EXHIBIT 10.1
SECURITY AGREEMENT
This Security Agreement is made as of May 17, 2005 by and
between LAURUS MASTER FUND, LTD., a Cayman Islands corporation ("Laurus"), and
RIVIERA TOOL COMPANY, a Michigan corporation (the "Company").
BACKGROUND
Company has requested that Laurus make advances available to
Company; and
Laurus has agreed to make such advances to Company on the
terms and conditions set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings and the terms and conditions contained herein, the parties hereto
agree as follows:
1. (a) General Definitions. In addition to the terms defined
elsewhere in this Agreement, 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 that are not specifically defined shall have the meanings customarily
given them in accordance with GAAP and all financial computations shall be
computed, unless specifically provided herein, in accordance with GAAP
consistently applied.
(c) Other Terms. All other terms used in this Agreement and
defined in the UCC, shall have the meaning given therein unless otherwise
defined herein.
(d) Rules of Construction. All Schedules, Addenda, Annexes and
Exhibits hereto or expressly identified to this Agreement are incorporated
herein by reference and taken together with this Agreement constitute but a
single agreement. The words "herein", "hereof" and "hereunder" or other words of
similar import refer to this Agreement as a whole, including the Exhibits,
Addenda, Annexes and Schedules thereto, as the same may be from time to time
amended, modified, restated or supplemented, and not to any particular section,
subsection or clause contained in this Agreement. Wherever from the context it
appears appropriate, each term stated in either the singular or plural shall
include the singular and the plural, and pronouns stated in the masculine,
feminine or neuter gender shall include the masculine, the feminine and the
neuter. The term "or" is not exclusive. The term "including" (or any form
thereof) shall not be limiting or exclusive. All references to statutes and
related regulations shall include any amendments of same and any successor
statutes and regulations. All references in this Agreement or in the Schedules,
Addenda, Annexes and Exhibits to this Agreement to sections, schedules,
disclosure schedules, exhibits, and attachments shall refer to the
corresponding sections, schedules, disclosure schedules, exhibits, and
attachments of or to this Agreement. All references to any instruments or
agreements, including references to any of this Agreement or the Ancillary
Agreements shall include any and all modifications or amendments thereto and any
and all extensions or renewals thereof.
2. Loans. (a)(i) Subject to the terms and conditions set forth
herein and in the Ancillary Agreements, Laurus shall make loans to Company from
time to time during the Term which, in the aggregate at any time outstanding,
will not exceed the lesser of (x) (I) the Capital Availability Amount minus (II)
such reserves as Laurus may reasonably in its good faith judgment deem proper
and necessary from time to time (the "Reserves") or (y) an amount equal to (I)
the Accounts Availability plus (II) the Inventory Availability, minus (III) the
Reserves (the "Loans"). The amount derived at any time from Section
2(a)(i)(y)(I) plus Section 2(a)(i)(y)(II) minus 2(a)(i)(y)(III) shall be
referred to as the "Formula Amount". 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 $1,000,000 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 $2,000,000, to the extent that the outstanding balance on
Minimum Borrowing Note shall be less than $1,000,000 (the difference of
$2,000,000 less the actual balance of the Minimum Borrowing Note, the "Available
Minimum Borrowing"), such portion of the balance of the Revolving Note as shall
equal the Available Minimum Borrowing shall be deemed to be simultaneously
extinguished on the Revolving Note and transferred to, and evidenced by, the
Minimum Borrowing Note. Notwithstanding the immediately foregoing, no more than
an aggregate of two (2) Minimum Borrowing Notes shall be issued by Company
pursuant hereto without the express prior written consent of Company.
(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 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 to Laurus when due, Company shall
thereby be deemed to have requested, and Laurus is hereby authorized at its
discretion to make and charge to Company's account, a Loan to Company as of such
date in an amount equal to such unpaid interest, fees, costs or charges.
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(v) Laurus will account to Company monthly with a
statement of all Loans and other advances,
charges and payments made pursuant to this Agreement, and such account rendered
by Laurus shall be deemed final, binding and conclusive unless Laurus is
notified by Company in writing to the contrary within thirty (30) days of the
date each account was rendered specifying the item or items to which objection
is made.
(vi) During the Term, Company may borrow and prepay
Loans in accordance with the terms and
conditions hereof and as provided in the Notes.
(vii) If any Eligible Account is not paid by the
Account Debtor within one hundred twenty (120) 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 for the
amount of the Loans made with respect to such Delinquent Account in the amount
of such deduction, dispute contingency, set-off or other claim, plus an
adjustment fee in an amount equal to one-half of one percent (0.50%) of the
gross face amount of such Eligible Account or (ii) immediately replace such
Delinquent Account with an otherwise Eligible Account.
(b) Minimum Borrowing Amount. After a registration statement
registering the Registrable Securities 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 any 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) corresponding amounts of all
outstanding Loans (not attributable to the then outstanding Minimum Borrowing
Amount) existing on or made after the First Conversion Date will be aggregated
until they reach the sum of $1,000,000 and (ii) Company will issue a new
(serialized) Minimum Borrowing Note to Laurus in respect of such $1,000,000
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.
3. Repayment of the Loans. Company (a) may prepay the Obligations from
time to time in accordance with the terms and provisions of the Notes (and
Section 17 hereof if such prepayment is due to a termination of this Agreement);
and (b) shall repay on the expiration of the Term (i) the then aggregate
outstanding principal balance of the Loans made by Laurus to Company hereunder
together with accrued and unpaid interest, fees and charges and (ii) all other
amounts owed Laurus under this Agreement and the Ancillary Agreements. Any
payments of principal, interest, fees or any other amounts payable hereunder or
under any Ancillary Agreement shall be made prior to 2:00 p.m. (New York time)
on the due date thereof in immediately available funds, provided, however, that
if such amount is due on a date that is not a Business Day, such amount shall be
due on the next following Business Day.
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4. Procedure for Loans. Each request for a borrowing of Loans hereunder
shall be made to Laurus in writing by the Company no later than 12:00 noon (New
York time) on a day that is one (1) Business Day prior to the date of such
requested borrowing. 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 designated 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,
Company shall pay interest at the Contract Rate
on the unpaid principal balance of each Loan until such time as such Loan is
collected in full in good funds in dollars of the United States of America.
(ii) Interest and payments shall be computed on the
basis of actual days elapsed in a year of 360 days. At Laurus' option, Laurus
may charge Company's account for any accrued but unpaid 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, shall continue to accrue
interest from the date of such Event of Default at the Default Rate applicable
to such Obligations.
(iv) In no event shall the aggregate interest payable
hereunder 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.
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(b) Payments.
(i) Closing/Annual Payments. Upon execution of this
Agreement by Company and Laurus, Company shall
pay to Laurus Capital Management, LLC a closing payment in an amount equal to
three and six tenths percent (3.60%) of the Capital Availability Amount. Such
payment shall be deemed fully earned on the Closing Date and shall not be
subject to rebate or proration for any reason.
(ii) Overadvance Payment. Without affecting Laurus'
rights hereunder in the event the Loans exceed
the Formula Amount (each such 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.
(iii) 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 (or portion thereof) for each such failure
until such failure is cured to Laurus' satisfaction or waived in writing by
Laurus. Such fee shall be charged to Company's account upon written notice by
Laurus to Company of each such failure.
(iv) Expenses. 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, and expenses incurred in connection with
Laurus' due diligence review of 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 be $52,500, plus such additional documented
reasonable fees and expenses incurred by Laurus in connection with any required
third party appraisals and/or extraordinary diligence, 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,
Company hereby assigns, pledges and grants to Laurus a continuing security
interest in and Lien upon all of the Collateral as set forth in that certain
Master Security Agreement dated as of the date hereof between Company and
Laurus. All of Company's Books and Records relating to the Collateral shall,
until delivered to or removed by Laurus, be kept by Company in trust for Laurus
until all Obligations have been paid in full. Each confirmatory assignment
schedule or other form of assignment hereafter executed by Company shall be
deemed to include the foregoing grant, whether or not the same appears therein.
(b) Company hereby authorizes Laurus to file any financing
statements, continuation statements or amendments thereto that (x) indicate the
Collateral (1) as all assets of Company or words of similar effect, regardless
of whether any
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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. Company acknowledges
that it is not authorized to file any financing statement or amendment or
termination statement with respect to any financing statement without the prior
written consent of Laurus and agrees that it will not do so without the prior
written consent of Laurus, subject to Company's rights under Section 9-509(d)(2)
of the UCC.
(c) Upon the occurrence and during the continuance of an Event
of Default and only to the extent Company has the legal right to do so, Company
hereby grants to Laurus an irrevocable, non-exclusive license (exercisable upon
the termination of this Agreement due to an occurrence and during the
continuance of an Event of Default without payment of royalty or other
compensation to Company) to use, transfer, license or sublicense any
Intellectual Property now owned, licensed to, or hereafter acquired by Company,
and wherever the same may be located, and including in such license access to
all media in which any of the licensed items may be recorded or stored and to
all computer and automatic machinery software and programs used for the
compilation or printout thereof, and represents, promises and agrees that any
such license or sublicense is not and will not be in conflict with the
contractual or commercial rights of any third Person; provided, that such
license will terminate on the termination of this Agreement and the payment in
full of all Obligations.
7. [RESERVED].
8. Payment of Accounts.
(a) Within 15 days of the Closing Date, Company will
irrevocably direct all of its present and future Account Debtors and other
Persons obligated to make payments constituting Collateral to make such payments
directly to the lockboxes maintained by Company (the "Lockboxes") with North
Fork Bank (the "Lockbox Bank") pursuant to the terms of the certain agreements
among Company, Laurus and/or the Lockbox Bank dated as of May 17, 2005. On or
prior to the Closing Date, Company shall and shall cause the Lockbox Bank to
enter into all such documentation acceptable to Laurus pursuant to which, among
other things, the Lockbox Bank agrees to: (a) sweep the Lockboxes 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 Lockboxes. All of Company's invoices, account statements
and other written or oral communications directing, instructing, demanding or
requesting payment of any Account of Company or any other amount constituting
Collateral shall conspicuously direct that all payments be made to the Lockboxes
or such other address as Laurus may direct in writing. If, notwithstanding the
instructions to Account Debtors, Company receives any payments, Company shall
immediately remit such payments to Laurus in their original form with all
necessary endorsements. Until so remitted, Company shall hold all such payments
in trust for and as the property of Laurus and shall not commingle such payments
with any of its other funds or property.
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(b) At Laurus' election, following the occurrence of an Event
of Default which is continuing, Laurus may notify Company's Account Debtors of
Laurus' security interest in the Accounts, collect them directly and charge the
collection costs and expenses thereof to Company's and the Eligible Subsidiaries
joint and several account.
(c) All payments to Laurus pursuant to this Section 8 shall be
applied to and reduce amounts due Laurus under the Revolving Note and any
Minimum Borrowing Notes. To the extent amounts paid to Laurus pursuant to this
Section 8 exceed the outstanding balance under the Revolving Note and any
Minimum Borrowing Notes then outstanding, Laurus shall remit such funds to
Company by wire transfer within one (1) business day.
9. Collection and Maintenance of Collateral.
(a) Laurus may verify Company's Accounts from time to time,
but not more often than once every three (3) months unless an Event of Default
has occurred and is continuing, utilizing an audit control company or any other
agent of Laurus.
(b) Proceeds of Accounts received by Laurus will be deemed
received on the 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, it shall (i)
apply such proceeds, as required, to amounts outstanding under the Notes, and
(ii) remit all such remaining proceeds (net of interest, fees and other amounts
then due and owing to Laurus hereunder) to Company 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 Company hereby grants to Laurus a security interest in such cash collateral
amounts as security for the Obligations and/or (c) do any combination of the
foregoing.
10. [RESERVED].
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 consolidating and consolidated
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basis to include all Subsidiaries and Affiliates, all in reasonable detail and
prepared in accordance with GAAP, together with (i) if and when available,
copies of any management letters prepared by 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 consolidating and consolidated basis to include all
Subsidiaries and Affiliates, in reasonable detail and stating in comparative
form the figures for the corresponding date and periods in the previous year,
all prepared in accordance with GAAP, subject to year-end adjustments and
accompanied by a certificate of 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 Accounts, unaudited
trial balances and their accounts payable and a calculation of Company's
Accounts, Eligible Accounts, Inventory and/or Eligible Inventory, provided,
however, that if Laurus shall request the foregoing information more often than
as set forth in the immediately preceding clause, Company shall have thirty (30)
days from each such request to comply with Laurus' demand; and
(d) Promptly after (i) the filing thereof, copies of Company's
most recent registration statements and annual, quarterly, monthly or other
regular reports which Company files with the SEC, and (ii) the issuance thereof,
copies of such financial statements, reports and proxy statements as Company
shall send to its stockholders.
12. Additional Representations and Warranties. Except as set forth on
the Schedules delivered by Company to Laurus prior to the execution of this
Agreement which hereby is incorporated by reference in and constitutes an
integral part of this Agreement (the "Schedules"), or except as set forth in the
SEC Reports (as defined below), Company hereby represents and warrants to Laurus
as follows:
(a) Organization, Good Standing and Qualification. Company is
a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization. Company has the corporate power and
authority to own and operate its properties and assets, to execute and deliver
this Agreement and the Ancillary Agreements, to issue and sell the Notes and the
shares of Common Stock issuable upon conversion of the Minimum Borrowing Note
(the "Note Shares"), to issue and sell the
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Options and the shares of Common Stock issuable upon conversion of the Options
(the "Option Shares"), and to carry out the provisions of this Agreement and the
Ancillary Agreements and to carry on its business as presently conducted.
Company is duly qualified and is authorized to do business and is in good
standing as a foreign corporation in all jurisdictions, except for those
jurisdictions in which the failure to do so has not had, or could not reasonably
be expected to have, individually or in the aggregate, a Material Adverse
Effect.
(b) Subsidiaries. Company does not have any Subsidiaries.
(c) Capitalization; Voting Rights.
(i) The authorized capital stock of the Company, as
of the date hereof consists of 9,990,575
shares, of which 9,785,575 are shares of Common Stock, no par value, 3,774,346
shares of which are issued and outstanding, and 205,000 are shares of preferred
stock, no par value of which no shares of preferred stock are issued and
outstanding.
(ii) Other than: (i) the shares reserved for issuance
under Company's stock option plans; and (ii)
shares which may be granted 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. Neither the
offer, issuance or sale of any of the Notes or the Options, or the issuance of
any of the Note Shares or Option 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) To the knowledge of Company, 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. For the purposes of this
Agreement, "knowledge of Company" and all derivatives thereof, shall mean the
actual knowledge, after due inquiry, of each of Xxxxxxx Xxxxx and/or Xxxxx
Xxxxxx on the date hereof.
(iv) The rights, preferences, privileges and
restrictions of the shares of the Common Stock are as
stated in Company's Certificate of Incorporation, as amended (the "Charter").
The Note Shares and Option Shares have been duly and validly reserved for
issuance. When issued in compliance with the provisions of this Agreement 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.
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(d) Authorization; Binding Obligations. All corporate action
on the part of Company (including its officers and directors) necessary for the
authorization of this Agreement and the Ancillary Agreements, the performance of
all obligations of Company hereunder and under the other Ancillary Agreements at
the Closing and, the authorization, sale, issuance and delivery of the Notes and
Options has been taken or will be taken prior to the Closing. This Agreement and
the Ancillary Agreements, when executed and delivered by it and all parties
thereto, to the extent it is a party thereto, will be valid and binding
obligations of Company, enforceable against it in accordance with their terms,
except:
(i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of
general application affecting enforcement of creditors' rights; and
(ii) general principles of equity that restrict the
availability of equitable or legal remedies.
The issuance of the 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 Options and the subsequent exercise of the Options for
Option 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) Controls and Procedures.
(i) Company has established and maintains "disclosure
controls and procedures" (as defined in Rules
13a-15(f) and 15d-16(e) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")); Company's "disclosure controls and procedures" are reasonably
designed to ensure that all information (both financial and non-financial)
required to be disclosed by Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Rules and Regulations, and that all such
information is accumulated and communicated to Company's management as
appropriate to allow timely decisions regarding required disclosure and to make
the certifications of the Chief Executive Officer and Chief Financial Officer of
Company required under the Exchange Act with respect to such reports.
(ii) Since February 28, 2005 (the "Balance Sheet
Date"), Company's auditors and the audit committee
of the Board of Directors of Company (or persons fulfilling the equivalent
function) have not been advised of (i) any significant deficiencies in the
design or operation of internal controls which could adversely affect Company's
ability to record, process, summarize and report financial data nor any material
weaknesses in internal controls; (ii) any fraud, whether or not material, that
involves management or other employees who have a significant role in Company's
internal controls.
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(f) Obligations to Related Parties. No relationship, direct or
indirect, exists between or among any of Company or any affiliate of Company, on
the one hand, and any director, officer, stockholder, customer or supplier of
Company or any affiliate of Company, on the other hand, which is required by the
Securities Act, the Exchange Act or the Rules and Regulations to be described in
any SEC Report which is not so described and described as required. There are no
outstanding loans, advances (except normal advances for business expenses in the
ordinary course of business) or guarantees of indebtedness by Company to or for
the benefit of any of the officers or directors of Company or any of their
respective family members, except as disclosed in the SEC Reports. Company has
not, in violation of the Xxxxxxxx-Xxxxx Act of 2002 (the "Xxxxxxxx-Xxxxx Act"),
directly or indirectly, extended or maintained credit, arranged for the
extension of credit, or renewed an extension of credit, in the form of a
personal loan to or for any director or executive officer of Company.
(g) Changes. Since the Balance Sheet Date, there has not been:
(i) any Material Adverse Effect;
(ii) any resignation or termination of any officer,
key employee or group of employees of Company;
(iii) any material change, except in the ordinary
course of business, in the contingent obligations
of Company by way of guaranty, endorsement, indemnity, warranty or otherwise;
(iv) any damage, destruction or loss, whether or not
covered by insurance, which has had a Material
Adverse Effect;
(v) any waiver by Company of a valuable right or of a
material debt owed to it;
(vi) any direct or indirect material loans made by
Company to any stockholder, employee, officer or director of Company, other
than advances made in the ordinary course of business;
(vii) any material change in any compensation
arrangement or agreement with any employee, officer,
director or stockholder of Company;
(viii) any declaration or payment of any dividend or
other distribution of the assets of Company;
(ix) any labor organization activity related to
Company;
(x) any debt, obligation or liability incurred,
assumed or guaranteed by Company, except those for immaterial amounts and for
liabilities incurred in the ordinary course of business;
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(xi) any sale, assignment or transfer of any patents,
trademarks, copyrights, trade secrets or other
intangible assets owned by Company;
(xii) any change in any material agreement to which
Company is a party or by which either Company is
bound which has had a Material Adverse Effect; or
(xiii) any arrangement or commitment by Company to do
any of the acts described in subsection (i)
through (xii) of this Section 12(g).
(h) Title to Properties and Assets; Liens, Etc. Company has
good and marketable title to its properties and assets, and good title to its
leasehold interests, 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, so long as in
each such case, such liens and encumbrances have no effect on the lien priority
of Laurus in such property; and
(iii) those that have otherwise arisen in the
ordinary course of business, so long as they have no
effect on the lien priority of Laurus therein.
All facilities, machinery, equipment, fixtures, vehicles and other properties
owned, leased or used by Company are in good operating condition and repair and
are reasonably fit and usable for the purposes for which they are being used.
Company is in compliance with all material terms of each lease to which it is a
party or is otherwise bound.
(i) Intellectual Property.
(i) Company owns or possesses sufficient legal rights
to all patents, trademarks, service marks,
trade names, copyrights, trade secrets, licenses, information and other
proprietary rights and processes (the "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 the
foregoing proprietary rights, nor is Company bound by or a party to any options,
licenses or agreements of any kind with respect to the patents, trademarks,
service marks, trade names, copyrights, trade secrets, licenses, information and
other proprietary rights and processes of any other person or entity other than
such licenses or agreements arising from the purchase of "off the shelf" or
standard products.
(ii) Company has not received any communications
alleging that Company has violated any of the
patents, trademarks, service marks, trade names, copyrights or trade secrets or
other proprietary rights of any other person or entity, nor is Company aware of
any basis therefor.
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(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, except for inventions, trade secrets or proprietary information that
have been rightfully assigned to Company.
(j) Compliance with Other Instruments. Company is not in
violation or default of (x) any term of its Charter or Bylaws, or (y) any
provision of any indebtedness, mortgage, indenture, contract, agreement or
instrument to which it is party or by which it is bound or of any judgment,
decree, order or writ, which violation or default, in the case of this clause
(y), has had 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 Option by
Company each pursuant hereto and thereto, will not, with or without the passage
of time or giving of notice, result in any such material violation, or be in
conflict with or constitute a default under any such term or provision, or
result in the creation of any mortgage, pledge, lien, encumbrance or charge upon
any of the properties or assets of Company or the suspension, revocation,
impairment, forfeiture or nonrenewal of any permit, license, authorization or
approval applicable to Company, its business or operations or any of its assets
or properties.
(k) Litigation. Except 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 that prevents Company from
entering into this Agreement or the other Ancillary Agreements, or from
consummating the transactions contemplated hereby or thereby, or which has had a
Material Adverse Effect, nor is Company aware that there is any basis to assert
any of the foregoing. Company is not a party to or subject to the provisions of
any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality. There is no action, suit, proceeding or investigation
by Company currently pending or material suit, proceeding or investigation which
Company intends to initiate.
(l) Tax Returns and Payments. Company has timely filed all tax
returns (federal, state and local) required to be filed by it. All taxes shown
to be due and payable on such returns, any assessments imposed, and all other
taxes due and payable by Company on or before the Closing, have been paid or
will be paid prior to the time they become delinquent (taking into account any
extension of time to file granted or obtained). Company has not been advised:
(i) that any of its returns, federal, state or other,
have been or are being audited as of the date
hereof; or
(ii) of any adjustment, deficiency, assessment or
court decision in respect of its federal, state or
other taxes.
To Company's knowledge, it has no liability for any tax to be imposed upon its
properties or assets as of the date of this Agreement that is not adequately
reserved for on its books, in accordance with GAAP.
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(m) Employees. Company does not have 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.
Company is not 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, nor any consultant
with whom Company has contracted, is in violation of any term of any employment
contract, proprietary information agreement or any other agreement relating to
the right of any such individual to be employed by, or to contract with, Company
because of the nature of the business to be conducted by Company; and to
Company's knowledge, the continued employment by Company of its present
employees, and the performance of Company's contracts with its independent
contractors, will not result in any such violation. Company is not aware that
any of its employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency that would
interfere with their duties to Company. Company has not received any notice
alleging that any such violation has occurred. Except for employees who have a
current effective employment agreement with Company, no employee of Company has
been granted the right to continued employment by Company or to any material
compensation following termination of employment with Company. Company is not
aware that any officer, key employee or group of employees intends to terminate
his, her or their employment with Company, nor does Company have a present
intention to terminate the employment of any officer, key employee or group of
employees.
(n) Registration Rights and Voting Rights. Company is not
presently under any obligation, and Company has not granted any rights, to
register any of Company's presently outstanding securities or any of its
securities that may hereafter be issued. To the knowledge of Company, no
stockholder of Company has entered into any agreement with respect to the voting
of equity securities of Company.
(o) Compliance with Laws; Permits. Company is not in violation
of any provision of the Xxxxxxxx-Xxxxx Act or SEC rule or rule of the Principal
Market (as hereafter defined) promulgated thereunder or 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 violation has had 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 other Related Agreement and the issuance of any of the
Securities, except such as have been duly and validly obtained or filed, or with
respect to any filings that must be made after the Closing, as will be filed in
a timely manner. Company has all material franchises, permits, licenses and any
similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which has had a Material Adverse Effect.
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(p) Environmental and Safety Laws. To Company's knowledge,
Company is not 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. No Hazardous Materials (as
defined below) are used or have been used, stored, or disposed of by Company or,
to Company's knowledge, by any other person or entity on any property owned,
leased or used by Company. For the purposes of the preceding sentence,
"Hazardous Materials" shall mean:
(i) materials which are listed or otherwise defined
as "hazardous" or "toxic" under any applicable
local, state, federal and/or foreign laws and regulations that govern the
existence and/or remedy of contamination on property, the protection of the
environment from contamination, the control of hazardous wastes, or other
activities involving hazardous substances, including building materials; or
(ii) any petroleum products or nuclear materials.
(q) 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.
(r) Full Disclosure. Company has provided Laurus with all
information requested by Laurus in connection with its decision to purchase the
Note. Neither this Agreement, the Ancillary Agreements, the exhibits and
schedules hereto and thereto nor any other document delivered by Company to
Purchaser 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 were based on Company's experience in the industry
and on assumptions of fact and opinion as to future events which Company, at the
date of the issuance of such projections or estimates, believed to be
reasonable.
(s) Insurance. Company has general commercial, product
liability, fire and casualty insurance policies with coverages which Company
believes are customary for companies similarly situated to Company in the same
or similar business.
(t) SEC Reports and Financial Statements. Company has filed
all reports required to be filed by it under the Exchange Act, including
pursuant to Section 13(a) or 15(d) thereof, for the two years preceding the date
hereof (or such shorter period as Company was required by law to file such
material) (the foregoing materials, including the exhibits thereto, being
collectively referred to herein as the "SEC Reports") on a timely basis or has
received a valid extension of such time of filing and has filed any such SEC
Reports prior to the expiration of any such extension. As of their respective
dates,
15
the SEC Reports complied in all material respects with the requirements of the
Securities Act and the Exchange Act, and none of the SEC Reports, when filed,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of Company included in the SEC Reports
comply in all material respects with applicable accounting requirements and the
rules and regulations of the Commission with respect thereto as in effect at the
time of filing. Such financial statements have been prepared in accordance with
GAAP, except as may be otherwise specified in such financial statements or the
notes thereto and except that unaudited financial statements may not contain all
footnotes required by GAAP, and fairly present in all material respects the
financial position of Company and its consolidated subsidiaries as of and for
the dates thereof and the results of operations and cash flows for the periods
then ended, subject, in the case of unaudited statements, to normal, year-end
adjustments.
(u) Listing. Company's Common Stock is listed for trading on a
Principal Market (as hereafter defined) and satisfies all requirements for the
continuation of such listing. Company has not received any notice that its
Common Stock will be delisted from the Principal Market or that its Common Stock
does not meet all requirements for listing. For purposes hereof, the term
"Principal Market" means the NASD OTC Bulletin Board, NASDAQ SmallCap Market,
NASDAQ National Marketing 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).
(v) No Integrated Offering. Neither Company, nor any of its
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any Company security or solicited any
offers to buy any security, under circumstances that would cause this offering
of the Securities to be integrated with prior offerings by Company or concurrent
offerings made by the Company on the date hereof, for purposes of the Securities
Act or any applicable shareholder approval provisions, including, without
limitation, under the rules and regulations of any exchange or automated
quotation system on which any of the securities of Company are listed or
designated.
(w) Stop Transfer. The Securities are restricted securities as
of the date of this Agreement. Other than as may be required by applicable law,
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.
(x) Dilution. Company specifically acknowledges that its
obligation to issue the shares of Common Stock upon conversion of the Notes and
exercise of the Option is binding upon Company and enforceable regardless of the
dilution such issuance may have on the ownership interests of other shareholders
of Company, subject to the limitations set forth therein.
16
(y) Foreign Corrupt Practices.Neither Company, nor to the
knowledge of Company, any agent or other person acting on behalf of Company, has
(i) directly or indirectly, used any corrupt funds for unlawful contributions,
gifts, entertainment or other unlawful expenses related to foreign or domestic
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to any foreign or domestic political
parties or campaigns from corporate funds, (iii) failed to disclose fully any
contribution made by Company (or made by any person acting on its behalf of
which Company is aware) which is in violation of law, or (iv) violated in any
material respect any provision of the Foreign Corrupt Practices Act of 1977, as
amended. Neither Company nor, to the knowledge of Company, any director,
officer, agent, employee or affiliate of Company is currently subject to any
U.S. sanctions administered by the Office of Foreign Assets Control of the U.S.
Treasury Department ("OFAC"); and Company will not directly or indirectly use
the proceeds of the offering, or lend, contribute or otherwise make available
such proceeds to any subsidiary, joint venture partner or other person or
entity, for the purpose of financing the activities of any person currently
subject to any U.S. sanctions administered by OFAC.
(z) Schedule 12(z) sets forth Company's name as it appears in
official filings in the state of its incorporation, the type of entity of
Company, the organizational identification number issued by Company's state of
incorporation or a statement that no such number has been issued, Company's
state of incorporation, and the location of Company's chief executive office,
corporate offices, warehouses, other locations of Collateral and locations where
records with respect to Collateral are kept (including in each case the county
of such locations) and such locations have not changed during the preceding
twelve months. As of the Closing Date, during the prior five years Company has
not been known as or conducted business in any other name (including trade
names). Company has only one state of incorporation.
(aa) Certain Fees. No brokerage or finder's fees or
commissions are or will be payable by Company to any broker, financial advisor
or consultant, finder, placement agent, investment banker, bank or other person
with respect to the transactions contemplated by this Agreement. To the
knowledge of Company, no facts exist which would make Laurus liable for such
Fees contemplated by the previous sentence.
(bb) ERISA. Based upon the Employee Retirement Income Security
Act of 1974 ("ERISA"), and the regulations and published interpretations
thereunder: (i) Company has not engaged in any Prohibited Transactions (as
defined in Section 406 of ERISA and Section 4975 of the Internal Revenue Code of
1986, as amended (the "Code")); (ii) Company has met all applicable minimum
funding requirements under Section 302 of ERISA in respect of its plans; (iii)
to the knowledge of Company no event or occurrence which would cause the Pension
Benefit Guaranty Corporation to institute proceedings under Title IV of ERISA to
terminate any employee benefit plan(s); (iv) Company does not have any fiduciary
responsibility for investments with respect to any plan existing for the benefit
of persons other than Company's employees; and (v) Company has not withdrawn,
completely or partially, from any multi-employer pension plan so as to incur
liability under the Multiemployer Pension Plan Amendments Act of 1980.
17
13. Covenants. Company covenants and agrees with Laurus as follows:
(a) Stop-Orders. Company will advise Laurus, promptly after it
receives notice of issuance by the SEC, any state securities commission or any
other regulatory authority of any stop order or of any order preventing or
suspending any offering of any securities of Company, or of the suspension of
the qualification of the Common Stock of Company for offering or sale in any
jurisdiction, or the initiation of any proceeding for any such purpose.
(b) Listing. Company shall promptly secure the listing of the
shares of Common Stock issuable upon conversion of the Notes and upon the
exercise of the Option on the Principal Market upon which shares of Common Stock
are listed (subject to official notice of issuance) and shall maintain such
listing so long as any other shares of Common Stock shall be so listed. Company
will maintain the listing of its Common Stock on 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 such exchanges, as applicable.
(c) Market Regulations. 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. 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 Options for general working capital purposes
only and to pay its senior secured debt to Comerica Bank and subordinated debt
to The Hillstreet Fund II, L.P. in full, in the amounts set forth in Company's
Disbursement Letter of even date herewith.
(f) Access to Facilities. Company will permit any
representatives designated by Laurus (or any successor of Laurus), upon
reasonable notice and during normal business hours, at such person's expense and
accompanied by a representative of Company, to:
(i) have access to, visit, inspect, review, evaluate
and make physical verification and appraisals
of Company's properties and the Collateral;
(ii) inspect, audit and copy (or take originals if
necessary) and make extracts from Company's Books and Records, including
management letters prepared by independent accountants; and
18
(iii) discuss with Company's principal officers, and
independent accountants, Company's business, assets, liabilities, financial
condition, results of operations and business prospects.
Company will deliver to Laurus any instrument necessary for Laurus to obtain
records from any service bureau maintaining records for Company. If any
internally prepared financial information, including that required under this
Section is unsatisfactory in any manner to Laurus, Laurus may request that the
Accountants review the same. Laurus acknowledges that it may be provided
material, non-public information and acknowledges its continuing obligations
under that certain Confidentiality and Standstill Agreement dated January 3,
2005 by and between Company and Laurus (the "Confidentiality Agreement").
(g) Taxes. Company will promptly pay and discharge, or cause
to be paid and discharged, when due and payable, all lawful taxes, assessments
and governmental charges or levies imposed upon the income, profits, property or
business of Company; provided, however, that any such tax, assessment, charge or
levy need not be paid if the validity thereof shall currently be contested in
good faith by appropriate proceedings and if Company shall have set aside on its
books adequate reserves with respect thereto, and provided, further, that
Company will pay all such taxes, assessments, charges or levies forthwith upon
the commencement of proceedings to foreclose any lien which may have attached as
security therefor.
(h) Insurance. Company will bear the full risk of loss from
any loss of any nature whatsoever with respect to the Collateral. Company will
keep its assets which are of an insurable character insured by financially sound
and reputable insurers against loss or damage by fire, explosion and other risks
customarily insured against by companies in similar business similarly situated
as Company; and Company will maintain, with financially sound and reputable
insurers, insurance against other hazards and risks and liability to persons and
property to the extent and in the manner which Company reasonably believes is
customary for companies in similar business similarly situated as Company and to
the extent available on commercially reasonable terms. Company and each of its
Subsidiaries will jointly and severally bear the full risk of loss from any loss
of any nature whatsoever with respect to the assets pledged to Laurus as
security for its obligations hereunder and under the Ancillary Agreements. At
Company's own cost and expense in amounts and with carriers reasonably
acceptable to Laurus, Company and each of the Subsidiaries shall (i) keep all
its insurable properties and properties in which it has an interest insured
against the hazards of fire, flood, sprinkler leakage, those hazards covered by
extended coverage insurance and such other hazards, and for such amounts, as is
customary in the case of companies engaged in businesses similar to Company's or
the respective Subsidiary's including business interruption insurance; (ii)
maintain public and product liability insurance against claims for personal
injury, death or property damage suffered by others; (iii) maintain all such
worker's compensation or similar insurance as may be required under the laws of
any state or jurisdiction in which Company or the Subsidiary is engaged in
business; and (iv) 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 workers'
19
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 Subsidiary 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
Laurus jointly. If any insurance losses are paid by check, draft or other
instrument payable to Company and Laurus jointly, Laurus may endorse Company'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 as a prepayment, in such order as Laurus in its sole discretion
shall determine or shall otherwise be delivered to Company. Any surplus shall be
paid by Laurus to Company or applied as may be otherwise required by law. Any
deficiency thereon shall be paid by Company to Laurus, on demand.
(i) Intellectual Property. Company shall maintain in full
force and effect its corporate existence, rights and franchises and all material
licenses and other rights to use Intellectual Property owned or possessed by it
and it reasonably deems to be necessary to the conduct of its business.
(j) Properties. Company will keep its properties in good
repair, working order and condition, reasonable wear and tear excepted, and from
time to time make all needful and proper repairs, renewals, replacements,
additions and improvements thereto; and Company will at all times comply with
each provision of all leases to which it is a party or under which it occupies
property if the breach of such provision could reasonably be expected to have a
Material Adverse Effect.
(k) Confidentiality. Company agrees that it will not disclose,
and will not include in any public announcement, the name of Laurus, unless
expressly agreed to by Laurus or unless and until such disclosure is required by
law or applicable regulation, and then only to the extent of such requirement.
Company may disclose Laurus' identity and the terms of this Agreement to its
current and prospective debt and equity financing sources.
(l) Required Approvals. Company shall not, 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
(A) Company's indebtedness to Laurus, (B) an aggregate amount of $50,000 in
unsecured debt outstanding at any time, or (C) as set forth on the Schedules
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
20
Preferred Stock outstanding on the date hereof or apply any of its funds,
property or assets to the purchase, redemption or other retirement of any Stock
of Company outstanding on the date hereof except as required under the terms of
Company's outstanding Preferred Stock issued and outstanding on the date hereof,
or issue any Preferred Stock; (v) purchase or hold beneficially any margin Stock
or other margin 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 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 the Schedules unless
such new Subsidiary 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 to grant to Laurus a first priority perfected security
interest in substantially all of such Subsidiary's assets to secure the
Obligations; (vii) directly or indirectly, prepay any indebtedness (other than
to Laurus and in the ordinary course of business), or repurchase, redeem, retire
or otherwise acquire any indebtedness (other than to Laurus and in the ordinary
course of business) except to make scheduled payments of principal and interest
thereof; (viii) enter into any merger, consolidation or other reorganization
with or into any other Person or acquire all or a portion of the assets or Stock
of any Person or permit any other Person to consolidate with or merge with it,
unless (1) 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 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; or (xiii) xxxx
Accounts under any name except the present name of Company or its existing
Subsidiaries.
(m) Reissuance of Securities. Company agrees to reissue
certificates representing the Securities without the legends set forth in
Section 37 below at such time as:
(i) the holder thereof is permitted to dispose of
such Securities pursuant to Rule 144(k) under the Securities Act; or
(ii) upon resale subject to an effective registration
statement after such Securities are registered
under the Securities Act.
21
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 reasonably necessary for the conversion of the Notes and the exercise of the
Options.
(o) Legal Name, etc. Company will not, without providing
Laurus with 30 days prior written notice, change (i) its name as it appears in
the official filings in the state of its incorporation or formation, (ii) the
type of legal entity it is, (iii) its organization identification number, if
any, issued by its state of incorporation, (iv) its state of incorporation or
(v) amend its certificate of incorporation, by-laws or other organizational
document.
(p) Compliance with Laws. The operation of Company's business
is and will continue to be in compliance in all material respects with all
applicable federal, state and local laws, rules and ordinances, including to all
laws, rules, regulations and orders relating to taxes, payment and withholding
of payroll taxes, employer and employee contributions and similar items,
securities, employee retirement and welfare benefits, employee health and safety
and environmental matters.
(q) Notices. Company will promptly inform Laurus in writing
of: (i) the commencement of all proceedings and investigations by or before
and/or the receipt of any notices from, any governmental or nongovernmental body
and all actions and proceedings in any court or before any arbitrator against or
in any way concerning any event which could reasonable be expected to have
singly or in the aggregate, a Material Adverse Effect; (ii) any change which has
had, or could reasonably be expected to have, a Material Adverse Effect; (iii)
any Event of Default or Default; and (iv) any default or any event which with
the passage of time or giving of notice or both would constitute a default under
any agreement for the payment of money to which Company is a party or by which
Company or any of Company's properties may be bound the breach of which would
have a Material Adverse Effect..
(r) Margin Stock. Company will not permit any of the proceeds
of the Loans made hereunder to be used directly or indirectly to "purchase" or
"carry" "margin stock" or to repay indebtedness incurred to "purchase" or
"carry" "margin stock" within the respective meanings of each of the quoted
terms under Regulation U of the Board of Governors of the Federal Reserve System
as now and from time to time hereafter in effect.
(s) Offering Restrictions. Except as previously disclosed in
the SEC Reports or stock or stock options granted to employees or directors of
Company (these exceptions hereinafter referred to as the "Excepted Issuances"),
neither Company nor any of its Subsidiaries will, prior to the full repayment or
conversion of the Notes (together
22
with all accrued and unpaid interest and fees related thereto), (x) enter into
any equity line of credit agreement or similar agreement or (y) issue, or enter
into any agreement to issue, any securities with a variable/floating conversion
and/or pricing feature which are or could be (by conversion or registration)
free-trading securities (i.e. common stock subject to a registration statement)
(the "Exclusion Period").
(t) Authorization and Reservation of Shares. Company will at
all times have authorized and reserved a sufficient number of shares of Common
Stock to provide for the conversion of the Notes and exercise of the Options.
(u) Financing Right of First Refusal. (i) Company hereby
grants to the Purchaser a right of first refusal to provide any Additional
Financing (as defined below) to be issued by Company and/or any of its
Subsidiaries, subject to the following terms and conditions. From and after the
date hereof, prior to the incurrence of any additional indebtedness convertible
into Common Stock and/or the sale or issuance of any convertible equity
interests of Company or any of its Subsidiaries (an "Additional Financing"),
Company and/or any 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 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 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 Subsidiary. Laurus Term Sheet shall contain terms no less favorable
to Company and/or such Subsidiary than those outlined in Proposed Term Sheet.
Laurus shall deliver such Laurus Term Sheet within ten business days of receipt
of each such Proposed Term Sheet. If the provisions of Laurus Term Sheet are at
least as favorable to Company and/or such Subsidiary, as the case may be, as the
provisions of the Proposed Term Sheet, Company and/or such Subsidiary shall
enter into and consummate the Additional Financing transaction outlined in
Laurus Term Sheet.
(ii) Company will not, and will not permit its
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 Subsidiaries.
14. Further Assurances. (a) At any time and from time to time,
upon the written request of Company and at the sole expense of Laurus, Laurus
shall promptly and duly execute and deliver any and all such further instruments
and documents and take such further action as Company may request (i) to obtain
the full benefits of this Agreement and the Ancillary Agreements, or (ii) to
enable Company to exercise all or any of the rights and powers herein granted or
any Ancillary Agreement.
23
(b) At any time and from time to time, upon the written
request of Laurus and at the sole expense of Company, Company shall promptly and
duly execute and deliver any and all such further instruments and documents and
take such further action as Laurus may request (i) to obtain the full benefits
of this Agreement and the Ancillary Agreements, (ii) to protect, preserve and
maintain Laurus's rights in the Collateral and under this Agreement or any
Ancillary Agreement, or (iii) to enable Laurus to exercise all or any of the
rights and powers herein granted or any Ancillary Agreement
15. Representations, Warranties and Covenants of Laurus.
Laurus hereby represents, warrants and covenants to Company as
follows:
(a) Organization, Requisite Power and Authority. Laurus is an
entity duly organized, validly existing and in good standing under the law of
the jurisdiction of its organization. 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.
24
(e) Laurus Can Protect Its Interest. Laurus represents that by
reason of its, or of its management's, business and financial experience, Laurus
has the capacity to evaluate the merits and risks of its investment in the Note,
and the Securities and to protect its own interests in connection with the
transactions contemplated in this Agreement, and the Ancillary Agreements.
Further, Laurus is aware of no publication of any advertisement in connection
with the transactions contemplated in the Agreement or the Ancillary Agreements.
(f) Accredited Investor. Laurus represents that it is an
accredited investor within the meaning of Regulation D under the Securities Act.
(g) Certain Fees. No brokerage or finder's fees or commissions
are or will be payable by Laurus to any broker, financial advisor or consultant,
finder, placement agent, investment banker, bank or other person with respect to
the transactions contemplated by this Agreement. Company shall have no
obligation with respect to any fees or with respect to any claims made by or on
behalf of other persons for fees of a type contemplated in this Section that may
be due in connection with the transactions contemplated by this Agreement. To
Laurus' knowledge, no fact exists which would make Company liable for such Fees
contemplated by the previous paragraph.
(h) No Shorting. Each of Laurus or any of its Affiliates and
investment partners has not, will not, and will not cause any Person or other
entity, nor will Laurus allow any its Affiliates and investment partners, to
directly or indirectly engage in "short sales" of Company's Common Stock as long
as any of the Notes shall be outstanding.
(i) Patriot Act. Laurus certifies that, to the best of Laurus'
knowledge after due inquiry, 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 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 Company if any of these representations
ceases to be true and accurate regarding Laurus. Laurus agrees to provide
Company any additional information regarding Laurus that 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 shall, at its own cost and expense,
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. Laurus further understands that Company may
release
25
information about Laurus and, if applicable, any underlying beneficial owners,
to proper authorities if Company, in its sole discretion, determines that it is
in the best interests of Company in light of relevant rules and regulations
under the laws set forth in subsection (ii) above.
(j) Limitation on Acquisition of Common Stock of 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 Company (and/or subsidiaries or affiliates of
Company), Laurus shall not acquire stock in 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 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 Company to Laurus not to qualify as portfolio interest,
within the meaning of Section 881(c)(2) of the Internal Revenue Code of 1986, as
amended (the "Code") by reason of Section 881(c)(3) of the Code, taking into
account the constructive ownership rules under Section 871(h)(3)(C) of the Code
(the "Stock Acquisition Limitation"). The Stock Acquisition Limitation shall
automatically become null and void without any notice to Company upon the
earlier to occur of either (a) Company's delivery to Laurus of a Notice of
Redemption (as defined in the Note) or (b) the existence of an Event of Default
(as defined in the Note) at a time when the average closing price of Company's
common stock as reported by Bloomberg, L.P. on the Principal Market for the
immediately preceding five trading days is greater than or equal to 150% of the
Fixed Conversion Price (as defined in the Note).
16. [RESERVED].
17. Term of Agreement. Laurus' agreement to make Loans and extend
financial accommodations under and in accordance with the terms of this
Agreement or any Ancillary Agreement shall continue in full force and effect
until the expiration of the Term. At Laurus' election following the occurrence
of an Event of Default which is continuing, 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 the Obligations have been irrevocably
disposed of, concluded or liquidated. Notwithstanding the foregoing, Laurus
shall release its security interests promptly upon irrevocable payment to it of
all Obligations if Company shall have (i) provided Laurus with an executed
release of any and all claims which Company may have or thereafter have under
this Agreement and all Ancillary Agreements and (ii) paid to Laurus an early
payment fee in an amount equal to (1) four percent (4.0%) of the Capital
Availability Amount if such payment occurs prior to the first anniversary of the
Closing Date, (2) three (3.0%) of the Capital Availability Amount if such
payment occurs on or after the first anniversary and prior to the second
anniversary of the Closing Date and (3) two percent (2.0%) of the Capital
Availability Amount if such termination occurs thereafter during the Term; such
26
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 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 Pay. Company fails to pay when due any
installment of principal, interest or other fees hereon in accordance herewith,
or Company fails to pay any of the other Obligations when due, and, in any such
case, such failure shall continue for a period of three (3) Business Days
following the date upon which any such payment was due.
(b) Breach of Covenant. Company or any of its Subsidiaries
breaches any covenant or any other term or condition of this Agreement in any
material respect and such breach, if subject to cure, continues for a period of
fifteen (15) days after the occurrence thereof.
(c) Breach of Representations and Warranties. Any
representation, warranty or statement made or furnished by Company or any of its
Subsidiaries in this Agreement or any Ancillary Agreement shall at any time be
false or misleading in any material respect.
(d) Other Indebtedness. The occurrence of any event of default
(or similar term) under any indebtedness in excess of $250,000 in the aggregate
which Company or any of its Subsidiaries is a party with third parties;
(e) Material Adverse Effect. Any change in Company's or any of
its Subsidiary's condition or affairs (financial or otherwise) which in the
Holder's reasonable, good faith opinion, could reasonably be expected to have a
Material Adverse Effect;
(f) Bankruptcy. Company or any of its Subsidiaries shall (i)
apply for, consent to or suffer to exist the appointment of, or the taking of
possession by, a receiver, custodian, trustee or liquidator of itself or of all
or a substantial part of its property, (ii) make a general assignment for the
benefit of creditors, (iii) commence a voluntary case
27
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;
(g) Judgments. An attachment or levy is made upon Company or
any of its Subsidiaries' assets having an aggregate value in excess of $50,000
or a judgment is rendered against 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;
(h) Insolvency. Company or any of its Subsidiaries shall admit
in writing its inability, or be generally unable to pay its debts as they become
due or cease operations of its present business;
(i) Change in Control. Any Change of Control (as defined
below) shall occur with respect to the Company, unless Laurus shall have
expressly consented to such Change of Control in writing. A "Change of Control"
shall mean any event or circumstance as a result of which (i) any Person or
"group" (within the meaning of Section 13(d) or 14(d) of the Securities Exchange
Act of 1934, as amended) other than Laurus or any of its Affiliate or a Person
or group that is an Affiliate of the Company on the date of this Loan Agreement:
(A) acquires beneficial ownership of 50% or more of outstanding Common Stock of
the Company or (B) obtains the power (regardless of whether exercised) to elect
a majority of the Company's directors, or (ii) the Company merges or
consolidates with, or sells all or substantially all of its assets to, any other
Person;
(j) Indictment; Proceedings. The indictment of Company or any
of its Subsidiaries under any criminal or civil proceeding against Company or
any of its Subsidiaries or any executive officer of Company or any of its
Subsidiaries pursuant to which statute or proceeding penalties or remedies
sought or available include forfeiture of any of the property of Company or any
of its Subsidiaries;
(k) Ancillary Agreements. (i) An Event of Default shall occur
under and as defined in any Note or Ancillary Agreement, (ii) Company or any of
its Subsidiaries shall breach any term or provision of this Agreement or any
Ancillary Agreement in any material respect which is not cured within any
applicable cure or grace period, (iii) Company or any of its Subsidiaries
attempts to terminate, challenges the validity of, or its liability under, this
Agreement or any Ancillary Agreement, (iv) any proceeding shall be brought to
challenge the validity, binding effect of this Agreement or any Ancillary
Agreement or (v) this Agreement or any Ancillary Agreement ceases to be a valid,
binding and enforceable obligation of Company or any of its Subsidiaries (to the
extent such persons or entities are a party thereto);
28
(l) Stop Trade. 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 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; or
(m) Failure to Deliver Common Stock or Replacement Note.
Subject to obtaining stockholder approval, if necessary, Company's failure to
deliver Common Stock to Laurus (or its designee) pursuant to and in the form
required by this Agreement and, if such failure to deliver Common Stock shall
not be cured within two (2) business days or Company is required to issue a
replacement Note to the Holder and Company shall fail to deliver such
replacement Note within seven (7) Business Days.
(n) any Lien created hereunder or under any Ancillary
Agreement ceases to be or is not a valid and perfected Lien having a first
priority interest in favor of Laurus due to actions taken or which fail to be
taken by Company or any Subsidiary; or
(o) 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 any interest therein, except as permitted
herein or in the Ancillary Agreements.
20. Remedies. Following the occurrence of an Event of Default which is
continuing, Laurus shall have the right to demand repayment in full of all
Obligations, whether or not otherwise due. Until all Obligations have been fully
satisfied, Laurus shall retain its Lien in all Collateral. Laurus shall have, in
addition to all other rights provided herein and in each Ancillary Agreement,
the rights and remedies of a secured party under the UCC, and under other
applicable law, all other legal and equitable rights to which Laurus may be
entitled, including the right to take immediate possession of the Collateral, to
require Company to assemble the Collateral, at Company's expense, and to make it
available to Laurus at a place designated by Laurus which is reasonably
convenient to both parties and to enter any of the premises of Company or
wherever the Collateral shall be located, with or without force or process of
law, and to keep and store the same on said premises until sold (and if said
premises be the property of Company, Company agrees not to charge Laurus for
storage thereof), and the right to apply for the appointment of a receiver for
Company's property. Further, Laurus may, at any time or times after the
occurrence of an Event of Default, sell and deliver all Collateral held by or
for Laurus at public or private sale for cash, upon credit or otherwise, at such
prices and upon such terms as Laurus, in Laurus' sole discretion, deems
advisable or Laurus may otherwise recover upon the Collateral in any
commercially reasonable manner as Laurus, in its sole discretion, deems
advisable. The requirement of reasonable notice shall be met if such notice is
mailed postage prepaid to Company at Company's address as shown in Laurus'
records, at least ten (10) days before the time of the event of which notice is
being given. Laurus may be the purchaser at any sale, if it is public. The
proceeds of sale shall be applied first to all costs and expenses of sale,
including attorneys' fees, and second to the payment (in whatever order Laurus
elects) of all Obligations. After the
29
indefeasible payment and satisfaction in full in cash of all of the Obligations,
and after the payment by Laurus of any other amount required by any provision of
law, including Section 608(a)(1) of the Code (but only after Laurus has received
what Laurus considers reasonable proof of a subordinate party's security
interest), the surplus, if any, shall be paid to Company or its representatives
or to whosoever may be lawfully entitled to receive the same, or as a court of
competent jurisdiction may direct. Company shall remain liable to Laurus for any
deficiency. In addition, Company shall pay Laurus a liquidation fee
("Liquidation Fee") in the amount of five percent (5%) of the actual amount
collected in respect of each Account outstanding at any time during a
"liquidation period". For purposes hereof, "liquidation period" means a period:
(i) beginning on the earliest date of (x) an event referred to in Section 19(i)
or 19(j), or (y) the cessation of Company's business; and (ii) ending on the
date on which Laurus has actually received all Obligations due and owing it
under this Agreement and the Ancillary Agreements. The Liquidation Fee shall be
paid on the date on which Laurus collects the applicable Account by deduction
from the proceeds thereof.. Company and Laurus acknowledge that the actual
damages that would be incurred by Laurus after the occurrence of an Event of
Default would be difficult to quantify and that Company and Laurus have agreed
that the fees and obligations set forth in this Section and in this Agreement
would constitute fair and appropriate liquidated damages in the event of any
such termination.
21. Waivers. To the full extent permitted by applicable law, Company
waives (a) presentment, demand and protest, and notice of presentment, dishonor,
intent to accelerate, acceleration, protest, default, nonpayment, maturity,
release, compromise, settlement, extension or renewal of any or all of this
Agreement and the Ancillary Agreements or any other notes, commercial paper,
Accounts, contracts, Documents, Instruments, Chattel Paper and guaranties at any
time held by Laurus on which Company may in any way be liable, and hereby
ratifies and confirms whatever Laurus may do in this regard; (b) all rights to
notice and a hearing prior to Laurus' taking possession or control of, or to
Laurus' replevy, attachment or levy upon, any Collateral or any bond or security
that might be required by any court prior to allowing Laurus to exercise any of
its remedies; and (c) the benefit of all valuation, appraisal and exemption
laws. Company acknowledges that it has been advised by counsel of its choices
and decisions with respect to this Agreement, the Ancillary Agreements and the
transactions evidenced hereby and thereby.
22. Expenses. Company shall pay all of Laurus' reasonable out-of-pocket
costs and expenses, including reasonable fees and disbursements of in-house or
outside counsel and appraisers, in connection with the preparation, execution
and delivery of this Agreement and the Ancillary Agreements, and in connection
with the prosecution or defense of any action, contest, dispute, suit or
proceeding concerning any matter in any way arising out of, related to or
connected with this Agreement or any Ancillary Agreement. Company shall also pay
all of Laurus' reasonable documented 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
30
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 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 at Company's request or in connection with Company's loan account with
Laurus. All such costs and expenses together with all filing, recording and
search fees, taxes and interest payable by Company to Laurus shall be payable on
demand and shall be secured by the Collateral.
23. Assignment By Laurus. Laurus may assign any or all of the
Obligations together with any or all of the security therefor to any Person
which is not a direct or indirect competitor of Company 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
31
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, LLC
000 Xxxxx Xxxxxx 00xx Xx.
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxx X. Xxxxxx, Esq.
Telephone: (000) 000-0000
Telecopier: (000) 000-0000
32
If to Company: Riviera Tool Company
0000 Xxxxxxxxx Xxxxxxx
Xxxxx Xxxxxx, XX 00000
Attention: Xxxxx X. Xxxxxx, Chief
Financial Officer
Facsimile: (000) 000-0000
With a copy to: Xxxxxxxxx Xxxxxxx, LLP
The MetLife Building
000 Xxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxx X. Annex, Esq.
Telephone: (000) 000-0000
Telecopier: (000) 000-0000
or such other address as may be designated in writing hereafter in accordance
with this Section 28 by such Person.
29. Governing Law, Jurisdiction and Waiver of Jury Trial. (a)
THIS AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE.
(b) COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR
FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE
EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN
COMPANY AND LAURUS PERTAINING TO THIS AGREEMENT OR ANY OF THE ANCILLARY
AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY
OF THE ANCILLARY AGREEMENTS; PROVIDED, THAT LAURUS AND COMPANY ACKNOWLEDGE THAT
ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF
THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER PROVIDED, THAT NOTHING IN
THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LAURUS FROM BRINGING SUIT
OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE
OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE
OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LAURUS.
COMPANY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY
ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND COMPANY HEREBY WAIVES ANY
OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER
VENUE OR FORUM NON CONVENIENS.
33
(c) THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A
JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION
OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO
WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO
RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN
LAURUS AND COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, ANY
ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED THERETO.
30. Limitation of Liability. Company acknowledges and understands that
in order to assure repayment of the Obligations hereunder Laurus may be required
to exercise any and all of Laurus' rights and remedies hereunder and agrees
that, except as limited by applicable law, neither Laurus nor any of Laurus'
agents shall be liable for acts taken or omissions made in connection herewith
or therewith except for actual bad faith.
31. Entire Understanding. This Agreement and the Ancillary
Agreements contain the entire understanding between Company and Laurus as to the
subject matter hereof and thereof and any promises, representations, warranties
or guarantees not herein contained shall have no force and effect unless in
writing, signed by Company's and Laurus' respective officers. Neither this
Agreement, the Ancillary Agreements, nor any portion or provisions thereof may
be changed, modified, amended, waived, supplemented, discharged, cancelled or
terminated orally or by any course of dealing, or in any manner other than by an
agreement in writing, signed by the party to be charged.
32. Severability. Wherever possible each provision of this Agreement or
the Ancillary Agreements shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this Agreement or the
Ancillary Agreements shall be prohibited by or invalid under applicable law such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
thereof.
33. Captions. All captions are and shall be without substantive meaning
or content of any kind whatsoever.
34. Counterparts; Telecopier Signatures. This Agreement may be executed
in one or more counterparts, each of which shall constitute an original and all
of which taken together 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.
34
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. 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 RIVIERA TOOL COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED."
(b) Any shares of Common Stock issued pursuant to conversion
of the Note or exercise of the Options, 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 RIVIERA TOOL COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED."
(c) The Options shall bear substantially the following legend:
35
"THIS OPTION AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF
THIS OPTION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS.
THIS OPTION AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF
THIS OPTION MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS OPTION OR THE UNDERLYING SHARES OF COMMON
STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR
AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO RIVIERA TOOL
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
[Balance of page intentionally left blank; signature page follows.]
36
IN WITNESS WHEREOF, the parties have executed this Security
Agreement as of the date first written above.
RIVIERA TOOL COMPANY
By:
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
LAURUS MASTER FUND, LTD.
By:
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
37
Annex A - Definitions
"Account Debtor" means any Person who is or may be obligated
with respect to, or on account of, an Account.
"Accountants" has the meaning given to such term in Section
11(a).
"Accounts" means 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 may 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 Company.
"Affiliate" of any Person means (a) any Person (other than a
Subsidiary) which, directly or indirectly, is in control of, is controlled by,
or is under common control with such Person, (b) any Person who is a director or
officer (i) of such Person, (ii) of any Subsidiary of such Person or (iii) of
any Person described in clause (a) above. For the purposes of this definition,
control of a Person shall mean the power (direct or indirect) to direct or cause
the direction of the management and policies of such Person whether by contract
or otherwise.
"Ancillary Agreements" means, the Notes, the Option, 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).
38
"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 $10,000,000.
"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.
"Code" shall have the meaning set forth in Section 15 (i).
"Collateral" shall have the meaning ascribed such term in the
Master Security Agreement, and shall include but not be limited to, all of
Company'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;
39
(j) all Letter-of-Credit Rights;
(k) all Instruments;
(l) all commercial tort claims set forth on Disclosure
Schedule ;
(m) all Books and Records;
(n) all Supporting Obligations including letters of credit and
guarantees issued in support of Accounts, Chattel Paper, General Intangibles and
Investment Property;
(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 (whether for
safekeeping, custody, pledge, transmission or otherwise); andall products and
Proceeds of all or any of the foregoing, tort claims and all claims and other
rights to payment including (i) insurance claims against third parties for loss
of, damage to, or destruction of, the foregoing Collateral and (ii) payments due
or to become due under leases, rentals and hires of any or all of the foregoing
and Proceeds payable under, or unearned premiums with respect to policies of
insurance in whatever form.
"Common Stock" the shares of stock representing 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.
"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 Account" shall mean an Account Receivable (net of
any offset to which it is subject) arising in the ordinary course of Company's
business which meets each of the following requirements:
(a) it is not owing more than one hundred twenty (120) days
after the date of the original invoice or other writing evidencing such Account
Receivable;
40
(b) it arises from the sale or lease of goods and such goods
have been shipped or delivered to the account debtor; or it arises from services
rendered and such services have been performed;
(c) it is evidenced by an invoice, dated not later than the
date of shipment or performance, rendered to such account debtor, or some other
evidence of billing acceptable to Laurus;
(d) it is not evidenced by any note, trade acceptance, draft
or other negotiable instrument or by any chattel paper, unless such note or
other document or instrument previously has been endorsed and delivered to
Laurus;
(e) it is a valid, legally enforceable obligation of the
account debtor thereunder, and is not subject to any offset, counterclaim or
other defense on the part of such account debtor or to any claim on the part of
such account debtor denying liability thereunder in whole or in part;
(f) it is not subject to any sale of accounts, any rights of
offset, assignment, lien or security interest whatsoever other than to Laurus;
(g) it is not owing by an Affiliate of Company, nor by any
account debtor, which: (i) does not maintain an executive office in the United
States of America, (ii) is not organized under the laws of the United States of
America, or any state thereof, or (iii) is the government of any foreign country
or sovereign state, or of any state, province, municipality or other
instrumentality thereof, without previous consent by the ;
(h) it is not an account owing by the United States of America
or any state or political subdivision thereof, or by any department, agency,
public body corporate or other instrumentality of any of the foregoing, unless
all necessary steps are taken to comply with the Federal Assignment of Claims
Act of 1940, as amended, or with any comparable state law, if applicable, and
all other necessary steps are taken to perfect Laurus' security interest in such
account;
(i) it is not owing by an account debtor for which the Company
has received a notice of: (i) the death of the account debtor or any partner of
the account debtor, (ii) the dissolution, liquidation, termination of existence,
insolvency or business failure of the account debtor, (iii) the appointment of a
receiver for any part of the property of the account debtor, or (iv) an
assignment for the benefit of creditors, the filing of a petition under or the
commencement of any proceeding under, the Bankruptcy Code by or against the
account debtor;
(j) it is not an account billed in advance, payable on
delivery, for consigned goods, for guaranteed sales, for unbilled sales, for
progress xxxxxxxx, payable at a future date in accordance with its terms,
subject to a retainage or holdback by the account debtor or insured by a surety
company.
41
An Account Receivable which is at any time an Eligible
Account, but which subsequently fails to meet any of the foregoing requirements,
shall forthwith cease to be an Eligible Account.
"Eligible Inventory" shall mean all of the Inventory of the
Company which is in good and merchantable condition, is not obsolete or
discontinued, and which would properly be classified as "work-in-process" or
"unbilled contracts in process" under GAAP, excluding:
(a) consigned goods and inventory located outside the United
States of America;
(b) inventory covered by or subject to a seller's right to
repurchase, or any consensual or nonconsensual lien or security interest
(including without limitation purchase money security interests) other than the
liens in favor of Laurus; or
(c) inventory delivered to a customer, unless such inventory
is subject to Company's perfected first priority security or title retention
interest.
Inventory shall be valued on a "percent complete" basis determined in accordance
with GAAP, and Inventory which is at any time Eligible Inventory, but which
subsequently fails to meet any of the foregoing requirements, shall forthwith
cease to be Eligible Inventory.
"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.
"Exclusion Period" shall have the meaning given such term in
Section 13(t).
"Fixed Conversion Price" has the meaning given such term in
the Minimum Borrowing Note.
"Fixtures" means all "fixtures" as such term is defined in the
UCC, now owned or hereafter acquired by any Person.
42
"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, now owned or hereafter acquired by any Person
including all right, title and interest that such Person may now or hereafter
have in or under any contract, all Payment Intangibles, customer lists,
Licenses, Intellectual Property, interests in partnerships, joint ventures and
other business associations, permits, proprietary or confidential information,
inventions (whether or not patented or patentable), technical information,
procedures, designs, knowledge, know-how, Software, data bases, data, skill,
expertise, experience, processes, models, drawings, materials, Books and
Records, Goodwill (including the Goodwill associated with any Intellectual
Property), all rights and claims in or under insurance policies (including
insurance for fire, damage, loss, and casualty, whether covering personal
property, real property, tangible rights or intangible rights, all liability,
life, key-person, and business interruption insurance, and all unearned
premiums), uncertificated securities, choses in action, deposit accounts, rights
to receive tax refunds and other payments, rights to received dividends,
distributions, cash, Instruments and other property in respect of or in exchange
for pledged Stock and Investment Property, and rights of indemnification.
"Goods" means all "goods", as such term is defined in the UCC,
now owned or hereafter acquired by any Person, wherever located, including
embedded software to the extent included in "goods" as defined in the UCC,
manufactured homes, 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.
"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.
43
"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 may from time to time make available to Company up to
fifty percent (50%) of the lesser of (i) the net face amount of WIP Inventory of
Company and (ii) $5,000,000.
"Investment Property" means all "investment property", as such
term is defined in the UCC, now owned or hereafter acquired by any Person,
wherever located.
"Letter-of-Credit Rights" means "letter-of-credit rights" as
such term is defined in the UCC, now owned or hereafter acquired by any Person,
including rights to payment or performance under a letter of credit, whether or
not such Person, as beneficiary, has demanded or is entitled to demand payment
or performance.
"License" means any rights under any written agreement now or
hereafter acquired by any Person to use any trademark, trademark registration,
copyright, copyright registration or invention for which a patent is in
existence or other license of rights or interests now held or hereafter acquired
by any Person.
"Lien" means any mortgage, security deed, deed of trust,
pledge, hypothecation, assignment, security interest, lien (whether statutory or
otherwise), charge, claim or encumbrance, or preference, priority or other
security agreement or preferential arrangement held or asserted in respect of
any asset of any kind or nature whatsoever including any conditional sale or
other title retention agreement, any lease having substantially the same
economic effect as any of the foregoing, and the filing of, or agreement to
give, any financing statement under the UCC or comparable law of any
jurisdiction.
"Loans" 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
the business, assets, liabilities, condition (financial or otherwise),
properties or operations of Company.
"Maximum Legal Rate" shall have the meaning given to such term
in Section 5(a)(iv).
44
"Minimum Borrowing Amount" means $2,000,000, 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" shall have the meaning set forth in that certain
Master Security Agreement dated as of the date hereof between the Company and
the Laurus, as such agreement shall be amended, modified or supplemented, from
time to time.
"Option Shares" has the meaning given such term in Section
12(a).
"Options" has the meaning set forth in the Registration Rights
Agreements.
"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 workers compensation, unemployment insurance or
other forms of governmental insurance or benefits, relating to employees,
securing sums (i) not overdue or (ii) being diligently contested in good faith
provided that adequate reserves with respect thereto are maintained on the books
of the applicable Company in conformity with GAAP; (c) Liens in favor of Laurus;
(d) Liens for taxes (i) not yet due or (ii) being diligently contested in good
faith by appropriate proceedings, provided that adequate reserves with respect
thereto are maintained on the books of the applicable Company in conformity with
GAAP provided, that, the Lien shall have no effect on the priority of Liens in
favor of Laurus or the value of the assets in which Laurus has a Lien; (e)
Purchase Money Liens securing Purchase Money Indebtedness to the extent
permitted in this Agreement and (f) Liens specified on the Schedules 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
45
government (whether federal, state, county, city, municipal or otherwise,
including any instrumentality, division, agency, body or department thereof),
and shall include such Person's successors and assigns.
"Prime Rate" means the "prime rate" published in The Wall
Street Journal from time to time. The Prime Rate shall be increased or decreased
as the case may be for each increase or decrease in the Prime Rate in an amount
equal to such increase or decrease in the Prime Rate; each change to be
effective as of the day of the change in such rate.
"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 or any other Person from time
to time with respect to any Collateral; (b) any and all payments (in any form
whatsoever) made or due and payable to Company from time to time in connection
with any requisition, confiscation, condemnation, seizure or forfeiture of any
Collateral by any governmental body, governmental authority, bureau or agency
(or any person acting under color of governmental authority); (c) any claim of
Company against third parties (i) for past, present or future infringement of
any Intellectual Property or (ii) for past, present or future infringement or
dilution of any trademark or trademark license or for injury to the goodwill
associated with any trademark, trademark registration or trademark licensed
under any trademark License; (d) any recoveries by Company against third parties
with respect to any litigation or dispute concerning any Collateral, including
claims arising out of the loss or nonconformity of, interference with the use
of, defects in, or infringement of rights in, or damage to, Collateral; (e) all
amounts collected on, or distributed on account of, other Collateral, including
dividends, interest, distributions and Instruments with respect to Investment
Property and pledged Stock; and (f) any and all other amounts , rights to
payment or other property acquired upon the sale, lease, license, exchange or
other disposition of Collateral and all rights arising out of Collateral.
"Purchase Money Indebtedness" means (a) any indebtedness
incurred for the payment of all or any part of the purchase price of any fixed
asset, including indebtedness under capitalized leases, (b) any indebtedness
incurred for the sole purpose of financing or refinancing all or any part of the
purchase price of any fixed asset, and (c) any renewals, extensions or
refinancings thereof (but not any increases in the principal amounts thereof
outstanding at that time).
"Purchase Money Lien" means any Lien upon any fixed assets
that secures the Purchase Money Indebtedness related thereto but only if such
Lien shall at all times be confined solely to the asset the purchase price of
which was financed or refinanced through the incurrence of the Purchase Money
Indebtedness secured by such Lien and only if such Lien secures only such
Purchase Money Indebtedness.
"Receivables Purchase" shall have the meaning given such term
in Section 2(b).
46
"Registration Rights Agreements" means those registration
rights agreements from time to time entered into between Company and Laurus, 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 Eight Million
Dollars ($8,000,000).
"SEC" shall mean the Securities and Exchange Commission.
"Securities" means the Notes and the Options being issued by
Company to Laurus pursuant to this Agreement and the Ancillary Agreements and
the shares of the common stock of Company which may be issued pursuant to
conversion of such Notes in whole or in part or exercise of such Options.
"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 Company or any of its Subsidiaries in favor of Laurus.
"Software" means all "software" as such term is defined in the
UCC, now owned or hereafter acquired by any Person, including all computer
programs and all supporting information provided in connection with a
transaction related to any program.
"Stock" means all certificated and uncertificated shares,
options, warrants, membership interests, general or limited partnership
interests, participation or other equivalents (regardless of how designated) of
or in a corporation, partnership, limited liability company or equivalent entity
whether voting or nonvoting, including common stock, preferred stock, or any
other "equity security" (as such term is defined in Rule 3a11-1 of the General
Rules and Regulations promulgated by the SEC under the Securities Exchange Act
of 1934).
"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 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
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termination hereunder or satisfaction of the Obligations by Company as provided
hereunder or under the Ancillary Agreements.
"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.
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