EXHIBIT 10.1
SECURITY AND PURCHASE AGREEMENT
LAURUS MASTER FUND, LTD.
and
NATURADE, INC.
Dated: July 26, 2005
TABLE OF CONTENTS
PAGE
----
1. General Definitions and Terms; Rules of Construction...................... 1
2. Loan Facility............................................................. 2
3. Repayment of the Loans.................................................... 4
4. Procedure for Revolving Loans............................................. 5
5. Interest and Payments..................................................... 5
6. Security Interest......................................................... 7
7. Representations, Warranties and Covenants Concerning the Collateral....... 8
8. Payment of Accounts....................................................... 11
9. Collection and Maintenance of Collateral.................................. 11
10. Inspections and Appraisals................................................ 12
11. Financial Reporting....................................................... 12
12. Additional Representations and Warranties................................. 13
13. Covenants................................................................. 24
14. Further Assurances........................................................ 30
15. Representations, Warranties and Covenants of Laurus....................... 30
16. Power of Attorney......................................................... 32
17. Term of Agreement......................................................... 33
18. Termination of Lien....................................................... 33
19. Events of Default......................................................... 33
20. Remedies.................................................................. 36
21. Waivers................................................................... 37
22. Expenses.................................................................. 37
23. Assignment By Laurus...................................................... 38
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PAGE (s)
24. No Waiver; Cumulative Remedies............................................ 38
25. Application of Payments................................................... 38
26. Indemnity................................................................. 38
27. Revival................................................................... 39
28. Borrowing Agency Provisions............................................... 39
29. Notices................................................................... 40
30. Governing Law, Jurisdiction and Waiver of Jury Trial...................... 41
31. Limitation of Liability................................................... 42
32. Entire Understanding; Maximum Interest.................................... 42
33. Severability.............................................................. 42
34. Survival.................................................................. 42
35. Captions.................................................................. 43
36. Counterparts; Telecopier Signatures....................................... 43
37. Construction.............................................................. 43
38. Publicity................................................................. 43
39. Joinder................................................................... 43
40. Legends................................................................... 43
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SECURITY AND PURCHASE AGREEMENT
This Security and Purchase Agreement is made as of July 26, 2005 by
and among LAURUS MASTER FUND, LTD., a Cayman Islands corporation ("Laurus"),
NATURADE, INC., a Delaware corporation ("the Parent"), and each party listed on
Exhibit A attached hereto (each an "Eligible Subsidiary" and collectively, the
"Eligible Subsidiaries") the Parent and each Eligible Subsidiary, each a
"Company" and collectively, the "Companies").
BACKGROUND
The Companies have requested that Laurus make advances available to
the Companies; and
Laurus has agreed to make such advances on the terms and conditions
set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings and the terms and conditions contained herein, the parties hereto
agree as follows:
1. General Definitions and Terms; Rules of Construction.
(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. Loan Facility.
(a) Revolving Loans.
(i) Subject to the terms and conditions set forth herein and
in the Ancillary Agreements, Laurus may make revolving loans (the " Revolving
Loans") to Companies from time to time during the Term which, in the aggregate
at any time outstanding, will not exceed the lesser of (x) (I) the Capital
Availability Amount minus (II) such reserves as Laurus may reasonably in its
good faith judgment deem proper and necessary from time to time based upon
significant business developments arising in respect of the Company and/or any
of its Account Debtors (the "Reserves"); it being understood and agreed that
Laurus shall endeavor to provide to the Company timely notice of such Reserves
and (y) an amount equal to (I) the Accounts Availability plus (II) the Inventory
Availability minus (III) the Reserves. The amount derived at any time from
Section 2(a)(i)(y)(I) plus Section 2(a)(i)(y)(II) minus 2(a)(i)(y)(III) shall be
referred to as the "Formula Amount." The Companies shall, jointly and severally,
execute and deliver to Laurus on the Closing Date the Revolving Note and a
Minimum Borrowing Note evidencing the Revolving Loans funded on the Closing
Date. From time to time thereafter, the Companies shall jointly and severally
execute and deliver to Laurus immediately prior to the final funding of each
additional $500,000 tranche of Revolving Loans allocated to any Minimum
Borrowing Note issued after the date hereof (calculated on a cumulative basis
for each such tranche) an additional Minimum Borrowing Note evidencing such
tranche, substantially in the form of the Minimum Borrowing Note delivered by
the Companies to Laurus on the Closing Date. Notwithstanding anything herein to
the contrary, whenever during the Term the outstanding balance on the Minimum
Borrowing Note shall be less than the Minimum Borrowing Amount (such amount
being referred to herein as the "Transferable Amount") to the extent that the
outstanding balance on the Revolving Note should equal or exceed $500,000, that
portion of the balance of the Revolving Note that exceeds $500,000, but does not
exceed the Transferable Amount, shall be segregated from the outstanding balance
under the Revolving Note and allocated to and aggregated with the then existing
balance of the next unissued serialized Minimum Borrowing Note (the "Next
Unissued Serialized Note"); provided that such segregated amount shall remain
subject to the terms and conditions of such Revolving Note until a new
serialized Minimum Borrowing Note is issued as set forth below. The Next
Unissued Serialized Note shall remain in book entry form until the balance
thereunder shall equal the Minimum Borrowing Amount, at which time a new
serialized Minimum Borrowing Note in the face amount equal to the Minimum
Borrowing Amount will be issued and registered as set forth in the Registration
Rights Agreement (and the outstanding balance under the Revolving Note shall at
such time be correspondingly reduced in the amount equal to the Minimum
Borrowing Amount as a result of the issuance of such new serialized Minimum
Borrowing Note).
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(ii) Notwithstanding the limitations set forth above, if
requested by any Company, Laurus retains the right to lend to such Company from
time to time such amounts in excess of such limitations as Laurus may determine
in its sole discretion.
(iii) The Companies acknowledge that the exercise of Laurus'
discretionary rights hereunder may result during the Term in one or more
increases or decreases in the advance percentages used in determining Accounts
Availability and/or Inventory Availability and each of the Companies hereby
consent to any such increases or decreases which may limit or restrict advances
requested by the Companies.
(iv) If any interest, fees, costs or charges payable to Laurus
hereunder are not paid when due, each of the Companies shall thereby be deemed
to have requested, and Laurus is hereby authorized at its discretion to make and
charge to the Companies' account, a Loan as of such date in an amount equal to
such unpaid interest, fees, costs or charges.
(v) If any Company at any time fails to perform or observe any
of the covenants contained in this Agreement or any Ancillary Agreement, Laurus
may, but need not, perform or observe such covenant on behalf and in the name,
place and stead of such Company (or, at Laurus' option, in Laurus' name) and
may, but need not, take any and all other actions which Laurus may deem
necessary to cure or correct such failure (including the payment of taxes, the
satisfaction of Liens, the performance of obligations owed to Account Debtors,
lessors or other obligors, the procurement and maintenance of insurance, the
execution of assignments, security agreements and financing statements, and the
endorsement of instruments). The amount of all monies expended and all costs and
expenses (including attorneys' fees and legal expenses) incurred by Laurus in
connection with or as a result of the performance or observance of such
agreements or the taking of such action by Laurus shall be charged to the
Companies' account as a Revolving Loan and added to the Obligations. To
facilitate Laurus' performance or observance of such covenants by each Company,
each Company hereby irrevocably appoints Laurus, or Laurus' delegate, acting
alone, as such Company's attorney in fact (which appointment is coupled with an
interest) with the right (but not the duty) from time to time to create,
prepare, complete, execute, deliver, endorse or file in the name and on behalf
of such Company any and all instruments, documents, assignments, security
agreements, financing statements, applications for insurance and other
agreements and writings required to be obtained, executed, delivered or endorsed
by such Company.
(vi) Laurus will account to Company Agent monthly with a
statement of all Loans and other advances, charges and payments made pursuant to
this Agreement, and such account rendered by Laurus shall be deemed final,
binding and conclusive unless Laurus is notified by Company Agent in writing to
the contrary within thirty (30) days of the date each account was rendered
specifying the item or items to which objection is made.
(vii) During the Term, the Companies may borrow and prepay
Loans in accordance with the terms and conditions hereof.
(viii) If any Eligible Account is not paid by the Account
Debtor within ninety (90) days after the date that such Eligible Account was
invoiced or if any Account Debtor asserts a deduction, dispute, contingency,
set-off, or counterclaim with respect to any Eligible
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Account, (a "Delinquent Account"), the Companies shall jointly and severally (i)
reimburse Laurus for the amount of the Loans made with respect to such
Delinquent Account plus an adjustment fee in an amount equal to one-half of one
percent (0.50%) of the gross face amount of such Eligible Account or (ii)
immediately replace such Delinquent Account with an otherwise Eligible Account.
(b) Receivables Purchase. Following the occurrence and during the
continuance of an Event of Default, Laurus may, at its option, elect to convert
the credit facility contemplated hereby to an accounts receivable purchase
facility. Upon such election by Laurus (subsequent notice of which Laurus shall
provide to Company Agent), the Companies shall be deemed to hereby have sold,
assigned, transferred, conveyed and delivered to Laurus, and Laurus shall be
deemed to have purchased and received from the Companies, all right, title and
interest of the Companies in and to all Accounts which shall at any time
constitute Eligible Accounts (the "Receivables Purchase"). All outstanding Loans
hereunder shall be deemed obligations under such accounts receivable purchase
facility. The conversion to an accounts receivable purchase facility in
accordance with the terms hereof shall not be deemed an exercise by Laurus of
its secured creditor rights under Article 9 of the UCC. Immediately following
Laurus' request, the Companies shall execute all such further documentation as
may be required by Laurus to more fully set forth the accounts receivable
purchase facility herein contemplated, including, without limitation, Laurus'
standard form of accounts receivable purchase agreement and account debtor
notification letters, but any Company's failure to enter into any such
documentation shall not impair or affect the Receivables Purchase in any manner
whatsoever.
(c) Minimum Borrowing Amount. After a registration statement
registering the Registrable Securities has been declared effective by the SEC,
conversions of the Minimum Borrowing Amount into the Common Stock may be
initiated as set forth in the respective Minimum Borrowing Note. From and after
the date upon which any outstanding principal of the Minimum Borrowing Amount
(as evidenced by the first Minimum Borrowing Note) is converted into Common
Stock (the "First Conversion Date"), (i) corresponding amounts of all
outstanding Loans (not attributable to the then outstanding Minimum Borrowing
Amount) existing on or made after the First Conversion Date will be aggregated
in accordance with Section 2(a)(i) and (ii) the Companies will issue a new
(serialized) Minimum Borrowing Note to Laurus in accordance with Section
2(a)(i), and (iii) the Parent shall prepare and file a subsequent registration
statement with the SEC to register such subsequent Minimum Borrowing Note as set
forth in the Registration Rights Agreement.
(d) Term Loan. Subject to the terms and conditions set forth herein
and in the Ancillary Agreements, Laurus shall make a term loan (the "Term Loan")
to Company Agent (for the benefit of Companies) in an aggregate amount equal to
$1,000,000. The Term Loan shall be advanced on the Closing Date and shall be,
with respect to principal, payable in consecutive monthly installments of
principal commencing on November 1, 2005 and on the first day of each month
thereafter, subject to acceleration upon the occurrence of an Event of Default
or termination of this Agreement. The Term Loan shall be evidenced by the
Secured Convertible Term Note
3. Repayment of the Loans. The Companies (a) may prepay the
Obligations from time to time in accordance with the terms and provisions of the
Notes (and Section 17
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hereof if such prepayment is due to a termination of this Agreement); (b) shall
repay on the expiration of the Term (i) the then aggregate outstanding principal
balance of the Loans together with accrued and unpaid interest, fees and charges
and; (ii) all other amounts owed Laurus under this Agreement and the Ancillary
Agreements; and (c) subject to Section 2(a)(ii), shall repay on any day on which
the then aggregate outstanding principal balance of the Loans are in excess of
the Formula Amount at such time, Loans in an amount equal to such excess. Any
payments of principal, interest, fees or any other amounts payable hereunder or
under any Ancillary Agreement shall be made prior to 12:00 noon (New York time)
on the due date thereof in immediately available funds.
4. Procedure for Revolving Loans. Company Agent may by written
notice request a borrowing of Revolving Loans prior to 12:00 noon (New York
time) on the Business Day of its request to incur, on the next Business Day, a
Loan. Together with each request for a Revolving Loan (or at such other
intervals as Laurus may request), Company Agent shall deliver to Laurus a
Borrowing Base Certificate in the form of Exhibit B attached hereto, which shall
be certified as true and correct by the Chief Executive Officer or Chief
Financial Officer of Company Agent together with all supporting documentation
relating thereto. All Revolving Loans shall be disbursed from whichever office
or other place Laurus may designate from time to time and shall be charged to
the Companies' account on Laurus' books. The proceeds of each Revolving Loan
made by Laurus shall be made available to Company Agent on the Business Day
following the Business Day so requested in accordance with the terms of this
Section 4 by way of credit to the applicable Company's operating account
maintained with such bank as Company Agent designated to Laurus. Any and all
Obligations due and owing hereunder may be charged to the Companies' account and
shall constitute Revolving Loans.
5. Interest and Payments.
(a) Interest.
(i) Except as modified by Section 5(a)(iii) below, the
Companies shall jointly and severally pay interest at the Contract Rate on the
unpaid principal balance of each Loan until such time as such Loan is collected
in full in good funds in dollars of the United States of America.
(ii) Interest and payments shall be computed on the basis of
actual days elapsed in a year of 360 days. At Laurus' option, Laurus may charge
the Companies' account for said interest.
(iii) Effective upon the occurrence of any Event of Default
and for so long as any Event of Default shall be continuing, the Contract Rate
shall automatically be increased as set forth in the Notes (such increased rate,
the "Default Rate"), and all outstanding Obligations, including unpaid interest,
shall continue to accrue interest from the date of such Event of Default at the
Default Rate applicable to such Obligations.
(iv) In no event shall the aggregate interest payable
hereunder exceed the maximum rate permitted under any applicable law or
regulation, as in effect from time to time (the "Maximum Legal Rate"), and if
any provision of this Agreement or any Ancillary
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Agreement is in contravention of any such law or regulation, interest payable
under this Agreement and each Ancillary Agreement shall be computed on the basis
of the Maximum Legal Rate (so that such interest will not exceed the Maximum
Legal Rate).
(v) The Companies shall jointly and severally pay principal,
interest and all other amounts payable hereunder, or under any Ancillary
Agreement, without any deduction whatsoever, including any deduction for any
set-off or counterclaim.
(b) Payments; Certain Closing Conditions.
(i) Closing/Annual Payments. Upon execution of this Agreement
by each Company and Laurus, the Companies shall jointly and severally pay to
Laurus Capital Management, LLC a closing payment in an amount equal to three and
nine tenths percent (3.9%) of the Total Investment 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) Unused Line Payment. None.
(iii) Overadvance Payment. Without affecting Laurus' rights
hereunder in the event the Loans exceed the Formula Amount (each such event, an
"Overadvance"), all such Overadvances shall bear additional interest at a rate
equal to one and one half percent (1.5%) per month of the amount of such
Overadvances for all times such amounts shall be in excess of the Formula
Amount. All amounts that are incurred pursuant to this Section 5(b)(iii) shall
be due and payable by the Companies monthly, in arrears, on the first business
day of each calendar month and upon expiration of the Term.
(iv) Financial Information Default. Without affecting Laurus'
other rights and remedies, in the event any Company fails to deliver the
financial information required by Section 11 on or before the date required by
this Agreement, the Companies shall jointly and severally pay Laurus an
aggregate fee in the amount of $500.00 per week (or portion thereof) for each
such failure until such failure is cured to Laurus' satisfaction or waived in
writing by Laurus. All amounts that are incurred pursuant to this Section
5(b)(iv) shall be due and payable by the Companies monthly, in arrears, on the
first business of each calendar month and upon expiration of the Term.
(v) Expenses. The Companies shall jointly and severally
reimburse Laurus for its expenses (including reasonable legal fees and expenses)
incurred in connection with the preparation and negotiation of this Agreement
and the Ancillary Agreements, and expenses incurred in connection with Laurus'
due diligence review of each Company and its Subsidiaries and all related
matters. Amounts required to be paid under this Section 5(b)(v) will be paid on
the Closing Date and shall be $52,500 for such expenses referred to in this
Section 5(b)(v) plus the cost of any required third-party appraisals and/or
extraordinary diligence, subject to the Parent's prior approval, as well as fees
and expenses of outside counsel to the extent the retention of whom Laurus deems
prudent.
(vi) Subordination. On or prior to the Closing Date, the
Companies shall cause each of Health Holdings and Botanicals, LLC, a California
limited liability company, Wald Holdings, LLC, a Missouri limited liability
company, Xxxxx X. Xxxx, Xxxx X. Xxxxxxx and
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Xxxxxx Xxxx as holders of certain of the Parent's outstanding debt obligations,
to each enter into subordination agreements in respect of such debt obligations
(or provide evidence of termination of such obligations), each in form and
substance satisfactory to Laurus (as amended, modified and/or or supplemented
from time to time, collectively, the "Subordination Agreements" and each, a
"Subordination Agreement").
(vii) Refinancing. On or prior to the Closing Date, all
indebtedness, together with all interest and fees related thereto (the "Existing
Indebtedness") under the (i) Credit and Security Agreement dated as of January
27, 2000 between Xxxxx Fargo Business Credit, Inc. ("Xxxxx Fargo") and the
Parent (as amended, modified and/or supplemented, the "Existing Credit
Agreement") together with the other Loan Documents referred to therein, shall
have been repaid in full and all commitments in respect thereof shall have been
terminated and all Liens and guaranties in connection therewith shall have been
terminated (and all appropriate releases, termination statements or other
instruments of assignment with respect thereto shall have been obtained) to the
reasonable satisfaction of Laurus. Laurus shall have received satisfactory
evidence (including satisfactory pay-off letters, mortgage releases,
intellectual property releases and UCC-3 termination statements) that the
matters set forth in the immediately preceding sentence have been satisfied as
of the Closing Date.
(viii) Common Stock Share Surrender. On or prior to the
Closing Date, the Parent shall have delivered evidence satisfactory to Laurus
that no less than 100% of the shares of Common Stock of the Parent held by each
of the Westgate Group L.P. and Health Holdings & Botanicals, LLC shall have been
irrevocably surrendered to the Parent.
(ix) Lockup Agreements. On or prior to the Closing Date, the
Parent shall deliver to Laurus evidence that each of Quincy Investments Corp.,
Liberty Company Financial LLC, Westgate Group, L.P., and Health Holdings &
Botanicals, LLC has agreed to "lockup" and not sell shares of Common Stock of
the Parent by each such party, and/or exercise their respective rights to
convert preferred shares of the Parent into shares of Common Stock of the
Parent, during the term commencing on the date hereof and continuing for a
period of no less than one year, all pursuant to agreements in form and
substance satisfactory to Laurus (collectively, the "Lock-Up Agreements").
6. Security Interest.
(a) To secure the prompt payment to Laurus of the Obligations, each
Company hereby assigns, pledges and grants to Laurus a continuing security
interest in and Lien upon all of the Collateral. All of each Company's Books and
Records relating to the Collateral shall, until delivered to or removed by
Laurus, be kept by such Company in trust for Laurus until all Obligations have
been paid in full. Each confirmatory assignment schedule or other form of
assignment hereafter executed by each Company shall be deemed to include the
foregoing grant, whether or not the same appears therein.
(b) Each Company hereby (i) authorizes Laurus to file any financing
statements, continuation statements or amendments thereto that (x) indicate the
Collateral (1) as all assets and personal property of such Company or words of
similar effect, regardless of whether any particular asset comprised in the
Collateral falls within the scope of Article 9 of the
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UCC of such jurisdiction, or (2) as being of an equal or lesser scope or with
greater detail, and (y) contain any other information required by Part 5 of
Article 9 of the UCC for the sufficiency or filing office acceptance of any
financing statement, continuation statement or amendment and (ii) ratifies its
authorization for Laurus to have filed any initial financial statements, or
amendments thereto if filed prior to the date hereof. Each Company acknowledges
that it is not authorized to file any financing statement or amendment or
termination statement with respect to any financing statement without the prior
written consent of Laurus and agrees that it will not do so without the prior
written consent of Laurus, subject to such Company's rights under Section
9-509(d)(2) of the UCC.
(c) Each Company hereby grants to Laurus an irrevocable,
non-exclusive license (exercisable upon the termination of this Agreement due to
an occurrence and during the continuance of an Event of Default without payment
of royalty or other compensation to such Company) to use, transfer, license or
sublicense any Intellectual Property now owned, licensed to, or hereafter
acquired by such Company, and wherever the same may be located, and including in
such license access to all media in which any of the licensed items may be
recorded or stored and to all computer and automatic machinery software and
programs used for the compilation or printout thereof, and represents, promises
and agrees that any such license or sublicense is not and will not be in
conflict with the contractual or commercial rights of any third Person;
provided, that such license will terminate on the termination of this Agreement
and the payment in full of all Obligations.
7. Representations, Warranties and Covenants Concerning the
Collateral. Each Company represents, warrants (each of which such
representations and warranties shall be deemed repeated upon the making of each
request for a Revolving Loan and made as of the time of each and every Revolving
Loan hereunder) and covenants as follows:
(a) all of the Collateral (i) is owned by it free and clear of all
Liens (including any claims of infringement) except those in Laurus' favor and
Permitted Liens and (ii) is not subject to any agreement prohibiting the
granting of a Lien or requiring notice of or consent to the granting of a Lien.
(b) it shall not encumber, mortgage, pledge, assign or grant any
Lien in any Collateral or any other assets to anyone other than Laurus and
except for Permitted Liens.
(c) the Liens granted pursuant to this Agreement, upon completion of
the filings and other actions listed on Schedule 7(c) (which, in the case of all
filings and other documents referred to in said Schedule, have been delivered to
Laurus in duly executed form) constitute valid perfected security interests in
all of the Collateral in favor of Laurus as security for the prompt and complete
payment and performance of the Obligations, enforceable in accordance with the
terms hereof against any and all of its creditors and purchasers and such
security interest is prior to all other Liens in existence on the date hereof.
(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.
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(e) it shall not dispose of any of the Collateral whether by sale,
lease or otherwise except for the sale of Inventory in the ordinary course of
business and for the disposition or transfer in the ordinary course of business
during any fiscal year of obsolete and worn-out Equipment having an aggregate
fair market value of not more than $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) it 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 it, with any agreements establishing control
to be in form and substance satisfactory to Laurus, (ii) the prompt (but in no
event later than five (5) Business Days following Laurus' request therefor)
delivery to Laurus of all original Instruments, Chattel Paper, negotiable
Documents and certificated Stock owned by it (in each case, accompanied by stock
powers, allonges or other instruments of transfer executed in blank), (iii)
notification of Laurus' interest in Collateral at Laurus' request, and (iv) the
institution of litigation against third parties as shall be prudent in order to
protect and preserve its and/or Laurus' respective and several interests in the
Collateral.
(g) it shall promptly, and in any event within five (5) Business
Days after the same is acquired by it, notify Laurus of any commercial tort
claim (as defined in the UCC) acquired by it and unless otherwise consented by
Laurus, it shall enter into a supplement to this Agreement granting to Laurus a
Lien in such commercial tort claim.
(h) it shall place notations upon its Books and Records and any of
its financial statements to disclose Laurus' Lien in the Collateral.
(i) if it retains possession of any Chattel Paper or Instrument with
Laurus' consent, upon Laurus' request such Chattel Paper and Instruments shall
be marked with the following legend: "This writing and obligations evidenced or
secured hereby are subject to the security interest of Laurus Master Fund, Ltd."
Notwithstanding the foregoing, upon the reasonable request of Laurus, such
Chattel Paper and Instruments shall be delivered to Laurus.
(j) it shall perform in a reasonable time all other steps requested
by Laurus to create and maintain in Laurus' favor a valid perfected first Lien
in all Collateral subject only to Permitted Liens.
(k) it shall notify Laurus promptly and in any event within three
(3) Business Days after obtaining knowledge thereof (i) of any event or
circumstance that, to its knowledge, would cause Laurus to consider any then
existing Account and/or Inventory as no longer constituting an Eligible Account
or Eligible Inventory, as the case may be; (ii) of any material delay in its
performance of any of its obligations to any Account Debtor; (iii) of any
assertion by any Account Debtor of any material claims, offsets or
counterclaims; (iv) of any allowances, credits and/or monies granted by it to
any Account Debtor; (v) of all material adverse
9
information relating to the financial condition of an Account Debtor; (vi) of
any material return of goods; and (vii) of any loss, damage or destruction of
any of the Collateral.
(l) all Eligible Accounts (i) represent complete bona fide
transactions which require no further act under any circumstances on its part to
make such Accounts payable by the Account Debtors, (ii) are not subject to any
present, future contingent offsets or counterclaims to the extent not reasonably
deemed to be material, made in the ordinary course of business and otherwise
consistent with past business practices of such Company , and (iii) do not
represent xxxx and hold sales, consignment sales, guaranteed sales, sale or
return or other similar understandings or obligations of any Affiliate or
Subsidiary of such Company. It has not made, nor will it make, any agreement
with any Account Debtor for any extension of time for the payment of any
Account, any compromise or settlement for less than the full amount thereof, any
release of any Account Debtor from liability therefor, or any deduction
therefrom except a discount or allowance for prompt or early payment allowed by
it in the ordinary course of its business consistent with historical practice
and as previously disclosed to Laurus in writing.
(m) it shall keep and maintain its Equipment in good operating
condition, except for ordinary wear and tear, and shall make all necessary
repairs and replacements thereof so that the value and operating efficiency
shall at all times be maintained and preserved. It shall not permit any such
items to become a Fixture to real estate or accessions to other personal
property.
(n) it shall maintain and keep all of its Books and Records
concerning the Collateral at its executive offices listed in Schedule 12(aa).
(o) it shall maintain and keep the tangible Collateral (other than
in respect of certain consigned inventory which shall be excluded from Eligible
Inventory) at the addresses listed in Schedule 12(aa), provided, that it may
change such locations or open a new location, provided that (i) it provides
Laurus at least thirty (30) days prior written notice of such changes or new
location and (ii) prior to such change or opening of a new location where
Collateral having a value of more than $50,000 will be located, it executes and
delivers to Laurus such agreements deemed reasonably necessary or prudent by
Laurus, including landlord agreements, mortgagee agreements and warehouse
agreements, each in form and substance satisfactory to Laurus, to adequately
protect and maintain Laurus' security interest in such Collateral, provided
further that such Company shall provide to Laurus a list of locations of such
consigned inventory upon reasonable request.
(p) Schedule 7(p) lists all banks and other financial institutions
at which it maintains deposits and/or other accounts, and such Schedule
correctly identifies the name, address and telephone number of each such
depository, the name in which the account is held, a description of the purpose
of the account, and the complete account number. It shall not establish any
depository or other bank account with any financial institution (other than the
accounts set forth on Schedule 7(p)) without Laurus' prior written consent.
(q) All Inventory manufactured by it in the United States of America
shall be produced in accordance with the requirements of the Federal Fair Labor
Standards Act of 1938, as amended and all rules, regulations and orders related
thereto or promulgated thereunder.
10
8. Payment of Accounts.
(a) Each Company will irrevocably direct all of its present and
future Account Debtors and other Persons obligated to make payments constituting
Collateral to make such payments directly to the lockboxes maintained by such
Company (the "Lockboxes") with Xxxxx Fargo Bank N.A. or such other financial
institution accepted by Laurus in writing as may be selected by such Company
(the "Lockbox Bank") pursuant to the terms of the certain agreements among one
or more Companies, Laurus and/or the Lockbox Bank dated as of July 26, 2005. On
or prior to the Closing Date, each Company shall and shall cause the Lockbox
Bank to enter into all such documentation acceptable to Laurus pursuant to
which, among other things, the Lockbox Bank agrees to: (a) sweep the Lockbox on
a daily basis and deposit all checks received therein to an account designated
by Laurus in writing and (b) comply only with the instructions or other
directions of Laurus concerning the Lockbox. All of each Company's invoices,
account statements and other written or oral communications directing,
instructing, demanding or requesting payment of any Account of any Company or
any other amount constituting Collateral shall conspicuously direct that all
payments be made to the Lockbox or such other address as Laurus may direct in
writing. If, notwithstanding the instructions to Account Debtors, any Company
receives any payments, such Company shall immediately remit such payments to
Laurus in their original form with all necessary endorsements. Until so
remitted, such Company shall hold all such payments in trust for and as the
property of Laurus and shall not commingle such payments with any of its other
funds or property.
(b) At Laurus' election, following the occurrence of an Event of
Default which is continuing, Laurus may notify each Company's Account Debtors of
Laurus' security interest in the Accounts, collect them directly and charge the
collection costs and expenses thereof to Company's and the Eligible Subsidiaries
joint and several account.
9. Collection and Maintenance of Collateral.
(a) Laurus may verify each Company's Accounts from time to time, but
not more often than once every three (3) months, unless an Event of Default has
occurred and is continuing or Laurus believes that such verification is
necessary to preserve or protect the Collateral, utilizing an audit control
company or any other agent of Laurus.
(b) Proceeds of Accounts received by Laurus will be deemed received
on the Business Day after Laurus' receipt of such proceeds in good funds in
dollars of the United States of America to an account designated by Laurus. Any
amount received by Laurus after 12:00 noon (New York time) on any Business Day
shall be deemed received on the next Business Day.
(c) As Laurus receives the proceeds of Accounts of any Company, it
shall (i) apply such proceeds, as required, to amounts outstanding under the
Notes, and (ii) remit all such remaining proceeds (net of interest, fees and
other amounts then due and owing to Laurus hereunder) to Company Agent (for the
benefit of the applicable Companies) upon request (but no more often than twice
a week). Notwithstanding the foregoing, following the occurrence and during the
continuance of an Event of Default, Laurus, at its option, may (a) apply such
proceeds to the Obligations in such order as Laurus shall elect, (b) hold all
such proceeds as cash collateral
11
for the Obligations and each Company hereby grants to Laurus a security interest
in such cash collateral amounts as security for the Obligations and/or (c) do
any combination of the foregoing.
10. Inspections and Appraisals. At all times during normal business
hours, Laurus, and/or any agent of Laurus shall have the right to (a) have
access to, visit, inspect, review, evaluate and make physical verification and
appraisals of each Company's properties and the Collateral, (b) inspect, audit
and copy (or take originals if necessary) and make extracts from each Company's
Books and Records, including management letters prepared by the Accountants, and
(c) discuss with each Company's directors, principal officers, and independent
accountants, each Company's business, assets, liabilities, financial condition,
results of operations and business prospects. Each Company will deliver to
Laurus any instrument necessary for Laurus to obtain records from any service
bureau maintaining records for such Company. If any internally prepared
financial information, including that required under this Section is
unsatisfactory in any manner to Laurus, Laurus may request that the Accountants
review the same.
11. Financial Reporting. Company Agent will deliver, or cause to be
delivered, to Laurus each of the following, which shall be in form and detail
acceptable to Laurus:
(a) As soon as available, and in any event within ninety (90) days
after the end of each fiscal year of the Parent, each Company's audited
financial statements with a report of independent certified public accountants
of recognized standing selected by the Parent and acceptable to Laurus (the
"Accountants"), which annual financial statements shall be without qualification
(other than in respect of a going concern qualification) and shall include each
Company's balance sheet as at the end of such fiscal year and the related
statements of each Company's income, retained earnings and cash flows for the
fiscal year then ended, prepared, if Laurus so requests, on a consolidating and
consolidated basis to include all Subsidiaries and Affiliates of each Company,
all in reasonable detail and prepared in accordance with GAAP, together with (i)
if and when available, copies of any management letters prepared by the
Accountants; and (ii) a certificate of the Parent's President, Chief Executive
Officer or Chief Financial Officer stating that such financial statements have
been prepared in accordance with GAAP and whether or not such officer has
knowledge of the occurrence of any Default or Event of Default hereunder and, if
so, stating in reasonable detail the facts with respect thereto;
(b) As soon as available and in any event within forty five (45)
days after the end of each quarter, an unaudited/internal balance sheet and
statements of income, retained earnings and cash flows of each Company as at the
end of and for such quarter and for the year to date period then ended,
prepared, if Laurus so requests, on a consolidating and consolidated basis to
include all Subsidiaries and Affiliates of each Company, in reasonable detail
and stating in comparative form the figures for the corresponding date and
periods in the previous year, all prepared in accordance with GAAP, subject to
year-end adjustments and accompanied by a certificate of the Parent's President,
Chief Executive Officer or Chief Financial Officer, stating (i) that such
financial statements have been prepared in accordance with GAAP, subject to
year-end audit adjustments, and (ii) whether or not such officer has knowledge
of the occurrence of any Default or Event of Default hereunder not theretofore
reported and remedied and, if so, stating in reasonable detail the facts with
respect thereto;
12
(c) Within fifteen (15) days after the end of each month (or more
frequently if Laurus so requests), agings of each Company's Accounts, unaudited
trial balances and their accounts payable and a calculation of each Company's
Accounts, Eligible Accounts, Inventory and/or Eligible Inventory, provided,
however, that if Laurus shall request the foregoing information more often than
as set forth in the immediately preceding clause, each Company shall have
fifteen (15) days from each such request to comply with Laurus' demand; and
(d) Promptly after (i) the filing thereof, copies of the Parent's
most recent registration statements and annual, quarterly, monthly or other
regular reports which the Parent files with the Securities and Exchange
Commission (the "SEC"), and (ii) the issuance thereof, copies of such financial
statements, reports and proxy statements as the Parent shall send to its
stockholders.
12. Additional Representations and Warranties. Each Company hereby
represents and warrants to Laurus as follows:
(a) Organization, Good Standing and Qualification. It and each of
its Subsidiaries is a corporation, partnership or limited liability company, as
the case may be, duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization. It and each of its Subsidiaries has
the corporate, limited liability company or partnership, as the case may be,
power and authority to own and operate its properties and assets and, insofar as
it is or shall be a party thereto, to (i) execute and deliver this Agreement and
the Ancillary Agreements, (ii) to issue and sell the Notes and the shares of
Common Stock issuable upon conversion of the Notes (the "Note Shares"), (iii) to
issue and sale the Warrants and the shares of Common Stock issuable upon
conversion of the Warrants (the "Warrant Shares"), (iv) to issue and grant the
Options and the shares of Common Stock issuable upon conversion of the Options
(the "Option Shares") and to (v) carry out the provisions of this Agreement and
the Ancillary Agreements and to carry on its business as presently conducted. It
and each of its Subsidiaries is duly qualified and is authorized to do business
and is in good standing as a foreign corporation, partnership or limited
liability company, as the case may be, in all jurisdictions in which the nature
or location of its activities and of its properties (both owned and leased)
makes such qualification necessary, except for those jurisdictions in which
failure to do so has not had, or could not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect.
(b) Subsidiaries. Each of its direct and indirect Subsidiaries, the
direct owner of each such Subsidiary and its percentage ownership thereof, is
set forth on Schedule 12(b).
(c) Capitalization; Voting Rights.
(i) The authorized capital stock of the Parent, as of the date
hereof consists of 154,000,000 shares, of which (1) 100,000,000 are shares of
Common Stock, par value $0.0001 per share, 34,451,964 shares of which are issued
and outstanding, (2) 2,000,000 are shares of Non-Voting Common Stock, par value
$0.001 per share, 117,284 shares of which are issued and outstanding of which ,
(3) 2,000,000 are shares of Series A preferred stock, par value $0.001 per share
of which 0 shares are issued and outstanding, (4) 20,000,000 are shares of
Series B preferred stock, par value $0.001 per share of which 0 shares are
issued and outstanding
13
and (5) 21,000,000 are shares of Series C preferred stock, par value $0.001 per
share of which 21,000,000 shares are issued and outstanding. The authorized,
issued and outstanding capital stock of each Subsidiary of each Company is set
forth on Schedule 12(c).
(ii) Except as disclosed on Schedule 12(c), other than: (i)
the shares reserved for issuance under the Parent's stock option plans; and (ii)
shares which may be issued pursuant to this Agreement and the Ancillary
Agreements, there are no outstanding options, warrants, rights (including
conversion or preemptive rights and rights of first refusal), proxy or
stockholder agreements, or arrangements or agreements of any kind for the
purchase or acquisition from the Parent of any of its securities. Except as
disclosed on Schedule 12(c), neither the offer, issuance or sale of any of the
Notes or the Warrants, or the grant of the Option or the issuance of any of the
Note Shares, the Warrant Shares or the Option Shares, nor the consummation of
any transaction contemplated hereby will result in a change in the price or
number of any securities of the Parent outstanding, under anti-dilution or other
similar provisions contained in or affecting any such securities.
(iii) All issued and outstanding shares of the Parent's Common
Stock: (i) have been duly authorized and validly issued and are fully paid and
non-assessable; and (ii) were issued in compliance with all applicable state and
federal laws concerning the issuance of securities.
(iv) The rights, preferences, privileges and restrictions of
the shares of the Common Stock are as stated in the Parent's Certificate of
Incorporation (the "Charter"). The Note Shares, the Warrant Shares and the
Option Shares have been duly and validly reserved for issuance. When issued in
compliance with the provisions of this Agreement and the Parent's Charter, the
Securities will be validly issued, fully paid and nonassessable, and will be
free of any liens or encumbrances; provided, however, that the Securities may be
subject to restrictions on transfer under state and/or federal securities laws
as set forth herein or as otherwise required by such laws at the time a transfer
is proposed.
(d) Authorization; Binding Obligations. All corporate, partnership
or limited liability company, as the case may be, action on its and its
Subsidiaries' part (including their respective officers and directors) necessary
for the authorization of this Agreement and the Ancillary Agreements, the
performance of all of its and its Subsidiaries' obligations hereunder and under
the Ancillary Agreements on the Closing Date and, the authorization, issuance
and delivery of the Notes and the Warrant has been taken or will be taken prior
to the Closing Date. This Agreement and the Ancillary Agreements, when executed
and delivered and to the extent it is a party thereto, will be its and its
Subsidiaries' valid and binding obligations enforceable against each such Person
in accordance with their terms, except:
(i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights; and
(ii) general principles of equity that restrict the
availability of equitable or legal remedies.
14
The issuance of the Notes and the subsequent conversion of the Notes into Note
Shares are not and will not be subject to any preemptive rights or rights of
first refusal that have not been properly waived or complied with. The issuance
of the Warrants and the subsequent exercise of the Warrants for Warrant Shares
are not and will not be subject to any preemptive rights or rights of first
refusal that have not been properly waived or complied with.
(e) Liabilities. Neither it nor any of its Subsidiaries has any
liabilities, except current liabilities incurred in the ordinary course of
business and liabilities disclosed in any Exchange Act Filings.
(f) Agreements; Action. Except as set forth on Schedule 12(f) or as
disclosed in any Exchange Act Filings:
(i) There are no agreements, understandings, instruments,
contracts, proposed transactions, judgments, orders, writs or decrees to which
it or any of its Subsidiaries is a party or to its knowledge by which it is
bound which may involve: (i) obligations (contingent or otherwise) of, or
payments to, it or any of its Subsidiaries in excess of $50,000 (other than
obligations of, or payments to, it or any of its Subsidiaries arising from
purchase or sale agreements entered into in the ordinary course of business); or
(ii) the transfer or license of any patent, copyright, trade secret or other
proprietary right to or from it (other than licenses arising from the purchase
of "off the shelf" or other standard products); or (iii) provisions restricting
the development, manufacture or distribution of its or any of its Subsidiaries'
products or services; or (iv) indemnification by it or any of its Subsidiaries
with respect to infringements of proprietary rights.
(ii) Since December 31, 2004 (the "Balance Sheet Date")
neither it nor any of its Subsidiaries has: (i) declared or paid any dividends,
or authorized or made any distribution upon or with respect to any class or
series of its capital stock; (ii) incurred any indebtedness for money borrowed
or any other liabilities (other than ordinary course obligations) individually
in excess of $50,000 or, in the case of indebtedness and/or liabilities
individually less than $50,000, in excess of $100,000 in the aggregate; (iii)
made any loans or advances to any Person not in excess, individually or in the
aggregate, of $100,000, other than ordinary advances for travel expenses; or
(iv) sold, exchanged or otherwise disposed of any of its assets or rights, other
than the sale of its Inventory in the ordinary course of business.
(iii) For the purposes of subsections (i) and (ii) of this
Section 12(f), all indebtedness, liabilities, agreements, understandings,
instruments, contracts and proposed transactions involving the same Person
(including Persons it or any of its applicable Subsidiaries has reason to
believe are affiliated therewith or with any Subsidiary thereof) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
(iv) the Parent maintains disclosure controls and procedures
("Disclosure Controls") designed to ensure that information required to be
disclosed by the Parent in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized, and reported, within the time
periods specified in the rules and forms of the SEC.
15
(v) The Parent makes and keeps books, records, and accounts,
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of its assets. It maintains internal control over financial
reporting ("Financial Reporting Controls") designed by, or under the supervision
of, its principal executive and principal financial officers, and effected by
its board of directors, management, and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with GAAP, including
that:
(1) transactions are executed in accordance with
management's general or specific authorization;
(2) unauthorized acquisition, use, or disposition of the
Parent's assets that could have a material effect on the financial statements
are prevented or timely detected;
(3) transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that its
receipts and expenditures are being made only in accordance with authorizations
of the Parent's management and board of directors;
(4) transactions are recorded as necessary to maintain
accountability for assets; and
(5) the recorded accountability for assets is compared
with the existing assets at reasonable intervals, and appropriate action is
taken with respect to any differences.
(vi) There is no weakness in any of its Disclosure Controls or
Financial Reporting Controls that is required to be disclosed in any of the
Exchange Act Filings, except as so disclosed.
(g) Obligations to Related Parties. Except as set forth on Schedule
12(g), neither it nor any of its Subsidiaries has any obligations to their
respective officers, directors, stockholders or employees other than:
(i) for payment of salary for services rendered and for bonus
payments;
(ii) reimbursement for reasonable expenses incurred on its or
its Subsidiaries' behalf;
(iii) for other standard employee benefits made generally
available to all employees (including stock option agreements outstanding under
any stock option plan approved by its and its Subsidiaries' Board of Directors,
as applicable); and
(iv) obligations listed in its and each of its Subsidiary's
financial statements or disclosed in any of the Parent's Exchange Act Filings.
16
Except as described above or set forth on Schedule 12(g), none of its officers,
directors or, to the best of its knowledge, key employees or stockholders, any
of its Subsidiaries or any members of their immediate families, are indebted to
it or any of its Subsidiaries, individually or in the aggregate, in excess of
$50,000 or have any direct or indirect ownership interest in any Person with
which it or any of its Subsidiaries is affiliated or with which it or any of its
Subsidiaries has a business relationship, or any Person which competes with it
or any of its Subsidiaries, other than passive investments in publicly traded
companies (representing less than one percent (1%) of such company) which may
compete with it or any of its Subsidiaries. Except as described above, none of
its officers, directors or stockholders, or any member of their immediate
families, is, directly or indirectly, interested in any material contract with
it or any of its Subsidiaries and no agreements, understandings or proposed
transactions are contemplated between it or any of its Subsidiaries and any such
Person. Except as set forth on Schedule 12(g), neither it nor any of its
Subsidiaries is a guarantor or indemnitor of any indebtedness of any other
Person.
(h) Changes. Since the Balance Sheet Date, except as disclosed in
any Exchange Act Filing or in any Schedule to this Agreement or to any of the
Ancillary Agreements, there has not been:
(i) any change in its or any of its Subsidiaries' business,
assets, liabilities, condition (financial or otherwise), properties, operations
or prospects, which, individually or in the aggregate, has had, or could
reasonably be expected to have, a Material Adverse Effect;
(ii) any resignation or termination of any of its or its
Subsidiaries' officers, key employees or groups of employees;
(iii) any material change, except in the ordinary course of
business, in its or any of its Subsidiaries' contingent obligations by way of
guaranty, endorsement, indemnity, warranty or otherwise;
(iv) any damage, destruction or loss, whether or not covered
by insurance, which has had, or could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect;
(v) any waiver by it or any of its Subsidiaries of a valuable
right or of a material debt owed to it;
(vi) any direct or indirect material loans made by it or any
of its Subsidiaries to any of its or any of its Subsidiaries' stockholders,
employees, officers or directors, other than advances made in the ordinary
course of business;
(vii) any material change in any compensation arrangement or
agreement with any employee, officer, director or stockholder;
(viii) any declaration or payment of any dividend or other
distribution of its or any of its Subsidiaries' assets;
(ix) any labor organization activity related to it or any of
its Subsidiaries;
17
(x) any debt, obligation or liability incurred, assumed or
guaranteed by it or any of its Subsidiaries, except those for immaterial amounts
and for current liabilities incurred in the ordinary course of business;
(xi) any sale, assignment or transfer of any Intellectual
Property or other intangible assets;
(xii) any change in any material agreement to which it or any
of its Subsidiaries is a party or by which either it or any of its Subsidiaries
is bound which, either individually or in the aggregate, has had, or could
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect;
(xiii) any other event or condition of any character that,
either individually or in the aggregate, has had, or could reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect;
or
(xiv) any arrangement or commitment by it or any of its
Subsidiaries to do any of the acts described in subsection (i) through (xiii) of
this Section 12(h).
(i) Title to Properties and Assets; Liens, Etc. Except as set forth
on Schedule 12(i), it and each of its Subsidiaries has good and marketable title
to their respective properties and assets, and good title to its leasehold
interests, in each case subject to no Lien, other than Permitted Liens.
All facilities, Equipment, Fixtures, vehicles and other properties owned, leased
or used by it or any of its Subsidiaries are in good operating condition and
repair and are reasonably fit and usable for the purposes for which they are
being used. Except as set forth on Schedule 12(i), it and each of its
Subsidiaries is in compliance with all material terms of each lease to which it
is a party or is otherwise bound.
(j) Intellectual Property.
(i) It and each of its Subsidiaries owns or possesses
sufficient legal rights to all Intellectual Property necessary for their
respective businesses as now conducted and, to its knowledge as presently
proposed to be conducted, without any known infringement of the rights of
others. There are no outstanding options, licenses or agreements of any kind
relating to its or any of its Subsidiary's Intellectual Property, nor is it or
any of its Subsidiaries bound by or a party to any options, licenses or
agreements of any kind with respect to the Intellectual Property of any other
Person other than such licenses or agreements arising from the purchase of "off
the shelf" or standard products.
(ii) Neither it nor any of its Subsidiaries has received any
communications alleging that it or any of its Subsidiaries has violated any of
the Intellectual Property or other proprietary rights of any other Person, nor
is it or any of its Subsidiaries aware of any basis therefor.
(iii) Neither it nor any of its Subsidiaries believes it is or
will be necessary to utilize any inventions, trade secrets or proprietary
information of any of its
18
employees made prior to their employment by it or any of its Subsidiaries,
except for inventions, trade secrets or proprietary information that have been
rightfully assigned to it or any of its Subsidiaries.
(k) Compliance with Other Instruments. Neither it nor any of its
Subsidiaries is in violation or default of (x) any term of its Charter or
Bylaws, or (y) any provision of any indebtedness, mortgage, indenture, contract,
agreement or instrument to which it is party or by which it is bound or of any
judgment, decree, order or writ, which violation or default, in the case of this
clause (y), has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect. The execution,
delivery and performance of and compliance with this Agreement and the Ancillary
Agreements to which it is a party, and the issuance of the Notes and the other
Securities each pursuant hereto and thereto, will not, with or without the
passage of time or giving of notice, result in any such material violation, or
be in conflict with or constitute a default under any such term or provision, or
result in the creation of any Lien upon any of its or any of its Subsidiary's
properties or assets or the suspension, revocation, impairment, forfeiture or
nonrenewal of any permit, license, authorization or approval applicable to it or
any of its Subsidiaries, their businesses or operations or any of their assets
or properties.
(l) Litigation. Except as set forth on Schedule 12(l), there is no
action, suit, proceeding or investigation pending or, to its knowledge,
currently threatened against it or any of its Subsidiaries that prevents it or
any of its Subsidiaries from entering into this Agreement or the Ancillary
Agreements, or from consummating the transactions contemplated hereby or
thereby, or which has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect, or could result in
any change in its or any of its Subsidiaries' current equity ownership, nor is
it aware that there is any basis to assert any of the foregoing. Neither it nor
any of its Subsidiaries is a party to or subject to the provisions of any order,
writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by it or
any of its Subsidiaries currently pending or which it or any of its Subsidiaries
intends to initiate.
(m) Tax Returns and Payments. It and each of its Subsidiaries has
timely filed all tax returns (federal, state and local) required to be filed by
it. All taxes shown to be due and payable on such returns, any assessments
imposed, and all other taxes due and payable by it and each of its Subsidiaries
on or before the Closing Date, have been paid or will be paid prior to the time
they become delinquent. Except as set forth on Schedule 12(m), neither it nor
any of its Subsidiaries has been advised:
(i) that any of its returns, federal, state or other, have
been or are being audited as of the date hereof; or
(ii) of any adjustment, deficiency, assessment or court
decision in respect of its federal, state or other taxes.
Neither it nor any of its Subsidiaries has any knowledge of any liability of any
tax to be imposed upon its properties or assets as of the date of this Agreement
that is not adequately provided for.
19
(n) Employees. Except as set forth on Schedule 12(n), neither it nor
any of its Subsidiaries has any collective bargaining agreements with any of its
employees. There is no labor union organizing activity pending or, to its
knowledge, threatened with respect to it or any of its Subsidiaries. Except as
disclosed in the Exchange Act Filings or on Schedule 12(n), neither it nor any
of its Subsidiaries is a party to or bound by any currently effective employment
contract, deferred compensation arrangement, bonus plan, incentive plan, profit
sharing plan, retirement agreement or other employee compensation plan or
agreement. To its knowledge, none of its or any of its Subsidiaries' employees,
nor any consultant with whom it or any of its Subsidiaries has contracted, is in
violation of any term of any employment contract, proprietary information
agreement or any other agreement relating to the right of any such individual to
be employed by, or to contract with, it or any of its Subsidiaries because of
the nature of the business to be conducted by it or any of its Subsidiaries; and
to its knowledge the continued employment by it and its Subsidiaries of their
present employees, and the performance of its and its Subsidiaries contracts
with its independent contractors, will not result in any such violation. Neither
it nor any of its Subsidiaries is aware that any of its or any of its
Subsidiaries' employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency that would
interfere with their duties to it or any of its Subsidiaries. Neither it nor any
of its Subsidiaries has received any notice alleging that any such violation has
occurred. Except for employees who have a current effective employment agreement
with it or any of its Subsidiaries, none of its or any of its Subsidiaries'
employees has been granted the right to continued employment by it or any of its
Subsidiaries or to any material compensation following termination of employment
with it or any of its Subsidiaries. Except as set forth on Schedule 12(n),
neither it nor any of its Subsidiaries is aware that any officer, key employee
or group of employees intends to terminate his, her or their employment with it
or any of its Subsidiaries, as applicable, nor does it or any of its
Subsidiaries have a present intention to terminate the employment of any
officer, key employee or group of employees.
(o) Registration Rights and Voting Rights. Except as set forth on
Schedule 12(o) and except as disclosed in Exchange Act Filings, neither it nor
any of its Subsidiaries is presently under any obligation, and neither it nor
any of its Subsidiaries has granted any rights, to register any of its or any of
its Subsidiaries' presently outstanding securities or any of its securities that
may hereafter be issued. Except as set forth on Schedule 12(o) and except as
disclosed in Exchange Act Filings, to its knowledge, none of its or any of its
Subsidiaries' stockholders has entered into any agreement with respect to its or
any of its Subsidiaries' voting of equity securities.
(p) Compliance with Laws; Permits. Neither it nor any of its
Subsidiaries is in violation of the Xxxxxxxx-Xxxxx Act of 2002 or any SEC
related regulation or rule or any rule of the Principal Market promulgated
thereunder or any other applicable statute, rule, regulation, order or
restriction of any domestic or foreign government or any instrumentality or
agency thereof in respect of the conduct of its business or the ownership of its
properties which has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect. No governmental
orders, permissions, consents, approvals or authorizations are required to be
obtained and no registrations or declarations are required to be filed in
connection with the execution and delivery of this Agreement or any Ancillary
Agreement and the issuance of any of the Securities, except such as have been
duly and validly obtained or filed, or with
20
respect to any filings that must be made after the Closing Date, as will be
filed in a timely manner. It and each of its Subsidiaries has all material
franchises, permits, licenses and any similar authority necessary for the
conduct of its business as now being conducted by it, the lack of which could,
either individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.
(q) Environmental and Safety Laws. Neither it nor any of its
Subsidiaries is in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety, and to its
knowledge, no material expenditures are or will be required in order to comply
with any such existing statute, law or regulation. Except as set forth on
Schedule 12(q), no Hazardous Materials (as defined below) are used or have been
used, stored, or disposed of by it or any of its Subsidiaries or, to its
knowledge, by any other Person on any property owned, leased or used by it or
any of its Subsidiaries. For the purposes of the preceding sentence, "Hazardous
Materials" shall mean:
(i) materials which are listed or otherwise defined as
"hazardous" or "toxic" under any applicable local, state, federal and/or foreign
laws and regulations that govern the existence and/or remedy of contamination on
property, the protection of the environment from contamination, the control of
hazardous wastes, or other activities involving hazardous substances, including
building materials; and (ii) any petroleum products or nuclear materials.
(r) Valid Offering. Assuming the accuracy of the representations and
warranties of Laurus contained in this Agreement, the offer and issuance of the
Securities will be exempt from the registration requirements of the Securities
Act of 1933, as amended (the "Securities Act"), and will have been registered or
qualified (or are exempt from registration and qualification) under the
registration, permit or qualification requirements of all applicable state
securities laws.
(s) Full Disclosure. It and each of its Subsidiaries has provided
Laurus with all information requested by Laurus in connection with Laurus'
decision to enter into this Agreement, including (i) all information each
Company and its Subsidiaries believe is reasonably necessary to make such
investment decision and (ii) the fact that its Accountants have issued a going
concern qualification in connection with its last annual audited financial
statements. Neither this Agreement, the Ancillary Agreements nor the exhibits
and schedules hereto and thereto nor any other document delivered by it or any
of its Subsidiaries to Laurus or its attorneys or agents in connection herewith
or therewith or with the transactions contemplated hereby or thereby, contain
any untrue statement of a material fact nor omit to state a material fact
necessary in order to make the statements contained herein or therein, in light
of the circumstances in which they are made, not misleading. Any financial
projections and other estimates provided to Laurus by it or any of its
Subsidiaries were based on its and its Subsidiaries' experience in the industry
and on assumptions of fact and opinion as to future events which it or any of
its Subsidiaries, at the date of the issuance of such projections or estimates,
believed to be reasonable.
21
(t) Insurance. It and each of its Subsidiaries has general
commercial, product liability, fire and casualty insurance policies with
coverages which it believes are customary for companies similarly situated to it
and its Subsidiaries in the same or similar business.
(u) SEC Reports and Financial Statements. Except as set forth on
Schedule 12(u), it and each of its Subsidiaries has filed all proxy statements,
reports and other documents required to be filed by it under the Exchange Act.
The Parent has furnished Laurus with copies of: (i) its Annual Report on Form
10-KSB for its fiscal years ended December 31, 2004; and (ii) its Quarterly
Reports on Form 10-QSB for its fiscal quarters ended March 31, 2005, and the
Form 8-K filings which it has made during its fiscal year 2005 to date
(collectively, the "SEC Reports"). Except as set forth on Schedule 12(u), each
SEC Report was, at the time of its filing, in substantial compliance with the
requirements of its respective form and none of the SEC Reports, nor the
financial statements (and the notes thereto) included in the SEC Reports, as of
their respective filing dates, contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. Such financial statements have been prepared in
accordance with GAAP applied on a consistent basis during the periods involved
(except (i) as may be otherwise indicated in such financial statements or the
notes thereto or (ii) in the case of unaudited interim statements, to the extent
they may not include footnotes or may be condensed) and fairly present in all
material respects the financial condition, the results of operations and cash
flows of the Parent and its Subsidiaries, on a consolidated basis, as of, and
for, the periods presented in each such SEC Report.
(v) Listing. The Parent's Common Stock is listed or quoted, as
applicable, on the Principal Market and satisfies all requirements for the
continuation of such listing or quotation, as applicable, and the Parent shall
do all things necessary for the continuation of such listing or quotation, as
applicable. The Parent has not received any notice that its Common Stock will be
delisted from, or no longer quoted on, as applicable, the Principal Market or
that its Common Stock does not meet all requirements for such listing or
quotation, as applicable.
(w) No Integrated Offering. Neither it, nor any of its Subsidiaries
nor any of its Affiliates, nor any Person acting on its or their behalf, has
directly or indirectly made any offers or sales of any security or solicited any
offers to buy any security (other than a concurrent offering to Laurus under a
Securities Purchase Agreement between the Parent and Laurus dated as of the date
hereof) under circumstances that would cause the offering of the Securities
pursuant to this Agreement or any Ancillary Agreement to be integrated with
prior offerings by it for purposes of the Securities Act which would prevent it
from issuing the Securities pursuant to Rule 506 under the Securities Act, or
any applicable exchange-related stockholder approval provisions, nor will it or
any of its Affiliates or Subsidiaries take any action or steps that would cause
the offering of the Securities to be integrated with other offerings.
(x) Stop Transfer. The Securities are restricted securities as of
the date of this Agreement. Neither it nor any of its Subsidiaries will issue
any stop transfer order or other order impeding the sale and delivery of any of
the Securities at such time as the Securities are registered for public sale or
an exemption from registration is available, except as required by state and
federal securities laws.
22
(y) Dilution. It specifically acknowledges that the Parent's
obligation to issue the shares of Common Stock upon conversion of the Notes and
exercise of the Warrants is binding upon the Parent and enforceable regardless
of the dilution such issuance may have on the ownership interests of other
shareholders of the Parent.
(z) Patriot Act. It certifies that, to the best of its knowledge,
neither it nor any of its Subsidiaries has been designated, nor is or shall be
owned or controlled, by a "suspected terrorist" as defined in Executive Order
13224. It hereby acknowledges that Laurus seeks to comply with all applicable
laws concerning money laundering and related activities. In furtherance of those
efforts, it hereby represents, warrants and covenants that: (i) none of the cash
or property that it or any of its Subsidiaries will pay or will contribute to
Laurus has been or shall be derived from, or related to, any activity that is
deemed criminal under United States law; and (ii) no contribution or payment by
it or any of its Subsidiaries to Laurus, to the extent that they are within its
or any such Subsidiary's control shall cause Laurus to be in violation of the
United States Bank Secrecy Act, the United States International Money Laundering
Control Act of 1986 or the United States International Money Laundering
Abatement and Anti-Terrorist Financing Act of 2001. It shall promptly notify
Laurus if any of these representations, warranties and covenants ceases to be
true and accurate regarding it or any of its Subsidiaries. It shall provide
Laurus with any additional information regarding it and each Subsidiary thereof
that Laurus deems necessary or convenient to ensure compliance with all
applicable laws concerning money laundering and similar activities. It
understands and agrees that if at any time it is discovered that any of the
foregoing representations, warranties and covenants are incorrect, or if
otherwise required by applicable law or regulation related to money laundering
or similar activities, Laurus may undertake appropriate actions to ensure
compliance with applicable law or regulation, including but not limited to
segregation and/or redemption of Laurus' investment in it. It further
understands that Laurus may release confidential information about it and its
Subsidiaries and, if applicable, any underlying beneficial owners, to proper
authorities if Laurus, in its sole discretion, determines that it is in the best
interests of Laurus in light of relevant rules and regulations under the laws
set forth in subsection (ii) above.
(aa) Company Name; Locations of Offices, Records and Collateral.
Schedule 12(aa) sets forth each Company's name as it appears in official filings
in the state of its organization, the type of entity of each Company, the
organizational identification number issued by each Company's state of
organization or a statement that no such number has been issued, each Company's
state of organization, and the location of each Company's chief executive
office, corporate offices, warehouses, other locations of Collateral and
locations where records with respect to Collateral are kept (including in each
case the county of such locations) and, except as set forth in such Schedule
12(aa), such locations have not changed during the preceding twelve months. As
of the Closing Date, during the prior five years, except as set forth in
Schedule 12(aa), no Company has been known as or conducted business in any other
name (including trade names). Each Company has only one state of organization.
(bb) ERISA. Based upon the Employee Retirement Income Security Act
of 1974 ("ERISA"), and the regulations and published interpretations thereunder:
(i) neither it nor any of its Subsidiaries has engaged in any Prohibited
Transactions (as defined in Section 406 of ERISA and Section 4975 of the Code);
(ii) it and each of its Subsidiaries has met all applicable minimum funding
requirements under Section 302 of ERISA in respect of its plans; (iii) neither
23
it nor any of its Subsidiaries has any knowledge of any event or occurrence
which would cause the Pension Benefit Guaranty Corporation to institute
proceedings under Title IV of ERISA to terminate any employee benefit plan(s);
(iv) neither it nor any of its Subsidiaries has any fiduciary responsibility for
investments with respect to any plan existing for the benefit of persons other
than its or such Subsidiary's employees; and (v) neither it nor any of its
Subsidiaries has withdrawn, completely or partially, from any multi-employer
pension plan so as to incur liability under the Multiemployer Pension Plan
Amendments Act of 1980.
13. Covenants. Each Company, as applicable, covenants and agrees
with Laurus as follows, during the Term of this Agreement:
(a) Stop-Orders. It shall advise Laurus, promptly after it receives
notice of issuance by the SEC, any state securities commission or any other
regulatory authority of any stop order or of any order preventing or suspending
any offering of any securities of the Parent, or of the suspension of the
qualification of the Common Stock of the Parent for offering or sale in any
jurisdiction, or the initiation of any proceeding for any such purpose.
(b) Listing. It shall promptly secure the listing or quotation, as
applicable, of the shares of Common Stock issuable upon conversion of the Notes,
exercise of the Warrants and exercise of the Options on the Principal Market
upon which shares of Common Stock are listed or quoted, as applicable, (subject
to official notice of issuance) and shall maintain such listing or quotation, as
applicable, so long as any other shares of Common Stock shall be so listed or
quoted, as applicable. The Parent shall maintain the listing or quotation, as
applicable, of its Common Stock on the NASDAQ OTC Bulletin Board or other
Principal Market approved in writing by Laurus, and will comply in all material
respects with the Parent's reporting, filing and other obligations under the
bylaws or rules of the National Association of Securities Dealers ("NASD") and
such exchanges, as applicable.
(c) Market Regulations. It shall notify the SEC, NASD and applicable
state authorities, in accordance with their requirements, of the transactions
contemplated by this Agreement, and shall take all other necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation, for the legal and valid issuance of the Securities to Laurus and
promptly provide copies thereof to Laurus.
(d) Reporting Requirements. It shall timely file with the SEC all
reports required to be filed pursuant to the Exchange Act and refrain from
terminating its status as an issuer required by the Exchange Act to file reports
thereunder even if the Exchange Act or the rules or regulations thereunder would
permit such termination.
(e) Use of Funds. It shall use the proceeds of the Loans (i) to
repay in full the Existing Indebtedness and (iii) for general working capital
purposes only.
(f) Access to Facilities. It shall, and shall cause each of its
Subsidiaries to, permit any representatives designated by Laurus (or any
successor of Laurus), upon reasonable notice and during normal business hours,
at Company's expense and accompanied by a representative of Company Agent
(provided that no such prior notice shall be required to be given and no such
representative shall be required to accompany Laurus in the event Laurus
24
believes such access is necessary to preserve or protect the Collateral or
following the occurrence and during the continuance of an Event of Default), to:
(i) visit and inspect any of its or any such Subsidiary's
properties;
(ii) examine its or any such Subsidiary's corporate and
financial records (unless such examination is not permitted by federal, state or
local law or by contract) and make copies thereof or extracts therefrom; and
(iii) discuss its or any such Subsidiary's affairs, finances
and accounts with its or any such Subsidiary's directors, officers and
Accountants.
Notwithstanding the foregoing, neither it nor any of its Subsidiaries shall
provide any material, non-public information to Laurus unless Laurus signs a
confidentiality agreement and otherwise complies with Regulation FD, under the
federal securities laws.
(g) Taxes. It shall, and shall cause each of its Subsidiaries to,
promptly pay and discharge, or cause to be paid and discharged, when due and
payable, all lawful taxes, assessments and governmental charges or levies
imposed upon it and its Subsidiaries' income, profits, property or business, as
the case may be; provided, however, that any such tax, assessment, charge or
levy need not be paid currently if (i) the validity thereof shall currently and
diligently be contested in good faith by appropriate proceedings, (ii) such tax,
assessment, charge or levy shall have no effect on the Lien priority of Laurus
in the Collateral, and (iii) if it and/or such Subsidiary, as applicable, shall
have set aside on its and/or such Subsidiary's books adequate reserves with
respect thereto in accordance with GAAP; and provided, further, that it shall,
and shall cause each of its Subsidiaries to, pay all such taxes, assessments,
charges or levies forthwith upon the commencement of proceedings to foreclose
any lien which may have attached as security therefor.
(h) Insurance. It shall bear the full risk of loss from any loss of
any nature whatsoever with respect to the Collateral. It and each of its
Subsidiaries shall keep its assets which are of an insurable character insured
by financially sound and reputable insurers against loss or damage by fire,
explosion and other risks customarily insured against by companies in similar
business similarly situated as it and its Subsidiaries; and it and its
Subsidiaries shall maintain, with financially sound and reputable insurers,
insurance against other hazards and risks and liability to persons and property
to the extent and in the manner which it and/or such Subsidiary thereof
reasonably believes is customary for companies in similar business similarly
situated as it and its Subsidiaries and to the extent available on commercially
reasonable terms. It and each of its Subsidiaries will jointly and severally
bear the full risk of loss from any loss of any nature whatsoever with respect
to the assets pledged to Laurus as security for its obligations hereunder and
under the Ancillary Agreements. At its own cost and expense in amounts and with
carriers reasonably acceptable to Laurus, it and each of its Subsidiaries shall
(i) keep all their insurable properties and properties in which they have an
interest insured against the hazards of fire, flood, sprinkler leakage, those
hazards covered by extended coverage insurance and such other hazards, and for
such amounts, as is customary in the case of companies engaged in businesses
similar to it or the respective Subsidiary's including business interruption
insurance; (ii) maintain a bond in such amounts as is customary in the case of
companies
25
engaged in businesses similar to it and its Subsidiaries' insuring against
larceny, embezzlement or other criminal misappropriation of insured's officers
and employees who may either singly or jointly with others at any time have
access to its or any of its Subsidiaries assets or funds either directly or
through governmental authority to draw upon such funds or to direct generally
the disposition of such assets; (iii) maintain public and product liability
insurance against claims for personal injury, death or property damage suffered
by others; (iv) maintain all such worker's compensation or similar insurance as
may be required under the laws of any state or jurisdiction in which it or any
of its Subsidiaries is engaged in business; and (v) furnish Laurus with (x)
copies of all policies and evidence of the maintenance of such policies at least
thirty (30) days before any expiration date, (y) excepting its and its
Subsidiaries' workers' compensation policy, endorsements to such policies naming
Laurus as "co-insured" or "additional insured" and appropriate loss payable
endorsements in form and substance satisfactory to Laurus, naming Laurus as
lenders loss payee, and (z) evidence that as to Laurus the insurance coverage
shall not be impaired or invalidated by any act or neglect of any Company or any
of its Subsidiaries and the insurer will provide Laurus with at least thirty
(30) days notice prior to cancellation. It shall instruct the insurance carriers
that in the event of any loss thereunder, the carriers shall make payment for
such loss to Laurus and not to any Company or any of its Subsidiaries and Laurus
jointly. If any insurance losses are paid by check, draft or other instrument
payable to any Company and/or any of its Subsidiaries and Laurus jointly, Laurus
may endorse, as applicable, such Company's and/or any of its Subsidiaries' name
thereon and do such other things as Laurus may deem advisable to reduce the same
to cash. Laurus is hereby authorized to adjust and compromise claims. All loss
recoveries received by Laurus upon any such insurance may be applied to the
Obligations, in such order as Laurus in its sole discretion shall determine or
shall otherwise be delivered to Company Agent for the benefit of the applicable
Company and/or its Subsidiaries. Any surplus shall be paid by Laurus to Company
Agent for the benefit of the applicable Company and/or its Subsidiaries, or
applied as may be otherwise required by law. Any deficiency thereon shall be
paid, as applicable, by Companies and their Subsidiaries to Laurus, on demand.
(i) Intellectual Property. It shall, and shall cause each of its
Subsidiaries to, maintain in full force and effect its corporate existence,
rights and franchises and all licenses and other rights to use Intellectual
Property owned or possessed by it and reasonably deemed to be necessary to the
conduct of its business.
(j) Properties. It shall, and shall cause each of its Subsidiaries
to, keep its properties in good repair, working order and condition, reasonable
wear and tear excepted, and from time to time make all needful and proper
repairs, renewals, replacements, additions and improvements thereto; and it
shall, and shall cause each of its Subsidiaries to, at all times comply with
each provision of all leases to which it is a party or under which it occupies
property if the breach of such provision could reasonably be expected to have a
Material Adverse Effect.
(k) Confidentiality. It shall not, and shall not permit any of its
Subsidiaries to, disclose, and will not include in any public announcement, the
name of Laurus, unless expressly agreed to by Laurus or unless and until such
disclosure is required by law or applicable regulation, and then only to the
extent of such requirement. Notwithstanding the foregoing, each Company and its
Subsidiaries may disclose Laurus' identity and the terms of this Agreement to
its current and prospective debt and equity financing sources.
26
(l) Required Approvals. It shall not, and shall not permit any of
its Subsidiaries to, without the prior written consent of Laurus, (i) create,
incur, assume or suffer to exist any indebtedness (exclusive of trade debt)
whether secured or unsecured other than each Company's indebtedness to Laurus
and as set forth on Schedule 13(l)(i) attached hereto and made a part hereof;
(ii) cancel any debt owing to it in excess of $50,000 in the aggregate during
any 12 month period; (iii) assume, guarantee, endorse or otherwise become
directly or contingently liable in connection with any obligations of any other
Person, except the endorsement of negotiable instruments by it or its
Subsidiaries for deposit or collection or similar transactions in the ordinary
course of business; (iv) directly or indirectly declare, pay or make any
dividend or distribution on any class of its Stock or apply any of its funds,
property or assets to the purchase, redemption or other retirement of any of its
or its Subsidiaries' Stock outstanding on the date hereof, or issue any
preferred stock; (v) purchase or hold beneficially any Stock or other securities
or evidences of indebtedness of, make or permit to exist any loans or advances
to, or make any investment or acquire any interest whatsoever in, any other
Person, including any partnership or joint venture, except (x) travel advances,
(y) loans to its and its Subsidiaries' officers and employees not exceeding at
any one time an aggregate of $10,000, and (z) loans to its existing Subsidiaries
so long as such Subsidiaries are designated as either a co-borrower hereunder or
has entered into such guaranty and security documentation required by Laurus,
including, without limitation, to grant to Laurus a first priority perfected
security interest in substantially all of such Subsidiary's assets to secure the
Obligations; (vi) create or permit to exist any Subsidiary, other than any
Subsidiary in existence on the date hereof and listed in Schedule 12(b) unless
such new Subsidiary is a wholly-owned Subsidiary and is designated by Laurus as
either a co-borrower or guarantor hereunder and such Subsidiary shall have
entered into all such documentation required by Laurus, including, without
limitation, to grant to Laurus a first priority perfected security interest in
substantially all of such Subsidiary's assets to secure the Obligations; (vii)
directly or indirectly, prepay any indebtedness (other than to Laurus and in the
ordinary course of business), or repurchase, redeem, retire or otherwise acquire
any indebtedness (other than to Laurus and in the ordinary course of business)
except to make scheduled payments of principal and interest thereof; (viii)
enter into any merger, consolidation or other reorganization with or into any
other Person or acquire all or a portion of the assets or Stock of any Person or
permit any other Person to consolidate with or merge with it, unless (1) such
Company is the surviving entity of such merger or consolidation, (2) no Event of
Default shall exist immediately prior to and after giving effect to such merger
or consolidation, (3) such Company shall have provided Laurus copies of all
documentation relating to such merger or consolidation and (4) such Company
shall have provided Laurus with at least thirty (30) days' prior written notice
of such merger or consolidation; (ix) materially change the nature of the
business in which it is presently engaged; (x) become subject to (including,
without limitation, by way of amendment to or modification of) any agreement or
instrument which by its terms would (under any circumstances) restrict its or
any of its Subsidiaries' right to perform the provisions of this Agreement or
any of the Ancillary Agreements; (xi) change its fiscal year or make any changes
in accounting treatment and reporting practices without prior written notice to
Laurus except as required by GAAP or in the tax reporting treatment or except as
required by law; (xii) enter into any transaction with any employee, director or
Affiliate, except in the ordinary course on arms-length terms; (xiii) xxxx
Accounts under any name except the present name of such Company; or (xiv) sell,
lease, transfer or otherwise dispose of any of its properties or assets, or any
of the properties or assets of its Subsidiaries, except for (1) the sale of
Inventory
27
in the ordinary course of business and (2) the disposition or transfer in the
ordinary course of business during any fiscal year of obsolete and worn-out
Equipment and only to the extent that (x) the proceeds of any such disposition
are used to acquire replacement Equipment which is subject to Laurus' first
priority security interest or are used to repay Loans or to pay general
corporate expenses, or (y) following the occurrence of an Event of Default which
continues to exist, the proceeds of which are remitted to Laurus to be held as
cash collateral for the Obligations.
(m) Reissuance of Securities. The Parent shall reissue certificates
representing the Securities without the legends set forth in Section 39 below at
such time as:
(i) the holder thereof is permitted to dispose of such
Securities pursuant to Rule 144(k) under the Securities Act; or
(ii) upon resale subject to an effective registration
statement after such Securities are registered under the Securities Act.
The Parent agrees to cooperate with Laurus in connection with all resales
pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions necessary to
allow such resales provided the Parent and its counsel receive reasonably
requested representations from Laurus and broker, if any.
(n) Opinion. On the Closing Date, it shall deliver to Laurus an
opinion acceptable to Laurus from each Company's legal counsel. Each Company
will provide, at the Companies' joint and several expense, such other legal
opinions in the future as are reasonably necessary for the conversion of the
Notes, the exercise of the Warrants and the exercise of the Options.
(o) Legal Name, etc. It shall not, without providing Laurus with 30
days prior written notice, change (i) its name as it appears in the official
filings in the state of its organization, (ii) the type of legal entity it is,
(iii) its organization identification number, if any, issued by its state of
organization, (iv) its state of organization or (v) amend its certificate of
incorporation, by-laws or other organizational document.
(p) Compliance with Laws. The operation of each of its and each of
its Subsidiaries' business is and shall continue to be in compliance in all
material respects with all applicable federal, state and local laws, rules and
ordinances, including to all laws, rules, regulations and orders relating to
taxes, payment and withholding of payroll taxes, employer and employee
contributions and similar items, securities, employee retirement and welfare
benefits, employee health and safety and environmental matters.
(q) Notices. It and each of its Subsidiaries shall promptly inform
Laurus in writing of: (i) the commencement of all proceedings and investigations
by or before and/or the receipt of any notices from, any governmental or
nongovernmental body and all actions and proceedings in any court or before any
arbitrator against or in any way concerning any event which could reasonably be
expected to have singly or in the aggregate, a Material Adverse Effect; (ii) any
change which has had, or could reasonably be expected to have, a Material
Adverse Effect; (iii) any Event of Default or Default; and (iv) any default or
any event which
28
with the passage of time or giving of notice or both would constitute a default
under any agreement for the payment of money to which it or any of its
Subsidiaries is a party or by which it or any of its Subsidiaries or any of its
or any such Subsidiary's properties may be bound the breach of which would have
a Material Adverse Effect.
(r) Margin Stock. It shall not permit any of the proceeds of the
Loans made hereunder to be used directly or indirectly to "purchase" or "carry"
"margin stock" or to repay indebtedness incurred to "purchase" or "carry"
"margin stock" within the respective meanings of each of the quoted terms under
Regulation U of the Board of Governors of the Federal Reserve System as now and
from time to time hereafter in effect.
(s) Offering Restrictions. Except as previously disclosed in the SEC
Reports or in the Exchange Act Filings, or stock or stock options granted to its
employees or directors, neither it nor any of its Subsidiaries shall, prior to
the full repayment or conversion of the Notes (together with all accrued and
unpaid interest and fees related thereto), (x) enter into any equity line of
credit agreement or similar agreement or (y) issue, or enter into any agreement
to issue, any securities with a variable/floating conversion and/or pricing
feature which are or could be (by conversion or registration) free-trading
securities (i.e. common stock subject to a registration statement).
(t) Authorization and Reservation of Shares. The Parent shall at all
times have authorized and reserved a sufficient number of shares of Common Stock
to provide for the conversion of the Notes, exercise of the Warrants and
exercise of the Options.
(u) Financing Right of First Refusal.
(i) It hereby grants to Laurus a right of first refusal to
provide any Additional Financing (as defined below) to be issued by any Company
and/or any of its Subsidiaries (the "Additional Financing Parties"), subject to
the following terms and conditions. From and after the date hereof, prior to the
incurrence of any additional convertible indebtedness and/or the sale or
issuance of any equity interests, other than straight equity issuances, of the
Additional Financing Parties (an "Additional Financing"), Company Agent shall
notify Laurus of such Additional Financing. For the avoidance of doubt, the
defined term "Additional Financing" shall not include issuances of
non-convertible debt or straight equity issuances. In connection therewith,
Company Agent shall submit a fully executed term sheet (a "Proposed Term Sheet")
to Laurus setting forth the terms, conditions and pricing of any such Additional
Financing (such financing to be negotiated on "arm's length" terms and the terms
thereof to be negotiated in good faith) proposed to be entered into by the
Additional Financing Parties. Laurus shall have the right, but not the
obligation, to deliver to Company Agent its own proposed term sheet (the "Laurus
Term Sheet") setting forth the terms and conditions upon which Laurus would be
willing to provide such Additional Financing to the Additional Financing
Parties. The Laurus Term Sheet shall contain terms no less favorable to the
Additional Financing Parties than those outlined in Proposed Term Sheet. Laurus
shall deliver to Company Agent the Laurus Term Sheet within ten Business Days of
receipt of each such Proposed Term Sheet. If the provisions of the Laurus Term
Sheet are at least as favorable to the Additional Financing Parties as the
provisions of the Proposed Term Sheet, the Additional Financing Parties shall
enter into and consummate the Additional Financing transaction outlined in the
Laurus Term Sheet.
29
(ii) It shall not, and shall not permit its Subsidiaries to,
agree, directly or indirectly, to any restriction with any Person which limits
the ability of Laurus to consummate an Additional Financing with it or any of
its Subsidiaries.
(v) Prohibition of Amendments to Subordinated Debt Documentation and
Lock-Up Agreements. It shall not, without the prior written consent of Laurus,
amend, modify or in any way alter the terms of any of the Subordinated Debt
Documentation or the Lock-Up Agreements.
(w) Prohibition of Grant of Collateral for Subordinated Debt
Documentation. It shall not, without the prior written consent of Laurus, grant
or permit any of its Subsidiaries to grant to any Person any Collateral of such
Company or any collateral of any of its Subsidiaries as security for any
obligation arising under the Subordinated Debt Documentation.
(x) Prohibitions of Payment Under Subordinated Debt Documentation.
Neither it nor any of its Subsidiaries shall, without the prior written consent
of Laurus, make any payments in respect of the indebtedness evidenced by the
Subordinated Debt Documentation, other than as expressly permitted by the terms
thereof.
14. Further Assurances. At any time and from time to time, upon the
written request of Laurus and at the sole expense of Companies, each Company
shall promptly and duly execute and deliver any and all such further instruments
and documents and take such further action as Laurus may request (a) to obtain
the full benefits of this Agreement and the Ancillary Agreements, (b) to
protect, preserve and maintain Laurus' rights in the Collateral and under this
Agreement or any Ancillary Agreement, and/or (c) to enable Laurus to exercise
all or any of the rights and powers herein granted or any Ancillary Agreement.
15. Representations, Warranties and Covenants of Laurus. Laurus
hereby represents, warrants and covenants to each Company as follows:
(a) Requisite Power and Authority. Laurus has all necessary power
and authority under all applicable provisions of law to execute and deliver this
Agreement and the Ancillary Agreements and to carry out their provisions. All
corporate action on Laurus' part required for the lawful execution and delivery
of this Agreement and the Ancillary Agreements have been or will be effectively
taken prior to the Closing Date. Upon their execution and delivery, this
Agreement and the Ancillary Agreements shall be valid and binding obligations of
Laurus, enforceable in accordance with their terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application affecting enforcement of creditors' rights, and (b) as
limited by general principles of equity that restrict the availability of
equitable and legal remedies.
(b) Investment Representations. Laurus understands that the
Securities are being offered 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 Notes to be
30
issued to it under this Agreement and the Securities acquired by it upon the
conversion of the Notes.
(c) Laurus Bears Economic Risk. Laurus has substantial experience in
evaluating and investing in private placement transactions of securities in
companies similar to the Parent so that it is capable of evaluating the merits
and risks of its investment in the Parent and has the capacity to protect its
own interests. Laurus must bear the economic risk of this investment until the
Securities are sold pursuant to (i) an effective registration statement under
the Securities Act, or (ii) an exemption from registration is available.
(d) Investment for Own Account. The Securities are being issued to
Laurus for its own account for investment only, and not as a nominee or agent
and not with a view towards or for resale in connection with their distribution.
(e) Laurus Can Protect Its Interest. Laurus represents that by
reason of its, or of its management's, business and financial experience, Laurus
has the capacity to evaluate the merits and risks of its investment in the
Notes, and the Securities and to protect its own interests in connection with
the transactions contemplated in this Agreement, and the Ancillary Agreements.
Further, Laurus is aware of no publication of any advertisement in connection
with the transactions contemplated in the Agreement or the Ancillary Agreements.
(f) Accredited Investor. Laurus represents that it is an accredited
investor within the meaning of Regulation D under the Securities Act.
(g) Shorting. Neither Laurus nor any of its Affiliates or investment
partners has, will, or will cause any Person, to directly engage in "short
sales" of the Parent's Common Stock as long as any Minimum Borrowing Note shall
be outstanding.
(h) Patriot Act. Laurus certifies that, to the best of Laurus'
knowledge, Laurus has not been designated, and is not owned or controlled, by a
"suspected terrorist" as defined in Executive Order 13224. Laurus seeks to
comply with all applicable laws concerning money laundering and related
activities. In furtherance of those efforts, Laurus hereby represents, warrants
and covenants that: (i) none of the cash or property that Laurus will use to
make the Loans has been or shall be derived from, or related to, any activity
that is deemed criminal under United States law; and (ii) no disbursement by
Laurus to any Company to the extent within Laurus' control, shall cause Laurus
to be in violation of the United States Bank Secrecy Act, the United States
International Money Laundering Control Act of 1986 or the United States
International Money Laundering Abatement and Anti-Terrorist Financing Act of
2001. Laurus shall promptly notify the Company Agent if any of these
representations ceases to be true and accurate regarding Laurus. Laurus agrees
to provide the Company any additional information regarding Laurus that the
Company deems necessary or convenient to ensure compliance with all applicable
laws concerning money laundering and similar activities. Laurus understands and
agrees that if at any time it is discovered that any of the foregoing
representations are incorrect, or if otherwise required by applicable law or
regulation related to money laundering similar activities, Laurus may undertake
appropriate actions to ensure compliance with applicable law or regulation,
including but not limited to segregation and/or redemption of Laurus' investment
in the Parent. Laurus further understands that the Parent may
31
release information about Laurus and, if applicable, any underlying beneficial
owners, to proper authorities if the Parent, in its sole discretion, determines
that it is in the best interests of the Parent in light of relevant rules and
regulations under the laws set forth in subsection (ii) above.
(i) Limitation on Acquisition of Common Stock. Notwithstanding
anything to the contrary contained in this Agreement, any Ancillary Agreement,
or any document, instrument or agreement entered into in connection with any
other transaction entered into by and between Laurus and any Company (and/or
Subsidiaries or Affiliates of any Company), Laurus shall not acquire stock in
the Parent (including, without limitation, pursuant to a contract to purchase,
by exercising an option or warrant, by converting any other security or
instrument, by acquiring or exercising any other right to acquire, shares of
stock or other security convertible into shares of stock in the Parent, or
otherwise, and such options, warrants, conversion or other rights shall not be
exercisable) to the extent such stock acquisition would cause any interest
(including any original issue discount) payable by any Company to Laurus not to
qualify as portfolio interest, within the meaning of Section 881(c)(2) of the
Internal Revenue Code of 1986, as amended (the "Code") by reason of Section
881(c)(3) of the Code, taking into account the constructive ownership rules
under Section 871(h)(3)(C) of the Code (the "Stock Acquisition Limitation"). The
Stock Acquisition Limitation shall automatically become null and void without
any notice to any Company upon the earlier to occur of either (a) the Parent's
delivery to Laurus of a Notice of Redemption (as defined in the Notes) or (b)
the existence of an Event of Default at a time when the average closing price of
the Common Stock as reported by Bloomberg, L.P. on the Principal Market for the
immediately preceding five trading days is greater than or equal to 150% of the
Fixed Conversion Price (as defined in the Notes).
(j) Limitation on Sale of Option Shares. Notwithstanding anything
contained herein to the contrary, the Holder shall not sell any Option Shares
resulting from the exercise of its rights under the Option prior to the
expiration of one hundred eighty (180) days following the date hereof. The
limitation described in this Section 15(j) shall automatically become null and
void without any notice to the Parent upon the occurrence and during the
continuance of an Event of Default.
16. Power of Attorney. Each Company hereby appoints Laurus, or any
other Person whom Laurus may designate as such Company's attorney, with power
to: (i) endorse such Company's name on any checks, notes, acceptances, money
orders, drafts or other forms of payment or security that may come into Laurus'
possession to the extent deemed prudent by Laurus to protect its interests
hereunder and under the Ancillary Agreements; (ii) sign such Company's name on
any invoice or xxxx of lading relating to any Accounts, drafts against Account
Debtors, schedules and assignments of Accounts, notices of assignment, financing
statements and other public records, verifications of Account and notices to or
from Account Debtors; (iii) verify the validity, amount or any other matter
relating to any Account by mail, telephone, telegraph or otherwise with Account
Debtors; (iv) do all things necessary to carry out this Agreement, any Ancillary
Agreement and all related documents; and (v) on or after the occurrence and
during the continuation of an Event of Default, notify the post office
authorities to change the address for delivery of such Company's mail to an
address designated by Laurus, and to receive, open and dispose of all mail
addressed to such Company. Each Company hereby ratifies and approves all acts of
the attorney. Neither Laurus, nor the attorney will be liable for any acts or
omissions or for any error of judgment or mistake of fact or law, except for
gross
32
negligence or willful misconduct. This power, being coupled with an interest, is
irrevocable so long as Laurus has a security interest and until the Obligations
have been fully satisfied.
17. Term of Agreement. Laurus' agreement to make Loans and extend
financial accommodations under and in accordance with the terms of this
Agreement or any Ancillary Agreement shall continue in full force and effect
until the expiration of the Term. At Laurus' election following the occurrence
of an Event of Default, Laurus may terminate this Agreement. The termination of
the Agreement shall not affect any of Laurus' rights hereunder or any Ancillary
Agreement and the provisions hereof and thereof shall continue to be fully
operative until all transactions entered into, rights or interests created and
the Obligations have been irrevocably disposed of, concluded or liquidated.
Notwithstanding the foregoing, Laurus shall release its security interests at
any time after thirty (30) days notice upon irrevocable payment to it of all
Obligations if each Company shall have (i) provided Laurus with an executed
release of any and all claims which such Company may have or thereafter have
under this Agreement and all Ancillary Agreements and (ii) paid to Laurus an
early payment fee in an amount equal to (1) five percent (5%) of the Total
Investment Amount if such payment occurs prior to the first anniversary of the
Closing Date, (2) four percent (4%) of the Total Investment Amount if such
payment occurs on or after the first anniversary of the Closing Date and prior
to the second anniversary of the Closing Date and (3) three percent (3%) of the
Total Investment Amount if such termination occurs thereafter during the Term;
such fee being intended to compensate Laurus for its costs and expenses incurred
in initially approving this Agreement or extending same. Such early payment fee
shall be due and payable jointly and severally by the Companies to Laurus upon
termination by acceleration of this Agreement by Laurus due to the occurrence
and continuance of an Event of Default.
18. Termination of Lien. The Liens and rights granted to Laurus
hereunder and any Ancillary Agreements and the financing statements filed in
connection herewith or therewith shall continue in full force and effect,
notwithstanding the termination of this Agreement or the fact that any Company's
account may from time to time be temporarily in a zero or credit position, until
all of the Obligations have been indefeasibly paid or performed in full after
the termination of this Agreement. Laurus shall not be required to send
termination statements to any Company, or to file them with any filing office,
unless and until this Agreement and the Ancillary Agreements shall have been
terminated in accordance with their terms and all Obligations indefeasibly paid
in full in immediately available funds.
19. Events of Default. The occurrence of any of the following shall
constitute an "Event of Default":
(a) failure to make payment of any of the Obligations when required
hereunder, and, in any such case, such failure shall continue for a period of
three (3) days following the date upon which any such payment was due;
(b) failure by any Company or any of its Subsidiaries to pay any
taxes when due unless such taxes are being contested in good faith by
appropriate proceedings and with respect to which adequate reserves have been
provided on such Company's and/or such Subsidiary's books;
33
(c) failure to perform under, and/or committing any breach of, in
any material respect, this Agreement or any covenant contained herein, which
failure or breach shall continue without remedy for a period of twenty (20) days
after the occurrence thereof;
(d) any representation, warranty or statement made by any Company or
any of its Subsidiaries hereunder, in any Ancillary Agreement, any certificate,
statement or document delivered pursuant to the terms hereof, or in connection
with the transactions contemplated by this Agreement should prove to be false or
misleading in any material respect on the date as of which made or deemed made;
(e) the occurrence of any default (or similar term) in the
observance or performance of any other agreement or condition relating to any
indebtedness or contingent obligation of any Company or any of its Subsidiaries
(including, without limitation, the indebtedness evidenced by the Subordinated
Debt Documentation) beyond the period of grace (if any), the effect of which
default is to cause, or permit the holder or holders of such indebtedness or
beneficiary or beneficiaries of such contingent obligation to cause, such
indebtedness to become due prior to its stated maturity or such contingent
obligation to become payable;
(f) attachments or levies in excess of $100,000 in the aggregate are
made upon any Company's assets or a judgment is rendered against any Company's
property involving a liability of more than $100,000 which shall not have been
vacated, discharged, stayed or bonded within thirty (30) days from the entry
thereof;
(g) any change in any Company's or any of its Subsidiary's condition
or affairs (financial or otherwise) which in Laurus' reasonable, good faith
opinion, could reasonably be expected to have a Material Adverse Effect;
(h) any Lien created hereunder or under any Ancillary Agreement for
any reason ceases to be or is not a valid and perfected Lien having a first
priority interest;
(i) any Company or any of its Subsidiaries shall (i) apply for,
consent to or suffer to exist the appointment of, or the taking of possession
by, a receiver, custodian, trustee or liquidator of itself or of all or a
substantial part of its property, (ii) make a general assignment for the benefit
of creditors, (iii) commence a voluntary case under the federal bankruptcy laws
(as now or hereafter in effect), (iv) be adjudicated a bankrupt or insolvent,
(v) file a petition seeking to take advantage of any other law providing for the
relief of debtors, (vi) acquiesce to without challenge within ten (10) days of
the filing thereof, or failure to have dismissed within thirty (30) days, any
petition filed against it in any involuntary case under such bankruptcy laws, or
(vii) take any action for the purpose of effecting any of the foregoing;
(j) any Company or any of its Subsidiaries shall admit in writing
its inability, or be generally unable, to pay its debts as they become due or
cease operations of its present business;
(k) any Company or any of its Subsidiaries directly or indirectly
sells, assigns, transfers, conveys, or suffers or permits to occur any sale,
assignment, transfer or conveyance of any assets of such Company or any interest
therein, except as permitted herein;
34
(l) any "Person" or "group" (as such terms are defined in Sections
13(d) and 14(d) of the Exchange Act, as in effect on the date hereof), other
than the Holder, is or becomes the "beneficial owner" (as defined in Rules
13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of 35% or
more on a fully diluted basis of the then outstanding voting equity interest of
any Company (other than a "Person" or "group" that beneficially owns 35% or more
of such outstanding voting equity interests of the respective Company on the
date hereof), (ii) the Board of Directors of the Parent shall cease to consist
of a majority of the Board of Directors of the Parent on the date hereof (or
directors appointed by a majority of the board of directors in effect
immediately prior to such appointment) or (iii) the Parent or any of its
Subsidiaries merges or consolidates with, or sells all or substantially all of
its assets to, any other person or entity;
(m) the indictment or threatened indictment of any Company or any of
its Subsidiaries or any executive officer of any Company or any of its
Subsidiaries under any criminal statute, or commencement or threatened
commencement of criminal or civil proceeding against any Company or any of its
Subsidiaries or any executive officer of any Company or any of its Subsidiaries
pursuant to which statute or proceeding penalties or remedies sought or
available include forfeiture of any of the property of any Company or any of its
Subsidiaries;
(n) an Event of Default (or similar term) shall occur under and as
defined in any Note or in any other Ancillary Agreement;
(o) any Company or any of its Subsidiaries shall breach any term or
provision of any Ancillary Agreement to which it is a party, in any material
respect which breach is not cured within any applicable cure or grace period
provided in respect thereof (if any);
(p) any Company or any of its Subsidiaries attempts to terminate,
challenges the validity of, or its liability under this Agreement or any
Ancillary Agreement, or any proceeding shall be brought to challenge the
validity, binding effect of any Ancillary Agreement or any Ancillary Agreement
ceases to be a valid, binding and enforceable obligation of such Company or any
of its Subsidiaries (to the extent such Persons are a party thereto) (it being
understood and agreed that nothing in this clause (p) shall be interpreted to
prevent any Company or any of its Subsidiaries from seeking to enforce its
rights under this Agreement or any Ancillary Agreement);
(q) an SEC stop trade order or Principal Market trading suspension
of the Common Stock shall be in effect for five (5) consecutive days or five (5)
days during a period of ten (10) consecutive days, excluding in all cases a
suspension of all trading on a Principal Market, provided that the Parent shall
not have been able to cure such trading suspension within thirty (30) days of
the notice thereof or list the Common Stock on another Principal Market within
sixty (60) days of such notice; or
(r) The Parent's failure to deliver Common Stock to Laurus pursuant
to and in the form required by the Notes and this Agreement, if such failure to
deliver Common Stock shall not be cured within two (2) Business Days or any
Company is required to issue a replacement Note to Laurus and such Company shall
fail to deliver such replacement Note within seven (7) Business Days.
35
(s) The Parent, or any of its Subsidiaries shall take or participate
in any action which would be prohibited under the provisions of any of the
Subordinated Debt Documentation or make any payment on the indebtedness
evidenced by the Subordinated Debt Documentation to a Person that was not
entitled to receive such payments under the subordination provisions of
applicable Subordinated Debt Documentation.
20. Remedies. Following the occurrence of an Event of Default,
Laurus shall have the right to demand repayment in full of all Obligations,
whether or not otherwise due. Until all Obligations have been fully and
indefeasibly satisfied, Laurus shall retain its Lien in all Collateral. Laurus
shall have, in addition to all other rights provided herein and in each
Ancillary Agreement, the rights and remedies of a secured party under the UCC,
and under other applicable law, all other legal and equitable rights to which
Laurus may be entitled, including the right to take immediate possession of the
Collateral, to require each Company to assemble the Collateral, at Companies'
joint and several expense, and to make it available to Laurus at a place
designated by Laurus which is reasonably convenient to both parties and to enter
any of the premises of any Company or wherever the Collateral shall be located,
with or without force or process of law, and to keep and store the same on said
premises until sold (and if said premises be the property of any Company, such
Company agrees not to charge Laurus for storage thereof), and the right to apply
for the appointment of a receiver for such Company's property. Further, Laurus
may, at any time or times after the occurrence of an Event of Default, sell and
deliver all Collateral held by or for Laurus at public or private sale for cash,
upon credit or otherwise, at such prices and upon such terms as Laurus, in
Laurus' sole discretion, deems advisable or Laurus may otherwise recover upon
the Collateral in any commercially reasonable manner as Laurus, in its sole
discretion, deems advisable. The requirement of reasonable notice shall be met
if such notice is mailed postage prepaid to Company Agent at Company Agent's
address as shown in Laurus' records, at least ten (10) days before the time of
the event of which notice is being given. Laurus may be the purchaser at any
sale, if it is public. In connection with the exercise of the foregoing
remedies, Laurus is granted permission to use all of each Company's Intellectual
Property. The proceeds of sale shall be applied first to all costs and expenses
of sale, including attorneys' fees, and second to the payment (in whatever order
Laurus elects) of all Obligations. After the indefeasible payment and
satisfaction in full of all of the Obligations, and after the payment by Laurus
of any other amount required by any provision of law, including Section
9-608(a)(1) of the UCC (but only after Laurus has received what Laurus considers
reasonable proof of a subordinate party's security interest), the surplus, if
any, shall be paid to Company Agent (for the benefit of the applicable
Companies) or its representatives or to whosoever may be lawfully entitled to
receive the same, or as a court of competent jurisdiction may direct. The
Companies shall remain jointly and severally liable to Laurus for any
deficiency. In addition, the Companies shall jointly and severally pay Laurus a
liquidation fee ("Liquidation Fee") in the amount of five percent (5%) of the
actual amount collected in respect of each Account outstanding at any time
during a Liquidation Period". For purposes hereof, "Liquidation Period" means a
period: (i) beginning on the earliest date of (x) an event referred to in
Section 19(i) or 19(j), or (y) the cessation of any Company's business; and (ii)
ending on the date on which Laurus has actually received all Obligations due and
owing it under this Agreement and the Ancillary Agreements. The Liquidation Fee
shall be paid on the date on which Laurus collects the applicable Account by
deduction from the proceeds thereof. Each Company and Laurus acknowledge that
the actual damages that would be incurred by Laurus after the occurrence of an
Event of Default would be difficult to quantify and that such Company
36
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, each
Company hereby waives (a) presentment, demand and protest, and notice of
presentment, dishonor, intent to accelerate, acceleration, protest, default,
nonpayment, maturity, release, compromise, settlement, extension or renewal of
any or all of this Agreement and the Ancillary Agreements or any other notes,
commercial paper, Accounts, contracts, Documents, Instruments, Chattel Paper and
guaranties at any time held by Laurus on which such Company may in any way be
liable, and hereby ratifies and confirms whatever Laurus may do in this regard;
(b) all rights to notice and a hearing prior to Laurus' taking possession or
control of, or to Laurus' replevy, attachment or levy upon, any Collateral or
any bond or security that might be required by any court prior to allowing
Laurus to exercise any of its remedies; and (c) the benefit of all valuation,
appraisal and exemption laws. Each Company acknowledges that it has been advised
by counsel of its choices and decisions with respect to this Agreement, the
Ancillary Agreements and the transactions evidenced hereby and thereby.
22. Expenses. The Companies shall jointly and severally pay all of
Laurus' out-of-pocket costs and expenses, including reasonable fees and
disbursements of in-house or outside counsel and appraisers, in connection with
the preparation, execution and delivery of this Agreement and the Ancillary
Agreements, and in connection with the prosecution or defense of any action,
contest, dispute, suit or proceeding concerning any matter in any way arising
out of, related to or connected with this Agreement or any Ancillary Agreement.
The Companies shall also jointly and severally pay all of Laurus' reasonable
fees, charges, out-of-pocket costs and expenses, including fees and
disbursements of counsel and appraisers, in connection with (a) the preparation,
execution and delivery of any waiver, any amendment thereto or consent proposed
or executed in connection with the transactions contemplated by this Agreement
or the Ancillary Agreements, (b) Laurus' obtaining performance of the
Obligations under this Agreement and any Ancillary Agreements, including, but
not limited to, the enforcement or defense of Laurus' security interests,
assignments of rights and Liens hereunder as valid perfected security interests,
(c) any attempt to inspect, verify, protect, collect, sell, liquidate or
otherwise dispose of any Collateral, (d) any appraisals or re-appraisals of any
property (real or personal) pledged to Laurus by any Company or any of its
Subsidiaries as Collateral for, or any other Person as security for, the
Obligations hereunder and (e) any consultations in connection with any of the
foregoing. The Companies shall also jointly and severally pay Laurus' customary
bank charges for all bank services (including wire transfers) performed or
caused to be performed by Laurus for any Company or any of its Subsidiaries at
any Company's or such Subsidiary's request or in connection with any Company's
loan account with Laurus. All such costs and expenses together with all filing,
recording and search fees, taxes and interest payable by the Companies to Laurus
shall be payable on demand and shall be secured by the Collateral. If any tax by
any Governmental Authority is or may be imposed on or as a result of any
transaction between any Company and/or any Subsidiary thereof, on the one hand,
and Laurus on the other hand, which Laurus is or may be required to withhold or
pay, the Companies hereby jointly and severally indemnifies and holds Laurus
harmless in respect of such taxes, and the Companies will repay to Laurus the
amount of any such taxes which shall be charged to the Companies' account; and
until the Companies shall furnish Laurus with indemnity therefor (or supply
Laurus with
37
evidence satisfactory to it that due provision for the payment thereof has been
made), Laurus may hold without interest any balance standing to each Company's
credit and Laurus shall retain its Liens in any and all Collateral.
23. Assignment By Laurus. Laurus may assign any or all of the
Obligations together with any or all of the security therefor to any Person
which is not a competitor of any 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. Laurus may from time to time sell or otherwise grant
participations in any of the Obligations and the holder of any such
participation shall, subject to the terms of any agreement between Laurus and
such holder, be entitled to the same benefits as Laurus with respect to any
security for the Obligations in which such holder is a participant. Each Company
agrees that each such holder may exercise any and all rights of banker's lien,
set-off and counterclaim with respect to its participation in the Obligations as
fully as though such Company were directly indebted to such holder in the amount
of such participation.
24. No Waiver; Cumulative Remedies. Failure by Laurus to exercise
any right, remedy or option under this Agreement, any Ancillary Agreement or any
supplement hereto or thereto or any other agreement between or among any Company
and Laurus or delay by Laurus in exercising the same, will not operate as a
waiver; no waiver by Laurus will be effective unless it is in writing and then
only to the extent specifically stated. Laurus' rights and remedies under this
Agreement and the Ancillary Agreements will be cumulative and not exclusive of
any other right or remedy which Laurus may have.
25. Application of Payments. Each Company irrevocably waive the
right to direct the application of any and all payments at any time or times
hereafter received by Laurus from or on such Company's behalf and each Company
hereby irrevocably agrees that Laurus shall have the continuing exclusive right
to apply and reapply any and all payments received at any time or times
hereafter against the Obligations hereunder in such manner as Laurus may deem
advisable notwithstanding any entry by Laurus upon any of Laurus' books and
records.
26. Indemnity. Each Company hereby jointly and severally indemnify
and hold Laurus, and its respective affiliates, employees, attorneys and agents
(each, an "Indemnified Person"), harmless from and against any and all suits,
actions, proceedings, claims, damages, losses, liabilities and expenses of any
kind or nature whatsoever (including attorneys' fees and disbursements and other
costs of investigation or defense, including those incurred upon any appeal)
which may be instituted or asserted against or incurred by any such Indemnified
Person as the result of credit having been extended, suspended or terminated
under this Agreement or any of the Ancillary Agreements or with respect to the
execution, delivery, enforcement, performance and administration of, or in any
other way arising out of or relating to, this Agreement, the Ancillary
Agreements or any other documents or transactions contemplated by or referred to
herein or therein 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 ANY COMPANY OR TO ANY OTHER PARTY OR TO
ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON
38
ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE,
EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT
HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR ANY
ANCILLARY AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED
HEREUNDER OR THEREUNDER.
27. Revival. The Companies further agree that to the extent any
Company makes a payment or payments to Laurus, which payment or payments or any
part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside and/or required to be repaid to a trustee, receiver or
any other party under any bankruptcy act, state or federal law, common law or
equitable cause, then, to the extent of such payment or repayment, the
obligation or part thereof intended to be satisfied shall be revived and
continued in full force and effect as if said payment had not been made.
28. Borrowing Agency Provisions.
(a) Each Company hereby irrevocably designates Company Agent to be
its attorney and agent and in such capacity to borrow, sign and endorse notes,
and execute and deliver all instruments, documents, writings and further
assurances now or hereafter required hereunder, on behalf of such Company, and
hereby authorizes Laurus to pay over or credit all loan proceeds hereunder in
accordance with the request of Company Agent.
(b) The handling of this credit facility as a co-borrowing facility
with a borrowing agent in the manner set forth in this Agreement is solely as an
accommodation to the Companies and at their request. Laurus shall not incur any
liability to any Company as a result thereof. To induce Laurus to do so and in
consideration thereof, each Company hereby indemnifies Laurus and holds Laurus
harmless from and against any and all liabilities, expenses, losses, damages and
claims of damage or injury asserted against Laurus by any Person arising from or
incurred by reason of the handling of the financing arrangements of the
Companies as provided herein, reliance by Laurus on any request or instruction
from Company Agent or any other action taken by Laurus with respect to this
Paragraph 28.
(c) All Obligations shall be joint and several, and the Companies
shall make payment upon the maturity of the Obligations by acceleration or
otherwise, and such obligation and liability on the part of the Companies shall
in no way be affected by any extensions, renewals and forbearance granted by
Laurus to any Company, failure of Laurus to give any Company notice of borrowing
or any other notice, any failure of Laurus to pursue to preserve its rights
against any Company, the release by Laurus of any Collateral now or thereafter
acquired from any Company, and such agreement by any Company to pay upon any
notice issued pursuant thereto is unconditional and unaffected by prior recourse
by Laurus to any Company or any Collateral for such Company's Obligations or the
lack thereof.
(d) Each Company expressly waives any and all rights of subrogation,
reimbursement, indemnity, exoneration, contribution or any other claim which
such Company may now or hereafter have against the other or other Person
directly or contingently liable for the Obligations, or against or with respect
to any other's property (including, without limitation, any
39
property which is Collateral for the Obligations), arising from the existence or
performance of this Agreement, until all Obligations have been indefeasibly paid
in full and this Agreement has been irrevocably terminated.
(e) Each Company represents and warrants to Laurus that (i)
Companies have one or more common shareholders, directors and officers, (ii) the
businesses and corporate activities of Companies are closely related to, and
substantially benefit, the business and corporate activities of Companies, (iii)
the financial and other operations of Companies are performed on a combined
basis as if Companies constituted a consolidated corporate group, (iv) Companies
will receive a substantial economic benefit from entering into this Agreement
and will receive a substantial economic benefit from the application of each
Loan hereunder, in each case, whether or not such amount is used directly by any
Company and (v) all requests for Loans hereunder by the Company Agent are for
the exclusive and indivisible benefit of the Companies as though, for purposes
of this Agreement, the Companies constituted a single entity.
29. Notices. Any notice or request hereunder may be given to any
Company, Company Agent or Laurus at the respective addresses set forth below or
as may hereafter be specified in a notice designated as a change of address
under this Section. Any notice or request hereunder shall be given by registered
or certified mail, return receipt requested, hand delivery, overnight mail or
telecopy (confirmed by mail). Notices and requests shall be, in the case of
those by hand delivery, deemed to have been given when delivered to any officer
of the party to whom it is addressed, in the case of those by mail or overnight
mail, deemed to have been given three (3) Business Days after the date when
deposited in the mail or with the overnight mail carrier, and, in the case of a
telecopy, when confirmed.
Notices shall be provided as follows:
If to Laurus: Laurus Master Fund, Ltd.
c/o Laurus Capital Management, LLC
000 Xxxxx Xxxxxx, 00xx Xx.
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxx X. Xxxxxx, Esq.
Telephone: (000) 000-0000
Telecopier: (000) 000-0000
If to any Company,
or Company Agent: Naturade, Inc.
00000 Xxxxxx Xxxx, #000
Xxxxxx, XX 00000
Attention: Xxxxxxx X. Xxxxxxxxx
Telephone: 000-000-0000
Facsimile: 000-000-0000
40
With a copy to: Sichenzia Xxxx Xxxxxxxx Xxxxxxx, LLP
00 Xxxxxxxxxxx Xxxx
Xxxxxxxx, XX 00000
Attention: Xxxxxx Xxxxxxx, Esq.
Telephone: 000-000-0000
Facsimile: 000-000-0000
or such other address as may be designated in writing hereafter in accordance
with this Section 29 by such Person.
30. Governing Law, Jurisdiction and Waiver of Jury Trial.
(a) THIS AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED BY
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW.
(b) EACH COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR
FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE
EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY
COMPANY, ON THE ONE HAND, AND LAURUS, ON THE OTHER HAND, PERTAINING TO THIS
AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR
RELATED TO THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS; PROVIDED, THAT
LAURUS AND EACH COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE
TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW
YORK; AND FURTHER PROVIDED, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR
OPERATE TO PRECLUDE LAURUS FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN
ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL
OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER
COURT ORDER IN FAVOR OF LAURUS. EACH COMPANY EXPRESSLY SUBMITS AND CONSENTS IN
ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT,
AND EACH COMPANY HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK
OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. EACH COMPANY
HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS
ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS,
COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL
ADDRESSED TO COMPANY AGENT AT THE ADDRESS SET FORTH IN SECTION 29 AND THAT
SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF COMPANY AGENT'S
ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER
POSTAGE PREPAID.
41
(c) THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE
APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE
BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL
RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE
ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN LAURUS,
AND/OR ANY COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, ANY
ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.
31. Limitation of Liability. Each Company acknowledges and
understands that in order to assure repayment of the Obligations hereunder
Laurus may be required to exercise any and all of Laurus' rights and remedies
hereunder and agrees that, except as limited by applicable law, neither Laurus
nor any of Laurus' agents shall be liable for acts taken or omissions made in
connection herewith or therewith except for actual bad faith.
32. Entire Understanding; Maximum Interest. This Agreement and the
Ancillary Agreements contain the entire understanding among each Company and
Laurus as to the subject matter hereof and thereof and any promises,
representations, warranties or guarantees not herein contained shall have no
force and effect unless in writing, signed by each Company's and Laurus'
respective officers. Neither this Agreement, the Ancillary Agreements, nor any
portion or provisions thereof may be changed, modified, amended, waived,
supplemented, discharged, cancelled or terminated orally or by any course of
dealing, or in any manner other than by an agreement in writing, signed by the
party to be charged. Nothing contained in this Agreement, any Ancillary
Agreement or in any document referred to herein or delivered in connection
herewith shall be deemed to establish or require the payment of a rate of
interest or other charges in excess of the maximum rate permitted by applicable
law. In the event that the rate of interest or dividends required to be paid or
other charges hereunder exceed the maximum rate permitted by such law, any
payments in excess of such maximum shall be credited against amounts owed by the
Companies to Laurus and thus refunded to the Companies.
33. Severability. Wherever possible each provision of this Agreement
or the Ancillary Agreements shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of this Agreement
or the Ancillary Agreements shall be prohibited by or invalid under applicable
law such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions thereof.
34. Survival. The representations, warranties, covenants and
agreements made herein shall survive any investigation made by Laurus and the
closing of the transactions contemplated hereby to the extent provided therein.
All statements as to factual matters contained in any certificate or other
instrument delivered by or on behalf of the Companies pursuant hereto in
connection with the transactions contemplated herebly shall be deemed to be
representations and warranties by the Companies hereunder solely as of the date
of such certificate or instrument. All indemnities set forth herein shall
survive the execution, delivery
42
and termination of this Agreement and the Ancillary Agreements and the making
and repaying of the Obligations.
35. Captions. All captions are and shall be without substantive
meaning or content of any kind whatsoever.
36. Counterparts; Telecopier Signatures. This Agreement may be
executed in one or more counterparts, each of which shall constitute an original
and all of which taken together shall constitute one and the same agreement. Any
signature delivered by a party via telecopier transmission shall be deemed to be
any original signature hereto.
37. Construction. The parties acknowledge that each party and its
counsel have reviewed this Agreement and that the normal rule of construction to
the effect that any ambiguities are to be resolved against the drafting party
shall not be employed in the interpretation of this Agreement or any amendments,
schedules or exhibits thereto.
38. Publicity. Each Company hereby authorizes Laurus to make
appropriate announcements of the financial arrangement entered into by and among
each Company and Laurus, including, without limitation, announcements which are
commonly known as tombstones, in such publications and to such selected parties
as Laurus shall in its sole and absolute discretion deem appropriate, or as
required by applicable law.
39. Joinder. It is understood and agreed that any Person that
desires to become a Company hereunder, or is required to execute a counterpart
of this Agreement after the date hereof pursuant to the requirements of this
Agreement or any Ancillary Agreement, shall become a Company hereunder by (a)
executing a Joinder Agreement in form and substance satisfactory to Laurus, (b)
delivering supplements to such exhibits and annexes to this Agreement and the
Ancillary Agreements as Laurus shall reasonably request and (c) taking all
actions as specified in this Agreement as would have been taken by such Company
had it been an original party to this Agreement, in each case with all documents
required above to be delivered to Laurus and with all documents and actions
required above to be taken to the reasonable satisfaction of Laurus.
40. Legends. The Securities shall bear legends as follows;
(a) The Notes 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 NATURADE, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED."
43
(b) Any shares of Common Stock issued pursuant to conversion of the
Notes, exercise of the Warrants or exercise of the Options, shall bear a legend
which shall be in substantially the following form until such shares are covered
by an effective registration statement filed with the SEC:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE,
STATE SECURITIES LAWS. THESE SHARES MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO NATURADE, INC. THAT SUCH REGISTRATION IS NOT
REQUIRED."
(c) The Warrants shall bear substantially the following legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT
AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE
UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO NATURADE, INC. THAT SUCH REGISTRATION IS NOT
REQUIRED."
(d) The Options shall bear substantially the following legend:
"THIS OPTION AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS
OPTION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS OPTION AND
THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE
44
REGISTRATION STATEMENT AS TO THIS OPTION OR THE UNDERLYING SHARES OF
COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR
AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO NATURADE, INC. THAT
SUCH REGISTRATION IS NOT REQUIRED."
[Balance of page intentionally left blank; signature page follows.]
45
IN WITNESS WHEREOF, the parties have executed this Security
Agreement as of the date first written above.
NATURADE, INC.
By: /s/ Xxxxxxx X. Xxxxxxxxx
-------------------------------------
Name: Xxxxxxx X. Xxxxxxxxx
Title: CFO
LAURUS MASTER FUND, LTD.
By: /s/ Xxxxx Grin
-------------------------------------
Name: Xxxxx Grin
Title: Director
46
Annex A - Definitions
"Account Debtor" means any Person who is or may be obligated with
respect to, or on account of, an Account.
"Accountants" has the meaning given to such term in Section 11(a).
"Accounts" means all "accounts", as such term is defined in the UCC,
now owned or hereafter acquired by any Person, including: (a) all accounts
receivable, other receivables, book debts and other forms of obligations (other
than forms of obligations evidenced by Chattel Paper or Instruments) (including
any such obligations that may be characterized as an account or contract right
under the UCC); (b) all of such Person's rights in, to and under all purchase
orders or receipts for goods or services; (c) all of such Person's rights to any
goods represented by any of the foregoing (including unpaid sellers' rights of
rescission, replevin, reclamation and stoppage in transit and rights to
returned, reclaimed or repossessed goods); (d) all rights to payment due to such
Person for Goods or other property sold, leased, licensed, assigned or otherwise
disposed of, for a policy of insurance issued or to be issued, for a secondary
obligation incurred or to be incurred, for energy provided or to be provided,
for the use or hire of a vessel under a charter or other contract, arising out
of the use of a credit card or charge card, or for services rendered or to be
rendered by such Person or in connection with any other transaction (whether or
not yet earned by performance on the part of such Person); and (e) all
collateral security of any kind given by any Account Debtor or any other Person
with respect to any of the foregoing.
"Accounts Availability" means sum of (i) the amount of Revolving
Loans against Eligible Accounts Laurus may make from time to time up to ninety
percent (90%) of the net face amount of Eligible Accounts.
"Affiliate" means, with respect to any Person, (a) any other Person
(other than a Subsidiary) which, directly or indirectly, is in control of, is
controlled by, or is under common control with such Person or (b) any other
Person who is a director or officer (i) of such Person, (ii) of any Subsidiary
of such Person or (iii) of any Person described in clause (a) above. For the
purposes of this definition, control of a Person shall mean the power (direct or
indirect) to direct or cause the direction of the management and policies of
such Person whether by contract or otherwise.
"Ancillary Agreements" means the Notes, the Warrants, the Options,
the Registration Rights Agreements, the Subordination Agreement, each Security
Document and all other agreements, instruments, documents, mortgages, pledges,
powers of attorney, consents, assignments, contracts, notices, security
agreements, trust agreements and guarantees whether heretofore, concurrently, or
hereafter executed by or on behalf of any Company, any of its Subsidiaries or
any other Person or delivered to Laurus, relating to this Agreement or to the
transactions contemplated by this Agreement or otherwise relating to the
relationship between or among any Company and Laurus, as each of the same may be
amended, supplemented, restated or otherwise modified from time to time.
"Available Minimum Borrowing" has the meaning given such term in
Section 2(a)(i).
"Balance Sheet Date" has the meaning given such term in Section
12(f)(ii).
"Books and Records" means all books, records, board minutes,
contracts, licenses, insurance policies, environmental audits, business plans,
files, computer files, computer discs and other data and software storage and
media devices, accounting books and records, financial statements (actual and
pro forma), filings with Governmental Authorities and any and all records and
instruments relating to the Collateral or otherwise necessary or helpful in the
collection thereof or the realization thereupon.
"Business Day" means a day on which Laurus is open for business and
that is not a Saturday, a Sunday or other day on which banks are required or
permitted to be closed in the State of New York.
"Capital Availability Amount" means $3,000,000.
"Charter" has the meaning given such term in Section 12(c)(iv).
"Chattel Paper" means all "chattel paper," as such term is defined
in the UCC, including electronic chattel paper, now owned or hereafter acquired
by any Person.
"Closing Date" means the date on which any Company shall first
receive proceeds of the initial Loans or the date hereof, if no Loan is made
under the facility on the date hereof.
"Code" has the meaning given such term in Section 15(i).
"Collateral" means all of each Company's property and assets,
whether real or personal, tangible or intangible, and whether now owned or
hereafter acquired, or in which it now has or at any time in the future may
acquire any right, title or interests including all of the following property in
which it now has or at any time in the future may acquire any right, title or
interest:
(a) all Inventory;
(b) all Equipment;
(c) all Fixtures;
(d) all Goods;
(e) all General Intangibles;
(f) all Accounts;
(g) all Deposit Accounts, other bank accounts and all funds on
deposit therein;
2
(h) all Investment Property;
(i) all Stock;
(j) all Chattel Paper;
(k) all Letter-of-Credit Rights;
(l) all Instruments;
(m) all commercial tort claims set forth on Schedule 1(A);
(n) all Books and Records;
(o) all Intellectual Property;
(p) all Supporting Obligations including letters of credit and
guarantees issued in support of Accounts, Chattel Paper, General Intangibles and
Investment Property;
(q) (i) all money, cash and cash equivalents and (ii) all cash held
as cash collateral to the extent not otherwise constituting Collateral, all
other cash or property at any time on deposit with or held by Laurus for the
account of any Company (whether for safekeeping, custody, pledge, transmission
or otherwise); and
(r) all products and Proceeds of all or any of the foregoing, tort
claims and all claims and other rights to payment including (i) insurance claims
against third parties for loss of, damage to, or destruction of, the foregoing
Collateral and (ii) payments due or to become due under leases, rentals and
hires of any or all of the foregoing and Proceeds payable under, or unearned
premiums with respect to policies of insurance in whatever form.
"Common Stock" means the shares of stock representing the Parent's
common equity interests.
"Company Agent" means Naturade, Inc..
"Contract Rate" has the meaning given such term in the respective
Note.
"Default" means any act or event that, with the giving of notice or
passage of time or both, would constitute an Event of Default.
"Deposit Accounts" means all "deposit accounts" as such term is
defined in the UCC, now or hereafter held in the name of any Person, including,
without limitation, the Lockboxes.
"Disclosure Controls" has the meaning given such term in Section
12(f)(iv).
"Documents" means all "documents", as such term is defined in the
UCC, now owned or hereafter acquired by any Person, wherever located, including
all bills of lading, dock
3
warrants, dock receipts, warehouse receipts, and other documents of title,
whether negotiable or non-negotiable.
"Eligible Accounts" means each Account of each Company which
conforms to the following criteria: (a) shipment of the merchandise or the
rendition of services has been completed; (b) no return, rejection or
repossession of the merchandise has occurred; (c) merchandise or services shall
not have been rejected or disputed by the Account Debtor and there shall not
have been asserted any offset, defense or counterclaim; (d) continues to be in
full conformity with the representations and warranties made by such Company to
Laurus with respect thereto; (e) Laurus is, and continues to be, satisfied with
the credit standing of the Account Debtor in relation to the amount of credit
extended; (f) there are no facts existing or threatened which are likely to
result in any adverse change in an Account Debtor's financial condition; (g) is
documented by an invoice in a form approved by Laurus and shall not be unpaid
more than ninety (90) days from invoice date; (h) not more than twenty-five
percent (25%) of the unpaid amount of invoices due from such Account Debtor
remains unpaid more than ninety (90) days from invoice date; (i) is not
evidenced by chattel paper or an instrument of any kind with respect to or in
payment of the Account unless such instrument is duly endorsed to and in
possession of Laurus or represents a check in payment of an Account; (j) the
Account Debtor is located in the United States; provided, however, Laurus may,
from time to time, in the exercise of its sole discretion and based upon
satisfaction of certain conditions to be determined at such time by Laurus, deem
certain Accounts as Eligible Accounts notwithstanding that such Account is due
from an Account Debtor located outside of the United States; (k) Laurus has a
first priority perfected Lien in such Account and such Account is not subject to
any Lien other than Permitted Liens; (l) does not arise out of transactions with
any employee, officer, director, stockholder or Affiliate of any Company; (m) is
payable to such Company; (n) does not arise out of a xxxx and hold sale prior to
shipment and does not arise out of a sale to any Person to which such Company is
indebted; (o) is net of any returns, discounts, claims, credits and allowances;
(p) if the Account arises out of contracts between such Company, on the one
hand, and the United States, on the other hand, any state, or any department,
agency or instrumentality of any of them, such Company has so notified Laurus,
in writing, prior to the creation of such Account, and there has been compliance
with any governmental notice or approval requirements, including compliance with
the Federal Assignment of Claims Act; (q) is a good and valid account
representing an undisputed bona fide indebtedness incurred by the Account Debtor
therein named, for a fixed sum as set forth in the invoice relating thereto with
respect to an unconditional sale and delivery upon the stated terms of goods
sold by such Company or work, labor and/or services rendered by such Company;
(r) does not arise out of progress xxxxxxxx prior to completion of the order;
(s) the total unpaid Accounts from such Account Debtor does not exceed
twenty-five percent (25%) of all Eligible Accounts; (t) such Company's right to
payment is absolute and not contingent upon the fulfillment of any condition
whatsoever; (u) such Company is able to bring suit and enforce its remedies
against the Account Debtor through judicial process; (v) does not represent
interest payments, late or finance charges owing to such Company, and (w) is
otherwise satisfactory to Laurus as determined by Laurus in the exercise of its
sole discretion. In the event any Company requests that Laurus include within
Eligible Accounts certain Accounts of one or more of such Company's acquisition
targets, Laurus shall at the time of such request consider such inclusion, but
any such inclusion shall be at the sole option of Laurus and shall at all times
be subject to the execution and delivery to Laurus of all such documentation
(including, without limitation, guaranty and security documentation) as Laurus
may require in its sole discretion.
4
"Eligible Inventory" means Inventory owned by a Company 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 located on premises with
respect to which Laurus has received a landlord or mortgagee waiver acceptable
in form and substance to Laurus; (c) is not in transit; (d) 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; (e) is currently
either usable or salable in the normal course of such Company's business; (f) is
not placed by such Company on consignment or held by such Company on consignment
from another Person; (g) is in conformity with the representations and
warranties made by such Company to Laurus with respect thereto; (h) is not
subject to any licensing, patent, royalty, trademark, trade name or copyright
agreement with any third parties; (i) 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 such Company is a party or to which
such Inventory is or may be subject; (j) is not work-in-process; (k) is covered
by casualty insurance acceptable to Laurus and under which Laurus has been named
as a lender's loss payee and additional insured; and (l) not to be ineligible
for any other reason.
"Eligible Subsidiary" means each Subsidiary of the Parent set forth
on Exhibit A hereto, as the same may be updated from time to time with Laurus'
written consent.
"Equipment" means all "equipment" as such term is defined in the
UCC, now owned or hereafter acquired by any Person, wherever located, including
any and all machinery, apparatus, equipment, fittings, furniture, Fixtures,
motor vehicles and other tangible personal property (other than Inventory) of
every kind and description that may be now or hereafter used in such Person's
operations or that are owned by such Person or in which such Person may have an
interest, and all parts, accessories and accessions thereto and substitute ons
and replacements therefor.
"ERISA" has the meaning given such term in Section 12(bb).
"Event of Default" means the occurrence of any of the events set
forth in Section 19.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exchange Act Filings" means the Parent's filings under the Exchange
Act made prior to the date of this Agreement.
"Financial Reporting Controls" has the meaning given such term in
Section 12(f)(v).
"Fixtures" means all "fixtures" as such term is defined in the UCC,
now owned or hereafter acquired by any Person.
"Formula Amount" has the meaning given such term in Section 2(a)(i).
5
"GAAP" means generally accepted accounting principles, practices and
procedures in effect from time to time in the United States of America.
"General Intangibles" means all "general intangibles" as such term
is defined in the UCC, now owned or hereafter acquired by any Person including
all right, title and interest that such Person may now or hereafter have in or
under any contract, all Payment Intangibles, customer lists, Licenses,
Intellectual Property, interests in partnerships, joint ventures and other
business associations, permits, proprietary or confidential information,
inventions (whether or not patented or patentable), technical information,
procedures, designs, knowledge, know-how, Software, data bases, data, skill,
expertise, experience, processes, models, drawings, materials, Books and
Records, Goodwill (including the Goodwill associated with any Intellectual
Property), all rights and claims in or under insurance policies (including
insurance for fire, damage, loss, and casualty, whether covering personal
property, real property, tangible rights or intangible rights, all liability,
life, key-person, and business interruption insurance, and all unearned
premiums), uncertificated securities, choses in action, deposit accounts, rights
to receive tax refunds and other payments, rights to received dividends,
distributions, cash, Instruments and other property in respect of or in exchange
for pledged Stock and Investment Property, and rights of indemnification.
"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.
"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.
"HHBLLC" means Health Holdings and Botanicals, LLC, a California
limited liability company.
"Instruments" means all "instruments", as such term is defined in
the UCC, now owned or hereafter acquired by any Person, wherever located,
including all certificated securities and all promissory notes and other
evidences of indebtedness, other than instruments that constitute, or are a part
of a group of writings that constitute, Chattel Paper.
"Intellectual Property" means any and all patents, trademarks,
service marks, trade names, copyrights, trade secrets, Licenses, information and
other proprietary rights and processes.
"Inventory" means all "inventory", as such term is defined in the
UCC, now owned or hereafter acquired by any Person, wherever located, including
all inventory, merchandise, goods and other personal property that are held by
or on behalf of such Person for
6
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 up to the lesser of (a) thirty-five
percent (35%) of the value of Companies' Eligible Inventory (calculated on the
basis of the lower of cost or market, on a first-in first-out basis) and (b)
$500,000.
"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" means the Revolving Loans and the Term Loan and all other
extensions of credit hereunder and under any Ancillary Agreement.
"Lockboxes" has the meaning given such term in Section 8(a).
"Material Adverse Effect" means a material adverse effect on (a) the
business, assets, liabilities, condition (financial or otherwise), properties,
operations or prospects of any Company or any of its Subsidiaries (taken
individually and as a whole), (b) any Company's or any of its Subsidiary's
ability to pay or perform the Obligations in accordance with the terms hereof or
any Ancillary Agreement, (c) the value of the Collateral, the Liens on the
Collateral or the priority of any such Lien or (d) the practical realization of
the benefits of Laurus' rights and remedies under this Agreement and the
Ancillary Agreements.
"Minimum Borrowing Amount" means $500,000.
"Minimum Borrowing Notes" means that certain Secured Convertible
Minimum Borrowing Note dated as of the Closing Date made by the Companies in
favor of Laurus
7
evidencing the Minimum Borrowing Amount and each other Secured Convertible
Minimum Borrowing Note made by the Companies in favor of Laurus which evidences
the Minimum Borrowing Amount, as each of the same may be amended, supplemented,
restated and/or otherwise modified from time to time.
"NASD" has the meaning given such term in Section 13(b).
"Next Unissued Serialized Note" has the meaning given such term in
Section 2(a)(i).
"Note Shares" has the meaning given such term in Section 12(a).
"Notes" means the Minimum Borrowing Notes, the Term Note and the
Revolving Note made by Companies in favor of Laurus in connection with the
transactions contemplated hereby, as each of the same may be amended,
supplemented, restated and/or otherwise modified from time to time.
"Obligations" means all Loans, all advances, debts, liabilities,
obligations, covenants and duties owing by each Company and each of its
Subsidiaries to Laurus (or any corporation that directly or indirectly controls
or is controlled by or is under common control with Laurus) of every kind and
description (whether or not evidenced by any note or other instrument and
whether or not for the payment of money or the performance or non-performance of
any act), direct or indirect, absolute or contingent, due or to become due,
contractual or tortious, liquidated or unliquidated, whether existing by
operation of law or otherwise now existing or hereafter arising including any
debt, liability or obligation owing from any Company and/or each of its
Subsidiaries to others which Laurus may have obtained by assignment or otherwise
and further including all interest (including interest accruing at the then
applicable rate provided in this Agreement after the maturity of the Loans and
interest accruing at the then applicable rate provided in this Agreement after
the filing of any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, whether or not a claim for post-filing or
post-petition interest is allowed or allowable in such proceeding), charges or
any other payments each Company and each of its Subsidiaries is required to make
by law or otherwise arising under or as a result of this Agreement, the
Ancillary Agreements or otherwise, together with all reasonable expenses and
reasonable attorneys' fees chargeable to the Companies' or any of their
Subsidiaries' accounts or incurred by Laurus in connection therewith.
"Option Shares" has the meaning given such term in Section 12(a).
"Options" means that certain Option dated as of the Closing Date
made by the Parent in favor of Laurus and each other option made by the Parent
in favor Laurus, as each of the same may be amended, restated, modified and/or
supplemented from time to time.
"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
8
overdue; (b) Liens incurred in the ordinary course of business in connection
with worker's compensation, unemployment insurance or other forms of
governmental insurance or benefits, relating to employees, securing sums (i) not
overdue or (ii) being diligently contested in good faith provided that adequate
reserves with respect thereto are maintained on the books of the Companies and
their Subsidiaries, as applicable, in conformity with GAAP; (c) Liens in favor
of Laurus; (d) Liens for taxes (i) not yet due or (ii) being diligently
contested in good faith by appropriate proceedings, provided that adequate
reserves with respect thereto are maintained on the books of the Companies and
their Subsidiaries, as applicable, in conformity with GAAP; and which have no
effect on the priority of Liens in favor of Laurus or the value of the assets in
which Laurus has a Lien; (e) Purchase Money Liens securing Purchase Money
Indebtedness to the extent permitted in this Agreement and (f) Liens specified
on Schedule 2 hereto.
"Person" means any individual, sole proprietorship, partnership,
limited liability partnership, joint venture, trust, unincorporated
organization, association, corporation, limited liability company, institution,
public benefit corporation, entity or government (whether federal, state,
county, city, municipal or otherwise, including any instrumentality, division,
agency, body or department thereof), and shall include such Person's successors
and assigns.
"Principal Market" means the NASD Over The Counter Bulletin Board,
NASDAQ SmallCap Market, NASDAQ National Market System, American Stock Exchange
or New York Stock Exchange (whichever of the foregoing is at the time the
principal trading exchange or market for the Common Stock).
"Proceeds" means "proceeds", as such term is defined in the UCC and,
in any event, shall include: (a) any and all proceeds of any insurance,
indemnity, warranty or guaranty payable to any Company or any other Person from
time to time with respect to any Collateral; (b) any and all payments (in any
form whatsoever) made or due and payable to any Company from time to time in
connection with any requisition, confiscation, condemnation, seizure or
forfeiture of any Collateral by any governmental body, governmental authority,
bureau or agency (or any person acting under color of governmental authority);
(c) any claim of any Company against third parties (i) for past, present or
future infringement of any Intellectual Property or (ii) for past, present or
future infringement or dilution of any trademark or trademark license or for
injury to the goodwill associated with any trademark, trademark registration or
trademark licensed under any trademark License; (d) any recoveries by any
Company against third parties with respect to any litigation or dispute
concerning any Collateral, including claims arising out of the loss or
nonconformity of, interference with the use of, defects in, or infringement of
rights in, or damage to, Collateral; (e) all amounts collected on, or
distributed on account of, other Collateral, including dividends, interest,
distributions and Instruments with respect to Investment Property and pledged
Stock; and (f) any and all other amounts, rights to payment or other property
acquired upon the sale, lease, license, exchange or other disposition of
Collateral and all rights arising out of Collateral.
"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
9
refinancings thereof (but not any increases in the principal amounts thereof
outstanding at that time).
"Purchase Money Lien" means any Lien upon any fixed assets that
secures the Purchase Money Indebtedness related thereto but only if such Lien
shall at all times be confined solely to the asset the purchase price of which
was financed or refinanced through the incurrence of the Purchase Money
Indebtedness secured by such Lien and only if such Lien secures only such
Purchase Money Indebtedness.
"Registration Rights Agreements" means that certain Registration
Rights Agreement dated as of the Closing Date by and between the Parent and
Laurus and each other registration rights agreement by and between the Parent
and Laurus, as each of the same may be amended, modified and supplemented from
time to time.
"Revolving Loans" shall have the meaning given such term in Section
2(a)(i).
"Revolving Note" means that certain Secured Revolving Note dated as
of the Closing Date made by the Companies in favor of Laurus in the original
principal amount of $3,000,000, as the same may be amended, supplemented,
restated and/or otherwise modified from time to time.
"SEC" means the Securities and Exchange Commission.
"SEC Reports" has the meaning given such term in Section 12(u).
"Securities" means the Notes, the Warrants and the Options and the
shares of Common Stock which may be issued pursuant to conversion of such Notes
in whole or in part exercise of such Warrants or Options.
"Securities Act" has the meaning given such term in Section 12(r).
"Security Documents" means all security agreements, mortgages, cash
collateral deposit letters, pledges and other agreements which are executed by
any Company or any of its Subsidiaries in favor of Laurus.
"Software" means all "software" as such term is defined in the UCC,
now owned or hereafter acquired by any Person, including all computer programs
and all supporting information provided in connection with a transaction related
to any program.
"Stock" means all certificated and uncertificated shares, options,
warrants, membership interests, general or limited partnership interests,
participation or other equivalents (regardless of how designated) of or in a
corporation, partnership, limited liability company or equivalent entity whether
voting or nonvoting, including common stock, preferred stock, or any other
"equity security" (as such term is defined in Rule 3a11-1 of the General Rules
and Regulations promulgated by the SEC under the Securities Exchange Act of
1934).
"Subordinated Debt Documentation" shall mean, collectively, (x) the
Loan Agreement, dated as of April 14, 2003 between the Parent, HHBLLC, Xxxxx X.
Xxxx and Xxxx X.
10
Xxxxxxx (as amended, modified or supplemented, the "HHBLLC Loan Agreement")
together with the Notes and the other documents referred to therein and (x) the
Loan Agreement, dated as of August 31, 2000 between the Parent, HHBLLC, Wald
Holdings, LLC and Xxxxxx Xxxx (as amended, modified or supplemented, the "Shao
Loan Agreement") together with the Notes and the other documents referred to
therein.
"Subordination Agreements" and "Subordination Agreement" have the
meaning given such term in Section 5(b)(vii).
"Subsidiary" means, with respect to any Person, (i) any other Person
whose shares of stock or other ownership interests having ordinary voting power
(other than stock or other ownership interests having such power only by reason
of the happening of a contingency) to elect a majority of the directors or other
governing body of such other Person, are owned, directly or indirectly, by such
Person or (ii) any other Person in which such Person owns, directly or
indirectly, more than 50% of the equity interests at such time.
"Supporting Obligations" means all "supporting obligations" as such
term is defined in the UCC.
"Term" means the Closing Date through the close of business on the
day immediately preceding the third anniversary of the Closing Date, subject to
acceleration at the option of Laurus upon the occurrence of an Event of Default
hereunder or other termination hereunder.
"Term Note" means that certain Secured Convertible Term Note dated
as of the Closing Date made by the Companies in favor of Laurus in the original
principal amount of $1,000,000 as the same may amended, supplemented, restated
and/or otherwise modified from time to time.
"Total Investment Amount" means $4,000,000
"Transferable Amount" has the meaning given such term in Section
2(a)(i).
"UCC" means the Uniform Commercial Code as the same may, from time
to time be in effect in the State of New York; provided, that in the event that,
by reason of mandatory provisions of law, any or all of the attachment,
perfection or priority of, or remedies with respect to, Laurus' Lien on any
Collateral is governed by the Uniform Commercial Code as in effect in a
jurisdiction other than the State of New York, the term "UCC" shall mean the
Uniform Commercial Code as in effect in such other jurisdiction for purposes of
the provisions of this Agreement relating to such attachment, perfection,
priority or remedies and for purposes of definitions related to such provisions;
provided further, that to the extent that UCC is used to define any term herein
or in any Ancillary Agreement and such term is defined differently in different
Articles or Divisions of the UCC, the definition of such term contained in
Article or Division 9 shall govern.
"Warrant Shares" has the meaning given such term in Section 12(a).
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"Warrants" means that certain Common Stock Purchase Warrant dated as
of the Closing Date made by the Parent in favor of Laurus and each other warrant
made by the Parent in favor Laurus, as each of the same may be amended,
restated, modified and/or supplemented from time to time.
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Exhibit A
Eligible Subsidiaries
None.
