EXHIBIT 10.1
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SECURITY AGREEMENT
This Security Agreement is made as of August 31, 2004 (this "Agreement") by
and between LAURUS MASTER FUND, LTD., a Cayman Islands corporation ("Laurus"),
and XXX.xxx, Inc., a Delaware corporation (the "Company").
BACKGROUND
Company has requested that Laurus make advances available to Company; and
Laurus has agreed to make such advances to Company on the terms and
conditions set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and undertakings
and the terms and conditions contained herein, the parties hereto agree as
follows:
1. (a) General Definitions. Capitalized terms used in this Agreement shall
have the meanings assigned to them in Annex A.
(b) Accounting Terms. Any accounting terms used in this Agreement which are
not specifically defined shall have the meanings customarily given them in
accordance with GAAP and all financial computations shall be computed, unless
specifically provided herein, in accordance with GAAP consistently applied.
(c) Other Terms. All other terms used in this Agreement and defined in the
UCC, shall have the meaning given therein unless otherwise defined herein.
(d) Rules of Construction. All Schedules, Addenda, Annexes and Exhibits
hereto or expressly identified to this Agreement are incorporated herein by
reference and taken together with this Agreement constitute but a single
agreement. The words "herein", hereof" and "hereunder" or other words of similar
import refer to this Agreement as a whole, including the Exhibits, Addenda,
Annexes and Schedules thereto, as the same may be from time to time amended,
modified, restated or supplemented, and not to any particular section,
subsection or clause contained in this Agreement. Wherever from the context it
appears appropriate, each term stated in either the singular or plural shall
include the singular and the plural, and pronouns stated in the masculine,
feminine or neuter gender shall include the masculine, the feminine and the
neuter. The term "or" is not exclusive. The term "including" (or any form
thereof) shall not be limiting or exclusive. All references to statutes and
related regulations shall include any amendments of same and any successor
statutes and regulations. All references in this Agreement or in the Schedules,
Addenda, Annexes and Exhibits to this Agreement to sections, schedules,
disclosure schedules, exhibits, and attachments shall refer to the corresponding
sections, schedules, disclosure schedules, exhibits, and attachments of or to
this Agreement. All references to any instruments or agreements, including
references to any of this Agreement or the Ancillary Agreements shall include
any and all modifications or amendments thereto and any and all extensions or
renewals thereof.
2. Loans. (a)(i) Subject to the terms and conditions set forth herein and
in the Ancillary Agreements, Laurus may make loans (the "Loans") to Company from
time to time during the Term which, in the aggregate at any time outstanding,
will not exceed the lesser of (x) (I) the Capital Availability Amount minus (II)
such reserves as Laurus may, in its commercially reasonable good faith judgment
deem proper and necessary from time to time (the "Reserves") or (y) an amount
equal to (I) the Accounts Availability minus (II) the Reserves. The amount
derived at any time from Section 2(a)(i)(y)(I) minus 2(a)(i)(y)(II) shall be
referred to as the "Formula Amount". Company shall execute and deliver to Laurus
on the Closing Date a Minimum Borrowing Note and a Revolving Note evidencing the
Loans funded on the Closing Date.
(ii) Notwithstanding the limitations set forth above, if requested by
Company, Laurus retains the right to lend to Company from time to time such
amounts in excess of such limitations as Laurus may determine in its sole
discretion.
(iii) If Company does not pay any interest, fees, costs or charges to
Laurus when due, Company shall thereby be deemed to have requested, and Laurus
is hereby authorized at its discretion to make and charge to Company's account,
a Loan (which such Loan shall be allocated to the Revolving Note) to Company as
of such date in an amount equal to such unpaid interest, fees, costs or charges.
(iv) If Company fails to perform or observe any of the covenants
contained in this Agreement or any Ancillary Agreement, and such failure is
during the continuance of an Event of Default, Laurus may, but need not, perform
or observe such covenant on behalf and in the name, place and stead of Company
(or, at Laurus' option, in Laurus' name) and may, only during the continuance of
the Event of Default, but need not, take any and all other actions which Laurus
may deem necessary to cure or correct such failure (including the payment of
taxes, the satisfaction of Liens, the performance of obligations owed to Account
Debtors, lessors or other obligors, the procurement and maintenance of
insurance, the execution of assignments, security agreements and financing
statements, and the endorsement of instruments). The amount of all monies
expended and all costs and expenses (including attorneys' fees and legal
expenses) incurred by Laurus in connection with or as a result of the
performance or observance of such agreements or the taking of such action by
Laurus shall be charged to Company's account as a Loan and added to the
Obligations. To facilitate Laurus' performance or observance of such covenants
of Company, with effect upon the occurrence and only during the continuance of
such Event of Default, Company hereby irrevocably appoints Laurus, or Laurus'
delegate, acting alone, as Company's attorney in fact, (which appointment is
coupled with an interest) with the right (but not the duty) from time to time to
create, prepare, complete, execute, deliver, endorse or file in the name and on
behalf of Company any and all instruments, documents, assignments, security
agreements, financing statements, applications for insurance and other
agreements and writings required to be obtained, executed delivered or endorsed
by Company.
(v) Laurus will account to Company monthly with a statement of all
Loans and other advances, charges and payments made pursuant to this Agreement,
and such account rendered by Laurus shall be deemed final, binding and
conclusive unless Laurus is
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notified by Company in writing to the contrary within thirty (30) days of the
date each account was rendered specifying the item or items to which objection
is made.
(vi) During the Term, Company may borrow and prepay Loans in
accordance with the terms and conditions hereof.
(b) Following the occurrence of an Event of Default which continues to
exist, Laurus may, at its option, elect to convert the credit facility
contemplated hereby to an accounts receivable purchase facility. Upon such
election by Laurus (subsequent notice of which Laurus shall provide to Company),
Company shall be deemed to hereby have sold, assigned, transferred, conveyed and
delivered to Laurus, and Laurus shall be deemed to have purchased and received
from Company, all right, title and interest of Company in and to all Accounts
which shall at any time constitute Eligible Accounts (the "Receivables
Purchase"). All outstanding Loans hereunder shall be deemed obligations under
such accounts receivable purchase facility. The conversion to an accounts
receivable purchase facility in accordance with the terms hereof shall not be
deemed an exercise by Laurus of its secured creditor rights under Article 9 of
the UCC. Immediately following Laurus' request, Company shall execute all such
further documentation as may be required by Laurus to more fully set forth the
accounts receivable purchase facility herein contemplated, including, without
limitation, Laurus' standard form of accounts receivable purchase agreement and
account debtor notification letters, but Company's failure to enter into any
such documentation shall not impair or affect the Receivables Purchase in any
manner whatsoever.
3. Repayment of the Loans. Company (a) may prepay the Obligations from time
to time in accordance with the terms and provisions of the Notes (and Section 17
hereof if such prepayment is due to a termination of this Agreement); and (b)
shall repay on the expiration of the Term (i) the then aggregate outstanding
principal balance of the Loans made by Laurus to Company hereunder together with
accrued and unpaid interest, fees and charges and (ii) all other amounts owed
Laurus under this Agreement and the Ancillary Agreements. Any payments of
principal, interest, fees or any other amounts payable hereunder or under any
Ancillary Agreement shall be made prior to 12:00 noon (New York time) on the due
date thereof in immediately available funds.
4. Procedure for Loans. In addition to the Loans funded on the Closing Date
pursuant to Section 2(a)(i), the Company may by written notice request
additional borrowings of Loans under the Revolving Note prior to 12:00 p.m. (New
York time) on the Business Day of its request to incur, on the next business
day, a Loan. Together with each request for a Loan (or at such other intervals
as Laurus may request, but in any event not more often than once per week),
Company shall deliver to Laurus a Borrowing Base Certificate in the form of
Exhibit A, which shall be certified as true and correct by the Chief Executive
Officer or Chief Financial Officer of Company together with all supporting
documentation relating thereto. All Loans shall be disbursed from whichever
office or other place Laurus may designate from time to time and shall be
charged to Company's account on Laurus' books. The proceeds of each Loan made by
Laurus shall be made available to Company on the Business Day following the
Business Day so requested in accordance with the terms of this Section 4 by way
of credit to Company's operating account maintained with such bank as Company
designated to Laurus. Any and all
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Obligations due and owing hereunder may be charged to Company's account and
shall constitute Loans under the Notes, as applicable.
5. Interest and Payments.
(a) Interest.
(i) Except as modified by Section 5(a)(iii) below, Company shall pay
interest at the applicable Contract Rate on the unpaid principal balance of each
Loan until such time as such Loan is collected in full in good funds in dollars
of the United States of America. (ii) Interest and payments shall be computed as
provided in the Notes. At Laurus' option, Laurus may charge Company's account
for said interest in accordance with the Notes.
(iii) Effective upon the occurrence of any Event of Default and for so
long as any Event of Default shall be continuing, the Contract Rate shall
automatically be increased to eighty eight and three tenths basis points (88.3
b.p.) per month (such increased rate, the "Default Rate"), and all outstanding
Obligations, including unpaid interest, shall continue to accrue interest from
the date of such Event of Default at the Default Rate applicable to such
Obligations until such Event of Default is cured or waived.
(iv) In no event shall the aggregate interest payable hereunder and
under the Notes exceed the maximum rate permitted under any applicable law or
regulation, as in effect from time to time (the "Maximum Legal Rate") and if any
provision of this Agreement, the Notes or any Ancillary Agreement is in
contravention of any such law or regulation, interest payable under this
Agreement, the Notes and each Ancillary Agreement shall be computed on the basis
of the Maximum Legal Rate (so that such interest will not exceed the Maximum
Legal Rate).
(v) Company shall pay principal, interest and all other amounts
payable hereunder, or under any Ancillary Agreement, without any deduction
whatsoever, including any deduction for any set-off or counterclaim.
(b) Payments.
(i) Closing/Annual Payments. Upon execution of this Agreement by
Company and Laurus, Company shall pay to Laurus Capital Management, LLC a
closing payment in an amount equal to three and one quarter percent (3.25%) of
the Capital Availability Amount. Such payment shall be deemed fully earned on
the Closing Date and shall not be subject to rebate or proration for any reason.
(ii) Unused Line Payment. If, during any month, the average of the
aggregate Loans outstanding under the Revolving Note during such month (the
"Average Revolving Note Loan Amount") does not equal the maximum amount
permitted to be outstanding under the Revolving Note (the "Revolving Note
Availability Amount"), Company shall pay to Laurus at the end of such month a
payment (calculated on a per annum basis) in an amount equal to thirty five
hundredths of one percent (0.35%) of the amount by which the
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Revolving Note Availability exceeds the Average Revolving Loan Amount.
Notwithstanding the foregoing, any such due and unpaid fee shall come
immediately due and payable upon termination of this Agreement.
(iii) Overadvance Payment. Without affecting Laurus' rights hereunder
in the event the Loans exceed the Formula Amount (each such event, an
"Overadvance") and provided that such Overadvacne does not constitute an Event
of Default, all such Overadvances shall bear interest at an annual rate equal to
one and one half percent (1.5%) of the amount of such Overadvances for each
month or portion thereof such amounts shall be outstanding and in excess of the
Formula Amount.
(iv) Financial Information Default. Without affecting Laurus' other
rights and remedies, in the event Company fails to deliver the financial
information required by Section 11 on or before the date required by this
Agreement, Company shall pay Laurus a fee in the amount of $250.00 per week (or
portion thereof) for each such failure until such failure is cured to Laurus'
satisfaction or waived in writing by Laurus. Such fee shall be charged to
Company's account upon the occurrence of each such failure.
6. Security Interest.
(a) To secure the prompt payment to Laurus of the Obligations, Company
hereby assigns, pledges and grants to Laurus a continuing security interest in
and Lien upon all of the Collateral. All of Company's Books and Records relating
to the Collateral shall, until delivered to or removed by Laurus in accordance
with the terms of this Agreement, be kept by Company in trust for Laurus until
all Obligations have been paid in full. Each confirmatory assignment schedule or
other form of assignment hereafter executed by Company shall be deemed to
include the foregoing grant, whether or not the same appears therein.
(b) Company hereby (i) authorizes Laurus to file any financing statements,
continuation statements or amendments thereto that (x) indicate the Collateral,
and (y) contain any other information required by Part 5 of Article 9 of the UCC
for the sufficiency or filing office acceptance of any financing statement,
continuation statement or amendment and (ii) ratifies its authorization for
Laurus to have filed any initial financial statements, or amendments thereto if
filed prior to the date hereof. Company acknowledges that it is not authorized
to file any financing statement or amendment or termination statement with
respect to any financing statement covering any portion of the Collateral
without the prior written consent of Laurus and agrees that it will not do so
without the prior written consent of Laurus, subject to Company's rights under
Section 9-509(d)(2) of the UCC. Promptly after payment in full of all
Obligations (but in any event within ten (10) Business Days), Laurus shall file
a termination statement with respect to each financing statement filed
hereunder.
7. Representations, Warranties and Covenants Concerning the Collateral.
Company represents, warrants (each of which such representations and warranties
shall be deemed repeated upon the making of each request for a Loan and made as
of the time of each and every Loan hereunder) and covenants as follows:
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(a) all of the Collateral (i) is owned by Company free and clear of all
Liens (including any claims of infringement) except those in Laurus' favor and
Permitted Liens and (ii) is not subject to any agreement prohibiting the
granting of a Lien or requiring notice of or consent to the granting of a Lien.
(b) Company shall not encumber, mortgage, pledge, assign or grant any Lien
in any Collateral of Company to anyone other than Laurus and except for
Permitted Liens.
(c) The Liens granted pursuant to this Agreement, upon completion of the
filings and other actions listed on Schedule 7(c) (which, in the case of all
filings and other documents referred to in said Schedule, have been delivered to
Laurus in duly executed form) constitute valid perfected security interests in
all of the Collateral in favor of Laurus as security for the prompt and complete
payment and performance of the Obligations, enforceable in accordance with the
terms hereof against any and all creditors of and any purchasers from Company
and such security interest is prior to all other Liens in existence on the date
hereof.
(d) No effective security agreement, mortgage, deed of trust, financing
statement, equivalent security or Lien instrument or continuation statement
covering all or any part of the Collateral is or will be on file or of record in
any public office, except those relating to Permitted Liens.
(e) Intentionally Omitted.
(f) Company shall defend the right, title and interest of Laurus in and to
the Collateral against the claims and demands of all Persons whomsoever, and
take such actions, including (i) all actions necessary to grant Laurus "control"
of the Deposit Account associated with the Control Agreement in accordance with
Section 8 hereunder, with any agreements establishing control to be in form and
substance satisfactory to Laurus and of all books and records relating to the
Collateral, (ii) notification of Laurus' interest in Collateral at Laurus'
request, and (iii) the institution of litigation against third parties as the
Company shall deem prudent in order to protect and preserve Company's and
Laurus' respective and several interests in the Collateral.
(g) Company shall place notations upon its Books and Records and, as
required by GAAP, any financial statement of Company to disclose Laurus' Lien in
the Collateral.
(h) Company shall perform in a reasonable time all other steps requested by
Laurus to create and maintain in Laurus' favor a valid perfected first Lien in
all Collateral subject only to Permitted Liens.
(i) Company shall notify Laurus promptly and in any event within three (3)
Business Days after obtaining knowledge thereof (i) of any material delay in
Company's performance of any of its obligations to any Account Debtor that is
material to the Collateral; (ii) of any assertion by any Account Debtor of any
claims, offsets or counterclaims which is material to the Collateral; (iii) of
any allowances, credits and/or monies granted by Company to any Account Debtor
which are material to the Collateral; and (iv) of all material adverse
information relating to the financial condition of an Account Debtor whose
Accounts comprise a material part of the Collateral, that becomes known to the
Company after the date hereof.
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(j) All Eligible Accounts (i) are not subject to any present, future
contingent offsets or counterclaims other than service credits issued by the
Company in the ordinary course of business, and (ii) do not represent xxxx and
hold sales, consignment sales, guaranteed sales, sale or return or other similar
understandings or obligations of any Affiliate or Subsidiary of Company. Other
than in the ordinary course of business, Company has not made, and will not make
any agreement with any Account Debtor for any extension of time for the payment
of any Account in excess of $250,000, any compromise or settlement for less than
the full amount thereof, any release of any such Account Debtor from liability
therefor, or any deduction therefrom except a discount or allowance for prompt
or early payment allowed by Company in the ordinary course of its business
consistent with historical practice.
(k) Company shall maintain and keep all of its Books and Records concerning
the Collateral at Company's executive offices listed in Schedule 12(bb).
(l) Company shall maintain and keep the tangible Collateral at the
addresses listed in Schedule 12(bb), provided, that Company may change such
locations or open a new location, provided that Company provides Laurus at least
ten (10) Business Days prior written notice of such changes or new location.
(m) Schedule 7(m) lists all banks and other financial institutions at which
Company maintains deposits and/or other accounts, and such Schedule correctly
identifies the name, address and telephone number of each such depository, the
name in which the account is held, a description of the purpose of the account,
and the complete account number. The Company shall not establish any depository
or other bank account of any with any financial institution (other than the
accounts set forth on Schedule 7(m)) without Laurus' prior written consent,
which consent shall not be unreasonably withheld.
8. Payment of Accounts. (a) Company will irrevocably direct all of its
present and future Account Debtors and other Persons obligated to make payments
constituting Collateral to make such payments directly to the lockbox maintained
by Company (the "Lockbox") with Fleet Bank (the "Lockbox Bank") pursuant to the
terms of the Clearing Account Agreement dated August 31, 2004 or such other
financial institution accepted by Laurus in writing as may be selected by
Company. On or prior to the Closing Date, Company shall and shall cause the
Lockbox Bank to enter into an agreement by and among the Company, the Lockbox
Bank and Laurus, in form and substance acceptable to Laurus (the "Control
Agreement"), pursuant to which, among other things, the Lockbox Bank shall
agree: (a) to deposit, on a daily basis, all checks received in the Lockbox into
a deposit account of the Company (the "Lockbox Account"), (b) on a daily basis,
wire transfer (in same day funds) the available balance in the Lockbox Account
to an account of Laurus designated by Laurus in writing, and (c) comply only
with the instructions or other directions of Laurus concerning the Lockbox. All
of Company's invoices, account statements and other written or oral
communications directing, instructing, demanding or requesting payment of any
Account of Company or any other amount constituting Collateral shall
conspicuously direct that all payments be made to the Lockbox or, upon the
occurrence and during the continuance of an Event of Default, such other address
as Laurus may direct in writing. If, notwithstanding the instructions to Account
Debtors, Company receives any payments, Company shall immediately remit such
payments to Laurus in their original form with all necessary endorsements. Until
so
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remitted, Company shall hold all such payments in trust for and as the property
of Laurus and shall not commingle such payments with any of its other funds or
property.
(b) At Laurus' election, following the occurrence of an Event of Default
which is continuing, Laurus may notify Company's Account Debtors of Laurus'
security interest in the Accounts, collect them directly and charge the
collection costs and expenses thereof to Company's account.
9. Collection and Maintenance of Collateral.
(a) Laurus may verify Company's Accounts from time to time, but not more
often than once every three (3) months unless an Event of Default has occurred
and is continuing, utilizing an audit control company or any other agent of
Laurus.
(b) Proceeds of Accounts received by Laurus will be deemed received on the
same Business Day of Laurus' receipt of such proceeds in good funds in dollars
of the United States of America in Laurus' account. Any amount received by
Laurus after 12:00 noon (New York time) on any Business Day shall be deemed
received on the next Business Day.
(c) As Laurus receives the proceeds of Accounts, either through operation
of the Control Agreement or otherwise, it shall (i) apply such proceeds, as
required, to amounts outstanding under the Revolving Note or Overadvances under
the Minimum Borrowing Note, and (ii) unconditionally remit all such remaining
proceeds (net of interest, fees and other amounts then due and owing to Laurus
hereunder or under the Notes) to Company on the same Business Day by wire
transfer of same day funds into such depository account of the Company as the
Company shall designate in writing to Laurus. . Notwithstanding the foregoing,
following the occurrence and during the continuance of an Event of Default,
Laurus, at its option, may (a) apply such proceeds to the Obligations in such
order as Laurus shall elect, (b) hold all such proceeds as cash collateral for
the Obligations up to the amount of the Obligations and Company hereby grants to
Laurus a security interest in such cash collateral amounts as security for the
Obligations provided, however, that Laurus shall unconditionally remit to the
Company any cash proceeds in excess of the of the Obligations in accordance with
and in the manner prescribed in clause (ii) above of this Section 9(c), and/or
(c) do any combination of the foregoing. Upon the full and final satisfaction of
the Obligations, Laurus' rights under the Control Agreement in respect to
control over the Lockbox Account shall immediately terminate and be of no
further force or effect, and Laurus shall within one (1) Business Day of such
full and final satisfaction, deliver a notice to the Lockbox Bank terminating
Laurus' rights under the Deposit Account Control Agreement.
10. Inspections and Appraisals. At all times during normal business hours,
Laurus, and/or any agent of Laurus shall have the right to (a) have access to,
visit, inspect, review, evaluate and make physical verification and appraisals
of the Collateral, (b) inspect, audit and copy (or take originals if necessary)
and make extracts from Company's Books and Records, including management letters
prepared by independent accountants in respect to the Collateral, and (c)
discuss with Company's principal officers, and independent accountants,
Company's business, assets, liabilities, financial condition, results of
operations and business prospects. Company will deliver to Laurus any instrument
necessary for Laurus to obtain
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records from any service bureau maintaining records for Company. If any
internally prepared financial information, including that required under this
Section is unsatisfactory in any manner to Laurus, Laurus may request that the
Accountants review the same.
11. Financial Reporting. Company will deliver, or cause to be delivered, to
Laurus each of the following, which shall be in form and detail acceptable to
Laurus:
(a) As soon as available, and in any event within ninety (90) days after
the end of each fiscal year of Company, Company's audited financial statements
with a report of independent certified public accountants of recognized standing
selected by Company (the "Accountants"), which annual financial statements shall
include Company's balance sheet as at the end of such fiscal year and the
related statements of Company's income, retained earnings and cash flows for the
fiscal year then ended, prepared, on a consolidated basis in accordance with
GAAP. Delivery of the Company's Annual Report on Report 10-K as filed with the
SEC for any given fiscal year shall be deemed delivery of such financial
statements. Company will also deliver (i) if and when available, copies of any
management letters prepared by such accountants; and (ii) a certificate of
Company's President, Chief Executive Officer or Chief Financial Officer stating
that such financial statements have been prepared in accordance with GAAP and
whether or not such officer has knowledge of the occurrence of any Default or
Event of Default hereunder and, if so, stating in reasonable detail the facts
with respect thereto;
(b) As soon as available and in any event within forty five (45) days after
the end of each quarter, an unaudited/internal balance sheet and statements of
income, retained earnings and cash flows of Company as at the end of and for
such quarter and for the year to date period then ended, prepared on a
consolidate basis in accordance with GAAP subject to year-end adjustments.
Delivery of the Company's Quarterly Report on Report 10-Q as filed with the SEC
for any given fiscal quarter shall be deemed delivery of such financial
statements. The Company shall also deliver a certificate of Company's President,
Chief Executive Officer or Chief Financial Officer, stating (i) that such
financial statements have been prepared in accordance with GAAP, subject to
year-end audit adjustments, and (ii) whether or not such officer has knowledge
of the occurrence of any Default or Event of Default hereunder not theretofore
reported and remedied and, if so, stating in reasonable detail the facts with
respect thereto;
(c) Within thirty (30) days after the end of each month, agings of
Company's Accounts, unaudited trial balances and their accounts payable and a
calculation of Company's Accounts, Eligible Accounts, provided, however, that if
Laurus shall request the foregoing information more often than as set forth in
the immediately preceding clause, Company shall have thirty (30) days from each
such request to comply with Laurus' demand; and
(d) Promptly after (i) the filing thereof, copies of Company's most recent
registration statements and annual, quarterly, monthly or other regular reports
which Company files with the SEC, and (ii) the issuance thereof, copies of such
financial statements, reports and proxy statements as Company shall send to its
stockholders.
12. Additional Representations and Warranties. Company hereby represents
and warrants to Laurus as follows (which representations and warranties are
supplemented by, and
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subject to, Company's filings under the Securities Exchange Act of 1934
(collectively, the "Exchange Act Filings"), copies of which have been provided
to Laurus:
(a) Organization, Good Standing and Qualification. Company is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of organization. Company has the corporate power and authority to
own and operate its properties and assets, to execute and deliver this Agreement
and the Ancillary Agreements, to issue and sell the Notes and the shares of
Common Stock issuable upon conversion of the Minimum Borrowing Note (the "Note
Shares"), to issue and sell the Warrants and the shares of Common Stock issuable
upon conversion of the Warrants (the "Warrant Shares"), and to carry out the
provisions of this Agreement and the Ancillary Agreements and to carry on its
business as presently conducted. Company is duly qualified and is authorized to
do business and is in good standing as a foreign corporation in all
jurisdictions, except for those jurisdictions in which the failure to do so has
not had, or could not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect.
(b) Subsidiaries. Company owns all of the issued and outstanding capital
stock of each of its Subsidiaries. Company does not own or control any equity
security or other equity interest of any other corporation, limited partnership
or other business entity.
(c) Capitalization; Voting Rights.
(i) The authorized capital stock of Company, as of the date hereof,
consists of 820,000,000 shares, of which 800,000,000 are shares of Common Stock,
par value $0.0005 per share, 233,617,317 shares of which are issued and
outstanding, and 20,000,000 are shares of Preferred Stock, par value $0.01 per
share, of which 20,000 have been designated Series X Preferred Stock none of
which are issued and outstanding of which 15,000 shares have been designated
Series Y Preferred Stock none of which are issued and outstanding and of which
14,000 shares have been designated Series Z Preferred Stock ,all of which are
issued and outstanding.
(ii) Except as disclosed in the SEC Reports , other than: (i) the
shares reserved for issuance under Company's stock option plans; and (ii) shares
which may be issued pursuant to this Agreement and the Ancillary Agreements,
there are no outstanding options, warrants, rights (including conversion or
preemptive rights and rights of first refusal), proxy or stockholder agreements,
or arrangements or agreements of any kind for the purchase or acquisition from
Company of any of its securities. Except as disclosed on Schedule 12(c), neither
the offer, issuance or sale of any of the Notes or the Warrants, or the issuance
of any of the Note Shares or Warrant Shares, nor the consummation of any
transaction contemplated hereby will result in a change in the price or number
of any securities of Company outstanding, under anti-dilution or other similar
provisions contained in or affecting any such securities.
(iii) All issued and outstanding shares of Company's Common Stock: (i)
have been duly authorized and validly issued and are fully paid and
nonassessable; and (ii) were
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issued in compliance with all applicable state and federal laws concerning the
issuance of securities.
(iv) The rights, preferences, privileges and restrictions of the
shares of the Common Stock are as stated in Company's certificate of
incorporation, as amended, and in effect on the date hereof (the "Charter"). The
Note Shares and Warrant Shares have been duly and validly reserved for issuance.
When issued in compliance with the provisions of this Agreement, the Notes, the
Warrants and Company's Charter, each of the Note Shares and the Warrant Shares
will be validly issued, fully paid and nonassessable, and will be free of any
liens or encumbrances; provided, however, that the Securities may be subject to
restrictions on transfer under state and/or federal securities laws as set forth
herein or as otherwise required by such laws at the time a transfer is proposed.
(d) Authorization; Binding Obligations. All corporate action on the part of
Company, its officers and directors necessary for the authorization of this
Agreement and the Ancillary Agreements, the performance of all obligations of
Company hereunder and under the Ancillary Agreements on the Closing Date and,
the authorization, sale, issuance and delivery of the Notes and Warrants has
been taken or will be taken prior to the Closing Date. This Agreement and the
Ancillary Agreements, when executed and delivered and to the extent it is a
party thereto, will be valid and binding obligations of Company enforceable in
accordance with their terms, except:
(i) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting enforcement of
creditors' rights; and
(ii) general principles of equity that restrict the availability of
equitable or legal remedies.
The sale of the Notes and the subsequent conversion of the Minimum Borrowing
Note into Note Shares are not and will not be subject to any preemptive rights
or rights of first refusal that have not been properly waived or complied with.
The issuance of the Warrants and the subsequent exercise of the Warrants for
Warrant Shares are not and will not be subject to any preemptive rights or
rights of first refusal that have not been properly waived or complied with.
(e) Liabilities. Company does not have any material contingent liabilities,
except current liabilities incurred in the ordinary course of business and
liabilities disclosed in any Exchange Act Filings.
(f) Agreements; Action. Except as set forth on Schedule 12(f) or as
disclosed in any Exchange Act Filings:
(i) There are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees to which Company is a
party or to its
11
knowledge by which it is bound which may involve: (i) obligations (contingent or
otherwise) of, or payments to, Company in excess of $50,000 (other than
obligations of, or payments to, Company arising from purchase or sale agreements
entered into in the ordinary course of business); or (ii) the transfer or
license of any patent, copyright, trade secret or other proprietary right to or
from Company (other than licenses arising from the purchase of "off the shelf"
or other standard products); or (iii) provisions restricting the development,
manufacture or distribution of Company's products or services; or (iv)
indemnification by Company with respect to infringements of proprietary rights.
(ii) Since June 30, 2004, Company has not: (i) declared or paid any
dividends, or authorized or made any distribution upon or with respect to any
class or series of its capital stock; (ii) incurred any indebtedness for money
borrowed or any other liabilities (other than ordinary course obligations)
individually in excess of $50,000 or, in the case of indebtedness and/or
liabilities individually less than $50,000, in excess of $100,000 in the
aggregate; (iii) made any loans or advances to any person not in excess,
individually or in the aggregate, of $100,000, other than ordinary advances for
travel expenses; or (iv) sold, exchanged or otherwise disposed of any of its
assets or rights, other than the sale of its inventory in the ordinary course of
business.
(iii) For the purposes of subsections (i) and (ii) of this Section
12(f) above, all indebtedness, liabilities, agreements, understandings,
instruments, contracts and proposed transactions involving the same person or
entity (including persons or entities Company has reason to believe are
affiliated therewith) shall be aggregated for the purpose of meeting the
individual minimum dollar amounts of such subsections.
(g) Obligations to Related Parties. Except as set forth on Schedule 12(g)
or as disclosed in any Exchange Act Filings, there are no obligations of Company
to officers, directors, stockholders or employees of Company other than:
(i) for payment of salary for services rendered and for bonus
payments;
(ii) reimbursement for reasonable expenses incurred on behalf of
Company;
(iii) for other standard employee benefits made generally available to
all employees (including stock option agreements outstanding under any stock
option plan approved by the Board of Directors of Company); and
(iv) obligations listed in Company's financial statements.
Except as described above or set forth on Schedule 12(g) or as disclosed in any
Exchange Act Filings, none of the officers, directors or, to the best of
Company's knowledge, key employees or stockholders of Company or any members of
their immediate families, are indebted to Company, individually or in the
aggregate, in excess of $60,000 or have any direct or indirect ownership
interest in any firm or corporation with which Company is affiliated or with
which Company has
12
a business relationship, or any firm or corporation which competes with Company,
other than passive investments in publicly traded companies (representing less
than one percent (1%) of such company) which may compete with Company. Except as
described above, no officer, director or stockholder, or any member of their
immediate families, is, directly or indirectly, interested in any material
contract with Company and no agreements, understandings or proposed transactions
are contemplated between Company and any such person. Except as disclosed in any
Exchange Act Filings, Company is not a guarantor or indemnitor of any
indebtedness of any other person, firm or corporation.
(h) Changes. Since June 30, 2004 , except as disclosed in any Exchange Act
Filing or in any Schedule to this Agreement or to any of the Ancillary
Agreements, there has not been:
(i) any change in the business, assets, liabilities, condition
(financial or otherwise), properties, operations or prospects of Company, which,
individually or in the aggregate, has had, or could reasonably be expected to
have, a Material Adverse Effect;
(ii) any resignation or termination of any officer, key employee or
group of employees of Company;
(iii) any material change, except in the ordinary course of business,
in the contingent obligations of Company by way of guaranty, endorsement,
indemnity, warranty or otherwise;
(iv) any damage, destruction or loss, whether or not covered by
insurance, which has had, or could reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect;
(v) any waiver by Company of a valuable right or of a material debt
owed to it;
(vi) any direct or indirect material loans made by Company to any
stockholder, employee, officer or director of Company, other than advances made
in the ordinary course of business;
(vii) any material change in any compensation arrangement or agreement
with any employee, officer, director or stockholder;
(viii) any declaration or payment of any dividend or other
distribution of the assets of Company;
(ix) any labor organization activity related to Company;
(x) any debt, obligation or liability incurred, assumed or guaranteed
by Company, except those for immaterial amounts and for current liabilities
incurred in the ordinary course of business;
13
(xi) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets other than in the ordinary
course of business;
(xii) any change in any material agreement to which Company is a party
or by which it is bound which, either individually or in the aggregate, has had,
or could reasonably be expected to have, a Material Adverse Effect; or
(xiii) any arrangement or commitment by Company to do any of the acts
described in subsection (i) through (xiii) of this Section 12(h).
(i) Title to Properties and Assets; Liens, Etc. Except as set forth on
Schedule 12(i), Company has good and marketable title to its properties and
assets, and good title to its leasehold estates, in each case subject to no
mortgage, pledge, lien, lease, encumbrance or charge, other than Permitted Liens
and:
(i) those resulting from taxes which have not yet become delinquent;
(ii) minor liens and encumbrances which do not materially detract from
the value of the property subject thereto or materially impair the operations of
Company;
(iii) those that have otherwise arisen in the ordinary course of
business; and
(iv) any other Permitted Lien.
All facilities, machinery, equipment, fixtures, vehicles and other properties
owned, leased or used by Company are in good operating condition and repair and
are reasonably fit and usable for the purposes for which they are being used.
Except as set forth on Schedule 12(i), Company is in compliance with all
material terms of each lease to which it is a party or is otherwise bound.
(j) Intellectual Property.
(i) Company owns or possesses sufficient legal rights to all
Intellectual Property necessary for its business as now conducted, without any
known infringement of the rights of others. There are no outstanding options,
licenses or agreements of any kind relating to such Intellectual Property of
Company, nor is Company bound by or a party to any options, licenses or
agreements of any kind with respect to the Intellectual Property of any other
person or entity other than such licenses or agreements arising from the
purchase of "off the shelf" or standard products.
(ii) Company has not received any written communications alleging that
Company has violated any of the patents, trademarks, service marks, trade names,
copyrights or trade secrets or other proprietary rights of any other person or
entity, nor is Company aware of any basis therefor.
(iii) Company does not believe it is or will be necessary to utilize
any inventions, trade secrets or proprietary information of any of its employees
made prior to their
14
employment by Company, except for inventions, trade secrets or proprietary
information that have been rightfully assigned to Company.
(k) Compliance with Other Instruments. Company is not in violation or
default of (x) any term of its Charter or Bylaws, or (y) of any provision of any
indebtedness, mortgage, indenture, contract, agreement or instrument to which it
is party or by which it is bound or of any judgment, decree, order or writ,
which violation or default, in the case of this clause (y), has had, or could
reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect. The execution, delivery and performance of and
compliance with this Agreement and the Ancillary Agreements to which it is a
party, and the issuance and sale of the Note by Company and the other Securities
by Company each pursuant hereto and thereto, will not, with or without the
passage of time or giving of notice, result in any such material violation, or
be in conflict with or constitute a default under any such term or provision, or
result in the creation of any mortgage, pledge, lien, encumbrance or charge upon
any of the properties or assets of Company or the suspension, revocation,
impairment, forfeiture or nonrenewal of any material permit, license,
authorization or approval applicable to Company, its business or operations or
any of its assets or properties.
(l) Litigation. Except as disclosed in any Exchange Act Filings, there is
no action, suit, proceeding or investigation pending or, to Company's knowledge,
currently threatened against Company that prevents Company from entering into
this Agreement or the Ancillary Agreements, or from consummating the
transactions contemplated hereby or thereby, or which has had, or could
reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect, or could result in any change in the current equity
ownership of Company, nor is Company aware that there is any basis to assert any
of the foregoing. Company is not a party or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by
Company currently pending or which Company intends to initiate.
(m) Tax Returns and Payments. Company has timely filed all tax returns
(federal, state and local) required to be filed by it except where failure to so
file could not reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect. All taxes shown to be due and payable on
such returns, any assessments imposed, and all other taxes due and payable by
Company on or before the Closing Date, have been paid or will be paid prior to
the time they become delinquent or are being contested by the Company in good
faith. Except as set forth on Schedule 12(m), Company has not been advised:
(i) that any of its returns, federal, state or other, have been or are
being audited as of the date hereof; or
(ii) of any deficiency in assessment or proposed judgment to its
federal, state or other taxes.
15
Company has no knowledge of any liability of any tax to be imposed upon its
properties or assets as of the date of this Agreement that is not adequately
provided for.
(n) Employees. Company has no collective bargaining agreements with any of
its employees. There is no labor union organizing activity pending or, to
Company's knowledge, threatened with respect to Company. Except as disclosed in
the Exchange Act Filings, Company is not a party to or bound by any currently
effective material employment contract, deferred compensation arrangement, bonus
plan, incentive plan, profit sharing plan, retirement agreement or other
employee compensation plan or agreement. To Company's knowledge, no employee of
Company, nor any consultant with whom Company has contracted, is in violation of
any term of any employment contract, proprietary information agreement or any
other agreement relating to the right of any such individual to be employed by,
or to contract with, Company because of the nature of the business to be
conducted by Company; and to Company's knowledge the continued employment by
Company of its present employees, and the performance of Company's contracts
with its independent contractors, will not result in any such violation. Company
is not aware that any of its employees is obligated under any contract
(including licenses, covenants or commitments of any nature) or other agreement,
or subject to any judgment, decree or order of any court or administrative
agency, that would materially interfere with their duties to Company. Company
has not received any notice alleging that any such violation has occurred.
Except for employees who have a current effective employment agreement with
Company, no employee of Company has been granted the right to continued
employment by Company or to any material compensation following termination of
employment with Company. Company is not aware that any officer, key employee or
group of employees intends to terminate his, her or their employment with
Company, nor does Company have a present intention to terminate the employment
of any officer, key employee or group of employees.
(o) Registration Rights and Voting Rights. Except as disclosed in Exchange
Act Filings, Company is presently not under any obligation, and has not granted
any rights, to register any of Company's presently outstanding securities or any
of its securities that may hereafter be issued. Except as set forth on Schedule
12(o) or disclosed in Exchange Act Filings, to Company's knowledge, no
stockholder of Company has entered into any agreement with respect to the voting
of equity securities of Company.
(p) Compliance with Laws; Permits. Company is not in violation in any
material respect of any applicable statute, rule, regulation, order or
restriction of any domestic or foreign government or any instrumentality or
agency thereof in respect of the conduct of its business or the ownership of its
properties which has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect. No governmental
orders, permissions, consents, approvals or authorizations are required to be
obtained and no registrations or declarations are required to be filed in
connection with the execution and delivery of this Agreement or any Ancillary
Agreement and the issuance of any of the Securities, except such as has been
duly and validly obtained or filed, or with respect to any filings that must be
made after the Closing Date, as will be filed in a timely manner. Company has
all material franchises, permits, licenses and any similar authority necessary
for the conduct of its business as
16
now being conducted by it, the lack of which could, either individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect.
(q) Environmental and Safety Laws. Company is not in violation in any
material respect of any applicable statute, law or regulation relating to the
environment or occupational health and safety, and to its knowledge, no material
expenditures are or will be required in order to comply with any such existing
statute, law or regulation. Except as set forth on Schedule 12(q), no Hazardous
Materials (as defined below) are used or have been used, stored, or disposed of
by Company or, to Company's knowledge, by any other person or entity on any
property owned, leased or used by Company. For the purposes of the preceding
sentence, "Hazardous Materials" shall mean:
(i) materials which are listed or otherwise defined as "hazardous" or
"toxic" under any applicable local, state, federal and/or foreign laws and
regulations that govern the existence and/or remedy of contamination on
property, the protection of the environment from contamination, the control of
hazardous wastes, or other activities involving hazardous substances, including
building materials; or
(ii) any petroleum products or nuclear materials.
(r) Valid Offering. Assuming the accuracy of the representations and
warranties of Laurus contained in this Agreement, the offer, sale and issuance
of the Securities will be exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and will have been
registered or qualified (or are exempt from registration and qualification)
under the registration, permit or qualification requirements of all applicable
state securities laws.
(s) Full Disclosure. Company has provided Laurus with all information
requested by Laurus in connection with its decision to purchase the Notes and
the Warrants. Neither this Agreement, the Ancillary Agreements nor the exhibits
and schedules hereto and thereto, contain any untrue statement of a material
fact nor omit to state a material fact necessary in order to make the statements
contained herein or therein, in light of the circumstances in which they are
made, not misleading. Any financial projections and other estimates provided to
Laurus by Company were based on Company's experience in the industry and on
assumptions of fact and opinion as to future events which Company, at the date
of the issuance of such projections or estimates, believed to be reasonable.
(t) Insurance. Company has general commercial, product liability, fire and
casualty insurance policies with coverages which Company believes are customary
for companies similarly situated to Company in the same or similar business.
17
(u) SEC Reports and Financial Statements. Except as set forth on Schedule
12(u), Company has filed all proxy statements, reports and other documents
required to be filed by it under the Exchange Act. Company has furnished Laurus
with copies of: (i) its Annual Report on Form 10-K for the fiscal year ended
December 31, 2003 ; and (ii) its Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 31, 2004 and June 30, 2004 , and the Form 8-K filings which
it has made during the fiscal year 2004 to date (collectively, the "SEC
Reports"). Except as set forth on Schedule 12(u), each SEC Report was, at the
time of its filing, in substantial compliance with the requirements of its
respective form and none of the SEC Reports, nor the financial statements (and
the notes thereto) included in the SEC Reports, as of their respective filing
dates, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Such financial statements have been prepared in accordance with GAAP
applied on a consistent basis during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto or (ii) in
the case of unaudited interim statements, to the extent they may not include
footnotes or may be condensed) and fairly present in all material respects the
financial condition, the results of operations and the cash flows of Company and
its subsidiaries, on a consolidated basis, as of, and for, the periods presented
in each such SEC Report.
(v) Listing. Company's Common Stock is listed for trading on the American
Stock Exchange ("AMEX") and satisfies all requirements for the continuation of
such listing. Company has not received any notice that its Common Stock will be
delisted from AMEX or that its Common Stock does not meet all requirements for
listing.
(w) No Integrated Offering. Neither Company, nor any of its affiliates, nor
any person acting on its or their behalf, has directly or indirectly made any
offers or sales of any security or solicited any offers to buy any security
under circumstances that would cause the offering of the Securities pursuant to
this Agreement or any Ancillary Agreement to be integrated with prior offerings
by Company for purposes of the Securities Act which would prevent Company from
selling the Securities pursuant to Rule 506 under the Securities Act, or any
applicable exchange-related stockholder approval provisions, nor will Company or
any of its affiliates or subsidiaries take any action or steps that would cause
the offering of the Securities to be integrated with other offerings.
(x) Stop Transfer. The Securities are restricted securities as of the date
of this Agreement. Company will not issue any stop transfer order or other order
impeding the sale and delivery of any of the Securities at such time as the
Securities are registered for public sale or an exemption from registration is
available, except as required by state and federal securities laws.
18
(y) Dilution. Company specifically acknowledges that its obligation to
issue the shares of Common Stock upon conversion of the Notes and exercise of
the Warrants is binding upon Company and enforceable regardless of the dilution
such issuance may have on the ownership interests of other shareholders of
Company.
(z) Patriot Act. Company certifies that, to the best of Company's
knowledge, Company has not been designated, and is not owned or controlled, by a
"suspected terrorist" as defined in Executive Order 13224. Company hereby
acknowledges that Laurus seeks to comply with all applicable laws concerning
money laundering and related activities. In furtherance of those efforts,
Company hereby represents, warrants and agrees that: (i) none of the cash or
property that Company will pay or will contribute to Laurus has been or shall be
derived from, or related to, any activity that is deemed criminal under United
States law; and (ii) no contribution or payment by Company to Laurus, to the
extent that they are within Company's control shall cause Laurus to be in
violation of the United States Bank Secrecy Act, the United States International
Money Laundering Control Act of 1986 or the United States International Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001. Company shall
promptly notify Laurus if any of these representations ceases to be true and
accurate regarding Company. Company agrees to provide Laurus with any additional
information regarding Company that Laurus reasonably deems necessary or
convenient to ensure compliance with all applicable laws concerning money
laundering and similar activities. Company understands and agrees that if at any
time it is discovered that any of the foregoing representations are incorrect,
or if otherwise required by applicable law or regulation related to money
laundering similar activities, Laurus may undertake appropriate actions to
ensure compliance with applicable law or regulation, including but not limited
to segregation and/or redemption of Laurus' investment in Company. Subject to
compliance with applicable securities law, Company further understands that
Laurus after consultation with the Company, may release confidential information
about Company and, if applicable, any underlying beneficial owners, to proper
authorities if Laurus, in its sole discretion, determines that it is in the best
interests of Laurus in light of relevant rules and regulations under the laws
set forth in subsection (ii) above.
(aa) Schedule 12(aa) sets forth Company's name as it appears in official
filing in the state of its incorporation, the type of entity of Company, the
organizational identification number issued by Company's state of incorporation
or a statement that no such number has been issued, Company's state of
incorporation, and the location of Company's chief executive office, corporate
offices, warehouses, other locations of Collateral and locations where records
with respect to Collateral are kept (including in each case the county of such
locations) .
13. Covenants. Company covenants and agrees with Laurus as follows:
(a) Stop-Orders. Company will advise Laurus, promptly after it receives
notice of issuance by the SEC, any state securities commission or any other
regulatory authority of any stop order or of any order preventing or suspending
any offering of any securities of Company,
19
or of the suspension of the qualification of the Common Stock of Company for
offering or sale in any jurisdiction, or the initiation of any proceeding for
any such purpose.
(b) Listing. Company shall promptly secure the listing of the shares of
Common Stock issuable upon conversion of the Notes and upon the exercise of the
Warrants on the Principal Market upon which shares of Common Stock are listed
(subject to official notice of issuance) and shall maintain such listing so long
as any other shares of Common Stock shall be so listed. Company will maintain
the listing of its Common Stock on a Principal Market, and will comply in all
material respects with Company's reporting, filing and other obligations under
the bylaws or rules of such Principal Market.
(c) Market Regulations. Company shall notify the SEC, the Principal Market
and applicable state authorities, in accordance with their requirements, of the
transactions contemplated by this Agreement, and shall take all other necessary
action and proceedings as may be required and permitted by applicable law, rule
and regulation, for the legal and valid issuance of the Securities to Laurus and
upon the request of Laurus promptly provide copies thereof to Laurus.
(d) Reporting Requirements. Company will timely file with the SEC all
reports required to be filed pursuant to the Exchange Act and refrain from
terminating its status as an issuer required by the Exchange Act to file reports
thereunder even if the Exchange Act or the rules or regulations thereunder would
permit such termination.
(e) Use of Funds. Company agrees that it will use the proceeds of the sale
of the Notes and the Warrants for general working capital purposes and/or for
acquisitions only.
(f) Access to Facilities. Company will permit any representatives
designated by Laurus (or any successor of Laurus), upon reasonable notice and
during normal business hours, without undue disruption, at such person's expense
and accompanied by a representative of Company, to:
(i) visit and inspect any of the properties of Company;
(ii) examine the corporate and financial records of Company (unless
such examination is not permitted by federal, state or local law or by
contract); and
20
(iii) discuss the affairs, finances and accounts of Company with the
directors, officers and independent accountants of Company.
Notwithstanding the foregoing, Company will not provide any material, non-public
information to Laurus unless Laurus signs a confidentiality agreement and
otherwise complies with Regulation FD, "xxxxxxx xxxxxxx" laws and other federal
securities laws.
(g) Taxes. Company will promptly pay and discharge, or cause to be paid and
discharged, when due and payable, all lawful taxes, assessments and governmental
charges or levies imposed upon the income, profits, property or business of
Company; provided, however, that any such tax, assessment, charge or levy need
not be paid if the validity thereof shall currently be contested in good faith
by appropriate proceedings and if Company shall have set aside on its books
adequate reserves with respect thereto, and provided, further, that Company will
pay all such taxes, assessments, charges or levies forthwith upon the
commencement of proceedings to foreclose any lien which may have attached as
security therefor.
(h) Insurance. Company will bear the full risk of loss from any loss of any
nature whatsoever with respect to the Collateral. Company will keep its assets
which are of an insurable character insured by financially sound and reputable
insurers against loss or damage by fire, explosion and other risks customarily
insured against by companies in similar business similarly situated as Company;
and Company will maintain, with financially sound and reputable insurers,
insurance against other hazards and risks and liability to persons and property
to the extent and in the manner which Company reasonably believes is customary
for companies in similar business similarly situated as Company and to the
extent available on commercially reasonable terms. Company and each of its
Subsidiaries will jointly and severally bear the full risk of loss from any loss
of any nature whatsoever with respect to the assets pledged to Laurus as
security for its obligations hereunder and under the Ancillary Agreements. At
Company's own cost and expense , Company and each of the Subsidiaries shall (i)
keep all its insurable properties and properties in which it has an interest
insured against the hazards of fire, flood, sprinkler leakage, those hazards
covered by extended coverage insurance and such other hazards, and for such
amounts, as is customary in the case of companies engaged in businesses similar
to Company's or the respective Subsidiary's including business interruption
insurance; (ii) maintain a bond in such amounts as is customary in the case of
companies engaged in businesses similar to Company's or the Subsidiary's
insuring against larceny, embezzlement or other criminal misappropriation of
insured's officers and employees who may either singly or jointly with others at
any time have access to the assets or funds of Company either directly or
through governmental authority to draw upon such funds or to direct generally
the disposition of such assets; (iii) maintain public and product liability
insurance against claims for personal injury, death or property damage suffered
by others; (iv) maintain all such worker's compensation or similar insurance as
may be required under the laws of any state or jurisdiction in which Company or
the Subsidiary is engaged in business; and (v) furnish Laurus with copies of all
policies and evidence of the maintenance of such policies(i) Intellectual
Property. Company shall
21
maintain in full force and effect its corporate existence, rights and franchises
and all licenses and other rights to use Intellectual Property owned or
possessed by it and reasonably deemed to be necessary to the conduct of its
business.
(j) Properties. Company will keep its properties in good repair, working
order and condition, reasonable wear and tear excepted, and from time to time
make all needful and proper repairs, renewals, replacements, additions and
improvements thereto; and Company will at all times comply with each provision
of all leases to which it is a party or under which it occupies property if the
breach of such provision could reasonably be expected to have a Material Adverse
Effect.
(k) Confidentiality. Company agrees that it will not disclose, and will not
include in any public announcement, the name of Laurus, unless expressly agreed
to by Laurus or unless and until such disclosure is required by law or
applicable regulation, and then only to the extent of such requirement. Company
may disclose Laurus' identity and the terms of this Agreement to its current and
prospective debt and equity financing sources.
(l) Required ApprovalsSo long as $2,125,000 aggregate principal amount or
more shall remain outstanding on the Minimum Borrowing Note, the Company shall
not, without the prior written consent of Laurus, (i) create, incur, assume or
suffer to exist any indebtedness (exclusive of trade debt, Purchase Money
Indebtedness and debt assumed in any acquisition or merger transaction involving
the Company and in which the Company is the surviving entity) whether secured or
unsecured other than Company's indebtedness to Laurus, indebtedness expressly
subordinate in all respects to the Obligations, and as set forth on Schedule
13(l)(i) attached hereto and made a part hereof; (ii) cancel any debt owing to
it in excess of $50,000 in the aggregate during any 12 month period; (iii)
assume, guarantee, endorse or otherwise become directly or contingently liable
in connection with any obligations of any other Person, except the endorsement
of negotiable instruments by a Company for deposit or collection or similar
transactions in the ordinary course of business; (iv) directly or indirectly
declare, pay or make any dividend or distribution on any class of its Stock
other than to pay dividends on shares of its Preferred Stock outstanding on the
date hereof or apply any of its funds, property or assets to the purchase,
redemption or other retirement of any Stock of Company outstanding on the date
hereof except as required under the terms of Company's outstanding Preferred
Stock issued and outstanding on the date hereof or for the repurchase of shares
of stock from such persons pursuant to contractual rights held by the Company at
repurchase prices not exceeding the respective original purchase prices paid to
the Company therefor directly or indirectly, prepay any indebtedness (other than
to Laurus and in the ordinary course of business), or repurchase, redeem, retire
or otherwise acquire any indebtedness (other than to Laurus and in the ordinary
course of business) except to make scheduled payments of principal and interest
thereof; (vii) enter into any merger, consolidation or other reorganization with
or into any other Person or acquire all or a portion of the assets or Stock of
any Person or permit any other Person to
22
consolidate with or merge with it, unless (1) Company is the surviving entity of
such merger or consolidation, or the surviving entity agrees to assume all of
the Obligations of the Company under this Agreement and the Ancillary Agreements
(2) no Event of Default shall exist immediately prior to and after giving effect
to such merger or consolidation, (3) Company shall have provided Laurus copies
of all documentation relating to the assumption of the Obligations under this
Agreement and the Ancillary Agreements if the Company is not the surviving
entity of such merger or consolidation and (4) Company shall have provided
Laurus with thirty (30) days' prior written notice or such lesser amount as is
commercially reasonable under the circumstances (but in no event less than ten
days' prior written notice) of such merger or consolidation; (viii) materially
change the nature of the business in which it is presently engaged; (ix) become
subject to (including, without limitation, by way of amendment to or
modification of) any agreement or instrument which by its terms would (under any
circumstances) restrict the Company's right to perform the provisions of this
Agreement or any of the agreements contemplated thereby; (x) change its fiscal
year or make any changes in accounting treatment and reporting practices without
prior written notice to Laurus except as required by GAAP or in the tax
reporting treatment or except as required by law; (xi) enter into any
non-compensation or non-corporate governance transaction with any employee,
director or Affiliate, except in the ordinary course on arms-length terms; or
(xii) xxxx Accounts under any name except the present name of Company or its
existing Subsidiaries or the names of any acquired or surviving entity of any
merger or consolidation involving the Company.
(m) Reissuance of Securities. Upon the request of Laurus, Company agrees to
reissue certificates representing the Securities without the legends set forth
in Section 37 below at such time as:
(i) the holder thereof is permitted to dispose of such Securities
pursuant to Rule 144(k) under the Securities Act; or
(ii) upon resale subject to an effective registration statement after
such Securities are registered under the Securities Act.
Company agrees to cooperate with Laurus in connection with all resales pursuant
to Rule 144(d) and Rule 144(k) and provide legal opinions reasonably necessary
to allow such resales provided Company and its counsel receive reasonably
requested representations from Laurus and broker, if any.
(n) Opinion. On the Closing Date, Company will deliver to Laurus an opinion
acceptable to Laurus from Company's legal counsel. Company will provide, at
Company's expense, such other legal opinions in the future as are reasonably
necessary for the conversion of the Notes and the exercise of the Warrants.
23
(o) Legal Name, etc. Company will not, without providing Laurus with 30
days prior written notice, change (i) its name as it appears in the official
filings in the state of its incorporation or formation, (ii) the type of legal
entity it is, (iii) its organization identification number, if any, issued by
its state of incorporation, (iv) its state of incorporation or (v) amend its
certificate of incorporation, by-laws or other organizational document in any
way that has or is reasonably likely to have a Material Adverse Effect.
(p) Compliance with Laws. The operation of Company's business is and will
continue to be in compliance in all material respects with all applicable
federal, state and local laws, rules and ordinances, including to all laws,
rules, regulations and orders relating to taxes, payment and withholding of
payroll taxes, employer and employee contributions and similar items,
securities, employee retirement and welfare benefits, employee health safety and
environmental matters.
(q) Notices. Company will promptly inform Laurus in writing of: (i) the
commencement of all proceedings and investigations by or before and/or the
receipt of any notices from, any governmental or nongovernmental body and all
actions and proceedings in any court or before any arbitrator against or in any
way concerning any event which could reasonable be expected to have singly or in
the aggregate, a Material Adverse Effect; (ii) any change which has had, or
could reasonably be expected to have, a Material Adverse Effect; (iii) any Event
of Default or Default; and (iv) any material default or any event which with the
passage of time or giving of notice or both would constitute a default under any
agreement for the payment of money in excess of $100,000 to which Company is a
party or by which Company or any of Company's properties may be bound the breach
of which would have a Material Adverse Effect.
(r) Margin Stock. The Company will not permit any of the proceeds of the
Loans made hereunder to be used directly or indirectly to "purchase" or "carry"
"margin stock" or to repay indebtedness incurred to "purchase" or "carry"
"margin stock" within the respective meanings of each of the quoted terms under
Regulation U of the Board of Governors of the Federal Reserve System as now and
from time to time hereafter in effect.
(s) Offering Restrictions. Except as previously disclosed in the SEC
Reports or in the Exchange Act Filings, or stock or stock options granted to
employees or directors of the Company (these exceptions hereinafter referred to
as the "Excepted Issuances"), the Company will not issue any securities with a
continuously variable/floating conversion feature which are or could be (by
conversion or registration) free-trading securities (i.e. common stock subject
to a registration statement) prior to the full repayment or conversion of the
Notes (together with all accrued and unpaid interest and fees related thereto
(the "Exclusion Period").
(t) Authorization and Reservation of Shares. Company will at all times have
authorized and reserved a sufficient number of shares of Common Stock to provide
for the conversion of the Notes and exercise of the Warrants.
(u) Proxy Statement; Stockholder Approval. At any time the Company is
obligated to issue shares of Common Stock to Laurus under the Minimum Borrowing
Note, the
24
Warrants or any Ancillary Agreement and such issuance or a portion thereof
requires the approval of the Company's stockholders under applicable rules and
regulations of the Principal Market (such affirmative approval being referred to
herein as, the "Stockholder Approval"), the Company shall provide each
stockholder entitled to vote at the next regularly scheduled meeting of
stockholders of the Company, a proxy statement, which has been previously
reviewed by Laurus and its counsel, soliciting each such stockholder's
affirmative vote at such stockholder meeting with respect to the issuance of the
shares of Common Stock requiring the Stockholder Approval, and the Company shall
use its reasonable efforts to obtain the Stockholder Approval and to cause the
Board of Directors of the Company to recommend to the stockholders that they
vote for the Stockholder Approval. In the event that the Stockholder Approval is
not obtained at the next regularly scheduled meeting of the Company's
stockholders, the Company shall continue to use its commercially reasonable best
efforts to seek the Stockholder Approval as soon as practicable after such
meeting.
14. Further Assurances. At any time and from time to time, upon the written
request of Laurus and at the sole expense of Company, Company shall promptly and
duly execute and deliver any and all such further instruments and documents and
take such further action as Laurus may reasonably request (a) to obtain the full
benefits of this Agreement and the Ancillary Agreements, (b) to protect,
preserve and maintain Laurus' rights in the Collateral and under this Agreement
or any Ancillary Agreement, or (c) to enable Laurus to exercise all or any of
the rights and powers herein granted or any Ancillary Agreement.
15. Representations and Warranties of Laurus.
Laurus hereby represents and warrants to Company as follows:
(a) Requisite Power and Authority. Laurus has all necessary power and
authority under all applicable provisions of law to execute and deliver this
Agreement and the Ancillary Agreements and to carry out their provisions. All
corporate action on Laurus' part required for the lawful execution and delivery
of this Agreement and the Ancillary Agreements have been or will be taken prior
to the Closing Date. Upon their execution and delivery, this Agreement and the
Ancillary Agreements will be valid and binding obligations of Laurus,
enforceable in accordance with their terms, except (a) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application affecting enforcement of creditors' rights, and (b) as limited by
general principles of equity that restrict the availability of equitable and
legal remedies.
(b) Investment Representations. Laurus understands that the Securities are
being offered and sold pursuant to an exemption from registration contained in
the Securities Act based in part upon Laurus' representations contained in this
Agreement, including, without limitation, that Laurus is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act.
Laurus has received or has had full access to all the information it considers
necessary or appropriate to make an informed investment decision with respect to
the Note to be purchased by it under this Agreement and the Securities acquired
by it upon the conversion of the Note.
25
(c) Laurus Bears Economic Risk. Laurus has substantial experience in
evaluating and investing in private placement transactions of securities in
companies similar to Company so that it is capable of evaluating the merits and
risks of its investment in Company and has the capacity to protect its own
interests. Laurus must bear the economic risk of this investment until the
Securities are sold pursuant to (i) an effective registration statement under
the Securities Act, or (ii) an exemption from registration is available.
(d) Acquisition for Own Account. Laurus is acquiring the Securities for its
own account for investment only, and not as a nominee or agent and not with a
view towards or for resale in connection with their distribution.
(e) Laurus Can Protect Its Interest. Laurus represents that by reason of
its, or of its management's, business and financial experience, Laurus has the
capacity to evaluate the merits and risks of its investment in the Notes, and
the Securities and to protect its own interests in connection with the
transactions contemplated in this Agreement, and the Ancillary Agreements.
Further, Laurus is aware of no publication of any advertisement in connection
with the transactions contemplated in the Agreement or the Ancillary Agreements.
(f) Accredited Investor. Laurus represents that it is a qualified
institutional buyer within the meaning of Rule 144A under the Securities Act.
(g) Shorting. Neither Laurus nor any of its Affiliates or investment partners
has, will, or will cause any person or entity nor will it permit any Affiliate,
directly or indirectly to, engage in "short sales" of Company's Common Stock
directly related to Company's Common Stock as long as any Minimum Borrowing Note
shall be outstanding.
16. Power of Attorney. Company hereby appoints Laurus, or any other Person
whom Laurus may designate as Company's attorney, with power to, upon the
occurrence and during the continuance of an Event of Default: (i) endorse
Company's name on any checks, notes, acceptances, money orders, drafts or other
forms of payment or security that may come into Laurus' possession; (ii) sign
Company's name on any invoice or xxxx of lading relating to any Accounts, drafts
against Account Debtors, schedules and assignments of Accounts, notices of
assignment, financing statements and other public records, verifications of
Account and notices to or from Account Debtors; (iii) verify the validity,
amount or any other matter relating to any Account by mail, telephone, telegraph
or otherwise with Account Debtors; (iv) do all things necessary to carry out
this Agreement, any Ancillary Agreement and all related documents; and (v)
notify the post office authorities to change the address for delivery of
Company's mail to an address designated by Laurus, and to receive, open and
dispose of all mail addressed to Company. Company hereby ratifies and approves
all acts of the attorney. Neither Laurus, nor the attorney will be liable for
any acts or omissions or for any error of judgment or mistake of fact or law,
except for gross negligence or willful misconduct. This power, being coupled
with an interest, is irrevocable so long as Laurus has a security interest and
until the Obligations have been fully satisfied.
17. Term of Agreement. Laurus' agreement to make Loans and extend financial
accommodations under and in accordance with the terms of this Agreement or any
Ancillary Agreement shall continue in full force and effect until the expiration
of the Initial Term. At
26
Laurus' election following the occurrence of an Event of Default, Laurus may
terminate this Agreement. The termination of the Agreement shall not affect any
of Laurus' rights hereunder or any Ancillary Agreement and the provisions hereof
and thereof shall continue to be fully operative until all transactions entered
into, rights or interests created and the Obligations have been irrevocably
disposed of, concluded or liquidated. Notwithstanding the foregoing, Laurus
shall release its security interests at any time within ten (10) Business Days
of irrevocable payment to it of all Obligations, if Company shall have (i)
provided Laurus with an executed release of any and all claims which Company may
have or thereafter have under this Agreement and all Ancillary Agreements and
(ii) if prepayment is made by the Company pursuant to Section 2.5 of the Minimum
Borrowing Note prior to the expiration of the Initial Term, the Company shall
have paid to Laurus an early payment fee in an amount equal to five percent (5%)
of the Capital Availability Amount such fee being intended to compensate Laurus
for its costs and expenses incurred in initially approving this Agreement or
extending same. .
18. Termination of Lien. The Liens and rights granted to Laurus hereunder
and any Ancillary Agreements and the financing statements filed in connection
herewith or therewith shall continue in full force and effect, notwithstanding
the termination of this Agreement or the fact that Company's account may from
time to time be temporarily in a zero or credit position, until all of the
Obligations of Company have been paid or performed in full after the termination
of this Agreement. Laurus shall promptly (but in any event within ten (10)
Business Days send termination statements to Company, or to file them with any
filing office, at such time as this Agreement and the Ancillary Agreements shall
have been terminated in accordance with their terms and all Obligations paid in
full in immediately available funds.
19. Events of Default. The occurrence of any of the following shall
constitute an "Event of Default":
(a) failure to make payment of any of the Obligations when required
hereunder or under the Notes or any Ancillary Agreement, including, any payment
of principal, interest or other fees on the Notes; provided, however, that the
Company shall have three (3) Business Day to cure such failure to pay any
monetary amounts due.
(b) failure to pay any material taxes when due unless such taxes are being
contested in good faith by appropriate proceedings and with respect to which
adequate reserves have been provided on Company's books;
(c) failure to perform under, and/or committing any breach of, in any
material respect, any covenant, or other term or condition of this Agreement,
the Notes, or any Ancillary Agreement or any other agreement between Company and
Laurus, which failure or breach shall continue for a period of fifteen (15)
Business Days after the occurrence thereof;
(d) the occurrence of any material event of default (or similar term) under
any indebtedness in excess of $100,000 which Company is a party with third
parties;
(e) any representation, warranty or statement made by Company hereunder, in
any Ancillary Agreement, any certificate, statement or document delivered
pursuant to the terms hereof, or in connection with the transactions
contemplated by this Agreement should as of the
27
time such representation, warranty or statement was made, be false or misleading
in any material respect;
(f) an attachment or levy is made upon Company's assets having an aggregate
value in excess of $250,000 or a judgment is rendered against Company or
Company's property involving a liability of more than $250,000 which shall not
have been vacated, discharged, stayed or bonded pending appeal within thirty
(30) days from the entry thereof or for which Company is not fully insured
against loss other than any such attachment, levy or judgment arising out of any
litigation disclosed as of the date hereof in any Exchange Act Filing;
(g) any Lien created hereunder or under any Ancillary Agreement for any
reason ceases to be or is not a valid and perfected Lien having a first priority
interest;
(h) if Company shall (i) apply for, consent to or suffer to exist the
appointment of, or the taking of possession by, a receiver, custodian, trustee
or liquidator of itself or of all or a substantial part of its property, (ii)
make a general assignment for the benefit of creditors, (iii) commence a
voluntary case under the federal bankruptcy laws (as now or hereafter in
effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a petition
seeking to take advantage of any other law providing for the relief of debtors,
(vi) acquiesce to, or fail to have dismissed, within thirty (30) days, any
petition filed against it in any involuntary case under such bankruptcy laws, or
(vii) take any action for the purpose of effecting any of the foregoing;
(i) Company shall admit in writing its inability, or be generally unable to
pay its debts as they become due or cease operations of its present business;
(j) any Subsidiary of Company shall (i) apply for, consent to or suffer to
exist the appointment of, or the taking possession by, a receiver, custodian,
trustee or liquidator of itself or of all or a substantial part of its property,
(ii) admit in writing its inability, or be generally unable, to pay its debts as
they become due or cease operations of its present business, (iii) make a
general assignment for the benefit of creditors, (iv) commence a voluntary case
under the federal bankruptcy laws (as now or hereafter in effect), (v) be
adjudicated a bankrupt or insolvent, (vi) file a petition seeking to take
advantage of any other law providing for the relief of debtors, (vii) acquiesce
to, or fail to have dismissed, within thirty (30) days, any petition filed
against it in any involuntary case under such bankruptcy laws or (viii) take any
action for the purpose of effecting any of the foregoing if any of the foregoing
shall have, or could reasonably be expected to have a Material Adverse Effect;
(k) Company directly or indirectly sells, assigns, transfers, conveys, or
suffers or permits to occur any sale, assignment, transfer or conveyance of any
Collateral or any interest therein, except as permitted herein;
(l) the occurrence of a change in the controlling ownership of Company;
(m) the indictment of Company or any executive officer of Company under any
criminal statute, or commencement of criminal or civil proceeding against
Company or any executive officer of Company pursuant to which statute or
proceeding penalties or remedies sought or available include forfeiture of any
of the property of Company; or
28
(n) if an Event of Default shall occur under and as defined in any Note;.
(o) the Company shall breach any material term or provision of any
Ancillary Agreement which such breach is not cured within any applicable cure or
grace period; or
(p) if Company fails to timely deliver Common Stock to Laurus pursuant to
and in the form required this Agreement, the Minimum Borrowing Note and/or the
Warrants, and such failure to timely deliver Common Stock shall not be cured
within two (2) Business Days; or if Company is required to issue a replacement
Note, Laurus and Company shall fail to deliver such replacement Note within
seven (7) Business Days.
20. Remedies. Following the occurrence and during the continuance of an
Event of Default, Laurus shall have the right to demand repayment in full of all
Obligations, whether or not otherwise due. Until all Obligations have been fully
satisfied, Laurus shall retain its Lien in all Collateral. Laurus shall have, in
addition to all other rights provided herein and in each Ancillary Agreement,
the rights and remedies of a secured party under the UCC, and under other
applicable law, all other legal and equitable rights to which Laurus may be
entitled, including the right to take immediate possession of the Collateral, to
require Company to assemble the Collateral, at Company's expense, and to make it
available to Laurus at a place designated by Laurus which is reasonably
convenient to both parties and to enter any of the premises of Company or
wherever the Collateral shall be located, with or without force or process of
law, and to keep and store the same on said premises until sold (and if said
premises be the property of Company, Company agrees not to charge Laurus for
storage thereof), and the right to apply for the appointment of a receiver for
Company's property. Further, Laurus may, at any time or times after the
occurrence and during the continuance of an Event of Default, sell and deliver
all Collateral held by or for Laurus at public or private sale for cash, upon
credit or otherwise, at such prices and upon such terms as Laurus, in Laurus'
sole discretion, deems advisable or Laurus may otherwise recover upon the
Collateral in any commercially reasonable manner as Laurus, in its sole
discretion, deems advisable. The requirement of reasonable notice shall be met
if such notice is mailed postage prepaid to Company at Company's address as
shown in Laurus' records, at least ten (10) days before the time of the event of
which notice is being given. Laurus may be the purchaser at any sale, if it is
public The proceeds of sale shall be applied first to all costs and expenses of
sale, including attorneys' fees, and second to the payment (in whatever order
Laurus elects) of all Obligations. After the indefeasible payment and
satisfaction in full in cash of all of the Obligations, and after the payment by
Laurus of any other amount required by any provision of law, including Section
608(a)(1) of the Code (but only after Laurus has received what Laurus considers
reasonable proof of a subordinate party's security interest), the surplus, if
any, shall be paid to Company or its representatives or to whosoever may be
lawfully entitled to receive the same, or as a court of competent jurisdiction
may direct. Company shall remain liable to Laurus for any deficiency. In
addition, Company shall pay Laurus a liquidation fee ("Liquidation Fee") in the
amount of five percent (5%) of the actual amount collected in respect of each
Account outstanding at any time during a "liquidation period". For purposes
hereof, "liquidation period" means a period: (i) beginning on the earliest date
of (x) an event referred to in Section 19(i) or 19(j), or (y) the cessation of
Company's business; and (ii) ending on the date on which Laurus has actually
received all Obligations due and owing it under this Agreement and the Ancillary
Agreements. The Liquidation Fee shall be paid on the date on which Laurus
collects the applicable Account by deduction from the proceeds thereof.. Company
and Laurus acknowledge
29
that the actual damages that would be incurred by Laurus after the occurrence of
an Event of Default would be difficult to quantify and that Company and Laurus
have agreed that the fees and obligations set forth in this Section and in this
Agreement would constitute fair and appropriate liquidated damages in the event
of any such termination.
21. Waivers. To the full extent permitted by applicable law, Company waives
(a) presentment, demand and protest, and notice of presentment, dishonor, intent
to accelerate, acceleration, protest, default, nonpayment, maturity, release,
compromise, settlement, extension or renewal of any or all of this Agreement and
the Ancillary Agreements or any other Collateral at any time held by Laurus on
which Company may in any way be liable, and hereby ratifies and confirms
whatever Laurus may do in this regard; (b) all rights to notice and a hearing
prior to Laurus' taking possession or control of, or to Laurus' replevy,
attachment or levy upon, any Collateral or any bond or security that might be
required by any court prior to allowing Laurus to exercise any of its remedies;
and (c) the benefit of all valuation, appraisal and exemption laws. Company
acknowledges that it has been advised by counsel of its choices and decisions
with respect to this Agreement, the Ancillary Agreements and the transactions
evidenced hereby and thereby.
22. Expenses. Company shall pay all of Laurus' reasonable out-of-pocket
costs and expenses, including reasonable fees and disbursements of in-house or
outside counsel and appraisers, in connection with the preparation, execution
and delivery of this Agreement and the Ancillary Agreements, and in connection
with the prosecution or defense of any action, contest, dispute, suit or
proceeding concerning any matter in any way arising out of, related to or
connected with this Agreement or any Ancillary Agreement; provided, however,
that Company shall not be required to pay Laurus' legal fees in excess of
$22,000 or expenses incurred by Laurus in performing due diligence on Company in
excess of $17,500. Company shall also pay all of Laurus' reasonable fees,
charges, out-of-pocket costs and expenses, including fees and disbursements of
counsel and appraisers, in connection with (a) the preparation, execution and
delivery of any waiver, any amendment thereto or consent proposed or executed in
connection with the transactions contemplated by this Agreement or the Ancillary
Agreements, (b) Laurus' obtaining performance of the Obligations under this
Agreement and any Ancillary Agreements, including, but not limited to, the
enforcement or defense of Laurus' security interests, assignments of rights and
Liens hereunder as valid perfected security interests, (c) any attempt to
inspect, verify, protect, collect, sell, liquidate or otherwise dispose of any
Collateral in accordance with the terms of this Agreement, (d) any consultations
in connection with any of the foregoing. Company shall also pay Laurus'
customary bank charges for all bank services (including wire transfers)
performed or caused to be performed by Laurus for Company at Company's request
or in connection with Company's loan account with Laurus. All such costs and
expenses together with all filing, recording and search fees, taxes and interest
payable by Company to Laurus shall be payable on demand and shall be secured by
the Collateral. If any tax by any Governmental Authority is or may be imposed on
or as a result of any transaction (other than taxes imposed on Laurus') between
Company and Laurus which Laurus is or may be required to withhold or pay,
Company agrees to indemnify and hold Laurus harmless in respect of such taxes,
and Company will repay to Laurus the amount of any such taxes which shall be
charged to Company's account; and until Company shall furnish Laurus with
indemnity therefor (or supply Laurus with evidence satisfactory to it that due
provision for the payment thereof has
30
been made), Laurus may hold without interest any balance standing to Company's
credit and Laurus shall retain its Liens in any and all Collateral.
23. Assignment By Laurus. Laurus may assign any or all of the Obligations
together with any or all of the security therefor to any Person that is neither
a competitor of Company nor a secured creditor of the Company, and any such
transferee shall agree succeed to all of Laurus' rights and obligations with
respect thereto, provided however, that no more than three (3) such assignments
may be made by Laurus and no assignee shall have any further right of
assignments. Upon such transfer, Laurus shall be released from all
responsibility for the Collateral to the extent same is assigned to any
transferee.
24. No Waiver; Cumulative Remedies. Failure by Laurus to exercise any
right, remedy or option under this Agreement, any Ancillary Agreement or any
supplement hereto or thereto or any other agreement between Company and Laurus
or delay by Laurus in exercising the same, will not operate as a waiver; no
waiver by Laurus will be effective unless it is in writing and then only to the
extent specifically stated. Laurus' rights and remedies under this Agreement and
the Ancillary Agreements will be cumulative and not exclusive of any other right
or remedy which Laurus may have.
25. Application of Payments. Company irrevocably waives the right to direct
the application of any and all payments at any time or times hereafter received
by Laurus from or on Company's behalf in accordance with and subject to the
terms and conditions of this Agreement and Company hereby irrevocably agrees
that Laurus shall have the continuing exclusive right to apply and reapply any
and all payments received at any time or times hereafter against the Obligations
hereunder in such manner as Laurus may deem advisable and in accordance with and
subject to the terms and conditions of this Agreement..
26. Indemnity. Company agrees to indemnify and hold Laurus, and its
respective affiliates, employees, attorneys and agents (each, an "Indemnified
Person"), harmless from and against any and all suits, actions, proceedings,
claims, damages, losses, liabilities and expenses of any kind or nature
whatsoever (including attorneys' fees and disbursements and other costs of
investigation or defense, including those incurred upon any appeal) which may be
instituted or asserted against or incurred by any such Indemnified Person as the
result of credit having been extended, suspended or terminated under this
Agreement or any of the Ancillary Agreements or with respect to the execution,
delivery, enforcement, performance and administration of, or in any other way
arising out of or relating to, this Agreement, the Ancillary Agreements or any
other documents or transactions contemplated by or referred to herein or therein
and any actions or failures to act with respect to any of the foregoing, except
to the extent that any such indemnified liability is finally determined by a
court of competent jurisdiction to have resulted solely from such Indemnified
Person's gross negligence or willful misconduct. NO INDEMNIFIED PERSON SHALL BE
RESPONSIBLE OR LIABLE TO COMPANY OR TO ANY OTHER PARTY OR TO ANY SUCCESSOR,
ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS
DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR
CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN
EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR ANY ANCILLARY
AGREEMENT OR AS A RESULT OF ANY OTHER
31
TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER. COMPANY SHALL NOT BE
RESPONSIBLE OR LIABLE TO ANY INDEMNIFIED PERSON OR TO ANY OTHER PARTY OR TO ANY
SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING
CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY,
CONSEQUENTIAL OR SPECIAL DAMAGES WHETHER OR NOT SUCH DAMAGES WERE REASONABLY
FORESEEABLE.
27. Revival. Company further agrees that to the extent Company makes a
payment or payments to Laurus, which payment or payments or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside
and/or required to be repaid to a trustee, receiver or any other party under any
bankruptcy act, state or federal law, common law or equitable cause, then, to
the extent of such payment or repayment, the obligation or part thereof intended
to be satisfied shall be revived and continued in full force and effect as if
said payment had not been made.
28. Notices. Any notice or request hereunder may be given to Company or
Laurus at the respective addresses set forth below or as may hereafter be
specified in a notice designated as a change of address under this Section. Any
notice or request hereunder shall be given by registered or certified mail,
return receipt requested, hand delivery, overnight mail or telecopy (confirmed
by mail). Notices and requests shall be, in the case of those by hand delivery,
deemed to have been given when delivered to any officer of the party to whom it
is addressed, in the case of those by mail or overnight mail, deemed to have
been given three (3) business days after the date when deposited in the mail or
with a nationally recognized overnight mail carrier , and, in the case of a
telecopy, when confirmed.
Notices shall be provided as follows:
If to Laurus: Laurus Master Fund, Ltd.
c/o Laurus Capital Management, LLC
000 Xxxxx Xxxxxx 00xx Xx.
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxx X. Xxxxxx, Esq.
Telephone: (000) 000-0000
Telecopier: (000) 000-0000
32
If to Company: XXX.Xxx, Inc.
000 Xxxx Xxxxx Xxxxx
Xxx Xxxxx, Xxxxxxxxxxx 00000
Attention: Chief Financial Officer
Telephone: (000) 000-0000
Telecopier: (000) 000-0000
With a copy to: Xxxxx, Xxxxxxx & Xxxxxxxxx, LLP
000 Xxxx Xxxxxx
Xxxxxx. XX 00000
Attention: Xxxx X. Xxxxxxx, Esq.
Telephone: (000) 000-0000
Telecopier: (000) 000-0000
or such other address as may be designated in writing hereafter in accordance
with this Section 28 by such Person.
29. Governing Law, Jurisdiction and Waiver of Jury Trial. (a) THIS
AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE.
(b) COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS
LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE
JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN COMPANY AND
LAURUS PERTAINING TO THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS OR TO ANY
MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OF THE ANCILLARY
AGREEMENTS; PROVIDED, THAT LAURUS AND COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM
THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF
NEW YORK, STATE OF NEW YORK; AND FURTHER PROVIDED, THAT NOTHING IN THIS
AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LAURUS FROM BRINGING SUIT OR
TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS,
TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO
ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LAURUS. COMPANY EXPRESSLY
SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT
COMMENCED IN ANY SUCH COURT, AND COMPANY HEREBY WAIVES ANY OBJECTION WHICH IT
MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON
CONVENIENS. COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND
OTHER PROCESS ISSUED IN ANY SUCH ACTION
33
OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY
BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO COMPANY AT THE ADDRESS SET
FORTH IN SECTION 28 AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE
EARLIER OF COMPANY'S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN
THE U.S. MAILS, PROPER POSTAGE PREPAID.
(c) THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING
SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS
OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS
TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY
DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN LAURUS AND
COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, ANY
ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED THERETO.
30. Limitation of Liability. Company acknowledges and understands that in
order to assure repayment of the Obligations hereunder Laurus may be required to
exercise any and all of Laurus' rights and remedies hereunder and agrees that,
except as limited by applicable law, neither Laurus nor any of Laurus' agents
shall be liable for acts taken or omissions made in connection herewith or
therewith except for actual bad faith or as a result of the gross negligence of
Laurus.
31. Entire Understanding. This Agreement and the Ancillary Agreements
contain the entire understanding between Company and Laurus as to the subject
matter hereof and thereof and any promises, representations, warranties or
guarantees not herein contained shall have no force and effect unless in
writing, signed by Company's and Laurus' respective officers. Neither this
Agreement, the Ancillary Agreements, nor any portion or provisions thereof may
be changed, modified, amended, waived, supplemented, discharged, cancelled or
terminated orally or by any course of dealing, or in any manner other than by an
agreement in writing, signed by the party to be charged.
32. Severability. Wherever possible each provision of this Agreement or the
Ancillary Agreements shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement or the
Ancillary Agreements shall be prohibited by or invalid under applicable law such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
thereof.
33. Captions. All captions are and shall be without substantive meaning or
content of any kind whatsoever.
34. Counterparts; Telecopier Signatures. This Agreement may be executed in
one or more counterparts, each of which shall constitute an original and all of
which taken together
34
shall constitute one and the same agreement. Any signature delivered by a party
via telecopier transmission shall be deemed to be any original signature hereto.
35. Construction. The parties acknowledge that each party and its counsel
have reviewed this Agreement and that the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party shall
not be employed in the interpretation of this Agreement or any amendments,
schedules or exhibits thereto.
36. Publicity. Without the prior approval of the other party hereto, which
such approval shall not be unreasonably withheld, neither Company nor Laurus
shall issue press releases relating to the financial arrangement entered into by
and between Company and Laurus, including, without limitation, announcements
which are commonly known as tombstones, except as required by applicable law.
37. Legends. The Securities shall bear legends as follows;
(a) The Notes shall bear substantially the following legend:
"THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE, STATE SECURITIES LAWS. THIS NOTE AND THE COMMON STOCK ISSUABLE
UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO
THIS NOTE OR SUCH SHARES UNDER SAID ACT AND APPLICABLE STATE SECURITIES
LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO XXX.XXX, INC. THAT
SUCH REGISTRATION IS NOT REQUIRED."
(b) Any shares of Common Stock issued pursuant to conversion of the Notes
or exercise of the Warrants, shall bear a legend which shall be in substantially
the following form until such legend may be removed in accordance with Section
13(m) of this Agreement :
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES
LAWS. THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
SUCH SECURITIES ACT AND APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO XXX.XXX, INC. THAT SUCH REGISTRATION IS NOT
REQUIRED."
35
(c) The Warrants shall bear substantially the following legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES
ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS WARRANT OR THE UNDERLYING SHARES OF COMMON STOCK UNDER
SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO XXX.XXX, INC. THAT SUCH REGISTRATION IS NOT
REQUIRED."
[Balance of page intentionally left blank; signature page follows.]
36
IN WITNESS WHEREOF, the parties have executed this Security Agreement as of
the date first written above.
XXX.XXX, INC.
By: /s/ Xxxxxx X. XxXxxxxx
----------------------------
Name: Xxxxxx X. XxXxxxxx
--------------------------
Title: Chief Financial Officer
-------------------------
LAURUS MASTER FUND, LTD.
By: /s/ Xxxxx Grin
----------------------------
Name: Xxxxx Grin
--------------------------
Title: Director
-------------------------
37
Annex A - Definitions
---------------------
"Account Debtor" means any Person who is or may be obligated with respect
to, or on account of, an Account.
"Accountants" has the meaning given to such term in Section 11(a).
"Accounts" means (a) all trade accounts receivable, and other book debts
and other forms of obligations associated with all trade accounts receivable
(other than forms of obligations evidenced by Chattel Paper or Instruments
relating thereto) (including any right to receive payment for the sale of a
product owned by the Company or the provision of services by the Company) now or
hereafter owned by the Company; and (b) all collateral security of any kind
given by any Account Debtor or any other Person with respect to any of the
foregoing.
"Accounts Availability" means ninety percent (90%) of the net face amount
of Eligible Accounts based on Accounts of Company.
"Affiliate" of any Person means (a) any Person (other than a Subsidiary)
which, directly or indirectly, is in control of, is controlled by, or is under
common control with such Person, (b) any Person who is a director or officer (i)
of such Person, (ii) of any Subsidiary of such Person or (iii) of any Person
described in clause (a) above. For the purposes of this definition, control of a
Person shall mean the power (direct or indirect) to direct or cause the
direction of the management and policies of such Person whether by contract or
otherwise.
"Ancillary Agreements" means, the Notes, the Warrants, the Registration
Rights Agreements, any Security Document and all other agreements, instruments,
documents, mortgages, pledges, powers of attorney, consents, assignments,
contracts, notices, security agreements, trust agreements and guarantees whether
heretofore, concurrently, or hereafter executed by or on behalf of Company or
any other Person or delivered to Laurus, relating to this Agreement or to the
transactions contemplated by this Agreement or otherwise relating to the
relationship between Company and Laurus.
"Books and Records" means all books, records, board minutes, contracts,
licenses, insurance policies, environmental audits, business plans, files,
computer files, computer discs and other data and software storage and media
devices, accounting books and records, financial statements (actual and pro
forma), filings with Governmental Authorities and any and all records and
instruments relating to the Collateral or otherwise necessary or helpful in the
collection thereof or the realization thereupon.
"Business Day" means a day on which Laurus is open for business and that is
not a Saturday, a Sunday or other day on which banks are required or permitted
to be closed in the State of New York.
"Capital Availability Amount" means $5,000,000.
"Charter" shall have the meaning given such term in Section 12(c)(iv).
38
"Chattel Paper" means all "chattel paper," as such term is defined in the
UCC, including "electronic chattel paper" (as such term is defined in the UCC),
now owned or hereafter acquired by any Person.
"Closing Date" means the date on which Company shall first receive proceeds
of the initial Loans .
"Collateral" means all of Company's Accounts and whether now owned or
hereafter acquired, or in which it now has or at any time in the future may
acquire any right, title or interests including all of the following property in
which it now has or at any time in the future may acquire any right, title or
interest:
(a) the Deposit Account maintained at the Lockbox Bank that is subject to
the Control Agreement, all funds on deposit therein;
(b) all Books and Records relating to the Accounts ;
all Supporting Obligations including letters of credit and guarantees issued in
support of Accounts and the Chattel Paper and Investment Property relating
thereto, if any ; and
(c) all Proceeds of all or any of the foregoing, tort claims and all claims
and other rights to payment including insurance claims against third parties for
loss of, damage to, or destruction of, and (ii) payments due or to become due
and Proceeds payable under Accounts .
"Common Stock" the shares of stock representing the Company's common equity
interests.
"Contract Rate" shall have the meaning given to such term in the Notes.
"Control Agreement" means the Account Control Agreement among Laurus,
Company and Bank of America, dated on or about the date hereof.
"Default" means any act or event which, with the giving of notice or
passage of time or both, would constitute an Event of Default.
"Default Rate" has the meaning given to such term in Section 5(a)(iii).
"Deposit Accounts" means all "deposit accounts" as such term is defined in
the UCC, now or hereafter held in the name of any Person, including, without
limitation, the Lockbox Account.
"Documents" means all "documents", as such term is defined in the UCC, now
owned or hereafter acquired by any Person, wherever located.
"Eligible Accounts" means and includes each Account which conforms to the
following criteria: (a) shipment of the merchandise or the rendition of services
has been or will be completed within thirty-one (31) days; (b) no return,
rejection or repossession of the merchandise has occurred, except for service
credits provided to Account Debtors in the
39
ordinary course of business; (c) merchandise or services shall not have been
rejected or disputed by the Account Debtor and there shall not have been
asserted any offset, defense or counterclaim except for service credits provided
to Account Debtors in the ordinary course of business; (d) continues to be in
full conformity with the representations and warranties made by Company to
Laurus with respect thereto; (e) Laurus is, and continues to be, satisfied with
the credit standing of the Account Debtor in relation to the amount of credit
extended; (f) there are no facts existing or threatened which are likely to
result in any Material Adverse Effect on the Collateral ; (g) is documented by
an invoice in a form approved by Laurus and shall not be unpaid more than ninety
(90) days from invoice date; (h) not more than twenty-five percent (25%) of the
unpaid amount of invoices due from such Account Debtor remains unpaid more than
ninety (90) days from invoice date; (i) is not evidenced by chattel paper or an
instrument of any kind with respect to or in payment of the Account unless such
instrument is duly endorsed to and in possession of Laurus or represents a check
in payment of a Account; (j) the Account Debtor is located in the United States;
provided, however, Laurus may, from time to time, in the exercise of its sole
discretion and based upon satisfaction of certain conditions to be determined at
such time by Laurus, deem certain Accounts as Eligible Accounts notwithstanding
that such Account is due from an Account Debtor located outside of the United
States; (k) Laurus has a perfected Lien in such Account and such Account is not
subject to any Lien other than Permitted Liens; (l) does not arise out of
transactions with any employee, officer, director, stockholder or Affiliate of
Company; (m) is payable to Company; (n) does not arise out of a xxxx and hold
sale prior to shipment and does not arise out of a sale to any Person to which
Company is indebted; (o) is net of any returns, discounts, claims, credits and
allowances, except for service credits provided to Account Debtors in the
ordinary course of business; (p) if the Account arises out of contracts between
Company and the United States, any state, or any department, agency or
instrumentality of any of them, Company has so notified Laurus, in writing,
prior to the creation of such Account, and there has been compliance with any
governmental notice or approval requirements, including compliance with the
Federal Assignment of Claims Act; (q) is a good and valid account representing
an undisputed bona fide indebtedness incurred by the Account Debtor therein
named, for a fixed sum as set forth in the invoice relating thereto with respect
to an unconditional sale and delivery upon the stated terms of goods sold by
Company or work, labor and/or services rendered by Company; (r) does not arise
out of progress xxxxxxxx prior to completion of the order; (s) the total unpaid
Accounts from such Account Debtor does not exceed twenty-five percent (25%) of
all Eligible Accounts; (t) Company's right to payment is absolute and not
contingent upon the fulfillment of any condition whatsoever other than delivery
of services up to thirty-one days; (u) Company is able to bring suit or
arbitration and enforce its remedies against the Account Debtor through judicial
process; (v) does not represent interest payments, late or finance charges owing
to Company and (w) does not represent an Account of Vector Internet Services,
Inc. a wholly-owned Subsidiary of the Company. In the event Company requests
that Laurus include within Eligible Accounts certain Accounts of one or more of
Company's acquisition targets, Laurus shall at the time of such request consider
such inclusion, but any such inclusion shall be at the sole option of Laurus and
shall at all times be subject to the execution and delivery to Laurus of all
such documentation (including, without limitation, guaranty and security
documentation) as Laurus may require in its sole discretion.
40
"Event of Default" means the occurrence of any of the events set forth in
Section 19.
"Excepted Issuances" shall have the meaning given such term in Section
13(s).
"Exchange Act" means the Securities Exchange Act of
1934, as amended.
"Exchange Act Filings" shall have the meaning given to such term in Section
12.
"Exclusion Period" shall have the meaning given such term in Section 13(s).
"Fixed Conversion Price" has the meaning given such term in the Minimum
Borrowing Note.
"Formula Amount" has the meaning set forth in Section 2(a)(i).
"GAAP" means generally accepted accounting principles, practices and
procedures in effect from time to time in the United States of America.
"Governmental Authority" means any nation or government, any state or other
political subdivision thereof, and any agency, department or other entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"Hazardous Materials" shall have the meaning given such term in Section
12(q).
"Indemnified Person" shall have the meaning given to such term in Section
26.
"Initial Term" means the Closing Date through the close of business on the
day immediately preceding the second anniversary of the Closing Date, subject to
acceleration at the option of Laurus upon the occurrence of an Event of Default
in accordance with the terms hereunder or other termination hereunder.
"Instruments" means all "instruments", as such term is defined in the UCC,
now owned or hereafter acquired by any Person, wherever located, including all
certificated securities and all promissory notes and other evidences of
indebtedness, other than instruments that constitute, or are a part of a group
of writings that constitute, Chattel Paper.
"Investment Property" means all "investment property", as such term is
defined in the UCC, now owned or hereafter acquired by any Person, wherever
located.
"Lien" means any mortgage, security deed, deed of trust, pledge,
hypothecation, assignment, security interest, lien (whether statutory or
otherwise), charge, claim or encumbrance, or preference, priority or other
security agreement or preferential arrangement held or asserted in respect of
any asset of any kind or nature whatsoever including any conditional sale or
other title retention agreement, any lease having substantially the same
economic effect as any of the foregoing, and the filing of, or agreement to
give, any financing statement under the UCC or comparable law of any
jurisdiction.
41
"Loans" shall have the meaning set forth in Section 2(a)(i) and shall
include all other extensions of credit hereunder and under any Ancillary
Agreement.
"Material Adverse Effect" means a material adverse effect on (a) on the
business, assets, liabilities, condition (financial or otherwise), properties,
operations or prospects of Company, (b) Company's ability to pay or perform the
Obligations in accordance with the terms hereof or any Ancillary Agreement, or
(c) the value of the Collateral, the Liens on the Collateral or the priority of
any such Lien.
"Maximum Legal Rate" shall have the meaning given to such term in Section
5(a)(iv).
"Minimum Borrowing Amount" means $4,250,000, which such aggregate amount
shall be evidenced by Minimum Borrowing Note.
"Minimum Borrowing Note" shall mean the Secured Convertible Minimum
Borrowing Note, made by Company in favor of Laurus to evidence the Minimum
Borrowing Amount.
"Note Shares" shall have the meaning given such term in Section 12(a).
"Notes" means each of the Minimum Borrowing Note and the Revolving Note
made by Company in favor of Laurus in connection with the transactions
contemplated hereby, as the same may be amended, modified and supplemented from
time to time, as applicable.
"Obligations" means all Loans, all advances, debts, liabilities,
obligations, covenants and duties owing by Company to Laurus (or any corporation
that directly or indirectly controls or is controlled by or is under common
control with Laurus) of every kind and description (whether or not evidenced by
any note or other instrument and whether or not for the payment of money or the
performance or non-performance of any act), direct or indirect, absolute or
contingent, due or to become due, contractual or tortious, liquidated or
unliquidated, whether existing by operation of law or otherwise now existing or
hereafter arising including any debt, liability or obligation owing from Company
to others which Laurus may have obtained by assignment or otherwise and further
including all interest (including interest accruing at the then applicable rate
provided in this Agreement after the maturity of the Loans and interest accruing
at the then applicable rate provided in this Agreement after the filing of any
petition in bankruptcy, or the commencement of any insolvency, reorganization or
like proceeding, whether or not a claim for post-filing or post-petition
interest is allowed in such proceeding), charges or any other payments Company
is required to make by law or otherwise arising under or as a result of this
Agreement and the Ancillary Agreements, together with all reasonable expenses
and reasonable attorneys' fees chargeable to Company's account or incurred by
Laurus in connection with Company's account whether provided for herein or in
any Ancillary Agreement.
"Permitted Liens" means (a) Liens of carriers, warehousemen, artisans,
bailees, mechanics and materialmen incurred in the ordinary course of business
securing sums not overdue; (b) Liens incurred in the ordinary course of business
in connection with workmen's compensation, unemployment insurance or other forms
of governmental insurance or benefits, relating to employees, securing sums (i)
not overdue or (ii) being diligently contested in good faith provided that
adequate reserves with respect thereto are maintained on the books of the
applicable Company in conformity with GAAP; (c) Liens in favor of Laurus; (d)
Liens for taxes (i) not yet due or (ii) being diligently contested in good
42
faith by appropriate proceedings, provided that adequate reserves with respect
thereto are maintained on the books of the applicable Company in conformity with
GAAP provided, that, the Lien shall have no effect on the priority of Liens in
favor of Laurus or the value of the assets in which Laurus has a Lien; (e)
Purchase Money Liens securing Purchase Money Indebtedness to the extent
permitted in this Agreement and (f) Liens specified on Schedule 2 hereto.
"Person" means any individual, sole proprietorship, partnership, limited
liability partnership, joint venture, trust, unincorporated organization,
association, corporation, limited liability company, institution, public benefit
corporation, entity or government (whether federal, state, county, city,
municipal or otherwise, including any instrumentality, division, agency, body or
department thereof), and shall include such Person's successors and assigns.
"Prime Rate" means the "prime rate" published in The Wall Street Journal
from time to time. The Prime Rate shall be increased or decreased as the case
may be for each increase or decrease in the Prime Rate in an amount equal to
such increase or decrease in the Prime Rate; each change to be effective as of
the day of the change in such rate.
"Principal Market" means the OTC Bulletin Board, NASDAQ SmallCap Market,
NASDAQ National Market System, American Stock Exchange, or New York Stock
Exchange (whichever of the foregoing is at the time the principal trading
exchange or market for the Common Stock), or any securities exchange or other
securities market on which the Common Stock is then being listed or traded.
"Proceeds" means "proceeds", as such term is defined in the UCC and, in any
event, shall include: (a) to the extent of the value of the Collateral and to
the extent payable to the Company or Laurus and all proceeds of any insurance,
indemnity, warranty or guaranty payable to Company or any other Person from time
to time with respect to any Collateral; (b) any and all payments (in any form
whatsoever) made or due and payable to Company from time to time in connection
with any requisition, confiscation, condemnation, seizure or forfeiture of any
Collateral by any governmental body, governmental authority, bureau or agency
(or any person acting under color of governmental authority); (c)) to the extent
of the value of the Collateral any recoveries by Company against third parties
with respect to any litigation or dispute concerning any Collateral, including
claims arising out of the loss or nonconformity of, interference with the use
of, defects in, or infringement of rights in, or damage to, Collateral; (d) all
amounts collected on, or distributed on account of, other Collateral, including
dividends, interest, distributions and Instruments with respect to Investment
Property and pledged Stock; and (e) any and all other amounts , rights to
payment or other property acquired upon the sale, lease, license, exchange or
other disposition of Collateral and all rights arising out of Collateral.
"Purchase Money Indebtedness" means (a) any indebtedness incurred for the
payment of all or any part of the purchase price of any fixed asset, including
indebtedness under capitalized leases, (b) any indebtedness incurred for the
sole purpose of financing or refinancing all or any part of the purchase price
of any fixed asset, and (c) any renewals, extensions or
43
refinancings thereof (but not any increases in the principal amounts thereof
outstanding at that time).
"Purchase Money Lien" means any Lien upon any fixed assets that secures the
Purchase Money Indebtedness related thereto but only if such Lien shall at all
times be confined solely to the asset the purchase price of which was financed
or refinanced through the incurrence of the Purchase Money Indebtedness secured
by such Lien and only if such Lien secures only such Purchase Money
Indebtedness.
"Receivables Purchase" shall have the meaning given such term in Section
2(b).
"Registration Rights Agreements" means that certain registration rights
agreement entered into between Company and Laurus on the date hereof, as
amended, modified and supplemented from time to time.
"Revolving Note" means that secured revolving note made by Company in favor
of Laurus in the aggregate principal amount of Seven Hundred Fifty Thousand
Dollars ($750,000 ).
"SEC" shall mean the Securities and Exchange Commission.
"SEC Reports" shall have the meaning provided such term in Section 12(u).
"Securities" means the Notes and the Warrants being issued by Company to
Laurus pursuant to this Agreement and the Ancillary Agreements and the shares of
the common stock of Company which may be issued pursuant to conversion of the
Minimum Borrowing Note in whole or in part or exercise of such Warrants.
"Securities Act" shall have the meaning given such term in Section 12(r).
"Security Documents" means all security agreements, mortgages, cash
collateral deposit letters, pledges and other agreements which are executed by
the Company or any of its Subsidiaries in favor of Laurus.
"Stock" means all certificated and uncertificated shares, options,
warrants, membership interests, general or limited partnership interests,
participation or other equivalents (regardless of how designated) of or in a
corporation, partnership, limited liability company or equivalent entity whether
voting or nonvoting, including common stock, preferred stock, or any other
"equity security" (as such term is defined in Rule 3a11-1 of the General Rules
and Regulations promulgated by the SEC under the Securities Exchange Act of
1934).
"Stockholder Approval" shall have the meaning given such term in Section
13(u).
"Subsidiary" of any Person means (i) a corporation or other entity whose
shares of stock or other ownership interests having ordinary voting power (other
than stock or other ownership interests having such power only by reason of the
happening of a contingency) to
44
elect a majority of the directors of such corporation, or other persons or
entities performing similar functions for such person or entity, are owned,
directly or indirectly, by such person or entity or (ii) a corporation or other
entity in which such person or entity owns, directly or indirectly, more than
50% of the equity interests at such time.
"Supporting Obligations" means all "supporting obligations" as such term is
defined in the UCC.
"Term" means, as applicable, the Initial Term and any extension thereof .
"UCC" means the Uniform Commercial Code as the same may, from time be in
effect in the State of New York; provided, that in the event that, by reason of
mandatory provisions of law, any or all of the attachment, perfection or
priority of, or remedies with respect to, Laurus' Lien on any Collateral is
governed by the Uniform Commercial Code as in effect in a jurisdiction other
than the State of New York, the term "UCC" shall mean the Uniform Commercial
Code as in effect in such other jurisdiction for purposes of the provisions of
this Agreement relating to such attachment, perfection, priority or remedies and
for purposes of definitions related to such provisions; provided further, that
to the extent that UCC is used to define any term herein or in any Ancillary
Agreement and such term is defined differently in different Articles or
Divisions of the UCC, the definition of such term contained in The Uniform
Commercial Code, Article 9, of Chapter 84 of the Laws of 2001 shall govern.
"Warrant Shares" shall have the meaning given such term in Section 12(a).
"Warrants" has the meaning set forth in the Registration Rights Agreements.
45
Exhibit A
---------
Borrowing Base Certificate
--------------------------
--------------------------------------------------------------------------------
DATE: CERTIFICATE NUMBER:
--------------------------------------------------------------------------------
BORROWER NAME: XXX.XXX, INC.
--------------------------------------------------------------------------------
1. Period end Accounts as of: ____________________ $
-----------
Ineligible Accounts as of: ____________________
$
a) Past Due accounts (> 90 days)
----------------------
b) Cross-age (>50% past due) $
----------------------
----------------------
c) Foreign Receivables $
----------------------
d) Government Receivables $
----------------------
e) Contras $
----------------------
f) Inactive Customers $
----------------------
----------------------
----------------------
2. Total ineligibles $
-----------
3. Eligible Accounts (Line 1 minus Line 2) $
-----------
4. Eligible Accounts advance rate (90% )
5. Accounts Availability Subtotal (Line 3 multiplied by Line 4) $
-----------
6. Dilution Reserve
7. Accounts Availability Total (Line 5 Minus Line 6) $
-----------
8. Outstanding Loan Balance $
-----------
9. Net Borrowing Availability (Line 7 minus Line 8) $
-----------
The undersigned hereby certifies that all of the foregoing information regarding
the Eligible Accounts is true and correct on the date hereof and all such
Accounts listed as Eligible Accounts are Eligible Accounts within the meaning
given such term in the Security Agreement dated _____, 2004 between Borrower and
Laurus Master Fund, Ltd.
XXX.XXX, INC.
By: _____________________________
Name: _______________________
Title: ______________________
46
LAURUS MASTER FUND, LTD.
and
XXX.XXX, INC.,
Dated: August 31, 2004
TABLE OF CONTENTS
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PAGE
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1. (a) General Definitions...................................................1
(b) Accounting Terms......................................................1
(c) Other Terms...........................................................1
(d) Rules of Construction.................................................1
2. Credit Advances...........................................................2
3. Repayment of the Loans....................................................3
4. Procedure for Loans.......................................................3
5. Interest and Payments.....................................................3
(a) Interest..............................................................3
(b) Payments..............................................................3
6. Security Interest.........................................................3
7. Representations, Warranties and Covenants Concerning the Collateral.......3
8. Payment of Accounts.......................................................3
9. Collection and Maintenance of Collateral..................................3
10. Inspections and Appraisals................................................3
11. Financial Reporting.......................................................3
12. Additional Representations and Warranties.................................3
13. Covenants. ..............................................................3
14. Further Assurances........................................................3
15. Power of Attorney.........................................................3
16. Term of Agreement.........................................................3
17. Termination of Lien.......................................................3
18. Events of Default.........................................................3
19. Remedies..................................................................3
i
20. Waivers...................................................................3
21. Expenses..................................................................3
22. Assignment By Laurus......................................................3
23. No Waiver; Cumulative Remedies............................................3
24. Application of Payments...................................................3
25. Indemnity.................................................................3
26. Revival...................................................................3
27. Notices...................................................................3
28. Governing Law, Jurisdiction and Waiver of Jury............................3
29. Limitation of Liability...................................................3
30. Entire Understanding......................................................3
31. Severability..............................................................3
32. Captions..................................................................3
33. Counterparts; Telecopier Signatures.......................................3
34. Construction..............................................................3
35. Publicity.................................................................3
LIST OF EXHIBITS
Exhibit A-Borrowing Base Certificate
ii
