Exhibit 10.8
SECURITY AGREEMENT
LAURUS MASTER FUND, LTD.
DIGITAL LIFESTYLES GROUP, INC.
HIP-E OPERATING COMPANY, INC.
AND
NORTHGATE OPERATING COMPANY, INC.
DATED: NOVEMBER 29, 2004
SECURITY AGREEMENT
This Security Agreement is made as of November 29, 2004 by and among LAURUS
MASTER FUND, LTD., a Cayman Islands corporation ("Laurus"), Digital Lifestyles
Group, Inc., a Delaware corporation ("Company"), and hip-e Operating Company,
Inc., a Delaware corporation ("HIP-E") and Northgate Operating Company, Inc. (a
California corporation) ("Northgate") each, of HIP-E and Northgate, being an
Eligible Subsidiary.
BACKGROUND
Company has requested that Laurus make advances available to Company; and
Laurus has agreed to make such advances to Company on the terms and conditions
set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and undertakings and
the terms and conditions contained herein, the parties hereto agree as follows:
1. (a) General Definitions. Capitalized terms used in this Agreement shall
have the meanings assigned to them in Annex A.
(b) Accounting Terms. Any accounting terms used in this Agreement which
are not specifically defined shall have the meanings customarily given
them in accordance with GAAP and all financial computations shall be
computed, unless specifically provided herein, in accordance with GAAP
consistently applied.
(c) Other Terms. All other terms used in this Agreement and defined in the
UCC, shall have the meaning given therein unless otherwise defined
herein.
(d) Rules of Construction. All Schedules, Addenda, Annexes and Exhibits
hereto or expressly identified to this Agreement are incorporated
herein by reference and taken together with this Agreement constitute
but a single agreement. The words "herein", "hereof" and "hereunder"
or other words of similar import refer to this Agreement as a whole,
including the Exhibits, Addenda, Annexes and Schedules thereto, as the
same may be from time to time amended, modified, restated or
supplemented, and not to any particular section, subsection or clause
contained in this Agreement. Wherever from the context it appears
appropriate, each term stated in either the singular or plural shall
include the singular and the plural, and pronouns stated in the
masculine, feminine or neuter gender shall include the masculine, the
feminine and the neuter. The term "or" is not exclusive. The term
"including" (or any form thereof) shall not be limiting or exclusive.
All references to statutes and related regulations shall include any
amendments of same and any successor statutes and regulations. All
references in this Agreement or in the Schedules, Addenda, Annexes and
Exhibits to this Agreement to sections, schedules, disclosure
schedules, exhibits, and attachments shall refer to the corresponding
sections, schedules, disclosure schedules, exhibits, and attachments
of or to this Agreement. All references to any instruments or
agreements, including references to any of this Agreement or
(e) the Ancillary Agreements shall include any and all modifications or
amendments thereto and any and all extensions or renewals thereof.
2. Loans. (a)(i) Subject to the terms and conditions set forth herein and in
the Ancillary Agreements, Laurus agrees to make loans (the "Loans") to
Company from time to time during the Term which, in the aggregate at any
time outstanding, will not exceed an amount equal to (I) the Accounts
Availability plus (II) the Inventory Availability. The amount derived at
any time from Section 2(a)(i)(I) plus Section 2(a)(i)(II) shall be referred
to as the "Formula Amount". Company shall execute and deliver to Laurus on
the Closing Date a Minimum Borrowing Note and a Revolving Note evidencing
the Loans funded on the Closing Date. From time to time thereafter, Company
shall execute and deliver to Laurus immediately prior to the final funding
of each additional $2,750,000 tranche of Loans allocated to any Minimum
Borrowing Note issued by Company to Laurus after the date hereof
(calculated on a cumulative basis for each such tranche) an additional
Minimum Borrowing Note evidencing such tranche, substantially in the form
of the Minimum Borrowing Note delivered by Company to Laurus on the Closing
Date. Notwithstanding anything herein to the contrary, whenever during the
Term the outstanding balance on the Revolving Note should equal or exceed
$1,500,000, to the extent that the outstanding balance on the Minimum
Borrowing Note shall be less than $2,750,000 (the difference of $2,750,000
less the actual balance of the Minimum Borrowing Note, the "Available
Minimum Borrowing"), such portion of the balance of the Revolving Note that
is in excess of $1,500,000, up to an amount equal the Available Minimum
Borrowing shall be deemed to be simultaneously extinguished on the
Revolving
Note and transferred to, and evidenced by, a new serialized Minimum
Borrowing Note. Any such transfer shall be limited to an amount that, after
such transfer, leaves an outstanding balance under the Revolving Note of at
least $1,500,000.
(ii) Notwithstanding the limitations set forth above, if requested by
Company, Laurus retains the right to lend to Company from time to
time such amounts in excess of such limitations as Laurus may
determine in its sole discretion.
(iii) Company acknowledges that the exercise of Laurus' discretionary
rights, exercised reasonably, hereunder may result during the
Term in one or more increases or decreases in the advance
percentages used in determining Accounts Availability and/or
Inventory Availability and Company hereby consents to any such
increases or decreases which may limit or restrict advances
requested by Company.
(iv) If Company does not pay any interest, fees, costs or charges due
to Laurus under this Agreement or any Ancillary Agreement when
due (after giving effect to any cure or grace periods applicable
thereto), Company shall thereby be deemed to have requested, and
Laurus is hereby authorized at its discretion to make and charge
to Company's account, a Loan to Company as of such date in an
amount equal to such unpaid interest, fees, costs or charges.
(v) If Company at any time fails to perform or observe any of the
covenants contained in this Agreement or any Ancillary Agreement
(after giving effect to any cure or grace periods applicable
thereto), Laurus may, but need not, perform or observe such
covenant on behalf and in the name, place and stead of Company
(or, at Laurus' option, in Laurus' name) and may, but need not,
take any and all other actions which Laurus may deem necessary to
cure or correct such failure (including the payment of taxes, the
satisfaction of Liens, the performance of obligations owed to
Account Debtors, lessors or other obligors, the procurement and
maintenance of insurance, the execution of assignments, security
agreements and financing statements, and the endorsement of
instruments). The amount of all monies expended and all costs and
expenses (including attorneys' fees and legal expenses) incurred
by Laurus in connection with or as a result of the performance or
observance of such agreements or the taking of such action by
Laurus shall be charged to Company's account as a Loan and added
to the Obligations. To facilitate Laurus' performance or
observance of such covenants of Company, Company hereby
irrevocably appoints Laurus, or Laurus' delegate, acting alone,
as Company's attorney in fact (which appointment is coupled with
an interest) with the right (but not the duty) from time to time,
following the occurrence and during the continuance of an Event
of Default, to create, prepare, complete, execute, deliver,
endorse or file in the name and on behalf of Company any and all
instruments, documents, assignments, security agreements,
financing statements, applications for insurance and other
agreements and writings required to be obtained, executed,
delivered or endorsed by Company.
(vi) Laurus will account to Company monthly with a statement of all
Loans and other advances, charges and payments made pursuant to
this Agreement, and such account rendered by Laurus shall be
deemed final, binding and conclusive unless Laurus is notified by
Company in writing to the contrary within thirty (30) days of the
date each account was rendered specifying the item or items to
which objection is made.
(vii) During the Term, Company may borrow and prepay Loans in
accordance with the terms and conditions hereof.
(viii) If any Eligible Account is not paid by the Account Debtor
within ninety (90) days after the date that such Eligible Account
was invoiced or if any Account Debtor asserts a deduction,
dispute, contingency, set-off, or counterclaim with respect to
any Eligible Account (a "Delinquent Account"), Company shall (i)
reimburse Laurus (X) for the amount of the Loans made with
respect to such portion of such Delinquent Account that is not
paid within such time or, in the case of the assertion of a
deduction, dispute, contingency, set-off or counterclaim by an
Account Debtor, such portion of such Delinquent Account that such
Account Debtor has not confirmed its intention to pay, plus, (Y)
in either case, an adjustment fee in an amount equal to one-half
of one percent (0.50%) of the amount determined in clause (X) or
(ii) immediately replace such Delinquent Account, or portion
thereof, with an otherwise Eligible Account.
(b) Minimum Borrowing Amount. After a registration statement registering
the resale of the Registrable Securities (as defined in the
Registration Rights Agreement) has been declared effective by the SEC,
conversions of the Minimum Borrowing Amount into the Common Stock of
Company may be initiated as set forth in the respective Minimum
Borrowing Note. From and after the date upon which the outstanding
principal of the Minimum Borrowing Amount (as evidenced by the first
Minimum Borrowing Note) is converted into Common Stock (the "First
Conversion Date"), (i) amounts of all outstanding Loans (not
attributable to the then outstanding Minimum Borrowing Note) existing
on or made after the First Conversion Date corresponding to, and in
amounts equal to, the principal amounts of the Minimum Borrowing Note
that have been converted will be aggregated, as described in Section
2(a)(i) and subject to the condition that no transfers or aggregations
may be made out of the Revolving Note in any amount that would cause
the outstanding balance under the Revolving Note to be less that
$1,500,000, until they reach the sum of $2,750,000 and (ii) Company
will, at the time of such aggregation reaches the sum of $2,750,000,
issue a new (serialized) Minimum Borrowing Note to Laurus in respect
of such
$2,750,000 aggregation, and (iii) Company shall prepare and file a
subsequent registration statement with the SEC to register such
subsequent Minimum Borrowing Note as set forth in the Registration
Rights Agreement. Notwithstanding the immediately foregoing, in no
event shall the Company be required to issue more than two serialized
Minimum Borrowing Notes without the Company's prior written consent.
3. Repayment of the Loans. Company (a) may prepay the Obligations from time to
time in accordance with the terms and provisions of the Notes (and Section
17 hereof if such prepayment is due to a termination of this Agreement);
(b) shall repay on the expiration of the Term (i) the then aggregate
outstanding principal balance of the Loans made by Laurus to Company
hereunder together with accrued and unpaid interest, fees and charges and
(ii) all other amounts owed Laurus under this Agreement and the Ancillary
Agreements; and (c) shall, either repay upon demand the amount by which the
aggregate amount of Loans outstanding at any time exceeds the Formula
Amount or such overage shall be deemed an Overadvance (as defined below
subject to the provisions of Section 5(b)(iii) hereof). Any payments of
principal, interest, fees or any other amounts payable hereunder or under
any Ancillary Agreement shall be made prior to 12:00 noon (New York time)
on the due date thereof in immediately available funds.
4. Procedure for Loans. Company may by written notice request a borrowing of
Loans prior to 12:00 p.m. (New York time) on the Business Day of its
request to incur, on the next Business Day, a Loan. Together with each
request for a Loan (or at such other intervals as Laurus may request),
Company shall deliver to Laurus a Borrowing Base Certificate in the form of
Exhibit A, which shall be certified as true and correct by the Chief
Executive Officer or Chief Financial Officer of Company together with all
supporting documentation relating thereto. All Loans shall be disbursed
from whichever office or other place Laurus may designate from time to time
and shall be charged to Company's account on Laurus' books. The proceeds of
each Loan made by Laurus shall be made available to Company on the Business
Day following the Business Day so requested in accordance with the terms of
this Section 4 by way of credit to Company's operating account maintained
with such bank as Company may designate from time to time to Laurus. Any
and all Obligations due and owing hereunder may be charged to Company's
account and shall constitute Loans.
5. Interest and Payments.
(a) Interest.
(i) Except as modified by Section 5(a)(iii) below, interest on the
unpaid balance of the Loans shall accrue at the Contract Rate and
Company shall pay such interest in full in good funds in dollars
of the United States of America, as set forth in the Notes.
(ii) Interest and payments shall be computed on the basis of actual
days elapsed in a year of 360 days. At Laurus' option, Laurus may
charge Company's account for said interest.
(iii) Effective upon the occurrence of any Event of Default and for so
long as any Event of Default shall be continuing, the Contract
Rate shall automatically be increased as set forth in the Notes,
respectively, (such increased rate, the "Default Rate"), and all
outstanding Obligations, including unpaid interest to the extent
due, shall continue to accrue interest from the date of such
Event of Default at the Default Rate applicable to such
Obligations.
(iv) In no event shall the aggregate interest or any other amount
constituting interest under applicable law payable hereunder
exceed the maximum rate permitted under any applicable law or
regulation, as in effect from time to time (the "Maximum Legal
Rate") and if any provision of this Agreement or any Ancillary
Agreement is in contravention of any such law or regulation,
interest payable under this Agreement and each Ancillary
Agreement shall be computed on the basis of the Maximum Legal
Rate (so that such interest will not exceed the Maximum Legal
Rate).
(v) Company shall pay principal, interest and all other amounts
payable hereunder, or under any Ancillary Agreement, without any
deduction whatsoever, including any deduction for any set-off or
counterclaim.
(b) Payments; Certain Closing Conditions.
(i) Closing/Annual Payments. Upon execution and delivery of this
Agreement by Company and Laurus, Company shall pay to Laurus
Capital Management, LLC a closing payment in an amount equal to
three and nine-tenths percent (3.90%) of the Capital Availability
Amount. Such payment shall be deemed fully earned on the Closing
Date and shall not be subject to rebate or proration for any
reason.
(ii) Unused Line Payment. If, during any calendar month, the average
of the aggregate Loans outstanding during such month (the
"Average Loan Amount") do not equal the Capital Availability
Amount, Company shall pay to Laurus at the end of such month a
payment (calculated on a per annum basis) in an amount equal to
three-tenths of one percent (0.30%) of the amount by which the
Capital Availability Amount exceeds the Average Loan Amount.
Notwithstanding the foregoing, any such due and unpaid fee shall
come immediately due and payable upon termination of this
Agreement.
(iii) Overadvance Payment. Without affecting Laurus' rights hereunder
in the event the Loans exceed the Formula Amount (each such
event, an "Overadvance"), all such Overadvances shall bear
interest at an annual rate equal to two percent (2%) of the
amount of such Overadvances for each month or portion thereof
such amounts shall be outstanding and in excess of the Formula
Amount.
(iv) Financial Information Default. Without affecting Laurus' other
rights and remedies, in the event Company fails to deliver the
financial information required by Section 11 on or before the
date required by this Agreement, Company shall pay Laurus a fee
in the amount of $500.00 per week for each such failure until
such failure is cured to Laurus' reasonable satisfaction or
waived in writing by Laurus. Such fee shall be charged to
Company's account upon the occurrence of each such failure.
(v) Expenses. The Company shall reimburse Laurus for its reasonable
expenses (including legal fees and expenses) incurred in
connection with the preparation and negotiation of this Agreement
and the Ancillary Agreements (as hereinafter defined), and
expenses incurred in connection with Laurus' due diligence review
of the Company and its subsidiaries and all related matters.
Amounts required to be paid under this Section 5(b)(v) will be
paid on the Closing Date and shall not exceed $44,500 for such
expenses referred to in this Section 5(b)(v).
6. Security Interest.
(a) To secure the prompt payment to Laurus of the Obligations, each of
Company and each Eligible Subsidiary hereby assigns, pledges and
grants to Laurus a continuing security interest in and Lien upon all
of the Collateral. All of Company's and each Eligible Subsidiary's
Books and Records relating to the Collateral shall, until delivered to
or removed by Laurus, be kept by Company and each Eligible Subsidiary,
as the case may be, in trust for Laurus until all Obligations have
been paid in full. Each confirmatory assignment schedule or other form
of assignment hereafter executed by Company and each Eligible
Subsidiary shall be deemed to include the foregoing grant, whether or
not the same appears therein.
(b) Company and each Eligible Subsidiary hereby (i) authorizes Laurus to
file any financing statements, continuation statements or amendments
thereto that (x) indicate the Collateral (1) as all assets and
personal property of Company or such Eligible Subsidiary, as the case
may be, or words of similar effect, regardless of whether any
particular asset comprised in the Collateral falls within the scope of
Article 9 of the UCC of such jurisdiction, or (2) as being of an equal
or lesser scope or with greater detail, and (y) contain any other
information required by Part 5 of Article 9 of the UCC for the
sufficiency or filing office acceptance of any financing statement,
continuation statement or amendment and (ii) ratifies its
authorization for Laurus to have filed any initial financial
statements, or amendments thereto if filed prior to the date hereof.
Each of Company and each Eligible Subsidiary acknowledges that it is
not authorized to file any financing statement or amendment or
termination statement with respect to any financing statement without
the prior written consent of Laurus and agrees that it will not do so
without the prior written consent of Laurus, subject to Company's and
such Eligible Subsidiary's rights under Section 9-509(d)(2) of the
UCC.
7. Representations, Warranties and Covenants Concerning the Collateral. Each
of Company and each Eligible Subsidiary hereby, as of the date hereof,
represents, warrants (each of which such representations and warranties
shall be deemed repeated upon the making of each request for a Loan and
made as of the time of each and every Loan hereunder) and covenants as
follows:
(a) all of the Collateral (i) is owned by Company and/or an Eligible
Subsidiary, as the case may be, free and clear of all Liens (including
any claims of infringement) except those in Laurus' favor and
Permitted Liens and (ii) is not subject to any agreement prohibiting
the granting of a Lien or requiring notice of or consent to the
granting of a Lien.
(b) During the Term, neither the Company nor any Eligible Subsidiary shall
encumber, mortgage, pledge, assign or grant any Lien in any Collateral
or any of Company's or any Eligible Subsidiary's other assets to
anyone other than Laurus and except for Permitted Liens.
(c) the Liens granted pursuant to this Agreement, upon completion of the
filings and other actions listed on Schedule 7(c) will constitute
valid perfected security interests in all of the Collateral consisting
of inventory, accounts, goods (other than goods subject to a
certificate of title or goods in possession of a person other than
Company, HIP-E, or Northgate), equipment,
general intangibles (other than intellectual property), the Pledged
Shares (as defined in Schedule 7(c)), chattel paper, and instruments,
in favor of Laurus as security for the prompt and complete payment and
performance of the Obligations, enforceable in accordance with the
terms hereof against any and all creditors of and any purchasers from
Company and the Eligible Subsidiaries and such security interest is
prior to all other Liens in existence on the date hereof, except
Permitted Liens.
(d) no effective security agreement, mortgage, deed of trust, financing
statement, equivalent security or Lien instrument or continuation
statement covering all or any part of the Collateral is or will be on
file or of record in any public office, except those relating to the
liens granted hereunder and to Permitted Liens.
(e) neither Company nor any Eligible Subsidiary shall dispose of any of
the Collateral whether by sale, lease or otherwise except for the sale
of Inventory in the ordinary course of business and for the
disposition or transfer in the ordinary course of business during any
fiscal year of obsolete and worn-out Equipment having an aggregate
fair market value of not more than $25,000 and only to the extent that
(i) the proceeds of any such disposition are used to acquire
replacement Equipment which is subject to Laurus' first priority
security interest or are used to repay Loans or to pay general
corporate expenses, or (ii) following the occurrence of an Event of
Default which continues to exist the proceeds of which are remitted to
Laurus to be held as cash collateral for the Obligations.
(f) each of Company and each Eligible Subsidiary shall defend the right,
title and interest of Laurus in and to the Collateral against the
claims and demands of all Persons whomsoever, and take such actions,
including (i) all actions necessary to grant Laurus "control" of any
Investment Property, Deposit Accounts, Letter-of-Credit Rights or
electronic Chattel Paper owned by Company and each Eligible
Subsidiary, with any agreements establishing control to be in form and
substance satisfactory to Laurus, (ii) the prompt (but in no event
later than five (5) Business Days following Laurus' request therefor)
delivery to Laurus of all original Instruments, Chattel Paper,
negotiable Documents and certificated Stock owned by Company and each
Eligible Subsidiary (in each case, accompanied by stock powers,
allonges or other instruments of transfer executed in blank), (iii)
notification of Laurus' interest in Collateral at Laurus' request, and
(iv) the institution of litigation against third parties as shall be
prudent in order to protect and preserve Company's, each Eligible
Subsidiary's and/or Laurus' respective and several interests in the
Collateral.
(g) each of Company and each Eligible Subsidiary shall promptly, and in
any event within five (5) Business Days after the same is acquired by
it, notify Laurus of any commercial tort claim (as defined in the UCC)
acquired by it and unless otherwise consented by
Laurus, each of Company and/or each Eligible Subsidiary, as the case
may be, shall enter into a supplement to this Agreement granting to
Laurus a Lien in such commercial tort claim.
(h) each of Company and each Eligible Subsidiary shall place notations
upon its Books and Records and any financial statement of Company and
each Eligible Subsidiary, as the case may be, to disclose Laurus' Lien
in the Collateral.
(i) If either Company and/or any Eligible Subsidiary retains possession of
any Chattel Paper or Instrument with Laurus' consent, upon Laurus'
request such Chattel Paper and Instruments shall be marked with the
following legend: "This writing and obligations evidenced or secured
hereby are subject to the security interest of Laurus Master Fund,
Ltd."
(j) each of Company and each Eligible Subsidiary shall perform in a
reasonable time all other steps requested by Laurus to create and
maintain in Laurus' favor a valid perfected first Lien in all
Collateral subject only to Permitted Liens.
(k) each of Company and each Eligible Subsidiary shall notify Laurus
promptly and in any event within three (3) Business Days after
obtaining knowledge thereof (i) of any event or circumstance that to
Company's or any Eligible Subsidiary's knowledge would cause Laurus to
consider any then existing Account and/or Inventory as no longer
constituting an Eligible Account or Eligible Inventory, as the case
may be; (ii) of any material delay in Company's or any Eligible
Subsidiary's performance of any of its obligations to any Account
Debtor; (iii) of any assertion by any Account Debtor of any material
claims, offsets or counterclaims; (iv) of any material allowances,
credits and/or monies granted by Company or any Eligible Subsidiary to
any Account Debtor; (v) of all material adverse information relating
to the financial condition of an Account Debtor; (vi) of any material
return of goods; and (vii) of any material loss, damage or destruction
of any of the Collateral.
(l) All Eligible Accounts (i) which are billed on a construction
completion basis but not payable until the project is completed,
represent complete bona fide transactions which require no further act
under any circumstances on Company's or any Eligible Subsidiary's part
to make such Accounts payable by the Account Debtors, (ii) are not
subject to any present, future contingent offsets or counterclaims,
and (iii) do not represent xxxx and hold sales, consignment sales,
guaranteed sales, sale or return or other similar understandings or
obligations of any Affiliate or subsidiary of either Company or any
Eligible Subsidiary. Neither Company nor any Eligible Subsidiary has
made, and neither Company nor any Eligible Subsidiary will make, any
agreement with any Account Debtor for any extension of time for the
payment of any Account, any compromise or settlement for less than the
full amount thereof, any release of any Account Debtor from liability
therefor, or any deduction therefrom except a discount or allowance
for prompt or early payment allowed by Company or any Eligible
Subsidiary in the ordinary course of its business consistent with
historical practice and as previously disclosed to Laurus in writing.
(m) each of Company and each Eligible Subsidiary shall keep and maintain
its Equipment in good operating condition, except for ordinary wear
and tear, and shall make all necessary repairs and replacements
thereof so that the value and operating efficiency shall at all times
be maintained and preserved. Neither Company nor any Eligible
Subsidiary shall permit any such items to become a Fixture to real
estate or accessions to other personal property not constituting
Collateral.
(n) each of Company and each Eligible Subsidiary shall maintain and keep
all of its Books and Records concerning the Collateral at such
person's executive offices listed in Schedule 12(bb).
(o) each of Company and each Eligible Subsidiary shall maintain and keep
the tangible Collateral at the addresses listed in Schedule 12(bb),
provided, that each of Company and/or any such Eligible Subsidiary may
change such locations or open a new location, provided that Company or
any such Eligible Subsidiary, as the case may be, provides Laurus at
least thirty (30) days prior written notice of such changes or new
location and (ii) prior to such change or opening of a new location
where Collateral having a value of more than $50,000 will be located,
Company and/or any such Eligible Subsidiary, as the case may be,
executes and delivers to Laurus such agreements as Laurus may request,
including landlord agreements, mortgagee agreements and warehouse
agreements, each in form and substance satisfactory to Laurus.
(p) Schedule 7(p) lists all banks and other financial institutions at
which Company and each Eligible Subsidiary maintains deposits and/or
other accounts, and such Schedule correctly identifies the name,
address and telephone number of each such depository, the name in
which the account is held, a description of the purpose of the
account, and the complete account number. Neither the Company nor any
Eligible Subsidiary shall establish any depository or other bank
account with any financial institution (other than the accounts set
forth on Schedule 7(p)) without Laurus' prior written consent.
(q) All Inventory manufactured by Company in the United States of America
shall be produced in accordance with the requirements of the Federal
Fair Labor Standards Act of 1938, as amended and all rules,
regulations and orders related thereto or promulgated thereunder.
8. Payment of Accounts.
(a) Each of Company and each Eligible Subsidiary will irrevocably direct
all of its present and future Account Debtors and other Persons
obligated to make payments constituting Collateral to make such
payments directly to the lockboxes maintained by Company and each
Eligible Subsidiary (the "Lockboxes") with North Fork Bank (the
"Lockbox Bank") pursuant to the terms of the Lockbox Agreement dated
as of October 28, 2004 or such other financial institution accepted by
Laurus in writing as may be selected by Company and/or any Eligible
Subsidiary. On or prior to the Closing Date, each of Company and each
Eligible Subsidiary shall and shall cause the Lockbox Bank to enter
into all such documentation acceptable to Laurus pursuant to which,
among other things, the Lockbox Bank agrees to: (a) sweep the Lockbox
on a daily basis and deposit all checks received therein to an account
designated by Laurus in writing and (b) comply only with the
instructions or other directions of Laurus concerning the Lockbox. All
of Company's and each Eligible Subsidiary's invoices, account
statements and other written or oral communications directing,
instructing, demanding or requesting payment of any Account of Company
or any Eligible Subsidiary or any other amount constituting Collateral
shall conspicuously direct that all payments be made to the Lockbox or
such other address as Laurus may direct in writing. If,
notwithstanding the instructions to Account Debtors, Company or any
Eligible Subsidiary receives any payments of any Account or any other
property constituting Collateral, Company or such Eligible Subsidiary,
as the case may be, shall promptly remit such payments to Laurus in
their original form with all necessary endorsements. Until so
remitted, Company and each Eligible Subsidiary shall hold all such
payments in trust for and as the property of Laurus and shall not
commingle such payments with any of its other funds or property.
(b) At Laurus' election, following the occurrence of an Event of Default
which is continuing, Laurus may notify each of Company's and each
Eligible Subsidiary's Account Debtors of Laurus' security interest in
the Accounts, collect them directly and charge the collection costs
and expenses thereof to Company's and the Eligible Subsidiaries joint
and several account.
9. Collection and Maintenance of Collateral.
(a) Laurus may verify Company's and each Eligible Subsidiary's Accounts
from time to time, but not more often than once every three (3) months
unless an Event of Default has occurred and is continuing, utilizing
an audit control company or any other agent of Laurus.
(b) Proceeds of Accounts received by Laurus will be deemed received on the
Business Day after Laurus' receipt of such proceeds in good funds in
dollars of the United States of America in Laurus' account. Any amount
received by Laurus after 12:00 noon (New York time) on any Business
Day shall be deemed received on the next Business Day.
(c) As Laurus receives the proceeds of Accounts of Company or any Eligible
Subsidiary, it shall (i) apply such proceeds, as required, to amounts
outstanding under the Revolving Note, and (ii) remit all such
remaining proceeds (net of interest, fees and other amounts then due
and owing to Laurus hereunder) to Company and/or any such Eligible
Subsidiary upon request (but no more often than twice a week).
Notwithstanding the foregoing, following the occurrence and during the
continuance of an Event of Default, Laurus, at its option, may (a)
apply such proceeds to the Obligations in such order as Laurus shall
elect, (b) hold all such proceeds as cash collateral for the
Obligations and each of Company and each Eligible Subsidiary hereby
grants to Laurus a security interest in such cash collateral amounts
as security for the Obligations and/or (c) do any combination of the
foregoing.
10. Inspections and Appraisals. At all times during normal business hours, and
upon two (2) Business Days' prior notice to the Company or any Eligible
Subsidiary, as applicable, Laurus, and/or any agent of Laurus shall have
the right to (a) have access to, visit, inspect, review, evaluate and make
physical verification and appraisals of each of Company's and each Eligible
Subsidiary's properties and the Collateral, (b) inspect, audit and copy (or
take originals if necessary) and make extracts from Company's and each
Eligible Subsidiary's Books and Records, including management letters
prepared by independent accountants, and (c) discuss with Company's and
each Eligible Subsidiary's principal officers, and independent accountants,
Company's and each Eligible Subsidiary's business, assets, liabilities,
financial condition, results of operations and business prospects. Each of
Company and each Eligible Subsidiary will deliver to Laurus any instrument
necessary for Laurus to obtain records from any service bureau maintaining
records for Company and such Eligible Subsidiary. If any internally
prepared financial information, including that required under this Section
is unsatisfactory in any manner to Laurus, Laurus may request that the
Accountants review the same. Notwithstanding the foregoing, neither the
Company nor any of its subsidiaries will provide any material, non-public
information to Laurus unless Laurus signs a confidentiality agreement and
otherwise complies with Regulation FD, under the federal securities laws.
11. Financial Reporting. Company will deliver, or cause to be delivered, to
Laurus each of the following, which shall be in form and detail reasonably
acceptable to Laurus:
(a) As soon as available, and in any event within ninety (90) days after
the end of each fiscal year of Company, Company's audited financial
statements with a report of independent certified public accountants
of recognized standing selected by Company and acceptable to Laurus
(the "Accountants"), which annual financial statements shall include
Company's balance sheet as at the end of such fiscal year and the
related statements of Company's income, retained earnings and cash
flows for the fiscal year then ended, prepared, if Laurus so requests,
on a consolidated basis to include all subsidiaries, all in reasonable
detail and prepared in accordance with GAAP, together with (i) if and
when available, copies of any management letters prepared by such
accountants; and (ii) a certificate of Company's President, Chief
Executive Officer or Chief Financial Officer stating that such
financial statements have been prepared in accordance with GAAP and
whether or not such officer has knowledge of the occurrence of any
Default or Event of Default hereunder and, if so, stating in
reasonable detail the facts with respect thereto;
(b) As soon as available and in any event within forty five (45) days
after the end of each quarter, an unaudited/internal balance sheet and
statements of income, retained earnings and cash flows of Company as
at the end of and for such quarter and for the year to date period
then ended, prepared, if Laurus so requests, on a consolidated basis
to include all subsidiaries, in reasonable detail and stating in
comparative form the figures for the corresponding date and periods in
the previous year, all prepared in accordance with GAAP, subject to
year-end adjustments and accompanied by a certificate of Company's
President, Chief Executive Officer or Chief Financial Officer, stating
(i) that such financial statements have been prepared in accordance
with GAAP, subject to year-end audit adjustments, and (ii) whether or
not such officer has knowledge of the occurrence of any Default or
Event of Default hereunder not theretofore reported and remedied and,
if so, stating in reasonable detail the facts with respect thereto;
(c) Within thirty (30) days after the end of each month (or more
frequently if Laurus so requests), agings of Company's and each
Eligible Subsidiary's Accounts, unaudited trial balances and their
accounts payable and a calculation of Company's and each Eligible
Subsidiary's Accounts, Eligible Accounts, Inventory and/or Eligible
Inventory, provided, however, that if
Laurus shall request the foregoing information more often than as set
forth in the immediately preceding clause, Company and/or any Eligible
Subsidiary shall have thirty (30) days from each such request to
comply with Laurus' demand; and
(d) Promptly after (i) the filing thereof, copies of Company's most recent
registration statements and annual, quarterly, monthly or other
regular reports which Company files with the SEC, and (ii) the
issuance thereof, copies of such financial statements, reports and
proxy statements as Company shall send to its stockholders.
12. Additional Representations and Warranties. Company hereby represents and
warrants to Laurus as follows (which representations and warranties are
supplemented by, and subject to, Company's filings under the Securities
Exchange Act of 1934 made prior to the date of this Agreement
(collectively, the "Exchange Act Filings"), copies of which have been
provided to Laurus):
(a) Organization, Good Standing and Qualification. Each of Company and
each of its Eligible Subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of its
jurisdiction of organization. Each of Company and each of its Eligible
Subsidiaries has the corporate power and authority to own and operate
its properties and assets, to execute and deliver this Agreement and
the Ancillary Agreements to which it is a party, and to the extent
applicable, to issue and sell the Notes and the shares of Common Stock
issuable upon conversion of the Minimum Borrowing Note (the "Note
Shares"), to issue and sell the Warrants and the shares of Common
Stock issuable upon conversion of the Warrants (the "Warrant Shares"),
and to carry out the provisions of this Agreement and the Ancillary
Agreements to which it is a party, and to the extent applicable and to
carry on its business as presently conducted. Each of Company and each
of its Eligible Subsidiaries is duly qualified and is authorized to do
business and is in good standing as a foreign corporation in all
jurisdictions, except for those jurisdictions in which the failure to
do so has not had, or could not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect.
(b) Subsidiaries. Each direct and indirect subsidiary of Company, the
direct owner of such subsidiary and its percentage ownership thereof,
is set forth on Schedule 12(b).
(c) Capitalization; Voting Rights.
(i) The authorized capital stock of the Company, as of the date
hereof consists of 105,000,000 shares, of which 100,000,000 are
shares of Common Stock, par value $0.03 per share, 37,647,233
shares of which are issued and outstanding, and 5,000,000 are
shares of preferred stock, par value $0.01 per share of which no
shares are issued and outstanding. The authorized capital stock
of each Eligible Subsidiary of the Company is set forth on
Schedule 12(c).
(ii) Except as disclosed on Schedule 12(c), other than: (i) the shares
reserved for issuance under Company's stock option plans; and
(ii) shares which may be issued pursuant to this Agreement and
the Ancillary Agreements, there are no outstanding options,
warrants, rights (including conversion or preemptive rights and
rights of first refusal), proxy or stockholder agreements, or
arrangements or agreements of any kind for the purchase or
acquisition from Company of any of its securities. Except as
disclosed on Schedule 12(c), neither the offer, issuance or sale
of any of the Notes or the Warrants, or the issuance of any of
the Note Shares or the Warrant Shares, nor the consummation of
any transaction contemplated hereby will result in a change in
the price or number of any securities of Company outstanding,
under anti-dilution or other similar provisions contained in or
affecting any such securities.
(iii) All issued and outstanding shares of Company's Common Stock: (i)
have been duly authorized and validly issued and are fully paid
and nonassessable; and (ii) were issued in compliance with all
applicable state and federal laws concerning the issuance of
securities.
(iv) The rights, preferences, privileges and restrictions of the
shares of the Common Stock are as stated in Company's Restated
Certificate of Incorporation (the "Charter"). The Note Shares and
the Warrant Shares have been duly and validly reserved for
issuance. When issued in compliance with the provisions of this
Agreement, the Ancillary Agreements and Company's Charter, the
Securities will be validly issued, fully paid and nonassessable,
and will be free of any liens or encumbrances; provided, however,
that the Securities may be subject to restrictions on transfer
under state and/or federal securities laws, as set forth herein
or as otherwise required by such laws at the time a transfer is
proposed.
(d) Authorization; Binding Obligations. All corporate action on the part
of each of Company and each of its Eligible Subsidiaries, and their
respective officers and directors necessary for the authorization of
this Agreement and the Ancillary Agreements, the performance of all
obligations of Company and each of its Eligible Subsidiaries hereunder
and under the Ancillary Agreements on the Closing Date and, the
authorization, sale, issuance and delivery of the Notes and the
Warrants has been taken or will be taken prior to the Closing Date.
This Agreement and the Ancillary Agreements, when executed and
delivered and to the extent it is a party thereto, will be valid and
binding obligations of each of Company and each of its Eligible
Subsidiaries enforceable in accordance with their terms, except:
(i) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting
enforcement of creditors' rights; and
(ii) general principles of equity that restrict the availability of
equitable or legal remedies.
The sale of the Notes and the subsequent conversion of the Notes into Note
Shares are not and will not be subject to any preemptive rights or rights of
first refusal that have not been properly waived or complied with. The issuance
of the Warrants and the subsequent exercise of the Warrants for Warrant Shares
are not and will not be subject to any preemptive rights or rights of first
refusal that have not been properly waived or complied with.
(e) Liabilities. Neither Company nor any of its Eligible Subsidiaries has
any contingent liabilities, except current liabilities incurred in the
ordinary course of business and liabilities disclosed in any Exchange
Act Filings.
(f) Agreements; Action. Except as set forth on Schedule 12(f) or as
disclosed in any Exchange Act Filings:
(i) There are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees to
which Company or any of its subsidiaries is a party or to its
knowledge by which it is bound which may involve: (i) obligations
(contingent or otherwise) of, or payments to, Company or any of
its subsidiaries in excess of $50,000 (other than obligations of,
or payments to, Company or any of its subsidiaries arising from
purchase or sale agreements entered into in the ordinary course
of business); or (ii) the transfer or license of any patent,
copyright, trade secret or other proprietary right to or from
Company or any of its subsidiaries (other than licenses arising
from the purchase of "off the shelf" or other standard products);
or (iii) provisions restricting the development, manufacture or
distribution of Company's or any of its subsidiaries' products or
services; or (iv) indemnification by Company or any of its
subsidiaries with respect to infringements of proprietary rights.
(ii) Since November 29, 2004, neither Company nor any of its
subsidiaries has: (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any
class or series of its capital stock; (ii) incurred any
indebtedness for money borrowed or any other liabilities (other
than ordinary course obligations) individually in excess of
$50,000 or, in the case of indebtedness and/or liabilities
individually less than $50,000, in excess of $100,000 in the
aggregate; (iii) made any loans or advances to any person not in
excess, individually or in the aggregate, of $100,000, other than
ordinary advances for travel expenses; or (iv) sold, exchanged or
otherwise disposed of any of its assets or rights, other than the
sale of its inventory in the ordinary course of business.
(iii) For the purposes of subsections (i) and (ii) of this Section
12(f) above, all indebtedness, liabilities, agreements,
understandings, instruments, contracts and proposed transactions
involving the same Person (including Persons Company has reason
to believe are affiliated therewith or with any subsidiary
thereof) shall be aggregated for the purpose of meeting the
individual minimum dollar amounts of such subsections.
(g) Obligations to Related Parties. Except as set forth on Schedule 12(g),
there are no obligations of Company or any of its subsidiaries to
officers, directors, stockholders or employees of Company or any of
its subsidiaries other than:
(i) for payment of salary for services rendered and for bonus
payments;
(ii) reimbursement for reasonable expenses incurred on behalf of
Company or any of its subsidiaries;
(iii) for other standard employee benefits made generally available to
all employees (including stock option agreements outstanding
under any stock option plan approved by the Board of Directors of
Company); and
(iv) obligations listed in Company's financial statements or disclosed
in any of its Exchange Act Filings.
Except as described in any Exchange Act Filing or as described above or set
forth on Schedule 12(g), none of the officers, directors or, to the best of
Company's knowledge, key employees or stockholders of Company, any of its
subsidiaries or any members of their immediate families, are indebted to Company
or any of its subsidiaries, individually or in the aggregate, in excess of
$50,000 or have any direct or indirect ownership interest in any firm or
corporation with which Company or any of its subsidiaries is affiliated (other
than the Company) or with which Company or any of its subsidiaries has a
business
relationship, or any firm or corporation which competes with Company or any of
its subsidiaries, in each case, other than passive investments in publicly
traded companies (representing less than one percent (1%) of such company) which
may compete with Company or any of its subsidiaries. Except as described above,
no officer, director or stockholder, or any member of their immediate families,
is, directly or indirectly, interested in any material contract with Company or
any of its subsidiaries and no agreements, understandings or proposed
transactions are contemplated between Company or any of its subsidiaries and any
such person. Except as set forth on Schedule 12(g), neither Company nor any of
its subsidiaries is a guarantor or indemnitor of any indebtedness of any other
person, firm or corporation.
(h) Changes. Since November 29, 2004, except as disclosed in any Exchange
Act Filing or in any Schedule to this Agreement or to any of the
Ancillary Agreements, there has not been:
(i) any change in the business, assets, liabilities, condition
(financial or otherwise), properties, operations or prospects of
Company or any of its Eligible Subsidiaries, which, individually
or in the aggregate, has had, or could reasonably be expected to
have, a Material Adverse Effect;
(ii) any resignation or termination of any officer, key employee or
group of employees of Company or any of its Eligible
Subsidiaries;
(iii) any material change, except in the ordinary course of business,
in the contingent obligations of Company or any of its Eligible
Subsidiaries by way of guaranty, endorsement, indemnity, warranty
or otherwise;
(iv) any damage, destruction or loss, whether or not covered by
insurance, which has had, or could reasonably be expected to
have, individually or in the aggregate, a Material Adverse
Effect;
(v) any waiver by Company or any of its Eligible Subsidiaries of a
valuable right or of a material debt owed to it;
(vi) any direct or indirect material loans made by Company or any of
its Eligible Subsidiaries to any stockholder, employee, officer
or director of Company or any of its Eligible Subsidiaries, other
than advances made in the ordinary course of business;
(vii) any material change in any compensation arrangement or agreement
with any employee, officer, director or stockholder;
(viii) any declaration or payment of any dividend or other
distribution of the assets of Company or any of its Eligible
Subsidiaries;
(ix) any labor organization activity related to Company or any of its
Eligible Subsidiaries;
(x) any debt, obligation or liability incurred, assumed or guaranteed
by Company or any of its Eligible Subsidiaries, except those for
immaterial amounts and for current liabilities incurred in the
ordinary course of business;
(xi) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(xii) any change in any material agreement to which Company or any of
its Eligible Subsidiaries is a party or by which it is bound
which, either individually or in the aggregate, has had, or could
reasonably be expected to have, a Material Adverse Effect;
(xiii) any other event or condition of any character that, either
individually or in the aggregate, has had, or could reasonably be
expected to have, a Material Adverse Effect; or
(xiv) any arrangement or commitment by Company or any of its Eligible
Subsidiaries to do any of the acts described in subsection (i)
through (xiii) of this Section 12(h).
(i) Title to Properties and Assets; Liens, Etc. Except as set forth on
Schedule 12(i), each of Company and each of its Eligible Subsidiaries
has good and marketable title to its properties and assets, and good
title to its leasehold estates, in each case subject to no mortgage,
pledge, lien, lease, encumbrance or charge, other than:
(i) those resulting from taxes which have not yet become delinquent;
(ii) minor liens and encumbrances which do not materially detract from
the value of the property subject thereto or materially impair
the operations of Company or any of its Eligible Subsidiaries;
(iii) those that have otherwise arisen in the ordinary course of
business; and
(iv) Permitted Liens.
All facilities, machinery, equipment, fixtures, vehicles and other properties
owned, leased or used by Company or any of its Eligible Subsidiaries are in good
operating condition and repair (excepting ordinary wear and tear) and are
reasonably fit and usable for the purposes for which they are being used. Except
as set forth on Schedule 12(i), each of Company and each of its Eligible
Subsidiaries is in compliance with all material terms of each lease to which it
is a party or is otherwise bound.
(j) Intellectual Property.
(i) Each of Company and each of its Eligible Subsidiaries owns or
possesses sufficient legal rights to all Intellectual Property
necessary for its business as now conducted and to Company's
knowledge as presently proposed to be conducted, without any
known infringement of the rights of others. There are no
outstanding options, licenses or agreements of any kind relating
to such Intellectual Property of Company or any of its Eligible
Subsidiaries, nor is Company or any of its Eligible Subsidiaries
bound by or a party to any options, licenses or agreements of any
kind with respect to the Intellectual Property of any other
person or entity other than such licenses or agreements arising
from the purchase of "off the shelf" or standard products.
(ii) Except as set forth on Schedule 12(j), neither Company nor any of
its Eligible Subsidiaries has received any communications
alleging that Company or any of its Eligible Subsidiaries has
violated any of the patents, trademarks, service marks, trade
names, copyrights or trade secrets or other proprietary rights of
any other person or entity, nor is Company aware of any basis
therefor.
(iii) Company does not believe it is or will be necessary to utilize
any inventions, trade secrets or proprietary information of any
of its employees made prior to their employment by Company or any
of its Eligible Subsidiaries, except for inventions, trade
secrets or proprietary information that have been rightfully
assigned to Company or any such Eligible Subsidiary.
(k) Compliance with Other Instruments. Neither Company nor any of its
Eligible Subsidiaries is in violation or default of (x) any term of
its Charter or Bylaws, or (y) of any provision of any indebtedness,
mortgage, indenture, contract, agreement or instrument to which it is
party or by which it is bound or of any judgment, decree, order or
writ, which violation or default, in the case of this clause (y), has
had, or could reasonably be expected to have, either individually or
in the aggregate, a Material Adverse Effect. The execution, delivery
and performance of and compliance with this Agreement and the
Ancillary Agreements to which it is a party, and the issuance and sale
of the Notes by Company and the other Securities by Company each
pursuant hereto and thereto, will not, with or without the passage of
time or giving of notice, result in any such material violation, or be
in conflict with or constitute a default under any such term or
provision, or result in the creation of any mortgage, pledge, lien,
encumbrance or charge upon any of the properties or assets of Company
or any of its Eligible Subsidiaries or the suspension, revocation,
impairment, forfeiture or nonrenewal of any permit, license,
authorization or approval applicable to Company or any of its Eligible
Subsidiaries, its business or operations or any of its assets or
properties.
(l) Litigation. Except as disclosed in any Exchange Act Filing or as set
forth on Schedule 12(l), there is no action, suit, proceeding or
investigation pending or, to Company's knowledge, currently threatened
against Company or any of its Eligible Subsidiaries that prevents
Company or any of its Eligible Subsidiaries from entering into this
Agreement or the Ancillary Agreements, or from consummating the
transactions contemplated hereby or thereby, or which has had, or
could reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect, or could result in any change in
the current equity ownership of Company or any of its Eligible
Subsidiaries, nor is Company aware that there is any basis to assert
any of the foregoing. Neither Company nor any of its Eligible
Subsidiaries is a party or subject to the provisions of any order,
writ, injunction, judgment or decree of any court or government agency
or instrumentality. Except as disclosed in any Exchange Act Filing,
there is no action, suit, proceeding or investigation by Company or
any of its Eligible Subsidiaries currently pending or which Company or
any of its Eligible Subsidiaries intends to initiate.
(m) Tax Returns and Payments. Each of Company and each of its Eligible
Subsidiaries has timely filed all tax returns (federal, state and
local) required to be filed by it or has received extensions in
respect thereof. All taxes shown to be due and payable on such
returns, any assessments imposed, and all other taxes due and payable
by each of Company and each of its
Eligible Subsidiaries on or before the Closing Date, have been paid or
will be paid prior to the time they become delinquent. Except as set
forth on Schedule 12(m), neither Company nor any of its Eligible
Subsidiaries has been advised:
(i) that any of its returns, federal, state or other, have been or
are being audited as of the date hereof; or
(ii) of any deficiency in assessment or proposed judgment to its
federal, state or other taxes.
Company has no knowledge of any liability of any tax to be imposed
upon its properties or assets as of the date of this Agreement that is
not adequately provided for.
(n) Employees. Except as set forth on Schedule 12(n), neither Company nor
any of its Eligible Subsidiaries has any collective bargaining
agreements with any of its employees. There is no labor union
organizing activity pending or, to Company's knowledge, threatened
with respect to Company or any of its Eligible Subsidiaries. Except as
disclosed in the Exchange Act Filings or on Schedule 12(n), neither
Company nor any of its Eligible Subsidiaries is a party to or bound by
any currently effective employment contract, deferred compensation
arrangement, bonus plan, incentive plan, profit sharing plan,
retirement agreement or other employee compensation plan or agreement.
To Company's knowledge, no employee of Company or any of its Eligible
Subsidiaries, nor any consultant with whom Company or any of its
Eligible Subsidiaries has contracted, is in violation of any term of
any employment contract, proprietary information agreement or any
other agreement relating to the right of any such individual to be
employed by, or to contract with, Company or any of its Eligible
Subsidiaries because of the nature of the business to be conducted by
Company or any of its Eligible Subsidiaries; and to Company's
knowledge the continued employment by Company and its Eligible
Subsidiaries of their respective present employees, and the
performance of Company's and its Eligible Subsidiaries contracts with
its independent contractors, will not result in any such violation.
Company is not aware that any of its or any of its Eligible
Subsidiaries' employees is obligated under any contract (including
licenses, covenants or commitments of any nature) or other agreement,
or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with their duties to
Company or any of its Eligible Subsidiaries. Neither Company nor any
of its Eligible Subsidiaries has received any notice alleging that any
such violation has occurred. Except for employees who have a current
effective employment agreement with Company or any of its Eligible
Subsidiaries, no employee of Company or any of its Eligible
Subsidiaries has been granted the right to continued employment by
Company or any of its Eligible Subsidiaries or to any material
compensation following termination of employment with Company or any
of its Eligible Subsidiaries. Except as set forth on Schedule 12(n),
neither Company nor any of its Eligible Subsidiaries is aware that any
officer, key employee or group of employees intends to terminate his,
her or their employment with Company or any of its Eligible
Subsidiaries, nor does Company or any of its Eligible Subsidiaries
have a present intention to terminate the employment of any officer,
key employee or group of employees.
(o) Registration Rights and Voting Rights. Except as set forth on Schedule
12(o) and except as disclosed in Exchange Act Filings, neither Company
nor any of its Eligible Subsidiaries is presently under any
obligation, and has not granted any rights, to register any of
Company's or any such Eligible Subsidiary's presently outstanding
securities or any of its securities that may hereafter be issued.
Except as set forth on Schedule 12(o) and except as disclosed in
Exchange Act Filings, to Company's knowledge, no stockholder of
Company or any of its Eligible Subsidiaries has entered into any
agreement with respect to the voting of equity securities of Company
or any of its Eligible Subsidiaries.
(p) Compliance with Laws; Permits. Neither Company nor any of its Eligible
Subsidiaries is in violation of any applicable statute, rule,
regulation, order or restriction of any domestic or foreign government
or any instrumentality or agency thereof in respect of the conduct of
its business or the ownership of its properties which has had, or
could reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect. No governmental orders,
permissions, consents, approvals or authorizations are required to be
obtained and no registrations or declarations are required to be filed
in connection with the execution and delivery of this Agreement or any
Ancillary Agreement and the issuance of any of the Securities, except
such as has been duly and validly obtained or filed, or with respect
to any filings that must be made after the Closing Date, as will be
filed in a timely manner. Each of Company and each of its Eligible
Subsidiaries has all material franchises, permits, licenses and any
similar authority necessary for the conduct of its business as now
being conducted by it, the lack of which could, either individually or
in the aggregate, reasonably be expected to have a Material Adverse
Effect.
(q) Environmental and Safety Laws. Neither Company is nor any of its
Eligible Subsidiaries is in violation of any applicable statute, law
or regulation relating to the environment or occupational health and
safety, and to its knowledge, no material expenditures are or will be
required in order to comply with any such existing statute, law or
regulation. Except as set forth on Schedule 12(q), no Hazardous
Materials (as defined below) are used or have been used, stored, or
disposed of by Company or any of its Eligible Subsidiaries or, to
Company's knowledge, by any other person or entity on any property
owned, leased or used by Company or any of its Eligible Subsidiaries.
For the purposes of the preceding sentence, "Hazardous Materials"
shall mean:
(i) materials which are listed or otherwise defined as "hazardous" or
"toxic" under any applicable local, state, federal and/or foreign
laws and regulations that govern the existence and/or remedy of
contamination on property, the protection of the environment from
contamination, the control of hazardous wastes, or other
activities involving hazardous substances, including building
materials; and
(ii) any petroleum products or nuclear materials.
(r) Valid Offering. Assuming the accuracy of the representations and
warranties of Laurus contained in this Agreement, the offer, sale and
issuance of the Securities will be exempt from the registration
requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and will have been registered or qualified (or are
exempt from registration and qualification) under the registration,
permit or qualification requirements of all applicable state
securities laws.
(s) Full Disclosure. Each of Company and each of its Eligible Subsidiaries
has provided Laurus with all information requested by Laurus in
connection with its decision to purchase the Notes and the Warrants,
including all information Company believes is reasonably necessary to
make such investment decision. Neither this Agreement, the Ancillary
Agreements nor the exhibits and schedules hereto and thereto nor any
other document delivered by Company or any of its Eligible
Subsidiaries to Laurus or its attorneys or agents in connection
herewith or therewith or with the transactions contemplated hereby or
thereby, contain any untrue statement of a material fact nor omit to
state a material fact necessary in order to make the statements
contained herein or therein, in light of the circumstances in which
they are made, not misleading. Any financial projections and other
estimates provided to Laurus by Company and its Eligible Subsidiaries
were based on Company's and its Eligible Subsidiaries' experience in
the industry and on assumptions of fact and opinion as to future
events which Company and/or such Eligible Subsidiary, at the date of
the issuance of such projections or estimates, believed to be
reasonable.
(t) Insurance. Each of Company and each of its Eligible Subsidiaries has
general commercial, product liability, fire and casualty insurance
policies with coverages which Company believes are customary for
companies similarly situated to Company and its Eligible Subsidiaries
in the same or similar business.
(u) SEC Reports and Financial Statements. Except as set forth on Schedule
12(u), Company and each of its Eligible Subsidiaries has filed all
proxy statements, reports and other documents required to be filed by
it under the Exchange Act. Company has furnished Laurus with copies
of: (i) its Annual Report on Form 10-K for its fiscal years ended
December 31, 2003; and (ii) its Quarterly Reports on Form 10-Q for its
fiscal quarters ended September 30, 2004, and the Form 8-K filings
which it has made during its fiscal year 2004 to date (collectively,
the "SEC Reports"). Except as set forth on Schedule 12(u), each SEC
Report was, at the time of its filing, in substantial compliance with
the requirements of its respective form and none of the SEC Reports,
nor the financial statements (and the notes thereto) included in the
SEC Reports, as of their respective filing dates, contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Such financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP") applied on a
consistent basis during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto
or (ii) in the case of unaudited interim statements, to the extent
they may not include footnotes or may be condensed) and fairly present
in all material respects the financial condition, the results of
operations and the cash flows of Company and its subsidiaries, on a
consolidated basis, as of, and for, the periods presented in each such
SEC Report.
(v) Listing. The Company's Common Stock is traded on the Over the Counter
Bulletin Board ("OTCBB") and satisfies all requirements for the
continuation of such trading. The Company has not received any notice
that its Common Stock will be ineligible to trade on the OTCBB or that
its Common Stock does not meet all requirements for such continued
trading.
(w) No Integrated Offering. Neither Company, nor any of its Eligible
Subsidiaries nor any of its Affiliates, nor any person acting on its
or their behalf, has directly or indirectly made any offers or sales
of any security or solicited any offers to buy any security under
circumstances that would cause the offering of the Securities pursuant
to this Agreement or any Ancillary Agreement to be integrated with
prior offerings by Company for purposes of the Securities Act in a
manner that would prevent Company from selling the Securities pursuant
to the Securities Act, or any applicable exchange-related stockholder
approval provisions, nor will Company or any of its Affiliates or
Eligible Subsidiaries take any action or steps that would cause the
offering of the Securities to be integrated with other such offerings.
(x) Stop Transfer. The Securities are restricted securities as of the date
of this Agreement. Company will not issue any stop transfer order or
other order impeding the sale and delivery of any of the Securities at
such time as the Securities are
registered for public sale or an exemption from registration is
available, except as required by state and federal securities laws.
(y) Dilution. Company specifically acknowledges that its obligation to
issue the shares of Common Stock upon conversion of the Notes and
exercise of the Warrants is binding upon Company and enforceable
regardless of the dilution such issuance may have on the ownership
interests of other shareholders of Company.
(z) Patriot Act. Company certifies that, to the best of Company's
knowledge, neither Company nor any of its subsidiaries has been
designated, and is not owned or controlled, by a "suspected terrorist"
as defined in Executive Order 13224. Company hereby acknowledges that
Laurus seeks to comply with all applicable laws concerning money
laundering and related activities. In furtherance of those efforts,
Company hereby represents, warrants and agrees that: (i) none of the
cash or property that Company or any of its subsidiaries will pay or
will contribute to Laurus has been or shall be derived from, or
related to, any activity that is deemed criminal under United States
law; and (ii) no contribution or payment by Company or any of its
subsidiaries to Laurus, to the extent that they are within Company's
or any such subsidiary's control shall cause Laurus to be in violation
of the United States Bank Secrecy Act, the United States International
Money Laundering Control Act of 1986 or the United States
International Money Laundering Abatement and Anti-Terrorist Financing
Act of 2001. Company shall promptly notify Laurus if any of these
representations ceases to be true and accurate regarding Company or
any of its subsidiaries. Company agrees to provide Laurus with any
additional information regarding Company and each subsidiary thereof
that Laurus deems necessary or convenient to ensure compliance with
all applicable laws concerning money laundering and similar
activities. Company understands and agrees that if at any time it is
discovered that any of the foregoing representations are incorrect, or
if otherwise required by applicable law or regulation related to money
laundering or similar activities, Laurus may undertake appropriate
actions to ensure compliance with applicable law or regulation,
including but not limited to segregation and/or redemption of Laurus'
investment in Company. Company further understands that Laurus may
release confidential information about Company and its subsidiaries
and, if applicable, any underlying beneficial owners, to proper
authorities if Laurus, in its sole discretion, exercised reasonably,
determines that it is in the best interests of Laurus in light of
relevant rules and regulations under the laws set forth in subsection
(ii) above.
(aa)Schedule 12(aa) sets forth Company's and each Eligible
Subsidiary's name as it appears in official filings in the state of
its incorporation, the type of entity of Company and each Eligible
Subsidiary, the organizational identification number issued by
Company's and each Eligible Subsidiary's state of incorporation or a
statement that no such number has been issued, Company's and each
Eligible Subsidiary's state of incorporation, and the location of
Company's and each Eligible Subsidiary's chief executive office,
corporate offices, warehouses, other locations of Collateral and
locations where records with respect to Collateral are kept (including
in each case the county of such locations) and, except as set forth in
such Schedule 12(aa), such locations have not changed during the
preceding twelve months. As of the Closing Date, during the prior five
years, except as set forth in Schedule 12(aa), neither Company nor any
Eligible Subsidiary has been known as or conducted business in any
other name (including trade names). Each of Company and each Eligible
Subsidiary has only one state of incorporation.
13. Covenants. Company covenants and agrees with Laurus as follows:
(a) Stop-Orders. During the Term, Company will advise Laurus, promptly
after it receives notice of issuance by the SEC, any state securities
commission or any other regulatory authority of any stop order or of
any order preventing or suspending any offering of any securities of
Company, or of the suspension of the qualification of the Common Stock
of Company for offering or sale in any jurisdiction, or the initiation
of any proceeding for any such purpose.
(b) Listing. Company shall maintain the trading of the shares of Common
Stock issuable upon conversion of the Notes and exercise of the
Warrants on the NASD OTC Bulletin Board, NASDAQ SmallCap Market,
NASDAQ National Market System, American Stock Exchange, or New York
Stock Exchange (whichever of the foregoing is at the time the
principal trading exchange or market for the Common Stock) (the
"Principal Market"), and will comply in all material respects with
Company's reporting, filing and other obligations under the bylaws or
rules of the National Association of Securities Dealers ("NASD") and
the Principal Market, as applicable.
(c) Market Regulations. During the Term, Company shall notify the SEC,
NASD and applicable state authorities, in accordance with their
requirements, of the transactions contemplated by this Agreement, and
shall take all other necessary action and proceedings as may be
required and permitted by applicable law, rule and regulation, for the
legal and valid issuance of the Securities to Laurus and promptly
provide copies thereof to Laurus.
(d) Reporting Requirements. During the Term, Company will timely file with
the SEC all reports required to be filed pursuant to the Exchange Act
and refrain from terminating its status as an issuer required by the
Exchange Act to file reports thereunder even if the Exchange Act or
the rules or regulations thereunder would permit such termination.
(e) Use of Funds. Company agrees that it will use the proceeds of the sale
of the Notes and the Warrants for working capital purposes only.
(f) Reserved.
(g) Taxes . During the Term, Company will, and will cause each of its
Eligible Subsidiaries to, promptly pay and discharge, or cause to be
paid and discharged, when due and payable, all lawful taxes,
assessments and governmental charges or levies imposed upon the
income, profits, property or business of Company or such Eligible
Subsidiary, as the case may be; provided, however, that any such tax,
assessment, charge or levy need not be paid if the validity thereof
shall then be contested in good faith by appropriate proceedings and
if Company and/or such Eligible Subsidiary shall have set aside on its
books adequate reserves with respect thereto, and provided, further,
that Company will, and will cause each of its Eligible Subsidiaries
to, pay all such taxes, assessments, charges or levies forthwith upon
the commencement of proceedings to foreclose any lien which may have
attached as security therefor.
(h) Insurance. Each of Company and each Eligible Subsidiary, as the case
may be, will bear the full risk of loss from any loss of any nature
whatsoever with respect to the Collateral. Each of Company and each of
its Eligible Subsidiaries will keep its assets which are of an
insurable character insured by financially sound and reputable
insurers against loss or damage by fire, flood, sprinkler leakage,
those hazards covered by extended coverage insurance and such other
hazards and other risks customarily insured against by companies in
similar business similarly situated as Company and its Eligible
Subsidiaries; and Company and its Eligible Subsidiaries will maintain,
with financially sound and reputable insurers, insurance against other
hazards and risks and liability to persons and property to the extent
and in the manner which Company and/or such Eligible Subsidiary
thereof reasonably believes is customary for companies in similar
business similarly situated as Company and its Eligible Subsidiaries
and to the extent available on commercially reasonable terms. Company
and each of its Eligible Subsidiaries will jointly and severally bear
the full risk of loss from any loss of any nature whatsoever with
respect to the assets pledged to Laurus as security for its
obligations hereunder and under the Ancillary Agreements. At Company's
own cost and expense in amounts and with carriers reasonably
acceptable to Laurus, Company and each of its Eligible Subsidiaries
shall (ii) maintain all such worker's compensation or similar
insurance as may be required under the laws of any state or
jurisdiction in which Company or any of its Eligible Subsidiaries is
engaged in business; and (iii) furnish Laurus with (x) copies of all
policies and evidence of the maintenance of such policies at least
thirty (30) days before any expiration date, (y) excepting Company's
and its Eligible Subsidiaries' workers' compensation policy,
endorsements to such policies naming Laurus as "co-insured" or
"additional insured" and appropriate loss payable endorsements in form
and substance satisfactory to Laurus, naming Laurus as loss payee, and
(z) evidence that as to Laurus the insurance coverage shall not be
impaired or invalidated by any act or neglect of Company or any of its
Eligible Subsidiaries and the insurer will provide Laurus with at
least thirty (30) days notice prior to cancellation. Company shall
instruct the insurance carriers that in the event of any loss
thereunder, the carriers shall make payment for such loss to Laurus
and not to Company and/or any Eligible Subsidiary thereof and Laurus
jointly. If any insurance losses are paid by check, draft or other
instrument payable to Company and/or any Eligible Subsidiary thereof
and Laurus jointly, Laurus may endorse Company's and/or such Eligible
Subsidiary's name thereon and do such other things as Laurus may deem
advisable to reduce the same to cash.Laurus is hereby authorized to
adjust and compromise claims. All loss recoveries received by Laurus
upon any such insurance may be applied to the Obligations, in such
order as Laurus in its sole discretion shall determine or shall
otherwise be delivered to Company and/or such Eligible Subsidiary
thereof. Any surplus shall be paid by Laurus to Company and/or such
Eligible Subsidiary thereof or applied as may be otherwise required by
law. Any deficiency thereon shall be paid by Company and its Eligible
Subsidiaries to Laurus, on demand.
(i) Intellectual Property. Company shall, and shall cause each of its
Eligible Subsidiaries to, maintain in full force and effect its
corporate existence, rights and franchises and all licenses and other
rights to use Intellectual Property owned or possessed by it and
reasonably deemed to be necessary to the conduct of its business.
(j) Properties. During the Term, Company will, and will cause each of its
Eligible Subsidiaries to, keep its properties in good repair, working
order and condition, reasonable wear and tear excepted, and from time
to time make all needful and proper repairs, renewals, replacements,
additions and improvements thereto; and Company will, and will cause
each of its Eligible Subsidiaries to, at all times comply with each
provision of all leases to which it is a party or under which it
occupies property if the breach of such provision could reasonably be
expected to have a Material Adverse Effect.
(k) Confidentiality. During the Term, Company agrees that it will not, and
will not permit any of its Eligible Subsidiaries to, disclose, and
will not include in any public announcement, the name of Laurus,
unless expressly agreed to by Laurus or unless and until such
disclosure is required by law or applicable regulation, and then only
to the extent of such requirement. Company may disclose Laurus'
identity and the terms of this Agreement to its current and
prospective debt and equity financing sources.
(l) Required Approvals. During the Term, Company shall not, and shall not
permit any of its Eligible Subsidiaries to, without the prior written
consent of Laurus, (i) create, incur, assume or suffer to exist any
indebtedness (exclusive of trade debt) whether secured or unsecured
other than Company's indebtedness to Laurus and as set forth on
Schedule 13(l)(i) attached hereto and made a part hereof; (ii) cancel
any debt owing to it in excess of $50,000 in the aggregate during any
12 month period; (iii) assume, guarantee, endorse or otherwise become
directly or contingently liable in connection with any obligations of
any other Person, except the endorsement of negotiable instruments by
Company for deposit or collection or similar transactions in the
ordinary course of business; (iv) directly or indirectly declare, pay
or make any dividend or distribution on any class of its Stock other
than to pay dividends on shares of its Preferred Stock outstanding on
the date hereof or apply any of its funds, property or assets to the
purchase, redemption or other retirement of any Stock of Company
outstanding on the date hereof, or issue any Preferred Stock
manditorily redeemable prior to the sixth month anniversary of the
Maturity Date (as defined in the Notes); (v) purchase or hold
beneficially any Stock or other securities or evidences of
indebtedness of, make or permit to exist any loans or advances to, or
make any investment or acquire any interest whatsoever in, any other
Person, including any partnership or joint venture, except (x) travel
advances, (y) loans to Company's and its Eligible Subsidiaries'
officers and employees not exceeding at any one time an aggregate of
$10,000, and (z) existing subsidiaries of Company; (vi) create or
permit to exist any subsidiary, other than any subsidiary in existence
on the date hereof and listed in Schedule 12(b) unless such new
subsidiary is a wholly-owned subsidiary and is designated by Laurus as
either a co-borrower or guarantor hereunder and such subsidiary shall
have entered into all such documentation required by Laurus,
including, without limitation, to grant to Laurus a first priority
perfected security interest in substantially all of such subsidiary's
assets to secure the Obligations; (vii) directly or indirectly, prepay
any indebtedness (other than to Laurus or in the ordinary course of
business), or repurchase, redeem, retire or otherwise acquire any
indebtedness (other than to Laurus or in the ordinary course of
business) except to make scheduled payments of principal and interest
thereof; (viii) enter into any merger, consolidation or other
reorganization with or into any other Person or acquire all or a
portion of the assets or Stock of any Person constituting Collateral
or permit any other Person to consolidate with or merge with it,
unless (1) Company is the surviving entity of such merger or
consolidation, (2) no Event of Default shall exist immediately prior
to and after giving effect to such merger or consolidation, (3)
Company shall have provided Laurus copies of all documentation
relating to such merger or consolidation and (4) Company shall have
provided Laurus with at least thirty (30) days' prior written notice
of such merger or consolidation; (ix) materially change the nature of
the business in which it is presently engaged; (x) become subject to
(including, without limitation, by way of amendment to or modification
of) any agreement or instrument which by its terms would (under any
circumstances) restrict the Company's right to perform the provisions
of this Agreement or any of the agreements contemplated thereby; (xi)
change its fiscal year or make any changes in accounting treatment and
reporting practices without prior written notice to Laurus except as
required by GAAP or in the tax reporting treatment or except as
required by law; (xii) enter into any transaction with any employee,
director or Affiliate, except in the ordinary course on arms-length
terms; (xiii) xxxx Accounts under any name except the present name of
Company or its existing Eligible Subsidiaries; or (xiv) make any
intercompany or inter-subsidiary loans or transfers of assets, other
than loans and transfers in the ordinary course of business consistent
with past practice among the Company and the Eligible Subsidiaries or
with the prior written consent of Laurus (such consent not to be
unreasonably withheld or conditioned) .
(m) Reissuance of Securities. Company agrees to reissue certificates
representing the Securities without the legends set forth in Section
38 below at such time as:
(i) the holder thereof is permitted to dispose of such Securities
pursuant to Rule 144(k) under the Securities Act; or
(ii) upon resale subject to an effective registration statement after
such Securities are registered under the Securities Act or
pursuant to Rule 144(d).
Company agrees to cooperate with Laurus in connection with all resales pursuant
to Rule 144(d) and Rule 144(k) and provide legal opinions necessary to allow
such resales provided Company and its counsel receive reasonably requested
representations from Laurus and broker, if any.
(n) Opinion. On the Closing Date, Company will deliver to Laurus an
opinion acceptable to Laurus from Company's legal counsel. Company
will provide, at Company's expense, such other legal opinions in the
future as are required by the transfer agent for the Common Stock and
are reasonably necessary for the conversion of the Notes and the
exercise of the Warrants.
(o) Legal Name, etc. During the Term, Neither Company nor any of its
Eligible Subsidiaries will, without providing Laurus with 30 days
prior written notice, change (i) its name as it appears in the
official filings in the state of its incorporation or formation, (ii)
the type of legal entity it is, (iii) its organization identification
number, if any, issued by its state of incorporation, (iv) its state
of incorporation or (v) amend its certificate of incorporation,
by-laws or other organizational document.
(p) Compliance with Laws. During the Term, the operation of each of the
Company's and each of its Eligible Subsidiaries' business is and will
continue to be in compliance in all material respects with all
applicable federal, state and local laws, rules and ordinances,
including to all laws, rules, regulations and orders relating to
taxes, payment and withholding of payroll taxes, employer and employee
contributions and similar items, securities, employee retirement and
welfare benefits, employee health and safety and environmental matters
except where failure to so comply could not reasonably be expected to
have a Material Adverse Effect.
(q) Notices. During the Term, each of the Company and each of its Eligible
Subsidiaries will promptly inform Laurus in writing of: (i) the
commencement of all proceedings and investigations by or before and/or
the receipt of any notices from, any governmental or nongovernmental
body and all actions and proceedings in any court or before any
arbitrator against or in any way concerning any event which could
reasonably be expected to have singly or in the aggregate, a Material
Adverse Effect; (ii) any change which has had, or could reasonably be
expected to have, a Material Adverse Effect; (iii) any Event of
Default or Default; and (iv) any default or any event which with the
passage of time or giving of notice or both would constitute a default
under any agreement for the payment of money (in excess of $50,000) to
which Company or any of its Eligible Subsidiaries is a party or by
which Company or any of its Eligible Subsidiaries or any of Company's
or any such Eligible Subsidiary's properties may be bound the breach
of which would have a Material Adverse Effect.
(r) Margin Stock. The Company will not permit any of the proceeds of the
Loans made hereunder to be used directly or indirectly to "purchase"
or "carry" "margin stock" or to repay indebtedness incurred to
"purchase" or "carry" "margin stock" within the respective meanings of
each of the quoted terms under Regulation U of the Board of Governors
of the Federal Reserve System as now and from time to time hereafter
in effect.
(s) Offering Restrictions. During the Term, except as previously disclosed
in the SEC Reports or in the Exchange Act Filings, or stock or stock
options granted to employees or directors of the Company (these
exceptions hereinafter referred to as the "Excepted Issuances"), the
Company will not issue any securities with a continuously
variable/floating conversion feature which are or could be (by
conversion or registration) free-trading securities (i.e. common stock
subject to a registration statement) prior to the full repayment or
conversion of the Notes (together with all accrued and unpaid interest
and fees related thereto.
(t) Authorization and Reservation of Shares. Company will at all times
have authorized and reserved a sufficient number of shares of Common
Stock to provide for the conversion of the Notes and exercise of the
Warrants.
(u) Financing Right of First Refusal. (i) Company hereby grants to Laurus
a right of first refusal to provide any Additional Financing (as
defined below) to be issued by Company and/or any of its Eligible
Subsidiaries, subject to the following terms and conditions. From and
after the date hereof, prior to the sale of any debt securities or
convertible securities by the Company or any Eligible Subsidiary in a
capital-raising transaction in excess of $50,000 by Company or any of
its Eligible Subsidiaries (an "Additional Financing"), Company and/or
any Eligible Subsidiary of Company, as the case may be, shall notify
Laurus of its intention to enter into such Additional Financing. In
connection therewith, Company and/or the applicable Eligible
Subsidiary thereof shall submit a fully executed term sheet (a
"Proposed Term Sheet") to Laurus setting forth the terms, conditions
and pricing of any such Additional Financing (such financing to be
negotiated on "arm's length" terms and the terms thereof to be
negotiated in good faith) proposed to be entered into by Company
and/or such Eligible Subsidiary. Laurus shall have the right, but not
the obligation, to deliver its own proposed term sheet (the "Laurus
Term Sheet") setting forth the terms and conditions upon which Laurus
would be willing to provide such Additional Financing to Company
and/or such Eligible Subsidiary. The Laurus Term Sheet shall contain
terms no less favorable to Company and/or such Eligible Subsidiary
than those outlined in Proposed Term Sheet. Laurus shall deliver such
Laurus Term Sheet within five Business Days of receipt of each such
Proposed Term Sheet. If the provisions of the Laurus Term Sheet are at
least as favorable to Company and/or such Eligible Subsidiary, as the
case may be, as the provisions of the Proposed Term Sheet, Company
and/or such Eligible Subsidiary shall enter into and consummate the
Additional Financing transaction outlined in the Laurus Term Sheet.
Notwithstanding anything to the contrary contained above, Laurus shall
not have a right of first
refusal with respect to (i) any proposed Additional Financing the
proceeds of which the Company proposes uses to pay off the Obligations
or the refinance the indebtedness created hereunder or under the
Ancillary Agreements or (ii) any renewals, extensions or amendments to
or of any indebtedness existing on the date hereof.
(ii) Company will not, and will not permit its Eligible Subsidiaries to,
agree, directly or indirectly, to any restriction with any person or
entity which limits the ability of Laurus to consummate an Additional
Financing with Company or any of its Eligible Subsidiaries.
14. Further Assurances. At any time and from time to time, upon the written
request of Laurus and at the sole expense of Company, each of Company and
each Eligible Subsidiary shall promptly and duly execute and deliver any
and all such further instruments and documents and take such further action
as Laurus may request (a) to obtain the full benefits of this Agreement and
the Ancillary Agreements, (b) to protect, preserve and maintain Laurus'
rights in the Collateral and under this Agreement or any Ancillary
Agreement, or (c) to enable Laurus to exercise all or any of the rights and
powers herein granted or any Ancillary Agreement.
15. Representations and Warranties and Covenants of Laurus.
Laurus hereby represents and warrants to Company as follows:
(a) Requisite Power and Authority. Laurus has all necessary power and
authority under all applicable provisions of law to execute and
deliver this Agreement and the Ancillary Agreements and to carry out
their provisions. All corporate action on Laurus' part required for
the lawful execution and delivery of this Agreement and the Ancillary
Agreements have been or will be effectively taken prior to the Closing
Date. Upon their execution and delivery, this Agreement and the
Ancillary Agreements will be valid and binding obligations of Laurus,
enforceable in accordance with their terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other
laws of general application affecting enforcement of creditors'
rights, and (b) as limited by general principles of equity that
restrict the availability of equitable and legal remedies.
(b) Investment Representations. Laurus understands that the Securities are
being offered and sold pursuant to an exemption from registration
contained in the Securities Act based in part upon Laurus'
representations contained in this Agreement, including, without
limitation, that Laurus is an "accredited investor" within the meaning
of Regulation D under the Securities Act. Laurus has received or has
had full access to all the information it considers necessary or
appropriate to make an informed investment decision with respect to
the Note to be purchased by it under this Agreement and the Securities
acquired by it upon the conversion of the Note.
(c) Laurus Bears Economic Risk. Laurus has substantial experience in
evaluating and investing in private placement transactions of
securities in companies similar to Company so that it is capable of
evaluating the merits and risks of its investment in Company and has
the capacity to protect its own interests. Laurus must bear the
economic risk of this investment until the Securities are sold
pursuant to (i) an effective registration statement under the
Securities Act, or (ii) an exemption from registration is available.
(d) Acquisition for Own Account. Laurus is acquiring the Securities for
its own account for investment only, and not as a nominee or agent and
not with a view towards or for resale in connection with their
distribution.
(e) Laurus Can Protect Its Interest. Laurus represents that by reason of
its, or of its management's, business and financial experience, Laurus
has the capacity to evaluate the merits and risks of its investment in
the Note, and the Securities and to protect its own interests in
connection with the transactions contemplated in this Agreement, and
the Ancillary Agreements. Further, Laurus is aware of no publication
of any advertisement in connection with the transactions contemplated
in the Agreement or the Ancillary Agreements.
(f) QIB. Laurus represents that it is a qualified institutional buyer,
within the meaning of Rule 144A under the Securities Act.
(g) Shorting. Neither Laurus nor any of its Affiliates or investment
partners has, directly or indirectly, engaged in short sales of
Company's Common Stock. Neither Laurus nor any of its Affiliates or
investments partners, directly or indirectly, will, or will cause any
person or entity, to directly engage in "short sales" of Company's
Common Stock as long as any Minimum Borrowing Note shall be
outstanding.
(h) Patriot Act. Laurus certifies that, to the best of Laurus' knowledge,
Laurus has not been designated, and is not owned or controlled, by a
"suspected terrorist" as defined in Executive Order 13224. Laurus
seeks to comply with all applicable laws concerning money laundering
and related activities. In furtherance of those efforts, Laurus hereby
represents, warrants and agrees that: (i) none of the cash or property
that Laurus will use to purchase the Notes has been or shall be
derived from, or related to, any activity that is deemed criminal
under United States law; and (ii) no disbursement by Laurus to the
Company, to the extent within Laurus' control, shall cause Laurus to
be in violation of the United States Bank Secrecy Act, the United
States International Money Laundering Control Act of 1986 or the
United States International Money Laundering Abatement and
Anti-Terrorist Financing Act of 2001. Laurus shall promptly notify the
Company if any of these representations ceases to be true and accurate
regarding Laurus. Laurus agrees to provide the Company any additional
information regarding Laurus that the Company deems necessary or
convenient to ensure compliance with all applicable laws concerning
money laundering and similar activities. Laurus understands and agrees
that if at any time it is discovered that any of the foregoing
representations are incorrect, or if otherwise required by applicable
law or regulation related to money laundering similar activities,
Laurus may undertake appropriate actions to ensure compliance with
applicable law or regulation, including but not limited to segregation
and/or redemption of Laurus' investment in the Company. Laurus further
understands that the Company may release information about Laurus and,
if applicable, any underlying beneficial owners, to proper authorities
if the Company, in its sole discretion, determines that it is in the
best interests of the Company in light of relevant rules and
regulations under the laws set forth in subsection (ii) above.
(i) Limitation on Acquisition of Common Stock of the Company.
Notwithstanding anything to the contrary contained in this Agreement,
any Ancillary Agreement, any document, instrument or agreement entered
into in connection with the transactions contemplated hereby or any
document, instrument or agreement entered into in connection with any
other transaction entered into by and between Laurus and the Company
(and/or subsidiaries or affiliates of the Company), Laurus shall not
acquire stock in the Company (including, without limitation, pursuant
to a contract to purchase, by exercising an option or warrant, by
converting any other security or instrument, by acquiring or
exercising any other right to acquire, shares of stock or other
security convertible into shares of stock in the Company, or
otherwise, and such options, warrants, conversion or other rights
shall not be exercisable) to the extent such stock acquisition would
cause any interest (including any original issue discount) payable by
the Company to Laurus not to qualify as portfolio interest, within the
meaning of Section 881(c)(2) of the Internal Revenue Code of 1986, as
amended (the "Code") by reason of Section 881(c)(3) of the Code,
taking into account the constructive ownership rules under Section
871(h)(3)(C) of the Code.
16. Power of Attorney. With effect from the occurrence and during the
continuance of an Event of Default, each of Company and each Eligible
Subsidiary hereby appoints Laurus, or any other Person whom Laurus may
designate as Company's and/or any Eligible Subsidiary's attorney, with
power to: (i) endorse Company's and each Eligible Subsidiary's name on any
checks, notes, acceptances, money orders, drafts or other forms of payment
or security that may come into Laurus' possession; (ii) sign Company's and
each Eligible Subsidiary's name on any invoice or xxxx of lading relating
to any Accounts, drafts against Account Debtors, schedules and assignments
of Accounts, notices of assignment, financing statements and other public
records, verifications of Account and notices to or from Account Debtors;
(iii) verify the validity, amount or any other matter relating to any
Account by mail, telephone, telegraph or otherwise with Account Debtors;
(iv) do all things necessary to carry out this Agreement, any Ancillary
Agreement and all related documents; and (v) on or after the occurrence and
during the continuation of an Event of Default, notify the post office
authorities to change the address for delivery of Company's and each
Eligible Subsidiary's mail to an address designated by Laurus, and to
receive, open and dispose of all mail addressed to Company or any Eligible
Subsidiary. Each of Company and each Eligible Subsidiary hereby ratifies
and approves all acts of the attorney. Neither Laurus, nor the attorney
will be liable for any acts or omissions or for any error of judgment or
mistake of fact or law, except for gross negligence or willful misconduct.
This power, being coupled with an interest, is irrevocable so long as
Laurus has a security interest and until the Obligations have been fully
satisfied.
17. Term of Agreement. Laurus' agreement to make Loans and extend financial
accommodations under and in accordance with the terms of this Agreement or
any Ancillary Agreement shall continue in full force and effect until the
expiration of the Initial Term. At Laurus' election following the
occurrence of an Event of Default, Laurus may terminate this Agreement. The
termination of the Agreement shall not affect any of Laurus' rights
hereunder or any Ancillary Agreement and the provisions hereof and thereof
shall continue to be fully operative until all transactions entered into,
rights or interests created and the Obligations have been irrevocably
disposed of, concluded or liquidated. Notwithstanding the foregoing, Laurus
shall release its security interests at any time after ten (10) days notice
upon irrevocable payment to it of all Obligations if Company and each
Eligible Subsidiary shall have (i) provided Laurus with an executed release
of any and all claims which Company or any Eligible Subsidiary may have or
thereafter have under this Agreement and all Ancillary Agreements and (ii)
paid to Laurus an early payment fee in an amount equal to (1) four percent
(4%) of the Capital Availability Amount if such payment occurs prior to the
first anniversary of the Closing Date, (2) three percent (3%) of the
Capital Availability Amount if such payment occurs on or after the first
anniversary of the Closing Date and prior to the second anniversary of the
Closing Date and (3) one percent (1%) of the Capital Availability Amount if
such termination occurs thereafter on or prior to the last Business Day
before the expiration of the Term (other than at maturity); such fee being
intended to compensate Laurus for its costs and expenses incurred in
initially approving this Agreement or extending same. Such early payment
fee shall be due and payable by Company to Laurus upon termination by
acceleration of this Agreement by Laurus due to the occurrence and
continuance of an Event of Default.
18. Termination of Lien. The Liens and rights granted to Laurus hereunder and
any Ancillary Agreements and the financing statements filed in connection
herewith or therewith shall continue in full force and effect,
notwithstanding the termination of this Agreement or the fact that
Company's account may from time to time be temporarily in a zero or credit
position, until all of the Obligations of Company have been paid or
performed in full after the termination of this Agreement. Laurus shall not
be required to send termination statements to Company or any Eligible
Subsidiary, or to file them with any filing office, unless and until this
Agreement and the Ancillary Agreements shall have been terminated in
accordance with their terms and all Obligations paid in full in immediately
available funds.
19. Events of Default. The occurrence of any of the following shall constitute
an "Event of Default":
(a) failure to make payment of any of the Obligations when required
hereunder and such failure shall continue unremedied for a period of
three (3) Business Days from the date due;
(b) failure by the Company or any of its Eligible Subsidiaries to pay any
taxes when due unless such taxes are being contested in good faith by
appropriate proceedings and
with respect to which adequate reserves have been provided on
Company's and/or such Eligible Subsidiary's books and such failure
shall continue unremedied for a period of 30 days from the date due,
except where the failure to so pay would not reasonably be expected to
have a Material Adverse Effect;
(c) failure to perform under, and/or committing any breach of, in any
material respect, this Agreement or any Ancillary Agreement or any
other agreement between Company and/or any Eligible Subsidiary
thereof, on the one hand, and Laurus, on the other hand, which failure
or breach shall continue for a period of thirty (30) days after the
occurrence thereof;
(d) the occurrence of any event of default (or similar term), and the
expiration of any grace or cure period applicable thereto under any
indebtedness in excess of $50,000, which Company or any of its
Eligible Subsidiaries is a party with third parties (except for any
indebtedness listed on Schedule 19(d));
(e) any representation, warranty or statement made by Company or any of
its Eligible Subsidiaries hereunder, in any Ancillary Agreement, any
certificate, statement or document delivered pursuant to the terms
hereof, or in connection with the transactions contemplated by this
Agreement should at any time be false or misleading in any material
respect when made;
(f) an attachment or levy is made upon Company's assets having an
aggregate value in excess of $50,000 or a judgment is rendered against
Company or Company's property involving a liability of more than
$50,000 which shall not have been vacated, discharged, stayed or
bonded within thirty (30) days from the entry thereof;
(g) any change in Company's and its Eligible Subsidiaries' condition or
affairs (financial or otherwise), taken as a whole, which in Laurus'
reasonable, good faith opinion, could reasonably be expected to have a
Material Adverse Effect;
(h) any Lien created hereunder or under any Ancillary Agreement for any
reason ceases to be or is not a valid and perfected Lien having a
first priority interest, except where such priority is subject to a
Permitted Lien with greater priority under law;
(i) if Company or any of its Eligible Subsidiaries shall (i) apply for,
consent to or suffer to exist the appointment of, or the taking of
possession by, a receiver, custodian, trustee or liquidator of itself
or of all or a substantial part of its property, (ii) make a general
assignment for the benefit of creditors, (iii) commence a voluntary
case under the federal bankruptcy laws (as now or hereafter in
effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a
petition seeking to take advantage of any other law providing for the
relief of debtors, (vi) acquiesce to, or fail to have dismissed,
within thirty (30) days, any petition filed against it in any
involuntary case under such bankruptcy laws, or (vii) take any action
for the purpose of effecting any of the foregoing;
(j) Company or any of its Eligible Subsidiaries shall admit in writing its
inability, or be generally unable to pay its debts as they become due
or cease operations of its present business;
(k) Company directly or indirectly sells, assigns, transfers, conveys, or
suffers or permits to occur any sale, assignment, transfer or
conveyance of any assets of Company or Eligible Subsidiary
constituting Collateral or any interest therein, except as permitted
herein;
(l) the occurrence of a change in the controlling ownership of Company;
(m) the indictment or threatened indictment of Company or any of its
Eligible Subsidiaries or any executive officer of Company or any of
its Eligible Subsidiaries under any criminal statute, or commencement
or threatened commencement of criminal or civil proceeding against
Company or any of its Eligible Subsidiaries or any executive officer
of Company or any of its Eligible Subsidiaries pursuant to which
statute or proceeding penalties or remedies sought or available
include forfeiture of any of the property of Company or any of its
Eligible Subsidiaries; or
(n) if an Event of Default shall occur under and as defined in any Note or
in any Ancillary Agreement;.
(o) the Company or any of its Eligible Subsidiaries shall breach any
material term or provision of any Ancillary Agreement to which it is a
party which is not cured within any applicable cure or grace period;
(p) if the Company of any of its Eligible Subsidiaries attempts to
terminate, challenges the validity of, or its liability under any
Ancillary Agreement;
(q) should the Company or any of its Eligible Subsidiaries default in its
material obligations under any Ancillary Agreement to which it is a
party or if any proceeding shall be brought to challenge the validity,
binding effect of any Ancillary Agreement to which it is a party or
should the Company or any of its Eligible Subsidiaries breach any
material representation, warranty or covenant contained in any
Ancillary Agreement to which it is a party or should any Ancillary
Agreement cease to be a valid, binding and enforceable obligation of
the Company of any of its Eligible Subsidiaries (to the extent such
Persons are a party thereto); or
(r) an SEC stop trade order or Principal Market trading suspension of the
Common Stock shall be in effect for five (5) consecutive days or five
(5) days during a period of ten (10) consecutive days, excluding in
all cases a suspension of all trading on a Principal Market, provided
that the Company shall not have been able to cure such trading
suspension within thirty (30) days of the notice thereof or list the
Common Stock on another Principal Market within sixty (60) days of
such notice. The "Principal Market" for the Common Stock, for the
purpose of this clause (r), shall mean the NASD OTC Bulletin Board,
NASDAQ SmallCap Market, NASDAQ National Market System, American Stock
Exchange, or New York Stock Exchange (whichever of the foregoing is at
the time the principal trading exchange or market for the Common
Stock).
20. Remedies. Following the occurrence of an Event of Default, Laurus shall
have the right to demand repayment in full of all Obligations, whether or
not otherwise due. Until all Obligations have been fully satisfied, Laurus
shall retain its Lien in all Collateral. Laurus shall have, in addition to
all other rights provided herein and in each Ancillary Agreement, the
rights and remedies of a secured party under the UCC, and under other
applicable law, all other legal and equitable rights to which Laurus may be
entitled, including the right to take immediate possession of the
Collateral, to require Company and/or each Eligible Subsidiary to assemble
the Collateral, at Company's and each Eligible Subsidiaries' joint and
several expense, and to make it available to Laurus at a place designated
by Laurus which is reasonably convenient to both parties and to enter any
of the premises of Company or any Eligible Subsidiary or wherever the
Collateral shall be located, with or without force or process of law, and
to keep and store the same on said premises until sold (and if said
premises be the property of Company or any Eligible Subsidiary, Company
agrees not to charge Laurus for storage thereof), and the right to apply
for the appointment of a receiver for Company's and each Eligible
Subsidiary's property. Further, Laurus may, at any time or times after the
occurrence of an Event of Default, sell and deliver all Collateral held by
or for Laurus at public or private sale for cash, upon credit or otherwise,
at such prices and upon such terms as Laurus, in Laurus' sole discretion,
exercised reasonably, deems advisable or Laurus may otherwise recover upon
the Collateral in any commercially reasonable manner as Laurus, in its sole
discretion, exercised reasonably, deems advisable. The requirement of
reasonable notice shall be met if such notice is mailed postage prepaid to
Company or any such Eligible Subsidiary, as the case may be, at Company's
or such Eligible Subsidiary's address as shown in Laurus' records, at least
ten (10) days before the time of the event of which notice is being given.
Laurus may be the purchaser at any sale, if it is public. In connection
with the exercise of the foregoing remedies, Laurus is granted permission
to use all of Company's and each Eligible Subsidiary's trademarks,
tradenames, tradestyles, patents, patent applications, licenses, franchises
and other proprietary rights. The proceeds of sale shall be applied first
to all costs and expenses of sale, including attorneys' fees, and second to
the payment (in whatever order Laurus elects) of all Obligations. After the
indefeasible payment and satisfaction in full in cash of all of the
Obligations, and after the payment by Laurus of any other amount required
by any provision of law, including Section 608(a)(1) of the Code (but only
after Laurus has received what Laurus considers reasonable proof of a
subordinate party's security interest), the surplus, if any, shall be
paid to Company, such Eligible Subsidiary or its representatives or to
whosoever may be lawfully entitled to receive the same, or as a court of
competent jurisdiction may direct. Each of Company and each Eligible
Subsidiary shall remain jointly and severally liable to Laurus for any
deficiency. In addition, each of Company and each Eligible Subsidiary shall
pay Laurus a liquidation fee ("Liquidation Fee") in the amount offive
percent (5%) of the actual amount collected in respect of each Account
outstanding at any time during a "liquidation period". For purposes hereof,
"liquidation period" means a period: (i) beginning on the earliest date of
(x) an event referred to in Section 19(i) or 19(j), or (y) the cessation of
Company's or any such Eligible Subsidiary's business; and (ii) ending on
the date on which Laurus has actually received all Obligations due and
owing it under this Agreement and the Ancillary Agreements. The Liquidation
Fee shall be paid on the date on which Laurus collects the applicable
Account by deduction from the proceeds thereof Company and Laurus
acknowledge that the actual damages that would be incurred by Laurus after
the occurrence of an Event of Default would be difficult to quantify and
that Company and Laurus have agreed that the fees and obligations set forth
in this Section and in this Agreement would constitute fair and appropriate
liquidated damages in the event of any such termination.
21. Waivers. To the full extent permitted by applicable law, each of Company
and each Eligible Subsidiary hereby waives (a) presentment, demand and
protest, and notice of presentment, dishonor, intent to accelerate,
acceleration, protest, default, nonpayment, maturity, release, compromise,
settlement, extension or renewal of any or all of this Agreement and the
Ancillary Agreements or any other notes, commercial paper, Accounts,
contracts, Documents, Instruments, Chattel Paper and guaranties at any time
held by Laurus on which Company or any such Eligible Subsidiary may in any
way be liable, and hereby ratifies and confirms whatever Laurus may do in
this regard; (b) all rights to notice and a hearing prior to Laurus' taking
possession or control of, or to Laurus' replevy, attachment or levy upon,
any Collateral or any bond or security that might be required by any court
prior to allowing Laurus to exercise any of its remedies; and (c) the
benefit of all valuation, appraisal and exemption laws. Each of Company and
each Eligible Subsidiary acknowledges that it has been advised by counsel
of its choices and decisions with respect to this Agreement, the Ancillary
Agreements and the transactions evidenced hereby and thereby.
22. Expenses. Company shall pay all of Laurus' reasonable out-of-pocket costs
and expenses, including reasonable fees and disbursements of in-house or
outside counsel and appraisers, in connection with the preparation,
execution and delivery of this Agreement and the Ancillary Agreements
subject to Section 5(v) above, and in connection with the prosecution or
defense of any action, contest, dispute, suit or proceeding concerning any
matter in any way arising out of, related to or connected with this
Agreement or any Ancillary Agreement. Company shall also pay all of Laurus'
reasonable fees, charges, out-of-pocket costs and expenses, including fees
and disbursements of counsel and appraisers, in connection with (a) the
preparation, execution and delivery of any waiver, any amendment thereto or
consent proposed or executed in connection with the transactions
contemplated by this Agreement or the Ancillary Agreements, (b) Laurus'
obtaining performance of the Obligations under this Agreement and any
Ancillary Agreements, including, but not limited to, the enforcement or
defense of Laurus' security interests, assignments of rights and Liens
hereunder as valid perfected security interests, (c) any attempt to
inspect, verify, protect, collect, sell, liquidate or otherwise dispose of
any Collateral, (d) any appraisals or re-appraisals of any property (real
or personal) pledged to Laurus by Company or any of its Eligible
Subsidiaries as Collateral for, or any other Person as security for,
Company's Obligations hereunder and (e) any consultations in connection
with any of the foregoing. Company shall also pay Laurus' customary bank
charges for all bank services (including wire transfers) performed or
caused to be performed by Laurus for Company or any of its Eligible
Subsidiaries at Company's or such Eligible Subsidiary's request or in
connection with Company's loan account with Laurus. All such costs and
expenses together with all filing, recording and search fees, taxes and
interest payable by Company to Laurus shall be payable on demand and shall
be secured by the Collateral. If any tax by any Governmental Authority is
or may be imposed on or as a result of any transaction between Company
and/or any Eligible Subsidiary thereof, on the one hand, and Laurus on the
other hand, which Laurus is or may be required to withhold or pay, Company
agrees to indemnify and hold Laurus harmless in respect of such taxes, and
Company will repay to Laurus the amount of any such taxes which shall be
charged to Company's account; and until Company shall furnish Laurus with
indemnity therefor (or supply Laurus with evidence satisfactory to it that
due provision for the payment thereof has been made), Laurus may hold
without interest any balance standing to Company's credit and Laurus shall
retain its Liens in any and all Collateral.
23. Assignment By Laurus. Laurus may assign, with the prior written consent of
Company (which consent shall not be unreasonably withheld or conditioned),
any or all of the Obligations together with any or all of the security
therefor to any Person and any such transferee shall succeed to all of
Laurus' rights with respect thereto. Upon such transfer, Laurus shall be
released from all responsibility for the Collateral to the extent same is
assigned to any transferee. Laurus may from time to time sell or otherwise
grant participations in any of the Obligations and the holder of any such
participation shall, subject to the terms of any agreement between Laurus
and such holder, be entitled to the same benefits as Laurus with respect to
any security for the Obligations in which such holder is a participant.
Company agrees that each such holder may exercise any and all rights of
banker's lien, set-off and counterclaim with respect to its participation
in the Obligations as fully as though Company were directly indebted to
such holder in the amount of such participation.
24. No Waiver; Cumulative Remedies. Failure by Laurus to exercise any right,
remedy or option under this Agreement, any Ancillary Agreement or any
supplement hereto or thereto or any other agreement between Company and
Laurus or delay by Laurus in exercising the same, will not operate as a
waiver; no waiver by Laurus will be effective unless it is in writing and
then only to the extent specifically stated. Laurus' rights and remedies
under this Agreement and the Ancillary Agreements will be cumulative and
not exclusive of any other right or remedy which Laurus may have.
25. Application of Payments. Company irrevocably waives the right to direct the
application of any and all payments at any time or times hereafter received
by Laurus from or on Company's behalf and Company hereby irrevocably agrees
that Laurus shall have the continuing exclusive right to apply and reapply
any and all payments received at any time or times hereafter against the
Obligations hereunder in such manner as Laurus may deem advisable
notwithstanding any entry by Laurus upon any of Laurus' books and records.
26. Indemnity. Company agrees to indemnify and hold Laurus, and its respective
affiliates, employees, attorneys and agents (each, an "Indemnified
Person"), harmless from and against any and all suits, actions,
proceedings, claims, damages, losses, liabilities and expenses of any kind
or nature whatsoever (including attorneys' fees and disbursements and other
costs of investigation or defense, including those incurred upon any
appeal) which may be instituted or asserted against or incurred by any such
Indemnified Person as the result of credit having been extended, suspended
or terminated under this Agreement or any of the Ancillary Agreements or
with respect to the execution, delivery, enforcement, performance and
administration of, or in any other way arising out of or relating to, this
Agreement, the Ancillary Agreements or any other documents or transactions
contemplated by or referred to herein or therein and any actions or
failures to act with respect to any of the foregoing, except to the extent
that any such indemnified liability is finally determined by a court of
competent jurisdiction to have resulted solely from such Indemnified
Person's gross negligence or willful misconduct. NO INDEMNIFIED PERSON
SHALL BE RESPONSIBLE OR LIABLE TO COMPANY OR TO ANY OTHER PARTY OR TO ANY
SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON
ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE,
EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF
CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT
OR ANY ANCILLARY AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION
CONTEMPLATED HEREUNDER OR THEREUNDER.
27. Revival. Company further agrees that to the extent Company makes a payment
or payments to Laurus, which payment or payments or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set
aside and/or required to be repaid to a trustee, receiver or any other
party under any bankruptcy act, state or federal law, common law or
equitable cause, then, to the extent of such payment or repayment, the
obligation or part thereof intended to be satisfied shall be revived and
continued in full force and effect as if said payment had not been made.
28. Notices. Any notice or request hereunder may be given to Company or Laurus
at the respective addresses set forth below or as may hereafter be
specified in a notice designated as a change of address under this Section.
Any notice or request hereunder shall be given by registered or certified
mail, return receipt requested, hand delivery, overnight mail or telecopy
(confirmed by mail). Notices and requests shall be, in the case of those by
hand delivery, deemed to have been given when delivered to any officer of
the party to whom it is addressed, in the case of those by mail or
overnight mail, deemed to have been given three (3) Business Days after the
date when deposited in the mail or with the overnight mail carrier, and, in
the case of a telecopy, when confirmed.
Notices shall be provided as follows:
If to Laurus: Laurus Master Fund, Ltd.
c/o Laurus Capital Management, L.L.C.
000 Xxxxx Xxxxxx 00xx Xx.
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxx X. Xxxxxx, Esq.
Telephone: (000) 000-0000
Telecopier: (000) 000-0000
If to Company or any Eligible Subsidiary: Digital Lifestyles Group, Inc.
1001 S. Capital of Xxxxx Xxxxxxx
Xxxxxxxx X, Xxxxx 000
Xxxxxx, Xxxxx 00000
Attention: Xxxxxxxx X. Xxxxxx
Telephone: 000- 000-0000
Facsimile: 000- 000-0000
With a copy to: Digital Lifestyles Group, Inc.
1001 S. Capital of Xxxxx Xxxxxxx
Xxxxxxxx X, Xxxxx 000
Xxxxxx, Xxxxx 00000
Attention: General Counsel
Telephone: 000-000-0000
Facsimile: 000-000-0000
or such other address as may be designated in writing hereafter in accordance
with this Section 28 by such Person.
29. Governing Law, Jurisdiction and Waiver of Jury Trial. (a) THIS AGREEMENT
AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE.
(b) COMPANY AND EACH ELIGIBLE SUBSIDIARY HEREBY CONSENTS AND AGREES THAT
THE STATE OR FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE
OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE
ANY CLAIMS OR DISPUTES BETWEEN COMPANY AND/OR EACH ELIGIBLE
SUBSIDIARY, ON THE ONE HAND, AND LAURUS, ON THE OTHER HAND, PERTAINING
TO THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS OR TO ANY MATTER
ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OF THE ANCILLARY
AGREEMENTS; PROVIDED, THAT LAURUS, EACH ELIGIBLE SUBSIDIARY AND
COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE
HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF
NEW YORK; AND FURTHER PROVIDED, THAT NOTHING IN THIS AGREEMENT SHALL
BE DEEMED OR OPERATE TO PRECLUDE LAURUS FROM BRINGING SUIT OR TAKING
OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE
OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR
THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN
FAVOR OF LAURUS. EACH OF COMPANY AND EACH ELIGIBLE SUBSIDIARY
EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY
ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND COMPANY HEREBY WAIVES
ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL
JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. EACH OF COMPANY
AND EACH ELIGIBLE SUBSIDIARY HEREBY WAIVES PERSONAL SERVICE OF THE
SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT
AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS
MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO COMPANY AT
THE ADDRESS SET FORTH IN SECTION 28 AND THAT SERVICE SO MADE SHALL BE
DEEMED COMPLETED UPON THE EARLIER OF COMPANY'S OR SUCH ELIGIBLE
SUBSIDIARY'S, AS THE CASE MAY BE, ACTUAL RECEIPT THEREOF OR THREE (3)
DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.
(c) THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING
SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF
THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES
HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR
PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN
CONTRACT, TORT, OR OTHERWISE BETWEEN LAURUS, ANY ELIGIBLE SUBSIDIARY
AND/OR COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL
TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS
AGREEMENT, ANY ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED
THERETO.
30. Limitation of Liability. Company acknowledges and understands that in order
to assure repayment of the Obligations hereunder Laurus may be required to
exercise any and all of Laurus' rights and remedies hereunder and agrees
that, except as limited by applicable law, neither Laurus nor any of
Laurus' agents shall be liable for acts taken or omissions made in
connection herewith or therewith except for actual bad faith, willful
misconduct or gross negligence.
31. Entire Understanding. This Agreement and the Ancillary Agreements contain
the entire understanding between Company and Laurus as to the subject
matter hereof and thereof and any promises, representations, warranties or
guarantees not herein contained shall have no force and effect unless in
writing, signed by Company's, the Eligible Subsidiaries' on the date hereof
and Laurus' respective officers. Neither this Agreement, the Ancillary
Agreements, nor any portion or provisions thereof may be changed, modified,
amended, waived, supplemented, discharged, cancelled or terminated orally
or by any course of dealing, or in any manner other than by an agreement in
writing, signed by the party to be charged.
32. Severability. Wherever possible each provision of this Agreement or the
Ancillary Agreements shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this Agreement or
the Ancillary Agreements shall be prohibited by or invalid under applicable
law such provision shall be ineffective to the extent of such prohibition
or invalidity, without invalidating the remainder of such provision or the
remaining provisions thereof.
33. Captions. All captions are and shall be without substantive meaning or
content of any kind whatsoever.
34. Counterparts; Telecopier Signatures. This Agreement may be executed in one
or more counterparts, each of which shall constitute an original and all of
which taken together shall constitute one and the same agreement. Any
signature delivered by a party via telecopier transmission shall be deemed
to be any original signature hereto.
35. Construction. The parties acknowledge that each party and its counsel have
reviewed this Agreement and that the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party
shall not be employed in the interpretation of this Agreement or any
amendments, schedules or exhibits thereto.
36. Publicity. Company hereby authorizes Laurus to make appropriate
announcements of the financial arrangement entered into by and between
Company and Laurus, including, without limitation, announcements which are
commonly known as tombstones, in such publications and to such selected
parties as Laurus shall in its sole and absolute discretion deem
appropriate, or as required by applicable law.
37. Joinder. It is understood and agreed that any person or entity that desires
to become an Eligible Subsidiary hereunder, or is required to execute a
counterpart of this Agreement after the date hereof pursuant to the
requirements of this Agreement or any Ancillary Agreement, shall become an
Eligible Subsidiary hereunder by (x) executing a Joinder Agreement in form
and substance satisfactory to Laurus, (y) delivering supplements to such
exhibits and annexes to this Agreement and the Ancillary Agreements as
Laurus shall reasonably request and (z) taking all actions as specified in
this Agreement as would have been taken by such Eligible Subsidiary had it
been an original party to this Agreement, in each case with all documents
required above to be delivered to Laurus and with all documents and actions
required above to be taken to the reasonable satisfaction of Laurus.
38. Legends. The Securities shall bear legends as follows;
(a) The Note shall bear substantially the following legend:
"THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE,
STATE SECURITIES LAWS. THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION
OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES
UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
(b) Any shares of Common Stock issued pursuant to conversion of the Note
or exercise of the Warrants, shall bear a legend which shall be in
substantially the following form until such shares are covered by an
effective registration statement filed with the SEC:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS.
THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
(c) The Warrants shall bear substantially the following legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE
UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS
WARRANT OR THE UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
[Balance of page intentionally left blank; signature page follows.]
IN WITNESS WHEREOF, the parties have executed this Security Agreement as of the
date first written above.
DIGITAL LIFESTYLES GROUP, INC.
By: /s/ Xxxxxxxx X. Xxxxxx
------------------------------------------
Name: Xxxxxxxx X. Xxxxxx
Title: Chief Financial Officer
HIP-E OPERATING COMPANY, INC.
By: /s/ Xxxxxxxx X. Xxxxxx
------------------------------------------
Name: Xxxxxxxx X. Xxxxxx
Title: Chief Financial Officer
NORTHGATE OPERATING COMPANY, INC.
By: /s/ Xxxxxxxx X. Xxxxxx
------------------------------------------
Name: Xxxxxxxx X. Xxxxxx
Title: Chief Financial Officer
LAURUS MASTER FUND, LTD.
By: ----------------------------------------
Name: ----------------------------------------
Title: ----------------------------------------
ANNEX A - DEFINITIONS
"Account Debtor" means any Person who is or may be obligated with respect to, or
on account of, an Account.
"Accountants" has the meaning given to such term in Section 11(a).
"Accounts" means all "accounts", as such term is defined in the UCC, now owned
or hereafter acquired by any Person, including: (a) all accounts receivable,
other receivables, book debts and other forms of obligations (other than forms
of obligations evidenced by Chattel Paper or Instruments) (including any such
obligations that may be characterized as an account or contract right under the
UCC); (b) all of such Person's rights in, to and under all purchase orders or
receipts for goods or services; (c) all of such Person's rights to any goods
represented by any of the foregoing (including unpaid sellers' rights of
rescission, replevin, reclamation and stoppage in transit and rights to
returned, reclaimed or repossessed goods); (d) all rights to payment due to such
Person for Goods or other property sold, leased, licensed, assigned or otherwise
disposed of, for a policy of insurance issued or to be issued, for a secondary
obligation incurred or to be incurred, for energy provided or to be provided,
for the use or hire of a vessel under a charter or other contract, arising out
of the use of a credit card or charge card, or for services rendered or to be
rendered by such Person or in connection with any other transaction (whether or
not yet earned by performance on the part of such Person); and (e) all
collateral security of any kind given by any Account Debtor or any other Person
with respect to any of the foregoing.
"Accounts Availability" means the amount of Loans against Eligible Accounts
Laurus shall from time to time make available to Company up to ninety percent
(90%) of the net face amount of Eligible Accounts based on Accounts of the
Company and each Eligible Subsidiary.
"Affiliate" of any Person means (a) any Person (other than a subsidiary) which,
directly or indirectly, is in control of, is controlled by, or is under common
control with such Person, (b) any Person who is a director or officer (i) of
such Person, (ii) of any subsidiary of such Person or (iii) of any Person
described in clause (a) above. For the purposes of this definition, control of a
Person shall mean the power (direct or indirect) to direct or cause the
direction of the management and policies of such Person whether by contract or
otherwise.
"Ancillary Agreements" means, the Notes, the Warrants, the Registration Rights
Agreements, each Security Document and all other agreements, instruments,
documents, mortgages, pledges, powers of attorney, consents, assignments,
contracts, notices, security agreements, trust agreements and guarantees whether
heretofore, concurrently, or hereafter executed by or on behalf of Company or
any other Person or delivered to Laurus, relating to this Agreement or to the
transactions contemplated by this Agreement or otherwise relating to the
relationship between the Company and Laurus.
"Available Minimum Borrowing" shall have the meaning given such term in Section
2(a)(i).
"Books and Records" means all books, records, board minutes, contracts,
licenses, insurance policies, environmental audits, business plans, files,
computer files, computer discs and other data and software storage and media
devices, accounting books and records, financial statements (actual and pro
forma), filings with Governmental Authorities and any and all records and
instruments relating to the Collateral or otherwise necessary or helpful in the
collection thereof or the realization thereupon.
"Business Day" means a day on which Laurus is open for business and that is not
a Saturday, a Sunday or other day on which banks are required or permitted to be
closed in the State of New York.
"Capital Availability Amount" means $7,500,000.
"Charter" shall have the meaning given such term in Section 12(c)(iv).
"Chattel Paper" means all "chattel paper," as such term is defined in the UCC,
including electronic chattel paper, now owned or hereafter acquired by any
Person.
"Closing Date" means the date on which Company shall first receive proceeds of
the initial Loans or the date hereof, if no Loan is made under the facility on
the date hereof.
"Collateral" means all of Company's and each Eligible Subsidiary's property and
assets, whether real or personal, tangible or intangible, and whether now owned
or hereafter acquired, or in which it now has or at any time in the future may
acquire any
right, title or interests including all of the following property in
which it now has or at any time in the future may acquire any right, title or
interest:
(a) all Inventory;
(b) all Equipment;
(c) all Fixtures;
(d) all General Intangibles;
(e) all Accounts;
(f) all Deposit Accounts, other bank accounts and all funds on deposit therein;
(g) all Investment Property;
(h) all Stock;
(i) all Chattel Paper;
(j) all Letter-of-Credit Rights;
(k) all Instruments;
(l) all commercial tort claims set forth on Schedule 1(A);
(m) all Books and Records;
(n) reserved;
(o) all Supporting Obligations including letters of credit and guarantees issued
in support of Accounts, Chattel Paper, General Intangibles and Investment
Property;
(p)(i) all money, cash and cash equivalents and (ii) all cash held as cash
collateral to the extent not otherwise constituting Collateral, all other cash
or property at any time on deposit with or held by Laurus for the account of
Company and/or any Eligible Subsidiary (whether for safekeeping, custody,
pledge, transmission or otherwise); and
(q) all products and Proceeds of all or any of the foregoing, tort claims and
all claims and other rights to payment including (i) insurance claims against
third parties for loss of, damage to, or destruction of, the foregoing
Collateral and (ii) payments due or to become due under leases, rentals and
hires of any or all of the foregoing and Proceeds payable under, or unearned
premiums with respect to policies of insurance covering the Collateral in
whatever form.
"Common Stock" the shares of stock representing the Company's common equity
interests.
"Contract Rate" shall have the meaning set forth in the respective Note.
"Default" means any act or event which, with the giving of notice or passage of
time or both, would constitute an Event of Default.
"Default Rate" has the meaning given to such term in Section 5(a)(iii).
"Deposit Accounts" means all "deposit accounts" as such term is defined in the
UCC, now or hereafter held in the name of any Person, including, without
limitation, the Lockbox Account(s).
"Documents" means all "documents", as such term is defined in the UCC, now owned
or hereafter acquired by any Person, wherever located, including all bills of
lading, dock warrants, dock receipts, warehouse receipts, and other documents of
title, whether negotiable or non-negotiable.
"Eligible Accounts" means and includes each portion of any Account of the
Company and/or each Eligible Subsidiary which conforms to the following
criteria: (a) shipment of the merchandise or the rendition of services has been
completed; (b) no return, rejection or repossession of the merchandise has
occurred; (c) merchandise or services shall not have been rejected or disputed
by the Account Debtor and there shall not have been asserted any offset, defense
or counterclaim, except that, if the Account Debtor has rejected, disputed or
asserted any offset, defense or counterclaim with respect to only a portion of
an Account and has otherwise indicated its intention to pay the remaining
portion of such Account (and such Account is otherwise eligible as set forth
herein), then the portion that the Account Debtor has indicated its intention to
pay shall be an Eligible Account; (d) continues to be in full conformity with
the representations and warranties made by Company to Laurus with respect
thereto; (e) Laurus is, and continues to be, satisfied with the credit standing
of the Account Debtor in relation to the amount of credit extended; (f) there
are no facts existing or threatened which are reasonably likely to result in any
material adverse change in an Account Debtor's financial condition; (g) is
documented by an invoice in a form approved by Laurus, in the exercise of its
reasonable discretion, and shall not be unpaid more than ninety (90) days from
invoice date; (h) not more than twenty-five percent (25%) of the unpaid amount
of invoices due from such Account Debtor remains unpaid more than ninety (90)
days from invoice date; (i) is not evidenced by chattel paper or an instrument
of any kind with respect to or in payment of the Account unless such instrument
is duly endorsed to and in possession of Laurus or represents a check in payment
of an Account; (j) the Account Debtor is located in United States; provided,
however, Laurus may, from time to time, in the exercise of its sole discretion
and based upon satisfaction of certain conditions to be determined at such time
by Laurus, deem certain Accounts as Eligible Accounts notwithstanding that such
Account is due from an Account Debtor located outside of United States (Laurus
acknowledges that, so long as such Account is otherwise eligible as set forth
herein, the Account of The Business Depot, Ltd., is deemed an Eligible Account,
notwithstanding that such Account Debtor is located in Canada); (k) Laurus has a
first priority perfected Lien in such Account and such Account is not subject to
any Lien other than Permitted Liens; (l) does not arise out of transactions with
any employee, officer, director, stockholder or Affiliate of Company; (m) is
payable to Company; (n) does not arise out of a xxxx and hold sale prior to
shipment and does not arise out of a sale to any Person to which Company is
indebted; (o) is net of any returns, discounts, claims, credits and allowances;
(p) if the Account arises out of contracts between Company, on the one hand, and
the United States, any state, or any department, agency or instrumentality of
any of them, on the other hand, Company has so notified Laurus, in writing,
prior to the creation of such Account, and there has been compliance with any
governmental notice or approval requirements, including compliance with the
Federal Assignment of Claims Act; (q) is a good and valid account representing
an undisputed bona fide indebtedness incurred by the Account Debtor therein
named, for a fixed sum as set forth in the invoice relating thereto with respect
to an unconditional sale and delivery upon the stated termsof goods sold by
Company or work, labor and/or services rendered by Company; (r) does not arise
out of progress xxxxxxxx prior to completion of the order; (s) the total unpaid
Accounts from such Account Debtor does not exceed fifty-five percent (55%) of
all Eligible Accounts (provided, however, only that portion of such Account that
exceeds 55% shall be excluded as ineligible); (t) Company's right to payment is
absolute and not contingent upon the fulfillment of any condition whatsoever;
(u) Company is able to bring suit and enforce its remedies against the Account
Debtor through judicial process; (v) does not represent interest payments, late
or finance charges owing to Company and (w) is otherwise satisfactory to Laurus
as determined by Laurus in the exercise of its sole discretion exercised
reasonably and in good faith. In the event Company requests that Laurus include
within Eligible Accounts certain Accounts of one or more of Company's
acquisition targets, Laurus shall at the time of such request consider such
inclusion, but any such inclusion shall be at the sole option of Laurus and
shall at all times be subject to the execution and delivery to Laurus of all
such documentation (including, without limitation, guaranty and security
documentation) as Laurus may require in its sole discretion.
"Eligible Inventory" means Inventory owned by Company and/or any Eligible
Subsidiary which Laurus, in its sole and absolute discretion exercised
reasonably and in good faith, determines: (a) is subject to a first priority
perfected Lien in favor of Laurus and is subject to no other Liens whatsoever
(other than Permitted Liens); (b) is located on premises with respect to which
Laurus has received a landlord or mortgagee waiver acceptable in form and
substance to Laurus; (c) is not in transit; (d) is in good condition and meets
all standards imposed by any governmental agency, or department or division
thereof having regulatory Governmental Authority over such Inventory, its use or
sale including the Federal Fair Labor Standards Act of 1938 as amended, and all
rules, regulations and orders thereunder; (e) is currently either usable or
salable in the normal course of business; (f) is not placed by Company on
consignment or held by Company on consignment from another Person; (g) is in
conformity with the representations and warranties made by Company to Laurus
with respect thereto; (h) is not subject to any licensing, patent, royalty,
trademark, trade name or copyright agreement with any third parties; (i) does
not require the consent of any Person for the completion of manufacture, sale or
other disposition of such Inventory and such completion, manufacture or sale
does not constitute a breach or default under any contract or agreement to which
Company is a party or to which such Inventory is or may be subject; (j) is not
work-in-process; (k) is covered by casualty insurance acceptable to Laurus; and
(l) not to be ineligible for any other reason. In no event shall any Loan(s)
made in respect of Eligible Inventory exceed $1,500,000 in the aggregate,
outstanding at any time.
"Eligible Subsidiary" shall mean each of HIP-E and Northgate and each other
subsidiary of the Company consented to in writing by Laurus to be included as an
"Eligible Subsidiary" for the purposes of this Agreement.
"Equipment" means all "equipment" as such term is defined in the UCC, now owned
or hereafter acquired by any Person, wherever located, including any and all
machinery, apparatus, equipment, fittings, furniture, fixtures, motor vehicles
and other tangible personal property (other than Inventory) of every kind and
description that may be now or hereafter used in such Person's operations or
that are owned by such Person or in which such Person may have an interest, and
all parts, accessories and accessions thereto and substitutions and replacements
therefor.
"Event of Default" means the occurrence of any of the events set forth in
Section 19.
"Excepted Issuances" shall have the meaning given such term in Section 13(t).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Act Filings" shall have the meaning given to such term in Section 12.
"Exclusion Period" shall have the meaning given such term in Section 13(t).
"Fixtures" means all "fixtures" as such term is defined in the UCC, now owned or
hereafter acquired by any Person.
"Formula Amount" has the meaning set forth in Section 2(a)(i).
"GAAP" means generally accepted accounting principles, practices and procedures
in effect from time to time in the United States of America.
"General Intangibles" means all "general intangibles" as such term is defined in
the UCC (excluding all Intellectual Property), now owned or hereafter acquired
by any Person including all right, title and interest that such Person may now
or hereafter have in or under any contract, all Payment Intangibles, customer
lists, Licenses interests in partnerships, joint ventures and other business
associations, permits, proprietary or confidential information, inventions
(whether or not patented or patentable), technical information, procedures,
designs, knowledge, know-how, Software, data bases, data, skill, expertise,
experience, processes, models, drawings, materials, Books and Records, Goodwill
(excluding the Goodwill associated with any Intellectual Property), all rights
and claims in or under insurance policies (including insurance for fire, damage,
loss, and casualty, whether covering personal property, real property, tangible
rights or intangible rights, all liability, life, key-person, and business
interruption insurance, and all unearned premiums), uncertificated securities,
choses in action, deposit accounts, rights to receive tax refunds and other
payments, rights to received dividends, distributions, cash, Instruments and
other property in respect of or in exchange for pledged Stock and Investment
Property, and rights of indemnification.
"Goods" means all "goods", as such term is defined in the UCC, now owned or
hereafter acquired by any Person, wherever located, including embedded software
to the extent included in "goods" as defined in the UCC, manufactured homes,
standing timber that is cut and removed for sale and unborn young of animals.
"Goodwill" means all goodwill, trade secrets, proprietary or confidential
information, technical information, procedures, formulae, quality control
standards, designs, operating and training manuals, customer lists, and
distribution agreements now owned or hereafter acquired by any Person.
"Governmental Authority" means any nation or government, any state or other
political subdivision thereof, and any agency, department or other entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"Hazardous Materials" shall have the meaning given such term in Section 12(q).
"Indemnified Person" shall have the meaning given to such term in Section 26.
"Initial Term" means the Closing Date through the close of business on the day
immediately preceding the third anniversary of the Closing Date, subject to
acceleration at the option of Laurus upon the occurrence of an Event of Default
hereunder or other termination hereunder.
"Instruments" means all "instruments", as such term is defined in the UCC, now
owned or hereafter acquired by any Person, wherever located, including all
certificated securities and all promissory notes and other evidences of
indebtedness, other than instruments that constitute, or are a part of a group
of writings that constitute, Chattel Paper.
Intellectual Property" means any and all patents, trademarks, service marks,
trade names, copyrights, trade secrets, Licenses, information and other
proprietary rights and processes.
"Inventory" means all "inventory", as such term is defined in the UCC, now owned
or hereafter acquired by any Person, wherever located, including all inventory,
merchandise, goods and other personal property that are held by or on behalf of
such Person for sale or lease or are furnished or are to be furnished under a
contract of service or that constitute raw materials, work in process, finished
goods, returned goods, or materials or supplies of any kind, nature or
description used or consumed or to be used or consumed in such Person's business
or in the processing, production, packaging, promotion, delivery or shipping of
the same, including all supplies and embedded software.
"Inventory Availability" means the amount of Loans against Eligible Inventory
Laurus shall from time to time make available to Company equal to the lesser of
(a) fifty percent (50%) of the aggregate value of Company's and each Eligible
Subsidiary's Eligible Inventory (calculated on the basis of the lower of cost or
market, on a first-in first-out basis) and (b) $1,500,000.
"Investment Property" means all "investment property", as such term is defined
in the UCC, now owned or hereafter acquired by any Person, wherever located.
"Letter-of-Credit Rights" means "letter-of-credit rights" as such term is
defined in the UCC, now owned or hereafter acquired by any Person, including
rights to payment or performance under a letter of credit, whether or not such
Person, as beneficiary, has demanded or is entitled to demand payment or
performance.
"License" means any rights under any written agreement now or hereafter acquired
by any Person to use any trademark, trademark registration, copyright, copyright
registration or invention for which a patent is in existence or other license of
rights or interests now held or hereafter acquired by any Person.
"Lien" means any mortgage, security deed, deed of trust, pledge, hypothecation,
assignment, security interest, lien (whether statutory or otherwise), charge,
claim or encumbrance, or preference, priority or other security agreement or
preferential arrangement held or asserted in respect of any asset of any kind or
nature whatsoever including any conditional sale or other title retention
agreement, any lease having substantially the same economic effect as any of the
foregoing, and the filing of, or agreement to give, any financing statement
under the UCC or comparable law of any jurisdiction.
"Loans" shall have the meaning set forth in Section 2(a)(i) and shall include
all other extensions of credit hereunder and under any Ancillary Agreement.
"Material Adverse Effect" means a material adverse effect on (a) on the
business, assets, liabilities, condition (financial or otherwise), properties,
operations or prospects of Company or any of its Eligible Subsidiaries (taken as
a whole), (b) the ability of Company and its Eligible Subsidiaries to pay or
perform the Obligations in accordance with the terms hereof or any Ancillary
Agreement, (c) the value of the Collateral, the Liens on the Collateral or the
priority of any such Lien or (d) the practical realization of the benefits of
Laurus' rights and remedies under this Agreement and the Ancillary Agreements.
"Maximum Legal Rate" shall have the meaning given to such term in Section
5(a)(iv).
"Minimum Borrowing Amount" means $2,750,000, which such aggregate amount shall
be evidenced by Minimum Borrowing Notes.
"Minimum Borrowing Notes" shall mean each Secured Convertible Note, which shall
be issued in a series, made by Company in favor of Laurus to evidence the
Minimum Borrowing Amount.
"NASD" shall have the meaning given to such term in Section 13(b).
"Note Shares" shall have the meaning given such term in Section 12(a).
"Notes" means each of the Minimum Borrowing Notes and the Revolving Note made by
Company in favor of Laurus in connection with the transactions contemplated
hereby, as the same may be amended, modified and supplemented from time to time,
as applicable.
"Obligations" means all Loans, all advances, debts, liabilities, obligations,
covenants and duties owing by Company or any of its Eligible Subsidiaries to
Laurus (or any corporation that directly or indirectly controls or is controlled
by or is under common control with Laurus) of every kind and description
(whether or not evidenced by any note or other instrument and whether or not for
the payment of money or the performance or non-performance of any act), direct
or indirect, absolute or contingent, due or to become due, contractual or
tortious, liquidated or unliquidated, whether existing by operation of law or
otherwise now existing or hereafter arising including any debt, liability or
obligation owing from Company or any of its Eligible Subsidiaries to others
(other than unsecured trade payables) which Laurus may have obtained by
assignment or otherwise and further including all interest (including interest
accruing at the then applicable rate provided in this Agreement after the
maturity of the Loans and interest accruing at the then applicable rate provided
in this Agreement after the filing of any petition in bankruptcy, or the
commencement of any insolvency, reorganization or like proceeding, whether or
not a claim for post-filing or post-petition interest is allowed in such
proceeding), charges or any other payments Company or any of its Eligible
Subsidiaries is required to make by law or otherwise arising under or as a
result of this Agreement and the Ancillary Agreements, together with all
reasonable expenses and reasonable attorneys' fees chargeable to Company's or
any of its Eligible Subsidiary's account or incurred by Laurus in connection
with Company's or any of its Eligible Subsidiary's account whether provided for
herein or in any Ancillary Agreement.
"Payment Intangibles" means all "payment intangibles" as such term is defined in
the UCC, now owned or hereafter acquired by any Person, including, a General
Intangible under which the Account Debtor's principal obligation is a monetary
obligation.
"Permitted Liens" means (a) Liens of carriers, warehousemen, artisans, bailees,
mechanics and materialmen incurred in the ordinary course of business securing
sums not overdue; (b) Liens incurred in the ordinary course of business in
connection with worker's compensation, unemployment insurance or other forms of
governmental insurance or benefits, relating to employees, securing sums (i) not
overdue or (ii) being diligently contested in good faith provided that adequate
reserves with respect thereto are maintained on the books of the Company or any
Eligible Subsidiary thereof in conformity with GAAP; (c) Liens in favor of
Laurus; (d) Liens for taxes (i) not yet due or (ii) being diligently contested
in good faith by appropriate proceedings, provided that adequate reserves with
respect thereto are maintained on the books of the Company or any Eligible
Subsidiary thereof in conformity with GAAP provided, that, the Lien shall have
no effect on the priority of Liens in favor of Laurus or the value of the assets
in which Laurus has a Lien; (e) Purchase Money Liens securing Purchase Money
Indebtedness to the extent permitted in this Agreement and (f) Liens specified
on Schedule 2 hereto.
"Person" means any individual, sole proprietorship, partnership, limited
liability partnership, joint venture, trust, unincorporated organization,
association, corporation, limited liability company, institution, public benefit
corporation, entity or government (whether federal, state, county, city,
municipal or otherwise, including any instrumentality, division, agency, body or
department thereof), and shall include such Person's successors and assigns.
"Proceeds" means "proceeds", as such term is defined in the UCC and, in any
event, shall include: (a) any and all proceeds of any insurance, indemnity,
warranty or guaranty payable to Company, any Eligible Subsidiary or any other
Person from time to time with respect to any Collateral; (b) any and all
payments (in any form whatsoever) made or due and payable to Company or any
Eligible Subsidiary from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of any Collateral by any
governmental body, governmental authority, bureau or agency (or any person
acting under color of governmental authority); (c) any claim of Company or any
Eligible Subsidiary against third parties (i) for past, present or future
infringement of any Intellectual Property or (ii) for past, present or future
infringement or dilution of any trademark or trademark license or for injury to
the goodwill associated with any trademark, trademark registration or trademark
licensed under any trademark License; (d) any recoveries by Company or any
Eligible Subsidiary against third parties with respect to any litigation or
dispute concerning any Collateral, including claims arising out of the loss or
nonconformity of, interference with the use of, defects in, or infringement of
rights in, or damage to, Collateral; (e) all amounts collected on, or
distributed on account of, other Collateral, including dividends, interest,
distributions and Instruments with respect to Investment Property and pledged
Stock; and (f) any and all other amounts, rights to payment or other property
acquired upon the sale, lease, license, exchange or other disposition of
Collateral and all rights arising out of Collateral.
"Purchase Money Indebtedness" means (a) any indebtedness incurred for the
payment of all or any part of the purchase price of any fixed asset, including
indebtedness under capitalized leases, (b) any indebtedness incurred for the
sole purpose of
financing or refinancing all or any part of the purchase price of any fixed
asset, and (c) any renewals, extensions or refinancings thereof (but not any
increases in the principal amounts thereof outstanding at that time).
"Purchase Money Lien" means any Lien upon any fixed assets that secures the
Purchase Money Indebtedness related thereto but only to the extent such Lien
relates solely to the asset the purchase price of which was financed or
refinanced through the incurrence of the Purchase Money Indebtedness secured by
such Lien and only if such Lien secures only such Purchase Money Indebtedness.
"Registration Rights Agreement" means the registration rights agreement entered
into between Company and Laurus on the Closing Date, as amended, modified and
supplemented from time to time.
"Revolving Note" means that secured revolving note made by Company in favor of
Laurus in the aggregate principal amount of Four Million Seven Hundred Fifty
Thousand Dollars ($4,750,000).
"SEC" shall mean the Securities and Exchange Commission.
"SEC Reports" shall have the meaning provided such term in Section 12(u).
"Securities" means the Notes and the Warrants being issued by Company to Laurus
pursuant to this Agreement and the Ancillary Agreements and the Note Shares and
the Warrant Shares.
"Securities Act" shall have the meaning given such term in Section 12(r).
"Security Documents" means all security agreements, mortgages, cash collateral
deposit letters, pledges and other agreements which are executed by the Company
or any of its Eligible Subsidiaries in favor of Laurus to secure the
Obligations.
"Software" means all "software" as such term is defined in the UCC, now owned or
hereafter acquired by any Person, including all computer programs and all
supporting information provided in connection with a transaction related to any
program.
"Stock" means all certificated and uncertificated shares, options, warrants,
membership interests, general or limited partnership interests, participation or
other equivalents (regardless of how designated) of or in a corporation,
partnership, limited liability company or equivalent entity whether voting or
nonvoting, including common stock, preferred stock, or any other "equity
security" (as such term is defined in Rule 3a11-1 of the General Rules and
Regulations promulgated by the SEC under the Securities Exchange Act of 1934).
"Subsidiary" of any Person means (i) a corporation or other entity whose shares
of stock or other ownership interests having ordinary voting power (other than
stock or other ownership interests having such power only by reason of the
happening of a contingency) to elect a majority of the directors of such
corporation, or other persons or entities performing similar functions for such
person or entity, are owned, directly or indirectly, by such person or entity or
(ii) a corporation or other entity in which such person or entity owns, directly
or indirectly, more than 50% of the equity interests at such time.
"Supporting Obligations" means all "supporting obligations" as such term is
defined in the UCC.
"Term" means, as applicable, the Initial Term.
"UCC" means the Uniform Commercial Code as the same may, from time to time be in
effect in the State of New York; provided, that in the event that, by reason of
mandatory provisions of law, any or all of the attachment, perfection or
priority of, or remedies with respect to, Laurus' Lien on any Collateral is
governed by the Uniform Commercial Code as in effect in a jurisdiction other
than the State of New York, the term "UCC" shall mean the Uniform Commercial
Code as in effect in such other jurisdiction for purposes of the provisions of
this Agreement relating to such attachment, perfection, priority or remedies and
for purposes of definitions related to such provisions; provided further, that
to the extent that UCC is used to define any term herein or in any Ancillary
Agreement and such term is defined differently in different Articles or
Divisions of the UCC, the definition of such term contained in Article or
Division 9 shall govern.
"Warrant Shares" shall have the meaning given such term in Section 12(a).
"Warrants" has the meaning set forth in the Registration Rights Agreement.
