Exhibit 10.7
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this "Agreement") is dated as of June
30, 2004, among Electronic Control Security Inc., a New Jersey corporation (the
"Company"), and the investors identified on the signature pages hereto (each, an
"Investor" and collectively, the "Investors").
WHEREAS, subject to the terms and conditions set forth in this Agreement
and pursuant to Section 4(2) of the Securities Act (as defined below) and Rule
506 promulgated thereunder, the Company desires to issue and sell to each
Investor, and each Investor, severally and not jointly, desires to purchase from
the Company certain securities of the Company, as more fully described in this
Agreement.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and the Investors agree
as follows:
ARTICLE I.
DEFINITIONS
1.1 Definitions. In addition to the terms defined elsewhere in this
Agreement, for all purposes of this Agreement, the following terms shall have
the meanings indicated in this Section 1.1:
"Action" means any action, suit, inquiry, notice of violation,
proceeding (including any partial proceeding such as a deposition) or
investigation pending or threatened in writing against or affecting the Company,
any Subsidiary or any of their respective properties before or by any court,
arbitrator, governmental or administrative agency, regulatory authority
(federal, state, county, local or foreign), stock market, stock exchange or
trading facility.
"Affiliate" means any Person that, directly or indirectly through
one or more intermediaries, controls or is controlled by or is under common
control with a Person, as such terms are used in and construed under Rule 144.
"Business Day" means any day other than Saturday, Sunday or other
day on which commercial banks in The City of New York are authorized or required
by law to remain closed.
"Certificate of Designation" shall mean a Certificate of Designation
relating to the Shares to be filed prior to the Closing by the Company with the
Secretary of State of the State of New Jersey incorporating the rights,
preferences and privileges set forth on Exhibit A hereto.
"Closing" means the closing of the purchase and sale of the Shares
and the Warrants pursuant to Article II.
"Closing Date" means the Business Day immediately following the date
on which all the conditions set forth in Sections 5.1 and 5.2 are satisfied, or
such other date as the parties may agree.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock of the Company, $0.001 par
value per share, and any securities into which such common stock may hereafter
be reclassified.
"Common Stock Equivalents" means any securities of the Company or
any Subsidiary which entitle the holder thereof to acquire Common Stock at any
time, including, without limitation, any debt, preferred stock, rights, options,
warrants or other instrument that is at any time convertible into or
exchangeable or exercisable for, or otherwise entitles the holder thereof to
receive, Common Stock or other securities that entitle the holder to receive,
directly or indirectly, Common Stock.
"Company Counsel" means Ruffa & Ruffa, P.C.
"Company Deliverables" has the meaning set forth in Section 2.2(a).
"Disclosure Materials" means the SEC Reports and the Company's
Schedules to this Agreement, collectively.
"Effective Date" means the date that the Registration Statement
required by Section 2(a) of the Registration Rights Agreement is first declared
effective by the Commission.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Form 10-K" means the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 2003.
"GAAP" means U.S. generally accepted accounting principles.
"Indebtedness" of any Person shall mean, without duplication, (a)
all obligations of such Person for borrowed money or with respect to deposits or
advances of any kind, (b) all obligations of such Person evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations of such Person
upon which interest charges are customarily paid, (d) all obligations of such
Person under conditional sale or other title retention agreements relating to
property or assets purchased by such Person, (e) all obligations of such Person
issued or assumed as the deferred purchase price of property or services, (f)
all Indebtedness of others secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien on property owned or acquired by such Person, whether or not the
obligations secured thereby have been assumed, (g) all guarantees by such Person
of Indebtedness of others, (h) all capital lease obligations of such Person, (i)
all obligations of such Person in respect of interest rate protection
agreements, foreign currency exchange agreements or other interest or exchange
rate hedging arrangements that exceed amounts necessary to hedge
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the borrower's cross-currency exposure and (j) all obligations of such Person as
an account party in respect of letters of credit and bankers' acceptances. The
Indebtedness of any Person shall include the Indebtedness of any partnership in
which such Person is a general partner.
"Intellectual Property Rights" means the ownership or right to use
patents, patent applications, trademarks, trademark applications, service marks,
trade names, copyrights, licenses and other similar rights in connection with
the respective businesses of the Company and the Subsidiaries as described in
the SEC Reports.
"Investment Amount" means, with respect to each Investor, the
Investment Amount indicated on such Investor's signature page to this Agreement.
"Lead Investor" means, collectively, the investment funds managed by
Corsair Capital Management, L.L.C. who become Investors hereunder.
"Lien" means any lien, charge, encumbrance, claim, security
interest, right of first refusal or other restriction of any kind.
"Lock-Up and Co-Sale Agreement" means the Lock-Up and Co-Sale
Agreement, dated as of the Closing Date, among the Company, Xxxxxx Xxxxxxxxx,
Xxxxxxx Xxxxxxxxx and Xxxx Xxxxxxxxx, substantially in the form of Exhibit D
hereto.
"Losses" means any and all losses, liabilities, obligations, claims,
contingencies, damages, costs or expenses, including all judgments, amounts paid
in settlements, court costs and reasonable attorneys' fees and costs of
investigation.
"Material Adverse Effect" means any of (a) an adverse effect on the
legality, validity or enforceability of any Transaction Document, (b) a material
and adverse effect on the results of operations, assets, prospects, business or
condition (financial or otherwise) of the Company and the Subsidiaries, taken as
a whole, or (c) an adverse impairment to the Company's ability to perform fully
on a timely basis its obligations under any Transaction Document.
"Person" means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or subdivision thereof)
or other entity of any kind.
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Registration Statement" means a registration statement meeting the
requirements set forth in the Registration Rights Agreement and covering the
resale by the Investors of the Underlying Shares and the Warrant Shares.
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"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the date of this Agreement, among the Company and the
Investors, in the form of Exhibit B hereto.
"Related Person" shall have the meaning set forth in Section 4.8.
"Rule 144" means Rule 144 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"SEC Reports" has the meaning set forth in Section 3.1(h).
"Securities" means the Shares, the Underlying Shares, the Warrants
and the Warrant Shares.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means the shares of the Company's 10% Series B Convertible
Preferred Stock issued or issuable to the Investors pursuant to this Agreement,
having the rights, preferences and privileges set forth in the Certificate of
Designation.
"Short Sales" include, without limitation, all "short sales" as
defined in Rule 3b-3 of the Exchange Act and all types of direct and indirect
stock pledges, forward sale contracts, options, puts, calls, short sales, swaps
and similar arrangements (including on a total return basis), and sales and
other transactions through non-US broker dealers or foreign regulated brokers.
"Stated Value" has the meaning set forth in the Certificate of
Designation.
"Strategic Transaction" means a transaction or relationship in which
(1) the Company issues shares of Common Stock to a Person which the Board of
Directors of the Company determines in good faith is, itself or through its
Subsidiaries, an operating company in a business synergistic with the business
of the Company and (2) the Company expects to receive benefits in addition to
the investment of funds, but shall not include (x) a transaction in which the
Company issues securities primarily for the purpose of raising capital or to an
entity whose primary business is investing in securities or (y) issuances to
lenders or suppliers.
"Subsidiary" means any "significant subsidiary" as defined in Rule
1-02(w) of the Regulation S-X promulgated by the Commission under the Exchange
Act.
"Trading Day" means (i) a day on which the Common Stock is traded on
a Trading Market (other than the OTC Bulletin Board), or (ii) if the Common
Stock is not listed on a Trading Market (other than the OTC Bulletin Board), a
day on which the Common Stock is traded or quoted in the over-the-counter
market, as reported by the OTC Bulletin Board, or (iii) if the Common Stock is
not quoted on a Trading Market, a day on which the Common Stock is quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated
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(or any similar organization or agency succeeding to its functions of reporting
prices); provided, that in the event that the Common Stock is not listed or
quoted as set forth in (i), (ii) and (iii) hereof, then Trading Day shall mean a
Business Day.
"Trading Market" means whichever of the New York Stock Exchange, the
American Stock Exchange, the NASDAQ National Market, the NASDAQ SmallCap Market
or OTC Bulletin Board on which the Common Stock is listed or quoted for trading
on the date in question.
"Transaction Documents" means this Agreement, the Registration
Rights Agreement, the Certificate of Designations, the Warrants, Lock-Up and
Co-Sale Agreement and any other documents or agreements executed in connection
with the transactions contemplated hereunder.
"Underlying Shares" means the shares of Common Stock issuable upon
conversion of the Shares.
"Warrants" means the Common Stock purchase warrants in the form of
Exhibit C hereto issued or issuable to the Investors at the Closing.
"Warrant Shares" means the shares of Common Stock issuable upon
exercise of the Warrants.
ARTICLE II.
PURCHASE AND SALE
2.1 Closing. Subject to the terms and conditions set forth in this
Agreement, at the Closing the Company shall issue and sell to each Investor, and
each Investor shall, severally and not jointly, purchase from the Company, such
number of Shares and a Warrant to purchase such number of Warrant Shares, each
as indicated below such Investor's signature on the signature page to this
Agreement. The Closing shall take place on the Closing Date at the offices of
Xxxxx Xxxx LLP (Lead Investor's legal counsel), 0000 Xxxxxx xx xxx Xxxxxxxx, Xxx
Xxxx, Xxx Xxxx 00000, or at such other location as the parties may agree.
2.2 Closing Deliveries. (a) At the Closing, the Company shall deliver or
cause to be delivered to each Investor the following (collectively, the "Company
Deliverables"):
(i) this Agreement, duly executed by the Company;
(ii) one or more stock certificates evidencing a number of
Shares equal to the Investment Amount for such Investor (as set forth on such
Investor's signature page to this Agreement) divided by $1,000, registered in
the name of such Investor;
(iii) a Warrant, registered in the name of such Investor,
pursuant to which such Investor shall have the right to acquire the number of
Warrant Shares equal to 100% of the number of Underlying Shares as would be
issuable upon a conversion in full of the Shares
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issuable to such Investor in accordance with Section 2.2(a)(ii) without regard
to any limitations on conversion of the Shares;
(iv) a copy of the executed, filed and effective Certificate
of Designations, accompanied by a certificate evidencing the acceptance thereof
by the Secretary of State of the State of New Jersey;
(v) the legal opinion of Company Counsel, in the form of
Exhibit E hereto, addressed to the Investors;
(vi) the Registration Rights Agreement, duly executed by the
Company; and
(vii) the Lock-Up and Co-Sale Agreement, duly executed by the
parties thereto.
(b) At the Closing, each Investor shall deliver or cause to be
delivered to the Company the following:
(i) this Agreement and the Registration Rights Agreement, each
duly executed by such Investor; and
(ii) such Investor's Investment Amount, in United States
dollars and in immediately available funds, by wire transfer to an account
designated in writing by the Company for such purpose.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company. The Company hereby
makes the following representations and warranties to each Investor:
(a) Subsidiaries. The Company has no direct or indirect Subsidiaries
other than as specified in the Form 10-K. Except as disclosed in Schedule
3.1(a), the Company owns, directly or indirectly, all of the capital stock or
comparable equity interests of each Subsidiary free and clear of any and all
Liens, and all the issued and outstanding shares of capital stock or comparable
equity interests of each Subsidiary are validly issued and are fully paid,
non-assessable and free of preemptive and similar rights.
(b) Organization and Qualification. The Company and each Subsidiary
are entities duly organized, validly existing and in good standing under the
laws of the jurisdiction of their respective organization, with the requisite
power and authority to own and use its respective properties and assets and to
carry on its respective businesses as currently conducted. Neither the Company
nor any Subsidiary is in violation of any of the provisions of its respective
certificate or articles of incorporation, bylaws or other organizational or
charter documents. The Company and each Subsidiary is duly qualified to conduct
business and is in good standing as a
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foreign corporation or other entity in each jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary, except where the failure to be so qualified or in good standing, as
the case may be, could not, individually or in the aggregate, have or reasonably
be expected to result in a Material Adverse Effect.
(c) Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents and otherwise to carry out its
obligations thereunder. The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary action on the
part of the Company and no further consent or action is required by the Company,
its Board of Directors or stockholders. Each Transaction Document has been (or
upon delivery will have been) duly executed by the Company and, when delivered
in accordance with the terms hereof, will constitute the valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to,
or affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application.
(d) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of the Company's or any Subsidiary's certificate or
articles of incorporation, bylaws or other organizational or charter documents
(including, without limitation, any right, privilege or term of any class or
series of the Company's outstanding preferred stock), or (ii) conflict with, or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation (with or without notice, lapse of time
or both) of, any agreement, credit facility, debt or other instrument
(evidencing a Company or Subsidiary debt or otherwise) (including, without
limitation, the term loans and credit facilities of the Company and any
Subsidiary) or other understanding to which the Company or any Subsidiary is a
party or by which any property or asset of the Company or any Subsidiary is
bound or affected, or (iii) result in a violation of any law, rule, regulation,
order, judgment, injunction, decree or other restriction of any court or
governmental authority to which the Company or a Subsidiary is subject
(including federal and state securities laws and regulations), or by which any
property or asset of the Company or a Subsidiary is bound or affected; except in
the case of each of clauses (ii) and (iii), such as could not, individually or
in the aggregate, have or reasonably be expected to result in a Material Adverse
Effect.
(e) Filings, Consents and Approvals. The Company is not required to
obtain any consent, waiver, authorization or order of, give any notice to, or
make any filing or registration with, any court or other federal, state, local
or other governmental authority or other Person in connection with the
execution, delivery and performance by the Company of the Transaction Documents,
other than (i) the filing with the Commission of one or more Registration
Statements in accordance with the requirements of the Registration Rights
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Agreement, (ii) filings under state securities laws in accordance with the
requirements of the Registration Rights Agreement, which will be made prior to
the Effectiveness Date (as such term is defined in the Registration Rights
Agreement), (iii) the filings required in accordance with Section 4.5, (iv) the
filing of a Form D with the Commission, (v) the filing of the Certificate of
Designation with the Secretary of State of the State of New Jersey and (vi)
those that have been made or obtained prior to the date of this Agreement.
(f) Issuance of the Securities. The Securities have been duly
authorized and, when issued and paid for in accordance with the Transaction
Documents, will be duly and validly issued, fully paid and nonassessable, free
and clear of all Liens and shall not be subject to preemptive or similar rights
of stockholders. The Company has reserved from its duly authorized capital stock
the maximum number of Underlying Shares and Warrants Shares issuable pursuant to
the Shares and the Warrants, as applicable.
(g) Capitalization. The number of shares and type of all authorized,
issued and outstanding capital stock of the Company, and all shares of Common
Stock reserved for issuance under the Company's various option and incentive
plans, is set forth in Schedule 3.1(g). All outstanding shares of capital stock
are duly authorized, validly issued, fully paid and nonassessable and have been
issued in compliance with all applicable securities laws. No securities of the
Company are entitled to preemptive or similar rights, and no Person has any
right of first refusal, preemptive right, right of participation, or any similar
right to participate in the transactions contemplated by the Transaction
Documents. Except as a result of the purchase and sale of the Securities and
except as disclosed in the SEC Reports, there are no outstanding options,
warrants, scrip rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities, rights or obligations convertible into or
exchangeable or exercisable for, or giving any Person any right to subscribe for
or acquire, any shares of Common Stock, or contracts, commitments,
understandings or arrangements by which the Company or any Subsidiary is or may
become bound to issue additional shares of Common Stock, or securities or rights
convertible or exchangeable or exercisable into shares of Common Stock. The
issue and sale of the Securities will not, immediately or with the passage of
time, obligate the Company to issue shares of Common Stock or other securities
to any Person (other than the Investors) and, except as expressly set forth in
Schedule 2.1(g), will not result in a right of any holder of securities of the
Company to adjust the exercise, conversion, exchange or reset price under such
securities. To the knowledge of the Company, except as specifically disclosed in
Schedule 3.1(g), no Person or group of related Persons beneficially owns (as
determined pursuant to Rule 13d-3 under the Exchange Act), or has the right to
acquire, by agreement with or by obligation binding upon the Company, beneficial
ownership of in excess of 5% of the outstanding Common Stock, ignoring for such
purposes any limitation on the number of shares of Common Stock that may be
owned at any single time.
(h) SEC Reports; Financial Statements. The Company has filed all
reports required to be filed by the Company under the Exchange Act for the
twelve months preceding the date of this Agreement (or such shorter period as
the Company was required by law to file such reports) (the foregoing materials
being collectively referred to herein as the "SEC Reports"). The Company has
filed all SEC Reports on a timely basis or has timely filed a valid
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extension of such time of filing and has filed any such SEC Reports prior to the
expiration of any such extension. The Company has delivered to each Investor a
true, correct and complete copy of all SEC Reports filed within the ten (10)
days preceding the date hereof. As of their respective dates, the SEC Reports
complied in all material respects with the requirements of the Securities Act
and the Exchange Act and the rules and regulations of the Commission promulgated
thereunder, and none of the SEC Reports, when filed, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
financial statements of the Company included in the SEC Reports were prepared in
accordance with GAAP applied on a consistent basis during the periods involved,
except as may be otherwise specified in such financial statements or the notes
thereto, and fairly present in all material respects the financial position of
the Company and its consolidated Subsidiaries as of and for the dates thereof
and the results of operations and cash flows for the periods then ended,
subject, in the case of unaudited statements, to normal, year-end audit
adjustments. All material agreements to which the Company or any Subsidiary is a
party or to which the property or assets of the Company or any Subsidiary are
subject are included as part of or specifically identified in the SEC Reports.
(i) Press Releases. The press releases disseminated by the Company
during the one (1) year preceding the date of this Agreement taken as a whole do
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(j) Material Changes. Except as set forth in Schedule 3.1(j) and as
disclosed in the SEC Reports, since the date of the latest audited financial
statements included within the SEC Reports, (i) there has been no event,
occurrence or development that has had or that could reasonably be expected to
result in a Material Adverse Effect, (ii) the Company has not incurred any
liabilities (contingent or otherwise) other than (A) trade payables and accrued
expenses incurred in the ordinary course of business consistent with past
practice and (B) liabilities not required to be reflected in the Company's
financial statements pursuant to GAAP or required to be disclosed in filings
made with the Commission, (iii) the Company has not altered its method of
accounting or the identity of its auditors, (iv) the Company has not declared or
made any dividend or distribution of cash or other property to its stockholders
or purchased, redeemed or made any agreements to purchase or redeem any shares
of its capital stock, other than dividends paid in the ordinary course on
outstanding series of the Company's preferred stock, and (v) the Company has not
issued any equity securities to any officer, director or Affiliate, except
pursuant to existing Company stock option plans or executive compensation
arrangements. The Company does not have pending before the Commission any
request for confidential treatment of information.
(k) Litigation. There is no Action that (i) adversely affects or
challenges the legality, validity or enforceability of any of the Transaction
Documents or the Securities or (ii) except as set forth in the SEC Reports,
could, if there were an unfavorable decision, individually or in the aggregate,
have or reasonably be expected to result in a Material Adverse Effect.
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Except as set forth in the SEC Reports, neither the Company nor any Subsidiary,
nor any presently serving director or officer thereof, is or has been during the
period from January 1, 1999 through the Closing Date the subject of any Action
involving a claim of violation of or liability under federal or state securities
laws or a claim of breach of fiduciary duty. There has not been, and to the
knowledge of the Company, there is not pending or contemplated, any
investigation by the Commission involving the Company or any current or former
director or officer of the Company. The Commission has not issued any stop order
or other order suspending the effectiveness of any registration statement filed
by the Company or any Subsidiary under the Exchange Act or the Securities Act.
(l) Labor Relations. No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company.
(m) Compliance.
(i) Neither the Company nor any Subsidiary (i) is in default
under or in violation of (and no event has occurred that has not been waived
that, with notice or lapse of time or both, would result in a default by the
Company or any Subsidiary under), nor has the Company or any Subsidiary received
notice of a claim that it is in default under or that it is in violation of, any
provision, right or privilege applicable to any class or series of outstanding
preferred stock or convertible debentures, indenture, loan, promissory note or
credit agreement (including, without limitation, the Indebtedness listed in
Schedule 3.1(m)) or any other agreement or instrument to which it is a party or
by which it or any of its properties is bound (whether or not such default or
violation has been waived), (ii) is in violation of any order of any court,
arbitrator or governmental body, or (iii) is or has been in violation of any
statute, rule or regulation of any governmental authority, including without
limitation all foreign, federal, state and local laws relating to taxes,
environmental protection, occupational health and safety, product quality and
safety and employment and labor matters, except in each case as could not,
individually or in the aggregate, have or reasonably be expected to result in a
Material Adverse Effect. Neither the Company nor any Subsidiary is liable as to
any Indebtedness other than pursuant to the terms of the credit facilities and
evidences of Indebtedness specified in Schedule 3.1(m). Neither the Company nor
any Subsidiary has any obligation (directly or indirectly through guarantees or
otherwise) under or in connection with any Indebtedness (including credit
facilities, term loans, or demand loans) except as specified in Schedule 3.1(m).
Schedule 3.1(m) sets forth the total amount of outstanding principal and accrued
but unpaid interest, liquidated damages, fees and other amounts owing in respect
of each Indebtedness of the Company and each Subsidiary as of the date hereof.
True and complete copies of each agreement, instrument, or note governing each
Indebtedness, including all modifications, amendments, extensions and waivers
applicable thereto through the date hereof have been delivered to each Investor.
The Company is in compliance with all effective requirements of the
Xxxxxxxx-Xxxxx Act of 2002, as amended, and the rules and regulations
thereunder, that are applicable to it, except where such noncompliance could not
have or reasonably be expected to result in a Material Adverse Effect.
(ii) Giving effect to the Closing and the use of proceeds set
forth in this Agreement (including Schedule 4.10), each of the Company and ECSI
International, Inc.
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meets and will meet the "effective tangible net worth" covenants set forth in
their respective Promissory Notes and Revolving Credit Agreements with Xxxxxx
United Bank, both as of the Closing Date and as of June 30, 2004 (such
covenants, the "Net Worth Covenants"). In furtherance thereof, the Company
agrees that, to the extent necessary to meet the Net Worth Covenants, its will
use its best efforts to cause the insider loans disclosed in Schedule 3.1(m) to
be converted to equity.
(iii) The Memorandum of Understanding among the Company, The
Xxxxxxxxx Corporation (and/or its Affiliates) and Xxxxxx Xxxxxxxxx is no longer
in effect, has expired, and is null and void. Accordingly, the Company has no
obligation or commitment to offer to sell Common Stock or Common Stock
Equivalents to Xxxxxxxxx, any of Xxxxxxxxx'x Affiliates or any other person.
(n) Regulatory Permits. The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports, except where the failure
to possess such permits would not, individually or in the aggregate, have or
reasonably be expected to result in a Material Adverse Effect, and neither the
Company nor any Subsidiary has received any notice of proceedings relating to
the revocation or modification of any such permits.
(o) Title to Assets. The Company and the Subsidiaries do not own any
real property. The Company and the Subsidiaries have good and marketable title
in all personal property owned by them that is material to their respective
businesses, in each case, except as set forth in Schedule 3.1(m), free and clear
of all Liens, except for Liens described in the SEC Reports and Liens as do not
materially affect the value of such property and do not materially interfere
with the use made and proposed to be made of such property by the Company and
the Subsidiaries. Any real property and facilities held under lease by the
Company and the Subsidiaries are held by them under valid, subsisting and
enforceable leases of which the Company and the Subsidiaries are in compliance,
except as could not, individually or in the aggregate, have or reasonably be
expected to result in a Material Adverse Effect.
(p) Patents and Trademarks. The Company and the Subsidiaries have,
or have rights to use, all Intellectual Property Rights that are necessary or
material for use in connection with their respective businesses as described in
the SEC Reports and which the failure to so have could, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect. Neither the Company nor any Subsidiary has received a written notice
that the Intellectual Property Rights used by the Company or any Subsidiary
violates or infringes upon the rights of any Person. Except as set forth in the
SEC Reports, to the knowledge, after due inquiry, of the Company, all such
Intellectual Property Rights are enforceable and there is no existing
infringement by another Person of any of the Intellectual Property Rights.
(q) Insurance. The Company and the Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in which the
Company and the Subsidiaries are
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engaged. The Company has no reason to believe that it or its Subsidiaries will
not be able to renew its respective existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business without a significant increase in cost.
(r) Transactions With Affiliates and Employees. Except as set forth
in the Form 10-K, Schedule 3.1(r) or in Schedule 3.1(m), none of the officers or
directors of the Company and, to the knowledge, after due inquiry, of the
Company, none of the employees of the Company is presently a party to any
transaction with the Company or any Subsidiary (other than for services as
employees, 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, after
due inquiry, 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. The amount of all Indebtedness (and maturity dates applicable thereto)
to any director, officer, or shareholder of in excess of 5% of the Common Stock
is specified in Schedule 3.1(m).
(s) Internal Accounting Controls. The Company and the Subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset accountability,
(iii) access to assets is permitted only in accordance with management's general
or specific authorization, and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences. The Company has established disclosure
controls and procedures (as defined in Exchange Act rules 13a-14 and 15d-14) for
the Company and designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its Subsidiaries, is
made known to the certifying officers by others within those entities,
particularly during the period in which the Company's Form 10-KSB or 10-QSB, as
the case may be, is being prepared. The Company's certifying officers have
evaluated the effectiveness of the Company's controls and procedures in
accordance with Item 307 of Regulation S-K under the Exchange Act for the
Company's most recently ended fiscal quarter or fiscal year-end (such date, the
"Evaluation Date"). The Company presented in its most recently filed Form 10-KSB
or Form 10-QSB the conclusions of the certifying officers about the
effectiveness of the disclosure controls and procedures based on their
evaluations as of the Evaluation Date. Since the Evaluation Date, there have
been no significant changes in the Company's internal controls (as such term is
defined in Item 308(c) of Regulation S-K under the Exchange Act) or, to the
Company's knowledge, in other factors that could significantly affect the
Company's internal controls.
(t) Solvency. Based on the financial condition of the Company as of
the Closing Date (and assuming that the Closing shall have occurred), (i) the
Company's fair saleable value of its assets exceeds the amount that will be
required to be paid on or in respect of the Company's existing debts and other
liabilities (including known contingent liabilities) as they
12
mature; (ii) the Company's assets do not constitute unreasonably small capital
to carry on its business for the current fiscal year as now conducted and as
proposed to be conducted including its capital needs taking into account the
particular capital requirements of the business conducted by the Company, and
projected capital requirements and capital availability thereof; and (iii) the
current cash flow of the Company, together with the proceeds the Company would
receive, were it to liquidate all of its assets, after taking into account all
anticipated uses of the cash, would be sufficient to pay all amounts on or in
respect of its debt when such amounts are required to be paid. The Company does
not intend to incur debts beyond its ability to pay such debts as they mature
(taking into account the timing and amounts of cash to be payable on or in
respect of its debt).
(u) Certain Fees. Except as specified in Schedule 3.1(u), no
brokerage or finder's fees or commissions are or will be payable by the Company
to any broker, financial advisor or consultant, finder, placement agent,
investment banker, bank or other Person with respect to the transactions
contemplated by this Agreement. True and complete copies of all writings
governing the direct and indirect compensation of any Person in connection with
the transactions contemplated by the Transaction Documents (or description of
any oral understanding thereto if not reduced to a writing) have been provided
to the Investors. The Company will not pay any cash to any Person as a finder,
consultant or investment banker in connection with the transactions contemplated
by the Transaction Documents. The Investors shall have no obligation with
respect to any fees or with respect to any claims made by or on behalf of other
Persons for fees of a type contemplated in this Section that may be due in
connection with the transactions contemplated by this Agreement. The Company
will not after the date hereof enter into any oral or written agreement to
provide for any compensation to any finder, consultant or placement agent (or
similar Person) as a result of the transactions contemplated by this Agreement.
(v) Certain Registration Matters. Assuming the accuracy of the
Investors' representations and warranties set forth in Section 3.2(b)-(e), no
registration under the Securities Act is required for the offer and sale of the
Securities by the Company to the Investors under the Transaction Documents.
Neither the Company nor any Person acting on the Company's behalf has sold or
offered to sell or solicited any offer to buy the Securities by means of any
form of general solicitation or advertising. Neither the Company nor any of its
Affiliates nor any Person acting on the Company's behalf has, directly or
indirectly, at any time within the past six months, made any offer or sale of
any security or solicitation of any offer to buy any security under
circumstances that would (i) eliminate the availability of the exemption from
registration under Regulation D under the Securities Act in connection with the
offer and sale of the Securities as contemplated hereby or (ii) cause the
offering of the Securities pursuant to the Transaction Documents to be
integrated with prior offerings by the Company for purposes of any applicable
law, regulation or stockholder approval provisions, including, without
limitation, under the rules and regulations of any Trading Market. Except as
described in Schedule 3.1(v), the Company has not granted or agreed to grant to
any Person any rights (including "piggy-back" registration rights) to have any
securities of the Company registered with the Commission or any other
governmental authority that have not been satisfied. The Company is eligible to
utilize Form SB-2 for the resale of the Underlying Shares and Warrant Shares.
13
(w) Listing and Maintenance Requirements. Except as specified in the
SEC Reports, the Company has not received notice from any Trading Market to the
effect that the Company is not in compliance with the listing or maintenance
requirements thereof. The Company is, and has no reason to believe that it will
not in the foreseeable future continue to be, in compliance with the listing and
maintenance requirements for continued listing of the Common Stock on the
Trading Market. The issuance and sale of the Securities under the Transaction
Documents does not contravene the rules and regulations of the Trading Market on
which the Common Stock is currently listed or quoted.
(x) Investment Company. The Company is not, is not an Affiliate of,
and immediately upon the Closing will not become, an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
(y) Application of Takeover Protections. The Company has taken all
necessary action, if any, in order to render inapplicable any control share
acquisition, business combination, poison pill (including any distribution under
a rights agreement) or other similar anti-takeover provision under the Company's
Certificate of Incorporation (or similar charter documents) or the laws of its
state of incorporation that is or could become applicable to the Investors as a
result of the Investors and the Company fulfilling their obligations or
exercising their rights under the Transaction Documents, including, without
limitation, the Company's issuance of the Securities and the Investors'
ownership of the Securities.
(z) No Additional Agreements. The Company does not have any
agreement or understanding with any Investor with respect to the transactions
contemplated by the Transaction Documents other than as specified in the
Transaction Documents.
(aa) Disclosure. Except to the extent that the existence of the
transactions contemplated by the Transaction Documents constitute material,
non-public information, the Company confirms that neither it nor any Person
acting on its behalf has provided any of the Investors or their agents or
counsel with any information that the Company believes constitutes material,
non-public information. The Company understands and confirms that the Investors
will rely on the foregoing representations and covenants in effecting
transactions in securities of the Company. All disclosure provided to the
Investors regarding the Company, its business and the transactions contemplated
hereby, furnished by or on behalf of the Company (including the Company's
representations and warranties set forth in this Agreement) are true and correct
and do not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not misleading.
(bb) Acknowledgment Regarding Investors' Purchase of Securities. The
Company acknowledges and agrees that each of the Investors is acting solely in
the capacity of an arm's length purchaser with respect to the Transaction
Documents and the transactions contemplated hereby and thereby. The Company
further acknowledges that no Investor is acting as a financial advisor or
fiduciary of the Company or any other Investor (or in any similar capacity) with
respect to the Transaction Documents and the transactions contemplated hereby
14
and thereby and any advice given by any Investor or any of their respective
representatives or agents in connection with the Transaction Documents and the
transactions contemplated hereby and thereby is merely incidental to such
Investor's purchase of the Securities. The Company further represents to each
Investor that the Company's decision to enter into the Transaction Documents has
been based solely on the independent evaluation of the transactions contemplated
hereby by the Company and its representatives.
3.2 Representations and Warranties of the Investors. Each Investor hereby,
for itself and for no other Investor, represents and warrants to the Company as
follows:
(a) Organization; Authority; Residency. If an entity, such Investor
has been duly organized, and is validly existing and in good standing under the
laws of the jurisdiction of its organization with the requisite power and
authority to enter into and to consummate the transactions contemplated by the
Transaction Documents to which it is a party and otherwise to carry out its
obligations hereunder and thereunder. If an individual, such Investor is legally
competent with the requisite capacity, power and authority to enter into and to
consummate the transactions contemplated by the Transaction Documents to which
it is a party and otherwise to carry out its obligations hereunder and
thereunder. The purchase by such Investor of the Shares and the Warrants
hereunder has been duly authorized by all necessary action on the part of such
Investor. Each of this Agreement and the Registration Rights Agreement has been
duly executed by such Investor, and when delivered by such Investor, will
constitute the valid and legally binding obligation of such Investor,
enforceable against it in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application.
(b) Investment Intent. Such Investor is acquiring the Securities as
principal for its own account for investment purposes only and not with a view
to or for distributing or reselling such Securities or any part thereof, without
prejudice, however, to such Investor's right at all times to sell or otherwise
dispose of all or any part of such Securities in compliance with applicable
federal and state securities laws. Nothing contained herein shall be deemed a
representation or warranty by such Investor to hold the Securities for any
period of time. Such Investor is acquiring the Securities hereunder in the
ordinary course of its business, and, if it is an entity, has not been formed
for the purpose of investing in the Securities. Such Investor does not have any
agreement or understanding, directly or indirectly, with any Person to
distribute any of the Securities.
(c) Investor Status. Such Investor is an "accredited investor" as
defined in Rule 501(a) under the Securities Act. Such Investor is not a
registered broker-dealer under Section 15 of the Exchange Act.
(d) General Solicitation. Such Investor is not purchasing the
Securities as a result of any advertisement, article, notice or other
communication regarding the Securities published in any newspaper, magazine or
similar media or broadcast over television or radio or presented at any seminar
or any other general solicitation or general advertisement.
15
(e) Access to Information. Such Investor acknowledges that it has
been afforded (i) the opportunity to ask such questions as it has deemed
necessary of, and to receive answers from, representatives of the Company
concerning the terms and conditions of the offering of the Securities and the
merits and risks of investing in the Securities; (ii) access to information
about the Company and the Subsidiaries and their respective financial condition,
results of operations, business, properties, management and prospects sufficient
to enable it to evaluate its investment; and (iii) the opportunity to obtain
such publicly available information that the Company possesses or can acquire
without unreasonable effort or expense that is necessary to make an informed
investment decision with respect to the investment. Neither such inquiries nor
any other investigation conducted by or on behalf of such Investor or its
representatives or counsel shall modify, amend or affect such Investor's right
to rely on the truth, accuracy and completeness of the Disclosure Materials and
the Company's representations and warranties contained in the Transaction
Documents.
(f) Independent Investment Decision. Such Investor has independently
evaluated the merits of its decision to purchase Securities pursuant to this
Agreement, and such Investor confirms that it has not relied on the advice of
any other Investor's business and/or legal counsel in making such decision. If
such Investor is other than the Lead Investor, such Investor represents and
warrants that Xxxxx Xxxx LLP has not acted as its legal counsel in connection
with the transactions contemplated by this Agreement.
(g) Certain Trading Activities. Such Investor has not directly or
indirectly, nor has any Person acting on behalf of or pursuant to any
understanding with such Investor, engaged in any transactions in the securities
of the Company (including, without limitations, any Short Sales involving the
Company's securities) since the earlier to occur of (1) the time that such
Investor was first contacted by the Company regarding an investment in the
Company and (2) the 30th day prior to the date of this Agreement. Such Investor
covenants that neither it nor any Person acting on its behalf or pursuant to any
understanding with it will engage in any transactions in the securities of the
Company (including Short Sales) prior to the time that the transactions
contemplated by this Agreement are publicly disclosed.
The Company acknowledges and agrees that no Investor has made or makes any
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 3.2.
ARTICLE IV.
OTHER AGREEMENTS OF THE PARTIES
4.1 Restrictions on Transfer. (a) Securities may only be disposed of in
compliance with state and federal securities laws. In connection with any
transfer of the Securities other than pursuant to an effective registration
statement, to the Company, to an Affiliate of an Investor or in connection with
a pledge as contemplated in Section 4.1(b), the Company may require the
transferor thereof to provide to the Company an opinion of counsel selected by
the transferor, the form and substance of which opinion shall be reasonably
satisfactory to the Company, to the
16
effect that such transfer does not require registration of such transferred
Securities under the Securities Act.
(b) Certificates evidencing the Securities will contain the
following legend, until such time as they are not required under Section 4.1(c):
[NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON
EXERCISE/CONVERSION OF THESE SECURITIES HAVE BEEN REGISTERED] [THESE
SECURITIES HAVE NOT BEEN REGISTERED] WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY,
MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE
WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL
OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE
OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.
NOTWITHSTANDING THE FOREGOING, [THESE SECURITIES AND THE SECURITIES
ISSUABLE UPON EXERCISE/CONVERSION OF THESE SECURITIES] [THESE
SECURITIES] MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
AGREEMENT OR ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED
BY SUCH SECURITIES.
The Company acknowledges and agrees that an Investor may from time
to time pledge, and/or grant a security interest in some or all of the
Securities pursuant to a bona fide margin agreement in connection with a bona
fide margin agreement or account or other loan or financing arrangement and, if
required under the terms of such agreement or account, loan or arrangement, such
Investor may transfer pledged or secured Securities to the pledgees or secured
parties. Such a pledge or transfer would not be subject to approval or consent
of the Company and no legal opinion of legal counsel to the pledgee, secured
party or pledgor shall be required in connection with the pledge, but such legal
opinion may be required in connection with a subsequent transfer following
default by the Investor transferee of the pledge. No notice shall be required of
such pledge. At the appropriate Investor's expense, the Company will execute and
deliver such reasonable documentation as a pledgee or secured party of
Securities may reasonably request in connection with a pledge or transfer of the
Securities including the preparation and filing of any required prospectus
supplement under Rule 424(b)(3) of the Securities Act or other applicable
provision of the Securities Act to appropriately amend the list of Selling
Stockholders thereunder.
17
(c) Certificates evidencing the Underlying Shares and Warrant Shares
shall not contain any legend (including the legend set forth in Section 4.1(b)):
(i) following a sale or transfer of such Securities pursuant to and in
accordance with an effective registration statement (including the Registration
Statement), or (ii) following a sale or transfer of such Underlying Shares or
Warrant Shares pursuant to Rule 144 (assuming the transferor is not an Affiliate
of the Company), or (iii) while such Underlying Shares or Warrant Shares are
eligible for sale under Rule 144(k). The Company may not make any notation on
its records or give instructions to any transfer agent of the Company that
enlarge the restrictions on transfer set forth in this Section.
4.2 Furnishing of Information. As long as any Investor owns the Securities
that are not eligible for resale under Rule 144(k) promulgated under the
Securities Act, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to the
Exchange Act. As long as any Investor owns Securities that are not eligible for
resale under Rule 144(k) promulgated under the Securities Act, if the Company is
not required to file reports pursuant to the Exchange Act, it will prepare and
furnish to the Investors and make publicly available in accordance with Rule
144(c) such information as is required for the Investors to sell the Shares
under Rule 144. The Company further covenants that it will take such further
action as any holder of Securities may reasonably request, all to the extent
required from time to time to enable such Person to sell such Shares without
registration under the Securities Act within the limitation of the exemptions
provided by Rule 144.
4.3 Integration. The Company shall not, and shall use its best efforts to
ensure that no Affiliate of the Company shall, sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or sale
of the Securities in a manner that would require the registration under the
Securities Act of the sale of the Securities to the Investors, or that would be
integrated with the offer or sale of the Securities for purposes of the rules
and regulations of any Trading Market.
4.4 Subsequent Registrations. Other than pursuant to the Registration
Statement, prior to the Effective Date, the Company may not file any
registration statement (other than on Form S-8) with the Commission with respect
to any securities of the Company.
4.5 Reservation of Securities. The Company shall maintain a reserve from
its duly authorized shares of Common Stock for issuance pursuant to the
Transaction Documents in such amount as may be required to fulfill its
obligations in full under the Transaction Documents. In the event that at any
time the then authorized shares of Common Stock are insufficient for the Company
to satisfy its obligations in full under the Transaction Documents, the Company
shall promptly take such actions as may be required to increase the number of
authorized shares.
4.6 Lockup; Subsequent Placements and Certain Securities Offerings. (a)
Except for the Securities issued or issuable pursuant to the Transaction
Documents, the Company shall not enter into any Subsequent Placement (as defined
in Section 4.6(c)) until after the one year anniversary of the Closing Date,
except that the Company, subject to Section 4.6(c), may enter into a Subsequent
Placement at a price per share of Common Stock of not less than $1.50
18
(subject to equitable adjustment for stock splits and similar events following
the Closing) as long as any such Subsequent Placement contains no pricing
adjustments. The Company will not enter in to any Change of Control Transaction
until after the third year anniversary of the Closing Date, except (subject to
Section 4.6(c)) at a price per share of Common Stock of not less than the
greater of (x) $2.50 per share (subject to equitable adjustment for stock splits
and similar events following the Closing) and (y) 120% of the average closing
sales price of the Common Stock for the 30 days immediately preceding the date
of such transaction.
(b) The Company shall use its best efforts to and shall take such
actions as are reasonably necessary to preclude its directors and executive
officers and specifically each of Xxxxxx Xxxxxxxxx, Xxxx Xxxxxxxxx and Xxxxxxx
Xxxxxxxxx from, offering, selling, contracting to sell, pledge, enter into any
Short Sale or hedging transactions of any nature, or otherwise disposing of,
directly or indirectly, any shares of the Common Stock or any Common Stock
Equivalents beneficially owned by any of them, until in each and every case
following the 90th Trading Day following the Effective Date; provided that the
90-Trading Day period specified in the immediately preceding sentence shall be
extended by one Trading Day for each Trading Day following the earlier to occur
of the Effective Date and the Effectiveness Date (as defined in the Registration
Rights Agreement) during which either (i) a Registration Statement is not
effective or (ii) the prospectus forming a portion of any such Registration
Statement is not available for the resale of all Registrable Securities (as
defined in the Registration Rights Agreement) required to be covered thereby.
(c) In the event the Company at any time prior to the one year
anniversary of the Closing, directly or indirectly, offers, sells, grants any
option to purchase, or otherwise disposes of (or announces any offer, sale,
grant or any option to purchase or other disposition of any of Common Stock or
Common Stock Equivalents or any of its Subsidiaries' equity or Common Stock
Equivalents (such offer, sale, grant, disposition or announcement being referred
to as a "Subsequent Placement"), the Company shall deliver to each Investor a
written notice (each, a "Subsequent Placement Notice") of its intention to
effect such Subsequent Placement, which specifies in reasonable detail all of
the material terms of such Subsequent Placement, the amount of proceeds intended
to be raised thereunder, the names of the investors (including the investment
manager of such investors, if any) and the investment bankers with whom such
Subsequent Placement is proposed to be effected, and attached to which shall be
a term sheet or similar document. Each Investor shall have until 6:30 p.m. (New
York City time) on the fifth Trading Day after its respective receipt of the
Subsequent Placement Notice to notify Company of its intention to provide,
subject to completion of mutually acceptable documentation, in all or a portion
of such financing on the same terms as set forth in the Subsequent Placement
Notice. In the event that the Investors do not timely elect to provide the
entire financing subject to the Subsequent Placement Notice and the Company
shall not have consummated the portion of the Subsequent Placement for which
such elections shall not have been so made on the terms and to the Persons
specified in the Subsequent Placement Notice within 30 days following the
expiration of the time to so elect, the Company shall provide each Investor with
a second Subsequent Placement Notice and each Investor will again have the right
of first refusal set forth in this Section. If the Investors indicate in the
aggregate a willingness to provide financing in excess of the amount set forth
in the Subsequent Placement Notice, then each Investor will be
19
entitled to provide financing pursuant to such Subsequent Placement Notice up to
an amount of all such proceeds equal to such Investor's pro rata portion of all
Investment Amounts hereunder. The Company's obligations under Sections 4.6(a)
and 4.6(c) shall not apply to any grant or issuance by the Company of any of the
following: (i) the issuance of securities upon the exercise or conversion of any
Common Stock Equivalents issued by the Company prior to the date of this
Agreement (but will apply to any amendments, modifications and reissuances
thereof), (ii) the grant of options or warrants, or the issuance of additional
securities, under any duly authorized Company stock option, restricted stock
plan or stock purchase plan whether now existing or approved by the Company and
its stockholders in the future (but not as to any amendments or other
modifications to the number of Common Stock issuable thereunder, the terms set
forth therein, or the exercise price set forth therein, unless such amendments
or other modifications are approved by the Company's stockholders), or (iii) the
issuance of Common Stock Equivalents pursuant to a Strategic Transaction.
4.7 Securities Laws Disclosure; Publicity. By 9:00 a.m. (New York City
time) on the Trading Day immediately following the date that this Agreement is
executed by the parties, the Company will issue a press release to disclose the
execution of this Agreement and the material terms of the transactions
contemplated by the Transaction Documents. On the Closing Date, the Company
shall issue a press release announcing the Closing and shall file a Current
Report on Form 8-K with the Commission (the "8-K Filing") describing the terms
of the transactions contemplated by the Transaction Documents and including as
exhibits to such Current Report on Form 8-K this Agreement and the form of
Warrants, in the form required by the Exchange Act. The Company shall timely
file any filings and notices required by the Commission or applicable law with
respect to the transactions contemplated hereby and provide copies thereof to
the Investors promptly after filing. Notwithstanding the foregoing, the Company
shall not publicly disclose the name of any Investor, or include the name of any
Investor in any filing with the Commission (other than the Registration
Statement and any exhibits to filings made in respect of this transaction in
accordance with periodic filing requirements under the Exchange Act) or any
regulatory agency or Trading Market, without the prior written consent of such
Investor, except to the extent such disclosure is required by law or Trading
Market regulations. The Company shall not, and shall cause each of its
Subsidiaries and its and each of their respective officers, directors, employees
and agents not to, provide any Investor with any material nonpublic information
regarding the Company or any of its Subsidiaries from and after the filing of
the 8-K Filing without the express written consent of such Investor. In the
event of a breach of the foregoing covenant by the Company, any of its
Subsidiaries, or any of its or their respective officers, directors, employees
and agents, in addition to any other remedy provided herein or in the
Transaction Documents, an Investor shall have the right to make a public
disclosure, in the form of a press release, public advertisement or otherwise,
of such material nonpublic information without the prior approval by the
Company, its Subsidiaries, or any of its or their respective officers,
directors, employees or agents. No Investor shall have any liability to the
Company, its Subsidiaries, or any of its or their respective officers,
directors, employees, stockholders or agents for any such disclosure.
20
4.8 Limitation on Issuance of Future Priced Securities. During the 12
months following the Closing Date, the Company shall not issue any security that
would be a "Future Priced Securities" as such term is described by NASD
IM-4350-1.
4.9 Reimbursement. If any Investor or any of its Affiliates or any
officer, director, partner, controlling Person, employee or agent of an Investor
or any of its Affiliates (a "Related Person") becomes involved in any capacity
in any Proceeding brought by or against any Person in connection with or as a
result of the transactions contemplated by the Transaction Documents, the
Company will indemnify and hold harmless such Investor or Related Person for its
reasonable legal fees and other expenses (including the costs of any
investigation, preparation and travel) and for any Losses incurred in connection
therewith, as such expenses or Losses are incurred, excluding only Losses that
result directly from such Investor's or Related Person's gross negligence or
willful misconduct. In addition, the Company shall indemnify and hold harmless
each Investor and Related Person from and against any and all Losses, as
incurred, arising out of or relating to any breach by the Company of any of the
representations, warranties or covenants made by the Company in this Agreement
or any other Transaction Document, or any allegation by a third party that, if
true, would constitute such a breach. The conduct of any Proceedings for which
indemnification is available under this paragraph shall be governed by Section
5(c) of the Registration Rights Agreement. The indemnification obligations of
the Company under this paragraph shall be in addition to any liability that the
Company may otherwise have and shall be binding upon and inure to the benefit of
any successors, assigns, heirs and personal representatives of the Investors and
any such Related Persons. The Company also agrees that neither the Investors nor
any Related Persons shall have any liability to the Company or any Person
asserting claims on behalf of or in right of the Company in connection with or
as a result of the transactions contemplated by the Transaction Documents,
except to the extent that any Losses incurred by the Company result from the
breach of any representation or warranty contained in this Agreement by the
applicable Investor or the gross negligence or willful misconduct of the
applicable Investor or Related Person in connection with such transactions. If
the Company breaches its obligations under any Transaction Document, then, in
addition to any other liabilities the Company may have under any Transaction
Document or applicable law, the Company shall pay or reimburse the Investors on
demand for all costs of collection and enforcement (including reasonable
attorneys fees and expenses). Without limiting the generality of the foregoing,
the Company specifically agrees to reimburse the Investors on demand for all
costs, including reasonable attorneys fees, of enforcing the indemnification
obligations in this paragraph.
4.10 Use of Proceeds. The Company shall use the net proceeds from the sale
of the Securities hereunder for working capital purposes, including, but not
limited to, the purchase of capital equipment, equipment installation, marketing
and market research, and not for the satisfaction of any portion of the
Company's or a Subsidiary's Indebtedness except as, when and to the extent
provided in Schedule 4.10, nor to redeem any equity or equity equivalent
securities of the Company or to settle any outstanding litigation. The Company
will insure that it will use the proceeds from this transaction in a manner that
ensures that it will satisfy the Net Worth Covenants. The Company will not repay
(directly or indirectly) any of the Indebtedness owed to Natalie or Xxxxxx
Xxxxxxxxx unless each of the following has been satisfied: (i) the date of
21
repayment shall be later than December 31, 2005, (ii) for the six month period
ended June 30, 2005 (x) the reported revenues of the Company shall not be less
than $11 million and (y) the reported earnings per share of Common Stock shall
be not less than $0.23 based upon 7,250,000 shares of Common Stock outstanding,
and (iii) both at December 31, 2005 and at the time of any such repayment, the
conditions precedent for the Company to deliver a Company Conversion Notice
under the Certificate of Designation shall be met.
ARTICLE V.
CONDITIONS PRECEDENT TO CLOSING
5.1 Conditions Precedent to Obligations of the Investors. Each Investor's
obligation to purchase Securities at the Closing is subject to the satisfaction
or waiver by such Investor of the following conditions:
(a) Representations and Warranties. The representations and
warranties of the Company contained herein shall be true and correct in all
material respects as of the date when made and as of the Closing as though made
on and as of such date.
(b) Performance of Obligations. The Company shall have performed in
all material respects all agreements and covenants required to be performed by
it under this Agreement prior to the Closing Date.
(c) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction that
prohibits the consummation of any of the transactions contemplated by the
Transaction Documents.
(d) No Material Adverse Effect. Between the execution of this
Agreement and the Closing, no event or series of events (other than stock price
fluctuations) shall have occurred which reasonably would be expected to have or
result in a Material Adverse Effect.
(e) Company Deliverables. The Company shall have delivered all of
the Company Deliverables for distribution at Closing.
(f) Shareholder Agreements. The Company shall have delivered fully
executed lockup and co-sale agreements from each of Xxxxxx, Xxxxxxx and Xxxx
Xxxxxxxxx, and any Affiliate thereof who beneficially owns Common Stock, in form
and substance reasonably acceptable to the Lead Investor.
(g) Minimum Subscriptions. The aggregate of all Investors'
Investment Amounts delivered to the Company in accordance with Section 2.2 shall
not be less than $2,000,000.
(h) Closing Date. The Closing shall have occurred by June 25, 2004,
subject to the right of the Lead Investor to waive until June 30, 2004.
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5.2 Conditions Precedent to Obligations of the Company. The Company's
obligation to issue and sell the Shares to each Investor at the Closing is
subject to the satisfaction, or waiver by the Company, of the following
conditions:
(a) Representations and Warranties. The representations and
warranties of each Investor contained herein shall be true and correct in all
material respects as of the date when made and as of the Closing Date as though
made on and as of such date.
(b) Performance of Obligations. Such Investor shall have performed
in all material respects all agreements and covenants required to be performed
by it under this Agreement prior to the Closing Date.
(c) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction that
prohibits the consummation of any of the transactions contemplated by the
Transaction Documents.
(d) Minimum Subscriptions. The aggregate of all Investors'
Investment Amounts delivered to the Company in accordance with Section 2.2 shall
not be less than $2,000,000.
(e) Closing Date. The Closing shall have occurred by June 25, 2004,
subject to the right of the Lead Investor to waive until June 30, 2004.
ARTICLE VI.
MISCELLANEOUS
6.1 Termination. This Agreement may be terminated by the Company or the
Lead Investor, by written notice to the other parties, if the Closing has not
been consummated by the fifth Trading Day following the date of this Agreement;
provided that no such termination will affect the right of any party to xxx for
any breach by the other party (or parties).
6.2 Fees and Expenses. At the Closing, the Company shall reimburse the
Lead Investor $25,000 (less any previously delivered amount) in connection with
its diligence and legal fees concerning the transactions contemplated by the
Transaction Documents (the Lead Investor may deduct such amount from the
Investment Amount deliverable to the Company at Closing), it being understood
that Xxxxx Xxxx LLP, the attorneys for such Investor, has not rendered any legal
advice to the Company or to any other Investor in connection with the
transactions contemplated hereby and that the Company and each other Investor
has relied for such matters on the advice of its own counsel. In addition, the
Company shall pay all legal fees and expenses incurred by the Lead Investor in
connection with any amendments, modifications, consents, waivers or similar
matters to any of the Transaction Documents. Except as specified above, each
party shall pay the fees and expenses of its advisers, counsel, accountants and
other experts, if any, and all other expenses incurred by such party incident to
the negotiation, preparation, execution, delivery and performance of the
Transaction Documents. The Company shall pay all stamp and other taxes and
duties levied in connection with the sale of the Securities.
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6.3 Entire Agreement. The Transaction Documents, together with the
Exhibits and Schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.
6.4 Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
specified in this Section prior to 6:30 p.m. (New York City time) on a Trading
Day, (b) the next Trading Day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified in
this Section on a day that is not a Trading Day or later than 6:30 p.m. (New
York City time) on any Trading Day, (c) the Trading Day following the date of
mailing, if sent by U.S. nationally recognized overnight courier service, or (d)
upon actual receipt by the party to whom such notice is required to be given.
The address for such notices and communications shall be as follows:
If to the Company: ELECTRONIC CONTROL SECURITY INC.
000 Xxxxxxxxxx Xxxxxx
Xxxxxxx, Xxx Xxxxxx 00000
Attn: President
Facsimile: (000) 000-0000
With a copy to: Ruffa & Ruffa, P.C.
000 Xxxx 00xx Xxxxxx, 00xx Xxxxx
Xxx Xxxx, XX 00000
Attention: Xxxxxxx X. Xxxxx, Xx., Esq.
Facsimile: (000) 000-0000
If to an Investor: To the address set forth under such Investor's name
on the signature pages hereof;
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
6.5 Amendments; Waivers. No provision of this Agreement may be waived or
amended except in a written instrument signed, in the case of an amendment, by
the Company and the Investors holding a majority of the Shares. No waiver of any
default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver of
any subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right.
6.6 Construction. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof. The language used in this Agreement will be deemed
to be the language chosen by the parties to
24
express their mutual intent, and no rules of strict construction will be applied
against any party. This Agreement shall be construed as if drafted jointly by
the parties, and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any provisions of this
Agreement or any of the Transaction Documents.
6.7 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their successors and permitted assigns. The
Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of the Investors. Any Investor may assign any
or all of its rights under this Agreement to any Person to whom such Investor
assigns or transfers any Securities, provided such transferee agrees in writing
to be bound, with respect to the transferred Securities, by the provisions
hereof that apply to the "Investors." Notwithstanding anything to the contrary
herein, Securities may be assigned to any Person in connection with a bona fide
margin agreement or account or other loan or financing arrangement secured by
such Company Securities.
6.8 No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except that each Related Person is an intended third party
beneficiary of Section 4.9 and may enforce the provisions of such Section
directly against the parties with obligations thereunder.
6.9 Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
agrees that all Proceedings concerning the interpretations, enforcement and
defense of the transactions contemplated by this Agreement and any other
Transaction Documents (whether brought against a party hereto or its respective
Affiliates, employees or agents) shall be commenced exclusively in the state and
federal courts sitting in The City of New York, Borough of Manhattan (the "New
York Courts"). Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the New York Courts for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein (including with respect to the enforcement of any of the
Transaction Documents), and hereby irrevocably waives, and agrees not to assert
in any Proceeding, any claim that it is not personally subject to the
jurisdiction of any such New York Court, or that such Proceeding has been
commenced in an improper or inconvenient forum. Each party hereto hereby
irrevocably waives personal service of process and consents to process being
served in any such Proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) 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. Each party hereto hereby
irrevocably waives, to the fullest extent permitted by applicable law, any and
all right to trial by jury in any legal proceeding arising out of or relating to
this Agreement or the transactions contemplated hereby. If either party shall
commence a Proceeding to enforce any provisions of a Transaction Document, then
the prevailing party in such Proceeding shall be reimbursed by the other party
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for its attorney's fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such Proceeding.
6.10 Survival. The representations, warranties, agreements and covenants
contained herein shall survive the Closing and the delivery and/or conversion or
exercise of the Shares and the Warrants, as applicable.
6.11 Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.
6.12 Severability. If any provision of this Agreement is held to be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.
6.13 Rescission and Withdrawal Right. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Investor exercises a right, election, demand
or option under a Transaction Document and the Company does not timely perform
its related obligations within the periods therein provided, then such Investor
may rescind or withdraw, in its sole discretion from time to time upon written
notice to the Company, any relevant notice, demand or election in whole or in
part without prejudice to its future actions and rights.
6.14 Replacement of Securities. If any certificate or instrument
evidencing any Securities is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon
cancellation thereof, or in lieu of and substitution therefor, a new certificate
or instrument, but only upon receipt of evidence reasonably satisfactory to the
Company and its transfer agent of such loss, theft or destruction and customary
and reasonable indemnity, if requested (which may not include the posting of a
bond). The applicants for a new certificate or instrument under such
circumstances shall also pay any reasonable third-party costs associated with
the issuance of such replacement Securities. If a replacement certificate or
instrument evidencing any Securities is requested due to a mutilation thereof,
the Company may require delivery of such mutilated certificate or instrument as
a condition precedent to any issuance of a replacement.
6.15 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Investors and the Company will be entitled to specific performance under the
Transaction Documents. The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations described in the foregoing sentence and hereby agrees to waive in
any
26
action for specific performance of any such obligation the defense that a remedy
at law would be adequate.
6.16 Payment Set Aside. To the extent that the Company makes a payment or
payments to any Investor pursuant to any Transaction Document or an Investor
enforces or exercises its rights thereunder, and such payment or payments or the
proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered
from, disgorged by or are required to be refunded, repaid or otherwise restored
to the Company, a trustee, receiver or any other Person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.
6.17 Independent Nature of Investors' Obligations and Rights. The
obligations of each Investor under any Transaction Document are several and not
joint with the obligations of any other Investor, and no Investor shall be
responsible in any way for the performance of the obligations of any other
Investor under any Transaction Document. The decision of each Investor to
purchase Securities pursuant to the Transaction Documents has been made by such
Investor independently of any other Investor. Nothing contained herein or in any
Transaction Document, and no action taken by any Investor pursuant thereto,
shall be deemed to constitute the Investors as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Investors are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Documents. Each
Investor acknowledges that no other Investor has acted as agent for such
Investor in connection with making its investment hereunder and that no Investor
will be acting as agent of such Investor in connection with monitoring its
investment in the Securities or enforcing its rights under the Transaction
Documents. Each Investor shall be entitled to independently protect and enforce
its rights, including without limitation the rights arising out of this
Agreement or out of the other Transaction Documents, and it shall not be
necessary for any other Investor to be joined as an additional party in any
proceeding for such purpose. The Company acknowledges that each of the Investors
has been provided with the same Transaction Documents for the purpose of closing
a transaction with multiple Investors and not because it was required or
requested to do so by any Investor.
6.18 Limitation of Liability. Notwithstanding anything herein to the
contrary, the Company acknowledges and agrees that the liability of an Investor
arising directly or indirectly, under any Transaction Document of any and every
nature whatsoever shall be satisfied solely out of the assets of such Investor,
and that no trustee, officer, other investment vehicle or any other Affiliate of
such Investor or any investor, shareholder or holder of shares of beneficial
interest of such a Investor shall be personally liable for any liabilities of
such Investor.
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SIGNATURE PAGES FOLLOW]
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IN WITNESS WHEREOF, the parties hereto have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.
ELECTRONIC CONTROL SECURITY INC.
By:_______________________________________
Name:
Title:
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES FOR INVESTORS FOLLOW]
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IN WITNESS WHEREOF, the parties have executed this Security Purchase
Agreement as of the date first written above.
NAME OF INVESTING ENTITY:
___________________________________________
AUTHORIZED SIGNATORY
By:________________________________________
Name:
Title:
Investment Amount: $_______________________
Number of Shares:__________________________
Number of Warrants:________________________
Tax ID No.:________________________________
ADDRESS FOR NOTICE
c/o:_______________________________________
Street:____________________________________
City/State/Zip:____________________________
Attention:_________________________________
Tel:_______________________________________
Fax:_______________________________________
Email:_____________________________________
DELIVERY INSTRUCTIONS
(if different from above)
c/o:_______________________________________
Street:____________________________________
City/State/Zip:____________________________
Attention:_________________________________
Tel:_______________________________________
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