SECURITY AGREEMENT LAURUS MASTER FUND, LTD. DIGITAL RECORDERS, INC. TWINVISION OF NORTH AMERICA, INC. DIGITAL AUDIO CORPORATION and ROBINSON-TURNEY INTERNATIONAL, INC. Dated: March 15, 2006
EXHIBIT
10.2
LAURUS MASTER FUND, LTD.
DIGITAL RECORDERS, INC.
TWINVISION OF NORTH AMERICA, INC.
DIGITAL AUDIO CORPORATION
and
XXXXXXXX-XXXXXX INTERNATIONAL, INC.
Dated: March 15, 2006
TABLE OF CONTENTS
| Page | ||||||
| 1. | General Definitions and Terms; Rules of Construction |
1 | ||||
| 2. | Loan Facility |
2 | ||||
| 3. | Repayment of the Loans |
3 | ||||
| 4. | Procedure for Loans |
4 | ||||
| 5. | Interest and Payments |
4 | ||||
| 6. | Security Interest |
5 | ||||
| 7. | Representations, Warranties and Covenants Concerning the Collateral |
6 | ||||
| 8. | Payment of Accounts |
9 | ||||
| 9. | Collection and Maintenance of Collateral |
9 | ||||
| 10. | Inspections and Appraisals |
10 | ||||
| 11. | Financial Reporting |
10 | ||||
| 12. | Additional Representations and Warranties |
11 | ||||
| 13. | Covenants |
22 | ||||
| 14. | Further Assurances |
28 | ||||
| 15. | Representations, Warranties and Covenants of Laurus |
28 | ||||
| 16. | Power of Attorney |
30 | ||||
| 17. | Term of Agreement |
31 | ||||
| 18. | Xxxxxxxxxxx xx Xxxx |
00 | ||||
| 00. | Events of Xxxxxxx |
00 | ||||
| 00. | Xxxxxxxx |
00 | ||||
| 00. | Waivers |
35 | ||||
| 22. | Expenses |
35 | ||||
| 23. | Assignment By Laurus |
36 |
| Page(s) | ||||||
| 24. | No Waiver; Cumulative Remedies |
36 | ||||
| 25. | Application of Payments |
36 | ||||
| 26. | Indemnity |
36 | ||||
| 27. | Xxxxxxx |
00 | ||||
| 00. | Borrowing Agency Provisions |
37 | ||||
| 29. | Notices |
38 | ||||
| 30. | Governing Law, Jurisdiction and Waiver of Jury Trial |
39 | ||||
| 31. | Limitation of Liability |
40 | ||||
| 32. | Entire Understanding |
40 | ||||
| 33. | Severability |
40 | ||||
| 34. | Captions |
41 | ||||
| 35. | Counterparts; Telecopier Signatures |
41 | ||||
| 36. | Construction |
41 | ||||
| 37. | Publicity |
41 | ||||
| 38. | Joinder |
41 | ||||
| 39. | Legends |
41 | ||||
This Security Agreement is made as of March 15, 2006 by and among LAURUS MASTER FUND, LTD., a
Cayman Islands company (“Laurus”), DIGITAL RECORDERS, INC., a North Carolina corporation
(“the Parent”), and each party listed on Exhibit A attached hereto (each an
“Eligible Subsidiary” and collectively, the “Eligible Subsidiaries”) the Parent and
each Eligible Subsidiary, each a “Company” and collectively, the “Companies”).
BACKGROUND
The Companies have requested that Laurus make advances available to the Companies; and
Laurus has agreed to make such advances on the terms and conditions set forth in this
Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and undertakings and the terms and
conditions contained herein, the parties hereto agree as follows:
1. General Definitions and Terms; Rules of Construction.
(a) General Definitions. Capitalized terms used in this Agreement shall have the
meanings assigned to them in Annex A.
(b) Accounting Terms. Any accounting terms used in this Agreement which are not
specifically defined shall have the meanings customarily given them in accordance with GAAP and all
financial computations shall be computed, unless specifically provided herein, in accordance with
GAAP consistently applied.
(c) Other Terms. All other terms used in this Agreement and defined in the UCC, shall
have the meaning given therein unless otherwise defined herein.
(d) Rules of Construction. All Schedules, Addenda, Annexes and Exhibits hereto or
expressly identified to this Agreement are incorporated herein by reference and taken together with
this Agreement constitute but a single agreement. The words “herein”, “hereof” and “hereunder” or
other words of similar import refer to this Agreement as a whole, including the Exhibits, Addenda,
Annexes and Schedules thereto, as the same may be from time to time amended, modified, restated or
supplemented, and not to any particular section, subsection or clause contained in this Agreement.
Wherever from the context it appears appropriate, each term stated in either the singular or plural
shall include the singular and the plural, and pronouns stated in the masculine, feminine or neuter
gender shall include the masculine, the feminine and the neuter. The term “or” is not exclusive.
The term “including” (or any form thereof) shall not be limiting or exclusive. All references to
statutes and related regulations shall include any amendments of same and any successor statutes
and regulations. All references in this Agreement or in the Schedules, Addenda, Annexes and
Exhibits to this Agreement to sections,
schedules, disclosure schedules, exhibits, and attachments shall refer to the corresponding
sections, schedules, disclosure schedules, exhibits, and attachments of or to this Agreement. All
references to any instruments or agreements, including references to any of this Agreement or the
Ancillary Agreements shall include any and all modifications or amendments thereto and any and all
extensions or renewals thereof.
2. Loan Facility.
(a) Loans.
(i) Subject to the terms and conditions set forth herein and in the Ancillary Agreements,
Laurus may make loans (the “Loans”) to Companies from time to time during the Term which,
in the aggregate at any time outstanding, will not exceed the lesser of (x) (I) the Capital
Availability Amount minus (II) such reserves as Laurus may reasonably in its good faith judgment
deem proper and necessary from time to time (the “Reserves”) and (y) an amount equal to (I)
the Accounts Availability plus (II) the Inventory Availability, minus (III) the Reserves. The
amount derived at any time from Section 2(a)(i)(y)(I) plus Section 2(a)(i)(y)(II) minus
2(a)(i)(y)(III) shall be referred to as the “Formula Amount.” The Companies shall, jointly
and severally, execute and deliver to Laurus on the Closing Date the Note. The Companies hereby
each acknowledge and agree that Laurus’ obligation to purchase the Note from the Companies on the
Closing Date shall be contingent upon the satisfaction (or waiver by Laurus) of the items and
matters set forth in the closing checklist provided by Laurus to the Companies on or prior to the
Closing Date.
(ii) Notwithstanding the limitations set forth above, if requested by any Company, Laurus
retains the right to lend to such Company from time to time such amounts in excess of such
limitations as Laurus may determine in its sole discretion.
(iii) The Companies acknowledge that the exercise of Laurus’ discretionary rights hereunder
may result during the Term in one or more increases or decreases in the advance percentages used in
determining Accounts Availability and/or Inventory Availability and each of the Companies hereby
consent to any such increases or decreases which may limit or restrict advances requested by the
Companies.
(iv) If any interest, fees, costs or charges payable to Laurus hereunder are not paid when
due, each of the Companies shall thereby be deemed to have requested, and Laurus is hereby
authorized at its discretion to make and charge to the Companies’ account, a Loan as of such date
in an amount equal to such unpaid interest, fees, costs or charges.
(v) If any Company at any time fails to perform or observe any of the covenants contained in
this Agreement or any Ancillary Agreement, Laurus may, but need not, perform or observe such
covenant on behalf and in the name, place and stead of such Company (or, at Laurus’ option, in
Laurus’ name) and may, but need not, take any and all other actions which Laurus may deem necessary
to cure or correct such failure (including the payment of taxes, the satisfaction of Liens, the
performance of obligations owed to Account Debtors, lessors or other obligors, the procurement and
maintenance of insurance, the execution of assignments, security agreements and financing
statements, and the endorsement of instruments). The amount
of all monies expended and all costs and expenses (including attorneys’ fees and legal
expenses) incurred by Laurus in connection with or as a result of the performance or observance of
such agreements or the taking of such action by Laurus shall be charged to the Companies’ account
as a Loan and added to the Obligations. To facilitate Laurus’ performance or observance of such
covenants by each Company, each Company hereby irrevocably appoints Laurus, or Laurus’ delegate,
acting alone, as such Company’s attorney in fact (which appointment is coupled with an interest)
with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver,
endorse or file in the name and on behalf of such Company any and all instruments, documents,
assignments, security agreements, financing statements, applications for insurance and other
agreements and writings required to be obtained, executed, delivered or endorsed by such Company.
(vi) Laurus will account to Company Agent monthly with a statement of all Loans and other
advances, charges and payments made pursuant to this Agreement, and such account rendered by Laurus
shall be deemed final, binding and conclusive unless Laurus is notified by Company Agent in writing
to the contrary within thirty (30) days of the date each account was rendered specifying the item
or items to which objection is made.
(vii) During the Term, the Companies may borrow and prepay Loans in accordance with the terms
and conditions hereof.
(b) Receivables Purchase. Following the occurrence and during the continuance of an
Event of Default, Laurus may, at its option, elect to convert the credit facility contemplated
hereby to an accounts receivable purchase facility. Upon such election by Laurus (subsequent
notice of which Laurus shall provide to Company Agent), the Companies shall be deemed to hereby
have sold, assigned, transferred, conveyed and delivered to Laurus, and Laurus shall be deemed to
have purchased and received from the Companies, all right, title and interest of the Companies in
and to all Accounts which shall at any time constitute Eligible Accounts (the “Receivables
Purchase”). All outstanding Loans hereunder shall be deemed obligations under such accounts
receivable purchase facility. The conversion to an accounts receivable purchase facility in
accordance with the terms hereof shall not be deemed an exercise by Laurus of its secured creditor
rights under Article 9 of the UCC. Immediately following Laurus’ request, the Companies shall
execute all such further documentation as may be required by Laurus to more fully set forth the
accounts receivable purchase facility herein contemplated, including, without limitation, Laurus’
standard form of accounts receivable purchase agreement and account debtor notification letters,
but any Company’s failure to enter into any such documentation shall not impair or affect the
Receivables Purchase in any manner whatsoever.
3. Repayment of the Loans. The Companies (a) may prepay the Obligations from time to
time in accordance with the terms and provisions of the Note (and Section 17 hereof if such
prepayment is due to a termination of this Agreement); (b) shall repay on the expiration of the
Term (i) the then aggregate outstanding principal balance of the Loans together with accrued and
unpaid interest, fees and charges and; (ii) all other amounts owed Laurus under this Agreement and
the Ancillary Agreements; and (c) subject to Section 2(a)(ii), shall repay on any day on which the
then aggregate outstanding principal balance of the Loans are in excess of the
| Security Agreement | 3 |
Formula Amount at such time, Loans in an amount equal to such excess. Any payments of
principal, interest, fees or any other amounts payable hereunder or under any Ancillary Agreement
shall be made prior to 12:00 noon (New York time) on the due date thereof in immediately available
funds.
4. Procedure for Loans. Company Agent may, by written notice, request a borrowing of
Loans prior to 12:00 noon (New York time) on the Business Day of its request to incur, on the next
Business Day, a Loan. Together with each request for a Loan (or at such other intervals as Laurus
may request), Company Agent shall deliver to Laurus a Borrowing Base Certificate in the form of
Exhibit B attached hereto, which shall be certified as true and correct by the Chief
Executive Officer, Chief Financial Officer or Controller of Company Agent together with all
supporting documentation relating thereto. All Loans shall be disbursed from whichever office or
other place Laurus may designate from time to time and shall be charged to the Companies’ account
on Laurus’ books. The proceeds of each Loan made by Laurus shall be made available to Company
Agent on the Business Day following the Business Day so requested in accordance with the terms of
this Section 4 by way of credit to the applicable Company’s operating account maintained with such
bank as Company Agent designated to Laurus. Any and all Obligations due and owing hereunder may be
charged to the Companies’ account and shall constitute Loans.
5. Interest and Payments.
(a) Interest.
(i) Except as modified by Section 5(a)(iii) below, the Companies shall jointly and severally
pay interest at the Contract Rate on the unpaid principal balance of each Loan until such time as
such Loan is collected in full in good funds in dollars of the United States of America.
(ii) Interest and payments shall be computed on the basis of actual days elapsed in a year of
360 days. At Laurus’ option, Laurus may charge the Companies’ account for said interest.
(iii) Effective upon the occurrence of any Event of Default and for so long as any Event of
Default shall be continuing, the Contract Rate shall automatically be increased as set forth in the
Note (such increased rate, the “Default Rate”), and all outstanding Obligations, including
unpaid interest, shall continue to accrue interest from the date of such Event of Default at the
Default Rate applicable to such Obligations.
(iv) In no event shall the aggregate interest payable hereunder or under the Note exceed the
maximum rate permitted under any applicable law or regulation, as in effect from time to time (the
“Maximum Legal Rate”), and if any provision of this Agreement or any Ancillary Agreement is
in contravention of any such law or regulation, interest payable under this Agreement and each
Ancillary Agreement shall be computed on the basis of the Maximum Legal Rate (so that such interest
will not exceed the Maximum Legal Rate).
| Security Agreement | 4 |
(v) The Companies shall jointly and severally pay principal, interest and all other amounts
payable hereunder, or under any Ancillary Agreement, without any deduction whatsoever, including
any deduction for any set-off or counterclaim.
(b) Payments; Certain Closing Conditions.
(i) Closing/Annual Payments. Upon execution of this Agreement by each Company and
Laurus, the Companies shall jointly and severally pay to Laurus Capital Management, LLC a closing
payment in an amount equal to three and three-fifths percent (3.60%) of the Capital Availability
Amount. Such payment shall be deemed fully earned on the Closing Date and shall not be subject to
rebate or proration for any reason.
(ii) Overadvance Payment. Without affecting Laurus’ rights hereunder in the event the
Loans exceed the Formula Amount (each such amount, an “Overadvance”), all such Overadvances
shall bear additional interest at a rate equal to one and a half percent (1.5%) per month of the
amount of such Overadvances for all times such amounts shall be in excess of the Formula Amount.
All amounts that are incurred pursuant to this Section 5(b)(iii) shall be due and payable by the
Companies monthly, in arrears, on the first business day of each calendar month and upon expiration
of the Term.
(iii) Financial Information Default. Without affecting Laurus’ other rights and
remedies, in the event any Company fails to deliver the financial information required by Section
11 on or before the date required by this Agreement, the Companies shall jointly and severally pay
Laurus an aggregate fee in the amount of $500.00 per week (or portion thereof) for each such
failure until such failure is cured to Laurus’ satisfaction or waived in writing by Laurus. All
amounts that are incurred pursuant to this Section 5(b)(iv) shall be due and payable by the
Companies monthly, in arrears, on the first business of each calendar month and upon expiration of
the Term.
(iv) Expenses. The Companies shall jointly and severally reimburse Laurus for its
third-party and estimated internal expenses (including reasonable legal fees and expenses) incurred
in connection with the preparation and negotiation of this Agreement and the Ancillary Agreements,
and expenses incurred in connection with Laurus’ due diligence review of each Company and its
Subsidiaries, structuring fees and all related matters. Amounts required to be paid under this
Section 5(b)(v) will be paid on the Closing Date and shall be $50,000 for such expenses referred to
in this Section 5(b)(v).
6. Security Interest.
(a) To secure the prompt payment to Laurus of the Obligations, each Company hereby assigns,
pledges and grants to Laurus a continuing security interest in and Lien upon all of the Collateral.
All of each Company’s Books and Records relating to the Collateral shall, until delivered to or
removed by Laurus, be kept by such Company in trust for Laurus until all Obligations have been paid
in full. Each confirmatory assignment schedule or other form of assignment hereafter executed by
each Company shall be deemed to include the foregoing grant, whether or not the same appears
therein.
| Security Agreement | 5 |
(b) Each Company hereby (i) authorizes Laurus to file any financing statements, continuation
statements or amendments thereto that (x) indicate the Collateral (1) as all U.S. and Canadian
assets and personal property of such Company or words of similar effect, regardless of whether any
particular asset comprised in the Collateral falls within the scope of Article 9 of the UCC of such
jurisdiction, or (2) as being of an equal or lesser scope or with greater detail, and (y) contain
any other information required by Part 5 of Article 9 of the UCC for the sufficiency or filing
office acceptance of any financing statement, continuation statement or amendment and (ii) ratifies
its authorization for Laurus to have filed any initial financial statements, or amendments thereto
if filed prior to the date hereof. Each Company acknowledges that it is not authorized to file any
financing statement or amendment or termination statement with respect to any financing statement
without the prior written consent of Laurus and agrees that it will not do so without the prior
written consent of Laurus, subject to such Company’s rights under Section 9-509(d)(2) of the UCC.
(c) Each Company hereby grants to Laurus an irrevocable, non-exclusive license (exercisable
upon the termination of this Agreement due to an occurrence and during the continuance of an Event
of Default without payment of royalty or other compensation to such Company) to use, transfer,
license or sublicense any Intellectual Property now owned, licensed to, or hereafter acquired by
such Company, and wherever the same may be located, and including in such license access to all
media in which any of the licensed items may be recorded or stored and to all computer and
automatic machinery software and programs used for the compilation or printout thereof, and
represents, promises and agrees that any such license or sublicense is not and will not be in
conflict with the contractual or commercial rights of any third Person; provided, that such license
will terminate on the termination of this Agreement and the payment in full of all Obligations.
7. Representations, Warranties and Covenants Concerning the Collateral. Each Company
represents, warrants (each of which such representations and warranties shall be deemed repeated
upon the making of each request for a Loan and made as of the time of each and every Loan
hereunder) and covenants as follows:
(a) all of the Collateral (i) is owned by it free and clear of all Liens (including any claims
of infringement) except those in Laurus’ favor and Permitted Liens and (ii) is not subject to any
agreement prohibiting the granting of a Lien or requiring notice of or consent to the granting of a
Lien.
(b) it shall not encumber, mortgage, pledge, assign or grant any Lien in any Collateral or any
other assets to anyone other than Laurus and except for Permitted Liens.
(c) the Liens granted pursuant to this Agreement, upon completion of the filings and other
actions listed on Schedule 7(c) (which, in the case of all filings and other documents
referred to in said Schedule, have been delivered to Laurus in duly executed form) constitute valid
perfected security interests in all of the Collateral in favor of Laurus as security for the prompt
and complete payment and performance of the Obligations, enforceable in accordance with the terms
hereof against any and all of its creditors and purchasers and such security interest is prior to
all other Liens in existence on the date hereof.
| Security Agreement | 6 |
(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 and
those to be extinguished with the proceeds hereof.
(e) it shall not dispose of any of the Collateral whether by sale, lease or otherwise except
for the sale of Inventory in the ordinary course of business and for the disposition or transfer in
the ordinary course of business during any fiscal year of obsolete and worn-out Equipment having an
aggregate fair market value of not more than $25,000 and only to the extent that (i) the proceeds
of any such disposition are used to acquire replacement Equipment which is subject to Laurus’ first
priority security interest or are used to repay Loans or to pay general corporate expenses, or (ii)
following the occurrence of an Event of Default which continues to exist the proceeds of which are
remitted to Laurus to be held as cash collateral for the Obligations.
(f) it shall defend the right, title and interest of Laurus in and to the Collateral against
the claims and demands of all Persons whomsoever, and take such actions, including (i) all actions
necessary to grant Laurus “control” of any Investment Property, Deposit Accounts, Letter-of-Credit
Rights or electronic Chattel Paper owned by it, with any agreements establishing control to be in
form and substance satisfactory to Laurus, (ii) the prompt (but in no event later than five (5)
Business Days following Laurus’ request therefor) delivery to Laurus of all original Instruments,
Chattel Paper, negotiable Documents and certificated Stock owned by it (in each case, accompanied
by stock powers, allonges or other instruments of transfer executed in blank), (iii) notification
of Laurus’ interest in Collateral at Laurus’ request, and (iv) the institution of litigation
against third parties as shall be prudent in order to protect and preserve its and/or Laurus’
respective and several interests in the Collateral.
(g) it shall promptly, and in any event within five (5) Business Days after the same is
acquired by it, notify Laurus of any commercial tort claim (as defined in the UCC) acquired by it
and unless otherwise consented by Laurus, it shall enter into a supplement to this Agreement
granting to Laurus a Lien in such commercial tort claim.
(h) it shall place notations upon its Books and Records and any of its financial statements to
disclose Laurus’ Lien in the Collateral.
(i) if it retains possession of any Chattel Paper or Instrument with Laurus’ consent, upon
Laurus’ request such Chattel Paper and Instruments shall be marked with the following legend:
“This writing and obligations evidenced or secured hereby are subject to the security interest of
Laurus Master Fund, Ltd.” Notwithstanding the foregoing, upon the reasonable request of Laurus,
such Chattel Paper and Instruments shall be delivered to Laurus.
(j) it shall perform in a reasonable time all other steps requested by Laurus to create and
maintain in Laurus’ favor a valid perfected first Lien in all Collateral subject only to Permitted
Liens.
(k) it shall notify Laurus promptly and in any event within five (5) Business Days after
obtaining knowledge thereof (i) of any event or circumstance that, to its knowledge,
| Security Agreement | 7 |
would cause Laurus to consider any then existing Account and/or Inventory as no longer
constituting an Eligible Account or Eligible Inventory, as the case may be; (ii) of any material
delay in its performance of any of its obligations to any Account Debtor; (iii) of any assertion by
any Account Debtor of any material claims, offsets or counterclaims; (iv) of any material
allowances, credits and/or monies granted by it to any Account Debtor; (v) of all material adverse
information relating to the financial condition of an Account Debtor; (vi) of any material return
of goods, except to the extent such concurrently reduces availability under the Agreement; and
(vii) of any loss, damage or destruction of any of the Collateral.
(l) all Eligible Accounts (i) represent complete bona fide transactions which require no
further act under any circumstances on its part to make such Accounts payable by the Account
Debtors, (ii) are not subject to any present, future contingent offsets or counterclaims, and (iii)
do not represent xxxx and hold sales, consignment sales, guaranteed sales, sale or return or other
similar understandings or obligations of any Affiliate or Subsidiary of such Company. It has not
made, nor will it make, any agreement with any Account Debtor for any extension of time for the
payment of any Account, any compromise or settlement for less than the full amount thereof, any
release of any Account Debtor from liability therefor, or any deduction therefrom except a discount
or allowance for prompt or early payment allowed by it in the ordinary course of its business
consistent with historical practice and as previously disclosed to Laurus in writing.
(m) it shall keep and maintain its Equipment in good operating condition, except for ordinary
wear and tear, and shall make all necessary repairs and replacements thereof so that the value and
operating efficiency shall at all times be maintained and preserved. It shall not permit any such
items to become a Fixture to real estate or accessions to other personal property.
(n) it shall maintain and keep all of its Books and Records concerning the Collateral at its
offices listed in Schedule 12(aa).
(o) it shall maintain and keep the tangible Collateral at the addresses listed in Schedule
7(o), provided, that it may change such locations or open a new location, provided that it
provides Laurus at least thirty (30) days prior written notice of such changes or new location and
(ii) prior to such change or opening of a new location where Collateral having a value of more than
$50,000 will be located, it executes and delivers to Laurus such agreements deemed reasonably
necessary or prudent by Laurus, including landlord agreements, mortgagee agreements and warehouse
agreements, each in form and substance satisfactory to Laurus, to adequately protect and maintain
Laurus’ security interest in such Collateral.
(p) Schedule 7(p) lists all banks and other financial institutions at which it
maintains deposits and/or other accounts, and such Schedule correctly identifies the name, address
and telephone number of each such depository, the name in which the account is held, a description
of the purpose of the account, and the complete account number. It shall not establish any
depository or other bank account with any financial institution (other than the accounts set forth
on Schedule 7(p)) without Laurus’ prior written consent.
| Security Agreement | 8 |
(q) All Inventory manufactured by it in the United States of America shall be produced in
accordance with the requirements of the Federal Fair Labor Standards Act of 1938, as amended and
all rules, regulations and orders related thereto or promulgated thereunder.
8. Payment of Accounts.
(a) Each Company will irrevocably direct all of its present and future Account Debtors and
other Persons obligated to make payments constituting Collateral to make such payments directly to
the lockboxes maintained by such Company (the “Lockbox”) with LaSalle Business Credit LLC
or such other financial institution accepted by Laurus in writing as may be selected by such
Company (the “Lockbox Bank”) pursuant to the terms of the certain agreements among one or
more Companies, Laurus and/or the Lockbox Bank dated as of March 15, 2006. On or prior to the
Closing Date, each Company shall and shall cause the Lockbox Bank to enter into all such
documentation acceptable to Laurus pursuant to which, among other things, the Lockbox Bank agrees
to: (a) sweep the Lockbox on a daily basis and deposit all checks received therein to an account
designated by Laurus in writing and (b) comply only with the instructions or other directions of
Laurus concerning the Lockbox. All of each Company’s invoices, account statements and other
written or oral communications directing, instructing, demanding or requesting payment of any
Account of any Company or any other amount constituting Collateral shall conspicuously direct that
all payments be made to the Lockbox. If, notwithstanding the instructions to Account Debtors, any
Company receives any payments, such Company shall immediately remit such payments to Lockbox in
their original form with all necessary endorsements. Until so remitted, such Company shall hold
all such payments in trust for and as the property of Laurus and shall not commingle such payments
with any of its other funds or property.
(b) At Laurus’ election, following the occurrence of an Event of Default which is continuing,
Laurus may notify each Company’s Account Debtors of Laurus’ security interest in the Accounts,
collect them directly and charge the collection costs and expenses thereof to Company’s and the
Eligible Subsidiaries joint and several account.
9. Collection and Maintenance of Collateral.
(a) Laurus may, at its expense, verify each Company’s Accounts from time to time, but not
more often than once every three (3) months, unless an Event of Default has occurred and is
continuing, utilizing an audit control company or any other agent of Laurus.
(b) Proceeds of Accounts received by Laurus will be deemed received on the Business Day after
Laurus’ receipt of such proceeds in good funds in dollars of the United States of America to an
account designated by Laurus. Any amount received by Laurus after 12:00 noon (New York time) on
any Business Day shall be deemed received on the next Business Day.
(c) As Laurus receives the proceeds of Accounts of any Company, it shall (i) apply such
proceeds, as required, to amounts outstanding under the Note, and (ii) remit all such remaining
proceeds (net of interest, fees and other amounts then due and owing to Laurus hereunder) to
Company Agent (for the benefit of the applicable Companies) upon request (but no
| Security Agreement | 9 |
more often than twice a week). Notwithstanding the foregoing, following the occurrence and
during the continuance of an Event of Default, Laurus, at its option, may (a) apply such proceeds
to the Obligations in such order as Laurus shall elect, (b) hold all such proceeds as cash
collateral for the Obligations and each Company hereby grants to Laurus a security interest in such
cash collateral amounts as security for the Obligations and/or (c) do any combination of the
foregoing.
10. Inspections and Appraisals. At all times during normal business hours, Laurus,
and/or any agent of Laurus shall have the right to (a) have access to, visit, inspect, review,
evaluate and make physical verification and appraisals of each Company’s properties and the
Collateral, (b) inspect, audit and copy (or take originals if necessary) and make extracts from
each Company’s Books and Records, including management letters prepared by the Accountants, and (c)
discuss with each Company’s Audit Committee Chairman, principal officers, and independent
accountants, each Company’s business, assets, liabilities, financial condition, results of
operations and business prospects. Each Company will deliver to Laurus any instrument necessary
for Laurus to obtain records from any service bureau maintaining records for such Company. If any
internally prepared financial information, including that required under this Section is
unsatisfactory in any manner to Laurus, Laurus may request that the Accountants review the same.
Expenses incurred related to the foregoing shall be borne by Laurus and shall not be an Obligation
hereunder.
11. Financial Reporting. Company Agent will deliver, or cause to be delivered, to
Laurus each of the following, which shall be in form and detail acceptable to Laurus:
(a) As soon as available, and in any event within ninety (90) days after the end of each
fiscal year of the Parent, or, in the event that the Parent has filed a Form 12b-25, within one
hundred and five (105) days after the end of such fiscal year, the Parent’s audited consolidated
financial statements with a report of independent certified public accountants of recognized
standing selected by the Parent and acceptable to Laurus (the “Accountants”), which annual
consolidated financial statements shall be without qualification, other than a “going concern”
qualification, and shall include each of the Parent’s and each of its Subsidiaries’ balance sheet
as at the end of such fiscal year and the related statements of each of the Parent’s and each of
its Subsidiaries’ income, retained earnings and cash flows for the fiscal year then ended, prepared
on a consolidating and consolidated basis to include the Parent, each Subsidiary of the Parent and
each of their respective affiliates, all in reasonable detail and prepared in accordance with GAAP,
together with (i) if and when available, copies of any management letters prepared by the
Accountants; and (ii) a certificate of the Parent’s President, Chief Executive Officer or Chief
Financial Officer stating that such financial statements have been prepared in accordance with GAAP
and whether or not such officer has knowledge of the occurrence of any Default or Event of Default
hereunder and, if so, stating in reasonable detail the facts with respect thereto.
(b) As soon as available and in any event within forty five (45) days after the end of each
fiscal quarter of the Parent, or, in the event that the Parent has filed a Form 12b-25, within
fifty (50) days after the end of such fiscal quarter, an unaudited/internal consolidated balance
sheet and statements of income, retained earnings and cash flows of each of the Parent’s and each
of its Subsidiaries’ as at the end of and for such quarter and for the year to date period
| Security Agreement | 10 |
then ended, prepared on a consolidating and consolidated basis to include the Parent, each
Subsidiary of the Parent and each of their respective affiliates, in reasonable detail and stating
in comparative form the figures for the corresponding date and periods in the previous year, all
prepared in accordance with GAAP, subject to year-end adjustments and accompanied by a certificate
of the Parent’s President, Chief Executive Officer or Chief Financial Officer, stating (i) that
such financial statements have been prepared in accordance with GAAP, subject to year-end audit
adjustments, and (ii) whether or not such officer has knowledge of the occurrence of any Default or
Event of Default hereunder not theretofore reported and remedied and, if so, stating in reasonable
detail the facts with respect thereto.
(c) As soon as available and in any event within twenty (20) days after the end of each
calendar month, an unaudited/internal consolidated balance sheet and statements of income, retained
earnings and cash flows of each of the Parent and its Subsidiaries as at the end of and for such
month and for the year to date period then ended, prepared on a consolidating and consolidated
basis to include the Parent, each Subsidiary of the Parent and each of their respective affiliates,
in reasonable detail and stating in comparative form the figures for the corresponding date and
periods in the previous year,, all prepared in accordance with GAAP, subject to year-end
adjustments and accompanied by a certificate of the Parent’s President, Chief Executive Officer or
Chief Financial Officer, stating (i) that such financial statements have been prepared in
accordance with GAAP, subject to year-end audit adjustments, and (ii) whether or not such officer
has knowledge of the occurrence of any Default or Event of Default hereunder not theretofore
reported and remedied and, if so, stating in reasonable detail the facts with respect thereto;
(d) Within fifteen (15) days after the end of each month (or more frequently if Laurus so
requests), agings of each Company’s Accounts, unaudited trial balances and their accounts payable
and a calculation of each Company’s Accounts, Eligible Accounts, Inventory and/or Eligible
Inventory, provided, however, that if Laurus shall request the foregoing information more often
than as set forth in the immediately preceding clause, each Company shall have fifteen (15) days
from each such request to comply with Laurus’ demand;
(e) Promptly after (i) the filing thereof, copies of the Parent’s most recent registration
statements and annual, quarterly, monthly or other regular reports which the Parent files with the
Securities and Exchange Commission (the “SEC”), and (ii) the issuance thereof, copies of
such financial statements, reports and proxy statements as the Parent shall send to its
shareholders.
(f) The Parent shall deliver, or cause the applicable Subsidiary of the Parent to deliver,
such other information as the Purchaser shall reasonably request.
12. Additional Representations and Warranties. Each Company hereby represents and
warrants to Laurus as follows:
(a) Organization, Good Standing and Qualification. It and each of its Subsidiaries is
a corporation, partnership or limited liability company, as the case may be, duly organized,
validly existing and in good standing under the laws of its jurisdiction of organization. It and
each of its Subsidiaries has the corporate, limited liability company or partnership, as the
| Security Agreement | 11 |
case may be, power and authority to own and operate its properties and assets and, insofar as
it is or shall be a party thereto, to (i) execute and deliver this Agreement and the Ancillary
Agreements, (ii) to issue the Note, (iii) to issue the Warrants and the shares of Common Stock
issuable upon exercise of the Warrants (the “Warrant Shares”), and (iv) to carry out the
provisions of this Agreement and the Ancillary Agreements and to carry on its business as presently
conducted. It and each of its Subsidiaries is duly qualified and is authorized to do business and
is in good standing as a foreign corporation, partnership or limited liability company, as the case
may be, in all jurisdictions in which the nature or location of its activities and of its
properties (both owned and leased) makes such qualification necessary, except for those
jurisdictions in which failure to do so has not had, or could not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect.
(b) Subsidiaries. Each of its direct and indirect Subsidiaries, the direct owner of
each such Subsidiary and its percentage ownership thereof, is set forth on Schedule 12(b).
(c) Capitalization; Voting Rights.
(i) The authorized , issued and outstanding capital stock of the Company and of each
Subsidiary of the Company is set forth on Schedule 12(c).
(ii) Except as disclosed on Schedule 12(c), other than: (i) the shares reserved for
issuance under the Parent’s stock option plans; and (ii) shares which may be issued pursuant to
this Agreement and the Ancillary Agreements, there are no outstanding options, warrants, rights
(including conversion or preemptive rights and rights of first refusal), proxy or shareholder
agreements, or arrangements or agreements of any kind for the purchase or acquisition from the
Parent of any of its securities. Except as disclosed on Schedule 12(c), neither the offer
or issuance of any of the Note or the Warrants, or the issuance of any of the Warrant Shares, nor
the consummation of any transaction contemplated hereby will result in a change in the price or
number of any securities of the Parent outstanding, under anti-dilution or other similar provisions
contained in or affecting any such securities.
(iii) All issued and outstanding shares of the Parent’s Common Stock: (i) have been duly
authorized and validly issued and are fully paid and nonassessable; and (ii) were issued in
compliance with all applicable state and federal laws concerning the issuance of securities.
(iv) The rights, preferences, privileges and restrictions of the shares of the Common Stock
are as stated in the Parent’s Certificate of Incorporation (the “Charter”). The Warrant
Shares have been duly and validly reserved for issuance. When issued in compliance with the
provisions of this Agreement and the Parent’s Charter, the Securities will be validly issued, fully
paid and nonassessable, and will be free of any liens or encumbrances; provided,
however, that the Securities may be subject to restrictions on transfer under state and/or
federal securities laws as set forth herein or as otherwise required by such laws at the time a
transfer is proposed.
(d) Authorization; Binding Obligations. All corporate, partnership or limited
liability company, as the case may be, action on its and its Subsidiaries’ part (including their
| Security Agreement | 12 |
respective officers and directors) necessary for the authorization of this Agreement and the
Ancillary Agreements, the performance of all of its and its Subsidiaries’ obligations hereunder and
under the Ancillary Agreements on the Closing Date and, the authorization, issuance and delivery of
the Note and the Warrant has been taken or will be taken prior to the Closing Date. This Agreement
and the Ancillary Agreements, when executed and delivered and to the extent it is a party thereto,
will be its and its Subsidiaries’ valid and binding obligations enforceable against each such
Person in accordance with their terms, except:
(i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws
of general application affecting enforcement of creditors’ rights; and
(ii) general principles of equity that restrict the availability of equitable or legal
remedies.
The issuance of the Note is not and will not be subject to any preemptive rights or rights of first
refusal that have not been properly waived or complied with. The issuance of the Warrants and the
subsequent exercise of the Warrants for Warrant Shares are not and will not be subject to any
preemptive rights or rights of first refusal that have not been properly waived or complied with.
(e) Liabilities. Neither it nor any of its Subsidiaries has any liabilities, except
current liabilities incurred in the ordinary course of business and liabilities disclosed in any
Exchange Act Filings.
(f) Agreements; Action. Except as set forth on Schedule 12(f) or as disclosed
in any Exchange Act Filings:
(i) There are no agreements, understandings, instruments, contracts, proposed transactions,
judgments, orders, writs or decrees to which it or any of its Subsidiaries is a party or to its
knowledge by which it is bound which may involve: (i) obligations (contingent or otherwise) of, or
payments to, it or any of its Subsidiaries in excess of $50,000 (other than obligations of, or
payments to, it or any of its Subsidiaries arising from purchase or sale agreements entered into in
the ordinary course of business); or (ii) the transfer or license of any patent, copyright, trade
secret or other proprietary right to or from it (other than licenses arising from the purchase of
“off the shelf” or other standard products); or (iii) provisions restricting the development,
manufacture or distribution of its or any of its Subsidiaries’ products or services; or (iv)
indemnification by it or any of its Subsidiaries with respect to infringements of proprietary
rights.
(ii) Since December 31, 2005 (the “Balance Sheet Date”) neither it nor any of its
Subsidiaries has: (i) declared or paid any dividends, or authorized or made any distribution upon
or with respect to any class or series of its capital stock; (ii) 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.
| Security Agreement | 13 |
(iii) For the purposes of subsections (i) and (ii) of this Section 12(f), all indebtedness,
liabilities, agreements, understandings, instruments, contracts and proposed transactions involving
the same Person (including Persons it or any of its applicable Subsidiaries has reason to believe
are affiliated therewith or with any Subsidiary thereof) shall be aggregated for the purpose of
meeting the individual minimum dollar amounts of such subsections.
(iv) the Parent maintains disclosure controls and procedures (“Disclosure Controls”)
designed to ensure that information required to be disclosed by the Parent in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized, and reported, within
the time periods specified in the rules and forms of the SEC.
(v) The Parent makes and keeps books, records, and accounts, that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of its assets. It maintains
internal control over financial reporting (“Financial Reporting Controls”) designed by, or
under the supervision of, its principal executive and principal financial officers, and effected by
its board of directors, management, and other personnel, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP, including that:
(1) transactions are executed in accordance with management’s general or specific
authorization;
(2) unauthorized acquisition, use, or disposition of the Parent’s assets that could have a
material effect on the financial statements are prevented or timely detected;
(3) transactions are recorded as necessary to permit preparation of financial statements in
accordance with GAAP, and that its receipts and expenditures are being made only in accordance with
authorizations of the Parent’s management and board of directors;
(4) transactions are recorded as necessary to maintain accountability for assets; and
(5) the recorded accountability for assets is compared with the existing assets at reasonable
intervals, and appropriate action is taken with respect to any differences.
(vi) There is no weakness in any of its Disclosure Controls or Financial Reporting Controls
that is required to be disclosed in any of the Exchange Act Filings, except as so disclosed.
(g) Obligations to Related Parties. Except as set forth on Schedule 12(g),
neither it nor any of its Subsidiaries has any obligations to their respective officers, directors,
shareholders or employees other than:
(i) for payment of salary for services rendered and for bonus payments;
| Security Agreement | 14 |
(ii) reimbursement for reasonable expenses incurred on its or its Subsidiaries’ behalf;
(iii) for other standard employee benefits made generally available to all employees
(including stock option agreements outstanding under any stock option plan approved by its and its
Subsidiaries’ Board of Directors, as applicable); and
(iv) obligations listed in its and each of its Subsidiary’s financial statements or disclosed
in any of the Parent’s Exchange Act Filings.
Except as described above or set forth on Schedule 12(g), none of its officers, directors
or, to the best of its knowledge, key employees or shareholders, any of its Subsidiaries or any
members of their immediate families, are indebted to it or any of its Subsidiaries, individually or
in the aggregate, in excess of $50,000 or have any direct or indirect ownership interest in any
Person with which it or any of its Subsidiaries is affiliated or with which it or any of its
Subsidiaries has a business relationship, or any Person which competes with it or any of its
Subsidiaries, other than passive investments in publicly traded companies (representing less than
one percent (1%) of such company) which may compete with it or any of its Subsidiaries. Except as
described above, none of its officers, directors or shareholders, or any member of their immediate
families, is, directly or indirectly, interested in any material contract with it or any of its
Subsidiaries and no agreements, understandings or proposed transactions are contemplated between it
or any of its Subsidiaries and any such Person. Except as set forth on Schedule 12(g),
neither it nor any of its Subsidiaries is a guarantor or indemnitor of any indebtedness of any
other Person.
(h) Changes. Since the Balance Sheet Date, except as disclosed in any Exchange Act
Filing or in Schedule 12(h) to this Agreement or to any of the Ancillary Agreements, there has not
been:
(i) any change in its or any of its Subsidiaries’ business, assets, liabilities, condition
(financial or otherwise), properties, operations or prospects, which, individually or in the
aggregate, has had, or could reasonably be expected to have, a Material Adverse Effect;
(ii) any resignation or termination of any of its officers, key employees or groups of
employees;
(iii) any material change, except in the ordinary course of business, in its or any of its
Subsidiaries’ contingent obligations by way of guaranty, endorsement, indemnity, warranty or
otherwise;
(iv) any damage, destruction or loss, whether or not covered by insurance, which has had, or
could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect;
(v) any waiver by it or any of its Subsidiaries of a valuable right or of a material debt owed
to it;
| Security Agreement | 15 |
(vi) any direct or indirect material loans made by it or any of its Subsidiaries to any of its
or any of its Subsidiaries’ shareholders, employees, officers or directors, other than advances
made in the ordinary course of business;
(vii) any material change in any compensation arrangement or agreement with any employee,
officer, director or shareholder;
(viii) any declaration or payment of any dividend or other distribution of its or any of its
Subsidiaries’ assets;
(ix) any labor organization activity related to it or any of its Subsidiaries;
(x) any debt, obligation or liability incurred, assumed or guaranteed by it or any of its
Subsidiaries, except those for immaterial amounts and for current liabilities incurred in the
ordinary course of business;
(xi) any sale, assignment or transfer of any Intellectual Property or other intangible assets;
(xii) any change in any material agreement to which it or any of its Subsidiaries is a party
or by which either it or any of its Subsidiaries is bound which, either individually or in the
aggregate, has had, or could reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect;
(xiii) any other event or condition of any character that, either individually or in the
aggregate, has had, or could reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect; or
(xiv) any arrangement or commitment by it or any of its Subsidiaries to do any of the acts
described in subsection (i) through (xiii) of this Section 12(h).
(i) Title to Properties and Assets; Liens, Etc. Except as set forth on Schedule
12(i), it and each of its Subsidiaries has good and marketable title to their respective
properties and assets, and good title to its leasehold interests, in each case subject to no Lien,
other than Permitted Liens.
All facilities, Equipment, Fixtures, vehicles and other properties owned, leased or used by it or
any of its Subsidiaries are in good operating condition and repair and are reasonably fit and
usable for the purposes for which they are being used. Except as set forth on Schedule
12(i), it and each of its Subsidiaries is in compliance with all material terms of each lease
to which it is a party or is otherwise bound.
(j) Intellectual Property.
(i) It and each of its Subsidiaries owns or possesses sufficient legal rights to all
Intellectual Property necessary for their respective businesses as now conducted and, to its
knowledge as presently proposed to be conducted, without any known infringement of the
| Security Agreement | 16 |
rights of others. There are no outstanding options, licenses or agreements of any kind
relating to its or any of its Subsidiary’s Intellectual Property, nor is it or any of its
Subsidiaries bound by or a party to any options, licenses or agreements of any kind with respect to
the Intellectual Property of any other Person other than such licenses or agreements arising from
the purchase of “off the shelf” or standard products.
(ii) Neither it nor any of its Subsidiaries has received any communications alleging that it
or any of its Subsidiaries has violated any of the Intellectual Property or other proprietary
rights of any other Person, nor is it or any of its Subsidiaries aware of any basis therefor.
(iii) Neither it nor any of its Subsidiaries believes it is or will be necessary to utilize
any inventions, trade secrets or proprietary information of any of its employees made prior to
their employment by it or any of its Subsidiaries, except for inventions, trade secrets or
proprietary information that have been rightfully assigned to it or any of its Subsidiaries.
(k) Compliance with Other Instruments. Neither it nor any of its Subsidiaries is in
violation or default of (x) any term of its Charter or Bylaws, or (y) any provision of any
indebtedness, mortgage, indenture, contract, agreement or instrument to which it is party or by
which it is bound or of any judgment, decree, order or writ, which violation or default, in the
case of this clause (y), has had, or could reasonably be expected to have, either individually or
in the aggregate, a Material Adverse Effect. The execution, delivery and performance of and
compliance with this Agreement and the Ancillary Agreements to which it is a party, and the
issuance of the Note and the other Securities each pursuant hereto and thereto, will not, with or
without the passage of time or giving of notice, result in any such material violation, or be in
conflict with or constitute a default under any such term or provision, or result in the creation
of any Lien upon any of its or any of its Subsidiary’s properties or assets or the suspension,
revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval
applicable to it or any of its Subsidiaries, their businesses or operations or any of their assets
or properties.
(l) Litigation. Except as set forth on Schedule 12(l), there is no action,
suit, proceeding or investigation pending or, to its knowledge, currently threatened against it or
any of its Subsidiaries that prevents it or any of its Subsidiaries from entering into this
Agreement or the Ancillary Agreements, or from consummating the transactions contemplated hereby or
thereby, or which has had, or could reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect, or could result in any change in its or any of its
Subsidiaries’ current equity ownership, nor is it aware that there is any basis to assert any of
the foregoing. Neither it nor any of its Subsidiaries is a party to or subject to the provisions
of any order, writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by it or any of its
Subsidiaries currently pending or which it or any of its Subsidiaries intends to initiate.
(m) Tax Returns and Payments. It and each of its Subsidiaries has timely filed all
tax returns (federal, state and local) required to be filed by it. All taxes shown to be due and
payable on such returns, any assessments imposed, and all other taxes due and payable by it and
| Security Agreement | 17 |
each of its Subsidiaries on or before the Closing Date, have been paid or will be paid prior
to the time they become delinquent. Except as set forth on Schedule 12(m), neither it nor
any of its Subsidiaries has been advised:
(i) that any of its returns, federal, state or other, have been or are being audited as of the
date hereof; or
(ii) of any adjustment, deficiency, assessment or court decision in respect of its federal,
state or other taxes.
Neither it nor any of its Subsidiaries has any knowledge of any liability of any tax to be imposed
upon its properties or assets as of the date of this Agreement that is not adequately provided for.
(n) Employees. Except as set forth on Schedule 12(n), neither it nor any of
its Subsidiaries has any collective bargaining agreements with any of its employees. There is no
labor union organizing activity pending or, to its knowledge, threatened with respect to it or any
of its Subsidiaries. Except as disclosed in the Exchange Act Filings or on Schedule 12(n),
neither it nor any of its Subsidiaries is a party to or bound by any currently effective employment
contract, deferred compensation arrangement, bonus plan, incentive plan, profit sharing plan,
retirement agreement or other employee compensation plan or agreement. To its knowledge, none of
its or any of its Subsidiaries’ employees, nor any consultant with whom it or any of its
Subsidiaries has contracted, is in violation of any term of any employment contract, proprietary
information agreement or any other agreement relating to the right of any such individual to be
employed by, or to contract with, it or any of its Subsidiaries because of the nature of the
business to be conducted by it or any of its Subsidiaries; and to its knowledge the continued
employment by it and its Subsidiaries of their present employees, and the performance of its and
its Subsidiaries contracts with its independent contractors, will not result in any such violation.
Neither it nor any of its Subsidiaries is aware that any of its or any of its Subsidiaries’
employees is obligated under any contract (including licenses, covenants or commitments of any
nature) or other agreement, or subject to any judgment, decree or order of any court or
administrative agency that would interfere with their duties to it or any of its Subsidiaries.
Neither it nor any of its Subsidiaries has received any notice alleging that any such violation has
occurred. Except for employees who have a current effective employment agreement with it or any of
its Subsidiaries, none of its or any of its Subsidiaries’ employees has been granted the right to
continued employment by it or any of its Subsidiaries or to any material compensation following
termination of employment with it or any of its Subsidiaries. Except as set forth on Schedule
12(n), neither it nor any of its Subsidiaries is aware that any officer, key employee or group
of employees intends to terminate his, her or their employment with it or any of its Subsidiaries,
as applicable, nor does it or any of its Subsidiaries have a present intention to terminate the
employment of any officer, key employee or group of employees.
(o) Registration Rights and Voting Rights. Except as set forth on Schedule
12(o) and except as disclosed in Exchange Act Filings, neither it nor any of its Subsidiaries
is presently under any obligation, and neither it nor any of its Subsidiaries has granted any
rights, to register any of its or any of its Subsidiaries’ presently outstanding securities or any
of its securities that may hereafter be issued. Except as set forth on Schedule 12(o) and
except as disclosed in Exchange Act Filings, to its knowledge, none of its or
| Security Agreement | 18 |
any of its Subsidiaries’ shareholders has entered into any agreement with respect to its or
any of its Subsidiaries’ voting of equity securities.
(p) Compliance with Laws; Permits. Neither it nor any of its Subsidiaries is in
violation of the Xxxxxxxx-Xxxxx Act of 2002 or any SEC related regulation or rule or any rule of
the Principal Market promulgated thereunder or any other applicable statute, rule, regulation,
order or restriction of any domestic or foreign government or any instrumentality or agency thereof
in respect of the conduct of its business or the ownership of its properties which has had, or
could reasonably be expected to have, either individually or in the aggregate, a Material Adverse
Effect. No governmental orders, permissions, consents, approvals or authorizations are required to
be obtained and no registrations or declarations are required to be filed in connection with the
execution and delivery of this Agreement or any Ancillary Agreement and the issuance of any of the
Securities, except such as have been duly and validly obtained or filed, or with respect to any
filings that must be made after the Closing Date, as will be filed in a timely manner. It and each
of its Subsidiaries has all material franchises, permits, licenses and any similar authority
necessary for the conduct of its business as now being conducted by it, the lack of which could,
either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(q) Environmental and Safety Laws. Neither it nor any of its Subsidiaries is in
violation of any applicable statute, law or regulation relating to the environment or occupational
health and safety, and to its knowledge, no material expenditures are or will be required in order
to comply with any such existing statute, law or regulation. Except as set forth on Schedule
12(q), no Hazardous Materials (as defined below) are used or have been used, stored, or
disposed of by it or any of its Subsidiaries or, to its knowledge, by any other Person on any
property owned, leased or used by it or any of its Subsidiaries. For the purposes of the preceding
sentence, “Hazardous Materials” shall mean:
(i) materials which are listed or otherwise defined as “hazardous” or “toxic” under any
applicable local, state, federal and/or foreign laws and regulations that govern the existence
and/or remedy of contamination on property, the protection of the environment from contamination,
the control of hazardous wastes, or other activities involving hazardous substances, including
building materials; and
(ii) any petroleum products or nuclear materials.
(r) Valid Offering. Assuming the accuracy of the representations and warranties of
Laurus contained in this Agreement, the offer and issuance of the Note and Warrants 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. It and each of its Subsidiaries has provided Laurus with all
information requested by Laurus in connection with Laurus’ decision to enter into this Agreement,
including all information each Company and its Subsidiaries believe is reasonably necessary to make
such investment decision. Neither this Agreement, the Ancillary Agreements
| Security Agreement | 19 |
nor the exhibits and schedules hereto and thereto nor any other document delivered by it or
any of its Subsidiaries to Laurus or its attorneys or agents in connection herewith or therewith or
with the transactions contemplated hereby or thereby, contain any untrue statement of a material
fact nor omit to state a material fact necessary in order to make the statements contained herein
or therein, in light of the circumstances in which they are made, not misleading. Any financial
projections and other estimates provided to Laurus by it or any of its Subsidiaries were based on
its and its Subsidiaries’ experience in the industry and on assumptions of fact and opinion as to
future events which it or any of its Subsidiaries, at the date of the issuance of such projections
or estimates, believed to be reasonable.
(t) Insurance. It and each of its Subsidiaries has general commercial, product
liability, fire and casualty insurance policies with coverages which it believes are customary for
companies similarly situated to it and its Subsidiaries in the same or similar business.
(u) SEC Reports and Financial Statements. Except as set forth on Schedule
12(u), it and each of its Subsidiaries has filed all proxy statements, reports and other
documents required to be filed by it under the Exchange Act. The Parent has made available to
Laurus copies of: (i) its Annual Report on Form 10-K for its fiscal year ended December 31, 2004;
and (ii) its Quarterly Reports on Form 10-Q for its fiscal quarters ended March 31, 2005, June 30,
2005 and September 30, 2005, and the Form 8-K filings which it has made during its fiscal year 2006
to date (collectively, the “SEC Reports”). Except as set forth on Schedule 12(u),
each SEC Report was, at the time of its filing, in substantial compliance with the requirements of
its respective form and none of the SEC Reports, nor the financial statements (and the notes
thereto) included in the SEC Reports, as of their respective filing dates, contained any untrue
statement of a material fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under which they were made,
not misleading. Such financial statements have been prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to
the extent they may not include footnotes or may be condensed) and fairly present in all material
respects the financial condition, the results of operations and cash flows of the Parent and its
Subsidiaries, on a consolidated basis, as of, and for, the periods presented in each such SEC
Report.
(v) Listing. The Parent’s Common Stock is listed or quoted, as applicable, on the
Principal Market and satisfies all requirements for the continuation of such listing or quotation,
as applicable, and the Parent shall do all things necessary for the continuation of such listing or
quotation, as applicable. The Parent has not received any notice that its Common Stock will be
delisted from, or no longer quoted on, as applicable, the Principal Market or that its Common Stock
does not meet all requirements for such listing or quotation, as applicable.
(w) No Integrated Offering. Neither it, nor any of its Subsidiaries nor any of its
Affiliates, nor any Person acting on its or their behalf, has directly or indirectly made any
offers or sales of any security or solicited any offers to buy any security under circumstances
that would cause the offering of the Securities pursuant to this Agreement or any Ancillary
Agreement to be integrated with prior offerings by it for purposes of the Securities Act which
would prevent it from issuing the Securities pursuant to Rule 506 under the Securities Act, or
| Security Agreement | 20 |
any applicable exchange-related shareholder approval provisions, nor will it or any of its
Affiliates or Subsidiaries take any action or steps that would cause the offering of the Securities
to be integrated with other offerings.
(x) Stop Transfer. The Securities are restricted securities as of the date of this
Agreement. Neither it nor any of its Subsidiaries will issue any stop transfer order or other
order impeding the sale and delivery of any of the Securities at such time as the Securities are
registered for public sale or an exemption from registration is available, except as required by
state and federal securities laws.
(y) Dilution. It specifically acknowledges that the Parent’s obligation to issue the
shares of Common Stock upon exercise of the Warrants is binding upon the Parent and enforceable
regardless of the dilution such issuance may have on the ownership interests of other shareholders
of the Parent.
(z) Patriot Act. It certifies that, to the best of its knowledge, neither it nor any
of its Subsidiaries has been designated, nor is or shall be owned or controlled, by a “suspected
terrorist” as defined in Executive Order 13224. It hereby acknowledges that Laurus seeks to comply
with all applicable laws concerning money laundering and related activities. In furtherance of
those efforts, it hereby represents, warrants and covenants that: (i) none of the cash or property
that it or any of its Subsidiaries will pay or will contribute to Laurus has been or shall be
derived from, or related to, any activity that is deemed criminal under United States law; and (ii)
no contribution or payment by it or any of its Subsidiaries to Laurus, to the extent that they are
within its or any such Subsidiary’s control shall cause Laurus to be in violation of the United
States Bank Secrecy Act, the United States International Money Laundering Control Act of 1986 or
the United States International Money Laundering Abatement and Anti-Terrorist Financing Act of
2001. It shall promptly notify Laurus if any of these representations, warranties and covenants
ceases to be true and accurate regarding it or any of its Subsidiaries. It shall provide Laurus
with any additional information regarding it and each Subsidiary thereof that Laurus deems
necessary or convenient to ensure compliance with all applicable laws concerning money laundering
and similar activities. It understands and agrees that if at any time it is discovered that any of
the foregoing representations, warranties and covenants are incorrect, or if otherwise required by
applicable law or regulation related to money laundering or similar activities, Laurus may
undertake appropriate actions to ensure compliance with applicable law or regulation, including but
not limited to segregation and/or redemption of Laurus’ investment in it. It further understands
that Laurus may release confidential information about it and its Subsidiaries and, if applicable,
any underlying beneficial owners, to proper authorities if Laurus, in its sole discretion,
determines that it is in the best interests of Laurus in light of relevant rules and regulations
under the laws set forth in subsection (ii) above.
(aa) Company Name; Locations of Offices, Records and Collateral. Schedule
12(aa) sets forth each Company’s name as it appears in official filings in the state of its
organization, the type of entity of each Company, the organizational identification number issued
by each Company’s state of organization or a statement that no such number has been issued, each
Company’s state of organization, and the location of each Company’s chief executive office,
corporate offices, warehouses, other locations of Collateral and locations where records with
respect to Collateral are kept (including in each case the county of such locations) and,
| Security Agreement | 21 |
except as set forth in such Schedule 12(aa), such locations have not changed during
the preceding twelve months. As of the Closing Date, during the prior five years, except as set
forth in Schedule 12(aa), no Company has been known as or conducted business in any other
name (including trade names). Each Company has only one state of organization.
(bb) ERISA. Based upon the Employee Retirement Income Security Act of 1974
(“ERISA”), and the regulations and published interpretations thereunder: (i) neither it
nor any of its Subsidiaries has engaged in any Prohibited Transactions (as defined in Section 406
of ERISA and Section 4975 of the Code); (ii) it and each of its Subsidiaries has met all applicable
minimum funding requirements under Section 302 of ERISA in respect of its plans; (iii) neither it
nor any of its Subsidiaries has any knowledge of any event or occurrence which would cause the
Pension Benefit Guaranty Corporation to institute proceedings under Title IV of ERISA to terminate
any employee benefit plan(s); (iv) neither it nor any of its Subsidiaries has any fiduciary
responsibility for investments with respect to any plan existing for the benefit of persons other
than its or such Subsidiary’s employees; and (v) neither it nor any of its Subsidiaries has
withdrawn, completely or partially, from any multi-employer pension plan so as to incur liability
under the Multiemployer Pension Plan Amendments Act of 1980.
13. Covenants. Each Company, as applicable, covenants and agrees with Laurus as
follows:
(a) Stop-Orders. It shall advise Laurus, promptly after it receives notice of
issuance by the SEC, any state securities commission or any other regulatory authority of any stop
order or of any order preventing or suspending any offering of any securities of the Parent, or of
the suspension of the qualification of the Common Stock of the Parent for offering or sale in any
jurisdiction, or the initiation of any proceeding for any such purpose.
(b) Listing. It shall promptly secure the listing or quotation, as applicable, of the
shares of Common Stock issuable upon exercise of the Warrants on the Principal Market upon which
shares of Common Stock are listed or quoted, as applicable, (subject to official notice of
issuance) and shall maintain such listing or quotation, as applicable, so long as any other shares
of Common Stock shall be so listed or quoted, as applicable. The Parent shall maintain the listing
or quotation, as applicable, of its Common Stock on the Principal Market, and will comply in all
material respects with the Parent’s reporting, filing and other obligations under the bylaws or
rules of the National Association of Securities Dealers (“NASD”) and such exchanges, as
applicable.
(c) Market Regulations. It shall notify the SEC, NASD and applicable state
authorities, in accordance with their requirements, of the transactions contemplated by this
Agreement, and shall take all other necessary action and proceedings as may be required and
permitted by applicable law, rule and regulation, for the legal and valid issuance of the
Securities to Laurus and promptly provide copies thereof to Laurus.
(d) Reporting Requirements. It shall timely file with the SEC all reports required to
be filed pursuant to the Exchange Act and refrain from terminating its status as an issuer required
by the Exchange Act to file reports thereunder even if the Exchange Act or the rules or regulations
thereunder would permit such termination.
| Security Agreement | 22 |
(e) Use of Funds. It shall use the proceeds of the Loans to repay existing
indebtedness and general working capital purposes only.
(f) Access to Facilities. It shall, and shall cause each of its Subsidiaries to,
permit any representatives designated by Laurus (or any successor of Laurus), upon reasonable
notice and during normal business hours, at Laurus’s expense and accompanied by a representative of
Company Agent (provided that no such prior notice shall be required to be given and no such
representative shall be required to accompany Laurus in the event Laurus believes such access is
necessary to preserve or protect the Collateral or following the occurrence and during the
continuance of an Event of Default), to:
(i) visit and inspect any of its or any such Subsidiary’s properties;
(ii) examine its or any such Subsidiary’s corporate and financial records (unless such
examination is not permitted by federal, state or local law or by contract) and make copies thereof
or extracts therefrom; and
(iii) discuss its or any such Subsidiary’s affairs, finances and accounts with the chairman of
the Audit Committee of the Company or any of its Subsidiary’s directors, officers and Accountants
.
Notwithstanding the foregoing, neither it nor any of its Subsidiaries shall provide any material,
non-public information to Laurus unless Laurus signs a confidentiality agreement and otherwise
complies with Regulation FD, under the federal securities laws.
(g) Taxes. It shall, and shall cause each of its Subsidiaries to, promptly pay and
discharge, or cause to be paid and discharged, when due and payable, all lawful taxes, assessments
and governmental charges or levies imposed upon it and its Subsidiaries’ income, profits, property
or business, as the case may be; provided, however, that any such tax, assessment, charge or levy
need not be paid currently if (i) the validity thereof shall currently and diligently be contested
in good faith by appropriate proceedings, (ii) such tax, assessment, charge or levy shall have no
effect on the Lien priority of Laurus in the Collateral, and (iii) if it and/or such Subsidiary, as
applicable, shall have set aside on its and/or such Subsidiary’s books adequate reserves with
respect thereto in accordance with GAAP; and provided, further, that it shall, and shall cause each
of its Subsidiaries to, pay all such taxes, assessments, charges or levies forthwith upon the
commencement of proceedings to foreclose any lien which may have attached as security therefor.
(h) Insurance. It shall bear the full risk of loss from any loss of any nature
whatsoever with respect to the Collateral. It and each of its Subsidiaries shall keep its assets
which are of an insurable character insured by financially sound and reputable insurers against
loss or damage by fire, explosion and other risks customarily insured against by companies in
similar business similarly situated as it and its Subsidiaries; and it and its Subsidiaries shall
maintain, with financially sound and reputable insurers, insurance against other hazards and risks
and liability to persons and property to the extent and in the manner which it and/or such
Subsidiary thereof reasonably believes is customary for companies in similar business similarly
situated as it and its Subsidiaries and to the extent available on commercially reasonable terms.
| Security Agreement | 23 |
It and each of its Subsidiaries will jointly and severally bear the full risk of loss from any
loss of any nature whatsoever with respect to the assets pledged to Laurus as security for its
obligations hereunder and under the Ancillary Agreements. At its own cost and expense in amounts
and with carriers reasonably acceptable to Laurus, it and each of its Subsidiaries shall (i) keep
all their insurable properties and properties in which they have an interest insured against the
hazards of fire, flood, sprinkler leakage, those hazards covered by extended coverage insurance and
such other hazards, and for such amounts, as is customary in the case of companies engaged in
businesses similar to it or the respective Subsidiary’s including business interruption insurance;
(ii) maintain a bond in such amounts as is customary in the case of companies engaged in businesses
similar to it and its Subsidiaries’ insuring against larceny, embezzlement or other criminal
misappropriation of insured’s officers and employees who may either singly or jointly with others
at any time have access to its or any of its Subsidiaries assets or funds either directly or
through governmental authority to draw upon such funds or to direct generally the disposition of
such assets; (iii) maintain public and product liability insurance against claims for personal
injury, death or property damage suffered by others; (iv) maintain all such worker’s compensation
or similar insurance as may be required under the laws of any state or jurisdiction in which it or
any of its Subsidiaries is engaged in business; and (v) furnish Laurus with (x) certificates of
insurance evidencing the maintenance of such insurance policies at least thirty (30) days before
any expiration date, (y) excepting its and its Subsidiaries’ workers’ compensation policy,
endorsements to such policies naming Laurus as “co-insured” or “additional insured” and appropriate
loss payable endorsements in form and substance satisfactory to Laurus, naming Laurus as lenders
loss payee, and (z) evidence that as to Laurus the insurance coverage shall not be impaired or
invalidated by any act or neglect of any Company or any of its Subsidiaries and the insurer will
provide Laurus with at least thirty (30) days notice prior to cancellation. It shall instruct the
insurance carriers that in the event of any loss thereunder, the carriers shall make payment for
such loss to Laurus and not to any Company or any of its Subsidiaries and Laurus jointly. If any
insurance losses are paid by check, draft or other instrument payable to any Company and/or any of
its Subsidiaries and Laurus jointly, Laurus may endorse, as applicable, such Company’s and/or any
of its Subsidiaries’ name thereon and do such other things as Laurus may deem advisable to reduce
the same to cash. Laurus is hereby authorized, acting in good faith, to adjust and compromise
claims. All loss recoveries received by Laurus upon any such insurance may be applied to the
Obligations, in such order as Laurus in its sole discretion shall determine or shall otherwise be
delivered to Company Agent for the benefit of the applicable Company and/or its Subsidiaries. Any
surplus shall be paid by Laurus to Company Agent for the benefit of the applicable Company and/or
its Subsidiaries, or applied as may be otherwise required by law. Any deficiency thereon shall be
paid, as applicable, by Companies and their Subsidiaries to Laurus, on demand.
(i) Intellectual Property. It shall, and shall cause each of its Subsidiaries to,
maintain in full force and effect its corporate existence, rights and franchises and all licenses
and other rights to use Intellectual Property owned or possessed by it and reasonably deemed to be
necessary to the conduct of its business.
(j) Properties. It shall, and shall cause each of its Subsidiaries to, keep its
properties in good repair, working order and condition, reasonable wear and tear excepted, and from
time to time make all needful and proper repairs, renewals, replacements, additions and
improvements thereto; and it shall, and shall cause each of its Subsidiaries to, at all times
comply
| Security Agreement | 24 |
with each provision of all leases to which it is a party or under which it occupies property
if the breach of such provision could reasonably be expected to have a Material Adverse Effect.
(k) Confidentiality. It shall not, and shall not permit any of its Subsidiaries to,
disclose, and will not include in any public announcement, the name of Laurus, unless expressly
agreed to by Laurus or unless and until such disclosure is required by law or applicable
regulation, and then only to the extent of such requirement. Notwithstanding the foregoing, each
Company and its Subsidiaries may disclose Laurus’ identity and the terms of this Agreement to its
current and prospective debt and equity financing sources.
(l) Required Approvals. It shall not, and shall not permit any of its Subsidiaries
to, without the prior written consent of Laurus, (i) create, incur, assume or suffer to exist any
indebtedness (exclusive of trade debt) whether secured or unsecured other than each Company’s
indebtedness to Laurus and as set forth on Schedule 13(l)(i) attached hereto and made a
part hereof; (ii) cancel any debt owing to it in excess of $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 it or its Subsidiaries for deposit or collection or similar transactions in the
ordinary course of business; (iv) directly or indirectly declare, pay or make any dividend or
distribution on any class of its Stock or apply any of its funds, property or assets to the
purchase, redemption or other retirement of any of its or its Subsidiaries’ Stock outstanding on
the date hereof, or issue any preferred stock; (v) purchase or hold beneficially any Stock or other
securities or evidences of indebtedness of, make or permit to exist any loans or advances to, or
make any investment or acquire any interest whatsoever in, any other Person, including any
partnership or joint venture, except (x) travel advances, (y) loans to its and its Subsidiaries’
officers and employees not exceeding at any one time an aggregate of $10,000, and (z) loans to its
existing Subsidiaries so long as such Subsidiaries are designated as either a co-borrower hereunder
or has entered into such guaranty and security documentation required by Laurus, including, without
limitation, to grant to Laurus a first priority perfected security interest in substantially all of
such Subsidiary’s assets to secure the Obligations; (vi) create or permit to exist any Subsidiary,
other than any Subsidiary in existence on the date hereof and listed in Schedule 12(b)
unless such new Subsidiary is a wholly-owned Subsidiary and is designated by Laurus as either a
co-borrower or guarantor hereunder and such Subsidiary shall have entered into all such
documentation required by Laurus, including, without limitation, to grant to Laurus a first
priority perfected security interest in substantially all of such Subsidiary’s assets to secure the
Obligations; (vii) directly or indirectly, prepay any indebtedness (other than to Laurus and in the
ordinary course of business), or repurchase, redeem, retire or otherwise acquire any indebtedness
(other than to Laurus and in the ordinary course of business) except to make scheduled payments of
principal and interest thereof; (viii) enter into any merger, consolidation or other reorganization
with or into any other Person or acquire all or a portion of the assets or Stock of any Person or
permit any other Person to consolidate with or merge with it, unless (1) such Company is the
surviving entity of such merger or consolidation, (2) no Event of Default shall exist immediately
prior to and after giving effect to such merger or consolidation, (3) such Company shall have
provided Laurus copies of all documentation relating to such merger or consolidation and (4) such
Company shall have provided Laurus with at least thirty (30) days’ prior written notice of such
merger or consolidation; (ix) materially change the nature of the business in which it is presently
engaged; (x) become subject to (including, without
| Security Agreement | 25 |
limitation, by way of amendment to or modification of) any agreement or instrument which by
its terms would (under any circumstances) restrict its or any of its Subsidiaries’ right to perform
the provisions of this Agreement or any of the Ancillary Agreements; (xi) change its fiscal year or
make any changes in accounting treatment and reporting practices without prior written notice to
Laurus except as required by GAAP or in the tax reporting treatment or except as required by law;
(xii) enter into any transaction with any employee, director or Affiliate, except in the ordinary
course on arms-length terms; (xiii) xxxx Accounts under any name except the present name of such
Company; or (xiv) sell, lease, transfer or otherwise dispose of any of its properties or assets, or
any of the properties or assets of its Subsidiaries, except for (1) sales, leases, transfer or
dispositions by any Company to any other Company, (2) the sale of Inventory in the ordinary course
of business and (3) the disposition or transfer in the ordinary course of business during any
fiscal year of obsolete and worn-out Equipment and only to the extent that (x) the proceeds of any
such disposition are used to acquire replacement Equipment which is subject to Laurus’ first
priority security interest or are used to repay Loans or to pay general corporate expenses, or (y)
following the occurrence of an Event of Default which continues to exist, the proceeds of which are
remitted to Laurus to be held as cash collateral for the Obligations.
(m) Reissuance of Securities. The Parent shall reissue certificates representing the
Securities without the legends set forth in Section 39 below at such time as:
(i) the holder thereof is permitted to dispose of such Securities pursuant to Rule 144(k)
under the Securities Act; or
(ii) upon resale subject to an effective registration statement after such Securities are
registered under the Securities Act.
The Parent agrees to cooperate with Laurus in connection with all resales pursuant to Rule 144(d)
and Rule 144(k) and provide legal opinions necessary to allow such resales provided the Parent and
its counsel receive reasonably requested representations from Laurus and broker, if any.
(n) Opinion. On the Closing Date, it shall deliver to Laurus an opinion acceptable to
Laurus from each Company’s legal counsel. Each Company will provide, at the Companies’ joint and
several expense, such other legal opinions in the future as are reasonably necessary for the
exercise of the Warrants.
(o) Legal Name, etc. It shall not, without providing Laurus with 30 days prior
written notice, change (i) its name as it appears in the official filings in the state of its
organization, (ii) the type of legal entity it is, (iii) its organization identification number, if
any, issued by its state of organization, (iv) its state of organization or (v) amend its
certificate of incorporation, by-laws or other organizational document.
(p) Compliance with Laws. The operation of each of its and each of its Subsidiaries’
business is and shall continue to be in compliance in all material respects with all applicable
federal, state and local laws, rules and ordinances, including to all laws, rules, regulations and
orders relating to taxes, payment and withholding of payroll taxes, employer and
| Security Agreement | 26 |
employee contributions and similar items, securities, employee retirement and welfare
benefits, employee health and safety and environmental matters.
(q) Notices. It and each of its Subsidiaries shall promptly inform Laurus in writing
of: (i) the commencement of all proceedings and investigations by or before and/or the receipt of
any notices from, any governmental or nongovernmental body and all actions and proceedings in any
court or before any arbitrator against or in any way concerning any event which could reasonably be
expected to have singly or in the aggregate, a Material Adverse Effect; (ii) any change which has
had, or could reasonably be expected to have, a Material Adverse Effect; (iii) any Event of Default
or Default; and (iv) any default or any event which with the passage of time or giving of notice or
both would constitute a default under any agreement for the payment of money to which it or any of
its Subsidiaries is a party or by which it or any of its Subsidiaries or any of its or any such
Subsidiary’s properties may be bound the breach of which would have a Material Adverse Effect.
(r) Margin Stock. It shall not permit any of the proceeds of the Loans made hereunder
to be used directly or indirectly to “purchase” or “carry” “margin stock” or to repay indebtedness
incurred to “purchase” or “carry” “margin stock” within the respective meanings of each of the
quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now and
from time to time hereafter in effect.
(s) Offering Restrictions. Except as previously disclosed in the SEC Reports or in
the Exchange Act Filings, or stock or stock options granted to its employees or directors, neither
it nor any of its Subsidiaries shall, prior to the full exercise by Laurus or the expiration of the
Warrants, (x) enter into any equity line of credit agreement or similar agreement or (y) issue, or
enter into any agreement to issue, any securities with a variable/floating conversion and/or
pricing feature which are or could be (by conversion or registration) free-trading securities (i.e.
common stock subject to a registration statement).
(t) Authorization and Reservation of Shares. The Parent shall at all times have
authorized and reserved a sufficient number of shares of Common Stock to provide for the exercise
of the Warrants.
(u) Financing Right of First Refusal.
(i) Each Company hereby grants to Laurus a right of first refusal to provide any Additional
Financing (as defined below) to be issued by any Company and/or any of its Subsidiaries (the
“Additional Financing Parties”), subject to the following terms and conditions. From and
after the date hereof, prior to the incurrence of any additional indebtedness and/or the sale or
issuance of any equity interests of the Additional Financing Parties (an “Additional
Financing”), Company Agent shall notify Laurus of such Additional Financing. In connection
therewith, Company Agent shall submit a fully executed term sheet (a “Proposed Term Sheet”)
to Laurus setting forth the terms, conditions and pricing of any such Additional Financing (such
financing to be negotiated on “arm’s length” terms and the terms thereof to be negotiated in good
faith) proposed to be entered into by the Additional Financing Parties. Laurus shall have the
right, but not the obligation, to deliver to Company Agent its own proposed term sheet (the
“Laurus Term Sheet”) setting forth the terms and conditions upon which Laurus would
| Security Agreement | 27 |
be willing to provide such Additional Financing to the Additional Financing Parties. The
Laurus Term Sheet shall contain terms no less favorable to the Additional Financing Parties than
those outlined in Proposed Term Sheet. Laurus shall deliver to Company Agent the Laurus Term Sheet
within five Business Days of receipt of each such Proposed Term Sheet. If the provisions of the
Laurus Term Sheet are at least as favorable to the Additional Financing Parties as the provisions
of the Proposed Term Sheet, the Additional Financing Parties shall enter into and consummate the
Additional Financing transaction outlined in the Laurus Term Sheet.
(ii) It shall not, and shall not permit its Subsidiaries to, agree, directly or indirectly, to
any restriction with any Person which limits the ability of Laurus to consummate an Additional
Financing with it or any of its Subsidiaries.
(u) Prohibition of Amendments to Subordinated Debt Documentation. It shall not,
without the prior written consent of Laurus, amend, modify or in any way alter the terms of any of
the Subordinated Debt Documentation.
(v) Prohibition of Grant of Collateral for Subordinated Debt Documentation. It shall
not, without the prior written consent of Laurus, grant or permit any of its Subsidiaries to grant
to any Person any Collateral of such Company or any collateral of any of its Subsidiaries as
security for any obligation arising under the Subordinated Debt Documentation.
(w) Prohibitions of Payment Under Subordinated Debt Documentation. Except as
otherwise set forth in the Subordinated Debt Documentation, neither it nor any of its Subsidiaries
shall, without the prior written consent of Laurus, make any payments in respect of the
indebtedness evidenced by the Subordinated Debt Documentation.
14. Further Assurances. At any time and from time to time, upon the written request
of Laurus and at the sole expense of Companies, each Company shall promptly and duly execute and
deliver any and all such further instruments and documents and take such further action as Laurus
may request (a) to obtain the full benefits of this Agreement and the Ancillary Agreements, (b) to
protect, preserve and maintain Laurus’ rights in the Collateral and under this Agreement or any
Ancillary Agreement, and/or (c) to enable Laurus to exercise all or any of the rights and powers
herein granted or any Ancillary Agreement.
15. Representations, Warranties and Covenants of Laurus. Laurus hereby represents,
warrants and covenants to each Company as follows:
(a) Requisite Power and Authority. Laurus has all necessary power and authority under
all applicable provisions of law to execute and deliver this Agreement and the Ancillary Agreements
and to carry out their provisions. All corporate action on Laurus’ part required for the lawful
execution and delivery of this Agreement and the Ancillary Agreements have been or will be
effectively taken prior to the Closing Date. Upon their execution and delivery, this Agreement and
the Ancillary Agreements shall be valid and binding obligations of Laurus, enforceable in
accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting enforcement of creditors’
rights, and (b) as limited by general principles of equity that restrict the availability of
equitable and legal remedies.
| Security Agreement | 28 |
(b) Investment Representations. Laurus understands that the Securities are being
offered pursuant to an exemption from registration contained in the Securities Act based in part
upon Laurus’ representations contained in this Agreement, including, without limitation, that
Laurus is an “accredited investor” within the meaning of Regulation D under the Securities Act.
Laurus has received or has had full access to all the information it considers necessary or
appropriate to make an informed investment decision with respect to the Note and Warrant to be
issued to it under this Agreement and the Securities acquired by it upon the exercise of the
Warrants.
(c) Laurus Bears Economic Risk. Laurus has substantial experience in evaluating and
investing in private placement transactions of securities in companies similar to the Parent so
that it is capable of evaluating the merits and risks of its investment in the Parent and has the
capacity to protect its own interests. Laurus must bear the economic risk of this investment until
the Securities are sold pursuant to (i) an effective registration statement under the Securities
Act, or (ii) an exemption from registration is available.
(d) Investment for Own Account. The Securities are being issued to Laurus for its own
account for investment only, and not as a nominee or agent and not with a view towards or for
resale in connection with their distribution.
(e) Laurus Can Protect Its Interest. Laurus represents that by reason of its, or of
its management’s, business and financial experience, Laurus has the capacity to evaluate the merits
and risks of its investment in the Note, and the Securities and to protect its own interests in
connection with the transactions contemplated in this Agreement, and the Ancillary Agreements.
Further, Laurus is aware of no publication of any advertisement in connection with the transactions
contemplated in the Agreement or the Ancillary Agreements.
(f) Accredited Investor. Laurus represents that it is an accredited investor within
the meaning of Regulation D under the Securities Act.
(g) Shorting. Neither Laurus nor any of its Affiliates or investment partners has,
will, or will cause any Person, to directly engage in “short sales” of the Parent’s Common Stock so
long as any amounts under the Note shall be outstanding.
(h) Patriot Act. Laurus certifies that, to the best of Laurus’ knowledge, Laurus has
not been designated, and is not owned or controlled, by a “suspected terrorist” as defined in
Executive Order 13224. Laurus seeks to comply with all applicable laws concerning money laundering
and related activities. In furtherance of those efforts, Laurus hereby represents, warrants and
covenants that: (i) none of the cash or property that Laurus will use to make the Loans has been
or shall be derived from, or related to, any activity that is deemed criminal under United States
law; and (ii) no disbursement by Laurus to any Company to the extent within Laurus’ control, shall
cause Laurus to be in violation of the United States Bank Secrecy Act, the United States
International Money Laundering Control Act of 1986 or the United States International Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001. Laurus shall promptly notify the
Company Agent if any of these representations ceases to be true and accurate regarding Laurus.
Laurus agrees to provide the Company any additional information regarding Laurus that the Company
deems necessary or convenient to ensure
| Security Agreement | 29 |
compliance with all applicable laws concerning money laundering and similar activities.
Laurus understands and agrees that if at any time it is discovered that any of the foregoing
representations are incorrect, or if otherwise required by applicable law or regulation related to
money laundering similar activities, Laurus may undertake appropriate actions to ensure compliance
with applicable law or regulation, including but not limited to segregation and/or redemption of
Laurus’ investment in the Parent. Laurus further understands that the Parent may release
information about Laurus and, if applicable, any underlying beneficial owners, to proper
authorities if the Parent, in its sole discretion, determines that it is in the best interests of
the Parent in light of relevant rules and regulations under the laws set forth in subsection (ii)
above.
(i) Limitation on Acquisition of Common Stock. Notwithstanding anything to the
contrary contained in this Agreement, any Ancillary Agreement, or any document, instrument or
agreement entered into in connection with any other transaction entered into by and between Laurus
and any Company (and/or Subsidiaries or Affiliates of any Company), Laurus shall not acquire stock
in the Parent (including, without limitation, pursuant to a contract to purchase, by exercising an
option or warrant, by converting any other security or instrument, by acquiring or exercising any
other right to acquire, shares of stock or other security convertible into shares of stock in the
Parent, or otherwise, and such options, warrants, conversion or other rights shall not be
exercisable) to the extent such stock acquisition would cause any interest (including any original
issue discount) payable by any Company to Laurus not to qualify as portfolio interest, within the
meaning of Section 881(c)(2) of the Internal Revenue Code of 1986, as amended (the “Code”)
by reason of Section 881(c)(3) of the Code, taking into account the constructive ownership rules
under Section 871(h)(3)(C) of the Code (the “Stock Acquisition Limitation”). The Stock
Acquisition Limitation shall automatically become null and void without any notice to any Company
upon the existence of an Event of Default at a time when the average closing price of the Common
Stock as reported by Bloomberg, L.P. on the Principal Market for the immediately preceding five
trading days is greater than or equal to 150% of the Exercise Price (as defined in the Warrant).
.
16. Power of Attorney. Each Company hereby appoints Laurus, or any other Person whom
Laurus may designate as such Company’s attorney, with power to: (i) endorse such Company’s name on
any checks, notes, acceptances, money orders, drafts or other forms of payment or security that may
come into Laurus’ possession; (ii) sign such Company’s name on any invoice or 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)
on or after the occurrence and during the continuation of an Event of Default, notify the post
office authorities to change the address for delivery of such Company’s mail to an address
designated by Laurus, and to receive, open and dispose of all mail addressed to such Company. Each
Company hereby ratifies and approves all 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
| Security Agreement | 30 |
misconduct. This power, being coupled with an interest, is irrevocable so long as Laurus has
a security interest and until the Obligations have been fully satisfied.
17. Term of Agreement. Laurus’ agreement to make Loans and extend financial
accommodations under and in accordance with the terms of this Agreement or any Ancillary Agreement
shall continue in full force and effect until the expiration of the Term. At Laurus’ election
following the occurrence of an Event of Default, Laurus may terminate this Agreement. The
termination of the Agreement shall not affect any of Laurus’ rights hereunder or any Ancillary
Agreement and the provisions hereof and thereof shall continue to be fully operative until all
transactions entered into, rights or interests created and the Obligations have been irrevocably
disposed of, concluded or liquidated. Notwithstanding the foregoing, Laurus shall release its
security interests at any time after thirty (30) days notice upon irrevocable payment to it of all
Obligations if each Company shall have (i) provided Laurus with an executed release of any and all
claims which such Company may have or thereafter have under this Agreement and all Ancillary
Agreements and (ii) unless an Event of Default has occurred and is continuing at the time of
prepayment, paid to Laurus an early payment fee in an amount equal to (1) four percent (4%) of the
Capital Availability Amount if such payment occurs prior to the first anniversary of the Closing
Date and (2) three percent (3%) of the Capital Availability Amount if such payment occurs on or
after the first anniversary of the Closing Date and prior to the second anniversary of the Closing
Date; such fee being intended to compensate Laurus for its costs and expenses incurred in initially
approving this Agreement or extending same. Such early payment fee shall be due and payable jointly
and severally by the Companies to Laurus upon termination by acceleration of this Agreement by
Laurus due to the occurrence and continuance of an Event of Default.
18. Termination of Lien. The Liens and rights granted to Laurus hereunder and any
Ancillary Agreements and the financing statements filed in connection herewith or therewith shall
continue in full force and effect, notwithstanding the termination of this Agreement or the fact
that any Company’s account may from time to time be temporarily in a zero or credit position, until
all of the Obligations have been indefeasibly paid or performed in full after the termination of
this Agreement. Laurus shall not be required to send termination statements to any Company, or to
file them with any filing office, unless and until this Agreement and the Ancillary Agreements
shall have been terminated in accordance with their terms and all Obligations indefeasibly paid in
full in immediately available funds.
19. Events of Default. The occurrence of any of the following shall constitute an
“Event of Default”:
(a) failure to make payment of any of the Obligations when required hereunder, and, in any
such case, such failure shall continue for a period of three (3) days following the date upon which
any such payment was due;
(b) failure by any Company or any of its Subsidiaries to pay any taxes when due unless such
taxes are being contested in good faith by appropriate proceedings and with respect to which
adequate reserves have been provided on such Company’s and/or such Subsidiary’s books;
| Security Agreement | 31 |
(c) failure to perform under, and/or committing any breach of, in any material respect, this
Agreement or any covenant contained herein, which failure or breach shall continue without remedy
for a period of fifteen (15) days after the occurrence thereof;
(d) any representation, warranty or statement made by any Company or any of its Subsidiaries
hereunder, in any Ancillary Agreement, any certificate, statement or document delivered pursuant to
the terms hereof, or in connection with the transactions contemplated by this Agreement should
prove to be false or misleading in any material respect on the date as of which made or deemed
made;
(e) the occurrence of any default (or similar term) in the observance or performance of any
other agreement or condition relating to any indebtedness or contingent obligation of any Company
or any of its Subsidiaries [(including, without limitation, the indebtedness evidenced by the
[Subordinated Debt Documentation)] beyond the period of grace (if any), the effect of which default
is to cause, or permit the holder or holders of such indebtedness or beneficiary or beneficiaries
of such contingent obligation to cause, such indebtedness to become due prior to its stated
maturity or such contingent obligation to become payable;
(f) attachments or levies in excess of $50,000 in the aggregate are made upon any Company’s
assets or a judgment is rendered against any Company’s property involving a liability of more than
$50,000 which shall not have been vacated, discharged, stayed or bonded within thirty (30) days
from the entry thereof;
(g) any change in any Company’s or any of its Subsidiary’s condition or affairs (financial or
otherwise) which in Laurus’ reasonable, good faith opinion, could reasonably be expected to have a
Material Adverse Effect;
(h) any Lien created hereunder or under any Ancillary Agreement for any reason ceases to be or
is not a valid and perfected Lien having a first priority interest;
(i) any Company or any of its Subsidiaries shall (i) apply for, consent to or suffer to exist
the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of
itself or of all or a substantial part of its property, (ii) make a general assignment for the
benefit of creditors, (iii) commence a voluntary case under the federal bankruptcy laws (as now or
hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a petition seeking to
take advantage of any other law providing for the relief of debtors, (vi) acquiesce to without
challenge within ten (10) days of the filing thereof, or failure to have dismissed within thirty
(30) days, any petition filed against it in any involuntary case under such bankruptcy laws, or
(vii) take any action for the purpose of effecting any of the foregoing;
(j) any Company or any of its Subsidiaries shall admit in writing its inability, or be
generally unable, to pay its debts as they become due or cease operations of its present business;
(k) any Company or any of its Subsidiaries directly or indirectly sells, assigns, transfers,
conveys, or suffers or permits to occur any sale, assignment, transfer or conveyance of any assets
of such Company or any interest therein, except as permitted herein;
| Security Agreement | 32 |
(l) any “Person” or “group” (as such terms are defined in Sections 13(d) and 14(d) of the
Exchange Act, as in effect on the date hereof), other than the Holder, is or becomes the
“beneficial owner” (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly or
indirectly, of 35% or more on a fully diluted basis of the then outstanding voting equity interest
of the Parent [(other than a “Person” or “group” that beneficially owns 35% or more of such
outstanding voting equity interests of the Parent on the date hereof)], (ii) the Board of
Directors of the Parent shall cease to consist of a majority of the Board of Directors of the
Parent on the date hereof (or directors appointed by a majority of the board of directors in effect
immediately prior to such appointment) or (iii) the Parent or any of its Subsidiaries merges or
consolidates with, or sells all or substantially all of its assets to, any other person or entity;
(m) the indictment or threatened indictment of any Company or any of its Subsidiaries or any
executive officer of any Company or any of its Subsidiaries under any criminal statute, or
commencement or threatened commencement of criminal or civil proceeding against any Company or any
of its Subsidiaries or any executive officer of any Company or any of its Subsidiaries pursuant to
which statute or proceeding penalties or remedies sought or available include forfeiture of any of
the property of any Company or any of its Subsidiaries;
(n) an Event of Default shall occur under and as defined in the Note or in any other Ancillary
Agreement;
(o) any Company or any of its Subsidiaries shall breach any term or provision of any Ancillary
Agreement to which it is a party (including, without limitation, Section 7(e) of the Registration
Rights Agreement), in any material respect which breach is not cured within any applicable cure or
grace period provided in respect thereof (if any);
(p) any Company or any of its Subsidiaries attempts to terminate, challenges the validity of,
or its liability under this Agreement or any Ancillary Agreement, or any proceeding shall be
brought to challenge the validity, binding effect of any Ancillary Agreement or any Ancillary
Agreement ceases to be a valid, binding and enforceable obligation of such Company or any of its
Subsidiaries (to the extent such Persons are a party thereto);
(q) an SEC stop trade order or Principal Market trading suspension of the Common Stock shall
be in effect for five (5) consecutive days or five (5) days during a period of ten (10) consecutive
days, excluding in all cases a suspension of all trading on a Principal Market, provided that the
Parent shall not have been able to cure such trading suspension within thirty (30) days of the
notice thereof or list the Common Stock on another Principal Market within sixty (60) days of such
notice;
(r) The Parent’s failure to deliver Common Stock to Laurus pursuant to and in the form
required by the Warrant and this Agreement, if such failure to deliver Common Stock shall not be
cured within two (2) Business Days or any Company is required to issue a replacement Note to Laurus
and such Company shall fail to deliver such replacement Note within seven (7) Business Days; or
(s) any Company, or any of its Subsidiaries shall take or participate in any action which
would be prohibited under the provisions of any of the Subordinated Debt
| Security Agreement | 33 |
Documentation or make any payment on the indebtedness evidenced by the Subordinated Debt
Documentation to a Person that was not entitled to receive such payments under the subordination
provisions of applicable Subordinated Debt Documentation.
20. Remedies. Following the occurrence of an Event of Default, Laurus shall have the
right to demand repayment in full of all Obligations, whether or not otherwise due. Until all
Obligations have been fully and indefeasibly satisfied, Laurus shall retain its Lien in all
Collateral. Laurus shall have, in addition to all other rights provided herein and in each
Ancillary Agreement, the rights and remedies of a secured party under the UCC, and under other
applicable law, all other legal and equitable rights to which Laurus may be entitled, including the
right to take immediate possession of the Collateral, to require each Company to assemble the
Collateral, at Companies’ joint and several expense, and to make it available to Laurus at a place
designated by Laurus which is reasonably convenient to both parties and to enter any of the
premises of any Company or wherever the Collateral shall be located, with or without force or
process of law, and to keep and store the same on said premises until sold (and if said premises be
the property of any Company, such Company agrees not to charge Laurus for storage thereof), and the
right to apply for the appointment of a receiver for such Company’s property. Further, Laurus may,
at any time or times after the occurrence of an Event of Default, sell and deliver all Collateral
held by or for Laurus at public or private sale for cash, upon credit or otherwise, at such prices
and upon such terms as Laurus, in Laurus’ sole discretion, deems advisable or Laurus may otherwise
recover upon the Collateral in any commercially reasonable manner as Laurus, in its sole
discretion, deems advisable. The requirement of reasonable notice shall be met if such notice is
mailed postage prepaid to Company Agent at Company Agent’s address as shown in Laurus’ records, at
least ten (10) days before the time of the event of which notice is being given. Laurus may be the
purchaser at any sale, if it is public. In connection with the exercise of the foregoing remedies,
Laurus is granted permission to use all of each Company’s Intellectual Property. The proceeds of
sale shall be applied first to all costs and expenses of sale, including attorneys’ fees, and
second to the payment (in whatever order Laurus elects) of all Obligations. After the indefeasible
payment and satisfaction in full of all of the Obligations, and after the payment by Laurus of any
other amount required by any provision of law, including Section 9-608(a)(1) of the UCC (but only
after Laurus has received what Laurus considers reasonable proof of a subordinate party’s security
interest), the surplus, if any, shall be paid to Company Agent (for the benefit of the applicable
Companies) or its representatives or to whosoever may be lawfully entitled to receive the same, or
as a court of competent jurisdiction may direct. The Companies shall remain jointly and severally
liable to Laurus for any deficiency. In addition, the Companies shall jointly and severally pay
Laurus a liquidation fee (“Liquidation Fee”) in the amount of five percent (5%) of the
actual amount collected in respect of each Account outstanding at any time during a Liquidation
Period. For purposes hereof, “Liquidation Period” means a period: (i) beginning on the
earliest date of (x) an event referred to in Section 19(i) or 19(j), or (y) the cessation of any
Company’s business; and (ii) ending on the date on which Laurus has actually received all
Obligations due and owing it under this Agreement and the Ancillary Agreements. The Liquidation
Fee shall be paid on the date on which Laurus collects the applicable Account by deduction from the
proceeds thereof. Each Company and Laurus acknowledge that the actual damages that would be
incurred by Laurus after the occurrence of an Event of Default would be difficult to quantify and
that such
Company and Laurus have agreed that the fees and obligations set forth in this Section
and in this Agreement would constitute fair and appropriate liquidated damages in the event of any
such
| Security Agreement | 34 |
termination. The parties hereto each hereby agree that the exercise by any party hereto of any
right granted to it or the exercise by any party hereto of any remedy available to it (including,
without limitation, the issuance of a notice of redemption, a borrowing request and/or a notice of
default), in each case, hereunder or under any Ancillary Agreement which has been publicly filed
with the SEC shall not constitute confidential information and no party shall have any duty to the
other party to maintain such information as confidential.
21. Waivers. To the full extent permitted by applicable law, each Company hereby
waives (a) presentment, demand and protest, and notice of presentment, dishonor, intent to
accelerate, acceleration, protest, default, nonpayment, maturity, release, compromise, settlement,
extension or renewal of any or all of this Agreement and the Ancillary Agreements or any other
notes, commercial paper, Accounts, contracts, Documents, Instruments, Chattel Paper and guaranties
at any time held by Laurus on which such Company may in any way be liable, and hereby ratifies and
confirms whatever Laurus may do in this regard; (b) all rights to notice and a hearing prior to
Laurus’ taking possession or control of, or to Laurus’ replevy, attachment or levy upon, any
Collateral or any bond or security that might be required by any court prior to allowing Laurus to
exercise any of its remedies; and (c) the benefit of all valuation, appraisal and exemption laws.
Each Company acknowledges that it has been advised by counsel of its choices and decisions with
respect to this Agreement, the Ancillary Agreements and the transactions evidenced hereby and
thereby.
22. Expenses. The Companies shall jointly and severally pay all of Laurus’
out-of-pocket costs and expenses, including reasonable fees and disbursements of in-house or
outside counsel and appraisers, in connection with the preparation, execution and delivery of this
Agreement and the Ancillary Agreements, which costs and expenses shall not exceed $50,000 in the
aggregate.
Furthermore, the Companies shall jointly and severally pay all of Laurus’ out-of-pocket costs
and expenses, including reasonable fees and disbursements of in-house or outside counsel and
appraisers, in connection with the prosecution or defense of any action, contest, dispute, suit or
proceeding concerning any matter in any way arising out of, related to or connected with this
Agreement or any Ancillary Agreement. The Companies shall also jointly and severally pay all of
Laurus’ reasonable fees, charges, out-of-pocket costs and expenses, including fees and
disbursements of counsel and appraisers, in connection with (a) the preparation, execution and
delivery of any waiver, any amendment thereto or consent proposed or executed in connection with
the transactions contemplated by this Agreement or the Ancillary Agreements, (b) Laurus’ obtaining
performance of the Obligations under this Agreement and any Ancillary Agreements, including, but
not limited to, the enforcement or defense of Laurus’ security interests, assignments of rights and
Liens hereunder as valid perfected security interests, (c) any attempt to inspect, verify, protect,
collect, sell, liquidate or otherwise dispose of any Collateral, (d) any appraisals or
re-appraisals of any property (real or personal) pledged to Laurus by any Company or any of its
Subsidiaries as Collateral for, or any other Person as security for, the Obligations hereunder and
(e) any consultations in connection with any of the foregoing. The Companies shall also jointly
and severally pay Laurus’ customary bank charges for all bank services (including wire transfers)
performed or caused to be performed by Laurus for any Company or any of its Subsidiaries at any
Company’s or such Subsidiary’s request or in connection with any Company’s loan account with
Laurus. All such costs and expenses together with all filing,
| Security Agreement | 35 |
recording and search fees, taxes and interest payable by the Companies to Laurus shall be
payable on demand and shall be secured by the Collateral. If any tax by any Governmental Authority
is or may be imposed on or as a result of any transaction between any Company and/or any Subsidiary
thereof, on the one hand, and Laurus on the other hand, which Laurus is or may be required to
withhold or pay, the Companies hereby jointly and severally indemnifies and holds Laurus harmless
in respect of such taxes, and the Companies will repay to Laurus the amount of any such taxes which
shall be charged to the Companies’ account; and until the Companies shall furnish Laurus with
indemnity therefor (or supply Laurus with evidence satisfactory to it that due provision for the
payment thereof has been made), Laurus may hold without interest any balance standing to each
Company’s credit and Laurus shall retain its Liens in any and all Collateral.
23. Assignment By Laurus. Laurus may assign any or all of the Obligations together
with any or all of the security therefor to any Person and any such assignee shall succeed to all
of Laurus’ rights with respect thereto; provided that Laurus shall not be permitted to effect any
such assignment to a competitor of any Company unless an Event of Default has occurred and is
continuing. Upon such assignment, Laurus shall be released from all responsibility for the
Collateral to the extent same is assigned to any transferee. Laurus may from time to time sell or
otherwise grant participations in any of the Obligations and the holder of any such participation
shall, subject to the terms of any agreement between Laurus and such holder, be entitled to the
same benefits as Laurus with respect to any security for the Obligations in which such holder is a
participant. Each Company agrees that each such holder may exercise any and all rights of banker’s
lien, set-off and counterclaim with respect to its participation in the Obligations as fully as
though such Company were directly indebted to such holder in the amount of such participation.
24. No Waiver; Cumulative Remedies. Failure by Laurus to exercise any right, remedy
or option under this Agreement, any Ancillary Agreement or any supplement hereto or thereto or any
other agreement between or among any Company and Laurus or delay by Laurus in exercising the same,
will not operate as a waiver; no waiver by Laurus will be effective unless it is in writing and
then only to the extent specifically stated. Laurus’ rights and remedies under this Agreement and
the Ancillary Agreements will be cumulative and not exclusive of any other right or remedy which
Laurus may have.
25. Application of Payments. Each Company irrevocably waives the right to direct the
application of any and all payments at any time or times hereafter received by Laurus from or on
such Company’s behalf and each Company hereby irrevocably agrees that Laurus shall have the
continuing exclusive right to apply and reapply any and all payments received at any time or times
hereafter against the Obligations hereunder in such manner as Laurus may deem advisable
notwithstanding any entry by Laurus upon any of Laurus’ books and records.
26. Indemnity. Each Company hereby jointly and severally indemnifies and holds
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
| Security Agreement | 36 |
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 ANY
COMPANY OR TO ANY OTHER PARTY OR TO ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER
PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR
CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR
TERMINATED UNDER THIS AGREEMENT OR ANY ANCILLARY AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION
CONTEMPLATED HEREUNDER OR THEREUNDER.
27. Revival. The Companies further agree that to the extent any Company makes a
payment or payments to Laurus, which payment or payments or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a
trustee, receiver or any other party under any bankruptcy act, state or federal law, common law or
equitable cause, then, to the extent of such payment or repayment, the obligation or part thereof
intended to be satisfied shall be revived and continued in full force and effect as if said payment
had not been made.
28. Borrowing Agency Provisions.
(a) Each Company hereby irrevocably designates Company Agent to be its attorney and agent and
in such capacity to borrow, sign and endorse notes, and execute and deliver all instruments,
documents, writings and further assurances now or hereafter required hereunder, on behalf of such
Company, and hereby authorizes Laurus to pay over or credit all loan proceeds hereunder in
accordance with the request of Company Agent.
(b) The handling of this credit facility as a co-borrowing facility with a borrowing agent in
the manner set forth in this Agreement is solely as an accommodation to the Companies and at their
request. Laurus shall not incur any liability to any Company as a result thereof. To induce
Laurus to do so and in consideration thereof, each Company hereby indemnifies Laurus and holds
Laurus harmless from and against any and all liabilities, expenses, losses, damages and claims of
damage or injury asserted against Laurus by any Person arising from or incurred by reason of the
handling of the financing arrangements of the Companies as provided herein, reliance by Laurus on
any request or instruction from Company Agent or any other action taken by Laurus with respect to
this Paragraph 28.
(c) All Obligations shall be joint and several, and the Companies shall make payment upon the
maturity of the Obligations by acceleration or otherwise, and such obligation and liability on the
part of the Companies shall in no way be affected by any extensions, renewals and forbearance
granted by Laurus to any Company, failure of Laurus to give any
| Security Agreement | 37 |
Company notice of borrowing or any other notice, any failure of Laurus to pursue to preserve
its rights against any Company, the release by Laurus of any Collateral now or thereafter acquired
from any Company, and such agreement by any Company to pay upon any notice issued pursuant thereto
is unconditional and unaffected by prior recourse by Laurus to any Company or any Collateral for
such Company’s Obligations or the lack thereof.
(d) Each Company expressly waives any and all rights of subrogation, reimbursement, indemnity,
exoneration, contribution or any other claim which such Company may now or hereafter have against
the other or other Person directly or contingently liable for the Obligations, or against or with
respect to any other’s property (including, without limitation, any property which is Collateral
for the Obligations), arising from the existence or performance of this Agreement, until all
Obligations have been indefeasibly paid in full and this Agreement has been irrevocably terminated.
(e) Each Company represents and warrants to Laurus that (i) Companies have one or more common
shareholders, directors and officers, (ii) the businesses and corporate activities of Companies are
closely related to, and substantially benefit, the business and corporate activities of Companies,
(iii) the financial and other operations of Companies are performed on a combined basis as if
Companies constituted a consolidated corporate group, (iv) Companies will receive a substantial
economic benefit from entering into this Agreement and will receive a substantial economic benefit
from the application of each Loan hereunder, in each case, whether or not such amount is used
directly by any Company and (v) all requests for Loans hereunder by the Company Agent are for the
exclusive and indivisible benefit of the Companies as though, for purposes of this Agreement, the
Companies constituted a single entity.
29. Notices. Any notice or request hereunder may be given to any Company, Company
Agent or Laurus at the respective addresses set forth below or as may hereafter be specified in a
notice designated as a change of address under this Section. Any notice or request hereunder shall
be given by registered or certified mail, return receipt requested, hand delivery, overnight mail
or telecopy (confirmed by mail). Notices and requests shall be, in the case of those by hand
delivery, deemed to have been given when delivered to any officer of the party to whom it is
addressed, in the case of those by mail or overnight mail, deemed to have been given three (3)
Business Days after the date when deposited in the mail or with the overnight mail carrier, and, in
the case of a telecopy, when confirmed.
Notices shall be provided as follows:
| If to Laurus: | Laurus Master Fund, Ltd. | |||
| c/o Laurus Capital Management, LLC | ||||
| 000 Xxxxx Xxxxxx, 00xx Xx. | ||||
| Xxx Xxxx, Xxx Xxxx 00000 | ||||
| Attention: Xxxx X. Xxxxxx, Esq. | ||||
| Telephone: (000) 000-0000 | ||||
| Telecopier: (000) 000-0000 | ||||
| If to any Company, | ||||
| or Company Agent: | Digital Recorders, Inc. |
| Security Agreement | 38 |
| 0000 Xxxxxx Xxxx, Xxxxx 0000 | ||||
| Xxxxxx, XX 00000 | ||||
| Attention: Chief Executive Officer | ||||
| Telephone: 000-000-0000 | ||||
| Facsimile: 000-000-0000 | ||||
| With a copy to: | Xxxx, Layton, Kersh, Solomon, Sigmon, | |||
| Xxxx & Xxxxx, P.A. | ||||
| X.X. Xxx 0000 | ||||
| Xxxxxxxx, XX 00000-0000 | ||||
| Attention: Xxxxx Xxxx | ||||
| Telephone: 000-000-0000 | ||||
| Facsimile: 000-000-0000 |
or such other address as may be designated in writing hereafter in accordance with this Section 29
by such Person.
30. Governing Law, Jurisdiction and Waiver of Jury Trial.
(a) THIS AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND
PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
(b) EACH COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN THE
COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY
CLAIMS OR DISPUTES BETWEEN ANY COMPANY, ON THE ONE HAND, AND LAURUS, ON THE OTHER HAND, PERTAINING
TO THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO
THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS; PROVIDED, THAT LAURUS AND EACH COMPANY
ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF
THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER PROVIDED, THAT NOTHING IN
THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LAURUS FROM BRINGING SUIT OR TAKING OTHER
LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR
ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF
LAURUS. EACH COMPANY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION
OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH COMPANY HEREBY WAIVES ANY OBJECTION THAT IT MAY HAVE
BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. EACH
COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY
SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS,
| Security Agreement | 39 |
COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO COMPANY
AGENT AT THE ADDRESS SET FORTH IN SECTION 29 AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED
UPON THE EARLIER OF COMPANY AGENT’S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE
U.S. MAILS, PROPER POSTAGE PREPAID.
(c) THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE
LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF
ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR
PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN
LAURUS, AND/OR ANY COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, ANY ANCILLARY AGREEMENT OR
THE TRANSACTIONS RELATED HERETO OR THERETO.
31. Limitation of Liability. Each Company acknowledges and understands that in order
to assure repayment of the Obligations hereunder Laurus may be required to exercise any and all of
Laurus’ rights and remedies hereunder and agrees that, except as limited by applicable law, neither
Laurus nor any of Laurus’ agents shall be liable for acts taken or omissions made in connection
herewith or therewith except for actual bad faith.
32. Entire Understanding; Maximum Interest. This Agreement and the Ancillary
Agreements contain the entire understanding among each Company and Laurus as to the subject matter
hereof and thereof and any promises, representations, warranties or guarantees not herein contained
shall have no force and effect unless in writing, signed by each Company’s and Laurus’ respective
officers. Neither this Agreement, the Ancillary Agreements, nor any portion or provisions thereof
may be changed, modified, amended, waived, supplemented, discharged, cancelled or terminated orally
or by any course of dealing, or in any manner other than by an agreement in writing, signed by the
party to be charged. Nothing contained in this Agreement, any Ancillary Agreement or in any
document referred to herein or delivered in connection herewith shall be deemed to establish or
require the payment of a rate of interest or other charges in excess of the maximum rate permitted
by applicable law. In the event that the rate of interest or dividends required to be paid or
other charges hereunder exceed the maximum rate permitted by such law, any payments in excess of
such maximum shall be credited against amounts owed by the Companies to Laurus and thus refunded to
the Companies.
33. Severability. Wherever possible each provision of this Agreement or the Ancillary
Agreements shall be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement or the Ancillary Agreements shall be prohibited by or
invalid under applicable law such provision shall be ineffective to the extent of such prohibition
or invalidity, without invalidating the remainder of such provision or the remaining provisions
thereof.
34. Survival. The representations, warranties, covenants and agreements made herein
shall survive any investigation made by Laurus and the closing of the transactions
| Security Agreement | 40 |
contemplated hereby to the extent provided therein. All statements as to factual matters
contained in any certificate or other instrument delivered by or on behalf of the Companies
pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be
representations and warranties by the Companies hereunder solely as of the date of such certificate
or instrument. All indemnities set forth herein shall survive the execution, delivery and
termination of this Agreement and the Ancillary Agreements and the making and repaying of the
Obligations.
35. Captions. All captions are and shall be without substantive meaning or content of
any kind whatsoever.
36. Counterparts; Telecopier Signatures. This Agreement may be executed in one or
more counterparts, each of which shall constitute an original and all of which taken together shall
constitute one and the same agreement. Any signature delivered by a party via telecopier
transmission shall be deemed to be any original signature hereto.
37. Construction. The parties acknowledge that each party and its counsel have
reviewed this Agreement and that the normal rule of construction to the effect that any ambiguities
are to be resolved against the drafting party shall not be employed in the interpretation of this
Agreement or any amendments, schedules or exhibits thereto.
38. Publicity. Each Company hereby authorizes Laurus to make appropriate
announcements of the financial arrangement entered into by and among each Company and Laurus,
including, without limitation, announcements which are commonly known as tombstones, in such
publications and to such selected parties as Laurus shall in its sole and absolute discretion deem
appropriate, or as required by applicable law.
39. Joinder. It is understood and agreed that any Person that desires to become a
Company hereunder, or is required to execute a counterpart of this Agreement after the date hereof
pursuant to the requirements of this Agreement or any Ancillary Agreement, shall become a Company
hereunder by (a) executing a Joinder Agreement in form and substance satisfactory to Laurus, (b)
delivering supplements to such exhibits and annexes to this Agreement and the Ancillary Agreements
as Laurus shall reasonably request and (c) taking all actions as specified in this Agreement as
would have been taken by such Company had it been an original party to this Agreement, in each case
with all documents required above to be delivered to Laurus and with all documents and actions
required above to be taken to the reasonable satisfaction of Laurus.
40. Legends. The Securities shall bear legends as follows;
(a) The Note shall bear substantially the following legend:
“THIS SECURED NON-CONVERTIBLE REVOLVING NOTE HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE,
STATE SECURITIES LAWS. THIS SECURED NON-CONVERTIBLE REVOLVING NOTE
MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
| Security Agreement | 41 |
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS
SECURED NON-CONVERTIBLE REVOLVING NOTE UNDER SAID ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO DIGITAL RECORDERS, INC. THAT SUCH REGISTRATION IS
NOT REQUIRED.”
(b) Any shares of Common Stock issued pursuant to exercise of the Warrants, shall bear a
legend which shall be in substantially the following form until such shares are covered by an
effective registration statement filed with the SEC:
“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE,
STATE SECURITIES LAWS. THESE SHARES MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO DIGITAL RECORDERS, INC. THAT SUCH REGISTRATION IS
NOT REQUIRED.”
(c) The Warrants shall bear substantially the following legend:
“THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT
AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE
UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO DIGITAL RECORDERS, INC. THAT SUCH REGISTRATION IS
NOT REQUIRED.”
[Balance of page intentionally left blank; signature page follows.]
| Security Agreement | 42 |
IN WITNESS WHEREOF, the parties have executed this Security Agreement as of the date first
written above.
| DIGITAL RECORDERS, INC. | ||||||
| By: | ||||||
| Name: | ||||||
| Title: | ||||||
| TWINVISION OF NORTH AMERICA, INC. | ||||||
| By: | ||||||
| Name: | ||||||
| Title: | ||||||
| DIGITAL AUDIO CORPORATION | ||||||
| By: | ||||||
| Name: | ||||||
| Title: | ||||||
| XXXXXXXX-XXXXXX INTERNATIONAL, INC. | ||||||
| By: | ||||||
| Name: | ||||||
| Title: | ||||||
| LAURUS MASTER FUND, LTD. | ||||||
| By: | ||||||
| Name: | ||||||
| Title: | ||||||
| Security Agreement | 43 |
Annex A — Definitions
“Account Debtor” means any Person who is or may be obligated with respect to, or on
account of, an Account.
“Accountants” has the meaning given to such term in Section 11(a).
“Accounts” means all “accounts”, as such term is defined in the UCC, now owned or
hereafter acquired by any Person, including: (a) all accounts receivable, other receivables, book
debts and other forms of obligations (other than forms of obligations evidenced by Chattel Paper or
Instruments) (including any such obligations that may be characterized as an account or contract
right under the UCC); (b) all of such Person’s rights in, to and under all purchase orders or
receipts for goods or services; (c) all of such Person’s rights to any goods represented by any of
the foregoing (including unpaid sellers’ rights of rescission, replevin, reclamation and stoppage
in transit and rights to returned, reclaimed or repossessed goods); (d) all rights to payment due
to such Person for Goods or other property sold, leased, licensed, assigned or otherwise disposed
of, for a policy of insurance issued or to be issued, for a secondary obligation incurred or to be
incurred, for energy provided or to be provided, for the use or hire of a vessel under a charter or
other contract, arising out of the use of a credit card or charge card, or for services rendered or
to be rendered by such Person or in connection with any other transaction (whether or not yet
earned by performance on the part of such Person); and (e) all collateral security of any kind
given by any Account Debtor or any other Person with respect to any of the foregoing.
“Accounts Availability” means, initially, ninety percent (90%) of the net face amount
of Eligible Accounts subject to later adjustment in accordance with provisions of this Security
Agreement.
“Affiliate” means, with respect to any Person, (a) any other Person (other than a
Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common
control with such Person or (b) any other Person who is a director or officer (i) of such Person,
(ii) of any Subsidiary of such Person or (iii) of any Person described in clause (a) above. For
the purposes of this definition, control of a Person shall mean the power (direct or indirect) to
direct or cause the direction of the management and policies of such Person whether by contract or
otherwise.
“Ancillary Agreements” means the Note, the Warrants, the Registration Rights
Agreements, each Security Document and all other agreements, instruments, documents, mortgages,
pledges, powers of attorney, consents, assignments, contracts, notices, security agreements, trust
agreements and guarantees whether heretofore, concurrently, or hereafter executed by or on behalf
of any Company, any of its Subsidiaries or any other Person or delivered to Laurus, relating to
this Agreement or to the transactions contemplated by this Agreement or otherwise relating to the
relationship between or among any Company and Laurus, as each of the same may be amended,
supplemented, restated or otherwise modified from time to time.
“Balance Sheet Date” has the meaning given such term in Section 12(f)(ii).
“Books and Records” means all books, records, board minutes, contracts, licenses,
insurance policies, environmental audits, business plans, files, computer files, computer discs and
other data and software storage and media devices, accounting books and records, financial
statements (actual and pro forma), filings with Governmental Authorities and any and all records
and instruments relating to the Collateral or otherwise necessary or helpful in the collection
thereof or the realization thereupon.
“Business Day” means a day on which Laurus is open for business and that is not a
Saturday, a Sunday or other day on which banks are required or permitted to be closed in the State
of New York.
“Capital Availability Amount” means $6,000,000.
“Charter” has the meaning given such term in Section 12(c)(iv).
“Chattel Paper” means all “chattel paper,” as such term is defined in the UCC,
including electronic chattel paper, now owned or hereafter acquired by any Person.
“Closing Date” means the date on which any Company shall first receive proceeds of the
initial Loans or the date hereof, if no Loan is made under the facility on the date hereof.
“Code” has the meaning given such term in Section 15(i).
“Collateral” means all of each Company’s U.S. and Canadian property and assets,
whether real or personal, tangible or intangible, and whether now owned or hereafter acquired, or
in which it now has or at any time in the future may acquire any right, title or interests
including all of the following property in which it now has or at any time in the future may
acquire any right, title or interest:
(a) all Inventory;
(b) all Equipment;
(c) all Fixtures;
(d) all Goods;
(e) all General Intangibles;
(f) all Accounts;
(g) all Deposit Accounts, other bank accounts and all funds on deposit therein;
(h) all Investment Property;
(i) all Stock;
| Security Agreement | 2 |
(j) all Chattel Paper;
(k) all Letter-of-Credit Rights;
(l) all Instruments;
(m) all commercial tort claims set forth on Schedule 1(A);
(n) all Books and Records;
(o) all Intellectual Property;
(p) all Supporting Obligations including letters of credit and guarantees issued in support of
Accounts, Chattel Paper, General Intangibles and Investment Property;
(q) (i) all money, cash and cash equivalents and (ii) all cash held as cash collateral to the
extent not otherwise constituting Collateral, all other cash or property at any time on deposit
with or held by Laurus for the account of any Company (whether for safekeeping, custody, pledge,
transmission or otherwise); and
(r) all products and Proceeds of all or any of the foregoing, tort claims and all claims and
other rights to payment including (i) insurance claims against third parties for loss of, damage
to, or destruction of, the foregoing Collateral and (ii) payments due or to become due under
leases, rentals and hires of any or all of the foregoing and Proceeds payable under, or unearned
premiums with respect to policies of insurance in whatever form.
“Common Stock” means the shares of stock representing the Parent’s common equity
interests.
“Company Agent” means Digital Recorders, Inc.
“Contract Rate” has the meaning given such term in the Note.
“Default” means any act or event which, with the giving of notice or passage of time
or both, would constitute an Event of Default.
“Deposit Accounts” means all “deposit accounts” as such term is defined in the UCC,
now or hereafter held in the name of any Person, including, without limitation, the Lockboxes.
“Disclosure Controls” has the meaning given such term in Section 12(f)(iv).
“Documents” means all “documents”, as such term is defined in the UCC, now owned or
hereafter acquired by any Person, wherever located, including all bills of lading, dock warrants,
dock receipts, warehouse receipts, and other documents of title, whether negotiable or
non-negotiable.
“Eligible Accounts” means each Account of each Company which conforms to the following
criteria: (a) shipment of the merchandise or the rendition of services has been
| Security Agreement | 3 |
completed; (b) no return, rejection or repossession of the merchandise has occurred; (c)
merchandise or services shall not have been rejected or disputed by the Account Debtor and there
shall not have been asserted any offset, defense or counterclaim; (d) continues to be in full
conformity with the representations and warranties made by such Company to Laurus with respect
thereto; (e) Laurus is, and continues to be, satisfied with the credit standing of the Account
Debtor in relation to the amount of credit extended; (f) there are facts existing or threatened
which are likely to result in any adverse change in an Account Debtor’s financial condition; (g) is
documented by an invoice in a form approved by Laurus and shall not be unpaid more than one hundred
twenty (120) days from invoice date; (h) not more than twenty-five percent (25%) of the unpaid
amount of invoices due from such Account Debtor remains unpaid more than one hundred twenty (120)
days from invoice date; (i) is not evidenced by chattel paper or an instrument of any kind with
respect to or in payment of the Account unless such instrument is duly endorsed to and in
possession of Laurus or represents a check in payment of an Account; (j) the Account Debtor is
located in the United States or Canada; 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 or Canada; (k)
Laurus has a first priority perfected Lien in such Account and such Account is not subject to any
Lien other than Permitted Liens; (l) does not arise out of transactions with any employee, officer,
director, shareholder or Affiliate of any Company; (m) is payable to such 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 such Company is indebted; (o) is net of any returns, discounts, claims, credits and
allowances; (p) if the Account arises out of contracts between such Company, on the one hand, and
the United States, on the other hand, any state, or any department, agency or instrumentality of
any of them and remains unpaid less than ninety (90) days from the invoice date, and, if such
Account described in this subsection (p) exceeds $60,000, such Company has so notified Laurus, in
writing, prior to the creation of such Account, and there has been compliance with any governmental
notice or approval requirements, including compliance with the Federal Assignment of Claims Act;
(q) is a good and valid account representing an undisputed bona fide indebtedness incurred by the
Account Debtor therein named, for a fixed sum as set forth in the invoice relating thereto with
respect to an unconditional sale and delivery upon the stated terms of goods sold by such Company
or work, labor and/or services rendered by such Company; (r) does not arise out of progress
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) such Company’s right to
payment is absolute and not contingent upon the fulfillment of any condition whatsoever; (u) such
Company is able to bring suit and enforce its remedies against the Account Debtor through judicial
process; (v) does not represent interest payments, late or finance charges owing to such Company;
and (w) is otherwise satisfactory to Laurus as determined by Laurus in the exercise of its sole
discretion. In the event any Company requests that Laurus include within Eligible Accounts certain
Accounts of one or more of such Company’s acquisition targets, Laurus shall at the time of such
request consider such inclusion, but any such inclusion shall be at the sole option of Laurus and
shall at all times be subject to the execution and delivery to Laurus of all such documentation
(including, without limitation, guaranty and security documentation) as Laurus may require in its
sole discretion.
| Security Agreement | 4 |
“Eligible Inventory” means Inventory owned by a Company which Laurus, in its sole and
absolute discretion, determines: (a) is subject to a first priority perfected Lien in favor of
Laurus and is subject to no other Liens whatsoever (other than Permitted Liens); (b) is located on
premises with respect to which Laurus has received a landlord or mortgagee waiver acceptable in
form and substance to Laurus; (c) is not in transit; (d) is in good condition and meets all
standards imposed by any governmental agency, or department or division thereof having regulatory
Governmental Authority over such Inventory, its use or sale including the Federal Fair Labor
Standards Act of 1938 as amended, and all rules, regulations and orders thereunder; (e) is
currently either usable or salable in the normal course of such Company’s business; (f) is not
placed by such Company on consignment or held by such Company on consignment from another Person;
(g) is in conformity with the representations and warranties made by such Company to Laurus with
respect thereto; (h) is not subject to any licensing, patent, royalty, trademark, trade name or
copyright agreement with any third parties; (i) does not require the consent of any Person for the
completion of manufacture, sale or other disposition of such Inventory and such completion,
manufacture or sale does not constitute a breach or default under any contract or agreement to
which such Company is a party or to which such Inventory is or may be subject; (j) is not
work-in-process; (k) is covered by casualty insurance acceptable to Laurus and under which Laurus
has been named as a lender’s loss payee and additional insured.
“Eligible Subsidiary” means each Subsidiary of the Parent set forth on Exhibit A
hereto, as the same may be updated from time to time with Laurus’ written consent.
“Equipment” means all “equipment” as such term is defined in the UCC, now owned or
hereafter acquired by any Person, wherever located, including any and all machinery, apparatus,
equipment, fittings, furniture, Fixtures, motor vehicles and other tangible personal property
(other than Inventory) of every kind and description that may be now or hereafter used in such
Person’s operations or that are owned by such Person or in which such Person may have an interest,
and all parts, accessories and accessions thereto and substitute ons and replacements therefor.
“ERISA” has the meaning given such term in Section 12(bb).
“Event of Default” means the occurrence of any of the events set forth in Section 19.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Exchange Act Filings” means the Parent’s filings under the Exchange Act made prior to
the date of this Agreement.
“Financial Reporting Controls” has the meaning given such term in Section 12(f)(v).
“Fixtures” means all “fixtures” as such term is defined in the UCC, now owned or
hereafter acquired by any Person.
“Formula Amount” has the meaning given such term in Section 2(a)(i).
| Security Agreement | 5 |
“GAAP” means generally accepted accounting principles, practices and procedures in
effect from time to time in the United States of America.
“General Intangibles” means all “general intangibles” as such term is defined in the
UCC, now owned or hereafter acquired by any Person including all right, title and interest that
such Person may now or hereafter have in or under any contract, all Payment Intangibles, customer
lists, Licenses, Intellectual Property, interests in partnerships, joint ventures and other
business associations, permits, proprietary or confidential information, inventions (whether or not
patented or patentable), technical information, procedures, designs, knowledge, know-how, Software,
data bases, data, skill, expertise, experience, processes, models, drawings, materials, Books and
Records, Goodwill (including the Goodwill associated with any Intellectual Property), all rights
and claims in or under insurance policies (including insurance for fire, damage, loss, and
casualty, whether covering personal property, real property, tangible rights or intangible rights,
all liability, life, key-person, and business interruption insurance, and all unearned premiums),
uncertificated securities, choses in action, deposit accounts, rights to receive tax refunds and
other payments, rights to received dividends, distributions, cash, Instruments and other property
in respect of or in exchange for pledged Stock and Investment Property, and rights of
indemnification.
“Goods” means all “goods”, as such term is defined in the UCC, now owned or hereafter
acquired by any Person, wherever located, including embedded software to the extent included in
“goods” as defined in the UCC, manufactured homes, fixtures, standing timber that is cut and
removed for sale and unborn young of animals.
“Goodwill” means all goodwill, trade secrets, proprietary or confidential information,
technical information, procedures, formulae, quality control standards, designs, operating and
training manuals, customer lists, and distribution agreements now owned or hereafter acquired by
any Person.
“Governmental Authority” means any nation or government, any state or other political
subdivision thereof, and any agency, department or other entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
“Instruments” means all “instruments”, as such term is defined in the UCC, now owned
or hereafter acquired by any Person, wherever located, including all certificated securities and
all promissory notes and other evidences of indebtedness, other than instruments that constitute,
or are a part of a group of writings that constitute, Chattel Paper.
“Intellectual Property” means any and all patents, trademarks, service marks, trade
names, copyrights, trade secrets, Licenses, information and other proprietary rights and processes.
“Inventory” means all “inventory”, as such term is defined in the UCC, now owned or
hereafter acquired by any Person, wherever located, including all inventory, merchandise, goods and
other personal property that are held by or on behalf of such Person for sale or lease or are
furnished or are to be furnished under a contract of service or that constitute raw materials, work
in process, finished goods, returned goods, or materials or supplies of any
| Security Agreement | 6 |
kind, nature or description used or consumed or to be used or consumed in such Person’s
business or in the processing, production, packaging, promotion, delivery or shipping of the same,
including all supplies and embedded software.
“Inventory Availability” means the lesser of (a) initially, forty percent (40%)
(subject to later adjustment in accordance with provisions of this Security Agreement) of the value
of Companies’ Eligible Inventory (calculated on the basis of the lower of cost or market, on an
average cost basis) and (b) $2,000,000.
“Investment Property” means all “investment property”, as such term is defined in the
UCC, now owned or hereafter acquired by any Person, wherever located.
“Letter-of-Credit Rights” means “letter-of-credit rights” as such term is defined in
the UCC, now owned or hereafter acquired by any Person, including rights to payment or performance
under a letter of credit, whether or not such Person, as beneficiary, has demanded or is entitled
to demand payment or performance.
“License” means any rights under any written agreement now or hereafter acquired by
any Person to use any trademark, trademark registration, copyright, copyright registration or
invention for which a patent is in existence or other license of rights or interests now held or
hereafter acquired by any Person.
“Lien” means any mortgage, security deed, deed of trust, pledge, hypothecation,
assignment, security interest, lien (whether statutory or otherwise), charge, claim or encumbrance,
or preference, priority or other security agreement or preferential arrangement held or asserted in
respect of any asset of any kind or nature whatsoever including any conditional sale or other title
retention agreement, any lease having substantially the same economic effect as any of the
foregoing, and the filing of, or agreement to give, any financing statement under the UCC or
comparable law of any jurisdiction.
“Loans” has the meaning given such term in Section 2(a)(i) and shall include all other
extensions of credit hereunder and under any Ancillary Agreement.
“Lockboxes” has the meaning given such term in Section 8(a).
“Material Adverse Effect” means a material adverse effect on (a) the business, assets,
liabilities, condition (financial or otherwise), properties, operations or prospects of any Company
or any of its Subsidiaries (taken individually and as a whole), (b) any Company’s or any of its
Subsidiary’s ability to pay or perform the Obligations in accordance with the terms hereof or any
Ancillary Agreement, (c) the value of the Collateral, the Liens on the Collateral or the priority
of any such Lien or (d) the practical realization of the benefits of Laurus’ rights and remedies
under this Agreement and the Ancillary Agreements.
“NASD” has the meaning given such term in Section 13(b).
“Note” means that certain Secured Non-Convertible Revolving Note dated as of the
Closing Date made by the Companies in favor of Laurus in the original face amount of
| Security Agreement | 7 |
$6,000,000, as same may be amended, supplemented, restated and/or otherwise modified from time
to time.
“Obligations” means all Loans, all advances, debts, liabilities, obligations,
covenants and duties owing by each Company and each of its Subsidiaries to Laurus (or any
corporation that directly or indirectly controls or is controlled by or is under common control
with Laurus) of every kind and description (whether or not evidenced by any note or other
instrument and whether or not for the payment of money or the performance or non-performance of any
act), direct or indirect, absolute or contingent, due or to become due, contractual or tortious,
liquidated or unliquidated, whether existing by operation of law or otherwise now existing or
hereafter arising including any debt, liability or obligation owing from any Company and/or each of
its Subsidiaries to others which Laurus may have obtained by assignment or otherwise and further
including all interest (including interest accruing at the then applicable rate provided in this
Agreement after the maturity of the Loans and interest accruing at the then applicable rate
provided in this Agreement after the filing of any petition in bankruptcy, or the commencement of
any insolvency, reorganization or like proceeding, whether or not a claim for post-filing or
post-petition interest is allowed or allowable in such proceeding), charges or any other payments
each Company and each of its Subsidiaries is required to make by law or otherwise arising under or
as a result of this Agreement, the Ancillary Agreements or otherwise, together with all reasonable
expenses and reasonable attorneys’ fees chargeable to the Companies’ or any of their Subsidiaries’
accounts or incurred by Laurus in connection therewith.
“Payment Intangibles” means all “payment intangibles” as such term is defined in the
UCC, now owned or hereafter acquired by any Person, including, a General Intangible under which the
Account Debtor’s principal obligation is a monetary obligation.
“Permitted Liens” means (a) Liens of carriers, warehousemen, artisans, bailees,
mechanics and materialmen incurred in the ordinary course of business securing sums not overdue;
(b) Liens incurred in the ordinary course of business in connection with worker’s compensation,
unemployment insurance or other forms of governmental insurance or benefits, relating to employees,
securing sums (i) not overdue or (ii) being diligently contested in good faith provided that
adequate reserves with respect thereto are maintained on the books of the Companies and their
Subsidiaries, as applicable, in conformity with GAAP; (c) Liens in favor of Laurus; (d) Liens for
taxes (i) not yet due or (ii) being diligently contested in good faith by appropriate proceedings,
provided that adequate reserves with respect thereto are maintained on the books of the Companies
and their Subsidiaries, as applicable, in conformity with GAAP; and which have no effect on the
priority of Liens in favor of Laurus or the value of the assets in which Laurus has a Lien; (e)
Purchase Money Liens securing Purchase Money Indebtedness to the extent permitted in this Agreement
and specified on Schedule 7(c) 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.
| Security Agreement | 8 |
“Principal Market” means the NASD Over The Counter Bulletin Board, NASDAQ Capital
Market, NASDAQ National Market System, American Stock Exchange or New York Stock Exchange
(whichever of the foregoing is at the time the principal trading exchange or market for the Common
Stock).
“Proceeds” means “proceeds”, as such term is defined in the UCC and, in any event,
shall include: (a) any and all proceeds of any insurance, indemnity, warranty or guaranty payable
to any Company or any other Person from time to time with respect to any Collateral; (b) any and
all payments (in any form whatsoever) made or due and payable to any Company from time to time in
connection with any requisition, confiscation, condemnation, seizure or forfeiture of any
Collateral by any governmental body, governmental authority, bureau or agency (or any person acting
under color of governmental authority); (c) any claim of any Company against third parties (i) for
past, present or future infringement of any Intellectual Property or (ii) for past, present or
future infringement or dilution of any trademark or trademark license or for injury to the goodwill
associated with any trademark, trademark registration or trademark licensed under any trademark
License; (d) any recoveries by any Company against third parties with respect to any litigation or
dispute concerning any Collateral, including claims arising out of the loss or nonconformity of,
interference with the use of, defects in, or infringement of rights in, or damage to, Collateral;
(e) all amounts collected on, or distributed on account of, other Collateral, including dividends,
interest, distributions and Instruments with respect to Investment Property and pledged Stock; and
(f) any and all other amounts, rights to payment or other property acquired upon the sale, lease,
license, exchange or other disposition of Collateral and all rights arising out of Collateral.
“Purchase Money Indebtedness” means (a) any indebtedness incurred for the payment of
all or any part of the purchase price of any fixed asset, including indebtedness under capitalized
leases, (b) any indebtedness incurred for the sole purpose of financing or refinancing all or any
part of the purchase price of any fixed asset, and (c) any renewals, extensions or refinancings
thereof (but not any increases in the principal amounts thereof outstanding at that time).
“Purchase Money Lien” means any Lien upon any fixed assets that secures the Purchase
Money Indebtedness related thereto but only if such Lien shall at all times be confined solely to
the asset the purchase price of which was financed or refinanced through the incurrence of the
Purchase Money Indebtedness secured by such Lien and only if such Lien secures only such Purchase
Money Indebtedness.
“Registration Rights Agreements” means that certain Registration Rights Agreement
dated as of the Closing Date by and between the Parent and Laurus and each other registration
rights agreement by and between the Parent and Laurus, as each of the same may be amended, modified
and supplemented from time to time.
“SEC” means the Securities and Exchange Commission.
“SEC Reports” has the meaning given such term in Section 12(u).
| Security Agreement | 9 |
“Securities” means the Note and the Warrants and the shares of Common Stock which may
be issued pursuant to exercise of such Warrants.
“Securities Act” has 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 any Company or any of its Subsidiaries
in favor of Laurus.
“Software” means all “software” as such term is defined in the UCC, now owned or
hereafter acquired by any Person, including all computer programs and all supporting information
provided in connection with a transaction related to any program.
“Stock” means all certificated and uncertificated shares, options, warrants,
membership interests, general or limited partnership interests, participation or other equivalents
(regardless of how designated) of or in a corporation, partnership, limited liability company or
equivalent entity whether voting or nonvoting, including common stock, preferred stock, or any
other “equity security” (as such term is defined in Rule 3a11-1 of the General Rules and
Regulations promulgated by the SEC under the Securities Exchange Act of 1934).
“Subordinated Debt Documentation” means Xxxx X. Xxxxxxx Subordinated Debenture.
“Subsidiary” means\, (i) any other Person whose shares of stock or other ownership
interests having ordinary voting power (other than stock or other ownership interests having such
power only by reason of the happening of a contingency) to elect a majority of the directors or
other governing body of such other Person, are owned, directly or indirectly, by such Person or
(ii) any other Person in which such Person owns, directly or indirectly, more than 50% of the
equity interests at such time.
“Supporting Obligations” means all “supporting obligations” as such term is defined in
the UCC.
“Term” means the Closing Date through the close of business on the day immediately
preceding the second anniversary of the Closing Date, subject to acceleration at the option of
Laurus upon the occurrence of an Event of Default hereunder or other termination hereunder.
“UCC” means the Uniform Commercial Code as the same may, from time to time be in
effect in the State of New York; provided, that in the event that, by reason of mandatory
provisions of law, any or all of the attachment, perfection or priority of, or remedies with
respect to, Laurus’ Lien on any Collateral is governed by the Uniform Commercial Code as in effect
in a jurisdiction other than the State of New York, the term “UCC” shall mean the Uniform
Commercial Code as in effect in such other jurisdiction for purposes of the provisions of this
Agreement relating to such attachment, perfection, priority or remedies and for purposes of
definitions related to such provisions; provided further, that to the extent that UCC is used to
define any term herein or in any Ancillary Agreement and such term is defined differently in
| Security Agreement | 10 |
different Articles or Divisions of the UCC, the definition of such term contained in Article
or Division 9 shall govern.
“Warrant Shares” has the meaning given such term in Section 12(a).
“Warrants” means that certain Common Stock Purchase Warrant dated as of the Closing
Date made by the Parent in favor of Laurus and each other warrant made by the Parent in favor
Laurus, as each of the same may be amended, restated, modified and/or supplemented from time to
time.
| Security Agreement | 11 |
Exhibit A
Eligible Subsidiaries
Twinvision of North America, Inc.
Digital Audio Corporation
Xxxxxxxx-Xxxxxx International, Inc.
| Security Agreement |
Exhibit B
Borrowing Base Certificate
[To be inserted]
| Security Agreement |
Security Agreement
Schedules
Schedules
Schedule 7(c)
Liens
Liens
LaSalle has the following UCC-1 Filings, which will be terminated at closing:
| • | North Carolina Secretary State for assets of Digital Recorders, Inc. | ||
| • | North Carolina Secretary State for assets of TwinVision of North America, Inc. | ||
| • | North Carolina Secretary State for assets of Digital Audio Corporation | ||
| • | Durham County for assets of Digital Recorders, Inc. | ||
| • | Durham County for assets of Digital Audio Corporation | ||
| • | State of Texas for assets of Xxxxxxxx Xxxxxx International, Inc. |
Filed at North Carolina Secretary of State as Permitted Liens:
| • | Dell Financial – Equipment lease | ||
| • | CNC Associates, Inc. – Equipment lease | ||
| • | CDW Leasing – Equipment lease | ||
| • | Varilease Technology assigned to Pullman Bank – leased trade shows exhibits & hardware |
Security Agreement
Schedules
Schedules
Schedule 7(o):
Inventory Locations:
Inventory Locations:
| Owner, Landlord, Processor, | ||||
| Activity and Assets | Warehouse or Cosignee | |||
Digital Recorders &
TwinVision of North
America |
||||
0000 Xxxxxxx Xxxxx Xxx Xxxx Xxxxxx, Xxxxx 000 Xxxxxx, XX 00000 |
U.S. Operating Headquarters for design, manufacturing, and sales. Office furniture and fixtures, production equipment, and inventory. | Landlord: Property Reserve Inc. c/o Xxxxxx Xxxxxx Senior Property Manager 0000 Xxxxxxxxxx Xxxxx Xxxxx 000 |
||
Digital Audio Corporation |
||||
0000 Xxxxxxx Xxxxx Xxx Xxxx Xxxxxx, Xxxxx 000 Xxxxxx, XX 00000 |
Operating Headquarters for design, manufacturing, and sales. Office furniture and fixtures, production equipment, and inventory. | Landlord: Property Reserve Inc. c/o Xxxxxx Xxxxxx Senior Property Manager 0000 Xxxxxxxxxx Xxxxx Xxxxx 000 |
||
TwinVision Candian Warehouse |
||||
Eastway 000 Xxxxxx Xxxxxx Xxxxxxxx, Xxxxxxx, Xxxxxx X0X 0X0 |
Candian warehouse — inventory only. | Landlord: Eastway 000 XxxXxx Xxxxxx Xxxxxxxx, Xxxxxxx, Xxxxxx X0X 0X0 |
||
TwinVision Field Service Technicians |
||||
| Field Service Technicians inventory of spare parts to meet customer repair | Employee |
|||
| Field Service Technicians inventory of spare parts to meet customer repair | Independent Contractor |
|||
| Field Service Technicians inventory of spare parts to meet customer repair | Employee |
|||
| Field Service Technicians inventory of spare parts to meet customer repair | Employee |
|||
| Field Service Technicians inventory of spare parts to meet customer repair | Employee |
Security Agreement
Schedules
Schedules
Schedule 7(p)
Bank Accounts
Bank Accounts
| Name, Address, Phone and Fax No. | ||||||
| Borrower | of Bank and Bank Contract | Type of Account | ||||
Digital Recorders
|
LaSalle Business Credit, LLC 0000 Xxxxxxxxx Xxxxxx Xxxxxxx XX 00000 |
Disbursement Payroll Acct LockBox |
||||
| LaSalle Business Credit, LLC Attn: LBX 6063 000 X Xxxxxxx — 0xx Xxxxx Xxxxxxx XX 00000 Xxxxxx Xxxxxx Ph 000 000 0000 |
||||||
Digital Audio Corp
|
LaSalle Business Credit, LLC 0000 Xxxxxxxx Xxxxxx Xxxxxxx XX 00000 |
Disbursement Payroll Acct LockBox |
||||
| LaSalle Business Credit, LLC Attn: LBX 5396 000 X Xxxxxxx — 0xx Xxxxx Xxxxxxx XX 00000 Xxxxxx Xxxxxx Ph 000 000 0000 |
||||||
Twin Vision na Inc
|
LaSalle Business Credit, LLC 0000 Xxxxxxxxx Xxxxxx Xxxxxxx XX 00000 |
Disbursement Payroll Acct LockBox |
||||
| LaSalle Business Credit, LLC Attn: LBX 5491 000 X Xxxxxxx — 0xx Xxxxx Xxxxxxx XX 00000 Xxxxxx Xxxxxx Ph 000 000 0000 |
||||||
Digital Recorders
|
Wachovia Bank NA Attn: Xxxx Xxxxx 000 Xxxxxxxxxxxx Xxxxxx Mall 6th Floor — NC 3287 Xxxxxxx XX 00000 |
Disbursement Payroll Acct |
||||
| Xxxxxxxx Xxxx XX XX Xxx 0000 Xxxxxxx XX 00000 Xxxx Xxxxx Ph 000 000 0000 |
||||||
Security Agreement
Schedules
Schedules
Schedule 12(b)
Subsidiaries
Subsidiaries
Digital Recorders, Inc. has the following subsidiaries:
| • | TwinVision of North America, Inc. is a wholly owned subsidiary of Digital Recorders, Inc. | ||
| • | Digital Audio Corporation is a wholly owned subsidiary of Digital Recorders, Inc. | ||
| • | Xxxxxxxx Xxxxxx International, Inc. is a wholly owned subsidiary of Digital Recorders, Inc. | ||
| • | DRI Europa AB is a wholly owned subsidiary of Digital Recorders, Inc. | ||
| • | Mobitec GmbH is owned 91% by DRI Europa AB and 9% by Digital Recorders, Inc. | ||
| • | Mobitec AB is wholly owned by DRI Europa AB | ||
| • | Mobitec Pty Ltd. is wholly owned by Mobitec AB | ||
| • | Mobitec AB owns 50% of Mobitec Brazil Ltda, the remaining 50% is owned by the Brazilian Managing Director. |
Security Agreement
Schedules
Schedules
Schedule 12(c)
Capitalizaton
Capitalizaton
12(c)(i)
TwinVision of North America, Inc.; 100 shares of no par value common stock authorized and outstanding
Digital Audio Corporation; 100 shares of no par value common stock authorized and outstanding
Xxxxxxxx Xxxxxx International, Inc.; 100 shares of no par value common stock authorized and outstanding
Digital Recorders, Inc. as shown on the following page:
12(c)(ii) Digital Recorders, Inc. has issued the rights to acquire stock listed on the attached chart..
Security Agreement
Schedules
Schedules
DRI Common Stock, Warrants, Convertibles and Preferred Stock
Potential “All-In” Calculation Summary — As of March 13, 2006
Potential “All-In” Calculation Summary — As of March 13, 2006
| Instrument | Quantity | Remarks | ||||
Common: |
||||||
Common — Beginning of Year |
9,733,515 | |||||
Conversions & Placements: |
40,000 | |||||
Total Common |
9,773,515 | |||||
Convertibles: |
||||||
Xxxxxxx ‘02 Conv Debt ($0.25M) |
125,000 | Converts at $2; not converted | ||||
Series E Conv Preferred |
305,000 | Conv. at $3.00; Face $5K; 183 Shares; 7% Div. | ||||
Series AAA Preferred |
161,818 | $5.50 Conversion Price (178 Shares Remaining Outstanding) | ||||
Series G Conv Preferred |
791,855 | $2.21 Conversion Price (350 Shares Remaining Outstanding) | ||||
Series H Conv Preferred |
120,192 | $2.08 Conversion Price (50 Shares Remaining Outstanding) | ||||
Total Convertibles: |
1,503,865 | |||||
Potential With Conversion |
11,277,380 | Outstanding & Potentially Outstanding w/ Conversion | ||||
Warrants and Options: |
||||||
Warrants |
1,120,819 | Ave Exercise ±$4.77 (See below) | ||||
Stock Option Plan (Old) |
495,800 | Ave Exercise Price approx $2.50; Plan now expired | ||||
Stock Option Plan (New) |
554,500 | Out of 675,000 Authorized; Wtd Ave Strike Price @ $2.83 | ||||
Total Warrants & Options |
2,171,119 | |||||
Potential “All-In” |
13,448,499 | |||||
Authorized Common Shares |
25,000,000 | |||||
Warrants & Weighted-Average Exercise Price — as of March 13, 2006
| Holder | Quantity | Strike @ | ||||
Xxxxx; Original Purchase Note
|
100,000 | @ $4.00 = $400,000 (Expire in 6/26/06) (related to original acquisition) | ||||
Xxxxx; Partial conversion of Purchase Note
|
40,000 | @ $2.50 = $100,000 (Expire in 6/19/06) (subsequent partial conversion of original Purchase Note) | ||||
X. Xxxxxxxx X. Xxxxxxxx
|
50,000 | @ $2.50 = $125,000 (Expires 4/16/08) (in respect of canceled Options at the time) | ||||
Mobitec Employees
|
76,000 | @ $3.00 = $228,000 (Expire in 6/27/06) (in replacement of rights held in original Mobitec) | ||||
Xxxx Capital I
|
62,500 | @ $10.25 = $640,625 (Expires 4/23/09) (placement fee) | ||||
Xxxx Placements
|
125,000 | @ $8.80 = $1,100,000 (Expires 4/23/09) (8 Entities — rights under private placement) | ||||
Xxxx Capital II
|
120,773 | @ $5.28 = $637,681 (Expires 10/6/09) (placement fee) | ||||
Riverview Group LLC
|
241,546 | @ $6.00 = $1,449,276 (Expires 10/6/09) | ||||
Y. Xxxx Xxx
|
7,500 | @ $2.50 = $18,750 (Expire 4/16/08) (recognition of service) | ||||
X. Xxxxx
|
2,500 | @ $3.19 = $7,975 (Expire 1/18/10) (professional services) | ||||
Dolphin Offshore Partners, L.P.
|
240,000 | @ $2.21 = $530,400 (Expire 6/23/10) (related to Series G) | ||||
Xxxx X. Xxxxxxx
|
55,000 | @ $2.02 = $111,100 (Expire 10/31/10) (related to Series H) | ||||
Total Warrants
|
1,120,819 | Average Exercise Price Approximately $4.77 | ||||
Security Agreement
Schedules
Schedules
Schedule 12(f)
(i) None
(ii) Company has made regular scheduled dividend payments pursuant to Certificate of Designation in
cash and in kind pursuant to each of its Preferred Shares.
Schedule 12(g)
Obligations to Related Parties
Obligations to Related Parties
I. Digital Recorders, Inc. has a $250,000 loan agreement dated August 26, 2002 (“Subordinated Debt
Agreement’) with its director, Xxxx X. Xxxxxxx, Xx. The stock of Digital Audio Corporation and
TwinVision of North America, Inc. are pledged to him as collateral and he has a Security Agreement
with Digital Recorders, Inc., TwinVision of North America, Inc. and Digital Audio Corporation
granting a continuing general security interest in all U.S. assets of the Digital Recorders, Inc.
Both TwinVision and Digital Audio Corporation also signed a Subsidiary Guaranty.
II. In December 2005, Digital Recorders, Inc. issued to director Xxxx X. Xxxxxxx, Xx. five shares
of Series H Redeemable Convertible Preferred Stock in settlement of a $250,000 short-term
loan Xx. Xxxxxxx had made to Digital Recorders, Inc. in July 2005.
Schedule 12(h)
Changes since the Balance Sheet Date
Changes since the Balance Sheet Date
| (i) | None | |
| (ii) | Xxxxxxx X. Xxxxxx, Vice President Operations, January 2006 Xxxxx X. XxxXxxxxxx, Chief Accounting and Compliance Officer, March 2006 | |
| (iii) | None | |
| (iv) | None | |
| (v) | None | |
| (vi) | None | |
| (vii) | None | |
| (viii) | See disclosure regarding dividends in 12(f) | |
| (ix) | None | |
| (x) | None | |
| (xi) | None | |
| (xii) | None | |
| (xiv) | None |
Security Agreement
Schedules
Schedules
Schedule 12(i)
Permitted Liens
Permitted Liens
Filed at North Carolina Secretary of State:
| • | Dell Financial – Equipment lease | ||
| • | CNC Associates, Inc. – Equipment lease | ||
| • | CDW Leasing – Equipment lease | ||
| • | Varilease Technology assigned to Pullman Bank – leased trade shows exhibits & related hardware | ||
| • | The stock of Digital Audio Corporation and TwinVision of North America, Inc. is pledged to Xxxx X. Xxxxxxx, Xx. | ||
| • | Xxxx X. Xxxxxxx, Xx., a director, has a Security Agreement with Digital Recorders, Inc., TwinVision of North America, Inc. and Digital Audio Corporation. Both TwinVision and Digital Audio Corporation also signed a Subsidiary Guaranty. |
Schedule 12(l)
Litigation
Litigation
As a result of the elimination of his position, the former Executive Vice President Business &
Corporate Development has sought to refute certain provisions of his employment agreement and
stated an intention to arbitrate a claim for, among other things, wrongful termination and age
discrimination under the Age Discrimination Enforcement Act. The Company believes the claims are
without merit and does not believe this matter will create a material adverse effect on the
company.
Schedule 12(m)
Tax Returns and Payments
Tax Returns and Payments
None
Schedule 12(n)
Employees
Employees
None
Schedule 12(o)
Registration Rights and Voting Rights
Registration Rights and Voting Rights
None
Security Agreement
Schedules
Schedules
Schedule 12(q)
Environmental and Safety Laws
Environmental and Safety Laws
On site and within its administrative offices, the Company has the usual and customary household
type furniture polishes, cleaning agents, etc. and printer and facsimile toner cartridges and
similar items, many of which meet the definition of Hazardous Materials as listed in various local,
state, federal and/or foreign laws and regulations. Usage of such is below permissible thresholds.
Within its light manufacturing and assembly operations the Company also uses de minimus amounts of
various petroleum-based lubricants, solvents, and cleaning agents also meeting such definitions.
Schedule 12(u)
SEC Reports and Financial Statements
SEC Reports and Financial Statements
None
Schedule 12(aa)
Collateral Location and Addresses of Borrowers
Collateral Location and Addresses of Borrowers
Books and Records:
Digital Recorders
0000 Xxxxxx Xxxx, Xxxxx 0000
Xxxxxx, XX 00000
Corporate Office
0000 Xxxxxx Xxxx, Xxxxx 0000
Xxxxxx, XX 00000
Corporate Office
Digital Recorders & TwinVision of North America
0000 Xxxxxxx Xxxxx
Xxx Xxxx Xxxxxx, Xxxxx 000
Xxxxxx, XX 00000
U.S. Operating Headquarters
0000 Xxxxxxx Xxxxx
Xxx Xxxx Xxxxxx, Xxxxx 000
Xxxxxx, XX 00000
U.S. Operating Headquarters
Digital Audio Corporation
0000 Xxxxxxx Xxxxx
Xxx Xxxx Xxxxxx, Xxxxx 000
Xxxxxx XX 00000
Operating Headquarters
0000 Xxxxxxx Xxxxx
Xxx Xxxx Xxxxxx, Xxxxx 000
Xxxxxx XX 00000
Operating Headquarters
Schedule 13(l)
Required Approvals
Required Approvals
The Company will continue to pay dividends to its preferred shareholders (approximately $250,000
annually) and interest under Xxxx X. Xxxxxxx, Xx.’s subordinated debenture (approximately $20,000
annually) in the ordinary course of business without further notice or approval.
