EXHIBIT 10.6
SECURITY AGREEMENT
This Security Agreement is made as of September 30, 2004 by and among
LAURUS MASTER FUND, LTD., a Cayman Islands corporation ("Laurus"), CATALYST
LIGHTING GROUP, INC., a Delaware corporation ("Company"), and WHITCO COMPANY,
LP, a Texas limited partnership.
BACKGROUND
Company and Eligible Subsidiaries have requested that Laurus make advances
available to Company; and
Laurus has agreed to make such advances on the terms and conditions set
forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and undertakings
and the terms and conditions contained herein, the parties hereto agree as
follows:
1. (a) General Definitions. Capitalized terms used in this Agreement shall
have the meanings assigned to them in Annex A.
(b) Accounting Terms. Any accounting terms used in this Agreement which
are not specifically defined shall have the meanings customarily given them in
accordance with GAAP and all financial computations shall be computed, unless
specifically provided herein, in accordance with GAAP consistently applied.
(c) Other Terms. All other terms used in this Agreement and defined in the
UCC, shall have the meaning given therein unless otherwise defined herein.
(d) Rules of Construction. All Schedules, Addenda, Annexes and Exhibits
hereto or expressly identified to this Agreement are incorporated herein by
reference and taken together with this Agreement constitute but a single
agreement. The words "herein", hereof" and "hereunder" or other words of similar
import refer to this Agreement as a whole, including the Exhibits, Addenda,
Annexes and Schedules thereto, as the same may be from time to time amended,
modified, restated or supplemented, and not to any particular section,
subsection or clause contained in this Agreement. Wherever from the context it
appears appropriate, each term stated in either the singular or plural shall
include the singular and the plural, and pronouns stated in the masculine,
feminine or neuter gender shall include the masculine, the feminine and the
neuter. The term "or" is not exclusive. The term "including" (or any form
thereof) shall not be limiting or exclusive. All references to statutes and
related regulations shall include any amendments of same and any successor
statutes and regulations. All references in this Agreement or in the Schedules,
Addenda, Annexes and Exhibits to this Agreement to sections, schedules,
disclosure schedules, exhibits, and attachments shall refer to the corresponding
sections, schedules, disclosure schedules, exhibits, and attachments of or to
this Agreement. All references to any instruments or agreements, including
references to any of this Agreement or the Ancillary Agreements shall include
any and all modifications or amendments thereto and any and all extensions or
renewals thereof.
2. Loans. (a)(i) Subject to the terms and conditions set forth herein and
in the Ancillary Agreements, Laurus may make revolving loans (the "Loans") to
Company and Eligible Subsidiaries from time to time during the Term which, in
the aggregate at any time outstanding, will not exceed the lesser of (x) (I) the
Capital Availability Amount minus (II) such reserves as Laurus may reasonably in
its good faith judgment deem proper and necessary from time to time (the
"Reserves") and (y) an amount equal to (I) the Accounts Availability plus (II)
the Inventory Availability, minus (III) the Reserves. The amount derived at any
time from Section 2(a)(i)(y)(I) plus Section 2(a)(i)(y)(II) minus
2(a)(i)(y)(III) shall be referred to as the "Formula Amount". Company and each
Eligible Subsidiary shall jointly and severally 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 and each
Eligible Subsidiary shall jointly and severally 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 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 and each Eligible Subsidiary to Laurus on
the Closing Date. Notwithstanding anything herein to the contrary, whenever
during the Term the outstanding balance on the Revolving Note should equal or
exceed $1,000,000 to the extent that the outstanding balance on the Minimum
Borrowing Note shall be less than $1,000,000 (the difference of $1,000,000 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.
(ii) Notwithstanding the limitations set forth above, if requested
by Company and/or the Eligible Subsidiaries, Laurus retains the right to lend to
Company and the Eligible Subsidiaries from time to time such amounts in excess
of such limitations as Laurus may determine in its sole discretion. If Laurus
decides, in its sole discretion, to lend such amounts in excess of such
limitations, the lending of such amounts shall not, on its own, cause the
occurrence of an Event of Default.
(iii) Each of Company and the Eligible Subsidiaries acknowledge that
the exercise of Laurus' discretionary rights hereunder (which shall be exercised
by Laurus in good faith and in its commercially reasonable discretion) may
result during the Term in one or more increases or decreases in the advance
percentages used in determining Accounts Availability and/or Inventory
Availability and each of Company and the Eligible Subsidiaries hereby consent to
any such increases or decreases which may limit or restrict advances requested
by Company.
(iv) If any interest, fees, costs or charges payable to Laurus
hereunder are not paid when due, each of Company and the Eligible Subsidiaries
shall thereby be deemed to have requested, and Laurus is hereby authorized at
its discretion to make and charge to Company's and the Eligible Subsidiaries'
account, a Loan as of such date in an amount equal to such unpaid interest,
fees, costs or charges.
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(v) If Company or any Eligible Subsidiary at any time fails to
perform or observe any of the covenants contained in this Agreement or any
Ancillary Agreement, following any applicable notice and grace periods, if any,
Laurus may, but need not, perform or observe such covenant on behalf and in the
name, place and stead of Company and/or such Eligible Subsidiary (or, at Laurus'
option, in Laurus' name) and may, but need not, take any and all other actions
which Laurus may deem necessary to cure or correct such failure (including the
payment of taxes, the satisfaction of Liens, the performance of obligations owed
to Account Debtors, lessors or other obligors, the procurement and maintenance
of insurance, the execution of assignments, security agreements and financing
statements, and the endorsement of instruments). Laurus shall provide written
notice to Company specifying all actions taken by Laurus under the immediately
preceding sentence. The amount of all monies expended and all costs and expenses
(including attorneys' fees and legal expenses) incurred by Laurus in connection
with or as a result of the performance or observance of such agreements or the
taking of such action by Laurus shall be charged to Company's and the Eligible
Subsidiaries' account as a Loan and added to the Obligations. To facilitate
Laurus' performance or observance of such covenants of Company and each Eligible
Subsidiary, Company and each Eligible Subsidiary hereby irrevocably appoint
Laurus, or Laurus' delegate, acting alone, as its attorney in fact (which
appointment is coupled with an interest) with the right (but not the duty) from
time to time to create, prepare, complete, execute, deliver, endorse or file in
the name and on behalf of it any and all instruments, documents, assignments,
security agreements, financing statements, applications for insurance and other
agreements and writings required to be obtained, executed, delivered or endorsed
by it. Laurus shall provide written notice to Company specifying all actions
taken by Laurus under the immediately preceding sentence.
(vi) Laurus will account to Company monthly with a statement of all
Loans and other advances, charges and payments made pursuant to this Agreement,
and such account rendered by Laurus shall be deemed final, binding and
conclusive unless Laurus is notified by Company in writing to the contrary
within thirty (30) days of the date each account was rendered specifying the
item or items to which objection is made.
(vii) During the Term, Company and each Eligible Subsidiary may
borrow and prepay Loans in accordance with the terms and conditions hereof.
(viii) If any Eligible Account is not paid by the Account Debtor
within ninety (90) days after the date that such Eligible Account was invoiced
or if any Account Debtor asserts a deduction, dispute, contingency, set-off, or
counterclaim with respect to any Eligible Account, (a "Delinquent Account"),
each of Company and the Eligible Subsidiaries shall (i) reimburse Laurus for the
amount of the Loans made with respect to such Delinquent Account 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) Following the occurrence of an Event of Default which continues to
exist, Laurus may, at its option, elect to convert the credit facility
contemplated hereby to an accounts receivable purchase facility. Upon such
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election by Laurus (subsequent notice of which Laurus shall provide to Company
and the Eligible Subsidiaries), Company and the Eligible Subsidiaries shall be
deemed to hereby have sold, assigned, transferred, conveyed and delivered to
Laurus, and Laurus shall be deemed to have purchased and received from Company
and each Eligible Subsidiary, all right, title and interest of Company and each
Eligible Subsidiary in and to all Accounts which shall at any time constitute
Eligible Accounts (the "Receivables Purchase"). All outstanding Loans hereunder
shall be deemed obligations under such accounts receivable purchase facility.
The conversion to an accounts receivable purchase facility in accordance with
the terms hereof shall not be deemed an exercise by Laurus of its secured
creditor rights under Article 9 of the UCC. Immediately following Laurus'
request, Company and each Eligible Subsidiary shall execute all such further
documentation as may be required by Laurus to more fully set forth the accounts
receivable purchase facility herein contemplated, including, without limitation,
Laurus' standard form of accounts receivable purchase agreement and account
debtor notification letters, but Company's or any Eligible Subsidiary's failure
to enter into any such documentation shall not impair or affect the Receivables
Purchase in any manner whatsoever.
(c) 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 and each Eligible
Subsidiary 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 shares of Common
Stock into which such subsequent Minimum Borrowing Note is convertible, as set
forth in the Registration Rights Agreement.
3. Repayment of the Loans. Company and the Eligible Subsidiaries (a) may
prepay the Obligations from time to time prior to expiration of the Term in
accordance with the terms and provisions of the Notes (and Section 16 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 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 12:00
noon (New York time) on the due date thereof in immediately available funds.
Company and the Eligible Subsidiaries may borrow, repay and reborrow Loans, in
whole or in part, in accordance with the terms hereof and the other Ancillary
Agreements.
4. Procedure for Loans. Company Agent may by written notice request a
borrowing of Loans prior to 12:00 noon (New York time) on the Business Day of
its request to incur, on the next Business Day, a Loan. Together with each
request for a Loan (or at such other intervals as Laurus may request), Company
Agent shall deliver to Laurus a Borrowing Base Certificate in the form of
Exhibit A, which shall be certified as true and correct by the Chief Executive
Officer of Company Agent together with all supporting documentation relating
thereto. All Loans shall be disbursed from whichever office or other place
Laurus may designate from time to time and shall be charged to Company's and the
Eligible Subsidiaries' account on Laurus' books. The proceeds of each Loan made
by Laurus shall be made available to Company Agent on the Business Day following
the Business Day so requested in accordance with the terms of this Section 4 by
way of credit to Company's and the Eligible Subsidiaries' operating account
maintained with such bank as Company and each Eligible Subsidiary designated to
Laurus. Any and all Obligations due and owing hereunder may be charged to
Company's and the Eligible Subsidiaries' account and shall constitute Loans.
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5. Interest and Payments.
(a) Interest.
(i) Except as modified by Section 5(a)(iii) below, Company and each
Eligible Subsidiary 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 and the Eligible Subsidiaries' account for said interest.
(iii) Effective upon the occurrence of any Event of Default and for
so long as any Event of Default shall be continuing, the Contract Rate shall
automatically be increased as set forth in the Notes, respectively, (such
increased rate, the "Default Rate"), and all outstanding Obligations, including
unpaid interest, 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 and each Eligible Subsidiary shall pay principal,
interest and all other amounts payable hereunder, or under any Ancillary
Agreement, without any deduction whatsoever, including any deduction for any
set-off or counterclaim.
(b) Payments; Certain Closing Conditions.
(i) Closing/Annual Payments. Upon execution of this Agreement by
Company and Laurus, Company and the Eligible Subsidiaries 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) Unused Line Payment. If, during any month, the average of the
aggregate Loans outstanding during such month (the "Average Loan Amount") do not
equal the Capital Availability Amount, Company shall pay to Laurus at the end of
such month a payment (calculated on a per annum basis) in an amount equal to
thirty five basis points (0.35%) of the amount by which the Capital Availability
Amount exceeds the Average Loan Amount. Notwithstanding the foregoing, any such
due and unpaid fee shall come immediately due and payable upon termination of
this Agreement.
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(iii) Overadvance Payment. Without affecting Laurus' rights
hereunder in the event the Loans exceed the Formula Amount (each such event, an
"Overadvance"), all such Overadvances shall bear interest at an annual rate
equal to one percent (1%) of the amount of such Overadvances for each month or
portion thereof such amounts shall be outstanding and in excess of the Formula
Amount.
(iv) Financial Information Default. Without affecting Laurus' other
rights and remedies, in the event Company or any Eligible Subsidiary fails to
deliver the financial information required by Section 11 on or before the date
required by this Agreement, Company and the Eligible Subsidiaries 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 or waived in writing by Laurus. Such
fee shall be charged to Company's and the Eligible Subsidiaries' account upon
the occurrence of each such failure.
(v) Expenses. The Company and the Eligible Subsidiaries shall
reimburse Laurus for its reasonable expenses (including legal fees and expenses)
incurred in connection with the preparation and negotiation of this Agreement
and the Ancillary Agreements (as hereinafter defined), and expenses incurred in
connection with Laurus' due diligence review of the Company and its Subsidiaries
and all related matters. Amounts required to be paid under this Section 5(b)(v),
together with similar amounts required to be paid pursuant to Section 2(c) of
the Securities Purchase Agreement will be paid on the Closing Date and shall not
exceed $44,500 in the aggregate.
6. Security Interest.
(a) To secure the prompt payment to Laurus of the Obligations, each of
Company and each Eligible Subsidiary hereby assigns, pledges and grants to
Laurus a continuing security interest in and Lien upon all of the Collateral.
All of Company's and each Eligible Subsidiary's Books and Records relating to
the Collateral shall, until delivered to or removed by Laurus, be kept by
Company and each Eligible Subsidiary, as the case may be, in trust for Laurus
until all Obligations have been paid in full. Each confirmatory assignment
schedule or other form of assignment hereafter executed by Company and each
Eligible Subsidiary shall be deemed to include the foregoing grant, whether or
not the same appears therein.
(b) Company and each Eligible Subsidiary hereby (i) authorizes Laurus to
file any financing statements, continuation statements or amendments thereto
that (x) indicate the Collateral (1) as all assets and personal property of
Company or such Eligible Subsidiary, as the case may be, or words of similar
effect, regardless of whether any particular asset comprised in the Collateral
falls within the scope of Article 9 of the UCC of such jurisdiction, or (2) as
being of an equal or lesser scope or with greater detail, and (y) contain any
other information required by Part 5 of Article 9 of the UCC for the sufficiency
or filing office acceptance of any financing statement, continuation statement
or amendment and (ii) ratifies its authorization for Laurus to have filed any
initial financial statements, or amendments thereto if filed prior to the date
hereof. Each of Company and each Eligible Subsidiary acknowledges that it is not
authorized to file any financing statement or amendment or termination statement
with respect to any financing statement without the prior written consent of
Laurus and agrees that it will not do so without the prior written consent of
Laurus, subject to Company's and such Eligible Subsidiary's rights under Section
9-509(d)(2) of the UCC.
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(c) Each of Company and each Eligible Subsidiary hereby grants to Laurus
an irrevocable, non-exclusive license (exercisable only 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 or such
Eligible Subsidiary, as the case may be) to use, transfer, license or sublicense
any Intellectual Property now owned, licensed to, or hereafter acquired by
Company and/or such Eligible Subsidiary, 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 granted by
each Company and each Eligible Subsidiary to Laurus hereunder is not and will
not be in conflict with the contractual or commercial rights of any third
Person; provided, that such license will terminate on the termination of this
Agreement and the payment in full of all Obligations.
7. Representations, Warranties and Covenants Concerning the Collateral.
Each of Company and each Eligible Subsidiary represents, warrants (each of which
such representations and warranties shall be deemed repeated upon the making of
each request for a Loan and made as of the time of each and every Loan
hereunder) and covenants as follows:
(a) all of the Collateral (i) is owned by Company and/or an Eligible
Subsidiary, as the case may be, free and clear of all Liens (including any
claims of infringement) except those in Laurus' favor and Permitted Liens and
(ii) is not subject to any agreement prohibiting the granting of a Lien or
requiring notice of or consent to the granting of a Lien.
(b) neither the Company nor any Eligible Subsidiary shall encumber,
mortgage, pledge, assign or grant any Lien in any Collateral or any of Company's
or any Eligible Subsidiary other assets to anyone other than Laurus and except
for Permitted Liens.
(c) the Liens granted pursuant to this Agreement, upon completion of the
filings and other actions listed on Schedule 7(c) (which, in the case of all
filings and other documents referred to in said Schedule, have been delivered to
Laurus in duly executed form) constitute valid perfected security interests in
all of the Collateral in favor of Laurus as security for the prompt and complete
payment and performance of the Obligations, enforceable in accordance with the
terms hereof against any and all creditors of and any purchasers from Company
and the Eligible Subsidiaries and such security interest is prior to all other
Liens in existence on the date hereof.
(d) no effective security agreement, mortgage, deed of trust, financing
statement, equivalent security or Lien instrument or continuation statement
covering all or any part of the Collateral is or will be on file or of record in
any public office, except those relating to Permitted Liens.
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(e) neither Company nor any Eligible Subsidiary shall dispose of any of
the Collateral whether by sale, lease or otherwise except for the sale of
Inventory in the ordinary course of business and for the disposition or transfer
in the ordinary course of business during any fiscal year of obsolete and
worn-out Equipment having an aggregate fair market value of not more than
$25,000 and only to the extent that (i) the proceeds of any such disposition are
used to acquire replacement Equipment which is subject to Laurus' first priority
security interest or are used to repay Loans or to pay general corporate
expenses, or (ii) following the occurrence of an Event of Default which
continues to exist the proceeds of which are remitted to Laurus to be held as
cash collateral for the Obligations.
(f) each of Company and each Eligible Subsidiary shall defend the right,
title and interest of Laurus in and to the Collateral against the claims and
demands of all Persons whomsoever, and take such actions, including (i) all
actions necessary to grant Laurus "control" of any Investment Property, Deposit
Accounts, Letter-of-Credit Rights or electronic Chattel Paper owned by Company
and each Eligible Subsidiary, with any agreements establishing control to be in
form and substance satisfactory to Laurus, (ii) the prompt (but in no event
later than five (5) Business Days following Laurus' request therefor) delivery
to Laurus of all original Instruments, Chattel Paper, negotiable Documents and
certificated Stock owned by Company and each Eligible Subsidiary (in each case,
accompanied by stock powers, allonges or other instruments of transfer executed
in blank), (iii) notification of Laurus' interest in Collateral at Laurus'
request, and (iv) the institution of litigation against third parties as shall
be prudent in order to protect and preserve Company's, each Eligible
Subsidiary's and/or Laurus' respective and several interests in the Collateral.
(g) each of Company and each Eligible Subsidiary shall promptly, and in
any event within five (5) Business Days after the same is acquired by it, notify
Laurus of any commercial tort claim (as defined in the UCC) acquired by it and
unless otherwise consented by Laurus, each of Company and/or each Eligible
Subsidiary, as the case may be, shall enter into a supplement to this Agreement
granting to Laurus a Lien in such commercial tort claim.
(h) each of Company and each Eligible Subsidiary shall place notations
upon its Books and Records and any financial statement of Company and each
Eligible Subsidiary, as the case may be, to disclose Laurus' Lien in the
Collateral.
(i) if either Company and/or ay Eligible Subsidiary retains possession of
any Chattel Paper or Instrument with Laurus' consent, upon Laurus' request such
Chattel Paper and Instruments shall be marked with the following legend: "This
writing and obligations evidenced or secured hereby are subject to the security
interest of Laurus Master Fund, Ltd."
(j) each of Company and each Eligible Subsidiary shall perform in a
reasonable time all other steps requested by Laurus to create and maintain in
Laurus' favor a valid perfected first Lien in all Collateral subject only to
Permitted Liens.
(k) each of Company and each Eligible Subsidiary shall notify Laurus
promptly and in any event within three (3) Business Days after obtaining
knowledge thereof (i) of any event or circumstance that to Company's or any
Eligible Subsidiary's knowledge would cause Laurus to consider any then existing
Account and/or Inventory as no longer constituting an Eligible Account or
Eligible Inventory, as the case may be; (ii) of any material delay in Company's
or any Eligible Subsidiary's performance of any of its obligations to any
Account Debtor; (iii) of any assertion by any Account Debtor of any material
claims, offsets or counterclaims; (iv) of any allowances, credits and/or monies
granted by Company and/or any Eligible Subsidiary (collectively, "Allowances")
to the extent such Allowances with respect to any Account Debtor exceed $50,000
in the aggregate; (v) of all material adverse information relating to the
financial condition of an Account Debtor; (vi) of any material return of goods;
and (vii) of any loss, damage or destruction of any of the Collateral.
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(l) all Eligible Accounts (i) which are billed on a construction
completion basis but not payable until the project is completed, represent
complete bona fide transactions which require no further act under any
circumstances on Company's or any Eligible Subsidiary's part to make such
Accounts payable by the Account Debtors, (ii) are not subject to any present,
future contingent offsets or counterclaims, and (iii) do not represent xxxx and
hold sales, consignment sales, guaranteed sales, sale or return or other similar
understandings or obligations of any Affiliate or Subsidiary of either Company
or any Eligible Subsidiary. Neither Company nor any Eligible Subsidiary has
made, and neither Company nor any Eligible Subsidiary will make, any agreement
with any Account Debtor for any extension of time for the payment of any
Account, any compromise or settlement for less than the full amount thereof, any
release of any Account Debtor from liability therefor, or any deduction
therefrom except an extension of time for payment or a discount or allowance for
prompt or early payment allowed by Company or any Eligible Subsidiary in the
ordinary course of its business consistent with historical practice and as
previously disclosed to Laurus in writing.
(m) each of Company and each Eligible Subsidiary shall keep and maintain
its Equipment in good operating condition, except for ordinary wear and tear,
and shall make all necessary repairs and replacements thereof so that the value
and operating efficiency shall at all times be maintained and preserved. Neither
Company nor any Eligible Subsidiary shall permit any such items to become a
Fixture to real estate or accessions to other personal property.
(n) each of Company and each Eligible Subsidiary shall maintain and keep
all of its Books and Records concerning the Collateral at such person's
executive offices listed in Schedule 12(bb).
(o) each of Company and each Eligible Subsidiary shall maintain and keep
the tangible Collateral at the addresses listed in Schedule 12(bb), provided,
that each of Company and/or any such Eligible Subsidiary may change such
locations or open a new location, provided that Company or any such Eligible
Subsidiary, as the case may be, provides Laurus at least thirty (30) days prior
written notice of such changes or new location and (ii) prior to such change or
opening of a new location where Collateral having a value of more than $50,000
will be located, Company and/or any such Eligible Subsidiary, as the case may
be, executes and delivers to Laurus such agreements as Laurus may request,
including landlord agreements, mortgagee agreements and warehouse agreements,
each in form and substance satisfactory to Laurus.
(p) Schedule 7(p) lists all banks and other financial institutions at
which Company and each Eligible Subsidiary maintains deposits and/or other
accounts, and such Schedule correctly identifies the name, address and telephone
number of each such depository, the name in which the account is held, a
description of the purpose of the account, and the complete account number.
Neither the Company nor any Eligible Subsidiary shall establish any depository
or other bank account of any with any financial institution (other than the
accounts set forth on Schedule 7(p)) without Laurus' prior written consent.
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(q) all Inventory manufactured by Company in the United States of America
shall be produced in accordance with the requirements of the Federal Fair Labor
Standards Act of 1938, as amended and all rules, regulations and orders related
thereto or promulgated thereunder.
8. Payment of Accounts.
(a) Each of Company and each Eligible Subsidiary will irrevocably direct
all of its present and future Account Debtors and other Persons obligated to
make payments constituting Collateral to make such payments directly to the
lockboxes maintained by Company and each Eligible Subsidiary (the "Lockboxes")
with First National Bank of Xxxxxxxxxx (the "Lockbox Bank") pursuant to the
terms of the Third Party Blocked Account Agreement dated as of September 30,
2004 or such other financial institution accepted by Laurus in writing as may be
selected by Company and/or any Eligible Subsidiary. On or prior to the Closing
Date, each of Company and each Eligible Subsidiary shall and shall cause the
Lockbox Bank to enter into all such documentation acceptable to Laurus pursuant
to which, among other things, the Lockbox Bank agrees to: (a) sweep the Lockbox
on a daily basis and deposit all checks received therein to an account
designated by Laurus in writing and (b) comply only with the instructions or
other directions of Laurus concerning the Lockbox. All of Company's and each
Eligible Subsidiary's invoices, account statements and other written or oral
communications directing, instructing, demanding or requesting payment of any
Account of Company or any Eligible Subsidiary or any other amount constituting
Collateral shall conspicuously direct that all payments be made to the Lockbox
or such other address as Laurus may direct in writing. If, notwithstanding the
instructions to Account Debtors, Company or any Eligible Subsidiary receives any
payments, Company or such Eligible Subsidiary, as the case may be, shall
immediately remit such payments to Laurus in their original form with all
necessary endorsements. Until so remitted, Company and each Eligible Subsidiary
shall hold all such payments in trust for and as the property of Laurus and
shall not commingle such payments with any of its other funds or property.
(b) At Laurus' election, following the occurrence of an Event of Default
which is continuing, Laurus may notify each of Company's and each Eligible
Subsidiary's Account Debtors of Laurus' security interest in the Accounts,
collect them directly and charge the collection costs and expenses thereof to
Company's and the Eligible Subsidiaries joint and several account.
9. Collection and Maintenance of Collateral.
(a) Laurus may verify Company's and each Eligible Subsidiary's Accounts
from time to time, but not more often than once every three (3) months unless an
Event of Default has occurred and is continuing, utilizing an audit control
company or any other agent of Laurus.
(b) Proceeds of Accounts received by Laurus will be deemed received on the
Business Day after Laurus' receipt of such proceeds in good funds in dollars of
the United States of America in Laurus' account. Any amount received by Laurus
after 12:00 noon (New York time) on any Business Day shall be deemed received on
the next Business Day.
10
(c) As Laurus receives the proceeds of Accounts of Company or any Eligible
Subsidiary, it shall (i) apply such proceeds, as required, to amounts
outstanding under the Notes, and (ii) remit all such remaining proceeds (net of
interest, fees and other amounts then due and owing to Laurus hereunder) to
Company and/or any such Eligible Subsidiary upon request (but no more often than
twice a week). Notwithstanding the foregoing, following the occurrence and
during the continuance of an Event of Default, Laurus, at its option, may (a)
apply such proceeds to the Obligations in such order as Laurus shall elect, (b)
hold all such proceeds as cash collateral for the Obligations and each of
Company and each Eligible Subsidiary hereby grants to Laurus a security interest
in such cash collateral amounts as security for the Obligations and/or (c) do
any combination of the foregoing.
10. Inspections and Appraisals. At all times during normal business hours,
Laurus, and/or any agent of Laurus shall have the right to (a) have access to,
visit, inspect, review, evaluate and make physical verification and appraisals
of each of Company's and each Eligible Subsidiary's properties and the
Collateral, (b) inspect, audit and copy (or take originals if necessary) and
make extracts from Company's and each Eligible Subsidiary's Books and Records,
including management letters prepared by independent accountants, and (c)
discuss with Company's and each Eligible Subsidiary's principal officers, and
independent accountants, Company's and each Eligible Subsidiary's business,
assets, liabilities, financial condition, results of operations and business
prospects. Each of Company and each Eligible Subsidiary will deliver to Laurus
any instrument necessary for Laurus to obtain records from any service bureau
maintaining records for Company and such Eligible Subsidiary. If any internally
prepared financial information, including that required under this Section is
unsatisfactory in any manner to Laurus, Laurus may request that the Accountants
review the same.
11. Financial Reporting. Company will deliver, or cause to be delivered,
to Laurus each of the following, which shall be in form and detail acceptable to
Laurus:
(a) As soon as available, and in any event within ninety (90) days after
the end of each fiscal year of 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 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
11
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, agings of
Company's and each Eligible Subsidiary's Accounts, unaudited trial balances and
their accounts payable and a calculation of Company's and each Eligible
Subsidiary's Accounts, Eligible Accounts, Inventory and/or Eligible Inventory,
provided, however, that if Laurus shall request the foregoing information more
often than as set forth in the immediately preceding clause, Company and/or any
Eligible Subsidiary shall have thirty (30) days from each such request to comply
with Laurus' demand; and
(d) Promptly after (i) the filing thereof, copies of Company's most recent
registration statements and annual, quarterly, monthly or other regular reports
which Company files with the Securities and Exchange Commission (the "SEC"), and
(ii) the issuance thereof, copies of such financial statements, reports and
proxy statements as Company shall send to its stockholders.
12. Additional Representations and Warranties. Company and each Eligible
Subsidiary hereby represent and warrant to Laurus as follows (which
representations and warranties are supplemented by, and subject to, Company's
filings under the Securities Exchange Act of 1934 (collectively, the "Exchange
Act Filings"), copies of which have been provided to Laurus:
(a) Organization, Good Standing and Qualification. Each of Company and
each of its Subsidiaries is a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of organization. Each of
Company and each of its Subsidiaries has the corporate power and authority to
own and operate its properties and assets, to execute and deliver this Agreement
and the Ancillary Agreements, to issue and sell the Notes and the shares of
Common Stock issuable upon conversion of the Notes (the "Note Shares"), to issue
and sell the Warrants and the shares of Common Stock issuable upon conversion of
the Warrants (the "Warrant Shares"),and to carry out the provisions of this
Agreement and the Ancillary Agreements and to carry on its business as presently
conducted. Each of Company and each of its Subsidiaries is duly qualified and is
authorized to do business and is in good standing as a foreign corporation in
all jurisdictions, except for those jurisdictions in which the failure to do so
has not had, or could not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect.
(b) Subsidiaries. Each direct and indirect Subsidiary of Company, the
direct owner of such Subsidiary and its percentage ownership thereof, is set
forth on Schedule 12(b).
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(c) Capitalization; Voting Rights.
(i) The authorized capital stock of the Company, as of the date
hereof consists of 50,000,000 shares, of which 40,000,000 are shares of Common
Stock, par value $0.01 per share, 3,646,869 shares of which are issued and
outstanding, and 10,000,000 are shares of preferred stock, par value $0.01 per
share, none of which are issued and outstanding. Company has also issued options
and warrants that are convertible into 1,015,732 shares of Common Stock. The
authorized capital stock of each Subsidiary of the Company is set forth on
Schedule 12(c).
(ii) Except as disclosed on Schedule 12(c), other than: (i) the
shares reserved for issuance under Company's stock option plans; and (ii) shares
which may be issued pursuant to this Agreement and the Ancillary Agreements,
there are no outstanding options, warrants, rights (including conversion or
preemptive rights and rights of first refusal), proxy or stockholder agreements,
or arrangements or agreements of any kind for the purchase or acquisition from
Company of any of its securities. Except as disclosed on Schedule 12(c), neither
the offer, issuance or sale of any of the Notes or the Warrants, or the issuance
of any of the Note Shares or the Warrant Shares, nor the consummation of any
transaction contemplated hereby will result in a change in the price or number
of any securities of Company outstanding, under anti-dilution or other similar
provisions contained in or affecting any such securities.
(iii) All shares of Company's Common Stock issued on or after August
27, 2003 and, to the best knowledge of Company, all issued and outstanding
shares of Common Stock outstanding: (i) have been duly authorized and validly
issued and are fully paid and nonassessable; and (ii) were issued in compliance
with all applicable state and federal laws concerning the issuance of
securities.
(iv) The rights, preferences, privileges and restrictions of the
shares of the Common Stock are as stated in Company's Certificate of
Incorporation (the "Charter"). The Note Shares and the Warrant Shares have been
duly and validly reserved for issuance. When issued in compliance with the
provisions of this Agreement and Company's Charter, the Securities will be
validly issued, fully paid and nonassessable, and will be free of any liens or
encumbrances; provided, however, that the Securities may be subject to
restrictions on transfer under state and/or federal securities laws as set forth
herein or as otherwise required by such laws at the time a transfer is proposed.
(d) Authorization; Binding Obligations. All corporate action on the part
of each of Company and each of its Subsidiaries, their respective officers and
directors necessary for the authorization of this Agreement and the Ancillary
Agreements, the performance of all obligations of Company and each of its
Subsidiaries hereunder and under the Ancillary Agreements on the Closing Date
and, the authorization, sale, issuance and delivery of the Notes and the Warrant
has been taken or will be taken prior to the Closing Date. This Agreement and
the Ancillary Agreements, when executed and delivered and to the extent it is a
party thereto, will be valid and binding obligations of each of Company and each
of its Subsidiaries enforceable in accordance with their terms, except:
(i) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting enforcement of
creditors' rights; and
13
(ii) general principles of equity that restrict the availability of
equitable or legal remedies.
The sale of the Notes and the subsequent conversion of the Notes into Note
Shares are not and will not be subject to any preemptive rights or rights of
first refusal that have not been properly waived or complied with. The issuance
of the Warrants and the subsequent exercise of the Warrants for Warrant Shares
are not and will not be subject to any preemptive rights or rights of first
refusal that have not been properly waived or complied with.
(e) Liabilities. Neither Company nor any of its Subsidiaries has any
contingent liabilities, except current liabilities incurred in the ordinary
course of business and liabilities disclosed in any Exchange Act Filings.
(f) Agreements; Action. Except as set forth on Schedule 12(f) or as
disclosed in any Exchange Act Filings:
(i) There are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees to which Company or
any of its Subsidiaries is a party or to its knowledge by which it is bound
which may involve: (i) obligations (contingent or otherwise) of, or payments to,
Company or any of its Subsidiaries in excess of $50,000 (other than obligations
of, or payments to, Company or any of its Subsidiaries arising from purchase or
sale agreements entered into in the ordinary course of business); or (ii) the
transfer or license of any patent, copyright, trade secret or other proprietary
right to or from Company or any of its Subsidiaries (other than licenses arising
from the purchase of "off the shelf" or other standard products); or (iii)
provisions restricting the development, manufacture or distribution of Company's
or any of its Subsidiaries' products or services; or (iv) indemnification by
Company or any of its Subsidiaries with respect to infringements of proprietary
rights.
(ii) Since September 30, 2003, neither Company nor any of its
Subsidiaries has: (i) declared or paid any dividends, or authorized or made any
distribution upon or with respect to any class or series of its capital stock;
(ii) incurred any indebtedness for money borrowed or any other liabilities
(other than ordinary course obligations) individually in excess of $50,000 or,
in the case of indebtedness and/or liabilities individually less than $50,000,
in excess of $100,000 in the aggregate; (iii) made any loans or advances to any
person not in excess, individually or in the aggregate, of $100,000, other than
ordinary advances for travel expenses; or (iv) sold, exchanged or otherwise
disposed of any of its assets or rights, other than the sale of its Inventory in
the ordinary course of business.
(iii) For the purposes of subsections (i) and (ii) of this Section
12(f) above, all indebtedness, liabilities, agreements, understandings,
instruments, contracts and proposed transactions involving the same person or
entity (including persons or entities Company has reason to believe are
affiliated therewith or with any Subsidiary thereof) shall be aggregated for the
purpose of meeting the individual minimum dollar amounts of such subsections.
14
(g) Obligations to Related Parties. Except as set forth on Schedule
12(g), there are no obligations of Company or any of its Subsidiaries to
officers, directors, stockholders or employees of Company or any of its
Subsidiaries other than:
(i) for payment of salary for services rendered and for bonus
payments;
(ii) reimbursement for reasonable expenses incurred on behalf of
Company or any of its Subsidiaries; (iii) for other standard employee benefits
made generally available to all employees (including stock option agreements
outstanding under any stock option plan approved by the Board of Directors of
Company); and
(iv) obligations listed in Company's financial statements or
disclosed in any of its Exchange Act Filings.
Except as described above or set forth on Schedule 12(g), none of the officers,
directors or, to the best of Company's and each Eligible Subsidiary's knowledge,
key employees or stockholders of Company, any of its Subsidiaries or any members
of their immediate families, are indebted to Company or any of their
Subsidiaries, individually or in the aggregate, in excess of $50,000 or have any
direct or indirect ownership interest in any firm or corporation with which
Company or any of its Subsidiaries is affiliated or with which Company or any of
its Subsidiaries has a business relationship, or any firm or corporation which
competes with Company or any of its Subsidiaries, other than passive investments
in publicly traded companies (representing less than one percent (1%) of such
company) which may compete with Company or any of its Subsidiaries. Except as
described above, no officer, director or stockholder, or any member of their
immediate families, is, directly or indirectly, interested in any material
contract with Company or any of its Subsidiaries and no agreements,
understandings or proposed transactions are contemplated between Company or any
of its Subsidiaries and any such person. Except as set forth on Schedule 12(g),
neither Company nor any of its Subsidiaries is a guarantor or indemnitor of any
indebtedness of any other person, firm or corporation.
(h) Changes. Since June 30, 2004, except as disclosed in any Exchange Act
Filing or in any Schedule to this Agreement or to any of the Ancillary
Agreements, there has not been:
(i) any change in the business, assets, liabilities, condition
(financial or otherwise), properties, operations or prospects of Company or any
of its Subsidiaries, which, individually or in the aggregate, has had, or could
reasonably be expected to have, a Material Adverse Effect;
(ii) any resignation or termination of any officer, key employee or
group of employees of Company or any of its Subsidiaries;
(iii) any material change, except in the ordinary course of
business, in the contingent obligations of Company or any of its Subsidiaries by
way of guaranty, endorsement, indemnity, warranty or otherwise;
15
(iv) any damage, destruction or loss, whether or not covered by
insurance, which has had, or could reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect;
(v) any waiver by Company or any of its Subsidiaries of a valuable
right or of a material debt owed to it;
(vi) any direct or indirect material loans made by Company or any of
its Subsidiaries to any stockholder, employee, officer or director of Company or
any of its Subsidiaries, other than advances made in the ordinary course of
business;
(vii) any material change in any compensation arrangement or
agreement with any employee, officer, director or stockholder;
(viii) any declaration or payment of any dividend or other
distribution of the assets of Company or any of its Subsidiaries;
(ix) any labor organization activity related to Company or any of
its Subsidiaries;
(x) any debt, obligation or liability incurred, assumed or
guaranteed by Company or any of its Subsidiaries, except those for immaterial
amounts and for current liabilities incurred in the ordinary course of business;
(xi) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(xii) any change in any material agreement to which Company or any
of its Subsidiaries is a party or by which it is bound which, either
individually or in the aggregate, has had, or could reasonably be expected to
have, a Material Adverse Effect;
(xiii) any other event or condition of any character that, either
individually or in the aggregate, has had, or could reasonably be expected to
have, a Material Adverse Effect; or
(xiv) any arrangement or commitment by Company or any of its
Subsidiaries to do any of the acts described in subsection (i) through (xiii) of
this Section 12(h).
(i) Title to Properties and Assets; Liens, Etc. Except as set forth on
Schedule 12(i), each of Company and each of its Subsidiaries has good and
marketable title to its properties and assets, and good title to its leasehold
estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance
or charge, other than:
(i) those resulting from taxes which have not yet become delinquent;
(ii) minor liens and encumbrances which do not materially detract
from the value of the property subject thereto or materially impair the
operations of Company or any of its Subsidiaries; and
(iii) those that have otherwise arisen in the ordinary course of
business.
16
All facilities, machinery, equipment, fixtures, vehicles and other properties
owned, leased or used by Company or any of its Subsidiaries are in good
operating condition and repair and are reasonably fit and usable for the
purposes for which they are being used. Except as set forth on Schedule 12(i),
each of Company and each of its Subsidiaries is in compliance with all material
terms of each lease to which it is a party or is otherwise bound.
(j) Intellectual Property.
(i) Each of Company and each of its Subsidiaries owns or possesses
sufficient legal rights to all Intellectual Property necessary for its business
as now conducted and to Company's knowledge as presently proposed to be
conducted, without any known infringement of the rights of others. There are no
outstanding options, licenses or agreements of any kind relating to such
Intellectual Property of Company or any of its Subsidiaries, nor is Company or
any of its Subsidiaries bound by or a party to any options, licenses or
agreements of any kind with respect to the Intellectual Property of any other
person or entity other than such licenses or agreements arising from the
purchase of "off the shelf" or standard products.
(ii) Neither Company nor any of its Subsidiaries has received any
communications alleging that Company or any of its Subsidiaries has violated any
of the patents, trademarks, service marks, trade names, copyrights or trade
secrets or other proprietary rights of any other person or entity, nor is
Company aware of any basis therefor.
(iii) Neither Company nor any Eligible Subsidiary believes it is or
will be necessary to utilize any inventions, trade secrets or proprietary
information of any of its employees made prior to their employment by Company or
any of its Subsidiaries, except for inventions, trade secrets or proprietary
information that have been rightfully assigned to Company or any such
Subsidiary.
(k) Compliance with Other Instruments. Neither Company nor any of its
Subsidiaries is in violation or default of (x) any term of its Charter or
Bylaws, or (y) of any provision of any indebtedness, mortgage, indenture,
contract, agreement or instrument to which it is party or by which it is bound
or of any judgment, decree, order or writ, which violation or default, in the
case of this clause (y), has had, or could reasonably be expected to have,
either individually or in the aggregate, a Material Adverse Effect. The
execution, delivery and performance of and compliance with this Agreement and
the Ancillary Agreements to which it is a party, and the issuance of the Notes
by Company and the Eligible Subsidiaries and the other Securities by Company
each pursuant hereto and thereto, will not, with or without the passage of time
or giving of notice, result in any such material violation, or be in conflict
with or constitute a default under any such term or provision, or result in the
creation of any mortgage, pledge, lien, encumbrance or charge upon any of the
properties or assets of Company or any of its Subsidiaries or the suspension,
revocation, impairment, forfeiture or nonrenewal of any permit, license,
authorization or approval applicable to Company or any of its Subsidiaries, its
business or operations or any of its assets or properties.
(l) 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 or any of its Subsidiaries that prevents Company or
any of its Subsidiaries from entering into this Agreement or the Ancillary
Agreements, or from consummating the transactions contemplated hereby or
thereby, or which has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect, or could result in
any change in the current equity ownership of Company or any of its
Subsidiaries, nor is Company aware that there is any basis to assert any of the
foregoing. Neither Company nor any of its Subsidiaries is a party or subject to
the provisions of any order, writ, injunction, judgment or decree of any court
or government agency or instrumentality. There is no action, suit, proceeding or
investigation by Company or any of its Subsidiaries currently pending or which
Company or any of its Subsidiaries intends to initiate.
17
(m) Tax Returns and Payments. Each of Company and each of its Subsidiaries
has timely filed all tax returns (federal, state and local) required to be filed
by it. All taxes shown to be due and payable on such returns, any assessments
imposed, and all other taxes due and payable by each of Company and each of its
Subsidiaries on or before the Closing Date, have been paid, will be paid prior
to the time they become delinquent or are being diligently contested in good
faith by appropriate proceedings so long as adequate reserves with respect
thereto are maintained on the books of Company or any Subsidiary thereof in
conformity with GAAP. Except as set forth on Schedule 12(m), neither Company nor
any of its Subsidiaries has been advised:
(i) that any of its returns, federal, state or other, have been or
are being audited as of the date hereof; or
(ii) of any deficiency in assessment or proposed judgment to its
federal, state or other taxes.
Neither Company nor any Eligible Subsidiary has any knowledge of any liability
of any tax to be imposed upon its properties or assets as of the date of this
Agreement that is not adequately provided for.
(n) Employees. Neither Company nor any of its Subsidiaries has any
collective bargaining agreements with any of its employees. There is no labor
union organizing activity pending or, to Company's or any Eligible Subsidiary's
knowledge, threatened with respect to Company or any of its Subsidiaries. Except
as disclosed in the Exchange Act Filings or on Schedule 12(n), neither Company
nor any of its Subsidiaries is a party to or bound by any currently effective
employment contract, deferred compensation arrangement, bonus plan, incentive
plan, profit sharing plan, retirement agreement or other employee compensation
plan or agreement. To Company's and each Eligible Subsidiary's knowledge, no
employee of Company or any of its Subsidiaries, nor any consultant with whom
Company or any of its Subsidiaries has contracted, is in violation of any term
of any employment contract, proprietary information agreement or any other
agreement relating to the right of any such individual to be employed by, or to
contract with, Company or any of its Subsidiaries because of the nature of the
business to be conducted by Company or any of its Subsidiaries; and to Company's
and each Eligible Subsidiary's knowledge the continued employment by Company and
its Subsidiaries of their respective present employees, and the performance of
Company's and its Subsidiaries contracts with its independent contractors, will
not result in any such violation. Neither Company nor any Eligible Subsidiary is
aware that any of its or any of its Subsidiaries' employees is obligated under
any contract (including licenses, covenants or commitments of any nature) or
other agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with their duties to Company or any
of its Subsidiaries. Neither Company nor any of its Subsidiaries has received
any notice alleging that any such violation has occurred. Except for employees
who have a current effective employment agreement with Company or any of its
Subsidiaries, no employee of Company or any of its Subsidiaries has been granted
the right to continued employment by Company or any of its Subsidiaries or to
any material compensation following termination of employment with Company or
any of its Subsidiaries. Except as set forth on Schedule 12(n), neither Company
nor any of its Subsidiaries is aware that any officer, key employee or group of
employees intends to terminate his, her or their employment with Company or any
of its Subsidiaries, nor does Company or any of its Subsidiaries have a present
intention to terminate the employment of any officer, key employee or group of
employees.
18
(o) Registration Rights and Voting Rights. Except as set forth on Schedule
12(o) and except as disclosed in Exchange Act Filings, neither Company nor any
of its Subsidiaries is presently not under any obligation, and has not granted
any rights, to register any of Company's or any such Subsidiary's presently
outstanding securities or any of its securities that may hereafter be issued.
Except as set forth on Schedule 12(o) and except as disclosed in Exchange Act
Filings, to Company's and each Eligible Subsidiary's knowledge, no stockholder
of Company or any of its Subsidiaries has entered into any agreement with
respect to the voting of equity securities of Company or any of its
Subsidiaries.
(p) Compliance with Laws; Permits. Neither Company nor any of its
Subsidiaries is in violation of any applicable statute, rule, regulation, order
or restriction of any domestic or foreign government or any instrumentality or
agency thereof in respect of the conduct of its business or the ownership of its
properties which has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect. No governmental
orders, permissions, consents, approvals or authorizations are required to be
obtained and no registrations or declarations are required to be filed in
connection with the execution and delivery of this Agreement or any Ancillary
Agreement and the issuance of any of the Securities, except such as has been
duly and validly obtained or filed, or with respect to any filings that must be
made after the Closing Date, as will be filed in a timely manner. Each of
Company and each of its Subsidiaries has all material franchises, permits,
licenses and any similar authority necessary for the conduct of its business as
now being conducted by it, the lack of which could, either individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect.
(q) Environmental and Safety Laws. Neither Company nor any of its
Subsidiaries is in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety, and to its
knowledge, no material expenditures are or will be required in order to comply
with any such existing statute, law or regulation. Except as set forth on
Schedule 12(q), no Hazardous Materials (as defined below) are used or have been
used, stored, or disposed of by Company or any of its Subsidiaries or, to
Company's knowledge, by any other person or entity on any property owned, leased
or used by Company or any of its Subsidiaries. For the purposes of the preceding
sentence, "Hazardous Materials" shall mean:
(i) materials which are listed or otherwise defined as "hazardous"
or "toxic" under any applicable local, state, federal and/or foreign laws and
regulations that govern the existence and/or remedy of contamination on
property, the protection of the environment from contamination, the control of
hazardous wastes, or other activities involving hazardous substances, including
building materials; and
19
(ii) any petroleum products or nuclear materials.
(r) Valid Offering. Assuming the accuracy of the representations and
warranties of Laurus contained in this Agreement and the satisfaction of Laurus
of all the conditions and requirements set forth herein, the offer, sale and
issuance of the Securities will be exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Securities Act"), and will have
been registered or qualified (or are exempt from registration and qualification)
under the registration, permit or qualification requirements of all applicable
state securities laws.
(s) Full Disclosure. Each of Company and each of its Subsidiaries has
provided Laurus with full and accurate copies of all information requested by
Laurus in connection with its decision to purchase the Notes and the Warrants,
including all information Company believes is reasonably necessary to make such
investment decision. Neither this Agreement, the Ancillary Agreements nor the
exhibits and schedules hereto and thereto nor any other document delivered by
Company or any of its Subsidiaries to Laurus or its attorneys or agents in
connection herewith or therewith or with the transactions contemplated hereby or
thereby, contain any untrue statement of a material fact nor omit to state a
material fact necessary in order to make the statements contained herein or
therein, in light of the circumstances in which they are made, not misleading.
Any financial projections and other estimates provided to Laurus by Company and
its Subsidiaries were based on Company's and its Subsidiaries' experience in the
industry and on assumptions of fact and opinion as to future events which
Company and/or such Subsidiary, at the date of the issuance of such projections
or estimates, believed to be reasonable.
(t) Insurance. Each of Company and each of its Subsidiaries has general
commercial, product liability, fire and casualty insurance policies with
coverages which Company believes are customary for companies similarly situated
to Company and its Subsidiaries in the same or similar business.
(u) SEC Reports and Financial Statements. Except as set forth on Schedule
12(u), as of August 27, 2003, Company and each of its Subsidiaries has filed all
proxy statements, reports and other documents required to be filed by it under
the Exchange Act. Company has furnished Laurus with copies of: (i) its Annual
Report on Form 10-KSB for its fiscal years ended September 30, 2003; and (ii)
its Quarterly Reports on Form 10-QSB for its fiscal quarters ended December 31,
2003, March 31, 2004 and June 30, 2004, and the Form 8-K filings which it has
made during its fiscal year [2004] to date (collectively, the "SEC Reports").
20
Except as set forth on Schedule 4.21, each SEC Report was, at the time of its
filing, in substantial compliance with the requirements of its respective form
and none of the SEC Reports, nor the financial statements (and the notes
thereto) included in the SEC Reports, as of their respective filing dates,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. Such
financial statements have been prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis during the periods
involved (except (i) as may be otherwise indicated in such financial statements
or the notes thereto or (ii) in the case of unaudited interim statements, to the
extent they may not include footnotes or may be condensed) and fairly present in
all material respects the financial condition, the results of operations and the
cash flows of Company and its Subsidiaries, on a consolidated basis, as of, and
for, the periods presented in each such SEC Report.
(v) Listing. The Company's Common Stock is traded on the National
Association of Securities Dealers Over the Counter Bulletin Board ("NASD OTCBB")
and satisfies all requirements for the continuation of such trading. The Company
has not received any notice that its Common Stock will be ineligible to trade on
the NASD OTCBB or that its Common Stock does not meet all requirements for such
trading.
(w) No Integrated Offering. Neither Company, nor any of its Subsidiaries
nor any of its affiliates, nor any person acting on its or their behalf, has
directly or indirectly made any offers or sales of any security or solicited any
offers to buy any security under circumstances that would cause the offering of
the Securities pursuant to this Agreement or any Ancillary Agreement to be
integrated with prior offerings by Company for purposes of the Securities Act
which would prevent Company from selling the Securities pursuant to Rule 506
under the Securities Act, or any applicable exchange-related stockholder
approval provisions, nor will Company or any of its affiliates or Subsidiaries
take any action or steps that would cause the offering of the Securities to be
integrated with other offerings.
(x) Stop Transfer. The Securities are restricted securities as of the date
of this Agreement. 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 or during any
permitted blackout periods.
(y) Dilution. Company specifically acknowledges that its obligation to
issue the shares of Common Stock upon conversion of the Notes and exercise of
the Warrants is binding upon Company and enforceable regardless of the dilution
such issuance may have on the ownership interests of other shareholders of
Company.
(z) Patriot Act. Each of Company and each Eligible Subsidiary certify
that, to the best of Company's and each Eligible Subsidiary's knowledge, neither
Company nor any of its Subsidiaries has been designated, and is not owned or
controlled, by a "suspected terrorist" as defined in Executive Order 13224. Each
of Company and each Eligible Subsidiary hereby acknowledge that Laurus seeks to
comply with all applicable laws concerning money laundering and related
activities. In furtherance of those efforts, each of Company and each Eligible
Subsidiary hereby represent, warrant and agree that: (i) none of the cash or
property that it or any of its Subsidiaries will pay or will contribute to
Laurus has been or shall be derived from, or related to, any activity that is
deemed criminal under United States law; and (ii) no contribution or payment by
it or any of its Subsidiaries to Laurus, to the extent that they are within it's
or any such Subsidiary's control shall cause Laurus to be in violation of the
United States Bank Secrecy Act, the United States International Money Laundering
Control Act of 1986 or the United States International Money Laundering
Abatement and Anti-Terrorist Financing Act of 2001. Each of Company and each
Eligible Subsidiary shall promptly notify Laurus if any of these representations
ceases to be true and accurate regarding Company or any of its Subsidiaries.
Each of Company and each Eligible Subsidiary agree to provide Laurus with any
additional information regarding it and each Subsidiary thereof that Laurus
deems necessary or convenient to ensure compliance with all applicable laws
concerning money laundering and similar activities. Each of Company and each
Eligible Subsidiary understand and agree that if at any time it is discovered
that any of the foregoing representations are incorrect, or if otherwise
required by applicable law or regulation related to money laundering similar
activities, Laurus may undertake appropriate actions to ensure compliance with
applicable law or regulation, including but not limited to segregation and/or
redemption of Laurus' investment in Company and each Eligible Subsidiary. Each
of Company and each Eligible Subsidiary further understand that Laurus may
release confidential information about it and its Subsidiaries and, if
applicable, any underlying beneficial owners, to proper authorities if Laurus,
in its sole discretion, determines that it is in the best interests of Laurus in
light of relevant rules and regulations under the laws set forth in subsection
(ii) above.
21
(aa) Schedule 12(aa) sets forth Company's and each Eligible Subsidiary's
name as it appears in official filing in the state of its incorporation, the
type of entity of Company and each Eligible Subsidiary, the organizational
identification number issued by Company's and each Eligible Subsidiary's state
of incorporation or a statement that no such number has been issued, Company's
and each Eligible Subsidiary's state of incorporation, and the location of
Company's and each Eligible Subsidiary's chief executive office, corporate
offices, warehouses, other locations of Collateral and locations where records
with respect to Collateral are kept (including in each case the county of such
locations) and, except as set forth in such Schedule 12(aa), such locations have
not changed during the preceding twelve months. As of the Closing Date, during
the prior five years, except as set forth in Schedule 12(aa), neither Company
nor any Eligible Subsidiary has been known as or conducted business in any other
name (including trade names). Each of Company and each Eligible Subsidiary has
only one state of incorporation.
13. Covenants. Each of Company and each Eligible Subsidiary, as
applicable, covenant and agree with Laurus as follows:
(a) Stop-Orders. It 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. It shall promptly secure the listing of the shares of Common
Stock issuable upon conversion of the Notes and exercise of the Warrants on the
NASD OTCBB (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.
22
(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 Warrants for working capital purposes only.
(f) Access to Facilities. It will, and will cause each of its Subsidiaries
to, permit any representatives designated by Laurus (or any successor of
Laurus), upon reasonable notice and during normal business hours, at such
person's expense and accompanied by a representative of Company or any such
Subsidiary, as the case may be, to:
(i) visit and inspect any of the properties of Company or any such
Subsidiary;
(ii) examine the corporate and financial records of Company or any
of its Subsidiaries (unless such examination is not permitted by federal, state
or local law or by contract) and make copies thereof or extracts therefrom; and
(iii) discuss the affairs, finances and accounts of Company or any
of its Subsidiaries with the directors, officers and independent accountants of
Company or any of its Subsidiaries.
Notwithstanding the foregoing, neither the Company nor any of its Subsidiaries
will provide any material, non-public information to Laurus unless Laurus signs
a confidentiality agreement and otherwise complies with Regulation FD, under the
federal securities laws.
(g) Taxes. It will, and will cause each of its Subsidiaries to, promptly
pay and discharge, or cause to be paid and discharged, when due and payable, all
lawful taxes, assessments and governmental charges or levies imposed upon the
income, profits, property or business of it or such Subsidiary, as the case may
be; provided, however, that any such tax, assessment, charge or levy need not be
paid if the validity thereof shall currently be contested in good faith by
appropriate proceedings and if it and/or such Subsidiary shall have set aside on
its books adequate reserves with respect thereto, and provided, further, that it
will, and will cause each of its Subsidiaries to, pay all such taxes,
assessments, charges or levies forthwith upon the commencement of proceedings to
foreclose any lien which may have attached as security therefor.
(h) Insurance. It will bear the full risk of loss from any loss of any
nature whatsoever with respect to the Collateral. It 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 it; and
it 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 it reasonably believes is customary for companies
in similar business similarly situated as it and to the extent available on
commercially reasonable terms. It 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
23
Ancillary Agreements. At it's own cost and expense in amounts and with carriers
reasonably acceptable to Laurus, it 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 it including business interruption
insurance; (ii) maintain insurance in such amounts as is customary in the case
of companies engaged in businesses similar to it insuring against larceny,
embezzlement or other criminal misappropriation of insured's officers and
employees who may either singly or jointly with others at any time have access
to the assets or funds of it either directly or through governmental authority
to draw upon such funds or to direct generally the disposition of such assets;
(iii) maintain public and product liability insurance against claims for
personal injury, death or property damage suffered by others; (iv) maintain all
such worker's compensation or similar insurance as may be required under the
laws of any state or jurisdiction in which it is engaged in business; and (v)
furnish Laurus with (x) copies of all policies and evidence of the maintenance
of such policies at least thirty (30) days before any expiration date, (y)
excepting Company's and its Subsidiaries' workers' compensation policy,
endorsements to such policies naming Laurus as "co-insured" or "additional
insured" and appropriate loss payable endorsements in form and substance
satisfactory to Laurus, naming Laurus as loss payee, and (z) evidence that as to
Laurus the insurance coverage shall not be impaired or invalidated by any act or
neglect of Company or any of its Subsidiaries and the insurer will provide
Laurus with at least thirty (30) days notice prior to cancellation. Each of
Company and each Eligible Subsidiary shall instruct the insurance carriers that
in the event of any loss thereunder, the carriers shall make payment for such
loss to Laurus and not to Company and/or any Subsidiary thereof and Laurus
jointly. If any insurance losses are paid by check, draft or other instrument
payable to Company and/or any Subsidiary thereof and Laurus jointly, Laurus may
endorse Company's and/or such Subsidiary's name thereon and do such other things
as Laurus may deem advisable to reduce the same to cash. Laurus is hereby
authorized to adjust and compromise claims. All loss recoveries received by
Laurus upon any such insurance may be applied to the Obligations, in such order
as Laurus in its sole discretion shall determine or shall otherwise be delivered
to Company and/or such Subsidiary thereof. Any surplus shall be paid by Laurus
to Company and/or such Subsidiary thereof or applied as may be otherwise
required by law. Any deficiency thereon shall be paid by Company and its
Subsidiaries to Laurus, on demand.
(i) Intellectual Property. It shall, and shall cause each of its
Subsidiaries to, maintain in full force and effect its corporate existence,
rights and franchises and all licenses and other rights to use Intellectual
Property owned or possessed by it and reasonably deemed to be necessary to the
conduct of its business.
(j) Properties. It will, and will cause each of its Subsidiaries to, keep
its properties in good repair, working order and condition, reasonable wear and
tear excepted, and from time to time make all needful and proper repairs,
renewals, replacements, additions and improvements thereto; and it will, and
will cause each of its Subsidiaries to, at all times comply with each provision
of all leases to which it is a party or under which it occupies property if the
breach of such provision could reasonably be expected to have a Material Adverse
Effect.
24
(k) Confidentiality. It agrees that it will not, and will not permit any
of its Subsidiaries to, disclose, and will not include in any public
announcement, the name of Laurus, unless expressly agreed to by Laurus or unless
and until such disclosure is required by law or applicable regulation, and then
only to the extent of such requirement. Company and its Subsidiaries may
disclose Laurus' identity and the terms of this Agreement to its current and
prospective debt and equity financing sources to the extent required by the
Exchange Act.
(l) Required Approvals. It shall not, and shall not permit any of its
Subsidiaries to, without the prior written consent of Laurus, (i) create, incur,
assume or suffer to exist any indebtedness (exclusive of trade debt) whether
secured or unsecured other than Company's and each Eligible Subsidiary's
indebtedness to Laurus and as set forth on Schedule 13(l)(i) attached hereto and
made a part hereof; (ii) cancel any debt owing to it in excess of $50,000 in the
aggregate during any 12 month period; (iii) assume, guarantee, endorse or
otherwise become directly or contingently liable in connection with any
obligations of any other Person, except the endorsement of negotiable
instruments by Company or an Eligible Subsidiary for deposit or collection or
similar transactions in the ordinary course of business; (iv) directly or
indirectly declare, pay or make any dividend or distribution on any class of its
Stock or apply any of its funds, property or assets to the purchase, redemption
or other retirement of any Stock of Company or any Eligible Subsidiary
outstanding on the date hereof or issue any preferred stock; (v) purchase or
hold beneficially any Stock or other securities or evidences of indebtedness of,
make or permit to exist any loans or advances to, or make any investment or
acquire any interest whatsoever in, any other Person, including any partnership
or joint venture, except (x) travel advances, (y) loans to Company's and each
Eligible Subsidiaries' officers and employees not exceeding at any one time an
aggregate of $10,000, and (z) existing Subsidiaries of Company; (vi) create or
permit to exist any Subsidiary, other than any Subsidiary in existence on the
date hereof and listed in Schedule 12(b) unless such new Subsidiary is a
wholly-owned Subsidiary and is designated by Laurus as either a co-borrower or
guarantor hereunder and such Subsidiary shall have entered into all such
documentation required by Laurus, including, without limitation, to grant to
Laurus a first priority perfected security interest in substantially all of such
Subsidiary's assets to secure the Obligations; (vii) directly or indirectly,
prepay any indebtedness (other than to Laurus 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 the
Company's or any Eligible Subsidiary'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 any Eligible Subsidiary.
25
(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.
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 and each Eligible Subsidiary
will deliver to Laurus an opinion acceptable to Laurus from Company's and each
Eligible Subsidiary's legal counsel. Company and each Eligible Subsidiary will
provide, at Company's and each Eligible Subsidiary's expense, such other legal
opinions in the future as are reasonably necessary for the conversion of the
Notes and the exercise of the Warrants.
(o) Legal Name, etc. Neither Company nor any of its Eligible Subsidiaries
will, without providing Laurus with 30 days prior written notice, change (i) its
name as it appears in the official filings in the state of its incorporation or
formation, (ii) the type of legal entity it is, (iii) its organization
identification number, if any, issued by its state of incorporation, (iv) its
state of incorporation or (v) amend its certificate of incorporation, by-laws or
other organizational document.
(p) Compliance with Laws. The operation of each of the Company's and each
of its Subsidiaries' business is and will continue to be in compliance in all
material respects with all applicable federal, state and local laws, rules and
ordinances, including to all laws, rules, regulations and orders relating to
taxes, payment and withholding of payroll taxes, employer and employee
contributions and similar items, securities, employee retirement and welfare
benefits, employee health safety and environmental matters.
(q) Notices. Each of the Company and each of its Subsidiaries will
promptly inform Laurus in writing of: (i) the commencement of all proceedings
and investigations by or before and/or the receipt of any notices from, any
governmental or nongovernmental body and all actions and proceedings in any
court or before any arbitrator against or in any way concerning any event which
could 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 or any of its Subsidiaries is a party or by which Company or
any of its Subsidiaries or any of Company's or any such Subsidiary's properties
may be bound the breach of which would have a Material Adverse Effect..
26
(r) Margin Stock. The Company will not permit any of the proceeds of the
Loans made hereunder to be used directly or indirectly to "purchase" or "carry"
"margin stock" or to repay indebtedness incurred to "purchase" or "carry"
"margin stock" within the respective meanings of each of the quoted terms under
Regulation U of the Board of Governors of the Federal Reserve System as now and
from time to time hereafter in effect.
(s) Offering Restrictions. Except as previously disclosed in the SEC
Reports or in the Exchange Act Filings, or stock or stock options granted to
employees or directors of the Company (these exceptions hereinafter referred to
as the "Excepted Issuances"), the Company will not issue any securities with a
continuously variable/floating conversion feature which are or could be (by
conversion or registration) free-trading securities (i.e. common stock subject
to a registration statement) prior to the full repayment or conversion of the
Notes (together with all accrued and unpaid interest and fees related thereto
(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 Warrants.
(u) Prohibition of Amendments to Subordinated Debt Documentation. Neither
the Company nor any Eligible Subsidiary shall, without prior written consent of
Laurus, amend, modify or in any way alter the terms of any of the Subordinated
Debt Documentation.
(v) Prohibition of Grant of Collateral for Subordinated Debt
Documentation. Neither the Company nor any Eligible Subsidiary shall, without
the prior written consent of Laurus, grant or permit any of its Subsidiaries to
grant to any Person any collateral of such Company, Eligible Subsidiary or other
Subsidiary as security for any obligation arising under the Subordinated Debt
Documentation.
(w) Prohibitions of Payment Under Subordinated Debt Documentation. Neither
the Company nor any Eligible Subsidiary shall, without the prior written consent
of Laurus, make any payments in respect of the indebtedness evidenced by the
Subordinated Debt Documentation, other than as expressly permitted by the terms
thereof.
14. Further Assurances. At any time and from time to time, upon the
written request of Laurus and at the sole expense of Company, each of Company
and each Eligible Subsidiary shall promptly and duly execute and deliver any and
all such further instruments and documents and take such further action as
Laurus may request (a) to obtain the full benefits of this Agreement and the
Ancillary Agreements, (b) to protect, preserve and maintain Laurus' rights in
the Collateral and under this Agreement or any Ancillary Agreement, or (c) to
enable Laurus to exercise all or any of the rights and powers herein granted or
any Ancillary Agreement.
15. Representations and Warranties of Laurus.
Laurus hereby represents and warrants to Company as follows:
(a) Requisite Power and Authority. Laurus has all necessary power and
authority under all applicable provisions of law to execute and deliver this
Agreement and the Ancillary Agreements and to carry out their provisions. All
corporate action on Laurus' part required for the lawful execution and delivery
of this Agreement and the Ancillary Agreements have been or will be effectively
taken prior to the Closing Date. Upon their execution and delivery, this
Agreement and the Ancillary Agreements will be valid and binding obligations of
Laurus, enforceable in accordance with their terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application affecting enforcement of creditors' rights, and (b) as
limited by general principles of equity that restrict the availability of
equitable and legal remedies.
27
(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 because
all of its equity investors are accredited investors or because it has more than
$5 million in assets and was not formed for the specific purpose of entering
into the transactions contemplated hereby. 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 Notes.
(c) Laurus Bears Economic Risk. Laurus has substantial experience in
evaluating and investing in private placement transactions of securities in
companies similar to Company so that it is capable of evaluating the merits and
risks of its investment in Company and has the capacity to protect its own
interests. Laurus must bear the economic risk of this investment until the
Securities are sold pursuant to (i) an effective registration statement under
the Securities Act, or (ii) an exemption from registration is available.
(d) Acquisition for Own Account. Laurus is acquiring the Securities for
its own account for investment only, and not as a nominee or agent and not with
a view towards or for resale in connection with their distribution.
(e) Laurus Can Protect Its Interest. Laurus represents that by reason of
its, or of its management's, business and financial experience, Laurus has the
capacity to evaluate the merits and risks of its investment in the Notes, 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) Shorting. Neither Laurus nor any of its Affiliates or investment
partners has, will, or will cause any person or entity, directly or indirectly
to, engage in "short sales" of Company's common stock directly related to
Company's Common Stock as long as any Minimum Borrowing Note shall be
outstanding.
(g) Patriot Act. Laurus certifies that, to the best of Laurus' knowledge,
Laurus has not been designated, and is not owned or controlled, by a "suspected
terrorist" as defined in Executive Order 13224. Laurus seeks to comply with all
applicable laws concerning money laundering and related activities. In
furtherance of those efforts, Laurus hereby represents, warrants and agrees
that: (i) none of the cash or property that Laurus will use to purchase the
Notes has been or shall be derived from, or related to, any activity that is
deemed criminal under United States law; and (ii) no disbursement by Laurus to
the Company, to the extent within Laurus' control, shall cause Laurus to be in
violation of the United States Bank Secrecy Act, the United States International
28
Money Laundering Control Act of 1986 or the United States International Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001. Laurus shall
promptly notify the Company if any of these representations ceases to be true
and accurate regarding Laurus. Laurus agrees to provide the Company any
additional information regarding Laurus that the Company deems necessary or
convenient to ensure compliance with all applicable laws concerning money
laundering and similar activities. Laurus understands and agrees that if at any
time it is discovered that any of the foregoing representations are incorrect,
or if otherwise required by applicable law or regulation related to money
laundering similar activities, Laurus may undertake appropriate actions to
ensure compliance with applicable law or regulation, including but not limited
to segregation and/or redemption of Laurus' investment in the Company. Laurus
further understands that the Company may release information about Laurus and,
if applicable, any underlying beneficial owners, to proper authorities if the
Company, in its sole discretion, determines that it is in the best interests of
the Company in light of relevant rules and regulations under the laws set forth
in subsection (ii) above.
16. Power of Attorney. Each of Company and each Eligible Subsidiary hereby
appoints Laurus, or any other Person whom Laurus may designate as Company's
and/or any Eligible Subsidiary's attorney, with power to: (i) endorse Company's
and each Eligible Subsidiary's name on any checks, notes, acceptances, money
orders, drafts or other forms of payment or security that may come into Laurus'
possession; (ii) sign Company's and each Eligible Subsidiary's name on any
invoice or xxxx of lading relating to any Accounts, drafts against Account
Debtors, schedules and assignments of Accounts, notices of assignment, financing
statements and other public records, verifications of Account and notices to or
from Account Debtors; (iii) verify the validity, amount or any other matter
relating to any Account by mail, telephone, telegraph or otherwise with Account
Debtors; (iv) do all things necessary to carry out this Agreement, any Ancillary
Agreement and all related documents; and (v) on or after the occurrence and
continuation of an Event of Default, notify the post office authorities to
change the address for delivery of Company's and each Eligible Subsidiary's mail
to an address designated by Laurus, and to receive, open and dispose of all mail
addressed to Company or any Eligible Subsidiary. Laurus shall provide written
notice to Company specifying all actions taken by Laurus under the immediately
preceding sentence. Each of Company and each Eligible Subsidiary hereby ratifies
and approves all acts undertaken by Laurus under this Section in its capacity as
attorney. Neither Laurus, nor the attorney will be liable for any acts or
omissions or for any error of judgment or mistake of fact or law, except for
gross negligence or willful misconduct. This power, being coupled with an
interest, is irrevocable so long as Laurus has a security interest and until the
Obligations have been fully satisfied.
17. Term of Agreement. Laurus' agreement to make Loans and extend
financial accommodations under and in accordance with the terms of this
Agreement or any Ancillary Agreement shall continue in full force and effect
until the expiration of the Initial Term. At Laurus' election following the
occurrence of an Event of Default, Laurus may terminate this Agreement. The
termination of the Agreement shall not affect any of Laurus' rights hereunder or
any Ancillary Agreement and the provisions hereof and thereof shall continue to
be fully operative until all transactions entered into, rights or interests
created and the Obligations have been irrevocably disposed of, concluded or
liquidated. Notwithstanding the foregoing, Laurus shall release its security
29
interests at any time after thirty (30) days notice upon irrevocable payment to
it of all Obligations if Company and each Eligible Subsidiary shall have (i)
provided Laurus with an executed release of any and all claims which Company or
any Eligible Subsidiary may have or thereafter have under this Agreement and all
Ancillary Agreements and (ii) paid to Laurus an early payment fee in an amount
equal to (1) five percent (5%) of the Capital Availability Amount if such
payment occurs prior to the first anniversary of the Initial Term or any
applicable renewal term, (2) four percent (4%) of the Capital Availability
Amount if such payment occurs on or after the first anniversary and prior to the
second anniversary of the Initial Term or any applicable renewal term and (3)
three percent (3%) of the Capital Availability Amount if such termination occurs
thereafter during the Initial Term or any applicable renewal term; such fee
being intended to compensate Laurus for its costs and expenses incurred in
initially approving this Agreement or extending same. Such early payment fee
shall be due and payable by Company and each Eligible Subsidiary 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 or any Eligible
Subsidiary's account may from time to time be temporarily in a zero or credit
position, until all of the Obligations of Company and all Eligible Subsidiaries
have been paid or performed in full after the termination of this Agreement.
Following the termination of this Agreement and the Ancillary Agreements in
accordance with their terms and the payment of all the Obligations in
immediately available funds, Laurus shall send termination statements to Company
Agent or file termination statements with the appropriate filing offices within
twenty (20) days of the receipt by Laurus of written notice from Company Agent
requesting the delivery or filing of such termination statements.
19. Events of Default. The occurrence of any of the following shall
constitute an "Event of Default":
(a) failure to make payment of any of the Obligations when required
hereunder;
(b) failure by the Company or any of its Subsidiaries to pay any taxes
when due unless such taxes are being contested in good faith by appropriate
proceedings and with respect to which adequate reserves have been provided on
Company's and/or such Subsidiary's books;
(c) failure to perform under, and/or committing any breach of, in any
material respect, this Agreement or any Ancillary Agreement or any other
agreement between Company and/or any Subsidiary thereof, on the one hand, and
Laurus, on the other hand, which failure or breach shall continue for a period
of thirty (30) days after the occurrence thereof;
(d) the occurrence of any event of default (or similar term) under any
indebtedness for borrowed money (including without limitation, the indebtedness
evidence by the Subordinated Debt Documentation) which Company or any of its
Subsidiaries is a party with third parties;
30
(e) any representation, warranty or statement made by Company or any of
its Subsidiaries hereunder, in any Ancillary Agreement, any certificate,
statement or document delivered pursuant to the terms hereof, or in connection
with the transactions contemplated by this Agreement should at any time be false
or misleading in any material respect;
(f) an attachment or levy is made upon Company's or any Eligible
Subsidiary's assets having an aggregate value in excess of $75,000 or a judgment
is rendered against Company or any Eligible Subsidiary or Company's or any
Eligible Subsidiary's property involving a liability of more than $75,000 which
shall not have been vacated, discharged, stayed or bonded within thirty (30)
days from the entry thereof;
(g) any change in Company's or any of its Subsidiaries' condition or
affairs (financial or otherwise) which in Laurus' reasonable, good faith
opinion, could reasonably be expected to have a Material Adverse Effect;
(h) any Lien created hereunder or under any Ancillary Agreement for any
reason ceases to be or is not a valid and perfected Lien having a first priority
interest;
(i) if Company or any of its Subsidiaries shall (i) apply for, consent to
or suffer to exist the appointment of, or the taking of possession by, a
receiver, custodian, trustee or liquidator of itself or of all or a substantial
part of its property, (ii) make a general assignment for the benefit of
creditors, (iii) commence a voluntary case under the federal bankruptcy laws (as
now or hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v)
file a petition seeking to take advantage of any other law providing for the
relief of debtors, (vi) acquiesce to, or fail to have dismissed, within forty
five (45) days, any petition filed against it in any involuntary case under such
bankruptcy laws, or (vii) take any action for the purpose of effecting any of
the foregoing;
(j) Company or any of its Subsidiaries shall admit in writing its
inability, or be generally unable to pay its debts as they become due or cease
operations of its present business;
(k) Company or any Eligible Subsidiary 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 Eligible
Subsidiary or any interest therein, except as permitted herein;
(l) the occurrence of a change in the controlling ownership of Company or
any Eligible Subsidiary;
(m) the indictment of Company or any of its Subsidiaries or any executive
officer of Company or any of its Subsidiaries under any criminal statute, or
commencement of 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; or
(n) if an Event of Default shall occur under and as defined in any Note or
in any Ancillary Agreement;.
31
(o) if an event of default shall occur, or a breach or default in
performance by Company or any of its Subsidiaries of any covenant or undertaking
to be performed by the Company or any of its Subsidiaries, under the Securities
Purchase Agreement, any other Related Agreement (as defined in the Securities
Purchase Agreement) or any other agreement entered into by the Company and/or
any of its Subsidiaries and Laurus relating thereto.
(p) if the Company of any of its Subsidiaries attempts to terminate,
challenges the validity of, or its liability under any Ancillary Agreement; or
(q) should any Ancillary Agreement cease to be a valid, binding and
enforceable obligation (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application affecting enforcement of creditors' rights and general
principles of equity that restrict the availability of equitable or legal
remedies) of the Company of any of its Subsidiaries (to the extent such Persons
are a party thereto).
20. Remedies. Following the occurrence of an Event of Default, Laurus
shall have the right to demand repayment in full of all Obligations, whether or
not otherwise due. Until all Obligations have been fully satisfied, Laurus shall
retain its Lien in all Collateral. Laurus shall have, in addition to all other
rights provided herein and in each Ancillary Agreement, the rights and remedies
of a secured party under the UCC, and under other applicable law, all other
legal and equitable rights to which Laurus may be entitled, including the right
to take immediate possession of the Collateral, to require Company and/or each
Eligible Subsidiary to assemble the Collateral, at Company's and each Eligible
Subsidiaries' joint and several expense, and to make it available to Laurus at a
place designated by Laurus which is reasonably convenient to both parties and to
enter any of the premises of Company or any Eligible Subsidiary or wherever the
Collateral shall be located, with or without force or process of law, and to
keep and store the same on said premises until sold (and if said premises be the
property of Company or any Eligible Subsidiary, Company agrees not to charge
Laurus for storage thereof), and the right to apply for the appointment of a
receiver for Company's and each Eligible Subsidiary's property. Further, Laurus
may, at any time or times after the occurrence of an Event of Default, sell and
deliver all Collateral held by or for Laurus at public or private sale for cash,
upon credit or otherwise, at such prices and upon such terms as Laurus, in
Laurus' sole discretion, deems advisable or Laurus may otherwise recover upon
the Collateral in any commercially reasonable manner as Laurus, in its sole
discretion, deems advisable. The requirement of reasonable notice shall be met
if such notice is mailed postage prepaid to Company Agent, at Company Agent's
address as shown in Laurus' records, at least ten (10) days before the time of
the event of which notice is being given. Laurus may be the purchaser at any
sale, if it is public. In connection with the exercise of the foregoing
remedies, Laurus is granted permission to use all of Company's and each Eligible
Subsidiary's trademarks, tradenames, tradestyles, patents, patent applications,
licenses, franchises and other proprietary rights. The proceeds of sale shall be
applied first to all costs and expenses of sale, including attorneys' fees, and
second to the payment (in whatever order Laurus elects) of all Obligations.
After the indefeasible payment and satisfaction in full in cash of all of the
Obligations, and after the payment by Laurus of any other amount required by any
provision of law, including Section 608(a)(1) of the Code (but only after Laurus
has received what Laurus considers reasonable proof of a subordinate party's
security interest), the surplus, if any, shall be paid to Company, such Eligible
Subsidiary or its representatives or to whosoever may be lawfully entitled to
receive the same, or as a court of competent jurisdiction may direct. Each of
Company and each Eligible Subsidiary shall remain jointly and severally liable
to Laurus for any deficiency. In addition, each of Company and each Eligible
Subsidiary shall pay Laurus a liquidation fee ("Liquidation Fee") in the amount
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 18(i) or 18(j), or (y) the cessation of
Company's of any Eligible such Subsidiary's business; and (ii) ending on the
date on which Laurus has actually received all Obligations due and owing it
under this Agreement and the Ancillary Agreements. The Liquidation Fee shall be
paid on the date on which Laurus collects the applicable Account by deduction
from the proceeds thereof. Company, each Eligible Subsidiary 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, each Eligible Subsidiary 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.
32
21. Waivers. To the full extent permitted by applicable law, each of
Company and each Eligible Subsidiary hereby waives (a) presentment, demand and
protest, and notice of presentment, dishonor, intent to accelerate,
acceleration, protest, default, nonpayment, maturity, release, compromise,
settlement, extension or renewal of any or all of this Agreement and the
Ancillary Agreements or any other notes, commercial paper, Accounts, contracts,
Documents, Instruments, Chattel Paper and guaranties at any time held by Laurus
on which Company or any such Eligible Subsidiary may in any way be liable, and
hereby ratifies and confirms whatever Laurus may do in this regard; (b) all
rights to notice and a hearing prior to Laurus' taking possession or control of,
or to Laurus' replevy, attachment or levy upon, any Collateral or any bond or
security that might be required by any court prior to allowing Laurus to
exercise any of its remedies; and (c) the benefit of all valuation, appraisal
and exemption laws. Each of Company and each Eligible Subsidiary acknowledges
that it has been advised by counsel of its choices and decisions with respect to
this Agreement, the Ancillary Agreements and the transactions evidenced hereby
and thereby.
22. Expenses. Company and each Eligible Subsidiary shall jointly and
severally pay all of Laurus' reasonable out-of-pocket costs and expenses,
including reasonable fees and disbursements of in-house or outside counsel and
appraisers, subject to Section 5(b)(v), 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 and each
Eligible Subsidiary shall also jointly and severally pay all of Laurus'
reasonable fees, charges, out-of-pocket costs and expenses, including fees and
disbursements of counsel and appraisers, in connection with (a) the preparation,
execution and delivery of any waiver, any amendment thereto or consent proposed
or executed in connection with the transactions contemplated by this Agreement
or the Ancillary Agreements, (b) Laurus' obtaining performance of the
Obligations under this Agreement and any Ancillary Agreements, including, but
not limited to, the enforcement or defense of Laurus' security interests,
assignments of rights and Liens hereunder as valid perfected security interests,
(c) any attempt to inspect, verify, protect, collect, sell, liquidate or
otherwise dispose of any Collateral, (d) any appraisals or re-appraisals of any
property (real or personal) pledged to Laurus by Company or any of its
Subsidiaries as Collateral for, or any other Person as security for, the
Obligations hereunder and (e) any consultations in connection with any of the
foregoing. Company and each Eligible Subsidiary shall also jointly and severally
pay Laurus' customary bank charges for all bank services (including wire
transfers) performed or caused to be performed by Laurus for Company or any of
its Subsidiaries at Company's or such Subsidiary's request or in connection with
Company's and/or any Eligible Subsidiary's loan account with Laurus. All such
costs and expenses together with all filing, recording and search fees, taxes
and interest payable by Company and each Eligible Subsidiary to Laurus shall be
payable on demand and shall be secured by the Collateral. If any tax by any
Governmental Authority is or may be imposed on or as a result of any transaction
between Company and/or any Subsidiary thereof, on the one hand, and Laurus on
the other hand, which Laurus is or may be required to withhold or pay, Company
and each Eligible Subsidiary agree to jointly and severally indemnify and hold
Laurus harmless in respect of such taxes, and Company and each Eligible
Subsidiary will repay to Laurus the amount of any such taxes which shall be
charged to Company's and/or any Eligible Subsidiary's account; and until Company
and each Eligible Subsidiary shall furnish Laurus with indemnity therefor (or
supply Laurus with evidence satisfactory to it that due provision for the
payment thereof has been made), Laurus may hold without interest any balance
standing to Company's or any Eligible Subsidiary's credit and Laurus shall
retain its Liens in any and all Xxxxxxxxxx.
00
00. 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
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 and each Eligible
Subsidiary 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 and/or such Eligible Subsidiary 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, any
Eligible Subsidiary 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 and each Eligible Subsidiary
irrevocably waive 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 or any
Eligible Subsidiary's behalf and Company and each Eligible Subsidiary hereby
irrevocably agree 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.
34
26. Indemnity. Company and each Eligible Subsidiary agree to jointly and
severally indemnify and hold Laurus, and its respective affiliates, employees,
attorneys and agents (each, an "Indemnified Person"), harmless from and against
any and all suits, actions, proceedings, claims, damages, losses, liabilities
and expenses of any kind or nature whatsoever (including attorneys' fees and
disbursements and other costs of investigation or defense, including those
incurred upon any appeal) which may be instituted or asserted against or
incurred by any such Indemnified Person as the result of credit having been
extended, suspended or terminated under this Agreement or any of the Ancillary
Agreements or with respect to the execution, delivery, enforcement, performance
and administration of, or in any other way arising out of or relating to, this
Agreement, the Ancillary Agreements or any other documents or transactions
contemplated by or referred to herein or therein and any actions or failures to
act with respect to any of the foregoing, except to the extent that any such
indemnified liability is finally determined by a court of competent jurisdiction
to have resulted solely from such Indemnified Person's gross negligence or
willful misconduct. NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO
COMPANY, ANY ELIGIBLE SUBSIDIARY 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 and each Eligible Subsidiary further agree that to
the extent Company or any Eligible Subsidiary makes a payment or payments to
Laurus, which payment or payments or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside and/or
required to be repaid to a trustee, receiver or any other party under any
bankruptcy act, state or federal law, common law or equitable cause, then, to
the extent of such payment or repayment, the obligation or part thereof intended
to be satisfied shall be revived and continued in full force and effect as if
said payment had not been made.
28. Borrowing Agency Provisions.
(a) Each of Company and each Eligible Subsidiary hereby irrevocably
designate Company Agent to be their attorney and agent and in such capacity to
borrow, sign and endorse notes, and execute and deliver all instruments,
documents, writings and further assurances now or hereafter required hereunder,
on behalf of such Company or Eligible Subsidiary, and hereby authorizes Laurus
to pay over or credit all loan proceeds hereunder in accordance with the request
of Company Agent.
(b) The handling of this credit facility as a co-borrowing facility with a
borrowing agent in the manner set forth in this Agreement is solely as an
accommodation to Company and each Eligible Subsidiary and at their request.
Laurus shall not incur any liability to Company or any Eligible Subsidiary as a
result thereof. To induce Agent and Lenders to do so and in consideration
thereof, each of Company and each Eligible Subsidiary hereby indemnifies Laurus
and holds Laurus harmless from and against any and all liabilities, expenses,
losses, damages and claims of damage or injury asserted against Laurus by any
Person arising from or incurred by reason of the handling of the financing
arrangements of Company and each Eligible Subsidiary as provided herein,
reliance by Laurus on any request or instruction from Company Agent or any other
action taken by Laurus with respect to this Paragraph 28.
35
(c) All Obligations shall be joint and several, and each of Company and
each Eligible Subsidiary shall make payment upon the maturity of the Obligations
by acceleration or otherwise, and such obligation and liability on the part of
Company and each Eligible Subsidiary shall in no way be affected by any
extensions, renewals and forbearance granted by Laurus to Company or any
Eligible Subsidiary, failure of Laurus to give Company or any Eligible
Subsidiary notice of borrowing or any other notice, any failure of Laurus to
pursue to preserve its rights against Company or any Eligible Subsidiary, the
release by Laurus of any Collateral now or thereafter acquired from Company or
any Eligible Subsidiary, and such agreement by Company or any Eligible
Subsidiary to pay upon any notice issued pursuant thereto is unconditional and
unaffected by prior recourse by Laurus to Company or any Eligible Subsidiary or
any Collateral for Company's or any Eligible Subsidiary's Obligations or the
lack thereof.
(d) Each of Company and each Eligible Subsidiary expressly waives any and
all rights of subrogation, reimbursement, indemnity, exoneration, contribution
or any other claim which Company and such Eligible Subsidiary many now or
hereafter have against the other or other person or entity directly or
contingently liable for the Obligations, or against or with respect to any
other's property (including, without limitation, any property which is
Collateral for the Obligations), arising from the existence or performance of
this Agreement, until all Obligations have been paid in full and this Agreement
has been irrevocably terminated.
(e) Each of the Company and each Eligible Subsidiary represents and
warrants to Laurus that (i) Company and each Eligible Subsidiary have one or
more common shareholders, directors and officers, (ii) the businesses and
corporate activities of the Company and each Eligible Subsidiary are closely
related to, and substantially benefit, the business and corporate activities of
Company and each Eligible Subsidiary, (iii) the financial and other operations
of Company and each Eligible Subsidiary are performed on a combined basis as if
Company and each Eligible Subsidiary constituted a consolidated corporate group,
(iv) Company and each Eligible Subsidiary will receive a substantial economic
benefit from the application of each Loan hereunder, in each case, whether or
not such amount is used directly by Company or any such Eligible Subsidiary and
(v) all requests for Loans hereunder by the Company Agent are for the exclusive
and indivisible benefit of Company and each Eligible Subsidiary as though, for
purposes of this Agreement, Company and each Eligible Subsidiary constituted a
single entity.
29. 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.
36
Notices shall be provided as follows:
If to Laurus: Laurus Master Fund, Ltd.
c/o Laurus Capital Management, L.L.C.
000 Xxxxx Xxxxxx 00xx Xx.
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxx X. Xxxxxx, Esq.
Telephone: (000) 000-0000
Telecopier: (000) 000-0000
If to Company, Company Agent or any Eligible Subsidiary: Catalyst Lighting Group, Inc.
0000 Xxxxx Xxxxx
Xxxx Xxxxx, Xxxxx 00000
Attention: Xxxxxx Xxxxxxxxxx
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
With a copy to: Xxxxxxx Xxxxxxxxx, LLP
000 Xxxxxxxxx Xxxxxx, Xxxxx 0000
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxxx X. Xxxxxxx, Esq.
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
or such other address as may be designated in writing hereafter in accordance
with this Section 29 by such Person.
30. Governing Law, Jurisdiction and Waiver of Jury Trial. (a) THIS
AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE.
(b) COMPANY AND EACH ELIGIBLE SUBSIDIARY HEREBY CONSENTS AND AGREES THAT
THE STATE OR FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK
SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES
BETWEEN COMPANY AND/OR EACH ELIGIBLE SUBSIDIARY, ON THE ONE HAND, AND LAURUS, ON
THE OTHER HAND, PERTAINING TO THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS
OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OF THE
ANCILLARY AGREEMENTS; PROVIDED, THAT LAURUS, EACH ELIGIBLE SUBSIDIARY AND
COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A
COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER
PROVIDED, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE
LAURUS FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION
TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY
37
FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF
LAURUS. EACH OF COMPANY AND EACH ELIGIBLE SUBSIDIARY EXPRESSLY SUBMITS AND
CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY
SUCH COURT, AND COMPANY AND EACH ELIGIBLE SUBSIDIARY HEREBY WAIVES ANY OBJECTION
WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR
FORUM NON CONVENIENS. EACH OF COMPANY AND EACH ELIGIBLE SUBSIDIARY HEREBY WAIVES
PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH
ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER
PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO COMPANY AGENT
AT THE ADDRESS SET FORTH IN SECTION 29 AND THAT SERVICE SO MADE SHALL BE DEEMED
COMPLETED UPON THE EARLIER OF COMPANY'S OR SUCH ELIGIBLE SUBSIDIARY'S, AS THE
CASE MAY BE, ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S.
MAILS, PROPER POSTAGE PREPAID.
(c) THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING
SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS
OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS
TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY
DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN LAURUS, ANY
ELIGIBLE SUBSIDIARY AND/OR COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR
INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS
AGREEMENT, ANY ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED THERETO. IN THE
EVENT ANY SUIT OR ACTION IS INSTITUTED TO ENFORCE ANY PROVISION IN THIS
AGREEMENT, THE PREVAILING PARTY IN SUCH DISPUTE SHALL BE ENTITLED TO RECOVER
FROM THE LOSING PARTY ALL FEES ,COSTS AND EXPENSES OF ENFORCING ANY RIGHT OF
SUCH PREVAILING PARTY UNDER OR WITH RESPECT TO THIS AGREEMENT, INCLUDING,
WITHOUT LIMITATION, SUCH REASONABLE FEES AND EXPENSES OF ATTORNEYS AND
ACCOUNTANTS, WHICH SHALL INCLUDE, WITHOUT LIMITATION, ALL FEES, COSTS AND
EXPENSES OF APPEALS.
31. Limitation of Liability. Each of Company and each Eligible Subsidiary
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 ,
gross negligence and willful misconduct.
32. Entire Understanding. This Agreement and the Ancillary Agreements
contain the entire understanding among Company, each Eligible Subsidiary 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, each Eligible
Subsidiary'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.
38
33. Severability. Wherever possible each provision of this Agreement or
the Ancillary Agreements shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this Agreement or the
Ancillary Agreements shall be prohibited by or invalid under applicable law such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
thereof.
34. Captions. All captions are and shall be without substantive meaning or
content of any kind whatsoever.
35. 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.
36. 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.
37. Publicity. Each of Company and each Eligible Subsidiary 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; provided, however, that
Company shall have the right to approve, in its reasonable judgment, such
announcement as required pursuant to the Securities Act, Exchange Act and
Regulation FD.
38. Joinder. It is understood and agreed that any person or entity that
desires to become an Eligible Subsidiary hereunder, or is required to execute a
counterpart of this Agreement after the date hereof pursuant to the requirements
of this Agreement or any Ancillary Agreement, shall become an Eligible
Subsidiary hereunder by (x) executing a Joinder Agreement in form and substance
satisfactory to Laurus, (y) delivering supplements to such exhibits and annexes
to this Agreement and the Ancillary Agreements as Laurus shall reasonably
request and (z) taking all actions as specified in this Agreement as would have
been taken by such Assignor had it been an original party to this Agreement, in
each case with all documents required above to be delivered to Laurus and with
all documents and actions required above to be taken to the reasonable
satisfaction of Laurus.
39. 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 CATALYST LIGHTING
GROUP, INC. THAT SUCH REGISTRATION IS NOT REQUIRED."
39
(b) Any shares of Common Stock issued pursuant to conversion of the Note
or exercise of the Warrants, shall bear a legend which shall be in substantially
the following form until such shares are covered by an effective registration
statement filed with the SEC:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE, STATE
SECURITIES LAWS. THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED
OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH SECURITIES ACT AND APPLICABLE STATE LAWS OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO CATALYST LIGHTING GROUP, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED."
(c) The Warrants shall bear substantially the following legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES
ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS WARRANT OR THE UNDERLYING SHARES OF COMMON STOCK
UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO CATALYST LIGHTING GROUP, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED."
[Balance of page intentionally left blank; signature page follows.]
40
IN WITNESS WHEREOF, the parties have executed this Security Agreement as
of the date first written above.
CATALYST LIGHTING GROUP, INC.
By:
-----------------------------------------------
Name:
-----------------------------------------------
Title:
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WHITCO COMPANY, LP
By: WHITCO Management, LLC, its General Partner
By:
-----------------------------------------------
Name:
-----------------------------------------------
Title:
----------------------------------------------
LAURUS MASTER FUND, LTD.
By:
-----------------------------------------------
Name:
-----------------------------------------------
Title:
----------------------------------------------
41
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 and the Eligible Subsidiaries.
"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.
"Allowances" shall have the meaning given such term in Section 7(k).
"Ancillary Agreements" means, the Notes, the Warrants, the Registration
Rights Agreements, each Security Document and all other agreements, instruments,
documents, mortgages, pledges, powers of attorney, consents, assignments,
contracts, notices, security agreements, trust agreements and guarantees whether
heretofore, concurrently, or hereafter executed by or on behalf of Company, any
Eligible Subsidiary 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, any Eligible Subsidiary and
Laurus.
"Available Minimum Borrowing" shall have the meaning given such term in
Section 2(a)(i).
42
"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 $3,000,000.
"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 or the date hereof, if no Loan is made under the
facility on the date hereof.
"Collateral" means all of Company's and each Eligible Subsidiary's
property and assets, whether real or personal, tangible or intangible, and
whether now owned or hereafter acquired, or in which it now has or at any time
in the future may acquire any right, title or interests including all of the
following property in which it now has or at any time in the future may acquire
any right, title or interest:
(a) all Inventory;
(b) all Equipment;
(c) all Fixtures;
(d) all General Intangibles;
(e) all Accounts;
(f) all Deposit Accounts, other bank accounts and all funds on deposit
therein (including, without limitation, the Restricted Account (as defined in
the Securities Purchase Agreement) maintained at North Fork Bank (Account Name:
Catalyst Lighting Group, Inc., Account Number: 2704053228));
(g) all Investment Property;
(h) all Stock;
(i) all Chattel Paper;
(j) all Letter-of-Credit Rights;
43
(k) all Instruments;
(l) all commercial tort claims set forth on Schedule 1(A);
(m) all Books and Records;
(n) all Intellectual Property;
(o) all Supporting Obligations including letters of credit and guarantees
issued in support of Accounts, Chattel Paper, General Intangibles and Investment
Property;
(p) (i) all money, cash and cash equivalents and (ii) all cash held as
cash collateral to the extent not otherwise constituting Collateral, all other
cash or property at any time on deposit with or held by Laurus for the account
of Company and/or any Eligible Subsidiary (whether for safekeeping, custody,
pledge, transmission or otherwise); and
(q) all products and Proceeds of all or any of the foregoing, tort claims
and all claims and other rights to payment including insurance claims against
third parties for loss of, damage to, or destruction of, and 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 the Company's common
equity interests, par value $.01 per share.
"Company Agent" means Catalyst Lighting Group, Inc.
"Contract Rate" shall have the meaning set forth in the respective Note.
"Default" means any act or event which, with the giving of notice or
passage of time or both, would constitute an Event of Default.
"Default Rate" has the meaning given to such term in Section 5(a)(iii).
"Deposit Accounts" means all "deposit accounts" as such term is defined in
the UCC, now or hereafter held in the name of any Person, including, without
limitation, the Lockbox Account(s).
"Documents" means all "documents", as such term is defined in the UCC, now
owned or hereafter acquired by any Person, wherever located, including all bills
of lading, dock warrants, dock receipts, warehouse receipts, and other documents
of title, whether negotiable or non-negotiable.
"Eligible Accounts" means and includes each Account of the Company and
each Eligible Subsidiary which conforms to the following criteria: (a) shipment
of the merchandise or the rendition of services has been completed; (b) no
return, rejection or repossession of the merchandise has occurred; (c)
merchandise or services shall not have been rejected or disputed by the Account
Debtor and there shall not have been asserted any offset, defense or
44
counterclaim with respect thereto; (d) continues to be in material conformity
with the representations and warranties made by Company and each Eligible
Subsidiary to Laurus with respect thereto; (e) Laurus is, and continues to be,
satisfied with the credit standing of the Account Debtor in relation to the
amount of credit extended; (f) there are no facts existing or threatened which
are likely to result in any material adverse change in an Account Debtor's
financial condition; (g) is documented by an invoice in a form approved by
Laurus and shall not be unpaid more than ninety (90) days from invoice date; (h)
not more than twenty-five percent (25%) of the unpaid amount of invoices due
from such Account Debtor remains unpaid more than ninety (90) days from invoice
date; (i) is not evidenced by chattel paper or an instrument of any kind with
respect to or in payment of the Account unless such instrument is duly endorsed
to and in possession of Laurus or represents a check in payment of an Account;
(j) the Account Debtor is located in the United States; provided, however,
Laurus may, from time to time, in the exercise of its sole commercially
reasonable discretion and based upon satisfaction of certain conditions to be
determined at such time by Laurus, deem certain Accounts as Eligible Accounts
notwithstanding that such Account is due from an Account Debtor located outside
of the United States; (k) Laurus has a first priority perfected Lien in such
Account and such Account is not subject to any Lien other than Permitted Liens;
(l) does not arise out of transactions with any employee, officer, director,
stockholder or Affiliate of Company or any Eligible Subsidiary; (m) is payable
to Company or any Eligible Subsidiary; (n) does not arise out of a xxxx and hold
sale prior to shipment and does not arise out of a sale to any Person to which
Company or any Eligible Subsidiary is indebted; (o) is net of any returns,
discounts, claims, credits and allowances; (p) if the Account arises out of
contracts between Company and/or any Eligible Subsidiary, on the one hand, and
the United States, on the other hand, any state, or any department, agency or
instrumentality of any of them, Company and/or such Eligible Subsidiary, as the
case may be, has so notified Laurus, in writing, prior to the creation of such
Account, and there has been compliance with any governmental notice or approval
requirements, including compliance with the Federal Assignment of Claims Act;
(q) is a good and valid account representing an undisputed bona fide
indebtedness incurred by the Account Debtor therein named, for a fixed sum as
set forth in the invoice relating thereto with respect to an unconditional sale
and delivery upon the stated terms of goods sold by Company or any Eligible
Subsidiary or work, labor and/or services rendered by Company or any Eligible
Subsidiary; (r) does not arise out of progress xxxxxxxx prior to completion of
the order; (s) the total unpaid Accounts from such Account Debtor does not
exceed twenty-five percent (25%) of all Eligible Accounts; (t) Company's or such
Eligible Subsidiary's right to payment is absolute and not contingent upon the
fulfillment of any condition whatsoever; (u) Company or such Eligible
Subsidiary, as the case may be, is able to bring suit and enforce its remedies
against the Account Debtor through judicial process; (v) does not represent
interest payments, late or finance charges owing to Company or such Eligible
Subsidiary, as the case may be, and (w) is otherwise satisfactory to Laurus as
determined by Laurus in the exercise of its sole commercially reasonable
discretion. In the event Company requests that Laurus include within Eligible
Accounts certain Accounts of one or more of Company's acquisition targets,
Laurus shall at the time of such request consider such inclusion, but any such
inclusion shall be at the sole option of Laurus and shall at all times be
subject to the execution and delivery to Laurus of all such documentation
(including, without limitation, guaranty and security documentation) as Laurus
may require in its sole discretion.
"Eligible Inventory" means Inventory owned by Company and/or an Eligible
Subsidiary which Laurus, in its sole and absolute discretion, determines: (a) is
subject to a first priority perfected Lien in favor of Laurus and is subject to
no other Liens whatsoever (other than Permitted Liens); (b) is located on
premises with respect to which Laurus has received a landlord or mortgagee
waiver reasonably acceptable in form and substance to Laurus; (c) is not in
45
transit; (d) is in good condition and meets all standards imposed by any
governmental agency, or department or division thereof having regulatory
Governmental Authority over such Inventory, its use or sale including the
Federal Fair Labor Standards Act of 1938 as amended, and all rules, regulations
and orders thereunder; (e) is currently either usable or salable in the normal
course of Company's and/or such Eligible Subsidiary's business; (f) is not
placed by Company and/or such Eligible Subsidiary on consignment or held by
Company and/or such Eligible Subsidiary on consignment from another Person; (g)
is in material conformity with the representations and warranties made by
Company and/or such Eligible Subsidiary to Laurus with respect thereto; (h) is
not subject to any licensing, patent, royalty, trademark, trade name or
copyright agreement with any third parties; (i) does not require the consent of
any Person for the completion of manufacture, sale or other disposition of such
Inventory and such completion, manufacture or sale does not constitute a
material breach or default under any contract or agreement to which Company
and/or such Eligible Subsidiary is a party or to which such Inventory is or may
be subject; (j) is not work-in-process; (k) is covered by casualty insurance
acceptable to Laurus; and (l) not to be ineligible for any other reason.
"Eligible Subsidiary" shall mean Whitco Company, LP and each other
Subsidiary of the Company consented to in writing by Laurus to be included as
and "Eligible Subsidiary" for the purposes of this Agreement.
"Equipment" means all "equipment" as such term is defined in the UCC, now
owned or hereafter acquired by any Person, wherever located, including any and
all machinery, apparatus, equipment, fittings, furniture, fixtures, motor
vehicles and other tangible personal property (other than Inventory) of every
kind and description that may be now or hereafter used in such Person's
operations or that are owned by such Person or in which such Person may have an
interest, and all parts, accessories and accessions thereto and substitutions
and replacements therefor.
"ERISA" shall have the meaning given to such term in Section 12(g).
"Event of Default" means the occurrence of any of the events set forth in
Section 18.
"Excepted Issuances" shall have the meaning given such term in Section
13(s).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Act Filings" shall have the meaning given to such term in
Section 12.
"Exclusion Period" shall have the meaning given such term in Section
13(s).
"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.
"Formula Amount" has the meaning set forth in Section 2(a)(i).
46
"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.
"Initial Term" means the Closing Date through the close of business on the
day immediately preceding the third anniversary of the Closing Date, subject to
acceleration at the option of Laurus upon the occurrence of an Event of Default
hereunder or other termination hereunder.
"Instruments" means all "instruments", as such term is defined in the UCC,
now owned or hereafter acquired by any Person, wherever located, including all
certificated securities and all promissory notes and other evidences of
indebtedness, other than instruments that constitute, or are a part of a group
of writings that constitute, Chattel Paper.
47
"Intellectual Property" means any and all patents, trademarks, service
marks, trade names, copyrights, trade secrets, Licenses, information and other
proprietary rights and processes
"Inventory" means all "inventory", as such term is defined in the UCC, now
owned or hereafter acquired by any Person, wherever located, including all
inventory, merchandise, goods and other personal property that are held by or on
behalf of such Person for sale or lease or are furnished or are to be furnished
under a contract of service or that constitute raw materials, work in process,
finished goods, returned goods, or materials or supplies of any kind, nature or
description used or consumed or to be used or consumed in such Person's business
or in the processing, production, packaging, promotion, delivery or shipping of
the same, including all supplies and embedded software.
"Inventory Availability" means the amount of Loans against Eligible
Inventory Laurus may from time to time make available to Company up to the
lesser of (a) fifty percent (50%) of the value of Company's Eligible Inventory
(calculated on the basis of the lower of cost or market, on a first-in first-out
basis) and (b) $1,000,000.
"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 (a) the
business, assets, liabilities, condition (financial or otherwise), properties,
operations or prospects of Company or any of its Subsidiaries (taken
individually or as a whole), (b) Company's or any of its Subsidiary's ability to
pay or perform the Obligations in accordance with the terms hereof or any
Ancillary Agreement, (c) the value of the Collateral, the Liens on the
Collateral or the priority of any such Lien or (d) the practical realization of
the benefits of Laurus' rights and remedies under this Agreement and the
Ancillary Agreements.
48
"Maximum Legal Rate" shall have the meaning given to such term in Section
5(a)(iv).
"Minimum Borrowing Amount" means $1,000,000, 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 and each Eligible Subsidiary in
favor of Laurus to evidence the Minimum Borrowing Amount.
"NASD" shall have the meaning given to such term in Section 13(b).
"NASD OTCBB" shall have the meaning given to such term in Section 12(w).
"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 and each Eligible Subsidiary in favor of Laurus in connection
with the transactions contemplated hereby, as the same may be amended, modified
and supplemented from time to time, as applicable.
"Obligations" means all Loans, all advances, debts, liabilities,
obligations, covenants and duties owing by Company and each of its Subsidiaries
to Laurus (or any corporation that directly or indirectly controls or is
controlled by or is under common control with Laurus) of every kind and
description (whether or not evidenced by any note or other instrument and
whether or not for the payment of money or the performance or non-performance of
any act), direct or indirect, absolute or contingent, due or to become due,
contractual or tortious, liquidated or unliquidated, whether existing by
operation of law or otherwise now existing or hereafter arising including any
debt, liability or obligation owing from Company and/or each of its Subsidiaries
to others which Laurus may have obtained by assignment or otherwise and further
including all interest (including interest accruing at the then applicable rate
provided in this Agreement after the maturity of the Loans and interest accruing
at the then applicable rate provided in this Agreement after the filing of any
petition in bankruptcy, or the commencement of any insolvency, reorganization or
like proceeding, whether or not a claim for post-filing or post-petition
interest is allowed in such proceeding), charges or any other payments Company
and/or each of its Subsidiaries is required to make by law or otherwise arising
under or as a result of this Agreement, the Ancillary Agreements, the Securities
Purchase Agreement and the Related Agreements (as defined in the Securities
Purchase Agreement), together with all reasonable expenses and reasonable
attorneys' fees chargeable to Company's and/or any of its Subsidiary's account
or incurred by Laurus in connection with Company's or any of its Subsidiary's
account whether provided for herein or therein.
"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 workmen's compensation, unemployment insurance or other forms
of governmental insurance or benefits, relating to employees, securing sums (i)
49
not overdue or (ii) being diligently contested in good faith provided that
adequate reserves with respect thereto are maintained on the books of the
Company or any Subsidiary thereof in conformity with GAAP; (c) Liens in favor of
Laurus; (d) Liens for taxes (i) not yet due or (ii) being diligently contested
in good faith by appropriate proceedings, provided that adequate reserves with
respect thereto are maintained on the books of the Company or any Subsidiary
thereof in conformity with GAAP provided, that, the Lien shall have no effect on
the priority of Liens in favor of Laurus or the value of the assets in which
Laurus has a Lien; (e) Purchase Money Liens securing Purchase Money Indebtedness
to the extent permitted in this Agreement and (f) Liens specified on Schedule 2
hereto.
"Principal Market" shall have the meaning given such term in Section
13(b).
"Person" means any individual, sole proprietorship, partnership, limited
liability partnership, joint venture, trust, unincorporated organization,
association, corporation, limited liability company, institution, public benefit
corporation, entity or government (whether federal, state, county, city,
municipal or otherwise, including any instrumentality, division, agency, body or
department thereof), and shall include such Person's successors and assigns.
"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, any Eligible Subsidiary or any other
Person from time to time with respect to any Collateral; (b) any and all
payments (in any form whatsoever) made or due and payable to Company or any
Eligible Subsidiary from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of any Collateral by any
governmental body, governmental authority, bureau or agency (or any person
acting under color of governmental authority); (c) any claim of Company or any
Eligible Subsidiary against third parties (i) for past, present or future
infringement of any Intellectual Property or (ii) for past, present or future
infringement or dilution of any trademark or trademark license or for injury to
the goodwill associated with any trademark, trademark registration or trademark
licensed under any trademark License; (d) any recoveries by Company or any
Eligible Subsidiary against third parties with respect to any litigation or
dispute concerning any Collateral, including claims arising out of the loss or
nonconformity of, interference with the use of, defects in, or infringement of
rights in, or damage to, Collateral; (e) all amounts collected on, or
distributed on account of, other Collateral, including dividends, interest,
distributions and Instruments with respect to Investment Property and pledged
Stock; and (f) any and all other amounts , rights to payment or other property
acquired upon the sale, lease, license, exchange or other disposition of
Collateral and all rights arising out of Collateral.
"Purchase Money Indebtedness" means (a) any indebtedness incurred for the
payment of all or any part of the purchase price of any fixed asset, including
indebtedness under capitalized leases, (b) any indebtedness incurred for the
sole purpose of financing or refinancing all or any part of the purchase price
of any fixed asset, and (c) any renewals, extensions or refinancings thereof
(but not any increases in the principal amounts thereof outstanding at that
time).
50
"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).
"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 Three Million Dollars
($3,000,000).
"SEC" shall mean the Securities and Exchange Commission.
"SEC Reports" shall have the meaning provided such term in Section 12(u).
"Securities" means the Notes and the Warrants being issued by Company to
Laurus pursuant to this Agreement and the Ancillary Agreements and the 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 Warrants.
"Securities Act" shall have the meaning given such term in Section 12(r).
"Securities Purchase Agreement" means that Securities Purchase Agreement
dated as of the date hereof by and between the Company and Laurus.
"Security Documents" means all security agreements, mortgages, cash
collateral deposit letters, pledges and other agreements which are executed by
the Company or any of its Subsidiaries in favor of Laurus.
"Software" means all "software" as such term is defined in the UCC, now
owned or hereafter acquired by any Person, including all computer programs and
all supporting information provided in connection with a transaction related to
any program.
"Stock" means all certificated and uncertificated shares, options,
warrants, membership interests, general or limited partnership interests,
participation or other equivalents (regardless of how designated) of or in a
corporation, partnership, limited liability company or equivalent entity whether
voting or nonvoting, including common stock, preferred stock, or any other
"equity security" (as such term is defined in Rule 3a11-1 of the General Rules
and Regulations promulgated by the SEC under the Securities Exchange Act of
1934).
"Subordinated Debt Documentation" means the documents, instruments and
agreements set forth on Schedule 14 hereto.
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"Subsidiary" of any Person means (i) a corporation or other entity whose
shares of stock or other ownership interests having ordinary voting power (other
than stock or other ownership interests having such power only by reason of the
happening of a contingency) to elect a majority of the directors of such
corporation, or other persons or entities performing similar functions for such
person or entity, are owned, directly or indirectly, by such person or entity or
(ii) a corporation or other entity in which such person or entity owns, directly
or indirectly, more than 50% of the equity interests at such time.
"Supporting Obligations" means all "supporting obligations" as such term
is defined in the UCC.
"Term" means, as applicable, the Initial Term and any Renewal Term.
"UCC" means the Uniform Commercial Code as the same may, from time be in
effect in the State of New York; provided, that in the event that, by reason of
mandatory provisions of law, any or all of the attachment, perfection or
priority of, or remedies with respect to, Laurus' Lien on any Collateral is
governed by the Uniform Commercial Code as in effect in a jurisdiction other
than the State of New York, the term "UCC" shall mean the Uniform Commercial
Code as in effect in such other jurisdiction for purposes of the provisions of
this Agreement relating to such attachment, perfection, priority or remedies and
for purposes of definitions related to such provisions; provided further, that
to the extent that UCC is used to define any term herein or in any Ancillary
Agreement and such term is defined differently in different Articles or
Divisions of the UCC, the definition of such term contained in Article or
Division 9 shall govern.
"Warrant Shares" shall have the meaning given such term in Section 12(a).
"Warrants" has the meaning set forth in the Registration Rights
Agreements.
52
Exhibit A
Borrowing Base Certificate
[To be inserted]
--------------------------------
53
LAURUS MASTER FUND, LTD.
CATALYST LIGHTING GROUP, INC.
and
WHITCO COMPANY, LP
Dated: September 30, 2004
54
TABLE OF CONTENTS
PAGE
1. (a) General Definitions................................................................................1
(b) Accounting Terms..............................................................................1
(c) Other Terms...................................................................................1
(d) Rules of Construction.........................................................................1
2. Loans..................................................................................................2
3. Repayment of the Loans.................................................................................4
4. Procedure for Loans....................................................................................4
5. Interest and Payments..................................................................................5
(a) Interest......................................................................................5
(b) Payments; Certain Closing Conditions..........................................................5
6. Security Interest......................................................................................6
7. Representations, Warranties and Covenants Concerning the Collateral....................................7
8. Payment of Accounts...................................................................................10
9. Collection and Maintenance of Collateral..............................................................10
10. Inspections and Appraisals............................................................................11
11. Financial Reporting...................................................................................11
12. Additional Representations and Warranties.............................................................12
13. Covenants.............................................................................................22
14. Further Assurances....................................................................................27
15. Representations and Warranties of Laurus..............................................................27
16. Power of Attorney.....................................................................................29
17. Term of Agreement.....................................................................................29
18. Termination of Lien...................................................................................30
19. Events of Default.....................................................................................30
20. Remedies..............................................................................................32
i
21. Waivers...............................................................................................33
22. Expenses..............................................................................................33
23. Assignment By Laurus..................................................................................34
24. No Waiver; Cumulative Remedies........................................................................34
25. Application of Payments...............................................................................34
26. Indemnity.............................................................................................35
27. Revival...............................................................................................35
28. Borrowing Agency Provisions...........................................................................35
29. Notices...............................................................................................36
30. Governing Law, Jurisdiction and Waiver of Jury Trial..................................................37
31. Limitation of Liability...............................................................................38
32. Entire Understanding..................................................................................38
33. Severability..........................................................................................39
34. Captions..............................................................................................39
35. Counterparts; Telecopier Signatures...................................................................39
36. Construction..........................................................................................39
37. Publicity.............................................................................................39
38. Joinder...............................................................................................39
39. Legends...............................................................................................39
LIST OF EXHIBITS
Exhibit A-Borrowing Base Certificate
ii
