EXCHANGE AGREEMENT
dated as of
May 25, 2004
by and between
Avitar, Inc.
as the Issuer,
and
Global Capital Funding Group, L.P.
Exchange Agreement
TABLE OF CONTENTS
ARTICLE I. DEFINITIONS.......................................................1
Section 1.1 Definitions.............................................1
Section 1.2 Accounting Terms and Determinations.....................9
ARTICLE II. EXCHANGE OF SECURITIES...........................................9
Section 2.1 Exchange of Securities...................................9
Section 2.2 Exchange of Securities...................................9
Section 2.3 Closing................................................10
10
ARTICLE III. PAYMENT TERMS OF CUMULATIVE CONVERTIBLE PREFERRED SHARES.......10
Section 3.1 Payment of Principal and Dividends; Payment Mechanics........10
Section 3.2 Payment of Dividends.........................................10
(a) Intentionally Omitted...............................................10
(b) Mandatory Prepayments...............................................10
Section 3.3 Redemption Procedures.........................................11
Section 3.4 Payment of Additional Amounts................................13
ARTICLE IV. REPRESENTATIONS AND WARRANTIES..................................14
Section 4.1 Organization and Qualification...............................14
Section 4.2 Authorization and Execution..................................14
Section 4.3 Capitalization...............................................15
Section 4.4 Governmental Authorization...................................15
Section 4.5 Issuance of Shares...........................................16
Section 4.6 No Conflicts.................................................16
Section 4.7 Financial Information........................................16
Section 4.8 Litigation...................................................17
Section 4.9 Compliance with ERISA and other Benefit Plans................17
Section 4.10 Environmental Matters.......................................18
Section 4.11 Taxes.......................................................18
Section 4.12 Investments, Joint Ventures.................................18
Section 4.13 Not an Investment Company...................................18
Section 4.14 Full Disclosure.............................................18
Section 4.15 No Solicitation; No Integration with Other Offerings........18
Section 4.16 Permits.....................................................19
Section 4.17 Leases......................................................19
Section 4.18 Absence of Any Undisclosed Liabilities or Capital Calls.....19
Section 4.19 Public Utility Holding Company..............................19
Section 4.20 Intellectual Property Rights................................19
Section 4.21 Insurance...................................................19
Section 4.22 Title to Properties.........................................20
Section 4.23 Internal Accounting Controls................................20
Section 4.24 Brokers......................................................20
Section 4.25 Foreign Practices...........................................20
Section 4.26 Subsidiaries................................................20
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PURCHASER......................21
Section 5.1 Purchaser....................................................21
ARTICLE VI. CONDITIONS PRECEDENT TO PURCHASE OF SECURITIES..................22
Section 6.1 Conditions Precedent to Purchaser's Obligations to Purchas...22
Section 6.2 Conditions to the Company's Obligations......................24
ARTICLE VII. AFFIRMATIVE COVENANTS..........................................24
Section 7.1 Information...................................................25
Section 7.2 Payment of Obligations.......................................25
Section 7.3 Maintenance of Property; Insurance............................26
Section 7.4 Maintenance of Existence......................................26
Section 7.5 Compliance with Laws..........................................26
Section 7.6 Inspection of Property, Books and Records....................26
Section 7.7 Investment Company Act.......................................26
Section 7.8 Reserved......................................................27
Section 7.9 Compliance with Terms and Conditions of Material Contracts...27
Section 7.10 Reserved Shares and Listings................................27
Section 7.11 Transfer Agent Instructions.................................27
Section 7.12 Maintenance of Reporting Status; Supplemental Information...28
Section 7.13 Form D; Blue Sky Laws.......................................28
ARTICLE VIII. NEGATIVE COVENANTS............................................28
Section 8.1 Limitations on Debt or Other Liabilities.....................28
Section 8.2 Transactions with Affiliates.................................29
Section 8.3 Merger or Consolidation......................................29
Section 8.4 Limitation on Asset Sales....................................29
Section 8.5 Restrictions on Certain Amendments...........................29
Section 8.6 Prohibition on Discounted Equity Offerings...................30
Section 8.7 Limitation on Stock Repurchases..............................31
ARTICLE IX. RESTRICTIVE LEGENDS.............................................31
Section 9.1 Restrictions on Transfer...............................31
Section 9.2 Legends......................................31
Section 9.3 Notice of Proposed Transfers...........................31
ARTICLE X. ADDITIONAL AGREEMENTS AMONG THE PARTIES..........................32
Section 10.1 Liquidated Damages....................................32
Section 10.2 Conversion Notice.....................................32
Section 10.3 Conversion Limit......................................32
Section 10.4 Registration Rights...................................33
Section 10.5 Restriction on Issuance of Securities.................34
ARTICLE XI. ADJUSTMENT OF FIXED PRICE.......................................35
Section 11.1 Reorganization........................................35
Section 11.2 Share Reorganization..................................35
Section 11.3 Rights Offering.......................................36
Section 11.4 Special Distribution..................................37
Section 11.5 Capital Reorganization.................................38
Section 11.6 Purchase Price Adjustments............................38
Section 11.7 Adjustment Rules......................................39
Section 11.8 Certificate as to Adjustment..........................39
Section 11.9 Notice to Holders.....................................40
ARTICLE XII. EVENTS OF DEFAULT..............................................40
Section 12.1 Events of Default.....................................40
Section 12.2 Powers and Remedies Cumulative........................42
ARTICLE XIII. MISCELLANEOUS.................................................43
Section 13.1 Notices...............................................43
Section 13.2 No Waivers; Amendments................................43
Section 13.3 Indemnification.......................................43
Section 13.4 Reserved..............................................45
Section 13.5 Payment...............................................45
Section 13.6 Successors and Assigns................................45
Section 13.7 Reserved..............................................45
Section 13.8 Delaware Law; Submission to Jurisdiction;
Waiver of Jury Trial; Appointment of Agent...........45
Section 13.9 Entire Agreement.................................46
Section 13.10 Survival; Severability...........................46
Section 13.12 Reporting Entity for the Common Stock.
Section 13.13 Confidentiality ................................46
Section 13.14 Publicity........................................47
Section 13.15 Counterparts.....................................47
LIST OF SCHEDULES
Schedule 1.1 Secured Note
Schedule 4.3 Capitalization
Schedule 4.7 Financial Information
Schedule 4.8 Litigation
Schedule 4.12 Investments, Joint Ventures
Schedule 4.27 Subsidiaries
Schedule 8.2 Transactions with Affiliates
LIST OF EXHIBITS
Exhibit A Form of Certificate of Designation
Exhibit B Form of Registration Rights Agreement
Exhibit C Form of Solvency Certificate
Exhibit D Form of Officer's Certificate
Exhibit E Pledge and Security Agreement
EXCHANGE AGREEMENT
AGREEMENT, dated as of May ___, 2004, between Avitar, Inc. (the "
Company"), a Delaware corporation, and Global Capital Funding Group, L.P.
("Purchaser"), a Delaware limited partnership.
R E C I T A L S:
WHEREAS, the Company desires and Purchaser has agreed to exchange the 14%
Secured Promissory Note due August 26, 2005, made by the Company and held by
Purchaser set forth on Schedule 1.1 of this Agreement (the "Secured Note") for
the Company's $1,250,000 aggregate principal amount Series A Convertible
Preferred Stock, 4% Cumulative Dividend (the "Preferred Shares"), with terms and
conditions as set forth in the form of the Certificate of Designations attached
hereto as Exhibit A;
WHEREAS, the Preferred Shares will be convertible into shares of the
Company's common stock, $0.01 par value per share (the " Common Stock");
WHEREAS, Purchaser will have certain registration rights with respect to
such shares of Common Stock issuable as dividends under, and upon conversion of,
the Preferred Shares (the "Conversion Shares") as set forth in the Registration
Rights Agreement in the form attached hereto as Exhibit B;
NOW, THEREFORE, in consideration of the foregoing premises and the
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
Article I. DEFINITIONS
Section 1.01 Definitions . The following terms, as used herein, have the
following meanings:
"Additional Shares of Common Stock" has the meaning set forth in Section
11.6.
"Affiliate" means, with respect to any Person (the " Subject Person"), (i)
any other Person (a " Controlling Person") that directly, or indirectly through
one or more intermediaries, Controls the Subject Person or (ii) any other Person
(other than the Subject Person or a Consolidated Subsidiary of the Subject
Person) which is Controlled by or is under common Control with a Controlling
Person.
"Agreement" means this Exchange Agreement, as amended, supplemented or
otherwise modified from time to time in accordance with its terms.
"Amex" means the American Stock Exchange.
"Asset Sale" has the meaning set forth in Section 8.4.
"Balance Sheet Date" has the meaning set forth in Section 4.7.
"Benefit Arrangement" means at any time an employee benefit plan within the
meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and
which is maintained or otherwise contributed to by the Company.
"Benefit Plans" has the meaning set forth in Section 4.9(b).
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in the City of New York are authorized or required by law
to close.
"Capital Reorganization" has the meaning set forth in Section 11.5.
"Certificate of Designation" means the Certificate of Designation,
Preference and Rights of Series A Convertible Preferred Stock of Avitar, Inc.,
dated the date hereof and substantially in the form set forth in Exhibit A
attached hereto (as further described in Section 2.4).
"Closing Bid Price" shall mean for any security as of any date, the lowest
closing bid price as reported by Bloomberg, L.P. (" Bloomberg") on the principal
securities exchange or trading market where such security is listed or traded
or, if the foregoing does not apply, the lowest closing bid price of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no lowest trading price is
reported for such security by Bloomberg, then the average of the bid prices of
any market makers for such securities as reported in the "Pink Sheets" by the
National Quotation Bureau, Inc. If the lowest closing bid price cannot be
calculated for such security on such date on any of the foregoing bases, the
lowest closing bid price of such security on such date shall be the fair market
value as mutually determined by Purchaser and the Company for which the
calculation of the closing bid price requires, and in the absence of such mutual
determination, as determined by the Board of Directors of the Company in good
faith.
"Closing Date" means the date hereof.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission or any entity
succeeding to all of its material functions.
"Common Stock" means the common stock, $0.01 par value per share, of the
Company.
"Company" means Avitar, Inc., a Delaware corporation, and its successors.
"Company Corporate Documents" means the certificate of incorporation and
bylaws of the Company.
"Consolidated Net Worth" means at any date the total shareholder's equity
which would appear on a consolidated balance sheet of the Company prepared as of
such date.
"Consolidated Subsidiary" means at any date with respect to any Person or
Subsidiary or other entity, the accounts of which would be consolidated with
those of such Person in its consolidated financial statements if such statements
were prepared as of such date.
"Control" (including, with correlative meanings, the terms "Controlling,"
"Controlled by" and under "common Control with"), as used with respect to any
Person, means the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of that Person, whether
through the ownership of voting securities, by contract or otherwise.
"Conversion Date" shall mean the date of delivery (including delivery via
telecopy) of a Notice of Conversion for all or a portion of a Preferred Share by
the holder thereof to the Company as specified in the Certificate of
Designations.
"Conversion Price" has the meaning ("Preferred Conversion Price") set forth
in Section 1.9 of the Certificate of Designations.
"Conversion Shares" has the meaning set forth in the Recitals.
"Preferred Shares" means the Company's Series A Convertible Preferred
Stock, 4% Cumulative Dividend with the rights and privileges set forth in the
Certificate of Designations, substantially in the form set forth as Exhibit A
hereto.
"Deadline" has the meaning set forth in Section 10.1.
"Debt" of any Person means at any date, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes, or other similar instruments
issued by such Person, (iii) all obligations of such Person as lessee which (y)
are capitalized in accordance with GAAP or (z) arise pursuant to sale-leaseback
transactions, (iv) all reimbursement obligations of such Person in respect of
letters of credit or other similar instruments, (v) all Debt of others secured
by a Lien on any asset of such Person, whether or not such Debt is otherwise an
obligation of such Person and (vi) all Debt of others Guaranteed by such Person.
"Default" means any event or condition which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Derivative Securities" has the meaning set forth in Section 8.6.
"Discounted Equity Offerings" has the meaning set forth in Section 8.6.
"Directors" means the individuals then serving on the Board of Directors or
similar such management council of the Company.
"Environmental Laws" means any and all federal, state, local and foreign
statutes, laws, regulations, ordinances, rules, judgments, orders, decrees,
permits, concessions, grants, franchises, licenses, agreements or other
governmental restrictions relating to the environment or to emissions,
discharges or releases of pollutants, contaminants, petroleum or petroleum
products, chemicals or industrial, toxic or hazardous substances or wastes into
the environment, including, without limitation, ambient air, surface water,
ground water, or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, petroleum or petroleum products, chemicals or
industrial, toxic or hazardous substances or wastes or the cleanup or other
remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"ERISA Group" means the Company and each Subsidiary and all members of a
controlled group of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with the Company or any
Subsidiary, are treated as a single employer under the Code.
"Event of Default" has the meaning set forth in Article XII hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Financing" means a public or private financing consummated (meaning
closing and funding) through the issuance of debt or equity securities (or
securities convertible into or exchangeable for debt or equity securities) of
the Company, other than Permitted Financings.
"Fixed Price(s)" has the meaning set forth in Section 11.1.
"Formula Price" has the meaning set forth in Section 3.4 (a).
"GAAP" has the meaning set forth in Section 1.2.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person directly or indirectly guaranteeing (whether by virtue of
partnership arrangements, by agreement to keep well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain a minimum net worth,
financial ratio or similar requirements, or otherwise) any Debt of any other
Person and, without limiting the generality of the foregoing, any obligation,
direct or indirect, contingent or otherwise, of such Person (i) to purchase or
pay (or advance or supply funds for the purchase or payment of) such Debt or
(ii) entered into for the purpose of assuring in any other manner the holder of
such Debt of the payment thereof or to protect such holder against loss in
respect thereof (in whole or in part); provided that the term Guarantee shall
not include endorsements for collection or deposit in the ordinary course of
business. The term Guarantee used as a verb has a corresponding meaning.
"Hazardous Materials" means any hazardous materials, hazardous wastes,
hazardous constituents, hazardous or toxic substances or petroleum products
(including crude oil or any derivative or fraction thereof), defined or
regulated as such in or under any Environmental Laws.
"Intellectual Property" has the meaning set forth in Section 4.20.
"Investment" means any investment in any Person, whether by means of share
purchase, partnership interest, capital contribution, loan, time deposit or
otherwise.
"Lien" means any lien, mechanic's lien, materialmen's lien, lease,
easement, charge, encumbrance, mortgage, conditional sale agreement, title
retention agreement, agreement to sell or convey, option, claim, title
imperfection, encroachment or other survey defect, pledge, restriction, security
interest or other adverse claim, whether arising by contract or under law or
otherwise (including, without limitation, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of any financing statement under the Uniform Commercial Code or comparable law
of any jurisdiction in respect of any of the foregoing).
"Majority Holders" means (i) as of the Closing Date, Purchaser and (ii) at
any time thereafter, the holders of more than 50% in aggregate principal amount
of the Preferred Shares outstanding at such time.
"Market Price" shall mean the Closing Bid Price of the Common Stock
preceding the date of determination.
"Maximum Number of Shares" shall mean that percentage that the Company may
issue without shareholder approval under the applicable rules of the National
Market or the applicable Amex or equivalent entity, of the then issued and
outstanding shares of Common Stock of the Company as of the applicable date of
determination, or such greater number of shares as the shareholders of the
Company may have previously approved.
"NASD" has the meaning set forth in Section 7.10.
"Nasdaq Market" means the Nasdaq Stock Market's National Market System.
"National Market" means the Nasdaq Market, the Nasdaq Small Cap Market, the
New York Stock Exchange, Inc. or the American Stock Exchange, Inc.
"Net Cash Proceeds" means, with respect to any transaction, the total
amount of cash proceeds received by the Company or any Subsidiary less (i)
reasonable underwriters' fees, brokerage commissions, reasonable professional
fees and other customary out-of-pocket expenses payable in connection with such
transaction, and (ii) in the case of dispositions of assets, (A) actual transfer
taxes (but not income taxes) payable with respect to such dispositions, and (B)
the amount of Debt, if any, secured by a Lien on the asset or assets disposed of
and required to be, and actually repaid by the Company or any Subsidiary in
connection therewith, and any trade payables specifically relating to such asset
or assets sold by the Company or any Subsidiary that are not assumed by the
purchaser of such asset or assets.
"Notice of Conversion" means the notice to be delivered by a holder of a
Preferred Share upon conversion of all or a portion thereof.
"Officer's Certificate" shall mean a certificate executed by the president,
chief executive officer or chief financial officer of the Company in the form of
Exhibit D attached hereto.
"Other Taxes" has the meaning set forth in Section 3.6(b).
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Permits" means all domestic and foreign licenses, franchises, grants,
authorizations, permits, easements, variances, exemptions, consents,
certificates, orders and approvals necessary to own, lease and operate the
properties of, and to carry on the business of the Company and the Subsidiaries.
"Permitted Financings" has the meaning set forth in Section 10.5.
"Person" means an individual, corporation, partnership, trust, incorporated
or unincorporated association, joint venture, joint stock Company, government
(or any agency or political subdivision thereof) or other entity of any kind.
"Plan" means at any time an employee pension benefit plan which is covered
by Title IV of ERISA or subject to the minimum funding standards under the Code
and either (i) is maintained, or contributed to, by any member of the ERISA
Group for employees of any member of the ERISA Group or (ii) has at any time
within the preceding five years been maintained, or contributed to, by any
Person which was at such time a member of the ERISA Group for employees of the
Person which was at such time a member of the ERISA Group.
"Purchaser" means Global Capital Funding Group, L.P. and its successors and
assigns, including holders from time to time of the Preferred Shares.
"Recourse Financing" means Debt of the Company or any Subsidiary which, by
its terms, does not bar the lender thereof from action against the Company or
any Subsidiary, as borrower or guarantor, if the security value of the project
or asset pledged in respect thereof falls below the amount required to repay
such Debt.
"Redemption Event" has the meaning set forth in Section 3.4.
"Registrable Securities" has the meaning set forth in Section 10.4(a).
"Registration Default" has the meaning set forth in Section 10.4(e).
"Registration Maintenance Period" has the meaning set forth in Section
10.4(e).
"Registration Statement" has the meaning set forth in Section 10.4(b).
"Registration Rights Agreement" means the agreement between the Company and
Purchaser dated the date hereof substantially in the form set forth in Exhibit B
attached hereto.
"Required Effectiveness Date" has the meaning set forth in Section 10.4(b).
"Reserved Amount" has the meaning set forth in Section 7.10(a).
"Restricted Payment" means, with respect to any Person, (i) any dividend or
other distribution on any shares of capital stock of such Person (except
dividends payable solely in shares of capital stock of the same or junior class
of such Person and dividends from a wholly-owned direct or indirect Subsidiary
of the Company to its parent corporation), (ii) any payment on account of the
purchase, redemption, retirement or acquisition of (a) any shares of such
Person's capital stock or (b) any option, warrant or other right to acquire
shares of such Person's capital stock or (iii) any loan, or advance or capital
contribution to any Person (a " Stockholder") owning any capital stock of such
Person other than relocation, travel or like advances to officers and employees
in the ordinary course of business, and other than reasonable compensation as
determined by the Board of Directors.
"Rights Offering" has the meaning set forth in Section 11.3.
"Sale Event" has the meaning set forth in Section 3.4.
"SEC Reports" shall have the meaning set forth in Section 7.1(a).
"Secured Note" has the meaning set forth in the recitals to this Agreement.
"Securities" means the Preferred Shares, and, as applicable, the Conversion
Shares.
"Securities Act" means the Securities Act of 1933, as amended.
"Share Reorganization" has the meaning set forth in Section 11.2.
"Solvency Certificate" shall mean a certificate executed by the chief
financial officer of the Company as to the solvency of the Company, the adequacy
of its capital and its ability to pay its debts, all after giving effect to the
issuance and sale of the Preferred Shares and the completion of the offering
(including without limitation the payment of any fees or expenses in connection
therewith), which such Solvency Certificate shall be in the form of Exhibit C
attached hereto.
"Special Distribution" has the meaning set forth in Section 11.4.
"Subsidiary" has the meaning set forth in Section 4.26.
"Subsidiary Corporate Documents" means the certificates of incorporation
and bylaws of each Subsidiary.
"Taxes" has the meaning set forth in Section 3.6.
"Trading Day" shall mean any Business Day in which the Nasdaq Market or
other automated quotation system or exchange on which the Common Stock is then
traded is open for trading for at least four (4) hours.
"Transaction Agreements" means this Agreement, the Preferred Shares, the
Registration Rights Agreement, and the other agreements contemplated by this
Agreement.
"Transfer" means any disposition of Securities that would constitute a sale
thereof under the Securities Act.
"Unfunded Liabilities" means, with respect to any Plan at any time, the
amount (if any) by which (i) the present value of all benefits under Plan
exceeds (ii) the fair market value of all Plan assets allocable to such benefits
(excluding any accrued but unpaid contributions), all determined as of the then
most recent valuation date for such Plan, but only to the extent that such
excess represents a potential liability of a member of the ERISA Group to the
PBGC or any other Person under Title IV of ERISA.
Section 1.02 Accounting Terms and Determinations . Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared, in accordance with
generally accepted accounting principles as in effect from time to time, applied
on a consistent basis (except for changes concurred in by the Company's
independent public accountants) (" GAAP"). All references to "dollars,"
"Dollars" or "$" are to United States dollars unless otherwise indicated.
Article II. EXCHANGE OF SECURITIES
Section 2.01 Exchange of Securities . Subject to the terms and conditions
set forth herein, the Purchaser agrees to exchange the Secured Note, and the
Company agrees to issue to Purchaser Preferred Shares in the aggregate principal
amount of One Million Two Hundred Fifty Thousand Dollars ($1,250,000.00). The
exchange price shall be Nine Hundred Fifty Dollars ($950.00) per One Thousand
Dollars ($1,000) in stated value per share. The number of Preferred Shares to be
issued to Purchaser hereunder shall be 1,316.
Section 2.02 Exchange of Securities. Purchaser shall pay the Purchase Price
to the Company by cancellation of the Secured Note and delivery thereof to the
Company. On the Closing Date, the Preferred Shares issuable in consideration of
the Purchase Price shall be issued by the Company following the Company's
receipt of the Secured Note.
Section 2.03 Closing.
(a) The Purchaser shall deliver to the Company the Secured Note on the
Closing Date in exchange for the Preferred Shares.
(b) The Preferred Shares issued on the Closing Date shall be dated the
date hereof and rights and privileges shall begin to accrue on the
Preferred Shares as of the date hereof.
Article III. PAYMENT TERMS OF CUMULATIVE CONVERTIBLE PREFERRED SHARES
Section 3.01 Payment of Principal and Dividends; Payment Mechanics . The
Company will pay all amounts due on each Preferred Share by the method and at
the address specified for such purpose by Purchaser in writing, without the
presentation or surrender of any Preferred Share or the making of any notation
thereon, except that upon written request of the Company made concurrently with
or reasonably promptly after payment or prepayment in full of this Preferred
Share, the holder shall surrender the certificate representing the Preferred
Share for cancellation, reasonably promptly after any such request, to the
Company at its principal executive office. Prior to any sale or other
disposition of any Preferred Share, the holder thereof will, at its election,
either endorse thereon the amount of principal paid thereon and the last date to
which dividends have been paid thereon or surrender the certificate representing
the Preferred Share to the Company in exchange for a new certificate. The
Company will afford the benefits of this Section 3.1 to any direct or indirect
transferee of the Preferred Share purchased under this Agreement and that has
made the same agreement in writing relating to the Preferred Shares as Purchaser
has in this Agreement; provided that such transferee is an "accredited investor"
under Rule 501 of the Securities Act.
Section 3.02 Payment of Dividends . Dividends shall be cumulative and
payable in cash, in kind or Common Stock of the Company, at the election of the
Company, on each Preferred Share as of the date of issuance and shall be payable
in accordance with the Certificate of Designation and before the payment of any
dividend on the Common Stock.
(a) Intentionally Omitted .
(b) Mandatory Prepayments .
1) Upon (i) the occurrence of a Change in Control of the Company,
(ii) a transfer of all or substantially all of the assets of the
Company to any Person in a single transaction or series of related
transactions, (iii) a consolidation, merger or amalgamation of the
Company with or into another Person in which the Company is not the
surviving entity (other than a merger which is effected solely to
change the jurisdiction of incorporation of the Company and results in
a reclassification, conversion or exchange of outstanding shares of
Common Stock solely into shares of Common Stock) (each of items (i),
(ii) and (iii) being referred to as a " Sale Event"), or (iv) the
occurrence of a Registration Default which continues uncured for a
period of forty-five (45) days, then, in each case, the Company shall,
upon request of the Purchaser, redeem the Preferred Shares, subject to
the provisions of Section 6 of the Certificate of Designation. The
redemption price payable upon any such redemption shall be the
Redemption Price in Section 6 of the Certificate of Designation
(referred to herein as the "Formula Price").
(c) At the option of Purchaser, upon the consummation of one or more
Financings (other than Qualified Future Financing), the Company shall use
25% of the Net Cash Proceeds therefrom (unless such Net Cash Proceeds from
each such Financing is less than $250,000) to redeem the Preferred Shares.
(d) Upon the issuance of the Maximum Number of Shares and the failure
within 40 days of such issuance to obtain shareholder approval to issue
additional shares of Common Stock (the " Redemption Event"), the Company
shall redeem the outstanding Preferred Share for the Formula Price.
(e) In the event that there is an insufficient number of authorized,
issuable, unlegended and freely tradeable shares of Common Stock registered
under the Registration Statement filed by the Company to fully convert the
Preferred Shares held by Purchaser and sell such shares issued thereon,
then the Company shall immediately file an amendment to the then current
registration statement to register a sufficient number of such shares to
convert said Preferred Shares. Upon the failure within forty-five (45) days
to register a sufficient number of such shares, the Company shall redeem
the Preferred Share for the Formula Price. In addition, failure of the
Company to register a sufficient number of such shares to fully convert
said Preferred Shares shall be a Registration Default under Section 10.4(e)
from --------------- the date of the Notice of Conversion to the date of
the earlier of (i) the redemption of the outstanding balance of the
Preferred Shares or (ii) full conversion of the Preferred Shares.
Section 3.03 Redemption Procedures .
(a) Any redemption of the Preferred Shares pursuant to Sections 3.3 or
3.4 above shall be deemed to be effective and consummated (for purposes of
determining the Formula Price and the time at which Purchaser shall
thereafter not be entitled to deliver a Notice of Conversion for the
Preferred Shares) as follows:
1) A prepayment pursuant to Section 3.3, the "redemption date"
specified therein;
2) A redemption pursuant to Section 3.4(a), the date of
consummation of the applicable Sale Event or the Registration Default;
3) A redemption pursuant to Section 3.4(b), three (3) Business
Days following the date of consummation of the applicable Financing
(meaning closing and funding);
4) A redemption pursuant to Section 3.4(c), 40 days from the date
of issuance of the Maximum Number of Shares unless shareholder
approval to issue additional shares of Common Stock is obtained by the
Company prior to the expiration of said 40 days; and
5) A redemption pursuant to Section 3.4(d), three (3) Business
Days following the expiration of forty-five (45) days without
registration of a sufficient number of shares.
(b) On the effective date of a redemption of the Preferred Shares as
specified in Section 3.5(a) above, the Company shall deliver by wire
transfer of funds the prepayment/redemption price to Purchaser of the
Preferred Shares subject to redemption. Should Purchaser not receive
payment of any amounts due on redemption of its Preferred Shares by reason
of the Company's failure to make payment at the times prescribed above for
any reason, the Company shall pay to the applicable holder on demand (x)
interest on the sums not paid when due at an annual rate equal to the
lesser of (I) the maximum lawful rate and (II) 18% per annum, compounded at
the end of each thirty (30) days, until the applicable holder is paid in
full and (y) all costs of collection, including, but not limited to,
reasonable attorneys' fees and costs, whether or not suit or other formal
proceedings are instituted.
(c) The Company shall select the Preferred Shares to be redeemed in
any redemption in which not all of the Preferred Shares are to be redeemed
so that the ratio of the Preferred Shares of each holder selected for
redemption to the total Preferred Shares owned by that holder shall be the
same as the ratio of all such Preferred Shares selected for redemption
bears to the total of all then outstanding Preferred Shares. Should any
Preferred Shares required to be redeemed under the terms hereof not be
redeemed solely by reason of limitations imposed by law, the applicable
Preferred Shares shall be redeemed on the earliest possible dates
thereafter to the maximum extent permitted by law.
(d) Any Notice of Conversion delivered by Purchaser (including
delivery via telecopy) to the Company prior to the effective date of a
voluntary prepayment pursuant to Section 3.3 or a mandatory prepayment
pursuant to Section 3.4 as specified in Section 3.5(a) above), shall be
honored by the Company and the conversion of the Preferred Shares shall be
deemed effected on the Conversion Date. In addition, between the effective
date of a mandatory prepayment pursuant to Section 3.4 as specified in
Section 3.5(a) above and the date the Company is required to deliver the
redemption proceeds in full to Purchaser, Purchaser may deliver a Notice of
Conversion to the Company. Such notice will be (x) of no force or effect if
the Company timely pays the redemption proceeds to Purchaser when due or
(y) honored on or as of the date of the Notice of Conversion if the Company
fails to timely pay the redemption proceeds to Purchaser when due.
Additionally, in the event the Company fails to make full payment of the
redemption price of the Preferred Shares being redeemed by the tenth (10)
day following the notice of redemption, then the Company waives its right
to redeem any of the remaining then outstanding Preferred Shares, unless
such redemption is approved by the Purchaser.
Section 3.04 Payment of Additional Amounts .
(a) Any and all payments by the Company hereunder or under the
Preferred Shares to Purchaser and each "qualified assignee" thereof shall
be made free and clear of and without deduction or withholding for any and
all present or future taxes, levies, imposts, deductions, charges or
withholdings, and all liabilities with respect thereto (all such taxes,
levies, imposts, deductions, charges, withholdings and liabilities being
hereinafter referred to as " Taxes") unless such Taxes are required by law
or the administration thereof to be deducted or withheld. If the Company
shall be required by law or the administration thereof to deduct or
withhold any Taxes from or in respect of any sum payable under the
Preferred Shares (i) the holders of the Preferred Shares subject to such
Taxes shall have the right, but not the obligation, for a period of thirty
(30) days commencing upon the day it shall have received written notice
from the Company that it is required to withhold Taxes to transfer all or
any portion of the Preferred Shares to a qualified assignee to the extent
such transfer can be effected in accordance with the other provisions of
this Agreement and applicable law; (ii) the Company shall make such
deductions or withholdings; (iii) the sum payable shall be increased as may
be necessary so that after making all required deductions or withholdings
(including deductions or withholdings applicable to additional amounts paid
under this Section 3.6) Purchaser receives an amount equal to the sum it
would have received if no such deduction or withholding had been made; and
(iv) the Company shall forthwith pay the full amount deducted or withheld
to the relevant taxation or other authority in accordance with applicable
law; provided, however, the Company shall not be required to pay any taxes
owed by Purchaser or any qualified assignee resulting from (x) the payment
of dividends on the Preferred Shares by the Company or (y) any gain
recognized from the transfer of the Preferred Shares by the Purchaser to a
qualified assignee. A "qualified assignee" of a Purchaser is a Person that
is organized under the laws of (i) the United States or (II) any
jurisdiction other than the United States or any political subdivision
thereof and that (y) represents and warrants to the Company that payments
of the Company to such assignee under the laws in existence on the date of
this Agreement would not be subject to any Taxes and (z) from time to time,
as and when requested by the Company, executes and delivers to the Company
and the Internal Revenue Service forms, and provides the Company with any
information necessary to establish such assignee's continued exemption from
Taxes under applicable law.
(b) The Company shall forthwith pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies (all such taxes, charges and levies hereinafter referred to as "
Other Taxes") which arise from any payment made under any of the
Transaction Agreements or from the execution, delivery or registration of,
or otherwise with respect to, this Agreement other than Taxes payable
solely as a result of the transfer from Purchaser to a Person of any
Security.
(c) The Company shall indemnify Purchaser, or qualified assignee, for
the full amount of Taxes (provided, however, the Company shall not be
required to indemnify or pay any taxes owed by Purchaser or any qualified
assignee resulting from (x) the payment of dividends on the Preferred
Shares by the Company or (y) any gain recognized from the transfer of the
Preferred Shares by the Purchaser to a qualified assignee) or Other Taxes
(including, without limitation, any Taxes or Other Taxes imposed by any
jurisdiction on amounts payable under this Section 3.6) paid by Purchaser,
or qualified assignee, and any liability (including penalties, interest and
expenses) arising therefrom or with respect thereto, whether or not such
Taxes or Other Taxes were correctly or legally asserted. Payment under this
indemnification shall be made within 30 days from the date Purchaser or
assignee makes written demand therefore. A certificate as to the amount of
such Taxes or Other Taxes submitted to the Company by Purchaser or
qualified assignee shall be conclusive evidence of the amount due from the
Company to such party.
(d) Within 30 days after the date of any payment of Taxes, the Company
will furnish to Purchaser the original or a certified copy of a receipt
evidencing payment thereof.
Article IV. REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to Purchaser as of the Closing Date
the following:
Section 4.01 Organization and Qualification . The Company and each
Subsidiary is a corporation (or other legal entity) duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation, with full power and authority to own, lease, use and operate its
properties and to carry on its business as and where now owned, leased, used,
operated and conducted. The Company and each subsidiary is qualified to conduct
business as a foreign corporation and is in good standing in every jurisdiction
in which the nature of the business conducted by it makes such qualification
necessary, except where such failure would not have a Material Adverse Effect. A
" Material Adverse Effect" means any material adverse effect on the operations,
results of operations, properties, assets or condition (financial or otherwise)
of the Company or the Company and its Subsidiaries, taken as a whole, or on the
transactions contemplated hereby or by the agreements or instruments to be
entered into in connection herewith.
Section 4.02 Authorization and Execution .
Section 4.03 The Company and each Subsidiary, as applicable, has all
requisite corporate power and authority to enter into and perform each
Transaction Agreement and to consummate the transactions contemplated hereby and
thereby and to issue the Securities in accordance with the terms hereof and
thereof.
Section 4.04 The execution, delivery and performance by the Company and
each Subsidiary, as applicable, of each Transaction Agreement and the issuance
by the Company of the Securities, have been duly and validly authorized by the
Board of Directors of the Company and each Subsidiary, as applicable, and no
further consent or authorization of the Company or its Subsidiaries, their Board
of Directors or the Company's shareholders is required.
Section 4.05 This Agreement has been duly executed and delivered by the
Company.
Section 4.06 This Agreement constitutes, and upon execution and delivery
thereof by the Company, each of the Transaction Agreements will constitute, a
valid and binding agreement of the Company and each Subsidiary, as applicable,
in each case enforceable against the Company and each Subsidiary, as applicable,
in accordance with its respective terms, subject to (i) applicable bankruptcy,
insolvency or similar laws affecting the enforceability of creditors rights
generally and (ii) equitable principles of general applicability.
Section 4.07 Capitalization . As of the date hereof, the authorized, issued
and outstanding capital stock of the Company is as set forth on Schedule 4.3
hereto and except as set forth on Schedule 4.3 no other shares of capital stock
of the Company will be outstanding as of the Closing Date. All of such
outstanding shares of capital stock are, or upon issuance will be, duly
authorized, validly issued, fully paid and nonassessable. No shares of capital
stock of the Company are subject to preemptive rights or similar rights of the
shareholders of the Company or any liens or encumbrances imposed through the
actions or failure to act of the Company. Other than as set forth on Schedule
4.3 hereto, as of the date hereof, (i) there are no outstanding options,
warrants, scrip, rights to subscribe for, puts, calls, rights of first refusal,
agreements, understandings, claims or other commitments or rights of any
character whatsoever relating to, or securities or rights convertible into or
exchangeable for any shares of capital stock of the Company or any of its
Subsidiaries, or arrangements by which the Company or any of its Subsidiaries is
or may become bound to issue additional shares of capital stock of the Company
or any of its Subsidiaries, and (ii) there are no agreements or arrangements
under which the Company or any of its Subsidiaries are obligated to register the
sale of any of its or their securities under the Securities Act (except pursuant
to the Registration Rights Agreement) and (iii) there are no anti-dilution or
price adjustment provisions contained in any security issued by the Company (or
in any agreement providing rights to security holders) that will be triggered by
the issuance of the Securities. The Company has furnished to Purchaser true and
correct copies of the Company's Corporate Documents, and the terms of all
securities convertible into or exercisable for Common Stock and the material
rights of the holders thereof in respect thereto.
Section 4.08 Governmental Authorization . The execution and delivery by the
Company of the Transaction Agreements does not and will not, the issuance and
sale by the Company of the Securities does not and will not, and the
consummation of the transactions contemplated hereby and by the other
Transaction Agreements will not, require any action by or in respect of, or
filing with, any governmental body, agency or governmental official except (a)
such actions or filings that have been undertaken or made prior to the date
hereof and that will be in full force and effect (or as to which all applicable
waiting periods have expired) on and as of the date hereof or which are not
required to be filed on or prior to the Closing Date, (b) such actions or
filings that, if not obtained, would not result in a Material Adverse Effect and
(d) the filing of a "Form D" as described in Section 7.13 below.
Section 4.09 Issuance of Shares . Upon conversion in accordance with the
terms of the Preferred Shares, the Conversion Shares shall be duly and validly
issued and outstanding, fully paid and nonassessable, free and clear of any
Taxes, Liens and charges with respect to issuance other than those created by
Purchaser and shall not be subject to preemptive rights or similar rights of any
other shareholders of the Company. Assuming the representations and warranties
of Purchaser herein are true and correct in all material respects, each of the
Securities will have been issued in material compliance with all applicable U.S.
federal and state securities laws. The Company understands and acknowledges
that, in certain circumstances, the issuance of Conversion Shares could dilute
the ownership interests of other shareholders of the Company. The Company
further acknowledges that its obligation to issue Conversion Shares upon
conversion of the Preferred Shares is absolute and unconditional regardless of
the dilutive effect that such issuance may have on the ownership interests of
other shareholders of the Company.
Section 4.10 No Conflicts . The execution and delivery by the Company of
the Transaction Agreements to which it is a party did not and will not, the
issuance and sale by the Company of the Securities did not and will not and the
consummation of the transactions contemplated hereby and by the other
Transaction Agreements will not, contravene or constitute a default under or
violation of (i) any provision of applicable law or regulation known by the
Company to be applicable to it, (ii) the Company Corporate Documents, (iii) any
agreement, judgment, injunction, order, decree or other instrument binding upon
the Company or any Subsidiary or any of their respective assets, or result in
the creation or imposition of any Lien on any asset of the Company or any
Subsidiary except those created by the Transaction Agreements. The Company and
each Subsidiary is in compliance with and conforms to all statutes, laws,
ordinances, rules, regulations, orders, restrictions and all other legal
requirements of any domestic or foreign government or any instrumentality
thereof having jurisdiction over the conduct of its businesses or the ownership
of its properties, except where such failure would not have a Material Adverse
Effect.
Section 4.11 Financial Information . Since March 31, 2004 (the " Balance
Sheet Date"), except as disclosed in Schedule 4.7, there has been (x) no
material adverse change in the assets or liabilities, or in the business or
condition, financial or otherwise, or in the results of operations or prospects,
of the Company and its Subsidiaries, whether as a result of any legislative or
regulatory change, revocation of any license or rights to do business, fire,
explosion, accident, casualty, labor trouble, flood, drought, riot, storm,
condemnation, act of God, public force or otherwise and (y) no material adverse
change in the assets or liabilities, or in the business or condition, financial
or otherwise, or in the results of operations or prospects, of the Company and
its subsidiaries except in the ordinary course of business; and to the knowledge
of the Company no fact or condition exists or is contemplated or threatened
which might cause such a change in the future. The audited consolidated balance
sheets of the Company and its Subsidiaries for the period ending December 31,
2001, 2002 and 2003, and the related consolidated statements of income, changes
in shareholders' equity and changes in cash flows for the periods then ended,
including the footnotes thereto, except as indicated therein, (i) complied in
all material respects with applicable accounting requirements and (ii) have been
prepared in accordance with GAAP consistently applied throughout the periods
indicated, except that the unaudited financial statements do not contain notes
and may be subject to normal audit adjustments and normal annual adjustments.
Such financial statements fairly present the financial condition of the Company
and its Subsidiaries at the dates indicated and the consolidated results of
their operations and cash flows for the periods then ended and, except as
indicated therein, reflect all claims against and all Debts and liabilities of
the Company and its Subsidiaries, fixed or contingency required to be reflected
therein.
Section 4.12 Litigation . Except as set forth on Schedule 4.8, there is no
action, suit or proceeding pending or, to the knowledge of the Company,
threatened against the Company or any Subsidiary, before any court or arbitrator
or any governmental body, agency or official in which there is a reasonable
possibility of an adverse decision which could be reasonably expected to have a
Material Adverse Effect or which challenges the validity of any Transaction
Agreements.
Section 4.13 Compliance with ERISA and other Benefit Plans .
Section 4.14 Each member of the ERISA Group has fulfilled its obligations
under the minimum funding standards of ERISA and the Code with respect to each
Plan and is in compliance in all material respects with the presently applicable
provisions of ERISA and the Code with respect to each Plan. No member of the
ERISA Group has (i) sought a waiver of the minimum funding standard under
Section 412 of the Code in respect of any Plan, (ii) failed to make any required
contribution or payment to any Plan or Multiemployer Plan or in respect of any
Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement,
which as resulted or could result in the imposition of a Lien or the posting of
a bond or other security under ERISA or the Code or (iii) incurred any liability
under Title IV of ERISA other than a liability to the PBGC for premiums under
Section 4007 of ERISA.
Section 4.15 The benefit plans not covered under clause (a) above
(including profit sharing, deferred compensation, stock option, employee stock
purchase, bonus, retirement, health or insurance plans, collectively the "
Benefit Plans") relating to the employees of the Company are duly registered
where required by, and are in good standing in all material respects under, all
applicable laws. All required employer and employee contributions and premiums
under the Benefit Plans to the date hereof have been made, the respective fund
or funds established under the Benefit Plans are funded in accordance with
applicable laws, and no past service funding liabilities exist thereunder.
Section 4.16 No Benefit Plans have any unfunded liabilities, either on a
"going concern" or "winding up" basis and determined in accordance with all
applicable laws and actuarial practices and using actuarial assumptions and
methods that are reasonable in the circumstances. No event has occurred and no
condition exists with respect to any Benefit Plans that has resulted or could
reasonably be expected to result in any pension plan having its registration
revoked or wound up (in whole or in part) or refused for the purposes of any
applicable laws or being placed under the administration of any relevant pension
benefits regulatory authority or being required to pay any taxes or penalties
(in any material amounts) under any applicable laws.
Section 4.17 Environmental Matters . The costs and liabilities associated
with Environmental Laws (including the cost of compliance therewith) are
unlikely to have a material adverse effect on the business, condition (financial
or otherwise), operations, performance, properties or prospects of the Company
or any Subsidiary. Each of the Company and the Subsidiaries conducts its
businesses in compliance in all material respects with all applicable
Environmental Laws.
Section 4.18 Taxes . All United States federal, state, county,
municipality, local or foreign income tax returns and all other material tax
returns (including foreign tax returns) which are required to be filed by or on
behalf of the Company and each Subsidiary have been filed and all material taxes
due pursuant to such returns or pursuant to any assessment received by the
Company and each Subsidiary have been paid except those being disputed in good
faith and for which adequate reserves have been established. The charges,
accruals and reserves on the books of the Company and each Subsidiary in respect
of taxes and other governmental charges have been established in accordance with
GAAP.
Section 4.19 Investments, Joint Ventures . Other than as set forth in
Schedule 4.12, the Company has no other direct or indirect Investment in any
Person, and the Company is not a party to any partnership, management,
shareholders' or joint venture or similar agreement.
Section 4.20 Not an Investment Company . Neither the Company nor any
Subsidiary is an "Investment Company" within the meaning of Investment Company
Act of 1940, as amended.
Section 4.21 Full Disclosure . The information heretofore furnished by the
Company to Purchaser for purposes of or in connection with this Agreement or any
transaction contemplated hereby does not, and all such information hereafter
furnished by the Company or any Subsidiary to Purchaser will not (in each case
taken together and on the date as of which such information is furnished),
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements contained therein, in the light of the
circumstances under which they are made, not misleading.
Section 4.22 No Solicitation; No Integration with Other Offerings . No form
of general solicitation or general advertising was used by the Company or, to
the best of its actual knowledge, any other Person acting on behalf of the
Company, in connection with the offer and sale of the Securities. Neither the
Company, nor, to its knowledge, any Person acting on behalf of the Company, has,
either directly or indirectly, sold or offered for sale to any Person (other
than Purchaser) any of the Securities or, within the six months prior to the
date hereof, any other similar security of the Company except as contemplated by
this Agreement, and the Company represents that neither itself nor any Person
authorized to act on its behalf (except that the Company makes no representation
as to Purchaser and their Affiliates) will sell or offer for sale any such
security to, or solicit any offers to buy any such security from, or otherwise
approach or negotiate in respect thereof with, any Person or Persons so as
thereby to cause the issuance or sale of any of the Securities to be in
violation of any of the provisions of Section 5 of the Securities Act. The
issuance of the Securities to Purchaser will not be integrated with any other
issuance of the Company's securities (past, current or future) which requires
stockholder approval under the rules of the any National Market.
Section 4.23 Permits . (a) Each of the Company and its Subsidiaries has all
material Permits; (b) all such Permits are in full force and effect, and each of
the Company and its Subsidiaries has fulfilled and performed all material
obligations with respect to such Permits; (c) no event has occurred which
allows, or after notice of lapse of time would allow, revocation or termination
by the issuer thereof or which results in any other material impairment of the
rights of the holder of any such Permit; and (d) the Company has no reason to
believe that any governmental body or agency is considering limiting, suspending
or revoking any such Permit, except in each case or in the aggregate that could
not be reasonably expected to have a Material Adverse Effect.
Section 4.24 Leases . Neither the Company nor any Subsidiary is a party to
any capital lease obligation with a value greater than $100,000 or to any
operating lease with an aggregate annual rental greater than $500,000 during the
life of such lease.
Section 4.25 Absence of Any Undisclosed Liabilities or Capital Calls .
There are no liabilities of the Company or any Subsidiary of any kind
whatsoever, whether accrued, contingent, absolute, determined, determinable or
otherwise, and there is no existing condition, situation or set of circumstances
which would reasonably be expected to result in such a liability, other than (i)
those liabilities provided for in the financial statements delivered pursuant to
Section 4.7 and (ii) other undisclosed liabilities which, individually or in the
aggregate, would not have a Material Adverse Effect.
Section 4.26 Public Utility Holding Company . Neither the Company nor any
Subsidiary is, or will be upon issuance and sale of the Securities and the use
of the proceeds described herein, subject to regulation under the Public Utility
Holding Company Act of 1935, as amended, the Federal Power Act, the Interstate
Commerce Act or to any federal or state statute or regulation limiting its
ability to issue and perform its obligations under any Transaction Agreement.
Section 4.27 Intellectual Property Rights . Each of the Company and its
Subsidiaries owns, or is licensed under, and has the rights to use, all material
to the knowledge of the Company, patents, trademarks, trade names, copyrights,
technology, know-how and processes (collectively, " Intellectual Property") used
in, or necessary for the conduct of its business; no claims have been asserted
by any Person to the use of any such Intellectual Property or challenging or
questioning the validity or effectiveness of any license or agreement related
thereto. To the best of Company's and its Subsidiaries' knowledge, there is no
valid basis for any such claim and the use of such Intellectual Property by the
Company and its Subsidiaries will not infringe upon the rights of any Person.
Section 4.28 Insurance . The Company and its Subsidiaries maintain, with
financially sound and reputable insurance companies, insurance in at least such
amounts and against such risks such that any uninsured loss would not have a
Material Adverse Effect. All insurance coverages of the Company and its
Subsidiaries are in full force and effect and there are no past due premiums in
respect of any such insurance.
Section 4.29 Title to Properties . The Company and its Subsidiaries have
good and marketable title to all their respective properties reflected on the
financial statements referred to in Section 4.7, free and clear of all Liens.
Section 4.30 Internal Accounting Controls . The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient, in
the judgment of the Company's Board of Directors, to provide reasonable
assurance that (i) transactions are executed in accordance with managements'
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with GAAP and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
Section 4.31 Brokers . Except as set forth on Schedule 4.24, the Company
has no contract, arrangement or understanding with any broker, finder of similar
agent with respect to the transactions contemplated by this Agreement.
Section 4.32 Foreign Practices . Neither the Company nor any of its
Subsidiaries nor, to the Company's knowledge, any employee or agent of the
Company or any Subsidiary has made any payments of funds of the Company or
Subsidiary, or received or retained any funds, in each case in violation of any
law, rule or regulation.
Section 4.33 Subsidiaries . Except for the directly and indirectly owned
subsidiaries of the Company as set forth on Schedule 4.26 (the "Subsidiaries"),
the Company does not own or hold any shares of stock or any other security or
interest in any other equity, or any rights to acquire any such security or
interest. Except for the Subsidiaries disclosed on Schedule 4.26, the Company
has never had any subsidiary corporation of which the securities having a
majority of voting power in electing the board of directors or representing a
majority of the economic interests were, at the time as of which any
determination was made, owned by the Company either directly or indirectly. The
number of authorized, issued and outstanding shares of capital stock of the
Subsidiaries is as set forth on Schedule 4.26. All outstanding shares of the
Subsidiaries capital stock are validly issued, fully paid and nonassessable, are
free from, and were not issued in violation of any preemptive rights, and are
owned of record and beneficially by the Company.
Article V. REPRESENTATIONS AND WARRANTIES OF PURCHASER
Section 5.01 Purchaser . Purchaser hereby represents and warrants to the
Company that:
Section 5.02 Purchaser is an "accredited investor" within the meaning of
Rule 501(a) under the Securities Act and the Securities to be acquired by it
pursuant to this Agreement are being acquired for its own account and, as of the
date hereof, not with a view toward, or for sale in connection with, any
distribution thereof except in compliance with applicable United States federal
and state securities law; provided that the disposition of Purchaser's property
shall at all times be and remain within its control;
Section 5.03 the execution, delivery and performance of this Agreement and
the exchange of the Securities pursuant thereto are within Purchaser's corporate
or partnership powers, as applicable, and have been duly and validly authorized
by all requisite corporate or partnership action;
(a) this Agreement has been duly executed and delivered by Purchaser;
(b) the execution and delivery by Purchaser of the Transaction
Agreements to which it is a party does not, and the consummation of the
transactions contemplated hereby and thereby will not, contravene or
constitute a default under or violation of (i) any provision of applicable
law or regulation, or (ii) any agreement, judgment, injunction, order,
decree or other instrument binding upon Purchaser;
(c) Purchaser understands that the Securities have not been registered
under the Securities Act and may not be transferred or sold except as
specified in this Agreement or the remaining Transaction Agreements;
(d) this Agreement constitutes a valid and binding agreement of
Purchaser enforceable in accordance with its terms, subject to (i)
applicable bankruptcy, insolvency or similar laws affecting the
enforceability of creditors rights generally and (ii) equitable principles
of general applicability;
Section 5.04 Purchaser has such knowledge and experience in financial and
business matters so as to be capable of evaluating the merits and risks of its
investment in the Securities and Purchaser is capable of bearing the economic
risks of such investment;
(a) Purchaser is knowledgeable, sophisticated and experienced in
business and financial matters; Purchaser has previously invested in
securities similar to the Securities and fully understands the limitations
on transfer described herein; Purchaser has been afforded access to
information about the Company and the financial condition, results of
operations, property, management and prospects of the Company sufficient to
enable it to evaluate its investment in the Securities; Purchaser has been
afforded the opportunity to ask such questions as it has deemed necessary
of, and to receive answers from, representatives of the Company concerning
the terms and conditions of the offering of the Securities and the merits
and the risks of investing in the Securities; and Purchaser has been
afforded the opportunity to obtain such additional information which the
Company possesses or can acquire that is necessary to verify the accuracy
and completeness of the information given to Purchaser concerning the
Company. The foregoing does not in any way relieve the Company of its
representations and other undertakings hereunder, and shall not limit
Purchaser's ability to rely thereon; and
(b) no part of the source of funds used by Purchaser to acquire the
Securities constitutes assets allocated to any separate account maintained
by Purchaser in which any employee benefit plan (or its related trust) has
any interest.
Article VI. CONDITIONS PRECEDENT TO PURCHASE OF SECURITIES
Section 6.01 Conditions Precedent to Purchaser's Obligations to Purchase .
The obligation of Purchaser hereunder to exchange the Secured Note at the
Closing is subject to the satisfaction, on or before the Closing Date, of each
of the following conditions, provided that these conditions are for Purchaser's
sole benefit and may be waived by Purchaser at any time in its sole discretion:
Section 6.02 The Company and each Subsidiary, as required, shall have duly
executed this Agreement, the Registration Rights Agreement, and all other
required agreements , and delivered the same to Purchaser;
(a) The Company shall have delivered to Purchaser a duly executed
certificate representing the Preferred Share in accordance with Section 2.3
hereof;
(b) The Company shall have delivered the Solvency Certificate;
(c) The representations and warranties of the Company and its
Subsidiaries contained in each Transaction Agreement shall be true and
correct in all material respects as of the date when made and as of the
Closing Date as though made at such time (except for representations and
warranties that speak as of a specified date) and the Company and its
Subsidiaries shall have performed, satisfied and complied with all
covenants, agreements and conditions required by such Transaction
Agreements to be performed, satisfied or complied with by them at or prior
to the Closing Date. Purchaser shall have received an Officer's Certificate
executed by the chief executive officer of the Company, dated as of the
Closing Date, to the foregoing effect and as to such other matters as may
be reasonably requested by Purchaser, including but not limited to
certificates with respect to the Company and Subsidiary Corporate
Documents, resolutions relating to the transactions contemplated hereby and
the incumbencies of certain officers and Directors of the Company. The form
of such certificate is attached hereto as Exhibit D; ---------
(d) The Company shall have received all governmental, Board of
Directors, shareholders and third party consents and approvals necessary or
desirable in connection with the issuance and exchange of the Securities
and the consummation of the transactions contemplated by the Transaction
Agreements;
(e) All applicable waiting periods in respect to the issuance and
exchange of the Securities shall have expired without any action having
been taken by any competent authority that could restrain, prevent or
impose any materially adverse conditions thereon or that could seek or
threaten any of the foregoing;
(f) No law or regulation shall have been imposed or enacted that, in
the judgment of Purchaser, could adversely affect the transactions set
forth herein or in the other Transaction Agreements, and no law or
regulation shall have been proposed that in the reasonable judgment of
Purchaser could reasonably have any such effect;
(g) Purchaser shall have received an opinion, dated the Closing Date,
of counsel to the Company, in form and substance satisfactory to Purchaser;
(h) All fees and expenses due and payable by the Company on or prior
to the Closing Date shall have been paid;
(i) The Company Corporate Documents and the Subsidiary Corporate
Documents, if any, shall be in full force and effect and no term or
condition thereof shall have been amended, waived or otherwise modified
without the prior written consent of Purchaser;
(j) There shall have occurred no material adverse change in the
business, condition (financial or otherwise), operations, performance,
properties or prospects of the Company or any Subsidiary since March 31,
2004;
(k) There shall exist no action, suit, investigation, litigation or
proceeding pending or threatened in any court or before any arbitrator or
governmental instrumentality that challenges the validity of or purports to
affect this Agreement or any other Transaction Agreement, or other
transaction contemplated hereby or thereby or that could reasonably be
expected to have a Material Adverse Effect, or any material adverse effect
on the enforceability of the Transaction Agreements or the Securities or
the rights of the holders of the Securities or Purchaser hereunder;
(l) Purchaser shall have confirmed the receipt of the Preferred Shares
to be issued, duly executed by the Company in the denominations and
registered in the name of Purchaser;
(m) There shall not have occurred any disruption or adverse change in
the financial or capital markets generally, or in the market for the Common
Stock (including but not limited to any suspension or delisting), which
Purchaser reasonably deems material in connection with the purchase of the
Securities;
(n) As of the Closing Date, no Default or Event of Default shall have
occurred and be continuing; and
(o) The Company shall have obtained approval by the Company's
stockholders of the proposals and resolution contained in the Company's
Definitive Proxy Statement dated January 26, 2004.
Section 6.03 Conditions to the Company's Obligations . The obligations of
the Company to issue and exchange the Securities to Purchaser pursuant to this
Agreement are subject to the satisfaction, at or prior to any Closing Date, of
the following conditions:
Section 6.04 The representations and warranties of Purchaser contained
herein shall be true and correct in all material respects on the Closing Date
and Purchaser shall have performed and complied in all material respects with
all agreements required by this Agreement to be performed or complied with by
Purchaser at or prior to the Closing Date;
(a) The issue and exchange of the Securities by the Company shall not
be prohibited by any applicable law, court order or governmental
regulation;
(b) Receipt by the Company of duly executed counterparts of this
Agreement and the Registration Rights Agreement signed by Purchaser;
(c) The Company shall have received the Secured Note for cancellation.
Article VII. AFFIRMATIVE COVENANTS
The Company hereby agrees that, from and after the date hereof for so long
as any Preferred Shares remain outstanding and for the benefit of Purchaser:
Section 7.01 Information . The Company will deliver to each holder of the
Preferred Shares:
(a) promptly upon the filing thereof, copies of (i) all registration
statements (other than the exhibits thereto and any registration statements
on Form S-8 or its equivalent), and (ii) all reports of Forms 10-K, 10-Q
and 8-K (or other equivalents) which the Company or any Subsidiary has
filed with the Commission (collectively, "SEC Reports");
(b) simultaneously with the delivery of each item referred to in
clause (a) above, a certificate from the chief financial officer of the
Company stating that no Default or Event of Default has occurred and is
continuing, or, if as of the date of such delivery a Default shall have
occurred and be continuing, a certificate from the Company setting forth
the details of such Default or Event of Default and the action which the
Company is taking or proposes to take with respect thereto;
(c) within two (2) days after any officer of the Company obtains
knowledge of a Default or Event of Default, or that any Person has given
any notice or taken any action with respect to a claimed Default hereunder,
a certificate of the chief financial officer of the Company setting forth
the details thereof and the action which the Company is taking or proposed
to take with respect thereto;
(d) promptly upon the mailing thereof to the shareholders of the
Company generally, copies of all financial statements, reports and proxy
statements so mailed and any other document generally distributed to
shareholders;
(e) at least five (5) Business Days prior to the consummation of any
Financing or other event requiring a redemption of the Preferred Shares
under Section 3.4, notice thereof together with a summary of all material
terms thereof and copies of all documents and instruments associated
therewith;
(f) notice promptly upon the occurrence of any event by which the
Reserved Amount becomes less than the sum of (i) 1.5 times the maximum
number of Conversion Shares issuable pursuant to the Transaction
Agreements; and
(g) promptly following the commencement thereof, notice and a
description in reasonable detail of any litigation or proceeding to which
the Company or any Subsidiary is a party in which the amount involved is
$100,000 or more and not covered by insurance or in which injunctive or
similar relief is sought.
Section 7.02 Payment of Obligations . The Company will, and will cause each
Subsidiary to, pay and discharge, at or before maturity, all their respective
material obligations, including, without limitation, tax liabilities, except
where the same may be contested in good faith by appropriate proceedings and
will maintain, in accordance with GAAP, appropriate reserves for the accrual of
any of the same.
Section 7.03 Maintenance of Property; Insurance . The Company will, and
will cause each Subsidiary to, keep all property useful and necessary in its
business in good working order and condition, ordinary wear and tear excepted.
In addition, the Company and each Subsidiary will maintain insurance in at least
such amounts and against such risks as it has insured against as of the Closing
Date.
Section 7.04 Maintenance of Existence . The Company will, and will cause
each Subsidiary to, continue to engage in business of the same general type as
now conducted by the Company and such Subsidiaries, and will preserve, renew and
keep in full force and effect its respective corporate existence and their
respective material rights, privileges and franchises necessary or desirable in
the normal conduct of business.
Section 7.05 Compliance with Laws . The Company will, and will cause each
Subsidiary to, comply, in all material respects, with all federal, state,
municipal, local or foreign applicable laws, ordinances, rules, regulations,
municipal by-laws, codes and requirements of governmental authorities
(including, without limitation, Environmental Laws and ERISA and the rules and
regulations thereunder) except (i) where compliance therewith is contested in
good faith by appropriate proceedings or (ii) where non-compliance therewith
could not reasonably be expected, in the aggregate, to have a material adverse
effect on the business, condition (financial or otherwise), operations,
performance, properties or prospects of the Company or such Subsidiary.
Section 7.06 Inspection of Property, Books and Records . The Company will,
and will cause each Subsidiary to, keep proper books of record and account in
which full, true and correct entries shall be made of all dealings and
transactions in relation to their respective businesses and activities; and will
permit, during normal business hours, Purchaser's Representative or an affiliate
thereof, as representatives of Purchaser and representatives of the Small
Business Administration, to visit and inspect any of their respective
properties, upon reasonable prior notice, to examine and make abstracts from any
of their respective books and records and to discuss their respective affairs,
finances and accounts with their respective executive officers and independent
public accountants (and by this provision the Company authorizes its independent
public accountants to disclose and discuss with Purchaser the affairs, finances
and accounts of the Company and its Subsidiaries in the presence of a
representative of the Company; provided, however, that such discussions will not
result in any unreasonable expense to the Company, without Company consent), all
at such reasonable times.
Section 7.07 Investment Company Act . The Company will not be or become an
open-end investment trust, unit investment trust or face-amount certificate
company that is or is required to be registered under Section 8 of the
Investment Company Act of 1940, as amended.
Section 7.08 Reserved.
Section 7.09 Compliance with Terms and Conditions of Material Contracts .
The Company will, and will cause each Subsidiary to, comply, in all respects,
with all terms and conditions of all material contracts to which it is subject.
Section 7.10 Reserved Shares and Listings .
Section 7.11 The Company shall at all times have authorized, and reserved
for the purpose of issuance, a sufficient number of shares of Common Stock to
provide for the full conversion of the outstanding Preferred Shares and issuance
of the Conversion Shares based on the conversion price of the Preferred Shares
in effect from time to time (the "Reserved Amount"). The Company shall not
reduce the Reserved Amount without the prior written consent of Purchaser. With
respect to all Securities which contain an indeterminate number of shares of
Common Stock issuable in connection therewith (such as the Preferred Shares),
the Company shall include in the Reserve Amount, no less than two (2) times the
number of shares that is then actually issuable upon conversion or exercise of
such Securities. If at any time the number of shares of Common Stock authorized
and reserved for issuance is below the number of Conversion Shares issued or
issuable upon conversion of the Preferred Shares, the Company will promptly take
all corporate action necessary to authorize and reserve a sufficient number of
shares, including, without limitation, either (x) calling a special meeting of
shareholders to authorize additional shares, in the case of an insufficient
number of authorized shares or (y) in lieu thereof, consummating the immediate
repurchase of the Preferred Shares contemplated in Section 3.4(c) hereof.
Section 7.12 The Company will maintain the listing and trading of its
Common Stock on the Amex. The Company will comply in all respects with the
Company's reporting, filing and other obligations under the bylaws or rules of
the National Association of Securities Dealers, Inc. (the "NASD") and such
exchanges, as applicable. The Company shall promptly provide to Purchaser copies
of any notices it receives from Nasdaq regarding the continued eligibility of
the Common Stock for listing on the Amex or any National Market, as applicable.
Section 7.13 Transfer Agent Instructions . Upon receipt of a Notice of
Conversion, the Company shall immediately direct the Company's transfer agent to
issue certificates, registered in the name of Purchaser or its nominee, for the
Conversion Shares, in such amounts as specified from time to time by Purchaser
to the Company upon proper conversion of the Preferred Shares. Upon conversion
of any Preferred Shares in accordance with their terms the Company will, and
will use its best lawful efforts to cause its transfer agent to, issue one or
more certificates representing shares of Common Stock in such name or names and
in such denominations specified by a Purchaser in a Notice of Conversion. As
long as the Registration Statement contemplated by the Registration Rights
Agreement shall remain effective, the shares of Common Stock issuable upon
conversion of any Preferred Shares shall be issued to any transferee of such
shares from Purchaser without any restrictive legend upon appropriate evidence
of transfer in compliance with the Securities Act and the rules and regulations
of the Commission; provided that for so long as the Registration Statement is
effective, no opinion of counsel will be required to effect any such transfer.
The Company further warrants and agrees that no instructions other than these
instructions have been or will be given to its transfer agent. Nothing in this
Section 7.11 shall affect in any way a Purchaser's obligation to comply with all
securities laws applicable to Purchaser upon resale of such shares of Common
Stock, including any prospectus delivery requirements.
Section 7.14 Maintenance of Reporting Status; Supplemental Information . So
long as any of the Securities are outstanding, the Company shall timely file all
reports required to be filed with the Commission pursuant to the Exchange Act.
The Company shall not terminate its status as an issuer required to file reports
under the Exchange Act, even if the Exchange Act or the rules and regulations
thereunder would permit such termination. If at anytime the Company is not
subject to the requirements of Section 13 or 15(d) of the Exchange Act, the
Company will promptly furnish at its expense, upon request, for the benefit of
the holders from time to time of Securities, and prospective purchasers of
Securities, information satisfying the information requirements of Rule 144
under the Securities Act.
Form D; Blue Sky Laws . The Company agrees to file a "Form D" with respect
to the Securities as required under Regulation D of the Securities Act and to
provide a copy thereof to Purchaser promptly after such filing. The Company
shall, on or before the Closing Date, take such action as the Company shall
reasonably determine is necessary to qualify the Securities for exchange with
Purchaser at the Closing pursuant to this Agreement under applicable securities
or "blue sky" laws of the states of the United States (or to obtain an exemption
from such qualification), and shall provide evidence of any such action so taken
to Purchaser on or prior to the Closing Date.
Article VIII. NEGATIVE COVENANTS
The Company hereby agrees that from and after the date hereof for so long
as any Preferred Shares remain outstanding and for the benefit of Purchaser:
Section 8.01 Limitations on Debt or Other Liabilities . Neither the Company
nor any Subsidiary will create, incur, assume or suffer to exist (at any time
after the Closing Date, after giving effect to the application of the proceeds
of the issuance of the Securities) (i) any Debt except (x) Debt incurred in a
Permitted Financing (hereinafter defined), (y) Debt incurred in connection with
equipment leases to which the Company or its Subsidiaries are a party incurred
in the ordinary course of business; and (z) Debt incurred in connection with
trade accounts payable, imbalances and refunds arising in the ordinary course of
business and (ii) any equity securities (including Derivative Securities) (other
than those securities that are issuable (x) under or pursuant to stock option
plans, warrants or other rights programs that exist as of the date hereof, (z)
in connection with the acquisition (including by merger) of a business or of
assets otherwise permitted under this Agreement), unless the Company complies
with the mandatory prepayment terms of Section 3.4(b) hereof.
Section 8.02 Transactions with Affiliates . The Company and each Subsidiary
will not, directly or indirectly, pay any funds to or for the account of, make
any investment (whether by acquisition or stock or indebtedness, by loan,
advance, transfer of property, guarantee or other agreement to pay, purchase or
service, directly or indirectly, and Debt, or otherwise) in, lease, sell,
transfer or otherwise dispose of any assets, tangible or intangible, to, or
participate in, or effect any transaction in connection with any joint
enterprise or other joint arrangement with, any Affiliate, except, (1) pursuant
to those agreements specifically identified on Schedule 8.2 attached hereto
(with a copy of such agreements annexed to such Schedule 8.2) and (2) on terms
to the Company or such Subsidiary no less favorable than terms that could be
obtained by the Company or such Subsidiary from a Person that is not an
Affiliate of the Company upon negotiation at arms' length, as determined in good
faith by the Board of Directors of the Company; provided that no determination
of the Board of Directors shall be required with respect to any such
transactions entered into in the ordinary course of business.
Section 8.03 Merger or Consolidation . The Company will not, in a single
transaction or a series of related transactions (i) consolidate with or merge
with or into any other Person, or (ii) permit any other Person to consolidate
with or merge into it, unless the Company shall be the survivor of such merger
or consolidation and (x) immediately before and immediately after given effect
to such transaction (including any indebtedness incurred or anticipated to be
incurred in connection with the transaction), no Default or Event of Default
shall have occurred and be continuing; and (y) the Company has delivered to
Purchaser an Officer's Certificate stating that such consolidation, merger or
transfer complies with this Agreement, and that all conditions precedent in this
Agreement relating to such transaction have been satisfied.
Section 8.04 Limitation on Asset Sales . Neither the Company nor any
Subsidiary will consummate an Asset Sale of material assets of the Company or
any Subsidiary without the prior written consent of Purchaser, which consent
shall not be unreasonably withheld. As used herein, "Asset Sale" means any sale,
lease, transfer or other disposition (or series of related sales, leases,
transfers or dispositions) or sales of capital stock of a Subsidiary (other than
directors' qualifying shares), property or other assets (each referred to for
the purpose of this definition as a "disposition"), including any disposition by
means of a merger, consolidation or similar transaction other than a disposition
of property or assets at fair market value in the ordinary course of business.
Section 8.05 Restrictions on Certain Amendments . Neither the Company nor
any Subsidiary will waive any provision of, amend, or suffer to be amended, any
provision of such entity's existing Debt, any material contract or agreement
previously or hereafter filed by the Company with the Commission as part of its
SEC Reports, any Company Corporate Document or Subsidiary Corporate Document if
such amendment, in the Company's reasonable judgment, would materially adversely
affect Purchaser or the holders of the Securities without the prior written
consent of Purchaser.
Section 8.06 Prohibition on Discounted Equity Offerings .
(a) In addition to and not in lieu of the covenant specified in
Section 8.1 above, beginning on the Closing Date and continuing until 180
days following the date on which the Registration Statement is declared
effective by the Commission (the "Effective Date") or until such time as
all of the Preferred Shares have been either redeemed or converted into
Conversion Shares in full, whichever is later to occur, the Company agrees
that it will not, without the written consent of the Purchaser or Majority
Holders, issue any of its equity securities (or securities convertible into
or exchangeable or exercisable for equity securities (the "Derivative
Securities")) on terms that allow a holder thereof to acquire such equity
securities (or Derivative Securities) at a discount to the Market Price of
the Common Stock at the time of issuance or, in the case of Derivative
Securities at a conversion price based on any formula (other than standard
anti-dilution provisions) based on the Market Price on a date later than
the date of issuance so long as such conversion is not below the Market
Price on the date of issuance (each such event, a "Discounted Equity
Offering"). As used herein, "discount" shall include, but not be limited
to, (i) any warrant, right or other security granted or offered in
connection with such issuance which, on the applicable date of grant, is
offered with an exercise or conversion price, as the case may be, at less
than the then current Market Price of the Common Stock or, if such security
has an exercise or conversion price based on any formula (other than
standard anti-dilution provisions) based on the Market Price on a date
later than the date of issuance, then at a price below the Market Price on
such date of exercise or conversion, as the case may be, or (ii) any
commissions, fees or other allowances paid in connection with such
issuances (other than customary underwriter or placement agent commissions,
fees or allowances). For the purposes of determining the Market Price at
which Common Stock is acquired under this Section, normal underwriting
commissions and placement fees (including underwriters' warrants) shall be
excluded. The 180-day restrictive period set forth in this paragraph (a) of
this Section 8.6 shall be increased by one day for each day a Registration
Default has occurred and not been cured by the Company.
(b) Beginning on the Closing Date and continuing until 180 days
following the Effective Date or until such time as all of the Preferred
Shares have been either redeemed or converted into Conversion Shares in
full, whichever is later to occur, the Company agrees it will not, without
the written consent of the Purchaser or Majority Holders, issue any of its
equity securities (or Derivative Securities), unless any shares of Common
Stock issued or issuable in connection therewith are "restricted
securities." As used herein "restricted securities" shall mean securities
which may not be sold by virtue of contractual restrictions imposed by the
Company or otherwise, in each case prior to twelve (12) months following
the date of issuance of such securities.
(c) The restrictions contained in this Section 8.6 shall not apply to
the issuance by the Company of (or the agreement to issue) Common Stock or
Derivative Securities in connection with (i) the acquisition (including by
merger) of a business or of assets otherwise permitted under this
Agreement, (ii) stock option or other compensatory plans, (iii) the
Securities Purchase Agreement dated May 14, 2004 between the Company and
GCA Strategic Investment Fund Limited or (iv) Qualified Future Financing
(hereafter defined).
Section 8.07 Limitation on Stock Repurchases . Except as otherwise set
forth in the Preferred Shares, the Company shall not, without the written
consent of the Majority Holders, redeem, repurchase or otherwise acquire
(whether for cash or in exchange for property or other securities or otherwise)
any shares of capital stock of the Company or any warrants, rights or options to
purchase or acquire any such shares.
Article IX. RESTRICTIVE LEGENDS
Section 9.01 Restrictions on Transfer . From and after their respective
dates of issuance, none of the Securities shall be transferable except upon the
conditions specified in this Article IX, which conditions are intended to ensure
compliance with the provisions of the Securities Act in respect of the Transfer
of any of such Securities or any interest therein. Each Purchaser will use its
best efforts to cause any proposed transferee of any Securities held by it to
agree to take and hold such Securities subject to the provisions and upon the
conditions specified in this Article IX.
Section 9.02 Legends . The Preferred Shares shall bear a restrictive legend
in accordance with applicable securities laws. The Conversion Shares, upon
resale by the Purchaser pursuant to the Registration Statement, shall be freely
tradeable and unrestricted.
Section 9.03 Notice of Proposed Transfers . Prior to any proposed Transfer
of the Securities (other than a Transfer (i) registered or exempt from
registration under the Securities Act, (ii) to an affiliate of a Purchaser which
is an "accredited investor" within the meaning of Rule 501(a) under the
Securities Act, provided that any such transferee shall agree to be bound by the
terms of this Agreement and the Registration Rights Agreement, or (iii) to be
made in reliance on Rule 144 under the Securities Act), the holder thereof shall
give written notice to the Company of such holder's intention to effect such
Transfer, setting forth the manner and circumstances of the proposed Transfer,
which shall be accompanied by (A) an opinion of counsel reasonably acceptable to
the Company, confirming that such transfer does not give rise to a violation of
the Securities Act, (B) representation letters in form and substance reasonably
satisfactory to the Company to ensure compliance with the provisions of the
Securities Act and (C) letters in form and substance reasonably satisfactory to
the Company from each such transferee stating such transferee's agreement to be
bound by the terms of this Agreement and the Registration Rights Agreement. Such
proposed Transfer may be effected only if the Company shall have received such
notice of transfer, opinion of counsel, representation letters and other letters
referred to in the immediately preceding sentence, whereupon the holder of such
Securities shall be entitled to Transfer such Securities in accordance with the
terms of the notice delivered by the holder to the Company.
Article X. ADDITIONAL AGREEMENTS AMONG THE PARTIES
Section 10.01 Liquidated Damages .
(a) The Company shall, and shall use its best efforts to cause its
transfer agent to, issue and deliver shares of Common Stock consistent with
Section 7.11 hereof within three (3) New York Stock Exchange Trading Days
of delivery of a Notice of Conversion (the "Deadline") to Purchaser (or any
party receiving Securities by transfer from Purchaser) at the address of
Purchaser set forth in the Notice of Conversion, as the case may be. The
Company understands that a delay in the issuance of such certificates after
the Deadline could result in economic loss to Purchaser.
(b) Without in any way limiting Purchaser's right to pursue other
remedies, including actual damages and/or equitable relief, the Company
agrees that if delivery of the Conversion Shares is more than one (1)
Business Day after the Deadline, the Company shall pay to Purchaser, as
liquidated damages and not as a penalty, $500 for each $100,000 principal
amount of Preferred Shares then outstanding per day in cash, for each of
the first ten days following the Deadline that the Company fails to deliver
such Common Stock, and $1,000 for each $100,000 principal amount of
Preferred Shares then outstanding per day in cash, for each day thereafter
the Company fails to deliver such Common Stock. Such cash amount shall be
paid to Purchaser by the last day of the calendar week following the week
in which it has accrued or, at the option of Purchaser (by written notice
to the Company by the first day of the week following the week in which it
has accrued), shall be added to the principal amount of the Preferred Share
(if then outstanding) payable to Purchaser, in which event dividends shall
accrue thereon in accordance with the terms of the Preferred Shares and
such additional principal amount shall be convertible into Common Stock in
accordance with the terms of the Preferred Shares.
Section 10.02 Conversion Notice . The Company agrees that, in addition to
any other remedies which may be available to Purchaser, including, but not
limited to, the remedies available under Section 10.1, in the event the Company
fails for any reason (other than as a result of actions taken by a Purchaser in
breach of this Agreement) to effect delivery to a Purchaser of certificates with
or without restrictive legends as contemplated by Article IX representing the
shares of Common Stock on or prior to the Deadline after conversion of any
Preferred Shares, Purchaser will be entitled, if prior to the delivery of such
certificates, to revoke the Notice of Conversion, by delivering a notice to such
effect to the Company whereupon the Company and Purchaser shall each be restored
to their respective positions immediately prior to delivery of such Notice of
Conversion.
Section 10.03 Conversion Limit . Notwithstanding the conversion rights
under the Preferred Shares, unless Purchaser delivers a waiver in accordance
with the immediately following sentence, in no event shall Purchaser be entitled
to convert any portion of the Preferred Shares, in excess of that portion of the
Preferred Shares, as applicable, of which the sum of (i) the number of shares of
Common Stock beneficially owned by Purchaser and its Affiliates (other than
shares of Common Stock which may be deemed beneficially owned through the
ownership of the unconverted portion of the Preferred Shares or other Derivative
Securities convertible into or exchangeable for shares of Common Stock which
contain a limitation similar to that set forth in this Section 10.3), and (ii)
the number of shares of Common Stock issuable upon the conversion of the portion
of the Preferred Shares with respect to which this determination is being made,
would result in beneficial ownership by Purchaser and its Affiliates of more
than 4.99% of the outstanding shares of Common Stock. For purposes of Section
10.3(i) beneficial ownership shall be determined in accordance with Rule 13d-3
of the Exchange Act and Regulations 13 D-G thereunder, except as otherwise
provided in this Section 10.3. The foregoing limitation shall not apply and
shall be of no further force or effect (i) immediately preceding and upon the
occurrence of any voluntary or mandatory redemption or repayment transaction
described herein or in the Certificate of Designation, (ii) immediately
preceding and upon any Sale Event, or (iii) following the occurrence of any
Event of Default which is not cured for a period of ten (10) calendar days.
Furthermore, in no event shall Purchaser be entitled to convert any portion of
the Preferred Shares in excess of that portion of Preferred Shares of which the
number of shares of Common Stock to be issued is in excess of 19.9% of the
Common Stock outstanding immediately prior to the Closing Date without the
approval of the shareholders of the Company in accordance with AMEX rules.
Section 10.04 Registration Rights . he Company shall grant Purchaser
registration rights covering the Conversion Shares (the "Registrable
Securities") on the terms set forth in the Registration Rights Agreement and
herein.
(a) The Company shall prepare and file within thirty (30) days of the
Closing Date (the "Filing Date"), a registration statement (the
"Registration Statement") to register a sufficient number of Common Stock
to cover the resale of the Registrable Securities. The Company shall use
its best efforts to cause the Registration Statement to be declared
effective by the Commission on the earlier of (i) 90 days following the
Filing Date or (ii) ten days following the receipt of a "no review" or
similar letter from the Commission or (iii) the first (1st) business day
following the day the Commission determines the Registration Statement
eligible to be declared effective (the "Required Effectiveness Date"). The
Company shall pay all expenses of registration (other than underwriting
fees and discounts, if any, in respect of Registrable Securities offered
and sold under such registration statement by Purchaser). The Company
agrees to file an initial written response to the Commission within ten
(10) calendar days of receipt of any comments by the Commission relating to
the Registration Statement and provide the Purchaser with a copy of the
formal response. If the Company fails to file the Registration Statement by
the Filing Date, the Company will pay to the Fund liquidated damages in the
amount of 2% of the principal amount of the then outstanding Preferred
Shares for each 30-day period, prorated, until the Registration Statement
has been filed.
(b) If the Registration Statement is not declared effective by the
Commission by the Required Effectiveness Date, the Company shall pay to
Purchaser, as liquidated damages and not as a penalty, an amount equal to
1% of the outstanding principal amount of the Preferred Shares, prorated,
for each 30 day period the Registration Statement is not declared effective
by the Commission. In the event the Company fails to obtain an effective
registration statement by the 360th day following the Closing Date, the
Company will redeem the Preferred Shares as set forth in Section 6.2 of the
Certificate of Designation. Additionally, the Company will grant to
Purchaser certain piggyback registration rights in the event the Company
proposes to effect a registered offering of Common Stock or warrants or
both prior to the filing of the Registration Statement referenced above.
(c) Any such liquidated damages shall be paid in cash by the Company
to Purchaser by wire transfer in immediately available funds on the last
day of each calendar week following the event requiring its payment.
(d) If, following the declaration of effectiveness of the Registration
Statement, such registration statement (or any prospectus or supplemental
prospectus contained therein) shall cease to be effective for any reason
(including but not limited to the occurrence of any event that results in
any prospectus or supplemental prospectus containing an untrue statement of
a material fact or omitting a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading) for the period
required in the Registration Rights Agreement (the "Registration
Maintenance Period"), the Company fails to file required amendments to the
Registration Statement in order to allow the Purchaser to exercise its
rights to receive unrestricted, unlegended, freely tradeable shares of
Common Stock, or if for any reason there are insufficient shares of such
shares of Common Stock registered under the then current Registration
Statement to effect full conversion of the Preferred Shares (each a
"Registration Default"), the Company shall immediately take all necessary
steps to cause the Registration Statement to be amended or supplemented so
as to cure such Registration Default. Failure to cure a Registration
Default within ten (10) business days shall result in the Company paying to
Purchaser liquidated damages in an amount equal to 1% of the principal
amount of the Preferred shares then outstanding, prorated, for each 30-day
period of such Registration Default until the Registration Default is
cured.
Section 10.05 Restriction on Issuance of Securities . Beginning on the
Closing Date and continuing for a period of 180 days following the Effective
Date or until the Preferred Shares have been fully converted into shares of
Common Stock, whichever is later to occur, the Company will not sell, or offer
to sell, any securities (including credit facilities which are convertible into
securities which may be issued at a discount to the then current Market Price)
other than borrowings that provide for the payment of the Preferred Shares,
borrowings under conventional credit facilities existing as of the date hereof,
stock issued or credit facilities to be established in connection with
acquisitions, employee and director stock options of the Company, existing
rights and warrants of the Company and securities issued under the Preferred
Shares and Qualified Future Financing as defined and set forth in the
Certificate of Designation in an amount not to exceed in the aggregate, Seven
Million Seven Hundred Thousand Dollars ($7,700,000) in the following tranches:
(1) an amount not to exceed One Million Two Hundred Thousand Dollars
($1,200,000) no sooner than June 1, 2004; (2) an amount not to exceed Three
Million Five Hundred Thousand Dollars ($3,500,000.) no sooner than August 1,
2004; and (3) an amount not to exceed Three Million Dollars ($3,000,000) no
sooner than October 31,. In addition, the Company shall not issue any securities
in connection with a strategic alliance entered into by the Company unless such
securities are the subject of a one year statutory or contractual hold period
or, if not subject to such a hold period, unless the Purchaser has fully
converted all outstanding Preferred Shares. Notwithstanding the foregoing, the
Company may enter into the following types of transactions (collectively
referred to as "Permitted Financings"): (1) "permanent financing" transactions,
which would include any form of debt or equity financing (other than an
underwritten offering), which is followed by a reduction of the said financing
commitment to zero and payment of all related fees and expenses; (2) "project
financing" which provide for the issuance of recourse debt instruments in
connection with the operation of the Company's business as presently conducted
or as proposed to be conducted; (3) an underwritten offering of Common Stock,
provided that such offering provides for the registration of the Common Stock to
be received by Purchaser as a result of the conversion of the Preferred Shares
held by the Purchaser to the extent there is not an effective Registration
Statement for the sale of the Conversion Shares in place at the time of such
offering; and (4) other financing transactions specifically consented to in
writing by the Purchaser. Until such time as all of the Preferred Shares have
been either redeemed or converted into Conversion Shares in full, the Company
will not issue any of its equity securities (or Derivative Securities), unless
any shares of Common stock issued or issuable in connection therewith are
"restricted securities" provided, however, this sentence shall not apply to the
above mentioned Qualified Future Financing. "Restricted Securities" shall mean
securities which may not be sold prior to twelve (12) months following the date
of issuance of such securities by virtue of contractual restrictions imposed by
the Company or otherwise.
Article XI. ADJUSTMENT OF FIXED PRICE
Section 11.01 Reorganization . The Conversion Price the ("Fixed Price")
shall be adjusted, as applicable, as hereafter provided.
Section 11.02 Share Reorganization . If and whenever the Company shall:
(a) subdivide the outstanding shares of Common Stock into a greater
number of shares;
(b) consolidate the outstanding shares of Common Stock into a smaller
number of shares;
(c) issue Common Stock or securities convertible into or exchangeable
for shares of Common Stock as a stock dividend to all or substantially all
the holders of Common Stock; or
(d) make a distribution on the outstanding Common Stock to all or
substantially all the holders of Common Stock payable in Common Stock or
securities convertible into or exchangeable for Common Stock;
any of such events being herein called a "Share Reorganization," then in each
such case the Fixed Price shall be adjusted, effective immediately after the
record date at which the holders of Common Stock are determined for the purposes
of the Share Reorganization or, if no record date is fixed, the effective date
of the Share Reorganization, by multiplying the Fixed Price in effect on such
record or effective date, as the case may be, by a fraction of which:
(i) the numerator shall be the number of shares of Common Stock
outstanding on such record or effective date (without giving effect to the
transaction); and
(ii) the denominator shall be the number of shares of Common Stock
outstanding after giving effect to such Share Reorganization, including, in
the case of a distribution of securities convertible into or exchangeable
for shares of Common Stock, the number of shares of Common Stock that would
have been outstanding if such securities had been converted into or
exchanged for Common Stock on such record or effective date.
Section 11.02 Rights Offering . If and whenever the Company shall issue to
all or substantially all the holders of Common Stock, rights, options or
warrants under which such holders are entitled, during a period expiring not
more than 45 days after the record date of such issue, to subscribe for or
purchase Common Stock (or Derivative Securities), at a price per share (or, in
the case of securities convertible into or exchangeable for Common Stock, at an
exchange or conversion price per share at the date of issue of such securities)
of less than 95% of the Market Price of the Common Stock on such record date
(any such event being herein called a "Rights Offering"), then in each such case
the Fixed Price shall be adjusted, effective immediately after the record date
at which holders of Common Stock are determined for the purposes of the Rights
Offering, by multiplying the Fixed Price in effect on such record date by a
fraction of which:
(i) the numerator shall be the sum of:
(I) the number of shares of Common Stock outstanding on such
record date; and
(II) a number obtained by dividing:
(A) either,
(x) the product of the total number of shares of Common
Stock so offered for subscription or purchase and the price at
which such shares are so offered, or
(y) the product of the maximum number of shares of Common
Stock into or for which the convertible or exchangeable
securities so offered for subscription or purchase may be
converted or exchanged and the conversion or exchange price of
such securities, or, as the case may be, by
(B) the Market Price of the Common Stock on such record
date; and
(ii) the denominator shall be the sum of:
(I) the number of shares of Common Stock outstanding on such
record date; and
(II) the number of shares of Common Stock so offered for
subscription or purchase (or, in the case of Derivative
Securities, the maximum number of shares of Common Stock for or
into which the securities so offered for subscription or purchase
may be converted or exchanged).
To the extent that such rights, options or warrants are not exercised prior to
the expiry time thereof, the Fixed Price shall be readjusted effective
immediately after such expiry time to the Fixed Price which would then have been
in effect upon the number of shares of Common Stock (or Derivative Securities)
actually delivered upon the exercise of such rights, options or warrants.
Section 11.03 Special Distribution . If and whenever the Company shall
issue or distribute to all or substantially all the holders of Common Stock:
(i) shares of the Company of any class, other than Common Stock;
(i) rights, options or warrants; or
(ii) any other assets (excluding cash dividends and equivalent
dividends in shares paid in lieu of cash dividends in the ordinary course);
and if such issuance or distribution does not constitute a Share Reorganization
or a Rights Offering (any such event being herein called a "Special
Distribution"), then in each such case the Fixed Price shall be adjusted,
effective immediately after the record date at which the holders of Common Stock
are determined for purposes of the Special Distribution, by multiplying the
Fixed Price in effect on such record date by a fraction of which:
(i)the numerator shall be the difference between:
(A) the product of the number of shares of Common Stock
outstanding on such record date and the Market Price of the Common
Stock on such date; and
(B) the fair market value, as determined by the Directors (whose
determination shall be conclusive), to the holders of Common Stock of
the shares, rights, options, warrants, evidences of indebtedness or
other assets issued or distributed in the Special Distribution (net of
any consideration paid therefore by the holders of Common Stock), and
(ii) the denominator shall be the product of the number of shares of
Common Stock outstanding on such record date and the Market Price of
the Common Stock on such date.
Section 11.05 Capital Reorganization . If and whenever there shall occur:
(1) a reclassification or redesignation of the shares of Common Stock or
any change of the shares of Common Stock into other shares, other than in a
Share Reorganization;
(2) a consolidation, merger or amalgamation of the Company with, or into
another body corporate; or
(3) the transfer of all or substantially all of the assets of the Company
to another body corporate;
(any such event being herein called a "Capital Reorganization"), then in each
such case the holder who exercises the right to convert Preferred Shares after
the effective date of such Capital Reorganization shall be entitled to receive
and shall accept, upon the exercise of such right, in lieu of the number of
shares of Common Stock to which such holder was theretofore entitled upon the
exercise of the conversion privilege, the aggregate number of shares or other
securities or property of the Company or of the body corporate resulting from
such Capital Reorganization that such holder would have been entitled to receive
as a result of such Capital Reorganization if, on the effective date thereof,
such holders had been the holder of the number of shares of Common Stock to
which such holder was theretofore entitled upon conversion; provided, however,
that no such Capital Reorganization shall be consummated in effect unless all
necessary steps shall have been taken so that such holders shall thereafter be
entitled to receive such number of shares or other securities of the Company or
of the body corporate resulting from such Capital Reorganization, subject to
adjustment thereafter in accordance with provisions the same, as nearly as may
be possible, as those contained above.
Section 11.06 Intentionally Omitted.
Section 11.07 Adjustment Rules . The following rules and procedures shall
be applicable to adjustments made in this Article XI:
(a) etc no adjustment in the Fixed Price shall be required unless such
adjustment would result in a change of at least 1% in the Fixed Price then
in effect, provided, however, that any adjustments which, but for the
provisions of this clause would otherwise have been required to be made,
shall be carried forward and taken into account in any subsequent
adjustment;
ii. if any event occurs of the type contemplated by the adjustment
provisions of this Article XI but not expressly provided for by such
provisions, the Company will give notice of such event as provided herein,
and the Company's board of directors will make an appropriate adjustment in
the Fixed Price so that the rights of the holders of the applicable
Security shall not be diminished by such event; and
iii. if a dispute shall at any time arise with respect to any
adjustment of the Fixed Price, such dispute shall be conclusively
determined by the auditors of the Company or, if they are unable or
unwilling to act, by a firm of independent chartered accountants selected
by the Directors and any such determination shall be binding upon the
Company and Purchaser.
Section 11.08 Certificate as to Adjustment . The Company shall from time to
time promptly after the occurrence of any event which requires an adjustment in
the Fixed Price deliver to Purchaser a certificate specifying the nature of the
event requiring the adjustment, the amount of the adjustment necessitated
thereby, the Fixed Price after giving effect to such adjustment and setting
forth, in reasonable detail, the method of calculation and the facts upon which
such calculation is based.
Section 11.09 Notice to Holders . If the Company shall fix a record date
for:
(a) etc any Share Reorganization (other than the subdivision of
outstanding Common Stock into a greater number of shares or the
consolidation of outstanding Common Stock into a smaller number of shares),
iv. any Rights Offering,
v. any Special Distribution,
vi. any Capital Reorganization (other than a reclassification or
redesignation of the Common Stock into other shares),
vii. Sale Event; or
viii. any cash dividend,
the Company shall, not less than 10 days prior to such record date or, if no
record date is fixed, prior to the effective date of such event, give to
Purchaser notice of the particulars of the proposed event or the extent that
such particulars have been determined at the time of giving the notice.
Article XII. EVENTS OF DEFAULT
Section 12.01 Events of Default. If one or more of the following events
(each an "Event of Default") shall have occurred and be continuing:
(a) failure by the Company to pay within five (5) Business Days
following the delivery of notice to the Company of any fees or any other
amount payable by the Company under this Agreement or any other Transaction
Agreement;
(b) failure by the Company to timely comply with the requirements of
Section 7.11 or 10.1 hereof, which failure is not cured within five (5)
Business Days of such failure;
(c) failure on the part of the Company to observe or perform any
covenant contained in Section 7.10 or Article VIII of this Agreement, which
failure is not cured within five business days of such failure;
(d) failure on the part of the Company to observe or perform any
covenant or agreement contained in any Transaction Agreement for 30 days
from the date of such occurrence;
(e) the trading in the Common Stock shall have been suspended by the
Commission, any National Market or the Amex (except for any suspension of
trading of limited duration solely to permit dissemination of material
information regarding the Company and except if, at the time there is any
suspension on any National Market or the Amex, the Common Stock is then
listed and approved for trading on another National Market within ten (10)
Trading Days thereof);
(f) failure of the Company to file the Listing Applications required
to be filed within twenty (20) Business Days of the Closing Date, which
failure is not cured within five (5) Business Days of such failure;
(g) the Company shall have its Common Stock delisted from a National
Market or the Amex for at least ten (10) consecutive Trading Days and is
unable to obtain a listing on a National Market or the Amex within such ten
(10) Trading Days;
(h) the Registration Statement shall not have been declared effective
by the Commission by the Required Effectiveness Date, or such effectiveness
shall not be maintained for the Registration Maintenance Period, in each
case which results in the Company incurring the Default Fee for a
continuous period in excess of 30 days;
(i) the Company or any Subsidiary has commenced a voluntary case or
other proceeding seeking liquidation, winding-up, reorganization or other
relief with respect to itself or its debts under any bankruptcy,
insolvency, moratorium or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or
other similar official of it or any substantial part of its property, or
has consented to any such relief or to the appointment of or taking
possession by any such official in an involuntary case or other proceeding
commenced against it, or has made a general assignment for the benefit of
creditors, or has failed generally to pay its debts as they become due, or
has taken any corporate action to authorize any of the foregoing;
(j) an involuntary case or other proceeding has been commenced against
the Company or any Subsidiary seeking liquidation, winding-up,
reorganization or other relief with respect to it or its debts under any
bankruptcy, insolvency, moratorium or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator,
custodian or other similar official of it or any substantial part of its
property, and such involuntary case or other proceeding shall remain
undismissed and unstayed for a period of 60 days, or an order for relief
has been entered against the Company or any Subsidiary under the federal
bankruptcy laws as now or hereafter in effect;
(k) default in any provision (including payment) or any agreement
governing the terms of any Debt of the Company or any Subsidiary in excess
of $500,000, which has not been cured within any applicable period of grace
associated therewith;
(l) judgments or orders for the payment of money which in the
aggregate at any one time exceed $500,000 and are not covered by insurance
have been rendered against the Company or any Subsidiary by a court of
competent jurisdiction and such judgments or orders shall continue
unsatisfied and unstayed for a period of 60 days;
(m) any representation, warranty, certification or statement made by
the Company in any Transaction Agreement or which is contained in any
certificate, document or financial or other statement furnished at any time
under or in connection with any Transaction Agreement shall prove to have
been untrue in any material respect when made; or
(n) any event of default under the Securities Purchase Agreement and
related documents dated May 14, 2004 between the Company and GCA Strategic
Investment Fund Limited;
then, and in every such occurrence, Purchaser may, with respect to an Event of
Default specified in paragraphs (a) or (b), and the Majority Holders may, with
respect to any other Event of Default, by notice to the Company, declare the
Preferred Shares to be, and the Preferred Shares shall thereon become
immediately due and payable; provided that in the case of any of the Events of
Default specified in paragraph (j) or (k) above with respect to the Company or
any Subsidiary, then, without any notice to the Company or any other act by
Purchaser, the entire amount of the Preferred Shares shall become immediately
due and payable, provided, further, if any Event of Default has occurred and is
continuing, and irrespective of whether any Preferred Share has been declared
immediately due and payable hereunder, any Purchaser of Preferred Shares may
proceed to protect and enforce the rights of Purchaser by an action at law, suit
in equity or other appropriate proceeding, whether for the specific performance
of any agreement contained herein or in any Preferred Share, or for an
injunction against a violation of any of the terms hereof or thereof, or in aid
of the exercise of any power granted hereby or thereby or by law or otherwise,
and provided further, in the case of any Event of Default, the amount declared
due and payable on the Preferred Shares shall be the Formula Price thereof.
Section 12.02 Powers and Remedies Cumulative . No right or remedy herein
conferred upon or reserved to Purchaser is intended to be exclusive of any other
right or remedy, and every right and remedy shall, to the extent permitted by
law, be cumulative and in addition to every other right and remedy given
hereunder or now hereafter existing at law or in equity or otherwise. The
assertion or employment of any right or remedy hereunder, or otherwise, shall
not prevent the concurrent assertion or employment of any other appropriate
right or remedy. Every power and remedy given by the Preferred Shares or by law
may be exercised from time to time, and as often as shall be deemed expedient,
by Purchaser (unless the provisions of this Agreement shall expressly condition
such right or remedy upon prior approval of the Majority Holders).
Article XIII. MISCELLANEOUS
Section 13.01 Notices . All notices, demands and other communications to
any party hereunder shall be in writing (including telecopier or similar
writing) and shall be given to such party at its address set forth on the
signature pages hereof, or such other address as such party may hereafter
specify for the purpose to the other parties. Each such notice, demand or other
communication shall be effective (i) if given by telecopy, when such telecopy is
transmitted to the telecopy number specified on the signature page hereof, (ii)
if given by mail, four days after such communication is deposited in the mail
with first class postage prepaid, addressed as aforesaid or (iii) if given by
any other means, when delivered at the address specified in or pursuant to this
Section.
Section 13.02 No Waivers; Amendments .
(a) No failure or delay on the part of any party in exercising any
right, power or remedy hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right, power or remedy
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy.
(b) Unless specifically noted to the contrary, any provision of this
Agreement may be amended, supplemented or waived after the Closing if, but
only if, such amendment, supplement or waiver is in writing and is signed
by the Company and the Purchaser.
Section 13.03 Indemnification .
(a) The Company agrees to indemnify and hold harmless Purchaser, its
Affiliates, and each Person, if any, who controls Purchaser, or any of its
Affiliates, within the meaning of the Securities Act or the Exchange Act
(each, a "Controlling Person"), and the respective partners, agents,
employees, officers and Directors of Purchaser, their Affiliates and any
such Controlling Person (each an "Indemnified Party") and collectively, the
"Indemnified Parties"), from and against any and all losses, claims,
damages, liabilities and expenses (including, without limitation and as
incurred, reasonable costs of investigating, preparing or defending any
such claim or action, whether or not such Indemnified Party is a party
thereto, provided that the Company shall not be obligated to advance such
costs to any Indemnified Party other than Purchaser unless it has received
from such Indemnified Party an undertaking to repay to the Company the
costs so advanced if it should be determined by final judgment of a court
of competent jurisdiction that such Indemnified Party was not entitled to
indemnification hereunder with respect to such costs) which may be incurred
by such Indemnified Party in connection with any investigative,
administrative or judicial proceeding brought or threatened that relates to
or arises out of, or is in connection with any activities contemplated by
any Transaction Agreement or any other services rendered in connection
herewith; provided that the Company will not be responsible for any
-------- claims, liabilities, losses, damages or expenses that are
determined by final judgment of a court of competent jurisdiction to result
from such Indemnified Party's gross negligence, willful misconduct or bad
faith.
(b) If any action shall be brought against an Indemnified Party with
respect to which indemnity may be sought against the Company under this
Agreement, such Indemnified Party shall promptly notify the Company in
writing and the Company, at its option, may, assume the defense thereof,
including the employment of counsel reasonably satisfactory to such
Indemnified Party and payment of all reasonable fees and expenses. The
failure to so notify the Company shall not affect any obligations the
Company may have to such Indemnified Party under this Agreement or
otherwise unless the Company is materially adversely affected by such
failure. Such Indemnified Party shall have the right to employ separate
counsel in such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Indemnified
Party, unless (i) the Company has failed to assume the defense and employ
counsel or (ii) the named parties to any such action (including any
impleaded parties) include such Indemnified Party and the Company, and such
Indemnified Party shall have been advised by counsel that there may be one
or more legal defenses available to it which are different from or
additional to those available to the Company, in which case, if such
Indemnified Party notifies the Company in writing that it elects to employ
separate counsel at the expense of the Company, the Company shall not have
the right to assume the defense of such action or proceeding on behalf of
such Indemnified Party, provided, however, that the Company shall not, in
connection with any one such action -------- ------- or proceeding or
separate but substantially similar or related actions or proceedings in the
same jurisdiction arising out of the same general allegations or
circumstances, be responsible hereunder for the reasonable fees and
expenses of more than one such firm of separate counsel, in addition to any
local counsel, which counsel shall be designated by Purchaser. The Company
shall not be liable for any settlement of any such action effected without
the written consent of the Company (which shall not be unreasonably
withheld) and the Company agrees to indemnify and hold harmless each
Indemnified Party from and against any loss or liability by reason of
settlement of any action effected with the consent of the Company. In
addition, the Company will not, without the prior written consent of
Purchaser, settle or compromise or consent to the entry of any judgment in
or otherwise seek to terminate any pending or threatened action, claim,
suit or proceeding in respect to which indemnification or contribution may
be sought hereunder (whether or not any Indemnified Party is a party
thereto) unless such settlement, compromise, consent or termination
includes an express unconditional release of Purchaser and the other
Indemnified Parties, satisfactory in form and substance to Purchaser, from
all liability arising out of such action, claim, suit or proceeding.
(c) If for any reason the foregoing indemnity is unavailable
(otherwise than pursuant to the express terms of such indemnity) to an
Indemnified Party or insufficient to hold an Indemnified Party harmless,
then in lieu of indemnifying such Indemnified Party, the Company shall
contribute to the amount paid or payable by such Indemnified Party as a
result of such claims, liabilities, losses, damages, or expenses (i) in
such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and by the Purchaser on the other from the
transactions contemplated by this Agreement or (ii) if the allocation
provided by clause (i) is not permitted under applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
received by the Company on the one hand and the Purchaser on the other, but
also the relative fault of the Company and the Purchaser as well as any
other relevant equitable considerations. Notwithstanding the provisions of
this Section 13.3, the aggregate contribution of all Indemnified Parties
shall not exceed the amount of interest and fees actually received by the
Purchaser pursuant to this Agreement. It is hereby further agreed that the
relative benefits to the Company on the one hand and the Purchaser on the
other with respect to the transactions contemplated hereby shall be
determined by reference to, among other things, whether any untrue or
alleged untrue statement of material fact or the omission or alleged
omission to state a material fact related to information supplied by the
Company or by the Purchaser and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement
or omission. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
(d) The indemnification, contribution and expense reimbursement
obligations set forth in this Section 13.3 (i) shall be in addition to any
liability the Company may have to any Indemnified Party at common law or
otherwise; (ii) shall survive the termination of this Agreement and the
other Transaction Agreements and the payment in full of the Preferred
Shares and (iii) shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of Purchaser or any
other Indemnified Party.
Section 13.04 Reserved .
Section 13.05 Payment . The Company agrees that, so long as Purchaser shall
own any Preferred Shares purchased by it from the Company hereunder, the Company
will make payments to Purchaser of all amounts due thereon by wire transfer by
4:00 P.M. (E.S.T.).
Section 13.06 Successors and Assigns . This Agreement shall be binding upon
the Company and upon Purchaser and its respective successors and assigns;
provided that the Company shall not assign or otherwise transfer its rights or
obligations under this Agreement to any other Person without the prior written
consent of the Majority Holders. All provisions hereunder purporting to give
rights to Purchaser and its affiliates or to holders of Securities are for the
express benefit of such Persons and their successors and assigns.
Section 13.07 Reserved .
Section 13.08 Delaware Law; Submission to Jurisdiction; Waiver of Jury
Trial; Appointment of Agent . THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE. EACH PARTY HERETO HEREBY
SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR
THE STATE OF DELAWARE AND OF ANY FEDERAL DISTRICT COURT SITTING IN DELAWARE FOR
PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT
OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY HERETO IRREVOCABLY WAIVES,
TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR
HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH
A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY TO THIS AGREEMENT IRREVOCABLY
CONSENTS TO THE SERVICE OF PROCESS IN ANY SUCH PROCEEDING BY THE MAILING OF
COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH PARTY
AT ITS ADDRESS SET FORTH HEREIN. NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY
PARTY TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. EACH PARTY WAIVES
ITS RIGHT TO A TRIAL BY JURY.
Section 13.09 Entire Agreement . This Agreement, the Exhibits or Schedules
hereto, which include, but are not limited to the Certificate of Designation,
the Registration Rights Agreement and the Preferred Shares, set forth the entire
agreement and understanding of the parties relating to the subject matter hereof
and supercedes all prior and contemporaneous agreements, negotiations and
understandings between the parties, both oral and written relating to the
subject matter hereof. The terms and conditions of all Exhibits and Schedules to
this Agreement are incorporated herein by this reference and shall constitute
part of this Agreement as is fully set forth herein.
Section 13.10 Survival; Severability. The representations, warranties,
covenants and agreements of the parties hereto shall survive (a) the Closing
hereunder and (b) with respect to any Purchaser, the death, disability,
incompetency, termination, bankruptcy, insolvency or dissolution of such
Purchaser. In the event that any provision of this Agreement becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision; provided that such severability shall be ineffective if it materially
changes the economic benefit of this Agreement to any party.
Section 13.11 Title and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
Section 13.12 Reporting Entity for the Common Stock. The reporting entity
relied upon for the determination of the trading price or trading volume of the
Common Stock on any given Trading Day for the purposes of this Agreement and all
Exhibits shall be Bloomberg, L.P. or any successor thereto. The written mutual
consent of the Purchaser and the Company shall be required to employ any other
reporting entity.
Section 13.13 Publicity. The Company and the Purchaser shall consult with
each other in issuing any press releases or otherwise making public statements
with respect to the transactions contemplated hereby and no party shall issue
any such press release or otherwise make any such public statement without the
prior written consent of the other parties, which consent shall not be
unreasonably withheld or delayed, except that no prior consent shall be required
if such disclosure is required by law, in which such case the disclosing party
shall provide the other parties with prior notice of such public statement.
Notwithstanding the foregoing, the Company shall not publicly disclose the name
of Purchaser without the prior written consent of Purchaser, except to the
extent required by law, in which case the Company shall provide Purchaser with
prior written notice of such public disclosure.
Section 13.14 Counterparts. This Agreement may be executed by telecopy
signatures and in any number of counterparts each of which shall be an original
with the same effect as if the signatures thereto and hereto were upon the same
instrument.
Signatures on Following Page
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers, as of the date first
above written.
AVITAR, INC.
By:
------------------------------
Name: Peter P. Phildius
Title: President
Address: Avitar, Inc.
65 Dan Road
Canton, MA 02021
Fax: 781-821-4458
Tel.: 781-821-2440
GLOBAL CAPITAL FUNDING GROUP, L.P.
By its General Partner: Global Capital
Management
Services, Inc.
By:
------------------------------
Name: Lewis N. Lester
Title: President
Address: 106 Colony Park Drive
Suite 900
Cumming, GA 30040
Fax: 678-947-6499
Tel.: 678-947-0028
Schedule 1.1
Secured Note
$1,250,000 Principal Amount 14% Secured Note of the Company, dated as of August
26, 2003.