8% SERIES C UNSECURED CONVERTIBLE DEBENTURE AND WARRANTS PURCHASE AGREEMENT BETWEEN AIRTRAX, INC.

 

 

   8% SERIES C UNSECURED CONVERTIBLE DEBENTURE AND WARRANTS PURCHASE AGREEMENT

 

                                     BETWEEN

 

                                  AIRTRAX, INC.

 

                                       and

 

             THE INVESTORS IDENTIFIED ON THE SIGNATURE PAGES HERETO

 

     THIS   8%   SERIES   C   UNSECURED   CONVERTIBLE DEBENTURE AND WARRANTS PURCHASE

AGREEMENT,   dated   as   of October 18, 2005 (the "Agreement"), is entered into by

and   between   the   investors   identified   on   the   signature   pages   Hereto (the

"Investor")   and   Airtrax,   Inc.   (Nasdaq   OTC   Bulletin   Board:   AITX.OB),   a

corporation   organized   and   existing   under the laws of the State of New Jersey

(the   "Company").

 

     WHEREAS,   the   parties   desire   that,   upon   the   terms   and subject to the

conditions   contained   herein, the Company shall issue and sell to the Investor,

and   the   Investor   shall   purchase   from the Company in the aggregate up to (i)

$5,000,000   principal   amount   of   the   Debenture   (as   defined   below) and (ii)

Warrants   (as   defined below) to purchase shares of the Common Stock (as defined

below);   and

 

     WHEREAS,   such   investments will be made in reliance upon the provisions of

Section   4(2)   ("Section   4(2)")   and/or   Section   4(6)   of   the   United   States

Securities Act of 1933, as amended, and/or Regulation D ("Regulation D") and the

other   rules   and   regulations   promulgated   thereunder   (the "Securities Act"),

and/or   upon   such   other   exemption   from   the registration requirements of the

Securities Act as may be available with respect to any or all of the investments

in   securities   to   be   made   hereunder.

 

     NOW,   THEREFORE,   in consideration of the mutual promises, representations,

warranties,   covenants   and   conditions set forth in this Agreement, the parties

hereto agree as follows.

 

                                    ARTICLE I

 

                               CERTAIN DEFINITIONS

 

     In addition to the definitions set forth in the text of this Agreement, the

following   capitalized   terms   shall   have   the meanings ascribed to them below:

 

     "Capital   Shares"   shall   mean the Common Stock and any shares of any other

class   of   common stock whether now or hereafter authorized, having the right to

participate   in   the   distribution   of   earnings   and   assets   of   the   Company.

 

 

                                   

<PAGE>

     "Capital   Shares   Equivalents"   shall   mean   any   securities,   rights,   or

 

obligations   that   are convertible into or exchangeable for or give any right to

subscribe   for   any   Capital   Shares   of the Company or any Warrants, options or

other rights to subscribe for or purchase Capital Shares or any such convertible

or exchangeable securities.

 

     "Closing" shall mean each closing of the purchase and sale of the Debenture

and   Warrants   pursuant   to   Section   2.1.

 

     "Closing   Date"   shall   mean   the   closing   of the purchase and sale of the

Debenture   and   Warrants   under   Section   2.1   hereof.

 

     "Common   Stock"   shall   mean   the   Company's common stock, no par value per

share.

 

     "Conversion   Shares"   shall   mean   the shares of Common Stock issuable upon

conversion of the Debenture and any shares of Common Stock issued as interest on

the   Debenture.

 

     "Conversion Price" shall mean the Conversion Price, as that term is defined

in   the   Debenture.

 

     "Damages"   shall   mean   any   loss,   claim,   damage,   judgment,   penalty,

deficiency,   liability,   costs   and   expenses   (including,   without   limitation,

reasonable   attorney's   fees and disbursements and reasonable costs and expenses

of   expert   witnesses   and   investigation).

 

     "Debenture"   shall   mean   the   8% Series C Unsecured Convertible Debenture,

substantially in the form attached hereto as Exhibit A.

                                          

     "Disclosure   Schedule" shall mean the written disclosure schedule delivered

on   or   prior to the date hereof by the Company to the Investor that is arranged

in paragraphs corresponding to the numbered and lettered paragraphs contained in

this Agreement.

 

     "Effective   Date"   shall   mean   the   date   on   which the SEC first declares

effective   a   Registration   Statement   registering the resale of the Registrable

Securities   applicable   to a particular Closing as set forth in the Registration

Rights   Agreement.

 

     "Escrow   Agent"   shall   have the meaning set forth in the Escrow Agreement.

 

 

                                      

<PAGE>

     "Escrow   Agreement"   shall   mean   the Escrow Agreement in substantially the

form   of   Exhibit   D   hereto   executed and delivered contemporaneously with this

Agreement.

 

     "Excepted   Issuances"   shall mean (i) the Company's issuance of warrants or

options   to   purchase   Common   Stock   to   officers,   directors,   employees   or

consultants   of   the   Company,   whether   pursuant to an employee stock option or

compensation   plan or otherwise, (ii) as a result of the exercise of Warrants or

conversion of Debentures which are granted or issued pursuant to this Agreement,

(iii)   as   full   and   partial   consideration   in   connection   with   a   merger,

consolidation   or   purchase   of substantially all of the securities or assets of

any   corporation   or   other   entity, including, without limitation, the proposed

acquisition   by   the   Company   of Filco GmbH, (iv) the issuance of securities in

situations   involving   strategic   business   partnerships,   and   acquisition

candidates,   and   (vii)   the   issuance   of   securities pursuant to securities or

arrangements   that   are   outstanding   or   in   place   prior   to   the date of this

Agreement   as have been described in the SEC Documents filed with the Commission

prior to the Closing Date.

 

     "Exchange   Act" shall mean the Securities Exchange Act of 1934, as amended,

and the rules and regulations promulgated thereunder.

 

     "GAAP"   shall   mean   generally accepted accounting principles in the United

States   as   shall   be   in   effect   from   time   to   time.

 

     "Irrevocable   Transfer   Agent   Instructions"   shall   mean   the   Irrevocable

Transfer   Agent Instructions, in the form of Exhibit F attached hereto, from the

Company   to   the   Company's   transfer   agent.

 

     "Issue Date" shall mean the date on which Debenture and Warrants are issued

pursuant   to   Article   II.

 

     "Legend"   shall   mean   the   legend   set   forth   in   Section   9.   1.

 

     "Material   Adverse   Effect"   shall   mean   any   effect   on   the   business,

operations,   properties,   prospects,   stock   price or financial condition of the

Company   that   is   material and adverse to the Company, taken as a whole, and/or

any   condition,   circumstance,   or   situation   that   would prohibit or otherwise

interfere   with   the ability of the Company to enter into and perform any of its

obligations   under   the   Transaction   Documents   in   any   material   respect.

 

     "Outstanding"   when   used with reference to Shares, shall mean, at any date

as   of   which   the   number   of   such   Shares is to be determined, all issued and

outstanding   Shares,   and   shall   include all such Shares issuable in respect of

outstanding   scrip or any certificates representing fractional interests in such

Shares;   provided,   however,   that   "Outstanding" shall not mean any such Shares

then   directly or indirectly owned or held by or for the account of the Company.

 

 

                                        3

<PAGE>

     "Person"   shall mean an individual, a corporation, a partnership, a limited

liability   company,   an   association,   a   trust or other entity or organization,

including   a government or political subdivision or an agency or instrumentality

thereof.

                                  

     "Principal   Market"   shall   mean   the American Stock Exchange, the New York

Stock   Exchange,   the   NASDAQ   National   Market, or the NASDAQ Small-Cap Market,

whichever is at the time the principal trading exchange or market for the Common

Stock   in   the United States, based upon share volume, or if the Common Stock is

not   then   traded   on   an   exchange   or   market,   the Nasdaq OTC Bulletin Board.

 

     "Purchase   Price"   shall   mean   the principal amount of the Debenture to be

purchased   pursuant   to   Section   2.1.

 

     "Registrable   Securities"   shall mean the Conversion Shares and the Warrant

Shares   until   (i) the Registration Statement has been declared effective by the

SEC, and all Conversion Shares and Warrant Shares have been disposed of pursuant

to   the   Registration   Statement,   (ii) all Conversion Shares and Warrant Shares

have   been sold under circumstances under which all of the applicable conditions

of   Rule   144   (or any similar provision then in force) under the Securities Act

("Rule   144")   are met, (iii) all Conversion Shares and Warrant Shares have been

otherwise   transferred   to holders who may trade such shares without restriction

under   the   Securities   Act,   and the Company has delivered a new certificate or

other evidence of ownership for such securities not bearing a restrictive legend

(iv)   such   time   as,   in   the opinion of counsel to the Company, all Conversion

Shares   and   Warrant   Shares may be sold within a 90-day period pursuant to Rule

144   (or   any   similar   provision   then in effect) under the Securities Act, (v)

shares   of   Common   Stock   set forth on Schedule 1(d) to the Registration Rights

Agreement   (as   defined   below),   and   (vi)   securities   issuable by the Company

pursuant   to   anti-dilution   provisions of the Debentures and/or Warrants   (vii)

shares   of   Common   Stock   issuable   by   the   Company, at the sole option of the

Company,   to   make   any   payments of interest upon the Debentures; (v) shares of

Common   Stock   to   be   issued pursuant to the Second Closing; and (vi) shares of

Common   Stock which may be issued by the Company between the date hereof and the

filing of the Registration Statement with the SEC in an amount not to exceed the

difference   between   the   gross   proceeds of securities sold in the Offering and

$5,000,000   of   gross   proceeds.

 

     "Registration   Rights   Agreement"   shall   mean   the agreement regarding the

filing   of   the   Registration   Statement   by   the   Company for the resale of the

Registrable Securities, entered into between the Company and the Investors as of

the   Closing   Date   substantially   in   the   form   annexed   hereto   as Exhibit C.

 

     "Registration   Statement" shall mean one or more registration statements on

Form SB-2   (if use of such form is then available to the Company pursuant to the

rules   of   the   SEC   and,   if not, on such other form promulgated by the SEC for

which   the   Company   then qualifies and which counsel for the Company shall deem

appropriate, and which form shall be available for the resale by the Investor of

the   Registrable   Securities   to be registered thereunder in accordance with the

provisions   of   this   Agreement,   the   Registration   Rights   Agreement   and   in

accordance with the intended method of distribution of such securities), for the

registration   of   the resale by the Investor of the Registrable Securities under

the   Securities   Act.

 

 

                                        4

<PAGE>

      "SEC"   shall   mean   the   Securities   and   Exchange   Commission.

 

      "Second   Closing"   shall   mean the proposed offering, on the same terms and

conditions   set   forth   in   the   Transaction   Documents,   of up to the remaining

$5,000,000   of   unsecured   convertible   debentures   and   common   stock   purchase

warrants   of the Company to certain existing accredited investors of the Company

who   have   elected   to   exercise   their   right   of participation granted to such

investors   pursuant to the Securities Purchase Agreement dated as of November 23

and   24, 2004 and the Subscription Agreement dated as of February 11, 2005.   The

Second   Closing   shall   take   place   on   or   prior   to   October   26,   2005.

 

     "Securities"   shall mean the Debenture, the Warrants, the Conversion Shares

and the Warrant Shares, collectively.

 

     "Securities   Act"   shall have the meaning set forth in the recitals of this

Agreement.

 

     "SEC   Documents"   shall   mean   each report, proxy statement or registration

statement   filed by the Company with the SEC pursuant to the Exchange Act or the

Securities   Act   from   the   initial filing with the SEC through the date hereof.

 

     "Shares" shall mean shares of Common Stock or Capital Shares.

 

     "Trading Day" shall mean any day during which the Principal Market shall be

open   for   business.

 

     "Transaction   Documents" shall mean this Agreement, the Registration Rights

Agreement,   the   Escrow   Agreement, the Debenture, the Warrants, the Irrevocable

Transfer   Agent   Instructions   and   each   of the other agreements, documents and

instruments   entered into and delivered by the parties hereto in connection with

the   transactions   contemplated   by   this   Agreement.

 

     "Warrants"   shall   mean the Warrants issued at Closing substantially in the

form   of   Exhibit   B   to   be   issued   to   the   Investor   hereunder.

 

     "Warrant   Shares" shall mean all shares of Common Stock or other securities

issued   or   issuable   pursuant   to   exercise   of   the   Warrants.

 

 

                                        5

<PAGE>

                                   ARTICLE II

 

              PURCHASE AND SALE OF CONVERTIBLE DEBENTURE AND WARRANTS

 

Section   2.1.   Investment.

     

     (a)      Upon   the   terms and subject to the conditions set forth herein, on

the Closing Date, the Company shall sell, and the Investor shall purchase, up to

$5,000,000 in principal amount of the Debenture at the applicable Purchase Price

and   Warrants   in   an   amount   and with an exercise price as provided in Section

2.1(c).

 

     (b)      The   Closing shall occur on the relative Closing Date at the Escrow

Agent's   offices,   at   which   time   the   Escrow   Agent   (x) shall release to the

Investor   the   Debenture   and Warrants to be issued on such Closing Date and (y)

shall   release   to the Company the Purchase Price in immediately available funds

(after   all   fees have been paid as set forth in the Escrow Agreement to be paid

on   the   Closing   Date),   pursuant   to   the   terms   of   the   Escrow   Agreement.

 

     (c)      The   number of Warrants to be issued to the Investor at the Closing

shall   be up to 2,500,000 (calculated as an amount equal to 100% of the quotient

of   (i)   the   principal amount of the Debenture issued at the Closing divided by

(ii)   the   Conversion   Price   on   the   Closing Date).   The exercise price of the

Warrants   shall   be   $3.25   per   share, subject to adjustment as provided in the

Warrant.   The   Warrants   shall   have   a   term of five years from the Issue Date.

 

     (d)      Company   Closing   Conditions.   The   obligation   of   the   Company

hereunder   to   issue   and sell the Debenture and Warrants to the Investor at the

Closing   is   subject to the satisfaction, at or before the Closing Date, of each

of   the   following   conditions,   provided   that   these   conditions   are   for the

Company's   sole benefit and may be waived by the Company at any time in its sole

discretion   by   providing   the   Investor   with   prior   written   notice   thereof:

 

          (i) The Investor shall have executed each of the Transaction Documents

     to be executed by them and delivered the same to the Company.

 

          (ii) The Escrow Agent shall have delivered to the Company the Purchase

     Price for the Debenture and the Warrants being purchased by the Investor at

     the Closing (less any amounts withheld pursuant to the Escrow Agreement) by

     wire   transfer   of immediately available funds pursuant to the written wire

     instructions provided by the Company.

 

          (iii) The representations and warranties of the Investor shall be true

     and   correct   as of the date when made and as of the Closing Date as though

     made   at that time (except for representations and warranties that speak as

     of   a   specific date), and the Investor shall have performed, satisfied and

     complied   with   the   covenants,   agreements   and conditions required by the

     Transaction   Documents to be performed, satisfied or complied with by it at

     or prior to the Closing Date.

 

     (e)      Investor   Closing   Conditions.   The   obligation   of   the   Investor

hereunder   to   purchase   the Debenture and Warrants at the Closing is subject to

the   satisfaction,   at   or   before   the   Closing   Date   thereof,   of each of the

following conditions, provided that these conditions are for the Investor's sole

benefit   and may be waived by the Investor at any time in its sole discretion by

providing   the   Company   with   prior   written   notice   thereof:

 

 

                                        6

<PAGE>

          (i)   The Company shall have executed each of the Transaction Documents

     to be executed by it and delivered the same to the Investor.

 

          (ii)   The   Common   Stock   shall   be   authorized   for   quotation on the

     Principal Market, trading in the Common Stock shall not have been suspended

     by the Principal Market or the SEC at any time beginning on the date hereof

      and   through and including the Closing Date, and the Company shall not have

     been   notified   of   any pending or threatened proceeding or other action to

     delist or suspend trading in the Common Stock.

 

          (iii)   The representations and warranties of the Company shall be true

     and   correct   as of the date when made and as of the Closing Date as though

     made   at that time (except for representations and warranties that speak as

     of   a   specific   date), and the Company shall have performed, satisfied and

     complied   with   the   covenants,   agreements   and conditions required by the

     Transaction   Documents   to   be performed, satisfied or complied with by the

     Company at or prior to the Closing Date.

 

          (iv)   The   Investor   shall   have received the opinion of the Company's

     counsel   dated   as   of   the   Closing   Date,   in   form,   scope and substance

     reasonably   satisfactory   to   the Investor and in substantially the form of

     Exhibit G attached   hereto.

 

           (v)   The   Company   shall   have   executed   and delivered (or shall have

     caused   the   Escrow   Agent   to deliver) to the Investor the Debenture being

     purchased by the Investor at the Closing.

 

          (vi)   The   Company   shall   have   executed and delivered (or shall have

     caused   the   Escrow   Agent   to   deliver) to the Investor the Warrants being

     purchased by the Investor at the Closing.

 

          (vii)   As   of the Closing Date, the Company shall have reserved out of

     its   authorized   and   unissued   Common   Stock,   solely   for   the purpose of

     effecting the issuance of the shares of Common Stock issuable in connection

     with   this   Agreement, a number of shares of Common Stock equal to at least

     200% of the number of (x) Conversion Shares issuable upon conversion of the

     Debenture to be outstanding on the Closing Date (assuming all the Debenture

     were   fully   convertible   on such date regardless of any limitations on the

     timing   or amount of such conversions) and (y) Warrant Shares issuable upon

     exercise   of   the   Warrants to be outstanding on the Closing Date (assuming

     all   such   Warrants   were   fully exercisable on such date regardless of any

     limitation on the timing or amount of such exercises).

 

          (viii) The Company shall have delivered the Irrevocable Transfer Agent

     Instructions   to   its   Transfer   Agent,   and such Transfer Agent shall have

     acknowledged receipt thereof in writing.

 

          (ix)   The   Company   shall have delivered to the Investor a certificate

     evidencing   the   good   standing   of   the   Company in New Jersey (and in any

     states where the Company is required to be qualified to do business) issued

     by the Secretary of State of such states.

 

           (x)   The Company shall have delivered to the Investor a certified copy

     of   its Certificate of Incorporation as certified by the Secretary of State

     of the State of New Jersey.

 

 

                                        7

<PAGE>

          (xi)   The   Company   shall   have   delivered   to the Investor such other

     documents   relating   to   the transactions contemplated by this Agreement as

     the Investor or its counsel may reasonably request.

 

Section   2.2.      Liquidated   Damages.   The parties hereto acknowledge and agree

that   the   sums   payable   pursuant   to   the   Registration Rights Agreement shall

constitute   liquidated   damages   and   not   penalties.   The   parties   further

acknowledge   that   (a)   the   amount   of loss or damages likely to be incurred is

incapable   or   is   difficult to precisely estimate, (b) the amounts specified in

the Registration Rights Agreement and the Debenture bear a reasonable proportion

and   are   not plainly or grossly disproportionate to the probable loss likely to

be   incurred   by   the   Investor in connection with the failure by the Company to

timely   cause the registration of the Registrable Securities and (c) the parties

are   sophisticated   business   parties and have been represented by sophisticated

and   able   legal   and   financial   counsel and negotiated this Agreement at arm's

length.

 

                                  ARTICLE III

 

                 REPRESENTATIONS AND WARRANTIES OF THE INVESTOR

 

The   Investor   represents   and   warrants   to   the   Company   that:

 

Section   3.1.   Intent.   The Investor is entering into this Agreement for its own

account   for   investment   purposes   only   and   not with a view to or for sale in

connection   with any distribution of the Securities. The Investor has no present

arrangement   (whether or not legally binding) at any time to sell the Securities

to   or   through   any   person   or   entity;   provided, however, that by making the

representations   herein, the Investor does not agree to hold such securities for

any   minimum   or   other   specific   term and reserves the right to dispose of the

Conversion   Shares and Warrant Shares at any time in accordance with federal and

state securities laws applicable to such disposition.

 

Section   3.2.   Organization   and Standing of the Investor. If the Investor is an

entity,   such   Investor   is   a   corporation,   partnership   or   other entity duly

incorporated   or organized, validly existing and in good standing under the laws

of the jurisdiction of its incorporation or organization.

 

Section   3.3. Authorization and Power. Each Investor has the requisite power and

authority to enter into and perform this Agreement and to purchase the Debenture

and Warrants being sold to it hereunder. The execution, delivery and performance

of   this   Agreement   by   such   Investor   and   the   consummation   by   it   of   the

transactions   contemplated   hereby   and thereby have been duly authorized by all

necessary   corporate   or   partnership   action,   and   no   further   consent   or

authorization   of   such   Investor   or   its   Board   of   Directors,   stockholders,

partners, members, as the case may be, is required. This Agreement has been duly

authorized,   executed   and   delivered by such Investor and constitutes, or shall

constitute   when   executed   and delivered, a valid and binding obligation of the

Investor enforceable against the Investor in accordance with the terms thereof.

 

 

                                        8

<PAGE>

Section   3.4.   No   Conflicts.   The   execution,   delivery and performance of this

Agreement and the consummation by such Investor of the transactions contemplated

hereby   or relating hereto do not and will not (i) result in a violation of such

Investor's charter documents or bylaws or other organizational documents or (ii)

conflict   with,   or constitute a default (or an event which with notice or lapse

of   time   or both would become a default) under, or give to others any rights of

termination, amendment, acceleration or cancellation of any agreement, indenture

or   instrument   or   obligation to which such Investor is a party or by which its

properties   or   assets   are bound, or result in a violation of any law, rule, or

regulation, or any order, judgment or decree of any court or governmental agency

applicable   to   such   Investor   or   its   properties   (except for such conflicts,

defaults   and   violations as would not, individually or in the aggregate, have a

Material   Adverse   Effect   on   such   Investor). Such Investor is not required to

obtain   any   consent,   authorization   or   order   of,   or   make   any   filing   or

registration   with, any court or governmental agency in order for it to execute,

deliver   or   perform   any of its obligations under this Agreement or to purchase

the   Debentures   or   acquire   the   Warrants in accordance with the terms hereof,

provided   that   for   purposes   of the representation made in this sentence, such

Investor   is   assuming   and   relying   upon   the   accuracy   of   the   relevant

representations and agreements of the Company herein.

 

Section 3.5.    Information on Company.    The Investor has been furnished with or

has   had   access   at   the   EDGAR Website of the Commission to the Company's Form

10-KSB   for   the   year   ended   December   31,   2004 as filed with the Commission,

together   with   all   subsequently filed Forms 10-QSB, 8-K, and filings made with

the   Commission   available   at   the   EDGAR   website   (hereinafter   referred   to

collectively   as   the   "Reports").   In   addition,   the   Investor has received in

writing   from   the   Company   such   other   information concerning its operations,

financial   condition   and other matters as the Investor has requested in writing

(such   other   information is collectively, the "Other Written Information"), and

considered   all   factors   the   Investor   deems   material   in   deciding   on   the

advisability   of   investing   in   the   securities.   The   Investor   has   had   full

opportunity to conduct, and has conducted, a complete and thorough due diligence

investigation   of   the   Company, and such opportunity has been made available to

the   Investor's   professional   representative(s) to ask questions of and receive

answers   from   representatives   of   the   Company   concerning the Company and its

financial   condition   and   prospects,   as well as request additional information

necessary   to   verify   the accuracy of the Reports and Other Written Information

provided   to   Investor.

 

Section   3.6.    Information   on   Investor.   The   Investor is, and will be at the

time of the purchase of the Debenture and Warrants, an "accredited investor", as

such   term   is   defined   in Regulation D promulgated by the Commission under the

1933   Act,   is   experienced   in   investments   and   business   matters,   has   made

investments   of   a   speculative   nature   and   has purchased securities of United

States   publicly-owned companies in private placements in the past and, with its

representatives,   has   such knowledge and experience in financial, tax and other

business   matters   as   to   enable   the   Investor to utilize the information made

available   by   the   Company   to   evaluate the merits and risks of and to make an

informed   investment   decision   with   respect   to   the   proposed purchase, which

represents a speculative investment.   The Investor has the authority and is duly

and   legally qualified to purchase and own the Securities.   The Investor is able

to   bear   the   risk   of such investment for an indefinite period and to afford a

complete   loss   thereof.   The information set forth on the signature page hereto

regarding   the   Investor   is   accurate.   The   Investor   is   not   required   to be

registered as a broker-dealer under Section 15 of the Securities Exchange Act of

1934,   as   amended   (the   "1934   Act")   and the Investor is not a broker-dealer.

 

 

                                        9

<PAGE>

Section   3.7.    Purchase   of   Debenture   and Warrants.   On the Closing Date, the

Investor   will   purchase   the   Debenture   and   Warrants as principal for its own

account   for   investment   only   and   not   with   a   view toward, or for resale in

connection   with,   the   public   sale   or   any   distribution   thereof.

 

Section   3.8.    Compliance   with   Securities   Act.   The Investor understands and

agrees   that   the   Securities have not been registered under the 1933 Act or any

applicable   state   securities laws, by reason of their issuance in a transaction

that   does   not   require   registration   under the 1933 Act (based in part on the

accuracy   of   the   representations and warranties of Investor contained herein),

and   that   such   Securities   must   be   held   indefinitely   unless   a   subsequent

disposition   is registered under the 1933 Act or any applicable state securities

laws   or   is   exempt   from   such   registration.   In   any   event,   and subject to

compliance   with   applicable securities laws, the Investor may enter into lawful

hedging transactions with third parties, which may in turn engage in short sales

of   the   Securities   in   the   course of hedging the position they assume and the

Investor   may   also   enter into short positions or other derivative transactions

relating   to   the   Securities,   or   interests in the Securities, and deliver the

Securities,   or   interests   in the Securities, to close out their short or other

positions   or   otherwise   settle   short   sales or other transactions, or loan or

pledge   the Securities, or interests in the Securities, to third parties that in

turn may dispose of these Securities.   Resales of the Securities by the Investor

will   be   made   in   compliance   with   all   applicable   securities laws including

Regulation   M   of   the   Securities   Exchange   Act   and   prospectus   delivery

requirements.

 

Section   3.9.   Communication   of   Offer.   The   offer   to sell the Securities was

directly   communicated   to   the   Investor   by   the   Company.   At no time was the

Investor   presented   with   or   solicited   by   any leaflet, newspaper or magazine

article,   radio   or   television   advertisement,   or   any   other   form of general

advertising   or   solicited   or invited to attend a promotional meeting otherwise

than   in   connection   and   concurrently   with   such   communicated   offer.

 

Section   3.10   Confidentiality/Public   Announcement.   From   the   date   of   this

Agreement   and until the Company makes a public announcement of the transactions

contemplated by this Agreement by filing a Form 8-K, Investor agrees it will not

disclose publicly or privately the nature of the transactions contemplated under

this   Agreement unless expressly agreed to in writing by the Company, or only to

the extent required by law.

 

Section   3.11.    Authority; Enforceability.   This Agreement and other agreements

delivered   together with this Agreement or in connection herewith have been duly

authorized,   executed   and   delivered   by the Investor and are valid and binding

agreements   enforceable   in   accordance with their terms, subject to bankruptcy,

insolvency,   fraudulent transfer, reorganization, moratorium and similar laws of

general   applicability   relating to or affecting creditors' rights generally and

 

 

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to   general   principles   of equity; and Investor has   full corporate   power   and

authority   necessary to   enter   into this   Agreement and   such other   agreements

and   to perform its obligations hereunder and under all other agreements entered

into   by   the   Investor   relating   hereto.   Section 3.12. Restricted Securities.

Investor understands that the Securities have not been registered under the 1933

Act   and such Investor will not sell, offer to sell, assign, pledge, hypothecate

or   otherwise   transfer   any   of   the Securities unless pursuant to an effective

registration   statement   under   the   1933   Act.   Notwithstanding anything to the

contrary   contained   in   this   Agreement,   such   Investor   may transfer (without

restriction   and   without   the need for an opinion of counsel) the Securities to

its   Affiliates   (as   defined   below)   provided   that   each such Affiliate is an

"accredited   investor"   under Regulation D and such Affiliate agrees to be bound

by   the   terms   and   conditions   of   this   Agreement.   For   the purposes of this

Agreement,   an   "Affiliate"   of   any   person or entity means any other person or

entity   directly   or   indirectly   controlling,   controlled by or under direct or

indirect   common   control   with   such   person or entity. Affiliate includes each

subsidiary   of the Company. For purposes of this definition, "control" means the

power   to direct the management and policies of such person or firm, directly or

indirectly,   whether   through the ownership of voting securities, by contract or

otherwise.

 

Section   3.13.    No   Governmental   Review.   Each   Investor   understands   that no

United   States federal or state agency or any other governmental or state agency

has   passed   on   or made recommendations or endorsement of the Securities or the

suitability of the investment in the Securities nor have such authorities passed

upon   or   endorsed   the   merits   of   the   offering   of   the   Securities.

 

Section   3.14.    No   Market   Manipulation.   No   Investor has taken, and will not

take,   directly   or indirectly, any action designed to, or that might reasonably

be expected to, cause or result in stabilization or manipulation of the price of

the   Common   Stock   to facilitate the sale or resale of the Securities or affect

the   price   at   which   the   Securities   may   be   issued   or   resold.

 

Section   3.15.    Short   Position   and Short Sales.   Each Investor covenants that

neither it nor any of their affiliates will engage in any illegal short sales of

or   illegal   hedging   transactions   with   respect to the Common Stock during the

period   from   the Closing Date until the later of (i) prior to Effective Date of

the   registration   statement   required   to   be   filed   pursuant   to   a   certain

Registration   Rights   Agreement   dated   as   of the date hereof, or (ii) 180 days

after   the   Closing   Date.

 

Section   3.16.    Correctness of Representations.   Each Investor represents as to

such   Investor   that   the   foregoing representations and warranties are true and

correct   as   of   the   date   hereof and, unless a Investor otherwise notifies the

Company   prior to each Closing Date shall be true and correct as of each Closing

Date.

 

Section 3.17.    Second Closing.   The Company shall be permitted to engage in the

proposed offering, on the same terms and conditions set forth in the Transaction

Documents, of up to the remaining $5,000,000 of unsecured convertible debentures

and common stock purchase warrants of the Company to certain existing accredited

investors   of   the   Company   who   have   elected   to   exercise   their   right   of

 

 

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participation   granted   to   such   investors   pursuant to the Securities Purchase

Agreement   dated   as   of November 23 and 24, 2004 and the Subscription Agreement

dated   as   of   February   11, 2005.   The Second Closing shall take place no later

than   15   business   days   from   the   Closing.

 

Section   3.18.      Survival.   The foregoing representations and warranties shall

su