NOTE AND WARRANT PURCHASE AGREEMENT
THIS NOTE AND WARRANT PURCHASE AGREEMENT, dated as of January 14, 2005
(this "AGREEMENT"), is entered into by and between VITROTECH CORPORATION, a
Nevada corporation (the "COMPANY"), and VITROBIRTH, LLC, a Delaware limited
liability company (the "INVESTOR").
RECITALS
A. On the terms and subject to the conditions set forth herein, the
Investor is willing to purchase from the Company, and the Company is willing to
sell to the Investor, up to four secured, convertible promissory notes in the
aggregate principal amount of three million dollars ($3,000,000), together with
related warrants to acquire shares of the Company's capital stock.
B. Capitalized terms not otherwise defined in Section 12(p) of this
Agreement shall have the meaning set forth in the form of secured, convertible
promissory note attached hereto as EXHIBIT A.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the
representations, warranties, covenants and conditions set forth below, the
parties hereto, intending to be legally bound, agree as follows:
1. THE LOAN, NOTES AND WARRANTS.
(a) Loan and Notes. On the terms and subject to the conditions of
this Agreement, the Investor agrees to make a loan to the Company in an
aggregate principal amount of up to three million dollars ($3,000,000) as
follows:
(i) The Company agrees to issue and sell to the Investor, and,
subject to the terms and conditions of this Agreement, the Investor agrees to
purchase from the Company, a secured, convertible promissory note in the form of
EXHIBIT A hereto in the principal amount of $1,500,000 (the "INITIAL NOTE");
(ii) The Company agrees to issue and sell to the Investor,
and, subject to the terms and conditions of this Agreement, the Investor agrees
to purchase from the Company, a secured, convertible promissory note in the form
of EXHIBIT A hereto in the principal amount of $500,000 (the "SECOND NOTE");
(iii) The Company agrees to issue and sell to the Investor,
and, subject to the terms and conditions of this Agreement, the Investor agrees
to purchase from the Company, a secured, convertible promissory note in the form
of EXHIBIT A hereto in the principal amount of $500,000 (the "THIRD NOTE"); and
(iv) The Company agrees to issue and sell to the Investor,
and, subject to the terms and conditions of this Agreement, the Investor agrees
to purchase from the Company, a secured, convertible promissory note in the form
of EXHIBIT A hereto in the principal amount of $500,000 (the "FOURTH NOTE").
(b) Warrant. In consideration for the purchase by the Investor of
each of the Notes, the Company will issue to the Investor warrants in the form
attached hereto as EXHIBIT B as follows (collectively, "WARRANTS"): (i) at the
Initial Closing, Warrants to purchase 3,625,000 shares of Common Stock at the
Warrant Price ("INITIAL Warrant"), (ii) at the Second Closing, Warrants to
purchase 1,208,333 shares of Common Stock at the Warrant Price ("SECOND
WARRANT"), (iii) at the Third Closing, Warrants to purchase 1,208,333 shares of
Common Stock at the Warrant Price ("THIRD WARRANT"), and (iv) at the Fourth
Closing, Warrants to purchase 1,208,334 shares of Common Stock. at the Warrant
Price ("FOURTH WARRANT").
(c) Delivery.
(i) The sale and purchase of the Initial Note and Initial
Warrant shall take place at a closing (the "INITIAL CLOSING") to be held at such
place and time as the Company and the Investor may determine (the "INITIAL
CLOSING DATE"). At the Initial Closing, the Company will deliver to the Investor
the Initial Note, Initial Warrant and a Registration Rights Agreement against
receipt by the Company of $1,500,000. The Initial Note and Warrant will be
registered in the Investor's name in the Company's records.
(ii) The sale and purchase of the Second Note and Second
Warrant shall take place at a closing (the "SECOND CLOSING") to be held at such
place and time as the Company and the Investor may determine (the "SECOND
CLOSING DATE"). At the Second Closing, the Company will deliver to the Investor
the Second Note, Second Warrant and a Registration Rights Agreement against
receipt by the Company of $500,000. The Second Note will be registered in the
Investor's name in the Company's records.
(iii) The sale and purchase of the Third Note and Third
Warrant shall take place at a closing (the "THIRD CLOSING") to be held at such
place and time as the Company and the Investor may determine (the "THIRD CLOSING
Date"). At the Third Closing, the Company will deliver to the Investor the Third
Note, Third Warrant and a Registration Rights Agreement against receipt by the
Company of $500,000. The Third Note will be registered in the Investor's name in
the Company's records.
(iv) The sale and purchase of the Fourth Note and Fourth
Warrant shall take place at a closing (the "FOURTH CLOSING") to be held at such
place and time as the Company and the Investor may determine (the "FOURTH
CLOSING DATE"). At the Fourth Closing, the Company will deliver to the Investor
the Fourth Note, Fourth Warrant and a Registration Rights Agreement against
receipt by the Company of $500,000. The Fourth Note will be registered in the
Investor's name in the Company's records.
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At any time, and from time to time, the Investor may, at its sole
and exclusive option, convert all or any part of the principal and accrued
interest outstanding under any or all of the Notes into fully paid and
nonassessable shares of Common Stock of the Company at a conversion price per
share of Common Stock equal to $0.12, subject to adjustment as provided in
Section 8 of the Notes.
(d) Use of Proceeds. The Company shall use the proceeds of the sale
and issuance of the Notes only for the purposes set forth on SCHEDULE 1 to this
Agreement. Except as set forth on SCHEDULE 1 to this Agreement, no portion of
such proceeds shall be used to pay or redeem all or any portion of any
Indebtedness of the Company or any Subsidiary existing as of the Initial Closing
Date.
(e) Payments. The Company will make all cash payments due under the
Notes in immediately available funds by 11:00 a.m. pacific time on the date such
payment is due in the manner and at the address for such purpose specified below
the Investor's name on the signature page hereto, or at such other address as
the Investor or other registered holder of the applicable Note may from time to
time direct in writing.
(f) No Original Issue Discount. The Company and the Investor
acknowledge and agree that the Warrant sold to the Investor in connection
herewith is part of an investment unit, which includes the Initial Note, within
the meaning of Section 1273(c)(2) of the Internal Revenue Code of 1986, as
amended ("IRC"). As of the Initial Closing Date, the Company and the Investor
further agree that as between the Company and the Investor, the fair market
value of the right to buy one share of Common Stock under the terms as set forth
in the Warrant purchased on the Initial Closing Date is equal to $0.001 and
that, pursuant to Treas. Reg. Section 1.1273-2(h), a portion of the issue price
of the investment unit (such amount being equal to $0.001 multiplied by the
number of shares of Common Stock issuable upon exercise of such Warrant) will be
allocable to such Warrant and the balance shall be allocable to the Initial Note
purchased on the Initial Closing Date. The Company and the Investor agree to
prepare their federal income tax returns in a manner consistent with the
foregoing agreement and, pursuant to Treas. Reg. Section 1.1273, the original
issue discount on the Initial Note shall be considered to be zero.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to the Investor that, except as set forth on a Schedule of
Exceptions (the "SCHEDULE OF EXCEPTIONS") furnished to the Investor prior to
execution hereof and attached hereto as SCHEDULE 2 specifically identifying the
relevant subparagraph hereof, which exceptions shall be deemed to be
representations and warranties as if made hereunder:
(a) Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Nevada. The Company is duly qualified to transact business and
is in good standing in each jurisdiction in which such qualification is
required. The Company has all required power and authority necessary to own and
operate its property, to carry on its business as now conducted and presently
proposed to be conducted and to carry out the transactions contemplated by this
Agreement.
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(b) Capitalization.
(i) The authorized capital stock of the Company consists of
500,000,000 shares of Common Stock, par value $0.001 per share. There are
outstanding 158,720,389 shares of Common Stock and the Company has no other
shares of capital stock outstanding. All of the outstanding shares of capital
stock of the Company have been duly authorized, validly issued and are fully
paid and nonassessable and were issued in compliance with all applicable state
and federal laws concerning the issuance of securities.
(ii) Except as set forth on the Schedule of Exceptions: (A)
there are no outstanding options, warrants, rights to subscribe for, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exercisable or exchangeable for, any shares of capital stock
of the Company, or arrangements by which the Company is or may become bound to
issue additional shares of capital stock, nor are any such issuances or
arrangements contemplated other than pursuant to the Company's 2004 Consultant
Stock Plan, (B) there are no agreements or arrangements under which the Company
is obligated to register the sale of any of its securities under the Securities
Act and (C) the Company has no obligations (contingent or otherwise) to
purchase, redeem or otherwise acquire any of its equity securities or any
interests therein or to pay any dividend or make any distribution in respect
thereof. The Company is not a party or subject to any agreement or understanding
between any Person which affects or relates to the voting or giving of written
consents concerning any security or by a director of the Company.
(iii) The Company has furnished to the Issuer true and correct
copies of the Company's Organizational Documents as in effect on the date
hereof. The Company is not in violation of any provision of its Organizational
Documents. None of the Securities is subject to preemptive rights or any other
similar rights of the stockholders of the Company.
(c) Subsidiaries. Other than as specified in paragraph 2(c) of the
Schedule of Exceptions, neither the Company nor any of its Subsidiaries
presently owns or controls, directly or indirectly, or holds any rights to
acquire, any interest in any other corporation, association or other business
entity nor has the Company or any of its Subsidiaries ever held such interest.
Neither the Company nor its Subsidiaries is a participant in any joint venture,
partnership or similar arrangement nor has the Company or any of its
Subsidiaries ever been a participant in any such arrangement. Each of the
Company's Subsidiaries is duly organized and existing under the laws of its
jurisdiction of organization and is in good standing under such laws. None of
the Company's Subsidiaries owns or leases property or engages in any activity in
any jurisdiction that might require its qualification to do business as a
foreign corporation.
(d) Authorization. All corporate action on the part of each of the
Company and its Subsidiaries, and their respective officers, directors and
stockholders necessary for the authorization, execution and delivery of each of
the Transaction Documents to which it is a party, the performance of all
obligations of each of the Company and its Subsidiaries hereunder and
thereunder, the sale and issuance (or reservation for issuance) of the Notes and
Warrant being sold hereunder and the Common Stock issuable upon conversion of
the Notes and Warrant has been taken or will be taken prior to the Initial
Closing. The Transaction Documents to which each of the Company and/or its
Subsidiaries is a party constitute valid and legally binding obligations of the
Company and/or its Subsidiaries, enforceable in accordance with their respective
terms. The Company's board of directors has determined in its good faith
business judgment that the issuance of the Notes and the Warrant hereunder and
the consummation of the other transactions contemplated by the Transaction
Documents are in the best interest of the Company and its stockholders.
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(e) Mining Companies. To the best of the Company's Knowledge, (i)
each of the Mining Companies is duly organized and existing under the laws of
its jurisdiction of organization and is in good standing under such laws (ii)
each of the Mining Companies is qualified to do business as a foreign entity and
is in good standing in each jurisdiction where owns property or conducts
business, (iii) all company action on the part of each of the Mining Companies,
and their respective officers, managers and members necessary for the
authorization, execution and delivery of the Mine Security Agreements, the
performance of all obligations of each of the Mining Companies thereunder, has
been taken or will be taken prior to the Initial Closing, (iv) the Mine Security
Agreements constitute valid and legally binding obligations of the Mining
Companies, enforceable in accordance with their respective terms, and (v) each
of the Mining Companies' respective have determined in its good faith business
judgment that the execution and delivery of the Mine Security Agreement are in
the best interest of the Mining Companies.
(f) Valid Issuance of Notes, Warrant and Common Stock. The Notes and
Warrant that are being purchased by the Investor hereunder, when issued, sold
and delivered in accordance with the terms of this Agreement for the
consideration expressed herein, will be duly and validly issued and will be free
of restrictions on transfer, other than restrictions on transfer under
applicable state and federal securities laws. The Common Stock issuable upon
conversion of the Notes and the exercise of the Warrant has been duly and
validly reserved for issuance and, upon issuance, will be duly and validly
issued, fully paid and nonassessable and will be free of restrictions on
transfer, other than restrictions under applicable state and federal securities
laws.
(g) Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company or any of its Subsidiaries is required in connection with the
consummation of the transactions contemplated by this Agreement, except for such
filings required pursuant to applicable federal and state securities laws, which
filings will be effected within the required statutory period.
(h) Offering. Subject in part to the truth and accuracy of the
Investor's representations set forth in SECTION 3 of this Agreement, the offer,
sale and issuance of the Notes and Warrant as contemplated by this Agreement are
exempt from the registration requirements of the Securities Act and the
qualification or registration requirements of the applicable blue sky laws.
Neither the Company nor any authorized agent acting on its behalf will take any
action hereafter that would cause the loss of such exemptions.
(i) Litigation. There is no action, suit, proceeding or
investigation pending or currently threatened against the Company or any of its
Subsidiaries (or, to the best of the Company's knowledge, threatened against or
affecting any of the officers, directors or employees of the Company or any of
its Subsidiaries with respect to their businesses or proposed business
activities) that questions the validity of this Agreement or the other
Transaction Documents or the right of the
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Company or any of its Subsidiaries to enter into such agreements or to
consummate the transactions contemplated hereby, or that might result, either
individually or in the aggregate, in any material adverse changes in the
business, assets or condition of the Company or any of its Subsidiaries,
financially or otherwise, or any change in the current equity ownership of the
Company or any of its Subsidiaries nor is the Company or any of its Subsidiaries
aware that there is any basis for the foregoing. The foregoing includes, without
limitation, actions, suits, proceedings or investigations pending or threatened
(or any basis therefor known to the Company) involving the prior employment of
any of the Company's or any of its Subsidiaries' employees, their use in
connection with the Company's or any of its Subsidiaries' business of any
information or techniques allegedly proprietary to any of their former employers
or their obligations under any agreements with prior employers. Neither the
Company nor any of its Subsidiaries is a party or subject to the provisions of
any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality. Neither the Company nor any of its Subsidiaries has
received any opinion or memorandum or legal advice from legal counsel to the
effect that it is exposed, from a legal standpoint, to any liability or
disadvantage which may be material to its business. There is no action, suit,
proceeding or investigation by the Company or any of its Subsidiaries currently
pending or that the Company or any of its Subsidiaries intends to initiate.
(j) Patents and Trademarks. The Schedule of Exceptions contains a
complete and accurate list of all (i) patented or registered Intellectual
Property Rights owned or used by the Company, or any of its Subsidiaries (ii)
pending patent applications and applications for registrations of other
Intellectual Property Rights filed by the Company or any of its Subsidiaries and
(iii) unregistered trade names and corporate names owned or used by the Company
or any of its Subsidiaries. Paragraph 2(j) of the Schedule of Exceptions also
contains a complete and accurate list of all licenses and other rights granted
by the Company or any of its Subsidiaries to any third party with respect to any
Intellectual Property Rights and all licenses and other rights granted by any
third party to the Company or any of its Subsidiaries with respect to any
Intellectual Property Rights, in each case identifying the subject Intellectual
Property Rights but not including licenses arising from the purchase of "off the
shelf" or other standard products. Each of the Company and its Subsidiaries owns
all right, title and interest in and to all of the Intellectual Property Rights
listed in paragraph 2(j) of the Schedule of Exceptions free and clear of
Encumbrances. Each of the Company and its Subsidiaries owns all right, title and
interest in and to all of the Intellectual Property Rights free and clear of all
Encumbrances. Each of the Company and its Subsidiaries owns all right, title and
interest to, or has the right to use pursuant to a valid license, all
Intellectual Property Rights necessary for the operation of the business of the
Company or any of its Subsidiaries as presently conducted and as presently
proposed to be conducted, free and clear of all Encumbrances. Each of the
Company and its Subsidiaries has taken all necessary and desirable actions to
maintain and protect the Intellectual Property Rights that it owns. To the best
of the Company's knowledge, the owners of any Intellectual Property Rights
licensed to the Company or any of its Subsidiaries have taken all necessary and
desirable actions to maintain and protect the Intellectual Property Rights that
are subject to such licenses. There have been no claims made against the Company
or any of its Subsidiaries asserting the invalidity, misuse or unenforceability
of any of such Intellectual Property Rights, and to the best of the Company's
knowledge, there are no valid grounds for the same. Neither the Company nor any
of its Subsidiaries has received any notices of, and is not aware of any facts
which indicate a likelihood of, any infringement or misappropriation by, or
conflict with, any third party with respect to such Intellectual Property Rights
(including, without limitation, any
6
demand or request that the Company or any of its Subsidiaries license any rights
from a third party). To the best of the Company's knowledge, the conduct of the
Company's or any of its Subsidiaries' business has not infringed,
misappropriated or conflicted with and does not infringe, misappropriate or
conflict with any Intellectual Property Rights of others, nor would any future
conduct as presently contemplated infringe, misappropriate or conflict with any
Intellectual Property Rights of others. To the best of the Company's knowledge,
the Intellectual Property Rights owned by or licensed to the Company or any of
its Subsidiaries have not been infringed, misappropriated or conflicted by
others. The transactions contemplated by this Agreement shall have no adverse
effect on the Company's or any of its Subsidiaries' right, title and interest in
and to the Intellectual Property Rights. To the best of the Company's knowledge
after due inquiry, none of its 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 the use of his or her best efforts to promote
the interests of the Company or any of its Subsidiaries or that would conflict
with the Company's or any of its Subsidiaries' business as presently conducted
and as presently proposed to be conducted. Neither the execution of this
Agreement nor the transactions contemplated by this Agreement nor the carrying
on of the Company's or any of its Subsidiaries' business by the employees of the
Company or any of its Subsidiaries, nor the conduct of the Company's or any of
its Subsidiaries' business as presently proposed to be conducted, will conflict
with or result in a breach of the terms, conditions or provisions of, or
constitute a default under, any contract, covenant or instrument under which any
of such employees is now obligated. The Company does not believe it is or will
be necessary to use any inventions of any of its employees (or people it
currently intends to hire) made prior to their employment by the Company or any
of its Subsidiaries, except for inventions that have been assigned or licensed
to the Company as of the date hereof.
(k) Compliance with Other Instruments.
(i) To the best of the Company's Knowledge, (A) each of the
Company and its Subsidiaries is not in violation of or default under any
provision of its Organizational Documents or of any instrument, judgment, order,
writ, decree or contract to which it is a party or by which it is bound, or of
any provision of any federal or state statute, rule or regulation applicable to
the Company and its Subsidiaries, and (B) the execution, delivery and
performance of the Transaction Documents to which the Company or any of its
Subsidiaries is a party and the consummation of the transactions contemplated
hereby or thereby will not result in any such violation, or be in conflict with
or constitute, with or without the passage of time or giving of notice, either a
default under any such provision, instrument, judgment, order, writ, decree or
contract or an event that results in the creation of any Encumbrance upon any
assets of the Company or any of its Subsidiaries or the suspension, revocation,
impairment, forfeiture or nonrenewal of any permit, license, authorization or
approval applicable to the Company or its Subsidiaries, their respective
business or operations or any of their respective assets or properties. No
default or Event of Default has occurred under any of the Transaction Documents.
(ii) Each of the Mining Companies is not in violation of or
default under any provision of its Organizational Documents or of any
instrument, judgment, order, writ, decree or contract to which it is a party or
by which it is bound, or of any provision of any federal or state statute, rule
or regulation applicable to the Mining Companies. The execution, delivery and
performance of the Mine Security Agreement to which any of the Mining Companies
is a party and the consummation of the transactions contemplated hereby or
thereby will not result in any such violation, or be in conflict with or
constitute, with or without the passage of time or giving of notice, either a
default under any such provision, instrument, judgment, order, writ, decree or
contract or an event that results in the creation of any Encumbrance upon any
assets of the Mining Companies or the suspension, revocation, impairment,
forfeiture or nonrenewal of any permit, license, authorization or approval
applicable to Mining Companies, their respective business or operations or any
of their respective assets or properties.
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(l) Agreements; Action.
(i) There are no agreements, understandings, instruments,
contracts, proposed transactions, judgments, orders, writs or decrees to which
the Company or any of its Subsidiaries is a party or by which it is bound that
may involve (A) obligations (contingent or otherwise) of, or payments to, the
Company or any of its Subsidiaries in excess of $100,000, other than obligations
of, or payments to, the Company or any of its Subsidiaries arising from purchase
or sale agreements entered into in the Ordinary Course of Business, (B) the
license of any patent, copyright, trade secret or other proprietary right to or
from the Company or any of its Subsidiaries, other than licenses arising from
the purchase of "off the shelf" or other standard products, (C) provisions
restricting or affecting the development, manufacture or distribution of the
products of any of the Company or its Subsidiaries, (D) a warranty with respect
to its products sold, other than in the Ordinary Course of Business, or (E)
indemnification by the Company or any of its Subsidiaries with respect to
infringements of proprietary rights.
(ii) Neither the Company nor any of its Subsidiaries has (A)
declared or paid any dividends or authorized or made any distribution upon or
with respect to any class or series of its capital stock, (B) incurred any
indebtedness for money borrowed or any other liabilities individually in excess
of $50,000 (other than as specified in the Schedule of Exceptions) or, in the
case of indebtedness and/or liabilities individually less than $50,000, in
excess of $100,000 in the aggregate, (C) made any loans or advances to any
Person, other than ordinary advances for travel expenses, or (D) 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) immediately
above, all indebtedness, liabilities, agreements, understandings, instruments,
contracts and proposed transactions involving the same Person or entity
(including Persons the Company or any of its Subsidiaries has reason to believe
are affiliated therewith) shall be aggregated for the purpose of meeting the
individual minimum dollar amounts of such subsections.
(iv) All of the contracts, agreements and instruments set
forth on the Schedule of Exceptions are valid, binding and enforceable in
accordance with their respective terms. Each of the Company and its Subsidiaries
has performed all material obligations required to be performed by it and is not
in default under or in breach of nor in receipt of any claim of default or
breach under any contract, agreement or instrument and neither the Company nor
any of its Subsidiaries has any present expectation or intention of not fully
performing all such obligations. No event has occurred which with the passage of
time or the giving of notice or both would result in a default, breach or event
of noncompliance by the Company or any of its Subsidiaries under any contract,
agreement or instrument. The Company has no knowledge of any breach or
anticipated breach by the other parties to any contract, agreement, instrument
or commitment.
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(v) The Company Records contain a true and correct copy of
each of the written instruments, plans, contracts and agreements and an accurate
description of each of the oral arrangements, contracts and agreements that are
referred to in the Company Records, together with all amendments, waivers or
other changes thereto.
(vi) Neither the Company nor any of its Subsidiaries is a
party to and is not bound by any contract, agreement or instrument, or subject
to any restriction under its Organizational Documents, that adversely affects
its business as now conducted or as proposed to be conducted, its properties or
its financial condition.
(vii) Neither the Company nor any of its Subsidiaries has
engaged in the past three (3) months in any discussion (i) with any
representative of any corporation or corporations regarding the consolidation or
merger of the Company or any of its Subsidiaries with or into any such
corporation or corporations, (ii) with any corporation, partnership, association
or other business entity or any individual regarding the sale, conveyance or
disposition of all or substantially all of the assets of the Company or any of
its Subsidiaries or a transaction or series of related transactions in which
more than fifty percent (50%) of the voting power of the Company or any of its
Subsidiaries is disposed of, or (iii) regarding any other form of acquisition,
liquidation, dissolution or winding up of the Company or any of its
Subsidiaries.
(m) Related-Party Transactions. No employee, stockholder, officer or
director of the Company (or any of its Subsidiaries) or member of his or her
Family is indebted to the Company (or any of its Subsidiaries), nor is the
Company (or any of its Subsidiaries) indebted (or committed to make loans or
extend or guarantee credit) to any of them. To the best of the Company's
knowledge, none of such Persons has any direct or indirect ownership interest in
any firm or corporation with which the Company (or any of its Subsidiaries) is
affiliated or with which the Company (or any of its Subsidiaries) has a business
relationship, or any firm or corporation that competes with the Company (or any
of its Subsidiaries), except that employees, stockholders, officers or directors
of the Company (or any of its Subsidiaries) and members of their Families may
own stock in publicly traded companies that may compete with the Company (or any
of its Subsidiaries). No officer, director, manager or member of the Family of
any officer, director or manager of the Company (or any of its Subsidiaries) is
directly or indirectly interested in any Material Contract with the Company (or
any of its Subsidiaries).
(n) Financial Statements. The Company has delivered or caused to be
delivered to the Investor audited consolidated balance sheets and audited
consolidated statements of income and retained earnings and cash flows of the
Company and each of its Subsidiaries, as applicable, as of December 31, 2003
(the "DELIVERED FINANCIAL STATEMENTS"). The Schedule of Exceptions sets forth an
unaudited consolidated balance sheet of the Company and its Subsidiaries, as
applicable, as of September 30, 2004 and unaudited consolidated statements of
income of the Company and its Subsidiaries, as applicable, for the nine months
ended September 30, 2004 (the "FINANCIAL STATEMENTS"). The Delivered Financial
Statements were prepared in conformity with GAAP applied
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on a consistent basis (except as may be indicated in the notes thereto) and
present fairly, in all material respects, the financial position and the results
of operations of the Company and its Subsidiaries, as applicable, as of the
dates, and for the periods, referred to therein. The Financial Statements were
prepared in conformity with GAAP applied on a consistent basis (except for the
lack of footnote disclosure) and present fairly, in all material respects, the
financial position and the results of operations of the Company and its
Subsidiaries, as applicable, as of the dates, and for the periods, referred to
therein.
(o) SEC Documents. Within the 18-month period immediately preceding
the date hereof, the Company has made all filings with the SEC required under
the Exchange Act or the Securities Act. The Company has previously made
available to Investor complete and accurate copies, as amended or supplemented
through the date hereof, of the following forms filed with the SEC: (i) Form
10-QSB under the Exchange Act for the period ended September 30, 2004, (ii) Form
10-KSB under the Exchange Act for the fiscal year ended December 31, 2003, and
(iii) each Form 8-K filed by the Company during fiscal years 2003 and 2004 (such
reports are collectively referred to herein as the "COMPANY REPORTS"). As of
their respective dates, the Company Reports did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited financial
statements and unaudited interim financial statements of the Company included in
the Company Reports (i) comply as to form in all material respects with
applicable accounting requirements and published rules and regulations of the
SEC with respect thereto, (ii) have been prepared in accordance with GAAP
applied on a consistent basis throughout the periods covered thereby (except as
may be indicated therein or in the notes thereto, and in the case of quarterly
financial statements, as permitted by Form 10-QSB under the Exchange Act), and
(iii) fairly presented in all material respects (subject, in the case of the
unaudited interim financial statements, to normal, year-end audit adjustments,
none of which will be material) the consolidated financial condition, results of
operations and cash flows of the Company as of the respective dates thereof and
for the periods referred to therein.
(p) Changes. Since September 30, 2004, there has not been:
(i) any adverse change in the assets, liabilities, financial
condition or operating results of the Company and/or its Subsidiaries from that
reflected in the Company's Form 10-QSB under the Exchange Act for the period
ended September 30, 2004;
(ii) any damage, destruction or loss, whether or not covered
by insurance, materially and adversely affecting the assets, properties,
financial condition, operating results or business of the Company or any of its
Subsidiaries;
(iii) any waiver by the Company or any of its Subsidiaries of
a valuable right or of a debt owed to it;
(iv) any satisfaction or discharge of any Encumbrance or
payment of any obligation by the Company or any of its Subsidiaries;
10
(v) any change or amendment to a Material Contract or
arrangement by which the Company or any of its Subsidiaries or any of their
respective assets or properties is bound or subject;
(vi) any change in any compensation arrangement or agreement
with any employee of the Company or Subsidiaries;
(vii) any sale, assignment or transfer of any patents or
patent applications, trademarks or trademark applications, service marks, trade
names, corporate names, copyrights or copyright registrations, trade secrets or
other intangible assets, or disclosure of any proprietary confidential
information to any Person;
(viii) any resignation or termination of employment of any key
officer of the Company or any of its Subsidiaries; and the Company, to the best
of its knowledge, does not know of the impending resignation or termination of
employment of any such officer;
(ix) any declaration, payment, setting aside or other
distribution of cash or other property to its stockholders with respect to its
capital stock or other equity securities (including without limitation, any
warrants, options or other rights to acquire its capital stock or other equity
securities);
(x) any Encumbrance created by, or transfer of a security
interest in, the Company or any of its Subsidiaries, with respect to any of its
properties or assets, except liens for taxes not yet due or payable;
(xi) receipt of notice that there has been a loss of, or order
cancellation by, any major customer of the Company or any of its Subsidiaries;
(xii) made capital expenditures or commitments therefor that
aggregate in excess of $50,000;
(xiii) made any loans or advances to, guarantees for the
benefit of, or any investments in, any Person (including but not limited to any
of the Company's or any of its Subsidiaries' employees, officers or directors,
or any members of their immediate families), corporation, partnership, joint
venture or other entity;
(xiv) to the best of the Company's knowledge, any other event
or condition of any character that might materially and adversely affect the
assets, properties, financial condition, operating results or business of the
Company or any of its Subsidiaries; or
(xv) any agreement or commitment by the Company or any of its
Subsidiaries to do any of the things described in this Section (p).
(q) Tax Returns. Except as set forth on the Schedule of Exceptions,
(i) each of the Company and its Subsidiaries has timely filed all Tax returns
(federal, state and local) required to be filed by it and all Taxes, assessments
and other government charges imposed upon the Company or any of its
Subsidiaries, or upon any of the assets, income or franchises of the Company or
any of
11
its Subsidiaries, have been timely paid or, if not yet payable, are adequately
accrued on each of the Company's and its Subsidiaries' books and records; (ii)
there are no actual or proposed Tax deficiencies, assessments or adjustments
with respect to the Company or any of its Subsidiaries or any assets or
operations of the Company or any of its Subsidiaries; (iii) no consent has been
given with respect to the Company or any of its Subsidiaries to extend the time
in which any Tax may be assessed or collected by any taxing authority; (iv)
there are no ongoing or pending Tax audits by any taxing authority against the
Company or any of its Subsidiaries; (v) the Company has never filed a consent
relating to any assets or property pursuant to Section 341(f) of the Code,
relating to collapsible corporations; and (vi) none of the assets or income
items of the Company or any of its Subsidiaries has been or potentially is
subject to Tax under Code Section 1374 (or any corresponding provision of state,
local or foreign law).
(r) Permits. Each of the Company and its Subsidiaries has all
franchises, permits, licenses and any similar authority necessary for the
conduct of its business, and the Company believes it can obtain, without undue
burden or expense, any similar authority for the conduct of its or any of the
Subsidiaries' business as planned to be conducted. Neither the Company nor any
of the Subsidiaries is in default in any material respect under any of such
franchises, permits, licenses or other similar authority.
(s) Environmental and Safety Laws. Each of the Company and its
Subsidiaries, the operation of their respective businesses and any real property
that the Company or any of the Subsidiaries owns or has owned, leases or has
leased or otherwise occupies or uses or has occupied or used (the "PREMISES")
are, to the best of the Company's knowledge, in compliance with all applicable
Environmental Laws and orders or directives of any governmental authorities
having jurisdiction under such Environmental Laws. The Company has not received
any citation, directive, letter or other communication, written or oral, or any
notice of any proceeding, claim or lawsuit, from any Person arising out of the
ownership or occupation of the Premises, or the conduct of its operations, and
the Company is not aware of any basis therefor. To the best of the Company's
knowledge, no material expenditures are or will be required to comply with any
Environmental Laws.
(t) Registration Rights. Except as provided in the Schedule of
Exceptions, the Company has not granted or agreed to grant any registration
rights, including piggyback rights, to any Person or entity.
(u) Title to Property and Assets. The Company and its Subsidiaries
have good and marketable title to their respective properties and assets,
including the properties and assets reflected in the most recent audited balance
sheet of the Company or purported to have been acquired by the Company or any
Subsidiary after said date (except as sold or otherwise disposed of in the
Ordinary Course of Business), in each case free and clear of Encumbrances. All
leases of the Company and its Subsidiaries are valid and subsisting and are in
full force and effect in all material respects. Neither the Company nor any of
its Subsidiaries owns any real property and none of them is in material breach
of any real property lease.
(v) Insurance. Each of the Company and its Subsidiaries has in full
force and effect fire and casualty insurance policies, with extended coverage,
sufficient in amount (subject to
12
reasonable deductibles) to allow it to replace any of its properties that might
be damaged or destroyed. Each of the Company and its Subsidiaries has in full
force and effect products liability and errors and omissions insurance in
amounts customary for companies similarly situated. Neither the Company nor any
of its Subsidiaries is in default with respect to its obligations under any
insurance policy maintained by it, and neither the Company nor any of the
Subsidiaries has been denied insurance coverage. The Company and its
Subsidiaries shall pay all insurance premiums payable by them. The Company has
directors' and officers' liability insurance policies (primary and excess) that
are in full force and effect for an aggregate of $10 million of coverage.
(w) Employee Benefit Plans. (i) neither the Company nor any
Subsidiary has employee benefit plans (as defined in Section 3(3) of ERISA);
(ii) the Company and each Subsidiary does not now, or has it ever, maintained,
established, sponsored, participated in, or contributed to, any pension plan
within the meaning of Section 3(2) of ERISA which is subject to Title IV of
ERISA or Section 412 of the Internal Revenue Code of 1986, as amended; and (iii)
at no time has the Company or any Subsidiary contributed to or been requested to
contribute to any multiemployer plan as defined in Section 3(37) of ERISA.
(x) Employee Relations.
(i) All material bonus, deferred compensation, pension,
retirement, profit-sharing, thrift, savings, employee stock ownership, stock
bonus, stock purchase, restricted stock plan, stock option or award plan, health
and medical insurance plans, life insurance and disability insurance plans,
other material employee benefit plans, contracts or arrangements which cover
multiple employees of the Company or the Subsidiaries including, but not limited
to, "employee benefit plans" within the meaning of ERISA (collectively, the
"Employee Benefit Plans"), are listed in paragraph 2(x)(i) of the Schedule of
Exceptions. No Employee Benefit Plans are or were collectively bargained for or
have terms requiring assumption of any guarantee by the Investor.
(ii) There have been no violations of ERISA or the Code by the
Company or any of the Subsidiaries relating to any Employee Benefit Plan. Each
of the Company and its Subsidiaries has timely filed all documents, notes and
reports (including IRS Form 5500) for each such Employee Benefit Plan with all
applicable governmental authorities and has timely furnished all required
documents to the participants or beneficiaries of each such Employee Benefit
Plans.
(iii) The Company and its Subsidiaries have operated and
administered all plans, programs and arrangements providing compensation and
benefits to employees materially in accordance with their terms and applicable
laws.
(iv) The Company and its Subsidiaries are not delinquent in
payments to any of their employees for any wages, salaries, commissions, bonuses
or other direct compensation for any services performed through the date hereof.
The Company and its Subsidiaries are in compliance with all applicable federal
and state laws, rules and regulations respecting employment, employment
practices, labor, terms and conditions of employment and wages and hours, except
for either immaterial instances of noncompliance or instances of noncompliance
of which the Company is unaware. Neither the Company nor any Subsidiary is party
to any collective bargaining agreement. There is no labor strike, dispute,
slowdown or stoppage actually pending or, to the knowledge of the Company,
threatened against or involving the Company or any Subsidiary.
13
(v) No director, officer or other employee of the Company or
any Subsidiary will become entitled to any retirement, severance or similar
benefit or enhanced or accelerated benefit (including any acceleration of
vesting or lapse of repurchase rights or obligations with respect to any
Employee Benefit Plan) solely as a result of the transactions contemplated in
this Agreement; and no payment made or to be made to any current or former
employee or director of the Company or any of its Affiliates by reason of the
transactions contemplated hereby (whether alone or in connection with any other
event, including, but not limited to, a termination of employment) will
constitute an "excess parachute payment" within the meaning of Section 280G of
the Code.
(vi) The Company and each of its Subsidiaries (A) has withheld
all amounts required by law or agreement to be withheld from wages, salaries and
other payments to its employees and former employees or has remedied any failure
to do so, (B) is not liable for any arrearages of wages and (iii) is not liable
for Taxes or penalties for failure to withhold or pay wages when due. There are
no complaints pending or, to the Company's knowledge, threatened before any
governmental authority alleging unfair labor practices or unlawful
discrimination nor, to the Company's knowledge, is there any basis for any such
claim. There are no existing or, to the Company's knowledge, threatened labor
strikes, disputes, grievances, controversies or other labor troubles affecting
the Company or any of its Subsidiaries.
(vii) Each employee and consultant or independent contractor
of the Company or any of its Subsidiaries whose material duties include the
development of products or Intellectual Property Rights, and each former
employee and consultant or independent contractor whose material duties included
the development of products or Intellectual Property Rights, has entered into
and executed an invention assignment and confidentiality agreement or an
employment or consulting agreement containing terms with respect to invention
assignments and confidentiality.
(y) Brokers. There is no investment banker, broker, finder,
financial advisor or other Person which has been retained by or is authorized to
act on behalf of the Company or any of its Subsidiaries who might be entitled to
any fee or commission in connection with the transactions contemplated by this
Agreement or the other Transaction Documents.
(z) Foreign Corrupt Practices Act. Neither the Company nor any
Subsidiary, director, officer, agent, employee or other Person acting on behalf
of the Company or any Subsidiary has, in the course of his, her or its actions
for, or on behalf of, the Company or any Subsidiary, offered or made, directly
or indirectly through any other Person, any payments of anything of value (in
the form of a contribution, gift, entertainment or other expense), to (a) any
Person employed by, or acting in an official capacity on behalf of, any
governmental agency, department or instrumentality, or (b) any foreign or
domestic government official, political party or official of such party, or any
candidate for political office or employee thereof. Neither the Company, any
Subsidiary, nor any director, officer, agent, employee or other Person acting on
behalf of the Company or any Subsidiary has violated or is in violation of any
provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended, or made
any bribe, rebate, payoff, influence payment, kickback or unlawful payment to
any foreign or domestic government or political party official, employee,
appointee or candidate.
14
(aa) Manufacturing and Marketing Rights. Neither the Company nor any
of its Subsidiaries has granted rights to manufacture, produce, assemble,
license, market or sell its products to any Person and is not bound by any
agreement that affects the Company's or its Subsidiaries' exclusive right to
develop, manufacture, assemble, distribute, market or sell its products.
(bb) Returns and Complaints. Neither the Company nor any of its
Subsidiaries has received any customer complaints concerning its products, nor
has it had its products returned by a purchaser thereof, that taken together
would constitute a Material Adverse Effect.
(cc) Status under Certain Statutes. Neither the Company nor any
Subsidiary is subject to regulation under the Investment Company Act of 1940, as
amended, the Public Utility Holding Company Act of 1935, as amended, the
Interstate Commerce Act, as amended, or the Federal Power Act, as amended.
(dd) Existing Indebtedness. The Schedule of Exceptions sets forth a
complete and correct list of all outstanding Indebtedness of the Company and its
Subsidiaries as of the Initial Closing Date (and as of each subsequent Closing,
as applicable), since which date there has been no material change in the
amounts, interest rates, sinking funds, installment payments or maturities of
the Indebtedness of the Company or its Subsidiaries. Neither the Company nor any
Subsidiary is in default and no waiver of default is currently in effect, in the
payment of any principal or interest on any Indebtedness of the Company or such
Subsidiary and no event or condition exists with respect to any Indebtedness of
the Company or any Subsidiary that would permit (or that with notice or the
lapse of time, or both, would permit) one or more Persons to cause such
Indebtedness to become due and payable before its stated maturity or before its
regularly scheduled dates of payment. Except as set forth on the Schedule of
Exceptions, since September 30, 2004, neither the Company nor any of the
Subsidiaries has incurred any liabilities of any kind, character and
description, whether accrued, absolute, secured or unsecured, contingent or
otherwise of a kind that would have been required to be disclosed on the
Financial Statements if they were dated as of the date hereof other than (i)
liabilities incurred in the Ordinary Course of Business subsequent to the date
of the Financial Statements and (ii) obligations under contracts and commitments
incurred in the ordinary course of business and not required under GAAP to be
reflected in the Financial Statements. (ee) No Material Adverse Effect. No event
has occurred and no condition exists which could reasonably be expected to have
a Material Adverse Effect since September 30, 2004.
(ff) Registration Rights. Except as set forth in the Registration
Rights Agreement and those registration rights specified on the Schedule of
Exceptions, the Company has not agreed to grant to any Person any rights
(including piggyback registration rights) to have any securities of the Company
registered with the SEC under the Securities Act or with any other governmental
authority.
15
(gg) Anti-Dilution and Other Shares(i) . The issuance of the Note,
Warrant or any of the other securities contemplated by the Transaction Documents
will not result in the triggering of any anti-dilution or similar rights
contained in any options, warrants, debentures or other securities or agreements
of the Company.
(hh) Poison Pill Provisions. Neither the Company nor its
Subsidiaries has a stockholder rights plan. None of the acquisition of the Note,
the Warrant or any of the of the other securities contemplated by the
Transaction Documents nor the deemed beneficial ownership of shares of any of
the securities contemplated by the Transaction Documents prior to, or the
acquisition of such shares pursuant to, the conversion of Note or the exercise
of the Warrant will in any event under any circumstance trigger the poison pill
provisions of any other or subsequently adopted plan or agreement, or a
substantially similar occurrence under any successor or similar plan.
(ii) No Preemptive Rights . Except as set forth in this Agreement,
no Person has any right of first refusal, any right of first offer, any right of
co-sale, any preemptive right or any similar rights in connection with the
issuance of any of the Notes or Warrant (or any securities issued in connection
with the conversion of any of the Notes or exercise of the Warrant), or the
issuance of any other securities by the Company, other than pursuant to the
Transaction Documents.
(jj) No Voting Rights. There are no agreements to which the Company
is a party with respect to the voting or transfer of any securities of the
Company other than the Transaction Documents or as set forth in the Company's
articles of incorporation, as amended or restated.
(kk) Acknowledgment Regarding the Purchase of the Securities. The
Company acknowledges and agrees that the Investor and its agents, employees,
attorneys and affiliates are not acting as a financial advisor or fiduciary of
the Company (or in any similar capacity) with respect to this Agreement or the
transactions contemplated hereby, and the relationship between the Company and
the Investor is "arms length" and that, except for the representations and
warranties of the Investor under this Agreement, any statement made by the
Investor or any of its representatives, employees, attorneys, affiliates or
agents in connection with this Agreement and the transactions contemplated
hereby is not advice or a recommendation and is merely incidental to the
Investor's purchase of Securities and has not been relied upon by the Company,
its officers or directors in any way. The Company further represents to the
Investor that the Company's decision to enter into this Agreement has been based
solely on an independent evaluation by the Company and its representatives.
(ll) Representations and Warranties Incorporated from the Security
Documents. As of the Applicable Closing Date, each of the representations and
warranties made in the Security Documents by the Company or any of its
Subsidiaries or, to the best of the Company's Knowledge, any of the Mining
Companies is true and correct in all material respects, and such representations
and warranties are hereby incorporated herein by reference with the same effect
as though set forth in their entirety herein, as qualified therein.
(mm) No Default. No Event of Default has occurred and is continuing
and neither the Company nor any of its Subsidiaries is in default under or with
respect to any Material Contract, agreement, lease or other instrument to which
it is a party or by which its property is bound or affected.
16
(nn) Absence of Certain Changes. Except as set forth in the Company
Reports, since September 30, 2004, the businesses and operations of the Company
and each of its Subsidiaries have been conducted in the Ordinary Course of
Business consistent with past practice and there has not been or occurred any
event or condition which, individually or in the aggregate, has had or is
reasonably likely to have a Material Adverse Effect.
(oo) Disclosure. The Company has fully provided Investor with all
the information that Investor has requested for deciding whether to purchase the
Notes and Warrant and all information that the Company believes is reasonably
necessary to enable Investor to make such decision. Neither this Agreement
(including all the exhibits and schedules hereto) nor any other statements or
certificates made or delivered in connection herewith contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements herein or therein not misleading in light of the circumstances
under which they were made. Except as set forth in this Agreement or the
Schedules or Exhibits attached hereto, there is no fact that the Company has not
disclosed to the Investor in writing and of which any of its officers, directors
or executive employees is aware and that has had or would reasonably be expected
to have a Material Adverse Effect.
3. REPRESENTATIONS AND WARRANTIES OF INVESTOR. The Investor represents and
warrants to the Company upon the acquisition of the Note and the Warrant as
follows:
(a) Binding Obligation. The Investor has full legal capacity, power
and authority to execute and deliver this Agreement and to perform its
obligations hereunder. This Agreement is a valid and binding obligation of the
Investor, enforceable in accordance with its terms, except as limited by
bankruptcy, insolvency or other laws of general application relating to or
affecting the enforcement of creditors' rights generally and general principles
of equity.
(b) Securities Law Compliance. The Investor has been advised that
the Note, the Warrants and the underlying securities have not been registered
under the Securities Act, or any state securities laws and, therefore, cannot be
resold unless they are registered under the Securities Act and applicable state
securities laws or unless an exemption from such registration requirements is
available. The Investor is aware that, except as set forth in the Registration
Rights Agreement, the Company is under no obligation to affect any such
registration with respect to the Note, the Warrants or the underlying securities
or to file for or comply with any exemption from registration. The Investor has
not been formed solely for the purpose of making this investment and is
purchasing the Note or Warrant to be acquired by the Investor hereunder for its
own account for investment, not as a nominee or agent, and not with a view to,
or for resale in connection with, the distribution thereof. The Investor has
such knowledge and experience in financial and business matters that the
Investor is capable of evaluating the merits and risks of such investment, is
able to incur a complete loss of such investment and is able to bear the
economic risk of such investment for an indefinite period of time. The Investor
is an accredited investor as such term is defined in Rule 501 of Regulation D
under the Securities Act.
17
4. CONDITIONS TO EACH CLOSING OF THE INVESTOR. The Investor's obligations
at each Closing are subject to the fulfillment, on or prior to the Applicable
Closing Date, of all of the conditions set forth in SECTION 5 and all of the
following conditions, any of which may be waived in whole or in part by the
Investor in writing:
(a) Representations and Warranties. The representations and
warranties made by the Company in SECTION 2 hereof shall have been true and
correct when made, and shall be true and correct on the Applicable Closing Date
as if made on the Applicable Closing Date.
(b) Governmental Approvals and Filings. Except for any notices
required or permitted to be filed after the Applicable Closing Date with certain
federal and state securities commissions, the Company shall have obtained all
governmental approvals required in connection with the lawful sale and issuance
of the Notes.
(c) Legal Requirements. At the applicable Closing, the sale and
issuance by the Company, and the purchase by the Investor, of the Notes and
Warrant shall be legally permitted by all laws and regulations to which the
Investor or the Company are subject.
(d) Fialkov Documents. All conditions precedent, concurrent and/or
subsequent set forth in the Fialkov Documents shall have been satisfied or
otherwise complied with in full.
(e) Proceedings and Documents. All corporate and other proceedings
in connection with the transactions contemplated at the applicable Closing and
all documents and instruments incident to such transactions shall be reasonably
satisfactory in substance and form to the Investor.
(f) Default. No default or Event of Default shall have occurred
under any of the Transaction Documents.
(g) Corporate Documents. The Company shall have delivered to the
Investor each of the following:
(i) A Certificate of Good Standing or comparable certificate
as to the Company, each of the Subsidiaries and the Mining Companies, certified
as of a recent date prior to the Applicable Closing Date by the Secretary of
State of Nevada and a Certificate of Good Standing certified as of a recent date
prior to the Applicable Closing Date by the Secretary of the State of Nevada and
the Secretary of the State of California.
(ii) All UCC-1 financing statements and other documents and
instruments that the Investor may request to perfect its security interest in
the collateral described in the Security Documents;
(iii) An opinion of counsel to the Company, in form and
substance reasonably satisfactory to the Investor;
(iv) A certificate of the Secretary of the Company, dated the
Applicable Closing Date, certifying that (1) Organizational Documents of the
Company, delivered to Investor
18
pursuant to the terms hereof, is in full force and effect and has not been
amended, supplemented, revoked or repealed since the date of such certification;
(2) attached thereto is a true and correct copy of the Bylaws of the Company as
in effect on the Applicable Closing Date; (3) attached thereto is a true and
correct copy of resolutions duly adopted by the Board of Directors of the
Company authorizing the execution, delivery, and performance by the Company of
this Agreement and the other Transaction Documents and the consummation of the
transactions contemplated hereby and thereby; and (4) there are no proceedings
for the dissolution or liquidation of the Company that have commenced or, to the
knowledge of the Company, been threatened; and
(v) A certificate of the Secretary of each of the
Subsidiaries, dated the Applicable Closing Date, certifying that (1) the
Organizational Documents of the Subsidiaries, delivered to Investor pursuant to
the terms hereof, is in full force and effect and has not been amended,
supplemented, revoked or repealed since the date of such certification; (2)
attached thereto is a true and correct copy of the Bylaws of the Subsidiaries as
in effect on the Applicable Closing Date; (3) attached thereto is a true and
correct copy of resolutions duly adopted by the Board of Directors of the
Subsidiaries authorizing the execution, delivery, and performance by the
Subsidiaries of this Agreement and the other Transaction and the consummation of
the transactions contemplated hereby and thereby; and (4) there are no
proceedings for the dissolution or liquidation of the Subsidiaries that have
commenced or, to the knowledge of the Subsidiaries, been threatened; and
(vi) A certificate of the Manager of each of the Mining
Companies, dated the Applicable Closing Date, certifying that (1) Organizational
Documents of the Mining Companies, delivered to Investor pursuant to the terms
hereof, is in full force and effect and has not been amended, supplemented,
revoked or repealed since the date of such certification; (2) attached thereto
is a true and correct copy of the operating agreement of each of the Mining
Companies as in effect on the Applicable Closing Date; (3) attached thereto is a
true and correct copy of resolutions duly adopted by the Managers and Members of
the Mining Companies authorizing the execution, delivery, and performance by the
Subsidiaries of this Agreement and the other Transaction Documents and the
consummation of the transactions contemplated hereby and thereby; and (4) there
are no proceedings for the dissolution or liquidation of the Mining Companies
that have commenced or, to the knowledge of the Mining Companies, been
threatened; and
(vii) A certificate of the Secretary of the Company, dated the
Applicable Closing Date, certifying the incumbency, signatures and authority of
the officers of the Company authorized to execute and deliver this Agreement and
the Notes on behalf of the Company and perform the Company's obligations
thereunder on behalf of the Company.
5. ADDITIONAL CONDITIONS TO CLOSINGS OF THE INVESTOR. The Investor's
obligations at each Closing set forth below are subject to the fulfillment, on
or prior to the Applicable Closing Date, of all of the conditions set forth in
Section 4 above and the following conditions, any of which may be waived in
whole or in part by the Investor in writing:
19
(a) First Closing. The Company shall have reimbursed Investor for
its transaction expenses in accordance with SECTION 12(K). Additionally, the
Company shall have delivered to the Investor the following documents
(collectively, the "TRANSACTION DOCUMENTS"):
(i) This Agreement, duly executed by the Company;
(ii) The applicable Note and Warrant issued hereunder, duly
executed by the Company;
(iii) The Company Security Agreement in the form of EXHIBIT C
hereto (the "COMPANY SECURITY AGREEMENT"), duly executed by the Company;
(iv) The Subsidiary Security Agreement in the form of EXHIBIT
D-1 hereto (the "SUBSIDIARY SECURITY Agreement"), and the Guaranty in form of
EXHIBIT D-2 hereto ("GUARANTY"), each duly executed by each of the Subsidiaries.
(v) The Mining Company Security Agreements in the form of
EXHIBIT E hereto (the "MINE SECURITY AGREEMENT"), duly executed by each of the
Mining Companies;
(vi) The Registration Rights Agreement in the form of EXHIBIT
F hereto, ("REGISTRATION RIGHTS AGREEMENT"), duly executed by the Company;
(vii) The Release in the form of EXHIBIT G hereto ("RELEASE"),
duly executed by Xxxx Xxx Xxxxx;
(viii) The Estoppel Certificate in the form of EXHIBIT H
hereto ("ESTOPPEL"), duly executed by each of the Mining Companies; and
(ix) A consent from the Fialkov Entities permitting the
consummation of the transactions contemplated by the Transaction Documents in a
form satisfactory to the Investor and terminating that certain "Put Option" in
favor of HJG Partnership described in that certain letter of intent among the
Company and certain Fialkov Entities dated November 18, 2004.
(b) Second Closing.
(i) The Company shall have generated no less than $750,000 in
Net Sales from the sale of its products to End-Users in the Ordinary Course Of
Business (determined on the accrual method of accounting in accordance with
GAAP), and such Net Sales shall be at a Gross Profit of no less than 40%.
(ii) The Company shall have performed and complied with all
agreements and conditions contained in Section 4 and the Transaction Documents
required to be performed or complied with by it prior to or at the Second
Closing.
(iii) The Company shall have delivered to the Investor an
officer's certificate, dated the date of the Second Closing, certifying that the
conditions specified in SECTION 4, SECTIONS 5(A) and 5(B) have been fulfilled.
20
(iv) Since September 30, 2004, there shall have been no
material adverse change or effect that, individually or when taken together with
all other changes or effects, is or could be likely to be materially adverse to
the business assets, financial condition, operations, capitalization, or
prospects of the Company and its subsidiaries, taken as a whole.
(v) The Investor shall have a first priority security interest
in all of the assets of the Company, each of the Subsidiaries and the collateral
described in the Mine Security Agreement.
(vi) There shall be no challenge to the enforceability or
validity of any of the Transaction Documents or any of the Mine Contracts.
(c) Third Closing.
(i) The Company shall have generated no less than $1,250,000
in Net Sales from the sale of its products to End-Users in the Ordinary Course
Of Business (determined on the accrual method of accounting in accordance with
GAAP), and such Net Sales shall be at a Gross Profit of no less than 40%.
(ii) The Company shall have performed and complied with all
agreements and conditions contained in SECTION 4 and the Transaction Documents
required to be performed or complied with by it prior to or at the Second
Closing.
(iii) The Company shall have delivered to the Investor an
officer's certificate, dated the date of the Second Closing, certifying that the
conditions specified in SECTION 4 and SECTIONS 5(A) through 5(C), inclusive,
have been fulfilled.
(iv) Since September 30, 2004, there shall have been no
material adverse change or effect that, individually or when taken together with
all other changes or effects, is or could be likely to be materially adverse to
the business assets, financial condition, operations, capitalization, or
prospects of the Company and its Subsidiaries, taken as a whole.
(v) The Investor shall have a first priority security interest
in all of the assets of the Company, each of the Subsidiaries and the collateral
described in Mine Security Agreement.
(vi) There shall be no challenge to the enforceability or
validity of any of the Transaction Documents or any of the Mine Contracts.
(d) Fourth Closing.
(i) The Company shall have generated no less than $2,000,000
in Net Sales from the sale of its products to End-Users in the Ordinary Course
Of Business (determined on the accrual method of accounting in accordance with
GAAP), and such Net Sales shall be at a Gross Profit of no less than 40%.
21
(ii) The Company shall have performed and complied with all
agreements and conditions contained in SECTION 4 and the Transaction Documents
required to be performed or complied with by it prior to or at the Second
Closing.
(iii) The Company shall have delivered to the Investor an
officer's certificate, dated the date of the Second Closing, certifying that the
conditions specified in Section 4 and SECTIONS 5(A) through 5(D), inclusive,
have been fulfilled.
(iv) Since September 30, 2004, there shall have been no
material adverse change or effect that, individually or when taken together with
all other changes or effects, is or could be likely to be materially adverse to
the business assets, financial condition, operations, capitalization, or
prospects of the Company and its subsidiaries, taken as a whole.
(v) The Investor shall have a first priority security interest
in all of the assets of the Company, each of the Subsidiaries and the collateral
described in the Mine Security Agreement.
(vi) There shall be no challenge to the enforceability or
validity of any of the Transaction Documents or any of the Mine Contracts.
6. CONDITIONS TO OBLIGATIONS OF THE COMPANY. The Company's
obligation to issue and sell the applicable Note at the Closing is subject to
the fulfillment, on or prior to the each Applicable Closing Date, of the
following conditions, any of which may be waived in whole or in part by the
Company:
(a) Representations and Warranties. The representations and
warranties made by the Investor in SECTION 3 hereof shall be true and correct
when made, and shall be true and correct on the Applicable Closing Date.
(b) Governmental Approvals and Filings. Except for any notices
required or permitted to be filed after the Applicable Closing Date with certain
federal and state securities commissions, the Company shall have obtained all
governmental approvals required in connection with the lawful sale and issuance
of the applicable Note.
(c) Legal Requirements. At the Closing, the sale and issuance by the
Company, and the purchase by the Investor, of the applicable Note shall be
legally permitted by all laws and regulations to which the Investor or the
Company are subject.
(d) Purchase Price. The Investor shall have delivered to the Company
the Applicable Purchase Price.
7. AFFIRMATIVE COVENANTS.
(a) Reverse Stock Split. Within ninety (90) calendar days following
the Initial Closing, the Company will undertake a reverse stock split which will
be determined in collaboration with its advisors and bankers.
22
(b) Financial Statements And Other Reports. The Company will
maintain a system of accounting established and administered in accordance with
sound business practices to permit preparation of financial statements in
accordance with GAAP and to provide the information required to be delivered to
the Investor hereunder, and will deliver to the Investor:
(i) as soon as practicable and in any event within 30 days
after the end of each month, a consolidated balance sheet of the Company and its
consolidated Subsidiaries as at the end of such month and the related
consolidated statements of operations and cash flows for such month, and for the
portion of the Fiscal Year ended at the end of such month setting forth in each
case in comparative form the figures for the corresponding periods of the
previous Fiscal Year and the figures for such month and for such portion of the
Fiscal Year ended at the end of such month set forth in the annual operating and
capital expenditure budgets and cash flow forecast delivered pursuant to SECTION
7(B)(VIII), all in reasonable detail and certified by the chief financial
officer of the Company as fairly presenting the financial condition and results
of operations of the Company and its consolidated Subsidiaries and as having
been prepared in accordance with GAAP applied on a basis consistent with the
audited financial statements of the Company, subject to changes resulting from
audit and normal year-end adjustments;
(ii) as soon as available and in any event within 90 days
after the end of each Fiscal Year, a consolidated balance sheet of the Company
and its consolidated Subsidiaries as of the end of such Fiscal Year and the
related consolidated statements of operations, stockholders' equity and cash
flows for such Fiscal Year, setting forth in each case in comparative form the
figures for the previous Fiscal Year and the figures for such Fiscal Year set
forth in the annual operating and capital expenditure budgets and cash flow
forecast delivered pursuant to SECTION 7(B)(VIII), certified (solely with
respect to such consolidated statements) without qualification (other than a
going concern qualification) by Stonefield Xxxxxxxxx, Inc. or other independent
public accountants acceptable to the Investor of nationally recognized standing;
(iii) together with each delivery of financial statements
pursuant to SECTION 7(B)(I) and 7(B)(II) above, an Officer's Certificate of the
Company (A) stating that the officer executing such certificate has reviewed the
terms of this Agreement and has made, or caused to be made under supervision, a
review in reasonable detail of the transactions and condition of the Company
during the accounting period covered by such financial statements and that such
review has not disclosed the existence during or at the end of such accounting
period, and that such officer does not have knowledge of the existence as at the
date of such Officer's Certificate of any Default, or, if any such Default
existed or exists, specifying the nature and period of existence thereof and
what action the Company has taken or is taking or proposes to take with respect
thereto, (B) providing details of all transactions between the Company and any
Related Person of the Company and (C) if not specified in the financial
statements delivered pursuant to 7(B)(I) and 7(B)(II) above, as the case may be,
specifying the aggregate amount of interest paid or accrued and the aggregate
amount of depreciation and amortization charged, during such accounting period;
(iv) promptly upon receipt thereof, copies of all reports
submitted to the Company by independent public accountants in connection with
each annual, interim or special audit of the financial statements of the Company
made by such accountants, including the comment letter submitted by such
accountants to management in connection with their annual audit;
23
(v) promptly upon their becoming available, copies of (A) all
financial statements, reports, notices and proxy statements sent or made
available generally by the Company to its security holders, (B) all regular and
periodic reports and all registration statements and prospectuses filed by the
Company with any securities exchange or with the SEC or any successor and (C)
all press releases and other statements made available generally by the Company
concerning material developments in the business of the Company;
(vi) promptly upon any executive officer of the Company
obtaining knowledge (A) of the existence of any Event of Default, or becoming
aware that the holder of any Debt of the Company has given any notice or taken
any other action with respect to a claimed default thereunder, (B) of any change
in the Company's independent public accountant or any resignation, or decision
not to stand for re-election, by any member of the Company's board of directors
(or comparable body), (C) that any Person has given any notice (other than a
notice received by the Company within 30 days of the Closing Date with respect
to a default under a material lease that has been cured or waived on or prior to
60 days after the Closing Date) to the Company with respect to a claimed default
under any Material Contract or instrument (other than the Transaction Documents)
to which the Company is a party or by which any of its assets is bound, or (D)
of the institution of any litigation or arbitration involving an alleged
liability of the Company equal to or greater than $100,000 or any adverse
determination in any litigation or arbitration involving a potential liability
of the Company equal to or greater than $100,000, an Officer's Certificate of
the Company specifying the nature and period of existence of any such condition
or event, or specifying the notice given or action taken by such holder or
Person and the nature of such claimed default (including any Event of Default),
event or condition, and what action the Company has taken, is taking or proposes
to take with respect thereto;
(vii) simultaneously with the financial statements referred to
in SECTION 7(B)(I) above, operating plans and financial forecasts, including
cash flow projections covering proposed fundings, repayments, additional
advances, investments and other cash receipts and disbursements, in each case to
the extent prepared from time to time by the management of the Company for
internal use;
(viii) at the conclusion of each Fiscal Year, the Company's
annual operating and capital expenditure budgets and cash flow forecast for the
following Fiscal Year presented on a monthly basis, which shall be in a format
reasonably consistent with projections, budgets and forecasts theretofore
provided to the Investor; and
(ix) with reasonable promptness, such other information and
data relating to the Company as from time to time may be reasonably requested by
the Investor.
(c) Payment Of Obligations. The Company (i) shall pay and discharge,
and cause its Subsidiaries to pay and discharge, at or before maturity, all of
their respective material obligations and liabilities, including Tax
liabilities, except where the same may be the subject of a Permitted Contest,
(ii) shall maintain, and cause its Subsidiaries to maintain, in accordance with
GAAP, appropriate reserves for the accrual of any of the same and (iii) shall
not breach or permit its Subsidiaries to breach, in any material respect, or
permit to exist any material default under, the terms of any lease, commitment,
contract, instrument or obligation to which it is a party, or by which
24
its properties or assets are bound. "PERMITTED CONTEST" means a contest
maintained in good faith by appropriate proceedings promptly instituted and
diligently conducted and with respect to which such reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made; provided that compliance with the obligation that is the subject of such
contest is effectively stayed during such challenge. "Permitted Contest" shall
also mean the debt listed on SCHEDULE 2 hereto.
(d) Conduct Of Business And Maintenance Of Existence. The Company
will continue, and will cause its Subsidiaries to continue, to engage in
business of the same general type as they now conduct and will preserve, renew
and keep in full force and effect, and will cause its Subsidiaries to preserve,
renew and keep in full force and effect their respective existence (unless
merged into the Company or a Subsidiary) and their respective material rights,
privileges and franchises necessary or desirable in the normal conduct of
business.
(e) Insurance. The Company will maintain, and will cause its
Subsidiaries to maintain, insurance (with financially sound and reputable
insurers) covering, without limitation, fire, theft, burglary, public liability,
property damage, product liability, workers' compensation and insurance on all
property and assets material to the operation of the business, all in amounts
customary for the Company's industry. The Company shall continue to maintain in
full force and effect directors' and officers' insurance in an amount and on
other terms as approved by a majority of the board of directors of the Company.
(f) Compliance With Laws; Filings Of Reports. The Company will
comply, and cause its Subsidiaries to comply with all applicable laws,
ordinances, rules, regulations, and requirements of governmental authorities
(including all environmental laws and ERISA and the rules and regulations
thereunder). The Company will, for so long as it has securities registered under
the Exchange Act or has an effective registration statement under the Securities
Act, make timely filing of such reports (which shall be complete and accurate)
as are required to be filed by it with the SEC.
(g) Inspection Of Property, Books And Records. The Company will
keep, and will cause its Subsidiaries to keep, proper books of record and
account in which full, true and correct entries shall be made of all dealings
and transactions in relation to its business and activities; and will permit,
and will cause its Subsidiaries to permit, representatives of the Investor, at
the Investor's expense, to visit and inspect any of their respective properties,
to examine and make abstracts or copies from any of their respective books and
records, to conduct a collateral audit and analysis of their respective
inventories and accounts receivable and to discuss their respective affairs,
finances and accounts with their respective officers and employees, all at such
reasonable times during normal business hours and as often as may reasonably be
desired.
(h) Reservation Of Shares. The Company shall at all times reserve
and keep available out of its authorized but unissued shares of Common Stock,
solely for the purpose of effecting the conversion of the Notes and the exercise
of the Warrant, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding Notes and the
full exercise of the Warrant and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all the then outstanding
25
Notes and the full exercise of the Warrant, the Company will take such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose, including without limitation engaging in best
efforts to obtain the requisite shareholder approval. Without in any way
limiting the foregoing, the Company agrees to reserve and at all times keep
available solely for purposes of conversion of Notes and the exercise of the
Warrant such number of authorized but unissued shares of Common Stock that is at
least equal to 100% of the aggregate shares issuable upon conversion of Notes,
and 100% of the aggregate shares issuable on exercise of the Warrant, which
number shall be appropriately adjusted for any stock split, reverse split, stock
dividend or reclassification of the Common Stock. The Company will not avoid or
seek to avoid the observance or performance of any of the terms of the Notes or
Warrant, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such action as may be necessary or
appropriate to protect the rights of the Investor thereunder. In addition, the
Company will promptly take all action as may from time to time be required to
permit the Investor to convert the Notes and exercise the Warrant to permit the
Company to duly and effectively issue shares of Common Stock pursuant thereto,
including, without limitation, complying with any applicable pre-merger
notification, reporting and waiting period requirements specified in 15 U.S.C.
Section 18a and all regulations promulgated thereunder, with costs associated
with compliance with such requirements to be borne by the Company.
(i) Investor Meetings. Within 30 days after the end of each fiscal
quarter, at the request of the Investor the Company will conduct a meeting with
the Investor to discuss such fiscal quarter's results and the financial
condition of the Company at which shall be present the chief executive officer
and the chief financial officer of the Company and such other officers of the
Company as the Company's chief executive officer shall designate. Such meetings
shall be held at a time and place convenient to the Investor and to the Company.
(j) Observer Rights; Expenses Of Board Observer. The Company will
notify the Investor of all meetings and actions by written consent of the board
of directors and each committee thereof at the same time and in the same manner
as notice of any meetings is required to be given to such Persons who do not
waive such notice (or, if such action requires no notice, then two Business
Days' written notice thereof describing the matters upon which action is to be
taken). Investor shall be allowed one representative (the "BOARD OBSERVER") of
its choice (which individual shall be reasonably acceptable to the Company) to
attend all meetings of the Company's board of directors in a nonvoting capacity
for so long as the Investor owns any of (i) the Note or (ii) the Securities
representing, convertible into and/or exercisable for at least 50% of the Common
Stock Equivalents (as defined below). In connection therewith, the Company shall
provide the Board Observer with copies of all notices, minutes, consents and
other materials, financial or otherwise, which the Company provides to its board
of directors; provided, however, that the Company reserves the right to exclude
such Board Observer from access to any material or meeting or portion thereof if
the Company in good faith believes, upon advice of counsel, that such exclusion
is necessary to preserve the attorney-client privilege. The Company shall
reimburse the Board Observer for any reasonable expenses incurred in connection
with its function as a Board Observer, including travel and lodging expenses
incurred to attend meetings of the Company's board of directors.
26
(k) Communication With Accountants. The Company authorizes the
Investor to communicate directly with its independent certified public
accountants and tax advisors and authorizes those accountants to disclose to the
Investor any and all financial statements and other supporting financial
documents and schedules including copies of any management letter with respect
to the business, financial condition and other affairs of the Company and any of
its subsidiaries. At or before the Closing Date, the Company shall deliver a
letter addressed to such accountants and tax advisors instructing them to comply
with the provisions of this SECTION 7(K).
(l) Trading Market. For so long as the Investor holds any of the
Securities, the Company shall maintain a trading market on the NASD
Over-the-Counter Bulletin Board (the "OTC BULLETIN BOARD"), or another national
exchange recognized as such by the SEC, and shall comply with all of the OTC
Bulletin Board listing requirements or other national exchange listing
requirements. Without limiting the generality of the foregoing, the Company
shall not list its shares on an exchange other than the NASDAQ National Market
System, the American Stock Exchange or the New York Stock Exchange (the
"APPROVED MARKETS"); provided that the Company's Common Stock may also be
supplementally listed on a major overseas market as long as it is primarily
listed on an Approved Market.
(m) Notification Of Certain Matters. The Company shall give prompt
notice to the Investor of the occurrence or non-occurrence of any event known to
the Company the occurrence or non-occurrence of which could cause (i) any
representation or warranty contained in SECTION 2 that is qualified as to
materiality to be untrue, (ii) any representation or warranty contained in
SECTION 2 that is not so qualified as to materiality to be untrue in any
material respect, or (iii) the failure of the Company to comply with or satisfy
any covenant or agreement under the Transaction Documents.
(n) Poison Pill. If the Company adopts a stockholder rights or
similar plan following the date of this Agreement, the Plan shall provide that
the acquisition of shares of stock of the Company by the Investor will not
trigger the poison pill provisions of such plan or any other subsequently
adopted plan or agreement, or a substantially similar occurrence under any
successor or similar plan.
(o) Termination Of Covenants. The covenants set forth in this
SECTION 7 (other than the covenants set forth in SECTION 7(H) regarding Board
Observer rights and their related expenses) shall continue in effect until the
full principal amount, all accrued but unpaid interest outstanding and any other
amounts owed on any of the Notes are repaid in full.
(p) Insurance. The Company will and will cause each of its
Subsidiaries to maintain, with financial sound and reputable insurers, insurance
with respect to their respective properties and businesses against such
casualties and contingencies, of such types, on such terms and in such amounts
(including deductibles, co-insurance and self-insurance, if adequate reserves
are maintained with respect thereto) as is customary in the case of entities of
established reputations engaged in the same or a similar business and similarly
situated. So long as any Note is outstanding, the Company shall maintain
directors and officers insurance policies with an aggregate policy limit of at
least ten million dollars ($10,000,000).
27
(q) Maintenance of Properties. The Company will and will cause each
of its Subsidiaries to maintain and keep, or cause to be maintained and kept,
their respective properties in good repair, working order and condition (other
than ordinary wear and tear), so that the business carried on in connection
therewith may be properly conducted at all times, provided that this Section
shall not prevent the Company or any Subsidiary from discontinuing the operation
and maintenance of any of its properties if such discontinuance is desirable in
the conduct of its business and the Company has concluded that such
discontinuance would not, individually or in the aggregate, have a Materially
Adverse Effect.
(r) Payment of Taxes. The Company will and will cause each of its
Subsidiaries to file all Tax returns required to be filed in any jurisdiction
and to pay and discharge all Taxes shown to be due and payable on such returns
and all other Taxes, assessments, governmental charges, or levies payable by any
of them, to the extent such Taxes and assessments have become due and payable
and before they have become delinquent, provided that neither the Company nor
any Subsidiary need pay any such Tax or assessment if the amount, applicability
or validity thereof is contested by the Company or such Subsidiary on a timely
basis in good faith and in appropriate proceedings, and the Company or a
Subsidiary has established adequate reserves therefor in accordance with GAAP on
the books of the Company or such Subsidiary.
(s) Intercreditor Agreement. Each party to the Security Documents
shall execute, and the Company shall cause each of the Fialkov Entities and the
parties to the Security Documents, to execute an Intercreditor Agreement in form
and substance reasonably satisfactory to Investor, pursuant to which the
Investor shall be granted a first priority security interest in all of the
assets covered by the Security Documents pari passu with any first priority
security interest in favor or any of the Fialkov Entities.
8. NEGATIVE COVENANTS. Except as otherwise consented to in writing by the
Investor, the Company agrees that so long as any of the Notes remain
outstanding:
(a) Burn Rate. The aggregate Burn Rate of the Company together with
its Subsidiaries shall not exceed $325,000 during any month that any of the
Notes remains outstanding, commencing February 1, 2005.
(b) Debt. The Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly, create, incur, assume, guarantee or
otherwise become or remain directly or indirectly liable with respect to, any
Debt, or any contingent obligations which would be Debt hereunder if they were
non-contingent, except for:
(i) Debt or such contingent obligations outstanding on the
date of this Agreement as set forth in paragraph 8(b)(i) of the Schedule of
Exceptions plus any renewals, extensions, replacements or other refinancing
thereof, provided that after giving effect to such renewal, extension,
replacement or other refinancing, Debt permitted pursuant to this Section
8(b)(i) does not exceed the amount listed on Schedule of Exceptions as of the
Initial Closing Date (and accrued interested thereon);
(ii) Debt under the Transaction Documents;
28
(iii) Debt incurred or assumed for the purpose of financing
all or any part of the cost of acquiring any asset (including through capital
leases), in an aggregate principal amount at any time outstanding not greater
than $50,000; and
(iv) Debt to a wholly-owned Subsidiary.
(c) Negative Pledge. The Company will not, and will not permit any
of its Subsidiaries to, create, assume or suffer to exist any Encumbrance on any
asset now owned or hereafter acquired by it, except:
(i) any Encumbrance on any asset securing Debt permitted under
SecTION 8(B)(III) incurred or assumed for the purpose of financing all or any
part of the cost of acquiring such asset, provided that such Encumbrance
attaches solely to such asset and concurrently with or within 90 days after the
acquisition thereof;
(ii) Encumbrances existing on the date of this Agreement in
favor of 1568931 Ontario Ltd.;
(iii) inchoate Encumbrances for Taxes, assessments or
governmental charges or levies not yet due or payable; and
(iv) other Encumbrances arising in the Ordinary Course of
Business which do not secure any obligation in an amount exceeding $100,000 and
(ii) do not in the aggregate materially detract from the value of the Company's
or its Subsidiaries' assets or materially impair the use thereof in the
operation of their respective businesses.
(d) Consolidations, Mergers And Sales Of Assets. The Company will
not, and will not permit any of its Subsidiaries to, (i) consolidate or merge
with or into any other Person or (ii) sell, lease or otherwise transfer,
directly or indirectly, any of its or their assets, other than dispositions for
cash and fair value of assets that the board of directors (or comparable body)
of the Company determines in good faith are no longer used or useful to or
necessary for the business of the Company and its Subsidiaries.
(e) Restricted Payments. The Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, declare, order, pay, make or
set apart any sum for any Restricted Payment. As used herein, "RESTRICTED
PAYMENT" means as to any Person (i) any dividend or other distribution on any
equity interest in such Person (except those payable solely in equity interests
of the same class) or (ii) any payment on account of (a) the purchase,
redemption, retirement, defeasance, surrender or acquisition of any equity
interests in such Person or any claim respecting the purchase or sale of any
equity interest in such Person or (b) any option, warrant or other right to
acquire any equity interests in such Person.
(f) Purchase Of Assets; Investments. The Company will not, and will
not permit any of its Subsidiaries to, acquire any assets other than in the
Ordinary Course of Business. The Company will not, and will not permit any of
its Subsidiaries to, make, acquire or own any Investment (as defined below) in
any Person other than Investments in Subsidiaries; provided that the aggregate
amount of Investments in Subsidiaries (whether now existing or hereafter created
or
29
acquired) made after the date hereof shall not exceed $100,000. Without limiting
the generality of the foregoing, the Company will not, and will not permit any
of its Subsidiaries to, (i) acquire or create any Subsidiary or (ii) engage in
any joint venture or partnership with any other Person, in each case without the
prior written consent of the Investor; provided that the foregoing clause (i)
shall not prohibit the Company or any Subsidiary from entering into a strategic
alliance which does not involve the transfer of cash or other assets, or equity
of the Company or any such Subsidiary. As used herein, "INVESTMENT" means any
investment in any Person, whether by means of acquiring or holding securities,
capital contribution, loan, time deposit, advance, guarantee or otherwise.
(g) Transactions With Affiliates. Except for transactions on fair
and reasonable terms and conditions no less favorable to the Company as the
terms and conditions which would apply in a comparable transaction with a Person
other than an Affiliate, the Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property or
the rendering of any service) with any Affiliate of the Company or any of the
Subsidiaries without the prior written consent of the Investor. Additionally,
the Company will not, and will not permit its Subsidiaries to, make any loans
that aggregate more than $10,000 or authorize or enter into any employment,
consulting or similar compensation agreements (other than at-will arrangements)
in excess of $150,000.
(h) Notice Of Issuance Of Securities. The Company shall not issue
any securities from the date of this Agreement until the conversion of the
Notes, in their entirety, without the prior written consent of the Investor,
such consent not to be unreasonably withheld; provided that the Company shall
not be required to obtain such consent in connection with (i) any issuance of
securities pursuant to the exercise or conversion of any securities outstanding
as of the date of this Agreement, (ii) the issuance of any shares of Common
Stock, or options or other rights to purchase or acquire shares of Common Stock,
or the issuance of any other securities, to directors, employees, consultants or
advisors to the Company pursuant to a formal plan duly adopted by the board of
directors, (iii) the issuance by the Company of Common Stock to any Person that
is not an Affiliate of the Company or (iv) the issuance by the Company of Common
Stock to the Investor as payment of interest on any Note.
(i) Amendments And Waivers. Without the prior written consent of the
Investor, the Company will not, nor will the Company permit any of its
Subsidiaries to, amend or waive any of the Organizational Documents of the
Company or such Subsidiary.
(j) No Impairment. The Company will not, by amendment of
Organizational Documents, or through reorganization, consolidation, merger,
dissolution, issuance or sale of securities, sale of assets or any other
voluntary action, willfully avoid or seek to avoid the observance or performance
of any of the provisions of this Agreement or any of the Transaction Documents,
but will at all times in good faith assist in the carrying out of all such
provisions and in the taking of all such action as may be necessary or
appropriate to protect the rights of the Investor under this Agreement and the
other Transaction Documents against wrongful impairment.
(k) Compliance. The Company will not become an "investment company"
or a company controlled by an "investment company," under the Investment Company
Act of 1940 or
30
undertake as one of its important activities extending credit to purchase or
carry margin stock, or use the proceeds of any Credit Extension for that
purpose; fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail
to comply with the Federal Fair Labor Standards Act or violate any other law or
regulation, if the violation could reasonably be expected to have a material
adverse effect on Company's or its Subsidiaries' business or operations or would
reasonably be expected to cause a Material Adverse Effect.
9. RIGHTS OF FIRST REFUSAL.
(a) Subsequent Offerings. The Investor shall have the following
rights of first refusal with respect to New Securities (as defined below) that
the Company may from time to time propose to sell and issue after the date of
this Agreement:
(i) Until the Investor converts in full the Notes or the
Company repays in full the full principal amount, all accrued but unpaid
interest outstanding and any other amounts owed on the Notes, the Investor shall
have a right of first refusal to purchase all such New Securities (other than
the New Securities excluded by subsection (iv) hereof); and
(ii) At anytime after the Investor has converted in full the
Notes or the Company has repaid in full the principal amount, all accrued but
unpaid interest outstanding and any other amounts owed on the Notes and for so
long as the Investor owns Securities representing, convertible into and/or
exercisable for at least 50% of the Common Stock Equivalents (as defined below),
the Investor shall have a right of first refusal to purchase up to that portion
of such New Securities (other than the New Securities excluded by subsection (v)
hereof) that equals the proportion that the number of shares of Common Stock
issued and held, or issuable upon conversion of the Notes or exercise or
conversion of the Warrant then held, by the Investor bears to the total number
of shares of Common Stock then outstanding (assuming full conversion and
exercise of all convertible or exercisable securities).
The term "NEW SECURITIES" shall mean (A) any Common Stock, Preferred Stock or
other debt or equity security of the Company, or (B) any security convertible
into or exercisable for (including without limitation a warrant or option), with
or without consideration, any Common Stock, Preferred Stock or other debt or
equity security of the Company (including any option to purchase such a
convertible security). The term "COMMON STOCK EQUIVALENTS" shall mean all shares
of Common Stock issued to the Investor pursuant to conversion of the Notes or
exercise or conversion of the Warrant plus all shares of Common Stock issuable
to the Investor upon conversion of the Notes or exercise or conversion of the
Warrant.
(b) Exercise Of Rights. If the Company proposes to issue any New
Securities, it shall give the Investor written notice of its intention,
describing the New Securities, the price and the terms and conditions upon which
the Company proposes to issue the same. The Investor shall have fifteen (15)
days from the giving of such notice to agree to purchase up to 100% of the New
Securities for the price and upon the terms and conditions specified in the
notice by giving written notice to the Company and stating therein the quantity
of New Securities to be purchased.
31
(c) Issuance Of Securities To Other Persons. If the Investor fails
to exercise in full its rights of first refusal, the Company shall have ninety
(90) days thereafter to sell the New Securities in respect of which the
Investor's rights were not exercised, at a price and upon general terms and
conditions materially no more favorable to the purchasers thereof than specified
in the Company's notice to the Investor pursuant to subsection (ii) hereof. If
the Company has not sold such New Securities within ninety (90) days of the
notice provided pursuant to subsection (ii) hereof, the Company shall not
thereafter issue or sell any New Securities, without first offering such
securities to the Investor in the manner provided above.
(d) Excluded Securities. The rights of first refusal established by
this SECTION 9 shall not apply with respect to any of the following:
(i) shares of Common Stock (and/or options, warrants or other
Common Stock purchase rights issued pursuant to such options, warrants or other
rights) issued or to be issued to employees, officers or directors of the
Company, pursuant to stock purchase or stock option plans or other arrangements
that are approved by the Board of Directors and are issued pursuant to a
registration on, and in strict conformity with the eligibility requirements of,
Form S-8; or
(ii) shares of Common Stock (and/or options, warrants or other
Common Stock purchase rights issued pursuant to such options, warrants or other
rights) issued or to be issued to consultants of the Company, pursuant to stock
purchase or stock option plans or other arrangements that are approved by the
Board of Directors and are issued pursuant to a registration on, and in strict
conformity with the eligibility requirements of, Form S-8.
10. LEGENDS.
(a) Each certificate representing any of the Securities shall bear a
legend substantially in the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
BY THE HOLDER FOR ITS OWN ACCOUNT, FOR INVESTMENT PURPOSES AND NOT
WITH A VIEW TO THE DISTRIBUTION OF SUCH SECURITIES. THE SECURITIES
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT") AND ANY APPLICABLE STATE SECURITIES LAWS AND MAY
NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT AND COMPLIANCE WITH SUCH STATE
SECURITIES LAWS, IN COMPLIANCE WITH RULE 144 UNDER THE SECURITIES
ACT, OR AN OPINION OF COUNSEL OR OTHER EVIDENCE SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION AND/OR COMPLIANCE IS NOT REQUIRED."
The Company may instruct its transfer agent not to register the transfer of the
Securities, unless the conditions specified in the foregoing legends are
satisfied.
32
(b) Any legend endorsed on a certificate pursuant to Section 10(a)
and the stop transfer instructions with respect to such Securities shall be
removed and the Company shall issue a certificate without such legend to the
holder thereof (i) if such Securities are registered and sold under the
Securities Act and a prospectus meeting the requirements of Section 10 of the
Securities Act is available, (ii) if such legend may be properly removed under
the terms of Rule 144 promulgated under the Securities Act, or (iii) if such
holder provides the Company with an opinion of counsel for such holder,
reasonably satisfactory to legal counsel for the Company to the effect that a
sale, transfer or assignment of such Securities may be made without
registration.
11. INDEMNIFICATION. The Company agrees to protect, indemnify, defend and
hold harmless the Investor and all of its Affiliates, partners, and their
respective directors, members, attorneys (including, without limitation, those
retained in connection with the transactions contemplated by the Transaction
Documents), representatives, officers, and employees (collectively, the
"INDEMNITEES") from and against any and all liabilities, losses, damages or
expenses (including in respect of or for attorney's fees and other expenses) of
any kind or nature and from any suits, claims or demands, causes of action,
proceedings, (payable by the Company monthly in advance of being incurred if the
Company is not immediately assuming satisfactory defense of the matter, in the
amounts reasonably estimated by the Investor to be incurred) arising on account
of, relating to, in connection with, or as a result of (i) any breach of a
representation or warranty of the Company contained herein, (ii) any breach of
any covenant, agreement or obligation of the Company contained in any of the
Transaction Documents, (iii) any use by the Company of any proceeds of the
Notes, and (iv) any violation by the Company, its Subsidiaries or their
respective officers, directors and employees of the Securities Act, the Exchange
Act, or any other applicable rule, regulation or law arising on account of,
relating to, in connection with, or as a result of the Transaction Documents
and/or the transactions contemplated therein, except to the extent such
liability is finally judicially determined to directly arise from the willful
misconduct or gross negligence of any such Indemnitee. Upon receiving knowledge
of any suit, claim or demand asserted by a third party that Purchaser believes
is covered by this indemnity, Investor shall give the Company notice of the
matter and an opportunity to defend it, at the Company's sole cost and expense,
with legal counsel reasonably satisfactory to Investor. Any failure or delay of
Investor to notify the Company of any such suit, claim or demand shall not
relieve the Company of its obligations under this SECTION 11 but shall reduce
such obligations to the extent of any increase in those obligations caused
solely by any such failure or delay which is unreasonable. The obligations of
the Company under this SECTION 11 shall survive the payment and performance of
the Company's obligations under the Transaction Documents.
12. MISCELLANEOUS.
(a) Waivers and Amendments. Any provision of this Agreement may be
amended, waived or modified only upon the written consent of the Company and the
Investor.
(b) Governing Law. This Agreement and all actions arising out of or
in connection with this Agreement shall be governed by and construed in
accordance with the laws of the State of California, without regard to the
conflicts of law provisions of the State of California or of any other state.
33
(c) Exclusive Jurisdiction. Any action or proceeding brought by a
party hereto arising out of or in connection with this Agreement or any other
Transaction Document, shall be brought solely in a court of competent
jurisdiction located in the County of Los Angeles, State of California, or in
the United States District Court for the Central District of California. the
parties agree not to contest such exclusive jurisdiction or seek to transfer any
action relating to such dispute to any other jurisdiction. Each of the parties
hereby submits to personal jurisdiction and waives any objection as to venue in
the County of Los Angeles. Service of process on the parties in any action
arising out of or relating to this Agreement shall be effective if mailed to the
parties in accordance with SECTION 12(J) hereof.
(d) JURY WAIVER. EACH OF COMPANY AND INVESTOR HEREBY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF
LOS ANGELES, STATE OF CALIFORNIA. COMPANY AND INVESTOR HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE TRANSACTION DOCUMENTS OR ANY OF THE TRANSACTIONS
CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS.
(e) Survival. The warranties, representations and covenants of the
Company and Investor contained in or made pursuant to this Agreement shall
survive the execution and delivery of this Agreement and each Closing and shall
in no way be affected by any investigation of the subject matter thereof made by
or on behalf of the Investor or the Company.
(f) Successors and Assigns. Subject to the restrictions on transfer
described in SECTIONS 12(G) and (h) below, the rights and obligations of the
Company and the Investor shall be binding upon and benefit the successors,
assigns, heirs, administrators and transferees of the parties.
(g) Registration, Transfer and Replacement of the Notes. The Notes
issuable under this Agreement shall be registered Notes. The Company will keep,
at its principal executive office, books for the registration and registration
of transfer of the Notes. Prior to presentation of the Notes for registration of
transfer, the Company shall treat the Person in whose name such Notes is
registered as the owner and holder of such Notes for all purposes whatsoever,
whether or not such Notes shall be overdue, and the Company shall not be
affected by notice to the contrary. Subject to any restrictions on or conditions
to transfer set forth in the Notes, the holder of the Notes, at its option, may
in person or by duly authorized attorney surrender the same for exchange at the
Company's chief executive office, and promptly thereafter and at the Company's
expense, except as provided below, receive in exchange therefor one or more new
Notes, each in the principal requested by such holder, dated the date to which
interest shall have been paid on the Notes so surrendered or, if no interest
shall have yet been so paid, dated the date of the Notes so surrendered and
registered in the name of such Person or Persons as shall have been designated
in writing by such holder or its attorney for the same principal amount as the
then unpaid principal amount of the Notes so surrendered. Upon receipt by the
Company of evidence reasonably satisfactory to it of the ownership of and the
loss, theft, destruction or mutilation of the Notes and (a) in the case of loss,
theft or destruction, of indemnity reasonably satisfactory to it; or (b) in the
case of mutilation, upon surrender thereof, the Company, at its expense, will
execute and deliver in lieu thereof new Notes executed in the same manner as the
Notes being replaced, in the same principal amount as the unpaid principal
amount of the Notes and dated the date to which interest shall have been paid on
the Notes or, if no interest shall have yet been so paid, dated the date of the
Notes.
34
(h) Assignment by the Company. The rights, interests or obligations
hereunder may not be assigned, by operation of law or otherwise, in whole or in
part, by the Company without the prior written consent of the Investor.
(i) Entire Agreement. This Agreement together with the other
Transaction Documents constitute and contain the entire agreement between the
Company and Investor and supersede any and all prior agreements, negotiations,
correspondence, understandings and communications among the parties, whether
written or oral, respecting the subject matter hereof.
(j) Notices. All notices, requests, demands, consents, instructions
or other communications required or permitted hereunder shall be provided in the
manner that notices, requests, demands, consents, instructions or other
communications are to be provided under the Initial Note.
(k) Expenses. The Company shall pay, at the Initial Closing, all
legal fees of Investor's counsel in connection with the preparation, execution
and delivery of this Agreement and the other Transaction Documents up to a
maximum amount of $25,000; and shall, upon receipt of a xxxx therefor, reimburse
the reasonable out of pocket expenses of such counsel. The Company shall pay on
demand all fees and expenses, including attorneys' fees and expenses, incurred
by Investor with respect to any amendments or waivers hereof requested by the
Company or in the enforcement or attempted enforcement of any of the obligations
of the Company to the Investor under the Transaction Documents or in preserving
the Investor's rights and remedies (including, without limitation, all such fees
and expenses incurred in connection with any "workout" or restructuring
affecting the Transaction Documents or the obligations thereunder or any
bankruptcy or similar proceeding involving the Company or any of its
Subsidiaries).
(l) Severability of this Agreement. If one or more provisions of
this Agreement are judicially determined to be invalid, illegal or unenforceable
under applicable law, the parties agree to renegotiate such provision in good
faith, in order to maintain the economic position enjoyed by each party as close
as possible to that under the provision rendered invalid, illegal or
unenforceable. If the parties cannot reach a mutually agreeable and enforceable
replacement for such provision, then (i) such provision shall be excluded from
this Agreement, (ii) the balance of the Agreement shall be interpreted as if
such provision were so excluded and (iii) the balance of the Agreement shall be
enforceable in accordance with its terms.
(m) Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same agreement. Facsimile copies of signed
signature pages will be deemed binding originals.
(n) Publicity. Neither Investor nor the Company shall issue any
press release or make any public disclosure regarding the transactions
contemplated hereby unless such press release or public disclosure is approved
by those parties mentioned in such press release or public disclosure
35
in advance. Notwithstanding the foregoing, each of the parties hereto, may, if
required by the SEC or other regulatory bodies, make such public disclosures
with respect to the transactions contemplated hereby as each may be advised by
counsel is legally necessary or advisable; provided, however, that the
disclosing party shall give the other party prior written notice of such
requirement and a copy of the proposed public disclosure, in all cases with
sufficient time for such other parties to seek a protective order or other limit
on the proposed public disclosure (unless the disclosing party would suffer
penalties or sanctions for failure to immediately disclose such information).
The parties hereto acknowledge that immediately following the Initial Closing,
the Company intends to file with the SEC a current report on Form 8-K regarding
the transactions contemplated hereby, which report likely will include the
Transaction Documents attached as exhibits thereto. Investor hereby agrees that
it shall not seek a protective order or other limit on the proposed public
disclosure of such exhibits to the Transaction Documents.
(o) Definitions. In addition to the terms defined elsewhere in this
Agreement, the following terms shall have the meaning set forth below:
"AFFILIATE" has the meanings assigned to such terms in Rule 12b-2 of the
General Rules and Regulations under the Exchange Act.
"APPLICABLE CLOSING DATE" means, with respect to: (A) the Initial Closing,
the Initial Closing Date, (B) the Second Closing, the Second Closing Date, (C)
the Third Closing, the Third Closing Date, and (D) the Fourth Closing, the
Fourth Closing Date.
"APPLICABLE PURCHASE PRICE" means, with respect to: (A) the Initial Note,
the principal balance of the Initial Note, (B) the Second Note, the principal
balance of the Second Note, (C) the Third Note, the principal balance of the
Third Note, and (D) the Fourth Note, the principal balance of the Fourth Note.
"BURN RATE" means the rate at which an entity uses up its capital to
finance overhead (excluding interest payments on outstanding debt) before
generating positive cash flow from operations (i.e., a measure of negative cash
flow).
"BUSINESS DAY" means any day other than a Saturday, Sunday or other day on
which the national or state banks located in the State of California are
authorized to be closed.
"CLOSING" shall mean each of the Initial Closing, Second Closing, Third
Closing and Fourth Closing, as applicable.
"CODE" means the Internal Revenue Code of 1986.
"COMMON STOCK" means shares of the Company's common stock, par value
$0.001 per share.
"ENCUMBRANCE" means any charge, claim, community or other marital property
interest, condition, equitable interest, lien, option, pledge, security
interest, mortgage, right of way, easement, encroachment, servitude, right of
first option, right of first refusal or similar restriction, including any
restriction on use, voting (in the case of any security or equity interest),
transfer, receipt of income or exercise of any other attribute of ownership.
36
"END-USER" shall mean a bona fide purchaser of the Company's product for
consumption, and not resale or distribution, by such purchaser. As used in the
preceding sentence, "CONSUMPTION" shall include incorporating the Company's
product as an integral component other products.
"ENVIRONMENT" means soil, land surface or subsurface strata, surface
waters (including navigable waters and ocean waters), groundwaters, drinking
water supply, stream sediments, ambient air (including indoor air), plant and
animal life and any other environmental medium or natural resource.
"ENVIRONMENTAL LAW" means any Legal Requirement that requires or relates
to: (i) advising appropriate authorities, employees or the public of intended or
actual Releases of pollutants or hazardous substances or materials, violations
of discharge limits or other prohibitions and the commencement of activities,
such as resource extraction or construction, that could have significant impact
on the Environment; (ii) preventing or reducing to acceptable levels the Release
of pollutants or hazardous substances or materials into the Environment; (iii)
reducing the quantities, preventing the Release or minimizing the hazardous
characteristics of wastes that are generated; (iv) assuring that products are
designed, formulated, packaged and used so that they do not present unreasonable
risks to human health or the Environment when used or disposed of; (v)
protecting resources, species or ecological amenities; (vi) reducing to
acceptable levels the risks inherent in the transportation of hazardous
substances, pollutants, oil or other potentially harmful substances; (vii)
cleaning up pollutants that have been Released, preventing the Threat of Release
or paying the costs of such clean up or prevention; or (viii) making responsible
parties pay private parties, or groups of them, for damages done to their health
or the Environment or permitting self-appointed representatives of the public
interest to recover for injuries done to public assets.
"ERISA" means the Employee Retirement Income Security Act of 1974.
"EVENT OF DEFAULT" shall have the meaning given that term in the Initial
Note.
"EXCHANGE ACT" means the Securities and Exchange Act of 1934, as amended.
"FIALKOV DOCUMENTS" means that certain letter of intent between the
Company and 1568931 Ontario Ltd ("ONTARIO") dated September 29, 2004, as amended
by that certain letter of intent between the Company and Ontario dated November
1, 2004 and as further amended by that certain letter of intent between the
Company and Ontario dated November 18, 2004, and as further amended by that
certain letter of intent between the Company and Ontario dated January 4, 2005.
"FISCAL YEAR" means a fiscal year of the Company.
"GAAP" means generally accepted accounting principles for financial
reporting in the United States, applied on a basis consistent with the basis on
which the Financial Statements were prepared.
37
"HAZARDOUS MATERIAL" means any substance, material or waste which is or
will foreseeably be regulated by any Governmental Body, including any material,
substance or waste which is defined as a "hazardous waste," "hazardous
material," "hazardous substance," "extremely hazardous waste," "restricted
hazardous waste," "contaminant," "toxic waste" or "toxic substance" under any
provision of Environmental Law, and including petroleum, petroleum products,
asbestos, presumed asbestos-containing material or asbestos-containing material,
urea formaldehyde and polychlorinated biphenyls.
"INTELLECTUAL PROPERTY RIGHTS" means all (i) patents, patent applications,
patent disclosures and inventions, (ii) trademarks, service marks, trade dress,
trade names, logos and corporate names and registrations and applications for
registration thereof together will all of the goodwill associated therewith,
(iii) copyrights (registered and unregistered) and copyrightable works and
registrations and applications for registration thereof, (iv) mask works and
registrations and applications for registration thereof, (v) computer software,
data, data bases and documentation thereof, (vi) trade secrets and other
confidential information (including, without limitation, ideas, formulas,
compositions, inventions (whether patentable or unpatentable and whether or not
reduced to practice), know-how, manufacturing and production processes and
techniques, research and development information, drawings, specifications,
designs, plans, proposals, technical data, financial and marketing plans and
customer and supplier lists and information), (vii) other intellectual property
rights and (viii) copies and tangible embodiments thereof (in whatever form or
medium).
"INDEBTEDNESS" with respect to the Company or any of the Subsidiaries
means, at any time, without duplication, (i) its liabilities for borrowed money
and its redemption obligations in respect of mandatory redeemable preferred
stock; (ii) its liabilities for the deferred purchase price of property acquired
by the Company or any of the Subsidiaries (excluding accounts payable arising in
the ordinary course of business but including all liabilities created or arising
under any conditional sale or other title retention agreement with respect to
any such property); (iii) all liabilities appearing on its balance sheet in
accordance with GAAP in respect of capital leases; (iv) all liabilities for
borrowed money secured by any Encumbrance with respect to any property owned by
the Company or any of the Subsidiaries (whether or not it has assumed or
otherwise become liable for such liabilities); (v) all its liabilities in
respect of letters of credit or instruments serving a similar function issued or
accepted for its account by banks and other financial institutions (whether or
not representing obligations for borrowed money); and (vi) any guaranty of the
Company or any of the Subsidiaries with respect to liabilities of a type
described in any of subclauses (i) through (v) hereof.
"KNOWLEDGE"--an individual will be deemed to have Knowledge of a
particular fact or other matter if: (a) that individual is actually aware of
that fact or matter; or (b) a prudent individual could be expected to discover
or otherwise become aware of that fact or matter in the course of conducting a
reasonably comprehensive investigation regarding the accuracy of any
representation or warranty contained in this Agreement. A Person (other than an
individual) will be deemed to have Knowledge of a particular fact or other
matter if any individual who is serving, or who has at any time served, as a
director, officer, partner, executor or trustee of that Person (or in any
similar capacity) has, or at any time had, Knowledge of that fact or other
matter (as set forth in (a) and (b) above), and any such individual (and any
individual party to this Agreement) will be deemed to have conducted a
reasonably comprehensive investigation regarding the accuracy of the
representations and warranties made herein by that Person or individual.
38
"LEGAL REQUIREMENT" means any federal, state, local, municipal, foreign,
international, multinational or other constitution, law, ordinance, principle of
common law, code, regulation, statute or treaty.
"MATERIAL ADVERSE EFFECT" means, with respect to any event, act, condition
or occurrence of whatever nature (including any adverse determination in any
litigation, arbitration, or governmental investigation or proceeding), whether
singly or in conjunction with any other event or events, act or acts, condition
or conditions, occurrence or occurrences, whether or not related, a material
adverse change in, or a material adverse effect upon, any of (i) the financial
condition, operations, business, properties or prospects of the Company and its
Subsidiaries, taken as a whole, (ii) the rights and remedies of the Investor
under the Transaction Documents, or the ability of any of the Company or its
Subsidiaries to perform its obligations under the Transaction Documents to which
it is a party, (iii) the legality, validity or enforceability of any Transaction
Document, or (iv) the existence, perfection or priority of any security interest
granted in the Transaction Documents with respect to, or the value of, any
material collateral covered by the Transaction Documents.
"MATERIAL CONTRACTS" means (i) all of the Company's and its subsidiaries'
contracts, agreements, leases or other instruments to which the Company or any
of its subsidiaries is a party or by which the Company, its subsidiaries or its
properties are bound, which involve prospective fixed and/or contingent payments
or expenditures by or to the Company or its subsidiaries of more than $100,000
or in excess of the normal ordinary and usual requirements of its business or
which extend for a term of more than a year from the date hereof, (ii) all of
the Company's and its subsidiaries' loans or advances to any person or entity,
and all loan agreements, bank lines of credit agreements, indentures, mortgages,
deeds of trust, pledge and security agreements, factoring agreements,
conditional sales contracts, letters of credit or other debt instruments to
which the Company or any of its subsidiaries is a party, (iii) any guarantees by
the Company or any of its subsidiaries, (iv) all material operating or capital
leases for equipment to which the Company or any of its subsidiaries is a party,
(v) all non-competition and similar agreements to which the Company is a party,
(vi) all contracts for the employment of any officer or employee, (vii) all
contracts, agreements or commitments with any agent, independent contractor,
advisor or dealer that are not cancelable by it on notice of not longer than 30
days, (viii) all consulting agreements, (ix) all distributor and sales agency
agreements, (x) any collective bargaining or union agreements, contracts or
commitments, and (xi) all other contracts filed, or required to be filed by the
Company as an exhibit to the Company Reports pursuant to Item 601 of Regulation
S-B promulgated pursuant to the Securities Act.
"MINE CONTRACTS" means (i) the Second Amended and Restated Agreement dated
as of March 16, 2001, by and between Hi-Tech Environmental Products, LLC
("Hi-Tech") and Enviro Investment Group, LLC, as amended by a First Amendment
dated as of December 31, 2001, a Second Amendment dated as of December 31, 2002,
a Third Amendment dated as of February 2, 2004 and a Fourth Amendment dated
February 10, 2004, (ii) Agreement dated as of April 5, 2002, by and between
Hi-Tech and Red Rock Canyon Mineral, LLC, as amended by a First Amendment dated
as of February 2, 2004 and a Second Amendment dated as of February 10, 2004, and
(iii) Agreement dated as of April 5, 2002, by and between Hi-Tech and Valley
Springs Mineral, LLC, as amended by a First Amendment dated as of February 2,
2004 and a Second Amendment dated as of February 10, 2004, each as assigned to
the Company's subsidiary, VitroCo Incorporated, pursuant to an Assignment and
Assumption of Agreements dated February 3, 2004 and as amended by the Settlement
and Modification Agreement dated October 1, 2004.
39
"MINING COMPANIES" means Enviro Investment Group, A Limited Liability
Company, a Nevada limited liability company.
"NET SALES" means all revenues recognized by the Company from the sale of
its products in the Ordinary Course of Business (as determined under GAAP by the
Company) on or after January 1, 2004, less: (i) any allowances actually made and
taken for returns; shipping and insurance costs; discounts and promotional
allowances actually allowed; sales, use, value-added and similar taxes and
duties and similar governmental assessments (on products as shipped); (ii)
revenues from products sold to any of its Affiliates; and (iii) revenues from
products sold pursuant to any pilot or product testing plan, program or
endeavor. "NOTES" means the Initial Note, Second Note, Third Note and Fourth
Note, collectively. "NOTE" shall refer to each of the Notes, individually.
"OCCUPATIONAL SAFETY AND HEALTH LAW" means any Legal Requirement designed
to provide safe and healthful working conditions and to reduce occupational
safety and health hazards, including the Occupational Safety and Health Act, and
any program, whether governmental or private (such as those promulgated or
sponsored by industry associations and insurance companies), designed to provide
safe and healthful working conditions.
"ORDINARY COURSE OF BUSINESS" mean an action taken by a Person only if
that action: (i) is consistent in nature, scope and magnitude with the past
practices of such Person and is taken in the ordinary course of the normal,
day-to-day operations of such Person; (ii) does not require authorization by the
board of directors or shareholders of such Person (or by any Person or group of
Persons exercising similar authority) and does not require any other separate or
special authorization of any nature; and (iii) is similar in nature, scope and
magnitude to actions customarily taken, without any separate or special
authorization, in the ordinary course of the normal, day-to-day operations of
other Persons that are in the same line of business as such Person.
"ORGANIZATIONAL DOCUMENTS" means, with respect to any Person other than a
natural person, the documents by which such Person was organized (such as a
certificate of incorporation, articles of organization, partnership agreement or
limited liability company operating agreement) or which relate to the internal
governance of such Person (such as by-laws).
"PERSON" means an individual, partnership, corporation, business trust,
limited liability company, limited liability partnership, joint stock company,
trust, unincorporated association, joint venture or other entity or a
governmental body.
"GROSS PROFIT shall have the meaning given that term under GAAP.
40
"REGISTRATION RIGHTS AGREEMENT" has the meaning set forth in SECTION
5(A)(VI), and shall also include a registration rights agreement in the form of
EXHIBIT F covering the shares that may be issued under the applicable Note and
applicable Warrant.
"RELATED PERSON" means, with respect to a particular individual: (a) each
other member of such individual's Family; (b) any Person that is directly or
indirectly controlled by any one or more members of such individual's Family;
(c) any Person in which members of such individual's Family hold (individually
or in the aggregate) a Material Interest; and (d) any Person with respect to
which one or more members of such individual's Family serves as a director,
officer, partner, executor or trustee (or in a similar capacity). With respect
to a specified Person other than an individual, "RELATED PERSON" means: (a) any
Person that directly or indirectly controls, is directly or indirectly
controlled by or is directly or indirectly under common control with such
specified Person; (b) any Person that holds a Material Interest in such
specified Person; (c) each Person that serves as a director, officer, partner,
executor or trustee of such specified Person (or in a similar capacity); (d) any
Person in which such specified Person holds a Material Interest; and (e) any
Person with respect to which such specified Person serves as a general partner
or a trustee (or in a similar capacity).For purposes of this definition, (x)
"control" (including "controlling," "controlled by," and "under common control
with") means the possession, direct or indirect, of the power to direct or cause
the direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise, and shall be construed
as such term is used in the rules promulgated under the Securities Act; (y) the
"FAMILY" of an individual includes (i) the individual, (ii) the individual's
spouse, (iii) any other natural person who is related to the individual or the
individual's spouse within the second degree and (iv) any other natural person
who resides with such individual; and (z) "Material Interest" means direct or
indirect beneficial ownership (as defined in Rule 13d-3 under the Exchange Act)
of voting securities or other voting interests representing at least ten percent
(10%) of the outstanding voting power of a Person or equity securities or other
equity interests representing at least ten percent (10%) of the outstanding
equity securities or equity interests in a Person.
"RELEASE" means any release, spill, emission, leaking, pumping, pouring,
dumping, emptying, injection, deposit, disposal, discharge, dispersal, leaching
or migration on or into the Environment or into or out of any property.
"SEC" means the United States Securities and Exchange Commission.
"SECURITIES" means the Notes, the Warrant and any shares of Common Stock
of the Company issuable upon conversion of any of the Notes or exercise or
conversion of the Warrant, collectively.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITY DOCUMENTS" means, collectively, the Company Security Agreement,
the Subsidiary Security Agreement and the Mine Security Agreement.
"SUBSIDIARY" or SUBSIDIARIES" means with respect to any Person (the
"OWNER"), any corporation (other than corporations having no assets, liabilities
and operations, which shall be
41
dissolved within ten calendar days following the date of this Agreement) or
other Person of which securities or other interests having the power to elect a
majority of that corporation's or other Person's board of directors or similar
governing body, or otherwise having the power to direct the business and
policies of that corporation or other Person (other than securities or other
interests having such power only upon the happening of a contingency that has
not occurred), are held by the Owner or one or more of its Subsidiaries.
"TAX" or "TAXES" means any federal, state, local or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, property, windfall, profits, environmental, customs, capital stock,
franchise, employees' income withholding, foreign or domestic withholding,
social security, unemployment, disability, real property, personal property,
sales, use, transfer, value added, alternative or add-on minimum or other
similar tax, governmental fee, governmental assessment or governmental charge of
any kind whatsoever, including any interest, penalties or additions to Tax or
additional amounts with respect to the foregoing.
"THREAT OF RELEASE" means a reasonable likelihood of a Release that may
require action in order to prevent or mitigate damage to the Environment that
may result from such Release.
"TRANSACTION DOCUMENTS" has the meaning given that term in SECTION 5(A) of
this Agreement and shall include, without limitation, all of the Notes.
"WARRANTS" shall have the meaning given to that term in Section 1(b) of
this Agreement.
"WARRANT PRICE" means $0.12 per share, subject to adjustment as described
in Section 3 of the Warrants.
[Signature Page Follows]
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The parties have caused this Agreement to be duly executed and delivered
by their proper and duly authorized officers as of the date and year first
written above.
COMPANY:
VITROTECH CORPORATION,
a Nevada corporation
By:_________________________________________
Name:_______________________________________
Title:______________________________________
INVESTOR:
VITROBIRTH, LLC
a Delaware limited liability company
By:_________________________________________
Name:_______________________________________
Title:______________________________________
[Signature page for Note and Warrant Purchase Agreement]
43
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