SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of
August 19, 2005, by and between VYTERIS HOLDINGS (NEVADA), INC., a Nevada
corporation (the "Company"), and each of the entities whose names appear on the
signature pages hereof. Such entities are each referred to herein as an
"Investor" and, collectively, as the "Investors".
A. The Company wishes to sell to each Investor, and each Investor
wishes to purchase, on the terms and subject to the conditions set forth in this
Agreement, (i) one or more Senior Secured Convertible Debentures in the form
attached hereto as Exhibit A (each, a "Debenture" and, collectively, the
"Debentures") and (ii) one or more Warrants in the form attached hereto as
Exhibit B (each, a "Warrant" and, collectively, the "Warrants"). The shares of
Common Stock into which the Debentures are convertible are referred to herein as
the "Conversion Shares" and the shares of Common Stock into which the Warrants
are exercisable are referred to herein as the "Warrant Shares".
B. Each Warrant issued at a Closing (as defined below) will (i) entitle
an Investor to purchase a number of Warrant Shares equal to fifty percent (50%)
of the number of shares that would be issuable upon conversion of the Debenture
purchased by such Investor at such Closing, at the Conversion Price (as defined
below) in effect on the date of such Closing, and without regard to any
restrictions on such conversion, (ii) have an exercise price equal to (A) with
respect to the Initial Warrants (as defined below), two dollars and eighty-eight
cents ($2.88) and (B) with respect to the Option Warrants (as defined below),
the lower of (x) $2.88 and (y) one hundred and twenty percent (120%) of the
Conversion Price for the Option Debentures (as defined below) (subject in each
case to adjustment as provided therein), and (iii) expire on the seventh (7th)
anniversary of such date.
C. At the Initial Closing (as defined below), the Company will deposit
with Wachovia Bank, National Association, as collateral agent (the "Collateral
Agent"), an amount of cash equal to $1,394,321 (as defined below) (the
"Collateral Amount") to be held by the Collateral Agent for the benefit of the
Investors pursuant to the Cash Collateral Agreement attached as Exhibit C (the
"Cash Collateral Agreement") in order to secure the Company's performance of its
obligations under such Debentures.
D. The Company's obligations under the Debentures, including without
limitation its obligation to make payments of principal thereof and interest
thereon, are guaranteed by the Company's wholly-owned subsidiary, Vyteris, Inc.
(the "Operating Subsidiary") pursuant to a Subsidiary Guaranty Agreement in the
form attached hereto as Exhibit D (the "Subsidiary Guaranty"), and are secured
pursuant to the terms of a Security Agreement in the form attached hereto as
Exhibit E (the "Security Agreement").
E. The Company has agreed to effect the registration of the shares of
Common Stock underlying the Debentures and the Warrants under the Securities Act
of 1933, as amended (the
"Securities Act"), pursuant to a Registration Rights Agreement in the form
attached hereto as Exhibit F (the "Registration Rights Agreement").
F. The sale of the Debentures and the Warrants by the Company to the
Investors will be effected in reliance upon the exemption from securities
registration afforded by the provisions of Regulation D ("Regulation D"), as
promulgated by the Commission (as defined below) under the Securities Act.
In consideration of the mutual promises made herein, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and each Investor hereby agree as follows:
1. PURCHASE AND SALE OF DEBENTURES AND WARRANTS.
1.1 Initial Closing. Upon the terms and subject to the satisfaction or
waiver of the conditions set forth herein, the Company agrees to sell and each
Investor agrees to purchase (i) a Debenture (an "Initial Debenture") with a
principal amount equal to the amount set forth below such Investor's name on the
signature pages hereof and (ii) a Warrant (an "Initial Warrant"). The date on
which the closing of such purchase and sale occurs (the "Initial Closing") is
hereinafter referred to as the "Initial Closing Date". The Initial Closing will
be deemed to occur when (A) this Agreement and the other Initial Transaction
Documents (as defined below) have been executed and delivered by the Company and
each Investor, (B) each of the conditions to the Initial Closing described in
this Agreement has been satisfied or waived as specified therein and (C) full
payment of each Investor's Purchase Price (as defined below) payable with
respect to the Initial Debenture and Initial Warrant being purchased by such
Investor at the Initial Closing has been made by wire transfer of immediately
available funds against physical delivery by the Company of duly executed
certificates representing such Initial Debenture and Initial Warrant.
1.2 Option Closing. Each Investor shall have the right, exercisable by
delivery to the Company of a written notice of such exercise in the form of
Exhibit G (an "Option Exercise Notice") at any time during the period commencing
on the Initial Closing Date and ending on (and including) the Option Expiration
Date (as defined below), to purchase, and upon such exercise the Company agrees
to sell to such Investor, upon the terms and subject to the satisfaction or
waiver of the conditions set forth herein, (i) a Debenture (an "Option
Debenture" and, together with the Debentures issued to the other Investors at
the Option Closing (as defined below), the "Option Debentures") with a principal
amount equal to or, at the option of such Investor, less than fifty percent
(50%) of the original principal amount of the Initial Debenture purchased by
such Investor at the Initial Closing and (ii) a Warrant (an "Option Warrant"
and, together with the Warrants issued to the other Investors at the Option
Closing (as defined below), the "Option Warrants"). For purposes hereof, "Option
Expiration Date" means the earlier to occur of (i) the ninetieth (90th) day
following the Effective Date and (ii) the date on which each Investor has either
exercised its rights under this Section 1.2 or notified the Company in writing
that it does not intend to exercise such rights (or, if such date is not a
Business Day, on the immediately succeeding Business Day). The date on which the
closing of the purchase and sale of the Option Debentures and Option Warrants
occurs (the "Option Closing") shall be the third (3rd) Business Day following
the Option Expiration Date (the "Option Closing Date"). The Option Closing will
be deemed to occur when (A) each of
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the conditions to the Option Closing described in this Agreement has been
satisfied or waived as specified therein and (B) full payment of each Investor's
Purchase Price (as defined below) payable with respect to the Option Debenture
and Option Warrant being purchased by such Investor at the Option Closing has
been made by wire transfer of immediately available funds against physical
delivery by the Company of duly executed certificates representing such Option
Debenture and Option Warrant.
1.3 Certain Definitions. When used herein, the following terms shall
have the respective meanings indicated:
"Affiliate" means, as to any Person (the "subject Person"), any
other Person (a) that directly or indirectly through one or more intermediaries
controls or is controlled by, or is under direct or indirect common control
with, the subject Person, (b) that directly or indirectly beneficially owns or
holds ten percent (10%) or more of any class of voting equity of the subject
Person, or (c) ten percent (10%) or more of the voting equity of which is
directly or indirectly beneficially owned or held by the subject Person. For the
purposes of this definition, "control" when used with respect to any Person
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, through
representation on such Person's board of directors or other management committee
or group, by contract or otherwise.
"Amortization Stock Option Share" has the meaning specified in
the Debentures.
"Board of Directors" means the Company's board of directors.
"Business Day" means any day other than a Saturday, a Sunday or a
day on which the New York Stock Exchange is closed or on which banks in the City
of New York are required or authorized by law to be closed.
"Closing" means each of the Initial Closing and the Option
Closing.
"Closing Date" means each of the Initial Closing Date and the
Option Closing Date.
"Collateral Amount" has the meaning specified in the preamble to
this Agreement
"Commission" means the United States Securities and Exchange
Commission.
"Common Stock" means the common stock, par value $0.001 per
share, of the Company.
"Conversion Price" has the meaning specified in the Debentures.
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"Debt" means as to any Person at any time: (a) all indebtedness,
liabilities and obligations of such Person for borrowed money; (b) all
indebtedness, liabilities and obligations of such Person to pay the deferred
purchase price of Property or services, except trade accounts payable of such
Person arising in the ordinary course of business that are not past due by more
than 90 days; (c) all capital lease obligations of such Person; (d) all Debt of
others guaranteed by such Person; (e) all indebtedness, liabilities and
obligations secured by a Lien existing on Property owned by such Person, whether
or not the indebtedness, liabilities or obligations secured thereby have been
assumed by such Person or are non-recourse to such Person; (f) all reimbursement
obligations of such Person (whether contingent or otherwise) in respect of
letters of credit, bankers' acceptances, surety or other bonds and similar
instruments; and (g) all liabilities and obligations of such Person to redeem or
retire shares of capital stock of such Person.
"Disclosure Documents" means all SEC Documents filed with the
Commission at least five (5) Business Days prior to the Execution Date via XXXXX
in accordance with the requirements of Regulation S-T under the Exchange Act.
"Effective Date" has the meaning set forth in the Registration
Rights Agreement.
"Environmental Law" means any federal, state, provincial, local
or foreign law, statute, code or ordinance, principle of common law, rule or
regulation, as well as any Permit, order, decree, judgment or injunction issued,
promulgated, approved or entered thereunder, relating to pollution or the
protection, cleanup or restoration of the environment or natural resources, or
to the public health or safety, or otherwise governing the generation, use,
handling, collection, treatment, storage, transportation, recovery, recycling,
discharge or disposal of hazardous materials.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and the regulations and published interpretations thereunder.
"Event of Default" has the meaning set forth in the Debentures.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended (or any successor act), and the rules and regulations thereunder (or
respective successors thereto).
"Excluded Security" has the meaning specified in the Debentures.
"Execution Date" means the date of this Agreement.
"GAAP" means United States generally accepted accounting
principles, applied on a consistent basis, as set forth in (i) opinions of the
Accounting Principles Board of the American Institute of Certified Public
Accountants, (ii) statements of the Financial Accounting Standards Board and
(iii) interpretations of the Commission and the Staff of the Commission.
Accounting principles are applied on a "consistent basis" when the accounting
principles applied in
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a current period are comparable in all material respects to those accounting
principles applied in a preceding period, except to the extent that new
accounting standards have been adopted by such organizations applicable as of
the current period.
"Governmental Authority" means any nation or government, any
state, provincial or political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government, including without limitation any stock exchange,
securities market or self-regulatory organization.
"Governmental Requirement" means any law, statute, code,
ordinance, order, rule, regulation, judgment, decree, injunction, franchise,
license or other directive or requirement of any federal, state, county,
municipal, parish, provincial or other Governmental Authority or any department,
commission, board, court, agency or any other instrumentality of any of them.
"Initial Effective Date" has the meaning set forth in the
Registration Rights Agreement.
"Initial Transaction Documents" means (i) this Agreement, (ii)
the Initial Debentures, (iii) the Initial Warrants, (iv) the Cash Collateral
Agreement, (v) the Registration Rights Agreement, (vi) the Subsidiary Guaranty,
(vii) the Security Agreement and (viii) all other agreements, documents and
other instruments executed and delivered by or on behalf of the Company any of
its officers at the Initial Closing.
"Intellectual Property" means any U.S. or foreign patents, patent
rights, patent applications, trademarks, trade names, service marks, brand
names, logos and other trade designations (including unregistered names and
marks), trademark and service xxxx registrations and applications, copyrights
and copyright registrations and applications, inventions, invention disclosures,
trade secrets, know-how or royalty rights.
"Interest Stock Option Share" has the meaning specified in the
Debentures.
"Key Employee" means each of Xxxxxxx Xx Xxxxxx, Xxxxxxx
XxXxxxxxxx, and Xxxxx Xxxxxxxx.
"Lien" means, with respect to any Property, any mortgage, pledge,
hypothecation, assignment, deposit arrangement, security interest, tax lien,
financing statement, pledge, charge, or other lien, easement, encumbrance,
preference, priority or other security agreement or preferential arrangement of
any kind or nature whatsoever on or with respect to such Property (including,
without limitation, any conditional sale or other title retention agreement
having substantially the same economic effect as any of the foregoing).
"Material Adverse Effect" means an effect that is material and
adverse to (i) the consolidated business, operations, properties, financial
condition or results of operations of the Company and the Subsidiaries taken as
a whole or (ii) the ability of the Company to perform its obligations under this
Agreement or the other Transaction Documents (as defined below).
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"Material Contracts" means, as to the Company, any agreement
required pursuant to Item 601 of Regulation S-B or Item 601 of Regulation S-K,
as applicable, promulgated under the Securities Act to be filed as an exhibit to
any report, schedule, registration statement or definitive proxy statement filed
or required to be filed by the Company with the Commission under the Exchange
Act or any rule or regulation promulgated thereunder, and any and all
amendments, modifications, supplements, renewals or restatements thereof.
"NASD" means the National Association of Securities Dealers, Inc.
"Obligations" means any and all indebtedness, liabilities and
obligations of the Company to the Investor evidenced by and/or arising pursuant
to this Agreement to pay amounts due on the Debentures or to make other cash
payments, now existing or hereafter arising, whether direct, indirect, related,
unrelated, fixed, contingent, liquidated, unliquidated, joint, several or joint
and several, including, without limitation, the obligations of the Company to
repay principal of the Debentures, to pay interest on the Debentures (including,
without limitation, interest accruing after any bankruptcy, insolvency,
reorganization or other similar filing) and to pay all fees, indemnities, costs
and expenses (including attorneys' fees) provided for in this Agreement or the
Debentures.
"Option Expiration Date" has the meaning specified in Section 1.2
hereof.
"Pension Plan" means an employee benefit plan (as defined in
ERISA) maintained by the Company for employees of the Company or any of its
Affiliates.
"Permitted Debt" means the following:
(a) the Debentures;
(b) Debt outstanding on the Execution Date and disclosed on
Schedule 3.5 hereto and any Debt incurred to replace any such outstanding Debt,
as long as such replacement Debt is on terms no less favorable to the Company
than the terms of such outstanding Debt, has no greater priority in payment or
liquidation than such outstanding Debt, and matures at least ninety (90) days
following the Maturity Date (as defined in the Debentures); provided, however,
that any currently outstanding loans made by Xxxxxxx Xxxxx (as defined below),
and any replacements thereof, shall constitute Permitted Debt only to the extent
that such loans do not exceed the limits set forth in paragraph (c) of this
definition;
(c) Debt consisting of working capital credit facilities obtained
on commercially reasonable terms and secured only by the Company's and/or the
Subsidiaries' accounts receivable and/or inventory, in an aggregate amount
(including in such amount any obligations outstanding currently or in the future
pursuant to loans made by Xxxxxxx Xxxxx or any Related Party (as each such term
is defined below)) not to exceed five million dollars ($5,000,000) at any one
time outstanding (the "Working Capital Threshold"); provided, however, that the
amount of such Debt at any one time outstanding (i) may exceed the Working
Capital Threshold if the amount in excess of the Working Capital Threshold is
used solely to pay down the Debentures (on a pro rata basis according to the
outstanding principal balance of each
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Debenture then outstanding) within one (1) Business Day following the date on
which such Debt is incurred, it being understood that any such payment shall be
applied to the principal due on the scheduled Principal Payment Date(s) (as
defined in the Debentures) immediately following the date on which such Debt is
incurred and (ii) shall not exceed ten million dollars ($10,000,000) in the
aggregate;
(d) Subordinated Debt; and
(e) Debt consisting of capitalized lease obligations and purchase
money indebtedness incurred in connection with acquisition of capital assets and
obligations under sale-leaseback or similar arrangements provided in each case
that such obligations are not secured by Liens on any assets of the Company or
the Subsidiaries other than the assets so leased.
"Permitted Liens" means the following:
(a) encumbrances consisting of easements, rights-of-way, zoning
restrictions or other restrictions on the use of real Property or imperfections
to title that do not (individually or in the aggregate) materially impair the
ability of the Company or any of the Subsidiaries to use such Property in its
businesses, and none of which is violated in any material respect by existing or
proposed structures or land use;
(b) Liens for taxes, assessments or other governmental charges
that are not delinquent or which are being contested in good faith by
appropriate proceedings, which proceedings have the effect of preventing the
forfeiture or sale of the Property subject to such Liens, and for which adequate
reserves (as determined in accordance with GAAP) have been established;
(c) Liens of mechanics, materialmen, warehousemen, carriers,
landlords or other similar statutory Liens securing obligations that are not yet
due and are incurred in the ordinary course of business or which are being
contested in good faith by appropriate proceedings, which proceedings have the
effect of preventing the forfeiture or sale of the Property subject to such
Liens, for which adequate reserves (as determined in accordance with GAAP) have
been established;
(d) any interest or title of a lessor under any capitalized lease
obligation provided that such Liens do not extend to any property or assets
which is not leased property subject to such capitalized lease obligation; and
(e) Liens on the Company's and/or the Subsidiaries' accounts
receivable and/or inventory securing amounts due under a working capital
facility obtained on commercially reasonable terms in an aggregate amount
(including in such amount any obligations outstanding currently or in the future
pursuant to loans made by Xxxxxxx Xxxxx or any Related Party) not to exceed five
million dollars ($5,000,000); provided, however, that the Debt so secured may be
up to but not more than $10,000,000 if all of the proceeds of such Debt in
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excess of $5,000,000 is used solely to pay down the Debentures in accordance
with paragraph (c) of the definition of "Permitted Debt."
"Person" means any individual, corporation, trust, association,
company, partnership, joint venture, limited liability company, joint stock
company, Governmental Authority or other entity.
"Principal Market" means the principal exchange or market on
which the Common Stock is listed or traded.
"Property" means property and/or assets of all kinds, whether
real, personal or mixed, tangible or intangible (including, without limitation,
all rights relating thereto).
"Pro Rata Share" means, with respect to an Investor, the ratio
determined by dividing (i) the principal amount of the Debenture or Debentures
purchased hereunder by such Investor by (ii) the aggregate principal amount of
the Debentures purchased hereunder by all of the Investors.
"Purchase Price" means, with respect to a Debenture and Warrant
purchased at the Closing, the original principal amount of such Debenture.
"Registrable Securities" has the meaning set forth in the
Registration Rights Agreement.
"Related Party" means each of Xxxxxxx Xxxxx Specialty Group, LLC,
a Delaware limited liability company, Xxxxxxx Xxxxx Private Equity Fund I, LP, a
Delaware limited partnership, Xxxxxxx Xxxxx Private Equity Fund II, LP, a
Delaware limited partnership, Xxxxxxx Xxxxx Private Equity Accredited Fund LLC,
a New York limited liability company, and Xxxxxxx Xxxxx Illumination Fund LLC, a
New York limited liability company.
"Reserved Amount" has the meaning specified in Section 4.3
hereof.
"Restricted Payment" means (a) any dividend or other distribution
(whether in cash, Property or obligations), direct or indirect, on account of
(or the setting apart of money for a sinking or other analogous fund for) any
shares of any class of capital stock of the Company or any of the Subsidiaries
now or hereafter outstanding, except a dividend payable solely in shares of that
class of stock to all of the holders of that class; (b) any redemption,
exchange, retirement, sinking fund or similar payment, purchase or other
acquisition for value, direct or indirect, of any shares of any class of capital
stock of the Company or any of the Subsidiaries now or hereafter outstanding,
except the Securities; (c) any payment of principal of, premium, if any, or
interest on, or any redemption, conversion, exchange, purchase, retirement,
sinking fund or defeasance of, any Subordinated Debt (whether upon acceleration
of such Debt or otherwise); and (d) any loan, advance or payment to any officer
or director of the Company or any of the Subsidiaries, exclusive of (i)
reasonable compensation and reimbursements paid to officers or directors in the
ordinary course of business and (ii) the scheduled repayment of
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principal and interest with respect to any loans made by any such officer or
director of the Company provided such loans are outstanding as of the date
hereof and are set forth on Schedule 3.5 hereto. Notwithstanding the foregoing,
(A) the issuance of securities upon exercise or conversion of the Company's
options, warrants or other convertible securities outstanding as of the date
hereof or the grant of additional options or warrants or the issuance of
additional securities (and the redemption of unvested restricted stock for an
amount equal to the purchase price thereof), in each such case under any Company
stock option or restricted stock plan approved by the independent members of the
Board of Directors or by a committee of the Board of Directors consisting only
of independent members of the Board of Directors, and (B) the issuance of equity
securities to, or making payments under license, joint venture or similar
agreements with, persons with whom the Company has a joint venture, strategic
alliance or other commercial relationship in connection with the operation of
the Company's business, the primary purpose of which is not to raise equity
capital, shall not be deemed to be a Restricted Payment.
"Rule 144" means Rule 144 under the Securities Act or any
successor provision.
"SEC Documents" has the meaning specified in Section 3.4 hereof.
"Securities" means the Debentures, the Conversion Shares, the
Warrants, the Warrant Shares, the Amortization Stock Option Shares and the
Interest Stock Option Shares.
"Security Agreement" has the meaning specified in the preamble to
this Agreement.
"Series B Waiver" means the Series B Preferred Waiver and
Agreement, dated as of the date hereof, by the Company, Xxxxxxx Xxxxx Specialty
Group, LLC, and The Xxxxxx X. Xxxxxx Inter Vivos Trust, for the benefit of the
Investors.
"Xxxxxxx Xxxxx" means STSG Specialty Group, LLC, a Delaware
limited liability company.
"Subordinated Debt" means Debt of the Company which meets each of
the following requirements: (a) such Debt is wholly unsecured; (b) such Debt is
contractually fully subordinated, as to payment and liquidation, to the payment
in full of the Debentures and the Obligations on terms, and pursuant to written
agreements in form and substance, that restrict the subordinated creditor from
pre-paying any amounts in respect of the principal of such Debt (upon
acceleration or otherwise) or commencing any judicial or other collection
efforts or exercising any other remedies prior to the date that is ninety-one
(91) days following the payment in full of the Debentures; and (c) such Debt
does not mature prior to the date that is ninety-one (91) days following the
latest Maturity Date (as defined in the Debentures) of the Debentures then
outstanding.
"Subsequent Effective Date" has the meaning set forth in the
Registration Rights Agreement.
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"Subsequent Placement" has the meaning specified in Section 4.9
hereof.
"Subsidiary" means any corporation or other entity of which at
least a majority of the outstanding shares of stock or other ownership interests
having by the terms thereof ordinary voting power to elect a majority of the
board of directors (or Persons performing similar functions) of such corporation
or entity (regardless of whether or not at the time, in the case of a
corporation, stock of any other class or classes of such corporation shall have
or might have voting power by reason of the happening of any contingency) is at
the time directly or indirectly owned or controlled by the Company or one or
more of the Subsidiaries.
"Termination Date" means the first date on which there are no
Debentures outstanding or any Obligations owed thereunder.
"Trading Day" means any day on which the Common Stock is
purchased and sold on the Principal Market.
"Transaction Documents" means (i) this Agreement, (ii) the
Debentures, (iii) the Warrants, (iv) the Cash Collateral Agreement, (v) the
Subsidiary Guaranty, (vi) the Security Agreement, (vii) the Registration Rights
Agreement, (viii) the Series B Waiver, and (ix) all other agreements, documents
and other instruments executed and delivered by or on behalf of the Company any
of its officers at any Closing.
"Variable Rate Security" means any security or other instrument
that is convertible into or exercisable or exchangeable for Common Stock at a
fluctuating conversion or exercise price or exchange ratio.
"VWAP" on a Trading Day means the volume weighted average price
of the Common Stock for such Trading Day on the Principal Market as reported by
Bloomberg Financial Markets or, if Bloomberg Financial Markets is not then
reporting such prices, by a comparable reporting service of national reputation
selected by the Investors and reasonably satisfactory to the Company. If the
VWAP cannot be calculated for the Common Stock on such Trading Day on any of the
foregoing bases, then the Company shall submit such calculation to an
independent investment banking firm of national reputation reasonably acceptable
to the Investors, and shall cause such investment banking firm to perform such
determination and notify the Company and the Investors of the results of
determination no later than two (2) Business Days from the time such calculation
was submitted to it by the Company. All such determinations shall be
appropriately adjusted for any stock dividend, stock split or other similar
transaction during such period.
1.4 Other Definitional Provisions. All definitions contained in this
Agreement are equally applicable to the singular and plural forms of the terms
defined. The words "hereof", "herein" and "hereunder" and words of similar
import referring to this Agreement refer to this Agreement as a whole and not to
any particular provision of this Agreement.
2. REPRESENTATIONS AND WARRANTIES OF EACH INVESTOR.
Each Investor (with respect to itself only) hereby represents and
warrants to the Company and agrees with the Company that, as of the Execution
Date:
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2.1 Authorization; Enforceability. Such Investor is duly and validly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization as set forth below such
Investor's name on the signature page hereof with the requisite corporate power
and authority to purchase the Debentures and Warrants to be purchased by it
hereunder and to execute and deliver this Agreement and the other Transaction
Documents to which it is a party. This Agreement constitutes, and upon the
execution and delivery thereof, each other Transaction Document to which such
Investor is a party will constitute, such Investor's valid and legally binding
obligation, enforceable in accordance with its terms, subject to (i) applicable
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other
similar laws of general application relating to or affecting the enforcement of
creditors' rights generally and (ii) general principles of equity.
2.2 Accredited Investor. Such Investor (i) is an "accredited investor"
as that term is defined in Rule 501 of Regulation D, (ii) is acquiring the
Debentures and Warrants solely for its own account and not with a present view
to the public resale or distribution of all or any part thereof, except pursuant
to sales that are registered under, or exempt from the registration requirements
of, the Securities Act and/or sales registered under the Securities Act;
provided, however, that in making such representation, such Investor does not
agree to hold the Securities for any minimum or specific term and reserves the
right to sell, transfer or otherwise dispose of the Securities at any time in
accordance with the provisions of this Agreement and with Federal and state
securities laws applicable to such sale, transfer or disposition. Such Investor
can bear the economic risk of a total loss of its investment in the Debentures
and the Warrants and has such knowledge and experience in business and financial
matters so as to enable it to understand the risks of and form an investment
decision with respect to its investment in the Securities.
2.3 Information. The Company has, prior to the Execution Date, provided
such Investor with information regarding the business, operations and financial
condition of the Company and has, prior to the Execution Date, granted to such
Investor the opportunity to ask questions of and receive answers from
representatives of the Company, its officers, directors, employees and agents
concerning the Company and materials relating to the terms and conditions of the
purchase and sale of the Debentures and Warrants hereunder, in order for such
Investor to make an informed decision with respect to its investment in the
Debentures and Warrants. Neither such information nor any other investigation
conducted by such Investor or any of its representatives shall modify, amend or
otherwise affect such Investor's right to rely on the Company's representations
and warranties contained in this Agreement.
2.4 Limitations on Disposition. Such Investor acknowledges that, except
as provided in the Registration Rights Agreement, the Securities have not been
and are not being registered under the Securities Act and may not be transferred
or resold without registration under the Securities Act or unless pursuant to an
exemption therefrom. Such Investor agrees that neither it nor any Person acting
on its behalf or at its direction will engage in any transactions in securities
of the Company prior to the time that the transactions contemplated by this
Agreement are publicly disclosed.
2.5 Legend. Such Investor understands that the certificates
representing the Securities may bear at issuance a restrictive legend in
substantially the following form:
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"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), or the securities laws of any state, and
may not be offered or sold unless a registration statement
under the Securities Act and applicable state securities laws
shall have become effective with regard thereto, or the
Corporation has been furnished with an opinion of legal
counsel, reasonably satisfactory to the Corporation, to the
effect that an exemption from registration under the
Securities Act and applicable state securities laws is
available in connection with such offer or sale.
Notwithstanding the foregoing but subject to compliance with
the requirements of the Securities Act and applicable state
securities laws, these securities and the securities issuable
upon exercise hereof (i) may be pledged or hypothecated in
connection with a bona fide margin account or other loan
secured by such securities and (ii) may be transferred or
assigned to an affiliate of the holder hereof."
Notwithstanding the foregoing, it is agreed that, as long as
such Securities (A) have been sold or transferred pursuant to an effective
registration statement, (B) have been sold pursuant to Rule 144, subject to
receipt by the Company of customary documentation reasonably acceptable to the
Company in connection therewith, or (C) are eligible for resale under Rule
144(k) or any successor provision, such Securities shall be issued without any
legend or other restrictive language and, with respect to Securities upon which
such legend is stamped, the Company shall issue new certificates without such
legend to the holder upon request.
2.6 Reliance on Exemptions. Such Investor understands that the
Securities are being offered and sold to it in reliance upon specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying upon the truth and accuracy of the
representations and warranties of such Investor set forth in this Section 2 in
order to determine the availability of such exemptions and the eligibility of
such Investor to acquire the Securities.
2.7 Non-Affiliate Status; Common Stock Ownership. Such Investor is not
an Affiliate of the Company and is not acting in association or concert with any
other Person in regard to its purchase of Debentures and Warrants or otherwise
in respect of the Company. Such Investor's investment in Debentures and Warrants
is not for the purpose of acquiring, directly or indirectly, control of, and it
has no intent to acquire or exercise control of, the Company or to influence the
decisions or policies of the Board of Directors.
2.8 Short Positions. Neither such Investor nor any person trading on
its behalf or at its discretion has established or maintained a short position
in the Company's securities at any time since the earlier to occur of (a) the
thirty (30) days immediately preceding the Execution Date and (b) the time such
Investor was first informed by the Company or any placement agent acting on
behalf of the Company about the transactions contemplated hereby.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to each Investor and agrees with each Investor that, as
of the Execution Date:
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3.1 Organization, Good Standing and Qualification. Each of the Company
and the Subsidiaries is duly organized, validly existing and, where applicable
as a legal concept, in good standing under the laws of the jurisdiction of its
incorporation or organization and has all requisite power and authority to carry
on its business as now conducted. Each of the Company and the Subsidiaries is
duly qualified to transact business and, where applicable as a legal concept, is
in good standing in each jurisdiction in which it conducts business except where
the failure so to qualify has not had or would not reasonably be expected to
have a Material Adverse Effect. The Operating Subsidiary is the only Subsidiary
that holds any assets or operates any part of the Company's consolidated
business.
3.2 Authorization; Consents. The Company has the requisite corporate
power and authority to enter into and perform its obligations under the
Transaction Documents, to issue and sell the Debentures and the Warrants to the
Investors in accordance with the terms hereof, to issue Conversion Shares,
Amortization Stock Option Shares and Interest Stock Option Shares pursuant to
the terms of the Debentures and to issue Warrant Shares upon exercise of the
Warrants. The Operating Subsidiary has the requisite corporate power and
authority to enter into and perform its obligations under the Subsidiary
Guaranty and the Security Agreement. All corporate action on the part of the
Company and of the Operating Subsidiary by their respective officers, directors
and shareholders necessary for the authorization, execution and delivery of, and
the performance by each of the Company and the Operating Subsidiary of its
obligations under, the Transaction Documents to which it is a party has been
taken, and no further consent or authorization of the Company or the Operating
Subsidiary, their respective Boards of Directors, shareholders, any Governmental
Authority or organization (other than such approval as may be required under the
Securities Act and applicable state securities laws in respect of the
Registration Rights Agreement), or any other person or entity is required
(pursuant to any rule of the National Association of Securities Dealers ("NASD")
or otherwise).
3.3 Enforcement. This Agreement has been and, at or prior to each
Closing, each other Transaction Document to be delivered at such Closing will
be, duly executed and delivered by the Company and, in the case of the
Subsidiary Guaranty and the Security Agreement, the Operating Subsidiary. This
Agreement constitutes and, following the execution and delivery thereof by the
Company, each Transaction Document will constitute, the valid and legally
binding obligation of the Company or, in the case of the Subsidiary Guaranty and
the Security Agreement, of the Operating Subsidiary, enforceable against it in
accordance with its terms, subject to (i) applicable bankruptcy, insolvency,
fraudulent transfer, moratorium, reorganization or other similar laws of general
application relating to or affecting the enforcement of creditors' rights
generally and (ii) general principles of equity.
3.4 Disclosure Documents; Agreements; Financial Statements; Other
Information. The Company has filed with the Commission all reports, schedules,
registration statements and definitive proxy statements that the Company was
required to file with the Commission on or after December 31, 2003
(collectively, the "SEC Documents"). The Company is not aware of any event
occurring or expected to occur on or prior to the Initial Closing Date (other
than the transactions effected hereby) that would require the filing of, or with
respect to which the Company intends to file, a Form 8-K after the Initial
Closing. Each SEC Document, as of the date of the filing thereof
13
with the Commission (or if amended or superseded by a filing prior to the
Execution Date, then on the date of such amending or superseding filing),
complied in all material respects with the requirements of the Securities Act or
Exchange Act, as applicable, and the rules and regulations promulgated
thereunder and, as of the date of such filing (or if amended or superseded by a
filing prior to the Execution Date, then on the date of such filing), such SEC
Document (including all exhibits and schedules thereto and documents
incorporated by reference therein) did not contain an untrue statement of
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. All documents that are required to be
filed as exhibits to the SEC Documents have been filed as required. Except as
set forth in the Disclosure Documents, the Company has no liabilities,
contingent or otherwise, other than liabilities incurred in the ordinary course
of business that, under GAAP, are not required to be reflected in the financial
statements included in the Disclosure Documents. Except as set forth in the
Disclosure Documents, as of their respective dates, the financial statements of
the Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the Commission with respect thereto. The financial statements
included in the SEC Documents have been and will be prepared in accordance with
GAAP consistently applied at the times and during the periods involved (except
(i) as may be otherwise indicated in such financial statements or the notes
thereto, (ii) in the case of unaudited interim statements, to the extent they
may exclude footnotes or may be condensed or summary statements, or (iii) as set
forth in the SEC Documents), and fairly present in all material respects the
financial position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end adjustments).
3.5 Capitalization; Debt Schedule. The capitalization of the Company as
of the date of this Agreement, including its authorized capital stock, the
number of shares issued and outstanding, the number of shares issuable and
reserved for issuance pursuant to the Company's stock option plans and
agreements, the number of shares issuable and reserved for issuance pursuant to
securities (other than the Debentures and Warrants) exercisable for, or
convertible into or exchangeable for any shares of Common Stock and the number
of shares initially to be reserved for issuance upon conversion of the
Debentures and exercise of the Warrants, is set forth on Schedule 3.5 hereto.
All issued and outstanding shares of capital stock of the Company have been
validly issued, fully paid and non-assessable. Except as disclosed on Schedule
3.5 hereto, the Company or a Subsidiary owns all of the capital stock of each
Subsidiary, which capital stock is validly issued, fully paid and, where
applicable as a legal concept, non-assessable, and no shares of the capital
stock of the Company or any of the Subsidiaries are subject to preemptive rights
or any other similar rights of the shareholders of the Company or any such
Subsidiary or any Liens created by or through the Company or any such
Subsidiary. Except as disclosed on Schedule 3.5 or as contemplated herein, there
are no outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exercisable or exchangeable for, any shares of capital stock
of the Company or any of the Subsidiaries, or arrangements by which the Company
or any of the Subsidiaries is or may become bound to issue additional shares of
capital stock of the Company or any of the Subsidiaries (whether pursuant to
anti-dilution, "reset" or other similar provisions). Schedule 3.5 identifies all
Debt of the Company and the Subsidiaries currently outstanding in excess of
$100,000 individually or in the aggregate as of the Execution Date.
14
3.6 Due Authorization; Valid Issuance. The Debentures are duly
authorized and, when issued, sold and delivered in accordance with the terms
hereof, (i) will be duly and validly issued, free and clear of any Liens imposed
by or through the Company and (ii) assuming the accuracy of each Investor's
representations in this Agreement, will be issued, sold and delivered in
compliance with all applicable Federal and state securities laws. The Warrants
are duly authorized and, when issued, sold and delivered in accordance with the
terms hereof, will be duly and validly issued, free and clear of any Liens
imposed by or through the Company and, assuming the accuracy of each Investor's
representations in this Agreement, will be issued, sold and delivered in
compliance with all applicable Federal and state securities laws. The Conversion
Shares, the Amortization Stock Option Shares and the Interest Stock Option
Shares are duly authorized and reserved for issuance and, when issued in
accordance with the terms of the Debentures, will be duly and validly issued,
fully paid and nonassessable, free and clear of any Liens imposed by or through
the Company. The Warrant Shares are duly authorized and reserved for issuance
and, when issued in accordance with the terms of the Warrants, will be duly and
validly issued, fully paid and nonassessable, free and clear of any Liens
imposed by or through the Company.
3.7 No Conflict. Neither the Company nor any of the Subsidiaries is in
violation of any provisions of its Certificate of Incorporation, Bylaws or any
other governing document. Neither the Company nor any of the Subsidiaries is in
violation of or in default (and no event has occurred which, with notice or
lapse of time or both, would constitute a default) under any provision of any
instrument or contract to which it is a party or by which it or any of its
Property is bound, or in violation of any provision of any Governmental
Requirement applicable to the Company or any Subsidiary, except for any
violation or default that has not had or would not reasonably be expected to
have a Material Adverse Effect. The (i) execution, delivery and performance of
this Agreement and the other Transaction Documents and (ii) consummation of the
transactions contemplated hereby and thereby (including without limitation, the
issuance of the Debentures and the Warrants and the reservation for issuance and
issuance of the Conversion Shares, the Amortization Stock Option Shares, the
Interest Stock Option Shares and the Warrant Shares) will not result in any
violation of any provisions of the Company's or any Subsidiary's Certificate of
Incorporation, Bylaws or any other governing document or in a default under any
provision of any instrument or contract to which it is a party or by which it or
any of its Property is bound, or in violation of any provision of any
Governmental Requirement applicable to the Company or any Subsidiary or be in
conflict with or constitute, with or without the passage of time and giving of
notice, either a default under any such provision, instrument or contract or an
event which results in the creation of any Lien upon any assets of the Company
or of any of the Subsidiaries or the triggering of any preemptive or
anti-dilution rights (including without limitation pursuant to any "reset" or
similar provisions) or rights of first refusal or first offer, or any other
rights that would allow or permit the holders of the Company's securities to
purchase shares of Common Stock or other securities of the Company (whether
pursuant to a shareholder rights plan provision or otherwise).
3.8 Financial Condition; Taxes; Litigation.
3.8.1 The financial condition of the Company and each Subsidiary
is, in all material respects, as described in the Disclosure Documents, except
for changes in the ordinary course of business and normal year-end adjustments.
Except as otherwise described on Schedule 3.8 hereto,
15
as of the date hereof and as of each Closing Date, there has been no material
adverse change to the business, operations, properties, financial condition, or
results of operations of the Company and the Subsidiaries taken as a whole since
the date of the Company's most recent audited financial statements contained in
the Disclosure Documents.
3.8.2 The Company and each of the Subsidiaries has prepared in good
faith and duly and timely filed all tax returns required to be filed by it and
such returns are complete and accurate in all material respects and the Company
and each of the Subsidiaries has paid all taxes required to have been paid by
it, except for taxes which it reasonably disputes in good faith or the failure
of which to pay has not had or would not reasonably be expected to have a
Material Adverse Effect. Neither the Company nor any Subsidiary has any material
liability with respect to taxes that accrued on or before the date of the most
recent balance sheet of the Company included in the Disclosure Documents in
excess of the amounts accrued with respect thereto that are reflected on such
balance sheet.
3.8.3 Neither the Company nor any of the Subsidiaries is the
subject of any pending or, to the Company's knowledge, threatened inquiry,
investigation or administrative or legal proceeding by the Internal Revenue
Service, the taxing authorities of any state or local jurisdiction, the
Commission, the NASD, any state securities commission or other Governmental
Authority.
3.8.4 Except as described on Schedule 3.8 hereto, there is no
material claim, litigation or administrative proceeding pending, or, to the
Company's knowledge, threatened or contemplated, against the Company or any of
the Subsidiaries, or against any officer, director or employee of the Company or
any such Subsidiary in connection with such person's employment therewith.
Neither the Company nor any of the Subsidiaries is a party to or subject to the
provisions of, any order, writ, injunction, judgment or decree of any court or
Government Authority which has had or would reasonably be expected to have a
Material Adverse Effect.
3.9 Form SB-2. The Company is eligible to register the Conversion
Shares and Warrant Shares for resale in a secondary offering by each Investor on
a registration statement on Form SB-2 under the Securities Act. To the Company's
knowledge, as of the date hereof and as of each Closing Date, there exist no
facts or circumstances (including without limitation any required approvals or
waivers of any circumstances that may delay or prevent the obtaining of
accountant's consents) that could reasonably be expected to prohibit or delay
the preparation, filing or effectiveness of such registration statement.
3.10 Acknowledgement of Dilution. The Company acknowledges that the
issuance of the Conversion Shares upon conversion of the Debentures and the
issuance of the Warrant Shares upon exercise of the Warrants may result in
dilution of the outstanding shares of Common Stock, which dilution may be
substantial under certain market conditions. The Company further acknowledges
that its obligation to issue Conversion Shares upon conversion of the Debentures
in accordance with the terms of the Debentures, and to issue Warrant Shares upon
exercise of the Warrants in accordance with the terms of the Warrants, is
unconditional (other than with respect to the conditions set forth in the
Debentures and the Warrants, respectively) regardless of the effect of any such
dilution.
3.11 Intellectual Property. Except as set forth in Schedule 3.11:
16
(a) The Company and the Subsidiaries own, free and clear of claims
or rights or any other Person, with full right to use, sell, license,
sublicense, dispose of, and bring actions for infringement of, or, to the
knowledge of the Company, has acquired licenses or other rights to use, all
Intellectual Property necessary for the conduct of its respective business as
presently conducted in all material respects (other than with respect to
software which is generally commercially available and not used or incorporated
into the Company's products and open source software which may be subject to one
or more "open source" licenses), except as has not had and would not reasonably
be expected to have a Material Adverse Effect.
(b) Neither the Company nor any of the Subsidiaries has received
written notice from any third party asserting that any Intellectual Property
owned or licensed by the Company or the Subsidiaries, or which the Company or
any of the Subsidiaries otherwise has the right to use, is invalid or
unenforceable by the Company or such Subsidiary and, to the Company's knowledge,
there is no valid basis for any such claim (whether or not pending or
threatened), except as has not had and would not reasonably be expected to have
a Material Adverse Effect.
(c) The business of the Company and the Subsidiaries as presently
conducted and the production, marketing, licensing, use and servicing of any
products or services of the Company and the Subsidiaries do not, to the
knowledge of the Company, infringe any patent, trademark, copyright, or trade
secret rights of any third parties or any other Intellectual Property of any
third parties, except, in each such case, as has not had and would not
reasonably be expected to have a Material Adverse Effect.
(d) No claim is pending or, to the Company's knowledge, threatened
against the Company or any of the Subsidiaries nor has the Company or any of the
Subsidiaries received any written notice or other written claim from any Person
asserting that any of the Company's or the Subsidiaries' present or contemplated
activities infringe or may infringe any Intellectual Property of such Person,
and the Company is not aware of any infringement by any other Person of any
rights of the Company or any of the Subsidiaries under any Intellectual Property
Rights, except as has not had and would not reasonably be expected to have a
Material Adverse Effect.
(e) All licenses or other agreements under which the Company or any
of the Subsidiaries is granted Intellectual Property (excluding licenses to use
software utilized in the Company's or such Subsidiary's internal operations and
which is generally commercially available) are in full force and effect and, to
the Company's knowledge, there is no default by any party thereto, except as has
not had and would not reasonably be expected to have a Material Adverse Effect.
The Company has no reason to believe that the licensors under such licenses and
other agreements do not have and did not have all requisite power and authority
to grant the rights to the Intellectual Property purported to be granted
thereby, except as has not had and would not reasonably be expected to have a
Material Adverse Effect.
(f) All licenses or other agreements under which the Company or any
of the Subsidiaries has granted rights to Intellectual Property to others
(including all end-user agreements) since January 1, 2004, are in full force and
effect unless otherwise terminated in accordance with the terms of such licenses
or arrangements and there has been no material default by the Company or
17
any of the Subsidiaries thereunder and, to the Company's knowledge, there is no
material default by any other party thereto.
(g) The Company and the Subsidiaries have taken all steps required
in accordance with commercially reasonable business practice to establish and
preserve their ownership in their owned Intellectual Property and to keep
confidential all trade secrets developed by or belonging to the Company or the
Subsidiaries which has not been patented or copyrighted. To the Company's
knowledge, none of the employees of the Company or any of the Subsidiaries has
any agreements or arrangements with former employers of such employees relating
to any Intellectual Property of such employers, which materially interfere or
conflict with the performance of such employee's duties for the Company or the
Subsidiaries or result in any former employers of such employees having any
rights in, or claims on, the Company's or any of the Subsidiaries' Intellectual
Property. Except as set forth on Schedule 3.11, each current and former employee
of the Company and of each of the Subsidiaries has executed agreements regarding
confidentiality, proprietary information and assignment of inventions to the
Company or the Subsidiaries, each independent contractor or consultant of the
Company and of each of the Subsidiaries has executed agreements regarding
confidentiality and proprietary information, and neither the Company nor any of
the Subsidiaries has received written notice that any employee, consultant or
independent contractor is in violation of any agreement or in breach of any
agreement or arrangement with former or present employers relating to
proprietary information or assignment of inventions. Without limiting the
foregoing: (i) the Company and each of the Subsidiaries has taken reasonable
security measures to guard against unauthorized disclosure or use of any of its
Intellectual Property that is confidential or proprietary; and (ii) the Company
has no reason to believe that any Person (including, without limitation, any
former employee or consultant of the Company or of any of the Subsidiaries) has
unauthorized possession of any of its trade secrets, or any part thereof, or
that any Person has obtained unauthorized access to any of its trade secrets. To
the Company's knowledge, the Company and each of the Subsidiaries has complied
in all material respects with its respective obligations pursuant to all
agreements relating to Intellectual Property rights that are the subject of
licenses granted by third parties, except for any non-compliance that has not
had or would not reasonably be expected to have a Material Adverse Effect.
3.12 Registration Rights; Rights of Participation. Except as described
on Schedule 3.12 hereto, (A) the Company has not granted or agreed to grant to
any person or entity any rights (including "piggy-back" registration rights) to
have any securities of the Company registered with the Commission or any other
governmental authority which has not been satisfied in full prior or waived to
the date hereof and (B) no person or entity, including, but not limited to,
current or former shareholders of the Company, underwriters, brokers, agents or
other third parties, has any right of first refusal, preemptive right, right of
participation, anti-dilutive right or any similar right to participate in, or to
receive securities or other assets of the Company as a result of the
transactions contemplated by this Agreement or the other Transaction Documents.
3.13 Solicitation; Other Issuances of Securities. Neither the Company
nor any of the Subsidiaries or Affiliates, nor any person acting on its or their
behalf, (i) has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D) in connection with the offer or
sale of the Securities, or (ii) has, directly or indirectly, made any offers or
sales of any
18
security or the right to purchase any security, or solicited any offers to buy
any security or any such right, under circumstances that would require
registration of the Securities under the Securities Act.
3.14 Fees. Except as described on Schedule 3.14 hereto, the Company is
not obligated to pay any brokers, finders or financial advisory fees or
commissions to any underwriter, broker, agent or other representative in
connection with the transactions contemplated hereby. The Company will indemnify
and hold harmless such Investor from and against any claim by any person or
entity alleging that such Investor is obligated to pay any such compensation,
fee, cost or related expenditure in connection with the transactions
contemplated hereby.
3.15 Foreign Corrupt Practices. Neither the Company, any of the
Subsidiaries nor, to the knowledge of the Company, any director, officer, agent,
employee or other person acting on behalf of the Company or any of the
Subsidiaries, has (i) used any corporate funds for any unlawful contribution,
gift, entertainment or other unlawful expenses relating to political activity,
(ii) made any direct or indirect unlawful payment to any foreign or domestic
government official or employee including, without limitation, any bribe,
rebate, payoff, influence payment, kickback or other unlawful payment, or (iii)
violated any provision of the Foreign Corrupt Practices Act of 1977, as amended.
3.16 Key Employees. Each Key Employee is currently serving in the
capacity described in the Disclosure Documents. The Company has no knowledge of
any fact or circumstance (including without limitation (i) the terms of any
agreement to which such person is a party or any litigation in which such person
is or may become involved and (ii) any illness or medical condition that could
reasonably be expected to result in the disability or incapacity of such person)
that would limit or prevent any such person from serving in such capacity on a
full-time basis in the foreseeable future, or of any intention on the part of
any such person to limit or terminate his or her employment with the Company.
3.17 Employee Matters. There is no strike, labor dispute or union
organization activities pending or, to the knowledge of the Company, threatened
between it and its employees. No employees of the Company belong to any union or
collective bargaining unit.
3.18 Environment. To the Company's knowledge, except as disclosed in
the Disclosure Documents, the Company and the Subsidiaries have no liabilities
under any Environmental Law nor, to the Company's knowledge, do any factors
exist that are reasonably likely to give rise to any such liability, affecting
any of the properties owned or leased by the Company or any of the Subsidiaries
that, individually or in the aggregate, has had or would reasonably be expected
to have a Material Adverse Effect. Neither the Company nor any of the
Subsidiaries has violated any Environmental Law applicable to it now or
previously in effect, other than such violations or infringements that,
individually or in the aggregate, have not had and would not reasonably be
expected to have a Material Adverse Effect.
3.19 ERISA. The Company is in compliance in all material respects with
the presently applicable provisions of ERISA and the United States Internal
Revenue Code of 1986, as amended, with respect to each Pension Plan except in
any such case for any such matters that, individually or in the aggregate, have
not had, and would not reasonably be expected to have, a Material Adverse
Effect.
19
3.20 Disclosure. The representations, warranties and written statements
contained in the Disclosure Documents, this Agreement and the other Transaction
Documents and in the certificates, exhibits and schedules delivered to such
Investor by the Company pursuant to this Agreement and the other Transaction
Documents and in connection with such Investor's due diligence investigation of
the Company, taken as a whole, do not contain any untrue statement of a material
fact, and do not omit to state a material fact required to be stated therein or
necessary in order to make such representations, warranties or statements not
misleading in light of the circumstances under which they were made. Except for
the terms of this Agreement and the other Transaction Documents, neither the
Company nor any Person acting on its behalf or at its direction has provided
such Investor with material non-public information. Following the issuance of
the press release in accordance with Section 4.1(c) hereof, to the Company's
knowledge, such Investor will not possess any material non-public information
concerning the Company as a result of information provided directly to such
Investor by the Company or its agents or representatives. The Company
acknowledges that each Investor is relying on the representations,
acknowledgments and agreements made by the Company in Section 3 hereof and
elsewhere in this Agreement in making investing, trading and/or other decisions
concerning the Company's securities.
3.21 Insurance. The Company maintains insurance for itself and the
Subsidiaries in such amounts and covering such losses and risks as is reasonably
sufficient and customary in the businesses in which the Company and the
Subsidiaries are engaged, except where the failure to maintain such insurance
has not had or would not reasonably be expected to have a Material Adverse
Effect. No notice of cancellation has been received for any of such policies and
the Company is in compliance in all material respects with all of the terms and
conditions thereof. The Company has no reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers as may be necessary to
continue to conduct its business as currently conducted without a significant
increase in cost (other than cost increases generally affecting the market for
such insurance). Without limiting the generality of the foregoing, the Company
maintains Director's and Officer's insurance in the amount set forth on Schedule
3.21.
3.22 Property. Neither the Company nor any Subsidiary owns any real
Property. The Company and the Subsidiaries have valid and legal title to all
personal Property owned by them, in each case free and clear of all Liens,
except for Permitted Liens. To the Company's knowledge, any Property held under
lease by the Company and the Subsidiaries is held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not materially interfere with the use made or proposed to be made of such
Property by the Company and the Subsidiaries.
3.23 Regulatory Permits. The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses, except where the failure to have any such authorization or permit
would not have a Material Adverse Effect, and neither the Company nor any such
Subsidiary has received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit.
20
3.24 Exchange Act Registration; Listing. The Company's Common Stock is
registered pursuant to Section 12(g) of the Exchange Act and the Company has
taken no action designed to, or which, to the knowledge of the Company, would
reasonably be expected to have the effect of, terminating the registration of
the Common Stock under the Exchange Act. The Company currently meets the
eligibility requirements for quotation of the Common Stock on the OTC Bulletin
Board, and has not received any notice from the NASD that it does not currently
satisfy such requirements or that such continued quotation is in any way
threatened.
3.25 Investment Company Status. The Company is not, and immediately
after receipt of payment for the Debentures and the Warrants issued under this
Agreement will not be, an "investment company" or an entity "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended (the "Investment Company Act"), and shall conduct its business in a
manner so that it will not become subject to the Investment Company Act.
3.26 Transfer Taxes. No stock transfer or other taxes (other than
income taxes) are required to be paid in connection with the issuance and sale
of any of the Securities, other than such taxes for which the Company has
established appropriate reserves and intends to pay in full on or before the
Initial Closing.
3.27 Xxxxxxxx-Xxxxx Act; Internal Controls and Procedures. The Company
is in compliance in all material respects with all applicable requirements of
the Xxxxxxxx-Xxxxx Act of 2002 and all applicable rules and regulations
promulgated by the Commission thereunder that are effective as of the date
hereof, except as has not had and would not reasonably be expected to have a
Material Adverse Effect. Except as set forth in the Disclosure Documents, the
Company maintains internal accounting controls, policies and procedures, and
such books and records as are reasonably designed to provide reasonable
assurance that (i) all transactions to which the Company or any Subsidiary is a
party or by which its properties are bound are effected by a duly authorized
employee or agent of the Company, supervised by and acting within the scope of
the authority granted by the Company's senior management; (ii) the recorded
accounting of the Company's consolidated assets is compared with existing assets
at regular intervals; and (iii) all transactions to which the Company or any
Subsidiary is a party, or by which its properties are bound, are recorded (and
such records maintained) in accordance with all Government Requirements and as
may be necessary or appropriate to ensure that the financial statements of the
Company are prepared in accordance with GAAP.
3.28 Transactions with Interested Persons. Except as set forth in
Schedule 3.28, no officer, director or employee of the Company or any of the
Subsidiaries is or has made any arrangements with the Company or any of the
Subsidiaries to become a party to any transaction with the Company or any
Subsidiary (other than for services as employees, consultants, officers and
directors), including any contract, agreement or other arrangement providing for
the furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.
21
3.29 Customers and Suppliers. The relationships of the Company and the
Subsidiaries with the material customers and suppliers of the Company and the
Subsidiaries taken as a whole, are maintained on commercially reasonable terms.
To the Company's knowledge, no customer or supplier of the Company or any of the
Subsidiaries has any plan or intention to terminate any agreement with the
Company or such Subsidiary, which termination would reasonably be expected to
have a Material Adverse Effect.
3.30 No Other Agreements. The Company has not, directly or indirectly,
entered into any agreement with or granted any right to any Investor relating to
the terms or conditions of the transactions contemplated by the Transaction
Documents, except as expressly set forth in the Transaction Documents.
4. COVENANTS OF THE COMPANY AND EACH INVESTOR.
4.1 The Company agrees with each Investor that the Company will:
(a) file a Form D with respect to the Securities issued at each
Closing as and when required by Regulation D and provide a copy thereof to such
Investor promptly after such filing at such Investor's request;
(b) take such action as the Company reasonably determines upon the
advice of counsel is necessary to qualify the Debentures and Warrants for sale
under applicable state or "blue-sky" laws or obtain an exemption therefrom, and
shall promptly provide evidence of any such action to such Investor at such
Investor's request;
(c) (i) on or prior to 8:30 a.m. (eastern time) on the Business Day
immediately following the Execution Date, issue a press release disclosing the
material terms of this Agreement and the other Transaction Documents and the
transactions contemplated hereby and thereby, and (ii) prior to Closing,
transmit for filing with the Commission a Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005 disclosing, among other things, the
material terms of this Agreement and the other Transaction Documents and the
transactions contemplated hereby and thereby, including as exhibits this
Agreement and the other Transaction Documents, and provide each Investor with a
receipt that such report has been accepted for filing by the Commission;
provided, however, that each Investor shall have a reasonable opportunity to
review and comment on any such press release or Form 10-Q prior to the issuance
or filing thereof; and
(d) (i) on or prior to 8:30 a.m. (eastern time) on the Business Day
immediately following the Option Expiration Date, issue a press release
disclosing the material terms of the transactions scheduled to occur on the
Option Closing Date, and (ii) on or prior to 5:00 p.m. (eastern time) on such
Business Day, transmit for filing with the Commission a Current Report on Form
8-K disclosing the material terms of the Securities to be issued at the Option
Closing; provided, however, that each Investor shall have a reasonable
opportunity to review and comment on any such press release or Form 8-K prior to
the issuance or filing thereof.
4.2 Existence and Compliance. The Company agrees that it will, during
the period beginning on the Execution Date and ending on the Termination Date:
22
(a) maintain its corporate existence in good standing;
(b) pay or discharge before becoming delinquent (a) all taxes,
levies, assessments and governmental charges imposed on it or its income or
profits or any of its Property and (b) all lawful claims for labor, material and
supplies, which, if unpaid, might become a Lien upon any of its Property, except
where the failure to do so would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect; provided, however,
that the Company shall not be required to pay or discharge any tax, levy,
assessment or governmental charge, or claim for labor, material or supplies,
whose amount, applicability or validity is being contested in good faith by
appropriate proceedings being diligently pursued and for which adequate reserves
have been established under GAAP;
(c) comply with all Governmental Requirements applicable to the
operation of its business, except for instances of noncompliance that would not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect;
(d) comply with all agreements, documents and instruments
binding on it or affecting its Properties or business, including, without
limitation, all Material Contracts, except for instances of noncompliance that
would not reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect; provided, however, that the Company shall not be
required to comply with any Governmental Requirements, the applicability or
validity of which is being contested in good faith by appropriate proceedings
being diligently pursued and for which adequate reserves have been established
under GAAP;
(e) provide each Investor with copies of all materials sent to
its shareholders at the same time as such materials are delivered to such
shareholders;
(f) timely file with the Commission 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;
(g) take commercially reasonable steps to restrict each of the
Company's Key Employees from selling shares of Common Stock prior to the later
to occur of (i) the Initial Effective Date and (ii) if the Option Closing
occurs, the Subsequent Effective Date (each as defined in the Registration
Rights Agreement), other than in connection with any 10b-5(1) trading plans in
effect as of the Execution Date and disclosed to each Investor in writing; and
(h) use commercially reasonable efforts to maintain adequate
insurance coverage (including D&O insurance) for the Company and each
Subsidiary.
4.3 Reservation of Common Stock. The Company shall, on the Initial
Closing Date, have a number of shares of Common Stock (the "Reserved Amount")
authorized and reserved for issuance to the Investors free from any preemptive
rights that, on such Closing Date, is not less than two hundred percent (200%)
of the sum of (A) the number of Conversion Shares issuable upon conversion of
all of the Debentures issued or issuable at or prior
23
to the Initial Closing plus (B) the number of Warrant Shares issuable upon
exercise of all of the Warrants issued or issuable at or prior to the Initial
Closing, in each case without regard to any limitation or restriction on such
conversion or exercise that may be set forth in the Debentures or the Warrants.
The Reserved Amount shall be allocated in accordance with each Investor's Pro
Rata Share. In the event that an Investor shall sell or otherwise transfer any
of such Investor's Debentures or Warrants, each transferee shall be allocated a
pro rata portion of such transferor's Reserved Amount. Any portion of the
Reserved Amount allocated to any Investor or other Person which no longer holds
any Debentures or Warrants shall be reallocated to the remaining Investors pro
rata based on the number of Registrable Securities held by such Investors at
such time. In the event that the Reserved Amount is insufficient at any time to
cover one hundred and fifty percent (150%) of the Registrable Securities
issuable upon the conversion of the Debentures and the exercise of the Warrants
(without regard to any restriction on such conversion or exercise), the Company
shall take such action (including without limitation holding a meeting of its
shareholders) to increase the Reserved Amount to cover two hundred percent
(200%) of the Registrable Securities issuable upon such conversion and
exercise), such increase to be effective not later than the thirtieth (30th) day
(or sixtieth (60th) day, in the event shareholder approval is required for such
increase) following the Company's receipt of written notice of such deficiency.
While any Debentures or Warrants are outstanding, the Company shall not reduce
the Reserved Amount without obtaining the prior written consent of each
Investor.
4.4 Use of Proceeds. The Company shall use the proceeds from the sale
of the Debentures and Warrants as specified on Schedule 4.4 hereof; provided,
that the Company shall not use any of such proceeds (i) to pay any dividend or
make any distribution on any of its equity securities, or (ii) to repay any loan
made to or incurred by any Key Employee or any other officer or director of the
Company.
4.5 Limitation on Debt and Liens. During the period beginning on the
Execution Date and ending on the Termination Date, the Company shall refrain,
and shall ensure that each of the Subsidiaries refrains, (a) from incurring any
Debt (including without limitation by issuing any Debt securities) or increasing
the amount of any existing line of credit or other Debt facility beyond the
amount outstanding on the date hereof, other than Permitted Debt, and (b) from
granting, establishing or maintaining any Lien on any of its assets, including
without limitation any pledge of securities owned or held by it (including
without limitation any securities issued by any such Subsidiary), other than
Permitted Liens.
4.6 Restricted Payments. During the period beginning on the Execution
Date and ending on the Termination Date, the Company will not, nor will it
permit any Subsidiary of the Company to, make any Restricted Payments, except
that:
(a) the Company may make scheduled payments of principal and
interest accrued on any Permitted Debt; and
(b) Subsidiaries of the Company may make Restricted Payments to
the Company;
provided, however, that no Restricted Payments may be made pursuant to clause
(a) or (b) above if an Event of Default (or an event or circumstance that with
the giving of notice or lapse of time
24
would constitute an Event of Default) exists at the time of such Restricted
Payment or would result therefrom.
4.7 Mergers and Consolidations. During the period beginning on the
Execution Date and ending on the Termination Date, the Company will not, and
will not permit any Subsidiary of the Company to, without the prior written
consent of Investors holding at least a majority in principal amount of the
Debentures then outstanding (which consent will not be unreasonably withheld),
merge with or consolidate into, any Person, except that (i) any of the Company's
wholly owned Subsidiaries may merge with, consolidate into the Company or
another of the Company's wholly owned Subsidiaries and (ii) the Company or any
Subsidiary of the Company may effect a merger solely for the purpose of changing
its jurisdiction of incorporation.
4.8 Acquisitions and Investments. During the period beginning on the
Execution Date and ending on the Termination Date, the Company will not, nor
will it permit any Subsidiary of the Company to, purchase or otherwise acquire
the capital stock or other equity interests in or assets (constituting a
business unit) of, any Person or agree to do so, unless (a) the business or
entity to be acquired has had net positive cash flow from operations (determined
in accordance with GAAP after deducting the amount of capital expenditures)
during the twelve-month period immediately preceding such acquisition and (b)
the Company in good faith believes that the acquired business or entity will
continue to generate such positive cash flow during the twelve-month period
immediately following such acquisition.
4.9 Issuance Limitations. From the Execution Date through the Effective
Date, the Company shall not issue, sell or exchange, or agree or obligate itself
to issue, sell or exchange or reserve, agree to or set aside for issuance, sale
or exchange, (1) any shares of Common Stock, (2) any other equity security of
the Company, including without limitation shares of preferred stock, (3) any
other security of the Company which by its terms is convertible into or
exchangeable or exercisable for any equity security of the Company, or (4) any
option, warrant or other right to subscribe for, purchase or otherwise acquire
any such security described in the foregoing clauses (1) through (3) (each a
"Subsequent Placement"); provided, however, that the foregoing shall not apply
to any Excluded Security. During the period beginning on the Execution Date and
ending on the Termination Date, the Company will not, nor will it permit any of
the Subsidiaries to, issue any Variable Rate Security, or any instrument, right
or security convertible, exchangeable or exercisable into any such security.
4.10 Right of Participation.
(a) Offered Securities. From the Effective Date through the
Termination Date, the Company will not, directly or indirectly, effect a
Subsequent Placement, unless in each such case the Company shall have first
offered to sell to the Investors at least thirty five percent (35%) of the
securities being offered in such Subsequent Placement (the securities being
offered to the Investors being referred to herein as the "Offered Securities").
The Company shall offer to sell to each Investor such Investor's Pro Rata Share
of the Offered Securities (the "Basic Amount"), at a price and on such other
terms as shall have been specified by the Company in writing delivered to such
Investor (the "Offer"), which Offer by its terms shall remain open and
25
irrevocable for a period of not less than ten (10) Business Days from such
Investor's receipt of the terms of the Offer in writing (the "Offer Period").
(b) Notice of Acceptance. Each Investor that wishes to accept the
Offer shall deliver written notice thereof (a "Notice of Acceptance") to the
Company prior to the expiration of the Offer Period, specifying the Basic Amount
that the Investor elects to purchase.
(c) Permitted Sales Of Refused Securities. In the event that
Notices of Acceptance are not timely delivered by the Investors in respect of
all the Offered Securities within the time frames required by paragraph (b)
above, the Company shall have forty-five (45) days from the expiration of the
Offer Period to close the sale of all or any part of such Offered Securities as
to which a Notice of Acceptance has not been given by an Investor (the "Refused
Securities") to the Person or Persons specified in the Offer, but only upon
terms and conditions, including, without limitation, unit price and interest
rates (if applicable), which are, in the aggregate, no more favorable to such
other Person or Persons or less favorable to the Company than those set forth in
the Offer.
(d) Closing. Upon the closing of the purchase and sale of Offered
Securities, each Investor shall purchase from the Company, and the Company shall
sell to such Investor, the number of Offered Securities specified in the Notice
of Acceptance delivered by such Investor. The purchase by the Investors of any
Offered Securities is subject in all cases to the preparation, execution and
delivery by the Company and the Investors of a purchase agreement relating to
such Offered Securities on the same terms and conditions applicable to other
Persons purchasing the Offered Securities.
(e) Further Sale. In each case, any Offered Securities not
purchased by the Investors or other Person or Persons in accordance herewith may
not be sold or otherwise disposed of by the Company until they are again offered
to the Investors under the procedures specified herein.
4.11 Transactions with Affiliates. The Company agrees that any
transaction or arrangement between it or any of the Subsidiaries and any
Affiliate or employee of the Company shall be effected on an arms' length basis
and shall be approved by the Board of Directors, including a majority of the
Company's directors not having an interest in such transaction.
4.12 Use of Investor Name. Except as may be required by applicable law
and/or this Agreement, the Company shall not use, directly or indirectly, any
Investor's name or the name of any of its Affiliates in any advertisement,
announcement, press release or other similar communication unless it has
received the prior written consent of such Investor or its Affiliate, as the
case may be, for the specific use contemplated or as otherwise required by
applicable law or regulation.
4.13 Company's Instructions to Transfer Agent. On or prior to the
Initial Closing Date, the Company shall execute and deliver irrevocable written
instructions to the transfer agent for its Common Stock (the "Transfer Agent"),
and provide each Investor with a copy thereof, directing the Transfer Agent (i)
to issue certificates representing Conversion Shares upon conversion of the
26
Debentures and receipt of a valid Conversion Notice (as defined in the
Debentures) from an Investor, in the amount specified in such Conversion Notice,
in the name of such Investor or its nominee, (ii) to issue certificates
representing Warrant Shares upon exercise of the Warrants and (iii) to deliver
such certificates to such Investor no later than the close of business on the
third (3rd) business day following the related Conversion Date (as defined in
the Debentures) or Exercise Date (as defined in the Warrant), as the case may
be. Such certificates may bear legends pursuant to applicable provisions of this
Agreement or applicable law. The Company shall instruct the transfer agent that,
in lieu of delivering physical certificates representing shares of Common Stock
to an Investor upon conversion of the Debentures, or exercise of the Warrants,
and as long as the Transfer Agent is a participant in the Depository Trust
Company ("DTC") Fast Automated Securities Transfer program, and such Investor
has not informed the Company that it wishes to receive physical certificates
therefor, and no restrictive legend is required to appear on any physical
certificate if issued, the transfer agent may effect delivery of Conversion
Shares or Warrant Shares, as the case may be, by crediting the account of such
Investor or its nominee at DTC for the number of shares for which delivery is
required hereunder within the time frame specified above for delivery of
certificates. The Company represents to and agrees with each Investor that it
will not give any instruction to the Transfer Agent that will conflict with the
foregoing instruction or otherwise restrict such Investor's right to convert the
Debentures or to receive Conversion Shares in accordance with the terms of the
Debentures or to exercise the Warrant or to receive Warrant Shares upon exercise
of the Warrants. In the event that the Company's relationship with the Transfer
Agent should be terminated for any reason, the Company shall use its
commercially reasonable efforts to cause the Transfer Agent to continue acting
as transfer agent pursuant to the terms hereof until such time that a successor
transfer agent is appointed by the Company and receives the instructions
described above.
4.14 Limitations on Disposition. No Investor shall sell, transfer,
assign or dispose of any Securities, unless:
(a) there is then in effect an effective registration statement
under the Securities Act covering such proposed disposition and such disposition
is made in accordance with such registration statement; or
(b) such Investor has notified the Company in writing of any such
disposition and furnished the Company with an opinion of counsel, reasonably
satisfactory to the Company, that such disposition will not require registration
of such Securities under the Securities Act; provided, however, that no such
opinion of counsel will be required (A) if the sale, transfer or assignment is
made to an Affiliate of such Investor in compliance with applicable securities
laws, provided that such Affiliate provides the Company with customary
accredited investor and investment representations and agrees to be bound by the
terms and conditions of this Agreement, (B) if the sale, transfer or assignment
is made pursuant to Rule 144 and such Investor provides the Company with
customary representations and/or other evidence reasonably satisfactory to the
Company that the proposed transaction satisfies the requirements of Rule 144, or
(C) in connection with a bona fide pledge or hypothecation of any Securities
under a margin arrangement with a broker-dealer or other financial institution
or the sale of any such Securities by such broker-dealer or other financial
institution following such Investor's default under such margin arrangement.
27
4.15 Disclosure of Information. The Company agrees that it will not at
any time following the Execution Date disclose material non-public information
to any Investor without first obtaining such Investor's written consent to such
disclosure.
4.16 Cash Collateral Deposit. On or before the Initial Closing Date,
the Company will deposit the Collateral Amount with the Collateral Agent as
required by the terms of the Cash Collateral Agreement.
4.17 Indemnification of Investors. The Company will indemnify and hold
each Investor and its directors, managers, officers, shareholders, members,
partners, employees and agents (each, an "Investor Party") harmless from any and
all losses, liabilities, obligations, claims, contingencies, damages, costs and
expenses, including all judgments, amounts paid in settlements, court costs and
reasonable attorneys' fees and costs of investigation that any such Investor
Party may suffer or incur as a result of or relating to (a) any breach of any of
the representations, warranties, covenants or agreements made by the Company in
this Agreement or in the other Transaction Documents or (b) any action
instituted against an Investor, or any of them or their respective Affiliates,
by any shareholder of the Company who is not an Affiliate of such Investor, with
respect to any of the transactions contemplated by the Transaction Documents
(unless such action is based upon a breach of such Investor's representation,
warranties or covenants under the Transaction Documents or any agreements or
understandings such Investor may have with any such shareholder or any
violations by such Investor of state or federal securities laws or any conduct
by such Investor which constitutes fraud, gross negligence, willful misconduct
or malfeasance). If any action shall be brought against any Investor Party in
respect of which indemnity may be sought pursuant to this Agreement, such
Investor Party shall promptly notify the Company in writing, and the Company
shall have the right to assume the defense thereof with counsel of its own
choosing. Any Investor Party shall have the right to employ separate counsel in
any such action and participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Investor Party except
to the extent that (i) the employment thereof has been specifically authorized
by the Company in writing, (ii) the Company has failed after a reasonable period
of time following such Investor Party's written request that it do so, to assume
such defense and to employ counsel or (iii) in such action there is, in the
reasonable opinion of such separate counsel, a material conflict on any material
issue between the position of the Company and the position of such Investor
Party. The Company will not be liable to any Investor Party under this Agreement
(i) for any settlement by an Investor Party effected without the Company's prior
written consent, which shall not be unreasonably withheld or delayed; or (ii) to
the extent, but only to the extent that a loss, claim, damage or liability is
attributable to such Investor Party's wrongful actions or omissions, or gross
negligence or to such Investor Party's breach of any of the representations,
warranties, covenants or agreements made by such Investor in this Agreement or
in the other Transaction Documents.
4.18 Short Sale Restriction. Each Investor agrees that, during a Notice
Period (as defined in the Debentures) it will refrain from engaging in any short
sale that, when aggregated with all other short sales effected by such Investor
during such Notice Period, would exceed the number of Amortization Stock Option
Shares issuable to such Investor with respect to such Notice Period. For
purposes hereof, the term "short sale" shall have the definition contained in
Rule 200 of Regulation SHO under the Exchange Act.
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5. CONDITIONS TO CLOSING.
5.1 Conditions to Investors' Obligations at the Initial Closing. Each
Investor's obligations to effect the Initial Closing, including without
limitation its obligation to purchase a Debenture and Warrant at the Initial
Closing, are conditioned upon the fulfillment (or waiver by such Investor in its
sole and absolute discretion) of each of the following events as of the Initial
Closing Date:
5.1.1 the representations and warranties of the Company set
forth in this Agreement and in the other Transaction
Documents shall be true and correct in all material
respects as of such date as if made on such date
(except that to the extent that any such
representation or warranty relates to a particular
date, such representation or warranty shall be true
and correct in all material respects as of that
particular date);
5.1.2 the Company shall have complied with or performed in
all material respects all of the agreements,
obligations and conditions set forth in this Agreement
and in the other Transaction Documents that are
required to be complied with or performed by the
Company on or before the Initial Closing;
5.1.3 the Initial Closing Date shall occur on a date that is
not later than August 19, 2005;
5.1.4 the Company shall have delivered to such Investor a
certificate, signed by the Chief Executive Officer and
Chief Financial Officer of the Company, certifying
that the conditions specified in this subparagraphs
5.1.1, 5.1.2, 5.1.9, 5.1.10, 5.1.11 and 5.1.12 have
been fulfilled as of the Initial Closing, it being
understood that such Investor may rely on such
certificate as though it were a representation and
warranty of the Company made herein;
5.1.5 the Company shall have delivered to such Investor an
opinion or opinions of counsel for the Company, dated
as of the Initial Closing Date, that is in form and
substance reasonably acceptable to such Investor;
5.1.6 the Company shall have delivered to such Investor duly
executed certificates representing the Debenture and
the Warrant being purchased by such Investor at the
Initial Closing;
5.1.7 the Company shall have executed and delivered to such
Investor the Registration H Rights Agreement, the
Security Agreement, the Cash Collateral Agreement and
the Subordination Agreement (as defined below);
29
5.1.8 the Company shall have delivered to such Investor a
certificate, signed by the Secretary or an Assistant
Secretary of the Company, attaching (i) the
Certificate of Incorporation and By-Laws of the
Company, (ii) resolutions passed by its Board of
Directors, or a duly authorized committee thereof, to
authorize the transactions contemplated hereby and by
the other Transaction Documents and (iii) resolutions
passed by the Board of Directors of the Operating
Subsidiary, or a duly authorized committee thereof, to
authorize the transactions contemplated by the
Subsidiary Guaranty and the Security Agreement, and
certifying that such documents are true and complete
copies of the originals and that such resolutions have
not been amended or superseded, it being understood
that such Investor may rely on such certificate as a
representation and warranty of the Company made
herein;
5.1.9 the Company shall have obtained the written agreement
of each Key Employee to refrain from selling shares of
Common Stock for the period specified in, and in
accordance with, Section 4.2(g) hereof;
5.1.10 there shall have occurred no material adverse change
in the Company's consolidated business or financial
condition since the date of the Company's most recent
financial statements contained in the Disclosure
Documents;
5.1.11 the Company shall have authorized and reserved for
issuance at least two hundred percent (200%) of the
aggregate number of shares of Common Stock issuable
upon conversion of all of the Debentures and exercise
of all of the Warrants to be issued at the Initial
Closing (such number to be determined without regard
to any restriction on such conversion or exercise),
and provided such Investor with reasonable evidence
thereof; and
5.1.12 there shall be no injunction, restraining order or
decree of any nature of any court or Government
Authority of competent jurisdiction that is in effect
that restrains or prohibits the consummation of the
transactions contemplated hereby or by the other
Transaction Documents;
5.1.13 the Operating Subsidiary shall have executed and
delivered to such Investor the Subsidiary Guaranty and
the Security Agreement;
5.1.14 Xxxxxxx Xxxxx shall have executed and delivered to
such Investor a Contingent Guaranty in the form of
Exhibit I hereto, and Xxxxxxx Xxxxx and each Related
Party shall have executed and delivered to such
Investor a Subordination Agreement in the form of
Exhibit J hereto (the "Subordination Agreement");
30
5.1.15 Xxxxxxx Xxxxx and each Related Party shall have
terminated all financing statements (or amended such
financing statements) filed with respect to liens on
the assets of the Company or the Operating Subsidiary
so that Xxxxxxx Xxxxx and each Related Party shall
have a first lien on the inventory and receivables of
the Company and the Operating Subsidiary, and a second
lien (subordinated to the first lien of the Investors)
on all other assets of the Company and the Operating
Subsidiary, and shall have provided such Investor with
reasonable evidence thereof; and
5.1.16 counsel for Xxxxxxx Xxxxx shall have delivered to such
Investor an opinion, dated as of the Initial Closing
Date, in the form attached hereto as Exhibit K hereto
and otherwise reasonably acceptable to such Investor.
5.2 Conditions to Company's Obligations at the Initial Closing. The
Company's obligations to effect the Initial Closing with each Investor are
conditioned upon the fulfillment (or waiver by the Company in its sole and
absolute discretion) of each of the following events as of the Initial Closing
Date:
5.2.1 the representations and warranties of such Investor
set forth in this Agreement and in the other
Transaction Documents shall be true and correct in all
material respects as of such date as if made on such
date (except that to the extent that any such
representation or warranty relates to a particular
date, such representation or warranty shall be true
and correct in all material respects as of that
particular date);
5.2.2 such Investor shall have complied with or performed
all of the agreements, obligations and conditions set
forth in this Agreement that are required to be
complied with or performed by such Investor on or
before the Initial Closing;
5.2.3 there shall be no injunction, restraining order or
decree of any nature of any court or Government
Authority of competent jurisdiction that is in effect
that restrains or prohibits the consummation of the
transactions contemplated hereby or by the other
Transaction Documents;
5.2.4 such Investor shall have executed each Initial
Transaction Document to which it is a party and shall
have delivered the same to the Company; and
5.2.5 such Investor shall have tendered to the Company the
Purchase Price for the Debenture and Warrant being
purchased by it at the Initial Closing by wire
transfer of immediately available funds.
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5.3 Conditions to Investors' Obligations at the Option Closing. Each
Investor's obligations to effect the Option Closing, including without
limitation its obligation to purchase a Debenture and Warrant at the Option
Closing, are conditioned upon the fulfillment (or waiver by such Investor in its
sole and absolute discretion) of each of the following events as of the Option
Closing Date:
5.3.1 the representations and warranties of the Company set
forth in this Agreement and in the Transaction
Documents shall be true and correct in all material
respects as of such date as if made on such date
(except that to the extent that any such
representation or warranty relates to a particular
date, such representation or warranty shall be true
and correct in all material respects as of that
particular date);
5.3.2 the Company shall have complied with or performed in
all material respects all of the agreements,
obligations and conditions set forth in this Agreement
and in the Transaction Documents that are required to
be complied with or performed by the Company on or
before the Option Closing;
5.3.3 the Company shall have delivered to such Investor a
certificate, signed by the Chief Executive Officer and
Chief Financial Officer of the Company, certifying
that the conditions specified in subparagraphs 5.3.1,
5.3.2, 5.3.6, 5.3.7 and 5.3.8 have been fulfilled as
of the Option Closing, it being understood that such
Investor may rely on such certificate as though it
were a representation and warranty of the Company made
herein;
5.3.4 the Company shall have delivered to such Investor an
opinion or opinions of counsel for the Company, dated
as of the Option Closing Date, in the form attached
hereto as Exhibit H hereto and otherwise reasonably
acceptable to such Investor;
5.3.5 the Company shall have delivered to such Investor duly
executed certificates representing the Option
Debenture and the Option Warrant;
5.3.6 there shall have occurred no material adverse change
in the Company's consolidated business or financial
condition since the date of the Company's most recent
financial statements contained in the Disclosure
Documents;
5.3.7 the Company shall have authorized and reserved for
issuance at least two hundred percent (200%) of the
aggregate number of shares of Common Stock issuable
upon conversion of all of the Debentures and exercise
of all of the Warrants, including the Option
Debentures
32
and Option Warrants (such number to be determined
without regard to any restriction on such conversion
or exercise);
5.3.8 there shall be no injunction, restraining order or
decree of any nature of any court or Government
Authority of competent jurisdiction that is in effect
that restrains or prohibits the consummation of the
transactions contemplated hereby and by the other
Transaction Documents; and
5.3.9 the Initial Transaction Documents, the Subordination
Agreement and (to the extent effective) the Contingent
Guaranty shall be in full force and effect and no
default, or event or occurrence that with the giving
of notice or lapse of time (or both) would constitute
a default, under any such agreement or instrument has
occurred.
5.4 Conditions to Company's Obligations at the Option Closing. The
Company's obligations to effect the Option Closing with each Investor are
conditioned upon the fulfillment (or waiver by the Company in its sole and
absolute discretion) of each of the following events as of the Option Closing
Date:
5.4.1 the representations and warranties of such Investor
set forth in this Agreement and in the Transaction
Documents shall be true and correct in all material
respects as of such date as if made on such date
(except that to the extent that any such
representation or warranty relates to a particular
date, such representation or warranty shall be true
and correct in all material respects as of that
particular date);
5.4.2 such Investor shall have complied with or performed
all of the agreements, obligations and conditions set
forth in this Agreement that are required to be
complied with or performed by such Investor on or
before the Option Closing;
5.4.3 there shall be no injunction, restraining order or
decree of any nature of any court or Government
Authority of competent jurisdiction that is in effect
that restrains or prohibits the consummation of the
transactions contemplated hereby and by the
Transaction Documents; and
5.4.4 such Investor shall have tendered to the Company the
Purchase Price for the Debenture and the Warrant being
purchased by it at the Option Closing by wire transfer
of immediately available funds.
33
6. MISCELLANEOUS.
6.1 Survival; Severability. The representations, warranties and
covenants made by the parties herein and in the other Transaction Documents
shall survive each Closing notwithstanding any due diligence investigation made
by or on behalf of the party seeking to rely thereon. In the event that any
provision of this Agreement becomes or is declared by a court of competent
jurisdiction to be illegal, unenforceable or void, this Agreement shall continue
in full force and effect without said provision; provided that in such case the
parties shall negotiate in good faith to replace such provision with a new
provision which is not illegal, unenforceable or void, as long as such new
provision does not materially change the economic benefits of this Agreement to
the parties.
6.2 Successors and Assigns. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors and
permitted assigns of the parties. Nothing in this Agreement, express or implied,
is intended to confer upon any party other than the parties hereto or their
respective successors and permitted assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement. After the Initial Closing, each Investor may assign its
rights and obligations hereunder, in connection with any private sale or
transfer of the Debentures or Warrants in accordance with the terms hereof, as
long as, as a condition precedent to such transfer, the transferee executes an
acknowledgment agreeing to be bound by the applicable provisions of this
Agreement, in which case the term "Investor" shall be deemed to refer to such
transferee as though such transferee were an original signatory hereto. The
Company may not assign its rights or obligations under this Agreement.
6.3 No Reliance. Each party acknowledges that (i) it has such knowledge
in business and financial matters as to be fully capable of evaluating this
Agreement, the other Transaction Documents and the transactions contemplated
hereby and thereby, (ii) it is not relying on any advice or representation of
any other party in connection with entering into this Agreement, the other
Transaction Documents or such transactions (other than the representations made
in this Agreement or the other Transaction Documents), (iii) it has not received
from any other party any assurance or guarantee as to the merits (whether legal,
regulatory, tax, financial or otherwise) of entering into this Agreement or the
other Transaction Documents or the performance of its obligations hereunder and
thereunder, and (iv) it has consulted with its own legal, regulatory, tax,
business, investment, financial and accounting advisors to the extent that it
has deemed necessary, and has entered into this Agreement and the other
Transaction Documents based on its own independent judgment and on the advice of
its advisors as it has deemed necessary, and not on any view (whether written or
oral) expressed by any other party.
6.4 Independent Nature of Investors' Obligations and Rights. The
obligations of each Investor hereunder are several and not joint with the
obligations of the other Investors hereunder, and no Investor shall be
responsible in any way for the performance of the obligations of any other
Investor hereunder. Nothing contained herein or in any other agreement or
document delivered at any Closing, and no action taken by any Investor pursuant
hereto or thereto, shall be deemed to constitute the Investors as a partnership,
an association, a joint venture or any other kind of entity, or a "group" as
described in Section 13(d) of the Exchange Act, or create a presumption
34
that the Investors are in any way acting in concert with respect to such
obligations or the transactions contemplated by this Agreement. Each Investor
has been represented by its own separate counsel in connection with the
transactions contemplated hereby, shall be entitled to protect and enforce its
rights, including without limitation rights arising out of this Agreement or the
other Transaction Documents, individually, and shall not be required to be join
any other Investor as an additional party in any proceeding for such purpose.
6.5 Injunctive Relief. Each Investor, on the one hand, and the Company,
on the other hand, each acknowledges and agrees that a breach by it of its
obligations hereunder will cause irreparable harm to the non-breaching party and
that the remedy or remedies at law for any such breach will be inadequate and
agrees, in the event of any such breach, in addition to all other available
remedies, the non-breaching party shall be entitled to an injunction restraining
any breach and requiring immediate and specific performance of such obligations
without the necessity of showing economic loss.
6.6 Governing Law; Jurisdiction. This Agreement shall be governed by
and construed under the laws of the State of New York applicable to contracts
made and to be performed entirely within the State of New York. Each party
hereby irrevocably submits to the non-exclusive jurisdiction of the state and
federal courts sitting in the City and County of New York for the adjudication
of any dispute hereunder or in connection herewith or with any transaction
contemplated hereby and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. Each party hereby irrevocably waives personal service of
process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address in effect for
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process in any
manner permitted by law.
6.7 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument. This Agreement may be
executed and delivered by facsimile transmission.
6.8 Headings. The headings used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.
6.9 Notices. Any notice, demand or request required or permitted to be
given by the Company or the Investors pursuant to the terms of this Agreement
shall be in writing and shall be deemed delivered (i) when delivered personally
or by verifiable facsimile transmission, unless such delivery is made on a day
that is not a Business Day, in which case such delivery will be deemed to be
made on the next succeeding Business Day and (ii) on the next Business Day after
timely delivery to an overnight courier , addressed as follows:
35
If to the Company:
Vyteris Holdings (Nevada), Inc.
00-00 Xxxxxxx Xxxxx
Xxxx Xxxx, XX 00000
Attn: Chief Financial Officer
Tel: 000-000-0000
Fax: 000-000-0000
with a copy to:
Xxxxxxxxxx Xxxxxxx PC
00 Xxxxxxxxxx Xxxxxx
Xxxxxxxx, Xxx Xxxxxx 00000
Attn: Xxxxx X. Xxxxxxxxx, Esq.
Tel: 000-000-0000
Fax: 000-000-0000
and if to any Investor, to such address for such Investor as shall appear on the
signature page hereof executed by such Investor, or as shall be designated by
such Investor in writing to the Company in accordance with this Section 6.9.
6.10 Expenses. The Company and each Investor shall pay all costs and
expenses that it incurs in connection with the negotiation, execution, delivery
and performance of this Agreement or the other Transaction Documents, provided,
however, that that the Company shall, at the Closing, pay $65,000 in immediately
available funds for its out-of-pocket expenses (including without limitation
reasonable legal fees and expenses) incurred or to be incurred by Satellite
Strategic Finance Associates, LLC ("Satellite") in connection with its due
diligence investigation of the Company and the negotiation, preparation,
execution, delivery and performance of this Agreement and the other Transaction
Documents. At the Closing, such amount may be netted out of the Purchase Price
payable by Satellite.
6.11 Entire Agreement; Amendments. This Agreement and the other
Transaction Documents constitute the entire agreement between the parties with
regard to the subject matter hereof and thereof, superseding all prior
agreements or understandings, whether written or oral, between or among the
parties. Except as expressly provided herein, neither this Agreement nor any
term hereof may be amended or waived except pursuant to a written instrument
executed by the Company and the holders of at least two-thirds (2/3) of the
Registrable Securities into which all of the Debentures and Warrants then
outstanding are convertible or exercisable (without regard to any limitation on
such conversion or exercise), and no provision hereof may be waived other than
by a written instrument signed by the holders of at least two-thirds (2/3) of
the Registrable Securities into which all of the Debentures and Warrants then
outstanding are convertible or exercisable (without regard to any limitation on
such conversion or exercise). Any waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given.
[Signature Pages to Follow]
36
IN WITNESS WHEREOF, the undersigned have executed this Securities Purchase
Agreement as of the date first-above written.
VYTERIS HOLDINGS (NEVADA), INC.
By: /s/ Xxxxxxx XxXxxxxxxx
------------------------------
Name: Xxxxxxx XxXxxxxxxx
Title: Chief Financial Officer
SATELLITE STRATEGIC FINANCE ASSOCIATES, LLC
By: Satellite Asset Management, L.P., its Manager
By: /s/ Authorized Person
---------------------
SATELLITE STRATEGIC FINANCE PARTNERS, LTD.
By: Satellite Asset Management, L.P., its Manager
By: /s/ Authorized Person
---------------------
Principal Amount of Debenture to be Purchased: $5,375,000
37
IN WITNESS WHEREOF, the undersigned have executed this Securities Purchase
Agreement as of the date first-above written.
VYTERIS HOLDINGS (NEVADA), INC.
By: /s/ Xxxxxxx XxXxxxxxxx
------------------------------
Name: Xxxxxxx XxXxxxxxxx
Title: Chief Financial Officer
PALISADES MASTER FUND, L.P.
By: /s/ Authorized Person
---------------------
Principal Amount of Debenture to be Purchased: $3,625,000
38
IN WITNESS WHEREOF, the undersigned have executed this Securities Purchase
Agreement as of the date first-above written.
VYTERIS HOLDINGS (NEVADA), INC.
By: /s/ Xxxxxxx XxXxxxxxxx
------------------------------
Name: Xxxxxxx XxXxxxxxxx
Title: Chief Financial Officer
QUBIT HOLDINGS LLC
By: /s/ Authorized Person
---------------------
Principal Amount of Debenture to be Purchased: $1,000,000
39
