SUBORDINATED NOTE WITH WARRANTS PURCHASE AGREEMENT

Exhibit 10.12

 

SUBORDINATED NOTE WITH

WARRANTS PURCHASE AGREEMENT

 

Dated as of October 14, 2005

 

between

 

Basin Water, Inc., as Issuer

 

- and -

 

The Co-Investment 2000 Fund, L.P. and

the other parties identified herein, as the Purchasers.

TABLE OF CONTENTS

 

SUBORDINATED NOTE WITH

WARRANTS PURCHASE AGREEMENT

 

THIS SUBORDINATED NOTE WITH WARRANTS PURCHASE AGREEMENT (this “ Agreement ”), dated as of October 14, 2005, is by and among Basin Water, Inc., a California corporation with its principal place of business at 8731 Prestige Court, Rancho Cucamonga, California 91730 (the “ Issuer ”), The Co-Investment 2000 Fund, L.P., a Delaware limited partnership with its principal place of business at Five Radnor Corporate Center, Suite 555, 100 Matsonford Road, Radnor, Pennsylvania 19087 (“ Co-Investment 2000 ”), and the other parties identified on Schedule I attached hereto. Capitalized terms used in this Agreement and not otherwise defined have the meanings set forth in Article I .

 

Background:

 

A. The Issuer has agreed to sell the Notes and to issue the Warrants to the Purchasers on the terms and conditions set forth herein.

 

B. The Purchasers have agreed to purchase the Notes and to acquire the Warrants on the terms and conditions set forth therein.

 

NOW, THEREFORE, in consideration of the foregoing and the covenants and promises set forth herein, the parties hereto, intending to be legally bound, hereby agree as follows:

 

ARTICLE I

DEFINITIONS

 

1.01 Defined Terms

 

As used in this Agreement, the following terms shall have the following meanings:

 

“ ADA ” means the Americans with Disabilities Act of 1990, as amended, and the rules and regulations promulgated thereunder.

 

“ Affiliate ” means (i) any Person that, directly or indirectly, is in control of, is controlled by, or is under common control with a Related Party, including, without limitation, any joint venture of the Related Parties or (ii) any Person who is a director, officer, member or partner of a Related Party or of any Person described in the preceding clause (i). For purposes of this definition, “control” of a Person means the power, directly or indirectly, either to (i) vote fifty percent (50%) or more of the voting equity having ordinary voting power for the election of the management of such Person, or (ii) direct or cause the direction of the management and policies of such Person whether by contract or otherwise.

 

“ Agreed Transfer ” has the meaning set forth in Section 2.06 .

 

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

 

“ Business Day ” means a day other than a Saturday, Sunday or other day on which commercial banks in New York, New York are authorized or required by law to close.

“ Capital Lease ” means any lease of property, real or personal by a Related Party, the obligations of which are required in accordance with GAAP to be capitalized on the balance sheet of the Issuer.

 

“ Capital Stock ” means (i) any and all shares, interests, participations or other equivalents (however designated) of the equity interests of any Person, (ii) any and all equivalent ownership interests in such Person and (iii) any and all warrants or options to purchase any of the foregoing.

 

“ Closing ” has the meaning set forth in Section 2.02 .

 

“ Closing Date ” means the date that is two (2) Business Days after the date on which all the conditions set forth in Article V shall first have been satisfied.

 

“ Code ” means the Internal Revenue Code of 1986, as amended from time to time.

 

“ Co-Investment 2000 ” has the meaning set forth in the preamble hereto.

 

“ Collateral ” has the meaning set forth in Section 2.03 .

 

“ Commonly Controlled Entity ” means an entity, whether or not incorporated, that is under common control with the Issuer within the meaning of Section 4001 of ERISA or is part of a group which includes the Issuer and which is treated as a single employer under Section 414 of the Code.

 

“ Common Stock ” means the common stock of the Issuer, no par value.

 

“ Copyrights ” has the meaning set forth in Section 4.19(a) .

 

“ Default ” means any of the events specified in Sections 8.01 or 8.02 , hereof, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied.

 

“ Disclosure Schedule ” has the meaning set forth in the introductory paragraph of Article IV.

 

“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended from time to time.

 

“ Event of Default ” means any of the events specified in Sections 8.01 or 8.02 , provided that any applicable requirement for the giving of notice, the lapse of time, or both, or any other applicable condition, has been satisfied.

 

“ Financing Statements ” means all UCC financing statements (or comparable documents now or hereafter filed in accordance with the UCC or comparable law) authorized by any Related Party to be filed in favor of the Purchaser in connection with the transactions contemplated hereby.

 

“ GAAP ” means generally accepted accounting principles in the United States of America in effect from time to time.

 

“ Governmental Authority ” means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.

 

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“ Guarantee Obligation ” means any obligation of the Issuer guaranteeing any indebtedness, leases, dividends or other obligations of any other Person in any manner, whether directly or indirectly or otherwise to assure or hold harmless the owner of any primary obligation against loss in respect thereof.

 

“ Indebtedness ” means, as of the date of determination, (i) all indebtedness of the Related Parties for borrowed money or for the deferred purchase price of property or services (other than current trade liabilities or accounts payable incurred in the ordinary course of business) or which is evidenced by a note, bond, debenture or similar instrument, (ii) all obligations of the Related Parties under Capital Leases, (iii) all obligations of the Issuer as an account party in respect of letters of credit or acceptances issued or created for or for the account of the Issuer, (iv) all obligations of the Issuer under currency exchange contracts or interest rate swap agreements and (v) all liabilities secured by any Lien on any property owned by the Related Parties whether or not the Related Parties have assumed or otherwise become liable for the payment thereof.

 

“ Indemnified Person ” has the meaning set forth in Section 9.06 .

 

“ Initial Public Offering ” means the date of the closing by the Issuer of an underwritten initial public offering of its Common Stock resulting in gross proceeds to the Issuer of at least Fifteen Million Dollars ($15,000,000) pursuant to an effective registration statement under the Securities Act.

 

“ Insolvent ” means, with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA.

 

“ Intellectual Property Assets ” has the meaning set forth in Section 4.19(a) .

 

“ Issuer ” has the meaning set forth in the preamble hereto.

 

“ Knowledge ” means the actual knowledge, or such knowledge as should have been obtained after reasonable inquiry, of any Responsible Officer.

 

“ Lien ” means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any Capital Lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the UCC or comparable law of any jurisdiction in respect of any of the foregoing).

 

“ Marks ” has the meaning set forth in Section 4.19(a) .

 

“ Material Adverse Effect ” means a material adverse effect on (i) the business, operations, property, condition (financial or otherwise) or prospects of the Related Parties, taken as a whole, (ii) the ability of the Issuer to perform its material obligations under the Purchase Documents or (iii) the validity or enforceability of the Purchase Documents or the rights or remedies of the Purchaser hereunder or thereunder that are material to the Purchaser; provided , however , that a material adverse effect with respect to the business, operations, property, condition (financial or otherwise) or prospects of the Related Parties, taken as a whole, shall not include such effects resulting from any one or more of the following: (a) the effect of any change in the United States or foreign economies or securities or financial markets in general, (b) the effect of any change that generally affects the industry in which the Related Parties operate, (c) the effect of any change arising in connection with earthquakes, hostilities, acts of war, sabotage or terrorism or military actions or any escalation or

 

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material worsening of any such hostilities, acts of war, sabotage or terrorism or military actions existing or underway as of the Closing Date or (d) the effect of any changes in applicable laws or accounting rules.

 

“ Material Contract ” has the meaning set forth in Section 4.05(a) .

 

“ Multiemployer Plan ” means a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA and which is or has been maintained or contributed to (or to which there is or has been an obligation to contribute to) by Issuer or a Commonly Controlled Entity.

 

“ Net Names ” has the meaning set forth in Section 4.19(a) .

 

“ Notes ” means, as of a particular time, the promissory notes issued pursuant to this Agreement substantially in the form of Exhibit 2.01 attached hereto and each Note delivered in substitution or exchange for any of such Notes, as applicable.

 

“ Notice of Acceptance ” has the meaning set forth in Section 9.17(b) .

 

“ Obligations ” means the obligation of the Issuer to (a) pay the principal of and interest on the Notes in accordance with the terms thereof, (b) reimburse the Purchasers for their fees and expenses as provided in Section 9.05 hereof and (c) provide the indemnification required by Section 9.06 hereof.

 

“ Offer Period ” has the meaning set forth in Section 9.17(a) .

 

“ Offered Securities ” has the meaning set forth in Section 9.17(a) .

 

“ Operating Lease ” means any lease of property, real or personal, which is not a Capital Lease.

 

“ Original Purchasers ” means Co-Investment 2000, Cross Atlantic Technology Fund II, L.P. and Catalyst Basin Water, LLC.

 

“ Patents ” has the meaning set forth in Section 4.19(a) .

 

“ PBGC ” means the Pension Benefit Guaranty Corporation.

 

“ Permitted Liens ” means (i) Liens securing Indebtedness permitted under Section 7.02(a) , including the Senior Debt in favor of the Senior Secured Creditor pursuant to the Senior Credit Agreement, (ii) Liens in favor of the Purchasers, (iii) Liens securing Indebtedness permitted under Section 7.02(e) , (iv) Liens for taxes, assessments or charges of any Governmental Authority for claims not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect to such taxes, assessments or charges which are being contested are maintained on the books of the Issuer, in conformity with GAAP, (v) carriers’, warehousemen’s, construction liens, repairmen’s or other like Liens arising in the ordinary course of business which are not overdue for a period of more than ninety (90) days or which are being contested in good faith by appropriate proceedings, (vi) pledges or deposits (including, without limitation, surety bonds and appeal bonds) in connection with workers’ compensation, unemployment insurance and other social security legislation, (vii) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations and other obligations of a like nature incurred in the ordinary course of business, (viii) Liens arising as a result of progress payments under government

 

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contracts, (ix) purchase money Liens in connection with the purchase by any Related Party of equipment in the ordinary course of business, (x) Liens in respect of any writ of execution, attachment, garnishment, judgment or award in an amount less than $250,000, (xi) easements, reservations, exceptions, rights-of-way, covenants, conditions, restrictions and other similar encumbrances which, in the aggregate, are not substantial in amount and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the Issuer and (xii) Liens set forth on Section 4.10 of the Disclosure Schedule.

 

“ Permitted Sales ” means (i) the lease or sale of water treatment systems or other inventory of the Issuer in the ordinary course of business, including the license of Intellectual Property Assets in connection therewith and (ii) the lease, sale, license or other transfer of the Intellectual Property Assets related to a proprietary process for biologically removing and destroying perchlorate load from used ion exchange resins and from perchlorate-laden ion exchange resin regeneration brines.

 

“ Person ” means an individual, partnership, corporation, business trust, joint stock company, limited liability company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature.

 

“ Plan ” means, as of the date of determination, any employee pension benefit plan as defined in Section 3(2) of ERISA (other than a Multiemployer Plan) which is or has been maintained or contributed to (or to which there is or has been an obligation to contribute to) by the Issuer or a Commonly Controlled Entity.

 

“ Pro Rata Portion ” has the meaning set forth in Section 9.17(a) .

 

“ Purchase Documents ” means the documents in identified in Section 5.01(a) whose delivery is a condition to the effectiveness of this Agreement.

 

“ Purchased Securities ” has the meaning set forth in Section 9.17(b) .

 

“ Purchaser Agent ” has the meaning set forth in Section 9.13 .

 

“ Purchasers ” means the parties identified on Schedule I attached hereto and each of their respective successors and assigns.

 

“ Purchaser Designee ” has the meaning set forth in Section 6.15(a) .

 

“ Registration Rights Agreement ” means the Registration Rights Agreement, dated as of the date hereof, by and among the Issuer and the holders of the Warrants.

 

“ Related Party ” means the Issuer and each Subsidiary of the Issuer.

 

“ Rights Offer ” has the meaning set forth in Section 9.17(a) .

 

“ Reorganization ” means, with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA.

 

“ Reportable Event ” means any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the thirty day notice period is waived under PBGC Reg. § 4043.

 

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“ Requirement of Law ” means, as to any Person, its certificate or articles of incorporation, certificate of formation, operating agreement, bylaws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or final and binding determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its material property is subject.

 

“ Responsible Officer ” means the Chief Executive Officer, the President and/or the Chief Financial Officer of the Issuer.

 

“ Securities Act ” means the Securities Act of 1933, as amended.

 

“ Security Documents ” means (i) the Security Agreement between the Issuer and the Purchasers whereby the Issuer grants to the Purchasers a subordinated security interest in the Collateral substantially in the form attached as Exhibit 5.01(a)(iv) , (ii) the Financing Statements and (iii) all other security agreements, patent and trademark assignments, lease assignments and other similar agreements necessary to create or perfect the Purchasers’ security interest in the Collateral and all amendments, restatements, modifications or supplements thereof or thereto.

 

“ Senior Credit Agreement ” means the Business Loan Agreement dated as of July 1, 2003 between the Senior Secured Creditor and the Issuer, as the same may be amended from time to time.

 

“ Senior Debt ” means the obligations of the Issuer incurred which are senior in priority to the Obligations, including, without limitation, obligations under the Senior Credit Agreement, and any refinancing thereof; provided , that , without the prior written consent of the Purchaser, the maximum aggregate principal amount of such Senior Debt shall not exceed Eight Million Dollars ($8,000,000).

 

“ Senior Secured Creditor ” means BWCA I, LLC, a Delaware limited liability company.

 

“ Subordination Agreement ” means, collectively, the Subordination Agreement between the Senior Secured Creditor and the Purchasers and any future agreement(s) between the Senior Secured Creditor and any other Purchasers entered into from time to time.

 

“ Subsidiary ” means, as to any Person, a corporation, partnership or other entity of which more than fifty percent (50%) of the shares of stock, or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect the board of directors or other managers of such corporation, partnership or other entity, are at the time owned, directly or indirectly, through one or more intermediaries, or both, by such Person.

 

“ Taxes ” means any amounts payable by a Person to any Governmental Authority, whether currently paid or accrued as a liability for future payment, that would be classified as taxes in accordance with GAAP (including, without limitation, deferred Taxes).

 

“ Trade Secrets ” has the meaning set forth in Section 4.19(a) .

 

“ UCC ” means the Uniform Commercial Code as from time to time in effect in the State of California.

 

“ Unfunded Current Liability ” means the amount, if any, by which the actuarial present value of accumulated benefits of any Plan subject to Title IV of ERISA as of the close of its most recent plan year, determined using actuarial assumptions at such time consistent with those prescribed by Financial Accounting Standard No. 87, exceeds the fair market value of the assets allocable to such liabilities.

 

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“ Warrants ” has the meaning set forth in Section 3.01(a) .

 

“ Warrant Shares ” means the shares of Common Stock issuable upon exercise of the Warrants.

 

1.02 Other Definitional Provisions.

 

(a) The words “hereof, “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, subsection, Schedule and Exhibit references are to this Agreement unless otherwise specified.

 

(b) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.

 

ARTICLE II

PURCHASE OF THE NOTES

 

2.01 The Notes.

 

(a) Subject to the terms and conditions of this Agreement, the Issuer will authorize for issuance to the Purchasers on the Closing Date, Notes with an aggregate original principal amount of Five Million Dollars ($5,000,000) in the amounts and to the Purchasers set forth on Schedule I attached hereto. The Notes shall accrue interest from and after the Closing Date and shall have such other terms as set forth in the form of Note attached hereto as Exhibit 2.01 . The Issuer agrees to sell the Notes to the Purchasers on the Closing Date in the amounts and to the Purchasers set forth on Schedule I attached hereto, and each of the Purchasers agrees to purchase its respective Note from the Issuer, in each case on the terms and conditions set forth herein.

 

(b) Payment of principal and interest on the Notes shall be made in accordance with the terms of the Notes as specified therein.

 

(c) Prepayment on the Notes shall be made in accordance with the terms of the Notes as specified therein.

 

(d) The Issuer will pay to the Purchasers in immediately available funds to the accounts designated by the Purchasers, all amounts payable to such Purchasers when due in respect of the principal of, or interest on, the Notes then held by the Purchasers, without any presentation of the Notes.

 

(e) The Issuer will not, without the unanimous approval of the Board of Directors, use the proceeds from the sale of the Notes to reduce the Senior Debt or any other Indebtedness; provided , however , that for the purposes of this Section 2.01(e) only, use of the proceeds from the sale of the Notes for payments by the Related Parties of obligations under Capital Leases or that constitute deferred purchase price of property or services, in each case, incurred in the ordinary course of business, shall be permitted.

 

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2.02 The Closing .

 

The closing of the purchase and sale of the Notes and the Warrants shall take place on the Closing Date with the documents set forth in Section 5.01 to be delivered by the Issuer to the Purchasers by facsimile and/or e-mail transmission (with originals to follow by overnight delivery to the addresses set forth in Section 9.02 ) and all payments to be made in connection with the Closing to be wired in immediately available funds to such accounts as the Issuer and the Purchasers may designate, as applicable, or in such other manner as the parties hereto may otherwise agree (the “ Closing ”).

 

2.03 Security for the Note .

 

Payment of all Obligations, including Indebtedness evidenced by the Notes, shall be secured by a second priority subordinated lien and security interest in and on all of the assets of the Issuer as described in the Security Documents (the “ Collateral ”). The Purchasers’ second priority lien on the Collateral will be subject only to the security interest of the Senior Secured Creditor and Permitted Liens.

 

2.04 Subordination. Payment of all Obligations shall be subordinated to the rights of the Senior Secured Creditor to the extent provided in the Subordination Agreement.

 

2.05 Registration, Transfer and Replacement of the Notes.

 

(a) Each of the Purchasers may, at its option, in person or by delivery, surrender its Note(s) for exchange at the principal office of the Issuer and, within a reasonable time thereafter and without expense for the issuance of replacement Note(s), receive in exchange therefor one or more duly executed Notes, dated as of the date to which interest has been paid on the Note so surrendered, or if no interest has yet been so paid, then dated the date hereof, and registered in such name or names, all as may be designated by such Purchaser, for the same aggregate principal amount as the then unpaid principal amount of the Note(s) so surrendered. The Issuer covenants and agrees to take and cause to be taken all action necessary to effect such exchanges; provided, that, notwithstanding the foregoing, Issuer shall not be responsible for any federal, state or other transfer taxes and charges which may be payable in connection with the exchange or transfer of any Note.

 

(b) The Issuer shall keep at its principal executive office a register for the registration of ownership and transfer of Notes. The name and address of each holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Any such issuance of new Notes shall not be deemed to be the sale of new securities and shall in all respects be subject to compliance with applicable federal, state and other securities laws. Prior to due presentment for registration of transfer, the Person in whose name any Notes shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Issuer shall not be affected by any notice or knowledge to the contrary. The Issuer shall give to any holder promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holder of Notes.

 

(c) Upon receipt by the Issuer of evidence satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of a Note and receipt of an affidavit of such loss, theft, destruction or mutilation and customary indemnification including, without limitation, an indemnity bond from the holder of such Note, the Issuer, at its own expense, shall execute and deliver, in lieu thereof, new Notes, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note(s) or dated the date of such lost, stolen, destroyed or mutilated Note(s) if no interest shall have been paid thereon.

 

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2.06 Revival of Obligations . If the incurring of any debt or the payments of money or transfers of property made to the Purchasers by or on behalf of the Issuer contemplated by the Notes, this Agreement, the Security Documents or any document delivered hereby (collectively, an “ Agreed Transfer ”) should for any reason subsequently be declared to be “voidable” or “avoidable” within the meaning of any state or federal law relating to creditor’s rights, including, without limitation, as fraudulent conveyances, fraudulent transfers, preferences or otherwise voidable or recoverable payments of money or transfer of property, in whole or in part, for any reason under the United States Bankruptcy Code or any other federal or state law, and the Purchasers are required to repay or restore any Agreed Transfer, or the amount of any portion thereof, then as to any such amount repaid or restored (including all reasonable costs, expenses and attorneys’ fees of the Purchasers related thereto), the liability of the Issuer shall automatically be revived, reinstated, and restored and shall exist as though such Agreed Transfer had never been made, notwithstanding the surrender of any Notes or cancellation of any instrument or document relating to this Agreement.

 

ARTICLE III

GRANT OF THE WARRANTS

 

3.01 The Warrants.

 

(a) In consideration of the purchase of the Notes by the Purchasers, the Issuer shall issue to the Purchasers at the Closing (i) warrants to purchase an aggregate of up to Seven Hundred Fifty Thousand (750,000) shares of Common Stock at an exercise price of Five Dollars and Fifty Cents ($5.50) per share in the amounts and to the Purchasers set forth on Schedule I attached hereto and (ii) warrants to purchase an aggregate of up to Two Hundred Fifty Thousand (250,000) shares of Common Stock at an exercise price of Seven Dollars ($7.00) per share as more specifically set forth on Schedule I attached hereto (collectively, the “ Warrants ”), in substantially the forms attached hereto as Exhibit 3.01 . The Warrants shall entitle the Purchasers thereof to purchase such number of shares of Common Stock as shall be set forth therein at the applicable exercise price at such time or times as shall be set forth therein, but the number of such shares of Common Stock and the applicable exercise price shall be subject to adjustment as provided therein.

 

(b) The Issuer will keep or cause to be kept, at its principal office, books for the registration and transfer of the Warrants issued hereunder.

 

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

 

To induce the Purchasers to enter into this Agreement and to purchase the Notes and to acquire the Warrants, the Issuer hereby represents and warrants to each of the Purchasers that, on the date hereof, after giving effect to the transactions contemplated herein, except as set forth in the disclosure schedule delivered by the Issuer to Purchasers on the date hereof (the “ Disclosure Schedule ”):

 

4.01 Organization and Authority . Each of the Related Parties is duly and validly organized and an existing corporation in good standing under the laws of its jurisdiction of formation and is duly licensed or qualified and in good standing as a foreign corporation, as applicable, in all other jurisdictions where the ownership or leasing of property or the nature of business transacted

 

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make such qualification necessary and where the failure to be so qualified and in good standing would, in the aggregate, reasonably be expected to have a Material Adverse Effect. Each of the Related Parties has requisite corporate power and authority to own its properties and assets and to carry on its business, as, and in the places where, such properties and assets are now owned or operated or such business is now conducted and presently proposed to be conducted.

 

4.02 Organizational Information . Section 4.02 of the Disclosure Schedule correctly sets forth (i) the state or other jurisdiction in which each of the Related Parties is incorporated or organized, (ii) the state or states in which each of the Related Parties conducts its respective business, (iii) the authorized capital stock or other equity interests of each of the Related Parties and (iv) a list of each class of stock or membership interests of each of the Related Parties showing in each case the number of shares of stock or membership interests of each class outstanding and the ownership of such shares or membership interests. The shares of stock and membership interests listed in Section 4.02 of the Disclosure Schedule have been duly issued and are fully paid and nonassessable, and are so owned free and clear of any mortgage, lien, pledge, charge, security interest or other encumbrance except as otherwise disclosed on Section 4.02 of the Disclosure Schedule. There are no preemptive or similar rights on the part of any Person with respect to the issuance of any securities or equity interests of any Related Party. There are no subscriptions, options, warrants or other similar securities or rights, agreements or commitments of any kind obligating any Related Party to issue or sell, or to cause to be issued or sold, or to repurchase or otherwise acquire any of their own respective securities or equity interests or securities convertible into or exchangeable for, or any options, warrants or other similar rights relating to any such securities or equity interests.

 

4.03 Transactions Legal and Authorized. The issuance and sale of the Notes, the issuance and sale of the Warrants and the compliance by the Related Parties with all the provisions of the Purchase Documents (other than the Subordination Agreement) are within the corporate powers of the Related Party executing the same. The Purchase Documents (other than the Subordination Agreement) have been duly authorized, executed and delivered and are the legal, valid and binding obligations of the Related Party executing the same, enforceable in accordance with their respective terms, except as provided below. The foregoing representations in this Section 4.03 are subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting the rights and remedies of creditors generally and to general principles of equity (regardless of whether in equity or at law).

 

4.04 No Defaults, Restrictions. None of the execution and delivery of this Agreement or the other Purchase Documents to which the Issuer is a party nor the consummation of the transactions contemplated hereby or thereby conflicts or results in breach of, or constitutes a default under, any of the terms, obligations, covenants, conditions or provisions of any Material Contract, articles, by-laws, operating agreement or any other material agreement or instrument, including, after giving effect to the consents set forth in Section 4.06 of the Disclosure Schedule, the Senior Credit Agreement, to which any Related Party is a party or by which its properties may be bound or affected, or violate any applicable statutes, rules, regulations, judgments, orders, writs, injunctions, decrees or demands of any court, arbitrator, grand jury, or any governmental agency or, with the exception of the transactions contemplated hereby or thereby, result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any property or asset of any Related Party, other than such conflicts, breaches, defaults, violations, liens, charges or encumbrances would not reasonably be expected to have a Material Adverse Effect.

 

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4.05 Material Contracts .

 

(a) As used in this Agreement, the term “ Material Contract ” means any written agreement, contract, lease, consensual obligation, promise or undertaking (whether written or oral and whether express or implied) under which (i) a Related Party has or may acquire any rights or benefits; (ii) under which a Related Party has or may become subject to any obligation or liability; (iii) by which a Related Party or any of the assets owned or used by a Related Party is or may become bound; or (iv) under which a Related Party is obligated to pay or is entitled to receive payments, goods or services valued in excess of $150,000 on an annual basis, in each of cases (i) through (iii), which is material to the Related Parties taken as a whole. Section 4.05(a) of the Disclosure Schedule contains an accurate and complete list, and the Issuer has delivered to the Purchaser accurate and complete copies of, all Material Contracts.

 

(b) (i) Each Material Contract is in full force and effect and is valid and enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting the rights and remedies of creditors generally and to general principles of equity (regardless of whether in equity or at law); and (ii) the completion or performance of any Material Contract would not reasonably be expected to have a Material Adverse Effect.

 

(c) Each of the Related Parties is, and at all times has been, in compliance with all applicable material terms and requirements of each Material Contract to which it is a party.

 

(d) To the Issuer’s Knowledge, each other Person that has or had any liability or other obligation under the Material Contracts is, and at all times has been, in material compliance with all applicable terms and requirements of such Material Contract.

 

(e) To the Issuer’s Knowledge, no event has occurred or circumstance exists that (with or without notice or lapse of time), will contravene, conflict with or result in a breach of, or give the Issuer or any other Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or payment under, or to cancel, terminate or modify, a Material Contract.

 

(f) None of the Related Parties has given to or received, at any time, any notice or other communication regarding any actual, alleged, possible or potential violation or breach of, or default under, any Material Contract to which such Related Party is a party.

 

4.06 Consents . No material consents, orders, permissions, approvals or authorizations, by or from any Governmental Authority or other Person, are required to be obtained, and no registrations with or declarations to any Governmental Authority are required to be filed, in connection with the execution and delivery of any of the Purchase Documents to which any Related Party is a party and the consummation of the transactions contemplated thereby.

 

4.07 Compliance with Law . Each of the Related Parties has complied with all applicable statutes, rules, regulations, orders and restrictions of any Governmental Authority having jurisdiction over the conduct of its business or the ownership of its properties, except where non-compliance therewith would not reasonably be expected to have a Material Adverse Effect.

 

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4.08 Financial Statements.

 

(a) The balance sheets of the Issuer as of December 31, 2004, and the related statements of operations, shareholders’ equity and cash flows for the fiscal year then ended, copies of which are attached as part of Section 4.08 of the Disclosure Schedule, have been prepared in conformity with GAAP consistently applied and fairly present, in all material respects, the financial position of the Issuer as of such date and their statement of operations, shareholders’ equity and cash flows for such period.

 

(b) The unaudited balance sheet of the Issuer as of June 30, 2005 and the related unaudited statement of operations, shareholders’ equity and cash flows for the six (6) months then ended, copies of which are attached as part of Section 4.08 of the Disclosure Schedule, have been prepared in conformity with GAAP on a basis consistent with the financial statements referred to in Section 4.08 of the Disclosure Schedule, and fairly present, in all material respects, the financial position of the Issuer as of such date and their statement of operations, shareholders’ equity and cash flows for the six (6) months then ended; provided, however, that the unaudited financials do not include footnotes and are subject to year-end adjustment.

 

(c) The Related Parties have no Indebtedness other than Indebtedness permitted pursuant to Section 7.02 and have no Guarantee Obligations other than Guarantee Obligations permitted pursuant to Section 7.04 hereof.

 

4.09 Pending Litigation . There are no actions, suits, investigations or proceedings (whether or not purportedly on behalf of any Related Party) pending or, to the Knowledge of the Issuer, threatened against any Related Party, or the business, operations or properties of any Related Party before or by any Governmental Authority, which, if adversely determined, would reasonably be expected to have a Material Adverse Effect. No Related Party is in default with respect to any judgment, order, writ, injunction, decree, demand, rule or regulation of any court, arbitrator, grand jury or of any Governmental Authority, default under which might have consequences which would reasonably be expected to have a Material Adverse Effect.

 

4.10 Title to Properties . Each Related Party has good and marketable title to all of its property and other assets that are material to the conduct of its business, except Permitted Liens. No Related Party owns tangible assets with a fair market value in excess of $150,000 in any state except for those assets located at the locations specified on Exhibit A to the Security Agreement and other assets in transit from time to time. All property and assets of any kind (real or personal, tangible or intangible) of the Related Parties is free from any encumbrance except Permitted Liens, and is free from any other Liens which would reasonably be expected to have a Material Adverse Effect. Except for financing statements evidencing Permitted Liens and the Financing Statements filed pursuant to this Agreement, to Issuer’s Knowledge, no financing statement under the UCC which names any Related Party as debtor has been filed and not terminated, and no Related Party has signed any security agreement authorizing any secured party thereunder to file any such financing statement which has not been terminated. All of the leases under which any Related Party is operating are valid, subsisting and in full force and effect in all material respects and none of such leases is in material default, and no event has occurred which with the passage of time or the giving of notice, or both, would constitute a default under any provision thereof except where such default would not reasonably be expected to have a Material Adverse Effect.

 

4.11 Licenses and Permits . Each Related Party has all federal, state and local licenses and permits required to be maintained in connection with and material to the operation of its

 

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businesses, and all such licenses and permits are valid and fully effective, except where the failure to have such valid or effective license or permit would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect.

 

4.12 Taxes . Each Related Party has timely filed all federal, state and local Tax returns which are required to be filed and has timely paid, or made provision for the payment of, all material Taxes which have become due pursuant to said returns or pursuant to any assessment received by any Related Party, including franchise taxes, except such Taxes, if any, as are being contested in good faith and for which adequate reserves have been provided.

 

4.13 Margin Securities . The Issuer is not engaged in the business of extending credit for the purpose of buying or carrying margin securities, and no part of the proceeds realized from the sale of the Notes will be used to buy or carry any such margin securities or be used in a manner inconsistent with the provisions of Regulation T, U or X of the Board of Governors of the Federal Reserve System.

 

4.14 No Investment Company . The Issuer is not an “investment company,” or a company “controlled” by an “investment company,” as such terms are defined in the Investment Company Act of 1940, as amended.

 

4.15 Securities Laws . The Issuer has not, either directly or through any agent, offered all or any part of the Notes to be purchased and sold hereunder, or any part of the Warrants to be granted hereunder, to, or solicited any offers to acquire any of the Notes or Warrants from, or otherwise approached or negotiated or communicated in respect of any of the Notes or Warrants with, any Person other than the Purchasers. Neither the Issuer nor any agent on its behalf has offered or will offer to sell all or any of the Notes or Warrants, or solicited any offers to acquire any of the Notes or Warrants from, or otherwise approached or negotiated or communicated in respect of any of the Notes or Warrants with, any Person so as thereby to bring the delivery of the Notes within the registration requirements of the Securities Act.

 

4.16 Employee Relations . Each Related Party has complied in all material respects with all applicable federal, state and local laws, rules and regulations relating to employment, and all applicable laws, rules and regulations governing payment of minimum wages and overtime rates, and the withholding and payment of taxes from compensation of employees and the payment of premiums and/or benefits under applicable workers’ compensation laws except any non-compliance which has not had and would not reasonably be expected to have a Material Adverse Effect. No employees of any Related Party are parties to a collective bargaining agreement, nor is any union organizing activity pending or, to the Knowledge of Issuer, threatened. No Related Party has experienced any work stoppage or other material labor difficulty during the past five (5) years which has had or would reasonably be expected to have a Material Adverse Effect.

 

4.17 Insurance . Each Related Party has been and is insured by financially sound and reputable insurers with respect to its property and the conduct of its business in such amounts and against such risks as is customary for companies of similar size and nature as Issuer in its industry. All policies of insurance are currently in full force and effect, and no notice of cancellation or termination has been received by any Related Party with respect to any such policies. All premiums due and payable on such policies have been paid or will be paid in accordance with the terms of such policies. Section 4.17 of the Disclosure Schedule correctly sets forth a complete list and description of all material policies of insurance currently maintained by the Related Parties.

 

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4.18 Solvency.

 

(a) The fair saleable value of the assets of the Related Parties on a consolidated basis will, immediately following the sale of the Note on the Closing Date and the other transactions contemplated in connection therewith, exceed the amount of their existing debts and other liabilities (including contingent liabilities, other than payments required to be made pursuant to the rights of redemption of the Series A Preferred Shares and the Series B Preferred Shares).

 

(b) The Related Parties on a consolidated basis do not have, and