EXHIBIT 10.1
NOTE PURCHASE
AGREEMENT
between
DYNTEK, INC.
and
THE PURCHASERS NAMED IN
SCHEDULE I
Dated as of March 8,
2006
INDEX TO SCHEDULES
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SCHEDULE I
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Schedule of Purchasers
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SCHEDULE II
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Trade Creditors
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SCHEDULE III
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Note Holders
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SCHEDULE IV
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Disclosure Schedules
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SCHEDULE V
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Use of Proceeds
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INDEX TO EXHIBITS
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EXHIBIT A
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Form of Senior Note
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EXHIBIT B
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Form of Settlement and Release
Agreement
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EXHIBIT C
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Form of Conversion and Settlement
Agreement
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EXHIBIT D
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Form of Warrant
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EXHIBIT E
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Form of Security and Pledge Agreement
(Senior Notes)
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EXHIBIT F
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Form of Junior Note
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EXHIBIT G
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Form of Security and Pledge Agreement
(Junior Notes)
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THIS NOTE PURCHASE
AGREEMENT (the
“Agreement”) is dated as of March 8, 2006, between
DynTek, Inc., a Delaware corporation (the
“Company”), and the purchasers named in the attached
Schedule I (each individually a “Purchaser”
and collectively the “Purchasers”).
WHEREAS , the Company wishes to issue and sell to the
Purchasers up to an aggregate of $6,700,000 in principal amount of
its senior secured promissory notes; and
WHEREAS, the Company wishes to issue and sell to a
Purchaser up to an aggregate of $3,000,000 in principal amount of a
junior secured promissory note; and
WHEREAS , the Purchasers, severally, wish to purchase
the notes on the terms and subject to the conditions set forth in
this Agreement.
NOW, THEREFORE
, in consideration of the premises
and the mutual covenants contained in this Agreement, the parties
agree as follows:
ARTICLE I
PURCHASE AND SALE OF NOTES AND TERMS OF
NOTES
SECTION 1.01.
The Senior Notes
. The Company has
authorized the issuance and sale to the Purchasers, in the
respective amounts set forth in the Schedule of Purchasers
attached hereto in Schedule I , of the Company’s
Senior Secured Promissory Notes, due March 1, 2010 (the
“Senior Note Maturity Date”), in the original aggregate
principal amount of up to $6,700,000. The Senior Notes will be
substantially in the form set forth in Exhibit A
hereto and are herein referred to individually as a “Senior
Note” and collectively as the “Senior Notes,”
which terms will also include any notes delivered in exchange or
replacement therefor.
SECTION 1.02.
The Junior Note
. The Company has authorized
the issuance and sale to the Purchaser, set forth in the
Schedule of Purchasers attached hereto in
Schedule I, of the Company’s Junior Secured
Convertible Promissory Note (the “Junior Note”, and
collectively with the Senior Notes referred to as the
“Notes,” which term will also include any notes
delivered in exchange or replacement therefor), due March 1,
2011 (the “Junior Note Maturity Date”), in the original
aggregate principal amount of up to $3,000,000. The Junior Note
will be substantially in the form set forth in
Exhibit F hereto.
SECTION 1.03.
Purchase and Sale of
Notes . The Company agrees to issue
and sell to the Purchasers, and, subject to and in reliance upon
the representations, warranties, terms and conditions of this
Agreement, the Purchasers, severally and not jointly, agree to
purchase, the Notes set forth opposite their respective names in
the Schedule of Purchasers attached as Schedule I
for the aggregate purchase price set forth therein. The
consideration to be paid for the Notes will consist of $9,700,000
cash. The closing of such purchase and sale (the
“Closing”) will be held at the office of Paul,
Hastings, Janofsky & Walker LLP, 695 Town Center Drive,
Costa Mesa, CA 92626, on March 8, 2006 (the “Closing
Date”) at 10:00 A.M., Pacific Standard Time, or on such
other date and at such time as may be mutually agreed upon. At
the Closing, the Company will issue and deliver to each Purchaser
one Senior Note or one Junior Note, as the case may be,
payable to the order of such Purchaser, in the principal amount set
forth opposite such Purchaser’s name in the Schedule of
Purchasers attached as Schedule I against delivery to
the Company of a check payable to the order of the Company, in the
amount set forth opposite the name of such Purchaser under the
heading “Aggregate Purchase Price for Notes” on
Schedule I , less the Purchaser’s reasonable
estimated expenses to be paid by the Company pursuant to
Section 7.01, transference of such sum to the account of the
Company by wire transfer, or delivery or transference of such sum
to the Company by any combination of such methods of
payment.
SECTION 1.04.
Payments and
Endorsements . Payments of principal and
interest on the Notes will be made directly by check duly mailed or
delivered to the Purchasers at their addresses referred to in the
Schedule of Purchasers attached as Schedule I or
made to the account of the Purchaser by wire transfer referred to
in the Schedule of Purchasers attached as
Schedule I or indicated in any notice delivered by a
Purchaser to the Company, without any presentment or notation of
payment, except that prior to any transfer of any Note, the holder
of record will endorse on such Note a record of the date to which
interest has been paid and all payments made on account of
principal of such Note.
SECTION 1.05.
Interest Rate for Senior Note;
Payment of Principal and Interest for Senior Note
. The Senior
Notes will accrue interest at the rate of 8% per annum if paid in
cash or 11% per annum if paid in kind. The Company in its sole
discretion may elect to pay in cash or in kind until
March 31, 2009, after which interest will be paid in cash.
Interest will be due and payable quarterly in arrears on the last
day of each fiscal quarter (each, a “Senior Note Interest
Payment Date”), with the first interest payment due
June 30, 2006. If the Company chooses to make interest
payments in kind, the amount of accrued interest to be so paid will
be added to the principal amount of the Senior Notes on the
applicable Senior Note Interest Payment Date. Principal will be
amortized over three years and payable in equal monthly
installments on the last day of each month beginning on
March 31, 2009. The Senior Notes and all accrued but unpaid
interest thereon shall be due and payable in full at the Senior
Note Maturity Date unless earlier redeemed pursuant to the terms
and conditions set forth in Section 1.06 herein.
SECTION 1.06.
Prepayment of Senior
Notes . The Senior Notes will be
payable by the Company prior to the Senior Note Maturity Date as
follows (all prepayments made by the Company to the Senior Note
holders under this Agreement shall be made by wire transfer of
immediately available funds in the lawful currency of the United
States without setoff or withholding of any kind):
(a)
Voluntary
Prepayment by the Company . At any time until the
Senior Notes have been repaid in full, the Company may, at its sole
option, redeem the entire outstanding principal amount of the
Senior Notes (including any and all accrued but unpaid interest on
such principal amount) through the date of repayment on such
principal amount (such entire outstanding principal amount, plus
all such accrued but unpaid interest, hereinafter referred to for
purposes of this Section 1.06 as the “ Redemption
Amount ”) by paying to the holders of the Senior Notes
105% of the Redemption Amount, with such payments to be apportioned
ratably among the Purchasers or their transferees according to the
unpaid principal balance and accrued but unpaid interest thereon to
which such payments relate.
(b)
Prepayment on
Change of Control . At any time until the
Senior Notes have been repaid in full, the Company will redeem the
Senior Notes in their entirety upon the occurrence of a Change of
Control by paying to the holders of the Senior Notes 105% of the
Redemption Amount on the closing date of the Change of Control.
Such payments will be apportioned ratably among the Senior Note
holders according to the unpaid principal balance and accrued but
unpaid interest thereon to which such payments relate. For purposes
of this Section 1.06(b), “ Change of Control
” means the event of (i) a merger, consolidation,
recapitalization or share exchange in which the holders of the
voting stock of the Company immediately prior to such merger,
consolidation, recapitalization or share exchange will not own 50%
or more of the voting stock of the continuing or surviving
corporation or other entity, or the parent company of such
corporation or other entity, immediately after such merger,
consolidation, recapitalization or share exchange, (ii) the
sale, assignment, conveyance, transfer, lease or other disposition
(other than the grant of a security interest) of all or
substantially all of the assets of Company to any person or group
of related persons, or (iii) any sale or other disposition of
the voting stock of the Company representing 50% or more of the
total voting power of the Company’s outstanding capital stock
in a single transaction or a series of related transactions to
any person, or group of related persons; provided,
however that none of the following events shall be deemed
to be a Change of Control for
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purposes of this Agreement:
(A) the Company’s issuance of shares of its Common
Stock, $0.0001 par value (the “ Common Stock ”)
to any of its existing unsecured trade creditors set forth on
Schedule II which opt to convert trade debt (as of the
date of this Agreement) up to the amount set forth on
Schedule II into Common Stock at a conversion rate of
$0.02 per share within three business days of the date immediately
following the effective date of the Reverse Stock Split (as defined
below in Section 1.15(g)), or June 30, 2006, whichever is
earlier, pursuant to a Settlement and Release Agreement
substantially in the form set forth as Exhibit B ;
and (B) the Company’s issuance of Common Stock within
the earlier of (i) three business days of the effective date
of the Reverse Stock Split, or (ii) June 30, 2006,
pursuant to a conversion and settlement agreement, substantially in
the form of Exhibit C hereto (a “
Conversion and Settlement Agreement ”), with each and
all of the holders (all of such holders are set forth on
Schedule III) of the Company’s: (a) 9% Senior
Subordinated Convertible Notes dated as of October 15, 2004
(the “ 9% Notes ”), (b) Amended and
Restated 9% Senior Subordinated Convertible Notes dated as of
October 26, 2005 (the “ Amended 9% Notes
”), (c) Secured Promissory Notes dated as of
October 26, 2005 (the “Bridge Notes”), and
(d) Secured Promissory Notes dated as of September 20,
2005 issued to the former shareholders of Integration
Technologies, Inc. (the “ Acquisition Notes
” and together with the 9% Notes, the Amended 9% Notes and
the Bridge Notes, the “ Outstanding Notes
”).
(c)
Prepayment on
Sale of Assets . At any time until the
Senior Notes have been repaid in full, the Company will redeem all
or a portion of the Redemption Amount immediately upon the
occurrence of a Substantial Asset Sale as follows: Upon the
occurrence of a Substantial Asset Sale, (i) 50% of the gross
proceeds of such sale (the “Asset Sale Prepayment
Amount”) will be paid to the Purchasers or subsequent
transferees of the Senior Notes in respect of the Redemption
Amount; and (ii) a prepayment penalty equal to 2% of the
Asset Sale Prepayment Amount will be paid by the Company to the
Purchasers or subsequent transferees of the Senior Notes. Such
payments will be apportioned ratably among the Senior Note holders
according to the unpaid principal balance and accrued but unpaid
interest thereon to which such payments relate. For purposes of
this Section 1.06(c), a “Substantial Asset Sale”
is any voluntary or involuntary sale or series of sales of the
Company’s assets (including casualty losses or
condemnations) which generate(s) (i) gross proceeds of
$100,000 or more in the case of a single-asset sale, or
(ii) aggregate gross proceeds of $100,000 or more over any
12-month period in the case of a series of asset
sales.
SECTION 1.07.
Warrants for Senior
Notes . At the Closing, the Company
will issue to the Purchasers of Senior Notes pro rata ,
according to each Purchaser’s proportion of the aggregate
principal amount of the Senior Notes, warrants for the purchase of
an aggregate of 19.9% of the Common Stock of the Company,
exercisable at $0.001 per share, in the form set forth as
Exhibit D .
SECTION 1.08.
Interest Rate for Junior Note;
Payment of Principal and Interest for Junior Note
. The Junior
Note will accrue interest at the rate of ten percent (10%) per
annum, compounding quarterly. The said interest shall become due
quarterly in arrears and shall be payable on the last day of each
fiscal quarter (each, an “Interest Payment Date”) in
respect of the immediately preceding completed fiscal quarter. The
first Interest Payment Date will be June 30, 2006. At the
Company’s sole option, all interest payments due and payable
through June 30, 2009 may be paid in kind at the rate of
fourteen percent (14%) per annum, compounding quarterly, in which
case the accrued interest will be added to the principal amount of
the Junior Note on the applicable Interest Payment Date, and
interest will accrue on the aggregate principal amount. All
interest payments due and payable after June 30, 2009 must be
paid in cash. The Junior Note shall be due and payable in full at
the Junior Note Maturity Date unless earlier converted in
accordance with Section 3 of the Junior Note.
SECTION 1.09.
Redemption of Junior
Note .
Until March 1, 2010, the Company may not prepay the
Junior Note in whole or in part without the prior written
consent of the holder thereto, which may be given or withheld
in such holder’s sole discretion. At anytime from
March 1, 2010 until the
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Junior Note Maturity Date,
the Company may prepay this Junior Note in whole or in
part at any time without penalty.
SECTION 1.10.
Conversion of Junior
Note .
All or any part of the principal plus accrued but unpaid
interest on the Junior Note may be converted at any time into
a number of fully paid and nonassessable shares of Common Stock of
the Company, at the sole option of the holder of the Junior Note,
pursuant to the terms and conditions of conversion set forth in the
Junior Note.
SECTION 1.11.
Payment on Non-Business
Days .
Whenever any payment to be made will be due on a Saturday, Sunday
or a public holiday under the laws of the State of California, such
payment may be made on the next succeeding business day, and
such extension of time will in such case be included in the
computation of payment of interest due.
SECTION 1.12.
Registration of Notes
. The Company
will maintain at its principal office a register of the Notes and
will record therein the names and addresses of the registered
holders of the Notes, the address to which notices are to be sent
and the address to which payments are to be made as designated by
the registered holder if other than the address of the holder, and
the particulars of all transfers, exchanges and replacements of
Notes. No transfer of a Note will be valid unless made on such
register for the registered holder or his executors or
administrators or his or their duly appointed attorney, upon
surrender therefor for exchange as hereinafter provided,
accompanied by an instrument in writing, in form and execution
reasonably satisfactory to the Company. Each Note issued hereunder,
whether originally or upon transfer, exchange or replacement of a
Note or Notes, will be registered on the date of execution thereof
by the Company and will be dated the date to which interest has
been paid on such Notes or Note. The registered holder of a Note
will be that person in whose name the Note has been so registered
by the Company. A registered holder will be deemed the owner of a
Note for all purposes of this Agreement and, subject to the
provisions hereof, will be entitled to the principal and interest
evidenced by such Note free from all equities or rights of setoff
or counterclaim between the Company and the transferor of such
registered holder or any previous registered holder of such
Note.
SECTION 1.13.
Transfer and Exchange of
Notes . The registered holder of
any Note or Notes may, prior to maturity or prepayment thereof,
surrender such Note or Notes at the principal office of the Company
for transfer or exchange; provided, however , the registered
holder of any Note or Notes will not transfer any such Note
(a) to any person or entity which is not an “accredited
investor” within the meaning of Rule 501 under the
Securities Act of 1933, as amended (the “Securities
Act”), (b) to any person or entity that could result in
the loss of the exemption from registration under the Securities
Act applicable to the original sale of the Notes, as determined in
the reasonable discretion of the Company pursuant to a written
opinion of the Company’s counsel, and (c) so long as no
Event of Default has occurred, without the consent of the Company,
which consent will not be unreasonably withheld. Within a
reasonable time after notice to the Company from a registered
holder of its intention to make such exchange and without expense
(other than transfer taxes, if any) to such registered holder,
subject to the Company’s consent, if such consent is required
by this Section 1.13, the Company will issue in exchange
therefor another Note or Notes, in such denominations as requested
by the registered holder, for the same aggregate principal amount
as the unpaid principal amount of the Note or Notes so surrendered
and having the same maturity and rate of interest, containing the
same provisions and subject to the same terms and conditions as the
Note or Notes so surrendered. Each new Note will be made payable to
such person or persons, or registered assigns, as the registered
holder of such surrendered Note or Notes may designate, and
such transfer or exchange will be made in such a manner that no
gain or loss of principal or interest will result
therefrom.
SECTION 1.14.
Replacement of Notes
. Upon receipt of
evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of any Note and, if requested in the case
of any such
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loss, theft or destruction,
upon delivery of an indemnity bond or other agreement or security
reasonably satisfactory to the Company, or, in the case of any such
mutilation, upon surrender and cancellation of such Note, the
Company will issue a new Note, of like tenor and amount and dated
the date to which interest has been paid, in lieu of such lost,
stolen, destroyed or mutilated Note; provided ,
however , if any Note of which a Purchaser whose name is set
forth in the Schedule of Purchasers attached as
Schedule I , its nominee, or any of its partners is the
registered holder is lost, stolen or destroyed, the affidavit of
the President, Treasurer or any Assistant Treasurer or any other
authorized representative of the registered holder setting forth
the circumstances with respect to such loss, theft or destruction
will be accepted as satisfactory evidence thereof, and no
indemnification bond or other security will be required as a
condition to the execution and delivery by the Company of a new
Note in replacement of such lost, stolen or destroyed Note other
than the registered holder’s written agreement to indemnify
the Company.
SECTION 1.15.
Events of Default
. If any of the
following events (“Events of Default”) shall occur and
be continuing:
(a)
The Company will
fail to pay any installment of principal of, or interest due on,
any of the Notes within five (5) calendar days of the
date such installment is due;
(b)
Any material
representation or warranty made by the Company in this Agreement or
the Security and Pledge Agreements (as hereinafter defined), or by
the Company (or any officers of the Company) in any certificate,
instrument or written statement contemplated by or made or
delivered pursuant to or in connection with this Agreement or the
Security and Pledge Agreements will prove to have been incorrect
when made in any material respect;
(c)
The Company will
fail to perform or observe any other material term, covenant
or agreement contained in this Agreement, the Security and Pledge
Agreements, the Notes or any agreement executed and delivered by
the Company in connection with this Agreement or the Security and
Pledge Agreements on its part to be performed or observed and
any such failure remains unremedied for ten (10) business
days after written notice thereof will have been given to the
Company by any registered holder of the Notes;
(d)
The Company will
fail to pay any indebtedness in excess of an aggregate of $100,000
for borrowed money (other than as evidenced by the Notes) owing by
the Company, or any interest or premium thereon, when due (or, if
permitted by the terms of the relevant document, within any
applicable grace period), whether such indebtedness will become due
by scheduled maturity, by required prepayment, by acceleration, by
demand or otherwise, or will fail to perform any term,
covenant or agreement on its part to be performed under any
agreement or instrument evidencing or securing or relating to any
indebtedness in excess of an aggregate of $100,000 owing by the
Company when required to be performed (or, if permitted by the
terms of the relevant document, within any applicable grace
period), if the effect of such failure to pay or perform is to
accelerate, or to permit the holder or holders of such
indebtedness, or the trustee or trustees under any such agreement
or instrument to accelerate, the maturity of such indebtedness,
unless such failure to pay or perform will be waived by the
holder or holders of such indebtedness or such trustee or
trustees;
(e)
The Company will
be involved in financial difficulties as evidenced (i) by its
admitting in writing its inability to pay its debts generally as
they become due; (ii) by its commencement of a voluntary case
under Title 11 of the United States Code as from time to time in
effect, or by its authorizing, by appropriate proceedings of its
Board of Directors or other governing body, the commencement of
such a voluntary case which is not dismissed within sixty (60)
days; (iii) by its filing an answer or other pleading
admitting or failing to deny the material allegations of a petition
filed against it commencing an involuntary case under said Title
11, or seeking, consenting to or acquiescing in the
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relief therein provided, or
by its failing to controvert timely the material allegations of any
such petition; (iv) by the entry of an order for relief in any
involuntary case commenced under said Title 11; (v) by its
seeking relief as a debtor under any applicable law, other than
said Title 11, of any jurisdiction relating to the liquidation or
reorganization of debtors or to the modification or alteration of
the rights of creditors, or by its consenting to or acquiescing in
such relief; (vi) by the entry of an order by a court of
competent jurisdiction (a) finding it to be bankrupt or
insolvent, (b) ordering or approving its liquidation,
reorganization or any modification or alteration of the rights of
its creditors, or (c) assuming custody of, or appointing a
receiver or other custodian for, all or a substantial part of
its property; or (vii) by its making an assignment for the
benefit of, or entering into a composition with, its creditors, or
appointing or consenting to the appointment of a receiver or other
custodian for all or a substantial part of its
property;
(f)
The Company shall
fail to perform any of its obligations under
Section 5.21, Section 5.22, Section 5.23 or
Article VI of this Agreement;
(g)
The Company shall
fail to effect a one-for-ten reverse stock split of its Common
Stock (the “Reverse Stock Split”) within 90 days
following the Closing Date;
(h)
The Company shall
fail to reduce Chief Executive Officer Casper Zublin’s salary
by $100,000 ratably over the 48 months within 15 days following the
Closing Date, with such reduction to be set forth in a written
agreement between the Company and Mr. Zublin in form and
substance reasonably satisfactory to the Purchasers;
(i)
The Company shall
fail to complete the conversion of all of the obligations
outstanding under the Outstanding Notes into Common Stock of the
Company at a conversion rate of $0.02 per share on or before the earlier of
(a) three business days following the effective date of the
Reverse Stock Split, or (b) June 30, 2006;
(j)
Any judgment,
writ, warrant of attachment or execution or similar process will be
issued or levied against a substantial part of the property of
the Company and such judgment, writ, or similar process will not be
released, vacated or fully bonded within sixty (60) days after
its issue or levy; or
(k)
The Company shall
fail to effect, as set forth on Schedule C of the
respective Security and Pledge Agreements, the termination within
(i) ten (10) calendar days of the Closing Date of each of
those certain financing statements on file by Laurus Master Fund,
Ltd., C.W. Zublin, Jr. Trust, Glen Ackerman, and Lisa Ackerman
in any jurisdiction purporting to evidence a security interest in
any assets of the Company or its affiliates and (ii) thirty
(30) calendar days of the Closing Date of any and all other
financing statements on file in any jurisdiction purporting to
evidence a security interest in any assets of the Company or its
affiliates, other than the financing statements evidencing the
security interests of the Purchasers pursuant to the Security and
Pledge Agreements.
then, and in any such event, any holder of any
Note may, by notice to the Company, declare the entire unpaid
principal amount of the Note, all interest accrued and unpaid
thereon and all other amounts payable under this Agreement to be
forthwith due and payable, whereupon the Note, all such accrued
interest and all such amounts will become and be forthwith due and
payable (unless there will have occurred an Event of Default under
subsection 1.15(e) in which case all such amounts will
automatically become due and payable), without presentment, demand,
protest or further notice of any kind, all of which are hereby
expressly waived by the Company.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE
COMPANY
The Company represents and warrants
to the Purchasers that, as of the Closing and except as set forth
in the Disclosure Schedule attached as Schedule IV
(which Disclosure Schedule makes explicit reference to the
particular representation or warranty as to which exception is
taken, which in each case will constitute the sole representation
and warranty as to which such exception will apply):
SECTION 2.01.
Organization, Qualifications and
Corporate Power .
(a)
The Company is a
corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware and is duly
licensed or qualified to transact business as a foreign corporation
and is in good standing in each jurisdiction in which the nature of
the business transacted by it or the character of the properties
owned or leased by it requires such licensing or qualification,
except where the failure to be so licensed or qualified does not
have a material adverse effect on the Company’s business or
financial condition. The Company has the corporate power and
authority to own and hold its properties and to carry on its
business as now conducted and as proposed to be conducted, to
execute, deliver and perform this Agreement and the Security
and Pledge Agreements, and to issue, sell and deliver the Notes and
the Warrants.
(b)
The Company has
no subsidiaries, other than as set forth on Schedule IV
. The Company does not (i) own of record or beneficially,
directly or indirectly, (A) any shares of capital stock or
securities convertible into capital stock of any other corporation
or (B) any participating interest in any partnership, joint
venture or other non-corporate business enterprise or
(ii) control, directly or indirectly, any other entity, other
than as set forth on Schedule IV .
SECTION 2.02.
Authorization of Agreements,
Etc .
(a)
The execution and
delivery by the Company of this Agreement and the Security and
Pledge Agreements, the performance by the Company of its
obligations hereunder and thereunder, the issuance, sale and
delivery of the Notes and the Warrants have been duly authorized by
all requisite corporate action and will not (i) violate any
provision of law, any order of any court or other agency of
government, (ii) violate the Certificate of Incorporation or
the By-laws of the Company, each as amended, (iii) violate any
provision of any indenture, agreement or other instrument to which
the Company or any of its properties or assets is bound,
(iv) conflict with, result in a breach of or constitute (with
due notice or lapse of time or both) a default under any such
indenture, agreement or other instrument, or (v) result in the
creation or imposition of any lien, charge, restriction, claim or
encumbrance of any nature whatsoever upon any of the properties or
assets of the Company, except in the case of clauses (i), (iii),
(iv) and (v), as would not have a material adverse effect on
the Company.
(b)
The Notes and the
Warrants have been duly authorized and, when issued in accordance
with this Agreement, will be free and clear of all liens, charges,
restrictions, claims and encumbrances imposed by or through the
Company. Except as set forth on Schedule IV , the
issuance, sale and delivery of the Notes and the Warrants are not
subject to any preemptive right of shareholders of the Company or
to any right of first refusal or other right in favor of any
person.
SECTION 2.03.
Validity . Each of this Agreement, the
Security and Pledge Agreements and the Notes and the Warrants have
been duly executed and delivered by the Company and constitute the
legal, valid and binding obligations of the Company, enforceable in
accordance with their terms.
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SECTION 2.04.
Authorized Capital
Stock . The authorized capital
stock of the Company consists of 450,000,000 shares of Common
Stock, $.0001 par value per share, and 10,000,000 shares of
preferred stock, $0.0001 par value per share (“Preferred
Stock”). As of the date of this Agreement, 81,164,636 shares
of Common Stock and no shares of Preferred Stock were validly
issued and outstanding, fully paid and nonassessable. Except as
disclosed in SEC Reports (as defined below), there are no options,
warrants and convertible securities of the Company, and any other
rights to acquire securities of the Company. All outstanding
securities of the Company are validly issued, fully paid and
nonassessable. No stockholder of the Company is entitled to any
preemptive rights with respect to the purchase of or sale of any
securities of the Company.
SECTION 2.05.
SEC Filings, Other Filings and
Regulatory Compliance . Since January 1, 2002,
the Company has timely made all filings required to be made by it
under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). The Company has delivered or made
accessible to the Purchasers true, accurate and complete copies of
(a) the Company’s Annual Report on Form 10-K for
the fiscal year ended June 30, 2005, (b) the
Company’s Quarterly Reports on Form 10-Q for the fiscal
quarters ended September 30, 2005 and December 31, 2005,
(c) the Company’s definitive proxy statement dated
November 17, 2005 relating to its Annual Meeting of
Stockholders, and (d) all the Company’s Current Reports
on Form 8-K filed since July 1, 2005 (collectively, the
“SEC Reports”). The SEC Reports when filed, complied in
all material respects with all applicable requirements of the
Exchange Act and the Sarbanes-Oxley Act of 2002, if and to the
extent applicable, and the rules and regulations of the
Securities and Exchange Commission (the “SEC”)
thereunder applicable to the SEC Reports. None of the SEC Reports,
at the time of filing, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein not
misleading in light of the circumstances in which they were made.
The Company has taken, or will have taken prior to the Closing, all
necessary actions to maintain eligibility of its Common Stock for
trading on OTC Bulletin Board under all currently effective
inclusion requirements. Each balance sheet included in the SEC
Reports (including any related notes and schedules) fairly presents
in all material respects the consolidated financial position of the
Company as of its date, and each of the other financial statements
included in the SEC Reports (including any related notes and
schedules) fairly presents in all material respect the consolidated
results of operations of the Company for the periods or as of the
dates therein set forth in accordance with generally accepted
accounting principles (“GAAP”) consistently applied
during the periods indicated or as a result of year end adjustments
and except as may be indicated in the notes thereto or, in the
case of interim consolidated financial statements, where
information and footnotes contained in such financial statements
are not required to be in compliance with GAAP). Such financial
statements included in the SEC Reports were, at the time they were
filed, consistent with the books and records of the Company in all
material respects and complied as to form in all material
respects with then applicable accounting requirements and with the
rules and regulations of the SEC with respect thereto. The
Company keeps accounting records in which all material assets and
liabilities, and all material transactions, including off-balance
sheet transactions, of the Company are recorded in accordance with
GAAP.
SECTION 2.06.
Governmental Approvals
. Subject to the
accuracy of the representations and warranties of the Purchasers
set forth in Article III, no registration or filing with, or
consent or approval of or other action by, any federal, state or
other governmental agency or instrumentality is or will be
necessary for the valid execution, delivery and performance by the
Company of this Agreement, the issuance, sale and delivery of the
Notes and the Warrants, other than filings pursuant to state
securities laws (all of which filings have been made by the
Company, other than those which are required or permitted to be
made after the Closing and which will be duly made on a timely
basis) in connection with the sale of the Notes and the
Warrants.
8
SECTION 2.07.
Offering of the Notes
. Except for the
filing of a registration statement on Form S-1 with the SEC on
November 25, 2005 in connection with a proposed rights
offering, which registration statement was withdrawn as of
February 3, 2006, 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 in any security or
solicited any offers to buy any security under circumstances that
would require registration under the Securities Act of the issuance
of the Notes and the Warrants to the Purchasers. Based upon the
policy position of the SEC, as described in the SEC staff’s
No-Action Letters dated June 26, 1990 to Black Box
Incorporated and February 28, 1992 to Squadron, Ellenoff,
Pleasant & Lehrer, and the Purchasers’
representations in Article III, the issuance of the Notes and
the Warrants to the Purchasers will not be integrated with any
other issuance of the Company’s securities (past, current or
future) for purposes of the Securities Act.
SECTION 2.08.
Material Changes
. Except as set
forth in Schedule IV attached hereto, since
June 30, 2005, there has not been (i) any direct or
indirect redemption, purchase or other acquisition by the Company
of any shares of Common Stock; (ii) any declaration, setting
aside or payment of any dividend or other distribution by the
Company with respect to the Common Stock; (iii) any material
liabilities (absolute, accrued or contingent) incurred or assumed
by the Company, other than current liabilities incurred in the
ordinary course of business, liabilities under contracts entered
into in the ordinary course of business, purchase price payment
obligations incurred in connection with the acquisition of Red Rock
Communications Solutions, Inc. and Integration
Technologies, Inc. and liabilities not required to be
reflected on the Company’s financial statements pursuant to
GAAP; or (iv) any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any conditional
sale or other title retention agreement, any lease in the nature
thereof, and the filing of or agreement to give any financing
statement under the Uniform Commercial Code or comparable law
of any jurisdiction in connection with such mortgage, pledge,
security interest, encumbrance, lien or charge) (each, a
“Lien”) or adverse claim on any of the Company’s
properties or assets, except for Liens for taxes not yet due and
payable, interest of lessors under operating capital leases,
purchase money liens, amounts deposited for security for surety
bonds, Liens incurred in connection with the Company’s credit
facility with New England Technology Finance, LLC, Liens incurred
in the ordinary course of business or Liens that are not material
in amount to the Company and its subsidiaries.
SECTION 2.09.
Litigation
. Except as
disclosed in the Schedule IV attached hereto, there is
no action, suit, proceeding or investigation pending or, to the
Company’s knowledge, currently threatened against the Company
or any of its subsidiaries that questions the validity of this
Agreement or the right of the Company to enter into it, or to
consummate the transactions contemplated hereby, or that could
reasonably be expected to result, either individually or in the
aggregate, in a material adverse effect on the Company. The
foregoing includes, without limitation, actions pending or, to the
Company’s knowledge, threatened involving the prior
employment of any of the Company’s employees or their use in
connection with the Company’s business of any information or
techniques allegedly proprietary to any of their former employers.
Neither the Company nor any of its subsidiaries is a party to or
subject to the provisions of any order, writ, injunction, judgment
or decree of any court or governmental authority. Except as
disclosed in Schedule IV attached hereto, there is no
action, suit, proceeding or investigation by the Company or any of
its Subsidiaries currently pending or which the Company or any of
its subsidiaries currently intends to initiate, which could
reasonably be expected to have a material adverse
effect.
SECTION 2.10.
Ownership of Property;
Liens . The Company and each of its
subsidiaries has good and marketable title in fee simple, or a
valid leasehold interest in, all of its real property; and good
title to, or a valid leasehold interest in, all of its other
property, and none such property is subject to any Lien except as
set forth on Schedule IV attached hereto.
9
SECTION 2.11.
Intellectual Property
Rights . To the best of its
knowledge, the Company owns or possesses the licenses or rights to
use all patents, patent applications, patent rights, inventions,
know-how, trade secrets, trademarks, trademark applications,
service marks, service names, trade names and copyrights necessary
to enable it to conduct its business as now operated (the
“Intellectual Property”). Except as set forth in
Schedule IV attached hereto, there are no material
outstanding options, licenses or agreements relating to the
Intellectual Property, nor is the Company bound by or a party to
any material options, licenses or agreements relating to the
patents, patent applications, patent rights, inventions, know-how,
trade secrets, trademarks, trademark applications, service marks,
service names, trade names or copyrights of any other person or
entity. Except as set forth in Schedule IV attached
hereto, there is no claim or action or proceeding pending or, to
the Company’s knowledge, threatened that challenges the right
of the Company with respect to any Intellectual Property. Except as
set forth in Schedule IV attached hereto, to the
knowledge of the Company, the Company’s Intellectual Property
does not infringe any intellectual property rights of any other
person which, if the subject of an unfavorable decision, ruling or
finding would have a material adverse effect.
SECTION 2.12.
Insurance . The Company is insured by
insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes
to be prudent and customary in the businesses in which the Company
is engaged.
SECTION 2.13.
Brokers . The Company has no
contract, arrangement or understanding with any broker, finder or
similar agent with respect to the transactions contemplated by this
Agreement.
SECTION 2.14.
Non-Operational
Subsidiaries . Neither
BugSolver.Com, Inc., TekInsight e-Government
Services, Inc., nor TekInsight Research, Inc. operates
any business, nor does any such entity own any material
assets.
SECTION 2.15.
Federal Reserve
Regulations . The Company is not engaged
in the business of extending credit for the purpose of purchasing
or carrying margin securities (within the meaning of Regulation G
of the Board of Governors of the Federal Reserve System), and no
part of the proceeds of the Notes will be used to purchase or
carry any margin security or to extend credit to others for the
purpose of purchasing or carrying any margin security or in any
other manner which would involve a violation of any of the
regulations of the Board of Governors of the Federal Reserve
System.
SECTION 2.16.
Office Headquarters
. The sole lease agreement now
currently in full force and effect for the Company’s
principal place of business is that certain Office Lease Agreement,
made and entered into as of the 21st day of July, 2003, by and
between CA-Fairchild Corporate Center Limited Partnership, a
Delaware limited partnership, as landlord, and Integration
Technologies, Inc., a California corporation, tenant (as
amended, supplemented, or otherwise modified from time to time)
(the “Office Lease”).
SECTION 2.17.
Representations
Complete . The representations and
warranties made by the Company in this Agreement, the statements
made in any certificates furnished by the Company pursuant to this
Agreement, and the statements made by the Company in any documents
mailed, delivered or furnished to the Purchasers in connection with
this Agreement, taken as a whole, do not contain and will not
contain, as of their respective dates and as of the Closing Date,
any misstatements of material fact or omit to state any material
fact necessary in order to make the statements contained herein or
therein, in the light of the circumstan
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