NOTE PURCHASE AGREEMENT

 

TABLE OF CONTENTS

 

1.	Purchase and Sale of the Notes and the Warrants			2
	1.1	Authorization of Issuance of the Notes and the Warrants		2
	1.2	Purchase and Sale of Initial Closing Notes and Initial Closing Warrants		2
	1.3	Purchase and Sale of Additional Notes and Additional Warrants		2
	1.4	Use of Proceeds		2
	1.5	Initial Closing		2
	1.6	Subsequent Closings		3
2.	Term of the Notes; Security for the Notes; Subordination; Priority			3
	2.1	General		3
	2.2	Security		3
	2.3	Subordination		4
	2.4	Pari Passu with Fall 2008 Notes		4
3.	Representations and Warranties of the Borrowers			4
	3.1	Organization and Qualification		4
	3.2	Certificate of Incorporation and Bylaws		4
	3.3	Corporate Power and Authority		4
	3.4	Capitalization		5
	3.5	Authorization		5
	3.6	Title to Properties and Assets; Leases; Insurance		5
	3.7	Related-Party Transactions		6
	3.8	Permits; Compliance with Applicable Laws		6
	3.9	Proprietary Rights		6
	3.10	Material Contracts		7
	3.11	Absence of Undisclosed Liabilities		7
	3.12	Absence of Conflicts		7
	3.13	Litigation		8
	3.14	Consents		8
	3.15	Labor Relations; Employees		8
	3.16	Employee Benefit Plans		8
	3.17	Tax Returns, Payments and Elections		8
	3.18	Brokers or Finders		9
	3.19	Offering Exemption		9
	3.20	Environmental Matters		9
	3.21	Offering of Purchased Shares and Warrants		10
	3.22	SEC Reports; Disclosure		10
	3.23	Financial Statements		10
	3.24	Suppliers and Customers		11
4.	Representations and Warranties of the Purchasers			11
	4.1	Organization and Qualification		11

 

i

 

	4.2	Power and Authority		11
	4.3	Authorization		11
	4.4	Purchase Entirely for Own Account		12
	4.5	Disclosure of Information		12
	4.6	Investment Experience		12
	4.7	Accredited Investor		12
	4.8	Restricted Securities; Legends		12
	4.9	No General Solicitation		13
	4.10	Absence of Conflicts		13
	4.11	Brokers or Finders		13
5.	Conditions of the Parties			13
	5.1	Conditions of Purchasers’ Obligations at any Closing		13
	5.2	Conditions of Initial Purchasers’ Obligations at the Initial Closing		14
	5.3	Conditions of Additional Purchasers’ Obligations at any Subsequent Closing		15
	5.4	Conditions of Borrowers’ Obligations at any Closing		15
6.	Events of Default and Remedies			16
	6.1	Events of Default		16
	6.2	Exercise of Remedies		18
	6.3	Waiver of Defaults		18
7.	Debt Covenants			18
	7.1	General		18
8.	Indemnification			18
	8.1	General Indemnification		18
	8.2	Indemnification Principles		18
	8.3	Claim Notice; Right to Defend		19
9.	Certain Definitions			19
10.	[RESERVED]			24
11.	Miscellaneous			24
	11.1	Survival of Representations and Warranties		24
	11.2	Successors and Assigns		24
	11.3	Governing Law		24
	11.4	Counterparts		24
	11.5	Titles and Subtitles		24
	11.6	Notices		24
	11.7	Expenses		25
	11.8	Consents, Amendments and Waivers		25
	11.9	Severability		25

 

ii

 

	11.10	Entire Agreement		25
	11.11	Delays or Omissions		26
	11.12	Facsimile and E-Mail Signatures		26
	11.13	Other Remedies		26
	11.14	Further Assurances		26
	11.15	Exchanges; Lost, Stolen or Mutilated Notes and Warrants		26
	11.16	Termination		27
	11.17	Pro Rata		27
	11.18	Appointment and Authorization of Phoenix Venture Fund LLC as Agent		27

 

iii

 

Exhibit & Schedules List

 

Exhibit A		-		Form of Note
Exhibit B		-		Form of Warrant
Exhibit C		-		Form of Amendment No. 1 to the Security Agreement
Exhibit D		-		Form of Subordination Agreement
Exhibit E		-		Debt Covenants
Schedule I				List of Initial Purchasers
Schedule II				List of Additional Purchasers

 

iv

 

NOTE PURCHASE AGREEMENT

 

THIS NOTE PURCHASE AGREEMENT (this “ Agreement ”) is made on the 27th day of February, 2009, by and among Xplore Technologies Corp., a Delaware corporation (the “ Parent ”), Xplore Technologies Corporation of America, a Delaware corporation and wholly-owned subsidiary of the Parent (the “ Subsidiary ” and collectively with the Parent, the “ Borrowers ”), and the purchasers listed on Schedule I hereto, each of which is herein referred to as an “ Initial Purchaser ” and the purchasers listed from time to time on Schedule II hereto, each of which is herein referred to as an “ Additional Purchaser ”, and collectively, as the “ Purchasers ”.

 

W I T N E S S E T H:

 

WHEREAS, subject to the terms and conditions set forth herein, the Borrowers desire to issue and sell to the Initial Purchasers on the Initial Closing Date (i) secured subordinated promissory notes in the aggregate principal amount of not greater than $1,500,000 maturing on the Maturity Date (each, an “ Initial Closing Note ” and, collectively, the “ Initial Closing Notes ”) and (ii) warrants to purchase up to such number of shares of Common Stock as determined by dividing (x) 100% of the aggregate principal amount of the Initial Closing Notes purchased by such Initial Purchasers, by (y) the Warrant Exercise Price (each, an “ Initial Closing Warrant ” and, collectively, the “ Initial Closing Warrants ”), and the Initial Purchasers shall purchase the Initial Closing Notes and the Initial Closing Warrants from the Borrowers on the terms and conditions set forth herein;

 

WHEREAS, subject to the terms and conditions set forth herein, the Borrowers desire to issue and sell to the Additional Purchasers on any Subsequent Closing Date (i) secured subordinated promissory notes in the aggregate principal amount which together with the aggregate principal amount of the Initial Closing Notes does not exceed $1,500,000 maturing on the Maturity Date (each, an “ Additional Note ” and, collectively, the “ Additional Notes ” and, together with the Initial Closing Notes, the “ Notes ”) and (ii) warrants to purchase such number of shares of Common Stock as determined by dividing (x) 100% of the aggregate principal amount of the Additional Notes purchased by such Additional Purchasers, by (y) the Warrant Exercise Price (each, an “ Additional Warrant ” and, collectively, the “ Additional  Warrants ” and together with the Initial Closing Warrants, the “ Warrants ”), and such Additional Purchasers shall purchase such Additional Notes and such Additional Warrants from the Borrowers on the terms and conditions set forth herein; and

 

WHEREAS, the board of directors of each of the Parent and of the Subsidiary has approved the execution and delivery of this Agreement, all ancillary agreements related hereto, and the transactions contemplated hereby.

 

NOW, THEREFORE, in consideration of the premises and agreements contained in this Agreement, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, THE PARTIES HEREBY AGREE AS FOLLOWS:

 

 

1.                                        Purchase and Sale of the Notes and the Warrants .

 

1.1                                  Authorization of Issuance of the Notes and the Warrants.

 

(a)                                   Subject to the terms and conditions of this Agreement, on or prior to the Initial Closing Date, the Borrowers shall have authorized the issuance and sale to the Initial Purchasers of (i) the Initial Closing Notes, in the form attached hereto as Exhibit A , and (ii) the Initial Closing Warrants, in the form attached hereto as Exhibit B .

 

(b)                                  Subject to the terms and conditions of this Agreement, on or prior to any Subsequent Closing Date, the Borrowers shall have authorized the issuance and sale to the Additional Purchasers of (i) all Additional Notes to be issued at any Subsequent Closing in the form attached hereto as Exhibit A , and (ii) the Additional Warrants, in the form attached hereto as Exhibit B .

 

1.2                                  Purchase and Sale of Initial Closing Notes and Initial Closing Warrants.   Subject to the terms and conditions of this Agreement, each Initial Purchaser, severally and not jointly, agrees to purchase at the Initial Closing, and the Borrowers agree to issue and sell to each such Initial Purchaser at the Initial Closing (i) an Initial Closing Note, dated as of the Initial Closing Date in the original principal amount equal to the dollar amount set forth opposite such Initial Purchaser’s name under the heading “ Initial Closing Note Purchase Price ” on Schedule I hereto and (ii) Initial Closing Warrants for such shares of Common Stock as set forth opposite such Initial Purchaser’s name under the heading “ Number of Initial Closing Warrant Shares ” on Schedule I hereto, in exchange for the amount set forth opposite such Initial Purchaser’s name under the heading “ Initial Closing Note Purchase Price ” on Schedule I hereto.

 

1.3                                  Purchase and Sale of Additional Notes and Additional Warrants.   At any time and from time to time, but in no event later than ninety (90) days after the Initial Closing Date, one or more Additional Purchasers may purchase at one or more Subsequent Closings, (i) Additional Notes, the aggregate purchase price of which, together with the aggregate purchase price of the Initial Closing Notes, shall not exceed $1,500,000 and (ii) Additional Warrants for the number of shares of Common Stock as determined by dividing (x) 100% of the principal amount of such Additional Notes purchased by such Additional Purchasers by the Warrant Exercise Price. Schedule II attached hereto shall be amended from time to time concurrent with each Subsequent Closing to include the names of the Additional Purchasers purchasing Additional Notes and Additional Warrants at such Subsequent Closing, as well as the purchase price of the Additional Notes, and  the number of shares of Common Stock that can be purchased on exercise of the Additional Warrants.  The aggregate purchase price for the Notes and Warrants shall not exceed $1,500,000.

 

1.4                                  Use of Proceeds .  The Borrowers agree to use the net proceeds from the sale and issuance of the Notes and Warrants pursuant to this Agreement for working capital, product development, and other general corporate purposes.

 

1.5                                  Initial Closing .  The purchase and sale of the Initial Closing Notes and the Initial Closing Warrants shall take place at the offices of Pillsbury Winthrop Shaw Pittman LLP, 1540 Broadway, New York, New York 10036, promptly upon the satisfaction or waiver of the

 

2

 

closing conditions set forth in Section 5.1, 5.2 and 5.4 hereto, but not later than February 27, 2009, or on such other date and at such other time as the Borrowers and Phoenix Venture Fund LLC, as Agent for the Purchasers (the “ Agent ”), mutually agree upon in writing (which time and place is designated as the “ Initial Closing ”).  The date of the Initial Closing is referred to herein as the “ Initial Closing Date .”  At the Initial Closing, the Borrowers shall deliver to each Initial Purchaser (i) Initial Closing Notes, in an original principal amount equal to the dollar amount set forth opposite such Initial Purchaser’s name under the heading “ Initial Closing Note Purchase Price ” on Schedule I hereto and (ii) Initial Closing Warrants entitling such Initial Purchaser to purchase the number of shares of Common Stock set forth opposite such Initial Purchaser’s name under the heading “ Number of Initial Closing Warrant Shares ” on Schedule I hereto, all against payment in the amounts set forth opposite such Initial  Purchaser’s name under the heading “ Initial Closing Note Purchase Price ” on Schedule I hereto, by wire transfer of immediately available funds to such account as the Borrowers designate.

 

1.6                                  Subsequent Closings .  Upon the purchase of any Additional Notes and Additional Warrants subject to the satisfaction or waiver of the closing conditions set forth in Sections 5.1, 5.3 and 5.4, Subsequent Closings shall take place at the offices of Pillsbury Winthrop Shaw Pittman LLP, 1540 Broadway, New York, New York 10036, on such date and at such time as the Borrowers and the Agent, acting on behalf of the Purchasers, mutually agree upon in writing (each, a “ Subsequent Closing ” and collectively, the “ Subsequent Closings ”).  The date of each applicable Subsequent Closing is referred to herein as a “ Subsequent Closing Date .” At each Subsequent Closing, the Borrowers shall deliver to each Additional Purchaser (i) an Additional Note, dated as of such Subsequent Closing Date, in an original principal amount equal to the dollar amount set forth opposite such Additional Purchaser’s name under the heading “ Additional Note Purchase Price ” on Schedule II hereto, which shall be updated by the Borrower and the Agent, acting on behalf of the Purchasers, from time to time as necessary upon each Subsequent Closing, with respect to such Additional Purchaser and (ii) Additional Warrants for the number of shares of Common Stock set forth opposite such Additional Purchaser’s name under the heading “ Number of Additional Closing Warrant Shares ” in Schedule II hereto.

 

2.                                        Term of the Notes; Security for the Notes; Subordination; Priority .

 

2.1                                  General .  The Notes shall be issued in the aggregate principal amount of up to $1,500,000 and shall bear interest, and otherwise be in the form attached hereto as Exhibit A .  Payment of all principal and accrued and unpaid interest on any Note shall be made in full no later than the Maturity Date.

 

2.2                                  Security .  The Notes shall be equally and ratably secured by all of the assets of the Borrowers pursuant an amendment (the “ Amendment No. 1 to the Security Agreement ”), in substantially the form attached hereto as Exhibit C, to that certain Security Agreement, dated as of September 5, 2008, among the Borrowers and the Agent (the “ Security Agreement ”), pursuant to such Security Agreement the Borrowers have granted to the Agent, acting on behalf of the purchasers of the Fall 2008 Notes (as defined below), a security interest in all of the assets of the Borrowers, subject to the Permitted Liens.  Amendment No. 1 to the Security Agreement will be entered into on or prior to the Initial Closing Date by the Borrowers and the Agent, acting on behalf of the Purchasers, and shall provide the benefits of the security interest in the Borrowers’ assets to the Purchasers.

 

3

 

2.3                                  Subordination .  The right of repayment of principal of and interest on the Notes and the security interest of the Purchasers in the assets of the Borrowers shall be subordinated to (a) the rights and security interest of Silicon Valley Bank (“ SVB ”) under the Loan and Security Agreement by and between SVB and the Subsidiary dated as of September 15, 2005, as amended (as the same may from time to time be further amended, modified, supplemented or restated, the “ Senior Credit Agreement ”), in accordance with the Subordination Agreement in substantially the form attached hereto as Exhibit D (the “ Subordination Agreement ) and (b) the rights of any Senior Lender in connection with any Senior Credit Facility reasonably acceptable to the Agent, acting on  behalf of the Purchasers, pursuant to a subordination agreement containing terms no less favorable, as a whole, to the Purchasers than the terms of the Subordination Agreement and shall be subject to the Permitted Liens.

 

2.4                                  Pari Passu with Fall 2008 Notes .  The right of repayment of principal and interest on the Notes and to the distribution of any Collateral shall rank pari passu with the right of repayment of principal and interest on the subordinated secured notes issued by the Borrowers in September and October 2008 in the aggregate principal amount of $3,000,000 (the “ Fall 2008 Notes ”).  The security interest of the Purchasers in the Notes shall rank pari passu with the security interest of the purchasers of the Fall 2008 Notes in the assets of the Borrowers, whether upon liquidation or dissolution, or otherwise.

 

3.                                        Representations and Warranties of the Borrowers .

 

The Borrowers, jointly and severally, hereby represent and warrant to each Purchaser as of the Initial Closing Date and in the case of any Additional Purchasers as of such Subsequent Closing Date, the following, except as expressly set forth on the Disclosure Schedule, specifically identifying or cross-referencing the relevant Sections hereof, which Disclosure Schedule shall be deemed to be part of the representations and warranties as if made hereunder:

 

3.1                                  Organization and Qualification .  Each of the Borrowers is duly organized, validly existing and in good standing under the Laws of the State of Delaware and has the requisite power and authority to own, lease and operate its assets, properties and business and to carry on its business as it is now being conducted or proposed to be conducted.  Each of the Borrowers is duly qualified as a foreign corporation to transact business, and is in good standing, in each jurisdiction where it owns or leases real property or maintains employees or where the nature of its activities make such qualification necessary, except where such failure to qualify could not reasonably be expected to have a Material Adverse Effect.

 

3.2                                  Certificate of Incorporation and Bylaws .  The Parent has delivered to the Agent, acting on behalf of the Purchasers, true, correct, and complete copies of the certificate of incorporation of the Parent and the Subsidiary as in effect on the date hereof (each a “ Certificate of Incorporation ” and collectively the “ Certificates of Incorporation ”) and each of their bylaws as in effect on the date hereof (each a “ Bylaw ” and collectively the “ Bylaws ”).

 

3.3                                  Corporate Power and Authority .  Each of the Borrowers has all requisite corporate power and authority to execute and deliver the Loan Documents and this Agreement to which it is a party.  The Borrowers have all requisite corporate power and authority to issue and sell the Notes and the Warrants to the Purchasers hereunder.  Each of the Borrowers has all

 

4

 

requisite corporate power and authority to carry out and perform its obligations under the terms of this Agreement and the Loan Documents.  Each of the Borrowers has all requisite corporate power and authority to sell and issue the Notes and the Warrants.

 

3.4                                  Capitalization.   Immediately prior to the date hereof, the Parent is authorized to issue 410,000,000 shares of capital stock of which (i) 300,000,000 are designated as Common Stock, of which 85,105,778 shares are issued and outstanding (ii) and 110,000,000 are designated as Preferred Stock, of which (A) 64,000,000 are designated as Series A Preferred Stock of which 63,178,777 shares are issued and outstanding, (B) 10,000,000 of which are designated Series B Preferred Stock of which 9,000,277 shares are issued and outstanding, (C) 20,000,000 of which are designated Series C Preferred Stock of which 15,274,000 shares are issued and outstanding.  The Parent owns all of the issued and outstanding capital stock of the Subsidiary.

 

3.5                                  Authorization .  The execution, delivery and performance by each Borrower of this Agreement and the Loan Agreements, the sale, issuance and delivery of the Notes and the Warrants and the performance of all of the obligations of the Borrowers under this Agreement and each of the Loan Documents have been authorized by each Borrower’s Board of Directors, no other corporate action on the part of any Borrower and no other corporate or other approval or authorization is required on the part of any Borrower or any other Person, by Law or otherwise, in order to make this Agreement and the Loan Documents the valid, binding and enforceable obligations (subject to (i) Laws of general application relating to bankruptcy, insolvency, and the relief of debtors, and (ii) rules of Law governing specific performance, injunctive relief, or other equitable remedies) of the Borrowers, as the case may be. This Agreement and each of the Loan Documents, when executed and delivered by each of the Borrowers that is a party thereto, will constitute a valid and legally binding obligation of such Borrower, enforceable against such Borrower in accordance with its respective terms, subject to (i) Laws of general application relating to bankruptcy, insolvency, and the relief of debtors, and (ii) rules of Law governing specific performance, injunctive relief, or other equitable remedies.

 

3.6                                  Title to Properties and Assets; Leases; Insurance .

 

(a)                                   Neither Borrower currently owns any real property nor has ever owned any real property.  Each of the Borrowers has good and marketable title to or has a valid leasehold interest in, or license to use, all of the property or assets used by it or located on its premises and necessary for the conduct of business as presently conducted, free and clear of all Liens, other than Permitted Liens.

 

(b)                                  With respect to the insurance policies and fidelity bonds covering the assets, business, equipment, properties, operations, employees, officers and directors of each Borrower, there is no claim by either Borrower pending under any of such policies or bonds as to which coverage has been denied or disputed by the underwriters of such policies or bonds which could reasonably be expected to have a Material Adverse Effect.  All premiums due and payable under all such policies and bonds have been paid and each Borrower, as applicable, is otherwise in compliance in all material respects with the terms of such policies and bonds.  Neither Borrower has any Knowledge of any threatened termination of, or material premium increase with respect to, any of such policies.  Each Borrower maintains insurance in such amounts,

 

5

 

including (as applicable) self-insurance, retainage and deductible arrangements, and of such a character as is reasonable for companies engaged in the same or similar business similarly situated.

 

3.7                                  Related-Party Transactions .  No employee, officer, shareholder, director or consultant of the Borrowers or member of the immediate family (defined as parents, spouse, siblings or lineal descendants) of any such officer or director is indebted to either of the Borrowers for borrowed money, and neither Borrower is indebted for borrowed money (or committed to make loans or extend or guarantee credit) to any of them other than for reimbursement of expenses incurred in connection with their service to such Borrower, and amounts accrued but not yet due to employees and other service providers. To the Knowledge of the Borrowers, except as provided for in this Agreement and the Loan Documents and except as set forth in the SEC Reports, (a) no employee, officer, shareholder, director or consultant of such Borrower or any member of the immediate family of any such officer or director is, directly or indirectly, interested in any Material Contract or has any other material business relationship with any Borrower, except stock ownership in or employment with a Borrower and (b) no officer, director of such Borrower or any member of the immediate family of such officer or director has any material business relationship with any competitor of such Borrower.

 

3.8                                  Permits; Compliance with Applicable Laws .  Each Borrower has all franchises, permits, licenses, authorizations, approvals, registrations and any similar authority necessary for the conduct of its business as now being conducted by it except for those the absence of which could not reasonably be expected to have a Material Adverse Effect (the “ Permits ”).  Neither Borrower is in violation in any material respect of, or default in any material respect under, any such Permits. All such Permits are in full force and effect, and to the Borrower’s Knowledge, no violations in any material respect have been recorded in respect of any such Permits; no proceeding is pending or, to the Borrower’s Knowledge, threatened to revoke or limit any such Permit; and no such Permit will be suspended, cancelled or adversely modified as a result of the execution and delivery of this Agreement and the Loan Documents.  Each Borrower is in compliance in all respects with all applicable Laws, except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect.

 

3.9                                  Proprietary Rights .  Each Borrower is the sole owner, free and clear of any Liens, other than Permitted Liens, or has a valid license, without the payment of any royalty (except with respect to off-the-shelf software that is licensed by such Borrower) and otherwise on commercially reasonable terms, to, all Proprietary Rights material to the business of such Borrower.  As used herein, the term “ Proprietary Rights ” means each Borrower’s patents, trademarks, trade names, service marks, logos, designs, formulations, copyrights, and other trade rights and all registrations and applications therefor, all know-how, trade secrets, technology or processes, research and development, all Internet domain addresses, Web sites and computer programs, data bases and software documentation and all other intellectual property owned, licensed or otherwise used by such Borrower (other than off-the-shelf software that is licensed by such Borrower).  Neither Borrower has received any written demand, claim, notice or inquiry from any person or entity in respect of the Proprietary Rights material to the business of such Borrower which challenges, threatens to challenge or inquires as to whether there is any basis to challenge, the validity of, or the rights of such Borrower in such Proprietary Rights, and neither Borrower has  Knowledge of any basis for any such challenge.  To each Borrower’s Knowledge,

 

6

 

such Borrower is not in violation or infringement of, and has not violated or infringed, any intellectual property rights of any other person or entity.  To such Borrower’s Knowledge no third party is infringing on the rights of such Borrower in and to such Proprietary Rights.

 

3.10                            Material Contracts .  (a)  All material agreements of each Borrower (collectively, the “ Material Contracts ”) are included as exhibits to the Parent’s filings with the SEC.  The SEC Reports disclose all financing arrangements of the Borrowers relating to the assets or liabilities of the Borrowers.

 

(b)                                  Assuming the due execution and delivery by the other parties thereto, each of such Material Contracts is as of the date hereof legal, valid and binding, and in full force and effect, and enforceable in accordance with its terms, subject to (i) Laws of general application relating to bankruptcy, insolvency, and the relief of debtors, and (ii) rules of Law governing specific performance, injunctive relief, or other equitable remedies.  There is no material breach, violation or default by a Borrower under any such Material Contract, and to each Borrower’s Knowledge, (x) no Material Contract has expired or been terminated in accordance with its terms and (y) no event (including, without limitation, the transactions contemplated by this Agreement) has occurred which, with notice or lapse of time or both, would (A) constitute a material breach, violation or default by a Borrower under any such Material Contract, or (B) give rise to any Lien (other than a Permitted Lien) or right of termination, modification, cancellation, prepayment, suspension, limitation, revocation or acceleration against a Borrower under any such Material Contract, which expiration, termination or event would cause a Material Adverse Effect.  Except as disclosed in the SEC Reports, neither Borrower is and, to the such Borrower’s Knowledge, no other party to any of such Material Contract is in arrears in respect of the performance or satisfaction of any material terms or conditions on its part to be performed or satisfied under any of such Material Contract, and neither Borrower has and, to such Borrower’s Knowledge, no other party thereto has granted or been granted any material waiver or indulgence under any of such Material Contract or repudiated any provision thereof.

 

3.11                            Absence of Undisclosed Liabilities .  Except as set forth in the SEC Reports or arising in the ordinary course since the date of the most recent balance sheet filed with the SEC, neither Borrower has any liabilities of any type, whether absolute or contingent.

 

3.12                            Absence of Conflicts .  Neither Borrower is in violation of or default under any provision of its Certificate of Incorporation or its Bylaws.  The execution, delivery, and performance of, and compliance with the Loan Documents and this Agreement, and the consummation of the transactions contemplated hereby and thereby, have not and will not:

 

(a)                                   violate, conflict with or result in a breach of any provision of or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, any of the terms, conditions or provisions of (i) Borrower’s Certificate of Incorporation or its Bylaws, or (ii) any Material Contract, or result in the creation of any Lien (other than a Permitted Lien or the liens granted under the Security Agreement) upon any of the assets, properties or business of either Borrower; or

 

7

 

(b)                                  violate any judgment, ruling, order, writ, injunction, award, decree, or any Law or regulation of any court or federal, state, county or local government or any other governmental, regulatory or administrative agency or authority which is applicable to either Borrower or any of their assets, properties or businesses.

 

3.13                            Litigation .  Except as disclosed in the SEC Reports, there is no action, claim, litigation, tax or compliance audit, suit or proceeding, regulatory or administrative enforcement action or governmental inquiry or investigation, pending, or, to such Borrower’s Knowledge, any threat thereof, against such Borrower or any of their officers or directors or the assets of either Borrower.  To the Borrower’s Knowledge, there is no reason to believe that any of the foregoing may occur which, in the aggregate, could reasonably be expected to have a Material Adverse Effect.  Neither Borrower is subject to any outstanding judgment, order or decree directed against such Borrower or any officer or director of any thereof.

 

3.14                            Consents .  No consent, approval, waiver or authorization, or designation, declaration, notification, or filing with any person or entity (governmental or private), on the part of a Borrower is required in connection with the valid execution, delivery and performance of the Loan Documents or this Agreement, the offer, sale or issuance of the Notes and Warrants (other than such notifications or filings required under applicable federal or state securities Laws, if any), except for such consents, approvals, waivers, authorizations, designations, declarations, notifications, or filings that will be received prior to or as of the Initial Closing Date.

 

3.15                            Labor Relations; Employees .  Each Borrower is in compliance in all material respects with all Laws relating to the employment of labor and classification of persons as employees.

 

3.16                            Employee Benefit Plans .  (a)  Except as set forth in the SEC Reports, the Borrowers have no employment agreements or labor or collective bargaining agreements and there are no employee benefit or compensation plans, agreements, arrangements or commitments (including “employee benefit plans,” as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ ERISA ”)) maintained by either Borrower for any employees of such Borrower or with respect to which such Borrower has liability, or makes or has an obligation to make contributions (each a “ Company Employee Plan ” and together the “ Company Employee Plans ”).

 

(b)                                  Each Company Employee Plan by its terms and operation is in compliance in all material respects with all applicable Laws and all required filings, if any, with respect to such Company Employee Plan has been made.  The events contemplated by this Agreement (either alone or together with any other event) will not (i) entitle any employees to severance pay, unemployment compensation, or other similar payments under any Company Employee Plan or Law, (ii) accelerate the time of payment or vesting or increase the amount of benefits due under any Company Employee Plan or compensation to any employees of the Borrowers or (iii) result in any payments (including parachute payments) under any Company Employee Plan or Law becoming due to any employee.

 

3.17                            Tax Returns, Payments and Elections .  Each Borrower has filed all tax returns and reports (including information returns and reports) as required by Law except to the

 

8

 

extent that the failure to so file did not and could not reasonably be expected to have a Material Adverse Effect, and such tax returns and reports are true and correct in all material respects.  Each Borrower has paid or made provision for payment of all taxes and other assessments shown as due on such returns.  The provision for taxes of each Borrower as shown in the Financial Statements (as hereinafter defined) is adequate in all material respects for all taxes, assessments and governmental charges due or accrued as of the date thereof with respect to its business, properties and operations.  Neither Borrower has elected pursuant to the Internal Revenue Code of 1986, as amended (the “ Code ”), to be treated as a Subchapter S corporation pursuant to Section 1362(a) or a collapsible corporation pursuant to Section 341(f) of the Code, nor has a Borrower made any other elections pursuant to the Code (other than elections that relate solely to methods of accounting, depreciation or amortization) that could reasonably be expected to have a Material Adverse Effect.  Neither Borrower has had any tax deficiency proposed or assessed against it by the Internal Revenue Service or any other foreign, federal, state or local taxing authority and none have been asserted in writing or, to a Borrower’s Knowledge, threatened at any time for additional taxes.  Neither Borrower has executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge and none of the foreign, federal, state or local income or franchise tax or sales or use tax returns have ever been audited by governmental authorities.  Since December 31, 2008, neither Borrower has incurred any taxes, assessments or governmental charges other than in the ordinary course of business.

 

3.18                            Brokers or Finders . Except for John Thomas Financial, Inc., neither Borrower has incurred, or will incur, directly or indirectly, as a result of any action taken by either Borrower, any liability for brokerage or finders’ fees or agents’ commissions or any similar charges in connection with this Agreement or the issuance of the Notes and the Warrants or any transaction contemplated hereby or thereby.  The Borrowers agree to indemnify and hold harmless each Purchaser from any liability for any commission or compensation in the nature of a finder’s fee (and the costs and expenses of defending against such liability or asserted liability) for which the Borrowers or any of their respective officers, employees or representatives is responsible.

 

3.19                            Offering Exemption .  Assuming the truth and accuracy of the representations and warranties contained in Section 5, the offer and sale of the Notes and the Warrants as contemplated hereby and the issuance and delivery to the Purchasers of the Notes and the Warrants are exempt from registration under the Securities Act of 1933, as amended (the “ Securities Act ”), and will be registered or qualified (or exempt from registration or qualification) under applicable state securities and “blue sky” Laws, as currently in effect.

 

3.20                            Environmental Matters .

 

(a)                                   Each Borrower complies and has at all times complied with all federal, state and local Laws, judgments, decrees, orders, consent agreements, authorizations, permits, licenses, rules, regulations, common or decision law (including, without limitation, principles of negligence and strict liability) relating to the protection, investigation or restoration of the environment (including, without limitation, natural resources) or the health or safety matters of humans and other living organisms, including the Resource Conservation and Recovery Act, as amended, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended,

 

9

 

the Federal Clean Water Act, as amended, the Federal Clean Air Act, as amended, the Toxic Substances Control Act, or any state and local analogue (hereinafter “ Environmental Laws ”), except where the failure to comply could not reasonably be expected to have a Material Adverse Effect.

 

(b)                                  Neither Borrower has Knowledge of any claim, and has not received notice of a written complaint, order, directive, claim, request for information or citation, and to such Borrower’s  Knowledge no proceeding has been instituted raising a claim against such Borrower indicating or alleging any damage to the environment or any liability or obligation under or violation of any Environmental Law and (ii) neither Borrower is subject to any order, decree, injunction or other directive of any Governmental Authority.

 

3.21                            Offering of Purchased Shares and Warrants .  No form of general solicitation or general advertising was used by the Borrowers or any of their agents or representatives in connection with the offer and sale of the Notes and the Warrants.

 

3.22                            SEC Reports; Disclosure .  (a)  The Parent has filed all required forms, reports and documents with the Securities and Exchange Commission (the “ SEC ”) since June 22, 2007, each of which has complied in all material respects with all applicable requirements of the Securities Act and the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), and the rules and regulations promulgated thereunder, each as in effect on the date such forms, reports and documents were filed.  The Parent has made available to the Purchasers, in the form filed with the SEC (including any amendments thereto) its (i) Annual Report on Form 10-K for the year ended March 31, 2008; (ii) Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, 2008, September 30, 2008 and December 31, 2008; (iii) Current Reports on Form 8-K dated April 3, 2008, April 4, 2008, April 24, 2008, June 4, 2008, June 6, 2008, August 12, 2008, August 14, 2008, September 4, 2008, September 11, 2008, October 6, 2008 and October 27, 2008 and (iv) all definitive proxy statements relating to the Parent’s meeting of shareholders (whether annual or special) held since June 22, 2007 (collectively, the “ SEC Reports ”).

 

(b)                                  None of (i) this Agreement (including, without limitation, the Disclosure Schedule and the Schedules and Exhibits attached hereto), (ii) any Loan Document, or (iii) the SEC Reports contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein in light of the circumstances under which they were made not misleading.  There is no fact which, to the Knowledge of either Borrower, has not been disclosed to the Purchasers, which could reasonably be expected to have a Material Adverse Effect on the ability of either Borrower to perform its obligations under the Loan Documents or this Agreement.

 

3.23                            Financial Statements .  Included in the SEC Reports are the audited financial statements of the Borrowers as at and for the years ended March 31, 2008, 2007 and the unaudited financial statements of the Borrowers for the fiscal quarters ended June 30, 2008, September 30, 2008 and December 31, 2008 (the “ Financial Statements ”).  The Financial Statements have been prepared in accordance with GAAP and fairly present the financial condition and operating results of the Borrowers on a Consolidated basis as of the dates and for the periods, indicated therein, except that the unaudited financial statements as at and for the quarters ended June 30, 2008, September 30, 2008 and December 31, 2008 are subject to normal

 

10

 

year-end adjustments and do not contain all notes required under GAAP.  Except as set forth in the Financial Statements, the Borrowers have no liabilities, obligations or commitments of any nature (whether accrued, absolute, contingent, unliquidated or otherwise, due or to become due and regardless of when addressed), which are required to be included in the Financial Statements in accordance with GAAP other than (a) liabilities that have arisen in the ordinary course of business since the date of the Parent’s most recent quarterly report on Form 10-Q that are not reasonably be expected to have a Material Adverse Effect and (b) obligations to perform after the date hereof any contracts or agreements which have been disclosed or which are not required to be disclosed in the SEC Reports because such contracts and agreements are not material to the Borrowers.

 

3.24                            Suppliers and Customers .  Since December 31, 2008, none of the Borrowers’ suppliers, vendors, or customers has: (i) terminated or cancelled a Material Contract or material business relationship with any Borrower; (ii) threatened in writing to terminate or cancel a Material Contract or material business relationship with any Borrower; (iii) expressed dissatisfaction in writing with the performance of a Borrower with respect to a Material Contract or material business relationship with any Borrower; or (iv) demanded in writing any material modification, termination or limitation of a Material Contract or material business relationship with any Borrower (excluding any contracts or business relationship which, if so terminated, cancelled, modified or limited, would not reasonably be expected to result in a Material Adverse Effect).

 

4.                                        Representations and Warranties of the Purchasers .  As of the Initial Closing Date or any Subsequent Closing Date, as the case may be, each  Purchaser severally and not jointly hereby represents and warrants to the Borrowers that:

 

4.1                                  Organization and Qualification .  Each Purchaser, if such person is not an individual, is duly organized, validly existing and in good standing under the Laws of its jurisdiction of incorporation or organization to carry on its business as it is now being conducted or proposed to be conducted.

 

4.2                                  Power and Authority .  Each Purchaser has all requisite power and authority (or if such Purchaser is an individual, the legal capacity) to execute and deliver the Loan Documents and this Agreement to which it is a party, to purchase the Notes and the Warrants from the Borrowers hereunder, and to carry out and perform its obligations under the terms of the Loan Documents and this Agreement.

 

4.3                                  Authorization .  The execution, delivery and performance by such Purchaser of the Loan Documents and this Agreement to which it is a party, and the performance of all of the obligations of such Purchaser under each of such Loan Documents and this Agreement have been duly and validly authorized, and no other action, approval or authorization is required on the part of such Purchaser or any Person by Law or otherwise in order to make the Loan Documents and this Agreement the valid, binding and enforceable obligations (subject to (i) Laws of general application relating to bankruptcy, insolvency, and the relief of debtors, and (ii) rules of Law governing specific performance, injunctive relief, or other equitable remedies) of such  Purchaser that is a party thereto.  Each of the Loan Documents and this Agreement, when executed and delivered by such Purchaser that is a party thereto, will constitute a valid and

 

11

 

legally binding obligation of such Purchaser, enforceable against such Purchaser in accordance with its terms subject to: (i) Laws of general application relating to bankruptcy, insolvency, and the relief of debtors, and (ii) rules of Law governing specific performance, injunctive relief, or other equitable remedies.

 

4.4                                  Purchase Entirely for Own Account .  The Notes and the Warrants will be acquired for investment for such Purchaser’s own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof.  Such Purchaser’s address is listed on Schedule I and II, as applicable, attached hereto.  Such Purchaser is aware that the Borrowers are issuing the Notes and the Warrants pursuant to Section 4(2) of the Securities Act and Regulation D promulgated thereunder without complying with the registration provisions of the Securities Act or other applicable federal or state securities laws.  Such Purchaser is also aware that the Borrowers are relying upon, among other things, the representations and warranties of such Purchaser contained in this Agreement for purposes of complying with Regulation D.

 

4.5                                  Disclosure of Information .  Each Purchaser represents that the Borrowers have made available to such Purchaser, at a reasonable time prior to the date of this Agreement, an opportunity to (a) ask questions and receive answers from the Borrowers regarding the terms and conditions of the offering of the Notes and the Warrants and the business, properties and financial condition of the Borrowers, all of which questions (if any) have been answered to the reasonable satisfaction of such Purchaser, and (b) obtain additional information, all of which was furnished by the Borrowers to the reasonable satisfaction of such Purchaser.  The foregoing, however, does not limit or modify the representations and warranties of the Borrowers in Section 3 of this Agreement or the right of the Purchasers to rely thereon.

 

4.6                                  Investment Experience .  Such Purchaser acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in investing in companies similar to the Borrowers and in financial or business matters such that it is capable of evaluating the merits and risks of the investment in the Notes and the Warrants.  Such Purchaser has made the determination to enter into this Agreement and the Loan Agreements and the other agreements contemplated hereby and to acquire the Notes and the Warrants based upon its own independent evaluation and assessment of the value of the Borrowers and its present and prospective business prospects.

 

4.7                                  Accredited Investor .  Such Purchaser is an “ accredited investor ” within the meaning of SEC Rule 501 of Regulation D, as presently in effect.

 

4.8                                  Restricted Securities; Legends .  Such Purchaser recognizes that the Notes and the Warrants will not be registered under the Securities Act or other applicable federal or state securities laws.  Such Purchaser understands that the Notes and the Warrants it is purchasing are characterized as “restricted securities” under the federal securities laws inasmuch as they are being acquired from the Borrowers in a transaction not involving a public offering.  Such Purchaser acknowledges that it may not to sell or transfer the Notes and the Warrants unless such Notes and Warrants are registered under the Securities Act and under any other applicable securities laws and that certificates evidencing the Purchased  Securities will bear the following legend or similar legend as applicable:

 

12

 

THIS SECURITY AND THE SHARES OF COMMON STOCK WHICH MAY BE PURCHASED UPON THE EXERCISE OF THIS SECURITY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ ACT ”), AND SUCH SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH REGISTRATION AND REGISTRATION UNDER APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION THEREFROM UNDER THE ACT AND THE RULES AND REGULATIONS THEREUNDER AND SUCH APPLICABLE STATE SECURITIES LAWS.

 

4.9                                  No General Solicitation .  Such Purchaser acknowledges that the Notes and the Warrants were not offered to such Purchaser by means of: (a) any advertisement, article, notice or other communication published in any newspaper, magazine or similar medium, or broadcast over television or radio, or (b) any other form of general solicitation or advertising.

 

4.10                            Absence of Conflicts .  Such Purchaser’s execution, delivery, and performance of, and compliance with the Loan Documents and this Agreement, and the consummation of the transactions contemplated hereby and thereby, have not and will not:

 

(a)                                   violate, conflict with or result in a breach of any provision of or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, any of the terms, conditions or provisions of (i) its certificate/articles of formation or organization or any of its other formation or organizational documents (if any), or (ii) any material contract to which it is a party, or result in the creation of any Lien upon any of the assets, properties or business of such Purchaser; or

 

(b)                                  violate any judgment, ruling, order, writ, injunction, award, decree, or any Law or regulation of any court or federal, state, county or local government or any other governmental, regulatory or administrative agency or authority which is applicable to such Purchaser or any of its assets, properties or businesses.

 

4.11                            Brokers or Finders .  Such Purchaser has not incurred, nor will it incur, directly or indirectly, as a result of any action taken by such Purchaser, any liability for brokerage or finders’ fees or agents’ commissions or any similar charges in connection with this Agreement or the issuance of the Notes and the Warrants or any transaction contemplated hereby or thereby.  Such Purchaser agrees to indemnify and hold harmless the Borrowers from any liability for any commission or compensation in the nature of a finders’ fee (and the costs and expenses of defending against such liability or asserted liability) for which such Purchaser, or any of its respective officers, employees or representatives is responsible.

 

5.                                        Conditions of the Parties .

 

5.1                                  Conditions of Purchasers’ Obligations at any Closing .  The obligations of each Purchaser under Section 1 of this Agreement are subject to the satisfaction by the Borrowers on or before such Closing of each of the following conditions:

 

13

 

(a)                                   Representations and Warranties .  The representations and warranties of the Borrowers contained in Section 3 shall be true and correct on and as of the Initial Closing Date and shall be true and correct in all material respects on and as of any Subsequent Closing Date with the same force and effect as though such representations and warranties had been made on such date.

 

(b)                                  Performance .  The Borrowers shall have performed and complied with all conditions contained in this Agreement that are required to be performed or complied with by it on or before such Closing.

 

(c)                                   No Material Adverse Effect; Officer’s Certificate .  No Material Adverse Effect shall have occurred between the date hereof and such Closing Date and the President and/or Chief Executive Officer of each Borrower shall deliver to the Agent, acting on behalf of the Purchasers, at each such Closing a certificate stating that the conditions specified in Sections 5.1(a), (b) and (c) have been fulfilled.

 

(d)                                  Consents and Approvals .  All authorizations, approvals, permits, or consents, if any, of any governmental authority or regulatory body of the United States or of any state or any creditor of the Borrowers or any other Person that are required in connection with the lawful issuance and sale of the Notes and the Warrants at such Closing pursuant to this Agreement shall be duly obtained and effective as of each such Closing and the purchase and payment of the Notes and the Warrants to be purchased by the Purchasers at each such Closing on the terms and conditions as provided herein shall not violate any applicable Law.

 

(e)                                   Good Standing; Qualification to do Business .  The Parent shall have delivered to the Agent, acting on behalf of the Purchasers, certificates of good standing with respect to each Borrower dated as of a date no earlier than 15 days prior to the any such Closing from the jurisdiction of incorporation of such Borrower.

 

(f)                                     Secretary’s Certificate .  The Parent shall have delivered to the Agent, acting on behalf of the Purchasers, a certificate executed by the Secretary of each Borrower dated such Closing Date certifying with respect to (i) a copy of the such Borrower’s Certificate of Incorporation and its Bylaws as amended to and in effect on such Closing Date and that such Borrower is not in violation of or default under any provision of its Certificate of Incorporation or Bylaw as of and on such Closing Date, (ii) board resolutions of such Borrower authorizing the transactions contemplated by this Agreement and the Loan Documents.

 

(g)                                  Compliance with Covenants .  On any such Closing Date the Borrowers shall be in compliance with each of the covenants set forth in Section 7.

 

5.2                                  Conditions of Initial Purchasers’ Obligations at the Initial Closing .  In addition to the conditions set forth in Sectio