SECURITIES PURCHASE AGREEMENT
Exhibit 99.1
SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of October 26, 2005, by and among
Telkonet, Inc., a Utah corporation with headquarters located at 00000 Xxxxxx Xxxxxxx Xxxxxxx,
Xxxxxxxxxx, Xxxxxxxx 00000, and the investors listed on the Schedule of Buyers attached hereto
(individually, a “Buyer” and collectively, the “Buyers”).
WHEREAS:
A. The Company and each Buyer is executing and delivering this Agreement in reliance upon the
exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933, as
amended (the “1933 Act”), and Rule 506 of Regulation D (“Regulation D”) as promulgated by the
United States Securities and Exchange Commission (the “SEC”) under the 1933 Act.
B. The Company has authorized a new series of senior convertible notes of the Company, which
notes shall be convertible into the Company’s common stock, par value $0.001 per share (the “Common
Shares”), in accordance with the terms of such notes.
C. Each Buyer wishes to purchase, and (i) the Company wishes to sell, upon the terms and
conditions stated in this Agreement, that aggregate principal amount of notes, in substantially the
form attached hereto as Exhibit A (the “Notes”), set forth opposite such Buyer’s name in
column (3) on the Schedule of Buyers (which aggregate amount for all Buyers shall be $20,000,000)
(as converted, amortized and/or redeemed for Common Shares pursuant to the terms of the Notes,
collectively, the “Conversion Shares”) and (ii) the Company wishes to sell, upon the terms and
conditions stated in this Agreement, warrants, in substantially the form attached hereto as
Exhibit B (the “Initial Warrants,” and together with the Accelerated Payment Option
Warrants (as defined in the Notes), the “Warrants”), to acquire up to that number of additional
shares of Common Shares set forth opposite such Buyer’s name in column (4) of the Schedule of
Buyers (as exercised, collectively, the “Initial Warrant Shares,” and together with the shares of
Common Shares issuable upon exercise of the Accelerated Payment Option Warrants, the “Warrant
Shares”).
D. Contemporaneously with the execution and delivery of this Agreement, the parties hereto are
executing and delivering a Registration Rights Agreement, substantially in the form attached hereto
as Exhibit C (the “Registration Rights Agreement”), pursuant to which the Company has
agreed to provide certain registration rights with respect to the Conversion Shares and the Initial
Warrant Shares under the 1933 Act and the rules and regulations promulgated thereunder, and
applicable state securities laws.
E. The Notes, the Conversion Shares, the Warrants and the Warrant Shares, collectively, are
referred to herein as the “Securities”.
F. Except as set forth on Section 1 of Schedule 3(dd), the Notes will be senior to all
outstanding and future indebtedness of the Company.
NOW, THEREFORE, the Company and each Buyer hereby agree as follows:
1. PURCHASE AND SALE OF NOTES AND WARRANTS.
(a) Purchase of Notes and Warrants.
(i) Subject to the satisfaction (or waiver) of the conditions set forth in Sections 6 and 7
below, on the Closing Date (as defined below), the Company shall issue and sell to each Buyer, and
each Buyer severally, but not jointly, agrees to purchase from the Company, (A) one or more Notes
with an aggregate principal amount as is set forth opposite such Buyer’s name in column (3) on the
Schedule of Buyers and (B) one or more Initial Warrants to acquire up to that number of Warrant
Shares as is set forth opposite such Buyer’s name in column (4) on the Schedule of Buyers (the
“Closing”).
(ii) Purchase Price. The purchase price for each Buyer of the Notes and the Initial
Warrants to be purchased by each such Buyer at the Closing (the “Purchase Price”) shall be the
amount set forth opposite such Buyer’s name in column (5) of the Schedule of Buyers.
(b) Closing Date. The date and time of the Closing (the “Closing Date”) shall be
10:00 a.m., New York City Time, on the date hereof after notification of satisfaction (or waiver)
of the conditions to the Closing set forth in Sections 6(a) and 7(a) below (or such later date as
is mutually agreed to by the Company and each Buyer) at the offices of Xxxxxxx Xxxx & Xxxxx LLP,
000 Xxxxx Xxxxxx, Xxx Xxxx, Xxx Xxxx 00000.
(c) Form of Payment. On the Closing Date, each Buyer shall pay its Purchase Price to
the Company for the Notes and the Warrants to be issued and sold to such Buyer at such Closing, by
wire transfer of immediately available funds in accordance with the Company’s written wire
instructions. At the Closing, the Company shall deliver to each Buyer (A) the Notes (allocated in
the principal amounts as such Buyer shall request) that such Buyer is then purchasing and (B) the
Initial Warrants (allocated in the amounts as such Buyer shall request) that such Buyer is
purchasing, in each case duly executed on behalf of the Company and registered in the name of such
Buyer or its designee.
2. BUYER’S REPRESENTATIONS AND WARRANTIES.
Each Buyer represents and warrants, with respect to only itself, that:
(a) No Public Sale or Distribution. Such Buyer is acquiring the Notes and the
Warrants and upon conversion of the Notes and exercise of the Warrants (other than pursuant to a
Cashless Exercise (as defined in the Warrants)) will acquire the Conversion Shares issuable upon
conversion of the Notes and the Warrant Shares issuable upon exercise of the Warrants for its own
account and not with a view towards, or for resale in connection with, the public sale or
distribution thereof, except pursuant to sales registered or exempted under the 1933 Act; provided,
however, that by making the representations herein, such Buyer does not agree to hold any of the
Securities for any minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration statement or an exemption
under the 1933 Act. Such Buyer is acquiring the Securities hereunder in the ordinary course of its
business. Such Buyer does not presently have any agreement or understanding, directly or
indirectly, with any Person to distribute any of the Securities.
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(b) Accredited Investor Status. Such Buyer is an “accredited investor” as that term
is defined in Rule 501(a) of Regulation D.
(c) Reliance on Exemptions. Such Buyer understands that the Securities are being
offered and sold to it in reliance on specific exemptions from the registration requirements of
United States federal and state securities laws and that the Company is relying in part upon the
truth and accuracy of, and such Buyer’s compliance with, the representations, warranties,
agreements, acknowledgments and understandings of such Buyer set forth herein in order to determine
the availability of such exemptions and the eligibility of such Buyer to acquire the Securities.
(d) Information. Such Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and materials relating
to the offer and sale of the Securities that have been requested by such Buyer. Such Buyer and its
advisors, if any, have been afforded the opportunity to ask questions of the Company. Neither such
inquiries nor any other due diligence investigations conducted by such Buyer or its advisors, if
any, or its representatives shall modify, amend or affect such Buyer’s right to rely on the
Company’s representations and warranties contained herein. Such Buyer understands that its
investment in the Securities involves a high degree of risk. Such Buyer has sought such
accounting, legal and tax advice as it has considered necessary to make an informed investment
decision with respect to its acquisition of the Securities.
(e) No Governmental Review. Such Buyer understands that no United States federal or
state agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Securities or the fairness or suitability of the investment in
the Securities nor have such authorities passed upon or endorsed the merits of the offering of the
Securities.
(f) Transfer or Resale. Such Buyer understands that, except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not being registered under
the 1933 Act or any state securities laws and (ii) such Buyer agrees that if it decides to offer,
sell or otherwise transfer any of the Notes, Conversion Shares, Warrants or Warrant Shares, such
Notes, Conversion Shares, Warrants and Warrant Shares may be offered, sold or otherwise transferred
only: (A) pursuant to an effective registration statement under the 1933 Act or (B) (1) in
accordance with the exemption from registration under the 1933 Act provided by Rule 144 or Rule
144A thereunder, if available, and in compliance with any applicable state securities laws or (2)
in a transaction that does not require registration under the 1933 Act or applicable state
securities laws, and the seller has provided the Company with reasonable assurance, prior to such
offer, sale or transfer, that such Securities may be so offered, sold or transferred in a
transaction that does not require registration under the 1933 Act or applicable state securities
laws.
(g) Legends. Such Buyer understands that the certificates or other instruments
representing the Notes and the Warrants and, until such time as the resale of the Conversion Shares
and the Warrant Shares have been registered under the 1933 Act as contemplated by the Registration
Rights Agreement, the stock certificates representing the Conversion Shares and the Warrant Shares,
except as set forth below, shall bear any legend as required by the “blue sky”
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laws of any state and a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of such stock certificates):
[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE]
[EXERCISABLE] HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN] REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR
SALE, SOLD OR TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE “1933 ACT”), OR (B) REASONABLE ASSURANCE THAT REGISTRATION
IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR
RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY
BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR
FINANCING ARRANGEMENT SECURED BY THE SECURITIES.
The legend set forth above shall be removed and the Company shall issue a certificate without such
legend to the holder of the Securities upon which it is stamped, if, unless otherwise required by
state securities laws, (i) such Securities are registered for resale under the 1933 Act, (ii) in
connection with a sale, assignment or other transfer, such holder provides the Company with
reasonable assurance that the sale, assignment or transfer of the Securities may be made without
registration under the applicable requirements of the 1933 Act or (iii) such holder provides the
Company with reasonable assurance that the Securities can be sold, assigned or transferred pursuant
to Rule 144 or Rule 144A.
(h) Validity; Enforcement. This Agreement and the Registration Rights Agreement have
been duly and validly authorized, executed and delivered on behalf of such Buyer and shall
constitute the legal, valid and binding obligations of such Buyer enforceable against such Buyer in
accordance with their respective terms, except as such enforceability may be limited by general
principles of equity or by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation and other similar laws relating to, or affecting generally, the enforcement of
applicable creditors’ rights and remedies.
(i) No Conflicts. The execution, delivery and performance by such Buyer of this
Agreement and the Registration Rights Agreement and the consummation by such Buyer of the
transactions contemplated hereby and thereby will not (i) result in a violation of the
organizational documents of such Buyer or (ii) conflict with, or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which such Buyer is a party, or (iii) result in a violation of any law, rule,
regulation, order, judgment or decree applicable to such Buyer, except in the case of clauses (ii)
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and (iii) above, for such conflicts, defaults, rights or violations which would not,
individually or in the aggregate, reasonably be expected to have a material adverse effect on the
ability of such Buyer to perform its obligations hereunder.
(j) Residency. Such Buyer is a resident of that jurisdiction specified below its
address on the Schedule of Buyers.
(k) Certain Trading Activities. Neither the Buyer nor any of its affiliates has
directly or indirectly, and no Person acting on behalf of the Buyer or its affiliates has directly
or indirectly, engaged in any transactions in the securities of the Company (including, without
limitation, any Short Sales involving the Company’s securities) since the time that the Buyer was
first contacted by the Company or First Albany Capital (the “Agent”) with respect to the
transactions contemplated hereby. “Short Sales” include, without limitation, all “short sales” as
defined in Rule 200 promulgated under Regulation SHO under the 1934 Act and all types of direct and
indirect stock pledges, forward sale contracts, options, puts, calls, short sales, swaps and
similar arrangements (including on a total return basis), and sales and other transactions through
non-US broker dealers or foreign regulated brokers. The Buyer covenants that neither it, its
affiliates, nor any Person acting on its or its affiliates’ behalf will engage in any transactions
in the securities of the Company (including Short Sales) prior to the time that the transactions
contemplated by this Agreement are publicly disclosed. Notwithstanding the foregoing, for
avoidance of doubt, nothing contained herein shall constitute a representation or warranty, or
preclude any actions, with respect to the identification of the availability of, or securing of,
available shares to borrow in order to effect Short Sales or similar transactions in the future.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Buyers as follows:
(a) Organization and Qualification. The Company and its “Subsidiaries” (which for
purposes of this Agreement means any entity in which the Company, directly or indirectly, owns
capital stock or holds an equity or similar interest of such entity) are entities duly organized
and validly existing and in good standing under the laws of the jurisdiction in which they are
formed, and have the requisite power and authorization to own their properties and to carry on
their business as now being conducted. Each of the Company and its Subsidiaries is duly qualified
as a foreign entity to do business and is in good standing in every jurisdiction in which its
ownership of property or the nature of the business conducted by it makes such qualification
necessary, except to the extent that the failure to be so qualified or be in good standing would
not have a Material Adverse Effect. As used in this Agreement, “Material Adverse Effect” means any
material adverse effect on the business, properties, assets, operations, results of operations,
condition (financial or otherwise) or prospects of any of the Company or its Subsidiaries,
individually or taken as a whole, or on the transactions contemplated hereby or in the other
Transaction Documents or by the agreements and instruments to be entered into in connection
herewith or therewith, or on the authority or ability of the Company to perform its obligations
under the Transaction Documents (as defined below). The Company has no Subsidiaries except as set
forth on Schedule 3(a).
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(b) Authorization; Enforcement; Validity. The Company has the requisite power and
authority to enter into and perform its obligations under this Agreement, the Notes, the
Registration Rights Agreement, the Irrevocable Transfer Agent Instructions (as defined in Section
5(b)), the Warrants, the Letter of Credit (as defined below) and each of the other agreements
entered into by the parties hereto in connection with the transactions contemplated by this
Agreement (collectively, the “Transaction Documents”) and to issue the Securities in accordance
with the terms hereof and thereof. The execution and delivery of the Transaction Documents by the
Company and the consummation by the Company of the transactions contemplated thereby, including,
without limitation, the issuance of the Notes and the Warrants, the reservation for issuance and
the issuance of the Conversion Shares issuable upon conversion, amortization or redemption of the
Notes and the reservation for issuance and issuance of Warrant Shares issuable upon exercise of the
Warrants have been duly authorized by the Company’s Board of Directors and, other than (i) the
filing with the SEC of one or more Registration Statements in accordance with the requirements of
the Registration Rights Agreement, (ii) the filing of a Form D with respect to the Notes and the
Warrants as required under Regulation D and (iii) such filings required under applicable securities
or “Blue Sky” laws of the states of the United States (all of the foregoing, the “Required
Approvals”), no further filing, consent, or authorization is required by the Company or of its
Board of Directors or its shareholders. This Agreement and the other Transaction Documents of even
date herewith have been duly executed and delivered by the Company and constitute the legal, valid
and binding obligations of the Company enforceable against the Company in accordance with their
respective terms, except as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating
to, or affecting generally, the enforcement of applicable creditors’ rights and remedies. Any of
the Transaction Documents dated after the date hereof, upon execution and delivery, will have been
duly executed and delivered by the Company, and constitute the legal, valid and binding obligations
of the Company, enforceable against the Company in accordance with their respective terms, except
as such enforceability may be limited by general principles of equity or applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting
generally, the enforcement of applicable creditors’ rights and remedies.
(c) Issuance of Securities. The issuance of the Notes and the Warrants are duly
authorized and are free from all taxes, liens and charges with respect to the issue thereof. As of
the Closing, the Company shall have reserved from its duly authorized capital stock not less than
the sum of 150% of the maximum number of Common Shares (A) issuable upon conversion, amortization
or redemption for Common Shares of the Notes (without taking into account any limitations on the
conversion, amortization or redemption of the Notes set forth in the Notes) and (B) issuable upon
exercise of the Warrants (without taking into account any limitations on the exercise of the
Warrants set forth in the Warrants). Upon issuance or conversion in accordance with the Notes or
exercise in accordance with the Warrants, as the case may be, the Conversion Shares and the Warrant
Shares, respectively, will be validly issued, fully paid and nonassessable and free from all
preemptive or similar rights, taxes, liens and charges with respect to the issue thereof, with the
holders being entitled to all rights accorded to a holder of Common Shares. The offer and issuance
by the Company of the Securities is exempt from registration under the 1933 Act.
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(d) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the transactions contemplated
hereby and thereby (including, without limitation, the issuance of the Notes and the Warrants and
reservation for issuance and issuance of the Conversion Shares and the Warrant Shares) will not (i)
result in a violation of the Articles of Incorporation, the terms of any capital stock of the
Company or any of its Subsidiaries, the bylaws or any of the organizational documents of the
Company or any of its Subsidiaries or (ii) conflict with, or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its Subsidiaries is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree (including federal and state
securities laws and regulations and the rules and regulations of the American Stock Exchange (the
“Principal Market”)) applicable to the Company or any of its Subsidiaries or by which any property
or asset of the Company or any of its Subsidiaries is bound or affected.
(e) Consents. Except as set forth on Schedule 3(e), neither the Company nor
any of its Subsidiaries is required to obtain any consent, authorization or order of, or make any
filing or registration with, any court, governmental agency or any regulatory or self-regulatory
agency or any other Person in order for it to execute, deliver or perform any of its obligations
under or contemplated by the Transaction Documents, in each case in accordance with the terms
hereof or thereof. All consents, authorizations, orders, filings and registrations (which the
Company is required to obtain pursuant to the preceding sentence) have been obtained or effected,
or will have been obtained or effected, on or prior to the Closing Date, and the Company and its
Subsidiaries are unaware of any facts or circumstances that might prevent the Company from
obtaining or effecting any of the registration, application or filings pursuant to the preceding
sentence. The Company is not in violation of the listing requirements of the Principal Market and
has no knowledge of any facts that would reasonably lead to delisting or suspension of the Common
Shares in the foreseeable future.
(f) Acknowledgment Regarding Buyer’s Purchase of Securities. The Company acknowledges
and agrees that each Buyer is acting solely in the capacity of arm’s length purchaser with respect
to the Transaction Documents and the transactions contemplated hereby and thereby and that no Buyer
is (i) an officer or director of the Company, (ii) to the best of the actual knowledge of the
Company, an “affiliate” of the Company or any of its Subsidiaries (as defined in Rule 144 under the
0000 Xxx) or (iii) to the best of the actual knowledge of the Company, a “beneficial owner” of more
than 10% of the shares of Common Shares (as defined for purposes of Rule 13d-3 of the Securities
Exchange Act of 1934, as amended (the “1934 Act”)). The Company further acknowledges that no Buyer
is acting as a financial advisor or fiduciary of the Company or any of its Subsidiaries (or in any
similar capacity) with respect to the Transaction Documents and the transactions contemplated
hereby and thereby, and any advice given by a Buyer or any of its representatives or agents in
connection with the Transaction Documents and the transactions contemplated hereby and thereby is
merely incidental to such Buyer’s purchase of the Securities. The Company further represents to
each Buyer that the Company’s decision to enter into the Transaction Documents has been based
solely on the independent evaluation by the Company and its representatives.
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(g) No General Solicitation; Placement Agent’s Fees. Neither the Company, nor any of
its Subsidiaries or affiliates, nor any Person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of Regulation D) in
connection with the offer or sale of the Securities. The Company shall be responsible for the
payment of any placement agent’s fees, financial advisory fees, or brokers’ commissions (other than
for persons engaged by any Buyer or its investment advisor) relating to or arising out of the
transactions contemplated hereby. The Company shall pay, and hold each Buyer harmless against, any
liability, loss or expense (including, without limitation, attorney’s fees and out-of-pocket
expenses) arising in connection with any such claim. The Company acknowledges that it has engaged
the Agent as placement agent in connection with the sale of the Securities. Other than the Agent,
neither the Company nor any of its Subsidiaries has engaged any placement agent or other agent in
connection with the sale of the Securities.
(h) No Integrated Offering. None of the Company, its Subsidiaries, any of their
affiliates, or any Person acting on 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
require registration of any of the Securities under the 1933 Act or cause this offering of the
Securities to be integrated with prior offerings by the Company for purposes of the 1933 Act or any
applicable shareholder approval provisions, including, without limitation, under the rules and
regulations of any exchange or automated quotation system on which any of the securities of the
Company are listed or designated. None of the Company, its Subsidiaries, their affiliates or any
Person acting on their behalf will take any action or steps referred to in the preceding sentence
that would require registration of any of the Securities under the 1933 Act or cause the offering
of the Securities to be integrated with other offerings.
(i) Dilutive Effect. The Company understands and acknowledges that the number of
Conversion Shares issuable upon conversion, amortization or redemption of the Notes and the Warrant
Shares issuable upon exercise of the Warrants will increase in certain circumstances. The Company
further acknowledges that its obligation to issue Conversion Shares upon conversion, amortization
or redemption of the Notes in accordance with this Agreement and the Notes and its obligation to
issue the Warrant Shares upon exercise of the Warrants in accordance with this Agreement and the
Warrants is, subject to the terms and conditions of the applicable Transaction Documents, in each
case, absolute and unconditional regardless of the dilutive effect that such issuance may have on
the ownership interests of other shareholders of the Company.
(j) Application of Takeover Protections; Rights Agreement. The Company and its board
of directors have taken all necessary action, if any, in order to render inapplicable any control
share acquisition, business combination, poison pill (including any distribution under a rights
agreement) or other similar anti-takeover provision under the Articles of Incorporation or the laws
of the jurisdiction of its incorporation which is or could become applicable to any Buyer as a
result of the transactions contemplated by this Agreement, including, without limitation, the
Company’s issuance of the Securities and any Buyer’s ownership of the Securities. The Company has
not adopted a shareholder rights plan or similar arrangement relating to accumulations of
beneficial ownership of Common Shares or a change in control of the Company.
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(k) SEC Documents; Financial Statements. During the two (2) years prior to the date
hereof, the Company has filed all reports, schedules, forms, statements and other documents
required to be filed by it with the SEC pursuant to the reporting requirements of the 1934 Act (all
of the foregoing filed prior to the date hereof and all exhibits included therein and financial
statements, notes and schedules thereto and documents incorporated by reference therein being
hereinafter referred to as the “SEC Documents”). The Company has delivered to the Buyers or their
respective representatives true, correct and complete copies of any SEC Documents not available on
the XXXXX system. As of their respective dates, the SEC Documents complied in all material
respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated
thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were
filed with the SEC, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading. As of their
respective dates, the financial statements of the Company included in the SEC Documents complied as
to form in all material respects with applicable accounting requirements and the published rules
and regulations of the SEC with respect thereto. Such financial statements have been prepared in
accordance with generally accepted accounting principles, consistently applied, 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 exclude
footnotes or may be condensed or summary statements) and fairly present in all material respects
the financial position of the Company as of the dates thereof and the results of its operations and
cash flows for the periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments). No other information provided by or on behalf of the Company to the
Buyers which is not included in the SEC Documents, including, without limitation, information
referred to in Section 2(d) of this Agreement, contains any untrue statement of a material fact or
omits to state any material fact necessary in order to make the statements therein, in the light of
the circumstance under which they are or were made, not misleading.
(l) Absence of Certain Changes. Since December 31, 2004, there has been no material
adverse change and no material adverse development in the business, properties, operations,
condition (financial or otherwise), results of operations or prospects of the Company. Except as
disclosed in Schedule 3(l), since December 31, 2004, neither the Company nor any of its
Subsidiaries has (i) declared or paid any dividends, (ii) sold any assets, individually or in the
aggregate, in excess of $100,000 outside of the ordinary course of business or (iii) had capital
expenditures, individually or in the aggregate, in excess of $100,000. Neither the Company nor any
of its Subsidiaries has taken any steps to seek protection pursuant to any bankruptcy law nor does
the Company have any knowledge or reason to believe that its creditors intend to initiate
involuntary bankruptcy proceedings or any actual knowledge of any fact that would reasonably lead a
creditor to do so. The Company and its Subsidiaries, individually and on a consolidated basis, are
not as of the date hereof, and after giving effect to the transactions contemplated hereby to occur
at the Closing, will not be Insolvent (as defined below). For purposes of this Section 3(l),
“Insolvent” means, with respect to any Person (as defined in Section 3(s)), (i) the present fair
saleable value of such Person’s assets is less than the amount required to pay such Person’s total
Indebtedness (as defined in Section 3(s)), (ii) such Person is unable to pay its debts and
liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute
and matured, (iii) such Person intends to incur or believes that it will incur debts that
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would be beyond its ability to pay as such debts mature or (iv) such Person has unreasonably
small capital with which to conduct the business in which it is engaged as such business is now
conducted and is proposed to be conducted.
(m) No Undisclosed Events, Liabilities, Developments or Circumstances. No event,
liability, development or circumstance has occurred or exists, or is contemplated to occur with
respect to the Company or its Subsidiaries or their respective business, properties, prospects,
operations or financial condition, that would be required to be disclosed by the Company under
applicable securities laws on a registration statement on Form S-1 filed with the SEC relating to
an issuance and sale by the Company of its Common Shares and which has not been publicly announced.
(n) Conduct of Business; Regulatory Permits. Neither the Company nor its Subsidiaries
is in violation of any term of or in default under its Articles of Incorporation or Bylaws or their
organizational charter or articles of incorporation or bylaws, respectively. Neither the Company
nor any of its Subsidiaries is in violation of any judgment, decree or order or any statute,
ordinance, rule or regulation applicable to the Company or its Subsidiaries, and neither the
Company nor any of its Subsidiaries will conduct its business in violation of any of the foregoing,
except for possible violations that would not, individually or in the aggregate, have a Material
Adverse Effect. Without limiting the generality of the foregoing, the Company is not in violation
of any of the rules, regulations or requirements of the Principal Market and has no knowledge of
any facts or circumstances that would reasonably lead to delisting or suspension of the Common
Shares by the Principal Market in the foreseeable future. Since December 31, 2003, (i) the Common
Shares have been designated for quotation on the Principal Market, (ii) trading in the Common
Shares has not been suspended by the SEC or the Principal Market and (iii) the Company has received
no communication, written or oral, from the SEC or the Principal Market regarding the suspension or
delisting of the Common Shares from the Principal Market. The Company and its Subsidiaries possess
all certificates, authorizations and permits issued by the appropriate regulatory authorities
necessary to conduct their respective businesses, except where the failure to possess such
certificates, authorizations or permits would not have, individually or in the aggregate, a
Material Adverse Effect, and neither the Company nor any such Subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificate, authorization or
permit.
(o) Foreign Corrupt Practices. Neither the Company, nor any of its Subsidiaries, nor
any director, officer, agent, employee or other Person acting on behalf of the Company or any of
its Subsidiaries has, in the course of its actions for, or on behalf of, the Company or any of its
Subsidiaries (i) used any corporate funds for any unlawful contribution, gift, entertainment or
other unlawful expenses relating to political activity; (ii) made any direct or indirect unlawful
payment to any foreign or domestic government official or employee from corporate funds; (iii)
violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as
amended; or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or other
unlawful payment to any foreign or domestic government official or employee.
(p) Xxxxxxxx-Xxxxx Act. The Company is in material compliance with any and all
applicable requirements of the Xxxxxxxx-Xxxxx Act of 2002 that are effective as of the date
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hereof, and any and all applicable rules and regulations promulgated by the SEC thereunder
that are effective as of the date hereof.
(q) Transactions With Affiliates. Except as set forth in the SEC Documents filed at
least ten days prior to the date hereof and other than the grant of stock options disclosed on
Schedule 3(r), none of the officers, directors or employees of the Company or any of its
Subsidiaries is presently a party to any material transaction with the Company or any of its
Subsidiaries (other than for ordinary course services as employees, officers or directors),
including any contract, agreement or other arrangement providing for the furnishing of services to
or by, providing for rental of real or personal property to or from, or otherwise requiring
payments to or from any such officer, director or employee or, to the knowledge of the Company or
any of its Subsidiaries, any corporation, partnership, trust or other entity in which any such
officer, director, or employee has a substantial interest or is an officer, director, trustee or
partner.
(r) Equity Capitalization. As of the date hereof, the authorized capital stock of the
Company consists of (i) 100,000,000 Common Shares, of which as of the date hereof, 44,910,908 are
issued and outstanding, 15,000,000 shares are reserved for issuance pursuant to the Company’s stock
option and purchase plans and no shares are reserved for issuance pursuant to securities (other
than the Notes and the Warrants) exercisable or exchangeable for, or convertible into, Common
Shares and (ii) 15,000,000 shares of preferred stock, par value $0.001 per share, of which as of
the date hereof none of which is issued and outstanding or reserved for issuance. All of such
outstanding shares have been, or upon issuance will be, validly issued and are fully paid and
nonassessable. Except as disclosed in Schedule 3(r): (i) none of the Company’s capital
stock is subject to preemptive rights or any other similar rights or any liens or encumbrances
suffered or permitted by the Company; (ii) there are no outstanding options, warrants, scrip,
rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities
or rights convertible into, or exercisable or exchangeable for, any capital stock of the Company or
any of its Subsidiaries, or contracts, commitments, understandings or arrangements by which the
Company or any of its Subsidiaries is or may become bound to issue additional capital stock of the
Company or any of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights convertible into, or
exercisable or exchangeable for, any capital stock of the Company or any of its Subsidiaries; (iii)
there are no outstanding debt securities, notes, credit agreements, credit facilities or other
agreements, documents or instruments evidencing Indebtedness (as defined in Section 3(s)) of the
Company or any of its Subsidiaries or by which the Company or any of its Subsidiaries is or may
become bound; (iv) there are no financing statements securing obligations in any material amounts,
either singly or in the aggregate, filed in connection with the Company or any of its Subsidiaries;
(v) there are no agreements or arrangements under which the Company or any of its Subsidiaries is
obligated to register the sale of any of their securities under the 1933 Act (except pursuant to
the Registration Rights Agreement); (vi) there are no outstanding securities or instruments of the
Company or any of its Subsidiaries which contain any redemption or similar provisions, and there
are no contracts, commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to redeem a security of the Company or any of its Subsidiaries;
(vii) there are no securities or instruments containing anti-dilution or similar provisions that
will be triggered by the issuance of the Securities; (viii) the Company does not have any stock
appreciation rights or “phantom
-11-
stock” plans or agreements or any similar plan or agreement; and (ix) the Company and its
Subsidiaries have no liabilities or obligations required to be disclosed in the SEC Documents but
not so disclosed in the SEC Documents, other than those incurred in the ordinary course of the
Company’s or its Subsidiaries’ respective businesses and which, individually or in the aggregate,
do not or could not reasonably be expected to have a Material Adverse Effect. The Company has made
available to the Buyer true, correct and complete copies of the Company’s Articles of
Incorporation, as amended and as in effect on the date hereof (the “Articles of Incorporation”),
and the Company’s Bylaws, as amended and as in effect on the date hereof (the “Bylaws”), and the
terms of all securities convertible into, or exercisable or exchangeable for, shares of Common
Shares and the material rights of the holders thereof in respect thereto.
(s) Indebtedness and Other Contracts. Except as disclosed in Schedule 3(s),
neither the Company nor any of its Subsidiaries (i) has any outstanding Indebtedness (as defined
below), (ii) is a party to any contract, agreement or instrument, the violation of which, or
default under which, by the other party(ies) to such contract, agreement or instrument could
reasonably be expected to result in a Material Adverse Effect, (iii) is in violation of any term of
or in default under any contract, agreement or instrument relating to any Indebtedness, except
where such violations and defaults would not result, individually or in the aggregate, in a
Material Adverse Effect, or (iv) is a party to any contract, agreement or instrument relating to
any Indebtedness, the performance of which, in the judgment of the Company’s officers, has or is
expected to have a Material Adverse Effect. Schedule 3(s) provides a detailed description
of the material terms of any such outstanding Indebtedness. For purposes of this Agreement: (x)
“Indebtedness” of any Person means, without duplication (A) all indebtedness for borrowed money,
(B) all obligations issued, undertaken or assumed as the deferred purchase price of property or
services, including (without limitation) “capital leases” in accordance with generally accepted
accounting principles (other than trade payables entered into in the ordinary course of business),
(C) all reimbursement or payment obligations with respect to letters of credit, surety bonds and
other similar instruments, (D) all obligations evidenced by notes, bonds, debentures or similar
instruments, including obligations so evidenced incurred in connection with the acquisition of
property, assets or businesses, (E) all indebtedness created or arising under any conditional sale
or other title retention agreement, or incurred as financing, in either case with respect to any
property or assets acquired with the proceeds of such indebtedness (even though the rights and
remedies of the seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (F) all monetary obligations under any leasing or similar
arrangement which, in connection with generally accepted accounting principles, consistently
applied for the periods covered thereby, is classified as a capital lease, (G) all indebtedness
referred to in clauses (A) through (F) above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, lien,
pledge, charge, security interest or other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by any Person, even though the Person which owns such assets or
property has not assumed or become liable for the payment of such indebtedness, and (H) all
Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to
in clauses (A) through (G) above; (y) “Contingent Obligation” means, as to any Person, any direct
or indirect liability, contingent or otherwise, of that Person with respect to any indebtedness,
lease, dividend or other obligation of another Person if the primary purpose or intent of the
Person incurring such liability, or the primary effect thereof, is to provide assurance to the
obligee of such liability that such liability will be paid or discharged, or that any agreements
relating thereto
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will be complied with, or that the holders of such liability will be protected (in whole or in
part) against loss with respect thereto; and (z) “Person” means an individual, a limited liability
company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and
a government or any department or agency thereof.
(t) Absence of Litigation. Except as set forth in Schedule 3(t), there is no
action, suit, proceeding, inquiry or investigation before or by the Principal Market, any court,
public board, government agency, self-regulatory organization or body pending or, to the knowledge
of the Company, threatened against or affecting the Company or any of its Subsidiaries, the Common
Shares or any of the Company’s Subsidiaries or any of the Company’s or its Subsidiaries’ officers
or directors in their capacities as such.
(u) Insurance. The Company and each of its Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such amounts as management
of the Company believes to be prudent and customary in the businesses in which the Company and its
Subsidiaries are engaged. Neither the Company nor any such Subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such Subsidiary has any
reason to believe that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not have a Material Adverse Effect.
(v) Employee Relations. (i) Neither the Company nor any of its Subsidiaries is a
party to any collective bargaining agreement or employs any member of a union. The Company and its
Subsidiaries believe that their relations with their employees are good. No executive officer of
the Company or any of its Subsidiaries (as defined in Rule 501(f) of the 0000 Xxx) has notified the
Company or any such Subsidiary that such officer intends to leave the Company or any such
Subsidiary or otherwise terminate such officer’s employment with the Company or any such
Subsidiary. Except as could reasonably be expected to have a Material Adverse Effect, no executive
officer of the Company or any of its Subsidiaries, is, or is now expected to be, in violation of
any material term of any employment contract, confidentiality, disclosure or proprietary
information agreement, non-competition agreement, or any other contract or agreement or any
restrictive covenant, and the continued employment of each such executive officer does not subject
the Company or any of its Subsidiaries to any liability with respect to any of the foregoing
matters.
(ii) The Company and its Subsidiaries are in compliance with all federal, state, local and
foreign laws and regulations respecting labor, employment and employment practices and benefits,
terms and conditions of employment and wages and hours, except where failure to be in compliance
would not, either individually or in the aggregate, reasonably be expected to result in a Material
Adverse Effect.
(w) Title. The Company and its Subsidiaries have good and marketable title in fee
simple to all real property and good and marketable title to all personal property owned by them
which is material to the business of the Company and its Subsidiaries, in each case free and clear
of all liens, encumbrances and defects except such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made of such property by the
-13-
Company and any of its Subsidiaries. Any real property and facilities held under lease by the
Company or any of its Subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made and proposed to be
made of such property and buildings by the Company and its Subsidiaries.
(x) Intellectual Property Rights. The Company and its Subsidiaries own or possess
adequate rights or licenses to use all trademarks, service marks and all applications and
registrations therefor, trade names, patents, patent rights, copyrights, original works of
authorship, inventions, trade secrets, licenses, approvals, governmental authorizations and other
intellectual property rights (“Intellectual Property Rights”) necessary to conduct their respective
businesses as now conducted. Except as set forth in Schedule 3(x), none of the Company’s
or its Subsidiaries’ Intellectual Property Rights have expired, terminated or have been abandoned,
or are expected to expire, terminate or be abandoned, within three years from the date of this
Agreement, except for such expirations, terminations or abandonments which would not, individually
or in the aggregate have a Material Adverse Effect. The Company does not have any knowledge of any
infringement by the Company or any of its Subsidiaries of Intellectual Property Rights of others.
There is no claim, action or proceeding being made or brought, or to the knowledge of the Company,
being threatened against the Company or any of its Subsidiaries regarding its Intellectual Property
Rights. The Company and its Subsidiaries are unaware of any facts or circumstances which might
give rise to any of the foregoing infringements or claims, actions or proceedings. The Company and
its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality
and value of all of their Intellectual Property Rights.
(y) Environmental Laws. The Company and its Subsidiaries (i) are in compliance with
any and all Environmental Laws (as hereinafter defined), (ii) have received all permits, licenses
or other approvals required of them under applicable Environmental Laws to conduct their respective
businesses and (iii) are in compliance with all terms and conditions of any such permit, license or
approval where, in each of the foregoing clauses (i), (ii) and (iii), the failure to so comply
could be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect.
The term “Environmental Laws” means all federal, state, local or foreign laws relating to pollution
or protection of human health or the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata), including, without limitation, laws
relating to emissions, discharges, releases or threatened releases of chemicals, pollutants,
contaminants, or toxic or hazardous substances or wastes (collectively, “Hazardous Materials”) into
the environment, or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all
authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses,
notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or
approved thereunder.
(z) Subsidiary Rights. Except as set forth in Schedule 3(z), the Company or
one of its Subsidiaries has the unrestricted right to vote, and (subject to limitations imposed by
applicable law) to receive dividends and distributions on, all capital securities of its
Subsidiaries as owned by the Company or such Subsidiary.
-14-
(aa) Tax Status. The Company and each of its Subsidiaries (i) has made or filed all
foreign, federal and state income and all other tax returns, reports and declarations required by
any jurisdiction to which it is subject, (ii) has paid all taxes and other governmental assessments
and charges that are material in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set aside on its books
provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to
which such returns, reports or declarations apply. There are no unpaid taxes in any material
amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.
(bb) Internal Accounting and Disclosure Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management’s general or specific
authorizations, (ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to maintain asset and
liability accountability, (iii) access to assets or incurrence of liabilities is permitted only in
accordance with management’s general or specific authorization and (iv) the recorded accountability
for assets and liabilities is compared with the existing assets and liabilities at reasonable
intervals and appropriate action is taken with respect to any difference. The Company maintains
disclosure controls and procedures (as such term is defined in Rule 13a-14 under the 0000 Xxx) that
are effective in ensuring that information required to be disclosed by the Company in the reports
that it files or submits under the 1934 Act is recorded, processed, summarized and reported, within
the time periods specified in the rules and forms of the SEC, including, without limitation,
controls and procedures designed in to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the 1934 Act is accumulated and communicated
to the Company’s management, including its principal executive officer or officers and its
principal financial officer or officers, as appropriate, to allow timely decisions regarding
required disclosure.
(cc) Off Balance Sheet Arrangements. There is no transaction, arrangement, or other
relationship between the Company and an unconsolidated or other off balance sheet entity that is
required to be disclosed by the Company in its 1934 Act filings and is not so disclosed or that
otherwise would be reasonably likely to have a Material Adverse Effect.
(dd) Ranking of Notes. Except as set forth on Section 1 of Schedule 3(dd), no
Indebtedness of the Company is senior to or ranks pari passu with the Notes in right of payment,
whether with respect of payment of redemptions, interest, damages or upon liquidation or
dissolution or otherwise.
(ee) Transfer Taxes. On the Closing Date, all stock transfer or other taxes (other
than income or similar taxes) which are required to be paid in connection with the sale and
transfer of the Securities to be sold to each Buyer hereunder will be, or will have been, fully
paid or provided for by the Company, and all laws imposing such taxes will be or will have been
complied with.
(ff) Acknowledgement Regarding Buyers’ Trading Activity. It is understood and
acknowledged by the Company (i) that none of the Buyers have been asked by the Company or
-15-
its Subsidiaries to agree, nor has any Buyer agreed with the Company or its Subsidiaries, to
desist from purchasing or selling, long and/or short, securities of the Company, or “derivative”
securities based on securities issued by the Company or to hold the Securities for any specified
term; (ii) that any Buyer, and counter parties in “derivative” transactions to which any such Buyer
is a party, directly or indirectly, presently may have a “short” position in the Common Shares, and
(iii) that each Buyer shall not be deemed to have any affiliation with or control over any arm’s
length counter party in any “derivative” transaction. The Company further understands and
acknowledges that one or more Buyers may engage in hedging and/or trading activities at various
times during the period that the Securities are outstanding, including, without limitation, during
the periods that the value of the Conversion Shares and the Warrant Shares deliverable with respect
to Securities are being determined and (b) such hedging and/or trading activities, if any, can
reduce the value of the existing Shareholders’ equity interest in the Company both at and after the
time the hedging and/or trading activities are being conducted. The Company acknowledges that such
aforementioned hedging and/or trading activities do not constitute a breach of this Agreement, the
Notes, the Warrants or any of the documents executed in connection herewith.
(gg) Form S-3 Eligibility. The Company is eligible to register the Conversion Shares
and the Warrant Shares for resale by the Buyers using Form S-3 promulgated under the 1933 Act.
(hh) Manipulation of Price. The Company has not, and to its knowledge no one acting
on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in
the stabilization or manipulation of the price of any security of the Company or (except for
actions taken by the Agent pursuant to the engagement letter dated as
of September 12, 2005 between
the Company and the Agent) to facilitate the sale or resale of any of the Securities, (ii) sold,
bid for, purchased, or paid any compensation for soliciting purchases of, any of the Securities, or
(iii) paid or agreed to pay to any person any compensation for soliciting another to purchase any
other securities of the Company.
(ii) Disclosure. The Company confirms that neither it nor any other Person acting on
its behalf has provided any of the Buyers or their agents or counsel with any information that
constitutes or could reasonably be expected to constitute material, nonpublic information. The
Company understands and confirms that each of the Buyers will rely on the foregoing representations
in effecting transactions in the Securities. All disclosure provided to the Buyers regarding the
Company and its Subsidiaries, their business and the transactions contemplated hereby, including
the Schedules to this Agreement, furnished by or on behalf of the Company is true and correct and
does not contain any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in the light of the circumstances under
which they were made, not misleading. Each press release issued by the Company or its Subsidiaries
during the twelve (12) months preceding the date of this Agreement did not at the time of release
contain any untrue statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. No event or circumstance has occurred or
information exists with respect to the Company or any of its Subsidiaries or its or their business,
properties, prospects, operations or financial conditions,
-16-
which, under applicable law, rule or regulation, requires public disclosure or announcement by
the Company but which has not been so publicly announced or disclosed.
4. COVENANTS.
(a) Best Efforts. Each party shall use its reasonable best efforts timely to satisfy
each of the conditions to be satisfied by it as provided in Sections 6 and 7 of this Agreement.
(b) Form D and Blue Sky. The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to each Buyer promptly
after such filing. The Company shall, on or before the Closing Date, take such action as the
Company shall reasonably determine is necessary in order to obtain an exemption for or to qualify
the Securities for sale to the Buyers at the Closing pursuant to this Agreement under applicable
securities or “Blue Sky” laws of the states of the United States (or to obtain an exemption from
such qualification), and shall provide evidence of any such action so taken to the Buyers on or
prior to the Closing Date. The Company shall make all filings and reports relating to the offer
and sale of the Securities required under applicable securities or “Blue Sky” laws of the states of
the United States following the Closing Date.
(c) Reporting Status. Until the date on which the Buyers shall have sold all the
Conversion Shares and Warrant Shares and none of the Notes or Warrants is outstanding (the
“Reporting Period”), the Company shall timely file all reports required to be filed with the SEC
pursuant to the 1934 Act, and the Company shall continue to timely file reports under the 1934 Act
even if the 1934 Act or the rules and regulations thereunder would otherwise no longer require or
permit such filings.
(d) Use of Proceeds. The Company will use the proceeds from the sale of the
Securities for working capital purposes, and not for the (i) repayment of any outstanding
Indebtedness of the Company or any of its Subsidiaries (other than set forth on Section 1 of
Schedule 3(dd)) or (ii) redemption or repurchase of any of its equity securities.
(e) Financial Information. The Company agrees to send the following to each Investor
(as defined in the Registration Rights Agreement) during the Reporting Period (i) unless the
following are filed with the SEC through XXXXX and are available to the public through the XXXXX
system, within one (1) Business Day after the filing thereof with the SEC, a copy of its Annual
Reports and Quarterly Reports on Form 10-K, 10-KSB, 10-Q or 10-QSB, any Current Reports on Form 8-K
and any registration statements (other than on Form S-8) or amendments filed pursuant to the 1933
Act, (ii) on the same day as the release thereof, facsimile copies of all press releases issued by
the Company or any of its Subsidiaries, and (iii) copies of any notices and other information made
available or given to the shareholders of the Company generally, contemporaneously with the making
available or giving thereof to the shareholders. As used herein “Business Day” means any other day
other than a Saturday, Sunday, or other day on which commercial banks in The City of New York are
authorized or required by law to remain closed.
(f) Listing. The Company shall promptly secure the listing of all of the Registrable
Securities (as defined in the Registration Rights Agreement) upon each national
-17-
securities exchange and automated quotation system, if any, upon which the Common Shares is
then listed (subject to official notice of issuance) and shall maintain such listing of all
Registrable Securities from time to time issuable under the terms of the Transaction Documents.
The Company shall maintain the Common Shares’ authorization for quotation on the Principal Market.
Neither the Company nor any of its Subsidiaries shall take any action which would be reasonably
expected to result in the delisting or suspension of the Common Shares on the Principal Market;
provided, however, that the Company makes no covenant regarding the trading price
of the Common Shares. The Company shall pay all fees and expenses in connection with satisfying
its obligations under this Section 4(f).
(g) Fees. Subject to Section 8 below, at the Closing, the Company shall pay an
expense allowance to Kings Road Investments Ltd. (a Buyer) or its designee(s) (in addition to any
other expense amounts paid to any Buyer prior to the date of this Agreement) to cover expenses
reasonably incurred by Kings Road Investments Ltd. or any professionals engaged by Kings Road
Investments Ltd. in relation to due diligence and investment documentation, in an amount, without
prior notice to the Company, not to exceed $100,000 (in addition to any other expense amounts paid
to any Buyer prior to the date of this Agreement), which amount may be withheld by such Buyer from
its Purchase Price at the Closing. The Company shall be responsible for the payment of any
placement agent’s fees, financial advisory fees, or broker’s commissions (other than for Persons
engaged by any Buyer) relating to or arising out of the transactions contemplated hereby,
including, without limitation, any fees or commissions payable to the Agent. Except as otherwise
set forth in the Transaction Documents, each party to this Agreement shall bear its own expenses in
connection with the sale of the Securities to the Buyers.
(h) Pledge of Securities. The Company acknowledges and agrees that the Securities may
be pledged by an Investor (as defined in the Registration Rights Agreement) in connection with a
bona fide margin agreement or other loan or financing arrangement that is secured by the
Securities. The pledge of Securities shall not be deemed to be a transfer, sale or assignment of
the Securities hereunder, and no Investor effecting a pledge of Securities shall be required to
provide the Company with any notice thereof or otherwise make any delivery to the Company pursuant
to this Agreement or any other Transaction Document. The Company hereby agrees to execute and
deliver such documentation as a pledgee of the Securities may reasonably request in connection with
a pledge of the Securities to such pledgee by an Investor.
(i) Disclosure of Transactions and Other Material Information. On or before 8:30
a.m., New York time, on the first Business Day following the date of this Agreement, the Company
shall issue a press release reasonably acceptable to the Buyers disclosing all material terms of
the transactions contemplated hereby. On or before 8:30 a.m., New York time, on the second
Business Day following the date of this Agreement, the Company shall file a Current Report on Form
8-K describing the terms of the transactions contemplated by the Transaction Documents in the form
required by the 1934 Act and attaching the material Transaction Documents (including, without
limitation, this Agreement, the form of each of the Notes, the forms of Warrants and the
Registration Rights Agreement) as exhibits to such filing (including all attachments, the “8-K
Filing”). From and after the 8-K Filing with the SEC, no Buyer shall be in possession of any
material, nonpublic information received from the Company or any of its Subsidiaries or any of its
respective officers, directors, employees or agents, that is not disclosed
-18-
in the 8-K Filing. The Company shall not, and shall cause each of its Subsidiaries and its
and each of their respective officers, directors, employees and agents, not to, provide any Buyer
with any material, nonpublic information regarding the Company or any of its Subsidiaries from and
after the 8-K Filing with the SEC without the express written consent of such Buyer. If a Buyer
has, or believes it has, received any such material, nonpublic information regarding the Company or
any of its Subsidiaries from the Company, its Subsidiaries or any of their Representatives, it may
provide the Company with written notice thereof. The Company shall, within five (5) Trading Days
of receipt of such notice, make public disclosure of such material, nonpublic information. In the
event of a breach of the foregoing covenant by the Company, any of its Subsidiaries, or any of its
or their respective officers, directors, employees and agents, in addition to any other remedy
provided herein or in the Transaction Documents, a Buyer shall have the right to make a public
disclosure, in the form of a press release, public advertisement or otherwise, of such material,
nonpublic information without the prior approval by the Company, its Subsidiaries, or any of its or
their respective officers, directors, employees or agents. No Buyer shall have any liability to
the Company, its Subsidiaries, or any of its or their respective officers, directors, employees,
shareholders or agents for any such disclosure. Subject to the foregoing, neither the Company, its
Subsidiaries nor any Buyer shall issue any press releases or any other public statements with
respect to the transactions contemplated hereby; provided, however, that the
Company shall be entitled, without the prior approval of any Buyer, to make any press release or
other public disclosure with respect to such transactions (i) in substantial conformity with the
8-K Filing and contemporaneously therewith and (ii) as is required by applicable law and
regulations (provided that in the case of clause (i) each Buyer shall be consulted by the Company
in connection with any such press release or other public disclosure prior to its release).
Without the prior written consent of any applicable Buyer, neither the Company nor any of its
Subsidiaries shall disclose the name of any Buyer in any filing, announcement, release or
otherwise.
(j) Restriction on Redemption and Dividends. So long as any Notes or Warrants are
outstanding, the Company shall not, directly or indirectly, redeem, repurchase or otherwise acquire
for value or declare or pay any dividend or distribution on, the Common Shares without the prior
express written consent of the holders of Notes representing not less than a majority of the
aggregate principal amount of the then outstanding Notes.
(k) Additional Notes; Variable Securities; Dilutive Issuances. So long as any Buyer
beneficially owns any Securities, the Company will not issue any Notes (other than to the Buyers as
contemplated hereby) and the Company shall not issue any other securities that would cause a breach
or default under the Notes. For so long as any Notes or Warrants remain outstanding, the Company
shall not, in any manner, issue or sell any rights, warrants or options to subscribe for or
purchase Common Shares or directly or indirectly convertible into or exchangeable or exercisable
for Common Shares at a price which varies or may vary with the market price of the Common Shares,
including by way of one or more reset(s) to any fixed price unless the conversion, exchange or
exercise price of any such security cannot be less than the then applicable Conversion Price (as
defined in the Notes) with respect to the Common Shares into which any Note is convertible or the
then applicable Exercise Price (as defined in the Warrants) with respect to the Common Shares into
which any Warrant is exercisable. For so long as any Notes or Warrants remain outstanding, the
Company shall not, in any manner, enter into or affect any Dilutive Issuance (as defined in the
Notes) if the effect of such Dilutive
-19-
Issuance is to cause the Company to be required to issue upon conversion of any Note or
exercise of any Warrant any shares of Common Shares in excess of that number of shares of Common
Shares which the Company may issue upon conversion of the Notes and exercise of the Warrants
without breaching the Company’s obligations under the rules or regulations of any Eligible Market
(as defined in the Notes).
(l) Corporate Existence. So long as any Buyer beneficially owns any Securities, the
Company shall not be party to any Fundamental Transaction (as defined in the Notes) unless the
Company is in compliance with the applicable provisions governing Fundamental Transactions set
forth in the Notes and the Warrants.
(m) Reservation of Shares. The Company shall take all action necessary to at all
times have authorized, and reserved for the purpose of issuance, after the Closing Date, the
maximum number of (i) shares of Common Shares issuable upon conversion, amortization or redemption
of all of the Notes, (ii) shares of Common Shares issuable upon exercise of the Warrants (without
taking into account any limitations on the conversion, amortization or redemption of the Notes or
exercise of the Warrants set forth in the Notes and Warrants, respectively) and (iii) any capital
stock of the Company issued or issuable with respect to the Conversion Shares, the Notes, the
Warrant Shares or the Warrants.
(n) Conduct of Business. The business of the Company and its Subsidiaries shall not
be conducted in violation of any law, ordinance or regulation of any governmental entity, except
where such violations would not result, either individually or in the aggregate, in a Material
Adverse Effect.
(o) Additional Issuances of Securities.
(i) For purposes of this Section 4(o), the following definitions shall apply.
(1) “Convertible Securities” means any stock or securities (other than Options)
convertible into or exercisable or exchangeable for shares of Common Shares.
(2) “Options” means any rights, warrants or options to subscribe for or purchase shares
of Common Shares or Convertible Securities.
(3) “Common Share Equivalents” means, collectively, Options and Convertible Securities.
(ii) From the date hereof until the date that is 30 Trading Days (as defined in the Notes)
following the Closing Date (the “Trigger Date”), the Company will not, directly or indirectly,
offer, sell, grant any option to purchase, or otherwise dispose of (or announce any offer, sale,
grant or any option to purchase or other disposition of) any of its or its Subsidiaries’ equity or
equity equivalent securities, including, without limitation, any debt, preferred stock or other
instrument or security that is, at any time during its life and under any circumstances,
convertible into or exchangeable or exercisable for shares of Common Shares or
-20-
Common Share Equivalents (any such offer, sale, grant, disposition or announcement being
referred to as a “Subsequent Placement”).
(iii) As long as 15% of the original principal amount of the Notes issued at the Closing are
outstanding, from the Trigger Date until the eighteen month anniversary of the Closing Date, the
Company will not, directly or indirectly, effect any Subsequent Placement unless the Company shall
have first complied with this Section 4(o)(iii).
(1) The Company shall deliver to each Buyer by facsimile a written notice (the “Offer
Notice”) of any proposed or intended issuance or sale or exchange (the “Offer”) of the
securities being offered (the “Offered Securities”) in a Subsequent Placement within one
Business Day of the determination of the terms of such Subsequent Placement, which Offer
Notice shall (w) identify and describe the Offered Securities, (x) describe the price and
other final terms upon which they are to be issued, sold or exchanged, and the number or
amount of the Offered Securities to be issued, sold or exchanged, (y) identify the persons
or entities (if known) to which or with which the Offered Securities are to be offered,
issued, sold or exchanged and (z) offer to issue and sell to or exchange with such Buyers
(which offer being non-transferable to any successor to such Buyer) a pro rata portion of at
least one-half of the Offered Securities allocated among such Buyers (a) based on such
Buyer’s pro rata portion of the aggregate principal amount of Notes purchased hereunder (the
“Basic Amount”), and (b) with respect to each Buyer that elects to purchase its Basic
Amount, any additional portion of the Offered Securities attributable to the Basic Amounts
of other Buyers as such Buyer shall indicate it will purchase or acquire should the other
Buyers subscribe for less than their Basic Amounts (the “Undersubscription Amount”).
(2) To accept an Offer, in whole or in part, such Buyer must deliver a written notice
to the Company prior to the end of the first (1st) full Business Day after such
Buyer’s receipt of the Offer Notice (for purposes of this Section 4(a)(iii)(2),
notwithstanding the provisions of Section 9(f), receipt of the Offer Notice shall not be
deemed to have occurred until the Buyer shall have physically received such Offer Notice)
(the “Offer Period”), setting forth the portion of such Buyer’s Basic Amount that such Buyer
elects to purchase and, if such Buyer shall elect to purchase all of its Basic Amount, the
Undersubscription Amount, if any, that such Buyer elects to purchase (in either case, the
“Notice of Acceptance”). If the Basic Amounts subscribed for by all Buyers are less than
the total of all of the Basic Amounts, then each Buyer who has set forth an
Undersubscription Amount in its Notice of Acceptance shall be entitled to purchase, in
addition to the Basic Amounts subscribed for, the Undersubscription Amount it has subscribed
for; provided, however, that if the Undersubscription Amounts subscribed for
exceed the difference between the total of all the Basic Amounts and the Basic Amounts
subscribed for (the “Available Undersubscription Amount”), each Buyer who has subscribed for
any Undersubscription Amount shall be entitled to purchase only that portion of the
Available Undersubscription Amount as the Basic Amount of such Buyer bears to the total
Basic Amounts of all Buyers that have subscribed for Undersubscription Amounts, subject to
rounding by the Company to the extent it deems reasonably necessary.
-21-
(3) The Company shall have ten (10) Business Days from the expiration of the Offer
Period above to offer, issue, sell or exchange all or any part of such Offered Securities as
to which a Notice of Acceptance has not been given by the Buyers (the “Refused Securities”),
but only to the offerees described in the Offer Notice (if so described therein) and only
upon terms and conditions (including, without limitation, unit prices and interest rates)
that are not more favorable to the acquiring person or persons or less favorable to the
Company than those set forth in the Offer Notice.
(4) In the event the Company shall propose to sell less than all the Refused Securities
(any such sale to be in the manner and on the terms specified in Section 4(o)(iii)(3)
above), then each Buyer may, at its sole option and in its sole discretion, reduce the
number or amount of the Offered Securities specified in its Notice of Acceptance to an
amount that shall be not less than the number or amount of the Offered Securities that such
Buyer elected to purchase pursuant to Section 4(o)(iii)(2) above multiplied by a fraction,
(i) the numerator of which shall be the number or amount of Offered Securities the Company
actually proposes to issue, sell or exchange (including Offered Securities to be issued or
sold to Buyers pursuant to Section 4(o)(iii)(3) above prior to such reduction) and (ii) the
denominator of which shall be the original amount of the Offered Securities. In the event
that any Buyer so elects to reduce the number or amount of Offered Securities specified in
its Notice of Acceptance, the Company may not issue, sell or exchange more than the reduced
number or amount of the Offered Securities unless and until such securities have again been
offered to the Buyers in accordance with Section 4(o)(iii)(1) above.
(5) Upon the closing of the issuance, sale or exchange of all or less than all of the
Refused Securities, the Buyers shall acquire from the Company, and the Company shall issue
to the Buyers, the number or amount of Offered Securities specified in the Notices of
Acceptance, as reduced pursuant to Section 4(o)(iii)(3) above if the Buyers have so elected,
upon the terms and conditions specified in the Offer. The purchase by the Buyers of any
Offered Securities is subject in all cases to (i) the preparation, execution and delivery by
the Company and the Buyers of a purchase agreement relating to such Offered Securities
reasonably satisfactory in form and substance to the Buyers and their respective counsel,
(ii) the Buyers’ satisfaction, in their sole discretion, with the final terms and/or
conditions that differ from those contained in the Offer Notice, and (iii) the Buyers’
reasonable satisfaction with the identity of the other persons or entities to which the
Offered Securities will be sold.
(6) Any Offered Securities not acquired by the Buyers or other persons in accordance
with this Section 4(o)(iii) may not be issued, sold or exchanged until they are again
offered to the Buyers under the procedures specified in this Agreement.
(iv) The restrictions contained in subsections (ii) and (iii) of this Section 4(o) shall not
apply in connection with the issuance of any Excluded Securities (as defined in the Notes).
-22-
(p) Holding Period. For the purposes of Rule 144, the Company acknowledges that the
holding period of the Conversion Shares, may be tacked onto the holding period of the Notes and the
Company agrees not to take a position contrary to this Section 4(p).
(q) Letter of Credit.
(i) On or prior to the Closing Date, the Company shall obtain an irrevocable letter of credit
(the “Letter of Credit”), in the amount of $10,000,000 issued in favor of Kings Road Investments
Ltd. (the “LC Agent”) by a bank acceptable to such LC Agent (the “Letter of Credit Bank”) and in
form and substance acceptable to such LC Agent. The Letter of Credit, including any renewals,
extensions or replacements referred to below, shall expire not earlier than 91 days after the
Maturity Date of the Notes (the “LC Expiration Date”). Upon the occurrence and during the
continuance of an Event of Default under (and as defined in) any of the Notes, the LC Agent shall
be entitled to draw under the Letter of Credit, including any renewals, extensions or replacements
referred to below, for the full Letter of Credit Amount (as defined in the Notes) then available
thereunder, it being understood that the LC Agent shall act for the benefit of the Buyers on a pro
rata basis based on the principal amount of the Notes held by each of the Buyers and hold such
amount as collateral security for the obligations under the Notes for the benefit of the Buyers.
The Company shall obtain such renewals, extensions or replacements of the Letter of Credit as
necessary to ensure that the Letter of Credit shall not expire prior to the LC Expiration Date
(unless the Letter of Credit shall have been reduced to zero in accordance with the terms contained
in this Section 4(q) prior to such date). If, at any time, the Company cannot obtain a renewal,
extension or replacement of the Letter of Credit such that the Letter of Credit will expire prior
to the LC Expiration Date (a “Withdrawal Event”), the Company and the Letter of Credit Bank shall
each give the LC Agent written notice of the occurrence of a Withdrawal Event at least forty-five
(45) days prior to the then current expiration date of the Letter of Credit. Following a
Withdrawal Event, the LC Agent shall be entitled to draw down the Letter of Credit Amount in its
entirety (whether or not an Event of Default shall have occurred or be continuing under any of the
Notes) and hold such amount as collateral security for the obligations under the Notes for the
benefit of the Buyers.
(ii) If more than $5 million of the Notes are converted, redeemed or amortized pursuant to the
terms of the Notes, the Company shall promptly deliver a notice to the LC Agent (the “LC Reduction
Notice”), certifying as to the occurrence of such event, the aggregate principal amount then
outstanding under the Notes, and the amount by which the Letter of Credit Amount shall be reduced,
such reduction amount to equal one-half of the difference between $15 million and the aggregate
principal amount of the Notes then outstanding. After delivery of the initial LC Reduction Notice,
if the outstanding principal amount of the Notes has been reduced by $2 million or more from the
time of the prior LC Reduction Notice, the Company may deliver a subsequent LC Reduction Notice to
the LC Agent certifying as to the occurrence of such event, the aggregate principal amount then
outstanding under the Notes, and the amount by which the Letter of Credit Amount shall be reduced,
such reduction amount to equal the difference between (A) one-half of the difference between (i)
$15 million and (ii) the aggregate principal amount of the Notes then outstanding and (B) the
aggregate amount of any prior reductions of the Letter of Credit Amount. Within 10 days of the
receipt of any such LC Reduction Notice, the LC Agent shall issue a written instruction to the
-23-
Letter of Credit Bank to request the reduction of the Letter of Credit Amount to the Company
as set forth in the LC Reduction Notice.
(iii) Notwithstanding the foregoing, if the LC Agent reasonably disagrees with the contents of
a LC Reduction Notice or the Company disagrees with any action taken or omitted to be taken by the
LC Agent, such party shall use the dispute resolution procedures contained in Section 25 of the
Notes.
(iv) Kings Road Investments Ltd. is hereby appointed as the LC Agent for the Buyers hereunder,
and each Buyer hereby authorizes the LC Agent (and its officers, directors, employees and agents)
to take any and all such actions on behalf of the Buyers with respect to the Letter of Credit in
accordance with the terms of this Agreement. The LC Agent shall not have, by reason hereof or any
of the other Transaction Documents, a fiduciary relationship in respect of any Buyer. To the
extent that the LC Agent, in such capacity, receives any funds pursuant to the terms of this
Section 4(q), if the LC Agent is to distribute any of such funds to any Buyer (including Kings Road
Investments Ltd., in its capacity as a Buyer), it shall distribute such funds to all of the Buyers
on a pro rata basis based on the principal amount of the Notes held by each of the Buyers.
Neither the LC Agent nor any of its officers, directors, employees and agents shall have any
liability to the Buyer for any action taken or omitted to be taken in connection hereof, and any
Buyer agrees to defend, protect, indemnify and hold harmless the LC Agent and all of its officers,
directors, employees and agents (collectively, the “Indemnitees”) from and against any losses,
damages, liabilities, obligations, penalties, actions, judgments, suits, fees, costs and expenses
(including, without limitation, reasonable attorneys’ fees, costs and expenses) incurred by such
Indemnitee, whether direct, indirect or consequential, arising from or in connection with the
performance by such Indemnitee of the duties and obligations of the LC Agent pursuant hereto.
(r) Pay off or Subordination of Indebtedness. Within five (5) Business Days from the
Closing Date, the Company shall either repay or make expressly subordinate in right of payment to
the Indebtedness evidenced by the Notes, as reflected in a written agreement acceptable to the
Required Holders and approved by the Required Holders, all Indebtedness set forth on Section 2 of
Schedule 3(dd).
5. REGISTER; TRANSFER AGENT INSTRUCTIONS.
(a) Register. The Company shall maintain at its principal executive offices (or such
other office or agency of the Company as it may designate by notice to each holder of Securities),
a register for the Notes and the Warrants in which the Company shall record the name and address of
the Person in whose name the Notes and the Warrants have been issued (including the name and
address of each transferee), the principal amount of Notes held by such Person, the number of
Conversion Shares issuable upon conversion of the Notes and the number of Warrant Shares issuable
upon exercise of the Warrants held by such Person. The Company shall keep the register open and
available at all times during business hours for inspection of any Buyer or its legal
representatives.
(b) Transfer Agent Instructions. The Company shall issue irrevocable instructions to
its transfer agent, and any subsequent transfer agent, to issue certificates or credit
-24-
shares to the applicable balance accounts at The Depository Trust Company (“DTC”), registered
in the name of each Buyer or its respective nominee(s), for the Conversion Shares and the Warrant
Shares issued upon conversion of the Notes or exercise of the Warrants in such amounts as specified
from time to time by each Buyer to the Company upon conversion of the Notes or exercise of the
Warrants in the form of Exhibit D attached hereto (the “Irrevocable Transfer Agent
Instructions”). The Company warrants that no instruction other than the Irrevocable Transfer Agent
Instructions referred to in this Section 5(b), and stop transfer instructions to give effect to
Section 2(g) hereof, will be given by the Company to its transfer agent, and that the Securities
shall otherwise be freely transferable on the books and records of the Company as and to the extent
provided in this Agreement and the other Transaction Documents. If a Buyer effects a sale,
assignment or transfer of the Securities in accordance with Section 2(f), the Company shall permit
the transfer and the Company shall promptly instruct its transfer agent to issue one or more
certificates or credit shares to the applicable balance accounts at DTC in such name and in such
denominations as specified by such Buyer to effect such sale, transfer or assignment. In the event
that such sale, assignment or transfer involves Conversion Shares or Warrant Shares sold, assigned
or transferred pursuant to an effective registration statement or pursuant to Rule 144, the
transfer agent shall issue such Securities to the Buyer, assignee or transferee, as the case may
be, without any restrictive legend. The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to a Buyer. Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations under this Section 5(b) will be
inadequate and agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Section 5(b), that a Buyer shall be entitled, in addition to all other available
remedies, to an order and/or injunction restraining any breach and requiring immediate issuance and
transfer, without the necessity of showing economic loss and without any bond or other security
being required.
6. CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the Notes and the related Warrants
to each Buyer at the Closing is subject to the satisfaction, at or before the Closing Date, of each
of the following conditions, provided that these conditions are for the Company’s sole benefit and
may be waived by the Company at any time in its sole discretion by providing each Buyer with prior
written notice thereof:
(a) Such Buyer shall have executed each of the Transaction Documents to which it is a party
and delivered the same to the Company.
(b) Such Buyer and each other Buyer shall have delivered to the Company the Purchase Price
(less, in the case of Kings Road Investments Ltd., the amounts withheld pursuant to Section 4(g))
for the Notes and the related Warrants being purchased by such Buyer at the Closing by wire
transfer of immediately available funds pursuant to the wire instructions provided by the Company.
(c) The representations and warranties of such Buyer shall be true and correct in all material
respects as of the date when made and as of the Closing Date as though made at that time (except
for representations and warranties that speak as of a specific date), and such Buyer shall have
performed, satisfied and complied in all material respects with the covenants,
-25-
agreements and conditions required by this Agreement to be performed, satisfied or complied
with by such Buyer at or prior to the Closing Date.
7. CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE.
The obligation of each Buyer hereunder to purchase the Notes and the related Warrants at the
Closing is subject to the satisfaction, at or before the Closing Date, of each of the following
conditions, provided that these conditions are for each Buyer’s sole benefit and may be waived by
such Buyer at any time in its sole discretion by providing the Company with prior written notice
thereof:
(a) The Company shall have duly executed and delivered to such Buyer: (A) the Notes (in such
principal amounts as such Buyer shall reasonably request) and the related Warrants (in such amounts
as such Buyer shall reasonably request) being purchased by such Buyer at the Closing pursuant to
this Agreement and (B) each of the other Transaction Documents.
(b) Such Buyer shall have received the opinion of Xxxxx & Hoestetler LLP, the Company’s
outside counsel, dated as of the Closing Date, in substantially the form of Exhibit E
attached hereto.
(c) The Company shall have delivered to such Buyer a copy of the Irrevocable Transfer Agent
Instructions, in the form of Exhibit D attached hereto, which instructions shall have been
delivered to and acknowledged in writing by the Company’s transfer agent.
(d) The Company shall have delivered to such Buyer a certificate evidencing the formation and
good standing of the Company and each of its Subsidiaries in each such entity’s jurisdiction of
formation issued by the Secretary of State (or comparable office) of such jurisdiction, as of a
date within 10 days of the Closing Date.
(e) The Company shall have delivered to such Buyer a certificate evidencing the Company’s
qualification as a foreign corporation and good standing issued by the Secretary of State (or
comparable office) of each jurisdiction in which the Company, as applicable, conducts business, as
of a date within 10 days of the Closing Date.
(f) The Company shall have delivered to such Buyer a certified copy of the Articles of
Incorporation of the Company as certified by the Secretary of State of Utah within ten (10) days of
the Closing Date.
(g) The Company shall have delivered to such Buyer a certificate, executed by the Secretary of
the Company dated as of the Closing Date, as to (i) the resolutions consistent with Section 3(b) as
adopted by the Company’s Board of Directors in a form reasonably acceptable to such Buyer, (ii) the
Articles of Incorporation, as in effect at the Closing and (iii) the Bylaws, as in effect at the
Closing, in the form attached hereto as Exhibit F.
(h) The representations and warranties of the Company shall be true and correct in all
material respects (except for those representations and warranties that are qualified by
materiality or Material Adverse Effect, which shall be true and correct in all respects) as of the
-26-
date when made and as of the Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants, agreements and
conditions required by the Transaction Documents to be performed, satisfied or complied with by the
Company at or prior to the Closing Date. Such Buyer shall have received a certificate, executed by
the Chief Executive Officer of the Company, dated as of the Closing Date, to the foregoing effect
and as to such other matters as may be reasonably requested by such Buyer in the form attached
hereto as Exhibit G.
(i) The Company shall have delivered to such Buyer a letter from the Company’s transfer agent
certifying the number of shares of Common Shares outstanding as of a date within five days of the
Closing Date.
(j) The Common Shares (i) shall be designated for quotation or listed on the Principal Market
and (ii) shall not have been suspended, as of the Closing Date, by the SEC or the Principal Market
from trading on the Principal Market nor shall suspension by the SEC or the Principal Market have
been threatened, as of the Closing Date, either (A) in writing by the SEC or the Principal Market
or (B) by falling below the minimum listing maintenance requirements of the Principal Market.
(k) The Company shall have obtained all governmental, regulatory or third party consents and
approvals, if any, necessary for the sale of the Securities.
(l) Except as set forth on Section 2 of Schedule 3(dd), there shall be no Indebtedness
of the Company other than Indebtedness which is subordinate to the Notes.
(m) The Company shall have delivered to such Buyer such other documents relating to the
transactions contemplated by this Agreement as such Buyer or its counsel may reasonably request.
8. TERMINATION.
In the event that the Closing shall not have occurred with respect to a Buyer on or before
five (5) Business Days from the date hereof due to the Company’s or such Buyer’s failure to satisfy
the conditions set forth in Sections 6 and 7 above (and the nonbreaching party’s failure to waive
such unsatisfied condition(s)), the nonbreaching party shall have the option to terminate this
Agreement with respect to such breaching party at the close of business on such date without
liability of any party to any other party; provided, however, this if this
Agreement is terminated pursuant to this Section 8, the Company shall remain obligated to reimburse
the non-breaching Buyers for the expenses described in Section 4(g) above.
9. MISCELLANEOUS.
(a) Governing Law; Jurisdiction; Jury Trial. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall be governed by the
internal laws of the State of New York, without giving effect to any choice of law or conflict of
law provision or rule (whether of the State of New York or any other jurisdictions) that would
cause the application of the laws of any jurisdictions other than the State of New York. Each
-27-
party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts
sitting in The City of New York, Borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding,
any claim that it is not personally subject to the jurisdiction of any such court, that such suit,
action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by mailing a copy thereof
to such party at the address for such notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process in any manner
permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR
ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
(b) Counterparts. This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the other party;
provided that a facsimile signature shall be considered due execution and shall be binding upon the
signatory thereto with the same force and effect as if the signature were an original, not a
facsimile signature.
(c) Headings. The headings of this Agreement are for convenience of reference and
shall not form part of, or affect the interpretation of, this Agreement.
(d) Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity
or enforceability of any provision of this Agreement in any other jurisdiction.
(e) Entire Agreement; Amendments. This Agreement and the other Transaction Documents
supersede all other prior oral or written agreements between the Buyers, the Company, their
affiliates and Persons acting on their behalf with respect to the matters discussed herein and
therein, and this Agreement, the other Transaction Documents and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters covered herein and
therein and, except as specifically set forth herein or therein, neither the Company nor any Buyer
makes any representation, warranty, covenant or undertaking with respect to such matters. No
provision of this Agreement may be amended other than by an instrument in writing signed by the
Company and the holders of at least a majority of the aggregate principal amount of Notes issued
and issuable hereunder, and any amendment to this Agreement made in conformity with the provisions
of this Section 9(e) shall be binding on all Buyers and holders of Securities, as applicable. No
provision hereof may be waived other than by an instrument in writing signed by the party against
whom enforcement is sought. No such amendment shall be effective to the extent that it applies to
less than all of the holders of the applicable Securities then outstanding. No consideration shall
be offered or paid to any Person
-28-
to amend or consent to a waiver or modification of any provision of any of the Transaction
Documents unless the same consideration also is offered to all of the parties to the Transaction
Documents, holders of Notes or holders of the Warrants, as the case may be. The Company has not,
directly or indirectly, made any agreements with any Buyers relating to the terms or conditions of
the transactions contemplated by the Transaction Documents except as set forth in the Transaction
Documents. Without limiting the foregoing, the Company confirms that, except as set forth in this
Agreement, no Buyer has made any commitment or promise or has any other obligation to provide any
financing to the Company or otherwise.
(f) Notices. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and will be deemed to
have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by
facsimile (provided confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one Business Day after deposit with an overnight
courier service, in each case properly addressed to the party to receive the same. The addresses
and facsimile numbers for such communications shall be:
| If to the Company: | ||||
| Telkonet, Inc. | ||||
| 00000 Xxxxxx Xxxxxxx Xxxxxxx | ||||
| Xxxxxxxxxx, Xxxxxxxx 00000 | ||||
| Telephone: (000) 000-0000 | ||||
| Facsimile: (000) 000-0000 | ||||
| Attention: Chief Financial Officer | ||||
| With a copy (for informational purposes only) to: | ||||
| Xxxxx & Xxxxxxxxx LLP | ||||
| 0000 Xxxxxxxxxxx Xxxxxx | ||||
| Xxxxxxxxxx, X.X. 00000 | ||||
| Telephone: (000) 000-0000 | ||||
| Facsimile: (000) 000-0000 | ||||
| Attention: Xxxxxxx X. Xxxxx, Esq. | ||||
| If to the Transfer Agent: | ||||
| StockTrans | ||||
| 00 Xxxx Xxxxxxxxx Xxxxxx | ||||
| Xxxxxxx, XX 00000 | ||||
| Telephone: 000-000-0000 | ||||
| Facsimile: 000-000-0000 | ||||
| Attention: Xxxxxxxx Xxxxxx, President | ||||
If to a Buyer, to its address and facsimile number set forth on the Schedule of Buyers, with copies
to such Buyer’s representatives as set forth on the Schedule of Buyers,
-29-
with a copy (for informational purposes only) to:
Xxxxxxx Xxxx & Xxxxx LLP
000 Xxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
Attention: Xxxxxxx X. Xxxxx, Esq.
000 Xxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
Attention: Xxxxxxx X. Xxxxx, Esq.
or to such other address and/or facsimile number and/or to the attention of such other Person as
the recipient party has specified by written notice given to each other party five (5) days prior
to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of
such notice, consent, waiver or other communication, (B) mechanically or electronically generated
by the sender’s facsimile machine containing the time, date, recipient facsimile number and an
image of the first page of such transmission or (C) provided by an overnight courier service shall
be rebuttable evidence of personal service, receipt by facsimile or receipt from an overnight
courier service in accordance with clause (i), (ii) or (iii) above, respectively.
(g) Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns, including any purchasers of the
Notes or the Warrants. The Company shall not assign this Agreement or any rights or obligations
hereunder without the prior written consent of the holders of at least a majority of the aggregate
principal amount of Notes issued and issuable hereunder, including by way of a Fundamental
Transaction (unless the Company is in compliance with the applicable provisions governing
Fundamental Transactions set forth in the Notes and the Warrants). A Buyer may assign some or all
of its rights hereunder without the consent of the Company in which event such assignee shall be
deemed to be a Buyer hereunder with respect to such assigned rights.
(h) No Third Party Beneficiaries. This Agreement is intended for the benefit of the
parties hereto and their respective permitted successors and assigns, and is not for the benefit
of, nor may any provision hereof be enforced by, any other Person.
(i) Survival. Unless this Agreement is terminated under Section 8, the
representations and warranties of the Company and the Buyers contained in Sections 2 and 3 and the
agreements and covenants set forth in Sections 4, 5 and 9 shall survive the Closing. Each Buyer
shall be responsible only for its own representations, warranties, agreements and covenants
hereunder.
(j) Further Assurances. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as any other party may reasonably request in
order to carry out the intent and accomplish the purposes of this Agreement and the consummation of
the transactions contemplated hereby.
(k) Indemnification. In consideration of each Buyer’s execution and delivery of the
Transaction Documents and acquiring the Securities thereunder and in addition to all of the
Company’s other obligations under the Transaction Documents, the Company shall defend,
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protect, indemnify and hold harmless each Buyer and each other holder of the Securities and
all of their shareholders, partners, members, officers, directors, employees and direct or indirect
investors and any of the foregoing Persons’ agents or other representatives (including, without
limitation, those retained in connection with the transactions contemplated by this Agreement)
(collectively, the “Indemnitees”) from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys’ fees and disbursements
(the “Indemnified Liabilities”), incurred by any Indemnitee as a result of, or arising out of, or
relating to (a) any inaccuracy in any representation or warranty made by the Company in the
Transaction Documents or any other certificate, instrument or document contemplated hereby or
thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in the
Transaction Documents or any other certificate, instrument or document contemplated hereby or
thereby or (c) any cause of action, suit or claim brought or made against such Indemnitee by a
third party (including for these purposes a derivative action brought on behalf of the Company) and
arising out of or resulting from (i) the execution, delivery, performance or enforcement of the
Transaction Documents or any other certificate, instrument or document contemplated hereby or
thereby, (ii) any transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, (iii) any disclosure made by such
Buyer pursuant to Section 4(i), or (iv) the status of such Buyer or holder of the Securities as an
investor in the Company pursuant to the transactions contemplated by the Transaction Documents. To
the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the
Company shall make the maximum contribution to the payment and satisfaction of each of the
Indemnified Liabilities that is permissible under applicable law. Except as otherwise set forth
herein, the mechanics and procedures with respect to the rights and obligations under this Section
9(k) shall be the same as those set forth in Section 6 of the Registration Rights Agreement.
(l) No Strict Construction. The language used in this Agreement will be deemed to be
the language chosen by the parties to express their mutual intent, and no rules of strict
construction will be applied against any party.
(m) Remedies. Each Buyer and each holder of the Securities shall have all rights and
remedies set forth in the Transaction Documents and all rights and remedies which such holders have
been granted at any time under any other agreement or contract and all of the rights which such
holders have under any law. Any Person having any rights under any provision of this Agreement
shall be entitled to enforce such rights specifically (without posting a bond or other security),
to recover damages by reason of any breach of any provision of this Agreement and to exercise all
other rights granted by law. Furthermore, the Company recognizes that in the event that it fails
to perform, observe, or discharge any or all of its obligations under the Transaction Documents,
any remedy at law may prove to be inadequate relief to the Buyers. The Company therefore agrees
that the Buyers shall be entitled to seek temporary and permanent injunctive relief in any such
case without the necessity of proving actual damages and without posting a bond or other security.
(n) Rescission and Withdrawal Right. Notwithstanding anything to the contrary
contained in (and without limiting any similar provisions of) the Transaction Documents,
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whenever any Buyer exercises a right, election, demand or option under a Transaction Document
and the Company does not timely perform its related obligations within the periods therein
provided, then such Buyer may rescind or withdraw, in its sole discretion from time to time upon
written notice to the Company, any relevant notice, demand or election in whole or in part without
prejudice to its future actions and rights.
(o) Payment Set Aside. To the extent that the Company makes a payment or payments to
the Buyers hereunder or pursuant to any of the other Transaction Documents or the Buyers enforce or
exercise their rights hereunder or thereunder, and such payment or payments or the proceeds of such
enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent
or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or
otherwise restored to the Company, a trustee, receiver or any other Person under any law
(including, without limitation, any bankruptcy law, federal or state, foreign law, common law or
equitable cause of action), then to the extent of any such restoration the obligation or part
thereof originally intended to be satisfied shall be revived and continued in full force and effect
as if such payment had not been made or such enforcement or setoff had not occurred.
(p) Independent Nature of Buyers’ Obligations and Rights. The obligations of each
Buyer under any Transaction Document are several and not joint with the obligations of any other
Buyer, and no Buyer shall be responsible in any way for the performance of the obligations of any
other Buyer under any Transaction Document. Nothing contained herein or in any other Transaction
Document, and no action taken by any Buyer pursuant hereto or thereto, shall be deemed to
constitute the Buyers as a partnership, an association, a joint venture or any other kind of
entity, or create a presumption that the Buyers are in any way acting in concert or as a group with
respect to such obligations or the transactions contemplated by the Transaction Documents and the
Company acknowledges that the Buyers are not acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Documents. Each Buyer confirms
that it has independently participated in the negotiation of the transaction contemplated hereby
with the advice of its own counsel and advisors. Each Buyer shall be entitled to independently
protect and enforce its rights, including, without limitation, the rights arising out of this
Agreement or out of any other Transaction Documents, and it shall not be necessary for any other
Buyer to be joined as an additional party in any proceeding for such purpose.
[Signature Page Follows]
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IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to
this Securities Purchase Agreement to be duly executed as of the date first written above.
| COMPANY: | ||||
| TELKONET, INC. | ||||
| By: | /s/ Xxxxxx X. Xxxxxxx | |||
| Name: Xxxxxx X. Xxxxxxx | ||||
| Title: President and Chief Executive Officer | ||||
[Signature Page to Securities Purchase Agreement]
IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to
this Securities Purchase Agreement to be duly executed as of the date first written above.
| BUYERS: | ||||
| KINGS ROAD INVESTMENTS LTD. | ||||
| By: | ||||
| Name: | ||||
| Title: | ||||
[Signature Page to Securities Purchase Agreement]
IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to
this Securities Purchase Agreement to be duly executed as of the date first written above.
| BUYERS: | ||||
| PORTSIDE GROWTH & OPPORTUNITY FUND | ||||
| By: | ||||
| Name: | ||||
| Title: | ||||
[Signature Page to Securities Purchase Agreement]
SCHEDULE OF BUYERS
| (1) | (2) | (3) | (4) | (5) | (6) | |||||||||||
| Aggregate | ||||||||||||||||
| Principal | Number of | |||||||||||||||
| Address and | Amount of | Warrant | Legal Representative’s Address | |||||||||||||
| Buyer | Facsimile Number | Notes | Shares | Purchase Price | and Facsimile Number | |||||||||||
Kings
Road Investments Ltd. |
c/o Polygon Investment
Partners LP 000 Xxxxxxx Xxxxxx, 00xx Xxxxx Xxx Xxxx, XX 00000 Attention: Xxxx X.X. Xxxxxxxxx and Xxxxxxx X. Xxxxx Facsimile: (000) 000-0000 Telephone: (000) 000-0000 Residence: Cayman Islands |
$ | 10,000,000 | 500,000 | $ | 10,000,000 | Xxxxxxx Xxxx & Xxxxx LLP 000 Xxxxx Xxxxxx Xxx Xxxx, Xxx Xxxx 00000 Attention: Xxxxxxx Xxxxx, Esq. Facsimile: (000) 000-0000 Telephone: (000) 000-0000 |
|||||||||
Portside Growth & Opportunity Fund |
c/o Ramius Capital Group, L.L.C. 000 Xxxxx Xxxxxx, 00xx Xxxxx Xxx Xxxx, Xxx Xxxx 00000 Attention: Xxxxxxx Xxxxx Facsimile: (000) 000-0000 Telephone: (000) 000-0000 Residence: Cayman Islands |
$ | 10,000,000 | 500,000 | $ | 10,000,000 | ||||||||||
EXHIBITS
Exhibit A
|
Form of Notes | |
Exhibit B
|
Form of Warrants | |
Exhibit C
|
Registration Rights Agreement | |
Exhibit D
|
Irrevocable Transfer Agent Instructions | |
Exhibit E
|
Form of Counsel Opinion | |
Exhibit F
|
Form of Secretary’s Certificate | |
Exhibit G
|
Form of Officer’s Certificate |
SCHEDULES
Schedule 3(a)
|
Subsidiaries | |
Schedule 3(e)
|
Consents | |
Schedule 3(l)
|
Absence of Certain Changes | |
Schedule 3(r)
|
Capitalization | |
Schedule 3(s)
|
Indebtedness and Other Contracts | |
Schedule 3(t)
|
Litigation | |
Schedule 3(x)
|
Intellectual Property | |
Schedule 3(z)
|
Subsidiary Rights | |
Schedule 3(dd)
|
Ranking of Notes |
