EXHIBIT 10.1
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this "Agreement") is dated as of
October 27, 2005 among Velocity Asset Management Inc., a Delaware corporation
(the "Company"), J. Holder Inc., a New Jersey corporation (the "Subsidiary", and
the Company and Subsidiary, collectively, the "Borrowers") and each purchaser
identified on the signature pages hereto (each, including its successors and
assigns, a "Purchaser" and collectively the "Purchasers").
WHEREAS, subject to the terms and conditions set forth in this Agreement
and pursuant to Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act") and Rule 506 promulgated thereunder, the Borrowers desire to
issue and sell to each Purchaser, and each Purchaser, severally and not jointly,
desires to purchase from the Borrowers, in the aggregate, up to $3,000,000 of
Debentures and Warrants, as more fully described in this Agreement.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Borrowers and each Purchaser
agree as follows:
ARTICLE I.
DEFINITIONS
1.1 Definitions. In addition to the terms defined elsewhere in this
Agreement: (a) capitalized terms that are not otherwise defined herein have the
meanings given to such terms in the Debentures (as defined herein), and (b) the
following terms have the meanings indicated in this Section 1.1:
"Action" shall have the meaning ascribed to such term in Section
3.1(j).
"Affiliate" means any Person that, directly or indirectly through one
or more intermediaries, controls or is controlled by or is under common
control with a Person, as such terms are used in and construed under Rule
144 under the Securities Act. With respect to a Purchaser, any investment
fund or managed account that is managed on a discretionary basis by the
same investment manager as such Purchaser will be deemed to be an Affiliate
of such Purchaser.
"Closing" means the closing of the purchase and sale of the Securities
pursuant to Section 2.1.
"Closing Date" means the Trading Day when all of the Transaction
Documents have been executed and delivered by the applicable parties
thereto, and all conditions precedent to (i) the Purchasers' obligations to
pay the Subscription Amount and (ii) the Borrowers' obligations to deliver
the Securities have been satisfied or waived.
"Closing Price" means on any particular date (a) the last reported
closing bid price per share of Common Stock on such date on the Trading
Market (as reported by Bloomberg L.P. at 4:15 PM (New York time), or (b) if
there is no such price on such date, then the closing bid price on the
Trading Market on the date nearest preceding such date (as reported by
Bloomberg L.P. at 4:15 PM (New York time) for the closing bid price for
regular session trading on such day), or (c) if the Common Stock is not
then listed or quoted on the Trading Market and if prices for the Common
Stock are then reported in the "pink sheets" published by the National
Quotation Bureau Incorporated (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid price
per share of the Common Stock so reported, or (d) if the shares of Common
Stock are not then publicly traded the fair market value of a share of
Common Stock as determined by a qualified independent appraiser selected in
good faith by the Purchasers of a majority in interest of the Securities
then outstanding.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock of the Company, par value $.001
per share, and any other class of securities into which such securities may
hereafter have been reclassified or changed into.
"Common Stock Equivalents" means any securities of the Borrowers or
the Subsidiaries which would entitle the holder thereof to acquire at any
time Common Stock, including, without limitation, any debt, preferred
stock, rights, options, warrants or other instrument that is at any time
convertible into or exercisable or exchangeable for, or otherwise entitles
the holder thereof to receive, Common Stock.
"Borrowers Counsel" means Ellenoff, Grossman & Schole, LLP.
"Conversion Price" shall have the meaning ascribed to such term in the
Debentures.
"Debentures" means, the 10% Convertible Secured Debentures due,
subject to the terms therein, 18 months from their date of issuance, issued
by the Borrowers, jointly and severally, to the Purchasers hereunder, in
the form of Exhibit A.
"Disclosure Schedules" shall have the meaning ascribed to such term in
Section 3.1.
"Effective Date" means the date that the initial Registration
Statement filed by the Company pursuant to the Registration Rights
Agreement is first declared effective by the Commission.
"Evaluation Date" shall have the meaning ascribed to such term in
Section 3.1(r).
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
2
"Exempt Issuance" means the issuance of (a) shares of Common Stock or
options to employees, officers or directors of the Company pursuant to any
stock or option plan in existence on the date hereof or duly adopted by a
majority of the Board of Directors of the Company, (b) securities upon the
exercise or exchange of or conversion of any Securities issued hereunder
and/or securities exercisable or exchangeable for or convertible into
shares of Common Stock issued and outstanding on the date of this
Agreement, provided that such securities have not been amended since the
date of this Agreement to increase the number of such securities or to
decrease the exercise, exchange or conversion price of any such securities,
and (c) securities issued pursuant to acquisitions or strategic
transactions (including, but not limited to, the acquisition of licenses,
sublicenses, intellectual property or proprietary rights), provided any
such issuance shall only be to a Person which is, itself or through its
subsidiaries, an operating company in a business synergistic with the
business of the Borrowers and in which the Borrowers receive benefits in
addition to the investment of funds, but shall not include a transaction in
which the Company is issuing securities primarily for the purpose of
raising capital or to an entity whose primary business is investing in
securities.
"FW" means Feldman Weinstein LLP with offices located at 420 Lexington
Avenue, Suite 2620, New York, New York 10170-0002.
"GAAP" shall have the meaning ascribed to such term in Section 3.1(h).
"Intellectual Property Rights" shall have the meaning ascribed to such
term in Section 3.1(o).
"Legend Removal Date" shall have the meaning ascribed to such term in
Section 4.1(c).
"Liens" means a lien, charge, security interest, encumbrance, right of
first refusal, preemptive right or other restriction.
"Material Adverse Effect" shall have the meaning assigned to such term
in Section 3.1(b).
"Material Permits" shall have the meaning ascribed to such term in
Section 3.1(m).
"Maximum Rate" shall have the meaning ascribed to such term in Section
5.17.
"Participation Maximum" shall have the meaning ascribed to such term
in Section 4.13.
"Person" means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or
subdivision thereof) or other entity of any kind.
3
"Pre-Notice" shall have the meaning ascribed to such term in Section
4.13.
"Proceeding" means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding,
such as a deposition) actually commenced or as to the threat of which the
Company has actual knowledge
"Purchaser Party" shall have the meaning ascribed to such term in
Section 4.11.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated the date hereof, among the Company and the Purchasers, in
the form of Exhibit B attached hereto.
"Registration Statement" means a registration statement meeting the
requirements set forth in the Registration Rights Agreement and covering
the resale of the Underlying Shares by each Purchaser as provided for in
the Registration Rights Agreement.
"Required Approvals" shall have the meaning ascribed to such term in
Section 3.1(e).
"Required Minimum" means, as of any date, the maximum aggregate number
of shares of Common Stock then issued or potentially issuable in the future
pursuant to the Transaction Documents, including any Underlying Shares
issuable upon exercise or conversion in full of all Warrants and Debentures
(including Underlying Shares issuable as payment of interest), ignoring any
conversion or exercise limits set forth therein, and assuming that the
Conversion Price is at all times on and after the date of determination 75%
of the then Conversion Price on the Trading Day immediately prior to the
date of determination.
"Rule 144" means Rule 144 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"SEC Reports" shall have the meaning ascribed to such term in Section
3.1(h).
"Secondary Offering" means a public offering of preferred stock of the
Company or Common Stock by the Company of up to $10,000,000 to be
consummated pursuant to the initial Registration Statement in a best
efforts underwritten offering.
"Securities" means the Debentures, the Warrants, the Warrant Shares
and the Underlying Shares.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Agreement" means the Security Agreement, dated the date
hereof, among the Company and the Purchasers, in the form of Exhibit E
attached hereto.
4
"Security Documents" shall mean the Security Agreement, the Subsidiary
Guarantees and any other documents and filing required thereunder in order
to grant the Purchasers a first priority security interest in the assets of
the Company as provided in the Security Agreement, including all UCC-1
filing receipts.
"Short Sales" shall include all "short sales" as defined in Rule 200
of Regulation SHO under the Exchange Act.
"Subscription Amount" means, as to each Purchaser, the aggregate
amount to be paid for Debentures and Warrants purchased hereunder as
specified below such Purchaser's name on the signature page of this
Agreement and next to the heading "Subscription Amount", in United States
Dollars and in immediately available funds.
"Subsequent Financing" shall have the meaning ascribed to such term in
Section 4.13.
"Subsequent Financing Notice" shall have the meaning ascribed to such
term in Section 4.13.
"Subsidiary" means any subsidiary of the Company as set forth on
Schedule 3.1(a).
"Subsidiary Guarantee" means the Subsidiary Guarantee, dated the date
hereof, among each of its Subsidiaries, other than Velocity Investments,
LLC, and the Purchasers, in the form of Exhibit F attached hereto.
"Trading Day" means a day on which the Common Stock is traded on a
Trading Market.
"Trading Market" means any of the following markets or exchanges on
which the Common Stock is listed or quoted for trading on the date in
question: the Nasdaq Capital Market, the American Stock Exchange, the New
York Stock Exchange, the Nasdaq National Market or OTC Bulletin Board.
"Transaction Documents" means this Agreement, the Debentures, the
Warrants, the Security Agreement, the Registration Rights Agreement and any
other documents or agreements executed in connection with the transactions
contemplated hereunder.
"Underlying Shares" means the shares of Common Stock issued and
issuable upon conversion of the Debentures and upon exercise of the
Warrants and issued and issuable in lieu of the cash payment of interest on
the Debentures in accordance with the terms of the Debentures.
"Warrants" means collectively the Common Stock purchase warrants, in
the form of Exhibit C delivered to the Purchasers at the Closing in
accordance with Section 2.2(a) hereof, which Warrants shall be exercisable
beginning 6 months following the date hereof and have a term of exercise
equal to 5 years.
5
"Warrant Shares" means the shares of Common Stock issuable upon
exercise of the Warrants.
ARTICLE II.
PURCHASE AND SALE
2.1 Closing. On the Closing Date, upon the terms and subject to the
conditions set forth herein, concurrent with the execution and delivery of this
Agreement by the parties hereto, the Borrowers agree to sell, jointly and
severally, and each Purchaser agrees to purchase in the aggregate, severally and
not jointly, up to $3,000,000 principal amount of the Debentures. Each Purchaser
shall deliver to the designated Borrower via wire transfer or a certified check
immediately available funds equal to their Subscription Amount and the Borrowers
shall deliver to each Purchaser their respective Debenture and Warrants as
determined pursuant to Section 2.2(a) and the other items set forth in Section
2.2 issuable at the Closing. Upon satisfaction of the conditions set forth in
Sections 2.2 and 2.3, the Closing shall occur at the offices of FW, or such
other location as the parties shall mutually agree.
2.2 Deliveries.
(a) On the Closing Date, the Borrowers, as applicable, shall deliver
or cause to be delivered to each Purchaser the following:
(i) this Agreement duly executed by each Borrower;
(ii) a legal opinion of Borrowers' Counsel, in the form of
Exhibit D attached hereto;
(iii) a Debenture with a principal amount equal to such
Purchaser's Subscription Amount, registered in the name of such
Purchaser;
(iv) a Warrant registered in the name of such Purchaser to
purchase up to 200,000 shares of Common Stock for each $1 million of
Subscription Amount of such Purchaser (pro-rated for fractional
Subscription Amounts), with an exercise price equal to $3.10 subject
to adjustment therein;
(v) a notarized Personal Guarantee, duly executed by Jack
Kleinert, Peter Ragan Sr. and Peter Ragan Jr. in favor of the
Purchasers, in the form of Exhibit G attached hereto;
(vi) the Security Agreement, duly executed by the Company, along
with all the Security Documents duly executed by the parties thereto,
including the Subsidiary Guarantee; and
(vii) the Registration Rights Agreement duly executed by the
Company.
(b) On the Closing Date, each Purchaser shall deliver or cause to be
delivered to the Borrowers the following:
6
(i) this Agreement duly executed by such Purchaser;
(ii) such Purchaser's Subscription Amount by wire transfer to the
account as specified in writing by the Borrowers; and
(iii) the Registration Rights Agreement, duly executed by such
Purchaser.
2.3 Closing Conditions.
(a) The obligations of the Borrowers hereunder in connection with the
Closing are subject to the following conditions being met:
(i) the accuracy in all material respects when made and on the
Closing Date of the representations and warranties of the Purchasers
contained herein;
(ii) all obligations, covenants and agreements of the Purchasers
required to be performed at or prior to the Closing Date shall have
been performed; and
(iii) the delivery by the Purchasers of the items set forth in
Section 2.2(b) of this Agreement including, without limitation,
Subscription Amounts in the aggregate of $3,000,000.
(b) The respective obligations of the Purchasers hereunder in
connection with the Closing are subject to the following conditions being
met:
(i) the accuracy in all material respects on the Closing Date of
the representations and warranties of the Borrowers contained herein;
(ii) all obligations, covenants and agreements of the Borrowers
required to be performed at or prior to the Closing Date shall have
been performed;
(iii) the delivery by the Borrowers, as applicable, of the items
set forth in Section 2.2(a) of this Agreement;
(iv) there shall have been no Material Adverse Effect with
respect to either Borrower since the date hereof; and
(v) from the date hereof to the Closing Date, trading in the
Common Stock shall not have been suspended by the Commission (except
for any suspension of trading of limited duration agreed to by the
Company, which suspension shall be terminated prior to the Closing),
and, at any time prior to the Closing Date, trading in securities
generally as reported by Bloomberg Financial Markets shall not have
been suspended or limited, or minimum prices shall not have been
established on securities whose trades are reported by such service,
or
7
on any Trading Market, nor shall a banking moratorium have been
declared either by the United States or New York State authorities nor
shall there have occurred any material outbreak or escalation of
hostilities or other national or international calamity of such
magnitude in its effect on, or any material adverse change in, any
financial market which, in each case, in the reasonable judgment of
each Purchaser, makes it impracticable or inadvisable to purchase the
Debentures at the Closing.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Borrowers. Except as set forth
under the corresponding section of the disclosure schedules delivered to the
Purchasers concurrently herewith (the "Disclosure Schedules") which Disclosure
Schedules shall be deemed a part hereof, the Borrowers, jointly and severally,
hereby make the representations and warranties set forth below to each
Purchaser.
(a) Subsidiaries. All of the direct and indirect subsidiaries of the
Borrowers are set forth on Schedule 3.1(a). The Borrowers own, directly or
indirectly, all of the capital stock or other equity interests of each
Subsidiary free and clear of any Liens, and all the issued and outstanding
shares of capital stock of each Subsidiary are validly issued and are fully
paid, non-assessable and free of preemptive and similar rights to subscribe
for or purchase securities.
(b) Organization and Qualification. The Borrowers and each of the
Subsidiaries is an entity duly incorporated or otherwise organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization (as applicable), with the requisite power and
authority to own and use its properties and assets and to carry on its
business as currently conducted. Neither the Borrowers nor any Subsidiary
is in violation or default of any of the provisions of its respective
certificate or articles of incorporation, bylaws or other organizational or
charter documents. Each of the Borrowers and the Subsidiaries is duly
qualified to conduct business and is in good standing as a foreign
corporation or other entity in each jurisdiction in which the nature of the
business conducted or property owned by it makes such qualification
necessary, except where the failure to be so qualified or in good standing,
as the case may be, could not have or reasonably be expected to result in
(i) a material adverse effect on the legality, validity or enforceability
of any Transaction Document, (ii) a material adverse effect on the results
of operations, assets, business, prospects or condition (financial or
otherwise) of the Borrowers and the Subsidiaries, taken as a whole, or
(iii) a material adverse effect on the Borrowers' ability to perform in any
material respect on a timely basis its obligations under any Transaction
Document (any of (i), (ii) or (iii), a "Material Adverse Effect") and no
Proceeding has been instituted in any such jurisdiction revoking, limiting
or curtailing or seeking to revoke, limit or curtail such power and
authority or qualification.
8
(c) Authorization; Enforcement. The Borrowers have the requisite
corporate power and authority to enter into and to consummate the
transactions contemplated by each of the Transaction Documents and
otherwise to carry out its obligations hereunder and thereunder. The
execution and delivery of each of the Transaction Documents by the
Borrowers and the consummation by it of the transactions contemplated
thereby have been duly authorized by all necessary action on the part of
the Borrowers and no further action is required by the Borrowers, its board
of directors or its stockholders in connection therewith other than in
connection with the Required Approvals. Each applicable Transaction
Document has been (or upon delivery will have been) duly executed by the
Borrowers and, when delivered in accordance with the terms hereof and
thereof, will constitute the valid and binding obligation of the Borrowers
enforceable against each Borrower in accordance with its terms except (i)
as limited by applicable bankruptcy, insolvency, reorganization, moratorium
and other laws of general application affecting enforcement of creditors'
rights generally, (ii) as limited by laws relating to the availability of
specific performance, injunctive relief or other equitable remedies and
(iii) as limited by federal and state laws or the public policy underlying
such laws with respect to indemnity or contribution.
(d) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Borrowers and the consummation by the
Borrowers of the other transactions contemplated hereby and thereby do not
and will not: (i) conflict with or violate any provision of the Borrowers'
or any Subsidiary's certificate or articles of incorporation, bylaws or
other organizational or charter documents, or (ii) conflict with, or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, result in the creation of any Lien upon any
of the properties or assets of the Borrowers or any Subsidiary, or give to
others any rights of termination, amendment, acceleration or cancellation
(with or without notice, lapse of time or both) of, any agreement, credit
facility, debt or other instrument (evidencing a Borrower or Subsidiary
debt or otherwise) or other understanding to which the Borrowers or any
Subsidiary is a party or by which any property or asset of the Borrowers or
any Subsidiary is bound or affected, or (iii) subject to the Required
Approvals, conflict with or result in a violation of any law, rule,
regulation, order, judgment, injunction, decree or other restriction of any
court or governmental authority to which the Borrowers or a Subsidiary is
subject (including federal and state securities laws and regulations), or
by which any property or asset of the Borrowers or a Subsidiary is bound or
affected; except in the case of each of clauses (ii) and (iii), such as
could not have or reasonably be expected to result in a Material Adverse
Effect.
(e) Filings, Consents and Approvals. The Borrowers are not required to
obtain any consent, waiver, authorization or order of, give any notice to,
or make any filing or registration with, any court or other federal, state,
local or other governmental authority or other Person in connection with
the execution, delivery and performance by the Borrowers of the Transaction
Documents, other than (i) filings required pursuant to Section 4.6, (ii)
the filing with the Commission of the Registration Statement, (iii) the
notice and/or application(s) to each applicable Trading Market for the
issuance and sale of the Debentures and Warrants and the listing of the
Underlying Shares for trading
9
thereon in the time and manner required thereby and (iv) the filing of Form
D with the Commission and such filings as are required to be made under
applicable state securities laws (collectively, the "Required Approvals").
(f) Issuance of the Securities. The Securities are duly authorized
and, when issued and paid for in accordance with the applicable Transaction
Documents, will be duly and validly issued, fully paid and nonassessable,
free and clear of all Liens imposed by the Borrowers other than
restrictions on transfer provided for in the Transaction Documents. The
Underlying Shares, when issued in accordance with the terms of the
Transaction Documents, will be validly issued, fully paid and
nonassessable, free and clear of all Liens imposed by the Company. The
Company has reserved from its duly authorized capital stock a number of
shares of Common Stock for issuance of the Underlying Shares at least equal
to the Required Minimum on the date hereof.
(g) Capitalization. The capitalization of the Company is as set forth
on Schedule 3.1(g). The Company has not issued any capital stock since its
most recently filed periodic report under the Exchange Act, other than
pursuant to the exercise of employee stock options under the Company's
stock option plans, the issuance of shares of Common Stock to employees
pursuant to the Company's employee stock purchase plan and pursuant to the
conversion or exercise of outstanding Common Stock Equivalents. No Person
has any right of first refusal, preemptive right, right of participation,
or any similar right to participate in the transactions contemplated by the
Transaction Documents. Except as a result of the purchase and sale of the
Securities, there are no outstanding options, warrants, script rights to
subscribe to, calls or commitments of any character whatsoever relating to,
or securities, rights or obligations convertible into or exercisable or
exchangeable for, or giving any Person any right to subscribe for or
acquire, any shares of Common Stock, or contracts, commitments,
understandings or arrangements by which the Borrowers or any Subsidiary is
or may become bound to issue additional shares of Common Stock or Common
Stock Equivalents. The issuance and sale of the Securities will not
obligate the Borrowers to issue shares of Common Stock or other securities
to any Person (other than the Purchasers) and will not result in a right of
any holder of Company securities to adjust the exercise, conversion,
exchange or reset price under such securities. All of the outstanding
shares of capital stock of the Company are validly issued, fully paid and
nonassessable, have been issued in compliance with all federal and state
securities laws, and none of such outstanding shares was issued in
violation of any preemptive rights or similar rights to subscribe for or
purchase securities. No further approval or authorization of any
stockholder, the board of directors of either Borrower or others is
required for the issuance and sale of the Securities. There are no
stockholders agreements, voting agreements or other similar agreements with
respect to the Company's capital stock to which the Company is a party or,
to the knowledge of the Company, between or among any of the Company's
stockholders.
(h) SEC Reports; Financial Statements. The Company has filed all
reports, schedules, forms, statements and other documents required to be
filed by it under the Securities Act and the Exchange Act, including
pursuant to Section 13(a) or 15(d)
10
thereof, for the two years preceding the date hereof (or such shorter
period as the Company was required by law to file such material) (the
foregoing materials, including the exhibits thereto and documents
incorporated by reference therein, being collectively referred to herein as
the "SEC Reports") on a timely basis or has received a valid extension of
such time of filing and has filed any such SEC Reports prior to the
expiration of any such extension. As of their respective dates, the SEC
Reports complied in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated thereunder, and none of the SEC Reports, when filed,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading. The financial statements of the Company included
in the SEC Reports comply in all material respects with applicable
accounting requirements and the rules and regulations of the Commission
with respect thereto as in effect at the time of filing. Such financial
statements have been prepared in accordance with United States generally
accepted accounting principles applied on a consistent basis during the
periods involved ("GAAP"), except as may be otherwise specified in such
financial statements or the notes thereto and except that unaudited
financial statements may not contain all footnotes required by GAAP, and
fairly present in all material respects the financial position of the
Company and its consolidated subsidiaries as of and for the dates thereof
and the results of operations and cash flows for the periods then ended,
subject, in the case of unaudited statements, to normal, immaterial,
year-end audit adjustments.
(i) Material Changes. Since the date of the latest audited financial
statements included within the SEC Reports, except as specifically
disclosed in the SEC Reports, (i) there has been no event, occurrence or
development that has had or that could reasonably be expected to result in
a Material Adverse Effect, (ii) the Borrowers have not incurred any
liabilities (contingent or otherwise) other than (A) trade payables and
accrued expenses incurred in the ordinary course of business consistent
with past practice and (B) liabilities not required to be reflected in the
Company's financial statements pursuant to GAAP or required to be disclosed
in filings made with the Commission, (iii) the Company has not altered its
method of accounting, (iv) the Company has not declared or made any
dividend or distribution of cash or other property to its stockholders or
purchased, redeemed or made any agreements to purchase or redeem any shares
of its capital stock and (v) the Company has not issued any equity
securities to any officer, director or Affiliate, except pursuant to
existing Company stock option plans. The Company does not have pending
before the Commission any request for confidential treatment of
information.
(j) Litigation. There is no action, suit, inquiry, notice of
violation, proceeding or investigation pending or, to the knowledge of the
Borrowers, threatened against or affecting the Borrowers, any Subsidiary or
any of their respective properties before or by any court, arbitrator,
governmental or administrative agency or regulatory authority (federal,
state, county, local or foreign) (collectively, an "Action") which (i)
adversely affects or challenges the legality, validity or enforceability of
any of the Transaction Documents or the Securities or (ii) could, if there
were an unfavorable decision, have or
11
reasonably be expected to result in a Material Adverse Effect. Neither the
Borrowers nor any Subsidiary, nor any director or officer thereof, is or
has been the subject of any Action involving a claim of violation of or
liability under federal or state securities laws or a claim of breach of
fiduciary duty. There has not been, and to the knowledge of the Company,
there is not pending or contemplated, any investigation by the Commission
involving the Company or any current or former director or officer of the
Company. The Commission has not issued any stop order or other order
suspending the effectiveness of any registration statement filed by the
Company or any Subsidiary under the Exchange Act or the Securities Act.
(k) Labor Relations. No material labor dispute exists or, to the
knowledge of the Borrowers, is imminent with respect to any of the
employees of the Borrowers which could reasonably be expected to result in
a Material Adverse Effect.
(l) Compliance. Neither the Borrowers nor any Subsidiary (i) is in
default under or in violation of (and no event has occurred that has not
been waived that, with notice or lapse of time or both, would result in a
default by the Borrowers or any Subsidiary under), nor has the Borrowers or
any Subsidiary received notice of a claim that it is in default under or
that it is in violation of, any indenture, loan or credit agreement or any
other agreement or instrument to which it is a party or by which it or any
of its properties is bound (whether or not such default or violation has
been waived), (ii) is in violation of any order of any court, arbitrator or
governmental body, or (iii) is or has been in violation of any statute,
rule or regulation of any governmental authority, including without
limitation all foreign, federal, state and local laws applicable to its
business except in each case as could not have a Material Adverse Effect.
(m) Regulatory Permits. The Borrowers and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports, except where the
failure to possess such permits could not have or reasonably be expected to
result in a Material Adverse Effect ("Material Permits"), and neither the
Borrowers nor any Subsidiary has received any notice of proceedings
relating to the revocation or modification of any Material Permit.
(n) Title to Assets. The Borrowers and the Subsidiaries have good and
marketable title in fee simple to all real property owned by them that is
material to the business of the Borrowers and the Subsidiaries and good and
marketable title in all personal property owned by them that is material to
the business of the Borrowers and the Subsidiaries, in each case free and
clear of all Liens, except for Liens as do not materially affect the value
of such property and do not materially interfere with the use made and
proposed to be made of such property by the Borrowers and the Subsidiaries
and Liens for the payment of federal, state or other taxes, the payment of
which is neither delinquent nor subject to penalties. Any real property and
facilities held under lease by the Borrowers and the Subsidiaries are held
by them under valid, subsisting and enforceable leases of which the
Borrowers and the Subsidiaries are in compliance.
12
(o) Patents and Trademarks. The Borrowers and the Subsidiaries have,
or have rights to use, all patents, patent applications, trademarks,
trademark applications, service marks, trade names, copyrights, licenses
and other similar rights necessary or material for use in connection with
their respective businesses as described in the SEC Reports and which the
failure to so have could have a Material Adverse Effect (collectively, the
"Intellectual Property Rights"). Neither the Borrowers nor any Subsidiary
have received a written notice that the Intellectual Property Rights used
by the Borrowers or any Subsidiary violates or infringes upon the rights of
any Person. To the knowledge of the Company, all such Intellectual Property
Rights are enforceable and there is no existing infringement by another
Person of any of the Intellectual Property Rights of others.
(p) Insurance. The Borrowers and the Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in
which the Borrowers and the Subsidiaries are engaged, including, but not
limited to, directors and officers liability insurance coverage at least
equal to the aggregate Subscription Amount. To the best knowledge of the
Borrowers, such insurance contracts and policies are accurate and complete.
Neither the Borrowers nor any Subsidiary has any reason to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business without a significant increase in
cost.
(q) Transactions With Affiliates and Employees. Except as set forth in
the SEC Reports, none of the officers or directors of each Borrower and, to
the knowledge of the Borrowers, none of the employees of either Borrower is
presently a party to any transaction with the Company or any Subsidiary
(other than for services as employees, officers and directors), including
any contract, agreement or other arrangement providing for the furnishing
of services to or by, providing for rental of real or personal property to
or from, or otherwise requiring payments to or from any officer, director
or such employee or, to the knowledge of the Borrowers, any entity in which
any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner, in each case in excess of
$60,000 other than (i) for payment of salary or consulting fees for
services rendered, (ii) reimbursement for expenses incurred on behalf of
the Borrowers and (iii) for other employee benefits, including stock option
agreements under any stock option plan of the Borrowers.
(r) Sarbanes-Oxley; Internal Accounting Controls. The Company is in
material compliance with all provisions of the Sarbanes-Oxley Act of 2002
which are applicable to it as of the Closing Date. The Company and the
Subsidiaries maintain a system of internal accounting controls sufficient
to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain asset accountability,
(iii) access to assets is permitted only in accordance with management's
general or specific authorization, and (iv) the recorded accountability for
assets is compared with the
13
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences. The Company has established disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the Company and designed such disclosure controls and
procedures to ensure that material information relating to the Company,
including its Subsidiaries, is made known to the certifying officers by
others within those entities, particularly during the period in which the
Company's most recently filed periodic report under the Exchange Act, as
the case may be, is being prepared. The Company's certifying officers have
evaluated the effectiveness of the Company's controls and procedures as of
the date prior to the filing date of the most recently filed periodic
report under the Exchange Act (such date, the "Evaluation Date"). The
Company presented in its most recently filed periodic report under the
Exchange Act the conclusions of the certifying officers about the
effectiveness of the disclosure controls and procedures based on their
evaluations as of the Evaluation Date. Since the Evaluation Date, there
have been no significant changes in the Company's internal controls (as
such term is defined in Item 307(b) of Regulation S-K under the Exchange
Act) or, to the knowledge of the Company, in other factors that could
significantly affect the Company's internal controls.
(s) Certain Fees. No brokerage or finder's fees or commissions are or
will be payable by the Borrowers to any broker, financial advisor or
consultant, finder, placement agent, investment banker, bank or other
Person with respect to the transactions contemplated by the Transaction
Documents. The Purchasers shall have no obligation with respect to any fees
or with respect to any claims made by or on behalf of other Persons for
fees of a type contemplated in this Section that may be due in connection
with the transactions contemplated by the Transaction Documents.
(t) Private Placement. Assuming the accuracy of the Purchasers
representations and warranties set forth in Section 3.2, no registration
under the Securities Act is required for the offer and sale of the
Securities by the Borrowers to the Purchasers as contemplated hereby. The
issuance and sale of the Securities hereunder does not contravene the rules
and regulations of the Trading Market.
(u) Investment Company. The Borrowers are not, and is not an Affiliate
of, and immediately after receipt of payment for the Securities, will not
be or be an Affiliate of, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended. The Borrowers shall conduct its
business in a manner so that it will not become subject to the Investment
Company Act.
(v) Registration Rights. Other than each of the Purchasers, no Person
has any right to cause the Company to effect the registration under the
Securities Act of any securities of the Company.
(w) Listing and Maintenance Requirements. The Company's Common Stock
is registered pursuant to Section 12(g) of the Exchange Act, and the
Company has taken no action designed to, or which to its knowledge is
likely to have the effect of, terminating the registration of the Common
Stock under the Exchange Act nor has the
14
Company received any notification that the Commission is contemplating
terminating such registration. The Company has not, in the 12 months
preceding the date hereof, received notice from any Trading Market on which
the Common Stock is or has been listed or quoted to the effect that the
Company is not in compliance with the listing or maintenance requirements
of such Trading Market. The Company is, and has no reason to believe that
it will not in the foreseeable future continue to be, in compliance with
all such listing and maintenance requirements.
(x) Application of Takeover Protections. The Borrowers and their
Boards of Directors have taken all necessary action, if any, in order to
render inapplicable any control share acquisition, business combination,
poison pill (including any distribution under a rights agreement) or other
similar anti-takeover provision under the Company's Certificate of
Incorporation (or similar charter documents) or the laws of its state of
incorporation that is or could become applicable to the Purchasers as a
result of the Purchasers and the Company fulfilling their obligations or
exercising their rights under the Transaction Documents, including without
limitation as a result of the Company's issuance of the Securities and the
Purchasers' ownership of the Securities.
(y) Disclosure. The Borrowers confirm that neither it nor any other
Person acting on its behalf has provided any of the Purchasers or their
agents or counsel with any information that constitutes or might constitute
material, nonpublic information other than information contained in the
Disclosure Schedules. The Borrowers understand and confirm that the
Purchasers will rely on the foregoing representations and covenants in
effecting transactions in securities of the Company. All disclosure
provided to the Purchasers regarding the Borrowers, their businesses and
the transactions contemplated hereby, including the Disclosure Schedules to
this Agreement, furnished by or on behalf of the Borrowers with respect to
the representations and warranties made herein are true and correct with
respect to such representations and warranties and do not contain any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading. The Borrowers
acknowledge and agree that no Purchaser makes or has made any
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in Section 3.2 hereof.
(z) No Integrated Offering. Assuming the accuracy of the Purchasers'
representations and warranties set forth in Section 3.2, neither the
Borrowers, nor any of their affiliates, nor any Person acting on its or
their behalf has, directly or indirectly, made any offers or sales of any
security or solicited any offers to buy any security, under circumstances
that would cause this offering of the Securities to be integrated with
prior offerings by the Company for purposes of the Securities Act or any
applicable shareholder approval provisions, including, without limitation,
under the rules and regulations of any Trading Market on which any of the
securities of the Company are listed or designated.
(aa) Solvency. Based on the financial condition of the Borrowers as of
the Closing Date after giving effect to the receipt by the Borrowers of the
proceeds from the
15
sale of the Securities hereunder, (i) each Borrower's fair saleable value
of its assets exceeds the amount that will be required to be paid on or in
respect of its respective existing debts and other liabilities (including
known contingent liabilities) as they mature; (ii) each Borrower's assets
do not constitute unreasonably small capital to carry on its business for
the current fiscal year as now conducted and as proposed to be conducted
including its capital needs taking into account the particular capital
requirements of the business conducted by the applicable Borrower, and
projected capital requirements and capital availability thereof; and (iii)
the current cash flow of each Borrower, together with the proceeds each
Borrower would receive, were it to liquidate all of its assets, after
taking into account all anticipated uses of the cash, would be sufficient
to pay all amounts on or in respect of its debt when such amounts are
required to be paid. The Borrowers do not intend to incur debts beyond its
ability to pay such debts as they mature (taking into account the timing
and amounts of cash to be payable on or in respect of its debt). The
Company has no knowledge of any facts or circumstances which lead it to
believe that it will file for reorganization or liquidation under the
bankruptcy or reorganization laws of any jurisdiction within one year from
the Closing Date. The SEC Reports set forth as of the dates thereof all
outstanding secured and unsecured Indebtedness of Borrowers, as applicable,
or any Subsidiary, or for which the Company or any Subsidiary has
commitments. For the purposes of this Agreement, "Indebtedness" shall mean
(a) any liabilities for borrowed money or amounts owed in excess of $50,000
(other than trade accounts payable incurred in the ordinary course of
business), (b) all guaranties, endorsements and other contingent
obligations in respect of Indebtedness of others, whether or not the same
are or should be reflected in each Borrower's balance sheet (or the notes
thereto), except guaranties by endorsement of negotiable instruments for
deposit or collection or similar transactions in the ordinary course of
business; and (c) the present value of any lease payments in excess of
$50,000 due under leases required to be capitalized in accordance with
GAAP. Neither the Borrowers nor any Subsidiary is in default with respect
to any Indebtedness.
(bb) Form SB-2 Eligibility. The Company is eligible to register the
resale of the Underlying Shares for resale by the Purchaser on Form SB-2
promulgated under the Securities Act.
(cc) Tax Status. Except for matters that would not, individually or in
the aggregate, have or reasonably be expected to result in a Material
Adverse Effect, the Borrowers and each Subsidiary have filed all necessary
federal, state and foreign income and franchise tax returns and has paid or
accrued all taxes shown as due thereon, and the Borrowers have no knowledge
of a tax deficiency which has been asserted or threatened against the
Borrowers or any Subsidiary.
(dd) No General Solicitation. Neither the Borrowers nor any person
acting on behalf of the Company has offered or sold any of the Securities
by any form of general solicitation or general advertising. The Borrowers
have offered the Securities for sale only to the Purchasers and certain
other "accredited investors" within the meaning of Rule 501 under the
Securities Act.
16
(ee) Foreign Corrupt Practices. Neither the Company, nor to the
knowledge of the Company, any agent or other person acting on behalf of the
Company, has (i) directly or indirectly, used any funds for unlawful
contributions, gifts, entertainment or other unlawful expenses related to
foreign or domestic political activity, (ii) made any unlawful payment to
foreign or domestic government officials or employees or to any foreign or
domestic political parties or campaigns from corporate funds, (iii) failed
to disclose fully any contribution made by the Company (or made by any
person acting on its behalf of which the Company is aware) which is in
violation of law, or (iv) violated in any material respect any provision of
the Foreign Corrupt Practices Act of 1977, as amended.
(ff) Accountants. Each Borrower's accountants are set forth on
Schedule 3.1(ff) of the Disclosure Schedule. To the knowledge of the
Company, such accountants, who the Company expects will express their
opinion with respect to the financial statements to be included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2005
are a registered public accounting firm as required by the Securities Act.
(gg) Seniority. As of the Closing Date, no indebtedness or other
equity of the Borrowers is senior to the Debentures in right of payment,
whether with respect to interest or upon liquidation or dissolution, or
otherwise, other than indebtedness secured by purchase money security
interests (which is senior only as to underlying assets covered thereby)
and capital lease obligations (which is senior only as to the property
covered thereby).
(hh) No Disagreements with Accountants and Lawyers. There are no
disagreements of any kind presently existing, or reasonably anticipated by
the Borrowers to arise, between the accountants and lawyers formerly or
presently employed by the Borrowers and the Borrowers are current with
respect to any fees owed to its accountants and lawyers.
(ii) Acknowledgment Regarding Purchasers' Purchase of Securities. The
Company acknowledges and agrees that each of the Purchasers is acting
solely in the capacity of an arm's length purchaser with respect to the
Transaction Documents and the transactions contemplated hereby. The Company
further acknowledges that no Purchaser is acting as a financial advisor or
fiduciary of the Company (or in any similar capacity) with respect to this
Agreement and the transactions contemplated hereby and any advice given by
any Purchaser or any of their respective representatives or agents in
connection with this Agreement and the transactions contemplated hereby is
merely incidental to the Purchasers' purchase of the Securities. The
Company further represents to each Purchaser that the Company's decision to
enter into this Agreement has been based solely on the independent
evaluation of the transactions contemplated hereby by the Company and its
representatives.
(jj) Acknowledgement Regarding Purchasers' Trading Activity. Anything
in this Agreement or elsewhere herein to the contrary notwithstanding
(except for Section 4.16 hereof), it is understood and agreed by the
Company (i) that none of the Purchasers
17
have been asked to agree, nor has any Purchaser agreed, to desist from
purchasing or selling, long and/or short, securities of the Company, or
"derivative" securities based on securities issued by the Company or to
hold the Securities for any specified term; (ii) that past or future open
market or other transactions by any Purchaser, including Short Sales, and
specifically including, without limitation, Short Sales or "derivative"
transactions, before or after the closing of this or future private
placement transactions, may negatively impact the market price of the
Company's publicly-traded securities; (iii) that any Purchaser, and counter
parties in "derivative" transactions to which any such Purchaser is a
party, directly or indirectly, presently may have a "short" position in the
Common Stock, and (iv) that each Purchaser shall not be deemed to have any
affiliation with or control over any arm's length counter-party in any
"derivative" transaction. The Company further understands and acknowledges
that (a) one or more Purchasers may engage in hedging activities at various
times during the period that the Securities are outstanding, including,
without limitation, during the periods that the value of the Underlying
Shares deliverable with respect to Securities are being determined and (b)
such hedging activities (if any) could reduce the value of the existing
stockholders' equity interests in the Company at and after the time that
the hedging activities are being conducted. The Company acknowledges that
such aforementioned hedging activities do not constitute a breach of any of
the Transaction Documents.
(kk) Manipulation of Price. The Company has not, and to its knowledge
no one acting on its behalf has, (i) taken, directly or indirectly, any
action designed to cause or to result in the stabilization or manipulation
of the price of any security of the Company to facilitate the sale or
resale of any of the Securities, (ii) sold, bid for, purchased, or, paid
any compensation for soliciting purchases of, any of the Securities (other
than for the placement agent's placement of the Securities), or (iii) paid
or agreed to pay to any person any compensation for soliciting another to
purchase any other securities of the Company.
3.2 Representations and Warranties of the Purchasers. Each Purchaser
hereby, for itself and for no other Purchaser, represents and warrants as of the
date hereof and as of the Closing Date to the Company as follows:
(a) Organization; Authority. Such Purchaser is an entity duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with full right, corporate or partnership
power and authority to enter into and to consummate the transactions
contemplated by the Transaction Documents and otherwise to carry out its
obligations hereunder and thereunder. The execution, delivery and
performance by such Purchaser of the transactions contemplated by this
Agreement have been duly authorized by all necessary corporate or similar
action on the part of such Purchaser. Each Transaction Document to which it
is a party has been duly executed by such Purchaser, and when delivered by
such Purchaser in accordance with the terms hereof, will constitute the
valid and legally binding obligation of such Purchaser, enforceable against
it in accordance with its terms, except (i) as limited by general equitable
principles and applicable bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting enforcement of
creditors' rights generally,
18
(ii) as limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies and (iii)
insofar as indemnification and contribution provisions may be limited by
applicable law.
(b) Own Account. Such Purchaser understands that the Securities are
"restricted securities" and have not been registered under the Securities
Act or any applicable state securities law and is acquiring the Securities
as principal for its own account and not with a view to or for distributing
or reselling such Securities or any part thereof in violation of the
Securities Act or any applicable state securities law, has no present
intention of distributing any of such Securities in violation of the
Securities Act or any applicable state securities law and has no
arrangement or understanding with any other persons regarding the
distribution of such Securities (this representation and warranty not
limiting such Purchaser's right to sell the Securities pursuant to the
Registration Statement or otherwise in compliance with applicable federal
and state securities laws) in violation of the Securities Act or any
applicable state securities law. Such Purchaser is acquiring the Securities
hereunder in the ordinary course of its business. Such Purchaser does not
have any agreement or understanding, directly or indirectly, with any
Person to distribute any of the Securities.
(c) Purchaser Status. At the time such Purchaser was offered the
Securities, it was, and at the date hereof it is, and on each date on which
it exercises any Warrants or converts any Debentures it will be either: (i)
an "accredited investor" as defined in Rule 501(a)(1), (a)(2), (a)(3),
(a)(7) or (a)(8) under the Securities Act or (ii) a "qualified
institutional buyer" as defined in Rule 144A(a) under the Securities Act.
Such Purchaser is not required to be registered as a broker-dealer under
Section 15 of the Exchange Act.
(d) Experience of Such Purchaser. Such Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of
evaluating the merits and risks of the prospective investment in the
Securities, and has so evaluated the merits and risks of such investment.
Such Purchaser is able to bear the economic risk of an investment in the
Securities and, at the present time, is able to afford a complete loss of
such investment.
(e) General Solicitation. Such Purchaser is not purchasing the
Securities as a result of any advertisement, article, notice or other
communication regarding the Securities published in any newspaper, magazine
or similar media or broadcast over television or radio or presented at any
seminar or any other general solicitation or general advertisement.
(f) Short Sales and Confidentiality Prior To The Date Hereof. Other
than the transaction contemplated hereunder, such Purchaser has not
directly or indirectly, nor has any Person acting on behalf of or pursuant
to any understanding with such Purchaser, executed any disposition,
including Short Sales (but not including the location and/or reservation of
borrowable shares of Common Stock), in the securities of the Company during
the period commencing from the time that such Purchaser first received a
term sheet from the Company or any other Person setting forth the material
terms of the
19
transactions contemplated hereunder until the date hereof ("Discussion
Time"). Notwithstanding the foregoing, in the case of a Purchaser that is a
multi-managed investment vehicle whereby separate portfolio managers manage
separate portions of such Purchaser's assets and the portfolio managers
have no direct knowledge of the investment decisions made by the portfolio
managers managing other portions of such Purchaser's assets, the
representation set forth above shall only apply with respect to the portion
of assets managed by the portfolio manager that made the investment
decision to purchase the Securities covered by this Agreement. Other than
to other Persons party to this Agreement, such Purchaser has maintained the
confidentiality of all disclosures made to it in connection with this
transaction (including the existence and terms of this transaction).
The Borrowers acknowledge and agree that each Purchaser does not make
or has not made any representations or warranties with respect to the
transactions contemplated hereby other than those specifically set forth in
this Section 3.2.
ARTICLE IV.
OTHER AGREEMENTS OF THE PARTIES
4.1 Transfer Restrictions.
(a) The Securities may only be disposed of in compliance with state
and federal securities laws. In connection with any transfer of Securities
other than pursuant to an effective registration statement or Rule 144, to
the Company or to an affiliate of a Purchaser or in connection with a
pledge as contemplated in Section 4.1(b), the Company may require the
transferor thereof to provide to the Company an opinion of counsel selected
by the transferor and reasonably acceptable to the Company, the form and
substance of which opinion shall be reasonably satisfactory to the Company,
to the effect that such transfer does not require registration of such
transferred Securities under the Securities Act. As a condition of
transfer, any such transferee shall agree in writing to be bound by the
terms of this Agreement and shall have the rights of a Purchaser under this
Agreement and the Registration Rights Agreement.
(b) The Purchasers agree to the imprinting, so long as is required by
this Section 4.1(b), of a legend on any of the Securities in the following
form:
[NEITHER] THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE SECURITIES
ARE [EXERCISABLE] [CONVERTIBLE]] HAVE BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN
A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN
20
ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL
OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH
SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE
SECURITIES ISSUABLE UPON [EXERCISE] [CONVERSION] OF THESE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED
BY SUCH SECURITIES.
The Borrowers acknowledge and agree that a Purchaser may from time to
time pledge pursuant to a bona fide margin agreement with a registered
broker-dealer or grant a security interest in some or all of the Securities
to a financial institution that is an "accredited investor" as defined in
Rule 501(a) under the Securities Act and who agrees to be bound by the
provisions of this Agreement and the Registration Rights Agreement and, if
required under the terms of such arrangement, such Purchaser may transfer
pledged or secured Securities to the pledgees or secured parties. Such a
pledge or transfer would not be subject to approval of the Borrowers and no
legal opinion of legal counsel of the pledgee, secured party or pledgor
shall be required in connection therewith. Further, no notice shall be
required of such pledge. At the appropriate Purchaser's expense, the
Borrowers will execute and deliver such reasonable documentation as a
pledgee or secured party of Securities may reasonably request in connection
with a pledge or transfer of the Securities, including, if the Securities
are subject to registration pursuant to the Registration Rights Agreement,
the preparation and filing of any required prospectus supplement under Rule
424(b)(3) under the Securities Act or other applicable provision of the
Securities Act to appropriately amend the list of Selling Stockholders
thereunder.
(c) Certificates evidencing the Underlying Shares shall not contain
any legend (including the legend set forth in Section 4.1(b) hereof): (i)
while a registration statement (including the Registration Statement)
covering the resale of such security is effective under the Securities Act,
or (ii) following any sale of such Underlying Shares pursuant to Rule 144,
or (iii) if such Underlying Shares are eligible for sale under Rule 144(k),
or (iv) if such legend is not required under applicable requirements of the
Securities Act (including judicial interpretations and pronouncements
issued by the staff of the Commission). The Company shall cause its counsel
to issue a legal opinion to the Company's transfer agent promptly after the
Effective Date if required by the Company's transfer agent to effect the
removal of the legend hereunder. If all or any portion of a Debenture or
Warrant is converted or exercised (as applicable) at a time when there is
an effective registration statement to cover the resale of the Underlying
Shares, or if such Underlying Shares may be sold under Rule 144(k) or if
such legend is not otherwise required under applicable requirements of the
Securities Act (including judicial interpretations thereof) then such
Underlying Shares shall be issued free of all legends. The Company agrees
that following the Effective Date or at such time as such legend is no
longer required under this Section 4.1(c), it will, no later than three
Trading Days following the delivery by a Purchaser to the Company or the
Company's transfer agent of a certificate representing Underlying Shares,
as applicable, issued with a restrictive legend (such third Trading Day,
the "Legend Removal Date"), deliver or cause to be
21
delivered to such Purchaser a certificate representing such shares that is
free from all restrictive and other legends. The Company may not make any
notation on its records or give instructions to any transfer agent of the
Company that enlarge the restrictions on transfer set forth in this
Section. Certificates for Securities subject to legend removal hereunder
shall be transmitted by the transfer agent of the Company to the Purchasers
by crediting the account of the Purchaser's prime broker with the
Depository Trust Company System.
(d) In addition to such Purchaser's other available remedies, the
Borrowers shall pay, jointly and severally, to a Purchaser, in cash, as
partial liquidated damages and not as a penalty, for each $1,000 of
Underlying Shares (based on the VWAP of the Common Stock on the date such
Securities are submitted to the Company's transfer agent) delivered for
removal of the restrictive legend and subject to Section 4.1(c), $10 per
Trading Day (increasing to $20 per Trading Day 5 Trading Days after such
damages have begun to accrue) for each Trading Day after the second Trading
Day after the Legend Removal Date until such certificate is delivered
without a legend. Nothing herein shall limit such Purchaser's right to
pursue actual damages for the Company's failure to deliver certificates
representing any Securities as required by the Transaction Documents, and
such Purchaser shall have the right to pursue all remedies available to it
at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief.
(e) Each Purchaser, severally and not jointly with the other
Purchasers, agrees that the removal of the restrictive legend from
certificates representing Securities as set forth in this Section 4.1 is
predicated upon the Company's reliance that the Purchaser will sell any
Securities pursuant to either the registration requirements of the
Securities Act, including any applicable prospectus delivery requirements,
or an exemption therefrom.
4.2 Acknowledgment of Dilution. The Company acknowledges that the issuance
of the Securities may result in dilution of the outstanding shares of Common
Stock, which dilution may be substantial under certain market conditions. The
Company further acknowledges that its obligations under the Transaction
Documents, including without limitation its obligation to issue the Underlying
Shares pursuant to the Transaction Documents, are unconditional and absolute and
not subject to any right of set off, counterclaim, delay or reduction,
regardless of the effect of any such dilution or any claim the Company may have
against any Purchaser and regardless of the dilutive effect that such issuance
may have on the ownership of the other stockholders of the Company.
4.3 Furnishing of Information. As long as any Purchaser owns Securities,
the Company covenants to timely file (or obtain extensions in respect thereof
and file within the applicable grace period) all reports required to be filed by
the Company after the date hereof pursuant to the Exchange Act. As long as any
Purchaser owns Securities, if the Company is not required to file reports
pursuant to the Exchange Act, it will prepare and furnish to the Purchasers and
make publicly available in accordance with Rule 144(c) such information as is
required for the Purchasers to sell the Securities under Rule 144. The Company
further covenants that it will take such further action as any holder of
Securities may reasonably request,
22
all to the extent required from time to time to enable such Person to sell such
Securities without registration under the Securities Act within the limitation
of the exemptions provided by Rule 144.
4.4 Integration. The Company shall not sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or sale
of the Securities in a manner that would require the registration under the
Securities Act of the sale of the Securities to the Purchasers or that would be
integrated with the offer or sale of the Securities for purposes of the rules
and regulations of any Trading Market.
4.5 Conversion and Exercise Procedures. The form of Notice of Exercise
included in the Warrants and the form of Notice of Conversion included in the
Debentures set forth the totality of the procedures required of the Purchasers
in order to exercise the Warrants or convert the Debentures. No additional legal
opinion or other information or instructions shall be required of the Purchasers
to exercise their Warrants or convert their Debentures. The Company shall honor
exercises of the Warrants and conversions of the Debentures and shall deliver
Underlying Shares in accordance with the terms, conditions and time periods set
forth in the Transaction Documents.
4.6 Securities Laws Disclosure; Publicity. The Company shall, by 8:30 a.m.
Eastern time on the second Trading Day following the date hereof, issue a
Current Report on Form 8-K, reasonably acceptable to each Purchaser disclosing
the material terms of the transactions contemplated hereby, and shall attach the
Transaction Documents thereto. The Borrowers and each Purchaser shall consult
with each other in issuing any other press releases with respect to the
transactions contemplated hereby, and neither the Borrowers nor any Purchaser
shall issue any such press release or otherwise make any such public statement
without the prior consent of the Borrowers, with respect to any press release of
any Purchaser, or without the prior consent of each Purchaser, with respect to
any press release of the Borrowers, which consent shall not unreasonably be
withheld, except if such disclosure is required by law, in which case the
disclosing party shall promptly provide the other party with prior notice of
such public statement or communication. Notwithstanding the foregoing, the
Company shall not publicly disclose the name of any Purchaser, or include the
name of any Purchaser in any filing with the Commission or any regulatory agency
or Trading Market, without the prior written consent of such Purchaser, except
(i) as required by federal securities law in connection with the registration
statement contemplated by the Registration Rights Agreement and (ii) to the
extent such disclosure is required by law or Trading Market regulations, in
which case the Company shall provide the Purchasers with prior notice of such
disclosure permitted under subclause (i) or (ii).
4.7 Shareholder Rights Plan. No claim will be made or enforced by the
Company or, to the knowledge of the Company, any other Person that any Purchaser
is an "Acquiring Person" under any shareholder rights plan or similar plan or
arrangement in effect or hereafter adopted by the Company, or that any Purchaser
could be deemed to trigger the provisions of any such plan or arrangement, by
virtue of receiving Securities under the Transaction Documents or under any
other agreement between the Company and the Purchasers. The Company shall
conduct its business in a manner so that it will not become subject to the
Investment Company Act.
23
4.8 Non-Public Information. The Borrowers covenant and agree that neither
it nor any other Person acting on its behalf will provide any Purchaser or its
agents or counsel with any information that the Borrowers believe constitutes
material non-public information, unless prior thereto such Purchaser shall have
executed a written agreement regarding the confidentiality and use of such
information. The Borrowers understand and confirm that each Purchaser shall be
relying on the foregoing representations in effecting transactions in securities
of the Company.
4.9 Use of Proceeds. The Borrowers shall use the net proceeds from the sale
of the Securities hereunder for working capital purposes including, but not
limited to, the purchase of distressed real property and distressed consumer
receivable portfolios and not for the satisfaction of any portion of either
Borrower's debt (other than payment of trade payables in the ordinary course of
the Borrowers' business and prior practices), to redeem any Common Stock or
Common Stock Equivalents or to settle any outstanding litigation.
4.10 Reimbursement. If any Purchaser becomes involved in any capacity in
any Proceeding by or against any Person who is a stockholder of the Borrowers
(except as a result of sales, pledges, margin sales and similar transactions by
such Purchaser to or with any current stockholder or unless such Proceeding is
based upon a breach of such Purchaser's representations, warranties or covenants
under the Transaction Documents or any agreements or understandings such
Purchaser may have with any such stockholder or any violations by the Purchaser
of state or federal securities laws or any conduct by such Purchaser which
constitutes fraud or willful misconduct), solely as a result of such Purchaser's
acquisition of the Securities under this Agreement, the Borrowers will jointly
and severally reimburse such Purchaser for its reasonable legal and other
expenses (including the cost of any investigation preparation and travel in
connection therewith) incurred in connection therewith, as such expenses are
incurred. The reimbursement obligations of the Borrowers under this paragraph
shall be in addition to any liability which the Borrowers may otherwise have,
shall extend upon the same terms and conditions to any Affiliates of the
Purchasers who are actually named in such action, proceeding or investigation,
and partners, directors, agents, employees and controlling persons (if any), as
the case may be, of the Purchasers and any such Affiliate, and shall be binding
upon and inure to the benefit of any successors, assigns, heirs and personal
representatives of the Borrowers, the Purchasers and any such Affiliate and any
such Person. The Borrowers also agree that neither the Purchasers nor any such
Affiliates, partners, directors, agents, employees or controlling persons shall
have any liability to the Borrowers or any Person asserting claims on behalf of
or in right of the Borrowers solely as a result of acquiring the Securities
under this Agreement.
4.11 Indemnification of Purchasers. Subject to the provisions of this
Section 4.11, the Borrowers will jointly and severally indemnify and hold the
Purchasers and their directors, officers, shareholders, members, partners,
employees and agents (each, a "Purchaser Party") harmless from any and all
losses, liabilities, obligations, claims, contingencies, damages, costs and
expenses, including all judgments, amounts paid in settlements, court costs and
reasonable attorneys' fees and costs of investigation that any such Purchaser
Party may suffer or incur as a result of or relating to (a) any breach of any of
the representations, warranties, covenants or agreements made by the Borrowers
in this Agreement or in the other Transaction Documents or (b) any action
instituted against a Purchaser, or any of them or their respective Affiliates,
by any stockholder of the Borrowers who is not an Affiliate of such Purchaser,
with respect to any of the
24
transactions contemplated by the Transaction Documents (unless such action is
based upon a breach of such Purchaser's representations, warranties or covenants
under the Transaction Documents or any agreements or understandings such
Purchaser may have with any such stockholder or any violations by the Purchaser
of state or federal securities laws or any conduct by such Purchaser which
constitutes fraud, gross negligence, willful misconduct or malfeasance). If any
action shall be brought against any Purchaser Party in respect of which
indemnity may be sought pursuant to this Agreement, such Purchaser Party shall
promptly notify the Borrowers in writing, and the Borrowers shall have the right
to assume the defense thereof with counsel of its own choosing. Any Purchaser
Party shall have the right to employ separate counsel in any such action and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Purchaser Party except to the extent that (i)
the employment thereof has been specifically authorized by the Borrowers in
writing, (ii) the Borrowers have failed after a reasonable period of time to
assume such defense and to employ counsel or (iii) in such action there is, in
the reasonable opinion of such separate counsel, a material conflict on any
material issue between the position of either Borrower and the position of such
Purchaser Party. The Borrowers will not be liable to any Purchaser Party under
this Agreement (i) for any settlement by a Purchaser Party effected without each
Borrower's prior written consent, which shall not be unreasonably withheld or
delayed; or (ii) to the extent, but only to the extent that a loss, claim,
damage or liability is attributable to any Purchaser Party's breach of any of
the representations, warranties, covenants or agreements made by the Purchasers
in this Agreement or in the other Transaction Documents.
4.12 Reservation and Listing of Securities.
(a) The Company shall maintain a reserve from its duly authorized
shares of Common Stock for issuance pursuant to the Transaction Documents
in such amount as may be required to fulfill its obligations in full under
the Transaction Documents.
(b) If, on any date, the number of authorized but unissued (and
otherwise unreserved) shares of Common Stock is less than the Required
Minimum on such date, then the Board of Directors of the Company shall use
commercially reasonable efforts to amend the Company's certificate or
articles of incorporation to increase the number of authorized but unissued
shares of Common Stock to at least the Required Minimum at such time, as
soon as possible and in any event not later than the 75th day after such
date.
(c) The Company shall, if applicable: (i) in the time and manner
required by the Trading Market, prepare and file with such Trading Market
an additional shares listing application covering a number of shares of
Common Stock at least equal to the Required Minimum on the date of such
application, (ii) take all steps necessary to cause such shares of Common
Stock to be approved for listing on the Trading Market as soon as possible
thereafter, (iii) provide to the Purchasers evidence of such listing, and
(iv) maintain the listing of such Common Stock on any date at least equal
to the Required Minimum on such date on such Trading Market or another
Trading Market.
4.13 Participation in Future Financing.
25
(a) From the date hereof until the date that is the 12 month
anniversary of the Effective Date, upon any financing by the Company or any
of its Subsidiaries of Common Stock, Common Stock Equivalents or
Indebtedness of a Borrower (a "Subsequent Financing"), each Purchaser shall
have the right to participate in up to an amount of the Subsequent
Financing equal to 100% of the Subsequent Financing (the "Participation
Maximum").
(b) At least 5 Trading Days prior to the closing of the Subsequent
Financing, the Borrowers shall deliver to each Purchaser a written notice
of its intention to effect a Subsequent Financing ("Pre-Notice"), which
Pre-Notice shall ask such Purchaser if it wants to review the details of
such financing (such additional notice, a "Subsequent Financing Notice").
Upon the request of a Purchaser, and only upon a request by such Purchaser,
for a Subsequent Financing Notice, the Borrowers shall promptly, but no
later than 1 Trading Day after such request, deliver a Subsequent Financing
Notice to such Purchaser. The Subsequent Financing Notice shall describe in
reasonable detail the proposed terms of such Subsequent Financing, the
amount of proceeds intended to be raised thereunder, the Person with whom
such Subsequent Financing is proposed to be effected, and attached to which
shall be a term sheet or similar document relating thereto.
(c) Any Purchaser desiring to participate in such Subsequent Financing
must provide written notice to the Borrowers by not later than 5:30 p.m.
(New York City time) on the 5th Trading Day after all of the Purchasers
have received the Pre-Notice that the Purchaser is willing to participate
in the Subsequent Financing, the amount of the Purchaser's participation,
and that the Purchaser has such funds ready, willing, and available for
investment on the terms set forth in the Subsequent Financing Notice. If
the Borrowers receives no notice from a Purchaser as of such 5th Trading
Day, such Purchaser shall be deemed to have notified the Borrowers that it
does not elect to participate.
(d) If by 5:30 p.m. (New York City time) on the 5th Trading Day after
all of the Purchasers have received the Pre-Notice, notifications by the
Purchasers of their willingness to participate in the Subsequent Financing
(or to cause their designees to participate) is, in the aggregate, less
than the total amount of the Subsequent Financing, then the Borrowers may
effect the remaining portion of such Subsequent Financing on the terms and
to the Persons set forth in the Subsequent Financing Notice.
(e) If by 5:30 p.m. (New York City time) on the 5th Trading Day after
all of the Purchasers have received the Pre-Notice, the Borrowers receives
responses to a Subsequent Financing Notice from Purchasers seeking to
purchase more than the aggregate amount of the Participation Maximum, each
such Purchaser shall have the right to purchase the greater of (a) their
Pro Rata Portion (as defined below) of the Participation Maximum and (b)
the difference between the Participation Maximum and the aggregate amount
of participation by all other Purchasers. "Pro Rata Portion" is the ratio
of (x) the Subscription Amount of Securities purchased on the Closing Date
by a Purchaser participating under this Section 4.13 and (y) the sum of the
aggregate
26
Subscription Amounts of Securities purchased on the Closing Date by all
Purchasers participating under this Section 4.13.
(f) The Borrowers must provide the Purchasers with a second Subsequent
Financing Notice, and the Purchasers will again have the right of
participation set forth above in this Section 4.13, if the Subsequent
Financing subject to the initial Subsequent Financing Notice is not
consummated for any reason on the terms set forth in such Subsequent
Financing Notice within 60 Trading Days after the date of the initial
Subsequent Financing Notice.
(g) Notwithstanding the foregoing, this Section 4.13 shall not apply
in respect of (i) an Exempt Issuance and (ii) a Secondary Offering.
4.14 Subsequent Equity Sales.
(a) From the date hereof until 90 days after the Effective Date,
neither the Borrowers nor any Subsidiary shall issue shares of Common Stock
or Common Stock Equivalents; provided, however, the 90 day period set forth
in this Section 4.14 shall be extended for the number of Trading Days
during such period in which (i) trading in the Common Stock is suspended by
any Trading Market, or (ii) following the Effective Date, the Registration
Statement is not effective or the prospectus included in the Registration
Statement may not be used by the Purchasers for the resale of the
Underlying Shares.
(b) From the date hereof until such time as no Purchaser holds any of
the Securities, the Company shall be prohibited from effecting or entering
into an agreement to effect any Subsequent Financing involving a "Variable
Rate Transaction". The term "Variable Rate Transaction" shall mean a
transaction in which the Company issues or sells (i) any debt or equity
securities that are convertible into, exchangeable or exercisable for, or
include the right to receive additional shares of Common Stock either (A)
at a conversion, exercise or exchange rate or other price that is based
upon and/or varies with the trading prices of or quotations for the shares
of Common Stock at any time after the initial issuance of such debt or
equity securities, or (B) with a conversion, exercise or exchange price
that is subject to being reset at some future date after the initial
issuance of such debt or equity security (but not including customary full
ratchet or weighted average anti-dilution provisions), or upon the
occurrence of specified or contingent events directly or indirectly related
to the business of the Company or the market for the Common Stock or (ii)
enters into any agreement, including, but not limited to, an equity line of
credit, whereby the Company may sell securities at a future determined
price.
(c) Notwithstanding the foregoing, this Section 4.14 shall not apply
in respect of an Exempt Issuance or a Secondary Offering, except that no
Variable Rate Transaction shall be an Exempt Issuance.
4.15 Equal Treatment of Purchasers. No consideration shall be offered or
paid to any person to amend or consent to a waiver or modification of any
provision of any of the
27
Transaction Documents unless the same consideration is also offered to all of
the parties to the Transaction Documents. Further, the Borrowers shall not make
any payment of principal or interest on the Debentures in amounts which are
disproportionate to the respective principal amounts outstanding on the
Debentures at any applicable time. For clarification purposes, this provision
constitutes a separate right granted to each Purchaser by the Borrowers and
negotiated separately by each Purchaser, and is intended for the Borrowers to
treat the Purchasers as a class and shall not in any way be construed as the
Purchasers acting in concert or as a group with respect to the purchase,
disposition or voting of Securities or otherwise.
4.16 Short Sales and Confidentiality After The Date Hereof. Each Purchaser
severally and not jointly with the other Purchasers covenants that neither it
nor any affiliates acting on its behalf or pursuant to any understanding with it
will execute any Short Sales during the period after the Discussion Time and
ending at the time that the transactions contemplated by this Agreement are
first publicly announced as described in Section 4.6. Each Purchaser, severally
and not jointly with the other Purchasers, covenants that until such time as the
transactions contemplated by this Agreement are publicly disclosed by the
Company as described in Section 4.6, such Purchaser will maintain, the
confidentiality of all disclosures made to it in connection with this
transaction (including the existence and terms of this transaction). Each
Purchaser understands and acknowledges, severally and not jointly with any other
Purchaser, that the Commission currently takes the position that coverage of
short sales of shares of the Common Stock "against the box" prior to the
Effective Date of the Registration Statement with the Securities is a violation
of Section 5 of the Securities Act, as set forth in Item 65, Section 5 under
Section A, of the Manual of Publicly Available Telephone Interpretations, dated
July 1997, compiled by the Office of Chief Counsel, Division of Corporation
Finance. Notwithstanding the foregoing, no Purchaser makes any representation,
warranty or covenant hereby that it will not engage in Short Sales in the
securities of the Company after the time that the transactions contemplated by
this Agreement are first publicly announced as described in Section 4.6.
Notwithstanding the foregoing, in the case of a Purchaser that is a
multi-managed investment vehicle whereby separate portfolio managers manage
separate portions of such Purchaser's assets and the portfolio managers have no
direct knowledge of the investment decisions made by the portfolio managers
managing other portions of such Purchaser's assets, the covenant set forth above
shall only apply with respect to the portion of assets managed by the portfolio
manager that made the investment decision to purchase the Securities covered by
this Agreement.
ARTICLE V.
MISCELLANEOUS
5.1 Termination. This Agreement may be terminated by any Purchaser, as to
such Purchaser's obligations hereunder only and without any effect whatsoever on
the obligations between the Borrowers and the other Purchasers, by written
notice to the other parties, if the Closing has not been consummated on or
before October 31, 2005; provided, however, that no such termination will affect
the right of any party to sue for any breach by the other party (or parties).
5.2 Fees and Expenses. At the Closing, the Borrowers have agreed to jointly
and severally reimburse DKR SoundShore Oasis Holding Fund Ltd. ("DKR")
non-accountable sum
28
of $30,000, for its actual, reasonable, out-of-pocket legal fees and expenses.
Accordingly, in lieu of the foregoing payments, the aggregate amount that DKR is
to pay for the Securities at the Closing shall be reduced by $30,000 in lieu
thereof. The Borrowers shall deliver, prior to the Closing, a completed and
executed copy of the Closing Statement, attached hereto as Annex A. Except as
expressly set forth in the Transaction Documents to the contrary, each party
shall pay the fees and expenses of its advisers, counsel, accountants and other
experts, if any, and all other expenses incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of this Agreement.
The Borrowers shall pay all transfer agent fees, stamp taxes and other taxes and
duties levied in connection with the delivery of any Securities.
5.3 Entire Agreement. The Transaction Documents, together with the exhibits
and schedules thereto, contain the entire understanding of the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.
5.4 Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
set forth on the signature pages attached hereto prior to 5:30 p.m. (New York
City time) on a Trading Day, (b) the next Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number set forth on the signature pages attached hereto on a day that
is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading
Day, (c) the 2nd Trading Day following the date of mailing, if sent by U.S.
nationally recognized overnight courier service, or (d) upon actual receipt by
the party to whom such notice is required to be given. The address for such
notices and communications shall be as set forth on the signature pages attached
hereto.
5.5 Amendments; Waivers. No provision of this Agreement may be waived or
amended except in a written instrument signed, in the case of an amendment, by
the Borrowers and each Purchaser or, in the case of a waiver, by the party
against whom enforcement of any such waiver is sought. No waiver of any default
with respect to any provision, condition or requirement of this Agreement shall
be deemed to be a continuing waiver in the future or a waiver of any subsequent
default or a waiver of any other provision, condition or requirement hereof, nor
shall any delay or omission of either party to exercise any right hereunder in
any manner impair the exercise of any such right.
5.6 Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.
5.7 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their successors and permitted assigns. The
Borrowers may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of each Purchaser. Any Purchaser may assign
any or all of its rights under this Agreement to any Person
29
to whom such Purchaser assigns or transfers any Securities, provided such
transferee agrees in writing to be bound, with respect to the transferred
Securities, by the provisions hereof that apply to the "Purchasers".
5.8 No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.11.
5.9 Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of the Transaction Documents shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. Each
party agrees that all legal proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by this Agreement and
any other Transaction Documents (whether brought against a party hereto or its
respective affiliates, directors, officers, shareholders, employees or agents)
shall be commenced exclusively in the state and federal courts sitting in the
City of New York. Each party hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in the City of New York,
borough of Manhattan for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein (including with respect to the enforcement of any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is improper
or inconvenient venue for such proceeding. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof via registered or certified
mail or overnight delivery (with evidence of delivery) to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. The parties hereby waive all
rights to a trial by jury. If either party shall commence an action or
proceeding to enforce any provisions of the Transaction Documents, then the
prevailing party in such action or proceeding shall be reimbursed by the other
party for its attorneys' fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such action or proceeding.
5.10 Survival. The representations and warranties contained herein shall
survive the Closing and the delivery, exercise and/or conversion of the
Securities, as applicable for the applicable statue of limitations.
5.11 Execution. This Agreement may be executed in two or more counterparts,
all of which when taken together shall be considered one and the same agreement
and shall become effective when counterparts have been signed by each party and
delivered to the other party, it being understood that both parties need not
sign the same counterpart. In the event that any signature is delivered by
facsimile transmission, such signature shall create a valid and binding
obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.
30
5.12 Severability. If any provision of this Agreement is held to be invalid
or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.
5.13 Rescission and Withdrawal Right. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Purchaser exercises a right, election,
demand or option under a Transaction Document and the Company does not timely
perform its related obligations within the periods therein provided, then such
Purchaser may rescind or withdraw, in its sole discretion from time to time upon
written notice to the Company, any relevant notice, demand or election in whole
or in part without prejudice to its future actions and rights; provided,
however, in the case of a rescission of a conversion of a Debenture or exercise
of a Warrant, the Purchaser shall be required to return any shares of Common
Stock subject to any such rescinded conversion or exercise notice.
5.14 Replacement of Securities. If any certificate or instrument evidencing
any Securities is mutilated, lost, stolen or destroyed, the Borrowers shall
issue or cause to be issued in exchange and substitution for and upon
cancellation thereof, or in lieu of and substitution therefor, a new certificate
or instrument, but only upon receipt of evidence reasonably satisfactory to the
Borrowers of such loss, theft or destruction and customary and reasonable
indemnity, if requested. The applicants for a new certificate or instrument
under such circumstances shall also pay any reasonable third-party costs
associated with the issuance of such replacement Securities.
5.15 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Purchasers and the Borrowers will be entitled to specific performance under the
Transaction Documents. The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations described in the foregoing sentence and hereby agrees to waive in
any action for specific performance of any such obligation the defense that a
remedy at law would be adequate.
5.16 Payment Set Aside. To the extent that the Borrowers make a payment or
payments to any Purchaser pursuant to any Transaction Document or a Purchaser
enforces or exercises its rights thereunder, and such payment or payments or the
proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered
from, disgorged by or are required to be refunded, repaid or otherwise restored
to the Borrowers, a trustee, receiver or any other person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.
31
5.17 Usury. To the extent it may lawfully do so, the Borrowers hereby agree
not to insist upon or plead or in any manner whatsoever claim, and will resist
any and all efforts to be compelled to take the benefit or advantage of, usury
laws wherever enacted, now or at any time hereafter in force, in connection with
any claim, action or proceeding that may be brought by any Purchaser in order to
enforce any right or remedy under any Transaction Document. Notwithstanding any
provision to the contrary contained in any Transaction Document, it is expressly
agreed and provided that the total liability of the Borrowers under the
Transaction Documents for payments in the nature of interest shall not exceed
the maximum lawful rate authorized under applicable law (the "Maximum Rate"),
and, without limiting the foregoing, in no event shall any rate of interest or
default interest, or both of them, when aggregated with any other sums in the
nature of interest that the Borrowers may be obligated to pay under the
Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum
contract rate of interest allowed by law and applicable to the Transaction
Documents is increased or decreased by statute or any official governmental
action subsequent to the date hereof, the new maximum contract rate of interest
allowed by law will be the Maximum Rate applicable to the Transaction Documents
from the effective date forward, unless such application is precluded by
applicable law. If under any circumstances whatsoever, interest in excess of the
Maximum Rate is paid by the Borrowers to any Purchaser with respect to
indebtedness evidenced by the Transaction Documents, such excess shall be
applied by such Purchaser to the unpaid principal balance of any such
indebtedness or be refunded to the Borrowers, the manner of handling such excess
to be at such Purchaser's election.
5.18 Independent Nature of Purchasers' Obligations and Rights. The
obligations of each Purchaser under any Transaction Document are several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Document. Nothing contained herein or in any
Transaction Document, and no action taken by any Purchaser pursuant thereto,
shall be deemed to constitute the Purchasers as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Documents. Each
Purchaser shall be entitled to independently protect and enforce its rights,
including without limitation the rights arising out of this Agreement or out of
the other Transaction Documents, and it shall not be necessary for any other
Purchaser to be joined as an additional party in any proceeding for such
purpose. Each Purchaser has been represented by its own separate legal counsel
in their review and negotiation of the Transaction Documents. For reasons of
administrative convenience only, Purchasers and their respective counsel have
chosen to communicate with the Borrowers through FW. FW does not represent all
of the Purchasers but only DKR SoundShore Oasis Holding Fund Ltd. The Borrowers
have elected to provide all Purchasers with the same terms and Transaction
Documents for the convenience of the Borrowers and not because it was required
or requested to do so by the Purchasers.
5.19 Liquidated Damages. The Borrowers' obligations to pay any partial
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of the Company and shall not terminate until all unpaid
partial liquidated damages and other amounts have been paid notwithstanding the
fact that the instrument or security pursuant to
32
which such partial liquidated damages or other amounts are due and payable shall
have been canceled.
5.20 Construction. The parties agree that each of them and/or their
respective counsel has reviewed and had an opportunity to revise the Transaction
Documents and, therefore, the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of the Transaction Documents or any amendments hereto.
(Signature Pages Follow)
33
IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.
VELOCITY ASSET MANAGEMENT INC. Address for Notice:
-------------------
By: /s/ JAMES J. MASTRIANI
----------------------
Name: James J. Mastriani
Title: CFO and Chief Legal Counsel
With a copy to (which shall not constitute notice):
J. HOLDER INC. Address for Notice:
-------------------
By: /s/ W. PETER RAGAN, SR.
-----------------------
Name: W. Peter Ragan, Sr.
Title: President
With a copy to (which shall not constitute notice):
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOR PURCHASER FOLLOWS]
34
[PURCHASER SIGNATURE PAGES TO VCYA SECURITIES PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the undersigned have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.
Name of Purchaser: DKR SoundShore Oasis Holding Fund, Ltd.
Signature of Authorized Signatory of Purchaser: /s/ BRAD CASWELL
Name of Authorized Signatory: Brad Caswell
Title of Authorized Signatory: Director
Email Address of Purchaser:
Address for Notice of Purchaser:
Address for Delivery of Securities for Purchaser (if not same as above):
Subscription Amount: $1,800,000
Warrant Shares:
EIN Number:
[SIGNATURE PAGES CONTINUE]
35
Annex A
CLOSING STATEMENT
Pursuant to the attached Securities Purchase Agreement, dated as of the date
hereto, the purchasers shall purchase up to $3,000,000 of Debentures and
Warrants from Velocity Asset Management Inc. (the "Company") and J. Holder Inc.
(the "Subsidiary", and the Company and Subsidiary, collectively, the
"Borrowers"). All funds will be wired into a trust account maintained by
____________, counsel to the Borrowers. All funds will be disbursed in
accordance with this Closing Statement.
Disbursement Date: October __, 2005
- --------------------------------------------------------------------------------
I. PURCHASE PRICE
--------------
Gross Proceeds to be Received in Trust $
II. DISBURSEMENTS
-------------
$
$
$
$
$
Total Amount Disbursed: $
WIRE INSTRUCTIONS:
- -----------------
To: _____________________________________
To: _____________________________________
36