SECURITIES PURCHASE AGREEMENT
Exhibit
10.34
SECURITIES PURCHASE AGREEMENT (this “Agreement”), dated as of September 8, 2006, by and among
Standard Management Corporation, an Indiana corporation, with headquarters located at 00000 X.
Xxxxxxxxxxxx Xxxxxx, Xxxxxxxxxxxx, XX 00000 (the “Company”), and each of the purchasers set forth
on the signature pages hereto (the “Buyers”).
WHEREAS:
A. The Company and the Buyers are executing and delivering this Agreement in reliance upon the
exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933, as
amended (the “1933 Act”) and Regulation D promulgated by the United States Securities and Exchange
Commission (the “SEC”) thereunder;
B. Buyers desire to purchase and the Company desires to issue and sell, upon the terms and
conditions set forth in this Agreement (i) 6% convertible debentures of the Company, in the form
attached hereto as Exhibit “A”, in the aggregate principal amount of Two Million Dollars
($2,000,000) (together with any debenture(s) issued in replacement thereof or as a dividend thereon
or otherwise with respect thereto in accordance with the terms thereof, the “Debentures”),
convertible into shares of common stock, no par value per share, of the Company (the “Common
Stock”), upon the terms and subject to the limitations and conditions set forth in such Debentures
and (ii) warrants, in the form attached hereto as Exhibit “B”, to purchase 3,000,000 shares of
Common Stock (the “Warrants”);
C. Each Buyer wishes to purchase, upon the terms and conditions stated in this Agreement, such
principal amount of Debentures and number of Warrants as is set forth immediately below its name on
the signature pages hereto; and
D. Contemporaneous with the execution and delivery of this Agreement, the parties hereto are
executing and delivering a Registration Rights Agreement, in the form attached hereto as Exhibit
“C” (the “Registration Rights Agreement”), pursuant to which the Company has agreed to provide
certain registration rights under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.
NOW THEREFORE, the Company and each of the Buyers severally (and not jointly) hereby agree as
follows:
1. PURCHASE AND SALE OF DEBENTURES AND WARRANTS.
a. Purchase of Debentures and Warrants. On the Closing Date (as defined below), the
Company shall issue and sell to each Buyer and each Buyer severally agrees to purchase from the
Company such principal amount of Debentures and number of Warrants as is set forth immediately
below such Buyer’s name on the signature pages hereto.
b. Form of Payment. On the Closing Date (as defined below), (i) each Buyer shall pay
the purchase price for the Debentures and the Warrants to be issued and sold to it at the Closing
(as defined below) (the “Purchase Price”) by wire transfer of
immediately available funds to the Company, in accordance with the Company’s written wiring
instructions, against delivery of the Debentures in the principal amount equal to the Purchase
Price and the number of Warrants as is set forth immediately below such Buyer’s name on the
signature pages hereto, and (ii) the Company shall deliver such Debentures and Warrants duly
executed on behalf of the Company, to such Buyer, against delivery of such Purchase Price.
c. Closing Date. Subject to the satisfaction (or written waiver) of the conditions
thereto set forth in Section 6 and Section 7 below, the date and time of the issuance and sale of
the Debentures and the Warrants pursuant to this Agreement (the “Closing Date”) shall be 12:00
noon, Eastern Standard Time on September 8_, 2006, or such other mutually agreed upon time. The
closing of the transactions contemplated by this Agreement (the “Closing”) shall occur on the
Closing Date at such location as may be agreed to by the parties.
2. BUYERS’ REPRESENTATIONS AND WARRANTIES. Each Buyer severally (and not jointly)
represents and warrants to the Company solely as to such Buyer that:
a. Investment Purpose. As of the date hereof, the Buyer is purchasing (1) the
Debentures and the shares of Common Stock issuable upon conversion of or otherwise pursuant to the
Debentures (including, without limitation, such additional shares of Common Stock, if any, as are
issuable (i) on account of interest on the Debentures, (ii) as a result of the events described in
Sections 1.3 and 1.4(g) of the Debentures and Section 2(c) of the Registration Rights Agreement or
(iii) in payment of the Standard Liquidated Damages Amount (as defined in Section 2(f) below)
pursuant to this Agreement, such shares of Common Stock being collectively referred to herein as
the “Conversion Shares”) and (2) the Warrants and the shares of Common Stock issuable upon exercise
thereof (the “Warrant Shares” and, collectively with the Debentures, Warrants and Conversion
Shares, the “Securities”) for its own account and not with a present view towards the public sale
or distribution thereof, except pursuant to sales registered or exempted from registration under
the 1933 Act; provided, however, that by making the representations herein, the
Buyer does not agree to hold any of the Securities for any minimum or other specific term and
reserves the right to dispose of the Securities at any time in accordance with or pursuant to a
registration statement or an exemption under the 1933 Act.
b. Accredited Investor Status. The Buyer is an “accredited investor” as that term is
defined in Rule 501(a) of Regulation D (an “Accredited Investor”).
c. Reliance on Exemptions. The Buyer understands that the Securities are being
offered and sold to it in reliance upon specific exemptions from the registration requirements of
United States federal and state securities laws and that the Company is relying upon the truth and
accuracy of, and the Buyer’s compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of the Buyer to acquire the Securities.
d. Information. The Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and materials relating
to the offer and sale of the Securities which have been requested by the Buyer
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or its advisors. The Buyer and its advisors, if any, have been afforded the opportunity to
ask questions of and receive answers from the Company. Neither Company nor any person acting on
its behalf has offered or sold Buyer the Securities by means of any form of general solicitation or
general advertising. The Securities were not offered or sold to Buyer by means of publicly
disseminated advertisements or sales literature. There has been furnished to Buyer by Company or
any person acting on its behalf full information regarding the business of Company and the risks
inherent therein and in Buyer’s investment in Company. The undersigned Buyer is not acquiring the
Securities based upon any representation, oral or written, by any person with respect to the future
value of, or income from, the Securities, but rather based upon an independent examination and
judgment by Buyer as to the prospects of the Company. Buyer is sophisticated and has such
knowledge and experience in financial and business matters that Buyer is capable of evaluating the
risks of its investment in Company. Buyer is able to bear the economic risks inherent in its
investment in Company. Neither such inquiries nor any other due diligence investigation conducted
by Buyer or any of its advisors or representatives shall modify, amend or affect Buyer’s right to
rely on the Company’s representations and warranties contained in Section 3 below. The Buyer
understands that its investment in the Securities involves a significant degree of risk.
e. Governmental Review. The Buyer understands that no United States federal or state
agency or any other government or governmental agency has passed upon or made any recommendation or
endorsement of the Securities.
f. Transfer or Re-sale. The Buyer understands that (i) except as provided in the
Registration Rights Agreement, the sale or re-sale of the Securities has not been and is not being
registered under the 1933 Act or any applicable state securities laws, and the Securities may not
be transferred unless (a) the Securities are sold pursuant to an effective registration statement
under the 1933 Act, (b) the Buyer shall have delivered to the Company an opinion of counsel that
shall be in form, substance and scope reasonably satisfactory to the Company and customary for
opinions of counsel in comparable transactions to the effect that the Securities to be sold or
transferred may be sold or transferred pursuant to an exemption from such registration, which
opinion shall be accepted by the Company, (c) the Securities are sold or transferred to an
“affiliate” (as defined in Rule 144 promulgated under the 1933 Act (or a successor rule) (“Rule
144”)) of the Buyer who agrees to sell or otherwise transfer the Securities only in accordance with
this Section 2(f) and who is an Accredited Investor, (d) the Securities are sold pursuant to Rule
144, or (e) the Securities are sold pursuant to Regulation S under the 1933 Act (or a successor
rule) (“Regulation S”), and the Buyer shall have delivered to the Company an opinion of counsel
that shall be in form, substance and scope reasonably satisfactory to the Company and customary for
opinions of counsel in corporate transactions, which opinion shall be accepted by the Company; (ii)
any sale of such Securities made in reliance on Rule 144 may be made only in accordance with the
terms of said Rule and further, if said Rule is not applicable or available, any re-sale of such
Securities under circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the 0000 Xxx) may require compliance
with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder;
and (iii) neither the Company nor any other person is under any obligation to register such
Securities under the 1933 Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder (in each case, other than pursuant to the Registration
Rights Agreement).
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Notwithstanding the foregoing or anything else contained herein to the contrary, the
Securities may be pledged as collateral in connection with a bona fide margin
account or other lending arrangement. In the event that the Company does not accept the opinion of
counsel provided by the Buyer with respect to the transfer of Securities pursuant to an exemption
from registration, such as Rule 144 or Regulation S, within three (3) business days of delivery of
the opinion to the Company, the Company shall pay to the Buyer liquidated damages of three percent
(3%) of the outstanding amount of the Debentures per month plus accrued and unpaid interest on the
Debentures, prorated for partial months, in cash or shares at the option of the Company (“Standard
Liquidated Damages Amount”). If the Company elects to pay the Standard Liquidated Damages Amount
in shares of Common Stock, such shares shall be issued at the Conversion Price at the time of
payment. Notwithstanding anything herein to the contrary, in the event the Company has to pay the
Standard Liquidated Damages Amount pursuant to any provision of this Agreement, the Buyers shall
first have to give the Company advance written notice of such breach and in such event, the Company
shall have 30 days from the receipt of such notice to cure such breach before the Standard
Liquidated Damages Amount shall be due and payable to the Buyers.
g. Legends. The Buyer understands that the Debentures and the Warrants and, until
such time as the Conversion Shares and Warrant Shares have been registered under the 1933 Act as
contemplated by the Registration Rights Agreement or otherwise may be sold pursuant to Rule 144 or
Regulation S without any restriction as to the number of securities as of a particular date that
can then be immediately sold, the Conversion Shares and Warrant Shares may bear a restrictive
legend in substantially the following form (and a stop-transfer order may be placed against
transfer of the certificates for such Securities):
“The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The
securities may not be sold, transferred or assigned in the absence
of an effective registration statement for the securities under said
Act, or an opinion of counsel, in form, substance and scope
customary for opinions of counsel in comparable transactions, that
registration is not required under said Act or unless sold pursuant
to Rule 144 or Regulation S under said Act.”
The legend set forth above shall be removed and the Company shall issue a certificate without
such legend to the holder of any Security upon which it is stamped, if, unless otherwise required
by applicable state securities laws, (a) such Security is registered for sale under an effective
registration statement filed under the 1933 Act or otherwise may be sold pursuant to Rule 144 or
Regulation S without any restriction as to the number of securities as of a particular date that
can then be immediately sold, or (b) such holder provides the Company with an opinion of counsel,
in form, substance and scope reasonably satisfactory to the Company and customary for opinions of
counsel in comparable transactions, to the effect that a public sale or transfer of such Security
may be made without registration under the 1933 Act, which opinion shall be accepted by the Company
so that the sale or transfer is effected or (c) such holder provides the Company with reasonable
assurances that such Security can be sold pursuant to Rule 144 or Regulation S. The Buyer agrees
to sell all Securities, including those represented by a
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certificate(s) from which the legend has been removed, in compliance with applicable
prospectus delivery requirements, if any.
h. Authorization; Enforcement. This Agreement and the Registration Rights Agreement
have been duly and validly authorized. This Agreement has been duly executed and delivered on
behalf of the Buyer, and this Agreement constitutes, and upon execution and delivery by the Buyer
of the Registration Rights Agreement, such agreement will constitute, valid and binding agreements
of the Buyer enforceable in accordance with their terms.
i. Residency. The Buyer is a resident of the jurisdiction set forth immediately below
such Buyer’s name on the signature pages hereto.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants
to each Buyer that, as of the date hereof:
a. Organization and Qualification. The Company and each of its Subsidiaries (as
defined below), if any, is duly organized, validly existing and in good standing under the laws of
the jurisdiction in which it is organized, with full power and authority (corporate or otherwise)
to own, lease, use and operate its properties and to carry on its business as and where now owned,
leased, used, operated and conducted. Schedule 3(a) sets forth a list of all of the Subsidiaries
of the Company and the jurisdiction in which each is incorporated or organized. The Company and
each of its Subsidiaries is duly qualified as a foreign corporation to do business and is in good
standing in every jurisdiction in which its ownership or use of property or the nature of the
business conducted by it makes such qualification necessary except where the failure to be so
qualified or in good standing would not have a Material Adverse Effect. “Material Adverse Effect”
means any material adverse effect on the business, operations, assets or financial condition of the
Company or its Subsidiaries, if any, taken as a whole, or on the transactions contemplated hereby
or by the agreements or instruments to be entered into in connection herewith. “Subsidiaries”
means any corporation or other organization, whether incorporated or unincorporated, in which the
Company owns, directly or indirectly, any equity or other ownership interest.
b. Authorization; Enforcement. (i) The Company has all requisite corporate power and
authority to enter into and perform this Agreement, the Registration Rights Agreement, the
Debentures and the Warrants and to consummate the transactions contemplated hereby and thereby and
to issue the Securities, in accordance with the terms hereof and thereof, (ii) the execution and
delivery of this Agreement, the Registration Rights Agreement, the Debentures and the Warrants by
the Company and the consummation by it of the transactions contemplated hereby and thereby
(including without limitation, the issuance of the Debentures and the Warrants and the issuance and
reservation for issuance of the Conversion Shares and Warrant Shares issuable upon conversion or
exercise thereof) have been duly authorized by the Company’s Board of Directors and other than as
contemplated in Section 4(n) hereof, no further consent or authorization of the Company, its Board
of Directors, or its shareholders is required, (iii) this Agreement has been duly executed and
delivered by the Company by its authorized representative, and such authorized representative is
the true and official representative with authority to sign this Agreement and the other documents
executed in connection herewith and bind the Company accordingly, and (iv) this Agreement
constitutes, and upon execution and
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delivery by the Company of the Registration Rights Agreement, the Debentures and the Warrants,
each of such instruments will constitute, a legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except as enforceability may be
limited (i) by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditor’s rights generally, and (ii) by the application of equitable principles.
c. Capitalization. As of the date hereof, the authorized capital stock of the Company
consists of (i) 60,000,000 shares of Common Stock, of which 16,087,861 shares are issued and
outstanding, no shares are reserved for issuance pursuant to the Company’s stock option plans,
2,356,080 shares are reserved for issuance pursuant to securities (other than the Debentures and
the Warrants) exercisable for, or convertible into or exchangeable for shares of Common Stock and,
4,300,000 shares are reserved for issuance upon conversion of the Debentures and the Additional
Debentures (as defined in Section 4(l)) and exercise of the Warrants; and (ii) 1,348,135 shares of
Series A preferred stock, of which 0 shares are issued and outstanding. All of such outstanding
shares of capital stock are, or upon issuance will be, duly authorized, validly issued, fully paid
and nonassessable. No shares of capital stock of the Company are subject to preemptive rights or
any other similar rights of the shareholders of the Company or any liens or encumbrances imposed
through the actions or failure to act of the Company. Except as disclosed in Schedule 3(c), as of
the effective date of this Agreement, (i) there are no outstanding options, warrants, scrip, rights
to subscribe for, puts, calls, rights of first refusal, agreements, understandings, claims or other
commitments or rights of any character whatsoever relating to, or securities or rights convertible
into or exchangeable for any shares of capital stock of the Company or any of its Subsidiaries, or
arrangements by which the Company or any of its Subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its Subsidiaries, (ii) there are no
agreements or arrangements under which the Company or any of its Subsidiaries is obligated to
register the sale of any of its or their securities under the 1933 Act (except the Registration
Rights Agreement) and (iii) there are no anti-dilution or price adjustment provisions contained in
any security issued by the Company (or in any agreement providing rights to security holders) that
will be triggered by the issuance of the Debentures, the Warrants, the Conversion Shares or Warrant
Shares. The Company has furnished to the Buyer true and correct copies of the Company’s Articles
of Incorporation as in effect on the date hereof (“Articles of Incorporation”), the Company’s
By-laws, as in effect on the date hereof (the “By-laws”), and the terms of all securities
convertible into or exercisable for Common Stock of the Company and the material rights of the
holders thereof in respect thereto. The Company shall provide the Buyer with a written update of
this representation signed by the Company’s Chief Executive or Chief Financial Officer on behalf of
the Company as of the Closing Date.
d. Issuance of Shares. The Conversion Shares and Warrant Shares are duly authorized
and reserved for issuance and, upon conversion of the Debentures and exercise of the Warrants in
accordance with their respective terms, will be validly issued, fully paid and non-assessable, and
free from all taxes, liens, claims and encumbrances with respect to the issue thereof and shall not
be subject to preemptive rights or other similar rights of shareholders of the Company and will not
impose personal liability upon the holder thereof.
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e. Acknowledgment of Dilution. The Company understands and acknowledges the
potentially dilutive effect to the Common Stock upon the issuance of the Conversion Shares and
Warrant Shares upon conversion of the Debenture or exercise of the Warrants. The Company further
acknowledges that its obligation to issue Conversion Shares and Warrant Shares upon conversion of
the Debentures or exercise of the Warrants in accordance with this Agreement, the Debentures and
the Warrants is absolute and unconditional regardless of the dilutive effect that such issuance may
have on the ownership interests of other shareholders of the Company.
f. No Conflicts. The execution, delivery and performance of this Agreement, the
Registration Rights Agreement, the Debentures and the Warrants by the Company and the consummation
by the Company of the transactions contemplated hereby and thereby (including, without limitation,
the issuance and reservation for issuance of the Conversion Shares and Warrant Shares) will not (i)
conflict with or result in a violation of any provision of the Articles of Incorporation or By-laws
or (ii) violate or conflict with, or result in a breach of any provision of, or constitute a
default (or an event which with notice or lapse of time or both could become a default) under, or
give to others any rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture, patent, patent license or instrument to which the Company or any of its
Subsidiaries is a party, or (iii) to the Company’s knowledge, result in a violation of any law,
rule, regulation, order, judgment or decree (including federal and state securities laws and
regulations and regulations of any self-regulatory organizations to which the Company or its
securities are subject) applicable to the Company or any of its Subsidiaries or by which any
property or asset of the Company or any of its Subsidiaries is bound or affected (except for such
conflicts, defaults, terminations, amendments, accelerations, cancellations and violations of the
types described in the foregoing clauses (i) – (iii) as would not, individually or in the
aggregate, have a Material Adverse Effect). Neither the Company nor any of its Subsidiaries is in
violation of its Articles of Incorporation, By-laws or other organizational documents and neither
the Company nor any of its Subsidiaries is in default (and no event has occurred which with notice
or lapse of time or both could put the Company or any of its Subsidiaries in default) under, and
neither the Company nor any of its Subsidiaries has taken any action or failed to take any action
that would give to others any rights of termination, amendment, acceleration or cancellation of,
any agreement, indenture or instrument to which the Company or any of its Subsidiaries is a party
or by which any property or assets of the Company or any of its Subsidiaries is bound or affected,
except for possible defaults as would not, individually or in the aggregate, have a Material
Adverse Effect. The businesses of the Company and its Subsidiaries, if any, are not being
conducted, and shall not be conducted so long as a Buyer owns any of the Securities, in violation
of any law, ordinance or regulation of any governmental entity which would result in a Material
Adverse Effect. Except as specifically contemplated by this Agreement and as required under the
1933 Act and any applicable state securities laws, and except where the failure to do so would not
have a Material Adverse Effect, the Company is not required to obtain any consent, authorization or
order of, or make any filing or registration with, any court, governmental agency, regulatory
agency, self regulatory organization or stock market or any third party in order for it to execute,
deliver or perform any of its obligations under this Agreement, the Registration Rights Agreement,
the Debentures or the Warrants in accordance with the terms hereof or thereof or to issue and sell
the Debentures and Warrants in accordance with the terms hereof and to issue the Conversion Shares
upon conversion of the Debentures and the Warrant Shares upon exercise of the Warrants. Except as
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disclosed in Schedule 3(f), all consents, authorizations, orders, filings and registrations
which the Company is required to obtain pursuant to the preceding sentence have been obtained or
effected on or prior to the date hereof.
g. SEC Documents; Financial Statements. Except as disclosed in Schedule 3(g), the
Company has timely filed all reports, schedules, forms, statements and other documents required to
be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act
of 1934, as amended (the “1934 Act”) (all of the foregoing filed prior to the date hereof and all
exhibits included therein and financial statements and schedules thereto and documents (other than
exhibits to such documents) incorporated by reference therein, being hereinafter referred to herein
as the “SEC Documents”). As of their respective dates, the SEC Documents complied in all material
respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated
thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were
filed with the SEC, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the statements therein,
in light of the circumstances under which they were made, not misleading. None of the statements
made in any such SEC Documents is, or has been, required to be amended or updated under applicable
law (except for such statements as have been amended or updated in subsequent filings prior the
date hereof). As of their respective dates, the financial statements of the Company included in
the SEC Documents complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect thereto. Such
financial statements have been prepared in accordance with United States generally accepted
accounting principles, consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of
unaudited interim statements, to the extent they may not include footnotes or may be condensed or
summary statements) and fairly present in all material respects the consolidated financial position
of the Company and its consolidated Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments). Except as set forth in the financial
statements of the Company included in the SEC Documents, or as otherwise disclosed on Schedule
3(g), the Company has no liabilities, contingent or otherwise, other than (i) liabilities incurred
in the ordinary course of business subsequent to December 31, 2005 and (ii) obligations under
contracts and commitments incurred in the ordinary course of business and not required under
generally accepted accounting principles to be reflected in such financial statements, which,
individually or in the aggregate, are not material to the financial condition or operating results
of the Company.
h. Absence of Certain Changes. Except as set forth on Schedule 3(h), since December
31, 2005, there has been no material adverse change and no material adverse development in the
assets, liabilities, business, properties, operations, financial condition, results of operations
or prospects of the Company or any of its Subsidiaries.
i. Absence of Litigation. Except as set forth on Schedule 3(i), there is no action,
suit, claim, proceeding, inquiry or investigation before or by any court, public board, government
agency, self-regulatory organization or body pending or, to the knowledge of the Company or any of
its Subsidiaries, threatened against or affecting the Company or any of its Subsidiaries, or their
officers or directors in their capacity as such, that could reasonably be
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expected to have a Material Adverse Effect. Schedule 3(i) contains a complete list and
summary description of any pending or, to the knowledge of the Company, proceeding threatened in
writing against or affecting the Company or any of its Subsidiaries, without regard to whether it
would have a Material Adverse Effect.
j. Patents, Copyrights, etc. The Company and each of its Subsidiaries owns or
possesses the requisite licenses or rights to use all patents, patent applications, patent rights,
inventions, know-how, trade secrets, trademarks, trademark applications, service marks, service
names, trade names and copyrights (“Intellectual Property”) material and necessary to enable it to
conduct its business as now operated (and, except as set forth in Schedule 3(j) hereof, to the best
of the Company’s knowledge, as presently contemplated to be operated in the future); there is no
claim or action by any person pertaining to, or proceeding pending, or to the Company’s knowledge
threatened, which challenges the right of the Company or of a Subsidiary with respect to any
Intellectual Property necessary to enable it to conduct its business as now operated (and, except
as set forth in Schedule 3(j) hereof, to the best of the Company’s knowledge, as presently
contemplated to be operated in the future); to the best of the Company’s knowledge, the Company’s
or its Subsidiaries’ current and intended products, services and processes do not infringe on any
Intellectual Property or other rights held by any person; and the Company is unaware of any facts
or circumstances which might give rise to any of the foregoing. The Company and each of its
Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and
value of their Intellectual Property.
k. Tax Status. Except as set forth on Schedule 3(l), the Company and each of its
Subsidiaries has made or filed all federal, state and foreign income and all other material tax
returns, reports and declarations required by any jurisdiction to which it is subject (unless and
only to the extent that the Company and each of its Subsidiaries has set aside on its books
provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all
taxes and other governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those being contested in
good faith and has set aside on its books provisions reasonably adequate for the payment of all
taxes for periods subsequent to the periods to which such returns, reports or declarations apply.
There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any
jurisdiction, and the officers of the Company know of no basis for any such claim. The Company has
not executed a waiver with respect to the statute of limitations relating to the assessment or
collection of any foreign, federal, state or local tax. Except as set forth on Schedule 3(l), none
of the Company’s tax returns is presently being audited by any taxing authority.
l. Certain Transactions. Except as set forth on Schedule 3(m) and except for arm’s
length transactions pursuant to which the Company or any of its Subsidiaries makes payments in the
ordinary course of business upon terms no less favorable than the Company or any of its
Subsidiaries could obtain from third parties, none of the officers, directors, or employees of the
Company is presently a party to any transaction with the Company or any of its Subsidiaries (other
than for services as employees, officers and directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for rental of real or
personal property to or from, or otherwise requiring payments to or
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from any officer, director or such employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or partner.
m. Disclosure. All information relating to or concerning the Company or any of its
Subsidiaries set forth in this Agreement, to the knowledge of the Company, all of the information
and provided to the Buyers pursuant to Section 2(d) hereof and otherwise in connection with the
transactions contemplated hereby is true and correct in all material respects and the Company has
not omitted to state any material fact necessary in order to make the statements made herein or
therein, in light of the circumstances under which they were made, not misleading. No event or
circumstance has occurred or exists with respect to the Company or any of its Subsidiaries or its
or their business, properties, prospects, operations or financial conditions, which, under
applicable law, rule or regulation, requires public disclosure or announcement by the Company but
which has not been so publicly announced or disclosed (assuming for this purpose that the Company’s
reports filed under the 1934 Act are being incorporated into an effective registration statement
filed by the Company under the 1933 Act).
n. Acknowledgment Regarding Buyers’ Purchase of Securities. The Company acknowledges
and agrees that the Buyers are acting solely in the capacity of arm’s length purchasers with
respect to this Agreement and the transactions contemplated hereby. The Company further
acknowledges that no Buyer is acting as a financial advisor or fiduciary of the Company (or in any
similar capacity) with respect to this Agreement and the transactions contemplated hereby and any
statement made by any Buyer or any of their respective representatives or agents in connection with
this Agreement and the transactions contemplated hereby is not advice or a recommendation and is
merely incidental to the Buyers’ purchase of the Securities. The Company further represents to
each Buyer that the Company’s decision to enter into this Agreement has been based solely on the
independent evaluation of the Company and its representatives.
o. No Integrated Offering. Neither the Company, nor any of its affiliates, nor any
person acting on its or their behalf, has directly or indirectly made any offers or sales in any
security or solicited any offers to buy any security under circumstances that would require
registration under the 1933 Act of the issuance of the Securities to the Buyers. The issuance of
the Securities to the Buyers will not be integrated with any other issuance of the Company’s
securities (past, current or future) for purposes of any shareholder approval provisions applicable
to the Company or its securities.
p. No Brokers. Except as set forth in Schedule 3(p), the Company has taken no action
which would give rise to any claim by any person for brokerage commissions, transaction fees or
similar payments relating to this Agreement or the transactions contemplated hereby.
q. Permits; Compliance. The Company and each of its Subsidiaries is in possession of
all franchises, grants, authorizations, licenses, permits, easements, variances, exemptions,
consents, certificates, approvals and orders necessary to own, lease and operate its properties and
to carry on its business as it is now being conducted, except for those, the failure of which to
possess could not reasonably be expected to result in a Material Adverse Effect
10
(collectively, the “Company Permits”), and there is no action pending or, to the knowledge of
the Company, threatened regarding suspension or cancellation of any of the Company Permits.
Neither the Company nor any of its Subsidiaries is in conflict with, or in default or violation of,
any of the Company Permits, except for any such conflicts, defaults or violations which,
individually or in the aggregate, would not reasonably be expected to have a Material Adverse
Effect. Since December 31, 2005, neither the Company nor any of its Subsidiaries has received any
notification with respect to possible conflicts, defaults or violations of applicable laws, except
for notices relating to possible conflicts, defaults or violations, which conflicts, defaults or
violations could not reasonably be expected to result in a Material Adverse Effect.
r. Environmental Matters.
(i) Except as set forth in Schedule 3(s), there are, to the Company’s knowledge, with respect
to the Company or any of its Subsidiaries or any predecessor of the Company, no past or present
violations of Environmental Laws (as defined below), releases of any material into the environment,
actions, activities, circumstances, conditions, events, incidents, or contractual obligations which
may give rise to any common law environmental liability or any liability under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 or similar federal, state, local or
foreign laws which in any such case could reasonably be expected to result in a Material Adverse
Effect, and neither the Company nor any of its Subsidiaries has received any notice with respect to
any of the foregoing, nor is any action pending or, to the Company’s knowledge, threatened in
connection with any of the foregoing. The term “Environmental Laws” means all federal, state,
local or foreign laws relating to pollution or protection of human health or the environment
(including, without limitation, ambient air, surface water, groundwater, land surface or subsurface
strata), including, without limitation, laws relating to emissions, discharges, releases or
threatened releases of chemicals, pollutants contaminants, or toxic or hazardous substances or
wastes (collectively, “Hazardous Materials”) into the environment, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters,
injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations
issued, entered, promulgated or approved thereunder.
(ii) Other than those that are or were stored, used or disposed of in material compliance with
applicable law, to the Company’s knowledge, no Hazardous Materials are contained on or about any
real property currently owned, leased or used by the Company or any of its Subsidiaries, and to the
Company’s knowledge, no Hazardous Materials were released on or about any real property previously
owned, leased or used by the Company or any of its Subsidiaries during the period the property was
owned, leased or used by the Company or any of its Subsidiaries, except in the normal course of the
Company’s or any of its Subsidiaries’ business and except for releases that could not reasonably be
expected to result in a Material Adverse Effect.
(iii) Except as set forth in Schedule 3(s), to the Company’s knowledge, there are no
underground storage tanks on or under any real property owned, leased or used by the Company or any
of its Subsidiaries that are not in material compliance with applicable law.
11
s. Title to Property. The Company and its Subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all personal property owned by
them which is material to the business of the Company and its Subsidiaries, in each case free and
clear of all liens, encumbrances and defects except such as are described in Schedule 3(t) or such
as would not have a Material Adverse Effect. Any real property and facilities held under lease by
the Company and its Subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as would not have a Material Adverse Effect.
t. Insurance. Except as set forth in Schedule 3(u), the Company and each of its
Subsidiaries are insured by insurers of recognized financial responsibility against such losses and
risks and in such amounts as management of the Company believes to be prudent and customary in the
businesses in which the Company and its Subsidiaries are engaged. Neither the Company nor any such
Subsidiary has any reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from similar insurers as
may be necessary to continue its business at a cost that would not have a Material Adverse Effect.
The Company has provided to Buyer true and correct copies of all policies relating to directors’
and officers’ liability coverage, errors and omissions coverage, and commercial general liability
coverage.
u. Internal Accounting Controls. The Company and each of its Subsidiaries maintain a
system of internal accounting controls sufficient, in the judgment of the Company’s board of
directors, to provide reasonable assurance that (i) transactions are executed in accordance with
management’s general or specific authorizations, (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability, (iii) access to assets is permitted only in
accordance with management’s general or specific authorization and (iv) the recorded accountability
for assets is compared with the existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
v. Foreign Corrupt Practices. Neither the Company, nor any of its Subsidiaries, nor
any director, officer, agent, employee or other person acting on behalf of the Company or any
Subsidiary has, in the course of his actions for, or on behalf of, the Company, used any corporate
funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to
political activity; made any direct or indirect unlawful payment to any foreign or domestic
government official or employee from corporate funds; violated or is in violation of any provision
of the U.S. Foreign Corrupt Practices Act of 1977, as amended, or made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment to any foreign or domestic government
official or employee.
w. No Investment Company. The Company is not, and upon the issuance and sale of the
Securities as contemplated by this Agreement will not be an “investment company” required to be
registered under the Investment Company Act of 1940 (an “Investment Company”). The Company is not
controlled by an Investment Company.
12
4. COVENANTS.
a. Reasonable Efforts. The parties shall use their reasonable efforts to satisfy
timely each of the conditions described in Section 6 and 7 of this Agreement.
b. Form D; Blue Sky Laws. The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to each Buyer promptly
after such filing. The Company shall, on or before the Closing Date, take such action as the
Company shall reasonably determine is necessary to qualify the Securities for sale to the Buyers at
the applicable closing pursuant to this Agreement under applicable securities or “blue sky” laws of
the states of the United States (or to obtain an exemption from such qualification), and shall
provide evidence of any such action so taken to each Buyer on or prior to the Closing Date.
c. Reporting Status; Eligibility to Use Form S-3, SB-2 or Form S-1. The Company’s Common Stock is registered under Section 12(g) of the 1934 Act.
The Company represents and warrants that it meets the requirements for the use of Form S-1 for
registration of the sale by the Buyer of the Registrable Securities (as defined in the Registration
Rights Agreement). So long as the Buyer beneficially owns any of the Securities, the Company shall
timely file all reports required to be filed with the SEC pursuant to the 1934 Act, and the Company
shall not terminate its status as an issuer required to file reports under the 1934 Act even if the
1934 Act or the rules and regulations thereunder would permit such termination. The Company shall
issue a press release describing the material terms of the transaction contemplated hereby as soon
as practicable following the Closing Date but in no event more than two (2) business days of the
Closing Date, which press release shall be subject to prior review by the Buyers. The Company
agrees that such press release shall not disclose the name of the Buyers unless expressly consented
to in writing by the Buyers or unless required by applicable law or regulation, and then only to
the extent of such requirement.
d. Use of Proceeds. The Company shall use the proceeds from the sale of the
Debentures and the Warrants in the manner set forth in Schedule 4(d) attached hereto and made a
part hereof and shall not, directly or indirectly, use such proceeds for any loan to or investment
in any other corporation, partnership, enterprise or other person (except in connection with its
currently existing direct or indirect Subsidiaries)
e. Future Offerings. Subject to the exceptions described below, the Company will not,
without the prior written consent of a majority-in-interest of the Buyers, not to be unreasonably
withheld, (A) negotiate or contract with any party to obtain additional equity financing (including
debt financing with an equity component) that involves the issuance of convertible securities that
are convertible into an indeterminate number of shares of Common Stock or (B) grant any
registration rights in connection with any issuance of Common Stock or warrants during the period
(the “Lock-up Period”) beginning on the Closing Date and ending on the later of (i) two hundred
seventy (270) days from the Closing Date and (ii) one hundred eighty (180) days from the date the
Registration Statement (as defined in the Registration Rights Agreement) is declared effective
(plus any days in which sales cannot be made thereunder). Notwithstanding the foregoing, the
Company shall be permitted to obtain additional equity financing (including debt financing with an
equity component) that does not involve the issuance
13
of convertible securities that are convertible into an indeterminate number of shares of
Common Stock and which involves the grant of registration rights, so long as such registration
rights do not become effective or may not be invoked by the holder thereof for a period of at least
320 days from the Closing Date. In addition, subject to the exceptions described below, the
Company will not conduct any equity financing (including debt with an equity component) (“Future
Offerings”) during the period beginning on the Closing Date and ending two (2) years after the end
of the Lock-up Period unless it shall have first delivered to each Buyer, at least twenty (20)
business days prior to the closing of such Future Offering, written notice describing the proposed
Future Offering, including the terms and conditions thereof and proposed definitive documentation
to be entered into in connection therewith, and providing each Buyer an option during the fifteen
(15) day period following delivery of such notice to purchase its pro rata share (based on the
ratio that the aggregate principal amount of Debentures purchased by it hereunder bears to the
aggregate principal amount of Debentures purchased hereunder) of the securities being offered in
the Future Offering on the same terms as contemplated by such Future Offering (the limitations
referred to in this sentence and the preceding sentence are collectively referred to as the
“Capital Raising Limitations”). In the event the terms and conditions of a proposed Future
Offering are amended in any respect after delivery of the notice to the Buyers concerning the
proposed Future Offering, the Company shall deliver a new notice to each Buyer describing the
amended terms and conditions of the proposed Future Offering and each Buyer thereafter shall have
an option during the fifteen (15) day period following delivery of such new notice to purchase its
pro rata share of the securities being offered on the same terms as contemplated by such proposed
Future Offering, as amended. The foregoing sentence shall apply to successive amendments to the
terms and conditions of any proposed Future Offering. The Capital Raising Limitations shall not
apply to any transaction involving (i) issuances of securities in a firm commitment underwritten
public offering (excluding a continuous offering pursuant to Rule 415 under the 0000 Xxx) or (ii)
issuances of securities as consideration for a merger, consolidation or purchase of assets, or in
connection with any strategic partnership or joint venture (the primary purpose of which is not to
raise equity capital), or in connection with the disposition or acquisition of a business, product
or license by the Company. The Capital Raising Limitations also shall not apply to the issuance of
securities upon exercise or conversion of the Company’s options, warrants or other convertible
securities outstanding as of the date hereof or to the grant of additional options or warrants, or
the issuance of additional securities, under any Company stock option or restricted stock plan
approved by the shareholders of the Company.
f. Expenses. At the Closing, the Company shall reimburse Buyers for reasonable
expenses incurred by them in connection with the negotiation, preparation, execution, delivery and
performance of this Agreement and the other agreements to be executed in connection herewith
(“Documents”), including, without limitation, reasonable attorneys’ and consultants’ fees and
expenses, transfer agent fees, fees for stock quotation services, fees relating to any amendments
or modifications of the Documents or any consents or waivers of provisions in the Documents,
reasonable fees for the preparation of opinions of counsel, escrow fees, and costs of restructuring
the transactions contemplated by the Documents. When possible, the Company must pay these fees
directly, otherwise the Company must make immediate payment for reimbursement to the Buyers for all
fees and expenses immediately upon written notice by the Buyer or the submission of an invoice by
the Buyer If the Company fails to reimburse the Buyer in full within three (3) business days of
the written notice or submission of invoice by the
14
Buyer, the Company shall pay interest on the total amount of fees to be reimbursed at a rate
of 15% per annum.
g. Financial Information. The Company agrees to send the following reports to each
Buyer until such Buyer transfers, assigns, or sells all of the Securities: (i) within ten (10) days
after the filing with the SEC, a copy of its Annual Report on Form
10-K, its Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K; (ii) within one
(1) day after release, copies of all press releases issued by the Company or any of its
Subsidiaries; and (iii) contemporaneously with the making available or giving to the shareholders
of the Company, copies of any notices or other information the Company makes available or gives to
such shareholders.
h. Authorization and Reservation of Shares. Subject to obtaining Stockholder Approval
(as defined in Section 4(n)), the Company shall at all times have authorized, and reserved for the
purpose of issuance, a sufficient number of shares of Common Stock to provide for the full
conversion or exercise of the outstanding Debentures and Warrants and issuance of the Conversion
Shares and Warrant Shares in connection therewith (based on the Conversion Price of the Debentures
or Exercise Price of the Warrants in effect from time to time) and as otherwise required by the
Debentures. The Company shall not reduce the number of shares of Common Stock reserved for
issuance upon conversion of Debentures and exercise of the Warrants without the consent of each
Buyer. The Company shall at all times maintain the number of shares of Common Stock so reserved
for issuance at an amount (“Reserved Amount”) equal to no less than the number that is then
actually issuable upon full conversion of the Debentures and Additional Debentures and upon
exercise of the Warrants and the Additional Warrants (based on the Conversion Price of the
Debentures or the Exercise Price of the Warrants in effect from time to time). If at any time the
number of shares of Common Stock authorized and reserved for issuance (“Authorized and Reserved
Shares”) is below the Reserved Amount, the Company will promptly take all corporate action
necessary to authorize and reserve a sufficient number of shares, including, without limitation,
calling a special meeting of shareholders to authorize additional shares to meet the Company’s
obligations under this Section 4(h), in the case of an insufficient number of authorized shares,
obtain shareholder approval of an increase in such authorized number of shares, and voting the
management shares of the Company in favor of an increase in the authorized shares of the Company to
ensure that the number of authorized shares is sufficient to meet the Reserved Amount. If the
Company fails to obtain such shareholder approval within (45) days following the date on which the
number of Reserved Amount exceeds the Authorized and Reserved Shares, the Company shall pay to the
Borrower the Standard Liquidated Damages Amount, in cash or in shares of Common Stock at the option
of the Buyer. If the Buyer elects to be paid the Standard Liquidated Damages Amount in shares of
Common Stock, such shares shall be issued at the Conversion Price at the time of payment. In order
to ensure that the Company has authorized a sufficient amount of shares to meet the Reserved Amount
at all times, the Company must deliver to the Buyer at the end of every month a list detailing (1)
the current amount of shares authorized by the Company and reserved for the Buyer; and (2) amount
of shares issuable upon conversion of the Debentures and upon exercise of the Warrants and as
payment of interest accrued on the Debentures for one year. If the Company fails to provide such
list within five (5) business days of the end of each month, the Company shall pay the Standard
Liquidated Damages Amount, in cash or in shares of Common Stock at the option of the Buyer, until
the list is delivered. If the Buyer elects to be
15
paid the Standard Liquidated Damages Amount in shares of Common Stock, such shares shall be
issued at the Conversion Price at the time of payment.
i. Listing. The Company shall promptly secure the listing of the Conversion Shares
and Warrant Shares upon each national securities exchange or automated quotation system, if any,
upon which shares of Common Stock are then listed (subject to official notice of issuance) and, so
long as any Buyer owns any of the Securities, shall maintain, so long as any other shares of Common
Stock shall be so listed, such listing of all Conversion Shares and Warrant Shares from time to
time issuable upon conversion of the Debentures or exercise of the Warrants. The Company will
provide for, so long as any Buyer owns any of the Securities, the quotation of its Common Stock on
the OTCBB or Pink Sheets or any equivalent replacement quotation service. The Company shall
promptly provide to each Buyer copies of any notices it receives from the OTCBB and any other
exchanges or quotation systems on which the Common Stock is then quoted regarding the continued
eligibility of the Common Stock for listing on such exchanges and quotation systems.
j. Corporate Existence. So long as a Buyer beneficially owns any Debentures or
Warrants, the Company shall maintain its corporate existence and shall not sell all or
substantially all of the Company’s assets, except in the event of a merger or consolidation or sale
of all or substantially all of the Company’s assets, where the surviving or successor entity in
such transaction (i) assumes the Company’s obligations hereunder and under the agreements and
instruments entered into in connection herewith and (ii) is a publicly traded corporation whose
Common Stock is listed for trading on the OTCBB, Nasdaq, Nasdaq SmallCap, NYSE or AMEX.
k. No Integration. The Company shall not make any offers or sales of any security
(other than the Securities) under circumstances that would require registration of the Securities
being offered or sold hereunder under the 1933 Act or cause the offering of the Securities to be
integrated with any other offering of securities by the Company for the purpose of any stockholder
approval provision applicable to the Company or its securities.
l. Subsequent Investment. The Company and the Buyers agree that, upon the filing by
the Company of the Registration Statement to be filed pursuant to the Registration Rights Agreement
(the “Filing Date”), the Buyers shall purchase additional Notes (the “Filing Notes”) in the
aggregate principal amount of Six Hundred Thousand Dollars ($600,000) for an aggregate purchase
price of Six Hundred Thousand Dollars ($600,000), with the closing of such purchase to occur within
two (2) days of the Filing Date; provided, however, that the obligation of each
Buyer to purchase the Filing Notes is subject to the satisfaction, at or before the closing of such
purchase and sale, of the conditions set forth in Section 7. The Company and the Buyers further
agree that, upon the declaration of effectiveness of the Registration Statement to be filed
pursuant to the Registration Rights Agreement (the “Effective Date”), the Buyers shall purchase
additional notes (the “Effectiveness Notes” and, collectively with the Filing Notes, the
“Additional Notes”) in the aggregate principal amount of Seven Hundred Thousand Dollars ($700,000)
for an aggregate purchase price of Seven Hundred Thousand Dollars ($700,000), with the closing of
such purchase to occur within two (2) days of the Effective Date; provided,
however, that the obligation of each Buyer to purchase the Additional Notes is subject to
the satisfaction, at or before the closing of such purchase and sale,
16
of the conditions set forth in Section 7; and, provided, further, that there
shall not have been a Material Adverse Effect as of such effective date. The terms of the
Additional Notes shall be identical to the terms of the Notes to be issued on the Closing Date.
The Common Stock underlying the Additional Notes shall be Registrable Securities (as defined in the
Registration Rights Agreement) and shall be included in the Registration Statement to be filed
pursuant to the Registration Rights Agreement.
m. Restriction on Short Sales. The Buyers agree that, so long as any of the Notes
remain outstanding, but in no event less than two (2) years from the date hereof, the Buyers will
not enter into or effect any “short sales” (as such term is defined in Rule 3b-3 of the 0000 Xxx)
of the Common Stock or hedging transaction which establishes a net short position with respect to
the Common Stock.
n. Stockholder Approval. The Company shall file a proxy or information statement with
the SEC no later than September 15, 2006 and use its best efforts to obtain, on or before November
15, 2006, such approvals of the Company’s stockholders as may be required to issue all of the
shares of Common Stock issuable upon conversion or exercise of, or otherwise with respect to, the
Notes and the Warrants in accordance with Delaware law and any applicable rules or regulations of
the OTCBB and Nasdaq, either through a reverse stock split of the Common Stock or an increase in
authorized capital (the “Stockholder Approval”). The Company shall furnish to each Buyer and its
legal counsel promptly (but in no event less than two (2) business days) before the same is filed
with the SEC, one copy of the proxy or information statement and any amendment thereto, and shall
deliver to each Buyer promptly each letter written by or on behalf of the Company to the SEC or the
staff of the SEC, and each item of correspondence from the SEC or the staff of the SEC, in each
case relating to such proxy or information statement (other than any portion thereof which contains
information for which the Company has sought confidential treatment). The Company will use
commercially reasonable efforts to promptly (but in no event more than three (3) business days)
respond to any and all comments received from the SEC (which comments shall promptly be made
available to each Buyer). The Company shall comply with the filing and disclosure requirements of
Section 14 under the 1934 Act in connection with the Stockholder Approval. The Company represents
and warrants that its Board of Directors has approved the proposal contemplated by this Section
4(l) and shall indicate such approval in the proxy or information statement used in connection with
the Stockholder Approval.
o. Breach of Covenants. If the Company breaches any of the covenants set forth in
this Section 4, and in addition to any other remedies available to the Buyers pursuant to this
Agreement, the Company shall pay to the Buyers the Standard Liquidated Damages Amount, in cash or
in shares of Common Stock at the option of the Company, until such breach is cured. If the Company
elects to pay the Standard Liquidated Damages Amount in shares, such shares shall be issued at the
Conversion Price at the time of payment.
5. TRANSFER AGENT INSTRUCTIONS. The Company shall issue irrevocable instructions to
its transfer agent to issue certificates, registered in the name of each Buyer or its nominee, for
the Conversion Shares and Warrant Shares in such amounts as specified from time to time by each
Buyer to the Company upon conversion of the Debentures or
17
exercise of the Warrants in accordance with the terms thereof (the “Irrevocable Transfer Agent
Instructions”). Prior to registration of the Conversion Shares and Warrant Shares under the 1933
Act or the date on which the Conversion Shares and Warrant Shares may be sold pursuant to Rule 144
without any restriction as to the number of Securities as of a particular date that can then be
immediately sold, all such certificates shall bear the restrictive legend specified in Section 2(g)
of this Agreement. The Company warrants that no instruction other than the Irrevocable Transfer
Agent Instructions referred to in this Section 5, and stop transfer instructions to give effect to
Section 2(f) hereof (in the case of the Conversion Shares and Warrant Shares, prior to registration
of the Conversion Shares and Warrant Shares under the 1933 Act or the date on which the Conversion
Shares and Warrant Shares may be sold pursuant to Rule 144 without any restriction as to the number
of Securities as of a particular date that can then be immediately sold), will be given by the
Company to its transfer agent and that the Securities shall otherwise be freely transferable on the
books and records of the Company as and to the extent provided in this Agreement and the
Registration Rights Agreement. Nothing in this Section shall affect in any way the Buyer’s
obligations and agreement set forth in Section 2(g) hereof to comply with all applicable prospectus
delivery requirements, if any, upon re-sale of the Securities. If a Buyer provides the Company
with (i) an opinion of counsel in form, substance and scope reasonably satisfactory to the Company
and customary for opinions in comparable transactions, to the effect that a public sale or transfer
of such Securities may be made without registration under the 1933 Act and such sale or transfer is
effected or (ii) the Buyer provides reasonable assurances that the Securities can be sold pursuant
to Rule 144, the Company shall permit the transfer, and, in the case of the Conversion Shares and
Warrant Shares, promptly instruct its transfer agent to issue one or more certificates, free from
restrictive legend, in such name and in such denominations as specified by such Buyer. The Company
acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the
Buyers, by vitiating the intent and purpose of the transactions contemplated hereby. Accordingly,
the Company acknowledges that the remedy at law for a breach of its obligations under this Section
5 may be inadequate and agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Section, that the Buyers shall be entitled, in addition to all other available
remedies, to an injunction restraining any breach and requiring immediate transfer, without the
necessity of showing economic loss and without any bond or other security being required.
6. CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL. The obligation of the Company
hereunder to issue and sell the Debentures and Warrants to a Buyer at the Closing is subject to the
satisfaction, at or before the Closing Date of each of the following conditions thereto, provided
that these conditions are for the Company’s sole benefit and may be waived by the Company at any
time in its sole discretion:
a. The applicable Buyer shall have executed this Agreement and the Registration Rights
Agreement, and delivered the same to the Company.
b. The applicable Buyer shall have delivered the Purchase Price in accordance with Section
1(b) above.
c. The representations and warranties of the applicable Buyer shall be true and correct in all
material respects as of the date when made and as of the Closing Date as though made at that time
(except for representations and warranties that speak as of a specific
18
date), and the applicable Buyer shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by this Agreement to be performed,
satisfied or complied with by the applicable Buyer at or prior to the Closing Date.
d. No litigation, statute, rule, regulation, executive order, decree, ruling or injunction
shall have been enacted, entered, promulgated or endorsed by or in any court or governmental
authority of competent jurisdiction or any self-regulatory organization having authority over the
matters contemplated hereby which prohibits the consummation of any of the transactions
contemplated by this Agreement.
7. CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE. The obligation of each Buyer
hereunder to purchase the Debentures and Warrants at the Closing is subject to the satisfaction, at
or before the Closing Date of each of the following conditions, provided that these conditions are
for such Buyer’s sole benefit and may be waived by such Buyer at any time in its sole discretion:
a. The Company shall have executed this Agreement and the Registration Rights Agreement, and
delivered the same to the Buyer.
b. The Company shall have delivered to such Buyer duly executed Debentures (in such
denominations as the Buyer shall request) and Warrants in accordance with Section 1(b) above.
c. The Irrevocable Transfer Agent Instructions, in form and substance satisfactory to a
majority-in-interest of the Buyers, shall have been delivered to and acknowledged in writing by the
Company’s Transfer Agent.
d. The representations and warranties of the Company shall be true and correct in all material
respects as of the date when made and as of the Closing Date as though made at such time (except
for representations and warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied with by the Company at
or prior to the Closing Date. The Buyer shall have received a certificate or certificates,
executed by the chief executive officer of the Company, dated as of the Closing Date, to the
foregoing effect and as to such other matters as may be reasonably requested by such Buyer
including, but not limited to certificates with respect to the Company’s Articles of Incorporation,
By-laws and Board of Directors’ resolutions relating to the transactions contemplated hereby.
e. No litigation, statute, rule, regulation, executive order, decree, ruling or injunction
shall have been enacted, entered, promulgated or endorsed by or in any court or governmental
authority of competent jurisdiction or any self-regulatory organization having authority over the
matters contemplated hereby which prohibits the consummation of any of the transactions
contemplated by this Agreement.
f. No event shall have occurred which could reasonably be expected to have a Material Adverse
Effect on the Company.
19
g. [Intentionally omitted]
h. The Buyer shall have received an opinion of the Company’s counsel (which may be bifurcated
between the Company’s inside general counsel and the Company’s outside counsel), dated as of the
Closing Date, in form, scope and substance reasonably satisfactory to the Buyer and in
substantially the same form as Exhibit “D” attached hereto.
i. The Buyer shall have received an officer’s certificate described in Section 3(c) above,
dated as of the Closing Date.
8. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law. THIS AGREEMENT SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED
ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. THE PARTIES
HERETO HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN
NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS AGREEMENT, THE AGREEMENTS ENTERED
INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES
IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR
PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS
MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT
OR PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY’S RIGHT TO SERVE PROCESS IN ANY OTHER
MANNER PERMITTED BY LAW. BOTH PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT
OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH
JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING
UNDER THIS AGREEMENT SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING ATTORNEYS’ FEES,
INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH DISPUTE.
b. Counterparts; Signatures by Facsimile. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original but all of which shall constitute one
and the same agreement and shall become effective when counterparts have been signed by each party
and delivered to the other party. This Agreement, once executed by a party, may be delivered to
the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature
of the party so delivering this Agreement.
c. Headings. The headings of this Agreement are for convenience of reference only and
shall not form part of, or affect the interpretation of, this Agreement.
20
d. Severability. In the event that any provision of this Agreement is invalid or
unenforceable under any applicable statute or rule of law, then such provision shall be deemed
inoperative to the extent that it may conflict therewith and shall be deemed modified to conform
with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable
under any law shall not affect the validity or enforceability of any other provision hereof.
e. Entire Agreement; Amendments. This Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters covered herein and
therein and, except as specifically set forth herein or therein, neither the Company nor the Buyer
makes any representation, warranty, covenant or undertaking with respect to such matters. No
provision of this Agreement may be waived or amended other than by an instrument in writing signed
by the party to be charged with enforcement.
f. Notices. Any notices required or permitted to be given under the terms of this
Agreement shall be sent by certified or registered mail (return receipt requested) or delivered
personally or by courier (including a recognized overnight delivery service) or by facsimile and
shall be effective five days after being placed in the mail, if mailed by regular United States
mail, or upon receipt, if delivered personally or by courier (including a recognized overnight
delivery service) or by facsimile, in each case addressed to a party. The addresses for such
communications shall be:
| If to the Company: | Standard Management Corporation | |||
| 00000 X. Xxxxxxxxxxxx Xxxxxx | ||||
| Xxxxxxxxxxxx, XX 00000 | ||||
| Attention: Chief Executive Officer | ||||
| Telephone: (000) 000-0000 | ||||
| Facsimile: (317) | ||||
| With copies to: | Xxxxxxxx Xxxxxxx LLP | |||
| 000 Xxxxxxxxx Xxxxxx, X.X., Xxxxx 0000 | ||||
| Xxxxxxx, XX 00000-0000 | ||||
| Attention: Xxxxxx X. Xxxxx | ||||
| Telephone: (000) 000-0000 | ||||
| Facsimile: (000) 000-0000 | ||||
| Email: xxxxxx.xxxxx@xxxxxxxxxxxxxxx.xxx |
If to a Buyer: To the address set forth immediately below such Buyer’s name on the signature
pages hereto.
| With copy to: | Xxxxxxx Xxxxx Xxxxxxx & Xxxxxxxxx, LLP |
21
| 0000 Xxxxxx Xxxxxx | ||||
| 00xx Xxxxx | ||||
| Xxxxxxxxxxxx, Xxxxxxxxxxxx 00000 | ||||
| Attention: Xxxxxx X. Xxxxxxxx, Esq. | ||||
| Telephone: 000-000-0000 | ||||
| Facsimile: 000-000-0000 | ||||
| Email: xxxxxxxx@xxxxxxxxxxxx.xxx |
Each party shall provide notice to the other party of any change in address.
g. Intentionally Omitted.
h. Intentionally Omitted.
i. Survival. The representations and warranties of the Company and the agreements and
covenants set forth in Sections 3, 4, 5 and 8 shall survive the closing hereunder notwithstanding
any due diligence investigation conducted by or on behalf of the Buyers. The Company agrees to
indemnify and hold harmless each of the Buyers and all their officers, directors, employees and
agents for loss or damage arising as a result of or related to any breach or alleged breach by the
Company of any of its representations, warranties and covenants set forth in Sections 3 and 4
hereof or any of its covenants and obligations under this Agreement or the Registration Rights
Agreement, including advancement of expenses as they are incurred.
j. Publicity. The Company and each of the Buyers shall have the right to review a
reasonable period of time before issuance of any press releases, SEC, OTCBB or NASD filings, or any
other public statements with respect to the transactions contemplated hereby; provided,
however, that the Company shall be entitled, without the prior approval of each of the
Buyers, to make any press release or SEC, OTCBB (or other applicable trading market) or NASD
filings with respect to such transactions as is required by applicable law and regulations
(although each of the Buyers shall be consulted by the Company in connection with any such press
release prior to its release and shall be provided with a copy thereof and be given an opportunity
to comment thereon).
k. Further Assurances. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may reasonably request in
order to carry out the intent and accomplish the purposes of this Agreement and the consummation of
the transactions contemplated hereby.
l. No Strict Construction. The language used in this Agreement will be deemed to be
the language chosen by the parties to express their mutual intent, and no rules of strict
construction will be applied against any party.
m. Remedies. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Buyers by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for
a breach of its obligations under this Agreement will be inadequate and
22
agrees, in the event of a breach or threatened breach by the Company of the provisions of this
Agreement, that the Buyers shall be entitled, in addition to all other available remedies at law or
in equity, and in addition to the penalties assessable herein, to an injunction or injunctions
restraining, preventing or curing any breach of this Agreement and to enforce specifically the
terms and provisions hereof, without the necessity of showing economic loss and without any bond or
other security being required.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
23
IN WITNESS WHEREOF, the undersigned Buyers and the Company have caused this Agreement to be
duly executed as of the date first above written.
STANDARD MANAGEMENT CORPORATION |
||
/s/ Xxxxxx X. Xxxxxx |
||
Xxxxxx X. Xxxxxx |
||
Chief Executive Officer |
||
AJW PARTNERS, LLC |
||
By: SMS Group, LLC |
||
/s/ Xxxxx Xxxxxxxx |
||
Xxxxx X. Xxxxxxxx |
||
Manager |
||
RESIDENCE: Delaware |
ADDRESS:
|
0000 Xxxxxxxx Xxxxxxxxx | |
| Xxxxx 000 | ||
| Xxxxxx, Xxx Xxxx 00000 | ||
| Facsimile: (000) 000-0000 | ||
| Telephone: (000) 000-0000 |
AGGREGATE SUBSCRIPTION AMOUNT:
Aggregate Principal Amount of Debentures: |
$ | |||||||
Number of Warrants: |
||||||||
Aggregate Purchase Price: |
$ | |||||||
AJW OFFSHORE, LTD.
By: First Street Manager II, LLC
By: First Street Manager II, LLC
/s/ Xxxxx Xxxxxxxx |
||
Xxxxx X. Xxxxxxxx |
||
Manager |
RESIDENCE:
|
Cayman Islands |
24
ADDRESS:
|
AJW Offshore, Ltd. | |
| X.X. Xxx 00000 XXX | ||
| Xxxxx Xxxxxx, Xxxxxx Xxxxxx, B.W.I. |
AGGREGATE SUBSCRIPTION AMOUNT:
Aggregate Principal Amount of Debentures: |
$ | |||||||
Number of Warrants: |
||||||||
Aggregate Purchase Price: |
$ | |||||||
25
AJW QUALIFIED PARTNERS, LLC |
||
By: AJW Manager, LLC |
||
/s/ Xxxxx Xxxxxxxx |
||
Xxxxx X. Xxxxxxxx |
||
Manager |
RESIDENCE:
|
New York | |
ADDRESS:
|
0000 Xxxxxxxx Xxxxxxxxx | |
| Xxxxx 000 | ||
| Xxxxxx, Xxx Xxxx 00000 | ||
| Facsimile: (000) 000-0000 | ||
| Telephone: (000) 000-0000 |
AGGREGATE SUBSCRIPTION AMOUNT:
Aggregate Principal Amount of Debentures: |
$ | |||||||
Number of Warrants: |
||||||||
Aggregate Purchase Price: |
$ | |||||||
26
NEW MILLENNIUM CAPITAL PARTNERS II, LLC |
||
By: First Street Manager II, LLP |
||
/s/ Xxxxx Xxxxxxxx |
||
Xxxxx X. Xxxxxxxx |
||
Manager |
RESIDENCE:
|
New York | |
ADDRESS:
|
0000 Xxxxxxxx Xxxxxxxxx | |
| Xxxxx 000 | ||
| Xxxxxx, Xxx Xxxx 00000 | ||
| Facsimile: (000) 000-0000 | ||
| Telephone: (000) 000-0000 |
AGGREGATE SUBSCRIPTION AMOUNT:
Aggregate Principal Amount of Notes: |
$ | |||||||
Number of Warrants: |
||||||||
Aggregate Purchase Price: |
$ |
27
