Exhibit 10.4
SECURITY AGREEMENT
This Security Agreement is made as of May 27, 2004 by and between
LAURUS MASTER FUND, LTD., a Cayman Islands corporation ("Laurus") and GVI
Security Solutions, Inc., a Delaware corporation (the "Company").
BACKGROUND
Company has requested that Laurus make advances available to
Company; and
Laurus has agreed to make such advances to Company on the terms and
conditions set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and undertakings
and the terms and conditions contained herein, the parties hereto agree as
follows:
1. (a) General Definitions. Capitalized terms used in this Agreement
shall have the meanings assigned to them in Annex A.
(b) Accounting Terms. Any accounting terms used in this Agreement
which are not specifically defined shall have the meanings customarily given
them in accordance with GAAP and all financial computations shall be computed,
unless specifically provided herein, in accordance with GAAP consistently
applied.
(c) Other Terms. All other terms used in this Agreement and defined
in the UCC, shall have the meaning given therein unless otherwise defined
herein.
(d) Rules of Construction. All Schedules, Addenda, Annexes and
Exhibits hereto or expressly identified to this Agreement are incorporated
herein by reference and taken together with this Agreement constitute but a
single agreement. The words "herein", hereof" and "hereunder" or other words of
similar import refer to this Agreement as a whole, including the Exhibits,
Addenda, Annexes and Schedules thereto, as the same may be from time to time
amended, modified, restated or supplemented, and not to any particular section,
subsection or clause contained in this Agreement. Wherever from the context it
appears appropriate, each term stated in either the singular or plural shall
include the singular and the plural, and pronouns stated in the masculine,
feminine or neuter gender shall include the masculine, the feminine and the
neuter. The term "or" is not exclusive. The term "including" (or any form
thereof) shall not be limiting or exclusive. All references to statutes and
related regulations shall include any amendments of same and any successor
statutes and regulations. All references in this Agreement or in the Schedules,
Addenda, Annexes and Exhibits to this Agreement to sections, schedules,
disclosure schedules, exhibits, and attachments shall refer to the corresponding
sections, schedules, disclosure schedules, exhibits, and attachments of or to
this Agreement. All references to any instruments or agreements, including
references to any of this Agreement or the Ancillary Agreements shall include
any and all modifications or amendments thereto and any and all extensions or
renewals thereof.
2. Loans. (a)(i) Subject to the terms and conditions set forth
herein and in the Ancillary Agreements, Laurus shall make loans (the "Loans") to
Company from time to time during the Term which, in the aggregate at any time
outstanding, will not exceed the lesser of (x) the Capital Availability Amount
or (y) an amount equal to (I) the Accounts Availability plus (II) the Inventory
Availability minus (III) such reserves as Laurus may reasonably in its good
faith judgment deem proper and necessary from time to time (the "Reserves"). The
amount derived at any time from Section 2(a)(i)(y)(I) plus 2(a)(i)(y)(II) minus
2(a)(i)(y)(III) shall be referred to as the "Formula Amount". Company shall
execute and deliver to Laurus on the Closing Date a Minimum Borrowing Note and a
Secured Revolving Note evidencing the Loans funded on the Closing Date. From
time to time thereafter, Company shall execute and deliver to Laurus immediately
prior to the final funding of each additional $5,000,000 tranche of Loans
(calculated on a cumulative basis for each such tranche) an additional Minimum
Borrowing Note evidencing such tranche, in the form of Note delivered by Company
to Laurus on the Closing Date, provided, however, that "Fixed Conversion Price"
with respect to each additional Minimum Borrower Note issued after the date
hereof shall be equal to 105% of the average closing price of the Common Stock
for the ten (10) trading days immediately preceding the final funding of the
applicable tranche. If the amount due and payable under the Revolving Note
should equal or exceed $1,500,000, and if the outstanding balance on the Minimum
Borrowing Note issued by the Borrower to the Holder on the date hereof ( the
"Series A Minimum Borrowing Note") shall be less than $5,000,000 (the difference
of $5,000,000 less the actual balance of the Minimum Borrowing Note, the
"Available Minimum Borrowing"), such portion of the balance thereof in excess of
$1,500,000 in an amount up the Available Minimum Borrowing shall be deemed to be
simultaneously extinguished the Revolving Note and transferred to, and evidenced
by, a new serialized Minimum Borrowing Note (e.g., the Available Minimum
Borrowing shall be $0). When Five Million Dollars ($5,000,000) have been
allocated from the Revolving Note to an additional serialized Minimum Borrowing
Note, such serialized Minimum Borrowing Note (with an appropriate serial
designation), shall then be issued by the Borrower and registered as set forth
in the Registration Rights Agreement. Notwithstanding the limitations set forth
above, if requested by the Company, Laurus retains the right to lend to Company
from time to time such amounts in excess of such limitations as Laurus may
determine in its sole discretion.
(i) Company acknowledges that the exercise of Laurus'
discretionary rights hereunder may result during the Term in one or more
increases or decreases in the Reserves used in determining the Formula Amount,
which may limit or restrict advances requested by Company.
(ii) If Company does not pay any interest, fees, costs or
charges to Laurus when due, Company shall thereby be deemed to have requested,
and Laurus is hereby authorized at its discretion to make and charge to
Company's account, a Loan to Company as of such date in an amount equal to such
unpaid interest, fees, costs or charges.
(iii) If Company at any time fails to perform or observe any
of the covenants contained in this Agreement or any Ancillary Agreement, Laurus
may, but need not, perform or observe such covenant on behalf and in the name,
place and stead of Company (or, at Laurus' option, in Laurus' name) and may, but
need not, take any and all other actions which Laurus may deem necessary to cure
or correct such failure (including the payment of taxes, the satisfaction of
Liens, the performance of obligations owed to Account Debtors, lessors or other
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obligors, the procurement and maintenance of insurance, the execution of
assignments, security agreements and financing statements, and the endorsement
of instruments). The amount of all monies expended and all costs and expenses
(including reasonable attorneys' fees and legal expenses) incurred by Laurus in
connection with or as a result of the performance or observance of such
agreements or the taking of such action by Laurus shall be charged to Company's
account as a Loan and added to the Obligations. To facilitate Laurus'
performance or observance of such covenants of Company, Company hereby
irrevocably appoints Laurus, or Laurus' delegate, acting alone, as Company's
attorney in fact (which appointment is coupled with an interest) with the right
(but not the duty) from time to time to create, prepare, complete, execute,
deliver, endorse or file in the name and on behalf of Company any and all
instruments, documents, assignments, security agreements, financing statements,
applications for insurance and other agreements and writings required to be
obtained, executed delivered or endorsed by Company.
(iv) Laurus will account to Company monthly with a statement
of all Loans and other advances, charges and payments made pursuant to this
Agreement, and such account rendered by Laurus shall be deemed final, binding
and conclusive unless Laurus is notified by Company in writing to the contrary
within thirty (30) days of the date each account was rendered specifying the
item or items to which objection is made.
(v) During the Term, Company may borrow, repay and reborrow
Loans in excess of the Minimum Borrowing Amount, all in accordance with the
terms and conditions hereof.
(vi) If any Eligible Account is not paid by the Account Debtor
within ninety (90) days after the date that such Eligible Account was invoiced
or if any Account Debtor asserts a deduction, dispute, contingency, set-off, or
counterclaim with respect to any Eligible Account, (a "Delinquent Account"), the
Company shall (i) reimburse Laurus for the amount of the Revolving Credit
Advance made with respect to such Delinquent Account or (ii) immediately replace
such Delinquent Account with an otherwise Eligible Account.
(b) Following the occurrence of an Event of Default that continues
to exist beyond any applicable grace period, Laurus may, at its option, elect to
convert the credit facility contemplated hereby to an accounts receivable
purchase facility. Upon such election by Laurus (subsequent notice of which
Laurus shall provide to Company), Company shall be deemed to hereby have sold,
assigned, transferred, conveyed and delivered to Laurus, and Laurus shall be
deemed to have purchased and received from Company, in consideration of the
cancellation of such portion of the Loans offset by the purchase and collection
in full of such corresponding Eligible Accounts, all right, title and interest
of Company in and to all Accounts which shall at such time constitute Eligible
Accounts (the "Receivables Purchase"). All outstanding loans not so offset shall
be deemed obligations under such accounts receivable purchase facility. The
conversion to an accounts receivable purchase facility in accordance with the
terms hereof shall not be deemed an exercise by Laurus of its secured creditor
rights under Article 9 of the UCC. Immediately following Laurus' request,
Company shall execute all such further documentation as may be required by
Laurus to more fully set forth the accounts receivable purchase facility herein
contemplated, including, without limitation, Laurus' standard form of accounts
receivable purchase agreement and account debtor notification letters, but
Company's failure to enter into any such documentation shall not impair or
affect the Receivables Purchase in any manner whatsoever.
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(c) Minimum Borrowing Amount. After a registration statement
registering the shares of Common Stock issuable upon conversion of a Minimum
Borrowing Note has been declared effective by the SEC, conversions of the Loans
evidenced thereby into the Common Stock of the Company may be initiated as set
forth in such Note. From and after the date upon which the Minimum Borrowing
Amount evidenced by the first Minimum Borrowing Note is converted into Common
Stock (the "Trigger Conversion Date"), (i) corresponding amounts of all
outstanding Loans (not attributable to the Minimum Borrowing Amount evidenced by
the first Minimum Borrowing Amount) existing on or made after the Trigger
Conversion Date will be aggregated until they reach the sum of $5,000,000, (ii)
the Company will issue a new (serialized) Minimum Borrowing Note (in accordance
with Section 2.1(a)) to Laurus in respect of such $5,000,000 aggregation, and
(iii) the Company shall prepare and file a subsequent registration statement
with the SEC to register the Common Stock issuable upon conversion of such
subsequent Minimum Borrowing Note as set forth in the Registration Rights
Agreement.
3. Repayment of the Loans. Company (a) may prepay the Obligations in
excess of the Minimum Borrowing Amount from time to time in accordance with the
terms and provisions of the Notes (and Section 17 hereof if such prepayment is
due to a termination of this Agreement); and (b) shall repay on the expiration
of the Term (i) the then aggregate outstanding principal balance of the Loans
made by Laurus to Company hereunder together with accrued and unpaid interest,
fees and charges and (ii) all other amounts owed Laurus under this Agreement and
the Ancillary Agreements. Any payments of principal, interest, fees or any other
amounts payable hereunder or under any Ancillary Agreement shall be made prior
to 12:00 noon (New York time) on the due date thereof in immediately available
funds.
4. Procedure for Loans. Company may by written notice request a
borrowing of Loans prior to 12:00 p.m. (New York time) on the Business Day of
its request to incur, on the next business day, a Loan. Together with each
request for a Loan (or at such other intervals as Laurus may request), Company
shall deliver to Laurus a Borrowing Base Certificate in the form of Exhibit A,
which shall be certified as true and correct by the Chief Executive Officer or
Chief Financial Officer of Company together with all supporting documentation
relating thereto. All Loans shall be disbursed from whichever office or other
place Laurus may designate from time to time and shall be charged to Company's
account on Laurus' books. The proceeds of each Loan made by Laurus shall be made
available to Company on the Business Day following the Business Day so requested
in accordance with the terms of this Section 4 by way of credit to Company's
operating account maintained with such bank as Company designated to Laurus. Any
and all Obligations due and owing hereunder may be charged to Company's account
and shall constitute Loans.
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5. Interest and Payments.
(a) Interest.
(i) Except as modified by Section 5(a)(iii) below, Company
shall pay interest at the Contract Rate on the unpaid principal balance of each
Loan until such time as such Loan is collected in full in good funds in dollars
of the United States of America.
(ii) Interest and payments shall be computed on the basis of
actual days elapsed in a year of 360 days. At Laurus' option, Laurus may charge
Company account for said interest.
(iii) Effective upon the occurrence of any Event of Default
and for so long as any Event of Default shall be continuing, the Contract Rate
shall automatically be increased by three percent (3%) per annum (such increased
rate, the "Default Rate"), and all outstanding Obligations, including unpaid
interest, shall continue to accrue interest from the date of such Event of
Default at the Default Rate applicable to such Obligations.
(iv) In no event shall the aggregate interest payable
hereunder exceed the maximum rate permitted under any applicable law or
regulation, as in effect from time to time (the "Maximum Legal Rate") and if any
provision of this Agreement or any Ancillary Agreement is in contravention of
any such law or regulation, interest payable under this Agreement and each
Ancillary Agreement shall be computed on the basis of the Maximum Legal Rate (so
that such interest will not exceed the Maximum Legal Rate).
(v) Company shall pay principal, interest and all other
amounts payable hereunder, or under any Ancillary Agreement, without any
deduction whatsoever, including any deduction for any set-off or counterclaim.
(b) Payments.
(i) Closing Payments. Upon execution of this Agreement by
Company and Laurus, Company shall pay to Laurus Capital Management, LLC a
closing payment in an amount equal to three and nine-tenths percent (3.90%) of
the Capital Availability Amount. Such payment shall be deemed fully earned on
the Closing Date and shall not be subject to rebate or proration for any reason.
(ii) Overadvance Payment. Without affecting Laurus' rights
hereunder in the event the Loans exceed the amounts permitted by Section 2
("Overadvances"), in the event an Overadvance occurs or is made by Laurus, all
such Overadvances shall bear interest at an annual rate equal to one percent
(1%) of the amount of such Overadvances for each month or portion thereof as
such amounts shall be outstanding.
6. Security Interest.
(a) To secure the prompt payment to Laurus of the Obligations,
Company hereby assigns, pledges and grants to Laurus a continuing security
interest in and Lien upon all of the Collateral. Each confirmatory assignment
schedule or other form of assignment hereafter executed by Company shall be
deemed to include the foregoing grant, whether or not the same appears therein.
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(b) Company hereby (i) authorizes Laurus to file any financing
statements, continuation statements or amendments thereto that (x) indicate the
Collateral (1) as all assets of Company or words of similar effect, regardless
of whether any particular asset comprised in the Collateral falls within the
scope of Article 9 of the UCC of such jurisdiction, or (2) as being of an equal
or lesser scope or with greater detail, and (y) contain any other information
required by Part 5 of Article 9 of the UCC for the sufficiency or filing office
acceptance of any financing statement, continuation statement or amendment and
(ii) ratifies its authorization for Laurus to have filed any initial financial
statements, or amendments thereto if filed prior to the date hereof. Company
acknowledges that it is not authorized to file any financing statement or
amendment or termination statement with respect to any financing statement
without the prior written consent of Laurus and agrees that it will not do so
without the prior written consent of Laurus, subject to Company's rights under
Section 9-509(d)(2) of the UCC.
(c) Company hereby grants to Laurus an irrevocable, non-exclusive
license (exercisable only upon the termination of this Agreement due to an
occurrence and during the continuance of an Event of Default without payment of
royalty or other compensation to Company) to use, transfer, license or
sublicense any Intellectual Property now owned, licensed to, or hereafter
acquired by Company, and wherever the same may be located, and including in such
license access to all media in which any of the licensed items may be recorded
or stored and to all computer and automatic machinery software and programs used
for the compilation or printout thereof, and represents, promises and agrees
that any such license or sublicense is not and will not be in conflict with the
contractual or commercial rights of any third Person; provided, that such
license will terminate on the termination of this Agreement and the payment in
full of all Obligations.
7. Representations, Warranties and Covenants Concerning the
Collateral. Company represents, warrants (each of which such representations and
warranties shall be deemed repeated upon the making of each request for a Loan
and made as of the time of each and every Loan hereunder) and covenants as
follows:
(a) all of the Collateral (i) is owned by Company free and clear of
all Liens (including any claims of infringement) except those in Laurus' favor
and Permitted Liens and (ii) is not subject to any agreement prohibiting the
granting of a Lien or requiring notice of or consent to the granting of a Lien.
(b) Company shall not encumber, mortgage, pledge, assign or grant
any Lien in any Collateral of Company or any of Company's other assets to anyone
other than Laurus and except for Permitted Liens.
(c) The Liens granted pursuant to this Agreement, upon completion of
the filings and other actions listed on Exhibit 7(c) (which, in the case of all
filings and other documents referred to in said Exhibit, have been delivered to
Laurus in duly executed form) constitute valid perfected security interests in
all of the Collateral in favor of Laurus as security for the prompt and complete
payment and performance of the Obligations, enforceable in accordance with the
terms hereof against any and all creditors of and any purchasers from Company
and such security interest is prior to all other Liens in existence on the date
hereof.
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(d) No effective security agreement, mortgage, deed of trust,
financing statement, equivalent security or Lien instrument or continuation
statement covering all or any part of the Collateral is or will be on file or of
record in any public office, except those relating to Permitted Liens.
(e) Company shall not dispose of any of the Collateral whether by
sale, lease or otherwise except for the sale of Inventory in the ordinary course
of business and for the disposition or transfer in the ordinary course of
business during any fiscal year of obsolete and worn-out Equipment having an
aggregate fair market value of not more than $25,000 and only to the extent that
(i) the proceeds of any such disposition are used to acquire replacement
Equipment which is subject to Laurus' first priority security interest or are
used to repay Loans or to pay general corporate expenses, or (ii) following the
occurrence of an Event of Default which continues to exist the proceeds of which
are remitted to Laurus to be held as cash collateral for the Obligations.
(f) Company shall defend the right, title and interest of Laurus in
and to the Collateral against the claims and demands of all Persons whomsoever,
and take such actions, including (i) all actions necessary to grant Laurus
"control" of any Investment Property, Deposit Accounts, Letter-of-Credit Rights
or electronic Chattel Paper owned by Company, with any agreements establishing
control to be in form and substance satisfactory to Laurus, (ii) the prompt (but
in no event later than five (5) Business Days following Laurus' request
therefor) delivery to Laurus of all original Instruments, Chattel Paper,
negotiable Documents and certificated Stock owned by the Company (in each case,
accompanied by stock powers, allonges or other instruments of transfer executed
in blank), (iii) notification of Laurus' interest in Collateral at Laurus'
request, and (iv) the institution of litigation against third parties as shall
be prudent in order to protect and preserve Company's and Laurus' respective and
several interests in the Collateral as determined by the Company in its
reasonable discretion.
(g) Company shall promptly, and in any event within five (5)
Business Days after the same is acquired by it, notify Laurus of any commercial
tort claim (as defined in the UCC) acquired by it and unless otherwise consented
by Laurus, Company shall enter into a supplement to this Agreement granting to
Laurus a Lien in such commercial tort claim.
(h) Company shall place notations upon its Books and Records and any
financial statement of Company to disclose Laurus' Lien in the Collateral.
(i) If Company retains possession of any Chattel Paper or Instrument
with Laurus' consent, upon Laurus' request such Chattel Paper and Instruments
shall be marked with the following legend: "This writing and obligations
evidenced or secured hereby are subject to the security interest of Laurus
Master Fund, Ltd."
(j) Company shall perform in a reasonable time all other steps
reasonably requested by Laurus to create and maintain in Laurus' favor a valid
perfected first Lien in all Collateral subject only to Permitted Liens.
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(k) Company shall notify Laurus promptly and in any event within
three (3) Business Days after obtaining knowledge thereof (i) of any event or
circumstance that to Company's knowledge would cause Laurus to consider any then
existing Account with a face amount of $250,000 or more as no longer
constituting an Eligible Account; (ii) of any assertion by any Account Debtor of
any material claims, offsets or counterclaims; (iii) of any material allowances,
credits and/or monies granted by Company to any Account Debtor other than in the
ordinary course of business; (iv) of any material return of goods; and (v) of
any loss, damage or destruction of any material portion of the Collateral.
(l) All Eligible Accounts (i) which are billed on a construction
completion basis but not payable until the project is completed, represent
complete bona fide transactions which require no further act under any
circumstances on Company's part to make such Accounts payable by the Account
Debtors, (ii) are not subject to any present, future contingent offsets or
counterclaims, and (iii) do not represent xxxx and hold sales, consignment
sales, guaranteed sales, sale or return or other similar understandings or
obligations of any Affiliate or Subsidiary of Company. Company has not made, and
will not make any agreement with any Account Debtor for any extension of time
for the payment of any Account, any compromise or settlement for less than the
full amount thereof, any release of any Account Debtor from liability therefor,
or any deduction therefrom except a discount or allowance for prompt or early
payment allowed by Company in the ordinary course of its business consistent
with historical practice.
(m) Company shall keep and maintain its Equipment in good operating
condition, except for ordinary wear and tear, and shall make all repairs and
replacements thereof deemed appropriate by the Company in its reasonable
discretion so that the value and operating efficiency shall at all times be
maintained and preserved. Company shall not permit any such items to become a
Fixture to real estate or accessions to other personal property.
(n) Company shall maintain and keep all of its Books and Records
concerning the Collateral at Company's executive offices listed in Exhibit
12(d).
(o) Company shall maintain and keep the tangible Collateral (other
than Collateral in transit) at the addresses listed in Exhibit 12(d), provided,
that Company may change such locations or open a new location, provided that
Company provides Laurus at least thirty (30) days prior written notice of such
changes or new location and (ii) prior to such change or opening of a new
location where Collateral having a value of more than $50,000 will be located,
Company executes and delivers to Laurus such agreements as Laurus may reasonably
request, including landlord agreements, mortgagee agreements and warehouse
agreements, each in form and substance satisfactory to Laurus.
(p) Exhibit 7(p) lists all banks and other financial institutions at
which Company maintains deposits and/or other accounts, and such Exhibit
correctly identifies the name, address and telephone number of each such
depository, the name in which the account is held, a description of the purpose
of the account, and the complete account number. The Company shall not establish
any depository or other bank account of any with any financial institution
(other than the accounts set forth on Exhibit 7(p)) without Laurus' prior
written consent.
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8. Payment of Accounts.
(a) Company will irrevocably direct all of its present and future
Account Debtors and other Persons obligated to make payments constituting
Collateral to make such payments directly to the lockbox maintained by Company
(the "Lockbox") with North Fork Bank (the "Lockbox Bank") pursuant to the terms
of the Clearing Account Agreement dated May 27, 2004 or such other financial
institution accepted by Laurus in writing as may be selected by Company. On or
prior to the Closing Date, Company shall and shall cause the Lockbox Bank to
enter into all such documentation acceptable to Laurus pursuant to which, among
other things, the Lockbox Bank agrees to: (a) sweep the Lockbox on a daily basis
and deposit all checks received therein to an account designated by Laurus in
writing and (b) comply only with the instructions or other directions of Laurus
concerning the Lockbox. All of Company's invoices, account statements and other
written or oral communications directing, instructing, demanding or requesting
payment of any Account of Company or any other amount constituting Collateral
shall conspicuously direct that all payments be made to the Lockbox or such
other address as Laurus may direct in writing. If, notwithstanding the
instructions to Account Debtors, Company receives any payments, Company shall
immediately remit such payments to Laurus in their original form with all
necessary endorsements. Until so remitted, Company shall hold all such payments
in trust for and as the property of Laurus and shall not commingle such payments
with any of its other funds or property.
(b) At Laurus' election, following the occurrence of an Event of
Default which is continuing, Laurus may notify Company's Account Debtors of
Laurus' security interest in the Accounts, collect them directly and charge the
collection costs and expenses thereof to Company's account.
9. Collection and Maintenance of Collateral.
(a) Laurus may verify Company's Accounts from time to time, but not
more often than once every three (3) months unless an Event of Default has
occurred and is continuing, utilizing an audit control company or any other
agent of Laurus.
(b) Proceeds of Accounts received by Laurus will be deemed received
on the Business Day of Laurus' receipt of such proceeds in good funds in dollars
of the United States of America in Laurus' if received prior to 12:00 noon on
such day. Any amount received by Laurus on any day other than a Business Day or
after 12:00 noon (New York time) on any Business Day shall be deemed received on
the next Business Day.
(c) As Laurus receives the proceeds of Accounts, it shall remit all
such proceeds (net of interest, fees and other amounts then due and owing to
Laurus hereunder) to Company upon request (but no more often than twice a week).
Notwithstanding the foregoing, following the occurrence and during the
continuance of an Event of Default, Laurus, at its option, may (a) apply such
proceeds to the Obligations in such order as Laurus shall elect, (b) hold such
proceeds as cash collateral for the Obligations and Company hereby grants to
Laurus a security interest in such cash collateral amounts as security for the
Obligations and/or (c) do any combination of the foregoing.
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10. Inspections and Appraisals. At all times during normal business
hours, upon reasonable advance notice, Laurus, and/or any agent of Laurus shall
have the right to (a) have access to, visit, inspect, review, evaluate and make
physical verification and appraisals of Company's properties and the Collateral,
(b) inspect, audit and copy (or take originals if necessary) and make extracts
from Company's Books and Records, including management letters prepared by
independent accountants, and (c) discuss with Company's principal officers, and
independent accountants, Company's business, assets, liabilities, financial
condition, results of operations and business prospects. Company will deliver to
Laurus any instrument necessary for Laurus to obtain records from any service
bureau maintaining records for Company. If any internally prepared financial
information, including that required under this Section is unsatisfactory in any
manner to Laurus, Laurus may request that the Accountants review the same.
11. Financial Reporting. Company will deliver, or cause to be
delivered, to Laurus each of the following, which shall be in form and detail
acceptable to Laurus:
(a) As soon as available, and in any event within ninety (90) days
after the end of each fiscal year of Company, Company's audited financial
statements with a report of independent certified public accountants of
recognized standing selected by Company and acceptable to Laurus (the
"Accountants"), which annual financial statements shall include Company's
balance sheet as at the end of such fiscal year and the related statements of
Company's income, retained earnings and cash flows for the fiscal year then
ended, prepared, if Laurus so requests, on a consolidating and consolidated
basis to include all Subsidiaries and Affiliates, all in reasonable detail and
prepared in accordance with GAAP, together with (i) if and when available,
copies of any management letters prepared by such accountants; and (ii) a
certificate of Company's President, Chief Executive Officer or Chief Financial
Officer stating that such financial statements have been prepared in accordance
with GAAP and whether or not such officer has knowledge of the occurrence of any
Default or Event of Default hereunder and, if so, stating in reasonable detail
the facts with respect thereto;
(b) As soon as available and in any event within forty five (45)
days after the end of each of the first three quarters in each fiscal year of
the Company, an unaudited/internal balance sheet and statements of income,
retained earnings and cash flows of Company as at the end of and for such
quarter and for the year to date period then ended, prepared, if Laurus so
requests, on a consolidating and consolidated basis to include all Subsidiaries
and Affiliates, in reasonable detail and stating in comparative form the figures
for the corresponding date and periods in the previous year, all prepared in
accordance with GAAP, subject to year-end adjustments and accompanied by a
certificate of Company's President, Chief Executive Officer or Chief Financial
Officer, stating (i) that such financial statements have been prepared in
accordance with GAAP, subject to year-end audit adjustments, and (ii) whether or
not such officer has knowledge of the occurrence of any Default or Event of
Default hereunder not theretofore reported and remedied and, if so, stating in
reasonable detail the facts with respect thereto;
(c) Within thirty (30) days after the end of each month (or more
frequently if Laurus so requests), agings of Company's Accounts, unaudited trial
balances and their accounts payable and a calculation of Company's Accounts and
Eligible Accounts, and thirty (30) days after the end of each fiscal quarter, an
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Inventory ledger as at the end of such quarter, provided, however, that if
Laurus shall request the foregoing information more often than as set forth in
the immediately preceding clause, the Company shall have thirty (30) days from
each such request to comply with Laurus' demand; and
(d) Promptly after (i) the filing thereof, copies of Company's most
recent registration statements and annual, quarterly, monthly or other regular
reports which Company files with the Securities and Exchange Commission (the
"SEC"), and (ii) the issuance thereof, copies of such financial statements,
reports and proxy statements as Company shall send to its stockholders.
12. Additional Representations and Warranties. Company represents
and warrants (each of which such representations and warranties shall be deemed
repeated upon the making of a request for a Loan and made as of the time of each
Loan made hereunder), as follows:
(a) Company is a corporation duly incorporated and validly existing
under the laws of the jurisdiction of its incorporation and duly qualified and
in good standing in every other state or jurisdiction in which the nature of
Company's business requires such qualification, except where the failure to be
so qualified would not have a Material Adverse Effect.
(b) The execution, delivery and performance of this Agreement and
the Ancillary Agreements (i) have been duly authorized, (ii) are not in
contravention of Company's certificate of incorporation, by-laws or of any
indenture, agreement or undertaking to which Company is a party or by which
Company is bound and (iii) are within Company's corporate powers.
(c) This Agreement and the Ancillary Agreements executed and
delivered by Company are Company's legal, valid and binding obligations,
enforceable in accordance with their terms, except (a) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application affecting enforcement of creditors' rights, and (b) as limited by
general principles of equity that restrict the availability of equitable and
legal remedies.
(d) Exhibit 12(d) sets forth Company's name as it appears in
official filing in the state of its incorporation, the type of entity of
Company, the organizational identification number issued by Company's state of
incorporation or a statement that no such number has been issued, Company's
state of incorporation, and the location of Company's chief executive office,
corporate offices, warehouses, other locations of Collateral and locations where
records with respect to Collateral are kept (including in each case the county
of such locations) and, except as set forth in such Exhibit 12(d), such
locations have not changed during the preceding twelve months. As of the Closing
Date, during the prior five years, except as set forth in Exhibit 12(d), Company
has not been known as or conducted business in any other name (including trade
names). Company has only one state of incorporation.
(e) Based upon the Employee Retirement Income Security Act of 1974
("ERISA"), and the regulations and published interpretations thereunder: (i)
Company has not engaged in any Prohibited Transactions as defined in Section 406
of ERISA and Section 4975 of the Internal Revenue Code, as amended; (ii) Company
11
has met all applicable minimum funding requirements under Section 302 of ERISA
in respect of its plans; (iii) Company has no knowledge of any event or
occurrence which would cause the Pension Benefit Guaranty Corporation to
institute proceedings under Title IV of ERISA to terminate any employee benefit
plan(s); (iv) Company has no fiduciary responsibility for investments with
respect to any plan existing for the benefit of persons other than Company's
employees; and (v) except as disclosed in Exhibit 12(e) attached hereto, Company
has not withdrawn, completely or partially, from any multi-employer pension plan
so as to incur liability under the Multiemployer Pension Plan Amendments Act of
1980.
(f) There is no pending or threatened litigation, court order,
judgment, writ, suit, action or proceeding that has not been disclosed to Laurus
which could reasonably be expected to have a Material Adverse Effect.
(g) All balance sheets and income statements which have been
delivered to Laurus fairly, accurately and properly state Company's financial
condition on a basis consistent with that of previous financial statements and
except as reflected in such financial statements there has been no material
adverse change in Company's financial condition as reflected in such statements
since the balance sheet date of the statements last delivered to Laurus and such
statements do not fail to disclose any fact or facts which might have a Material
Adverse Effect on Company's financial condition.
(h) Company possesses or has licenses to use all of the Intellectual
Property necessary to conduct its business. There has been no assertion or claim
of violation or infringement with respect to any Intellectual Property. Exhibit
12(i) describes all Intellectual Property of Company.
(i) Neither this Agreement, the exhibits and schedules hereto, the
Ancillary Agreements nor any other document delivered by Company to Laurus or
its attorneys or agents in connection herewith or therewith or with the
transactions contemplated hereby or thereby, contain any untrue statement of a
material fact nor omit to state a material fact necessary in order to make the
statements contained herein or therein, in light of the circumstances in which
they are made, not misleading. The issuance of the Notes and the shares of
common stock to be issued upon conversion of the Notes and will be exempt from
the registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and will have been registered or qualified (or are exempt
from registration and qualification) under the registration, permit or
qualification requirements of all applicable state securities laws. Neither
Company nor any of its 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 under the Securities Act) in connection with the
offer or sale of the Securities.
(j) The Common Stock is registered pursuant to Section 12(b) or
12(g) of the Exchange Act and, except with respect to certain matters set forth
on Exhibit 12(j) attached hereto, the Company has filed all proxy statements,
reports, schedules, forms, statements and other documents required to be filed
by it under the Exchange Act. The Company has filed (i) its Annual Report on
Form 10-K for the fiscal year ended December 31, 2003 and (ii) its Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 2004 (collectively,
the "SEC Reports"). Each SEC Report was, at the time of its filing, in
12
substantial compliance with the requirements of its respective form and none of
the SEC Reports, nor the financial statements (and the notes thereto) included
in the SEC Reports, as of their respective filing dates, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Reports comply as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the Commission or other applicable rules and
regulations with respect thereto. Such financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") applied on
a consistent basis during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto or (ii) in the case
of unaudited interim statements, to the extent they may not include footnotes or
may be condensed) and fairly present in all material respects the financial
condition, the results of operations and the cash flows of the Company and its
subsidiaries, on a consolidated basis, as of, and for, the periods presented in
each such SEC Report.
(k) The Common Stock of the Company is, as of the date hereof,
traded on the Pink Sheets and satisfies all requirements for the continuation of
such trading. The Company has not received any notice that its common stock will
be ineligible to be traded on the Pink Sheets or that the Common Stock does not
meet all requirements for the continuation of such trading. The Company hereby
certifies that as of the date hereof it meets or exceeds all eligibility
requirements to have its shares listed for trading on the NASD Over the Counter
Bulletin Board ("OTCBB") and shall secure the listing of its Common Stock on the
OTCBB within 60 days from the date hereof.
(l) Neither the Company, nor any of its Affiliates, nor any person
acting on its or their behalf, has directly or indirectly made any offers or
sales of any security or solicited any offers to buy any security (other than a
concurrent offering to Laurus under a Securities Purchase Agreement between the
Company and Laurus dated as of May 27, 2004) under circumstances that would
cause the offering of the Securities pursuant to this Agreement and the
Ancillary Agreements to be integrated with prior offerings by the Company for
purposes of the Securities Act which would prevent the Company from selling the
Securities pursuant to Rule 506 under the Securities Act, or any applicable
exchange-related stockholder approval provisions, nor will the Company or any of
its Affiliates or Subsidiaries take any action or steps that would cause the
offering of the Securities to be integrated with other offerings (other than
such concurrent offering to Laurus).
(m) The Securities are all restricted securities under the
Securities Act as of the date of this Agreement. The Company will not issue any
stop transfer order or other order impeding the sale and delivery of any of the
Securities at such time as such Securities are registered for public sale or an
exemption from registration is available, except as required by federal or state
securities laws.
(n) The Company understands the nature of the Securities issuable
under the Ancillary Agreements and recognizes that the issuance of such
Securities may have a potential dilutive effect. The Company specifically
acknowledges that its obligation to issue the Securities is binding upon the
Company and enforceable regardless of the dilution such issuance may have on the
ownership interests of other shareholders of the Company.
13
(o) Except for agreements made in the ordinary course of business,
there is no agreement that has not been filed with the Commission as an exhibit
to a registration statement or to a form required to be filed by the Company
under the Exchange Act, the breach of which could reasonably be expected to have
a Material Adverse Effect or would prohibit or otherwise interfere with the
ability of the Company to enter into and perform any of its obligations under
this Agreement the Registration Rights Agreement executed by Company in favor of
Laurus in any material respect.
(p) Patriot Act. If the Company is a corporation, trust,
partnership, limited liability Purchaser or other organization, the Company
certifies that, to the best of Company's knowledge, the Company has not been
designated, and is not owned or controlled, by a "suspected terrorist" as
defined in Executive Order 13224. The Company hereby acknowledges that the
Purchaser seeks to comply with all applicable laws concerning money laundering
and related activities. In furtherance of those efforts, the Company hereby
represents, warrants and agrees that: (i) none of the cash or property that the
Company will pay or will contribute to the Purchaser has been or shall be
derived from, or related to, any activity that is deemed criminal under United
States law; and (ii) no contribution or payment by the Company to the Purchaser,
to the extent that they are within the Company's control shall cause the
Purchaser to be in violation of the United States Bank Secrecy Act, the United
States International Money Laundering Control Act of 1986 or the United States
International Money Laundering Abatement and Anti-Terrorist Financing Act of
2001. The Company shall promptly notify the Purchaser if any of the
representations under this subsection cease to be true and accurate regarding
the Company. The Company agrees to provide the Purchaser any additional
information regarding the Company that the Purchaser deems necessary or
convenient to ensure compliance with all applicable laws concerning money
laundering and similar activities. The Company understands and agrees that if at
any time it is discovered that any of the representations under this subsection
are incorrect, or if otherwise required by applicable law or regulation related
to money laundering similar activities, the Purchaser may undertake appropriate
actions to ensure compliance with applicable law or regulation, including but
not limited to segregation and/or redemption of the Company's investment in the
Purchaser. The Company further understands that the Purchaser may release
confidential information about the Company and, if applicable, any underlying
beneficial owners, to proper authorities if the Purchaser, in its sole
discretion, determines that it is in the best interests of the Purchaser in
light of relevant rules and regulations under the laws set forth in subsection
(ii) above.
(q) The Company will at all times have authorized and reserved a
sufficient number of shares of Common Stock for the full conversion of each
Revolving Note and each Minimum Borrowing Note issued hereunder. 6.
13. Covenants. Company covenants as follows:
(a) Company will not, without 15-days' prior written notice to
Laurus, change (i) its name as it appears in the official filings in the state
of its incorporation or formation, (ii) the type of legal entity it is, (iii)
its organization identification number, if any, issued by its state of
incorporation, (iv) its state of incorporation or (v) amend its certificate of
incorporation, by-laws or other organizational document.
14
(b) The operation of Company's business is and will continue to be
in compliance in all material respects with all applicable federal, state and
local laws, rules and ordinances, including to all laws, rules, regulations and
orders relating to taxes, payment and withholding of payroll taxes, employer and
employee contributions and similar items, securities, employee retirement and
welfare benefits, employee health safety and environmental matters.
(c) Company will pay or discharge when due all taxes, assessments
and governmental charges or levies imposed upon Company or any of the Collateral
unless such amounts are being diligently contested in good faith by appropriate
proceedings provided that (i) adequate reserves with respect thereto are
maintained on the books of Company in conformity with GAAP and (ii) the related
Lien shall have no effect on the priority of the Liens in favor of Laurus or the
value of the assets in which Laurus has a Lien.
(d) Company will promptly inform Laurus in writing of: (i) the
commencement of all proceedings and investigations by or before and/or the
receipt of any notices from, any governmental or nongovernmental body and all
actions and proceedings in any court or before any arbitrator against or in any
way concerning any event which could reasonable be expected to have singly or in
the aggregate, a Material Adverse Effect; (ii) any amendment of Company's
certificate of incorporation, by-laws or other organizational document; (iii)
any change which has had or could reasonably be expected to have a Material
Adverse Effect; (iv) any Event of Default or Default; (v) any default or any
event which with the passage of time or giving of notice or both would
constitute a default under any agreement for the payment of money to which
Company is a party or by which Company or any of Company's properties may be
bound the breach of which would have a Material Adverse Effect and (vi) any
change in Company's name or any other name used in its business.
(e) The Company will not (i) create, incur, assume or suffer to
exist any indebtedness for borrowed money (exclusive of trade debt and debt
incurred to finance the purchase of equipment (not in excess of five percent
(5%) per annum of the fair market value of the Company's assets)) whether
secured or unsecured, other than (w) the Company's indebtedness to Laurus, (x)
debt subordinated to the Company's indebtedness to Laurus, (y) indebtedness set
forth on Exhibit 13(e)(i) attached hereto and made a part hereof and any
refinancings or replacements thereof on terms no less favorable to Laurus than
the indebtedness being refinanced or replaced, and (z) any debt incurred in
connection with the purchase of assets in the ordinary course of business, or
any refinancings or replacements thereof on terms no less favorable to Laurus
than the indebtedness being refinanced or replaced; (ii) cancel any debt owing
to it in excess of $50,000 in the aggregate during any 12 month period; (iii)
assume, guarantee, endorse or otherwise become directly or contingently liable
in connection with any obligations of any other Person, except the endorsement
of negotiable instruments by a Company for deposit or collection or similar
transactions in the ordinary course of business; (iv) directly or indirectly
declare, pay or make any dividend or distribution on any class of its Stock
other than to pay dividends on shares of its outstanding Preferred Stock or
apply any of its funds, property or assets to the purchase, redemption or other
retirement of any Stock of the Company except as set forth on Schedule 6.5 to
Securities Purchase Agreement of even date herewith between Laurus and Company;
15
(v) purchase or hold beneficially any Stock or other securities or evidences of
indebtedness of, make or permit to exist any loans or advances to, or make any
investment or acquire any interest whatsoever in, any other Person, including
any partnership or joint venture, except (x) travel advances, (y) loans to
Company's officers and employees not exceeding at any one time an aggregate of
$10,000, and (z) existing Subsidiaries of the Company or Subsidiaries permitted
to exist under clause (vi) below; (vi) create or permit to exist any Subsidiary,
other than any Subsidiary in existence on the date hereof and listed in Exhibit
13(e)(ii) unless such new Subsidiary is designated by Laurus as either a
co-borrower or guarantor hereunder and such Subsidiary shall have entered into
all such documentation required by Laurus to grant to Laurus a first priority
perfected security interest in such Subsidiary's assets to secure the
Obligations; (vii) directly or indirectly, prepay any indebtedness (other than
to Laurus or in the ordinary course of business), or repurchase, redeem, retire
or otherwise acquire any indebtedness (other than to Laurus or the ordinary
course of business) except to make scheduled payments of principal and interest
thereof; (viii) enter into any merger, consolidation or other reorganization
with or into any other Person or acquire all or a portion of the assets or Stock
of any Person or permit any other Person to consolidate with or merge with it,
unless (1) Company is the surviving entity of such merger or consolidation, (2)
no Event of Default shall exist immediately prior to and after giving effect to
such merger or consolidation, (3) Company shall have provided Laurus copies of
all documentation relating to such merger or consolidation and (4) Company shall
have provided Laurus with at least thirty (30) days' prior written notice of
such merger or consolidation; (ix) materially change the nature of the business
in which it is presently engaged; (x) change its fiscal year or make any changes
in accounting treatment and reporting practices without prior written notice to
Laurus except as required by GAAP or in the tax reporting treatment or except as
required by law; (xi) enter into any transaction with any employee, director or
Affiliate, except in the ordinary course on arms-length terms; or (xii) xxxx
Accounts under any name except the present name of Company or its existing
Subsidiaries.
(f) None of the proceeds of the Loans hereunder will be used
directly or indirectly to "purchase" or "carry" "margin stock" or to repay
indebtedness incurred to "purchase" or "carry" "margin stock" within the
respective meanings of each of the quoted terms under Regulation U of the Board
of Governors of the Federal Reserve System as now and from time to time
hereafter in effect.
(g) Company will bear the full risk of loss from any loss of any
nature whatsoever with respect to the Collateral. At Company's own cost and
expense in amounts and with carriers acceptable to Laurus, Company shall (i)
keep all its insurable properties and properties in which it has an interest
insured against the hazards of fire, sprinkler leakage, those hazards covered by
extended coverage insurance and such other hazards, and for such amounts, as is
customary in the case of companies engaged in businesses similar to Company's
including business interruption insurance; (ii) maintain a bond in such amounts
as is customary in the case of companies engaged in businesses similar to
Company's insuring against larceny, embezzlement or other criminal
misappropriation of insured's officers and employees who may either singly or
jointly with others at any time have access to the assets or funds of Company
either directly or through Governmental Authority to draw upon such funds or to
direct generally the disposition of such assets; (iii) maintain public and
product liability insurance against claims for personal injury, death or
property damage suffered by others; (iv) maintain all such worker's compensation
or similar insurance as may be required under the laws of any state or
16
jurisdiction in which Company is engaged in business; and (v) furnish Laurus
with (x) certificates as to all such insurance coverages and evidence of the
maintenance of such policies at least thirty (30) days before any expiration
date, (y) endorsements to such policies naming Laurus as "co-insured" or
"additional insured" and appropriate loss payable endorsements in form and
substance satisfactory to Laurus, naming Laurus as loss payee, and (z) evidence
that as to Laurus the insurance coverage shall not be impaired or invalidated by
any act or neglect of Company and the insurer will provide Laurus with at least
thirty (30) days notice prior to cancellation or expiration thereof. Company
shall instruct the insurance carriers that in the event of any loss thereunder,
the carriers shall make payment for such loss to Company and Laurus jointly. In
the event that as of the date of receipt of each loss recovery upon any such
insurance, Laurus has not declared an event of default with respect to this
Agreement or any of the Ancillary Agreements, then Company shall be permitted to
direct the application of such loss recovery proceeds toward investment in
property, plant and equipment that would comprise Collateral. In the event that
Laurus has properly declared an Event of Default, then all loss recoveries
received by Laurus upon any such insurance thereafter may be applied to the
obligations of Company hereunder and under the Ancillary Agreements, in such
order as Laurus may determine. Any surplus (following satisfaction of all
Company obligations to Laurus) shall be paid by Laurus to the Company or applied
as may be otherwise required by law. Any deficiency thereon shall be paid by the
Company to Laurus on demand.
(h) Company will at all times have authorized and reserved a
sufficient number of shares of Common Stock to provide for the conversion of the
Notes.
14. Further Assurances. At any time and from time to time, upon the
written request of Laurus and at the sole expense of Company, Company shall
promptly and duly execute and deliver any and all such further instruments and
documents and take such further action as Laurus may reasonably request (a) to
obtain the full benefits of this Agreement and the Ancillary Agreements, (b) to
protect, preserve and maintain Laurus' rights in the Collateral and under this
Agreement or any Ancillary Agreement, or (c) to enable Laurus to exercise all or
any of the rights and powers herein granted or any Ancillary Agreement.
15. Representations and Warranties of Laurus.
Laurus hereby represents and warrants to the Company as follows:
(a) Requisite Power and Authority. Laurus has all necessary power
and authority under all applicable provisions of law to execute and deliver this
Agreement and the Ancillary Agreements and to carry out their provisions. All
corporate action on Laurus' part required for the lawful execution and delivery
of this Agreement and the Ancillary Agreements have been or will be effectively
taken prior to the Closing Date. Upon their execution and delivery, this
Agreement and the Ancillary Agreements will be valid and binding obligations of
Laurus, enforceable in accordance with their terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application affecting enforcement of creditors' rights, and (b) as
limited by general principles of equity that restrict the availability of
equitable and legal remedies.
17
(b) Investment Representations. Laurus understands that the
Securities are being offered and sold pursuant to an exemption from registration
contained in the Securities Act based in part upon Laurus' representations
contained in this Agreement, including, without limitation, that Laurus is an
"accredited investor" within the meaning of Regulation D under the Securities
Act. Laurus has received or has had full access to all the information it
considers necessary or appropriate to make an informed investment decision with
respect to the Note to be purchased by it under this Agreement and the
Securities acquired by it upon the conversion of the Note.
(c) Laurus Bears Economic Risk. Laurus has substantial experience in
evaluating and investing in private placement transactions of securities in
companies similar to the Company so that it is capable of evaluating the merits
and risks of its investment in the Company and has the capacity to protect its
own interests. Laurus must bear the economic risk of this investment until the
Securities are sold pursuant to (i) an effective registration statement under
the Securities Act, or (ii) an exemption from registration is available.
(d) Acquisition for Own Account. Laurus is acquiring the Securities
for its own account for investment only, and not as a nominee or agent and not
with a view towards or for resale in connection with their distribution.
(e) Laurus Can Protect Its Interest. Laurus represents that by
reason of its, or of its management's, business and financial experience, Laurus
has the capacity to evaluate the merits and risks of its investment in the Note,
and the Securities and to protect its own interests in connection with the
transactions contemplated in this Agreement, and the Ancillary Agreements.
Further, Laurus is aware of no publication of any advertisement in connection
with the transactions contemplated in the Agreement or the Ancillary Agreements.
(f) Accredited Investor. Laurus represents that it is an accredited
investor within the meaning of Regulation D under the Securities Act.
(g) Shorting. Neither Laurus nor any of its Affiliates or investment
partners has engaged in "short sales" of the Company's Common Stock or any other
hedging strategies, and neither Laurus nor any of its Affiliates will, or cause
any person or entity, directly or indirectly, to, engage in "short sales" of
Company's Common Stock or any other hedging strategies directly involving the
Company's Common Stock as long as any Minimum Borrowing Note shall be
outstanding.
16. Power of Attorney. Company hereby appoints Laurus, or any other
Person whom Laurus may designate as Company's attorney, on or after the
occurrence and continuation of an Event of Default, with power to: (i) endorse
Company's name on any checks, notes, acceptances, money orders, drafts or other
forms of payment or security that may come into Laurus' possession; (ii) sign
Company's name on any invoice or xxxx of lading relating to any Accounts, drafts
against Account Debtors, schedules and assignments of Accounts, notices of
assignment, financing statements and other public records, verifications of
Account and notices to or from Account Debtors; (iii) verify the validity,
amount or any other matter relating to any Account by mail, telephone, telegraph
or otherwise with Account Debtors; (iv) do all things necessary to carry out
this Agreement, any Ancillary Agreement and all related documents; and (v)
notify the post office authorities to change the address for delivery of
18
Company's mail to an address designated by Laurus, and to receive, open and
dispose of all mail addressed to Company. Company hereby ratifies and approves
all acts of the attorney. Neither Laurus, nor the attorney will be liable for
any acts or omissions or for any error of judgment or mistake of fact or law,
except for gross negligence or willful misconduct. This power, being coupled
with an interest, is irrevocable so long as Laurus has a security interest and
until the Obligations have been fully satisfied.
17. Term of Agreement. Laurus' agreement to make Loans and extend
financial accommodations under and in accordance with the terms of this
Agreement or any Ancillary Agreement shall continue in full force and effect
until the expiration of the Term. At Laurus' election following the occurrence
of an Event of Default, Laurus may terminate this Agreement. The termination of
the Agreement shall not affect any of Laurus' rights hereunder or any Ancillary
Agreement and the provisions hereof and thereof shall continue to be fully
operative until all transactions entered into, rights or interests created and
the Obligations have been disposed of, concluded or liquidated. Notwithstanding
the foregoing, Laurus shall release its security interests at any time upon
payment to it of all Obligations if Company shall have paid to Laurus an early
payment fee in an amount equal to (i) five percent (5%) of the Capital
Availability Amount if such payment occurs prior to the first anniversary of the
Closing Date, (ii) four (4%) of the Capital Availability Amount if such payment
occurs on or after the first anniversary and prior to the second anniversary of
the Closing Date, and (iii) three percent (3%) if such termination occurs
thereafter prior to the third anniversary of the Closing Date; such fee being
intended to compensate Laurus for its costs and expenses incurred in initially
approving this Agreement.
18. Termination of Lien. The Liens and rights granted to Laurus
hereunder and any Ancillary Agreements and the financing statements filed in
connection herewith or therewith shall continue in full force and effect,
notwithstanding the termination of this Agreement or the fact that Company's
account may from time to time be temporarily in a zero or credit position, until
all of the Obligations of Company have been paid or performed in full after the
termination of this Agreement. Laurus shall not be required to send termination
statements to Company, or to file them with any filing office, unless and until
this Agreement and the Ancillary Agreements shall have been terminated in
accordance with their terms and all Obligations paid in full in immediately
available funds.
19. Events of Default. The occurrence of any of the following shall
constitute an Event of Default:
(a) failure to make payment of any of the Obligations when required
hereunder and such failure shall not be cured with three (3) Business Days;
(b) failure to pay any taxes when due unless such taxes are being
contested in good faith by appropriate proceedings and with respect to which
adequate reserves have been provided on Company's books;
(c) failure to perform in any material respect under and/or
committing any material breach of this Agreement or any Ancillary Agreement or
any other agreement between Company and Laurus which shall continue for a period
of fifteen (15) days after the occurrence thereof;
19
(d) the occurrence of a default under any agreement to which Company
is a party with third parties which has a Material Adverse Effect;
(e) any material representation, warranty or statement made by
Company hereunder, in any Ancillary Agreement, any certificate, statement or
document delivered pursuant to the terms hereof, or in connection with the
transactions contemplated by this Agreement should at any time be false or
misleading in any material respect;
(f) an attachment or levy is made upon Company's assets having an
aggregate value in excess of $250,000 or a judgment is rendered against Company
or Company's property involving a liability of more than $250,000 which shall
not have been vacated, discharged, stayed or bonded pending appeal within thirty
(30) days from the entry thereof;
(g) any change in Company's condition or affairs (financial or
otherwise) which in Laurus' reasonable, good faith opinion has a Material
Adverse Effect;
(h) any Lien created hereunder or under any Ancillary Agreement on
any material portion of the collateral securing the Obligations for any reason
ceases to be or is not a valid and perfected Lien having a first priority
interest (subject to Permitted Liens);
(i) if Company shall (i) apply for, consent to or suffer to exist
the appointment of, or the taking of possession by, a receiver, custodian,
trustee or liquidator of itself or of all or a substantial part of its property,
(ii) make a general assignment for the benefit of creditors, (iii) commence a
voluntary case under the federal bankruptcy laws (as now or hereafter in
effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a petition
seeking to take advantage of any other law providing for the relief of debtors,
(vi) acquiesce to, or fail to have dismissed, within thirty (30) days, any
petition filed against it in any involuntary case under such bankruptcy laws, or
(vii) take any action for the purpose of effecting any of the foregoing;
(j) Company shall admit in writing its inability, or be generally
unable to pay its debts as they become due or cease operations of its present
business;
(k) any Affiliate or Subsidiary of the Company shall (i) apply for,
consent to or suffer to exist the appointment of, or the taking possession by, a
receiver, custodian, trustee or liquidator of itself or of all or a substantial
part of its property, (ii) admit in writing its inability, or be generally
unable, to pay its debts as they become due or cease operations of its present
business, (iii) make a general assignment for the benefit of creditors, (iv)
commence a voluntary case under the federal bankruptcy laws (as now or hereafter
in effect), (v) be adjudicated a bankrupt or insolvent, (vi) file a petition
seeking to take advantage of any other law providing for the relief of debtors,
(vii) acquiesce to, or fail to have dismissed, within thirty (30) days, any
petition filed against it in any involuntary case under such bankruptcy laws or
(viii) take any action for the purpose of effecting any of the foregoing;
20
(l) Company directly or indirectly sells, assigns, transfers,
conveys, or suffers or permits to occur any sale, assignment, transfer or
conveyance of any material amount of its assets or any interest therein, except
as permitted herein;
(m) the occurrence of a change in the controlling ownership of the
Company; provided, however, that a change in the controlling ownership of the
Company shall be deemed not to occur if the person obtaining such control
possessed beneficial ownership, directly or indirectly, as of the date hereof,
of 35% or more of the outstanding shares of Common Stock;
(n) a default by Company in the payment, when due, of any principal
of or interest on any other indebtedness for money borrowed in an amount greater
than $250,000, which is not cured within any applicable cure or grace period;
(o) the indictment of Company under any criminal statute, or
commencement of criminal proceeding against Company;
(p) any Guarantor shall breach any term or provision of any
Ancillary Agreement which is not cured within any applicable cure or grace
period;
(q) if any Guarantor attempts to terminate, challenges the validity
of, or its liability under any Guaranty or any Guarantor Security Agreement; or
(r) should any Guarantor default in its obligations under any
Guaranty or any Guarantor Security Agreement or if any proceeding shall be
brought to challenge the validity, binding effect of any Guaranty or any
Guarantor Security Agreement or should any Guarantor breach any material
representation, warranty or covenant contained in any Guaranty Agreement or any
Guarantor Security Agreement or should any Guaranty or Guarantor Security
Agreement cease to be a valid, binding and enforceable obligation.
20. Remedies. Following the occurrence of an Event of Default which
is then continuing, Laurus shall have the right to demand repayment in full of
all Obligations, whether or not otherwise due. Until all Obligations have been
fully satisfied, Laurus shall retain its Lien in all Collateral. Laurus shall
have, in addition to all other rights provided herein and in each Ancillary
Agreement, the rights and remedies of a secured party under the UCC, and under
other applicable law, all other legal and equitable rights to which Laurus may
be entitled, including the right to take immediate possession of the Collateral,
to require Company to assemble the Collateral, at Company's expense, and to make
it available to Laurus at a place designated by Laurus which is reasonably
convenient to both parties and to enter any of the premises of Company or
wherever the Collateral shall be located, with or without force or process of
law, and to keep and store the same on said premises until sold (and if said
premises be the property of Company, Company agrees not to charge Laurus for
storage thereof), and the right to apply for the appointment of a receiver for
Company's property. Further, Laurus may, at any time or times after the
occurrence of an Event of Default which is then continuing, sell and deliver all
Collateral held by or for Laurus at public or private sale for cash, upon credit
or otherwise, at such prices and upon such terms as Laurus, in Laurus' sole
discretion, deems advisable or Laurus may otherwise recover upon the Collateral
in any commercially reasonable manner as Laurus, in its sole discretion, deems
advisable. The requirement of reasonable notice shall be met if such notice is
21
mailed postage prepaid to Company at Company's address as shown in Laurus'
records, at least ten (10) days before the time of the event of which notice is
being given. Laurus may be the purchaser at any sale, if it is public. In
connection with the exercise of the foregoing remedies, Laurus is granted
permission to use all of Company's trademarks, tradenames, tradestyles, patents,
patent applications, licenses, franchises and other proprietary rights. The
proceeds of sale shall be applied first to all costs and expenses of sale,
including attorneys' fees, and second to the payment (in whatever order Laurus
elects) of all Obligations. After the indefeasible payment and satisfaction in
full in cash of all of the Obligations, and after the payment by Laurus of any
other amount required by any provision of law, including Section 608(a)(1) of
the Code (but only after Laurus has received what Laurus considers reasonable
proof of a subordinate party's security interest), the surplus, if any, shall be
paid to Company or its representatives or to whosoever may be lawfully entitled
to receive the same, or as a court of competent jurisdiction may direct. Company
shall remain liable to Laurus for any deficiency. In addition, Company shall pay
Laurus a liquidation fee ("Liquidation Fee") in the amount of two percent (2%)
of the actual amount collected in respect of each Account outstanding at any
time during a "liquidation period". For purposes hereof, "liquidation period"
means a period: (i) beginning on the earliest date of (x) an event referred to
in Section 18(i) or 18(j), or (y) the cessation of Company's business; and (ii)
ending on the date on which Laurus has actually received all Obligations due and
owing it under this Agreement and the Ancillary Agreements. The Liquidation Fee
shall be paid on the date on which Laurus collects the applicable Account by
deduction from the proceeds thereof. Company and Laurus acknowledge that the
actual damages that would be incurred by Laurus after the occurrence of an Event
of Default would be difficult to quantify and that Company and Laurus have
agreed that the fees and obligations set forth in this Section and in this
Agreement would constitute fair and appropriate liquidated damages in the event
of any such termination.
21. Waivers. To the full extent permitted by applicable law, Company
waives (a) presentment, demand and protest, and notice of presentment, dishonor,
intent to accelerate, acceleration, protest, default, nonpayment, maturity,
release, compromise, settlement, extension or renewal of any or all of this
Agreement and the Ancillary Agreements or any other notes, commercial paper,
Accounts, contracts, Documents, Instruments, Chattel Paper and guaranties at any
time held by Laurus on which Company may in any way be liable, and hereby
ratifies and confirms whatever Laurus may do in this regard; (b) all rights to
notice and a hearing prior to Laurus' taking possession or control of, or to
Laurus' replevy, attachment or levy upon, any Collateral or any bond or security
that might be required by any court prior to allowing Laurus to exercise any of
its remedies; and (c) the benefit of all valuation, appraisal and exemption
laws. Company acknowledges that it has been advised by counsel of its choices
and decisions with respect to this Agreement, the Ancillary Agreements and the
transactions evidenced hereby and thereby.
22. Expenses. Company shall pay all of Laurus' reasonable
out-of-pocket costs and expenses, including reasonable fees and disbursements of
in-house or outside counsel and appraisers, in connection with the prosecution
or defense of any action, contest, dispute, suit or proceeding concerning any
matter in any way arising out of, related to or connected with this Agreement or
any Ancillary Agreement. Company shall also pay all of Laurus' reasonable fees,
charges, out-of-pocket costs and expenses, including fees and disbursements of
counsel and appraisers, in connection with (a) the preparation, execution and
delivery of any waiver, any amendment thereto or consent proposed or executed in
22
connection with the transactions contemplated by this Agreement or the Ancillary
Agreements, (b) Laurus' obtaining performance of the Obligations under this
Agreement and any Ancillary Agreements, including, but not limited to, the
enforcement or defense of Laurus' security interests, assignments of rights and
Liens hereunder as valid perfected security interests, (c) any attempt to
inspect, verify, protect, collect, sell, liquidate or otherwise dispose of any
Collateral, (d) any appraisals or re-appraisals of any property (real or
personal) pledged to Laurus by Company as Collateral for, or any other Person as
security for, Company's Obligations hereunder and (e) any consultations in
connection with any of the foregoing. Company shall also pay Laurus' customary
bank charges for all bank services (including wire transfers) performed or
caused to be performed by Laurus for Company at Company's request or in
connection with Company's loan account with Laurus . All such costs and expenses
together with all filing, recording and search fees, taxes and interest payable
by Company to Laurus shall be payable on demand and shall be secured by the
Collateral. If any tax (other than a tax imposed on income) by any Governmental
Authority is or may be imposed on or as a result of any transaction between
Company and Laurus which Laurus is or may be required to withhold or pay,
Company agrees to indemnify and hold Laurus harmless in respect of such taxes,
and Company will repay to Laurus the amount of any such taxes which shall be
charged to Company's account; and until Company shall furnish Laurus with
indemnity therefor (or supply Laurus with evidence satisfactory to it that due
provision for the payment thereof has been made), Laurus may hold without
interest any balance standing to Company's credit and Laurus shall retain its
Liens in any and all Collateral.
23. Assignment By Laurus. Laurus may assign any or all of the
Obligations together with any or all of the security therefor to any Person
which is not a competitor of the Company and any such transferee shall succeed
to all of Laurus' rights with respect thereto. Upon such transfer, Laurus shall
be released from all responsibility for the Collateral to the extent same is
assigned to any transferee. Upon Company's written approval not to be
unreasonably withheld, Laurus may from time to time sell or otherwise grant
participations in any of the Obligations and the holder of any such
participation shall, subject to the terms of any agreement between Laurus and
such holder, be entitled to the same benefits as Laurus with respect to any
security for the Obligations in which such holder is a participant. Company
agrees that each such holder may exercise any and all rights of banker's lien,
set-off and counterclaim with respect to its participation in the Obligations as
fully as though Company were directly indebted to such holder in the amount of
such participation.
24. No Waiver; Cumulative Remedies. Failure by Laurus to exercise
any right, remedy or option under this Agreement, any Ancillary Agreement or any
supplement hereto or thereto or any other agreement between Company and Laurus
or delay by Laurus in exercising the same, will not operate as a waiver; no
waiver by Laurus will be effective unless it is in writing and then only to the
extent specifically stated. Laurus' rights and remedies under this Agreement and
the Ancillary Agreements will be cumulative and not exclusive of any other right
or remedy which Laurus may have.
25. Application of Payments. Company irrevocably waives the right to
direct the application of any and all payments at any time or times hereafter
received by Laurus from or on Company's behalf and Company hereby irrevocably
agrees that Laurus shall have the continuing exclusive right to apply and
reapply any and all payments received at any time or times hereafter against the
Obligations hereunder in such manner as Laurus may deem advisable
notwithstanding any entry by Laurus upon any of Laurus' books and records.
23
26. Indemnity. Company agrees to indemnify and hold Laurus, and its
respective affiliates, employees, attorneys and agents (each, an "Indemnified
Person"), harmless from and against any and all suits, actions, proceedings,
claims, damages, losses, liabilities and expenses of any kind or nature
whatsoever (including attorneys' fees and disbursements and other costs of
investigation or defense, including those incurred upon any appeal) which may be
instituted or asserted against or incurred by any such Indemnified Person as the
result of credit having been extended, suspended or terminated under this
Agreement or any of the Ancillary Agreements or with respect to the execution,
delivery, enforcement, performance and administration of, or in any other way
arising out of or relating to, this Agreement, the Ancillary Agreements or any
other documents or transactions contemplated by or referred to herein or therein
and any actions or failures to act with respect to any of the foregoing, except
to the extent that any such indemnified liability is finally determined by a
court of competent jurisdiction to have resulted solely from such Indemnified
Person's gross negligence or willful misconduct. NO INDEMNIFIED PERSON SHALL BE
RESPONSIBLE OR LIABLE TO COMPANY OR TO ANY OTHER PARTY OR TO ANY SUCCESSOR,
ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS
DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR
CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN
EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR ANY ANCILLARY
AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR
THEREUNDER.
27. Revival. Company further agrees that to the extent Company makes
a payment or payments to Laurus, which payment or payments or any part thereof
are subsequently invalidated, declared to be fraudulent or preferential, set
aside and/or required to be repaid to a trustee, receiver or any other party
under any bankruptcy act, state or federal law, common law or equitable cause,
then, to the extent of such payment or repayment, the obligation or part thereof
intended to be satisfied shall be revived and continued in full force and effect
as if said payment had not been made.
28. Notices. Any notice or request hereunder may be given to Company
or Laurus at the respective addresses set forth below or as may hereafter be
specified in a notice designated as a change of address under this Section. Any
notice or request hereunder shall be given by registered or certified mail,
return receipt requested, hand delivery, overnight mail or telecopy (confirmed
by mail). Notices and requests shall be, in the case of those by hand delivery,
deemed to have been given when delivered to any officer of the party to whom it
is addressed, in the case of those by mail or overnight mail, deemed to have
been given three (3) business days after the date when deposited in the mail or
with the overnight mail carrier, and, in the case of a telecopy, when confirmed.
24
Notices shall be provided as follows:
If to Laurus: Laurus Master Fund, Ltd.
c/o Laurus Capital Management, LLC
000 Xxxxx Xxxxxx 00xx Xx.
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxx X. Xxxxxx, Esq.
Telephone: (000) 000-0000
Telecopier: (000) 000-0000
If to Company: GVI Security Solutions, Inc.
0000 Xxxx Xxxxxx
Xxxxx 000
Xxxxxxxxxx, XX 00000
Attention: Xxxxxxxxx X. Xxxxxxxx,
Chief Financial Officer
Telephone: (000) 000-0000
Telecopier: (000) 000-0000
With a copy to: Kronish Xxxx Xxxxxx & Xxxxxxx LLP
0000 Xxxxxx xx xxx Xxxxxxxx
Xxx Xxxx, XX 00000
Attention: Xxxxxx Xxxxxx, Esq.
Telephone: (000) 000-0000
Telecopier: (000) 000-0000
or such other address as may be designated in writing hereafter in accordance
with this Section 28 by such Person.
29. Governing Law, Jurisdiction and Waiver of Jury Trial. (a) THIS
AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE.
(b) COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL
COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE
JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN COMPANY AND
LAURUS PERTAINING TO THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS OR TO ANY
MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OF THE ANCILLARY
AGREEMENTS; PROVIDED, THAT LAURUS AND COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM
THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF
NEW YORK, STATE OF NEW YORK; AND FURTHER PROVIDED, THAT NOTHING IN THIS
AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LAURUS FROM BRINGING SUIT OR
TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS,
TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO
ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LAURUS. COMPANY EXPRESSLY
25
SUBMITS AND CONSENTS IN ADVANCE TO THE JURISDICTION OF SUCH NEW YORK COURTS IN
ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND COMPANY HEREBY WAIVES ANY
OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER
VENUE OR FORUM NON CONVENIENS. COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE
SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND
AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY
REGISTERED OR CERTIFIED MAIL ADDRESSED TO COMPANY AT THE ADDRESS SET FORTH IN
SECTION 28 AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER
OF COMPANY'S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S.
MAILS, PROPER POSTAGE PREPAID.
(c) THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE
APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE
BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL
RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE
ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN LAURUS AND
COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, ANY
ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED THERETO.
30. Limitation of Liability. Company acknowledges and understands
that in order to assure repayment of the Obligations hereunder Laurus may be
required to exercise any and all of Laurus' rights and remedies hereunder and
agrees that, except as limited by applicable law, neither Laurus nor any of
Laurus' agents shall be liable for acts taken or omissions made in connection
herewith or therewith except for actual bad faith or gross negligence.
31. Entire Understanding. This Agreement and the Ancillary
Agreements contain the entire understanding between Company and Laurus as to the
subject matter hereof and thereof and any promises, representations, warranties
or guarantees not herein contained shall have no force and effect unless in
writing, signed by Company's and Laurus' respective officers. Neither this
Agreement, the Ancillary Agreements, nor any portion or provisions thereof may
be changed, modified, amended, waived, supplemented, discharged, cancelled or
terminated orally or by any course of dealing, or in any manner other than by an
agreement in writing, signed by the party to be charged.
32. Severability. Wherever possible each provision of this Agreement
or the Ancillary Agreements shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of this Agreement
or the Ancillary Agreements shall be prohibited by or invalid under applicable
law such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions thereof.
26
33. Captions. All captions are and shall be without substantive
meaning or content of any kind whatsoever.
34. Counterparts; Telecopier Signatures. This Agreement may be
executed in two or more counterparts, each of which shall constitute an original
and all of which taken together shall constitute one and the same agreement. Any
signature delivered by a party via telecopier transmission shall be deemed to be
any original signature hereto.
35. Construction. The parties acknowledge that each party and its
counsel have reviewed this Agreement and that the normal rule of construction to
the effect that any ambiguities are to be resolved against the drafting party
shall not be employed in the interpretation of this Agreement or any amendments,
schedules or exhibits thereto.
36. Publicity. Company hereby authorizes Laurus to make appropriate
announcements of the financial arrangement entered into by and between Company
and Laurus, including, without limitation, announcements which are commonly
known as tombstones, in such publications and to such selected parties as Laurus
shall in its sole and absolute discretion deem appropriate, or as required by
applicable law.
37. Legends. The Securities shall bear legends as follows;
(a) The Note shall bear substantially the following legend:
"THIS NOTE AND THE COMMON STOCK ISSUABLE UPON
CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE, STATE SECURITIES LAWS. THIS NOTE AND THE
COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE
MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES
UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS
OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
GVI SECURITY SOLUTIONS, INC. THAT SUCH REGISTRATION
IS NOT REQUIRED."
(b) Any shares of Common Stock issued pursuant to
conversion of the Note shall bear a legend which shall be in
substantially the following form until such shares are covered by
an effective registration statement filed with the SEC:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS.
THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE
27
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH SECURITIES ACT AND APPLICABLE STATE
LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO GVI SECURITY SOLUTIONS, INC.
THAT SUCH REGISTRATION IS NOT REQUIRED."
[Balance of page intentionally left blank; signature page follows.]
28
IN WITNESS WHEREOF, the parties have executed this Security
Agreement as of the date first written above.
GVI SECURITY SOLUTIONS, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
LAURUS MASTER FUND, LTD.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
29
Annex A - Definitions
"Account Debtor" means any Person who is or may be obligated with
respect to, or on account of, an Account.
"Accountants" has the meaning given to such term in Section 11(a).
"Accounts" means all "accounts", as such term is defined in the UCC,
now owned or hereafter acquired by any Person, including: (a) all accounts
receivable, other receivables, book debts and other forms of obligations (other
than forms of obligations evidenced by Chattel Paper or Instruments) (including
any such obligations that may be characterized as an account or contract right
under the UCC); (b) all of such Person's rights in, to and under all purchase
orders or receipts for goods or services; (c) all of such Person's rights to any
goods represented by any of the foregoing (including unpaid sellers' rights of
rescission, replevin, reclamation and stoppage in transit and rights to
returned, reclaimed or repossessed goods); (d) all rights to payment due to such
Person for Goods or other property sold, leased, licensed, assigned or otherwise
disposed of, for a policy of insurance issued or to be issued, for a secondary
obligation incurred or to be incurred, for energy provided or to be provided,
for the use or hire of a vessel under a charter or other contract, arising out
of the use of a credit card or charge card, or for services rendered or to be
rendered by such Person or in connection with any other transaction (whether or
not yet earned by performance on the part of such Person); and (e) all
collateral security of any kind given by any Account Debtor or any other Person
with respect to any of the foregoing.
"Accounts Availability" means the amount of Loans against Eligible
Accounts that Laurus may from time to time make available to Company equal to
the sum of ninety percent (90%) of the net face amount of Eligible Accounts
based solely on Accounts of Company and its Subsidiaries.
"Affiliate" of any Person means (a) any Person (other than a
Subsidiary) which, directly or indirectly, is in control of, is controlled by,
or is under common control with such Person, (b) any Person who is a director or
officer (i) of such Person, (ii) of any Subsidiary of such Person or (iii) of
any Person described in clause (a) above. For the purposes of this definition,
control of a Person shall mean the power (direct or indirect) to direct or cause
the direction of the management and policies of such Person whether by contract
or otherwise.
"Ancillary Agreements" means, the Notes, Registration Rights
Agreement, each Guaranty, each Guaranty Security Agreement and all other
agreements, instruments, documents, mortgages, pledges, powers of attorney,
consents, assignments, contracts, notices, security agreements, trust agreements
and guarantees whether heretofore, concurrently, or hereafter executed by or on
behalf of Company or any other Person or delivered to Laurus, relating to this
Agreement or to the transactions contemplated by this Agreement.
"Books and Records" means all books, records, board minutes,
contracts, licenses, insurance policies, environmental audits, business plans,
files, computer files, computer discs and other data and software storage and
media devices, accounting books and records, financial statements (actual and
pro forma), filings with Governmental Authorities and any and all records and
instruments relating to the Collateral or otherwise necessary or helpful in the
collection thereof or the realization thereupon.
30
"Business Day" means a day on which Laurus is open for business and
that is not a Saturday, a Sunday or other day on which banks are required or
permitted to be closed in the State of New York.
"Capital Availability Amount" means $10,000,000.
"Chattel Paper" means all "chattel paper," as such term is defined
in the UCC, including electronic chattel paper, now owned or hereafter acquired
by any Person.
"Closing Date" means the date on which Company shall first receive
proceeds of the initial Loans or the date hereof, if no Loan is made under the
facility on the date hereof.
"Collateral" means all of Company's property and assets, whether
real or personal, tangible or intangible, and whether now owned or hereafter
acquired, or in which it now has or at any time in the future may acquire any
right, title or interests including all of the following property in which it
now has or at any time in the future may acquire any right, title or interest:
(a) all Inventory;
(b) all Equipment;
(c) all Fixtures;
(d) all General Intangibles;
(e) all Accounts;
(f) all Deposit Accounts, other bank accounts and all funds on
deposit therein;
(g) all Investment Property;
(h) all Stock;
(i) all Chattel Paper;
(j) all Letter-of-Credit Rights;
(k) all Instruments;
(l) all commercial tort claims set forth on Exhibit 1(A);
(m) all Books and Records;
(n) all Supporting Obligations including letters of credit and
guarantees issued in support of Accounts, Chattel Paper, General Intangibles and
Investment Property;
31
(o) (i) all money, cash and cash equivalents and (ii) all cash held
as cash collateral to the extent not otherwise constituting Collateral, all
other cash or property at any time on deposit with or held by Laurus for the
account of Company (whether for safekeeping, custody, pledge, transmission or
otherwise); and
(p) all products and Proceeds of all or any of the foregoing, tort
claims and all claims and other rights to payment including insurance claims
against third parties for loss of, damage to, or destruction of, and (ii)
payments due or to become due under leases, rentals and hires of any or all of
the foregoing and Proceeds payable under, or unearned premiums with respect to
policies of insurance in whatever form.
"Common Stock" means the common stock, par value $.001 per share, of
the Company.
"Contract Rate" means an interest rate per annum equal to the Prime
Rate minus two percent (2.0%). The Contract Rate shall be calculated on the last
business day of each month (the "Determination Date") hereafter until the
Maturity Date and shall be subject to adjustment as follows: If (i) the Company
shall have an effective registration statement under the Securities Act of 1933,
as amended, with respect to the Common Stock issuable upon conversion of the
Minimum Borrowing Note, and (ii) the average closing market price (the "Market
Price") of the Common Stock as reported by Bloomberg, L.P. on the Principal
Market for the five (5) trading days immediately preceding a Determination Date
exceeds the then applicable Fixed Conversion Price by at least twenty five
percent (25%), the Interest Rate for the succeeding calendar month shall
automatically be reduced by 200 basis points (200 b.p.) (2.0%) for each
incremental twenty five percent (25%) increase in the Market Price of the Common
Stock above the then applicable Fixed Conversion Price. If (i) the Company shall
not have an effective registration statement with respect to the Common Stock
issuable upon conversion of the Minimum Borrowing Note, and (ii) the Market
Price of the Common Stock as reported by Bloomberg, L.P. on the Principal Market
for the five (5) trading days immediately preceding a Determination Date exceeds
the then applicable Fixed Conversion Price by at least twenty five percent
(25%), the Interest Rate for the succeeding calendar month shall automatically
be decreased by 100 basis points (100 b.p.) (1.0%) for each incremental twenty
five percent (25%) increase in the Market Price of the Common Stock above the
then applicable Fixed Conversion Price. Notwithstanding the foregoing (and
anything to the contrary contained in herein) (i) if on or after November 26,
2004, the Market Price of the Common Stock for the five (5) trading days
immediately preceding a Determination Date is below the then Fixed Conversion
Price, the Contract Rate for the month immediately following the Determination
Date will be reset to the Prime Rate plus two percent (2.0%), and (ii) in no
event shall the Contract Rate be less than zero percent (0%).
"Default" means any act or event which, with the giving of notice or
passage of time or both, would constitute an Event of Default.
"Default Rate" has the meaning given to such term in Section
5(a)(iii).
32
"Deposit Accounts" means all "deposit accounts" as such term is
defined in the UCC, now or hereafter held in the name of any Person, including,
without limitation, the Lockbox Account.
"Documents" means all "documents", as such term is defined in the
UCC, now owned or hereafter acquired by any Person, wherever located, including
all bills of lading, dock warrants, dock receipts, warehouse receipts, and other
documents of title, whether negotiable or non-negotiable.
"Eligible Accounts" means and includes each Account which conforms
to the following criteria: (a) shipment of the merchandise or the rendition of
services has been completed; (b) no return, rejection or repossession of the
merchandise has occurred; (c) merchandise or services shall not have been
rejected or disputed by the Account Debtor and there shall not have been
asserted any offset, defense or counterclaim; (d) continues to be in full
conformity with the representations and warranties made by Company to Laurus
with respect thereto; (e) Laurus is, and continues to be, satisfied with the
credit standing of the Account Debtor in relation to the amount of credit
extended; (f) there are no facts existing or threatened which are likely to
result in any adverse change in the Account Debtor's financial condition; (g) is
documented by an invoice and shall not be unpaid more than ninety (90) days from
invoice date; (h) not more than twenty five percent (25%) of the unpaid amount
of invoices due from such Account Debtor remains unpaid more than ninety (90)
days from invoice date; (i) is not evidenced by chattel paper or an instrument
of any kind with respect to or in payment of the Account unless such instrument
is duly endorsed to and in possession of Laurus or represents a check in payment
of a Account; (j) the Account Debtor is located in the United States; provided,
however, Laurus may, from time to time, in the exercise of its sole discretion
and based upon satisfaction of certain conditions to be determined at such time
by Laurus, deem certain Accounts as Eligible Accounts notwithstanding that such
Account is due from an Account Debtor located outside of the United States; (k)
Laurus has a first priority perfected Lien in such Account and such Account is
not subject to any Lien other than Permitted Liens; (l) does not arise out of
transactions with any employee, officer, director, stockholder or Affiliate of
Company unless made at arms' length; (m) is payable to Company or any of its
Subsidiaries; (n) does not arise out of a xxxx and hold sale prior to shipment
and does not arise out of a sale to any Person to which Company is indebted; (o)
is net of any returns, discounts, claims, credits and allowances; (p) if the
Account arises out of contracts between Company or any of its Subsidiaries and
the United States, any state, or any department, agency or instrumentality of
any of them, Company has so notified Laurus, in writing, prior to the creation
of such Account, and there has been compliance with any governmental notice or
approval requirements, including compliance with the Federal Assignment of
Claims Act; (q) is a good and valid account representing an undisputed bona fide
indebtedness incurred by the Account Debtor therein named, for a fixed sum as
set forth in the invoice relating thereto with respect to an unconditional sale
and delivery upon the stated terms of goods sold by Company or any of its
Subsidiaries or work, labor and/or services rendered by Company or any of its
Subsidiaries; (r) does not arise out of progress xxxxxxxx prior to completion of
the order; (s) the total unpaid Accounts from such Account Debtor does not
exceed fifty percent (50%) of all Eligible Accounts; (t) Company's right to
payment is absolute and not contingent upon the fulfillment of any condition
whatsoever; (u) Company or any of its Subsidiaries is able to bring suit and
enforce its remedies against the Account Debtor through judicial process; (v)
does not represent interest payments, late or finance charges owing to Company
33
or any of its Subsidiaries and (w) is otherwise satisfactory to Laurus as
determined by Laurus in the exercise of its reasonable discretion. In the event
Company requests that Laurus include within Eligible Accounts certain Accounts
of one or more of Company's acquisition targets, Laurus shall at the time of
such request consider such inclusion, but any such inclusion shall be at the
sole option of Laurus and shall at all times be subject to the execution and
delivery to Laurus of all such documentation (including, without limitation,
guaranty and security documentation) as Laurus may require in its sole
discretion.
"Eligible Inventory" means Inventory owned by Company or any of its
Subsidiaries which Laurus, in its sole and absolute discretion, determines: (a)
is subject to a first priority perfected Lien in favor of Laurus and is subject
to no other Liens whatsoever (other than Permitted Liens); (b) is not in
transit; (c) is in good condition and meets all standards imposed by any
governmental agency, or department or division thereof having regulatory
Governmental Authority over such Inventory, its use or sale including the
Federal Fair Labor Standards Act of 1938 as amended, and all rules, regulations
and orders thereunder; (d) is currently either usable or salable in the normal
course of Company's business; (e) is not placed by Company on consignment or
held by Company on consignment from another Person; (f) is in conformity with
the representations and warranties made by Company to Laurus with respect
thereto; (g) does not require the consent of any Person for the completion of
manufacture, sale or other disposition of such Inventory and such completion,
manufacture or sale does not constitute a breach or default under any contract
or agreement to which Company is a party or to which such Inventory is or may be
subject; (h) is not work-in-process; (i) is covered by casualty insurance
acceptable to Laurus; and (j) is located on premises with respect to which
Laurus has received a landlord or mortgagee waiver acceptable in form and
substance to Laurus.
"Equipment" means all "equipment" as such term is defined in the
UCC, now owned or hereafter acquired by any Person, wherever located, including
any and all machinery, apparatus, equipment, fittings, furniture, fixtures,
motor vehicles and other tangible personal property (other than Inventory) of
every kind and description that may be now or hereafter used in such Person's
operations or that are owned by such Person or in which such Person may have an
interest, and all parts, accessories and accessions thereto and substitutions
and replacements therefor.
"ERISA" shall have the meaning given to such term in Section 12(e).
"Event of Default" means the occurrence of any of the events set
forth in Section 19.
"Fixed Conversion Price" has the meaning given such term in the
Minimum Borrowing Note.
"Fixtures" means all "fixtures" as such term is defined in the UCC,
now owned or hereafter acquired by any Person.
"Formula Amount" has the meaning set forth in Section 2(a)(i).
"GAAP" means generally accepted accounting principles, practices and
procedures in effect from time to time in the United States of America.
34
"General Intangibles" means all "general intangibles" as such term
is defined in the UCC, now owned or hereafter acquired by any Person including
all right, title and interest that such Person may now or hereafter have in or
under any contract, all Payment Intangibles, customer lists, Licenses,
Intellectual Property, interests in partnerships, joint ventures and other
business associations, permits, proprietary or confidential information,
inventions (whether or not patented or patentable), technical information,
procedures, designs, knowledge, know-how, Software, data bases, data, skill,
expertise, experience, processes, models, drawings, materials, Books and
Records, Goodwill (including the Goodwill associated with any Intellectual
Property), all rights and claims in or under insurance policies (including
insurance for fire, damage, loss, and casualty, whether covering personal
property, real property, tangible rights or intangible rights, all liability,
life, key-person, and business interruption insurance, and all unearned
premiums), uncertificated securities, choses in action, deposit accounts, rights
to receive tax refunds and other payments, rights to received dividends,
distributions, cash, Instruments and other property in respect of or in exchange
for pledged Stock and Investment Property, and rights of indemnification.
"Goods" means all "goods", as such term is defined in the UCC, now
owned or hereafter acquired by any Person, wherever located, including embedded
software to the extent included in "goods" as defined in the UCC, manufactured
homes, standing timber that is cut and removed for sale and unborn young of
animals.
"Goodwill" means all goodwill, trade secrets, proprietary or
confidential information, technical information, procedures, formulae, quality
control standards, designs, operating and training manuals, customer lists, and
distribution agreements now owned or hereafter acquired by any Person.
"Guarantor" means and any Person who may guarantee payment of
performance of the whole or any part of the Obligations.
"Guarantor Security Agreements" means all security agreements,
mortgages, cash collateral deposit letters, pledges and other agreements which
are executed by any Guarantor in favor of Laurus.
"Guaranty" means all agreements to perform all or any portion of the
Obligations on behalf of Company.
"Governmental Authority" means any nation or government, any state
or other political subdivision thereof, and any agency, department or other
entity exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"Indemnified Person" shall have the meaning given to such term in
Section 26.
"Instruments" means all "instruments", as such term is defined in
the UCC, now owned or hereafter acquired by any Person, wherever located,
including all certificated securities and all promissory notes and other
evidences of indebtedness, other than instruments that constitute, or are a part
of a group of writings that constitute, Chattel Paper.
35
"Intellectual Property" means any and all Licenses, patents, patent
registrations, copyrights, copyright registrations, trademarks, trademark
registrations, trade secrets and customer lists.
"Inventory" means all "inventory", as such term is defined in the
UCC, now owned or hereafter acquired by any Person, wherever located, including
all inventory, merchandise, goods and other personal property that are held by
or on behalf of such Person for sale or lease or are furnished or are to be
furnished under a contract of service or that constitute raw materials, work in
process, finished goods, returned goods, or materials or supplies of any kind,
nature or description used or consumed or to be used or consumed in such
Person's business or in the processing, production, packaging, promotion,
delivery or shipping of the same, including all supplies and embedded software.
"Inventory Availability" means the amount of Loans against Eligible
Inventory Laurus may from time to time make available to Company up to sixty
percent (60%) of the value of Eligible Inventory of the Company and its
Subsidiaries (calculated on the basis of the lower of cost or market, on a
first-in first-out basis) up to a maximum of $2,000,000 outstanding at any time.
"Investment Property" means all "investment property", as such term
is defined in the UCC, now owned or hereafter acquired by any Person, wherever
located.
"Letter-of-Credit Rights" means "letter-of-credit rights" as such
term is defined in the UCC, now owned or hereafter acquired by any Person,
including rights to payment or performance under a letter of credit, whether or
not such Person, as beneficiary, has demanded or is entitled to demand payment
or performance.
"License" means any rights under any written agreement now or
hereafter acquired by any Person to use any trademark, trademark registration,
copyright, copyright registration or invention for which a patent is in
existence or other license of rights or interests now held or hereafter acquired
by any Person.
"Lien" means any mortgage, security deed, deed of trust, pledge,
hypothecation, assignment, security interest, lien (whether statutory or
otherwise), charge, claim or encumbrance, or preference, priority or other
security agreement or preferential arrangement held or asserted in respect of
any asset of any kind or nature whatsoever including any conditional sale or
other title retention agreement, any lease having substantially the same
economic effect as any of the foregoing, and the filing of, or agreement to
give, any financing statement under the UCC or comparable law of any
jurisdiction.
"Loans" shall have the meaning set forth in Section 2(a)(i) and
shall include all other extensions of credit hereunder and under any Ancillary
Agreement.
"Material Adverse Effect" means a material adverse effect on (a) the
condition, operations, assets, business or prospects of Company and its
Subsidiaries, taken as a whole, (b) Company's ability to pay or perform the
Obligations in accordance with the terms hereof or any Ancillary Agreement, (c)
the value of the Collateral, the Liens on the Collateral or the priority of any
such Lien or (d) the practical realization of the benefits of Laurus' rights and
remedies under this Agreement and the Ancillary Agreements.
36
"Maximum Legal Rate" shall have the meaning given to such term in
Section 5(a)(iv).
"Minimum Borrowing Amount" means $5,000,000, which such aggregate
amount shall be evidenced by Minimum Borrowing Notes.
"Minimum Borrowing Notes" shall mean each Secured Convertible Note,
which shall be issued in a series, made by the Company in favor of Laurus to
evidence the Minimum Borrowing Amount.
"Notes" means each of the Minimum Borrowing Notes and the Revolving
Note made by Company in favor of Laurus in connection with the transactions
contemplated hereby, as the same may be amended, modified and supplemented from
time to time, as applicable.
"Obligations" means all Loans, all advances, debts, liabilities,
obligations, covenants and duties owing by Company to Laurus (or any corporation
that directly or indirectly controls or is controlled by or is under common
control with Laurus) of every kind and description (whether or not evidenced by
any note or other instrument and whether or not for the payment of money or the
performance or non-performance of any act), direct or indirect, absolute or
contingent, due or to become due, contractual or tortious, liquidated or
unliquidated, whether existing by operation of law or otherwise now existing or
hereafter arising including any debt, liability or obligation owing from Company
to others which Laurus may have obtained by assignment or otherwise and further
including all interest (including interest accruing at the then applicable rate
provided in this Agreement after the maturity of the Loans and interest accruing
at the then applicable rate provided in this Agreement after the filing of any
petition in bankruptcy, or the commencement of any insolvency, reorganization or
like proceeding, whether or not a claim for post-filing or post-petition
interest is allowed in such proceeding), charges or any other payments Company
is required to make by law or otherwise arising under or as a result of this
Agreement and the Ancillary Agreements, together with all reasonable expenses
and reasonable attorneys' fees chargeable to Company's account or incurred by
Laurus in connection with Company's account whether provided for herein or in
any Ancillary Agreement.
"Payment Intangibles" means all "payment intangibles" as such term
is defined in the UCC, now owned or hereafter acquired by any Person, including,
a General Intangible under which the Account Debtor's principal obligation is a
monetary obligation.
"Permitted Liens" means (a) Liens of carriers, warehousemen,
artisans, bailees, mechanics and materialmen incurred in the ordinary course of
business securing sums not overdue; (b) Liens incurred in the ordinary course of
business in connection with workmen's compensation, unemployment insurance or
other forms of governmental insurance or benefits, relating to employees,
securing sums (i) not overdue or (ii) being diligently contested in good faith
provided that adequate reserves with respect thereto are maintained on the books
of the applicable Company in conformity with GAAP; (c) Liens in favor of Laurus;
(d) Liens for taxes (i) not yet due or (ii) being diligently contested in good
faith by appropriate proceedings, provided that adequate reserves with respect
37
thereto are maintained on the books of the Company in conformity with GAAP
provided, that, the Lien shall have no effect on the priority of Liens in favor
of Laurus or the value of the assets in which Laurus has a Lien; (e) Purchase
Money Liens securing Purchase Money Indebtedness to the extent permitted in this
Agreement and (f) Liens specified on Exhibit 2 hereto.
"Person" means any individual, sole proprietorship, partnership,
limited liability partnership, joint venture, trust, unincorporated
organization, association, corporation, limited liability company, institution,
public benefit corporation, entity or government (whether federal, state,
county, city, municipal or otherwise, including any instrumentality, division,
agency, body or department thereof), and shall include such Person's successors
and assigns.
"Prime Rate" means the "prime rate" published in The Wall Street
Journal from time to time. The Prime Rate shall be increased or decreased as the
case may be for each increase or decrease in the Prime Rate in an amount equal
to such increase or decrease in the Prime Rate; each change to be effective as
of the day of the change in such rate.
"Proceeds" means "proceeds", as such term is defined in the UCC and,
in any event, shall include: (a) any and all proceeds of any insurance,
indemnity, warranty or guaranty payable to Company or any other Person from time
to time with respect to any Collateral; (b) any and all payments (in any form
whatsoever) made or due and payable to Company from time to time in connection
with any requisition, confiscation, condemnation, seizure or forfeiture of any
Collateral by any governmental body, governmental authority, bureau or agency
(or any person acting under color of governmental authority); (c) any claim of
Company against third parties (i) for past, present or future infringement of
any Intellectual Property or (ii) for past, present or future infringement or
dilution of any trademark or trademark license or for injury to the goodwill
associated with any trademark, trademark registration or trademark licensed
under any trademark License; (d) any recoveries by Company against third parties
with respect to any litigation or dispute concerning any Collateral, including
claims arising out of the loss or nonconformity of, interference with the use
of, defects in, or infringement of rights in, or damage to, Collateral; (e) all
amounts collected on, or distributed on account of, other Collateral, including
dividends, interest, distributions and Instruments with respect to Investment
Property and pledged Stock; and (f) any and all other amounts, rights to payment
or other property acquired upon the sale, lease, license, exchange or other
disposition of Collateral and all rights arising out of Collateral.
"Purchase Money Indebtedness" means (a) any indebtedness incurred
for the payment of all or any part of the purchase price of any fixed asset,
including indebtedness under capitalized leases, (b) any indebtedness incurred
for the sole purpose of financing or refinancing all or any part of the purchase
price of any fixed asset, and (c) any renewals, extensions or refinancings
thereof (but not any increases in the principal amounts thereof outstanding at
that time).
"Purchase Money Lien" means any Lien upon any fixed assets that
secures the Purchase Money Indebtedness related thereto but only if such Lien
shall at all times be confined solely to the asset the purchase price of which
was financed or refinanced through the incurrence of the Purchase Money
Indebtedness secured by such Lien and only if such Lien secures only such
Purchase Money Indebtedness.
38
"Registration Rights Agreements" means those registration rights
agreements from time to time entered into between Company and Laurus, as
amended, modified and supplemented from time to time.
"Revolving Note" means that secured revolving note made by the
Company in favor of Laurus in the aggregate principal amount of Five Million
Dollars ($5,000,000).
"Securities" means the Notes being issued by the Company to Laurus
pursuant to this Agreement and the Ancillary Agreements and the shares of Common
Stock of the Company which may be issued pursuant to conversion of such Notes in
whole or in part.
"Software" means all "software" as such term is defined in the UCC,
now owned or hereafter acquired by any Person, including all computer programs
and all supporting information provided in connection with a transaction related
to any program.
"Stock" means all certificated and uncertificated shares, options,
warrants, membership interests, general or limited partnership interests,
participation or other equivalents (regardless of how designated) of or in a
corporation, partnership, limited liability company or equivalent entity whether
voting or nonvoting, including common stock, preferred stock, or any other
"equity security" (as such term is defined in Rule 3a11-1 of the General Rules
and Regulations promulgated by the SEC under the Securities Exchange Act of
1934).
"Subsidiary" of any Person means a corporation or other entity whose
shares of stock or other ownership interests having ordinary voting power (other
than stock or other ownership interests having such power only by reason of the
happening of a contingency) to elect a majority of the directors of such
corporation, or other Persons performing similar functions for such entity, are
owned, directly or indirectly, by such Person.
"Supporting Obligations" means all "supporting obligations" as such
term is defined in the UCC.
"Term" means the Closing Date through the close of business on the
day immediately preceding the third anniversary of the Closing Date, subject to
acceleration at the option of Laurus upon the occurrence of an Event of Default
hereunder or other termination hereunder.
"UCC" means the Uniform Commercial Code as the same may, from time
be in effect in the State of New York; provided, that in the event that, by
reason of mandatory provisions of law, any or all of the attachment, perfection
or priority of, or remedies with respect to, Laurus' Lien on any Collateral is
governed by the Uniform Commercial Code as in effect in a jurisdiction other
than the State of New York, the term "UCC" shall mean the Uniform Commercial
Code as in effect in such other jurisdiction for purposes of the provisions of
this Agreement relating to such attachment, perfection, priority or remedies and
for purposes of definitions related to such provisions; provided further, that
to the extent that UCC is used to define any term herein or in any Ancillary
Agreement and such term is defined differently in different Articles or
Divisions of the UCC, the definition of such term contained in Article or
Division 9 shall govern.
39
EXHIBITS
Exhibit 1(A) - Commercial Tort Claims
Exhibit 2 - Permitted Liens
Exhibit 7(c) - Actions for Perfection
Exhibit 7(p) - Bank Accounts
Exhibit 12(d) - Corporate Information and Locations of Collateral
Exhibit 12(e) - ERISA
Exhibit 12(i) - Licenses, Patents, Trademarks and Copyrights
Exhibit 12(j) - Certain SEC matters
Exhibit 13(e)(i) - Permitted Indebtedness
Exhibit 13(e)(ii) - Existing Subsidiaries
Exhibit A - Form of Borrowing Base Certificate
40
