Exhibit 10.1
SECURITY AGREEMENT
This Security Agreement is made as of February 28, 2006 by and among LAURUS
MASTER FUND, LTD., a Cayman Islands company ("Laurus"), GENERAL ENVIRONMENTAL
MANAGEMENT, INC., a Nevada corporation ("the Parent"), and each party listed on
Exhibit A attached hereto (each an "Eligible Subsidiary" and collectively, the
"Eligible Subsidiaries") the Parent and each Eligible Subsidiary, each a
"Company" and collectively, the "Companies").
BACKGROUND
The Companies have requested that Laurus make advances available to the
Companies; and
Laurus has agreed to make such advances on the terms and conditions set
forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and undertakings
and the terms and conditions contained herein, the parties hereto agree as
follows:
1. General Definitions and Terms; Rules of Construction.
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(a) General Definitions. Capitalized terms used in this Agreement shall
have the meanings assigned to them in Annex A.
(b) Accounting Terms. Any accounting terms used in this Agreement that are
not specifically defined shall have the meanings customarily given them in
accordance with GAAP and all financial computations shall be computed, unless
specifically provided herein, in accordance with GAAP consistently applied.
(c) Other Terms. All other terms used in this Agreement and defined in the
UCC, shall have the meaning given therein unless otherwise defined herein.
(d) Rules of Construction. All Schedules, Addenda, Annexes and Exhibits
hereto or expressly identified to this Agreement are incorporated herein by
reference and taken together with this Agreement constitute but a single
agreement. The words "herein", "hereof" and "hereunder" or other words of
similar import refer to this Agreement as a whole, including the Exhibits,
Addenda, Annexes and Schedules thereto, as the same may be from time to time
amended, modified, restated or supplemented, and not to any particular section,
subsection or clause contained in this Agreement. Wherever from the context it
appears appropriate, each term stated in either the singular or plural shall
include the singular and the plural, and pronouns stated in the masculine,
feminine or neuter gender shall include the masculine, the feminine and the
neuter. The term "or" is not exclusive. The term "including" (or any form
thereof) shall not be limiting or exclusive. All references to statutes and
related regulations shall include any amendments of same and any successor
statutes and regulations. All references in this Agreement or in the Schedules,
Addenda, Annexes and Exhibits to this Agreement to sections, schedules,
disclosure schedules, exhibits, and attachments shall refer to the corresponding
sections, schedules, disclosure schedules, exhibits, and attachments of or to
this Agreement. All references to any instruments or agreements, including
references to any of this Agreement or the Ancillary Agreements shall include
any and all modifications or amendments thereto and any and all extensions or
renewals thereof.
2. Loan Facility.
(a) Revolving Loans.
(i) Subject to the terms and conditions set forth herein and in the
Ancillary Agreements, upon request of the Companies, Laurus shall make
revolving loans (the "Revolving Loans") to the Companies from time to time
during the Term which, in the aggregate at any time outstanding, will not
exceed the lesser of (x) (I) the Capital Availability Amount minus (II)
such reserves as Laurus may reasonably in its good faith judgment deem
proper and necessary from time to time (the "Reserves") and (y) an amount
equal to (I) the Accounts Availability minus (II) the Reserves. The amount
derived at any time from Section 2(a)(i)(y)(I) minus 2(a)(i)(y)(II) shall
be referred to as the "Formula Amount." The Companies shall, jointly and
severally, execute and deliver to Laurus on the Closing Date the Secured
Non-Convertible Revolving Note and the Secured Convertible Term Note. The
Companies hereby each acknowledge and agree that Laurus' obligation to
purchase the Secured Non-Convertible Revolving Note and the Secured
Convertible Term Note from the Companies on the Closing Date shall be
contingent upon the satisfaction (or waiver by Laurus in its sole
discretion) of the items and matters set forth in the closing checklist
provided by Laurus to the Companies on or prior to the Closing Date.
(ii) Notwithstanding the limitations set forth above, if requested by
any Company, Laurus retains the right to lend to such Company from time to
time such amounts in excess of such limitations as Laurus may determine in
its sole discretion.
(iii) The Companies acknowledge that the exercise of Laurus'
discretionary rights hereunder may result during the Term in one or more
increases or decreases in the advance percentages used in determining
Accounts Availability and each of the Companies hereby consent to any such
increases or decreases which may limit or restrict advances requested by
the Companies.
(iv) If any interest, fees, costs or charges payable to Laurus
hereunder are not paid when due, each of the Companies shall thereby be
deemed to have requested, and Laurus is hereby authorized at its discretion
to make and charge to the Companies' account, a Loan as of such date in an
amount equal to such unpaid interest, fees, costs or charges.
(v) If any Company at any time fails to perform or observe any of the
covenants contained in this Agreement or any Ancillary Agreement, Laurus
may, but need not, perform or observe such covenant on behalf and in the
name, place and stead of such Company (or, at Laurus' option, in Laurus'
name) and may, but need not, take any and all other actions which Laurus
may deem necessary to cure or correct such failure (including the payment
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of taxes, the satisfaction of Liens, the performance of obligations owed to
Account Debtors, lessors or other obligors, the procurement and maintenance
of insurance, the execution of assignments, security agreements and
financing statements, and the endorsement of instruments). The amount of
all monies expended and all costs and expenses (including attorneys' fees
and legal expenses) incurred by Laurus in connection with or as a result of
the performance or observance of such agreements or the taking of such
action by Laurus shall be charged to the Companies' account as a Revolving
Loan and added to the Obligations. To facilitate Laurus' performance or
observance of such covenants by each Company, each Company hereby
irrevocably appoints Laurus, or Laurus' delegate, acting alone, as such
Company's attorney in fact (which appointment is coupled with an interest)
with the right (but not the duty) from time to time to create, prepare,
complete, execute, deliver, endorse or file in the name and on behalf of
such Company any and all instruments, documents, assignments, security
agreements, financing statements, applications for insurance and other
agreements and writings required to be obtained, executed, delivered or
endorsed by such Company.
(vi) Laurus will account to Company Agent monthly with a statement of
all Loans and other advances, charges and payments made pursuant to this
Agreement, and such account rendered by Laurus shall be deemed final,
binding and conclusive unless Laurus is notified by Company Agent in
writing to the contrary within thirty (30) days of the date each account
was rendered specifying the item or items to which objection is made.
(vii) During the Term, the Companies may borrow and prepay Loans in
accordance with the terms and conditions hereof.
(viii) If any Eligible Account is not paid by the Account Debtor
within ninety (90) days after the date that such Eligible Account was
invoiced or if any Account Debtor asserts a deduction, dispute,
contingency, set-off, or counterclaim with respect to any Eligible Account,
(a "Delinquent Account"), the Companies shall jointly and severally (i)
reimburse Laurus for the amount of the Loans made with respect to such
Delinquent Account or (ii) immediately replace such Delinquent Account with
an otherwise Eligible Account.
(b) Receivables Purchase. Following the occurrence and during the
continuance of an Event of Default, Laurus may, at its option, elect to convert
the credit facility contemplated hereby to an accounts receivable purchase
facility. Upon such election by Laurus (subsequent notice of which Laurus shall
provide to Company Agent), the Companies shall be deemed to hereby have sold,
assigned, transferred, conveyed and delivered to Laurus, and Laurus shall be
deemed to have purchased and received from the Companies, all right, title and
interest of the Companies in and to all Accounts which shall at any time
constitute Eligible Accounts (the "Receivables Purchase"). All outstanding Loans
hereunder shall be deemed obligations under such accounts receivable purchase
facility. The conversion to an accounts receivable purchase facility in
accordance with the terms hereof shall not be deemed an exercise by Laurus of
its secured creditor rights under Article 9 of the UCC. Immediately following
Laurus' request, the Companies shall execute all such further documentation as
may be required by Laurus to more fully set forth the accounts receivable
purchase facility herein contemplated, including, without limitation, Laurus'
standard form of accounts receivable purchase agreement and account debtor
notification letters, but any Company's failure to enter into any such
documentation shall not impair or affect the Receivables Purchase in any manner
whatsoever.
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(c) Term Loan. Subject to the terms and conditions set forth herein and in
the Ancillary Agreements, Laurus shall make a term loan (the "Term Loan") to
Company Agent (for the benefit of Companies) in an aggregate amount equal to
$2,000,000. The Term Loan shall be advanced on the Closing Date (or thereafter
to the extent all terms and conditions set forth herein and in the Ancillary
Agreements are not satisfied on the Closing Date) and shall be, with respect to
principal, payable in consecutive monthly installments of principal commencing
on June 1, 2006 and on the first day of each month thereafter, subject to
acceleration upon the occurrence of an Event of Default or termination of this
Agreement. The Term Loan shall be evidenced by the Secured Convertible Term
Note.
3. Repayment of the Loans. The Companies (a) may prepay the Obligations
from time to time in accordance with the terms and provisions of the Notes (and
Section 17 hereof if such prepayment is due to a termination of this Agreement);
(b) shall repay on the Maturity Date (as defined in the Secured Convertible Term
Note) (i) the then aggregate outstanding principal balance of the Term Loan
together with accrued and unpaid interest, fees and charges and: (ii) all other
amounts owed Laurus under the Secured Convertible Term Note; (c) shall repay on
the expiration of the Term (i) the then aggregate outstanding principal balance
of the Revolving Loans together with accrued and unpaid interest, fees and
charges and; (ii) all other amounts owed Laurus under this Agreement and the
Ancillary Agreements; and (c) subject to Section 2(a)(ii), shall repay on any
day on which the then aggregate outstanding principal balance of the Loans are
in excess of the Formula Amount at such time, Loans in an amount equal to such
excess. Any payments of principal, interest, fees or any other amounts payable
hereunder or under any Ancillary Agreement shall be made prior to 12:00 noon
(New York time) on the due date thereof in immediately available funds.
4. Procedure for Revolving Loans. Company Agent may by written notice
request a borrowing of Revolving Loans prior to 12:00 noon (New York time) on
the Business Day of its request to incur, on the next Business Day, a Revolving
Loan. Together with each request for a Revolving Loan (or at such other
intervals as Laurus may request), Company Agent shall deliver to Laurus a
Borrowing Base Certificate in the form of Exhibit B attached hereto, which shall
be certified as true and correct by the Chief Executive Officer or Chief
Financial Officer of Company Agent together with all supporting documentation
relating thereto. All Revolving Loans shall be disbursed from whichever office
or other place Laurus may designate from time to time and shall be charged to
the Companies' account on Laurus' books. The proceeds of each Revolving Loan
made by Laurus shall be made available to Company Agent on the Business Day
following the Business Day so requested in accordance with the terms of this
Section 4 by way of credit to the applicable Company's operating account
maintained with such bank as Company Agent designated to Laurus. Any and all
Obligations due and owing hereunder may be charged to the Companies' account and
shall constitute Revolving Loans.
5. Interest and Payments.
(a) Interest.
(i) Except as modified by Section 5(a)(iii) below, the Companies shall
jointly and severally pay interest at the Contract Rate on the unpaid
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principal balance of each Loan until such time as such Loan is collected in
full in good funds in dollars of the United States of America.
(ii) Interest and payments shall be computed on the basis of actual
days elapsed in a year of 360 days. At Laurus' option, Laurus may charge
the Companies' account for said interest.
(iii) Effective upon the occurrence of any Event of Default and for so
long as any Event of Default shall be continuing, the Contract Rate shall
automatically be increased as set forth in the Notes (such increased rate,
the "Default Rate"), and all outstanding Obligations, including unpaid
interest, shall continue to accrue interest from the date of such Event of
Default at the Default Rate applicable to such Obligations.
(iv) In no event shall the aggregate interest payable hereunder exceed
the maximum rate permitted under any applicable law or regulation, as in
effect from time to time (the "Maximum Legal Rate"), and if any provision
of this Agreement or any Ancillary Agreement is in contravention of any
such law or regulation, interest payable under this Agreement and each
Ancillary Agreement shall be computed on the basis of the Maximum Legal
Rate (so that such interest will not exceed the Maximum Legal Rate).
(v) The Companies shall jointly and severally pay principal, interest
and all other amounts payable hereunder, or under any Ancillary Agreement,
without any deduction whatsoever, including any deduction for any set-off
or counterclaim.
(b) Payments; Certain Closing Conditions.
(i) Closing/Annual Payments. Upon execution of this Agreement by each
Company and Laurus, the Companies shall jointly and severally pay to Laurus
Capital Management, LLC a closing payment in an amount equal to three and
one-half percent (3.50%) of the Total Investment Amount (the "Closing
Payment"). The Closing Payment shall be deemed fully earned on the Closing
Date and shall not be subject to rebate or proration for any reason.
(ii) Overadvance Payment. Without affecting Laurus' rights hereunder
in the event the Loans exceed the Formula Amount (each such event, an
"Overadvance"), all such Overadvances shall bear additional interest at a
rate equal to two percent (2%) per month of the amount of such Overadvances
for all times such amounts shall be in excess of the Formula Amount. All
amounts that are incurred pursuant to this Section 5(b) (iii) shall be due
and payable by the Companies monthly, in arrears, on the first business day
of each calendar month and upon expiration of the Term.
(iii) Financial Information Default. Without affecting Laurus' other
rights and remedies, in the event any Company fails to deliver the
financial information required by Section 11 on or before the date required
by this Agreement, the Companies shall jointly and severally pay Laurus an
aggregate fee in the amount of $250.00 per week (or portion thereof) for
each such failure until such failure is cured to Laurus' satisfaction or
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waived in writing by Laurus. All amounts that are incurred pursuant to this
Section 5(b)(iv) shall be due and payable by the Companies monthly, in
arrears, on the first business of each calendar month and upon expiration
of the Term.
(iv) Expenses. The Companies shall jointly and severally reimburse
Laurus for its expenses (including reasonable legal fees and expenses)
incurred in connection with the preparation and negotiation of this
Agreement and the Ancillary Agreements, and expenses incurred in connection
with Laurus' due diligence review of each Company and its Subsidiaries and
all related matters. Amounts required to be paid under this Section 5(b)(v)
will be paid on the Closing Date and shall be $55,000 for such expenses
referred to in this Section 5(b)(v) plus the cost of any required
third-party appraisals and/or extraordinary diligence, subject to the
Parent's prior approval, as well as fees and expenses of outside counsel to
the extent the retention of same is deemed reasonably necessary by Laurus.
6. Security Interest.
(a) To secure the prompt payment to Laurus of the Obligations, each Company
hereby assigns, pledges and grants to Laurus a continuing security interest in
and Lien upon all of the Collateral. All of each Company's Books and Records
relating to the Collateral shall, until delivered to or removed by Laurus, be
kept by such Company in trust for Laurus until all Obligations have been paid in
full. Each confirmatory assignment schedule or other form of assignment
hereafter executed by each Company shall be deemed to include the foregoing
grant, whether or not the same appears therein.
(b) Each Company hereby (i) authorizes Laurus to file any financing
statements, continuation statements or amendments thereto that (x) indicate the
Collateral (1) as all assets and personal property of such Company or words of
similar effect, regardless of whether any particular asset comprised in the
Collateral falls within the scope of Article 9 of the UCC of such jurisdiction,
or (2) as being of an equal or lesser scope or with greater detail, and (y)
contain any other information required by Part 5 of Article 9 of the UCC for the
sufficiency or filing office acceptance of any financing statement, continuation
statement or amendment and (ii) ratifies its authorization for Laurus to have
filed any initial financial statements, or amendments thereto if filed prior to
the date hereof. Each Company acknowledges that it is not authorized to file any
financing statement or amendment or termination statement with respect to any
financing statement without the prior written consent of Laurus and agrees that
it will not do so without the prior written consent of Laurus, subject to such
Company's rights under Section 9-509(d)(2) of the UCC.
(c) Each Company hereby grants to Laurus an irrevocable, non-exclusive
license (exercisable upon the termination of this Agreement due to an occurrence
and during the continuance of an Event of Default without payment of royalty or
other compensation to such Company) to use, transfer, license or sublicense any
Intellectual Property now owned, licensed to, or hereafter acquired by such
Company, and wherever the same may be located, and including in such license
access to all media in which any of the licensed items may be recorded or stored
and to all computer and automatic machinery software and programs used for the
compilation or printout thereof, and represents, promises and agrees that any
such license or sublicense is not and will not be in conflict with the
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contractual or commercial rights of any third Person; provided, that such
license will terminate on the termination of this Agreement and the payment in
full of all Obligations.
7. Representations, Warranties and Covenants Concerning the Collateral.
Each Company represents, warrants (each of which such representations and
warranties shall be deemed repeated upon the making of each request for a
Revolving Loan and made as of the time of each and every Revolving Loan
hereunder) and covenants as follows:
(a) all of the Collateral (i) is owned by it free and clear of all Liens
(including any claims of infringement) except those in Laurus' favor and
Permitted Liens and (ii) is not subject to any agreement prohibiting the
granting of a Lien or requiring notice of or consent to the granting of a Lien.
(b) it shall not encumber, mortgage, pledge, assign or grant any Lien in
any Collateral or any other assets to anyone other than Laurus and except for
Permitted Liens.
(c) the Liens granted pursuant to this Agreement, upon completion of the
filings and other actions listed on Schedule 7(c) (which, in the case of all
filings and other documents referred to in said Schedule, have been delivered to
Laurus in duly executed form) constitute valid perfected security interests in
all of the Collateral in favor of Laurus as security for the prompt and complete
payment and performance of the Obligations, enforceable in accordance with the
terms hereof against any and all of its creditors and purchasers and such
security interest is prior to all other Liens in existence on the date hereof
other than Permitted Liens.
(d) no effective security agreement, mortgage, deed of trust, financing
statement, equivalent security or Lien instrument or continuation statement
covering all or any part of the Collateral is or will be on file or of record in
any public office, except those relating to Permitted Liens.
(e) it shall not dispose of any of the Collateral whether by sale, lease or
otherwise except for the sale of Inventory in the ordinary course of business
and for the disposition or transfer in the ordinary course of business during
any fiscal year of obsolete and worn-out Equipment having an aggregate fair
market value of not more than $75,000 and only to the extent that (i) the
proceeds of any such disposition are used to acquire replacement Equipment which
is subject to Laurus' first priority security interest or are used to repay
Loans or to pay general corporate expenses, or (ii) following the occurrence of
an Event of Default which continues to exist the proceeds of which are remitted
to Laurus to be held as cash collateral for the Obligations.
(f) it shall defend the right, title and interest of Laurus in and to the
Collateral against the claims and demands of all Persons whomsoever (other than
in respect of claims and demands by the holders of Permitted Liens to the extent
such claim and/or demand is only related to the Collateral subject of such
Permitted Lien), and take such actions, including (i) all actions necessary to
grant Laurus "control" of any Investment Property, Deposit Accounts,
Letter-of-Credit Rights or electronic Chattel Paper owned by it, with any
agreements establishing control to be in form and substance satisfactory to
Laurus, (ii) the prompt (but in no event later than five (5) Business Days
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following Laurus' request therefor) delivery to Laurus of all original
Instruments, Chattel Paper, negotiable Documents and certificated Stock owned by
it (in each case, accompanied by stock powers, allonges or other instruments of
transfer executed in blank), (iii) notification of Laurus' interest in
Collateral at Laurus' request, and (iv) the institution of litigation against
third parties as shall be prudent in order to protect and preserve its and/or
Laurus' respective and several interests in the Collateral.
(g) it shall promptly, and in any event within five (5) Business Days after
the same is acquired by it, notify Laurus of any commercial tort claim (as
defined in the UCC) acquired by it and unless otherwise consented by Laurus, it
shall enter into a supplement to this Agreement granting to Laurus a Lien in
such commercial tort claim.
(h) it shall place notations upon its Books and Records and any of its
financial statements to disclose Laurus' Lien in the Collateral.
(i) if it retains possession of any Chattel Paper or Instrument with
Laurus' consent, upon Laurus' request such Chattel Paper and Instruments shall
be marked with the following legend: "This writing and obligations evidenced or
secured hereby are subject to the security interest of Laurus Master Fund, Ltd."
Notwithstanding the foregoing, upon the reasonable request of Laurus, such
Chattel Paper and Instruments shall be delivered to Laurus.
(j) it shall perform in a reasonable time all other steps requested by
Laurus to create and maintain in Laurus' favor a valid perfected first Lien in
all Collateral subject only to Permitted Liens.
(k) it shall notify Laurus promptly and in any event within three (3)
Business Days after obtaining knowledge thereof (i) of any event or circumstance
that, to its knowledge, would cause Laurus to consider any then existing Account
as no longer constituting an Eligible Account; (ii) of any material delay in its
performance of any of its obligations to any Account Debtor; (iii) of any
assertion by any Account Debtor of any material claims, offsets or
counterclaims; (iv) of any allowances, credits and/or monies granted by it to
any Account Debtor; (v) of all material adverse information relating to the
financial condition of an Account Debtor; (vi) of any material return of goods;
and (vii) of any loss, damage or destruction of any of the Collateral.
(l) all Eligible Accounts (i) represent complete bona fide transactions
which require no further act under any circumstances on its part to make such
Accounts payable by the Account Debtors, (ii) are not subject to any present,
future contingent offsets or counterclaims, and (iii) do not represent xxxx and
hold sales, consignment sales, guaranteed sales, sale or return or other similar
understandings or obligations of any Affiliate or Subsidiary of such Company. It
has not made, nor will it make, any agreement with any Account Debtor for any
extension of time for the payment of any Account, any compromise or settlement
for less than the full amount thereof, any release of any Account Debtor from
liability therefor, or any deduction therefrom except a discount or allowance
for prompt or early payment allowed by it in the ordinary course of its business
consistent with historical practice and as previously disclosed to Laurus in
writing.
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(m) it shall keep and maintain its Equipment in good operating condition,
except for ordinary wear and tear, and shall make all necessary repairs and
replacements thereof so that the value and operating efficiency shall at all
times be maintained and preserved. It shall not permit any such items to become
a Fixture to real estate or accessions to other personal property.
(n) it shall maintain and keep all of its Books and Records concerning the
Collateral at its executive offices listed in Schedule 12(aa).
(o) it shall maintain and keep the tangible Collateral at the addresses
listed in Schedule 12(aa), provided, that it may change such locations or open a
new location, provided that it provides Laurus at least thirty (30) days prior
written notice of such changes or new location and (ii) prior to such change or
opening of a new location where Collateral having a value of more than $100,000
will be located, it executes and delivers to Laurus such agreements deemed
reasonably necessary or prudent by Laurus, including landlord agreements,
mortgagee agreements and warehouse agreements, each in form and substance
satisfactory to Laurus, to adequately protect and maintain Laurus' security
interest in such Collateral.
(p) Schedule 7(p) lists all banks and other financial institutions at which
it maintains deposits and/or other accounts, and such Schedule correctly
identifies the name, address and telephone number of each such depository, the
name in which the account is held, a description of the purpose of the account,
and the complete account number. It shall not establish any depository or other
bank account with any financial institution (other than the accounts set forth
on Schedule 7(p)) without Laurus' prior written consent.
(q) All Inventory manufactured by it in the United States of America shall
be produced in accordance with the requirements of the Federal Fair Labor
Standards Act of 1938, as amended and all rules, regulations and orders related
thereto or promulgated thereunder.
8. Payment of Accounts.
(a) Each Company will irrevocably direct all of its present and future
Account Debtors and other Persons obligated to make payments constituting
Collateral to make such payments directly to the lockboxes maintained by such
Company (the "Lockboxes") with Xxxxx Fargo Bank N.A. or such other financial
institution accepted by Laurus in writing as may be selected by such Company
(the "Lockbox Bank") pursuant to the terms of the certain agreements among one
or more Companies, Laurus and/or the Lockbox Bank dated as of February 21, 2006.
On or prior to the Closing Date, each Company shall and shall cause the Lockbox
Bank to enter into all such documentation acceptable to Laurus pursuant to
which, among other things, the Lockbox Bank agrees to: (a) sweep the Lockbox on
a daily basis and deposit all checks received therein to an account designated
by Laurus in writing and (b) comply only with the instructions or other
directions of Laurus concerning the Lockbox. All of each Company's invoices,
account statements and other written or oral communications directing,
instructing, demanding or requesting payment of any Account of any Company or
any other amount constituting Collateral shall conspicuously direct that all
payments be made to the Lockbox or such other address as Laurus may direct in
writing. If, notwithstanding the instructions to Account Debtors, any Company
receives any payments, such Company shall immediately remit such payments to
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Laurus in their original form with all necessary endorsements. Until so
remitted, such Company shall hold all such payments in trust for and as the
property of Laurus and shall not commingle such payments with any of its other
funds or property.
(b) At Laurus' election, following the occurrence of an Event of Default
which is continuing, Laurus may notify each Company's Account Debtors of Laurus'
security interest in the Accounts, collect them directly and charge the
collection costs and expenses thereof to Company's and the Eligible Subsidiaries
joint and several account.
9. Collection and Maintenance of Collateral.
(a) Laurus may verify each Company's Accounts from time to time, but not
more often than once every three (3) months, unless an Event of Default has
occurred and is continuing or Laurus believes that such verification is
necessary to preserve or protect the Collateral, utilizing an audit control
company or any other agent of Laurus.
(b) Proceeds of Accounts received by Laurus will be deemed received on the
Business Day after Laurus' receipt of such proceeds in good funds in dollars of
the United States of America to an account designated by Laurus. Any amount
received by Laurus after 12:00 noon (New York time) on any Business Day shall be
deemed received on the next Business Day.
(c) As Laurus receives the proceeds of Accounts of any Company, it shall
(i) apply such proceeds, as required, to amounts outstanding under the Notes,
and (ii) remit all such remaining proceeds (net of interest, fees and other
amounts then due and owing to Laurus hereunder) to Company Agent (for the
benefit of the applicable Companies) upon request (but no more often than twice
a week). Notwithstanding the foregoing, following the occurrence and during the
continuance of an Event of Default, Laurus, at its option, may (a) apply such
proceeds to the Obligations in such order as Laurus shall elect, (b) hold all
such proceeds as cash collateral for the Obligations and each Company hereby
grants to Laurus a security interest in such cash collateral amounts as security
for the Obligations and/or (c) do any combination of the foregoing.
10. Inspections and Appraisals. At all times during normal business hours,
Laurus, and/or any agent of Laurus shall have the right to (a) have access to,
visit, inspect, review, evaluate and make physical verification and appraisals
of each Company's properties and the Collateral, (b) inspect, audit and copy (or
take originals if necessary) and make extracts from each Company's Books and
Records, including management letters prepared by the Accountants, and (c)
discuss with each Company's directors, principal officers, and independent
accountants, each Company's business, assets, liabilities, financial condition,
results of operations and business prospects. Each Company will deliver to
Laurus any instrument necessary for Laurus to obtain records from any service
bureau maintaining records for such Company. If any internally prepared
financial information, including that required under this Section is
unsatisfactory in any manner to Laurus, Laurus may request that the Accountants
review the same.
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11. Financial Reporting. Company Agent will deliver, or cause to be
delivered, to Laurus each of the following, which shall be in form and detail
acceptable to Laurus:
(a) As soon as available, and in any event within ninety (90) days after
the end of each fiscal year of the Parent, each Company's audited financial
statements with a report of independent certified public accountants of
recognized standing selected by the Parent and acceptable to Laurus (the
"Accountants"), which annual financial statements, other than in respect of the
annual financial statements of each Company for its fiscal year ended December
31, 2005, shall be without qualification and shall include each Company's
balance sheet as at the end of such fiscal year and the related statements of
each Company's income, retained earnings and cash flows for the fiscal year then
ended, prepared, if Laurus so requests, on a consolidating and consolidated
basis to include all Subsidiaries and Affiliates of each Company, all in
reasonable detail and prepared in accordance with GAAP, together with (i) if and
when available, copies of any management letters prepared by the Accountants;
and (ii) a certificate of the Parent's President, Chief Executive Officer or
Chief Financial Officer stating that such financial statements have been
prepared in accordance with GAAP and whether or not such officer has knowledge
of the occurrence of any Default or Event of Default hereunder and, if so,
stating in reasonable detail the facts with respect thereto;
(b) As soon as available and in any event within forty five (45) days after
the end of each fiscal quarter of the Parent, an unaudited/internal balance
sheet and statements of income, retained earnings and cash flows of each Company
as at the end of and for such quarter and for the year to date period then
ended, prepared, if Laurus so requests, on a consolidating and consolidated
basis to include all Subsidiaries and Affiliates of each Company, in reasonable
detail and stating in comparative form the figures for the corresponding date
and periods in the previous year, all prepared in accordance with GAAP, subject
to year-end adjustments and accompanied by a certificate of the Parent's
President, Chief Executive Officer or Chief Financial Officer, stating (i) that
such financial statements have been prepared in accordance with GAAP, subject to
year-end audit adjustments, and (ii) whether or not such officer has knowledge
of the occurrence of any Default or Event of Default hereunder not theretofore
reported and remedied and, if so, stating in reasonable detail the facts with
respect thereto;
(c) As soon as available and in any event within twenty (20) days after the
end of each calendar month, an unaudited/internal balance sheet and statements
of income, retained earnings and cash flows of each Company as at the end of and
for such month and for the year to date period then ended, prepared on a
consolidating and consolidated basis to include all Subsidiaries and Affiliates
of each Company, in reasonable detail and stating in comparative form the
figures for the corresponding date and periods in the previous year, all
prepared in accordance with GAAP, subject to year-end adjustments and
accompanied by a certificate of the Parent's President, Chief Executive Officer
or Chief Financial Officer, stating (i) that such financial statements have been
prepared in accordance with GAAP, subject to year-end audit adjustments, and
(ii) whether or not such officer has knowledge of the occurrence of any Default
or Event of Default hereunder not theretofore reported and remedied and, if so,
stating in reasonable detail the facts with respect thereto;
11
(d) Within twenty (20) days after the end of each month (or more frequently
if Laurus so requests), agings of each Company's Accounts, unaudited trial
balances and their accounts payable and a calculation of each Company's
Accounts, Eligible Accounts, provided, however, that if Laurus shall request the
foregoing information more often than as set forth in the immediately preceding
clause, each Company shall have fifteen (15) days from each such request to
comply with Laurus' demand; and
(e) Promptly after (i) the filing thereof, copies of the Parent's most
recent registration statements and annual, quarterly, monthly or other regular
reports which the Parent files with the Securities and Exchange Commission (the
"SEC"), and (ii) the issuance thereof, copies of such financial statements,
reports and proxy statements as the Parent shall send to its stockholders.
(f) Each Company shall deliver, and/or cause such Company's respective
Subsidiary or Subsidiaries to deliver, such other information as Laurus shall
reasonably request.
12. Additional Representations and Warranties. Each Company hereby
represents and warrants to Laurus as follows:
(a) Organization, Good Standing and Qualification. It and each of its
Subsidiaries is a corporation, partnership or limited liability company, as the
case may be, duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization. It and each of its Subsidiaries has
the corporate, limited liability company or partnership, as the case may be,
power and authority to own and operate its properties and assets and, insofar as
it is or shall be a party thereto, to (i) execute and deliver this Agreement and
the Ancillary Agreements, (ii) to issue and sell the Notes and the shares of
Common Stock issuable upon conversion of the Secured Convertible Term Note (the
"Note Shares"), (iii) to issue and sale the Warrants and the shares of Common
Stock issuable upon exercise of the Warrants (the "Warrant Shares"), (v) carry
out the provisions of this Agreement and the Ancillary Agreements and to carry
on its business as presently conducted. It and each of its Subsidiaries is duly
qualified and is authorized to do business and is in good standing as a foreign
corporation, partnership or limited liability company, as the case may be, in
all jurisdictions in which the nature or location of its activities and of its
properties (both owned and leased) makes such qualification necessary, except
for those jurisdictions in which failure to do so has not had, or could not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect.
(b) Subsidiaries. Each of its direct and indirect Subsidiaries, the direct
owner of each such Subsidiary and its percentage ownership thereof, is set forth
on Schedule 12(b).
(c) Capitalization; Voting Rights.
(i) The authorized capital stock of the Parent, as of the date hereof
consists of 250,000,000 shares, of which 200,000,000 are shares of Common
Stock, par value $0.001 per share, 28,253,570 shares of which are issued
and outstanding, and 50,000,000 are shares of preferred stock, par value
$0.001 per share of which 250,000 shares of 10% convertible preferred stock
are issued and outstanding. The authorized, issued and outstanding capital
stock of each Subsidiary of each Company is set forth on Schedule 12(c).
12
(ii) Except as disclosed on Schedule 12(c), other than: (i) the shares
reserved for issuance under the Parent's stock option plans; and (ii)
shares which may be issued pursuant to this Agreement and the Ancillary
Agreements, there are no outstanding options, warrants, rights (including
conversion or preemptive rights and rights of first refusal), proxy or
stockholder agreements, or arrangements or agreements of any kind for the
purchase or acquisition from the Parent of any of its securities. Except as
disclosed on Schedule 12(c), neither the offer, issuance or sale of any of
the Notes or the Warrants or the issuance of any of the Note Shares or the
Warrant Shares, nor the consummation of any transaction contemplated hereby
will result in a change in the price or number of any securities of the
Parent outstanding, under anti-dilution or other similar provisions
contained in or affecting any such securities.
(iii) All issued and outstanding shares of the Parent's Common Stock:
(i) have been duly authorized and validly issued and are fully paid and
non-assessable; and (ii) were issued in compliance with all applicable
state and federal laws concerning the issuance of securities.
(iv) The rights, preferences, privileges and restrictions of the
shares of the Common Stock are as stated in the Parent's Certificate of
Incorporation (the "Charter"). The Note Shares and the Warrant Shares have
been duly and validly reserved for issuance. When issued in compliance with
the provisions of this Agreement and the Parent's Charter, the Securities
will be validly issued, fully paid and nonassessable, and will be free of
any liens or encumbrances; provided, however, that the Securities may be
subject to restrictions on transfer under state and/or federal securities
laws as set forth herein or as otherwise required by such laws at the time
a transfer is proposed.
(d) Authorization; Binding Obligations. All corporate, partnership or
limited liability company, as the case may be, action on its and its
Subsidiaries' part (including their respective officers and directors) necessary
for the authorization of this Agreement and the Ancillary Agreements, the
performance of all of its and its Subsidiaries' obligations hereunder and under
the Ancillary Agreements on the Closing Date and, the authorization, issuance
and delivery of the Notes and the Warrant has been taken or will be taken prior
to the Closing Date. This Agreement and the Ancillary Agreements, when executed
and delivered and to the extent it is a party thereto, will be its and its
Subsidiaries' valid and binding obligations enforceable against each such Person
in accordance with their terms, except:
(i) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting enforcement of
creditors' rights; and
(ii) general principles of equity that restrict the availability of
equitable or legal remedies.
The issuance of the Notes and the subsequent conversion of the Secured
Convertible Term Note into Note Shares are not and will not be subject to any
preemptive rights or rights of first refusal that have not been properly waived
or complied with. The issuance of the Warrants and the subsequent exercise of
the Warrants for Warrant Shares are not and will not be subject to any
preemptive rights or rights of first refusal that have not been properly waived
or complied with.
13
(e) Liabilities. Neither it nor any of its Subsidiaries has any liabilities,
except current liabilities incurred in the ordinary course of business and
liabilities disclosed in any Exchange Act Filings.
(f) Agreements; Action.
Except as set forth on Schedule 12(f) or as disclosed in any Exchange Act
Filings:
(i) There are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees to which it or
any of its Subsidiaries is a party or to its knowledge by which it is bound
which may involve: (i) obligations (contingent or otherwise) of, or
payments to, it or any of its Subsidiaries in excess of $50,000 (other than
obligations of, or payments to, it or any of its Subsidiaries arising from
purchase or sale agreements entered into in the ordinary course of
business); or (ii) the transfer or license of any patent, copyright, trade
secret or other proprietary right to or from it (other than licenses
arising from the purchase of "off the shelf" or other standard products);
or (iii) provisions restricting the development, manufacture or
distribution of its or any of its Subsidiaries' products or services; or
(iv) indemnification by it or any of its Subsidiaries with respect to
infringements of proprietary rights.
(ii) Since December 31, 2004 (the "Balance Sheet Date") neither it nor
any of its Subsidiaries has: (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or
series of its capital stock; (ii) incurred any indebtedness for money
borrowed or any other liabilities (other than ordinary course obligations)
individually in excess of $50,000 or, in the case of indebtedness and/or
liabilities individually less than $50,000, in excess of $100,000 in the
aggregate; (iii) made any loans or advances to any Person not in excess,
individually or in the aggregate, of $100,000, other than ordinary advances
for travel expenses; or (iv) sold, exchanged or otherwise disposed of any
of its assets or rights, other than the sale of its Inventory in the
ordinary course of business.
(iii) For the purposes of subsections (i) and (ii) of this Section
12(f), all indebtedness, liabilities, agreements, understandings,
instruments, contracts and proposed transactions involving the same Person
(including Persons it or any of its applicable Subsidiaries has reason to
believe are affiliated therewith or with any Subsidiary thereof) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts
of such subsections.
(iv) the Parent maintains disclosure controls and procedures
("Disclosure Controls") designed to ensure that information required to be
disclosed by the Parent in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized, and reported, within the
time periods specified in the rules and forms of the SEC.
(v) The Parent makes and keeps books, records, and accounts, that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of its assets. It maintains internal control over financial
reporting ("Financial Reporting Controls") designed by, or under the
supervision of, its principal executive and principal financial officers,
and effected by its board of directors, management, and other personnel, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in accordance with GAAP, including that:
14
(1) transactions are executed in accordance with management's
general or specific authorization;
(2) unauthorized acquisition, use, or disposition of the Parent's
assets that could have a material effect on the financial statements
are prevented or timely detected;
(3) transactions are recorded as necessary to permit preparation
of financial statements in accordance with GAAP, and that its receipts
and expenditures are being made only in accordance with authorizations
of the Parent's management and board of directors;
(4) transactions are recorded as necessary to maintain
accountability for assets; and
(5) the recorded accountability for assets is compared with the
existing assets at reasonable intervals, and appropriate action is
taken with respect to any differences.
(vi) There is no weakness in any of its Disclosure Controls or
Financial Reporting Controls that is required to be disclosed in any of the
Exchange Act Filings, except as so disclosed.
(g) Obligations to Related Parties. Except as set forth on Schedule 12(g),
neither it nor any of its Subsidiaries has any obligations to their respective
officers, directors, stockholders or employees other than:
(i) for payment of salary for services rendered and for bonus
payments;
(ii) reimbursement for reasonable expenses incurred on its or its
Subsidiaries' behalf;
(iii) for other standard employee benefits made generally available to
all employees (including stock option agreements outstanding under any
stock option plan approved by its and its Subsidiaries' Board of Directors,
as applicable); and
(iv) obligations listed in its and each of its Subsidiary's financial
statements or disclosed in any of the Parent's Exchange Act Filings.
Except as described above or set forth on Schedule 12(g), none of its officers,
directors or, to the best of its knowledge, key employees or stockholders, any
of its Subsidiaries or any members of their immediate families, are indebted to
it or any of its Subsidiaries, individually or in the aggregate, in excess of
$50,000 or have any direct or indirect ownership interest in any Person with
which it or any of its Subsidiaries is affiliated or with which it or any of its
Subsidiaries has a business relationship, or any Person which competes with it
or any of its Subsidiaries, other than passive investments in publicly traded
companies (representing less than one percent (1%) of such company) which may
compete with it or any of its Subsidiaries. Except as described above, none of
15
its officers, directors or stockholders, or any member of their immediate
families, is, directly or indirectly, interested in any material contract with
it or any of its Subsidiaries and no agreements, understandings or proposed
transactions are contemplated between it or any of its Subsidiaries and any such
Person. Except as set forth on Schedule 12(g), neither it nor any of its
Subsidiaries is a guarantor or indemnitor of any indebtedness of any other
Person.
(h) Changes. Since the Balance Sheet Date, except as disclosed in any
Exchange Act Filing or in any Schedule to this Agreement or to any of the
Ancillary Agreements, there has not been:
(i) any change in its or any of its Subsidiaries' business, assets,
liabilities, condition (financial or otherwise), properties, operations or
prospects, which, individually or in the aggregate, has had, or could
reasonably be expected to have, a Material Adverse Effect;
(ii) any resignation or termination of any of its or its Subsidiaries'
officers, key employees or groups of employees;
(iii) any material change, except in the ordinary course of business,
in its or any of its Subsidiaries' contingent obligations by way of
guaranty, endorsement, indemnity, warranty or otherwise;
(iv) any damage, destruction or loss, whether or not covered by
insurance, which has had, or could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect;
(v) any waiver by it or any of its Subsidiaries of a valuable right or
of a material debt owed to it;
(vi) any direct or indirect material loans made by it or any of its
Subsidiaries to any of its or any of its Subsidiaries' stockholders,
employees, officers or directors, other than advances made in the ordinary
course of business;
(vii) any material change in any compensation arrangement or agreement
with any employee, officer, director or stockholder;
(viii) any declaration or payment of any dividend or other
distribution of its or any of its Subsidiaries' assets;
(ix) any labor organization activity related to it or any of its
Subsidiaries;
(x) any debt, obligation or liability incurred, assumed or guaranteed
by it or any of its Subsidiaries, except those for immaterial amounts and
for current liabilities incurred in the ordinary course of business;
(xi) any sale, assignment or transfer of any Intellectual Property or
other intangible assets;
16
(xii) any change in any material agreement to which it or any of its
Subsidiaries is a party or by which either it or any of its Subsidiaries is
bound which, either individually or in the aggregate, has had, or could
reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect;
(xiii) any other event or condition of any character that, either
individually or in the aggregate, has had, or could reasonably be expected
to have, individually or in the aggregate, a Material Adverse Effect; or
(xiv) any arrangement or commitment by it or any of its Subsidiaries
to do any of the acts described in subsection (i) through (xiii) of this
Section 12(h).
(i) Title to Properties and Assets; Liens, Etc. Except as set forth on
Schedule 12(i), it and each of its Subsidiaries has good and marketable title to
their respective properties and assets, and good title to its leasehold
interests, in each case subject to no Lien, other than Permitted Liens.
All facilities, Equipment, Fixtures, vehicles and other properties owned, leased
or used by it or any of its Subsidiaries are in good operating condition and
repair and are reasonably fit and usable for the purposes for which they are
being used. Except as set forth on Schedule 12(i), it and each of its
Subsidiaries is in compliance with all material terms of each lease to which it
is a party or is otherwise bound.
(j) Intellectual Property.
(i) It and each of its Subsidiaries owns or possesses sufficient legal
rights to all Intellectual Property necessary for their respective
businesses as now conducted and, to its knowledge as presently proposed to
be conducted, without any known infringement of the rights of others. There
are no outstanding options, licenses or agreements of any kind relating to
its or any of its Subsidiary's Intellectual Property, nor is it or any of
its Subsidiaries bound by or a party to any options, licenses or agreements
of any kind with respect to the Intellectual Property of any other Person
other than such licenses or agreements arising from the purchase of "off
the shelf" or standard products.
(ii) Neither it nor any of its Subsidiaries has received any
communications alleging that it or any of its Subsidiaries has violated any
of the Intellectual Property or other proprietary rights of any other
Person, nor is it or any of its Subsidiaries aware of any basis therefor.
(iii) Neither it nor any of its Subsidiaries believes it is or will be
necessary to utilize any inventions, trade secrets or proprietary
information of any of its employees made prior to their employment by it or
any of its Subsidiaries, except for inventions, trade secrets or
proprietary information that have been rightfully assigned to it or any of
its Subsidiaries.
(k) Compliance with Other Instruments. Neither it nor any of its
Subsidiaries is in violation or default of (x) any term of its Charter or
Bylaws, or (y) any provision of any indebtedness, mortgage, indenture, contract,
agreement or instrument to which it is party or by which it is bound or of any
17
judgment, decree, order or writ, which violation or default, in the case of this
clause (y), has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect. The execution,
delivery and performance of and compliance with this Agreement and the Ancillary
Agreements to which it is a party, and the issuance of the Notes and the other
Securities each pursuant hereto and thereto, will not, with or without the
passage of time or giving of notice, result in any such material violation, or
be in conflict with or constitute a default under any such term or provision, or
result in the creation of any Lien upon any of its or any of its Subsidiary's
properties or assets or the suspension, revocation, impairment, forfeiture or
nonrenewal of any permit, license, authorization or approval applicable to it or
any of its Subsidiaries, their businesses or operations or any of their assets
or properties.
(l) Litigation. Except as set forth on Schedule 12(l), there is no action,
suit, proceeding or investigation pending or, to its knowledge, currently
threatened against it or any of its Subsidiaries that prevents it or any of its
Subsidiaries from entering into this Agreement or the Ancillary Agreements, or
from consummating the transactions contemplated hereby or thereby, or which has
had, or could reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect, or could result in any change in its or
any of its Subsidiaries' current equity ownership, nor is it aware that there is
any basis to assert any of the foregoing. Neither it nor any of its Subsidiaries
is a party to or subject to the provisions of any order, writ, injunction,
judgment or decree of any court or government agency or instrumentality. There
is no action, suit, proceeding or investigation by it or any of its Subsidiaries
currently pending or which it or any of its Subsidiaries intends to initiate.
(m) Tax Returns and Payments. It and each of its Subsidiaries has timely
filed all tax returns (federal, state and local) required to be filed by it. All
taxes shown to be due and payable on such returns, any assessments imposed, and
all other taxes due and payable by it and each of its Subsidiaries on or before
the Closing Date, have been paid or will be paid prior to the time they become
delinquent. Except as set forth on Schedule 12(m), neither it nor any of its
Subsidiaries has been advised:
(i) that any of its returns, federal, state or other, have been or are
being audited as of the date hereof; or
(ii) of any adjustment, deficiency, assessment or court decision in
respect of its federal, state or other taxes.
Neither it nor any of its Subsidiaries has any knowledge of any liability of any
tax to be imposed upon its properties or assets as of the date of this Agreement
that is not adequately provided for.
(n) Employees. Except as set forth on Schedule 12(n), neither it nor any of
its Subsidiaries has any collective bargaining agreements with any of its
employees. There is no labor union organizing activity pending or, to its
knowledge, threatened with respect to it or any of its Subsidiaries. Except as
disclosed in the Exchange Act Filings or on Schedule 12(n), neither it nor any
of its Subsidiaries is a party to or bound by any currently effective employment
contract, deferred compensation arrangement, bonus plan, incentive plan, profit
sharing plan, retirement agreement or other employee compensation plan or
agreement. To its knowledge, none of its or any of its Subsidiaries' employees,
18
nor any consultant with whom it or any of its Subsidiaries has contracted, is in
violation of any term of any employment contract, proprietary information
agreement or any other agreement relating to the right of any such individual to
be employed by, or to contract with, it or any of its Subsidiaries because of
the nature of the business to be conducted by it or any of its Subsidiaries; and
to its knowledge the continued employment by it and its Subsidiaries of their
present employees, and the performance of its and its Subsidiaries contracts
with its independent contractors, will not result in any such violation. Neither
it nor any of its Subsidiaries is aware that any of its or any of its
Subsidiaries' employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency that would
interfere with their duties to it or any of its Subsidiaries. Neither it nor any
of its Subsidiaries has received any notice alleging that any such violation has
occurred. Except for employees who have a current effective employment agreement
with it or any of its Subsidiaries, none of its or any of its Subsidiaries'
employees has been granted the right to continued employment by it or any of its
Subsidiaries or to any material compensation following termination of employment
with it or any of its Subsidiaries. Except as set forth on Schedule 12(n),
neither it nor any of its Subsidiaries is aware that any officer, key employee
or group of employees intends to terminate his, her or their employment with it
or any of its Subsidiaries, as applicable, nor does it or any of its
Subsidiaries have a present intention to terminate the employment of any
officer, key employee or group of employees.
(o) Registration Rights and Voting Rights. Except as set forth on Schedule
12(o) and except as disclosed in Exchange Act Filings, neither it nor any of its
Subsidiaries is presently under any obligation, and neither it nor any of its
Subsidiaries has granted any rights, to register any of its or any of its
Subsidiaries' presently outstanding securities or any of its securities that may
hereafter be issued. Except as set forth on Schedule 12(o) and except as
disclosed in Exchange Act Filings, to its knowledge, none of its or any of its
Subsidiaries' stockholders has entered into any agreement with respect to its or
any of its Subsidiaries' voting of equity securities.
(p) Compliance with Laws; Permits. Neither it nor any of its Subsidiaries
is in violation of the Xxxxxxxx-Xxxxx Act of 2002 or any SEC related regulation
or rule or any rule of the Principal Market promulgated thereunder or any other
applicable statute, rule, regulation, order or restriction of any domestic or
foreign government or any instrumentality or agency thereof in respect of the
conduct of its business or the ownership of its properties which has had, or
could reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect. No governmental orders, permissions, consents,
approvals or authorizations are required to be obtained and no registrations or
declarations are required to be filed in connection with the execution and
delivery of this Agreement or any Ancillary Agreement and the issuance of any of
the Securities, except such as have been duly and validly obtained or filed, or
with respect to any filings that must be made after the Closing Date, as will be
filed in a timely manner. It and each of its Subsidiaries has all material
franchises, permits, licenses and any similar authority necessary for the
conduct of its business as now being conducted by it, the lack of which could,
either individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.
19
(q) Environmental and Safety Laws. Neither it nor any of its Subsidiaries
is in violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety, and to its knowledge, no material
expenditures are or will be required in order to comply with any such existing
statute, law or regulation. Except as set forth on Schedule 12(q), no Hazardous
Materials (as defined below) are used or have been used, stored, or disposed of
by it or any of its Subsidiaries or, to its knowledge, by any other Person on
any property owned, leased or used by it or any of its Subsidiaries other than
in full compliance with all applicable statute, law and regulation. For the
purposes of the preceding sentence, "Hazardous Materials" shall mean:
(i) materials which are listed or otherwise defined as "hazardous" or
"toxic" under any applicable local, state, federal and/or foreign laws and
regulations that govern the existence and/or remedy of contamination on
property, the protection of the environment from contamination, the control
of hazardous wastes, or other activities involving hazardous substances,
including building materials; and
(ii) any petroleum products or nuclear materials.
(r) Valid Offering. Assuming the accuracy of the representations and
warranties of Laurus contained in this Agreement, the offer and issuance of the
Securities will be exempt from the registration requirements of the Securities
Act of 1933, as amended (the "Securities Act"), and will have been registered or
qualified (or are exempt from registration and qualification) under the
registration, permit or qualification requirements of all applicable state
securities laws.
(s) Full Disclosure. It and each of its Subsidiaries has provided Laurus
with all information requested by Laurus in connection with Laurus' decision to
enter into this Agreement, including all information each Company and its
Subsidiaries believe is reasonably necessary to make such investment decision.
Neither this Agreement, the Ancillary Agreements nor the exhibits and schedules
hereto and thereto nor any other document delivered by it or any of its
Subsidiaries to Laurus or its attorneys or agents in connection herewith or
therewith or with the transactions contemplated hereby or thereby, contain any
untrue statement of a material fact nor omit to state a material fact necessary
in order to make the statements contained herein or therein, in light of the
circumstances in which they are made, not misleading. Any financial projections
and other estimates provided to Laurus by it or any of its Subsidiaries were
based on its and its Subsidiaries' experience in the industry and on assumptions
of fact and opinion as to future events which it or any of its Subsidiaries, at
the date of the issuance of such projections or estimates, believed to be
reasonable.
(t) Insurance. It and each of its Subsidiaries has general commercial,
product liability, fire and casualty insurance policies with coverages which it
believes are customary for companies similarly situated to it and its
Subsidiaries in the same or similar business.
(u) SEC Reports and Financial Statements. Except as set forth on Schedule
12(u), it and each of its Subsidiaries has filed all proxy statements, reports
and other documents required to be filed by it under the Exchange Act. The
Parent has furnished Laurus with copies of: (i) its Annual Report on Form 10-KSB
for its fiscal year ended December 31, 2004; and (ii) its Quarterly Reports on
20
Form 10-QSB for its fiscal quarters ended March 31, 2005, June 30, 2005 and
September 30, 2005, and the Form 8-K filings which it has made during its fiscal
years 2005 and 2006 to date (collectively, the "SEC Reports"). Except as set
forth on Schedule 12(u), each SEC Report was, at the time of its filing, in
substantial compliance with the requirements of its respective form and none of
the SEC Reports, nor the financial statements (and the notes thereto) included
in the SEC Reports, as of their respective filing dates, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Such financial
statements have been prepared in accordance with GAAP applied on a consistent
basis during the periods involved (except (i) as may be otherwise indicated in
such financial statements or the notes thereto or (ii) in the case of unaudited
interim statements, to the extent they may not include footnotes or may be
condensed) and fairly present in all material respects the financial condition,
the results of operations and cash flows of the Parent and its Subsidiaries, on
a consolidated basis, as of, and for, the periods presented in each such SEC
Report.
(v) Listing. The Parent's Common Stock is listed or quoted, as applicable,
on the Principal Market and satisfies all requirements for the continuation of
such listing or quotation, as applicable, and the Parent shall do all things
necessary for the continuation of such listing or quotation, as applicable. The
Parent has not received any notice that its Common Stock will be delisted from,
or no longer quoted on, as applicable, the Principal Market or that its Common
Stock does not meet all requirements for such listing or quotation, as
applicable.
(w) No Integrated Offering. Neither it, nor any of its Subsidiaries nor any
of its Affiliates, nor any Person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would cause the offering of the
Securities pursuant to this Agreement or any Ancillary Agreement to be
integrated with prior offerings by it for purposes of the Securities Act which
would prevent it from issuing the Securities pursuant to Rule 506 under the
Securities Act, or any applicable exchange-related stockholder approval
provisions, nor will it or any of its Affiliates or Subsidiaries take any action
or steps that would cause the offering of the Securities to be integrated with
other offerings.
(x) Stop Transfer. The Securities are restricted securities as of the date
of this Agreement. Neither it nor any of its Subsidiaries will issue any stop
transfer order or other order impeding the sale and delivery of any of the
Securities at such time as the Securities are registered for public sale or an
exemption from registration is available, except as required by state and
federal securities laws.
(y) Dilution. It specifically acknowledges that the Parent's obligation to
issue the shares of Common Stock upon conversion of the Secured Convertible Term
Noteand exercise of the Warrants is binding upon the Parent and enforceable
regardless of the dilution such issuance may have on the ownership interests of
other shareholders of the Parent.
(z) Patriot Act. It certifies that, to the best of its knowledge, neither
it nor any of its Subsidiaries has been designated, nor is or shall be owned or
controlled, by a "suspected terrorist" as defined in Executive Order 13224. It
hereby acknowledges that Laurus seeks to comply with all applicable laws
21
concerning money laundering and related activities. In furtherance of those
efforts, it hereby represents, warrants and covenants that: (i) none of the cash
or property that it or any of its Subsidiaries will pay or will contribute to
Laurus has been or shall be derived from, or related to, any activity that is
deemed criminal under United States law; and (ii) no contribution or payment by
it or any of its Subsidiaries to Laurus, to the extent that they are within its
or any such Subsidiary's control shall cause Laurus to be in violation of the
United States Bank Secrecy Act, the United States International Money Laundering
Control Act of 1986 or the United States International Money Laundering
Abatement and Anti-Terrorist Financing Act of 2001. It shall promptly notify
Laurus if any of these representations, warranties and covenants ceases to be
true and accurate regarding it or any of its Subsidiaries. It shall provide
Laurus with any additional information regarding it and each Subsidiary thereof
that Laurus deems necessary or convenient to ensure compliance with all
applicable laws concerning money laundering and similar activities. It
understands and agrees that if at any time it is discovered that any of the
foregoing representations, warranties and covenants are incorrect, or if
otherwise required by applicable law or regulation related to money laundering
or similar activities, Laurus may undertake appropriate actions to ensure
compliance with applicable law or regulation, including but not limited to
segregation and/or redemption of Laurus' investment in it. It further
understands that Laurus may release confidential information about it and its
Subsidiaries and, if applicable, any underlying beneficial owners, to proper
authorities if Laurus, in its sole discretion, determines that it is in the best
interests of Laurus in light of relevant rules and regulations under the laws
set forth in subsection (ii) above.
(aa) Company Name; Locations of Offices, Records and Collateral. Schedule
12(aa) sets forth each Company's name as it appears in official filings in the
state of its organization, the type of entity of each Company, the
organizational identification number issued by each Company's state of
organization or a statement that no such number has been issued, each Company's
state of organization, and the location of each Company's chief executive
office, corporate offices, warehouses, other locations of Collateral and
locations where records with respect to Collateral are kept (including in each
case the county of such locations) and, except as set forth in such Schedule
12(aa), such locations have not changed during the preceding twelve months. As
of the Closing Date, during the prior five years, except as set forth in
Schedule 12(aa), no Company has been known as or conducted business in any other
name (including trade names). Each Company has only one state of organization.
(bb) ERISA. Based upon the Employee Retirement Income Security Act of 1974
("ERISA"), and the regulations and published interpretations thereunder: (i)
neither it nor any of its Subsidiaries has engaged in any Prohibited
Transactions (as defined in Section 406 of ERISA and Section 4975 of the Code);
(ii) it and each of its Subsidiaries has met all applicable minimum funding
requirements under Section 302 of ERISA in respect of its plans; (iii) neither
it nor any of its Subsidiaries has any knowledge of any event or occurrence
which would cause the Pension Benefit Guaranty Corporation to institute
proceedings under Title IV of ERISA to terminate any employee benefit plan(s);
(iv) neither it nor any of its Subsidiaries has any fiduciary responsibility for
investments with respect to any plan existing for the benefit of persons other
than its or such Subsidiary's employees; and (v) neither it nor any of its
Subsidiaries has withdrawn, completely or partially, from any multi-employer
pension plan so as to incur liability under the Multiemployer Pension Plan
Amendments Act of 1980.
22
13. Covenants. Each Company, as applicable, covenants and agrees with
Laurus as follows:
(a) Stop-Orders. It shall advise Laurus, promptly after it receives notice
of issuance by the SEC, any state securities commission or any other regulatory
authority of any stop order or of any order preventing or suspending any
offering of any securities of the Parent, or of the suspension of the
qualification of the Common Stock of the Parent for offering or sale in any
jurisdiction, or the initiation of any proceeding for any such purpose.
(b) Listing. It shall promptly secure the listing or quotation, as
applicable, of the shares of Common Stock issuable upon conversion of the
Secured Convertible Term Noteand exercise of the Warrants on the Principal
Market upon which shares of Common Stock are listed or quoted, as applicable,
(subject to official notice of issuance) and shall maintain such listing or
quotation, as applicable, so long as any other shares of Common Stock shall be
so listed or quoted, as applicable. The Parent shall maintain the listing or
quotation, as applicable, of its Common Stock on the NASD OTC Bulletin Board or
other Principal Market approved in writing by Laurus, and will comply in all
material respects with the Parent's reporting, filing and other obligations
under the bylaws or rules of the National Association of Securities Dealers
("NASD") and such exchanges, as applicable.
(c) Market Regulations. It shall notify the SEC, NASD and applicable state
authorities, in accordance with their requirements, of the transactions
contemplated by this Agreement, and shall take all other necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation, for the legal and valid issuance of the Securities to Laurus and
promptly provide copies thereof to Laurus.
(d) Reporting Requirements. It shall timely file with the SEC all reports
required to be filed pursuant to the Exchange Act and refrain from terminating
its status as an issuer required by the Exchange Act to file reports thereunder
even if the Exchange Act or the rules or regulations thereunder would permit
such termination.
(e) Use of Funds. It shall use the proceeds of the Loans (i) to repay in full
the Existing Indebtedness, (ii) to consummate the acquisition of all equity
interests of K2M Mobile Treatment Services, Inc. and (iii) for general
working capital purposes only.
(f) Access to Facilities. It shall, and shall cause each of its Subsidiaries
to, permit any representatives designated by Laurus (or any successor of
Laurus), upon reasonable notice and during normal business hours (not to
exceed one visit per fiscal quarter subject to the proviso in the following
parenthetical), at Company's expense and accompanied by a representative of
Company Agent (provided that no such limitation on the number of visits
shall be applicable, no such prior notice shall be required to be given and
no such representative shall be required to accompany Laurus in the event
Laurus believes such access is necessary to preserve or protect the
Collateral or following the occurrence and during the continuance of an
Event of Default), to:
(i) visit and inspect any of its or any such Subsidiary's properties;
23
(ii) examine its or any such Subsidiary's corporate and financial
records (unless such examination is not permitted by federal, state or
local law or by contract) and make copies thereof or extracts therefrom;
and
(iii) discuss its or any such Subsidiary's affairs, finances and
accounts with its or any such Subsidiary's directors, officers and
Accountants.
Notwithstanding the foregoing, neither it nor any of its Subsidiaries shall
provide any material, non-public information to Laurus unless Laurus signs a
confidentiality agreement and otherwise complies with Regulation FD, under the
federal securities laws.
(g) Taxes. It shall, and shall cause each of its Subsidiaries to, promptly
pay and discharge, or cause to be paid and discharged, when due and payable, all
lawful taxes, assessments and governmental charges or levies imposed upon it and
its Subsidiaries' income, profits, property or business, as the case may be;
provided, however, that any such tax, assessment, charge or levy need not be
paid currently if (i) the validity thereof shall currently and diligently be
contested in good faith by appropriate proceedings, (ii) such tax, assessment,
charge or levy shall have no effect on the Lien priority of Laurus in the
Collateral, and (iii) if it and/or such Subsidiary, as applicable, shall have
set aside on its and/or such Subsidiary's books adequate reserves with respect
thereto in accordance with GAAP; and provided, further, that it shall, and shall
cause each of its Subsidiaries to, pay all such taxes, assessments, charges or
levies forthwith upon the commencement of proceedings to foreclose any lien
which may have attached as security therefor.
(h) Insurance. It shall bear the full risk of loss from any loss of any
nature whatsoever with respect to the Collateral. It and each of its
Subsidiaries shall keep its assets which are of an insurable character insured
by financially sound and reputable insurers against loss or damage by fire,
explosion and other risks customarily insured against by companies in similar
business similarly situated as it and its Subsidiaries; and it and its
Subsidiaries shall maintain, with financially sound and reputable insurers,
insurance against other hazards and risks and liability to persons and property
to the extent and in the manner which it and/or such Subsidiary thereof
reasonably believes is customary for companies in similar business similarly
situated as it and its Subsidiaries and to the extent available on commercially
reasonable terms. It and each of its Subsidiaries will jointly and severally
bear the full risk of loss from any loss of any nature whatsoever with respect
to the assets pledged to Laurus as security for its obligations hereunder and
under the Ancillary Agreements. At its own cost and expense in amounts and with
carriers reasonably acceptable to Laurus, it and each of its Subsidiaries shall
(i) keep all their insurable properties and properties in which they have an
interest insured against the hazards of fire, flood, sprinkler leakage, those
hazards covered by extended coverage insurance and such other hazards, and for
such amounts, as is customary in the case of companies engaged in businesses
similar to it or the respective Subsidiary's including business interruption
insurance; (ii) maintain a bond in such amounts as is customary in the case of
companies engaged in businesses similar to it and its Subsidiaries' insuring
against larceny, embezzlement or other criminal misappropriation of insured's
officers and employees who may either singly or jointly with others at any time
have access to its or any of its Subsidiaries assets or funds either directly or
through governmental authority to draw upon such funds or to direct generally
the disposition of such assets; (iii) maintain public and product liability
24
insurance against claims for personal injury, death or property damage suffered
by others; (iv) maintain all such worker's compensation or similar insurance as
may be required under the laws of any state or jurisdiction in which it or any
of its Subsidiaries is engaged in business; and (v) furnish Laurus with (x)
copies of all policies and evidence of the maintenance of such policies at least
thirty (30) days before any expiration date, (y) excepting its and its
Subsidiaries' workers' compensation policy, endorsements to such policies naming
Laurus as "co-insured" or "additional insured" and appropriate loss payable
endorsements in form and substance satisfactory to Laurus, naming Laurus as
lenders loss payee, and (z) evidence that as to Laurus the insurance coverage
shall not be impaired or invalidated by any act or neglect of any Company or any
of its Subsidiaries and the insurer will provide Laurus with at least thirty
(30) days notice prior to cancellation. It shall instruct the insurance carriers
that in the event of any loss thereunder, the carriers shall make payment for
such loss to Laurus and not to any Company or any of its Subsidiaries and Laurus
jointly. If any insurance losses are paid by check, draft or other instrument
payable to any Company and/or any of its Subsidiaries and Laurus jointly, Laurus
may endorse, as applicable, such Company's and/or any of its Subsidiaries' name
thereon and do such other things as Laurus may deem advisable to reduce the same
to cash. Laurus is hereby authorized to adjust and compromise claims. All loss
recoveries received by Laurus upon any such insurance may be applied to the
Obligations, in such order as Laurus in its sole discretion shall determine or
shall otherwise be delivered to Company Agent for the benefit of the applicable
Company and/or its Subsidiaries. Any surplus shall be paid by Laurus to Company
Agent for the benefit of the applicable Company and/or its Subsidiaries, or
applied as may be otherwise required by law. Any deficiency thereon shall be
paid, as applicable, by Companies and their Subsidiaries to Laurus, on demand.
(i) Intellectual Property. It shall, and shall cause each of its
Subsidiaries to, maintain in full force and effect its corporate existence,
rights and franchises and all licenses and other rights to use Intellectual
Property owned or possessed by it and reasonably deemed to be necessary to the
conduct of its business.
(j) Properties. It shall, and shall cause each of its Subsidiaries to, keep
its properties in good repair, working order and condition, reasonable wear and
tear excepted, and from time to time make all needful and proper repairs,
renewals, replacements, additions and improvements thereto; and it shall, and
shall cause each of its Subsidiaries to, at all times comply with each provision
of all leases to which it is a party or under which it occupies property if the
breach of such provision could reasonably be expected to have a Material Adverse
Effect.
(k) Confidentiality. It shall not, and shall not permit any of its
Subsidiaries to, disclose, and will not include in any public announcement, the
name of Laurus, unless expressly agreed to by Laurus or unless and until such
disclosure is required by law or applicable regulation, and then only to the
extent of such requirement. Notwithstanding the foregoing, each Company and its
Subsidiaries may disclose Laurus' identity and the terms of this Agreement to
its current and prospective debt and equity financing sources.
(l) Required Approvals. It shall not, and shall not permit any of its
Subsidiaries to, without the prior written consent of Laurus, (i) create, incur,
assume or suffer to exist any indebtedness (exclusive of trade debt) whether
secured or unsecured other than each Company's indebtedness to Laurus and as set
forth on Schedule 13(l)(i) attached hereto and made a part hereof; (ii) cancel
25
any debt owing to it in excess of $50,000 in the aggregate during any 12 month
period; (iii) assume, guarantee, endorse or otherwise become directly or
contingently liable in connection with any obligations of any other Person,
except the endorsement of negotiable instruments by it or its Subsidiaries for
deposit or collection or similar transactions in the ordinary course of
business; (iv) directly or indirectly declare, pay or make any dividend or
distribution on any class of its Stock or apply any of its funds, property or
assets to the purchase, redemption or other retirement of any of its or its
Subsidiaries' Stock outstanding on the date hereof, or issue any preferred
stock; (v) purchase or hold beneficially any Stock or other securities or
evidences of indebtedness of, make or permit to exist any loans or advances to,
or make any investment or acquire any interest whatsoever in, any other Person,
including any partnership or joint venture, except (x) travel advances, (y)
loans to its and its Subsidiaries' officers and employees not exceeding at any
one time an aggregate of $10,000, and (z) loans to its existing Subsidiaries so
long as such Subsidiaries are designated as either a co-borrower hereunder or
has entered into such guaranty and security documentation required by Laurus,
including, without limitation, to grant to Laurus a first priority perfected
security interest in substantially all of such Subsidiary's assets to secure the
Obligations; (vi) create or permit to exist any Subsidiary, other than any
Subsidiary in existence on the date hereof and listed in Schedule 12(b) unless
such new Subsidiary is a wholly-owned Subsidiary and is designated by Laurus as
either a co-borrower or guarantor hereunder and such Subsidiary shall have
entered into all such documentation required by Laurus, including, without
limitation, to grant to Laurus a first priority perfected security interest in
substantially all of such Subsidiary's assets to secure the Obligations; (vii)
directly or indirectly, prepay any indebtedness (other than to Laurus and in the
ordinary course of business), or repurchase, redeem, retire or otherwise acquire
any indebtedness (other than to Laurus and in the ordinary course of business)
except to make scheduled payments of principal and interest thereof; (viii)
enter into any merger, consolidation or other reorganization with or into any
other Person or acquire all or a portion of the assets or Stock of any Person or
permit any other Person to consolidate with or merge with it, unless (1) such
Company is the surviving entity of such merger or consolidation, (2) no Event of
Default shall exist immediately prior to and after giving effect to such merger
or consolidation, (3) such Company shall have provided Laurus copies of all
documentation relating to such merger or consolidation and (4) such Company
shall have provided Laurus with at least thirty (30) days' prior written notice
of such merger or consolidation; (ix) materially change the nature of the
business in which it is presently engaged; (x) become subject to (including,
without limitation, by way of amendment to or modification of) any agreement or
instrument which by its terms would (under any circumstances) restrict its or
any of its Subsidiaries' right to perform the provisions of this Agreement or
any of the Ancillary Agreements; (xi) change its fiscal year or make any changes
in accounting treatment and reporting practices without prior written notice to
Laurus except as required by GAAP or in the tax reporting treatment or except as
required by law; (xii) enter into any transaction with any employee, director or
Affiliate, except in the ordinary course on arms-length terms; (xiii) xxxx
Accounts under any name except the present name of such Company; or (xiv) sell,
lease, transfer or otherwise dispose of any of its properties or assets, or any
of the properties or assets of its Subsidiaries, except for (1) sales, leases,
transfer or dispositions by any Company to any other Company, (2) the sale of
Inventory in the ordinary course of business and (3) the disposition or transfer
in the ordinary course of business during any fiscal year of obsolete and
worn-out Equipment and only to the extent that (x) the proceeds of any such
disposition are used to acquire replacement Equipment which is subject to
26
Laurus' first priority security interest or are used to repay Loans or to pay
general corporate expenses, or (y) following the occurrence of an Event of
Default which continues to exist, the proceeds of which are remitted to Laurus
to be held as cash collateral for the Obligations.
(m) Reissuance of Securities. The Parent shall reissue certificates
representing the Securities without the legends set forth in Section 39 below at
such time as:
(i) the holder thereof is permitted to dispose of such Securities
pursuant to Rule 144(k) under the Securities Act; or
(ii) upon resale subject to an effective registration statement after
such Securities are registered under the Securities Act.
The Parent agrees to cooperate with Laurus in connection with all resales
pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions necessary to
allow such resales provided the Parent and its counsel receive reasonably
requested representations from Laurus and broker, if any.
(n) Opinion. On the Closing Date, it shall deliver to Laurus an opinion
acceptable to Laurus from each Company's legal counsel. Each Company will
provide, at the Companies' joint and several expense, such other legal opinions
in the future as are reasonably necessary for the resale and conversion of the
Secured Convertible Term Note and the exercise of the Warrants.
(o) Legal Name, etc. It shall not, without providing Laurus with 30 days
prior written notice, change (i) its name as it appears in the official filings
in the state of its organization, (ii) the type of legal entity it is, (iii) its
organization identification number, if any, issued by its state of organization,
(iv) its state of organization or (v) amend its certificate of incorporation,
by-laws or other organizational document.
(p) Compliance with Laws. The operation of each of its and each of its
Subsidiaries' business is and shall continue to be in compliance in all material
respects with all applicable federal, state and local laws, rules and
ordinances, including to all laws, rules, regulations and orders relating to
taxes, payment and withholding of payroll taxes, employer and employee
contributions and similar items, securities, employee retirement and welfare
benefits, employee health and safety and environmental matters.
(q) Notices. It and each of its Subsidiaries shall promptly inform Laurus
in writing of: (i) the commencement of all proceedings and investigations by or
before and/or the receipt of any notices from, any governmental or
nongovernmental body and all actions and proceedings in any court or before any
arbitrator against or in any way concerning any event which could reasonably be
expected to have singly or in the aggregate, a Material Adverse Effect; (ii) any
change which has had, or could reasonably be expected to have, a Material
Adverse Effect; (iii) any Event of Default or Default; and (iv) any default or
any event which with the passage of time or giving of notice or both would
constitute a default under any agreement for the payment of money to which it or
any of its Subsidiaries is a party or by which it or any of its Subsidiaries or
any of its or any such Subsidiary's properties may be bound the breach of which
would have a Material Adverse Effect.
27
(r) Margin Stock. It shall not permit any of the proceeds of the Loans made
hereunder to be used directly or indirectly to "purchase" or "carry" "margin
stock" or to repay indebtedness incurred to "purchase" or "carry" "margin stock"
within the respective meanings of each of the quoted terms under Regulation U of
the Board of Governors of the Federal Reserve System as now and from time to
time hereafter in effect.
(s) Offering Restrictions. Except as previously disclosed in the SEC
Reports or in the Exchange Act Filings, or stock or stock options granted to its
employees or directors, neither it nor any of its Subsidiaries shall, prior to
the full repayment or conversion of the Secured Convertible Term Note (together
with all accrued and unpaid interest and fees related thereto), (x) enter into
any equity line of credit agreement or similar agreement or (y) issue, or enter
into any agreement to issue, any securities with a variable/floating conversion
and/or pricing feature which are or could be (by conversion or registration)
free-trading securities (i.e. common stock subject to a registration statement).
(t) Authorization and Reservation of Shares. The Parent shall at all times
have authorized and reserved a sufficient number of shares of Common Stock to
provide for the full conversion of the Secured Convertible Term Note and the
full exercise of the Warrants.
(u) Financing Right of First Refusal.
(i) Each Company hereby grants to Laurus a right of first refusal to
provide any Additional Financing (as defined below) to be issued by any
Company and/or any of its Subsidiaries (the "Additional Financing
Parties"), subject to the following terms and conditions. From and after
the date hereof, prior to the incurrence of any additional indebtedness
and/or the sale or issuance of any equity interests of the Additional
Financing Parties (an "Additional Financing"), Company Agent shall notify
Laurus of such Additional Financing. In connection therewith, Company Agent
shall submit a fully executed term sheet (a "Proposed Term Sheet") to
Laurus setting forth the terms, conditions and pricing of any such
Additional Financing (such financing to be negotiated on "arm's length"
terms and the terms thereof to be negotiated in good faith) proposed to be
entered into by the Additional Financing Parties. Laurus shall have the
right, but not the obligation, to deliver to Company Agent its own proposed
term sheet (the "Laurus Term Sheet") setting forth the terms and conditions
upon which Laurus would be willing to provide such Additional Financing to
the Additional Financing Parties. The Laurus Term Sheet shall contain terms
no less favorable to the Additional Financing Parties than those outlined
in Proposed Term Sheet. Laurus shall deliver to Company Agent the Laurus
Term Sheet within five (5) Business Days of receipt of each such Proposed
Term Sheet. If the provisions of the Laurus Term Sheet are at least as
favorable to the Additional Financing Parties as the provisions of the
Proposed Term Sheet, the Additional Financing Parties shall enter into and
consummate the Additional Financing transaction outlined in the Laurus Term
Sheet.
(ii) It shall not, and shall not permit its Subsidiaries to, agree,
directly or indirectly, to any restriction with any Person which limits the
ability of Laurus to consummate an Additional Financing with it or any of
its Subsidiaries.
28
(v) Prohibition of Amendments to Subordinated Debt Documentation. It shall
not, without the prior written consent of Laurus, amend, modify or in any way
alter the terms of any of the Subordinated Debt Documentation.
(w) Prohibition of Grant of Collateral for Subordinated Debt Documentation.
It shall not, without the prior written consent of Laurus, grant or permit any
of its Subsidiaries to grant to any Person any Collateral of such Company or any
collateral of any of its Subsidiaries as security for any obligation arising
under the Subordinated Debt Documentation.
(x) Prohibitions of Payment Under Subordinated Debt Documentation. Neither
it nor any of its Subsidiaries shall, without the prior written consent of
Laurus, make any payments in respect of the indebtedness evidenced by the
Subordinated Debt Documentation.
14. Further Assurances. At any time and from time to time, upon the written
request of Laurus and at the sole expense of Companies, each Company shall
promptly and duly execute and deliver any and all such further instruments and
documents and take such further action as Laurus may request (a) to obtain the
full benefits of this Agreement and the Ancillary Agreements, (b) to protect,
preserve and maintain Laurus' rights in the Collateral and under this Agreement
or any Ancillary Agreement, and/or (c) to enable Laurus to exercise all or any
of the rights and powers herein granted or any Ancillary Agreement.
15. Representations, Warranties and Covenants of Laurus. Laurus hereby
represents, warrants and covenants to each Company as follows:
(a) Requisite Power and Authority. Laurus has all necessary power and
authority under all applicable provisions of law to execute and deliver this
Agreement and the Ancillary Agreements and to carry out their provisions. All
corporate action on Laurus' part required for the lawful execution and delivery
of this Agreement and the Ancillary Agreements have been or will be effectively
taken prior to the Closing Date. Upon their execution and delivery, this
Agreement and the Ancillary Agreements shall be valid and binding obligations of
Laurus, enforceable in accordance with their terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application affecting enforcement of creditors' rights, and (b) as
limited by general principles of equity that restrict the availability of
equitable and legal remedies.
(b) Investment Representations. Laurus understands that the Securities are
being offered pursuant to an exemption from registration contained in the
Securities Act based in part upon Laurus' representations contained in this
Agreement, including, without limitation, that Laurus is an "accredited
investor" within the meaning of Regulation D under the Securities Act. Laurus
has received or has had full access to all the information it considers
necessary or appropriate to make an informed investment decision with respect to
the Notes to be issued to it under this Agreement and the Securities acquired by
it upon the conversion of the Secured Convertible Term Note and the exercise of
the Warrants.
(c) Laurus Bears Economic Risk. Laurus has substantial experience in
evaluating and investing in private placement transactions of securities in
companies similar to the Parent so that it is capable of evaluating the merits
29
and risks of its investment in the Parent and has the capacity to protect its
own interests. Laurus must bear the economic risk of this investment until the
Securities are sold pursuant to (i) an effective registration statement under
the Securities Act, or (ii) an exemption from registration is available.
(d) Investment for Own Account. The Securities are being issued to Laurus
for its own account for investment only, and not as a nominee or agent and not
with a view towards or for resale in connection with their distribution.
(e) Laurus Can Protect Its Interest. Laurus represents that by reason of
its, or of its management's, business and financial experience, Laurus has the
capacity to evaluate the merits and risks of its investment in the Notes, and
the Securities and to protect its own interests in connection with the
transactions contemplated in this Agreement, and the Ancillary Agreements.
Further, Laurus is aware of no publication of any advertisement in connection
with the transactions contemplated in the Agreement or the Ancillary Agreements.
(f) Accredited Investor. Laurus represents that it is an accredited
investor within the meaning of Regulation D under the Securities Act.
(g) Shorting. Neither Laurus nor any of its Affiliates or investment
partners has, will, or will cause any Person, to directly engage in "short
sales" of the Parent's Common Stock as long as any Note shall be outstanding.
(h) Patriot Act. Laurus certifies that, to the best of Laurus' knowledge,
Laurus has not been designated, and is not owned or controlled, by a "suspected
terrorist" as defined in Executive Order 13224. Laurus seeks to comply with all
applicable laws concerning money laundering and related activities. In
furtherance of those efforts, Laurus hereby represents, warrants and covenants
that: (i) none of the cash or property that Laurus will use to make the Loans
has been or shall be derived from, or related to, any activity that is deemed
criminal under United States law; and (ii) no disbursement by Laurus to any
Company to the extent within Laurus' control, shall cause Laurus to be in
violation of the United States Bank Secrecy Act, the United States International
Money Laundering Control Act of 1986 or the United States International Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001. Laurus shall
promptly notify the Company Agent if any of these representations ceases to be
true and accurate regarding Laurus. Laurus agrees to provide the Company any
additional information regarding Laurus that the Company deems necessary or
convenient to ensure compliance with all applicable laws concerning money
laundering and similar activities. Laurus understands and agrees that if at any
time it is discovered that any of the foregoing representations are incorrect,
or if otherwise required by applicable law or regulation related to money
laundering similar activities, Laurus may undertake appropriate actions to
ensure compliance with applicable law or regulation, including but not limited
to segregation and/or redemption of Laurus' investment in the Parent. Laurus
further understands that the Parent may release information about Laurus and, if
applicable, any underlying beneficial owners, to proper authorities if the
Parent, in its sole discretion, determines that it is in the best interests of
the Parent in light of relevant rules and regulations under the laws set forth
in subsection (ii) above.
(i) Limitation on Acquisition of Common Stock. Notwithstanding anything to
the contrary contained in this Agreement, any Ancillary Agreement, or any
document, instrument or agreement entered into in connection with any other
30
transaction entered into by and between Laurus and any Company (and/or
Subsidiaries or Affiliates of any Company), Laurus shall not acquire stock in
the Parent (including, without limitation, pursuant to a contract to purchase,
by exercising an option or warrant, by converting any other security or
instrument, by acquiring or exercising any other right to acquire, shares of
stock or other security convertible into shares of stock in the Parent, or
otherwise, and such options, warrants, conversion or other rights shall not be
exercisable) to the extent such stock acquisition would cause any interest
(including any original issue discount) payable by any Company to Laurus not to
qualify as portfolio interest, within the meaning of Section 881(c)(2) of the
Internal Revenue Code of 1986, as amended (the "Code") by reason of Section
881(c)(3) of the Code, taking into account the constructive ownership rules
under Section 871(h)(3)(C) of the Code (the "Stock Acquisition Limitation"). The
Stock Acquisition Limitation shall automatically become null and void without
any notice to any Company upon the earlier to occur of either (a) the Parent's
delivery to Laurus of a Notice of Redemption (as defined in the Secured
Convertible Term Note) or (b) the existence of an Event of Default at a time
when the average closing price of the Common Stock as reported by Bloomberg,
L.P. on the Principal Market for the immediately preceding five trading days is
greater than or equal to 150% of the Fixed Conversion Price (as defined in the
Secured Convertible Term Note).
16. Power of Attorney. Each Company hereby appoints Laurus, or any other
Person whom Laurus may designate as such Company's attorney, with power to: (i)
endorse such Company's name on any checks, notes, acceptances, money orders,
drafts or other forms of payment or security that may come into Laurus'
possession; (ii) sign such Company's name on any invoice or xxxx of lading
relating to any Accounts, drafts against Account Debtors, schedules and
assignments of Accounts, notices of assignment, financing statements and other
public records, verifications of Account and notices to or from Account Debtors;
(iii) verify the validity, amount or any other matter relating to any Account by
mail, telephone, telegraph or otherwise with Account Debtors; (iv) do all things
necessary to carry out this Agreement, any Ancillary Agreement and all related
documents; and (v) on or after the occurrence and during the continuation of an
Event of Default, notify the post office authorities to change the address for
delivery of such Company's mail to an address designated by Laurus, and to
receive, open and dispose of all mail addressed to such Company. Each Company
hereby ratifies and approves all acts of the attorney. Neither Laurus, nor the
attorney will be liable for any acts or omissions or for any error of judgment
or mistake of fact or law, except for gross negligence or willful misconduct.
This power, being coupled with an interest, is irrevocable so long as Laurus has
a security interest and until the Obligations have been fully satisfied.
17. Term of Agreement. Laurus' agreement to make Loans and extend financial
accommodations under and in accordance with the terms of this Agreement or any
Ancillary Agreement shall continue in full force and effect until the expiration
of the Term. At Laurus' election following the occurrence of an Event of
Default, Laurus may terminate this Agreement. The termination of the Agreement
shall not affect any of Laurus' rights hereunder or any Ancillary Agreement and
the provisions hereof and thereof shall continue to be fully operative until all
transactions entered into, rights or interests created and the Obligations have
been irrevocably disposed of, concluded or liquidated. Notwithstanding the
foregoing, Laurus shall release its security interests at any time after thirty
(30) days notice upon irrevocable payment to it of all Obligations if each
Company shall have (i) provided Laurus with an executed release of any and all
31
claims which such Company may have or thereafter have under this Agreement and
all Ancillary Agreements and (ii) paid to Laurus an early payment fee in an
amount equal to (1) five percent (5%) of the Total Investment Amount if such
payment occurs prior to the first anniversary of the Closing Date, (2) four
percent (4%) of the Total Investment Amount if such payment occurs on or after
the first anniversary of the Closing Date and prior to the second anniversary of
the Closing Date and (3) three percent (3%) of the Total Investment Amount if
such termination occurs thereafter during the Term; such fee being intended to
compensate Laurus for its costs and expenses incurred in initially approving
this Agreement or extending same. Such early payment fee shall be due and
payable jointly and severally by the Companies to Laurus upon termination by
acceleration of this Agreement by Laurus due to the occurrence and continuance
of an Event of Default.
18. Termination of Lien. The Liens and rights granted to Laurus hereunder
and any Ancillary Agreements and the financing statements filed in connection
herewith or therewith shall continue in full force and effect, notwithstanding
the termination of this Agreement or the fact that any Company's account may
from time to time be temporarily in a zero or credit position, until all of the
Obligations have been indefeasibly paid or performed in full after the
termination of this Agreement. Laurus shall not be required to send termination
statements to any Company, or to file them with any filing office, unless and
until this Agreement and the Ancillary Agreements shall have been terminated in
accordance with their terms and all Obligations indefeasibly paid in full in
immediately available funds.
19. Events of Default. The occurrence of any of the following shall
constitute an "Event of Default":
(a) failure to make payment of any of the Obligations when required
hereunder, and, in any such case, such failure shall continue for a period of
three (3) days following the date upon which any such payment was due;
(b) failure by any Company or any of its Subsidiaries to pay any taxes when
due unless such taxes are being contested in good faith by appropriate
proceedings and with respect to which adequate reserves have been provided on
such Company's and/or such Subsidiary's books;
(c) failure to perform under, and/or committing any breach of, in any
material respect, this Agreement or any covenant contained herein, which failure
or breach shall continue without remedy for a period of fifteen (15) days after
the occurrence thereof;
(d) any representation, warranty or statement made by any Company or any of
its Subsidiaries hereunder, in any Ancillary Agreement, any certificate,
statement or document delivered pursuant to the terms hereof, or in connection
with the transactions contemplated by this Agreement should prove to be false or
misleading in any material respect on the date as of which made or deemed made;
(e) the occurrence of any default (or similar term) in the observance or
performance of any other agreement or condition relating to any indebtedness or
contingent obligation of any Company or any of its Subsidiaries (including,
32
without limitation, the indebtedness evidenced by the Subordinated Debt
Documentation) beyond the period of grace (if any), the effect of which default
is to cause, or permit the holder or holders of such indebtedness or beneficiary
or beneficiaries of such contingent obligation to cause, such indebtedness to
become due prior to its stated maturity or such contingent obligation to become
payable;
(f) attachments or levies in excess of $50,000 in the aggregate are made
upon any Company's assets or a judgment is rendered against any Company's
property involving a liability of more than $50,000 which shall not have been
vacated, discharged, stayed or bonded within thirty (30) days from the entry
thereof;
(g) any change in any Company's or any of its Subsidiary's condition or
affairs (financial or otherwise) which in Laurus' reasonable, good faith
opinion, could reasonably be expected to have a Material Adverse Effect;
(h) any Lien created hereunder or under any Ancillary Agreement for any
reason ceases to be or is not a valid and perfected Lien having a first priority
interest (other than in respect of Permitted Liens);
(i) any Company or any of its Subsidiaries shall (i) apply for, consent to
or suffer to exist the appointment of, or the taking of possession by, a
receiver, custodian, trustee or liquidator of itself or of all or a substantial
part of its property, (ii) make a general assignment for the benefit of
creditors, (iii) commence a voluntary case under the federal bankruptcy laws (as
now or hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v)
file a petition seeking to take advantage of any other law providing for the
relief of debtors, (vi) acquiesce to without challenge within ten (10) days of
the filing thereof, or failure to have dismissed within thirty (30) days, any
petition filed against it in any involuntary case under such bankruptcy laws, or
(vii) take any action for the purpose of effecting any of the foregoing;
(j) any Company or any of its Subsidiaries shall admit in writing its
inability, or be generally unable, to pay its debts as they become due or cease
operations of its present business;
(k) any Company or any of its Subsidiaries directly or indirectly sells,
assigns, transfers, conveys, or suffers or permits to occur any sale,
assignment, transfer or conveyance of any assets of such Company or any interest
therein, except as permitted herein;
(l) any "Person" or "group" (as such terms are defined in Sections 13(d)
and 14(d) of the Exchange Act, as in effect on the date hereof), other than
Laurus, is or becomes the "beneficial owner" (as defined in Rules 13(d)-3 and
13(d)-5 under the Exchange Act), directly or indirectly, of 35% or more on a
fully diluted basis of the then outstanding voting equity interest of any
Company, (ii) the Board of Directors of the Parent shall cease to consist of a
majority of the Board of Directors of the Parent on the date hereof (or
directors appointed by a majority of the board of directors in effect
immediately prior to such appointment) or (iii) the Parent or any of its
Subsidiaries merges or consolidates with, or sells all or substantially all of
its assets to, any other person or entity;
(m) the indictment or threatened indictment of any Company or any of its
Subsidiaries or any executive officer of any Company or any of its Subsidiaries
under any criminal statute, or commencement or threatened commencement of
33
criminal or civil proceeding against any Company or any of its Subsidiaries or
any executive officer of any Company or any of its Subsidiaries pursuant to
which statute or proceeding penalties or remedies sought or available include
forfeiture of any of the property of any Company or any of its Subsidiaries;
(n) an Event of Default (or similar term) shall occur under and as defined
in any Note or in any other Ancillary Agreement;
(o) any Company or any of its Subsidiaries shall breach any term or
provision of any Ancillary Agreement to which it is a party (including, without
limitation, Section 7(e) of the Registration Rights Agreement), in any material
respect which breach is not cured within any applicable cure or grace period
provided in respect thereof (if any);
(p) any Company or any of its Subsidiaries attempts to terminate,
challenges the validity of, or its liability under this Agreement or any
Ancillary Agreement, or any proceeding shall be brought to challenge the
validity, binding effect of any Ancillary Agreement or any Ancillary Agreement
ceases to be a valid, binding and enforceable obligation of such Company or any
of its Subsidiaries (to the extent such Persons are a party thereto);
(q) an SEC stop trade order or Principal Market trading suspension of the
Common Stock shall be in effect for five (5) consecutive days or five (5) days
during a period of ten (10) consecutive days, excluding in all cases a
suspension of all trading on a Principal Market, provided that the Parent shall
not have been able to cure such trading suspension within thirty (30) days of
the notice thereof or list the Common Stock on another Principal Market within
sixty (60) days of such notice; or
(r) The Parent's failure to deliver Common Stock to Laurus pursuant to and
in the form required by the Secured Convertible Term Note and this Agreement, if
such failure to deliver Common Stock shall not be cured within two (2) Business
Days or any Company is required to issue a replacement Note to Laurus and such
Company shall fail to deliver such replacement Note within seven (7) Business
Days; or
(s) any Company, or any of its Subsidiaries shall take or participate in
any action which would be prohibited under the provisions of any of the
Subordinated Debt Documentation or make any payment on the indebtedness
evidenced by the Subordinated Debt Documentation to a Person that was not
entitled to receive such payments under the subordination provisions of
applicable Subordinated Debt Documentation.
20. Remedies. Following the occurrence of an Event of Default, Laurus shall
have the right to demand repayment in full of all Obligations, whether or not
otherwise due. Until all Obligations have been fully and indefeasibly satisfied,
Laurus shall retain its Lien in all Collateral. Laurus shall have, in addition
to all other rights provided herein and in each Ancillary Agreement, the rights
and remedies of a secured party under the UCC, and under other applicable law,
all other legal and equitable rights to which Laurus may be entitled, including
the right to take immediate possession of the Collateral, to require each
Company to assemble the Collateral, at Companies' joint and several expense, and
to make it available to Laurus at a place designated by Laurus which is
34
reasonably convenient to both parties and to enter any of the premises of any
Company or wherever the Collateral shall be located, with or without force or
process of law, and to keep and store the same on said premises until sold (and
if said premises be the property of any Company, such Company agrees not to
charge Laurus for storage thereof), and the right to apply for the appointment
of a receiver for such Company's property. Further, Laurus may, at any time or
times after the occurrence of an Event of Default, sell and deliver all
Collateral held by or for Laurus at public or private sale for cash, upon credit
or otherwise, at such prices and upon such terms as Laurus, in Laurus' sole
discretion, deems advisable or Laurus may otherwise recover upon the Collateral
in any commercially reasonable manner as Laurus, in its sole discretion, deems
advisable. The requirement of reasonable notice shall be met if such notice is
mailed postage prepaid to Company Agent at Company Agent's address as shown in
Laurus' records, at least ten (10) days before the time of the event of which
notice is being given. Laurus may be the purchaser at any sale, if it is public.
In connection with the exercise of the foregoing remedies, Laurus is granted
permission to use all of each Company's Intellectual Property. The proceeds of
sale shall be applied first to all costs and expenses of sale, including
attorneys' fees, and second to the payment (in whatever order Laurus elects) of
all Obligations. After the indefeasible payment and satisfaction in full of all
of the Obligations, and after the payment by Laurus of any other amount required
by any provision of law, including Section 9-608(a)(1) of the UCC (but only
after Laurus has received what Laurus considers reasonable proof of a
subordinate party's security interest), the surplus, if any, shall be paid to
Company Agent (for the benefit of the applicable Companies) or its
representatives or to whosoever may be lawfully entitled to receive the same, or
as a court of competent jurisdiction may direct. The Companies shall remain
jointly and severally liable to Laurus for any deficiency. In addition, the
Companies shall jointly and severally pay Laurus a liquidation fee ("Liquidation
Fee") in the amount of five percent (5%) of the actual amount collected in
respect of each Account outstanding at any time during a Liquidation Period".
For purposes hereof, "Liquidation Period" means a period: (i) beginning on the
earliest date of (x) an event referred to in Section 19(i) or 19(j), or (y) the
cessation of any Company's business; and (ii) ending on the date on which Laurus
has actually received all Obligations due and owing it under this Agreement and
the Ancillary Agreements. The Liquidation Fee shall be paid on the date on which
Laurus collects the applicable Account by deduction from the proceeds thereof.
Each Company and Laurus acknowledge that the actual damages that would be
incurred by Laurus after the occurrence of an Event of Default would be
difficult to quantify and that such Company and Laurus have agreed that the fees
and obligations set forth in this Section and in this Agreement would constitute
fair and appropriate liquidated damages in the event of any such termination.
The parties hereto each hereby agree that the exercise by any party hereto of
any right granted to it or the exercise by any party hereto of any remedy
available to it (including, without limitation, the issuance of a notice of
redemption, a borrowing request and/or a notice of default), in each case,
hereunder or under any Ancillary Agreement which has been publicly filed with
the SEC shall not constitute confidential information and no party shall have
any duty to the other party to maintain such information as confidential, except
for the portions of such publicly filed documents that are subject to
confidential treatment request made by the Companies to the SEC.
21. Waivers. (a) To the full extent permitted by applicable law, each
Company hereby waives (a) presentment, demand and protest, and notice of
presentment, dishonor, intent to accelerate, acceleration, protest, default,
nonpayment, maturity, release, compromise, settlement, extension or renewal of
35
any or all of this Agreement and the Ancillary Agreements or any other notes,
commercial paper, Accounts, contracts, Documents, Instruments, Chattel Paper and
guaranties at any time held by Laurus on which such Company may in any way be
liable, and hereby ratifies and confirms whatever Laurus may do in this regard;
(b) all rights to notice and a hearing prior to Laurus' taking possession or
control of, or to Laurus' replevy, attachment or levy upon, any Collateral or
any bond or security that might be required by any court prior to allowing
Laurus to exercise any of its remedies; and (c) the benefit of all valuation,
appraisal and exemption laws. Each Company acknowledges that it has been advised
by counsel of its choices and decisions with respect to this Agreement, the
Ancillary Agreements and the transactions evidenced hereby and thereby.
(b) Each of the undersigned consents and agrees that, without notice to or
by the undersigned and without affecting or impairing in any way the obligations
or liability of the undersigned hereunder, Laurus may, from time to time,
exercise any right or remedy it may have with respect to any or all of the
Obligations or any property securing any or all of the Obligations or any
guaranty thereof, including without limitation, judicial foreclosure,
nonjudicial foreclosure, exercise of a power of sale, and taking a deed,
assignment or transfer in lieu of foreclosure as to any such property, and the
undersigned each expressly waives any defense based upon the exercise of any
such right or remedy, notwithstanding the effect thereof upon any of the
undersigned's rights, including without limitation, any destruction of the
undersigned's right of subrogation against any Company and any destruction of
the undersigned's right of contribution or other right against any other
guarantor of any or all of the Obligations or against any other person, whether
by operation of Sections 580a, 580d or 726 of the California Code of Civil
Procedure, or any comparable provisions of the laws of any other jurisdiction,
or any other statutes or rules of law now or hereafter in effect, or otherwise.
The undersigned hereby waive and relinquish all rights and remedies accorded by
applicable law to sureties or guarantors including, without limitation: (i) any
right to require Laurus to proceed against any of the undersigned or any other
person or to proceed against or exhaust any security held by Laurus at any time
or to pursue any other remedy in Laurus' power before proceeding against any of
the undersigned; (ii) the defense of the statute of limitations in any action
hereunder or in any action for the collection or performance of any of the
Obligations; (iii) demand, presentment, protest and notice of any kind
including, without limitation, notice of the existence, creation or incurring of
any new or additional indebtedness or obligation or of any action or non-action
on the part of any of the undersigned, Laurus or on the part of any other person
under this or any other instrument in connection with any obligation or evidence
of indebtedness held by Laurus as collateral or in connection with the
Obligations; (iv) any defense based upon any statute or rule of law which
provides that the obligation of a surety must be neither larger in amount nor in
other respects more burdensome than that of the principal; and (v) any duty on
the part of Laurus to disclose to the undersigned any facts Laurus may now or
hereafter know about any Company, regardless of whether Laurus has reason to
believe that any such facts materially increase the risk beyond that which any
of the undersigned intends to assume, or has reason to believe that such facts
are unknown to any of the undersigned, or has a reasonable opportunity to
communicate such facts to any of the undersigned, because the undersigned
acknowledges that they are fully responsible for being and keeping informed of
the financial condition of any Company and of all circumstances bearing on the
risk of nonpayment of any obligations of them. Without limiting the generality
of the foregoing, the undersigned hereby expressly waive any and all benefits
which might otherwise be available to them under California Civil Code Sections
2809, 2810, 2819, 2839, 2845 through 2847, 2849, 2850, 2855 and 3433, and
California Code of Civil Procedure Sections 580a, 580b, 580d and 726. Further,
to the fullest extent permitted by applicable law, including, but not limited
to, Section 2856 of the California Civil Code, each of the undersigned hereby
waives all of the following: (1) any and all rights of subrogation,
37
reimbursement, indemnification and contribution and any other rights and
defenses that are or may become available to the undersigned by reason of
Sections 2787 to 2855, inclusive, of the California Civil Code; (2) any and all
rights or defenses the undersigned may have in respect of its obligations as a
surety by reason of any election of remedies by Laurus; and (3) any and all
rights and defenses that it may have because the Obligations are secured by real
property. This means, among other things: (a) Laurus may collect from and/or
pursue its rights against any of the undersigned without first foreclosing on
any real or personal property collateral pledged by any Company or any other
guarantor; and (b) if Laurus forecloses on any real property collateral pledged
by any Company or any other guarantor: (i) the amount of the Obligations may be
reduced only by the price for which that collateral is sold at the foreclosure
sale, even if the collateral is worth more than the sale price; and (ii) Laurus
may collect from and/or pursue its rights against any of the undersigned even if
Laurus, by foreclosing on such real property collateral, has destroyed any right
any of the undersigned may have to collect from any Company or such other
guarantor. This is an unconditional and irrevocable waiver of any rights and
defenses the undersigned may have because the Obligations are secured by real
property. These rights and defenses include, but are not limited to, any rights
or defenses based upon Section 580a, 580b, 580d, or 726 of the California Code
of Civil Procedure.
22. Expenses. The Companies shall jointly and severally pay all of Laurus'
out-of-pocket costs and expenses, including reasonable fees and disbursements of
in-house or outside counsel and appraisers, in connection with the preparation,
execution and delivery of this Agreement and the Ancillary Agreements, and in
connection with the prosecution or defense of any action, contest, dispute, suit
or proceeding concerning any matter in any way arising out of, related to or
connected with this Agreement or any Ancillary Agreement; provided that legal
fees incurred by in-house counsel in connection with the preparation, execution
and delivery of this Agreement and the Ancillary Agreements shall be subject to
the limitation set forth in Section 5(b)(iv). The Companies shall also jointly
and severally pay all of Laurus' reasonable fees, charges, out-of-pocket costs
and expenses, including fees and disbursements of counsel and appraisers, in
connection with (a) the preparation, execution and delivery of any waiver, any
amendment thereto or consent proposed or executed in connection with the
transactions contemplated by this Agreement or the Ancillary Agreements, (b)
Laurus' obtaining performance of the Obligations under this Agreement and any
Ancillary Agreements, including, but not limited to, the enforcement or defense
of Laurus' security interests, assignments of rights and Liens hereunder as
valid perfected security interests, (c) any attempt to inspect, verify, protect,
collect, sell, liquidate or otherwise dispose of any Collateral, (d) any
appraisals or re-appraisals of any property (real or personal) pledged to Laurus
by any Company or any of its Subsidiaries as Collateral for, or any other Person
as security for, the Obligations hereunder and (e) any consultations in
connection with any of the foregoing. The Companies shall also jointly and
severally pay Laurus' customary bank charges for all bank services (including
wire transfers) performed or caused to be performed by Laurus for any Company or
any of its Subsidiaries at any Company's or such Subsidiary's request or in
connection with any Company's loan account with Laurus. All such costs and
expenses together with all filing, recording and search fees, taxes and interest
payable by the Companies to Laurus shall be payable on demand and shall be
secured by the Collateral. If any tax by any Governmental Authority is or may be
37
imposed on or as a result of any transaction between any Company and/or any
Subsidiary thereof, on the one hand, and Laurus on the other hand, which Laurus
is or may be required to withhold or pay, the Companies hereby jointly and
severally indemnifies and holds Laurus harmless in respect of such taxes, and
the Companies will repay to Laurus the amount of any such taxes which shall be
charged to the Companies' account; and until the Companies shall furnish Laurus
with indemnity therefor (or supply Laurus with evidence satisfactory to it that
due provision for the payment thereof has been made), Laurus may hold without
interest any balance standing to each Company's credit and Laurus shall retain
its Liens in any and all Collateral.
23. Assignment By Laurus. Laurus may assign any or all of the Obligations
together with any or all of the security therefor to any Person and any such
assignee shall succeed to all of Laurus' rights with respect thereto; provided
that Laurus shall not be permitted to effect any such assignment to a competitor
of any Company unless an Event of Default has occurred and is continuing. Upon
such transfer, Laurus shall be released from all responsibility for the
Collateral to the extent same is assigned to any transferee. Laurus may from
time to time sell or otherwise grant participations in any of the Obligations
and the holder of any such participation shall, subject to the terms of any
agreement between Laurus and such holder, be entitled to the same benefits as
Laurus with respect to any security for the Obligations in which such holder is
a participant. Each Company agrees that each such holder may exercise any and
all rights of banker's lien, set-off and counterclaim with respect to its
participation in the Obligations as fully as though such Company were directly
indebted to such holder in the amount of such participation.
24. No Waiver; Cumulative Remedies. Failure by Laurus to exercise any
right, remedy or option under this Agreement, any Ancillary Agreement or any
supplement hereto or thereto or any other agreement between or among any Company
and Laurus or delay by Laurus in exercising the same, will not operate as a
waiver; no waiver by Laurus will be effective unless it is in writing and then
only to the extent specifically stated. Laurus' rights and remedies under this
Agreement and the Ancillary Agreements will be cumulative and not exclusive of
any other right or remedy which Laurus may have.
25. Application of Payments. Each Company irrevocably waives the right to
direct the application of any and all payments at any time or times hereafter
received by Laurus from or on such Company's behalf and each Company hereby
irrevocably agrees that Laurus shall have the continuing exclusive right to
apply and reapply any and all payments received at any time or times hereafter
against the Obligations hereunder in such manner as Laurus may deem advisable
notwithstanding any entry by Laurus upon any of Laurus' books and records.
26. Indemnity. Each Company hereby jointly and severally indemnify and hold
Laurus, and its respective affiliates, employees, attorneys and agents (each, an
"Indemnified Person"), harmless from and against any and all suits, actions,
proceedings, claims, damages, losses, liabilities and expenses of any kind or
nature whatsoever (including attorneys' fees and disbursements and other costs
of investigation or defense, including those incurred upon any appeal) which may
be instituted or asserted against or incurred by any such Indemnified Person as
the result of credit having been extended, suspended or terminated under this
Agreement or any of the Ancillary Agreements or with respect to the execution,
delivery, enforcement, performance and administration of, or in any other way
arising out of or relating to, this Agreement, the Ancillary Agreements or any
other documents or transactions contemplated by or referred to herein or therein
38
and any actions or failures to act with respect to any of the foregoing, except
to the extent that any such indemnified liability is finally determined by a
court of competent jurisdiction to have resulted solely from such Indemnified
Person's gross negligence or willful misconduct. In addition, each Company
hereby indemnifies and saves Laurus harmless from any claim, cost, expense,
liability, obligation, loss or damage (including reasonable legal fees) of any
nature, incurred by or imposed upon Laurus which results, arises out of or is
based upon: (i) any misrepresentation by any Company or breach of any warranty
by any Company in this Agreement or any Ancillary Agreement or any agreement
between any Company and Laurus relating hereto or thereto; or (ii) any breach or
default in performance by the Companies of any covenant or undertaking to be
performed by the Companies hereunder or under any Ancillary Agreement, or any
other agreement entered into by any Company and Laurus relating hereto or
thereto or (iii) (a) the violation of any local, state or federal law, rule or
regulation pertaining to environmental regulation, contamination or cleanup
(collectively, "Environmental Laws"), including without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42
U.S.C. ss.9601 et seq. and 40 CFR ss.302.1 et seq.), the Resource Conservation
and Recovery Act of 1976 (42 U.S.C. ss.6901 et seq.), the Federal Water
Pollution Control Act (33 U.S.C. ss.1251 et seq., and 40 CFR ss.116.1 et seq.),
the Hazardous Materials Transportation Act (49 U.S.C. ss.1801 et seq.) and the
regulations promulgated pursuant to said laws, all as amended and relating to or
affecting any Company and/or any Company's properties, whether or not caused by
or within the control of Laurus and/or (b) the presence, release or threat of
release of any hazardous, toxic or harmful substances, wastes, materials,
pollutants or contaminants (including, without limitation, asbestos,
polychlorinated biphenyls, petroleum products, flammable explosives, radioactive
materials, infectious substances or raw materials which include hazardous
constituents) or any other substances or raw materials which are included under
or regulated by Environmental Laws on, in, under or affecting all or any portion
of any property of any Company or any surrounding areas, regardless of whether
or not caused by or within the control of Laurus. NO INDEMNIFIED PERSON SHALL BE
RESPONSIBLE OR LIABLE TO ANY COMPANY OR TO ANY OTHER PARTY OR TO ANY SUCCESSOR,
ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS
DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR
CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN
EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR ANY ANCILLARY
AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR
THEREUNDER.
27. Revival. The Companies further agree that to the extent any Company
makes a payment or payments to Laurus, which payment or payments or any part
thereof are subsequently invalidated, declared to be fraudulent or preferential,
set aside and/or required to be repaid to a trustee, receiver or any other party
under any bankruptcy act, state or federal law, common law or equitable cause,
then, to the extent of such payment or repayment, the obligation or part thereof
intended to be satisfied shall be revived and continued in full force and effect
as if said payment had not been made.
39
28. Borrowing Agency Provisions.
(a) Each Company hereby irrevocably designates Company Agent to be its
attorney and agent and in such capacity to borrow, sign and endorse notes, and
execute and deliver all instruments, documents, writings and further assurances
now or hereafter required hereunder, on behalf of such Company, and hereby
authorizes Laurus to pay over or credit all loan proceeds hereunder in
accordance with the request of Company Agent.
(b) The handling of this credit facility as a co-borrowing facility with a
borrowing agent in the manner set forth in this Agreement is solely as an
accommodation to the Companies and at their request. Laurus shall not incur any
liability to any Company as a result thereof. To induce Laurus to do so and in
consideration thereof, each Company hereby indemnifies Laurus and holds Laurus
harmless from and against any and all liabilities, expenses, losses, damages and
claims of damage or injury asserted against Laurus by any Person arising from or
incurred by reason of the handling of the financing arrangements of the
Companies as provided herein, reliance by Laurus on any request or instruction
from Company Agent or any other action taken by Laurus with respect to this
Paragraph 28.
(c) All Obligations shall be joint and several, and the Companies shall
make payment upon the maturity of the Obligations by acceleration or otherwise,
and such obligation and liability on the part of the Companies shall in no way
be affected by any extensions, renewals and forbearance granted by Laurus to any
Company, failure of Laurus to give any Company notice of borrowing or any other
notice, any failure of Laurus to pursue to preserve its rights against any
Company, the release by Laurus of any Collateral now or thereafter acquired from
any Company, and such agreement by any Company to pay upon any notice issued
pursuant thereto is unconditional and unaffected by prior recourse by Laurus to
any Company or any Collateral for such Company's Obligations or the lack
thereof.
(d) Each Company expressly waives any and all rights of subrogation,
reimbursement, indemnity, exoneration, contribution or any other claim which
such Company may now or hereafter have against the other or other Person
directly or contingently liable for the Obligations, or against or with respect
to any other's property (including, without limitation, any property which is
Collateral for the Obligations), arising from the existence or performance of
this Agreement, until all Obligations have been indefeasibly paid in full and
this Agreement has been irrevocably terminated.
(e) Each Company represents and warrants to Laurus that (i) Companies have
one or more common shareholders, directors and officers, (ii) the businesses and
corporate activities of Companies are closely related to, and substantially
benefit, the business and corporate activities of Companies, (iii) the financial
and other operations of Companies are performed on a combined basis as if
Companies constituted a consolidated corporate group, (iv) Companies will
receive a substantial economic benefit from entering into this Agreement and
will receive a substantial economic benefit from the application of each Loan
hereunder, in each case, whether or not such amount is used directly by any
Company and (v) all requests for Loans hereunder by the Company Agent are for
the exclusive and indivisible benefit of the Companies as though, for purposes
of this Agreement, the Companies constituted a single entity.
40
29. Notices. Any notice or request hereunder may be given to any Company,
Company Agent or Laurus at the respective addresses set forth below or as may
hereafter be specified in a notice designated as a change of address under this
Section. Any notice or request hereunder shall be given by registered or
certified mail, return receipt requested, hand delivery, overnight mail or
telecopy (confirmed by mail). Notices and requests shall be, in the case of
those by hand delivery, deemed to have been given when delivered to any officer
of the party to whom it is addressed, in the case of those by mail or overnight
mail, deemed to have been given three (3) Business Days after the date when
deposited in the mail or with the overnight mail carrier, and, in the case of a
telecopy, when confirmed.
Notices shall be provided as follows:
If to Laurus: Laurus Master Fund, Ltd.
c/o Laurus Capital Management, LLC
000 Xxxxx Xxxxxx, 00xx Xx.
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxx X. Xxxxxx, Esq.
Telephone: (000) 000-0000
Telecopier: (000) 000-0000
If to any Company,
or Company Agent: General Environmental Management, Inc.
0000 Xxxxxx Xxx.
Xxxxx 000
Xxxxxx, XX 00000
Attention: Chief Financial Officer
Telephone: 000.000.0000
Facsimile: 909.444.8356
With a copy to: xx Xxxxxx, PC
-------------
000 Xxxxxx Xxxxxx
-----------------
Xxx Xxxxx, XX 00000
--------------------
Attention: Xxxxxxx Xxxxxxxxx
-----------------
Telephone: 000.000.0000
------------
Facsimile: 619.702.9401
------------
or such other address as may be designated in writing hereafter in accordance
with this Section 29 by such Person.
30. Governing Law, Jurisdiction and Waiver of Jury Trial.
(a) THIS AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW.
41
(b) EACH COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL
COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE
JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY COMPANY,
ON THE ONE HAND, AND LAURUS, ON THE OTHER HAND, PERTAINING TO THIS AGREEMENT OR
ANY OF THE ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO
THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS; PROVIDED, THAT LAURUS AND
EACH COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD
BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND
FURTHER PROVIDED, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO
PRECLUDE LAURUS FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER
JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY
OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT
ORDER IN FAVOR OF LAURUS. EACH COMPANY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE
TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH
COMPANY HEREBY WAIVES ANY OBJECTION THAT IT MAY HAVE BASED UPON LACK OF PERSONAL
JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. EACH COMPANY HEREBY WAIVES
PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH
ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER
PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO COMPANY AGENT
AT THE ADDRESS SET FORTH IN SECTION 29 AND THAT SERVICE SO MADE SHALL BE DEEMED
COMPLETED UPON THE EARLIER OF COMPANY AGENT'S ACTUAL RECEIPT THEREOF OR THREE
(3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.
(c) THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING
SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS
OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS
TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY
DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN LAURUS, AND/OR
ANY COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, ANY
ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.
31. Limitation of Liability. Each Company acknowledges and understands that
in order to assure repayment of the Obligations hereunder Laurus may be required
to exercise any and all of Laurus' rights and remedies hereunder and agrees
that, except as limited by applicable law, neither Laurus nor any of Laurus'
agents shall be liable for acts taken or omissions made in connection herewith
or therewith except for actual bad faith.
32. Entire Understanding; Maximum Interest. This Agreement and the
Ancillary Agreements contain the entire understanding among each Company and
Laurus as to the subject matter hereof and thereof and any promises,
42
representations, warranties or guarantees not herein contained shall have no
force and effect unless in writing, signed by each Company's and Laurus'
respective officers. Neither this Agreement, the Ancillary Agreements, nor any
portion or provisions thereof may be changed, modified, amended, waived,
supplemented, discharged, cancelled or terminated orally or by any course of
dealing, or in any manner other than by an agreement in writing, signed by the
party to be charged. Nothing contained in this Agreement, any Ancillary
Agreement or in any document referred to herein or delivered in connection
herewith shall be deemed to establish or require the payment of a rate of
interest or other charges in excess of the maximum rate permitted by applicable
law. In the event that the rate of interest or dividends required to be paid or
other charges hereunder exceed the maximum rate permitted by such law, any
payments in excess of such maximum shall be credited against amounts owed by the
Companies to Laurus and thus refunded to the Companies.
33. Severability. Wherever possible each provision of this Agreement or the
Ancillary Agreements shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement or the
Ancillary Agreements shall be prohibited by or invalid under applicable law such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
thereof.
34. Survival. The representations, warranties, covenants and agreements
made herein shall survive any investigation made by Laurus and the closing of
the transactions contemplated hereby to the extent provided therein. All
statements as to factual matters contained in any certificate or other
instrument delivered by or on behalf of the Companies pursuant hereto in
connection with the transactions contemplated hereby shall be deemed to be
representations and warranties by the Companies hereunder solely as of the date
of such certificate or instrument. All indemnities set forth herein shall
survive the execution, delivery and termination of this Agreement and the
Ancillary Agreements and the making and repaying of the Obligations.
35. Captions. All captions are and shall be without substantive meaning or
content of any kind whatsoever.
36. Counterparts; Telecopier Signatures. This Agreement may be executed in
one or more counterparts, each of which shall constitute an original and all of
which taken together shall constitute one and the same agreement. Any signature
delivered by a party via telecopier transmission shall be deemed to be any
original signature hereto.
37. Construction. The parties acknowledge that each party and its counsel
have reviewed this Agreement and that the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party shall
not be employed in the interpretation of this Agreement or any amendments,
schedules or exhibits thereto.
38. Publicity. Each Company hereby authorizes Laurus to make appropriate
announcements of the financial arrangement entered into by and among each
Company and Laurus, including, without limitation, announcements which are
43
commonly known as tombstones, in such publications and to such selected parties
as Laurus shall in its sole and absolute discretion deem appropriate, or as
required by applicable law.
39. Joinder. It is understood and agreed that any Person that desires to
become a Company hereunder, or is required to execute a counterpart of this
Agreement after the date hereof pursuant to the requirements of this Agreement
or any Ancillary Agreement, shall become a Company hereunder by (a) executing a
Joinder Agreement in form and substance satisfactory to Laurus, (b) delivering
supplements to such exhibits and annexes to this Agreement and the Ancillary
Agreements as Laurus shall reasonably request and (c) taking all actions as
specified in this Agreement as would have been taken by such Company had it been
an original party to this Agreement, in each case with all documents required
above to be delivered to Laurus and with all documents and actions required
above to be taken to the reasonable satisfaction of Laurus.
40. Legends. The Securities shall bear legends as follows;
(a) The Secured Convertible Term Note shall bear substantially the
following legend:
"THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF
THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS.
THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF
THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS NOTE OR SUCH SHARES UNDER SAID ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO GENERAL ENVIRONMENTAL MANAGEMENT,
INC., A NEVADA CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED."
(b) The Secured Non-Convertible Revolving Note shall bear substantially the
following legend:
"THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS.
THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS NOTE OR SUCH SHARES UNDER SAID ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO GENERAL ENVIRONMENTAL MANAGEMENT,
INC., A NEVADA CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED."
44
(c) Any shares of Common Stock issued pursuant to conversion of the Secured
Convertible Term Note or exercise of the Warrants, shall bear a legend which
shall be in substantially the following form until such shares are covered by an
effective registration statement filed with the SEC:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY APPLICABLE, STATE SECURITIES LAWS. THESE SHARES MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES
ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO GENERAL ENVIRONMENTAL
MANAGEMENT, INC., A NEVADA CORPORATION THAT SUCH REGISTRATION
IS NOT REQUIRED."
(d) The Warrants shall bear substantially the following legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS.
THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF
THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS WARRANT OR THE UNDERLYING SHARES OF
COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES
LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
GENERAL ENVIRONMENTAL MANAGEMENT, INC., A NEVADA CORPORATION
THAT SUCH REGISTRATION IS NOT REQUIRED."
[Balance of page intentionally left blank; signature page follows.]
45
IN WITNESS WHEREOF, the parties have executed this Security
Agreement as of the date first written above.
GENERAL ENVIRONMENTAL MANAGEMENT, INC., a Nevada corporation
By:
------------------------------------------------------
Name:Xxxxxxx X. Xxxxxx
Title: Chief Executive Officer
GENERAL ENVIRONMENTAL MANAGEMENT, INC., a Delaware corporation
By:
------------------------------------------------------
Name: Xxxxxxx X. Xxxxxx
Title: Chief Executive Officer
GENERAL ENVIRONMENTAL MANAGEMENT OF RANCHO XXXXXXX, LLC, INC.,
a California limited liability company
By:
------------------------------------------------------
Name: Xxxxxxx X. Xxxxxx
Title: Manager
LAURUS MASTER FUND, LTD.
By:
------------------------------------------------------
Name:
----------------------------------------------------
Title:
---------------------------------------------------
46
Annex A - Definitions
"Account Debtor" means any Person who is or may be obligated
with respect to, or on account of, an Account.
"Accountants" has the meaning given to such term in Section
11(a).
"Accounts" means all "accounts", as such term is defined in
the UCC, now owned or hereafter acquired by any Person, including: (a) all
accounts receivable, other receivables, book debts and other forms of
obligations (other than forms of obligations evidenced by Chattel Paper or
Instruments) (including any such obligations that may be characterized as an
account or contract right under the UCC); (b) all of such Person's rights in, to
and under all purchase orders or receipts for goods or services; (c) all of such
Person's rights to any goods represented by any of the foregoing (including
unpaid sellers' rights of rescission, replevin, reclamation and stoppage in
transit and rights to returned, reclaimed or repossessed goods); (d) all rights
to payment due to such Person for Goods or other property sold, leased,
licensed, assigned or otherwise disposed of, for a policy of insurance issued or
to be issued, for a secondary obligation incurred or to be incurred, for energy
provided or to be provided, for the use or hire of a vessel under a charter or
other contract, arising out of the use of a credit card or charge card, or for
services rendered or to be rendered by such Person or in connection with any
other transaction (whether or not yet earned by performance on the part of such
Person); and (e) all collateral security of any kind given by any Account Debtor
or any other Person with respect to any of the foregoing.
"Accounts Availability" means up to ninety percent (90%) of
the net face amount of Eligible Accounts.
"Affiliate" means, with respect to any Person, (a) any other
Person (other than a Subsidiary) which, directly or indirectly, is in control
of, is controlled by, or is under common control with such Person or (b) any
other Person who is a director or officer (i) of such Person, (ii) of any
Subsidiary of such Person or (iii) of any Person described in clause (a) above.
For the purposes of this definition, control of a Person shall mean the power
(direct or indirect) to direct or cause the direction of the management and
policies of such Person whether by contract or otherwise.
"Ancillary Agreements" means the Notes, the Warrants, the
Registration Rights Agreements, the Subordination Agreement, each Security
Document and all other agreements, instruments, documents, mortgages, pledges,
powers of attorney, consents, assignments, contracts, notices, security
agreements, trust agreements and guarantees whether heretofore, concurrently, or
hereafter executed by or on behalf of any Company, any of its Subsidiaries or
any other Person or delivered to Laurus, relating to this Agreement or to the
transactions contemplated by this Agreement or otherwise relating to the
relationship between or among any Company and Laurus, as each of the same may be
amended, supplemented, restated or otherwise modified from time to time.
"Balance Sheet Date" has the meaning given such term in
Section 12(f)(ii).
1
"Books and Records" means all books, records, board minutes,
contracts, licenses, insurance policies, environmental audits, business plans,
files, computer files, computer discs and other data and software storage and
media devices, accounting books and records, financial statements (actual and
pro forma), filings with Governmental Authorities and any and all records and
instruments relating to the Collateral or otherwise necessary or helpful in the
collection thereof or the realization thereupon.
"Business Day" means a day on which Laurus is open for
business and that is not a Saturday, a Sunday or other day on which banks are
required or permitted to be closed in the State of New York.
"Capital Availability Amount" means $5,000,000.
"Charter" has the meaning given such term in Section
12(c)(iv).
"Chattel Paper" means all "chattel paper," as such term is
defined in the UCC, including electronic chattel paper, now owned or hereafter
acquired by any Person.
"Closing Date" means the date on which any Company shall first
receive proceeds of the initial Loans or the date hereof, if no Loan is made
under the facility on the date hereof.
"Code" has the meaning given such term in Section 15(i).
"Collateral" means all of each Company's property and assets,
whether real or personal, tangible or intangible, and whether now owned or
hereafter acquired, or in which it now has or at any time in the future may
acquire any right, title or interests including all of the following property in
which it now has or at any time in the future may acquire any right, title or
interest:
(a) all Inventory;
(b) all Equipment;
(c) all Fixtures;
(d) all Goods;
(e) all General Intangibles;
(f) all Accounts;
(g) all Deposit Accounts, other bank accounts and all funds on deposit
therein;
(h) all Investment Property;
(i) all Stock;
(j) all Chattel Paper;
2
(k) all Letter-of-Credit Rights;
(l) all Instruments;
(m) all commercial tort claims set forth on Schedule 1(A);
(n) all Books and Records;
(o) all Intellectual Property;
(p) all Supporting Obligations including letters of credit and
guarantees issued in support of Accounts, Chattel Paper, General
Intangibles and Investment Property;
(q) (i) all money, cash and cash equivalents and (ii) all cash held as
cash collateral to the extent not otherwise constituting Collateral, all
other cash or property at any time on deposit with or held by Laurus for
the account of any Company (whether for safekeeping, custody, pledge,
transmission or otherwise); and
(r) all products and Proceeds of all or any of the foregoing, tort
claims and all claims and other rights to payment including (i) insurance
claims against third parties for loss of, damage to, or destruction of, the
foregoing Collateral and (ii) payments due or to become due under leases,
rentals and hires of any or all of the foregoing and Proceeds payable
under, or unearned premiums with respect to policies of insurance in
whatever form.
"Common Stock" means the shares of stock representing the
Parent's common equity interests.
"Company Agent" means General Environmental Management, Inc.,
a Nevada corporation.
"Contract Rate" has the meaning given such term in the
respective Note.
"Default" means any act or event that, with the giving of
notice or passage of time or both, would constitute an Event of Default.
"Deposit Accounts" means all "deposit accounts" as such term
is defined in the UCC, now or hereafter held in the name of any Person,
including, without limitation, the Lockboxes.
"Disclosure Controls" has the meaning given such term in
Section 12(f)(iv).
"Documents" means all "documents", as such term is defined in
the UCC, now owned or hereafter acquired by any Person, wherever located,
including all bills of lading, dock warrants, dock receipts, warehouse receipts,
and other documents of title, whether negotiable or non-negotiable.
"Eligible Accounts" means each Account of each Company which
conforms to the following criteria: (a) shipment of the merchandise or the
rendition of services has been completed; (b) no return, rejection or
3
repossession of the merchandise has occurred; (c) merchandise or services shall
not have been rejected or disputed by the Account Debtor and there shall not
have been asserted any offset, defense or counterclaim; (d) continues to be in
full conformity with the representations and warranties made by such Company to
Laurus with respect thereto; (e) Laurus is, and continues to be, satisfied with
the credit standing of the Account Debtor in relation to the amount of credit
extended; (f) there are no facts existing or threatened which are likely to
result in any adverse change in an Account Debtor's financial condition; (g) is
documented by an invoice in a form approved by Laurus and shall not be unpaid
more than ninety (90) days from invoice date; (h) not more than twenty-five
percent (25%) of the unpaid amount of invoices due from such Account Debtor
remains unpaid more than ninety (90) days from invoice date; (i) is not
evidenced by chattel paper or an instrument of any kind with respect to or in
payment of the Account unless such instrument is duly endorsed to and in
possession of Laurus or represents a check in payment of an Account; (j) the
Account Debtor is located in the United States; provided, however, Laurus may,
from time to time, in the exercise of its sole discretion and based upon
satisfaction of certain conditions to be determined at such time by Laurus, deem
certain Accounts as Eligible Accounts notwithstanding that such Account is due
from an Account Debtor located outside of the United States; (k) Laurus has a
first priority perfected Lien in such Account and such Account is not subject to
any Lien other than Permitted Liens; (l) does not arise out of transactions with
any employee, officer, director, stockholder or Affiliate of any Company; (m) is
payable to such Company; (n) does not arise out of a xxxx and hold sale prior to
shipment and does not arise out of a sale to any Person to which such Company is
indebted; (o) is net of any returns, discounts, claims, credits and allowances;
(p) if the Account arises out of contracts between such Company, on the one
hand, and the United States, on the other hand, any state, or any department,
agency or instrumentality of any of them, such Company has so notified Laurus,
in writing, prior to the creation of such Account, and there has been compliance
with any governmental notice or approval requirements, including compliance with
the Federal Assignment of Claims Act; (q) is a good and valid account
representing an undisputed bona fide indebtedness incurred by the Account Debtor
therein named, for a fixed sum as set forth in the invoice relating thereto with
respect to an unconditional sale and delivery upon the stated terms of goods
sold by such Company or work, labor and/or services rendered by such Company;
(r) does not arise out of progress xxxxxxxx prior to completion of the order;
(s) the total unpaid Accounts from such Account Debtor does not exceed
twenty-five percent (25%) of all Eligible Accounts; (t) such Company's right to
payment is absolute and not contingent upon the fulfillment of any condition
whatsoever; (u) such Company is able to bring suit and enforce its remedies
against the Account Debtor through judicial process; (v) does not represent
interest payments, late or finance charges owing to such Company, and (w) is
otherwise satisfactory to Laurus as determined by Laurus in the exercise of its
sole discretion. In the event any Company requests that Laurus include within
Eligible Accounts certain Accounts of one or more of such Company's acquisition
targets, Laurus shall at the time of such request consider such inclusion, but
any such inclusion shall be at the sole option of Laurus and shall at all times
be subject to the execution and delivery to Laurus of all such documentation
(including, without limitation, guaranty and security documentation) as Laurus
may require in its sole discretion.
"Eligible Subsidiary" means each Subsidiary of the Parent set
forth on Exhibit A hereto, as the same may be updated from time to time with
Laurus' written consent.
4
"Equipment" means all "equipment" as such term is defined in
the UCC, now owned or hereafter acquired by any Person, wherever located,
including any and all machinery, apparatus, equipment, fittings, furniture,
Fixtures, motor vehicles and other tangible personal property (other than
Inventory) of every kind and description that may be now or hereafter used in
such Person's operations or that are owned by such Person or in which such
Person may have an interest, and all parts, accessories and accessions thereto
and substitute ons and replacements therefor.
"ERISA" has the meaning given such term in Section 12(bb).
"Event of Default" means the occurrence of any of the events
set forth in Section 19.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exchange Act Filings" means the Parent's filings under the
Exchange Act made prior to the date of this Agreement.
"Existing Indebtedness" means indebtedness of the Parent and
its Subsidiaries to Gibraltar Financial Corporation or any of its affiliates
or divisions.
"Financial Reporting Controls" has the meaning given such term
in Section 12(f)(v).
"Fixtures" means all "fixtures" as such term is defined in the
UCC, now owned or hereafter acquired by any Person.
"Formula Amount" has the meaning given such term in Section
2(a)(i).
"GAAP" means generally accepted accounting principles,
practices and procedures in effect from time to time in the United States of
America.
"General Intangibles" means all "general intangibles" as such
term is defined in the UCC, now owned or hereafter acquired by any Person
including all right, title and interest that such Person may now or hereafter
have in or under any contract, all Payment Intangibles, customer lists,
Licenses, Intellectual Property, interests in partnerships, joint ventures and
other business associations, permits, proprietary or confidential information,
inventions (whether or not patented or patentable), technical information,
procedures, designs, knowledge, know-how, Software, data bases, data, skill,
expertise, experience, processes, models, drawings, materials, Books and
Records, Goodwill (including the Goodwill associated with any Intellectual
Property), all rights and claims in or under insurance policies (including
insurance for fire, damage, loss, and casualty, whether covering personal
property, real property, tangible rights or intangible rights, all liability,
life, key-person, and business interruption insurance, and all unearned
premiums), uncertificated securities, choses in action, deposit accounts, rights
to receive tax refunds and other payments, rights to received dividends,
distributions, cash, Instruments and other property in respect of or in exchange
for pledged Stock and Investment Property, and rights of indemnification.
5
"Goods" means all "goods", as such term is defined in the UCC,
now owned or hereafter acquired by any Person, wherever located, including
embedded software to the extent included in "goods" as defined in the UCC,
manufactured homes, fixtures, standing timber that is cut and removed for sale
and unborn young of animals.
"Goodwill" means all goodwill, trade secrets, proprietary or
confidential information, technical information, procedures, formulae, quality
control standards, designs, operating and training manuals, customer lists, and
distribution agreements now owned or hereafter acquired by any Person.
"Governmental Authority" means any nation or government, any
state or other political subdivision thereof, and any agency, department or
other entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"Instruments" means all "instruments", as such term is defined
in the UCC, now owned or hereafter acquired by any Person, wherever located,
including all certificated securities and all promissory notes and other
evidences of indebtedness, other than instruments that constitute, or are a part
of a group of writings that constitute, Chattel Paper.
"Intellectual Property" means any and all patents, trademarks,
service marks, trade names, copyrights, trade secrets, Licenses, information and
other proprietary rights and processes.
"Inventory" means all "inventory", as such term is defined in
the UCC, now owned or hereafter acquired by any Person, wherever located,
including all inventory, merchandise, goods and other personal property that are
held by or on behalf of such Person for sale or lease or are furnished or are to
be furnished under a contract of service or that constitute raw materials, work
in process, finished goods, returned goods, or materials or supplies of any
kind, nature or description used or consumed or to be used or consumed in such
Person's business or in the processing, production, packaging, promotion,
delivery or shipping of the same, including all supplies and embedded software.
"Investment Property" means all "investment property", as such
term is defined in the UCC, now owned or hereafter acquired by any Person,
wherever located.
"Letter-of-Credit Rights" means "letter-of-credit rights" as
such term is defined in the UCC, now owned or hereafter acquired by any Person,
including rights to payment or performance under a letter of credit, whether or
not such Person, as beneficiary, has demanded or is entitled to demand payment
or performance.
"License" means any rights under any written agreement now or
hereafter acquired by any Person to use any trademark, trademark registration,
copyright, copyright registration or invention for which a patent is in
existence or other license of rights or interests now held or hereafter acquired
by any Person.
"Lien" means any mortgage, security deed, deed of trust,
pledge, hypothecation, assignment, security interest, lien (whether statutory or
otherwise), charge, claim or encumbrance, or preference, priority or other
security agreement or preferential arrangement held or asserted in respect of
6
any asset of any kind or nature whatsoever including any conditional sale or
other title retention agreement, any lease having substantially the same
economic effect as any of the foregoing, and the filing of, or agreement to
give, any financing statement under the UCC or comparable law of any
jurisdiction.
"Loans" means the Revolving Loans and the Term Loan and all
other extensions of credit hereunder and under any Ancillary Agreement.
"Lockboxes" has the meaning given such term in Section 8(a).
"Material Adverse Effect" means a material adverse effect on
(a) the business, assets, liabilities, condition (financial or otherwise),
properties, operations or prospects of any Company or any of its Subsidiaries
(taken individually and as a whole), (b) any Company's or any of its
Subsidiary's ability to pay or perform the Obligations in accordance with the
terms hereof or any Ancillary Agreement, (c) the value of the Collateral, the
Liens on the Collateral or the priority of any such Lien or (d) the practical
realization of the benefits of Laurus' rights and remedies under this Agreement
and the Ancillary Agreements.
"NASD" has the meaning given such term in Section 13(b).
"Note Shares" has the meaning given such term in Section
12(a).
"Notes" means the Secured Non-Convertible Revolving Note and
the Secured Convertible Term Note made by Companies in favor of Laurus in
connection with the transactions contemplated hereby, as each of the same may be
amended, supplemented, restated and/or otherwise modified from time to time.
"Obligations" means all Loans, all advances, debts,
liabilities, obligations, covenants and duties owing by each Company and each of
its Subsidiaries to Laurus (or any corporation that directly or indirectly
controls or is controlled by or is under common control with Laurus) of every
kind and description (whether or not evidenced by any note or other instrument
and whether or not for the payment of money or the performance or
non-performance of any act), direct or indirect, absolute or contingent, due or
to become due, contractual or tortious, liquidated or unliquidated, whether
existing by operation of law or otherwise now existing or hereafter arising
including any debt, liability or obligation owing from any Company and/or each
of its Subsidiaries to others which Laurus may have obtained by assignment or
otherwise and further including all interest (including interest accruing at the
then applicable rate provided in this Agreement after the maturity of the Loans
and interest accruing at the then applicable rate provided in this Agreement
after the filing of any petition in bankruptcy, or the commencement of any
insolvency, reorganization or like proceeding, whether or not a claim for
post-filing or post-petition interest is allowed or allowable in such
proceeding), charges or any other payments each Company and each of its
Subsidiaries is required to make by law or otherwise arising under or as a
result of this Agreement, the Ancillary Agreements or otherwise, together with
all reasonable expenses and reasonable attorneys' fees chargeable to the
Companies' or any of their Subsidiaries' accounts or incurred by Laurus in
connection therewith.
7
"Payment Intangibles" means all "payment intangibles" as such
term is defined in the UCC, now owned or hereafter acquired by any Person,
including, a General Intangible under which the Account Debtor's principal
obligation is a monetary obligation.
"Permitted Liens" means (a) Liens of carriers, warehousemen,
artisans, bailees, mechanics and materialmen incurred in the ordinary course of
business securing sums not overdue; (b) Liens incurred in the ordinary course of
business in connection with worker's compensation, unemployment insurance or
other forms of governmental insurance or benefits, relating to employees,
securing sums (i) not overdue or (ii) being diligently contested in good faith
provided that adequate reserves with respect thereto are maintained on the books
of the Companies and their Subsidiaries, as applicable, in conformity with GAAP;
(c) Liens in favor of Laurus; (d) Liens for taxes (i) not yet due or (ii) being
diligently contested in good faith by appropriate proceedings, provided that
adequate reserves with respect thereto are maintained on the books of the
Companies and their Subsidiaries, as applicable, in conformity with GAAP; and
which have no effect on the priority of Liens in favor of Laurus or the value of
the assets in which Laurus has a Lien; (e) Purchase Money Liens securing
Purchase Money Indebtedness to the extent permitted in this Agreement and (f)
Liens specified on Schedule 2 hereto.
"Person" means any individual, sole proprietorship,
partnership, limited liability partnership, joint venture, trust, unincorporated
organization, association, corporation, limited liability company, institution,
public benefit corporation, entity or government (whether federal, state,
county, city, municipal or otherwise, including any instrumentality, division,
agency, body or department thereof), and shall include such Person's successors
and assigns.
"Principal Market" means the NASD Over The Counter Bulletin
Board, NASDAQ Capital Market, NASDAQ National Market System, American Stock
Exchange or New York Stock Exchange (whichever of the foregoing is at the time
the principal trading exchange or market for the Common Stock).
"Proceeds" means "proceeds", as such term is defined in the
UCC and, in any event, shall include: (a) any and all proceeds of any insurance,
indemnity, warranty or guaranty payable to any Company or any other Person from
time to time with respect to any Collateral; (b) any and all payments (in any
form whatsoever) made or due and payable to any Company from time to time in
connection with any requisition, confiscation, condemnation, seizure or
forfeiture of any Collateral by any governmental body, governmental authority,
bureau or agency (or any person acting under color of governmental authority);
(c) any claim of any Company against third parties (i) for past, present or
future infringement of any Intellectual Property or (ii) for past, present or
future infringement or dilution of any trademark or trademark license or for
injury to the goodwill associated with any trademark, trademark registration or
trademark licensed under any trademark License; (d) any recoveries by any
Company against third parties with respect to any litigation or dispute
concerning any Collateral, including claims arising out of the loss or
nonconformity of, interference with the use of, defects in, or infringement of
rights in, or damage to, Collateral; (e) all amounts collected on, or
distributed on account of, other Collateral, including dividends, interest,
distributions and Instruments with respect to Investment Property and pledged
Stock; and (f) any and all other amounts, rights to payment or other property
acquired upon the sale, lease, license, exchange or other disposition of
Collateral and all rights arising out of Collateral.
8
"Purchase Money Indebtedness" means (a) any indebtedness
incurred for the payment of all or any part of the purchase price of any fixed
asset, including indebtedness under capitalized leases, (b) any indebtedness
incurred for the sole purpose of financing or refinancing all or any part of the
purchase price of any fixed asset, and (c) any renewals, extensions or
refinancings thereof (but not any increases in the principal amounts thereof
outstanding at that time).
"Purchase Money Lien" means any Lien upon any fixed assets
that secures the Purchase Money Indebtedness related thereto but only if such
Lien shall at all times be confined solely to the asset the purchase price of
which was financed or refinanced through the incurrence of the Purchase Money
Indebtedness secured by such Lien and only if such Lien secures only such
Purchase Money Indebtedness.
"Registration Rights Agreements" means that certain
Registration Rights Agreement dated as of the Closing Date by and between the
Parent and Laurus and each other registration rights agreement by and between
the Parent and Laurus, as each of the same may be amended, modified and
supplemented from time to time.
"Revolving Loans" shall have the meaning given such term in
Section 2(a)(i).
"SEC" means the Securities and Exchange Commission.
"SEC Reports" has the meaning given such term in Section
12(u).
"Secured Non-Convertible Revolving Note" means that certain
Secured Non-Convertible Revolving Note dated as of the Closing Date made by the
Companies in favor of Laurus in the original face amount of Five Million Dollars
($5,000,000), as the same may be amended, supplemented, restated and/or
otherwise modified from time to time.
"Secured Convertible Term Note" means that certain Secured
Convertible Term Note dated as of the Closing Date made by the Companies in
favor of Laurus in the original face amount of Two Million Dollars ($2,000,000),
as the same may be amended, supplemented, restated and/or otherwise modified
from time to time.
"Securities" means the Notes and the Warrants and the shares
of Common Stock that may be issued pursuant to conversion of the Secured
Convertible Term Note in whole or in part exercise of such Warrants.
"Securities Act" has the meaning given such term in Section
12(r).
"Security Documents" means all security agreements, mortgages,
cash collateral deposit letters, pledges and other agreements which are executed
by any Company or any of its Subsidiaries in favor of Laurus.
"Software" means all "software" as such term is defined in the
UCC, now owned or hereafter acquired by any Person, including all computer
programs and all supporting information provided in connection with a
transaction related to any program.
9
"Stock" means all certificated and uncertificated shares,
options, warrants, membership interests, general or limited partnership
interests, participation or other equivalents (regardless of how designated) of
or in a corporation, partnership, limited liability company or equivalent entity
whether voting or nonvoting, including common stock, preferred stock, or any
other "equity security" (as such term is defined in Rule 3a11-1 of the General
Rules and Regulations promulgated by the SEC under the Securities Exchange Act
of 1934).
"Subordinated Debt Documentation" shall mean all documentation
evidencing and/or related to indebtedness of the Parent and/or any of its
Subsidiaries to General Pacific Partners LLC, Xxxx Xxxxxxx, Xxxxxxx Xxxxxxxxxx,
Xxxx Xxxxxxxxxx, Xxxx Xxxxxxx, Xxxxxxxxx Environmental Services and/or Firestone
Associates.
"Subsidiary" means, with respect to any Person, (i) any other
Person whose shares of stock or other ownership interests having ordinary voting
power (other than stock or other ownership interests having such power only by
reason of the happening of a contingency) to elect a majority of the directors
or other governing body of such other Person, are owned, directly or indirectly,
by such Person or (ii) any other Person in which such Person owns, directly or
indirectly, more than 50% of the equity interests at such time.
"Supporting Obligations" means all "supporting obligations" as
such term is defined in the UCC.
"Term" means the Closing Date through the close of business on
the day immediately preceding the third anniversary of the Closing Date, subject
to acceleration at the option of Laurus upon the occurrence of an Event of
Default hereunder or other termination hereunder.
"Term Loan" has the meaning given such term in Section
2(a)(c).
"Total Investment Amount" means Seven Million Dollars
($7,000,000).
"UCC" means the Uniform Commercial Code as the same may, from
time to time be in effect in the State of New York; provided, that in the event
that, by reason of mandatory provisions of law, any or all of the attachment,
perfection or priority of, or remedies with respect to, Laurus' Lien on any
Collateral is governed by the Uniform Commercial Code as in effect in a
jurisdiction other than the State of New York, the term "UCC" shall mean the
Uniform Commercial Code as in effect in such other jurisdiction for purposes of
the provisions of this Agreement relating to such attachment, perfection,
priority or remedies and for purposes of definitions related to such provisions;
provided further, that to the extent that UCC is used to define any term herein
or in any Ancillary Agreement and such term is defined differently in different
Articles or Divisions of the UCC, the definition of such term contained in
Article or Division 9 shall govern.
"Warrant Shares" has the meaning given such term in Section
12(a).
"Warrants" means those certain Common Stock Purchase Warrants
dated as of the Closing Date made by the Parent in favor of Laurus and each
other warrant made by the Parent in favor Laurus, as each of the same may be
amended, restated, modified and/or supplemented from time to time.
10
Exhibit A
Eligible Subsidiaries
General Environmental Management, Inc., a Delaware corporation
General Environmental Management of Rancho Xxxxxxx, LLC, a California limited
liability company
Exhibit B
Borrowing Base Certificate
[To be inserted]
SECURITY AGREEMENT
LAURUS MASTER FUND, LTD.
GENERAL ENVIRONMENTAL MANAGEMENT, INC., a Nevada corporation
GENERAL ENVIRONMENTAL MANAGEMENT, INC., a Delaware corporation
and
GENERAL ENVIRONMENTAL MANAGEMENT OF RANCHO XXXXXXX, LLC,
a California limited liability company
Dated: February 28, 2006
TABLE OF CONTENTS
Page
1. General Definitions and Terms; Rules of Construction....................1
2. Loan Facility...........................................................2
3. Repayment of the Loans..................................................4
4. Procedure for Loans.....................................................4
5. Interest and Payments...................................................4
6. Security Interest.......................................................6
7. Representations, Warranties and Covenants Concerning the Collateral.....7
8. Payment of Accounts.....................................................9
9. Collection and Maintenance of Collateral...............................10
10. Inspections and Appraisals.............................................10
11. Financial Reporting....................................................11
12. Additional Representations and Warranties..............................12
13. Covenants..............................................................23
14. Further Assurances.....................................................29
15. Representations, Warranties and Covenants of Laurus....................29
16. Power of Attorney......................................................31
17. Term of Agreement......................................................31
18. Termination of Lien....................................................32
19. Events of Default......................................................32
20. Remedies...............................................................34
21. Waivers................................................................35
22. Expenses...............................................................37
23. Assignment By Laurus...................................................38
i
TABLE OF CONTENTS (continued)
Page
24. No Waiver; Cumulative Remedies.........................................38
25. Application of Payments................................................38
26. Indemnity..............................................................38
27. Revival................................................................39
28. Borrowing Agency Provisions............................................40
29. Notices................................................................41
30. Governing Law, Jurisdiction and Waiver of Jury Trial...................41
31. Limitation of Liability................................................42
32. Entire Understanding...................................................42
33. Severability...........................................................43
34. Captions...............................................................43
35. Counterparts; Telecopier Signatures....................................43
36. Construction...........................................................43
37. Publicity..............................................................43
38. Joinder................................................................44
39. Legends................................................................44
ii
