PREFERRED STOCK PURCHASE AGREEMENT
BETWEEN
ADSOUTH PARTNERS INC.
AND
XXXXXX PARTNERS LP,
XXXXXX VENTURE CAPITAL AND XXXXXXX XXXXXXXX
DATED
JUNE 16, 2005
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PREFERRED STOCK PURCHASE AGREEMENT
This PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is made and
entered into as of the 16th day of June, 2005 by and among Adsouth Partners
Inc., a corporation organized and existing under the laws of the State of Nevada
(the "Company" or "Adsouth") and XXXXXX PARTNERS LP, a Delaware limited
partnership ("Investor")., Xxxxxx Venture Capital ("Xxxxxx") and Xxxxxxx
Xxxxxxxx ("Xxxxxxxx"), with the Investor, Xxxxxx and Xxxxxxxx being collectively
referred to as the "Purchasers" and each, individually, as a "Purchaser." The
Purchasers are not investing as an equity group and each of the investors have
independently made their own decision with regards to the purchase of the
securities
PRELIMINARY STATEMENT:
WHEREAS, the Investor wishes to purchase from the Company, upon the
terms and subject to the conditions of this Agreement, Nine Hundred and Twenty
Five Thousand Nine Hundred and Twenty Six shares (925,926 shares) of series B
convertible preferred stock of the Company, with such preferred stock being as
described in the Certificate of Designations, Rights and Preferences (the
"Certificate of Designations") in substantially the form attached hereto as
Exhibit A (the "Series B Preferred Stock") for the Purchase Price set forth in
Section 1.3.14 hereof. Subject to the limitations set forth in the Certificate
of Designation, each share of Series B Preferred Stock shall be convertible into
Nine (9.0) shares of Common Stock at any time. In addition, the Company will
issue to the Purchasers Common Stock Purchase Warrants (the "Warrants") to
purchase up to an additional twelve million (12,000,000) shares of Common Stock
of the Company at exercise prices as stated in the Warrants; and
WHEREAS, at the Closing pursuant to this Agreement, (i) Xxxxxx is
exchanging all of the convertible notes, in the principal amount plus accrued
interest of Seven Hundred and Sixty One Thousand Two Hundred and Forty Four
Dollars ($761,244), and the shares of Common Stock and warrants which Xxxxxx
purchased from the Company for an aggregate purchase price plus accrued interest
of Seven Hundred Fifty Five Thousand Dollars ($750,000) pursuant to subscription
agreements dated February 17, 2005 and May 16, 2005, for (x) Two Hundred and
Eighty One Thousand Nine Hundred and Forty Two (281,942) shares of Series B
Preferred Stock and (y) Warrants to purchase Two Million Seven Hundred and Fifty
Eight Thousand Three Hundred and Seventy Seven (2,758,377) shares of Common
Stock, and (ii) Xxxxxxxx is exchanging the convertible note in the principal
amount plus accrued interest of Fifty Thousand Four Hundred and Sixty Dollars
($50,460) and the shares of Common Stock and warrants which Xxxxxxxx purchased
from the Company for an aggregate purchase price of Fifty Thousand Dollars
($50,000) pursuant to a subscription agreement dated as of May 16, 2005 for (x)
Eighteen Thousand Six Hundred and Eighty Nine (18,689) shares of Series B
Preferred Stock and Warrants to purchase One Hundred and Eight Two Thousand
Eight Hundred and Forty Two (182,842) shares of Common Stock, the exchanges by
Xxxxxx and Xxxxxxxx being referred to as the "Exchanges," the notes, shares of
Common Stock and warrants issued previously issued to Xxxxxx and Xxxxxxxx being
referred to as the "Exchange Securities," and the subscription agreements
referred to in this recital are collectively referred to as the "Prior
Subscription Agreements"; and
WHEREAS, the parties intend to memorialize the purchase and sale of
such Series B Preferred Stock and the Warrants.
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NOW, THEREFORE, in consideration of the mutual covenants and premises
contained herein, and for other good and valuable consideration, the receipt and
adequacy of which are hereby conclusively acknowledged, the parties hereto,
intending to be legally bound, agree as follows:
ARTICLE I
INCORPORATION BY REFERENCE, SUPERSEDER AND DEFINITIONS
1.1 Incorporation by Reference. The foregoing recitals and the Exhibits and
Schedules attached hereto and referred to herein, are hereby acknowledged to be
true and accurate, and are incorporated herein by this reference.
1.2 Supersedes Other Documents. This Agreement, to the extent that it is
inconsistent with any other instrument or understanding among the parties
governing the affairs of the Company, shall supersede such instrument or
understanding to the fullest extent permitted by law. A copy of this Agreement
shall be filed at the Company's principal office.
1.3 Certain Definitions. For purposes of this Agreement, the following
capitalized terms shall have the following meanings (all capitalized terms used
in this Agreement that are not defined in this Article 1 shall have the meanings
set forth elsewhere in this Agreement):
1.3.1 "1933 Act" means the Securities Act of 1933, as amended.
1.3.2 "1934 Act" means the Securities Exchange Act of 1934, as
amended.
1.3.3 "Affiliate" means a Person or Persons directly or indirectly,
through one or more intermediaries, controlling, controlled by or under common
control with the Person(s) in question. The term "control," as used in the
immediately preceding sentence, means, with respect to a Person that is a
corporation, the right to the exercise, directly or indirectly, of more than 50
percent of the voting rights attributable to the shares of such controlled
corporation and, with respect to a Person that is not a corporation, the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such controlled Person.
1.3.4 "Articles" means the Articles of Incorporation of the Company,
as the same may be amended from time to time.
1.3.5 "Closing" shall mean the Closing of the transactions
contemplated by this Agreement on the Closing Date.
1.3.6 "Closing Date" means the date on which the payment of the
Purchase Price (as defined herein) by the Investor to the Company is completed
pursuant to this Agreement to purchase the Series B Preferred Stock and
Warrants, which shall occur on or before June 16th, 2005.
1.3.7 "Common Stock" means shares of common stock of the Company,
par value $0.0001 per share.
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1.3.8 "Escrow Agreement" shall mean the Escrow Agreement among the
Company, the Investor and Esanu Katsky Xxxxxx & Siger, LLP, as Escrow Agent,
attached hereto as Exhibit D
1.3.9 "Exempt Issuance" means the issuance of (a) shares of Common
Stock or options to employees, officers, or directors of and consultants (other
than consultants whose services relate to the raising or investment of funds) to
the Company pursuant to (i) the Company's existing stock option and equity
incentive plans, (ii) the New Plan, as defined in Section 3.2 of this Agreement,
(iii) any stock or option plan duly adopted by a majority of the non-employee
members of the Board of Directors of the Company or by a majority of the members
of a committee of non-employee directors established for such purpose or (iv)
any stock issued or options granted at no less then 85% of fair market value to
an officer of the Company or any subsidiary if such person were not previously
employed by the Company or any subsidiary and such stock or option were issued
or granted in connection with his or her initial employment by the Company or a
subsidiary, (b) securities upon the exercise of or conversion of any securities
issued pursuant to or contemplated by this Agreement, (c) any issuance of Common
Stock upon exercise or conversion of outstanding options and warrants, (d)
securities issued pursuant to acquisitions of material assets, products or
licensing agreements, but shall not include a transaction in which the Company
is issuing securities primarily for the purpose of raising capital or to an
entity whose primary business is investing in securities., (e) any issuance of
securities in a public offering or (f) any issuance of Common Stock upon
conversion or exercise of any options, warrants or other securities which come
within the definition of Exempt Issuance pursuant to clauses (a) through (e),
inclusive, of this Section 1.3.9.
1.3.10 "Material Adverse Effect" shall mean any adverse effect on the
business, operations, properties or financial condition of the Company that is
material and adverse to the Company and its subsidiaries and affiliates, taken
as a whole and/or any condition, circumstance, or situation that would prohibit
or otherwise materially interfere with the ability of the Company to perform any
of its material obligations under this Agreement or the Registration Rights
Agreement or to perform its obligations under any other material agreement.
1.3.11 "Nevada Act" means the Chapter 78 of the Nevada Revised
Statutes, as amended.
1.3.12 "Person" means an individual, partnership, firm, limited
liability company, trust, joint venture, association, corporation, or any other
legal entity.
1.3.13 "Purchase Price" means the $2,500,000 paid by the Investor to
the Company for the Series B Preferred Stock and the Warrants.
1.3.14 "Registration Rights Agreement" shall mean the registration
rights agreement between the Investor and the Company attached hereto as Exhibit
B.
1.3.15 "Registration Statement" shall mean the registration statement
under the 1933 Act to be filed with the Securities and Exchange Commission for
the registration of the Shares pursuant to the Registration Rights Agreement
attached hereto as Exhibit B.
1.3.16 "SEC" means the Securities and Exchange Commission.
1.3.17 "SEC Documents" shall mean the Company's latest Form 10-K or
10-KSB as of the time in question, all Forms 10-Q or 10-QSB and 8-K and proxy
statements filed thereafter, until such time as the Company no longer has an
obligation to maintain the effectiveness of a Registration Statement as set
forth in the Registration Rights Agreement.
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1.3.18 "Shares" shall mean, collectively, the shares of Common Stock
of the Company issued upon conversion of the Series B Preferred Stock subscribed
for hereunder and those shares of Common Stock issuable to the Investor upon
exercise of the Warrants.
1.3.19 "Subsequent Financing" shall mean any offer and sale of
convertible debt or shares of preferred stock that is senior or superior to the
Series B Preferred Stock other than Exempt Issuances.
1.3.20 "Transaction Documents" shall mean this Agreement, all Schedule
s and Exhibits attached hereto, the Warrants and the Registration Rights
Agreement and all other documents and instruments to be executed and delivered
by the parties in order to consummate the transactions contemplated hereby,
including, but not limited to the documents listed in Sections 3.2 and 3.3
hereof.
1.3.21 "Warrants" shall mean the Common Stock Purchase Warrants in the
form attached hereto Exhibit D. The exercise price shall be sixty five cents
($.65) per share for two million five hundred thousand shares, one and 20/100
dollars ($1.20) per share for two million five hundred thousand Warrants, one
and 50/100 dollars ($1.50) per share for three million five hundred thousand
shares, and one and 80/100 dollars ($1.80) as to the remaining three million
five hundred thousand shares, subject, in each case, to adjustment as provided
in the Warrants. Warrants shall be allocated to Purchasers per Schedule C to
this Agreement.
ARTICLE II
SALE AND PURCHASE OF ADSOUTH PARTNERS INC PREFERRED STOCK AND WARRANTS
PURCHASE PRICE
2.1 Sale of Preferred Stock and Issuance of Warrants.
(a) (i) Upon the terms and subject to the conditions set forth
herein, and in accordance with applicable law, on the Closing Date
(A) the Company agrees to sell to the Investor, and
the Investor agrees to purchase from the Company, on the Closing Date (x) Nine
Hundred Twenty Five Thousand Nine Hundred and Twenty Six shares (925,926 shares)
of Series B Preferred Stock and the Warrants to purchase Nine Million Fifty
Eight Thousand Seven Hundred and Eighty One (9,058,781) shares of Common Stock
for the Purchase Price of Two Million Five Hundred Thousand Dollars
($2,500,000.00). The Purchase Price shall be paid by the Investor to the Company
on the Closing Date by a wire transfer of the Purchase Price into escrow to be
held by the Escrow Agent pursuant to the terms of the Escrow Agreement.
(B) the Company agrees to issue to Xxxxxx Two
Hundred Eighty One Thousand Nine Hundred and Forty Two (281,942) shares of
Series B Preferred Stock and (y) Warrants to purchase Two Million Seven Hundred
and Fifty Eight Thousand Three Hundred and Seventy Seven (2,758,377) shares of
Common Stock, and Xxxxxx agrees to transfer and convey to the Company, all of
the Exchange Securities owned by Xxxxxx free and clear of any liens or
encumbrances, in full payment for the shares of Series B Preferred Stock and
Warrants issuable pursuant to this Section 2.1(a)(i)(B).
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(C) the Company agrees to issue to Xxxxxxxx Eighteen
Thousand Six Hundred Eighty Nine (18,689) shares of Series B Preferred Stock and
Warrants to purchase One Hundred Eighty Two Thousand Eight Hundred and Forty Two
(182,842) shares of Common Stock, and Xxxxxxxx agrees to transfer and convey to
the Company, all of the Exchange Securities owned by Xxxxxxxx all of the
Exchange Securities owned by Xxxxxxxx free and clear of any liens or
encumbrances, in full payment for the shares of Series B Preferred Stock and
Warrants issuable pursuant to this Section 2.1(a)(i)(C).
(ii) The Company shall cause the Preferred Stock and the
Warrants to be issued to the Investor upon the release pursuant to Section
2.1(a) of this Agreement upon delivery of the Purchase Price to the Company by
the Escrow Agent pursuant to the terms of the Escrow Agreement. The Company
shall register the shares of Common Stock into which the Preferred Stock is
convertible pursuant to the terms and conditions of a Registration Rights
Agreement attached hereto as Exhibit B.
(b) Each share of Preferred Stock shall be convertible by the Investor
into Nine (9) shares of Common Stock (the "Conversion Shares"); provided,
however, that the Purchaser shall not be entitled to convert the Preferred Stock
into shares of Common Stock that would result in beneficial ownership by the
Investor and its Affiliates of more than the applicable percentage of the then
outstanding shares of Common Stock on such date. The applicable percentage shall
be 4.9% for each of the Investor, Xxxxxx, Xxxxxxxx and their respective
Affiliates. For the purposes of this Agreement, beneficial ownership shall be
determined in accordance with Section 13(d) of the 1934 Act and Regulation
13d-3.
(c) On the Closing Date:
(i) The Company will deliver to the Escrow Agent the shares of
Series B Preferred Stock and Warrants to be issued to the Investor
contemporaneously with the wire transfer by the Investor of the Purchase Price
to the Escrow Agent.
(ii) The Company will deliver to Escrow Agent the shares of
Series B Preferred Stock and Warrants issuable to Xxxxxx and Xxxxxxxx upon
receipt by the Escrow Agent of the Exchange Securities to be delivered by such
party.
(d) Upon execution and delivery of this Agreement and the Company's
receipt of the Purchase Price from the Escrow Agent pursuant to the terms of the
Escrow Agreement, the Company shall issue to the Purchasers the Warrants to
purchase an aggregate of twelve million shares of Common Stock at exercise
prices as stated in the Warrants, all pursuant to the terms and conditions of
the form of Warrants attached hereto as Exhibit C; provided, however, that the
Investor, Xxxxxx and Xxxxxxxx shall not be entitled to exercise any Warrants or
receive shares of Common Stock that would result in beneficial ownership by the
Investor, Xxxxxx and Xxxxxxxx and their respective affiliates of more than 4.9%
of the then outstanding number of shares of Common Stock on such date. For the
purposes of this Agreement, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13d-3 thereunder.
2.2 Purchase Price. The Purchase Price shall be delivered by the Investor
by wire transfer made payable to the Escrow Agent in United States Dollars
pursuant to the Escrow Agreement on the Closing Date.
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ARTICLE III
CLOSING DATE AND DELIVERIES AT CLOSING
3.1 Closing Date The closing of the transactions contemplated by this
Agreement (the "Closing"), unless expressly determined herein, shall be held at
the offices of the Company, at 5:00 P.M. local time, on the Closing Date or on
such other date and at such other place as may be mutually agreed by the
parties, including closing by facsimile with originals to follow.
3.2 Deliveries by the Company. In addition to and without limiting any
other provision of this Agreement, the Company agrees to deliver, or cause to be
delivered, to the escrow agent under the Escrow Agreement, the following:
a) At or prior to Closing, an executed Agreement;
b) At or prior to Closing, the certificates for the shares of Series B
Preferred Stock issuable to the Investor, Xxxxxx and Xxxxxxxx;
c) At or prior to Closing, executed Warrants in the names of the
Investor, Xxxxxx and Xxxxxxxx in the form attached hereto as
Exhibits C;
d) The executed Registration Rights Agreement;
e) Certifications in form and substance acceptable to the Company and
the Investor from any and all brokers or agents involved in the
transactions contemplated hereby as to the amount of commission or
compensation payable to such broker or agent as a result of the
consummation of the transactions contemplated hereby; and from the
Company or Investor, as appropriate, to the effect that reasonable
reserves for any other commissions or compensation that may be
claimed by any broker or agent have been set aside;
f) Evidence of approval of the Board of Directors of the Company of the
Transaction Documents and the transactions contemplated hereby;
g) Evidence that all lawsuits currently outstanding and referenced in
the financial statements have been settled or are no longer
outstanding;
h) Evidence that Xxxx Xxxxxxxxx Xx. has been elected as President and
CEO of the Company and that his employment agreement has been
amended to reflect a base salary of $250,000 and will be issued
800,000 in options with an exercise price of $0.65 per share vesting
over three years and the other terms of the employment agreement
will be established by the compensation committee;
i) Evidence that Xxxx Xxxxxx Xx. has resigned as an officer of the
Company and has entered into a three year exclusive consulting
agreement with the Company as in Exhibit E.
j) Evidence that the Insiders have agreed to the restrictions of
Section 6.
k) Evidence that all management's bonus plans will be adjusted to be
based on growth in earnings per share as determined by the board of
directors once the independent board of directors compensation
committee has been put in place per this agreement.
l) Price adjustments and rachets for all stock, preferred stock,
convertible debt and warrants waived for all previous transactions;
and/or all existing stock, preferred stock, convertible debt and
warrants be bought out at or prior to closing at a reasonable
valuation as determined by the Investor.
m) The Company's existing incentive plan shall be converted to
long-term incentive plan (the "New Plan") covering 10.0% of the
total primary shares post the Purchasers investment to be vested
over five (5) years; or as seen fit by the compensation committee,
provided, however, that
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primary shares shall include shares of Common Stock issued or
issuable upon conversion of the all of the shares of Series B
Preferred Stock issued by the Company;
n) Certificate of the President and the Secretary of the Company that
the Certificate of Designation has been adopted and filed;
o) Good standing certificates of the Company issued by each of the
Secretary of States for the States of Florida and Nevada;
p) An opinion form the Company's counsel concerning the Transaction
Documents and the transactions contemplated hereby in form and
substance reasonably acceptable to Investor.
q) Stock Certificate in the name of Investor evidencing the Preferred
Stock;
r) The executed Escrow Agreement, and
s) Such other documents or certificates as shall be reasonably
requested by Investor or its counsel.
3.3 Deliveries by Investor. In addition to and without limiting any other
provision of this Agreement, the Investor agrees to deliver, or cause to be
delivered, to the escrow agent under the Escrow Agreement the following:
a) A deposit in the amount of the Purchase Price;
b) The executed Agreement with all Exhibits and Schedules attached
hereto;
c) The executed Registration Rights Agreement;
d) The executed Escrow Agreement, and
e) Such other documents or certificates as shall be reasonably
requested by the Company or its counsel.
In the event any document provided to the other party in Paragraphs 3.2, 3.3 and
3.4 herein are provided by facsimile, the party shall forward an original
document to the other party within seven (7) business days.
3.4 Deliveries by Xxxxxx and Xxxxxxxx. In addition to and without limiting
any other provision of this Agreement, each of Xxxxxx and Xxxxxxxx
severally agrees to deliver, or cause to be delivered, to the Escrow
Agent, the following:
a) The Exchanged Securities set forth after such Person's name on
Schedule to this Agreement.
b) The executed Agreement with all Exhibits and Schedules attached
hereto;
c) The executed Registration Rights Agreement;
d) Such other documents or certificates as shall be reasonably
requested by the Company or its counsel.
3.5 Further Assurances. The Company and each Purchaser, shall, upon
request, on or after the Closing Date, cooperate with each other
(specifically, the Company shall cooperate with the Purchasers, and
each Purchaser shall cooperate with the Company and the other
Purchasers) by furnishing any additional information, executing and
delivering any additional documents and/or other instruments and doing
any and all such things as may be reasonably required by the parties or
their counsel to consummate or otherwise implement the transactions
contemplated by this Agreement.
3.6 Termination of Prior Subscription Agreements and Exchange Securities.
Upon the delivery of the shares of Series B Preferred Stock and the
Warrants to Xxxxxx and Xxxxxxxx pursuant to this Agreement, all of
their rights under, and all of the Company's obligations under, the
Prior Subscription Agreements
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and the Exchange Securities shall terminate, and neither Xxxxxx nor
Xxxxxxxx nor any other Person shall have any rights under, and the
Company shall have no obligations under or with respect to (i) the
Prior Subscription Agreements or (ii) the Exchange Securities.
3.7 Termination of Security Interest. Effective upon the issuance to Xxxxxx
and Xxxxxxxx of the Series B Preferred Stock and Warrants pursuant to
this Agreement, the security agreement (the "Security Agreement"),
dated as of May 16, 2005, by and among the Company, Xxxxxx, as Agent,
and Xxxxxx and Xxxxxxxx, as lenders, and the security interests granted
pursuant to the Security Agreement shall, without any further action on
the part of Xxxxxx or Xxxxxxxx, terminate, and neither Xxxxxx nor
Xxxxxxxx shall have any rights or interest pursuant to the Security
Agreement.
3.8 Waiver. Any Purchaser may waive (i) any of the requirements of Section
3.2 of this Agreement, and (ii) any of the requirements of the Company
under the Escrow Agreement but only to the extent that such
requirements relate to such Purchaser. The Company, at its discretion,
may waive any of the provisions of Section 3.3 or 3.4 of this
Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
ADSOUTH PARTNERS INC
The Company represents and warrants to the Purchasers as of the date
hereof and as of Closing (which warranties and representations shall survive the
Closing regardless of what examinations, inspections, audits and other
investigations the Investor has heretofore made or may hereinafter make with
respect to such warranties and representations) as follows:
4.1 Organization and Qualification. Adsouth is a corporation duly organized,
validly existing and in good standing under the laws of the State of Nevada and
has the requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as it is now being conducted and is duly
qualified to do business in any other jurisdiction by virtue of the nature of
the businesses conducted by it or the ownership or leasing of its properties,
except where the failure to be so qualified will not, when taken together with
all other such failures, have a Material Adverse Effect on the business,
operations, properties, assets, financial condition or results of operation of
Adsouth and its subsidiaries taken as a whole.
4.2 Articles of Incorporation and By-Laws. The complete and correct copies
of the Company's Articles and By-Laws, as amended or restated to date, have been
provided to the Purchasers. Except for the filing of the Certificate of
Designation, the Articles and the By-laws will be not be modified or amended
between the date of the Agreement and the Closing Date.
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4.3 Capitalization.
4.3.1 The authorized and outstanding capital stock of Adsouth as of the
date of this Agreement and as adjusted to reflect the issuance of the Series B
Preferred Stock pursuant to this Agreement is set forth in Schedule 4.3 to this
Agreement. Schedule 4.3 also sets forth information as to shares of Common Stock
issuable upon conversion or exercise of outstanding options, warrants and
convertible securities. All shares of capital stock have been duly authorized
and are validly issued, and are fully paid and non-assessable, and free of
preemptive rights. All shares of Common Stock issuable upon conversion or
exercise of the convertible securities, including the Series B Preferred Stock
and Warrants, will, when issued in accordance with the terms thereof and upon
payment of any consideration provided by the instruments relating to the
convertible securities, be duly authorized, validly existing, fully-paid,
non-assessible and free of preemptive rights.
4.3.2 Except pursuant to this Agreement and as set forth in Schedule
4.3 hereto and in the SEC Documents as of the date hereof and as of the Closing
Date, there are not now outstanding options, warrants, rights to subscribe for,
calls or commitments of any character whatsoever relating to, or securities or
rights convertible into or exchangeable for, shares of any class of capital
stock of Adsouth, or agreements, understandings or arrangements to which the
Company is a party, or by which the Company is bound, to issue additional shares
of its capital stock or options, warrants, scrip or rights to subscribe for,
calls or commitment of any character whatsoever relating to, or securities or
rights convertible into or exchangeable for, any shares of any class of its
capital stock. The Company agrees to inform the Purchasers in writing of any
additional warrants granted prior to the Closing Date.
4.3.3 The Company on the Closing Date (i) will have full right, power
and authority to issue to the Purchasers, the shares of Series B Preferred Stock
to be issued pursuant to this Agreement, free and clear of all liens, charges,
claims, options, pledges, restrictions, and encumbrances whatsoever, other than
restrictions under applicable securities laws and set forth in the Preferred
Stock Designations; and (ii) upon conversion of the Series B Preferred Stock or
exercise of the Warrants, the Purchasers will acquire title to such Shares, free
and clear of all liens, charges, claims, options, pledges, restrictions, and
encumbrances whatsoever, except as otherwise provided in this Agreement as to
the limitation on the voting rights of such Shares in certain circumstances and
except as required by applicable securities laws.
4.4 Authority. The Company has all requisite corporate power and authority
to execute and deliver this Agreement, the Series B Preferred Stock, and the
Warrants, to perform its obligations hereunder and thereunder and to consummate
the transactions contemplated hereby and thereby. The execution and delivery of
this Agreement by the Company and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
and no other corporate proceedings on the part of the Company is necessary to
authorize this Agreement or to consummate the transactions contemplated hereby
except as disclosed in this Agreement. This Agreement has been duly executed and
delivered by Adsouth and constitutes the legal, valid and binding obligation of
the Company, enforceable against the Company in accordance with its terms.
4.5 No Conflict; Required Filings and Consents. The execution and delivery
of this Agreement by the Company does not, and the performance by Adsouth of its
obligations hereunder will not: (i) conflict with or violate the Articles or
By-Laws of Adsouth; (ii) conflict with, breach or violate any federal, state,
foreign or local law, statute, ordinance, rule, regulation, order, judgment or
decree (collectively, "Laws") in effect as of
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the date of this Agreement and applicable to Adsouth; or (iii) result in any
breach of, constitute a default (or an event that with notice or lapse of time
or both would become a default) under, give to any other entity any right of
termination, amendment, acceleration or cancellation of, require payment under,
or result in the creation of a lien or encumbrance on any of the properties or
assets of the Company pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which the Company is a party or by Adsouth or any of its
properties or assets is bound., except as set forth in Schedule 4.5 to this
Agreement. Excluding from the foregoing are such violations, conflicts,
breaches, defaults, terminations, accelerations, creations of liens, or
incumbency that would not, in the aggregate, have a Material Adverse Effect.
4.6 Report and Financial Statements. Adsouth has made available to the
Purchasers the SEC Documents, including the audited financial statements for the
year ended December 31, 2004 and the unaudited financial statements for the
three months ended March 31, 2005 (collectively, the "Financial Statements").
Each of the balance sheets contained in or incorporated by reference into any
such Financial Statements (including the related notes and schedules thereto)
fairly presented the financial position of the Company, as of its date, and each
of the statements of income and changes in stockholders' equity and cash flows
or equivalent statements in such Financial Statements (including any related
notes and schedules thereto) fairly presents, changes in stockholders' equity
and changes in cash flows, as the case may be, of the Company, for the periods
to which they relate, in each case in accordance with United States generally
accepted accounting principles ("U.S. GAAP") consistently applied during the
periods involved, except in each case as may be noted therein, subject to normal
year-end audit adjustments in the case of unaudited statements, and except that
the financial statements included in the Form 10-QSB for the three months ended
March 31, 2005 have the information required by the rules of the SEC. The books
and records of the Company have been, and are being, maintained in all material
respects in accordance with U.S. GAAP and reflect only actual transaction.
4.7 Compliance with Applicable Laws. The Company is not in violation of, or,
to the knowledge of Adsouth is under investigation with respect to or has been
given notice or has been charged with the violation of any Law of a governmental
agency, except for violations which individually or in the aggregate do not have
a Material Adverse Effect.
4.8 Brokers. Except as set forth on Schedule 4.8, no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
Commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Company.
4.9 SEC Documents. The Company acknowledges that Adsouth is a publicly -held
company and has made available to the Investor true and complete copies of any
requested SEC Documents. The Company has registered its Common Stock pursuant to
Section 12(g) of the 1934 Act, and the Common Stock is quoted and traded on the
OTC Bulletin Board. The Company has received no notice, either oral or written,
with respect to the continued quotation or trading of the Common Stock on the
OTC Bulletin Board. The Company has not provided to the Investor any information
that, according to applicable law, rule or regulation, should have been
disclosed publicly prior to the date hereof by the Company, but which has not
been so disclosed. As of their respective dates, the SEC Documents complied in
all material respects with the requirements of the 1934 Act, and rules and
regulations of the SEC promulgated thereunder and the SEC Documents did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
11
4.10 Litigation. To the knowledge of the Company, except as disclosed in the
SEC Documents, no litigation, claim, or other proceeding before any court or
governmental agency is pending or to the knowledge of the Company, threatened
against the Company, the prosecution or outcome of which may have a Material
Adverse Effect.
4.11 Exemption from Registration. Subject to the accuracy of the Investor's
representations in Article V, except as required pursuant to the Registration
Rights Agreement, the sale of the Common Stock and Warrants by the Company to
the Investor will not require registration under the 1933 Act. When validly
converted in accordance with the terms of the Series B Preferred Stock, and upon
exercise of the Warrants in accordance with their terms, the Shares underlying
the Preferred Stock and the Warrants will be duly and validly issued, fully
paid, and non-assessable. The Company is issuing the Preferred Stock and the
Warrants in accordance with and in reliance upon the exemption from securities
registration afforded, inter alia, by Rule 506 under Regulation D as promulgated
by the SEC under the 1933 Act, and/or Section 4(2) and/or 4(6) of the 1933 Act;
provided, however, that certain filings and registrations may be required under
state securities "blue sky" laws depending upon the residency of the Investor.
4.12 No General Solicitation or Advertising in Regard to this Transaction.
Neither the Company nor any of its Affiliates nor, to the knowledge of the
Company, any Person acting on its or their behalf (i) has conducted or will
conduct any general solicitation (as that term is used in Rule 502(c) of
Regulation D as promulgated by the SEC under the 0000 Xxx) or general
advertising with respect to the sale of the Preferred Stock or Warrants, or (ii)
made any offers or sales of any security or solicited any offers to buy any
security under any circumstances that would require registration of the Series B
Preferred Stock or Warrants, under the 1933 Act, except as required herein.
4.13 No Material Adverse Effect. Except as set forth in Schedule 4.13
attached hereto, since March 31, 2005, no event or circumstance resulting in a
Material Adverse Effect has occurred or exists with respect to the Company. No
material supplier has given notice, oral or written, that it intends to cease or
reduce the volume of its business with the Company from historical levels. Since
March 31, 2005, no event or circumstance has occurred or exists with respect to
the Company or its businesses, properties, prospects, operations or financial
condition, that, under any applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which has
not been so publicly announced or disclosed in writing to the Investor.
4.14 Material Non-Public Information. The Company has not disclosed to the
Purchaser any material non-public information that (i) if disclosed, would
reasonably be expected to have a material effect on the price of the Common
Stock or (ii) according to applicable law, rule or regulation, should have been
disclosed publicly by the Company prior to the date hereof but which has not
been so disclosed.
4.15 Internal Controls And Procedures. The Company maintains books and
records and internal accounting controls which provide reasonable assurance that
(i) all transactions to which the Company or any subsidiary is a party or by
which its properties are bound are executed with management's authorization;
(ii) the recorded accounting of the Company's consolidated assets is compared
with existing assets at regular intervals; (iii) access to the Company's
consolidated assets is permitted only in accordance with management's
authorization; and (iv) all transactions to which the Company or any subsidiary
is a party or by which its
12
properties are bound are recorded as necessary to permit preparation of the
financial statements of the Company in accordance with U.S. generally accepted
accounting principles.
4.16 Full Disclosure. The representations and warranties made by Adsouth in
this Agreement and the certificates and documents furnished or to be furnished
to the Purchasers pursuant to this Agreement, taken together with any other
written information provided to the Purchasers in connection with this
Agreement, do not contain and will not contain any untrue statement of a
material fact, or omit or will omit to state a material fact necessary to make
the statements contained herein or therein not misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser, severally, represents and warrants to the Company, with respect
to itself, that:
5.1 Organization and Standing of the Purchaser. The Investor is a limited
partnership duly formed, validly existing and in good standing under the laws of
the State of Delaware. Xxxxxx is a general partnership. The state in which any
offer to purchase securities hereunder was made or accepted by such Purchaser is
the state shown as such Purchaser's address. The Purchaser was not formed for
the purpose of investing solely in the Series B Preferred Stock, the Warrants or
the shares of Common Stock which are the subject of this Agreement.
5.2 Authorization and Power. Such Purchaser has the requisite power and
authority to enter into and perform this Agreement and to purchase the
securities being sold to it hereunder. The execution, delivery and performance
of this Agreement by the Purchaser and the consummation by the Purchaser of the
transactions contemplated hereby have been duly authorized by all necessary
partnership action where appropriate. This Agreement and the Registration Rights
Agreement have been duly executed and delivered by the Purchaser and at the
Closing shall constitute valid and binding obligations of the Purchaser
enforceable against the Purchaser in accordance with their terms.
5.3 No Conflicts. The execution, delivery and performance of this Agreement
and the consummation by the Purchaser of the transactions contemplated hereby or
relating hereto do not and will not (i) result in a violation of such
Purchaser's partnership agreement or other governing instruments where
appropriate or (ii) conflict with, or constitute a default (or an event which
with notice or lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation of any
agreement, indenture or instrument to which the Purchaser is a party, or result
in a violation of any law, rule, or regulation, or any order, judgment or decree
of any court or governmental agency applicable to the Purchaser or its
properties (except for such conflicts, defaults and violations as would not,
individually or in the aggregate, have a Material Adverse Effect on such
Purchaser). The Purchaser is not required to obtain any consent, authorization
or order of, or make any filing or registration with, any court or governmental
agency in order for it to execute, deliver or perform any of such Purchaser's
obligations under this Agreement or to purchase the securities from the Company
in accordance with the terms hereof, provided that for purposes of the
representation made in this sentence, the Purchaser is assuming and relying upon
the accuracy of the relevant representations and agreements of the Company
herein.
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5.4 Financial Risks. The Purchaser acknowledges that such Purchaser is able
to bear the financial risks associated with an investment in the securities
being purchased by the Purchaser from the Company and that it has been given
full access to such records of the Company and the subsidiaries and to the
officers of the Company and the subsidiaries as it has deemed necessary or
appropriate to conduct its due diligence investigation. The Purchaser is capable
of evaluating the risks and merits of an investment in the securities being
purchased by the Purchaser from the Company by virtue of its experience as an
investor and its knowledge, experience, and sophistication in financial and
business matters and the Purchaser is capable of bearing the entire loss of its
investment in the securities being purchased by the Purchaser from the Company.
5.5 Accredited Investor. The Purchaser is (i) an "accredited investor" as
that term is defined in Rule 501 of Regulation D promulgated under the 1933 Act
by reason of Rule 501(a)(3) and (6), (ii) experienced in making investments of
the kind described in this Agreement and the related documents, (iii) able, by
reason of the business and financial experience of its officers (if an entity)
and professional advisors (who are not affiliated with or compensated in any way
by the Company or any of its affiliates or selling agents), to protect its own
interests in connection with the transactions described in this Agreement, and
the related documents, and (iv) able to afford the entire loss of its investment
in the securities being purchased by the Purchaser from the Company. The
Purchaser is acquiring the shares of Series B Preferred Stock and Warrants for
investment and not with a view to the sale or distribution thereof and
understands that such shares and Warrants are restricted securities, as defined
in the 1933 Act, and may not be sold or otherwise distributed except pursuant to
an effective registration statement or an exemption from the registration
requirements of the 1933 Act and that the certificates for such shares and
Warrants will bear an investment legend.
5.6 Brokers. Except as set forth in Schedule 4.8, no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
Commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Purchaser.
5.7 Knowledge of Company. The Purchaser and such Purchaser's advisors, if
any, have been, upon request, furnished with all materials relating to the
business, finances and operations of the Company and materials relating to the
offer and sale of the securities being purchased by the Purchaser from the
Company. The Purchaser and such Purchaser's advisors, if any, have been afforded
the opportunity to ask questions of the Company and have received complete and
satisfactory answers to any such inquiries.
5.8 Risk Factors. The Purchaser understands that such Purchaser's investment
in the securities being purchased by the Purchaser from the Company involves a
high degree of risk. The Purchaser understands that no United States federal or
state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the securities being purchased by the
Purchaser from the Company. The Purchaser warrants that such Purchaser is able
to bear the complete loss of such Purchaser's investment in the securities being
purchased by the Purchaser from the Company. In acquiring the shares of Series B
Preferred Stock and Warrants, the Purchaser is not relying upon any projections
of the future financial condition, results of operations or cash flows relating
to the Company,
5.9 Full Disclosure. The representations and warranties made by the
Purchaser in this Agreement and the certificates and document furnished pursuant
to this Agreement do not contain and will not contain any untrue statement of a
material fact, or omit or will omit to state a material fact necessary to make
the statements contained herein or therein not misleading. Except as set forth
or referred to in this Agreement, Purchaser does not have any agreement or
understanding with any person relating to acquiring, holding, voting or
disposing of any equity securities of the Company.
14
5.10 Payment of Due Diligence Expenses. The Company shall pay Investor
$50,000 for due diligence expenses.
5.11 Exchange Securities. Schedule 5.11 sets forth a list of the Exchange
Securities owned by each of Xxxxxx and Xxxxxxxx. Xxxxxx and Xxxxxxxx each
represents as to its or his Exchange Securities that it or he has the marketable
title to such Exchange Securities free and clear of any lien, security interest,
pledge, encumbrance, marital right, right of first refusal, option or any other
encumbrance of any kind and description.
ARTICLE VI
COVENANTS OF THE COMPANY
6.1. Registration Rights. The Company shall cause the Registration Rights
Agreement to remain in full force and effect according to the provisions of the
Registration Rights Agreement and the Company shall comply in all material
respects with the terms thereof.
6.2. Reservation Of Common Stock. As of the date hereof, the Company has
reserved such number of shares of Common Stock as are issuable upon conversion
of the Series B Preferred Stock and for issuance upon exercise of the Warrants
based on the current conversion and exercise price. The Purchasers recognize
that, as of the date of this Agreement, the Company does not have a sufficient
number of authorized shares of Common Stock to permit the issuance of additional
shares of Common Stock or Series B Preferred Stock as may be issuable pursuant
to this Agreement or pursuant to adjustments in the conversion price of the
Series B Preferred Stock. The Company's board of directors has approved, and the
holder of more than 51% of the outstanding Common Stock has consented to and
agreed to formally vote in favor of, an increase in the authorized capital stock
as provided in Section 6.20 of this Agreement in order to provide for the
potential issuance of such additional shares of Series B Preferred Stock and
Common Stock. Upon stockholder approval of the amendment and the filing of a
certificate of amendment with the Secretary of State of Nevada, the Company
shall reserve and keep available at all times, free of preemptive rights, shares
of Series B Preferred Stock and shares of Common Stock for the purpose of
enabling the Company to issue the maximum possible shares of Series B Preferred
Stock issuance pursuant to this Agreement and shares of Common Stock issuable
upon conversion of the Series B Preferred Stock and Warrants.
6.3. Compliance with Laws. The Company hereby agrees to comply in all
material respects with the Company's reporting, filing and other obligations
under federal securities laws.
6.4. Exchange Act Registration. The Company (a) will use its commercially
reasonable best efforts to comply in all material respects with its reporting
and filing obligations under the 1934 Act, and will not take any action or file
any document (whether or not permitted by the 1934 Act or the rules thereunder)
to terminate or suspend any registration under the 1934 Act or to terminate or
suspend its reporting and filing obligations under the 1934 until the Purchasers
have disposed of all of their Shares.
6.5. Corporate Existence; Conflicting Agreements. The Company will take all
steps necessary to preserve and continue the corporate existence of the Company.
The Company shall not enter into any agreement, the
15
terms of which agreement would restrict or impair the right or ability of the
Company to perform any of its obligations under this Agreement or any of the
other agreements attached as exhibits hereto.
6.6 Preferred Stock. Until the earlier of (a) three years from the Closing
or (b) such date as not less than eighty five percent (85%) of the Series B
Preferred Stock shall have been converted and the shares of Common Stock issued
on such conversion have been sold, the Company will not issue any Preferred
Stock of the Company. 6.7 Convertible Debt. On or prior to the Closing Date, the
Company will pay all convertible debt in the Company then outstanding. Until the
earlier of (a) three years from the Closing or (b) such date as not less than
eighty five percent (85%) of the Series B Preferred Stock shall have been
converted, the Company will not issue any convertible debt.
6.8 Reset Equity Deals. On or prior to the Closing Date, the Company will
cause to be cancelled any and all reset features related to any shares
outstanding that could result in additional shares being issued. The Company
will not enter into any transactions that have any reset features that could
result in additional shares being issued. For purposes of this Section 6.8, a
reset provision for a convertible security shall mean a provision whereby the
issuance of securities at a lower price or having a lower conversion or exercise
price will result in the conversion or exercise price of the security being
reduced to the lower price or lower conversion or exercise price or more shares
being issued, as the case may be. The Company may not enter into any
transactions pursuant to which it issues convertible securities that have a
conversion or exercise price that is based on the market price at the time of
conversion or exercise.
6.9 Independent Directors. Within forty five (45) days from the Closing Date
the Company shall have caused the appointment of such number of independent
directors as will result in the independent directors constituting a majority of
the board of directors and shall remain so until the Purchasers no longer own
any of their Series B Preferred Stock. An independent director shall mean an
individual who is not employed by the Company and who does not beneficially own
ten percent (10%) of the Company's common stock and who is not an Affiliate of a
Person who beneficially owns more than ten percent (10%) of the Company's
outstanding Common Stock as well as any other individual who is an independent
director under the regulations of the principal stock exchange or market on
which the Common Stock is traded, provided, however, that if the Common Stock is
not traded on a stock exchange or market that has a standard for independence,
the independence of a director shall be determined under the regulations of the
Nasdaq Stock Market deems to be independent. In the event that the Company fails
to meet the requirements of this Section 6.9 as a result of the death,
retirement, disability or resignation of an independent director, the Company
shall have sixty (60) days to elect a replacement director. The Company shall
pay to the Purchasers, pro rata, as liquidated damages and not as a penalty, an
amount equal to twenty percent (20%) of the Purchase Price per annum, payable
monthly for the period of 45 days to 60 days after the closing and thirty
percent (30%) for the period of greater than 60 days post closing until
rectified. All damages are payable in shares of Series B Preferred Stock. The
parties agree that the only damages payable for a violation of the terms of this
Agreement with respect to which liquidated damages are expressly provided shall
be such liquidated damages. Nothing shall preclude the Purchasers from pursuing
or obtaining specific performance or other equitable relief with respect to this
Agreement. The parties hereto agree that the liquidated damages provided for in
this Section 6.9 constitute a reasonable estimate of the damages that may be
incurred by the Purchasers by reason of the failure of the Company to appoint at
least two independent directors in accordance with the provision hereof.
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6.10 Independent Directors Become Audit Committee and Majority of
Compensation Committees. The Company will cause the audit committee to be
composed solely of independent directors and the compensation committees to be
composed by a majority of independent directors within 45 days post Closing. If
at any time after the 45 days post Closing the audit committee is not compose
solely of independent directors and the compensation committee is not composed
by a majority of independent directors, the Company shall pay in shares of
Series B Preferred Stock to the Purchasers, pro rata, as liquidated damages and
not as a penalty, an amount equal to ten percent (10%) of the Purchase Price per
annum, payable monthly. The parties agree that the only damages payable for a
violation of the terms of this Agreement with respect to which liquidated
damages are expressly provided shall be such liquidated damages. Nothing shall
preclude the Purchasers from pursuing other remedies or obtaining specific
performance or other equitable relief with respect to this Agreement. The
parties hereto agree that the liquidated damages provided for in this Section
6.10 constitute a reasonable estimate of the damages that may be incurred by the
Purchasers by reason of the failure of the Company to appoint at least two
independent directors in accordance with the provision hereof. At such time as a
majority of the Company's directors are independent directors, the Company will
cause the composition of the audit committee to be solely independent directors
and the composition of the compensation committee to be a majority of
independent directors.
6.11 Use of Proceeds. The Company will use the net proceeds from the sale of
the Preferred Stock and the Warrants (excluding amounts paid by the Company for
legal and administrative fees in connection with the sale of such securities)
for the payment of debt, including convertible debt, acquisition of a warehouse
facility and equipment, purchase of inventory, purchase of advertising and print
placement and working capital and other corporate purposes and acquisitions.
6.12 Right of First Refusal. Until the earlier of (a) three years from the
Closing or (b) such date as not less than ninety percent (90%) of the Series B
Preferred Stock purchased by a Purchaser shall have been converted, such
Purchaser shall have the right to participate in any subsequent funding by the
Company, other than an Exempt Issuance, on a pro rata basis at eighty percent
(80%) of the offering price. The pro rata basis for any Purchaser shall be that
percentage which the number of shares of Series B Preferred Stock owned by such
Purchaser bears to the total number of shares of Series B Preferred Stock
initially issued by the Company.
6.13 Price Adjustment. The Certificate of Designation shall include the
following provision: If, within the 24 months following the Closing Date, the
Company closes on the sale of a note or notes, shares of Common Stock, or shares
of any class of Preferred Stock at a price per share of Common Stock, or with a
conversion right to acquire Common Stock at a price per share of Common Stock
(other than (x) an Exempt Issuance or (y) an issuance covered by Section 7(a) or
7(c) hereof or (z) an issuance of Common Stock upon exercise or upon conversion
of warrants, options or other convertible securities for which an adjustment has
already been made pursuant to this Section 7(b)), that is less than the
Conversion Price in effect at the time of such sale (such lower price being
referred to as the "Lower Price"), the conversion rate shall be adjusted as
follows. The "Conversion Price" shall mean the price paid for one share of
Series B Preferred Stock divided by the number of shares of Common Stock
issuable upon conversion of one share of Series B Preferred Stock. The
"Conversion Rate" is the number of shares of Common Stock issuable upon
conversion of one (1) share of Series B Preferred Stock. The initial Conversion
Rate is nine (9) shares of Common Stock per share of Series B Preferred Stock
and the initial Conversion Price is $.30. The Conversion Rate shall be adjusted
by multiplying the Conversion Rate in effect immediately prior to such issuance
by a fraction, the numerator of which shall be the number of shares of Common
Stock outstanding immediately after the issuance of such additional shares
(including the exercise or conversion of all options, warrants and other
convertible securities) and the denominator of which shall be the sum of the
number of shares of Common Stock outstanding immediately prior to the issuance
of such additional shares and the number of shares of Common Stock which the
aggregate
17
consideration received or receivable for the issuance of such additional shares
at the Lower Price would purchase at the Conversion Price then in effect. Such
adjustment shall be made successively whenever such an issuance is made.
6.14 Price Adjustment Based on Earnings Per Share. In the event the Company
earns between $0.167 and $0.1086 (35% Decline) per share (where such earnings in
this paragraph shall always be defined as earnings on a pre tax fully diluted
basis as reported for the fiscal year ended December 31, 2005 from continuing
operations before any non recurring items (For the purpose of this calculation
the amortization expense included from the buyout of the February 17 and 22,
2005 convertible debt and the exchange of the debt issued in connection with the
May 2005 convertible debt for the Series B Preferred Stock and Warrants pursuant
to this Agreement shall be included as non-recurring items.)) the number of
preferred shares outstanding to the Purchasers shall be increased
proportionately by 0% if the earnings are $0.1671 per share and by 35% if the
earnings are $0.1086 per share or less (35% increase in number of Series B
Preferred Shares). For purposes of determining fully-diluted earnings per share,
convertible notes, shares of Common Stock and warrants that were issued by the
Company to Xxxxxx and Xxxxxxxx and are being exchanged for Series B Preferred
Stock and Warrants shall not be included in the calculation post Closing.
6.15 Insider Selling. The earliest any "Insiders" can start selling their
shares shall be two years from Closing. Insiders shall include all persons who
are officers or directors of the Company on the Closing Date. Xxxxxx Xxxxxx
Xxxxxx, the Purchasers, and Xxxx Xxxxxx Xx. shall not be considered "Insiders".
Xxxx Xxxxxx Xx. will be limited to selling his shares based on the 144a clause
of 1% of the total outstanding shares of the company per quarter. Xxxx Xxxxxx
Jr's restricted shares and options are included under the definition of an
insider above.
6.16 Employment and Consulting Contracts. Employment and consulting contracts
with officers and directors shall at time of Closing and for two years
thereafter shall not contain: any bonuses not related directly to increases in
earnings; any car allowances not approved by the unanimous vote of the board of
directors; any anti-dilution or reverse split protection provisions for shares,
options or warrants; any deferred compensation; any unreasonable compensation or
benefit clauses; or any termination clauses of over one year of salary.
6.17 Sale or Merger of Company. In the event of a sale of substantially all
of the assets of the Company or a merger or consolidation of the Company in a
transaction in which the Company is not the surviving entity, then, subject to
and in accordance with the terms of the Preferred Stock and Warrants, the
applicable percentage restriction in the Preferred Stock and in the Warrants
will immediately be terminated and the Investors will have the right to convert
the Preferred Stock and exercise the Warrants concurrent with the sale, subject
to the conversion by the Investor of the Preferred Stock and the payment by the
Investor to the Company of the aggregate exercise price of the Warrant.
6.18 Debt Limitation. The Company agrees that, from January 1, 2006 until the
earlier of (a) three years from the Closing starting December 31, 2005 or (b)
such date as not less than eighty five percent (85%) of the Series B Preferred
Stock shall have been converted, the Company will not to enter into any new
borrowings of more than three times as much as the sum of the EBITDA from
recurring operations over the past four quarters for the first year and twice as
much as the sum of the EBITDA from recurring operations over the past four
quarters for the first second and third year.
6.19 Subsequent Equity Sales. From the date hereof until such time as no
Purchaser holds any of the
18
Securities, the Company shall be prohibited from effecting or entering into an
agreement to effect any Subsequent Financing involving a "Variable Rate
Transaction" or an "MFN Transaction" (each as defined below). The term "Variable
Rate Transaction" shall mean a transaction in which the Company issues or sells
(i) any debt or equity securities that are convertible into, exchangeable or
exercisable for, or include the right to receive additional shares of Common
Stock either (A) at a conversion, exercise or exchange rate or other price that
is based upon and/or varies with the trading prices of or quotations for the
shares of Common Stock at any time after the initial issuance of such debt or
equity securities, or (B) with a conversion, exercise or exchange price that is
subject to being reset at some future date after the initial issuance of such
debt or equity security or upon the occurrence of specified or contingent events
directly or indirectly related to the business of the Company or the market for
the Common Stock. The term "MFN Transaction" shall mean a transaction in which
the Company issues or sells any securities in a capital raising transaction or
series of related transactions which grants to an investor the right to receive
additional shares based upon future transactions of the Company on terms more
favorable than those granted to such investor in such offering. Any Purchaser
shall be entitled to obtain injunctive relief against the Company to preclude
any such issuance, which remedy shall be in addition to any right to collect
damages. Notwithstanding the foregoing, this Section 6.19 shall not apply in
respect of an Exempt Issuance, except that no Variable Rate Transaction or MFN
Transaction shall be an Exempt Issuance.
6.20 Amendment to Articles of Incorporation. The Company's board of directors
has approved, subject to stockholder approval, an amendment to its Articles that
(i) eliminates the Series A Convertible Preferred Stock and gives the board of
directors the right to determine the rights, preferences, privileges and
limitations of the 3,500,000 shares of preferred stock presently designated as
Series A Convertible Preferred Stock and (ii) increases the number of authorized
shares of preferred stock to 10,000,000 shares and increases the number of
authorized shares of Common Stock to 60,000,000 shares. The Company will submit
such amendment to its stockholders as soon as practical after the Closing Date.
The board of directors has approved, subject to (x) the approval by the
Company's stockholders of the amendment to the Articles referred to in the
preceding sentence and (y) the approval of the holders of a majority of the
shares of Series B Preferred Stock, an amendment to the Certificate of
Designation which increases the number of authorized shares of Series B
Preferred Stock to 3,000,000 shares. Each Purchaser agrees to consent to the
foregoing increase in the number of authorized shares of Series B Preferred
Stock.
6.21 Limitation on Liquidated Damages. Notwithstanding any contrary
provisions of this Agreement, in no event shall the number of shares of Series B
Preferred Stock issuable as liquidated damages pursuant to Sections 6.9 or 6.10
of this Agreement or the Registration Rights Agreement exceed fifty percent
(50%) of the number of shares of Series B Preferred Stock issued pursuant to
this Agreement; provided, however, that in lieu is issuing shares of Series B
Preferred Stock, the Company may issue shares of a new series of preferred
stock, the terms of which are identical to the Series B Preferred Stock and
which are pari passu with the Series B Preferred Stock as to voting, dividends
and upon voluntary or involuntary liquidation, dissolution or winding up.
ARTICLE VII
COVENANTS OF THE PURCHASERS
19
7.1 Compliance with Law. Each Purchaser's trading activities with respect to
shares of the Company's Common Stock will be in compliance with all applicable
state and federal securities laws, rules and regulations and rules and
regulations of any public market on which the Company's Common Stock is listed
or traded.
7.2 Transfer Restrictions. Each Purchaser acknowledges that (1) the
Preferred Stock, Warrants and shares underlying the Preferred Stock and Warrants
have not been registered under the provisions of the 1933 Act, and may not be
transferred unless (A) subsequently registered thereunder or (B) the Purchaser
shall have delivered to the Company an opinion of counsel, reasonably
satisfactory in form, scope and substance to the Company, to the effect that the
Preferred Stock, Warrants and shares underlying the Notes and Warrants to be
sold or transferred may be sold or transferred pursuant to an exemption from
such registration; and (2) any sale of the Preferred Stock, Warrants and shares
underlying the Preferred Stock and Warrants made in reliance on Rule 144
promulgated under the 1933 Act may be made only in accordance with the terms of
said Rule and further, if said Rule is not applicable, any resale of such
securities under circumstances in which the seller, or the person through whom
the sale is made, may be deemed to be an underwriter, as that term is used in
the 1933 Act, shall require compliance with some other exemption under the 1933
Act or the rules and regulations of the SEC thereunder.
7.3 Restrictive Legend. Each Purchaser acknowledges and agrees that the
Preferred Stock, the Warrants and the Shares underlying the Preferred Stock and
Warrants, and, until such time as the Shares underlying the Preferred Stock and
Warrants have been registered under the 1933 Act and sold in accordance with an
effective Registration Statement, certificates and other instruments
representing any of the Shares, shall bear a restrictive legend in substantially
the following form (and a stop-transfer order may be placed against transfer of
any such securities):
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SHARES
NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR
OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT
THERETO IS EFFECTIVE UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAWS, OR (2) PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER THE SECURITIES ACT."
7.4 Release of Security Interest. Xxxxxx, as Agent pursuant to the Security
Agreement shall take, and Xxxxxx and Xxxxxxxx, in their capacities as lenders
instruct Xxxxxx, as Agent, to take, such steps as are necessary to evidence the
release of the security interest in the Company's assets held by them pursuant
to the Security Agreement.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS
The obligation of the Company to consummate the transactions
contemplated hereby shall be subject to the fulfillment, on or prior to Closing
Date, of the following conditions:
8.1 No Termination. This Agreement shall not have been terminated pursuant
to Article X hereof.
20
8.2 Representations True and Correct. The representations and warranties of
the Purchasers contained in this Agreement shall be true and correct in all
material respects on and as of the Closing Date with the same force and effect
as if made on as of the Closing Date.
8.3 Compliance with Covenants. The Investor shall have performed and
complied in all material respects with all covenants, agreements, and conditions
required by this Agreement to be performed or complied by it prior to or at the
Closing Date.
8.4 No Adverse Proceedings. On the Closing Date, no action or proceeding
shall be pending by any public authority or individual or entity before any
court or administrative body to restrain, enjoin, or otherwise prevent the
consummation of this Agreement or the transactions contemplated hereby or to
recover any damages or obtain other relief as a result of the transactions
proposed hereby.
ARTICLE IX
CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS
The obligation of each Purchaser to consummate the transactions
contemplated hereby shall be subject to the fulfillment, on or prior to Closing
Date unless specified otherwise, of the following conditions:
9.1 No Termination. This Agreement shall not have been terminated pursuant
to Article X hereof.
9.2 Representations True and Correct. The representations and warranties of
the Company contained in this Agreement shall be true and correct in all
material respects on and as of the Closing Date with the same force and effect
as if made on as of the Closing Date.
9.3 Compliance with Covenants. Adsouth shall have performed and complied in
all material respects with all covenants, agreements, and conditions required by
this Agreement to be performed or complied by it prior to or at the Closing
Date.
9.4 No Adverse Proceedings. On the Closing Date, no action or proceeding
shall be pending by any public authority or individual or entity before any
court or administrative body to restrain, enjoin, or otherwise prevent the
consummation of this Agreement or the transactions contemplated hereby or to
recover any damages or obtain other relief as a result of the transactions
proposed hereby.
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
10.1 Termination. This Agreement may be terminated at any time prior to the
Closing Date:
10.1.1 by mutual written consent of the Investor and the Company;
21
10.1.2 by the Company upon a material breach of any representation,
warranty, covenant or agreement on the part of the Investor set forth in this
Agreement, or the Investor upon a material breach of any representation,
warranty, covenant or agreement on the part of the Company set forth in this
Agreement, or if the representations and warranties of Adsouth or the
Purchasers, respectively, taken as a whole, shall have become untrue in any
material respect, in either case such that any of the conditions set forth in
Article VIII or Article IX hereof would not be satisfied (a "Terminating
Breach"), and such breach shall, if capable of cure, not have been cured within
five (5) business days after receipt by the party in breach of a notice from the
non-breaching party setting forth in detail the nature of such breach, it being
understood that the right of termination on behalf of the Purchasers may only be
made by the Investor.
10.2 Effect of Termination. Except as otherwise provided herein, in the event
of the termination of this Agreement pursuant to Section 10.1 hereof, there
shall be no liability on the part of the Company or any Purchaser or any of
their respective officers, directors, agents or other representatives and all
rights and obligations of any party hereto shall cease; provided that in the
event of a Terminating Breach, the breaching party shall be liable to the
non-breaching party for all costs and expenses incurred by the non-breaching
party not to exceed $50,000.
10.3 Amendment. This Agreement may be amended by the parties hereto any time
prior to the Closing Date by an instrument in writing signed by the parties
hereto; provided, however, that the provisions of Sections 2.1(b) and 2.1(d) may
not be amended without the approval of the holders of a majority of the shares
of Common Stock then outstanding.
10.4 Waiver. At any time prior to the Closing Date, the Company or the
Investor (on behalf of the Purchasers), as appropriate, may: (a) extend the time
for the performance of any of the obligations or other acts of other party or;
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto which have been made to it
or them; or (c) waive compliance with any of the agreements or conditions
contained herein for its or their benefit. Any such extension or waiver shall be
valid only if set forth in an instrument in writing signed by the party or
parties to be bound hereby.
ARTICLE XI
GENERAL PROVISIONS
11.1 Transaction Costs. Except as otherwise provided herein, each of the
parties shall pay all of his or its costs and expenses (including attorney fees
and other legal costs and expenses and accountants' fees and other accounting
costs and expenses) incurred by that party in connection with this Agreement;
provided, the Company shall pay Investor such due diligence expenses as
described in section 5.10.
11.2 Indemnification. The Purchasers agrees to indemnify, defend and hold the
Company (following the Closing Date) and its officers and directors harmless
against and in respect of any and all claims, demands, losses, costs, expenses,
obligations, liabilities or damages, including interest, penalties and
reasonable attorney's fees, that it shall incur or suffer, which arise out of or
result from any breach of this Agreement by such Purchaser or failure by such
Purchaser to perform with respect to any of its representations, warranties or
covenants contained in this Agreement or in any exhibit or other instrument
furnished or to be furnished under this Agreement. The Company agrees to
indemnify, defend and hold the Purchasers harmless against and in
22
respect of any and all claims, demands, losses, costs, expenses, obligations,
liabilities or damages, including interest, penalties and reasonable attorney's
fees, that it shall incur or suffer, which arise out of, result from or relate
to any breach of this Agreement or failure by the Company to perform with
respect to any of its representations, warranties or covenants contained in this
Agreement or in any exhibit or other instrument furnished or to be furnished
under this Agreement. In no event shall the Company or the Purchasers be
entitled to recover consequential or punitive damages resulting from a breach or
violation of this Agreement nor shall any party have any liability hereunder in
the event of gross negligence or willful misconduct of the indemnified party. In
the event of the failure of the Company to issue the Series B Preferred Stock
and Warrants in violation of the provisions of this Agreement, the Purchasers,
as their sole remedy, shall be entitled to pursue a remedy of specific
performance upon tender into the Court an amount equal to the Purchase Price
hereunder. The indemnification by the Company and the Investors (other than the
Company's obligations to issue the Series B Preferred Stock and Warrants) shall
be limited to $50,000. This Section 11.2 shall not relate to indemnification
under the Registration Rights Agreement.
11.3 Headings. The table of contents and headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
11.4 Entire Agreement. This Agreement (together with the Schedule, Exhibits,
Warrants and documents referred to herein) constitute the entire agreement of
the parties and supersede all prior agreements and undertakings, both written
and oral, between the parties, or any of them, with respect to the subject
matter hereof.
11.5 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been given (i) on the date they are
delivered if delivered in person; (ii) on the date initially received if
delivered by facsimile transmission followed by registered or certified mail
confirmation; (iii) on the date delivered by an overnight courier service; or
(iv) on the date of delivery as shown on the return receipt, after it is mailed
by registered or certified mail, return receipt requested with postage and other
fees prepaid as follows:
If to Adsouth:
-------------
Adsouth Partners Inc
0000 Xxxxx Xxxxxxx Xxxxxxx; Xxxxx 000
Xxxx Xxxxx, Xxxxxxx 00000
Attention: Xxxxx Xxx Xxxxxxxx, CFO
With a copy to:
--------------
Xxxxx X. Xxxxxxxx, P.C.
Esanu Katsky Xxxxxx & Siger, LLP
000 Xxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Facsimile No.: 000 000-0000
If to the Investor:
------------------
Xxxxxx Partners L.P.
c/o Barron Capital Advisors, LLC
23
000 Xxxxx Xxxxxx, 0xx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attn: Xxxxxx Xxxxxx Xxxxxx
If to Vestal:
------------
0000 Xxxxxxx Xxx
Xxxx Xxxxx, XX 00000
Attention: Xx. Xxxxx X. Xxxxx
Fax No.: (000) 000-0000
If to Xxxxxxxx:
--------------
00 Xxxxxx Xxxxxxx Xxxx
Xxxxxx, XX 00000
11.6 Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any such term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that the transactions contemplated hereby are fulfilled to the extent
possible.
11.7 Binding Effect. All the terms and provisions of this Agreement whether
so expressed or not, shall be binding upon, inure to the benefit of, and be
enforceable by the parties and their respective administrators, executors, legal
representatives, heirs, successors and assignees.
11.8 Preparation of Agreement. This Agreement shall not be construed more
strongly against any party regardless of who is responsible for its preparation.
The parties acknowledge each contributed and is equally responsible for its
preparation.
11.9 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York, without giving effect to
applicable principles of conflicts of law.
11.10 Jurisdiction. If any action is brought among the parties with respect to
this Agreement or otherwise, by way of a claim or counterclaim, the parties
agree that in any such action, and on all issues, the parties irrevocably waive,
to the maximum extent permitted by law, their right to a trial by jury.
Exclusive jurisdiction and venue for any such action shall be the Federal and
State Courts serving the City and State of New York. In the event suit or action
is brought by any party under this Agreement to enforce any of its terms, or in
any appeal there from, it is agreed that the prevailing party shall be entitled
to reasonable attorneys fees to be fixed by the court.
24
11.11 Preparation and Filing of Securities and Exchange Commission filings.
The Purchasers shall reasonably assist and cooperate with the Company in the
preparation of all filings with the SEC after the Closing Date due after the
Closing Date.
11.12 Further Assurances, Cooperation. Each party shall, upon reasonable
request by the other party, execute and deliver any additional documents
necessary or desirable to complete the transactions herein pursuant to and in
the manner contemplated by this Agreement. The parties hereto agree to cooperate
and use their respective best efforts to consummate the transactions
contemplated by this Agreement.
11.13 Survival. The representations, warranties, covenants and agreements made
herein shall survive the Closing of the transaction contemplated hereby.
11.14 Third Parties. Except as disclosed in this Agreement, nothing in this
Agreement, whether express or implied, is intended to confer any rights or
remedies under or by reason of this Agreement on any persons other than the
parties hereto and their respective administrators, executors, legal
representatives, heirs, successors and assignees. Nothing in this Agreement is
intended to relieve or discharge the obligation or liability of any third
persons to any party to this Agreement, nor shall any provision give any third
persons any right of subrogation or action over or against any party to this
Agreement.
11.15 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or
delay on the part of any party hereto in the exercise of any right hereunder
shall impair such right or be construed to be a waiver of, or acquiescence in,
any breach of any representation, warranty, covenant or agreement herein, nor
shall nay single or partial exercise of any such right preclude other or further
exercise thereof or of any other right. All rights and remedies existing under
this Agreement are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
11.16 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original, but all of which taken
together shall constitute one and the same agreement. A facsimile transmission
of this signed Agreement shall be legal and binding on the party who executed
and delivered this Agreement by facsimile transmission.
IN WITNESS WHEREOF, the Purchasers and the Company have as of the date
first written above executed this Agreement.
THE COMPANY:
ADSOUTH PARTNERS INC.
_________________________
By: _____________________
Xxxxx Xxx Xxxxxxxx, CFO
INVESTOR:
XXXXXX PARTNERS LP
25
______________________________
Xxxxxx Xxxxxx Xxxxxx
President, General Partner of
Xxxxxx Partners LP
000 Xxxxx Xxxxxx, 0xx Xxxxx
Xxx Xxxx XX 00000
XXXXXX VENTURE CAPITAL
_____________________________
Name: Xx. Xxxxx X. Xxxxx
_____________________
Xxxxxxx Xxxxxxxx
26
Schedule A
----------
NUMBER OF SHARES OF COMMON
STOCK INTO WHICH PREFERRED
STOCK IS CONVERTIBLE
AMOUNT OF --------------------
NAME AND ADDRESS INVESTMENT
---------------- ----------
Xxxxxx Partners LP
000 Xxxxx Xxxxxx, 0xx Xxxxx
Xxx Xxxx, Xxx Xxxx 00000 $2,500,000.00 8,333,334
Attn: Xxxxxx Xxxxxx Xxxxxx
Xxxxxx Venture Capital
0000 Xxxxxxx Xxx $761,244.00 2,537,480
Xxxx Xxxxx, XX 00000
Attention: Xx. Xxxxx X.
Xxxxx
Fax No.: (000) 000-0000
Xxxxxxx Xxxxxxxx
00 Xxxxxx Xxxxxxx Xxxx $50,460.00 168,200
Xxxxxx, XX 00000
27
Schedule 4.13 - Events or Circumstance Resulting in a Material Adverse Effect
-----------------------------------------------------------------------------
None
28
Schedule 4.3 - Authorized and Outstanding Capital Stock
-------------------------------------------------------
Series A Convertible Preferred Stock Series B Convertible Preferred Stock
Preferred Shares Authorized 5,000,000 3,500,000 Designated 1,500,000 Designated
------------------------------------------------------------------------------------------------------------------------------------
Currently Outstanding 0 0
Issuance of securities pursuant to Agreement 0 1,226,559
------------------------------------------------------------------------------------------------------------------------------------
Total outstanding after issuance of securities
pursuant to Agreement 0 1,226,559
------------------------------------------------------------------------------------------------------------------------------------
Assumed Conversion
of Series B Assumed Exercise of
Common Stock Convertible Outstanding Options
Common Shares Authorized 33,000,000 Outstanding Preferred Stock and Warrants Fully Diluted
------------------------------------------------------------------------------------------------------------------------------------
Currently Outstanding 8,231,765 0 3,134,414 11,366,179
Securities exchanged pursuant to Agreement (570,833) 0 (937,500) (1,508,333)
Buy-out existing convertible debt warrants 0 0 (550,087) (550,087)
Issuance of securities pursuant to Agreement 0 11,039,016 12,000,000 23,039,016
Investment banking warrants 0 633,333 633,333
------------------------------------------------------------------------------------------------------------------------------------
Sub-total 7,660,932 11,039,016 14,280,160 32,980,108
Options issued to executives, subject to
increase in authorized shares of common stock 0 0 2,800,000 2,800,000
------------------------------------------------------------------------------------------------------------------------------------
Total outstanding and issuable after issuance
of securities pursuant to Agreement 7,660,932 11,039,016 17,080,160 35,780,108
------------------------------------------------------------------------------------------------------------------------------------
29
Schedule 4.5 - Conflicts; Required Filings and Consents
-------------------------------------------------------
None
30
Schedule 5.11 - Exchanged Securities
-------------------------------------
Name Shares of Common Warrants to
---- Stock Exchanged Purchase the
Following
Underlying
Shares of
Common
Xxxxxx Venture Capital 550,000 875,000
Xxxxxxx Xxxxxxxx 20,833 62,500
--------------------------------------------------------------------------------
Total 570,833 937,500
--------------------------------------------------------------------------------
31
Schedule 4.8 - List of Brokers
------------------------------
AMOUNT OF
NAME AND ADDRESS INVESTMENT WARRANTS
---------------- ---------- --------
Atlas Capital Services, LLC $125,000.00 300,000 at an exercise
price of $0.30
Liberty Company Financial LLC $125,000.00 333,333 at an exercise
price of $0.30.
32
Exhibit A
---------
Form of Certificate of Deisgnations of Preferences, Rights and Limitations
--------------------------------------------------------------------------
33
Exhibit B
---------
Registration Rights Agreement
-----------------------------
34
Exhibit C
---------
Warrants
--------
Xxxxxx
NAME AND ADDRESS Xxxxxx Partners LP Venture Capital Xxxxxxx Xxxxxxxx
------------------ --------------- ----------------
1,887,246 574,662 38,092
Warrant (1) - $0.65 Exercise Price
1,887,246 574,662 38,092
Warrant (2) - $1.20 Exercise Price
2,642,144 804,527 53,329
Warrant (3) - $1.50 Exercise Price
2,642,144 804,527 53,329
Warrant (4) - $1.80 Exercise Price
35
Exhibit D
---------
Escrow Agreement
----------------
36
Exhibit E
---------
Xxxx Xxxxxx Xx. Consulting Agreement
------------------------------------
37
