NOTE PURCHASE AGREEMENT

 

1.2                                  Certain Definitions .  When used herein, the following terms shall have the respective meanings indicated:

 

“ Affiliate ” means, as to any Person (the “ subject Person ”), any other Person (a) that directly or indirectly through one or more intermediaries controls or is controlled by, or is under direct or indirect common control with, the subject Person, (b) that directly or indirectly beneficially owns or holds ten percent (10%) or more of any class of voting equity of the subject Person, or (c) ten percent (10%) or more of the voting equity of which is directly or indirectly beneficially owned or held by the subject Person. For the purposes of this definition, “ control ” when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting equity, through representation on such Person’s board of directors or other management committee or group, by contract or otherwise.

 

“ Agreement ” has the meaning specified in the preamble to this Agreement.

 

“ Board of Directors ” means the board of directors of the Company.

 

“ Business Day ” means any day other than a Saturday, a Sunday or a day on which the New York Stock Exchange is closed or on which banks are authorized by law to close in New York, New York.

 

“ Closing ” has the meaning given to it in Section 1.1 of this Agreement.

 

“ Closing Date ” has the meaning given to it in Section 1.1 of this Agreement.

 

“ Commission ” means the United States Securities and Exchange Commission.

 

“ Common Stock ” means the common stock, par value $.01 per share, of the Company.

 

“ Debt ” means, as to the Company and any Subsidiary at any time: (a) all indebtedness, liabilities and obligations of the Company or any such Subsidiary for borrowed money; (b) all indebtedness, liabilities and obligations of the Company or any such Subsidiary to pay the deferred purchase price of Property or services, except (i) trade accounts payable of such Person arising in the ordinary course of business that are not past due by more than 180 days or the payables outstanding as of the date hereof and set forth on Schedule 1.2(i)  hereto, and (ii) the obligations of Government Telecommunications, Inc. arising in the ordinary course of business that are set forth on Schedule 1.2(ii)  hereto; provided that the payment and/or performance of all such obligations described in foregoing clauses (i) and (ii)  shall be made and performed at such time and in such manner that is consistent with past practice; (c) all capital lease obligations of the Company or any such Subsidiary; (d) all indebtedness, liabilities and obligations of others guaranteed by the Company or any such Subsidiary; (e) all indebtedness, liabilities and obligations secured by a Lien existing on Property owned by the Company or any such

 

2

 

Subsidiary, whether or not the indebtedness, liabilities or obligations secured thereby have been assumed by such Person or are non-recourse to such Person; (f) all reimbursement obligations of the Company or any such Subsidiary (whether contingent or otherwise) in respect of letters of credit, bankers’ acceptances, surety or other bonds and similar instruments; and (g) all indebtedness, liabilities and obligations of such Person to redeem or retire shares of capital stock of the Company or any such Subsidiary.

 

“ Disclosure Documents ” means all SEC Documents filed with the Commission at least five (5) Business Days prior to the Execution Date via EDGAR in accordance with the requirements of Regulation S-T under the Exchange Act.

 

“ Environmental Law ” means any federal, state, provincial, local or foreign law, statute, code or ordinance, principle of common law, rule or regulation, as well as any permit, order, decree, judgment or injunction issued, promulgated, approved or entered thereunder, relating to pollution or the protection, cleanup or restoration of the environment or natural resources, or to the public health or safety, or otherwise governing the generation, use, handling, collection, treatment, storage, transportation, recovery, recycling, discharge or disposal of hazardous materials.

 

“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder.

 

“ Exchange Act ” means the Securities Exchange Act of 1934, as amended (or any successor act), and the rules and regulations thereunder (or respective successors thereto).

 

“ Execution Date ” means the date of this Agreement.

 

“ Existing Notes ” has the meaning specified in Section 4.3 of this Agreement.

 

“ GAAP ” means United States generally accepted accounting principles, applied on a consistent basis, as set forth in (i) opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants, (ii) statements of the Financial Accounting Standards Board and (iii) interpretations of the Commission and the Staff of the Commission.  Accounting principles are applied on a “consistent basis” when the accounting principles applied in a current period are comparable in all material respects to those accounting principles applied in a preceding period, except to the extent that new accounting standards have been adopted by such organizations applicable as of the current period.

 

“ Governmental Authority ” means any nation or government, any state, provincial or political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including without limitation any stock exchange, securities market or self-regulatory organization.

 

3

 

“ Governmental Requirement ” means any law, statute, code, ordinance, order, rule, regulation, judgment, decree, injunction, franchise, license or other directive or requirement of any federal, state, county, municipal, parish, provincial or other Governmental Authority or any department, commission, board, court, agency or any other instrumentality of any of them.

 

“ Intellectual Property ” means any U.S. or foreign patents, patent rights, patent applications, trademarks, trade names, service marks, brand names, logos and other trade designations (including unregistered names and marks), trademark and service mark registrations and applications, copyrights and copyright registrations and applications, inventions, invention disclosures, protected formulae, formulations, processes, methods, trade secrets, computer software, computer programs and source codes, manufacturing research and similar technical information, engineering know-how, customer and supplier information, assembly and test data drawings or royalty rights.

 

“ Investment Company Act ” has the meaning specified in Section 3.22 of this Agreement.

 

“ Investor ” and “ Investors ” have the respective meanings specified in the preamble to this Agreement.

 

“ Issue Date ” means the first date on which the Notes are issued pursuant to this Agreement.

 

“ Key Employee ” means, with respect to the Company, its president, any vice president of the Company in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy making function or any other person who performs similar policy making functions for the Company.  Executive officers of Subsidiaries may be deemed Key Employees if they perform such policy making functions for the Company.

 

“ Lien ” means, with respect to any Property, any mortgage, pledge, hypothecation, assignment, deposit arrangement, security interest, tax lien, financing statement, pledge, charge, or other lien, charge, easement, encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such Property (including, without limitation, any conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing).

 

“ Mandatory Redemption Event ” has the meaning set forth in the Notes.

 

“ Material Adverse Effect ” means an effect that is material and adverse to (i) the consolidated business, operations, properties, financial condition or results of operations of the Company and its Pledged Subsidiaries taken as a whole, (ii) the transactions contemplated by this Agreement or the other Transaction Documents, or (iii) the ability of the Company to perform its obligations (or the ability of an Investor to enforce any such obligations) under this Agreement or the other Transaction Documents.

 

4

 

“ Material Contracts ” means, as to the Company, any agreement required pursuant to Item 601 of Regulation S-B or Item 601 of Regulation S-K, as applicable, promulgated under the Securities Act to be filed as an exhibit to any report, schedule, registration statement or definitive proxy statement filed or required to be filed by the Company with the Commission under the Exchange Act or any rule or regulation promulgated thereunder, and any and all amendments, modifications, supplements, renewals or restatements thereof.

 

“ NASD ” means the National Association of Securities Dealers, Inc.

 

“ Non-Material Subsidiaries ” means any Person (other than a Pledged Subsidiary) in which the Company owns at least a majority of the outstanding shares of stock or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors (or Persons performing similar functions) of such Person (regardless of whether or not at the time, in the case of a corporation, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency).

 

“ Note ” and “ Notes ” have the respective meanings specified in the preamble to this Agreement.

 

“ Obligations ” means any and all indebtedness, liabilities and obligations of the Company or any of its Subsidiaries to the Investor evidenced by and/or arising pursuant to this Agreement or any other Transaction Documents, now existing or hereafter arising, whether direct, indirect, related, unrelated, fixed, contingent, liquidated, unliquidated, joint, several or joint and several, including, without limitation, the obligations of the Company to repay principal of the Notes (and any premium thereon, if applicable), to pay interest on the Notes (including, without limitation, interest accruing after any bankruptcy, insolvency, reorganization or other similar filing) and to pay all indemnities, costs and expenses (including attorneys’ fees) provided for in this Agreement or any other Transaction Documents.

 

“ Pension Plan ” means an employee benefit plan (as defined in ERISA) maintained by the Company for employees of the Company or any of its Affiliates.

 

“ Permitted Debt ” means the following:

 

(a)                                   the Notes;

 

(b)                                  Debt outstanding on the Execution Date and disclosed on Schedule 3.5 hereto and any Debt incurred to replace any such outstanding Debt, as long as such replacement Debt is on terms not materially less favorable to the Company than the terms of such outstanding Debt, has no greater priority in payment or liquidation than such outstanding Debt, and matures at least ninety-one (91) days following the Maturity Date (as defined in the Notes);

 

(c)                                   Debt consisting of capitalized lease obligations and purchase money indebtedness incurred in connection with acquisition of capital assets and obligations

 

5

 

under sale-leaseback or similar arrangements provided in each case that such obligations are not secured by Liens on any assets of the Company or any of its Subsidiaries other than the assets so leased; and

 

(d)                                  Subordinated Debt incurred by the Company that, individually or in the aggregate, does not exceed $2 million in principal or face amount.

 

“ Permitted Liens ” means the following:

 

(a)                                   Liens securing the Notes;

 

(b)                                  Liens in existence on the Execution Date and disclosed on Schedule 3.5 hereto;

 

(c)                                   encumbrances consisting of easements, rights-of-way, zoning restrictions or other restrictions on the use of real Property or imperfections to title that do not (individually or in the aggregate) materially impair the ability of the Company or any of its Subsidiaries to use such Property in its businesses, and none of which is violated in any material respect by existing or proposed structures or land use;

 

(d)                                  Liens for taxes, assessments or other governmental charges that are not delinquent or which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the Property subject to such Liens, and for which adequate reserves (as determined in accordance with GAAP) have been established;

 

(e)                                   Liens of mechanics, materialmen, warehousemen, carriers, landlords or other similar statutory Liens securing obligations that are not yet due and are incurred in the ordinary course of business or which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the Property subject to such Liens, for which adequate reserves (as determined in accordance with GAAP) have been established;

 

(f)                                     any interest or title of a lessor under any capitalized lease obligation, provided that such Liens do not extend to any property or assets which is not leased property subject to such capitalized lease obligation;

 

(g)                                  purchase money Liens to finance property or assets of the Company or any Subsidiary of the Company acquired in the ordinary course of business; provided, however , that (A) the related purchase money Debt shall not exceed the cost of such property or assets (including the cost of design, development, improvement, production, acquisition, construction, installation and integration) and shall not be secured by any property or assets of the Company or any Subsidiary of the Company other than the property and assets so acquired or constructed (and any improvements) and (B) the Liens securing such purchase money Debt shall be created within ten (10) days of such acquisition, construction or improvement; and

 

6

 

(h)                                  mortgages on real Property in existence on the Execution Date and disclosed on Schedule 3.19 hereto, and any replacements thereof, securing amounts not greater than the amounts secured thereby on the Execution Date.

 

“ Person ” means any individual, corporation, trust, association, company, partnership, joint venture, limited liability company, joint stock company, Governmental Authority or other entity.

 

“ Pledge Agreement ” has the meaning specified in the preamble to this Agreement.

 

“ Pledged Subsidiaries ” means Digital Angel Corporation, VeriChip Corporation, InfoTech USA, Inc. and the Subsidiaries.

 

“ Principal Market ” means the principal exchange or market on which the Common Stock is listed or traded.

 

“ Property ” means property and/or assets of all kinds, whether real, personal or mixed, tangible or intangible (including, without limitation, all rights relating thereto).

 

“ Pro Rata Share ” means, with respect to an Investor, the ratio determined by dividing (i) the principal amount of the Note or Notes purchased hereunder by such Investor by (ii) the aggregate principal amount of the Notes purchased hereunder by all of the Investors.

 

“ Purchase Price ” means, with respect to a Note, (A) the original principal amount of such Note times (B) 0.99.

 

“ Regulation D ” has the meaning specified in the preamble to this Agreement.

 

“ Restricted Payment ” means: (a) any dividend or other distribution (whether in cash, Property or obligations), direct or indirect, on account of (or the setting apart of money for a sinking or other analogous fund for) any shares of any class of capital stock of the Company or any of its Subsidiaries now or hereafter outstanding, except a dividend payable solely in shares of that class of stock to all of the holders of that class; (b) any redemption, exchange, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of capital stock of the Company or any of its Subsidiaries now or hereafter outstanding; (c) any payment of principal of, premium, if any, or interest on, or any redemption, conversion, exchange, purchase, retirement, sinking fund or defeasance of, any Debt (whether upon acceleration of such Debt or otherwise); and (d) any loan, advance or payment to any officer or director of the Company or any of the Subsidiaries, exclusive of compensation and reimbursements paid to officers or directors that are approved by the Compensation Committee of the Board of Directors.  Notwithstanding the foregoing, the term “ Restricted Payment ” shall not include (x) the adjustment to the exercise or conversion price of any of the Company’s options, warrants or other convertible securities or (y) (1)

 

7

 

the issuance of securities upon exercise or conversion of the Company’s options, warrants or other convertible securities outstanding as of the date hereof or (2) the grant of additional options or warrants or the issuance of additional securities (and the redemption of unvested restricted stock for an amount equal to the purchase price thereof), in  case of the foregoing clauses (y)(1) or (y)(2) under any Company stock option or restricted stock plan approved by the independent members of the Board of Directors or by a committee of the Board of Directors consisting only of independent members of the Board of Directors, shall not be deemed to be a Restricted Payment.

 

“ Rule 144 ” means Rule 144 under the Securities Act or any successor provision.

 

“ Satellite ” has the meaning specified in Section 3.10 of this Agreement.

 

“ SEC Documents ” has the meaning specified in Section 3.4 hereof.

 

“ Securities Act ” means the Securities Act of 1933, as amended (or any successor act), and the rules and regulations thereunder (or respective successors thereto).

 

“ Security Agreement ” has the meaning specified in the preamble to this Agreement.

 

“ Security Documents ” has the meaning specified in the preamble to this Agreement.

 

“ Subordinated Debt ” means Debt of the Company which is wholly unsecured (other than Permitted Liens) and subordinated, as to payment and liquidation, to the payment in full of the Notes, provided that with respect to Debt incurred in connection with a lending transaction (whether as primary obligor or guarantor), such Debt shall also be contractually subordinated, as to payment and liquidation, to the payment in full of the Notes and shall mature at least ninety-one (91) days following the Maturity Date (as defined in the Note).

 

“ Subsidiary ” means all or any of the following subsidiaries of the Company:  Computer Equity Corporation, Government Telecommunications, Inc., Pacific Decision Sciences Corporation, Perimeter Acquisition Corp., and Thermo Life Energy Corp.

 

“ Termination Date ” means the first date on which there are no Notes outstanding or any Obligations owed thereunder.

 

“ Trading Day ” means any day on which the Common Stock is purchased and sold on the Principal Market.

 

“ Transaction Documents ” means (i) this Agreement, (ii) the Notes, (iii) the Security Documents and (iv) all other agreements, documents and other instruments executed and delivered by or on behalf of the Company or any of its Subsidiaries in connection with the transactions contemplated by this Agreement.

 

8

 

“ VeriChip Event ” means either of the following:  (i) the sale by VeriChip Corporation or any successor entity of any shares of its common stock (the “ VeriChip Common Stock ”) in any transactions constituting a public offering, or (ii) the VeriChip Common Stock otherwise becomes registered pursuant to Section 12 of the Exchange Act.

 

1.3                                  Other Definitional Provisions .  All definitions contained in this Agreement are equally applicable to the singular and plural forms of the terms defined.  The words “hereof”, “herein” and “hereunder” and words of similar import referring to this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement.

 

2.                                        REPRESENTATIONS AND WARRANTIES OF EACH INVESTOR .

 

Each Investor (with respect to itself only) hereby represents and warrants to the Company and agrees with the Company that, as of the Execution Date:

 

2.1                                  Authorization; Enforceability .  Such Investor is duly and validly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization as set forth below such Investor’s name on the signature page hereof with the requisite corporate power and authority to purchase the Note to be purchased by it hereunder and to execute and deliver this Agreement and the other Transaction Documents to which it is a party.  This Agreement constitutes, and upon the execution and delivery thereof, each other Transaction Document to which such Investor is a party will constitute, such Investor’s valid and legally binding obligation, enforceable in accordance with its terms, subject to (i) applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws of general application relating to or affecting the enforcement of creditors’ rights generally and (ii) general principles of equity.

 

2.2                                  Investor Status and Intent .  Such Investor (i) is an “accredited investor” as that term is defined in Rule 501 of Regulation D and (ii) is acquiring the Notes solely for its own account and not with a present view to the public resale or distribution of all or any part thereof, except pursuant to sales that are registered under, or exempt from the registration requirements of, the Securities Act; provided, however, that in making such representation, such Investor does not agree to hold the Notes for any minimum or specific term and reserves the right to sell, transfer or otherwise dispose of the Notes at any time in accordance with the provisions of this Agreement and with Federal and state securities laws applicable to such sale, transfer or disposition. Such Investor can bear the economic risk of a total loss of its investment in the Notes and has such knowledge and experience in business and financial matters so as to enable it to understand the risks of and form an investment decision with respect to its investment in the Notes.

 

2.3                                  Information .  The Company has, prior to the Execution Date, provided such Investor with information regarding the business, operations and financial condition of the Company and has, prior to the Execution Date, granted to such Investor the opportunity to ask questions of and receive answers from representatives of the Company, its officers, directors, employees and agents concerning the Company and materials relating to the terms and conditions of the purchase and sale of the Notes hereunder, in order for such Investor to make an informed decision with respect to its investment in the Notes. Neither such information nor any other investigation conducted by such

 

9

 

Investor or any of its representatives shall modify, amend or otherwise affect such Investor’s right to rely on the Company’s representations and warranties contained in this Agreement.

 

2.4                                  Limitations on Disposition .  Such Investor acknowledges that the Notes have not been and are not being registered under the Securities Act and may not be transferred or resold without registration under the Securities Act or unless pursuant to an exemption therefrom. Such Investor agrees that neither it nor any Person acting on its behalf or at its direction will engage in any transactions in securities of the Company prior to the time that the transactions contemplated by this Agreement are publicly disclosed.

 

2.5                                  Legend .  Such Investor understands that the Notes may bear at issuance a restrictive legend in substantially the following form:

 

“The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of any state, and may not be offered for sale or sold unless a registration statement under the Securities Act and applicable state securities laws shall have become effective with regard thereto, or an exemption from registration under the Securities Act and applicable state securities laws is available in connection with such offer or sale.  This Note does not require physical surrender hereof in order to effect a partial payment or redemption hereof.  Accordingly, the outstanding principal amount of this note may be less than the principal amount shown below.  Notwithstanding the foregoing but subject to compliance with the requirements of the Securities Act and applicable state securities laws, these securities (i) may be pledged or hypothecated in connection with a bona fide margin account or other loan secured by such securities and (ii) may be transferred or assigned to an affiliate of the holder hereof.”

 

Notwithstanding the foregoing, it is agreed that, as long as such Notes (A) have been sold or transferred pursuant to an effective registration statement, (B) have been sold pursuant to Rule 144, subject to receipt by the Company of customary documentation reasonably acceptable to the Company in connection therewith, or (C) are eligible for resale under Rule 144(k) or any successor provision, such Notes shall be issued without any legend or other restrictive language and, with respect to Notes upon which such legend is stamped, the Company shall issue new certificates without such legend to the holder upon request.

 

2.6                                  Reliance on Exemptions .  Such Investor understands that the Notes are being offered and sold to it in reliance upon specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of the representations and warranties of such Investor set forth in this Section 2 in order to determine the availability of such exemptions and the eligibility of such Investor to acquire the Notes.

 

2.7                                  Fees .  Such Investor is not obligated to pay any commissions, compensation or other fee, cost or related expenditure to any underwriter, broker, agent or other representative in connection with the transactions contemplated hereby, other than legal fees to its counsel. Such

 

10

 

Investor will indemnify and hold harmless the Company from and against any claim by any Person alleging that, as a result of any agreement or arrangement between such Person and such Investor, the Company is obligated to pay any such commissions, compensations, fee, cost or related expenditure in connection with the transactions completed hereby.

 

3.                                        REPRESENTATIONS AND WARRANTIES OF THE COMPANY .  The Company hereby represents and warrants to each Investor as of the Execution Date (except that, to the extent that any representation or warranty relates to a particular date, the Company hereby makes such representation or warranty as of that particular date), and agrees with such Investor, as follows:

 

3.1                                  Organization, Good Standing and Qualification; Non-Material Subsidiaries .  Each of the Company and the Pledged Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization and has all requisite power and authority to carry on its business as now conducted.  Each of the Company and the Pledged Subsidiaries is duly qualified to transact business and is in good standing in each jurisdiction in which it conducts business except where the failure so to qualify has not had or would not reasonably be expected to have a Material Adverse Effect.  None of the Non-Material Subsidiaries has any material business operations, and the aggregate fair market value of all of the assets of the Non-Material Subsidiaries does not exceed $50,000.

 

3.2                                  Authorization; Consents .  The Company has the requisite corporate power and authority to enter into and perform its obligations under the Transaction Documents, and to issue and sell the Notes to the Investors in accordance with the terms hereof. All corporate action on the part of the Company by its officers, directors and shareholders necessary for the authorization, execution and delivery of, and the performance by the Company of its obligations under, the Transaction Documents to which it is a party has been taken, and no further consent or authorization of the Company or the Board of Directors, shareholders, any Governmental Authority or organization or any other person or entity is required.

 

3.3                                  Enforcement .  The Company has duly executed and delivered this Agreement and, at or prior to the Closing, shall have duly executed and delivered the other Transaction Documents to which it is a party.  This Agreement constitutes and, following the execution and delivery thereof by the Company, each other Transaction Document will constitute, the valid and legally binding obligations of the Company, enforceable against it in accordance with its terms, subject to (i) applicable bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization or other similar laws of general application relating to or affecting the enforcement of creditors’ rights generally and (ii) general principles of equity.

 

3.4                                  Disclosure Documents; Agreements; Financial Statements; Other Information .  The Company has filed with the Commission all reports, schedules, registration statements and definitive proxy statements that the Company was required to file with the Commission on or after December 31, 2004 (collectively, the “ SEC Documents ”).  The Company is not aware of any event occurring or expected to occur on or prior to the Closing Date (other than the transactions effected hereby) that would require the filing of, or with respect to which the Company intends to file, a Form 8-K after the Closing. Each SEC Document, as of the date of the filing thereof with the Commission (or if amended or superseded by a filing prior to the Execution Date, then on the date of such amending or superseding filing), complied in all material respects with the requirements of

 

11

 

the Securities Act or Exchange Act, as applicable, and the rules and regulations promulgated thereunder and, as of the date of such filing (or if amended or superseded by a filing prior to the Execution Date, then on the date of such filing), such SEC Document (including all exhibits and schedules thereto and documents incorporated by reference therein) did not contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.  All documents that are required to be filed as exhibits to the SEC Documents have been filed as required.