of Laurus' books and
records.
26. INDEMNITY. Each Company hereby agrees to jointly and
severally indemnify and hold Laurus, and its respective affiliates, employees,
attorneys and agents (each, an "INDEMNIFIED PERSON"), harmless from and against
any and all suits, actions, proceedings, claims, damages, losses, liabilities
and expenses of any kind or nature whatsoever (including attorneys' fees and
disbursements and other costs of investigation or defense, including those
incurred upon any appeal) which may be instituted or asserted against or
incurred by any such Indemnified Person as the result of credit having been
extended, suspended or terminated under this Agreement or any of the Ancillary
Agreements or with respect to the execution, delivery, enforcement, performance
and administration of, or in any other way arising out of or relating to, this
Agreement, the Ancillary Agreements or any other documents or transactions
contemplated by or referred to herein or therein and any actions or failures to
act with respect to any of the foregoing, except to the extent that any such
indemnified liability is finally determined by a court of competent jurisdiction
to have resulted solely from such Indemnified Person's gross
40
negligence or willful misconduct. NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR
LIABLE TO ANY COMPANY OR TO ANY OTHER PARTY OR TO ANY SUCCESSOR, ASSIGNEE OR
THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY
THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES
WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR
TERMINATED UNDER THIS AGREEMENT OR ANY ANCILLARY AGREEMENT OR AS A RESULT OF ANY
OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER.
27. REVIVAL. The Companies further agree that to the extent
any Company makes a payment or payments to Laurus, which payment or payments or
any part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside and/or required to be repaid to a trustee, receiver or
any other party under any bankruptcy act, state or federal law, common law or
equitable cause, then, to the extent of such payment or repayment, the
obligation or part thereof intended to be satisfied shall be revived and
continued in full force and effect as if said payment had not been made.
28. BORROWING AGENCY PROVISIONS.
(a) Each Company hereby irrevocably designates Company Agent
to be its attorney and agent and in such capacity to borrow, sign and endorse
notes, and execute and deliver all instruments, documents, writings and further
assurances now or hereafter required hereunder, on behalf of such Company, and
hereby authorizes Laurus to pay over or credit all loan proceeds hereunder in
accordance with the request of Company Agent.
(b) The handling of this credit facility as a co-borrowing
facility with a borrowing agent in the manner set forth in this Agreement is
solely as an accommodation to the Companies and at their request. Laurus shall
not incur any liability to any Company as a result thereof. To induce Laurus to
do so and in consideration thereof, each Company hereby indemnifies Laurus and
holds Laurus harmless from and against any and all liabilities, expenses,
losses, damages and claims of damage or injury asserted against Laurus by any
Person arising from or incurred by reason of the handling of the financing
arrangements of the Companies as provided herein, reliance by Laurus on any
request or instruction from Company Agent or any other action taken by Laurus
with respect to this Paragraph 28.
(c) All Obligations shall be joint and several, and the
Companies shall make payment upon the maturity of the Obligations by
acceleration or otherwise, and such obligation and liability on the part of the
Companies shall in no way be affected by any extensions, renewals and
forbearance granted by Laurus to any Company, failure of Laurus to give any
Company notice of borrowing or any other notice, any failure of Laurus to pursue
to preserve its rights against any Company, the release by Laurus of any
Collateral now or thereafter acquired from any Company, and such agreement by
any Company to pay upon any notice issued pursuant thereto is unconditional and
unaffected by prior recourse by Laurus to any Company or any Collateral for such
Company's Obligations or the lack thereof.
41
(d) Each Company expressly waives any and all rights of
subrogation, reimbursement, indemnity, exoneration, contribution or any other
claim which such Company may now or hereafter have against the other or other
Person directly or contingently liable for the Obligations, or against or with
respect to any other's property (including, without limitation, any property
which is Collateral for the Obligations), arising from the existence or
performance of this Agreement, until all Obligations have been indefeasibly paid
in full and this Agreement has been irrevocably terminated.
(e) Each Company represents and warrants to Laurus that (i)
Companies have one or more common shareholders, directors and officers, (ii) the
businesses and corporate activities of Companies are closely related to, and
substantially benefit, the business and corporate activities of Companies, (iii)
the financial and other operations of Companies are performed on a combined
basis as if Companies constituted a consolidated corporate group, (iv) Companies
will receive a substantial economic benefit from entering into this Agreement
and will receive a substantial economic benefit from the application of each
Loan hereunder, in each case, whether or not such amount is used directly by any
Company and (v) all requests for Loans hereunder by the Company Agent are for
the exclusive and indivisible benefit of the Companies as though, for purposes
of this Agreement, the Companies constituted a single entity.
29. NOTICES. Any notice or request hereunder may be given to
any Company, Company Agent or Laurus at the respective addresses set forth below
or as may hereafter be specified in a notice designated as a change of address
under this Section. Any notice or request hereunder shall be given by registered
or certified mail, return receipt requested, hand delivery, overnight mail or
telecopy (confirmed by mail). Notices and requests shall be, in the case of
those by hand delivery, deemed to have been given when delivered to any officer
of the party to whom it is addressed, in the case of those by mail or overnight
mail, deemed to have been given three (3) Business Days after the date when
deposited in the mail or with the overnight mail carrier, and, in the case of a
telecopy, when confirmed.
Notices shall be provided as follows:
If to Laurus: Laurus Master Fund, Ltd.
c/o Laurus Capital Management, LLC
825 Third Avenue, 14th Fl.
New York, New York 10022
Attention: John E. Tucker, Esq.
Telephone: (212) 541-4434
Telecopier: (212) 541-5800
42
If to any Company,
or Company Agent: Incentra Solutions, Inc.
1140 Pearl Street
Boulder, Colorado 80302
Attention: CFO
Facsimile: (303) 449-9584
With a copy to: Law Offices of Karl Reed Guest
94 Underhill Road
Orinda, CA 94563
Attention: Reed Guest, Esq.
Telephone: (925) 254-0677
Facsimile: (925) 254-9226
or such other address as may be designated in writing hereafter in accordance
with this Section 29 by such Person.
30. GOVERNING LAW, JURISDICTION AND WAIVER OF JURY TRIAL.
(a) THIS AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE
GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
(b) EACH 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 ANY
COMPANY, ON THE ONE HAND, AND LAURUS, ON THE OTHER HAND, PERTAINING TO THIS
AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR
RELATED TO THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS; PROVIDED, THAT
LAURUS AND EACH COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE
TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW
YORK; AND FURTHER PROVIDED, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR
OPERATE TO PRECLUDE LAURUS FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN
ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL
OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER
COURT ORDER IN FAVOR OF LAURUS. EACH COMPANY EXPRESSLY SUBMITS AND CONSENTS IN
ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT,
AND EACH COMPANY HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK
OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. EACH COMPANY
HEREBY WAIVES PERSONAL
43
SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR
SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE
MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO COMPANY AGENT AT THE ADDRESS
SET FORTH IN SECTION 29 AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON
THE EARLIER OF COMPANY AGENT'S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER
DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.
(c) THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A
JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION
OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO
WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO
RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN
LAURUS, AND/OR ANY COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL
TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT,
ANY ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.
31. LIMITATION OF LIABILITY. Each Company acknowledges and
understands that in order to assure repayment of the Obligations hereunder
Laurus may be required to exercise any and all of Laurus' rights and remedies
hereunder and agrees that, except as limited by applicable law, neither Laurus
nor any of Laurus' agents shall be liable for acts taken or omissions made in
connection herewith or therewith except for actual bad faith.
32. ENTIRE UNDERSTANDING; MAXIMUM INTEREST. This Agreement and
the Ancillary Agreements contain the entire understanding among each Company and
Laurus as to the subject matter hereof and thereof and any promises,
representations, warranties or guarantees not herein contained shall have no
force and effect unless in writing, signed by each Company's and Laurus'
respective officers. Neither this Agreement, the Ancillary Agreements, nor any
portion or provisions thereof may be changed, modified, amended, waived,
supplemented, discharged, cancelled or terminated orally or by any course of
dealing, or in any manner other than by an agreement in writing, signed by the
party to be charged. Nothing contained in this Agreement, any Ancillary
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
Companies to Laurus and thus refunded to the Companies.
33. SEVERABILITY. Wherever possible each provision of this
Agreement or the Ancillary Agreements shall be interpreted in such manner as to
be effective and valid under applicable law, but if any provision of this
Agreement or the Ancillary Agreements shall be prohibited by or invalid under
applicable law such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions thereof.
44
34. SURVIVAL. The representations, warranties, covenants and
agreements made herein shall survive any investigation made by Laurus 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 Companies pursuant hereto in
connection with the transactions contemplated herebly shall be deemed to be
representations and warranties by the Companies 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
Ancillary Agreements and the making and repaying of the Obligations.
35. CAPTIONS. All captions are and shall be without
substantive meaning or content of any kind whatsoever.
36. COUNTERPARTS; TELECOPIER SIGNATURES. This Agreement may be
executed in one or more counterparts, each of which shall constitute an original
and all of which taken together shall constitute one and the same agreement. Any
signature delivered by a party via telecopier transmission shall be deemed to be
any original signature hereto.
37. CONSTRUCTION. The parties acknowledge that each party and
its counsel have reviewed this Agreement and that the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement or
any amendments, schedules or exhibits thereto.
38. PUBLICITY. Each Company hereby authorizes Laurus to make
appropriate announcements of the financial arrangement entered into by and among
each Company and Laurus, including, without limitation, announcements which are
commonly known as tombstones, in such publications and to such selected parties
as Laurus shall in its sole and absolute discretion deem appropriate, or as
required by applicable law.
39. JOINDER. It is understood and agreed that any Person that
desires to become a Company hereunder, or is required to execute a counterpart
of this Agreement after the date hereof pursuant to the requirements of this
Agreement or any Ancillary Agreement, shall become a Company hereunder by (a)
executing a Joinder Agreement in form and substance satisfactory to Laurus, (b)
delivering supplements to such exhibits and annexes to this Agreement and the
Ancillary Agreements as Laurus shall reasonably request and (c) taking all
actions as specified in this Agreement as would have been taken by such Company
had it been an original party to this Agreement, in each case with all documents
required above to be delivered to Laurus and with all documents and actions
required above to be taken to the reasonable satisfaction of Laurus.
40. LEGENDS. The Securities shall bear legends as follows;
(a) The Notes shall bear substantially the following legend:
"THIS NOTE AND THE COMMON STOCK ISSUABLE
UPON CONVERSION OF THIS NOTE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS
45
AMENDED, OR ANY APPLICABLE, STATE SECURITIES
LAWS. THIS NOTE AND THE COMMON STOCK
ISSUABLE UPON CONVERSION OF THIS NOTE MAY
NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS NOTE OR
SUCH SHARES UNDER SAID ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO PARENT
THAT SUCH REGISTRATION IS NOT REQUIRED."
(b) Any shares of Common Stock issued pursuant to conversion
of the Notes or exercise of the Warrants, shall bear a legend which shall be in
substantially the following form until such shares are covered by an effective
registration statement filed with the SEC:
"THE SHARES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE, STATE SECURITIES LAWS. THESE
SHARES MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO PARENT THAT SUCH
REGISTRATION IS NOT REQUIRED."
(c) The Warrants shall bear substantially the following
legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE
UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE STATE
SECURITIES LAWS. THIS WARRANT AND THE COMMON
SHARES ISSUABLE UPON EXERCISE OF THIS
WARRANT MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS
WARRANT OR THE UNDERLYING SHARES OF COMMON
STOCK UNDER SAID ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO PARENT THAT SUCH
REGISTRATION IS NOT REQUIRED."
[Balance of page intentionally left blank; signature page follows.]
46
IN WITNESS WHEREOF, the parties have executed this Security
Agreement as of the date first written above.
INCENTRA SOLUTIONS, INC.
By: /s/ Matthew Richman
-----------------------------------
Name: Matthew Richman
---------------------------------
Title: Sr. Vice President & Treasurer
--------------------------------
PWI TECHNOLOGIES, INC.
By: /s/ Matthew Richman
-----------------------------------
Name: Matthew Richman
---------------------------------
Title: Secretary & Treasurer
--------------------------------
STAR SOLUTIONS OF DELAWARE, INC.
By: /s/ Matthew Richman
-----------------------------------
Name: Matthew Richman
---------------------------------
Title: Secretary & Treasurer
--------------------------------
LAURUS MASTER FUND, LTD.
By: /s/ David Grin
-----------------------------------
Name: David Grin
---------------------------------
Title: Managing Partner
--------------------------------
47
ANNEX A - DEFINITIONS
"ACCOUNT DEBTOR" means any Person who is or may be obligated
with respect to, or on account of, an Account.
"ACCOUNTANTS" has the meaning given to such term in Section
11(a).
"ACCOUNTS" means all "accounts", as such term is defined in
the UCC, now owned or hereafter acquired by any Person, including: (a) all
accounts receivable, other receivables, book debts and other forms of
obligations (other than forms of obligations evidenced by Chattel Paper or
Instruments) (including any such obligations that may be characterized as an
account or contract right under the UCC); (b) all of such Person's rights in, to
and under all purchase orders or receipts for goods or services; (c) all of such
Person's rights to any goods represented by any of the foregoing (including
unpaid sellers' rights of rescission, replevin, reclamation and stoppage in
transit and rights to returned, reclaimed or repossessed goods); (d) all rights
to payment due to such Person for Goods or other property sold, leased,
licensed, assigned or otherwise disposed of, for a policy of insurance issued or
to be issued, for a secondary obligation incurred or to be incurred, for energy
provided or to be provided, for the use or hire of a vessel under a charter or
other contract, arising out of the use of a credit card or charge card, or for
services rendered or to be rendered by such Person or in connection with any
other transaction (whether or not yet earned by performance on the part of such
Person); and (e) all collateral security of any kind given by any Account Debtor
or any other Person with respect to any of the foregoing.
"ACCOUNTS AVAILABILITY" means up to ninety percent (90%) of
the net face amount of Eligible Accounts.
"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.
"ANCILLARY AGREEMENTS" means the Notes, the Warrants, the
Registration Rights Agreements, each Security Document and all other agreements,
instruments, documents, mortgages, pledges, powers of attorney, consents,
assignments, contracts, notices, security agreements, trust agreements and
guarantees whether heretofore, concurrently, or hereafter executed by or on
behalf of any Company, any of its Subsidiaries or any other Person or delivered
to Laurus, relating to this Agreement or to the transactions contemplated by
this Agreement or otherwise relating to the relationship between or among any
Company and Laurus, as each of the same may be amended, supplemented, restated
or otherwise modified from time to time.
"AVAILABLE MINIMUM BORROWING" has the meaning given such term
in Section 2(a).
"BALANCE SHEET DATE" has the meaning given such term in
Section 12(f)(ii).
"BOOKS AND RECORDS" means all books, records, board minutes,
contracts, licenses, insurance policies, environmental audits, business plans,
files, computer files, computer discs and other data and software storage and
media devices, accounting books and records, financial statements (actual and
pro forma), filings with Governmental Authorities and any and all records and
instruments relating to the Collateral or otherwise necessary or helpful in the
collection thereof or the realization thereupon.
"BUSINESS DAY" means a day on which Laurus is open for
business and that is not a Saturday, a Sunday or other day on which banks are
required or permitted to be closed in the State of New York.
"CAPITAL AVAILABILITY AMOUNT" means Nine Million Dollars
($9,000,000).
"CHARTER" has the meaning given such term in Section
12(c)(iv).
"CHATTEL PAPER" means all "chattel paper," as such term is
defined in the UCC, including electronic chattel paper, now owned or hereafter
acquired by any Person.
"CLOSING DATE" means the date on which any Company shall first
receive proceeds of the initial Loans or the date hereof, if no Loan is made
under the facility on the date hereof.
"CODE" has the meaning given such term in Section 15(i).
"COLLATERAL" means all of each Company's property and assets,
whether real or personal, tangible or intangible, and whether now owned or
hereafter acquired, or in which it now has or at any time in the future may
acquire any right, title or interests including all of the following property in
which it now has or at any time in the future may acquire any right, title or
interest:
(a) all Inventory;
(b) all Equipment;
(c) all Fixtures;
(d) all General Intangibles;
(e) all Accounts;
(f) all Deposit Accounts, other bank accounts and all funds on
deposit therein;
(g) all Investment Property;
(h) all Stock;
(i) all Chattel Paper;
2
(j) all Letter-of-Credit Rights;
(k) all Instruments;
(l) all commercial tort claims set forth on SCHEDULE 1(A);
(m) all Books and Records;
(n) all Intellectual Property;
(o) all Supporting Obligations including letters of credit and
guarantees issued in support of Accounts, Chattel Paper, General Intangibles and
Investment Property;
(p) (i) all money, cash and cash equivalents and (ii) all cash
held as cash collateral to the extent not otherwise constituting Collateral, all
other cash or property at any time on deposit with or held by Laurus for the
account of any Company (whether for safekeeping, custody, pledge, transmission
or otherwise); and
(q) all products and Proceeds of all or any of the foregoing,
tort claims and all claims and other rights to payment including (i) insurance
claims against third parties for loss of, damage to, or destruction of, the
foregoing Collateral and (ii) payments due or to become due under leases,
rentals and hires of any or all of the foregoing and Proceeds payable under, or
unearned premiums with respect to policies of insurance in whatever form.
"COMMON STOCK" means the shares of stock representing the
Parent's common equity interests.
"COMPANY AGENT" means the Parent.
"CONTRACT RATE" has the meaning given such term in the
respective Note.
"DEFAULT" means any act or event which, with the giving of
notice or passage of time or both, would constitute an Event of Default.
"DEPOSIT ACCOUNTS" means all "deposit accounts" as such term
is defined in the UCC, now or hereafter held in the name of any Person,
including, without limitation, the Lockboxes.
"DISCLOSURE CONTROLS" has the meaning given such term in
Section 12(f)(iv).
"DOCUMENTS" means all "documents", as such term is defined in
the UCC, now owned or hereafter acquired by any Person, wherever located,
including all bills of lading, dock warrants, dock receipts, warehouse receipts,
and other documents of title, whether negotiable or non-negotiable.
"ELIGIBLE ACCOUNTS" means each Account of each Eligible
Subsidiary which conforms to the following criteria: (a) shipment of the
merchandise or the rendition of services has been completed; (b) no return,
rejection or repossession of the merchandise has occurred;
3
(c) merchandise or services shall not have been rejected or disputed by the
Account Debtor and there shall not have been asserted any offset, defense or
counterclaim; (d) continues to be in full conformity with the representations
and warranties made by such Company to Laurus with respect thereto; (e) Laurus
is, and continues to be, satisfied with the credit standing of the Account
Debtor in relation to the amount of credit extended; (f) there are no facts
existing or threatened which are likely to result in any adverse change in an
Account Debtor's financial condition; (g) is documented by an invoice in a form
approved by Laurus and shall not be unpaid more than one hundred (100) days from
invoice date; (h) not more than twenty-five percent (25%) of the unpaid amount
of invoices due from such Account Debtor remains unpaid more than one hundred
(100) days from invoice date; (i) is not evidenced by chattel paper or an
instrument of any kind with respect to or in payment of the Account unless such
instrument is duly endorsed to and in possession of Laurus or represents a check
in payment of an Account; (j) the Account Debtor is located in the United
States; PROVIDED, HOWEVER, Laurus may, from time to time, in the exercise of its
sole discretion and based upon satisfaction of certain conditions to be
determined at such time by Laurus, deem certain Accounts as Eligible Accounts
notwithstanding that such Account is due from an Account Debtor located outside
of the United States; (k) Laurus has a first priority perfected Lien in such
Account and such Account is not subject to any Lien other than Permitted Liens;
(l) does not arise out of transactions with any employee, officer, director,
stockholder or Affiliate of any Company; (m) is payable to such Company; (n)
does not arise out of a bill and hold sale prior to shipment and does not arise
out of a sale to any Person to which such Company is indebted; (o) is net of any
returns, discounts, claims, credits and allowances; (p) if the Account arises
out of contracts between such Company, on the one hand, and the United States,
on the other hand, any state, or any department, agency or instrumentality of
any of them, such Company has so notified Laurus, in writing, prior to the
creation of such Account, and there has been compliance with any governmental
notice or approval requirements, including compliance with the Federal
Assignment of Claims Act; (q) is a good and valid account representing an
undisputed bona fide indebtedness incurred by the Account Debtor therein named,
for a fixed sum as set forth in the invoice relating thereto with respect to an
unconditional sale and delivery upon the stated terms of goods sold by such
Company or work, labor and/or services rendered by such Company; (r) does not
arise out of progress billings prior to completion of the order; (s) the total
unpaid Accounts from such Account Debtor does not exceed twenty-five percent
(25%) of all Eligible Accounts; (t) such Company's right to payment is absolute
and not contingent upon the fulfillment of any condition whatsoever; (u) such
Company is able to bring suit and enforce its remedies against the Account
Debtor through judicial process; (v) does not represent interest payments, late
or finance charges owing to such Company, and (w) is otherwise satisfactory to
Laurus as determined by Laurus in the exercise of its sole discretion. In the
event any Company requests that Laurus include within Eligible Accounts certain
Accounts of one or more of such Company's acquisition targets, Laurus shall at
the time of such request consider such inclusion, but any such inclusion shall
be at the sole option of Laurus and shall at all times be subject to the
execution and delivery to Laurus of all such documentation (including, without
limitation, guaranty and security documentation) as Laurus may require in its
sole discretion.
"ELIGIBLE SUBSIDIARY" means each Subsidiary of the Parent set
forth on EXHIBIT A hereto, as the same may be updated from time to time with
Laurus' written consent.
4
"EQUIPMENT" means all "equipment" as such term is defined in
the UCC, now owned or hereafter acquired by any Person, wherever located,
including any and all machinery, apparatus, equipment, fittings, furniture,
Fixtures, motor vehicles and other tangible personal property (other than
Inventory) of every kind and description that may be now or hereafter used in
such Person's operations or that are owned by such Person or in which such
Person may have an interest, and all parts, accessories and accessions thereto
and substitute ons and replacements therefor.
"ERISA" has the meaning given such term in Section 12(bb).
"EVENT OF DEFAULT" means the occurrence of any of the events
set forth in Section 19.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"EXCHANGE ACT FILINGS" means the Parent's filings under the
Exchange Act made prior to the date of this Agreement.
"FINANCIAL REPORTING CONTROLS" has the meaning given such term
in Section 12(f)(v).
"FIXTURES" means all "fixtures" as such term is defined in the
UCC, now owned or hereafter acquired by any Person.
"FORMULA AMOUNT" has the meaning given such term in Section
2(a)(i).
"GAAP" means generally accepted accounting principles,
practices and procedures in effect from time to time in the United States of
America.
"GENERAL INTANGIBLES" means all "general intangibles" as such
term is defined in the UCC, now owned or hereafter acquired by any Person
including all right, title and interest that such Person may now or hereafter
have in or under any contract, all Payment Intangibles, customer lists,
Licenses, Intellectual Property, interests in partnerships, joint ventures and
other business associations, permits, proprietary or confidential information,
inventions (whether or not patented or patentable), technical information,
procedures, designs, knowledge, know-how, Software, data bases, data, skill,
expertise, experience, processes, models, drawings, materials, Books and
Records, Goodwill (including the Goodwill associated with any Intellectual
Property), all rights and claims in or under insurance policies (including
insurance for fire, damage, loss, and casualty, whether covering personal
property, real property, tangible rights or intangible rights, all liability,
life, key-person, and business interruption insurance, and all unearned
premiums), uncertificated securities, choses in action, deposit accounts, rights
to receive tax refunds and other payments, rights to received dividends,
distributions, cash, Instruments and other property in respect of or in exchange
for pledged Stock and Investment Property, and rights of indemnification.
"GOODS" means all "goods", as such term is defined in the UCC,
now owned or hereafter acquired by any Person, wherever located, including
embedded software to the extent
5
included in "goods" as defined in the UCC, manufactured homes, standing timber
that is cut and removed for sale and unborn young of animals.
"GOODWILL" means all goodwill, trade secrets, proprietary or
confidential information, technical information, procedures, formulae, quality
control standards, designs, operating and training manuals, customer lists, and
distribution agreements now owned or hereafter acquired by any Person.
"GOVERNMENTAL AUTHORITY" means any nation or government, any
state or other political subdivision thereof, and any agency, department or
other entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"INSTRUMENTS" means all "instruments", as such term is defined
in the UCC, now owned or hereafter acquired by any Person, wherever located,
including all certificated securities and all promissory notes and other
evidences of indebtedness, other than instruments that constitute, or are a part
of a group of writings that constitute, Chattel Paper.
"INTELLECTUAL PROPERTY" means any and all patents, trademarks,
service marks, trade names, copyrights, trade secrets, Licenses, information and
other proprietary rights and processes.
"INVENTORY" means all "inventory", as such term is defined in
the UCC, now owned or hereafter acquired by any Person, wherever located,
including all inventory, merchandise, goods and other personal property that are
held by or on behalf of such Person for sale or lease or are furnished or are to
be furnished under a contract of service or that constitute raw materials, work
in process, finished goods, returned goods, or materials or supplies of any
kind, nature or description used or consumed or to be used or consumed in such
Person's business or in the processing, production, packaging, promotion,
delivery or shipping of the same, including all supplies and embedded software.
"INVESTMENT PROPERTY" means all "investment property", as such
term is defined in the UCC, now owned or hereafter acquired by any Person,
wherever located.
"LETTER-OF-CREDIT RIGHTS" means "letter-of-credit rights" as
such term is defined in the UCC, now owned or hereafter acquired by any Person,
including rights to payment or performance under a letter of credit, whether or
not such Person, as beneficiary, has demanded or is entitled to demand payment
or performance.
"LICENSE" means any rights under any written agreement now or
hereafter acquired by any Person to use any trademark, trademark registration,
copyright, copyright registration or invention for which a patent is in
existence or other license of rights or interests now held or hereafter acquired
by any Person.
"LIEN" means any mortgage, security deed, deed of trust,
pledge, hypothecation, assignment, security interest, lien (whether statutory or
otherwise), charge, claim or encumbrance, or preference, priority or other
security agreement or preferential arrangement held or asserted in respect of
any asset of any kind or nature whatsoever including any conditional sale or
other title retention agreement, any lease having substantially the same
6
economic effect as any of the foregoing, and the filing of, or agreement to
give, any financing statement under the UCC or comparable law of any
jurisdiction.
"LOANS" has the meaning given such term in Section 2(a) and
shall include all other extensions of credit hereunder and under any Ancillary
Agreement.
"LOCKBOXES" has the meaning given such term in Section 8(a).
"MATERIAL ADVERSE EFFECT" means a material adverse effect on
(a) the business, assets, liabilities, condition (financial or otherwise),
properties, operations or prospects of any Company or any of its Subsidiaries
(taken individually and as a whole), (b) any Company's or any of its
Subsidiary's ability to pay or perform the Obligations in accordance with the
terms hereof or any Ancillary Agreement, (c) the value of the Collateral, the
Liens on the Collateral or the priority of any such Lien or (d) the practical
realization of the benefits of Laurus' rights and remedies under this Agreement
and the Ancillary Agreements.
"MINIMUM BORROWING AMOUNT" means Three Million Dollars
($3,000,000).
"MINIMUM BORROWING NOTES" means that certain Secured
Convertible Minimum Borrowing Note dated as of the Closing Date made by the
Companies in favor of Laurus evidencing the Minimum Borrowing Amount and each
other Secured Convertible Minimum Borrowing Note made by the Companies in favor
of Laurus which evidences the Minimum Borrowing Amount, as each of the same may
be amended, supplemented, restated and/or otherwise modified from time to time.
"NASD" has the meaning given such term in Section 13(b).
"NEXT UNISSUED SERIALIZED NOTE" has the meaning given such
term in Section 2(a)(i).
"NOTE SHARES" has the meaning given such term in Section
12(a).
"NOTES" means the Minimum Borrowing Notes and the Revolving
Note made by Companies in favor of Laurus in connection with the transactions
contemplated hereby, as each of the same may be amended, supplemented, restated
and/or otherwise modified from time to time.
"OBLIGATIONS" means all Loans, all advances, debts,
liabilities, obligations, covenants and duties owing by each Company and each of
its Subsidiaries to Laurus (or any corporation that directly or indirectly
controls or is controlled by or is under common control with Laurus) of every
kind and description (whether or not evidenced by any note or other instrument
and whether or not for the payment of money or the performance or
non-performance of any act), direct or indirect, absolute or contingent, due or
to become due, contractual or tortious, liquidated or unliquidated, whether
existing by operation of law or otherwise now existing or hereafter arising
including any debt, liability or obligation owing from any Company and/or each
of its Subsidiaries to others which Laurus may have obtained by assignment or
otherwise and further including all interest (including interest accruing at the
then applicable rate provided in this Agreement after the maturity of the Loans
and interest accruing at the then
7
applicable rate provided in this Agreement after the filing of any petition in
bankruptcy, or the commencement of any insolvency, reorganization or like
proceeding, whether or not a claim for post-filing or post-petition interest is
allowed or allowable in such proceeding), charges or any other payments each
Company and each of its Subsidiaries is required to make by law or otherwise
arising under or as a result of this Agreement, the Ancillary Agreements or
otherwise, together with all reasonable expenses and reasonable attorneys' fees
chargeable to the Companies' or any of their Subsidiaries' accounts or incurred
by Laurus in connection therewith.
"PAYMENT INTANGIBLES" means all "payment intangibles" as such
term is defined in the UCC, now owned or hereafter acquired by any Person,
including, a General Intangible under which the Account Debtor's principal
obligation is a monetary obligation.
"PERMITTED LIENS" means (a) Liens of carriers, warehousemen,
artisans, bailees, mechanics and materialmen incurred in the ordinary course of
business securing sums not overdue; (b) Liens incurred in the ordinary course of
business in connection with worker's compensation, unemployment insurance or
other forms of governmental insurance or benefits, relating to employees,
securing sums (i) not overdue or (ii) being diligently contested in good faith
provided that adequate reserves with respect thereto are maintained on the books
of the Companies and their Subsidiaries, as applicable, in conformity with GAAP;
(c) Liens in favor of Laurus; (d) Liens for taxes (i) not yet due or (ii) being
diligently contested in good faith by appropriate proceedings, provided that
adequate reserves with respect thereto are maintained on the books of the
Companies and their Subsidiaries, as applicable, in conformity with GAAP; and
which have no effect on the priority of Liens in favor of Laurus or the value of
the assets in which Laurus has a Lien; (e) Purchase Money Liens securing
Purchase Money Indebtedness to the extent permitted in this Agreement and (f)
Liens specified on SCHEDULE 2 hereto.
"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, including any instrumentality, division,
agency, body or department thereof), and shall include such Person's successors
and assigns.
"PRINCIPAL MARKET" means the NASD Over The Counter Bulletin
Board, NASDAQ SmallCap Market, NASDAQ National Market 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).
"PROCEEDS" means "proceeds", as such term is defined in the
UCC and, in any event, shall include: (a) any and all proceeds of any insurance,
indemnity, warranty or guaranty payable to any Company or any other Person from
time to time with respect to any Collateral; (b) any and all payments (in any
form whatsoever) made or due and payable to any Company from time to time in
connection with any requisition, confiscation, condemnation, seizure or
forfeiture of any Collateral by any governmental body, governmental authority,
bureau or agency (or any person acting under color of governmental authority);
(c) any claim of any Company against third parties (i) for past, present or
future infringement of any Intellectual Property or (ii) for past, present or
future infringement or dilution of any trademark or trademark license or for
injury to the goodwill associated with any trademark, trademark registration or
trademark
8
licensed under any trademark License; (d) any recoveries by any Company against
third parties with respect to any litigation or dispute concerning any
Collateral, including claims arising out of the loss or nonconformity of,
interference with the use of, defects in, or infringement of rights in, or
damage to, Collateral; (e) all amounts collected on, or distributed on account
of, other Collateral, including dividends, interest, distributions and
Instruments with respect to Investment Property and pledged Stock; and (f) any
and all other amounts, rights to payment or other property acquired upon the
sale, lease, license, exchange or other disposition of Collateral and all rights
arising out of Collateral.
"PURCHASE AGREEMENT" means that certain Securities Purchase
Agreement dated as of May 13, 2004 between the Parent and Laurus, as amended,
modified or supplemented from time to time.
"PURCHASE MONEY INDEBTEDNESS" means (a) any indebtedness
incurred for the payment of all or any part of the purchase price of any fixed
asset, including indebtedness under capitalized leases, (b) any indebtedness
incurred for the sole purpose of financing or refinancing all or any part of the
purchase price of any fixed asset, and (c) any renewals, extensions or
refinancings thereof (but not any increases in the principal amounts thereof
outstanding at that time).
"PURCHASE MONEY LIEN" means any Lien upon any fixed assets
that secures the Purchase Money Indebtedness related thereto but only if such
Lien shall at all times be confined solely to the asset the purchase price of
which was financed or refinanced through the incurrence of the Purchase Money
Indebtedness secured by such Lien and only if such Lien secures only such
Purchase Money Indebtedness.
"REGISTRATION RIGHTS AGREEMENTS" means that certain Minimum
Borrowing Note Registration Rights Agreement dated as of the Closing Date by and
between the Parent and Laurus and each other registration rights agreement by
and between the Parent and Laurus, as each of the same may be amended, modified
and supplemented from time to time.
"RELATED AGREEMENTS" means the Related Agreements as defined
in the Securities Purchase Agreement, as amended, modified or supplemented from
time to time.
"REVOLVING NOTE" means that certain Secured Revolving Note
dated as of the Closing Date made by the Companies in favor of Laurus in the
original principal amount of Six Million Dollars ($6,000,000), as the same may
be amended, supplemented, restated and/or otherwise modified from time to time.
"SEC" means the Securities and Exchange Commission.
"SEC REPORTS" has the meaning given such term in Section
12(u).
"SECURITIES" means the Notes and the Warrants and the shares
of Common Stock which may be issued pursuant to conversion of such Notes in
whole or in part or exercise of such Warrants.
"SECURITIES ACT" has the meaning given such term in Section
12(r).
9
"SECURITY DOCUMENTS" means all security agreements, mortgages,
cash collateral deposit letters, pledges and other agreements which are executed
by any Company or any of its Subsidiaries in favor of Laurus.
"SOFTWARE" means all "software" as such term is defined in the
UCC, now owned or hereafter acquired by any Person, including all computer
programs and all supporting information provided in connection with a
transaction related to any program.
"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 Securities Exchange Act
of 1934).
"SUBSIDIARY" means, with respect to any Person, (i) any other
Person 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
or other governing body of such other Person, are owned, directly or indirectly,
by such Person or (ii) any other Person in which such Person owns, directly or
indirectly, more than 50% of the equity interests at such time.
"SUPPORTING OBLIGATIONS" means all "supporting obligations" as
such term is defined in the UCC.
"TERM" means the Closing Date through the close of business on
the day immediately preceding the third anniversary of the Closing Date, subject
to acceleration at the option of Laurus upon the occurrence of an Event of
Default hereunder or other termination hereunder.
"TRANSFERABLE AMOUNT" has the meaning given such term in
Section 2(a)(i).
"UCC" means the Uniform Commercial Code as the same may, from
time to time be in effect in the State of New York; provided, that in the event
that, by reason of mandatory provisions of law, any or all of the attachment,
perfection or priority of, or remedies with respect to, Laurus' Lien on any
Collateral is governed by the Uniform Commercial Code as in effect in a
jurisdiction other than the State of New York, the term "UCC" shall mean the
Uniform Commercial Code as in effect in such other jurisdiction for purposes of
the provisions of this Agreement relating to such attachment, perfection,
priority or remedies and for purposes of definitions related to such provisions;
provided further, that to the extent that UCC is used to define any term herein
or in any Ancillary Agreement and such term is defined differently in different
Articles or Divisions of the UCC, the definition of such term contained in
Article or Division 9 shall govern.
"WARRANT SHARES" has the meaning given such term in Section
12(a).
"WARRANTS" means that certain Common Stock Purchase Warrant
dated as of the Closing Date made by the Parent in favor of Laurus and each
other warrant made by the Parent in favor Laurus, as each of the same may be
amended, restated, modified and/or supplemented from time to time.
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EXHIBIT A
ELIGIBLE SUBSIDIARIES
1. PWI Technologies, Inc. (WA)
2. Star Solutions of Delaware, Inc. (DE)
EXHIBIT B
BORROWING BASE CERTIFICATE