INVESTMENT AGREEMENT
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INVESTMENT AGREEMENT (this "AGREEMENT"), dated as of April 1, 2003 by and
between Cal Bay International, Inc., a Nevada corporation (the "COMPANY"), and
Dutchess Private Equities Fund, L.P., a Delaware limited partnership (the
"INVESTOR").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Investor shall invest up to $10,000,000 to
purchase the Company's common stock, $.001 par value per share (the "COMMON
STOCK");
WHEREAS, such investments will be made in reliance upon the provisions of
Section 4(2) under the Securities Act of 1933, as amended (the "1933 ACT"), Rule
506 of Regulation D, and the rules and regulations promulgated thereunder,
and/or upon such other exemption from the registration requirements of the 1933
Act as may be available with respect to any or all of the investments in Common
Stock to be made hereunder; and
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Registration Rights
Agreement substantially in the form attached hereto as Exhibit A (the
"REGISTRATION RIGHTS AGREEMENT") pursuant to which the Company has agreed to
provide certain registration rights under the 1933 Act, and the rules and
regulations promulgated thereunder, and applicable state securities laws.
NOW THEREFORE, in consideration of the foregoing recitals, which shall be
considered an integral part of this Agreement, the covenants and agreements set
forth hereafter, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Company and the Investor hereby
agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms shall
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have the following meanings specified or indicated, and such meanings shall be
equally applicable to the singular and plural forms of the defined terms.
"1933 ACT" shall mean the Securities Act of 1933, as it may be amended.
"1934 ACT" shall mean the Securities Exchange Act of 1934, as it may be amended.
"AFFILIATE" shall have the meaning specified in Section 5(h).
"AGREED UPON PROCEDURES REPORT" shall have the meaning specified in Section
2(o).
"AGREEMENT" shall mean this Investment Agreement.
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"BRING DOWN COLD COMFORT LETTER" shall have the meaning specified in Section
2(n).
"BUY-IN" shall have the meaning specified in Section 6.
"BUY-IN ADJUSTMENT AMOUNT" shall have the meaning specified in Section 6.
"CLOSING" shall have the meaning specified in Section 2(h).
"CLOSING DATE" shall mean, as defined in Section 2(h), the date which is
thirteen (13) Trading Days following the Put Notice Date.
"COMMON STOCK" shall mean the Common Stock of the Company.
"CONTROL" or "CONTROLS" shall have the meaning specified in Section 5(h).
"COVERING SHARES" shall have the meaning specified in Section 6.
"EFFECTIVE DATE" shall mean the date the SEC declares effective under the 1933
Act the Registration Statement covering the Securities.
"ENVIRONMENTAL LAWS" shall have the meaning specified in Section 4(m).
"ESCROW AGENT" shall mean Brown Rudnick Berlack & Israels, LP
"ESCROW AGREEMENT" shall mean the Escrow Agreement entered into between the
Company, Investor and Escrow Agent and attached as Exhibit C.
"EXECUTION DATE" shall mean the date all Transaction Documents are executed by
the Company and Investor.
"INDEMNITEES" shall have the meaning specified in Section 10.
"INDEMNIFIED LIABILITIES" shall have the meaning specified in Section 10.
"INEFFECTIVE PERIOD" shall mean any period of time that the Registration
Statement or any Supplemental Registration Statement (as defined in the
Registration Rights Agreement) becomes ineffective or unavailable for use for
the sale or resale, as applicable, of any or all of the Registrable Securities
(as defined in the Registration Rights Agreement) for any reason (or in the
event the prospectus under either of the above is not current and deliverable)
during any time period required under the Registration Rights Agreement.
"INVESTOR" shall mean Dutchess Private Equities Fund, L.P., a Delaware limited
partnership.
"MAJOR TRANSACTION" shall have the meaning specified in Section 2(g).
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"MATERIAL ADVERSE EFFECT" shall have the meaning specified in Section 4(a).
"MATERIAL FACTS" shall have the meaning specified in Section 2(m).
"MAXIMUM COMMON STOCK ISSUANCE" shall have the meaning specified in Section
2(j).
"MINIMUM ACCEPTABLE PRICE" with respect to any Put Notice Date shall mean 75% of
the average of the closing bid prices for the fifteen (15) Trading Day period
immediately preceding such Put Notice Date.
"OPEN PERIOD" shall mean the period beginning on and including the Trading Day
immediately following the Effective Date and ending on the earlier to occur of
(i) the date which is 36 (thirty-six) months from the Effective Date and (ii)
termination of the Agreement in accordance with Section 9.
"PAYMENT AMOUNT" shall have the meaning specified in Section 2(p).
"PARTIAL RELEASE FORM" shall have the meaning specified in Section 2(i).
"PRICING PERIOD" shall mean the period beginning on the Put Notice Date and
ending on and including the date which is ten (10) Trading Days after such Put
Notice Date.
"PRINCIPAL MARKET" shall mean the American Stock Exchange, Inc., the National
Association of Securities Dealer's, Inc. OTC-BB, the BBX, the Nasdaq National
Market System or the Nasdaq SmallCap Market, whichever is the principal market
on which the Common Stock is listed.
"PROSPECTUS" shall mean the prospectus, preliminary prospectus and supplemental
prospectus used in connection with the Registration Statement.
"PURCHASE AMOUNT" shall mean the total amount being paid by the Investor on a
particular Closing Date to purchase the Securities.
"PURCHASE PRICE" shall mean 94% (ninety-four percent) of the lowest closing bid
price of the Common Stock during the Pricing Period.
"PUT AMOUNT" shall have the meaning set forth in Section 2(b) hereof.
"PUT NOTICE" shall mean a written notice sent to the Investor by the Company
stating the Put Amount of Shares the Company intends to sell to the Investor
pursuant to the terms of the Agreement and stating the current number of Shares
issued and outstanding on such date.
"PUT NOTICE DATE" shall mean the Trading Day immediately following the day on
which the Investor receives a Put Notice, however a Put Notice shall be deemed
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delivered on (x) the Trading Day it is received by facsimile or otherwise by the
Investor if such notice is received prior to 9:00 am Eastern Time, or (y) the
immediately succeeding Trading Day if it is received by facsimile or otherwise
after 9:00 am Eastern Time on a Trading Day. No Put Notice may be deemed
delivered on a day that is not a Trading Day.
"PUT RESTRICTION" shall mean the days between the end of the Pricing Period and
the date on which the Investor deems the Put closed. During this time, the
Company shall not be entitled to deliver another Put Notice.
"REGISTRATION OPINION" shall have the meaning specified in Section 2(m).
"REGISTRATION OPINION DEADLINE" shall mean the date that is three (3) Trading
Days prior to each Put Notice Date.
"REGISTRATION PERIOD" shall have the meaning specified in Section 5(c).
"REGISTRATION RIGHTS AGREEMENT" shall mean the Agreement entered into by the
Company with Investor for the registration of the Securities.
"REGISTRATION STATEMENT" means the registration statement of the Company filed
under the 1933 Act covering the Common Stock issuable hereunder.
"RELATED PARTY" shall have the meaning specified in Section 5(h).
"REPURCHASE EVENT" shall have the meaning specified in Section 2(p).
"RESOLUTION" shall have the meaning specified in Section 8(f).
"SEC" shall mean the U.S. Securities & Exchange Commission.
"SEC DOCUMENTS" shall have the meaning specified in Section 4(f).
"SECURITIES" shall mean the shares of Common Stock issued pursuant to the terms
of the Agreement.
"SHARES" shall mean the shares of common stock of the Company having no par
value per share.
"SOLD SHARES" shall have the meaning specified in Section 6.
"SUBSIDIARIES" shall have the meaning specified in Section 4(a).
"TRADING DAY" shall mean any day on which the Principal Market for the Company's
common stock is open for trading, from the hours of 9:30 am until 4:00 pm.
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"TRANSACTION DOCUMENTS" shall mean this Agreement, the Registration Rights
Agreement, the Escrow Agreement and each of the other agreements entered into by
the parties hereto in connection with this Agreement.
"VALUATION EVENT" shall have the meaning specified in Section 2(k).
2. PURCHASE AND SALE OF COMMON STOCK
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a. Purchase and Sale of Common Stock. Subject to the terms and
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conditions set forth herein, the Company shall issue and sell to the Investor,
and the Investor shall purchase from the Company, up to that number of Shares
having an aggregate Purchase Price of $10,000,000.
b. Delivery of Put Notices. (i) Subject to the terms and conditions
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of the Transaction Documents, and from time to time during the Open Period, the
Company may, in its sole discretion, deliver a Put Notice to the Investor which
states the Put Amount (designated in shares of Common Stock) which the Company
intends to sell to the Investor on a Closing Date. The Put Notice shall be in
the form attached hereto as Exhibit "F" and incorporated herein by reference.
The Company shall simultaneously deliver a copy of the Put Notice to the Escrow
Agent. The Put Amount designated by the Company in the form of a Put Notice
shall be as follows:
The amount that the Company shall be entitled to Put to the Investor
shall be equal to 175% of the average daily volume (U.S. market only) of the
Common Stock for the 20 (twenty) Trading Days prior to the applicable Put Notice
Date multiplied by the average of the three (3) daily closing bid prices
immediately preceding the Put Date, but in no event more than $1,000,000.
During the Open Period, the Company shall not be entitled to submit a
Put Notice until after the previous Closing has been completed. The Purchase
Price for the Common Stock identified in the Put Notice shall be equal to 94%
(ninety-four percent) of the lowest closing bid price of the Common Stock during
the Pricing Period.
(ii) If the closing bid price during the applicable Pricing Period with
respect to that Put Notice is less than 75% (seventy-five percent) of the
closing bid prices of the Common Stock for the fifteen (15) Trading Days prior
to the Put Notice Date ("MINIMUM ACCEPTABLE PRICE") the Put Notice will
terminate, only at the Company's request, sent via FACSIMILE to the Investor,
the Investor will continue the Put until the FACSIMILE is received by the
Investor. In the event that the closing bid price for the applicable Pricing
Period is less than the Minimum Acceptable Price, the Company may elect, by
sending written notice to the Investor via facsimile with a copy to the Escrow
Agent, to cancel that portion of the Put Notice remaining for that number of
Trading Days remaining after the written cancellation notice is received by the
Investors. The written notice shall be deemed received by the Investors on (i)
the Trading Day it is actually received by facsimile or otherwise by the
Investors if such notice is received on or prior to 9:00 A.M. New York time, or
(ii) the immediately succeeding Trading Day if it is received by facsimile after
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9:00 A.M. New York time on a Trading Day or at anytime on a day which is not a
Trading Day. Notwithstanding the foregoing, there shall be a closing with
respect to, and the Company shall be responsible for delivering, that number of
shares of Common Stock to the Escrow Agent that were sold by the Investors
through and including the end of the Trading Day the written cancellation notice
is received by the Investor.
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(iii) Within Thirteen (13) calendar days after the commencement of each
calendar quarter occurring subsequent to the commencement of the Open Period,
the Company undertakes to notify Investor as to its reasonable expectations as
to the Put Amount it intends to raise during such calendar quarter, if any,
through the issuance of Put Notices. Such notification shall constitute only the
Company's good faith estimate with respect to such calendar quarter and shall in
no way obligate the Company to raise such amount during such calendar quarter or
otherwise limit its ability to deliver Put Notices during such calendar quarter.
The failure by the Company to comply with this provision can be cured by the
Company's notifying Investor at any time as to its reasonable expectations with
respect to the current calendar quarter.
c. Interest. It is the intention of the parties that any interest that
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may be deemed to be payable under this Agreement shall not exceed the maximum
amount permitted under any applicable law. If a law, which applies to this
Agreement which sets the maximum interest amount, is finally interpreted so that
the interest in connection with this Agreement exceeds the permitted limits,
then: (1) any such interest shall be reduced by the amount necessary to reduce
the interest to the legally permitted limit; and (2) any sums already collected
(if any) from the Company which exceed the legally permitted limits will be
refunded to the Company. The Investor may choose to make this refund by
reducing the amount that the Company owes under this Agreement or by making a
direct payment to the Company. If a refund reduces the amount that the Company
owes the Investor, the reduction will be treated as a partial payment. In case
any provision of this Agreement is held by a court of competent jurisdiction to
be excessive in scope or otherwise invalid or unenforceable, such provision
shall be adjusted rather than voided, if possible, so that it is enforceable to
the maximum extent possible, and the validity and enforceability of the
remaining provisions of this Agreement will not in any way be affected or
impaired thereby.
d. reserved.
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e. Limitation on Investor's Obligation to Purchase Shares.
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Notwithstanding anything to the contrary in this Agreement, in no event shall
the Investor be required to purchase, and the Company shall in no event sell to
the Investor, that number of Shares, which when added to the sum of the number
of Shares "beneficially owned" (as such term is defined under Section 13(d) and
Rule 13d-3 of the Securities Exchange Act of 1934, as may be amended, (the "1934
ACT")), by the Investor, would exceed 4.99% of the number of Shares outstanding
on the Put Notice Date for such Pricing Period, as determined in accordance with
Rule 13d-1(j) promulgated under the 1934 Act. In no event shall the Investor
purchase Shares other than pursuant to this Agreement until such date as this
Agreement is terminated. Each Put Notice shall include a representation of the
Company as to the number of Shares outstanding on the related Put Notice Date.
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In the event that the number of Shares outstanding is different on any date
during a Pricing Period than the number of Shares outstanding on the Put Notice
Date associated with such Pricing Period, then the number of Shares outstanding
on such date during such Pricing Period shall govern for purposes of determining
whether the Investor would be acquiring beneficial ownership of more than 4.99%
of the number of Shares outstanding during such period.
f. Conditions to Investor's Obligation to Purchase Shares.
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Notwithstanding anything to the contrary in this Agreement, the Company shall
not be entitled to deliver a Put Notice and the Investor shall not be obligated
to purchase any Shares at a Closing (as defined in Section 2(h)) unless each of
the following conditions are satisfied:
(i) a Registration Statement shall have been declared effective and
shall remain effective and available for the resale of all the
Registrable Securities (as defined in the Registration Rights
Agreement) at all times until the Closing with respect to the subject
Put Notice;
(ii) at all times during the period beginning on the related Put
Notice Date and ending on and including the related Closing Date, the
Common Stock shall have been listed on the Principal Market and shall
not have been suspended from trading thereon for a period of five (5)
consecutive Trading Days during the Open Period and the Company shall
not have been notified of any pending or threatened proceeding or
other action to delist or suspend the Common Stock;
(iii) the Company has complied with its obligations and is otherwise
not in breach of a material provision of, or in default under, this
Agreement, the Registration Rights Agreement or any other agreement
executed in connection herewith which has not been corrected prior to
delivery of the Put Notice Date;
(iv) no injunction shall have been issued and remain in force, or
action commenced by a governmental authority which has not been stayed
or abandoned, prohibiting the purchase or the issuance of the
Securities; and
(v) the issuance of the Securities will not violate the shareholder
approval requirements of the Principal Market.
If any of the events described in clauses (i) through (v) above occurs
during a Pricing Period, then the Investor shall have no obligation to
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purchase the Put Amount of Common Stock set forth in the applicable
Put Notice.
g. For purposes of this Agreement, a "MAJOR TRANSACTION" shall be deemed
to have occurred upon the closing of any of the following events: (i) the
consolidation, merger or other business combination of the Company with or into
another person (other than pursuant to a migratory merger effected solely for
the purposes of changing the jurisdiction of incorporation of the Company or
other than a transaction in which the Company is the surviving corporation) (ii)
the sale or transfer of all or substantially all of the Company's assets; or
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(iii) the consummation of a purchase, tender or exchange offer made to, and
accepted by, the holders of more than 30% of the economic interest in, or the
combined voting power of all classes of voting stock of, the Company.
h. Mechanics of Purchase of Shares by Investor. Subject to the
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satisfaction of the conditions set forth in Sections 2(f), 7 and 8, the closing
of the purchase by the Investor of Shares (a "CLOSING") shall occur on the date
which is Thirteen (13) Trading Days following the applicable Put Notice Date or
when the Investor deems a Put closed (each a "CLOSING DATE"). Prior to each
Closing Date, (i) the Company shall deliver to the Escrow Agent pursuant to the
Escrow Agreement, annexed hereto as Exhibit C, certificates representing the
Shares to be issued to the Investor on such date and registered in the name of
the Investor and (ii) the Investor shall deliver to the Escrow Agent the
Purchase Price to be paid for such Shares (after receipt from Escrow Agent of
confirmation of delivery of such Shares), determined as set forth in Section
2(b) and (d), by wire transfer. In lieu of delivering physical certificates
representing the Securities and provided that the Company's transfer agent then
is participating in The Depository Trust Company ("DTC") Fast Automated
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Securities Transfer ("FAST") program, upon request of the Investor, the Company
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shall use its commercially reasonable efforts to cause its transfer agent to
electronically transmit the Securities by crediting the account of the Escrow
Agent's prime broker (which shall be specified by the Escrow Agent a reasonably
sufficient time in advance) with DTC through its Deposit Withdrawal Agent
Commission ("DWAC") system.
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The Company understands that a delay in the issuance of Securities beyond
the Closing Date could result in economic loss to the Investor. After the
Effective Date, as compensation to the Investor for such loss, the Company
agrees to pay late payments to the Investor for late issuance of Securities
(delivery of Securities after the applicable Closing Date) in accordance with
the following schedule (where "No. of Days Late" is defined as the number of
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days beyond the Closing Date):
Late Payment For Each
No. of Days Late $10,000 of Common Stock
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1 $100
2 $200
3 $300
4 $400
5 $500
6 $600
7 $700
8 $800
9 $900
10 $1,000
Over 10 $1,000 + $200 for each
Business Day late beyond 10
The Company shall pay any payments incurred under this Section in
immediately available funds upon demand. Nothing herein shall limit the
Investor's right to pursue actual damages for the Company's failure to issue and
deliver the Securities to the Investor, except to
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the extent that such late payments shall constitute payment for and offset any
such actual damages alleged by the Investor, and any Buy In Adjustment Amount.
i. Partial Release of Shares. After Investor has received a Put
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Notice, but prior to the related Closing Date, the Investor may authorize the
Escrow Agent to release, every five (5) Trading Days, a portion of the Purchase
Amount from escrow to the Company in exchange for a fixed number of Shares,
subject to the following conditions:
(i) The Investor shall fill out and sign a Partial Release of
Purchase Amount and Shares (the "Partial Release Form"). The
Partial Release Form shall set forth the number of Shares to be
released to Investor and the dollar amount the Escrow Agent shall
wire to the Company.
(ii) The Partial Release Form shall be filled out and signed by the
Investor and faxed to the Company prior to 12:00 p.m. New York
City time.
The number of Shares stated in the Partial Release Form shall be equal to
the dollar amount to be released divided by 94% (ninety-four percent) of the
lowest closing bid price during that number of Trading Days of the Pricing
Period that have expired.
The Company and Investor agree that on the related Closing Date, an
adjustment shall be made so that the terms set forth in this Agreement shall be
honored with the balance of the Purchase Amount being released to the Company
and the balance of the Shares owed to the Investor being released to Investor.
j. Overall Limit on Common Stock Issuable. Notwithstanding anything
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contained herein to the contrary, if during the Open Period the Company becomes
listed on an exchange that limits the number of shares of Common Stock that may
be issued without shareholder approval, then the number of Shares issuable by
the Company and purchasable by the Investor, including the shares of Common
Stock issuable to the Investors pursuant to Section 11(b), shall not exceed that
number of the shares of Common Stock that may be issuable without shareholder
approval, subject to appropriate adjustment for stock splits, stock dividends,
combinations or other similar recapitalization affecting the Common Stock (the
"MAXIMUM COMMON STOCK ISSUANCE"), unless the issuance of Shares, including any
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Common Stock to be issued to the Investors pursuant to Section 11(b), in excess
of the Maximum Common Stock Issuance shall first be approved by the Company's
shareholders in accordance with applicable law and the By-laws and Articles of
Incorporation of the Company, if such issuance of shares of Common Stock could
cause a delisting on the Principal Market. The parties understand and agree that
the Company's failure to seek or obtain such shareholder approval shall in no
way adversely affect the validity and due authorization of the issuance and sale
of Securities or the Investor's obligation in accordance with the terms and
conditions hereof to purchase a number of Shares in the aggregate up to the
Maximum Common Stock Issuance limitation, and that such approval pertains only
to the applicability of the Maximum Common Stock Issuance limitation provided in
this Section 2(j).
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k. "VALUATION EVENT" means the Company taking any of the following actions
at any time during a "Pricing Period":
(i) subdivides or combines its Common Stock;
(ii) pays a dividend in Common Stock or makes any other distribution
of its Common Stock, except for dividends paid with respect to
the Preferred Stock;
(iii) issues any options or other rights to subscribe for or purchase
Common Stock ("Options") and the price per share for which Common
Stock may at any time thereafter be issuable pursuant to such
Options shall be less than the Bid Price in effect immediately
prior to such issuance of such Options;
(iv) issues any securities convertible into or exchangeable for Common
Stock ("Convertible Securities") and the consideration per share
for which shares of Common Stock may at any time thereafter be
issuable pursuant to the terms of such Convertible Securities
shall be less than the Bid Price in effect immediately prior to
such issuance of the Convertible Securities;
(v) issues shares of Common Stock otherwise than as provided in the
foregoing subsections (i) through (iv), at a price per share
less, or for other consideration lower, than the Bid Price in
effect immediately prior to such issuance, or without
consideration;
(vi) makes a distribution of its assets or evidences of indebtedness
to the holders of Common Stock as a dividend in liquidation or by
way of return of capital or other than as a dividend payable out
of earnings or surplus legally available for dividends under
applicable law or any distribution to such holders made in
respect of the sale of all or substantially all of the Company's
assets (other than under the circumstances provided for in the
foregoing subsections (i) through (v); or
(vii) takes any action affecting the number of shares of Common Stock
outstanding, other than an action described in any of the
foregoing subsections (i) through (vi) hereof, inclusive, which
in the opinion of the Company's Board of Directors, determined in
good faith, would have a materially adverse effect upon the
rights of Investor at the time of a Put Notice is delivered to
Investor.
l. The Company agrees that it shall not take any action that would
result in a Valuation Event occurring during a Pricing Period.
m. Accountant's Letter and Registration Opinion. Whenever reasonably
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requested by Investor, the Company shall cause to be delivered to the Investor,
on or prior to each Registration Opinion Deadline, an opinion of the Company's
independent counsel (the "REGISTRATION OPINION"), addressed to the Investor
stating, inter alia, that no material facts ("MATERIAL FACTS") have come to such
counsel's attention that have caused it to believe that the Registration
Statement is subject to an Ineffective Period or to believe that the
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Registration Statement, any supplemental Registration Statement (as each may be
amended, if applicable), and any related prospectuses, contain an untrue
statement of material fact or omits a material fact required to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading. If a Registration Opinion cannot be delivered by the
Company's independent counsel to the Investor on the Registration Opinion
Deadline, the Company shall promptly notify the Investor and as promptly as
possible amend each of the Registration Statement and any supplemental
Registration Statements, as applicable, and any related prospectus or cause such
Ineffective Period to terminate, as the case may be, and deliver such
Registration Opinion and updated prospectus as soon as possible thereafter. If
at any time after a Put Notice shall have been delivered to Investor but before
the related Closing Date, the Company acquires knowledge of such Material Facts
or any Ineffective Period occurs, the Company shall immediately notify the
Investor in writing.
n. (i) Whenever reasonably requested by Investor, the Company shall
engage its independent auditors to prepare in accordance with the provisions of
Statement on Auditing Standards No. 71, as amended, such written report (the
"BRING DOWN COLD COMFORT LETTERS") with respect to the financial information
contained in the Registration Statement and shall have delivered to the Investor
such a report addressed to the Investor, on or prior to each Registration
Opinion Deadline;
(ii) in the event that the Investor shall have requested delivery of an
Agreed Upon Procedures Report pursuant to Section 2(o), the Company shall engage
its independent auditors to perform certain agreed upon procedures and report
thereon as shall have been reasonably requested by the Investor with respect to
certain financial information of the Company and the Company shall deliver to
the Investor a copy of such report addressed to the Investor. In the event that
the report required by this Section 2(n) cannot be delivered by the Company's
independent auditors, the Company shall, if necessary, promptly revise the
Registration Statement and the Company shall not deliver a Put Notice to
Investor until such report is delivered.
o. Procedure if Material Facts are Reasonably believed to be untrue or
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are omitted. In the event after such consultation the Investor or the Investor's
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counsel reasonably believes that the Registration Statement contains an untrue
statement or a material fact or omits a material fact required to be stated in
the Registration Statement or necessary to make the statements contained
therein, in light of the circumstances in which they were made, not misleading,
(i) the Company shall file with the SEC an amendment to the Registration
Statement responsive to such alleged untrue statement or omission and provide
the Investor, as promptly as practicable, with copies of the Registration
Statement and related Prospectus, as so amended, or (ii) if the Company disputes
the existence of any such material misstatement or omission, (x) the Company's
independent counsel shall provide the Investor's counsel with a Registration
Opinion and (y) in the event the dispute relates to the adequacy of financial
disclosure and the Investor shall reasonably request, the Company's independent
auditors shall provide to the Company a letter ("AGREED UPON PROCEDURES REPORT")
outlining the performance of such "agreed upon procedures," which shall not
require any more than the SAS 71 review described above as shall be reasonably
requested by the Investor and the Company shall provide the Investor with a copy
of such letter.
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p. Delisting; Suspension. If at any time during the Open Period or
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within thirty (30) calendar days after the end of the Open Period, (i) the
Registration Statement, after it has been declared effective, shall not remain
effective and available for sale of all the Registrable Securities for a period
exceeding 10 calendar days, (ii) the Common Stock shall not be listed on the
Principal Market or shall have been suspended from trading thereon (excluding
suspensions of not more than one trading day resulting from business
announcements by the Company) or the Company shall have been notified of any
pending or threatened proceeding or other action to delist or suspend the Common
Stock, (iii) there shall have occurred a Major Transaction (as defined in
Section 2(g)) or the public announcement of a pending Major Transaction which
has not been abandoned or terminated, or (iv) the Registration Statement is no
longer effective or stale for a period of more than five (5) Trading Days as a
result of the Company's failure to timely file its financial statements or for
any other reason, the Company shall repurchase within thirty (30) calendar days
of the occurrence of one of the events listed in clauses (i), (ii), (iii) or
(iv) above (each a "REPURCHASE EVENT") and subject to the limitations imposed by
applicable federal and state law, all or any part of the Securities issued to
the Investor within the sixty (60) Trading Days preceding the occurrence of the
Repurchase Event and then held by the Investor at a price per Share equal to the
highest closing bid price during the period beginning on the date of the
Repurchase Event and ending on and including the date on which the Investor is
paid by the Company for the repurchase of the Shares (the "PAYMENT AMOUNT"). If
the Company fails to pay to the Investor the full aggregate Payment Amount
within ten (10) calendar days of the occurrence of a Repurchase Event, the
Company shall pay to the Investor, on the first Trading Day following such tenth
(10th) calendar day, in addition to and not in lieu of the Payment Amount
payable by the Company to the Investor, an amount equal to two (2%) percent of
the aggregate Payment Amount then due and payable to the Investor, in cash by
wire transfer, plus compounded annual interest of 18% on such Payment Amount
during the period, beginning on the day following such tenth calendar day,
during which such Payment Amount, or any portion thereof, is outstanding.
3. INVESTOR'S REPRESENTATIONS, WARRANTIES AND COVENANTS.
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The Investor represents and warrants to the Company, and covenants, that:
a. Sophisticated Investor. The Investor has, by reason of its business
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and financial experience, such knowledge, sophistication and experience in
financial and business matters and in making investment decisions of this type
that it is capable of (A) evaluating the merits and risks of an investment in
the Securities and making an informed investment decision, (B) protecting its
own interest and (C) bearing the economic risk of such investment for an
indefinite period of time.
b. Authorization; Enforcement. This Agreement has been duly and
---------------------------
validly authorized, executed and delivered on behalf of the Investor and is a
12
valid and binding agreement of the Investor enforceable against the Investor in
accordance with its terms, subject as to enforceability to general principles of
equity and to applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation and other similar laws relating to, or affecting generally, the
enforcement of applicable creditors' rights and remedies.
c. Section 9 of the 1934 Act. During the Open Period, the Investor
-----------------------------
will comply with the provisions of Section 9 of the 1934 Act, and the rules
promulgated thereunder, with respect to transactions involving the Common Stock.
The Investor agrees not to short, either directly or indirectly through its
affiliates, principals or advisors, the Company's common stock during the term
of this Agreement, however, it shall not be deemed a short if the Investor sells
common stock after the delivery of the Put Notice from the Company.
d. Accredited Investor. Investor is an "Accredited Investor" as that
---------------------
term is defined in Rule 501(a)(3) of Regulation D of the 1933 Act.
e. No Conflicts. The execution, delivery and performance of the
-------------
Transaction Documents by the Investor and the consummation by the Investor of
the transactions contemplated hereby and thereby will not result in a violation
of the Articles of Incorporation, the By-laws or other organizational documents
of the Investor.
f. The Investor has had an opportunity to discuss the business,
management and financial affairs of the Company with the Company's management;
The Investor is purchasing the Securities for its own account for
investment purposes and not with a view towards distribution; provided, however,
that by making the representations herein, the Investor does not agree to hold
any of the Securities for any minimum or other specific term and reserves the
right to dispose of the Securities at any time in accordance with or pursuant to
a registration statement or an exemption under applicable state and/or federal
securities law;
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
--------------------------------------------------
Except as set forth in the Schedules attached hereto, the Company
represents and warrants to the Investor that:
a. Organization and Qualification. The Company is a corporation duly
--------------------------------
organized and validly existing in good standing under the laws of its
jurisdiction, and has the requisite corporate power and authorization to own its
properties and to carry on its business as now being conducted. Each of the
Company and its Subsidiaries is duly qualified as a foreign corporation to do
business and is in good standing in every jurisdiction in which its ownership of
property or the nature of the business conducted by it makes such qualification
necessary, except to the extent that the failure to be so qualified or be in
good standing would not have a Material Adverse Effect. As used in this
Agreement, "MATERIAL ADVERSE EFFECT" means any material adverse effect on the
business, properties, assets, operations, results of operations, financial
condition or prospects of the Company and its Subsidiaries, if any, taken as a
whole, or on the transactions contemplated hereby or by the agreements and
13
instruments to be entered into in connection herewith, or on the authority or
ability of the Company to perform its obligations under the Transaction
Documents (as defined in Section 1 and 4(b)below). The Company has no
subsidiaries.
b. Authorization; Enforcement; Compliance with Other Instruments. (i)
--------------------------------------------------------------
The Company has the requisite corporate power and authority to enter into and
perform this Agreement, the Registration Rights Agreement, the Escrow Agreement
and each of the other agreements entered into by the parties hereto in
connection with the transactions contemplated by this Agreement (collectively,
the "TRANSACTION DOCUMENTS"), and to issue the Securities in accordance with the
terms hereof and thereof, (ii) the execution and delivery of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated hereby and thereby, including without limitation the reservation
for issuance and the issuance of the Securities pursuant to this Agreement, have
been duly and validly authorized by the Company's Board of Directors and no
further consent or authorization is required by the Company, its Board of
Directors, or its shareholders, (iii) the Transaction Documents have been duly
and validly executed and delivered by the Company, and (iv) the Transaction
Documents constitute the valid and binding obligations of the Company
enforceable against the Company in accordance with their terms, except as such
enforceability may be limited by general principles of equity or applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally, the enforcement of creditors' rights and
remedies.
c. Capitalization. As of the date hereof, the authorized capital stock
--------------
of the Company consists of (i) 75,000,000 shares of Common Stock, $.001 par
value per share, of which as of the date hereof, 24,985,000 shares are issued
and outstanding. All of such outstanding shares have been validly issued and
are fully paid and nonassessable. Except as disclosed in Schedule 4(c) which is
attached hereto and made a part hereof, (i) no shares of the Company's capital
stock are subject to preemptive rights or any other similar rights or any liens
or encumbrances suffered or permitted by the Company, (ii) there are no
outstanding debt securities, (iii) there are no outstanding shares of capital
stock, options, warrants, scrip, rights to subscribe to, calls or commitments of
any character whatsoever relating to, or securities or rights convertible into,
any shares of capital stock of the Company or any of its Subsidiaries, or
contracts, commitments, understandings or arrangements by which the Company or
any of its Subsidiaries is or may become bound to issue additional shares of
capital stock of the Company or any of its Subsidiaries or options, warrants,
scrip, rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, any shares of capital
stock of the Company or any of its Subsidiaries, (iv) there are no agreements or
arrangements under which the Company or any of its Subsidiaries is obligated to
register the sale of any of their securities under the 1933 Act (except the
Registration Rights Agreement), (v) there are no outstanding securities of the
Company or any of its Subsidiaries which contain any redemption or similar
provisions, and there are no contracts, commitments, understandings or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to redeem a security of the Company or any of its Subsidiaries, (vi) there
are no securities or instruments containing anti-dilution or similar provisions
that will be triggered by the issuance of the Securities as described in this
Agreement, (vii) the Company does not have any stock appreciation rights or
14
"phantom stock" plans or agreements or any similar plan or agreement and (viii)
there is no dispute as to the class of any shares of the Company's capital
stock. The Company has furnished to the Investor, or the Investor has had access
through EDGAR to, true and correct copies of the Company's Articles of
Incorporation, as in effect on the date hereof (the "ARTICLES OF
INCORPORATION"), and the Company's By-laws, as in effect on the date hereof (the
"BY-LAWS '), and the terms of all securities convertible into or exercisable for
Common Stock and the material rights of the holders thereof in respect thereto.
d. Issuance of Shares. A sufficient number of Shares issuable
--------------------
pursuant to this Agreement has been duly authorized and reserved for issuance
(subject to adjustment pursuant to the Company's covenant set forth in Section
5(f) below) pursuant to this Agreement. Upon issuance in accordance with this
Agreement, the Securities will be validly issued, fully paid and nonassessable
and free from all taxes, liens and charges with respect to the issue thereof. In
the event the Company cannot register a sufficient number of Shares, due to the
remaining number of authorized shares of Common Stock being insufficient, the
Company will use its best efforts to register the maximum number of shares it
can based on the remaining balance of authorized shares and will use its best
efforts to increase the number of its authorized shares as soon as reasonably
practicable.
e. No Conflicts. The execution, delivery and performance of the
-------------
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby will not (i) result in a violation
of the Articles of Incorporation, any Certificate of Designations, Preferences
and Rights of any outstanding series of preferred stock of the Company or the
By-laws or (ii) conflict with, or constitute a material default (or an event
which with notice or lapse of time or both would become a material default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, contract, indenture mortgage,
indebtedness or instrument to which the Company or any of its Subsidiaries is a
party, or result in a violation of any law, rule, regulation, order, judgment or
decree (including United States federal and state securities laws and
regulations and the rules and regulations of the Principal Market or principal
securities exchange or trading market on which the Common Stock is traded or
listed) applicable to the Company or any of its Subsidiaries or by which any
property or asset of the Company or any of its Subsidiaries is bound or
affected. Except as disclosed in Schedule 4(e), neither the Company nor its
Subsidiaries is in violation of any term of, or in default under, the Articles
of Incorporation, any Certificate of Designations, Preferences and Rights of any
outstanding series of preferred stock of the Company or the By-laws or their
organizational charter or by-laws, respectively, or any contract, agreement,
mortgage, indebtedness, indenture, instrument, judgment, decree or order or any
statute, rule or regulation applicable to the Company or its Subsidiaries,
except for possible conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations that would not individually or in
the aggregate have a Material Adverse Effect. The business of the Company and
its Subsidiaries is not being conducted, and shall not be conducted, in
violation of any law, statute, ordinance, rule, order or regulation of any
governmental authority or agency, regulatory or self-regulatory agency, or
court, except for possible violations the sanctions for which either
individually or in the aggregate would not have a Material Adverse Effect.
Except as specifically contemplated by this Agreement and as required under the
15
1933 Act, the Company is not required to obtain any consent, authorization,
permit or order of, or make any filing or registration (except the filing of a
registration statement) with, any court, governmental authority or agency,
regulatory or self-regulatory agency or other third party in order for it to
execute, deliver or perform any of its obligations under, or contemplated by,
the Transaction Documents in accordance with the terms hereof or thereof. All
consents, authorizations, permits, orders, filings and registrations which the
Company is required to obtain pursuant to the preceding sentence have been
obtained or effected on or prior to the date hereof and are in full force and
effect as of the date hereof. Except as disclosed in Schedule 4(e), the Company
and its Subsidiaries are unaware of any facts or circumstances which might give
rise to any of the foregoing. The Company is not, and will not be, in violation
of the listing requirements of the Principal Market as in effect on the date
hereof and on each of the Closing Dates and is not aware of any facts which
would reasonably lead to delisting of the Common Stock by the Principal Market
in the foreseeable future.
f. SEC Documents; Financial Statements. Since at least January 1999,
-------------------------------------
the Company has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC pursuant to the reporting
requirements of the 1934 Act (all of the foregoing filed prior to the date
hereof and all exhibits included therein and financial statements and schedules
thereto and documents incorporated by reference therein being hereinafter
referred to as the "SEC DOCUMENTS"). The Company has delivered to the Investor
or its representatives, or they have had access through EDGAR to, true and
complete copies of the SEC Documents. As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the 1934
Act and the rules and regulations of the SEC promulgated thereunder applicable
to the SEC Documents, and none of the SEC Documents, at the time they were filed
with the SEC, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. As of their respective dates, the financial statements of the
Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have been
prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). No other written information provided by or on behalf of the
Company to the Investor which is not included in the SEC Documents, including,
without limitation, information referred to in Section 4(d) of this Agreement,
contains any untrue statement of a material fact or omits to state any material
fact necessary to make the statements therein, in the light of the circumstance
under which they are or were made, not misleading. Neither the Company nor any
of its Subsidiaries or any of their officers, directors, employees or agents
have provided the Investor with any material, nonpublic information which was
not publicly disclosed prior to the date hereof and any material, nonpublic
information provided to the Investor by the Company or its Subsidiaries or any
of their officers, directors, employees or agents prior to any Closing Date
shall be publicly disclosed by the Company prior to such Closing Date.
16
g. Absence of Certain Changes. Except as disclosed in Schedule 4(g),
----------------------------
the Company does not intend to change the business operations of the Company.
The Company has not taken any steps, and does not currently expect to take any
steps, to seek protection pursuant to any bankruptcy law nor does the Company or
its Subsidiaries have any knowledge or reason to believe that its creditors
intend to initiate involuntary bankruptcy proceedings.
h. Absence of Litigation. Except as set forth in Schedule 4(h), there
----------------------
is no action, suit, proceeding, inquiry or investigation before or by any court,
public board, government agency, self-regulatory organization or body pending
or, to the knowledge of the executive officers of Company or any of its
Subsidiaries, threatened against or affecting the Company, the Common Stock or
any of the Company's Subsidiaries or any of the Company's or the Company's
Subsidiaries' officers or directors in their capacities as such, in which an
adverse decision could have a Material Adverse Effect.
i. Acknowledgment Regarding Investor's Purchase of Shares. The Company
------------------------------------------------------
acknowledges and agrees that the Investor is acting solely in the capacity of
arm's length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby. The Company further acknowledges
that the Investor is not acting as a financial advisor or fiduciary of the
Company (or in any similar capacity) with respect to the Transaction Documents
and the transactions contemplated hereby and thereby and any advice given by the
Investor or any of its respective representatives or agents in connection with
the Transaction Documents and the transactions contemplated hereby and thereby
is merely incidental to the Investor's purchase of the Securities. The Company
further represents to the Investor that the Company's decision to enter into the
Transaction Documents has been based solely on the independent evaluation by the
Company and its representatives.
j. No Undisclosed Events, Liabilities, Developments or Circumstances.
-------------------------------------------------------------------
Since June 30, 2002, no event, liability, development or circumstance has
occurred or exists, or to the Company's knowledge is contemplated to occur, with
respect to the Company or its Subsidiaries or their respective business,
properties, assets, prospects, operations or financial condition, that would be
required to be disclosed by the Company under applicable securities laws on a
registration statement filed with the SEC relating to an issuance and sale by
the Company of its Common Stock and which has not been publicly announced.
k. Employee Relations. Neither the Company nor any of its Subsidiaries
------------------
is involved in any union labor dispute nor, to the knowledge of the Company or
any of its Subsidiaries, is any such dispute threatened. Neither the Company nor
any of its Subsidiaries is a party to a collective bargaining agreement, and the
Company and its Subsidiaries believe that relations with their employees are
good. No executive officer (as defined in Rule 501(f) of the 1933 Act) has
notified the Company that such officer intends to leave the Company's employ or
otherwise terminate such officer's employment with the Company.
17
l. Intellectual Property Rights. The Company and its Subsidiaries own
-----------------------------
or possess adequate rights or licenses to use all trademarks, trade names,
service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted. Except as set forth on Schedule 4(l), none of the
Company's trademarks, trade names, service marks, service mark registrations,
service names, patents, patent rights, copyrights, inventions, licenses,
approvals, government authorizations, trade secrets or other intellectual
property rights necessary to conduct its business as now or as proposed to be
conducted have expired or terminated, or are expected to expire or terminate
within two years from the date of this Agreement. The Company and its
Subsidiaries do not have any knowledge of any infringement by the Company or its
Subsidiaries of trademark, trade name rights, patents, patent rights,
copyrights, inventions, licenses, service names, service marks, service mark
registrations, trade secret or other similar rights of others, or of any such
development of similar or identical trade secrets or technical information by
others and, except as set forth on Schedule 4(l), there is no claim, action or
proceeding being made or brought against, or to the Company's knowledge, being
threatened against, the Company or its Subsidiaries regarding trademark, trade
name, patents, patent rights, invention, copyright, license, service names,
service marks, service mark registrations, trade secret or other infringement;
and the Company and its Subsidiaries are unaware of any facts or circumstances
which might give rise to any of the foregoing. The Company and its Subsidiaries
have taken reasonable security measures to protect the secrecy, confidentiality
and value of all of their intellectual properties.
m. Environmental Laws. The Company and its Subsidiaries (i) are in
-------------------
compliance with any and all applicable foreign, federal, state and local laws
and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or
other approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval where, in each of the three
foregoing cases, the failure to so comply would have, individually or in the
aggregate, a Material Adverse Effect.
n. Title. The Company and its Subsidiaries have good and marketable
-----
title in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the Company
and its Subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such as are described in Schedule 4(n) or such as do not
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company or any of its
Subsidiaries. Any real property and facilities held under lease by the Company
or any of its Subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its Subsidiaries.
o. Insurance. The Company and each of its Subsidiaries are insured by
---------
insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company reasonably believes to be
18
prudent and customary in the businesses in which the Company and its
Subsidiaries are engaged. Neither the Company nor any such Subsidiary has been
refused any insurance coverage sought or applied for and neither the Company nor
any such 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 at a cost that would not have a Material Adverse Effect.
p. Regulatory Permits. The Company and its Subsidiaries have in full
-------------------
force and effect all certificates, approvals, authorizations and permits from
the appropriate federal, state, local or foreign regulatory authorities and
comparable foreign regulatory agencies, necessary to own, lease or operate their
respective properties and assets and conduct their respective businesses, and
neither the Company nor any such Subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificate,
approval, authorization or permit, except for such certificates, approvals,
authorizations or permits which if not obtained, or such revocations or
modifications which, would not have a Material Adverse Effect.
q. Internal Accounting Controls. The Company and each of its
------------------------------
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 generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
r. No Materially Adverse Contracts, Etc. Neither the Company nor any
--------------------------------------
of its Subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in the
judgment of the Company's officers has or is expected in the future to have a
Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a
party to any contract or agreement which in the judgment of the Company's
officers has or is expected to have a Material Adverse Effect.
s. Tax Status. The Company and each of its Subsidiaries has made or
-----------
filed all United States federal and state income and all other tax returns,
reports and declarations required by any jurisdiction to which it is subject
(unless and only to the extent that the Company and each of its Subsidiaries has
set aside on its books provisions reasonably adequate for the payment of all
unpaid and unreported taxes) and has paid all taxes and other governmental
assessments and charges that are material in amount, shown or determined to be
due on such returns, reports and declarations, except those being contested in
good faith and has set aside on its books provision reasonably adequate for the
payment of all taxes for periods subsequent to the periods to which such
returns, reports or declarations apply. There are no unpaid taxes in any
material amount claimed to be due by the taxing authority of any jurisdiction,
and the officers of the Company know of no basis for any such claim.
19
t. Certain Transactions. Except as set forth on Schedule 4(t) and in
---------------------
the SEC Documents filed at least ten days prior to the date hereof and except
for arm's length transactions pursuant to which the Company makes payments in
the ordinary course of business upon terms no less favorable than the Company
could obtain from third parties and other than the grant of stock options
disclosed on Schedule 4(c), none of the officers, directors, or employees of the
Company is presently a party to any transaction with the Company or any of its
Subsidiaries (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 Company, any corporation,
partnership, trust or other entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner.
u. Dilutive Effect. The Company understands and acknowledges that the
----------------
number of shares of Common Stock issuable upon purchases pursuant to this
Agreement will increase in certain circumstances including, but not necessarily
limited to, the circumstance wherein the trading price of the Common Stock
declines during the period between the Effective Date and the end of the Open
Period. The Company's executive officers and directors have studied and fully
understand the nature of the transactions contemplated by this Agreement and
recognize that they have a potential dilutive effect. The board of directors of
the Company has concluded, in its good faith business judgment, that such
issuance is in the best interests of the Company. The Company specifically
acknowledges that, subject to such limitations as are expressly set forth in the
Transaction Documents, its obligation to issue shares of Common Stock upon
purchases pursuant to this Agreement is absolute and unconditional regardless of
the dilutive effect that such issuance may have on the ownership interests of
other shareholders of the Company.
v. Right of First Refusal. The Company shall not, directly or indirectly,
----------------------
without the prior written consent of Investor offer, sell, grant any option to
purchase, or otherwise dispose of (or announce any offer, sale, grant or any
option to purchase or other disposition) any of its Common Stock or securities
convertible into Common Stock at a price that is less than the market price of
the Common Stock at the time of issuance of such security or investment (a
"SUBSEQUENT FINANCING") for a period of one year after the Effective Date,
except (i) the granting of options, warrants or shares to employees, officers,
directors and consultants, and the issuance of shares upon exercise of options
granted, under any stock option plan heretofore or hereafter duly adopted by the
Company, (ii) shares issued upon exercise of any currently outstanding warrants
or options and upon conversion of any currently outstanding convertible
debenture or convertible preferred stock, in each case disclosed pursuant to
Section 4(c), (iii) securities issued in connection with the capitalization or
creation of a joint venture with a strategic partner, (iv) shares issued to pay
part or all of the purchase price for the acquisition by the Company of another
entity (which, for purposes of this clause (iv), shall not include an individual
or group of individuals), and (v) shares issued in a bona fide public offering
by the Company of its securities, unless (A) the Company delivers to Investor a
------
written notice (the "SUBSEQUENT FINANCING NOTICE") of its intention to effect
such Subsequent Financing, which Subsequent Financing Notice shall describe in
20
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 shall be effected, and attached to which shall be a term sheet or
similar document relating thereto and (B) Investor shall not have notified the
Company by 5:00 p.m. (New York time) on the fifth (5th) Trading Day after its
receipt of the Subsequent Financing Notice of its willingness to provide,
subject to completion of mutually acceptable documentation, financing to the
Company on substantially the terms set forth in the Subsequent Financing Notice.
If Investor shall fail to notify the Company of its intention to enter into such
negotiations within such time period, then the Company may effect the Subsequent
Financing substantially upon the terms set forth in the Subsequent Financing
Notice; PROVIDED THAT the Company shall provide Investor with a second
Subsequent Financing Notice, and Investor shall again have the right of first
refusal set forth above in this Section, if the Subsequent Financing subject to
the initial Subsequent Financing Notice shall not have been consummated for any
reason on the terms set forth in such Subsequent Financing Notice within thirty
(30) Trading Days after the date of the initial Subsequent Financing Notice. The
rights granted to Investor in this Section are not subject to any prior right of
first refusal given to any other person except as disclosed on Schedule 4(c).
w. Lock-up. The Company shall cause its officers, insiders, directors,
--------
affiliates or other related parties to refrain from selling Common Stock during
each Pricing Period.
x. No General Solicitation. Neither the Company, nor any of its affiliates,
-----------------------
nor any person acting on its behalf, has engaged in any form of general
solicitation or general advertising (within the meaning of Regulation D) in
connection with the offer or sale of the Common Stock offered hereby.
5. COVENANTS OF THE COMPANY
---------------------------
a. Best Efforts. The Company shall use its best efforts timely to
-------------
satisfy each of the conditions to be satisfied by it as provided in Section 7 of
this Agreement.
b. Blue Sky. The Company shall, at its sole cost and expense, on or
---------
before each of the Closing Dates, take such action as the Company shall
reasonably determine is necessary to qualify the Securities for, or obtain
exemption for the Securities for, sale to the Investor at each of the Closings
pursuant to this Agreement under applicable securities or "Blue Sky" laws of
such states of the United States, as reasonably specified by Investor, and shall
provide evidence of any such action so taken to the Investor on or prior to the
Closing Date. The Company shall, at its sole cost and expense, make all filings
and reports relating to the offer and sale of the Securities required under the
applicable securities or "Blue Sky" laws of such states of the United States
following each of the Closing Dates.
c. Reporting Status. Until the earlier to occur of (i) the first date
-----------------
which is after the date this Agreement is terminated pursuant to Section 9 and
on which the Holders (as that term is defined in the Registration Rights
Agreement) may sell all of the Securities without restriction pursuant to Rule
144(k) promulgated under the 1933 Act (or successor thereto), and (ii) the date
21
on which (A) the Holders shall have sold all the Securities and (B) this
Agreement has been terminated pursuant to Section 9 (the "REGISTRATION PERIOD"),
the Company shall file all reports required to be filed with the SEC pursuant to
the 1934 Act, and the Company shall not terminate its status as a reporting
company under the 1934 Act.
d. Use of Proceeds. The Company will use the proceeds from the sale of
---------------
the Shares (excluding amounts paid by the Company for fees as set forth in the
Transaction Documents) for general corporate and working capital purposes, but
not to pay down debt.
e. Financial Information. The Company agrees to make available to the
----------------------
Investor via EDGAR or other electronic means the following to the Investor
during the Registration Period: (i) within five (5) Trading Days after the
filing thereof with the SEC, a copy of its Annual Reports on Form 10-KSB, its
Quarterly Reports on Form 10-QSB, any Current Reports on Form 8-K and any
Registration Statements or amendments filed pursuant to the 1933 Act; (ii) on
the same day as the release thereof, facsimile copies of all press releases
issued by the Company or any of its Subsidiaries, (iii) copies of any notices
and other information made available or given to the shareholders of the Company
generally, contemporaneously with the making available or giving thereof to the
shareholders and (iv) within two (2) calendar days of filing or delivery
thereof, copies of all documents filed with, and all correspondence sent to, the
Principal Market, any securities exchange or market, or the National Association
of Securities Dealers, Inc., unless such information is material nonpublic
information.
f. Reservation of Shares. Subject to the following sentence, the
-----------------------
Company shall take all action necessary to at all times have authorized, and
reserved for the purpose of issuance, a sufficient number of shares of Common
Stock to provide for the issuance of the Securities hereunder. In the event that
the Company determines that it does not have a sufficient number of authorized
shares of Common Stock to reserve and keep available for issuance as described
in this Section 5(f), the Company shall use its best efforts to increase the
number of authorized shares of Common Stock by seeking shareholder approval for
the authorization of such additional shares.
g. Listing. The Company shall promptly secure and maintain the listing
-------
of all of the Registrable Securities (as defined in the Registration Rights
Agreement) upon the Principal Market and each other national securities exchange
and automated quotation system, if any, upon which shares of Common Stock are
then listed (subject to official notice of issuance) and shall maintain, such
listing of all Registrable Securities from time to time issuable under the terms
of the Transaction Documents. The Company shall maintain the Common Stock's
authorization for quotation on the Principal Market. Neither the Company nor any
of its Subsidiaries shall take any action which would be reasonably expected to
result in the delisting or suspension of the Common Stock on the Principal
Market (excluding suspensions of not more than one trading day resulting from
business announcements by the Company). The Company shall promptly provide to
the Investor copies of any notices it receives from the Principal Market
regarding the continued eligibility of the Common Stock for listing on such
automated quotation system or securities exchange. The Company shall pay all
fees and expenses in connection with satisfying its obligations under this
Section 5(g).
22
h. Transactions With Affiliates. The Company shall not, and shall
------------------------------
cause each of its Subsidiaries not to, enter into, amend, modify or supplement,
or permit any Subsidiary to enter into, amend, modify or supplement, any
agreement, transaction, commitment or arrangement with any of its or any
Subsidiary's officers, directors, persons who were officers or directors at any
time during the previous two years, shareholders who beneficially own 5% or more
of the Common Stock, or affiliates or with any individual related by blood,
marriage or adoption to any such individual or with any entity in which any such
entity or individual owns a 5% or more beneficial interest (each a "RELATED
PARTY"), except for (i) customary employment arrangements and benefit programs
on reasonable terms, (ii) any agreement, transaction, commitment or arrangement
on an arms-length basis on terms no less favorable than terms which would have
been obtainable from a person other than such Related Party, or (iii) any
agreement, transaction, commitment or arrangement which is approved by a
majority of the disinterested directors of the Company. For purposes hereof, any
director who is also an officer of the Company or any Subsidiary of the Company
shall not be a disinterested director with respect to any such agreement,
transaction, commitment or arrangement. "AFFILIATE" for purposes hereof means,
with respect to any person or entity, another person or entity that, directly or
indirectly, (i) has a 5% or more equity interest in that person or entity, (ii)
has 5% or more common ownership with that person or entity, (iii) controls that
person or entity, or (iv) is under common control with that person or entity.
"CONTROL" or "CONTROLS" for purposes hereof means that a person or entity has
the power, direct or indirect, to conduct or govern the policies of another
person or entity.
i. Filing of Form 8-K. On or before the date which is five (5) Trading
------------------
Days after the Execution Date, the Company shall file a Current Report on Form
8-K with the SEC describing the terms of the transaction contemplated by the
Transaction Documents in the form required by the 1934 Act, if such filing is
required.
j. Corporate Existence. The Company shall use its best efforts to
--------------------
preserve and continue the corporate existence of the Company.
k. Notice of Certain Events Affecting Registration; Suspension of Right to
-----------------------------------------------------------------------
Make a Put. The Company shall promptly notify Investor upon the occurrence of
- -------------
any of the following events in respect of a Registration Statement or related
prospectus in respect of an offering of the Securities: (i) receipt of any
request for additional information by the SEC or any other federal or state
governmental authority during the period of effectiveness of the Registration
Statement for amendments or supplements to the Registration Statement or related
prospectus; (ii) the issuance by the SEC or any other federal or state
governmental authority of any stop order suspending the effectiveness of any
Registration Statement or the initiation of any proceedings for that purpose;
(iii) receipt of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Securities for sale
in any jurisdiction or the initiation or threatening of any proceeding for such
purpose; (iv) the happening of any event that makes any statement made in such
Registration Statement or related prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires the making of any changes in the Registration Statement, related
prospectus or documents so that, in the case of a Registration Statement, it
23
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and that in the case of the related prospectus, it will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and (v) the Company's reasonable determination that a post-effective
amendment to the Registration Statement would be appropriate, and the Company
shall promptly make available to Investor any such supplement or amendment to
the related prospectus. The Company shall not deliver to Investor any Put Notice
during the continuation of any of the foregoing events.
l. Reimbursement. If (i) Investor, other than by reason of its gross
-------------
negligence or willful misconduct, becomes involved in any capacity in any
action, proceeding or investigation brought by any shareholder of the Company,
in connection with or as a result of the consummation of the transactions
contemplated by the Transaction Documents, or if Investor is impleaded in any
such action, proceeding or investigation by any person, or (ii) Investor, other
than by reason of its gross negligence or willful misconduct, becomes involved
in any capacity in any action, proceeding or investigation brought by the SEC
(or any other regulatory agency) against or involving the Company or in
connection with or as a result of the consummation of the transactions
contemplated by the Transaction Documents, or if Investor is impleaded in any
such action, proceeding or investigation by any person, then in any such case,
the Company will reimburse Investor for its reasonable legal and other expenses
(including the cost of any investigation and preparation) incurred in connection
therewith, as such expenses are incurred. In addition, other than with respect
to any matter in which Investor is a named party, the Company will pay to
Investor the charges, as reasonably determined by Investor, for the time of any
officers or employees of Investor devoted to appearing and preparing to appear
as witnesses, assisting in preparation for hearings, trials or pretrial matters,
or otherwise with respect to inquiries, hearing, trials, and other proceedings
relating to the subject matter of this Agreement. The reimbursement obligations
of the Company under this section shall be in addition to any liability which
the Company may otherwise have, shall extend upon the same terms and conditions
to any affiliates of Investor that are actually named in such action, proceeding
or investigation, and partners, directors, agents, employees, attorneys,
accountants, auditors and controlling persons (if any), as the case may be, of
Investor and any such affiliate, and shall be binding upon and inure to the
benefit of any successors of the Company, Investor and any such affiliate and
any such person.
6. COVER. If the number of Shares represented by any Put Notices become
-----
restricted or are no longer freely trading for any reason, and after the
applicable Closing Date, the Investor purchases, in an open market transaction
or otherwise, the Company's Common Stock (the "Covering Shares") in order to
make delivery in satisfaction of a sale of Common Stock by the Investor (the
"Sold Shares"), which delivery such Investor anticipated to make using the
Shares represented by the Put Notice (a "Buy-In"), the Company shall pay to the
Investor the Buy-In Adjustment Amount (as defined below). The "Buy-In
Adjustment Amount" is the amount equal to the excess, if any, of (a) the
Investor's total purchase price (including brokerage commissions, if any) for
24
the Covering Shares over (b) the net proceeds (after brokerage commissions, if
any) received by the Investor from the sale of the Sold Shares. The Company
shall pay the Buy-In Adjustment Amount to the Investor in immediately available
funds immediately upon demand by the Investor. By way of illustration and not
in limitation of the foregoing, if the Investor purchases Common Stock having a
total purchase price (including brokerage commissions) of $11,000 to cover a
Buy-In with respect to the Common Stock it sold for net proceeds of $10,000, the
Buy-In Adjustment Amount which the Company will be required to pay to the
Investor will be $1,000.
7. CONDITIONS OF THE COMPANY'S OBLIGATION TO SELL.
----------------------------------------------------
The obligation hereunder of the Company to issue and sell the Securities to
the Investor is further subject to the satisfaction, at or before each Closing
Date, of each of the following conditions set forth below. These conditions are
for the Company's sole benefit and may be waived by the Company at any time in
its sole discretion.
a. The Investor shall have executed each of this Agreement and the
Registration Rights Agreement and delivered the same to the Company.
b. The Investor shall have delivered to the Escrow Agent the Purchase Price
for the Securities being purchased by the Investor at the Closing (after receipt
of confirmation of delivery of such Securities) by wire transfer of immediately
available funds pursuant to the wire instructions provided by the Escrow Agent.
c. The representations and warranties of the Investor shall be true and
correct as of the date when made and as of the applicable Closing Date as though
made at that time (except for representations and warranties that speak as of a
specific date), and the Investor shall have performed, satisfied and complied
with the covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by the Investor at or
prior to such Closing Date.
d. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by this Agreement.
e. No Valuation Event shall have occurred since the applicable Put Notice
Date.
8. FURTHER CONDITIONS OF THE INVESTOR'S OBLIGATION TO PURCHASE.
------------------------------------------------------------------
The obligation of the Investor hereunder to purchase Shares is subject to
the satisfaction, on or before each Closing Date, of each of the following
conditions set forth below.
a. The Company shall have executed each of the Transaction Documents
and delivered the same to the Investor.
25
b. The Common Stock shall be authorized for quotation on the Principal
Market and trading in the Common Stock shall not have been suspended by the
Principal Market or the SEC, at any time beginning on the date hereof and
through and including the respective Closing Date (excluding suspensions of not
more than one Trading Day resulting from business announcements by the Company,
provided that such suspensions occur prior to the Company's delivery of the Put
Notice related to such Closing).
c. The representations and warranties of the Company shall be true and
correct as of the date when made and as of the applicable Closing Date as though
made at that time (except for (i) representations and warranties that speak as
of a specific date and (ii) with respect to the representations made in Sections
4(g), (h) and (j) and the third sentence of Section 4(k) hereof, events which
occur on or after the date of this Agreement and are disclosed in SEC filings
made by the Company at least ten (10) Trading Days prior to the applicable Put
Notice Date) and the Company shall have performed, satisfied and complied with
the covenants, agreements and conditions required by the Transaction Documents
to be performed, satisfied or complied with by the Company on or before such
Closing Date. The Investor may request an update as of such Closing Date
regarding the representation contained in Section 4(c) above.
d. Investor shall have received an opinion letter of the Company's
counsel on or before the Execution Date.
e. The Company shall have executed and delivered to the Escrow Agent or
Investor the certificates representing, or have executed electronic book-entry
transfer of, the Securities (in such denominations as such Investor shall
request) being purchased by the Investor at such Closing.
f. The Board of Directors of the Company shall have adopted resolutions
consistent with Section 4(b)(ii) above (the "RESOLUTIONS") and such Resolutions
shall not have been amended or rescinded prior to such Closing Date.
g. If requested by the Investor, the Investor shall receive letters of
the type, in the form and with the substance of the letters described in
Sections 2(m) and 2(n) of this Agreement from the Company's auditors.
h. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by this Agreement.
i. The Registration Statement shall be effective on each Closing Date
and no stop order suspending the effectiveness of the Registration statement
shall be in effect or shall be pending or threatened. Furthermore, on each
Closing Date (i) neither the Company nor Investor shall have received notice
that the SEC has issued or intends to issue a stop order with respect to such
Registration Statement or that the SEC otherwise has suspended or withdrawn the
26
effectiveness of such Registration Statement, either temporarily or permanently,
or intends or has threatened to do so (unless the SEC's concerns have been
addressed and Investor is reasonably satisfied that the SEC no longer is
considering or intends to take such action), and (ii) no other suspension of the
use or withdrawal of the effectiveness of such Registration Statement or related
prospectus shall exist.
j. At the time of each Closing, the Registration Statement (including
information or documents incorporated by reference therein) and any amendments
or supplements thereto shall not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading or which would require public
disclosure or an update supplement to the prospectus.
k. There shall have been no filing of a petition in bankruptcy, either
voluntarily or involuntarily, with respect to the Company and there shall not
have been commenced any proceedings under any bankruptcy or insolvency laws, or
any laws relating to the relief of debtors, readjustment of indebtedness or
reorganization of debtors, and there shall have been no calling of a meeting of
creditors of the Company or appointment of a committee of creditors or
liquidating agents or offering of a composition or extension to creditors by,
for, with or without the consent or acquiescence of the Company.
l. If applicable, the shareholders of the Company shall have approved
the issuance of any Shares in excess of the Maximum Common Stock Issuance in
accordance with Section 2(j).
m. The conditions to such Closing set forth in Section 2(f) shall have
been satisfied on or before such Closing Date.
n. The Company shall have certified to the Investor the number of
shares of Common Stock outstanding as of a date within ten (10) Trading Days
prior to such Closing Date.
o. The Company shall have delivered to such Investor such other
documents relating to the transactions contemplated by this Agreement as such
Investor or its counsel may reasonably request upon reasonable advance notice.
p. On or before the execution of this Agreement, the Company shall have
a draft of the Registration Statement covering the Securities.
9. TERMINATION. This Agreement shall terminate upon any of the
following events or upon the Company submitting in writing to the Investor such
notification of cancellation, which shall be effective within 30 days of receipt
from the Investor:
(i) when the Investor has purchased an aggregate of $10,000,000 in the
Common Stock of the Company pursuant to this Agreement; provided that
the Company's representations, warranties and covenants contained in
this Agreement insofar as applicable to the transactions consummated
hereunder prior to such termination, shall survive the termination of
this Agreement for the period of any applicable statute of
limitations,
27
(ii) on the date which is 36 (thirty-six) months after the Effective
Date;
(iii) if the Company shall file or consent by answer or otherwise to
the entry of an order for relief or approving a petition for relief,
reorganization or arrangement or any other petition in bankruptcy for
liquidation or to take advantage of any bankruptcy or insolvency law
of any jurisdiction, or shall make an assignment for the benefit of
its creditors, or shall consent to the appointment of a custodian,
receiver, trustee or other officer with similar powers of itself or of
any substantial part of its property, or shall be adjudicated a
bankrupt or insolvent, or shall take corporate action for the purpose
of any of the foregoing, or if a court or governmental authority of
competent jurisdiction shall enter an order appointing a custodian,
receiver, trustee or other officer with similar powers with respect to
the Company or any substantial part of its property or an order for
relief or approving a petition for relief or reorganization or any
other petition in bankruptcy or for liquidation or to take advantage
of any bankruptcy or insolvency law, or an order for the dissolution,
winding up or liquidation of the Company, or if any such petition
shall be filed against the Company;
(iv) if the Company shall issue or sell any equity securities or
securities convertible into, or exchangeable for, equity securities or
enter into any other equity financing facility during the Open Period,
other than in compliance with Section 4(v);
(v) the trading of the Common Stock is suspended by the SEC, the
Principal Market or the NASD for a period of five (5) consecutive
Trading Days during the Open Period;
(vi) the Company shall not have filed with the SEC the initial
Registration Statement with respect to the resale of the Registrable
Securities in accordance with the terms of the initial Registration
Rights Agreement within sixty (60) calendar days of the date hereof or
the Registration Statement has not been declared effective within one
hundred eighty (180) calendar days of the date hereof; or
(vii) The Common Stock ceases to be registered under the 1934 Act or
listed or traded on the Principal Market; or
(viii) The Company requires shareholder approval under Nasdaq rules to
issue additional shares and such approval is not obtained within 60
days from the date when the Company has issued its 19.9% maximum
allowable shares.
28
Upon the occurrence of one of the above-described events, the Company shall send
written notice of such event to the Investor.
10. INDEMNIFICATION. In consideration of the Investor's execution and
delivery of the this Agreement and the Registration Rights Agreement and
acquiring the Shares hereunder and in addition to all of the Company's other
obligations under the Transaction Documents, the Company shall defend, protect,
indemnify and hold harmless the Investor and all of their shareholders,
officers, directors, employees, counsel, and direct or indirect investors and
any of the foregoing person's agents or other representatives (including,
without limitation, those retained in connection with the transactions
contemplated by this Agreement) (collectively, the "INDEMNITEES") from and
against any and all actions, causes of action, suits, claims, losses, costs,
penalties, fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Indemnitee is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys' fees
and disbursements (the "INDEMNIFIED LIABILITIES'), incurred by any Indemnitee as
a result of, or arising out of, or relating to (i) any misrepresentation or
breach of any representation or warranty made by the Company in the Transaction
Documents or any other certificate, instrument or document contemplated hereby
or thereby (ii) any breach of any covenant, agreement or obligation of the
Company contained in the Transaction Documents or any other certificate,
instrument or document contemplated hereby or thereby, (iii) any cause of
action, suit or claim brought or made against such Indemnitee by a third party
and arising out of or resulting from the execution, delivery, performance or
enforcement of the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby, (iv) any transaction financed or to be
financed in whole or in part, directly or indirectly, with the proceeds of the
issuance of the Securities or (v) the status of the Investor or holder of the
Securities as an investor in the Company, except insofar as any such
misrepresentation, breach or any untrue statement, alleged untrue statement,
omission or alleged omission is made in reliance upon and in conformity with
written information furnished to the Company by the Investor which is
specifically intended by the Investor for use in the preparation of any such
Registration Statement, preliminary prospectus or prospectus or based on illegal
or alleged illegal trading of the Shares by the Investor. To the extent that the
foregoing undertaking by the Company may be unenforceable for any reason, the
Company shall make the maximum contribution to the payment and satisfaction of
each of the Indemnified Liabilities which is permissible under applicable law.
The indemnity provisions contained herein shall be in addition to any cause of
action or similar rights the Investor may have, and any liabilities the Company
may be subject to.
11. INDEMNIFICATION. In consideration of the Company's execution and
delivery of the this Agreement and the Registration Rights Agreement and selling
the Shares hereunder and in addition to all of the Investor's other obligations
under the Transaction Documents, the Investor shall defend, protect, indemnify
and hold harmless the Company and all of its shareholders, officers, directors,
employees, counsel, and direct or indirect investors and any of the foregoing
person's agents or other representatives (including, without limitation, those
retained in connection with the transactions contemplated by this Agreement)
(collectively, the "INDEMNITEES") from and against any and all actions, causes
of action, suits, claims, losses, costs, penalties, fees, liabilities and
29
damages, and expenses in connection therewith (irrespective of whether any such
Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys' fees and disbursements (the
"INDEMNIFIED LIABILITIES'), incurred by any Indemnitee as a result of, or
arising out of, or relating to (i) any misrepresentation or breach of any
representation or warranty made by the Investor in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby or
(ii) any breach of any covenant, agreement or obligation of the Investor
contained in the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby. To the extent that the foregoing
undertaking by the Investor may be unenforceable for any reason, the Investor
shall make the maximum contribution to the payment and satisfaction of each of
the Indemnified Liabilities which is permissible under applicable law. The
indemnity provisions contained herein shall be in addition to any cause of
action or similar rights the Company may have, and any liabilities the Investor
may be subject to.
12. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law. This Agreement shall be governed by and interpreted
--------------
in accordance with the laws of the State of Massachusetts without regard to the
principles of conflict of laws. Each party hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in the City of
Boston, County of Suffolk, for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein, 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 brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. 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 to such party at the address for such 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.
If any provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction.
b. Investor Fees; Legal Fees; and Escrow Fees.
-------------------------------------------------
(i) Prior to execution of this Agreement, the Company has paid $5,000
to Investor's counsel for document preparation and review. Investor's
counsel shall have a reasonable amount of time to review the Registration
Statement contemplated by the Registration Rights Agreement and any SEC
comments on the Registration Statement.
(ii) The Company shall sell to Dutchess Private Equities Fund, L.P.
("Dutchess") on the Execution Date Six Hundred Seventy Five Thousand Six
Hundred Seventy Five (675,675) shares of the Company's Common Stock. These
shares will be registered on the Registration Statement and shall be issued
and delivered to Dutchess within three (3) business days of the Execution
30
Date in the form of four (4) certificates (one for 200,000 shares, one for
158,559 shares and two for 158,558 shares). Dutchess shall pay Five
Thousand Dollars ($5,000) for these shares within ten (10) days of the
Effective Date.
(iii) The Company shall also pay the Escrow Agent for escrow services
pursuant to the terms of a separate escrow agreement dated as of the date
hereof.
(iv) Except as otherwise set forth in the Transaction Documents, each
party shall pay the fees and expenses of its advisers, counsel, the
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. Any attorneys' fees and expenses
incurred by either the Company or by the Investor in connection with the
preparation, negotiation, execution and delivery of any amendments to this
Agreement or relating to the enforcement of the rights of any party, after
the occurrence of any breach of the terms of this Agreement by another
party or any default by another party in respect of the transactions
contemplated hereunder, shall be paid on demand by the party which breached
the Agreement and/or defaulted, as the case may be. The Company shall pay
all stamp and other taxes and duties levied in connection with the issuance
of any Securities.
c. Counterparts. This Agreement may be executed in two or more
------------
identical counterparts, all of which 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; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original, not
a facsimile signature.
d. Headings; Singular/Plural. The headings of this Agreement are for
---------------------------
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement. Whenever required by the context of this
Agreement, the singular shall include the plural and masculine shall include the
feminine.
e. Severability. If any provision of this Agreement shall be invalid or
------------
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
f. Entire Agreement; Amendments. This Agreement supersedes all other
------------------------------
prior oral or written agreements between the Investor, the Company, their
affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
(including the other Transaction Documents) contain the entire understanding of
the parties with respect to the matters covered herein and therein and, except
as specifically set forth herein or therein, neither the Company nor the
Investor makes any representation, warranty, covenant or undertaking with
respect to such matters. No provision of this Agreement may be amended other
than by an instrument in writing signed by the Company and the Investor, and no
provision hereof may be waived other than by an instrument in writing signed by
the party against whom enforcement is sought.
31
g. Notices. Any notices or other communications required or permitted
-------
to be given under the terms of this Agreement must be in writing and will be
deemed to have been delivered (i) upon receipt, when delivered personally; (ii)
upon receipt, when sent by facsimile (provided confirmation of transmission is
mechanically or electronically generated and kept on file by the sending party);
or (iii) one (1) day after deposit with a nationally recognized overnight
delivery service, in each case properly addressed to the party to receive the
same. The addresses and facsimile numbers for such communications shall be:
If to the Company:
Cal Bay International, Inc.
1582 Parkway Loop
Suite G
Tustin, CA 92780
Attention: Robert Thompson, CEO
Telephone: 714-258-7070
Facsimile: 714-258-7077
With a copy to:
Cletha Walstrand, Attorney at Law
8 East Broadway, Suite 609
Salt Lake City, UT 84111
Tel: (801) 363-0890
Fax: (801) 363-8512
If to the Investor:
Dutchess Private Equities fund, LP
312 Stuart St.
Boston, MA 02116
Tel: (617) 960-3582
Fax:: (617) 960-3772
With a copy to:
John Nossiff, Esq
Brown Rudnick Berlack & Israels, LP
One Financial Center
Boston, MA 02111
Tel: 617-856-8200
Fax: 617-856-8201
32
Each party shall provide five (5) days' prior written notice to the other
party of any change in address or facsimile number.
h. No Assignment. This Agreement may not be assigned.
--------------
i. No Third Party Beneficiaries. This Agreement is intended for the
-------------------------------
benefit of the parties hereto and is not for the benefit of, nor may any
provision hereof be enforced by, any other person.
j. Survival. The representations and warranties of the Company and the
--------
Investor contained in Sections 2 and 3, the agreements and covenants set forth
in Sections 4 and 5, and the indemnification provisions set forth in Section 10,
shall survive each of the Closings and the termination of this Agreement.
k. Publicity. The Company and Investor shall consult with each other
---------
in issuing any press releases or otherwise making public statements with respect
to the transactions contemplated hereby and no party shall issue any such press
release or otherwise make any such public statement without the prior written
consent of the other parties, which consent shall not be unreasonably withheld
or delayed, except that no prior consent shall be required if such disclosure is
required by law, in which such case the disclosing party shall provide the other
parties with prior notice of such public statement. Notwithstanding the
foregoing, the Company shall not publicly disclose the name of Investor without
the prior written consent of such Investor, except to the extent required by
law. Investor acknowledges that this Agreement and all or part of the
Transaction Documents may be deemed to be "material contracts" as that term is
defined by Item 601(b)(10) of Regulation S-K, and that the Company may therefore
be required to file such documents as exhibits to reports or registration
statements filed under the Securities 1933 Act or the 1934 Act. Investor further
agrees that the status of such documents and materials as material contracts
shall be determined solely by the Company, in consultation with its counsel.
l. Further Assurances. Each party shall do and perform, or cause to be
-------------------
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
m. Placement Agent. The Company agrees to pay Boston First Capital,
----------------
LLC, ("BFC") a registered broker dealer, 1% of the Put Amount on each draw as a
fee. BFC will also act as an unaffiliated broker dealer. The Investor shall
have no obligation with respect to any fees or with respect to any claims made
by or on behalf of other persons or entities for fees of a type contemplated in
this Section that may be due in connection with the transactions contemplated by
the Transaction Documents. The Company shall indemnify and hold harmless the
Investor, their employees, officers, directors, agents, and partners, and their
respective affiliates, from and against all claims, losses, damages, costs
(including the costs of preparation and attorney's fees) and expenses incurred
in respect of any such claimed or existing fees, as such fees and expenses are
incurred.
33
n. No Strict Construction. 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.
o. Remedies. The Investor and each holder of the Shares shall have all
--------
rights and remedies set forth in this Agreement and the Registration Rights
Agreement and all rights and remedies which such holders have been granted at
any time under any other agreement or contract and all of the rights which such
holders have under any law. Any person having any rights under any provision of
this Agreement shall be entitled to enforce such rights specifically (without
posting a bond or other security), to recover damages by reason of any default
or breach of any provision of this Agreement, including the recovery of
reasonable attorneys fees and costs, and to exercise all other rights granted by
law.
p. Payment Set Aside. To the extent that the Company makes a payment or
-----------------
payments to the Investor hereunder or the Registration Rights Agreement or the
Investor enforces or exercises its rights hereunder or 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 Company, 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.
q. Pricing of Common Stock. For purposes of this Agreement, the bid
--------------------------
price of the Common Stock in this Agreement shall be as reported by Bloomberg.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
34
Cal Bay International, Inc.
SIGNATURE PAGE
--------------
Your signature on this Signature Page evidences your agreement to be bound
by the terms and conditions of the Investment Agreement and the Registration
Rights Agreement.
1. The undersigned signatory hereby certifies that he/she has read and
understands the Investment Agreement, and the representations made by the
undersigned in this Investment Agreement are true and accurate.
DUTCHESS PRIVATE EQUITIES FUND, L.P.
BY ITS GENERAL PARTNER DUTCHESS
CAPITAL MANAGEMENT, LLC
By:/s/Douglas H. Leighton
-----------------------------
Douglas H. Leighton
A Managing Member
35
COMPANY ACCEPTANCE PAGE
-----------------------
This Investment Agreement accepted and agreed
to on April 1, 2003.
Cal Bay International, Inc.
By /s/ Robert Thompson,
- --------------------------
Robert Thompson
CEO
36
LIST OF EXHIBITS
-----------------
EXHIBIT A Registration Rights Agreement
EXHIBIT B Opinion of Company's Counsel
EXHIBIT C Escrow Agreement
EXHIBIT D Broker Representation Letter
EXHIBIT E Board Resolution
EXHIBIT F Put Notice
EXHIBIT G Put Settlement Sheet
EXHIBIT H Partial Release of Put Amount and Shares
LIST OF SCHEDULES
-----------------
Schedule 4(a) Subsidiaries
Schedule 4(c) Capitalization
Schedule 4(e) Conflicts
Schedule 4(g) Material Changes
Schedule 4(h) Litigation
Schedule 4(l) Intellectual Property
Schedule 4(n) Liens
Schedule 4(t) Certain Transactions
37
EXHIBIT A
38
EXHIBIT B
39
EXHIBIT C
40
EXHIBIT D
[BROKER'S LETTERHEAD]
Date
Via Facsimile
Attention:
______________________
______________________
______________________
Re: Cal Bay International, Inc.
Dear __________________:
It is our understanding that the Form______ Registration Statement bearing SEC
File Number ( ___-______) filed by Cal Bay International, Inc. on Form _____ on
__________, 2003 was declared effective on _________, 200_.
This letter shall confirm that ______________ shares of the common stock of Cal
Bay International, Inc. are being sold on behalf of __________________ and that
we shall comply with the prospectus delivery requirements set forth in that
Registration Statement by filing the same with the purchaser.
If you have any questions please do not hesitate to call.
Sincerely,
______________________
cc: .
41
EXHIBIT E
42
EXHIBIT F
Date:
RE: Put Notice Number __
Dear Mr. Leighton,
This is to inform you that as of today, Cal Bay International, Inc., a Nevada
corporation (the "Company"), hereby elects to exercise its right pursuant to the
Investment Agreement to require Dutchess Private Equities Fund, LP. to purchase
shares of its common stock. The Company hereby certifies that:
The amount of this put is $__________.
The Pricing Period runs from ________ until _______.
The current number of shares issued and outstanding as of the Company are:
____________________
Regards,
________________________
Robert Thompson, CEO
Cal Bay International, Inc.
43
EXHIBIT G
PUT SETTLEMENT SHEET
Date:
Robert,
Pursuant to the Put given by Cal Bay International, Inc. to Dutchess Private
Equities Fund, L.P. on _________________ 20xx, we are now submitting the amount
of common shares for you to issue to Dutchess.
Please have a certificate baring no restrictive legend totaling __________
shares issued to Dutchess Private Equities Fund, LP immediately and send via
DWAC to the following account:
XXXXXX
If not DWAC eligible, please send Fedex Priority Overnight to:
XXXXXX
Once these shares are received by us, we will break escrow and have the funds
wired to the Company.
Regards,
Douglas H. Leighton
44
DATE PRICE
Date of Day 1 Closing Bid of Day 1
Date of Day 2 Closing Bid of Day 2
Date of Day 3 Closing Bid of Day 3
Date of Day 4 Closing Bid of Day 4
Date of Day 5 Closing Bid of Day 5
Date of Day 6 Closing Bid of Day 6
Date of Day 7 Closing Bid of Day 7
Date of Day 8 Closing Bid of Day 8
Date of Day 9 Closing Bid of Day 9
Date of Day 10 Closing Bid of Day 10
LOWEST 1 (ONE) BIDS IN PRICING
PERIOD
PUT AMOUNT
LESS BFC FEE (1%)
LESS ESCROW FEE
AMOUNT WIRED TO COMPANY
PURCHASE PRICE (94% (NINETY-FOUR
PERCENT))
AMOUNT OF SHARES DUE
The undersigned has completed this Put as of this ___th day of _________, 20xx.
Cal Bay International, Inc.
________________________________
Robert Thompson, CEO
45
EXHIBIT H
PARTIAL RELEASE OF PURCHASE AMOUNT AND SHARES
To:
Cal Bay International, Inc.
1582 Parkway Loop
Suite G
Tustin, CA 92780
Attention: RobertThompson
Telephone: 714-258-7070
Facsimile: 714-258-7077
With a copy to
John Nossiff, Esq
Brown Rudnick Berlack & Israels, LP
One Financial Center
Boston, MA 02111
Phone: 617-856-8200
Facsimile: 617-856-8201
Pursuant to the terms of the Investment Agreement the Investor requests the
release from the Company of __________ shares of the Company's Common Stock by
overnight delivery or DWAC, if available, and the Investor, upon confirmation of
receipt of the Securities by the Escrow Agent shall wire $____________ to the
Escrow Agent within two (2) Trading Days of said confirmation at which time
Escrow Agent shall wire the funds to the Company and deliver the shares to the
Investor pursuant to the instructions given to the Escrow Agent by the Investor
INVESTOR
By:
-------------------------------------------------
Note: The number of Shares stated in this PARTIAL RELEASE OF PUT AMOUNT AND
- ----
SHARES Form shall be equal to the dollar amount to be released divided by 94%
(ninety-four percent) of the lowest closing bid price during that number of
Trading Days that have elapsed in the specified Pricing Period.
46
SCHEDULE 4(a) SUBSIDIARIES
47
SCHEDULE 4(c) CAPITALIZATION
48
SCHEDULE 4(e) CONFLICTS
49
SCHEDULE 4(g) MATERIAL CHANGES
50
SCHEDULE 4(h) LITIGATION
51
SCHEDULE 4(l) INTELLECTUAL PROPERTY
52
SCHEDULE 4(n) LIENS
53
SCHEDULE 4(t) CERTAIN TRANSACTIONS
54