CONVERTIBLE DEBENTURES AND WARRANTS PURCHASE AGREEMENT
BETWEEN
ECO SOIL SYSTEMS, INC. AND ITS SUBSIDIARIES SIGNATORY HERETO
AND
THE INVESTORS SIGNATORY HERETO
CONVERTIBLE DEBENTURES AND WARRANTS PURCHASE AGREEMENT dated as of
January 17, 2000 (the "Agreement"), between the Investors signatory hereto
(each an "Investor" and together the "Investors"), and Eco Soil Systems,
Inc., a corporation organized and existing under the laws of the State of
Nebraska (the "Company") and its subsidiaries, Agricultural Supply, Inc., a
Delaware corporation ("Ag Supply"), Turf Partners, Inc., a Delaware
corporation ("Turf Partners"), and the subsidiaries of Ag Supply, Sistemas Y
Equipos Agricolas, S.A. de C.V. and Agricultural Supply de Mexico, S.A. de
C.V., each incorporated under the laws of Mexico (each a "Subsidiary" and all
of such subsidiaries taken together, the "Subsidiaries").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Investors shall lend the Company and the
Subsidiaries, jointly and severally, $4,500,000 in the form of secured
subordinated Convertible Debentures (as defined below) and the Investors
shall receive Warrants (as defined below) to purchase shares of the Common
Stock of the Company (as defined below).
WHEREAS, such investments will be made in reliance upon the
provisions of Section 4(2) and/or 4(6) of the United States Securities Act
and/or Regulation D ("Regulation D") and the other rules and regulations
promulgated thereunder (the "Securities Act"), and/or upon such other
exemption from the registration requirements of the Securities Act as may be
available with respect to any or all of the investments in securities to be
made hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1. "CAPITAL SHARES" shall mean the Common Stock and any shares of
any other class of common stock whether now or hereafter authorized, having
the right to participate in the distribution of earnings and assets of the
Company.
Section 1.2. "CAPITAL SHARES EQUIVALENTS" shall mean any securities, rights,
or obligations that are convertible into or exchangeable for or give any
right to subscribe for any Capital Shares of
the Company or any Warrants, options or other rights to subscribe for or
purchase Capital Shares or any such convertible or exchangeable securities.
Section 1.3. "CLOSING" shall mean each closing of the purchase and sale of
the Convertible Debentures and Warrants pursuant to Section 2.1.
Section 1.4. "CLOSING DATE" shall mean the date on which all conditions to
the applicable Closing have been satisfied or waived by the appropriate party
or parties (as defined in Section 2.1 (b) hereto) and the Closing shall have
occurred.
Section 1.5. "COMMON STOCK" shall mean the Company's common stock, $0.005
par value.
Section 1.6. "CONVERSION SHARES" shall mean the shares of Common Stock
issuable upon conversion of the Convertible Debentures and any shares of
Common Stock issued as interest upon the Convertible Debentures.
Section 1.7. "CONVERTIBLE DEBENTURES" shall mean the Company's 7% Senior
Secured Convertible Debentures in the form attached hereto as Exhibit A.
Section 1.8. "DAMAGES" shall mean any loss, claim, damage, judgment,
penalty, deficiency or liability, including reasonable out-of-pocket costs
and expenses (including, without limitation, reasonable attorney's fees and
disbursements and reasonable costs and expenses of expert witnesses and
investigation).
Section 1.9. "EFFECTIVE DATE" shall mean the date on which the SEC first
declares effective a Registration Statement registering the resale of the
Registrable Securities as set forth in the Registration Rights Agreement.
Section 1.10. "ESCROW AGENT" shall have the meaning set forth in the Escrow
Agreement.
Section 1.11. "ESCROW AGREEMENT" shall mean the Escrow Agreement in
substantially the form of Exhibit D hereto executed and delivered
contemporaneously with this Agreement.
Section 1.12. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder.
Section 1.13. "LEGEND" shall mean the legend set forth in Section 9.1.
Section 1.14. "MARKET PRICE" on any given date shall mean the average of any
three closing bid prices on the Principal Market (as reported by Bloomberg,
L.P.) of the Common Stock during the fifteen Trading Day period ending on the
Trading Day immediately prior to the date for which the Market Price is to be
determined, as selected by the Investor.
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Section 1.15. "MATERIAL ADVERSE EFFECT" shall mean any effect on the
business, operations, properties, prospects, stock price or financial
condition of the Company or any Subsidiary that is material and adverse to
the Company and its Subsidiaries and affiliates, taken as a whole, and/or any
condition, circumstance, or situation that would prohibit or otherwise
interfere with the ability of the Company or any of the Subsidiaries to enter
into and perform any of their respective obligations under this Agreement,
the Registration Rights Agreement, the Escrow Agreement, the Convertible
Debentures, the Security Documents or the Warrants in any material respect.
Section 1.16. "OUTSTANDING" when used with reference to shares of Common
Stock or Capital Shares (collectively the "Shares"), shall mean, at any date
as of which the number of such Shares is to be determined, all issued and
outstanding Shares, and shall include all such Shares issuable in respect of
outstanding scrip or any certificates representing fractional interests in
such Shares; PROVIDED, HOWEVER, that "Outstanding" shall not mean any such
Shares then directly or indirectly owned or held by or for the account of the
Company.
Section 1.17. "PERSON" shall mean an individual, a corporation, a
partnership, a limited liability company, an association, a trust or other
entity or organization, including a government or political subdivision or an
agency or instrumentality thereof.
Section 1.18. "PRINCIPAL MARKET" shall mean the American Stock Exchange, the
New York Stock Exchange or the NASDAQ National Market, whichever is at the
time the principal trading exchange or market for the Common Stock, based
upon share volume.
Section 1.19. "PURCHASE PRICE" shall mean the face principal amount of the
Convertible Debentures.
Section 1.20. "REGISTRABLE SECURITIES" shall mean the Conversion Shares and
the Warrant Shares until (i) the Registration Statement has been declared
effective by the SEC, and all Conversion Shares and Warrant Shares have been
disposed of pursuant to the Registration Statement, (ii) all Conversion
Shares and Warrant Shares have been sold under circumstances under which all
of the applicable conditions of Rule 144 (or any similar provision then in
force) under the Securities Act ("Rule 144") are met, (iii) all Conversion
Shares and Warrant Shares have been otherwise transferred to holders who may
trade such shares without restriction under the Securities Act, and the
Company has delivered a new certificate or other evidence of ownership for
such securities not bearing a restrictive legend or (iv) such time as, in the
opinion of counsel to the Company, all Conversion Shares and Warrant Shares
may be sold within a three-month period pursuant to Rule 144 (or any similar
provision then in effect) under the Securities Act.
Section 1.21. "REGISTRATION RIGHTS AGREEMENT" shall mean the agreement
regarding the filing of the Registration Statement(s) for the resale of the
Registrable Securities, entered into between the Company and the Investors as
of the Closing Date substantially in the form annexed hereto as Exhibit C.
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Section 1.22. "REGISTRATION STATEMENT" shall mean a registration statement
on Form S-3 (if use of such form is then available to the Company pursuant to
the rules of the SEC and, if not, on such other form promulgated by the SEC
for which the Company then qualifies and which counsel for the Company shall
deem appropriate, and which form shall be available for the resale by the
Investors of the Registrable Securities to be registered thereunder in
accordance with the provisions of this Agreement, the Registration Rights
Agreement and in accordance with the intended method of distribution of such
securities), for the registration of the resale by the Investor of the
Registrable Securities under the Securities Act.
Section 1.23. "REGULATION D" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.24. "SEC" shall mean the Securities and Exchange Commission.
Section 1.25. "SECTION 4(2)" AND "SECTION 4(6)" shall have the meanings set
forth in the recitals of this Agreement.
Section 1.26. "SECURITIES ACT" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.27. "SEC DOCUMENTS" shall mean the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998 and each report, proxy
statement or registration statement filed by the Company with the SEC
pursuant to the Exchange Act or the Securities Act since the filing of such
Annual Report through the date hereof.
Section 1.28. "SECURITY DOCUMENTS" shall mean the Security Agreement in the
form of Exhibit G hereto and all UCC-1 and similar financing statements
executed by the Company or any of its direct or indirect Subsidiaries in
favor of Investors in connection therewith.
Section 1.29. "SHARES" shall have the meaning set forth in Section 1.16.
Section 1.30. "TRADING DAY" shall mean any day during which the Principal
Market shall be open for business.
Section 1.31. "WARRANTS" shall mean the Warrants substantially in the form
of Exhibit B to be issued to the Investors hereunder.
Section 1.32. "WARRANT SHARES" shall mean all shares of Common Stock or
other securities issued or issuable pursuant to exercise of the Warrants.
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ARTICLE II
PURCHASE AND SALE OF CONVERTIBLE DEBENTURES AND WARRANTS
Section 2.1. INVESTMENT.
(a) Upon the terms and subject to the conditions set forth herein,
the Company agrees to sell, and the Investors agree to purchase in the
aggregate Four Million Five Hundred Thousand Dollars ($4,500,000) face
principal amount of the Convertible Debentures together with the Warrants at
the Purchase Price on the Closing Date as follows:
(i) Upon execution and delivery of this Agreement, each
Investor shall deliver to the Escrow Agent immediately
available funds in their proportionate amount of the
Purchase Price as set forth on the signature pages hereto,
and the Company shall deliver the Convertible Debentures
and the Warrants to the Escrow Agent, in each case to be
held by the Escrow Agent pursuant to the Escrow Agreement.
(ii) Upon satisfaction or waiver by the appropriate party or
parties of the conditions set forth in Section 2.1(b), the
Closing ("Closing") shall occur at the offices of the
Escrow Agent at which the Escrow Agent (x) shall release
the Convertible Debentures and the Warrants to the
Investors and (y) shall release the Purchase Price to the
Company (after all fees have been paid as set forth in the
Escrow Agreement), pursuant to the terms of the Escrow
Agreement.
(b) Closing is subject to the satisfaction or waiver by the
appropriate party or parties of the following conditions:
(i) acceptance and execution by the Company and by the
Investors, of this Agreement and all Exhibits hereto;
(ii) delivery into escrow by each Investor of immediately
available funds in the amount of the Purchase Price of the
Convertible Debentures and the Warrants, as more fully set
forth in the Escrow Agreement;
(iii) all representations and warranties of the Investors
contained herein shall remain true and correct as of the
Closing Date (as a condition to the Company's obligations);
(iv) all representations and warranties of the Company contained
herein shall remain true and correct as of the Closing Date
(as a condition to the Investors' obligations);
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(v) the Company shall have obtained all permits and
qualifications required by any state for the offer and sale
of the Convertible Debentures and Warrants, or shall have
the availability of exemptions therefrom and shall have
obtained the subordination and intercreditor agreements
described in Section 6.11;
(vi) the sale and issuance of the Convertible Debentures and the
Warrants hereunder, and the proposed issuance by the
Company to the Investors of the Common Stock underlying the
Convertible Debentures and the Warrants upon the conversion
or exercise thereof shall be legally permitted by all laws
and regulations to which the Investors and the Company are
subject and there shall be no ruling, judgment or writ of
any court prohibiting the transactions contemplated by this
Agreement;
(vii) delivery of the original fully executed Convertible
Debentures and Warrants to the Escrow Agent;
(viii) delivery to the Escrow Agent of the opinions of Xxxxxx &
Xxxxxxx, counsel to the Company and of Fitzgerald, Schorr,
Xxxxxxxxxx & Xxxxxxx, P.C., Nebraska counsel to the
Company, substantially to the effect of Exhibit E hereto;
(ix) delivery to the Escrow Agent of the Irrevocable
Instructions to Transfer Agent substantially in the form
attached hereto as Exhibit F;
(x) delivery to the Escrow Agent of the Registration Rights
Agreement; and
(xi) delivery to the Escrow Agent of the Security Documents.
(c) The number of Warrants to be issued at Closing shall be
determined by dividing 25% of the principal amount of the Convertible
Debentures issued at Closing by the Market Price of the Common Stock on the
Closing Date. The exercise price of the Warrants shall initially be 110% of
the average of the closing bid prices on the five Trading Days immediately
preceding the Closing Date, and shall be reset to be 110% of the average of
the closing bid prices on the five Trading Days immediately preceding the
180th day after the Closing Date, if less than the initial exercise price.
Section 2.2. LIQUIDATED DAMAGES. The parties hereto acknowledge and agree
that the sums payable pursuant to the Registration Rights Agreement and the
Convertible Debentures shall constitute liquidated damages and not penalties.
The parties further acknowledge that (a) the amount of loss or damages likely
to be incurred is incapable or is difficult to precisely estimate, (b) the
amounts specified in such Sections bear a reasonable proportion and are not
plainly or grossly disproportionate to the probable loss likely to be
incurred by the Investors in connection with the failure by the Company to
timely cause the registration of the Registrable Securities and (c) the
parties are sophisticated business parties and have been represented by
sophisticated and able legal and financial counsel and negotiated this
Agreement at arm's length.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INVESTORS
Each Investor, severally and not jointly, represents and warrants to the
Company that:
Section 3.1. INTENT. The Investor is entering into this Agreement for its
own account and not with a view to or for sale in connection with any
distribution of the Convertible Debentures, the Warrants or the Common Stock
issuable upon conversion or exercise thereof. The Investor has no present
arrangement (whether or not legally binding) at any time to sell the
Convertible Debentures, the Warrants, any Conversion Shares or Warrant Shares
to or through any person or entity; provided, however, that by making the
representations herein, the Investor does not agree to hold such securities
for any minimum or other specific term and reserves the right to dispose of
the Conversion Shares and Warrant Shares at any time in accordance with
federal and state securities laws applicable to such disposition.
Section 3.2. SOPHISTICATED INVESTOR. The Investor is a sophisticated
investor (as described in Rule 506(b)(2)(ii) of Regulation D) and an
accredited investor (as defined in Rule 501 of Regulation D), and Investor
has such experience in business and financial matters that it has the
capacity to protect its own interests in connection with this transaction and
is capable of evaluating the merits and risks of an investment in the
Convertible Debentures, the Warrants and the underlying Common Stock. The
Investor acknowledges that an investment in the Convertible Debentures, the
Warrants and the underlying Common Stock is speculative and involves a high
degree of risk.
Section 3.3. AUTHORITY. This Agreement and each agreement attached as an
Exhibit hereto that is required to be executed by Investor has been duly
authorized and validly executed and delivered by the Investor and is a valid
and binding agreement of the Investor enforceable against it in accordance
with its terms, subject to applicable bankruptcy, insolvency, or similar laws
relating to, or affecting generally the enforcement of, creditors' rights and
remedies or by other equitable principles of general application.
Section 3.4. NOT AN AFFILIATE. The Investor is not an officer, director or
"affiliate" (as that term is defined in Rule 405 of the Securities Act) of
the Company.
Section 3.5. ABSENCE OF CONFLICTS. The execution and delivery of this
Agreement and each agreement which is attached as an Exhibit hereto and
executed by the Investor in connection herewith, and the consummation of the
transactions contemplated hereby and thereby, and compliance with the
requirements hereof and thereof by the Investor, will not violate any law,
rule, regulation, order, writ, judgment, injunction, decree or award binding
on Investor or (a) violate any provision of any indenture, instrument or
agreement to which Investor is a party or is subject, or by which Investor or
any of its assets is bound; (b) conflict with or constitute a material
default thereunder; (c) result in the creation or imposition of any lien
pursuant to the terms of any such indenture, instrument or agreement, or
constitute a breach of any fiduciary duty owed by Investor to any third
party; or (d) require the approval of any third-party (which has not been
obtained) pursuant to any material contract, agreement, instrument,
relationship or
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legal obligation to which Investor is subject or to which any of its assets,
operations or management may be subject.
Section 3.6. DISCLOSURE; ACCESS TO INFORMATION. The Investor has received
all documents, records, books and other publicly available information
pertaining to Investor's investment in the Company that have been requested
by the Investor. The Company is subject to the periodic reporting
requirements of the Exchange Act, and the Investor has reviewed copies of all
SEC Documents deemed relevant by Investor.
Section 3.7. MANNER OF SALE. At no time was Investor presented with or
solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SUBSIDIARIES
The Company, and as to itself, each Subsidiary, represents and warrants to
the Investors that, except as set forth on the Disclosure Schedule prepared
by the Company and delivered herewith:
Section 4.1. ORGANIZATION OF THE COMPANY. The Company is a corporation duly
incorporated and existing in good standing under the laws of the State of
Nebraska and has all requisite corporate authority to own its properties and
to carry on its business as now being conducted. The Company does not have
any subsidiaries and does not own more that fifty percent (50%) of or control
any other business entity except for the Subsidiaries and as set forth in the
SEC Documents. None of the subsidiaries of the Company listed in the SEC
Documents other than the Subsidiaries conducts any active business or holds
any other than nominal assets. The Company is duly qualified and is in good
standing as a foreign corporation to do business in every jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary, other than those in which the failure so to qualify
would not have a Material Adverse Effect.
Section 4.2. AUTHORITY. (i) The Company and each Subsidiary has the
requisite corporate power and corporate authority to enter into and perform
its obligations under this Agreement, the Convertible Debentures, the
Security Documents, the Registration Rights Agreement, the Escrow Agreement,
and the Warrants and the Company has the authority to issue the Conversion
Shares, the Warrants and the Warrant Shares pursuant to their respective
terms, (ii) the execution, issuance and delivery of this Agreement, the
Security Documents, the Registration Rights Agreement, the Escrow Agreement,
the Convertible Debentures and the Warrants by the Company and the
Subsidiaries (as applicable) and the consummation by them of the transactions
contemplated hereby have been duly authorized by all necessary corporate
action and no further consent or authorization of the Company or any
Subsidiary or their respective Boards of Directors or stockholders is
required, and (iii) this Agreement, the Security Documents, the Registration
Rights Agreement, the Escrow Agreement, the Convertible Debentures and the
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Warrants have been duly executed and delivered by the Company (or Subsidiary,
as applicable) and at each Closing shall constitute valid and binding
obligations of the Company (or Subsidiary, as applicable) enforceable against
the Company (or Subsidiary, as applicable) in accordance with their terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, or similar laws relating to, or affecting generally the
enforcement of, creditors' rights and remedies or by other equitable
principles of general application. The Company has duly and validly
authorized and reserved for issuance shares of Common Stock sufficient in
number for the conversion of the Convertible Debentures and for the exercise
of the Warrants. The Company understands and acknowledges the potentially
dilutive effect to the Common Stock of the issuance of the Conversion Shares.
The Company further acknowledges that its obligation to issue Conversion
Shares upon conversion of the Convertible Debentures and Warrant Shares upon
exercise of the Warrants in accordance with this Agreement is absolute and
unconditional regardless of the dilutive effect that such issuance may have
on the ownership interests of other stockholders of the Company and
notwithstanding the commencement of any case under 11 U.S.C. Section 101 et
seq. (the "Bankruptcy Code"). The Company (or Subsidiary, as applicable)
shall not seek judicial relief from its obligations hereunder except pursuant
to the Bankruptcy Code. In the event the Company (or Subsidiary, as
applicable) is a debtor under the Bankruptcy Code, the Company hereby waives
to the fullest extent permitted any rights to relief it may have under 11
U.S.C. Section 362 in respect of the conversion of the Convertible Debentures
and the exercise of the Warrants. The Company agrees, without cost or expense
to the Investors, to take or consent to any and all action necessary to
effectuate relief under 11 U.S.C. Section 362.
Section 4.3. CAPITALIZATION. The authorized capital stock of the Company
consists of 50,000,000 shares of Common Stock, $0.005 par value, of which
17,887,739 shares were issued and outstanding as of September 30, 1999 and
5,000,000 shares of preferred stock, none of which are issued and outstanding
or been designated as to series. Except for outstanding options and warrants
as set forth in the SEC Documents, there are no outstanding Capital Shares
Equivalents nor any agreements or understandings pursuant to which any
Capital Shares Equivalents may become outstanding. The Company is not a party
to any agreement granting registration or anti-dilution rights to any person
with respect to any of its equity or debt securities. All of the outstanding
shares of Common Stock of the Company have been duly and validly authorized
and issued and are fully paid and non-assessable.
Section 4.4. COMMON STOCK. The Company has registered its Common Stock
pursuant to Section 12(b) or (g) of the Exchange Act and is in full
compliance with all reporting requirements of the Exchange Act, and the
Company is in compliance with all requirements for the continued listing or
quotation of its Common Stock, and such Common Stock is currently listed or
quoted on, the Principal Market. As of the date hereof, the Principal Market
is the Nasdaq National Market and the Company has not received any notice
regarding, and to its knowledge there is no threat of, the termination or
discontinuance of the eligibility of the Common Stock for such listing.
Section 4.5. SEC DOCUMENTS. The Company has made available to the Investors
true and complete copies of the SEC Documents. The Company has not provided
to the Investors any information that, according to applicable law, rule or
regulation, should have been disclosed publicly prior to the date hereof by
the Company, but which has not been so disclosed. As of
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their respective dates, the SEC Documents (a) complied in all material
respects with the requirements of the Exchange Act, and rules and regulations
of the SEC promulgated thereunder, and (b) did not contain any untrue
statement of a material fact or omit 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. The
financial statements of the Company included in the SEC Documents complied in
all material respects with applicable accounting requirements and the
published rules and regulations of the SEC or other applicable rules and
regulations with respect thereto at the time of such inclusion. Such
financial statements have been prepared in accordance with generally accepted
accounting principles 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 exclude footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of operations
and cash flows for the periods then ended (subject, in the case of unaudited
interim statements, to normal year-end audit adjustments). Neither the
Company nor any of its subsidiaries has any material indebtedness,
obligations or liabilities of any kind (whether accrued, absolute, contingent
or otherwise, and whether due or to become due) that would have been required
to be reflected in, reserved against or otherwise described in the financial
statements or in the notes thereto in accordance with GAAP, which was not
fully reflected in, reserved against or otherwise described in the financial
statements or the notes thereto included in the SEC Documents or was not
incurred in the ordinary course of business consistent with the Company's
past practices since the last date of such financial statements.
Section 4.6. EXEMPTION FROM REGISTRATION; VALID ISSUANCES. Subject to the
accuracy of the Investors' representations in Article III, the sale of the
Convertible Debentures, the Conversion Shares, the Warrants and the Warrant
Shares will not require registration under the Securities Act and/or any
applicable state securities law. When issued and paid for in accordance with
the Warrants and validly converted in accordance with the terms of the
Convertible Debentures, the Conversion Shares and the Warrant Shares will be
duly and validly issued, fully paid, and non-assessable. Neither the sales of
the Convertible Debentures, the Conversion Shares, the Warrants or the
Warrant Shares pursuant to, nor the Company's performance of its obligations
under, this Agreement, the Security Documents, the Registration Rights
Agreement, the Escrow Agreement or the Warrants will (i) result in the
creation or imposition by the Company of any liens, charges, claims or other
encumbrances upon the Convertible Debentures, the Conversion Shares, the
Warrants or the Warrant Shares or, except as contemplated herein, any of the
assets of the Company (or Subsidiary, as applicable), or (ii) entitle the
holders of Outstanding Capital Shares to preemptive or other rights to
subscribe for or acquire the Capital Shares or other securities of the
Company. The Convertible Debentures, the Conversion Shares, the Warrants and
the Warrant Shares shall not subject the Investors to personal liability to
the Company or its creditors by reason of the possession thereof.
Section 4.7. NO GENERAL SOLICITATION OR ADVERTISING IN REGARD TO THIS
TRANSACTION. Neither the Company nor any of its affiliates nor, to the
knowledge of the Company, any person acting on its or their behalf (i) has
conducted or will conduct any general solicitation (as that term is used in
Rule 502(c) of Regulation D) or general advertising with respect to the sale
of the Convertible Debentures or the Warrants, or (ii) made any offers or
sales of any security or solicited any offers
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to buy any security under any circumstances that would require registration
of the sale of the Convertible Debentures, the Conversion Shares, the
Warrants or the Warrant Shares under the Securities Act.
Section 4.8. NO CONFLICTS. The execution, delivery and performance of this
Agreement and the Security Documents by the Company (or Subsidiary, as
applicable) and the consummation by the Company (or Subsidiary, as
applicable) of the transactions contemplated hereby, including without
limitation the granting of liens to the Investors on all assets of the
Company and each Subsidiary, the issuance of and payment of interest upon the
Convertible Debentures, the Conversion Shares, the Warrants and the Warrant
Shares, do not and will not (i) result in a violation of the Company's (or
Subsidiary's, as applicable) Certificate of Incorporation or By-Laws or (ii)
conflict with, or constitute a material default (or an event that with notice
or lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
material agreement, loan document, security agreement, indenture or
instrument, or any "lock-up" or similar provision of any underwriting or
similar agreement to which the Company is a party, or (iii) result in a
violation of any federal, state or local law, rule, regulation, order,
judgment or decree (including federal and state securities laws and
regulations) applicable to the Company (or Subsidiary, as applicable) or by
which any material property or asset of the Company (or Subsidiary, as
applicable) is bound or affected, nor is the Company (or Subsidiary, as
applicable) otherwise in violation of, conflict with or default under any of
the foregoing (except in each case for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as
would not have, individually or in the aggregate, a Material Adverse Effect).
The business of the Company (or Subsidiary, as applicable) is not being
conducted in violation of any law, ordinance or regulation of any
governmental entity, except for possible violations that either singly or in
the aggregate would not have a Material Adverse Effect. The Company (or
Subsidiary, as applicable) is not required under any Federal, state or local
law, rule or regulation to obtain any consent, authorization or order of, or
make any filing or registration with, any court or governmental agency in
order for it to execute, deliver or perform any of its obligations under this
Agreement or issue and sell the Convertible Debentures or the Warrants in
accordance with the terms hereof (other than any SEC, Principal Market or
state securities filings that may be required to be made by the Company
subsequent to any Closing, any registration statement that may be filed
pursuant hereto, and any shareholder approval required by the rules
applicable to companies whose common stock trades on the Principal Market);
provided that, for purposes of the representation made in this sentence, the
Company is assuming and relying upon the accuracy of the relevant
representations and agreements of the Investors herein.
Section 4.9. NO MATERIAL ADVERSE CHANGE. Since September 30, 1999, no
Material Adverse Effect has occurred or exists with respect to the Company,
except as disclosed in the SEC Documents.
Section 4.10. NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. Since September 30,
1999, no event or circumstance has occurred or exists with respect to the
Company or its businesses, properties, prospects, operations or financial
condition, that, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which
has not been so publicly announced or disclosed in the SEC Documents.
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Section 4.11. NO INTEGRATED OFFERING. Other than pursuant to an effective
registration statement under the Securities Act, or pursuant to the issuance
or exercise of employee stock options, or pursuant to its discussion with the
Investors in connection with the transactions contemplated hereby, (a) the
Company has not issued or sold the Convertible Debentures, the Warrants or
any shares of Common Stock (including for this purpose any securities of the
same or a similar class as the Convertible Debentures, the Warrants or Common
Stock, or any securities convertible into a exchangeable or exercisable for
the Convertible Debentures or Common Stock or any such other securities)
within the six-month period before the date hereof, and (b) the Company shall
not permit any of its directors, officers or affiliates directly or
indirectly to take, any action (including, without limitation, any sale to
any Person of the Convertible Debentures, Warrants or shares of Common
Stock), so as in either (a) or (b) or both to make unavailable the exemption
from Securities Act registration being relied upon by the Company for the
offer and sale to Investors of the Convertible Debentures (and the Conversion
Shares) or the Warrants (and the Warrant Shares) as contemplated by this
Agreement.
Section 4.12. LITIGATION AND OTHER PROCEEDINGS. Except as disclosed in the
SEC Documents, there are no lawsuits or proceedings pending or, to the
knowledge of the Company, threatened, against the Company or any Subsidiary,
nor has the Company received any written or oral notice of any such action,
suit, proceeding or investigation, which could reasonably be expected to have
a Material Adverse Effect. Except as set forth in the SEC Documents, no
judgment, order, writ, injunction or decree or award has been issued by or,
to the knowledge of the Company, requested of any court, arbitrator or
governmental agency which could result in a Material Adverse Effect.
Section 4.13. NO MISLEADING OR UNTRUE COMMUNICATION. The Company and, to
the knowledge of the Company, any person representing the Company, or any
other person selling or offering to sell the Convertible Debentures or the
Warrants in connection with the transaction contemplated by this Agreement,
have not made, at any time, any oral communication in connection with the
offer or sale of the same which, together with all such communications,
including the SEC Documents, taken as a whole, contained any untrue statement
of a material fact or omitted to state any material fact necessary in order
to make the statements, in the light of the circumstances under which they
were made, not misleading.
Section 4.14. MATERIAL NON-PUBLIC INFORMATION. The Company has not
disclosed to the Investors any material non-public information that (i) if
disclosed, would reasonably be expected to have a material effect on the
price of the Common Stock or (ii) according to applicable law, rule or
regulation, should have been disclosed publicly by the Company prior to the
date hereof but which has not been so disclosed.
Section 4.15. INSURANCE. The Company and each Subsidiary maintains property
and casualty, general liability, workers' compensation, environmental hazard,
personal injury and other similar types of insurance with financially sound
and reputable insurers that is adequate, consistent with industry standards
and the Company's historical claims experience. The Company has not received
notice from, and has no knowledge of any threat by, any insurer (that has
issued any insurance policy to the Company) that such insurer intends to deny
coverage under or cancel, discontinue or not renew any insurance policy
presently in force.
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Section 4.16. TAX MATTERS.
(a) The Company and each Subsidiary has filed all Tax Returns which
it is required to file under applicable laws; all such Tax Returns are true
and accurate in all material respects and have been prepared in compliance
with all applicable laws; the Company has paid all Taxes due and owing by it
or any Subsidiary (whether or not such Taxes are required to be shown on a
Tax Return) and have withheld and paid over to the appropriate taxing
authorities all Taxes which it is required to withhold from amounts paid or
owing to any employee, stockholder, creditor or other third parties; and
since December 31, 1998, the charges, accruals and reserves for Taxes with
respect to the Company (including any provisions for deferred income taxes)
reflected on the books of the Company are adequate to cover any Tax
liabilities of the Company if its current tax year were treated as ending on
the date hereof.
(b) No claim has been made by a taxing authority in a jurisdiction
where the Company does not file tax returns that the Company or any
subsidiary is or may be subject to taxation by that jurisdiction. There are
no foreign, federal, state or local tax audits or administrative or judicial
proceedings pending or being conducted with respect to the Company or any
Subsidiary; no information related to Tax matters has been requested from the
Company by any foreign, federal, state or local taxing authority; and no
written notice indicating an intent to open an audit or other review has been
received by the Company or any Subsidiary from any foreign, federal, state or
local taxing authority. There are no material unresolved questions or claims
concerning the Company's Tax liability. The Company (A) has not executed or
entered into a closing agreement pursuant to Section 7121 of the Internal
Revenue Code or any predecessor provision thereof or any similar provision of
state, local or foreign law; or (B) has not agreed to or is required to make
any adjustments pursuant to Section 481 (a) of the Internal Revenue Code or
any similar provision of state, local or foreign law by reason of a change in
accounting method initiated by the Company or any of its Subsidiaries or has
any knowledge that the IRS has proposed any such adjustment or change in
accounting method, or has any application pending with any taxing authority
requesting permission for any changes in accounting methods that relate to
the business or operations of the Company. The Company has not been a United
States real property holding corporation within the meaning of Section
897(c)(2) of the Internal Revenue Code during the applicable period specified
in Section 897(c)(1)(A)(ii) of the Internal Revenue Code.
(c) The Company has not made an election under Section 341(f) of
the Internal Revenue Code. The Company is not liable for the Taxes of another
person that is not a subsidiary of the Company (A) under Treas. Reg. Section
1.1502-6 (or comparable provisions of state, local or foreign law), (B) as a
transferee or successor, (C) by contract or indemnity or (D) otherwise. The
Company is not a party to any tax sharing agreement. The Company has not made
any payments, is not obligated to make payments nor is the Company a party to
an agreement that could obligate it to make any payments that would not be
deductible under Section 280G of the Internal Revenue Code.
(d) For purposes of this Section 4.16:
"IRS" means the United States Internal Revenue Service.
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"TAX" or "TAXES" means federal, state, county, local, foreign,
or other income, gross receipts, ad valorem, franchise,
profits, sales or use, transfer, registration, excise,
utility, environmental, communications, real or personal
property, capital stock, license, payroll, wage or other
withholding, employment, social security, severance, stamp,
occupation, alternative or add-on minimum, estimated and other
taxes of any kind whatsoever (including, without limitation,
deficiencies, penalties, additions to tax, and interest
attributable thereto) whether disputed or not.
"TAX RETURN" means any return, information report or filing
with respect to Taxes, including any schedules attached
thereto and including any amendment thereof.
Section 1.17. PROPERTY. Neither the Company nor any of its Subsidiaries
owns any real property. Each of the Company and its Subsidiaries has good and
marketable title to all personal property owned by it, free and clear of all
liens, encumbrances and defects except those granted to the Investors, to
Coast Business Credit, to First National Bank or such as do not materially
affect the value of such property and do not materially interfere with the
use made and proposed to be made of such property by the Company; and to the
Company's knowledge any real property, and buildings held under lease by the
Company (or Subsidiary, as applicable) as tenant are held by it under valid,
subsisting and enforceable leases with such exceptions as are not material
and do not interfere with the use made and intended to be made of such
property and buildings by the Company (or Subsidiary, as applicable).
Section 4.18. INTELLECTUAL PROPERTY. Each of the Company and its
Subsidiaries owns or possesses adequate and enforceable rights to use all
patents, patent applications, trademarks, trademark applications, trade
names, service marks, copyrights, copyright applications, licenses, know-how
(including trade secrets and other unpatented and/or unpatentable proprietary
or confidential information, systems or procedures) and other similar rights
and proprietary knowledge (collectively, "Intangibles") necessary for the
conduct of its business as now being conducted. To the Company's knowledge,
except as disclosed in the SEC Documents neither the Company nor any of its
Subsidiaries is infringing upon or in conflict with any right of any other
person with respect to any Intangibles. Except as disclosed in the SEC
Documents, no adverse claims have been asserted by any person to the
ownership or use of any Intangibles and the Company has no knowledge of any
basis for such claim.
Section 4.19. INTERNAL CONTROLS AND PROCEDURES. The Company maintains books
and records and internal accounting controls which provide reasonable
assurance that (i) all transactions to which the Company or any subsidiary is
a party or by which its properties are bound are executed with management's
authorization; (ii) the recorded accounting of the Company's consolidated
assets is compared with existing assets at regular intervals; (iii) access to
the Company's consolidated assets is permitted only in accordance with
management's authorization; and (iv) all transactions to which the Company or
any subsidiary is a party or by which its properties are bound are recorded
as necessary to permit preparation of the financial statements of the Company
in accordance with U.S. generally accepted accounting principles.
14
Section 4.20. PAYMENTS AND CONTRIBUTIONS. Neither the Company, any
Subsidiary, nor any of its directors, officers or, to its knowledge, other
employees has (i) used any Company funds for any unlawful contribution,
endorsement, gift, entertainment or other unlawful expense relating to
political activity; (ii) made any direct or indirect unlawful payment of
Company funds to any foreign or domestic government official or employee;
(iii) violated or is in violation of any provision of the Foreign Corrupt
Practices Act of 1977, as amended; or (iv) made any bribe, rebate, payoff,
influence payment, kickback or other similar payment to any person with
respect to Company matters.
Section 4.21. NO MISREPRESENTATION. The representations and warranties of
the Company contained in this Agreement, any schedule, annex or exhibit
hereto and any agreement, instrument or certificate furnished by the Company
to the Investors pursuant to this Agreement, do not contain any untrue
statement of a material fact or omit 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.
ARTICLE V
COVENANTS OF THE INVESTORS
Each Investor, severally and not jointly, covenants with the Company
that:
Section 5.1. COMPLIANCE WITH LAW. The Investor's trading activities with
respect to shares of the Company's Common Stock will be in compliance with
all applicable state and federal securities laws, rules and regulations and
rules and regulations of the Principal Market on which the Company's Common
Stock is listed.
ARTICLE VI
COVENANTS OF THE COMPANY
Section 6.1. REGISTRATION RIGHTS. The Company shall cause the Registration
Rights Agreement to remain in full force and effect and the Company shall
comply in all material respects with the terms thereof.
Section 6.2. RESERVATION OF COMMON STOCK. As of the date hereof, the
Company has reserved and the Company shall continue to reserve and keep
available at all times, free of preemptive rights, shares of Common Stock for
the purpose of enabling the Company to issue the Conversion Shares and the
Warrant Shares pursuant to any conversion of the Convertible Debentures or
exercise of the Warrants. The number of shares so reserved from time to time,
as theretofore increased or reduced as hereinafter provided, may be reduced
by the number of shares actually delivered pursuant to any conversion of the
Convertible Debentures or exercise of the Warrants and the number of shares
so reserved shall be increased or decreased to reflect potential increases or
decreases in the Common Stock that the Company may thereafter be
15
obligated to issue by reason of adjustments to the Warrants. The Company
further agrees that if at any time 200% of the number of shares of Common
Stock issuable upon conversion of the Convertible Debentures and exercise of
the Warrants would cause the Company to be obligated to issue a number of
shares of Common Stock in excess of its authorized capital (after taking into
account all other Capital Shares Equivalents then existing), it shall
promptly commence all necessary corporate and shareholder action necessary to
increase its authorized capital so as to eliminate the aforesaid condition.
Section 6.3. LISTING OF COMMON STOCK. The Company hereby agrees to maintain
the listing of the Common Stock on a Principal Market, and as soon as
reasonably practicable following the Closing to list the Conversion Shares
and the Warrant Shares on the Principal Market. The Company further agrees,
if the Company applies to have the Common Stock traded on any other Principal
Market, it will include in such application the Conversion Shares and the
Warrant Shares, and will take such other action as is necessary or desirable
in the opinion of the Investors to cause the Conversion Shares and Warrant
Shares to be listed on such other Principal Market as promptly as possible.
The Company will take all action to continue the listing and trading of its
Common Stock on a Principal Market (including, without limitation,
maintaining sufficient net tangible assets) and will comply in all respects
with the Company's reporting, filing and other obligations under the bylaws
or rules of the Principal Market and shall provide Investors with copies of
any correspondence to or from such Principal Market which questions or
threatens delisting of the Common Stock, within three (3) Trading Days of the
Company's receipt thereof, until the Investors have disposed of all of their
Registrable Securities.
Section 6.4. EXCHANGE ACT REGISTRATION. The Company will cause its Common
Stock to continue to be registered under Section 12(b) or (g) of the Exchange
Act, will use its best efforts to comply in all respects with its reporting
and filing obligations under the Exchange Act, and will not take any action
or file any document (whether or not permitted by the Exchange Act or the
rules thereunder) to terminate or suspend such registration or to terminate
or suspend its reporting and filing obligations under said Act until the
Investors have disposed of all of their Registrable Securities.
Section 6.5. LEGENDS. The certificates evidencing the Registrable
Securities shall be free of legends, except as set forth in Article IX.
Section 6.6. CORPORATE EXISTENCE; CONFLICTING AGREEMENTS. The Company will
take all steps necessary to preserve and continue the corporate existence of
the Company and each Subsidiary. The Company shall not enter into, or permit
any Subsidiary to enter into, any agreement, the terms of which agreement
would restrict or impair the right or ability of the Company or any
Subsidiary to perform any of their respective obligations under this
Agreement or any of the other agreements attached as exhibits hereto.
Section 6.7. CONSOLIDATION; MERGER. The Company shall not, at any time
after the date hereof, effect any merger or consolidation of the Company or
any Subsidiary with or into, or a transfer of all or substantially all of the
assets of the Company or any Subsidiary to, another entity (a
16
"Consolidation Event") unless the resulting successor or acquiring entity (if
not the Company) assumes by written instrument or by operation of law the
Company's and/or such Subsidiary's obligations under this Agreement,
including the obligation to deliver to the Investors such shares of stock
and/or securities as the Investors are entitled to receive pursuant to this
Agreement and the Convertible Debentures.
Section 6.8. ISSUANCE OF CONVERTIBLE DEBENTURES AND WARRANT SHARES. The
sale of the Convertible Debentures and the Warrants and the issuance of the
Warrant Shares pursuant to exercise of the Warrants and the Conversion Shares
upon conversion of the Convertible Debentures shall be made in accordance
with the provisions and requirements of Section 4(2), 4(6) or Regulation D
and any applicable state securities law. The Company shall make any necessary
SEC and "blue sky" filings required to be made by the Company in connection
with the sale of the Securities to the Investors as required by all
applicable laws, and shall provide a copy thereof to the Investors promptly
after such filing.
Section 6.9. LIMITATIONS ON AND RIGHT TO PARTICIPATE IN FUTURE FINANCING.
The Company agrees that it will not enter into any sale of Capital Shares
Equivalents for a period of 180 days after the Closing Date except (i)
pursuant to the exercise of outstanding warrants, or options issued pursuant
to any shareholder-approved stock option plan, or (ii) to any strategic
partner, the purpose of which is not primarily to raise money, or (iii) the
sale of shares of Common Stock at a price of not less than $2.50 per share
with warrant coverage of up to 40% for aggregate proceeds of up to
$3,500,000. In addition, until 12 months after the Closing Date, the Company
agrees that it will not enter into any sale of Capital Shares Equivalents
(other than the sale of shares of Common Stock at a price of not less than
$2.50 per share with warrant coverage of up to 40% for aggregate proceeds of
up to $3,500,000, or pursuant to the exceptions set forth in the previous
sentence) without offering each Investor, severally and not jointly, (i) the
right of first refusal to purchase such Capital Shares Equivalents on the
same terms and conditions on which the Company is prepared to sell such
Capital Shares Equivalents to other persons and (ii) if the Investor does not
exercise such right of first refusal, the further right to exchange all or
part of the securities purchased pursuant to this Agreement (as elected by
each Investor) for an equivalent Purchase Price amount of the securities
being sold in such subsequent offering. Such right of first refusal or right
of exchange must be exercised in writing within seven (7) Trading Days of the
Investors' receipt of notice of the proposed terms of such financing. For
purposes of this Section 6.9, the issuance of shares of Common Stock in
fulfillment of the earn-out obligations described in Section 4.3 of the
Disclosure Schedule shall not constitute a "sale." The Company further agrees
that it shall not issue any equity or equity-linked securities to either
Albion Alliance Mezzanine Fund, LP or Paribas Capital Funding LLC as a means
of repayment of any existing indebtedness owed to either such company,
without the express prior written consent of all Investors.
Section 6.10. USE OF PROCEEDS. The proceeds from the sale of the
Convertible Debentures shall be used for general working capital purposes,
and shall not be used to repay the principal of any of the Company's
indebtedness for borrowed money.
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Section 6.11. AGREEMENTS WITH EXISTING LENDERS. The Company is presently
indebted to Coast Business Credit and to Albion Alliance Mezzanine Fund, LP
and Paribas Capital Funding LLC. Each such lender shall have waived in
writing any existing covenant defaults through March 31, 2000 on or before
the Closing, subject to completion of the Closing. Further, Coast and First
National Bank of San Diego shall each have entered into Intercreditor and
Subordination Agreements with the Investors on terms satisfactory to both
such lenders and the Investors prior to the Closing, and Albion and Paribas
shall have consented to the transactions contemplated by this Agreement,
agreed that their respective term notes are subordinate in right of payment
to the rights of the Investors, and to the lockup of all but 100,000 of their
shares, notwithstanding the registration of any or all of such shares in such
Registration Statement, on terms satisfactory to both such subordinated
lenders and the Investors.
ARTICLE VII
SURVIVAL; INDEMNIFICATION
Section 7.1. SURVIVAL. The representations, warranties and covenants made
by each of the Company (or Subsidiary, as applicable) and each Investor in
this Agreement, the annexes, schedules and exhibits hereto and in each
instrument, agreement and certificate entered into and delivered by them
pursuant to this Agreement, shall survive each Closing and the consummation
of the transactions contemplated hereby. In the event of a breach or
violation of any of such representations, warranties or covenants, the party
to whom such representations, warranties or covenants have been made shall
have all rights and remedies for such breach or violation available to it
under the provisions of this Agreement, irrespective of any investigation
made by or on behalf of such party on or prior to any Closing Date.
Section 7.2. INDEMNITY. (a) The Company and each Subsidiary jointly and
severally hereby agrees to indemnify and hold harmless the Investors, their
respective Affiliates (as defined in SEC Rule 405) and their respective
officers, directors, partners and members (collectively, the "Investor
Indemnitees"), from and against any and all Damages, in each case promptly as
incurred by the Investor Indemnitees and to the extent arising out of or in
connection with:
(i) any misrepresentation, omission of fact or breach of any
of the Company's (or Subsidiary's, as applicable) representations or
warranties contained in this Agreement, the annexes, schedules or
exhibits hereto or any instrument, agreement or certificate entered
into or delivered by the Company pursuant to this Agreement; or
(ii) any failure by the Company (or Subsidiary, as applicable)
to perform in any material respect any of its covenants, agreements,
undertakings or obligations set forth in this Agreement, the annexes,
schedules or exhibits hereto or any instrument, agreement or
certificate entered into or delivered by the Company (or Subsidiary, as
applicable) pursuant to this Agreement; or
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(iii) any action instituted against the Investors, or any of
them, by any stockholder of the Company who is not an Affiliate of an
Investor, with respect to any of the transactions contemplated by this
Agreement.
(b) Each Investor, severally and not jointly, hereby agrees to
indemnify and hold harmless the Company, its Affiliates and their respective
officers, directors, partners and members (collectively, the "Company
Indemnitees"), from and against any and all Damages, in each case promptly as
incurred by the Company Indemnitees and to the extent arising out of or in
connection with any misrepresentation, omission of fact, or breach of any of
the Investor's representations or warranties contained in this Agreement, the
annexes, schedules or exhibits hereto or any instrument, agreement or
certificate entered into or delivered by the Investor pursuant to this
Agreement.
Section 7.3. NOTICE. Promptly after receipt by either party hereto seeking
indemnification pursuant to Section 7.2 (an "Indemnified Party") of written
notice of any investigation, claim, proceeding or other action in respect of
which indemnification is being sought (each, a "Claim"), the Indemnified
Party promptly shall notify the party from whom indemnification pursuant to
Section 7.2 is being sought (the "Indemnifying Party") of the commencement
thereof; but the omission to so notify the Indemnifying Party shall not
relieve it from any liability that it otherwise may have to the Indemnified
Party, except to the extent that the Indemnifying Party is actually
prejudiced by such omission or delay. In connection with any Claim as to
which both the Indemnifying Party and the Indemnified Party are parties, the
Indemnifying Party shall be entitled to assume the defense thereof.
Notwithstanding the assumption of the defense of any Claim by the
Indemnifying Party, the Indemnified Party shall have the right to employ
separate legal counsel and to participate in the defense of such Claim, and
the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs
and expenses of such separate legal counsel to the Indemnified Party if (and
only if): (x) the Indemnifying Party shall have agreed to pay such fees,
out-of-pocket costs and expenses, (y) the Indemnified Party reasonably shall
have concluded that representation of the Indemnified Party and the
Indemnifying Party by the same legal counsel would not be appropriate due to
actual or, as reasonably determined by legal counsel to the Indemnified
Party, potentially differing interests between such parties in the conduct of
the defense of such Claim, or if there may be legal defenses available to the
Indemnified Party that are in addition to or disparate from those available
to the Indemnifying Party, or (z) the Indemnifying Party shall have failed to
employ legal counsel reasonably satisfactory to the Indemnified Party within
a reasonable period of time after notice of the commencement of such Claim.
If the Indemnified Party employs separate legal counsel in circumstances
other than as described in clauses (x), (y) or (z) above, the fees, costs and
expenses of such legal counsel shall be borne exclusively by the Indemnified
Party. Except as provided above, the Indemnifying Party shall not, in
connection with any Claim in the same jurisdiction, be liable for the fees
and expenses of more than one firm of legal counsel for the Indemnified Party
(together with appropriate local counsel). The Indemnifying Party shall not,
without the prior written consent of the Indemnified Party (which consent
shall not unreasonably be withheld), settle or compromise any Claim or
consent to the entry of any judgment that does not include an unconditional
release of the Indemnified Party from all liabilities with respect to such
Claim or judgment.
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Section 7.4. DIRECT CLAIMS. In the event one party hereunder should have a
claim for indemnification that does not involve a claim or demand being
asserted by a third party, the Indemnified Party promptly shall deliver
notice of such claim to the Indemnifying Party. If the Indemnified Party
disputes the claim, such dispute shall be resolved by mutual agreement of the
Indemnified Party and the Indemnifying Party or by binding arbitration
conducted in accordance with the procedures and rules of the American
Arbitration Association as set forth in Article X. Judgment upon any award
rendered by any arbitrators may be entered in any court having competent
jurisdiction thereof.
ARTICLE VIII
DUE DILIGENCE REVIEW; NON-DISCLOSURE OF NON-PUBLIC INFORMATION.
Section 8.1. DUE DILIGENCE REVIEW. Subject to Section 8.2, the Company
shall make available for inspection and review by the Investors, advisors to
and representatives of the Investors (who may or may not be affiliated with
the Investors and who are reasonably acceptable to the Company), any
underwriter participating in any disposition of the Registrable Securities on
behalf of the Investors pursuant to the Registration Statement, any such
registration statement or amendment or supplement thereto or any blue sky,
Nasdaq or other filing, all SEC Documents and other filings with the SEC, and
all other publicly available corporate documents and properties of the
Company as may be reasonably necessary for the purpose of such review, and
cause the Company's officers, directors and employees to supply all such
publicly available information reasonably requested by the Investors or any
such representative, advisor or underwriter in connection with such
Registration Statement (including, without limitation, in response to all
questions and other inquiries reasonably made or submitted by any of them),
prior to and from time to time after the filing and effectiveness of the
Registration Statement for the sole purpose of enabling the Investors and
such representatives, advisors and underwriters and their respective
accountants and attorneys to conduct initial and ongoing due diligence with
respect to the Company and the accuracy of the Registration Statement.
Section 8.2. NON-DISCLOSURE OF NON-PUBLIC INFORMATION.
(a) The Company shall not disclose material non-public information
to the Investors, advisors to or representatives of the Investors unless
prior to disclosure of such information the Company identifies such
information as being non-public information and provides the Investors, such
advisors and representatives with the opportunity to accept or refuse to
accept such non-public information for review. Other than disclosure of any
comment letters received from the SEC staff with respect to the Registration
Statement, the Company may, as a condition to disclosing any non-public
information hereunder, require the Investors' advisors and representatives to
enter into a confidentiality agreement in form and content reasonably
satisfactory to the Company and the Investors.
(b) Nothing herein shall require the Company to disclose material
non-public information to the Investors or their advisors or representatives,
and the Company represents that
20
it does not disseminate material non-public information to any investors who
purchase stock in the Company in a public offering, to money managers or to
securities analysts, provided, however, that notwithstanding anything herein
to the contrary, the Company will, as hereinabove provided, promptly notify
the advisors and representatives of the Investors and, if any, underwriters,
of any event or the existence of any circumstance (without any obligation to
disclose the specific event or circumstance) of which it becomes aware,
constituting material non-public information (whether or not requested of the
Company specifically or generally during the course of due diligence by such
persons or entities), which, if not disclosed in the prospectus included in
the Registration Statement would cause such prospectus to include a material
misstatement or to omit a material fact required to be stated therein in
order to make the statements, therein in light of the circumstances in which
they were made, not misleading. Nothing contained in this Section 8.2 shall
be construed to mean that such persons or entities other than the Investors
(without the written consent of the Investors prior to disclosure of such
information as set forth in Section 8.2(a)) may not obtain non-public
information in the course of conducting due diligence in accordance with the
terms of this Agreement and nothing herein shall prevent any such persons or
entities from notifying the Company of their opinion that based on such due
diligence by such persons or entities, that the Registration Statement
contains an untrue statement of a material fact or omits a material fact
required to be stated in the Registration Statement or necessary to make the
statements contained therein, in light of the circumstances in which they
were made, not misleading.
ARTICLE IX
LEGENDS; TRANSFER AGENT INSTRUCTIONS
Section 9.1. LEGENDS. Unless otherwise provided below, each certificate
representing Registrable Securities will bear the following legend or
equivalent (the "Legend"):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH
OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED,
OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS
EXEMPT FROM SUCH REGISTRATION.
Section 9.2. TRANSFER AGENT INSTRUCTIONS. Upon Closing, the Company will
issue to the transfer agent for its Common Stock (and to any substitute or
replacement transfer agent for its Common Stock upon the Company's
appointment of any such substitute or replacement transfer agent)
instructions substantially in the form of Exhibit F hereto. Such instructions
shall be
21
irrevocable by the Company from and after the date hereof or from and after
the issuance thereof to any such substitute or replacement transfer agent, as
the case may be.
Section 9.3. NO OTHER LEGEND OR STOCK TRANSFER RESTRICTIONS. No legend
other than the one specified in Section 9.1 has been or shall be placed on
the share certificates representing the Registrable Securities and no
instructions or "stop transfer orders," "stock transfer restrictions," or
other restrictions have been or shall be given to the Company's transfer
agent with respect thereto other than as expressly set forth in this Article
IX.
Section 9.4. INVESTORS' COMPLIANCE. Nothing in this Article shall affect in
any way each Investor's obligations to comply with all applicable securities
laws upon resale of the Common Stock.
ARTICLE X
CHOICE OF LAW; ARBITRATION
Section 10.1. GOVERNING LAW/ARBITRATION. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York
applicable to contracts made in New York by persons domiciled in New York
City and without regard to its principles of conflicts of laws. Any dispute
under this Agreement shall be submitted to arbitration under the American
Arbitration Association (the "AAA") in New York City, New York, and shall be
finally and conclusively determined by the decision of a board of arbitration
consisting of three (3) members (hereinafter referred to as the "Board of
Arbitration") selected according to the rules governing the AAA. The Board of
Arbitration shall meet on consecutive business days in New York City, New
York, and shall reach and render a decision in writing (concurred in by a
majority of the members of the Board of Arbitration) with respect to the
amount, if any, which the losing party is required to pay to the other party
in respect of a claim filed. In connection with rendering its decisions, the
Board of Arbitration shall adopt and follow the laws of the State of New York
unless the matter at issue is the corporation law of the company's state of
incorporation, in which event the corporation law of such jurisdiction shall
govern such issue. To the extent practical, decisions of the Board of
Arbitration shall be rendered no more than thirty (30) calendar days
following commencement of proceedings with respect thereto. The Board of
Arbitration shall cause its written decision to be delivered to all parties
involved in the dispute. Any decision made by the Board of Arbitration
(either prior to or after the expiration of such thirty (30) calendar day
period) shall be final, binding and conclusive on the parties to the dispute,
and entitled to be enforced to the fullest extent permitted by law and
entered in any court of competent jurisdiction. The Board of Arbitration
shall be authorized and is hereby directed to enter a default judgment
against any party failing to participate in any proceeding hereunder within
the time periods set forth in the AAA rules. The non-prevailing party to any
arbitration (as determined by the Board of Arbitration) shall pay the
expenses of the prevailing party, including reasonable attorney's fees, in
connection with such arbitration. Any party shall be entitled to obtain
injunctive relief from a court in any case where such relief is available,
and the non-prevailing party in such injunctive action shall pay the expenses
of the prevailing party, including reasonable attorneys' fees, in connection
with such injunctive action.
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ARTICLE XI
ASSIGNMENT
Section 11.1. ASSIGNMENT. Neither this Agreement nor any rights of the
Investors or the Company hereunder may be assigned by either party to any
other person. Notwithstanding the foregoing, (a) the provisions of this
Agreement shall inure to the benefit of, and be enforceable by, any permitted
transferee of any of the Convertible Debentures or Warrants purchased or
acquired by any Investor hereunder with respect to the Convertible Debentures
or Warrants held by such person, and (b) each Investor's interest in this
Agreement may be assigned at any time, in whole or in part, to any other
person or entity (including any Affiliate of the Investor) who agrees to make
the representations and warranties contained in Article III and who agrees to
be bound by the terms of this Agreement.
ARTICLE XII
NOTICES
Section 12.1. NOTICES. All notices, demands, requests, consents, approvals,
and other communications required or permitted hereunder shall be in writing
and, unless otherwise specified herein, shall be (i) hand delivered, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with
charges prepaid, or (iv) transmitted by facsimile, addressed as set forth
below or to such other address as such party shall have specified most
recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand
delivery or delivery by facsimile, with accurate confirmation generated by
the transmitting facsimile machine, at the address or number designated below
(if delivered on a business day during normal business hours where such
notice is to be received), or the first business day following such delivery
(if delivered other than on a business day during normal business hours where
such notice is to be received) or (b) on the first business day following the
date of sending by reputable courier service, fully prepaid, addressed to
such address, or (c) upon actual receipt of such mailing, if mailed. The
addresses for such communications shall be:
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If to the Company: Eco Soil Systems, Inc.
00000 Xxxxxxxxx Xxxx
Xxx Xxxxx, XX 00000
Attention: Xxxxxxx X. Xxxxx,
C.E.O.
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
with a copy to (shall not constitute
notice): Xxxxxx & Xxxxxxx
000 X Xxxxxx, Xxxxx 0000
Xxx Xxxxx, XX 00000
Attention: Xxxxx Xxxxxxxx, Esq.
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
if to the Investors: As set forth on the signature
pages hereto
with a copy to: Xxxxxx X. Xxxxx, Esq.
(shall not constitute notice) Xxxxxxx Xxxxxx & Green, P.C.
000 Xxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
Either party hereto may from time to time change its address or facsimile
number for notices under this Section 12.1 by giving written notice of such
changed address or facsimile number to the other party hereto as provided in
this Section 12.1.
ARTICLE XIII
MISCELLANEOUS
Section 13.1. COUNTERPARTS/FACSIMILE/AMENDMENTS. This Agreement may be
executed in multiple counterparts, each of which may be executed by less than
all of the parties and shall be deemed to be an original instrument which
shall be enforceable against the parties actually executing such counterparts
and all of which together shall constitute one and the same instrument.
Except as otherwise stated herein, in lieu of the original documents, a
facsimile transmission or copy of the original documents shall be as
effective and enforceable as the original. This Agreement may be amended only
by a writing executed by all parties.
Section 13.2. ENTIRE AGREEMENT. This Agreement, the agreements attached as
Exhibits hereto, which include, but are not limited to the Certificate of
Designations, the Warrants, the Escrow Agreement and the Registration Rights
Agreement, set forth the entire agreement and
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understanding of the parties relating to the subject matter hereof and
supersedes all prior and contemporaneous agreements, negotiations and
understandings between the parties, both oral and written relating to the
subject matter hereof. The terms and conditions of all Exhibits to this
Agreement are incorporated herein by this reference and shall constitute part
of this Agreement as is fully set forth herein.
Section 13.3. SEVERABILITY. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force
and effect without said provision; provided that such severability shall be
ineffective if it materially changes the economic benefit of this Agreement
to any party.
Section 13.4. HEADINGS. The headings used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting
this Agreement.
Section 13.5. NUMBER AND GENDER. There may be one or more Investors parties
to this Agreement, which Investors may be natural persons or entities. All
references to plural Investors shall apply equally to a single Investor if
there is only one Investor, and all references to an Investor as "it" shall
apply equally to a natural person.
Section 13.6. REPLACEMENT OF CERTIFICATES. Upon (i) receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of a certificate representing the Convertible Debentures or any
Conversion Shares or Warrants or any Warrant Shares and (ii) in the case of
any such loss, theft or destruction of such certificate, upon delivery of an
indemnity agreement or security reasonably satisfactory in form to the
Company (which shall not include the posting of any bond) or (iii) in the
case of any such mutilation, on surrender and cancellation of such
certificate, the Company at its expense will execute and deliver, in lieu
thereof, a new certificate of like tenor.
Section 13.7. FEES AND EXPENSES. Each of the Company and the Investors
agrees to pay its own expenses incident to the execution and delivery of this
Agreement and each agreement which is an Exhibit hereto, except that the
Company shall pay actual fees, expenses and disbursements relating to
accountant and legal and escrow fees of the Investors in an amount up to
$30,000 as set forth in the Escrow Agreement, irrespective of whether a
Closing occurs. The Company shall reimburse the Investors for their
reasonable expenses and legal fees incurred in enforcing this Agreement or in
any modifications or waivers with respect thereto.
Section 13.8. BROKERAGE. Each of the parties hereto represents that it has
had no dealings in connection with this transaction with any finder or broker
who will demand payment of any fee or commission from the other except for X.
Xxxxxxx & Associates, The Shemano Group, Inc. and CIBC World Markets, whose
fees shall be paid by the Company. The Company on the one hand, and the
Investors, on the other hand, agree to indemnify the other against and hold
the other harmless from any and all liabilities to any person claiming
brokerage commissions or finder's fees on account of services purported to
have been rendered on behalf of the indemnifying party in connection with
this Agreement or the transactions contemplated hereby.
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Section 13.9. PUBLICITY. The Company agrees that it will not issue any
press release or other public announcement of the transactions contemplated
by this Agreement without the prior consent of the Investors, which shall not
be unreasonably withheld nor delayed by more than two (2) Trading Days from
their receipt of such proposed release. No release shall name the Investors
without their express consent.
IN WITNESS WHEREOF, the parties hereto have caused this Convertible
Debentures and Warrants Purchase Agreement to be executed by the undersigned,
thereunto duly authorized, as of the date first set forth above.
Eco Soil Systems, Inc.
By:
------------------------------------------
Xxxx X. Xxxxxxx, Vice President
Agricultural Supply, Inc.
By:
------------------------------------------
Xxxx X. Xxxxxxx, Vice President
Turf Partners, Inc.
By:
------------------------------------------
Xxxx X. Xxxxxxx, Vice President
Sistemas Y Equipos Agricolas, S.A. de C.V.
By:
------------------------------------------
Xxxx X. Xxxxxxx, Vice President
Agricultural Supply de Mexico, S.A. de C.V.
By:
------------------------------------------
Xxxx X. Xxxxxxx, Vice President
26
INVESTORS:
Address: 000 Xxxxx Xxxxxx Xxxx Xxxxxxxx: BH Capital Investments, L.P.
Xxxxx Xxxxx, 0xx Xxxxx By: HB and Co., Inc., its General Partner
Xxxxxxx, Xxxxxxx, Xxxxxx X0X 0X0
Fax: 000-000-0000 By:
Total principal amount of Convertible --------------------------------------
Debentures to be purchased at closing: Name: Xxxxx Xxxxxxxxx
$1,625,000 Authorized Signatory
Address: 00 Xxxxxx Xxxxxx Xxxxxx Investor: Excalibur Limited Partnership
Xxxxxxx, Xxxxxxx, Xxxxxx X0X 0X0 By: Excalibur Capital Management, Inc.,
Fax: 000-000-0000 its General Partner
Total principal amount of Convertible
Debentures to be purchased at closing: By:
$1,625,000 --------------------------------------
Name: Xxxxxxx Xxxxxxx, President
Address: 0000 Xxxxx Xxxxxx, Xxxxx 000 Investor: Gundyco in trust for RSP 000-00000-00
Xxxxxxx, Xxxxxxx, Xxxxxx X0X 0X0
Fax: 000-000-0000
Total principal amount of Convertible
Debentures to be purchased at closing: By:
$750,000 --------------------------------------
Name: Xxxx Shoom, Authorized Signatory
Address: c/o Borden, Elliot, Xxxxx & Investor: MB Capital Partners
Aylen By: MSM Management Corporation,
0000-00 Xxx Xxxxx Xxxxxx its General Partner
Ottawa, Canada K1P 5Y7
Fax: 000-000-0000 : By:
--------------------------------------
Name: Xxxxxxx X. XxXxxx, President
Total principal amount of Convertible
Debentures to be purchased at closing:
$500,000
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