SUBSCRIPTION AGREEMENT
THIS
SUBSCRIPTION AGREEMENT
(this "Agreement"),
dated as of February
11,
2005, by and among Airtrax Inc., a New Jersey corporation (the "Company"),
and
the subscribers identified on the signature page hereto (each a
"Subscriber" and
collectively "Subscribers").
WHEREAS, the Company
and the Subscribers are executing and delivering this
Agreement in reliance upon an exemption from securities
registration afforded by
the provisions of
Section 4(2), Section
4(6) and/or Regulation
D ("Regulation
D") as promulgated by the United States Securities and Exchange
Commission (the
"Commission") under the Securities Act of 1933, as amended (the
"1933 Act").
WHEREAS, the
parties desire that, upon the terms and subject to the
conditions
contained herein,
the Company shall issue and sell to the
Subscribers, as
provided herein, and the Subscribers, in the aggregate, shall
purchase up to Five
Million Dollars
($5,000,000)
(the "Purchase Price") of
principal amount
of promissory notes of the Company ("Note" or "Notes")
convertible into shares of the Company's common stock, no par value
(the "Common
Stock") at a per share
conversion
price equal to $1.30, and share purchase
warrants (the
"Warrants") in the form attached hereto as Exhibit A, to
purchase
shares of Common Stock (the "Warrant Shares"). The Notes, shares of
Common Stock
issuable upon
conversion
of the Notes (the
"Shares"),
the Warrants and the
Warrant Shares are collectively referred to herein as the
"Securities"; and
WHEREAS, the aggregate
proceeds of the sale
of the Notes and the Warrants
contemplated hereby
shall be held in
escrow pursuant
to the terms of a
Funds
Escrow Agreement
to be executed by the parties substantially in the form
attached hereto as Exhibit B (the "Escrow Agreement").
NOW,
THEREFORE,
in consideration of the mutual covenants and other
agreements contained
in this Agreement the Company and the Subscribers hereby
agree as follows:
1.
Conditions
to Closing.
Subject to the
satisfaction
or waiver of the
terms and conditions
of this Agreement,
on the "Closing
Date" (as defined
in
Section 2 below), each
Subscriber shall
purchase and the Company shall sell to
each Subscriber a Note in the principal amount designated on the signature
page
hereto and the amount of Warrants determined pursuant to Section 3 below.
The
aggregate principal
amount of the Notes to
be purchased by the
Subscribers on
the Closing Date shall, in the aggregate, be equal to the Purchase
Price.
2.
Closing. The consummation of the transactions contemplated herein shall
take place at the offices of Grushko & Mittman, P.C., 551 Fifth Avenue, Suite
1601, New York,
New York 10176,
upon the satisfaction of all conditions to
Closing set forth in this Agreement ("Closing Date").
3.
Warrants.
(a) A Warrants.
On the Closing Date, the Company will issue and
deliver Class A Warrants to the Subscribers. Fifty (50) Class A
Warrants will be
issued for each one hundred (100) Shares which would be issued on the
Closing
Date assuming the complete conversion of the Notes issued on the
Closing Date at
the Conversion
Price in effect on the
Closing Date. The per Warrant Share
exercise price to
acquire a Warrant
Share upon exercise
of a Class A
Warrant
shall be $1.85. The
Class A Warrants shall be exercisable until five (5) years
after the Closing Date. The Class A Warrants shall have a cashless
feature.
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(b) B Warrants.
On the Closing Date, the Company will issue and
deliver Class B Warrants to the Subscribers. Twenty-Five (25) Class B
Warrants
will be issued for each one hundred (100) Shares which would be issued on the
Closing Date assuming the complete conversion of the Notes issued
on the Closing
Date at the Conversion
Price in effect on the
Closing Date. The per Warrant
Share exercise
price to acquire a Warrant Share upon exercise of a Class B
Warrant shall be $____ (101% of the three day average closing bid prices of the
Common Stock on the trading day immediately preceding the Closing Date). The
Class B Warrants shall
be exercisable
until five (5) years
after the Closing
Date. The Class B Warrants shall have a cashless feature.
4.
Subscriber's
Representations
and Warranties.
Each Subscriber
hereby
represents and
warrants to and agrees with the Company only as to such
Subscriber that:
(a) Organization and Standing of the Subscribers. If the Subscriber
is
an entity, such
Subscriber 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.
(b) Authorization
and Power. Each
Subscriber has the requisite power
and authority to enter into and perform this Agreement and to
purchase the Notes
and Warrants being sold to it hereunder. The execution, delivery
and performance
of this Agreement by such Subscriber 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
Subscriber
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 Subscriber and constitutes, or shall
constitute when
executed and delivered, a valid and binding obligation of the
Subscriber enforceable
against the
Subscriber
in accordance with the terms
thereof.
(c) No Conflicts. The
execution,
delivery and
performance
of this
Agreement and
the consummation by such Subscriber of the transactions
contemplated hereby
or relating hereto do not and will not (i)
result in a
violation of
such Subscriber'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 Subscriber 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
Subscriber 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
Subscriber).
Such Subscriber
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 Notes or acquire the
Warrants in accordance with the terms hereof, provided that for purposes of
the
representation made in
this sentence, such
Subscriber is assuming
and relying
upon the accuracy of the relevant representations and agreements of
the Company
herein.
(d) Information on Company. The Subscriber 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, 2003 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 Subscriber has received in
writing from the
Company such other
information
concerning
its operations,
financial condition and other matters as the Subscriber has
requested in writing
(such other information is collectively, the "Other Written Information"),
and
considered all
factors the Subscriber deems material in deciding on the
advisability of
investing in the Securities. The Subscriber 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 Subscriber'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 Subscriber.
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<PAGE>
(e) Information on
Subscriber. The
Subscriber is, and will be at the
time of the issuance
of the Notes and at the time of conversion of any of the
Notes and exercise of any of the 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 Subscriber
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 Subscriber has the authority and is
duly and legally qualified to purchase and own the Securities. The
Subscriber 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
Subscriber
is accurate.
The Subscriber 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 Subscriber is not a
broker-dealer.
(f) Purchase
of Notes and Warrants. On the Closing Date, the
Subscriber will purchase the Notes 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.
(g) Compliance with
Securities
Act. The Subscriber
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 Subscriber
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 Subscriber 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
Subscriber 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
Subscriber will be
made in compliance
with all applicable securities laws
including Regulation M
of the Securities
Exchange Act and prospectus delivery
requirements.
(h) Shares Legend.
The Shares and the
Warrant Shares shall
bear the
following or similar legend:
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<PAGE>
"THE
SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED OR
APPLICABLE STATE
SECURITIES LAWS. THESE
SHARES MAY NOT BE SOLD,
OFFERED FOR SALE,
PLEDGED OR
HYPOTHECATED IN THE
ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT OR
ANY
APPLICABLE STATE
SECURITIES
LAW OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO AIRTRAX INC. THAT SUCH REGISTRATION
IS
NOT
REQUIRED."
(i) Warrants Legend. The Warrants shall bear the following
or similar legend:
"THIS WARRANT AND THE
COMMON SHARES
ISSUABLE UPON EXERCISE OF
THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED
OR APPLICABLE STATE SECURITIES LAWS. THIS
WARRANT AND THE COMMON
SHARES ISSUABLE UPON EXERCISE OF THIS
WARRANT MAY
NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS
WARRANT UNDER SAID ACT OR ANY APPLICABLE
STATE SECURITIES
LAW OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO
AIRTRAX INC. THAT SUCH REGISTRATION IS NOT
REQUIRED."
(j) Note Legend. The Note shall bear the following legend:
"THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF
THIS
NOTE
HAVE NOT BEEN
REGISTERED UNDER THE
SECURITIES ACT OF 1933,
AS
AMENDED OR APPLICABLE STATE SECURITIES LAWS. THIS NOTE AND THE
COMMON SHARES ISSUABLE
UPON CONVERSION OF THIS NOTE MAY NOT
BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF
AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER
SAID
ACT
OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO AIRTRAX
INC.
THAT SUCH REGISTRATION IS NOT REQUIRED."
(k) Communication
of Offer. The offer to sell the Securities was
directly communicated
to the Subscriber by the Company. At no time was the
Subscriber 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.
(l) 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
Subscriber 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
to general principles
of equity; and
Subscriber 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 Subscriber relating hereto.
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<PAGE>
(m) Restricted Securities. Subscriber understands that the
Securities
have not been
registered under the
1933 Act and such Subscriber 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
Subscriber 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.
(n) No Governmental Review. Each Subscriber 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.
(o) No Market
Manipulation. No
Subscriber
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.
(p) Short Position and
Short Sales. Each
Subscriber
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 this Agreement,
or
(ii) 90 days after the Closing Date.
(q) Correctness of Representations. Each Subscriber represents as to
such Subscriber that the foregoing representations and warranties are true and
correct as of the date hereof and, unless a Subscriber otherwise notifies the
Company prior to each
Closing Date shall be true and correct as of each Closing
Date.
(r) Survival.
The foregoing
representations
and warranties shall
survive the Closing Date for a period of two years.
5.
Company
Representations and
Warranties.
The Company
represents
and
warrants to and agrees with each Subscriber that:
(a) Due Incorporation. The Company and each of its material
subsidiaries is a
corporation
duly organized, validly existing and in good
standing under the laws of the respective jurisdictions of their
incorporation
and have the requisite
corporate power to own their properties and to carry on
their business as now being conducted other than those
jurisdictions
in which
the failure to so qualify would not have a material adverse effect.
The Company
and each of its material subsidiaries is duly qualified as a
foreign corporation
to do business and is in good standing in each jurisdiction
where the nature
of
the business
conducted or property owned by it makes such qualification
necessary, other than
those jurisdictions
in which the
failure to so
qualify
would not have a material adverse effect. (For purposes of this Agreement, a
"Material Adverse
Effect" shall mean a material adverse effect on the financial
condition, results of operations, properties or business of the
Company taken as
a whole.)
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(b) Outstanding Stock.
All issued and
outstanding shares of
capital
stock of the Company has been duly authorized and validly issued and are
fully
paid and nonassessable.
(c) Authority; Enforceability. This Agreement, the Note, the
Warrants,
the Escrow Agreement,
and any other
agreements
delivered together with this
Agreement or in connection herewith (collectively "Transaction Documents") have
been duly authorized,
executed and
delivered by the
Company 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 to general principles of equity. The Company has full corporate
power and authority necessary to enter into and deliver the Transaction
Documents and to perform its obligations thereunder.
(d) Additional
Issuances.
There are no
outstanding
agreements
or
preemptive or similar rights affecting the Company's common
stock or equity and
no outstanding
rights,
warrants
or options to acquire, or instruments
convertible into or
exchangeable
for, or agreements or understandings with
respect to the sale or issuance of any shares of common
stock or equity of
the
Company or other
equity interest
in any of the
Subsidiaries
of the Company
except as described on Schedule 5(d).
(e) Consents.
No consent,
approval, authorization or order of any
court, governmental
agency or body or
arbitrator having
jurisdiction over the
Company, or any of its Affiliates, the OTC Bulletin Board
("Bulletin Board") nor
the Company's
shareholders is
required for the execution by the Company of the
Transaction Documents
and compliance and performance by the Company of its
obligations under the Transaction Documents, including, without limitation,
the
issuance and sale of the Securities.
(f) No Violation or Conflict. Assuming the representations and
warranties of the
Subscribers
in Section 4 are true
and correct, neither
the
issuance and
sale of the
Securities
nor the performance of the Company's
obligations under the
Transaction Documents
by the Company relating thereto by
the Company will:
(i) violate, conflict
with, result in a breach of, or constitute
a default (or an event
which with the giving
of notice or the lapse of time or
both would be reasonably likely to constitute a default)
under (A) the articles
or certificate of
incorporation, charter
or bylaws of the Company, (B) to the
Company's knowledge, any decree, judgment, order, law, treaty, rule,
regulation
or determination applicable to the Company of any court,
governmental agency
or
body, or arbitrator having jurisdiction over the Company or
over the properties
or assets of the
Company or any of its
Affiliates, (C) the
terms of any bond,
debenture, note or any other evidence of indebtedness, or any agreement, stock
option or other similar plan, indenture, lease, mortgage, deed of
trust or other
instrument to which the Company or any of its Affiliates is a party, by which
the Company or any of its Affiliates is bound, or to which any of
the properties
of the Company or any
of its Affiliates
is subject, or (D) the terms of any
"lock-up" or similar provision of any underwriting or similar
agreement to which
the Company, or any of its Affiliates is a party except the
violation, conflict,
breach, or default of which would not have a Material Adverse
Effect; or
(ii) result in the creation or imposition of any lien, charge or
encumbrance upon the
Securities
or any of the assets
of the Company or any of
its Affiliates; or
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(iii) except
as disclosed on Schedule 5(d), result in the
activation of any
anti-dilution
rights or a reset or
repricing of any debt or
security instrument of
any other creditor or equity holder of the Company, nor
result in the acceleration of the due date of any obligation of the
Company; or
(iv) except
as disclosed on Schedule 11.1, result in the
activation of any piggy-back registration rights of any person or
entity holding
securities of the
Company or having the right to
receive securities of the
Company; or
(v) result in a violation of Section 5 under the 1933 Act.
(g) The Securities. The Securities upon issuance:
(i) are, or will be,
free and clear of any
security
interests,
liens, claims or other encumbrances, subject to restrictions upon
transfer under
the 1933 Act and any applicable state securities laws;
(ii) have been, or
will be, duly and validly authorized and on
the date of issuance of the Shares and upon exercise of the
Warrants, the Shares
and Warrant Shares will be duly and validly issued, fully paid and
nonassessable
or if registered
pursuant to the 1933 Act, and resold pursuant to an effective
registration statement
will be free trading and unrestricted) , provided that
each Subscriber complies with the prospectus delivery requirements of the 1933
Act);
(iii) will not have
been issued or sold in violation of any
preemptive or other
similar rights of the holders of any securities of the
Company; and
(iv) will not subject the holders thereof to personal liability
by reason of being such holders.
(h) Litigation.
There is no pending
or, to the best knowledge of the
Company, threatened
action, suit, proceeding or investigation before any court,
governmental agency or body, or arbitrator having jurisdiction over
the Company,
or any of its
Affiliates that would
affect the execution by the Company or the
performance by the Company of its obligations under the Transaction Documents.
Except as disclosed in the Reports, there is no pending or, to the best
knowledge of the Company, basis for or threatened action,
suit, proceeding or
investigation before
any court,
governmental
agency or body,
or arbitrator
having jurisdiction
over the Company, or any of its Affiliates which litigation
if adversely determined would have a Material Adverse Effect.
(i) Reporting Company. The Company is a publicly-held company subject
to reporting
obligations pursuant to Section 13 of the 1934 Act and has a
class
of common shares registered pursuant to Section 12(g) of the
1934 Act. Pursuant
to the provisions of
the 1934 Act, the Company has timely filed all reports and
other materials
required to be filed thereunder with the Commission during the
preceding twelve months.
(j) No Market
Manipulation. The
Company has not 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.
(k) Information
Concerning Company.
The Reports contain all material
information relating
to the Company and its operations and financial condition
as of their respective
dates which
information
is required to be disclosed
therein. Since the date of the financial statements included in the
Reports, and
except as modified in the Other Written Information or in the Schedules
hereto,
there has been no Material Adverse Event relating to the Company's business,
financial condition or affairs not disclosed in the Reports.
The Reports do 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 not
misleading in light of the circumstances when made.
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(l) Stop Transfer. The Securities, when issued prior to the
effectiveness of the "Registration Statement" (as defined in Section
__ of this
Agreement), will be
restricted securities.
Subscriber agrees that, in order to
ensure compliance with the restrictions referenced at Section 4(h), (i)
and (j)
herein, the Company may issue "stop transfer" instructions to its
transfer agent
consistent with the legends.
(m) Defaults.
The Company is not in violation of its articles of
incorporation or bylaws. The Company is (i) not in default under or
in violation
of any other material agreement or instrument to which it is a
party or by which
it or any of its
properties are bound
or affected, which
default or violation
would have a Material
Adverse Effect,
(ii) not in default
with respect to any
order of any court,
arbitrator or
governmental body or
subject to or party to
any order of any court or governmental authority arising out of any
action, suit
or proceeding under
any statute or other law respecting antitrust, monopoly,
restraint of trade,
unfair competition or similar matters, or (iii) to the
Company's knowledge
not in violation of any statute, rule or regulation of any
governmental authority which violation would have a Material
Adverse Effect.
(n) No Integrated
Offering. Neither the Company, nor any of its
Affiliates, nor any
person acting on its or their
behalf, has directly or
indirectly made any
offers or sales of any security or solicited any offers to
buy any security under circumstances that would cause the offer of the
Securities pursuant to
this Agreement to be integrated with prior offerings by
the Company for purposes of the 1933 Act or any applicable
stockholder
approval
provisions, including,
without limitation,
under the rules and
regulations of
the Bulletin Board
which if so integrated
would eliminate the exemption as
described in Section 6 of this Agreement for the offering.
The Company will
not
conduct any offering other than the transactions contemplated hereby that will
be integrated
with the offer or issuance of the Securities which if so
integrated would impair the exemption for the offering.
(o) No General
Solicitation.
Neither the Company, nor any of its
Affiliates, nor to its
knowledge, any person acting on its or their behalf, has
engaged in any form of general solicitation or general
advertising (within
the
meaning of Regulation D under the 1933 Act) in connection with the
offer or sale
of the Securities.
(p) Listing. The
Company's common stock is quoted on the OTC Bulletin
Board. The Company has
not received any oral or written notice that its common
stock is not eligible nor will become ineligible for quotation on the Bulletin
Board nor that
its common stock does not meet all requirements for the
continuation of such
quotation and the Company satisfies all the requirements
for the continued quotation of its common stock on the Bulletin
Board.
(q) No Undisclosed
Liabilities.
The Company has no
liabilities
or
obligations which are material, individually or in the aggregate,
which are not
disclosed in the
Reports and Other Written Information, other than those
incurred in the ordinary course of the Company's businesses since December 31,
2003 and which,
individually or in the aggregate, would reasonably be expected
to have a Material Adverse Effect.
8
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(r) No Undisclosed
Events or Circumstances. Since December 31, 2003,
no event or
circumstance has
occurred or exists with respect to the Company or
its businesses,
properties,
operations or
financial condition,
that, under
applicable law, rule or regulation, requires public disclosure or announcement
prior to the date
hereof by the Company
but which has not been so publicly
announced or disclosed in the Reports.
(s) Capitalization.
The authorized and
outstanding capital
stock of
the Company as of the date of this Agreement and the Closing Date
(not including
the Securities) are set forth on Schedule 5(s). Except as set forth on
Schedule
5(d), there are no
options, warrants,
or rights to subscribe
to, securities,
rights or obligations
convertible into or
exchangeable for or giving any right
to subscribe
for any shares of capital stock of the Company or any of its
Subsidiaries. All of
the outstanding shares of Common Stock of the Company have
been duly and validly authorized and issued and are fully paid and
nonassessable.
(t)
Dilution. The Company's executive officers and directors
understand the nature of the Securities being sold hereby and
recognize that the
issuance of the Securities will have a potential dilutive effect on the equity
holdings of other holders of the Company's equity or rights to
receive equity of
the Company. The board
of directors of the Company has concluded, in its good
faith business
judgment that the issuance of the Securities is in the best
interests of the
Company. The Company specifically acknowledges that its
obligation to issue
the Shares upon
conversion of the
Notes, and the
Warrant
Shares upon exercise of the Warrants is binding upon the Company
and enforceable
regardless of the dilution such issuance may have on the ownership
interests of
other shareholders of
the Company or parties
entitled to receive equity of the
Company.
(u) No Disagreements
with Accountants and Lawyers. There are no
disagreements of any kind presently existing, or reasonably anticipated by the
Company to arise,
between the Company and the accountants and lawyers formerly
or presently employed
by the Company,
including but not limited to disputes or
conflicts over payment owed to such accountants and lawyers.
(v) Correctness of
Representations. The
Company represents
that the
foregoing
representations and
warranties
are true and correct
as of the date
hereof in all material respects, and, unless the Company otherwise
notifies the
Subscribers prior
to each Closing Date, shall be true and correct in all
material respects as of each Closing Date.
(w) DTC Status. The
Company's transfer
agent is a participant in and
the Common Stock is
eligible for
transfer pursuant to the Depository Trust
Company Automated Securities Transfer Program.
(x) Investment
Company. The Company is not an Affiliate of an
"investment company"
within the meaning of the Investment Company Act of 1940,
as amended.
(y) Registration Statement. As of the date of this Agreement,
and as
of the Closing
Date, the Company will not have any registration statement
pending before the Commission.
(z) Survival.
The foregoing
representations
and warranties shall
survive the Closing Date for a period of two years.
6.
Regulation D Offering.
The offer and issuance
of the Securities to the
Subscribers is being
made pursuant to the exemption from the registration
provisions of the 1933
Act afforded by Section 4(2) or Section 4(6) of the 1933
Act and/or Rule 506 of Regulation D promulgated thereunder. On the
Closing Date,
the Company will provide an opinion reasonably acceptable to
Subscriber from the
Company's legal
counsel opining on the availability of an exemption from
registration under the
1933 Act as it relates to the offer and issuance of the
Securities and other matters reasonably requested by Subscribers.
A form of the
legal opinion is annexed hereto as Exhibit C. The Company
will provide, at
the
Company's expense,
such other legal
opinions in the future
as are reasonably
necessary for the
issuance and resale of the Common Stock issuable upon
conversion of the
Notes and exercise of the Warrants pursuant to an effective
registration statement.
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<PAGE>
7.1.
Conversion of Note.
(a) Upon the conversion of a Note or part thereof, the Company shall,
at its own cost and expense, take all necessary action,
including obtaining
and
delivering, an opinion
of counsel to assure that the Company's transfer agent
shall issue stock
certificates in the
name of Subscriber
(or its nominee)
or
such other persons as designated by Subscriber and in such
denominations
to be
specified at
conversion
representing
the number of shares of Common Stock
issuable upon such conversion. The Company warrants that no
instructions other
than these
instructions have been or will be given to the transfer agent of
the
Company's Common Stock
and that, unless
waived by the
Subscriber, the
Shares
will be free-trading,
and freely
transferable,
and will not contain a
legend
restricting the resale or transferability of the Shares
provided the Shares are
being sold pursuant to an effective registration statement covering the Shares
or are otherwise exempt from registration when sold.
(b) Subscriber will
give notice of its decision to exercise its right
to convert the Note or part thereof by telecopying an executed and completed
Notice of Conversion
(a form of which is
annexed as Exhibit A
to the Note) to
the Company via
confirmed telecopier
transmission
or otherwise pursuant to
Section 13(a)
of this Agreement. The Subscriber will not be required to
surrender the Note until the Note has been fully converted or satisfied. Each
date on which a Notice of Conversion is telecopied to the
Company in accordance
with the provisions
hereof shall be deemed a Conversion Date. The Company will
itself or cause the Company's transfer agent to transmit the Company's
Common
Stock certificates
representing the Shares issuable upon conversion of the Note
to the Subscriber via express courier for receipt by such
Subscriber within five
(5) business days after receipt by the Company of the Notice of
Conversion (such
third day being the "Delivery Date"). In the event the Shares are
electronically
transferable, then
delivery of the Shares must be made by electronic transfer
provided request for
such electronic
transfer has been made
by the Subscriber
and the Subscriber has complied with all applicable securities laws in
connection with the sale of the Common Stock, including, without
limitation, the
prospectus delivery
requirements.
A Note representing
the balance of the Note
not so converted will
be provided by the Company to the Subscriber if requested
by Subscriber,
provided the Subscriber delivers the original Note to the
Company. In the event
that a Subscriber elects not to surrender a Note for
reissuance upon partial payment or conversion, the Subscriber
hereby indemnifies
the Company against
any and all loss or damage attributable to a third-party
claim in an amount in excess of the actual amount then due under
the Note.
(c) The Company understands that a delay in the delivery of the
Shares
in the form required pursuant to Section 7.1 hereof, or the
Mandatory Redemption
Amount described in Section 7.2 hereof, respectively after the Delivery
Date or
the Mandatory
Redemption Payment Date (as hereinafter defined) could result in
economic loss to the
Subscriber. As
compensation
to the Subscriber for such
loss, the Company agrees to pay (as liquidated damages and not as a penalty)
to
the Subscriber
for late issuance of Shares in the form
required pursuant to
Section 7.1
hereof upon Conversion of the Note in the amount of $100 per
business day after the Delivery Date for each $10,000 of Note
principal amount
being converted of the corresponding Shares which are not timely
delivered. The
Company shall pay any
payments incurred under this Section in immediately
available funds upon
demand. Furthermore, in addition to any other
remedies
which may be available to the Subscriber, in the event that the Company
fails
for any reason to effect delivery of the Shares by the Delivery Date or make
payment by the
Mandatory Redemption Payment Date, the Subscriber will be
entitled to revoke all or part of the relevant Notice of Conversion or rescind
all or part of the notice of Mandatory Redemption by delivery of a notice to
such effect to the Company whereupon the Company and the
Subscriber shall
each
be restored to their respective positions immediately prior to the delivery
of
such notice, except that the liquidated damages described above
shall be payable
through the date notice of revocation or rescission is given to the
Company.
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<PAGE>
(d) Nothing contained
herein or in any document referred to herein or
delivered in
connection
herewith shall be deemed to establish or
require the
payment of a rate of
interest or other charges in excess of the maximum
permitted by applicable law. In the event that the rate of interest
or dividends
required to be paid or other charges hereunder exceed the maximum
permitted by
such law, any
payments in excess of
such maximum
shall be credited against
amounts owed by the Company to the Subscriber and thus refunded to
the Company.
7.2.
Mandatory Redemption at Subscriber's Election. In the event the
Company is prohibited from issuing Shares, or fails to timely deliver Shares
on
a Delivery Date,
or upon the
occurrence
of any other
Event of Default (as
defined in the Note or in this Agreement) or for any reason other
than pursuant
to the limitations
set forth in Section
7.3 hereof, then at
the Subscriber's
election, the Company
must pay to the
Subscriber ten (10)
business days after
request by the Subscriber the outstanding principal amount of the
Note, together
with accrued but unpaid interest thereon ("Mandatory Redemption Payment"). The
Mandatory Redemption Payment must be received by the Subscriber on
the same date
as the Company Shares
otherwise deliverable or within ten (10) business
days
after request,
whichever is sooner ("Mandatory Redemption Payment Date").
Upon
receipt of the Mandatory Redemption Payment, the corresponding Note
principal
and interest will be deemed paid and no longer outstanding, and any obligation
to deliver Shares with respect to conversion of the redeemed
portion of the Note
shall be extinguished.
7.3.
Maximum Conversion. The Subscriber shall not be entitled to convert
on
a Conversion
Date that amount of the Note in connection with that number of
shares of Common Stock
which would be in excess of the sum of (i) the number of
shares of common stock
beneficially owned by
the Subscriber and its Affiliates
on a Conversion Date,
and (ii) the number of
shares of Common Stock
issuable
upon the conversion of the Note with respect to which the
determination of
this
provision is being made on a Conversion Date, which would result in
beneficial
ownership by the
Subscriber
and its Affiliates of more than 9.99% of the
outstanding shares of
common stock of the Company on such Conversion Date. For
the purposes of the provision to the immediately preceding
sentence,
beneficial
ownership shall be determined in accordance with Section 13(d) of
the Securities
Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. Subject to
the foregoing, the
Subscriber shall not be limited to aggregate conversions of
only 9.99% and aggregate conversions by the Subscriber may exceed 9.99%. The
Subscriber may void the conversion limitation described in this
Section 7.3 upon
and effective after 61 days prior written notice to the Company.
The Subscriber
may allocate which of the equity of the Company deemed beneficially
owned by the
Subscriber shall be included in the 9.99% amount described above
and which shall
be allocated to the excess above 9.99%.
7.4.
Injunction
Posting of Bond. In
the event a Subscriber shall elect to
convert a Note or part thereof or exercise the Warrant in whole or
in part, the
Company may not
refuse conversion or exercise based on any claim that such
Subscriber or any one
associated or affiliated with such Subscriber has been
engaged in any violation of law, or for any other reason,
unless, an
injunction
from a court, on notice, restraining and or enjoining
conversion of all or part
of such Note or exercise of all or part of such Warrant shall have been sought
and obtained
by the Company and the Company has posted a
surety bond for the
benefit of such
Subscriber in the
amount of 120% of the amount of the Note, or
aggregate purchase price of the Warrant Shares which are sought to
be subject to
the injunction,
which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which
shall be payable
to such Subscriber to the extent Subscriber obtains judgment.
11
<PAGE>
7.5.
Buy-In. In addition to any other rights
available to the Subscriber,
if the Company fails
to deliver to the
Subscriber such shares
issuable upon
conversion of a Note
by the Delivery Date
and if after seven (7) business days
after the Delivery Date the Subscriber purchases (in an open market
transaction
or otherwise)
shares of Common Stock
to deliver in
satisfaction of a sale
by
such Subscriber of the Common Stock which the Subscriber was
entitled to receive
upon such conversion
(a "Buy-In"), then the Company shall pay in cash
to the
Subscriber (in
addition to any remedies available to or elected by the
Subscriber) the
amount by which (A) the Subscriber's total purchase price
(including brokerage
commissions,
if any) for the
shares of Common
Stock so
purchased exceeds (B) the aggregate principal and/or interest
amount of the Note
for which such conversion was not timely honored, together with
interest thereon
at a rate of 15% per annum, accruing until such amount and any
accrued interest
thereon is paid in full (which amount shall be paid as
liquidated
damages and
not as a penalty). For
example, if the
Subscriber purchases
shares of Common
Stock having a total purchase price of $11,000 to cover a Buy-In
with respect to
an attempted
conversion
of $10,000 of note
principal and/or interest, the
Company shall be
required to pay the
Subscriber $1,000,
plus interest. The
Subscriber shall
provide the Company
written notice indicating the amounts
payable to the Subscriber in respect of the Buy-In.
7.6
Adjustments. The Conversion Price, Warrant exercise price and
amount of
Shares issuable upon
conversion of the Notes and exercise of the Warrants shall
be adjusted as described in this Agreement, the Notes and
Warrants.
7.7.
Mandatory Conversion.
Provided an Event of
Default has not occurred,
then commencing after the later of both the Approval Date and
Effective Date and
ending ten (10) days after the later of the Approval Date and Effective Date,
the Company will have the option by written notice to the
Subscriber ("Notice of
Mandatory Conversion")
of compelling the
Subscriber to convert the outstanding
and unpaid principal
of the Notes and accrued interest, thereon, into Common
Stock at the Conversion Price then in affect ("Mandatory
Conversion"). The
date
the Notice of Mandatory Conversion is given is the "Mandatory
Conversion Date."
The Notice of Mandatory Conversion shall specify the
aggregate principal amount
of the Note which is
subject to
Mandatory Conversion. Mandatory Conversion
Notices must be given proportionately to all Holders of Notes who
received Notes
similar in term and tenure as this Note. A Notice of Mandatory Conversion may
not be given unless the Registration Statement described in Section 11.1 (iv)
has been effective
for the unrestricted public resale of Shares and Warrant
Shares. The Company
shall reduce the amount of Note
principal and interest
subject to a Notice of Mandatory Conversion by the amount of Note
Principal and
interest for which the
Subscriber had
delivered a Notice of
Conversion to the
Company during the
seven (7) trading days
preceding the
Mandatory
Conversion
Date. Each Mandatory
Conversion Date shall be a deemed Conversion Date and the
Company will be
required to deliver
the Common Stock
issuable pursuant to a
Mandatory Conversion
Notice in the same
manner and time period as described in
Section 2.2 of the Note.
7.8.
Redemption. The Note
and Warrants shall not be redeemable or callable
except as described in the Note.
7.9. Shareholder
Approval. The Company and Subscribers agree that until the
Company obtains
shareholder
approval of an
increase in the authorized Common
Stock of the Company to not less than 100,000,000 Shares of Common Stock (the
"Approval"), each
Subscriber
may not convert a Note. The Company filed a
preliminary proxy statement for a meeting of the Company's
shareholders relating
to the Approval with the Commission on January 11, 2005.
The Company
covenants
to use its reasonable
best efforts to obtain
the Approval not later than April
30, 2005 ("Approval
Date"). If the Company fails to obtain the
Approval on or
before the Approval
date, interest shall accrue on the Note at the
default
interest rate set forth in Section 1.1 of the Note, from the
Approval Date until
the date the Approval is obtained.
12
<PAGE>
8.
Legal Fee/Escrow Agent/Broker's Commission/Broker's Warrants.
(a) Legal Fee. The Company shall pay to Grushko & Mittman,
P.C., a fee
of $25,000 ("Legal Fees") as payment for services rendered to the
Subscribers in
connection with this Agreement and the purchase and sale of the
shares of Common
Stock (the "Offering")
and acting as Escrow
Agent for the Offering. The Legal
Fees will be payable out of funds held pursuant to the Escrow
Agreement.
(b) Broker's
Commission.
The Company on the one hand, and each
Subscriber (for
himself only) on the
other hand, agree to
indemnify the other
against and hold the other harmless from any and all liabilities to any persons
claiming brokerage
commissions or Broker's Commission other than First
Montauk
Securities Corp.
("Broker")
on account
of services purported to have been
rendered on behalf of the indemnifying party in connection with this
Agreement
or the transactions contemplated hereby and arising out of such
party's actions.
Anything in this Agreement to the contrary notwithstanding, each Subscriber is
providing indemnification only for such Subscriber's own actions
and not for any
action of any other Subscriber. Each Subscriber's liability
hereunder is several
and not joint. The
Company agrees that it will pay Broker a
cash fee equal to
10% of the Purchase Price on the Closing Date (as defined
herein) directly out
of the funds held pursuant to the Escrow Agreement ("Broker's Commissions") as
payment to broker
for acting as a finder in connection with the sale of the
Securities hereunder. The Broker will also receive on the Closing
Date an amount
equal to 3% of the Purchase Price as a non-accountable expense allowance. The
Company represents
that there are no
other parties
entitled to receive
fees,
commissions, or
similar payments in
connection with the offering described in
this Agreement except the Broker.
(c) Broker's Warrants.
On the Closing Date, the Company will issue to
the Broker, or at the Broker's written instructions to officers or
employees of
the Broker, Warrants
similar to and
carrying the same rights as the
Warrants
issuable to the Subscribers ("Broker's Warrants"). The Broker will receive, in
the aggregate,
one Broker's Warrant for each ten (10) Shares issuable on
Conversion of the
Notes on the Closing Date to the Subscribers. All the
representations,
covenants, warranties,
undertakings,
remedies, liquidated
damages,
indemnification, and
other rights including but not limited to
reservation and registration rights made or granted to or for the
benefit of the
Subscribers are hereby
also made by the
Company and granted to
the holders of
the Broker's Warrants.
9.
Covenants of the
Company. The Company covenants and agrees with the
Subscribers as follows:
(a) Stop Orders.
The Company will
advise the
Subscribers,
promptly
after it receives
notice of issuance by the Commission, any state securities
commission or any other regulatory authority of any stop order or of
any order
preventing or suspending any offering of any securities of the Company,
or of
the suspension
of the qualification of the Common Stock of the Company for
offering or sale in any jurisdiction, or the initiation of any proceeding
for
any such purpose.
13
<PAGE>
(b)
Listing. The Company shall promptly secure the listing of the
shares of Common Stoc
