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SECURITIES PURCHASE AGREEMENT

Purchase and Sale Agreement

SECURITIES PURCHASE AGREEMENT | Document Parties: GEMINI MASTER FUND, LTD | Gemini Strategies, LLC | GREY K OFFSHORE FUND, LTD | RNK Capital LLC You are currently viewing:
This Purchase and Sale Agreement involves

GEMINI MASTER FUND, LTD | Gemini Strategies, LLC | GREY K OFFSHORE FUND, LTD | RNK Capital LLC

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Title: SECURITIES PURCHASE AGREEMENT
Governing Law: California     Date: 12/11/2006
Industry: Recreational Products     Sector: Consumer Cyclical

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Exhibit 99.1

Execution Copy

 

 

SECURITIES PURCHASE AGREEMENT

 

SECURITIES PURCHASE AGREEMENT (this " Agreement "), dated as of December 5, 2006, by and between ZAP, a California corporation (the " Company "), and each of the entities whose names appear on the signature pages hereof. Such entities are each referred to herein as an " Investor " and, collectively, as the " Investors ".

A. The Company wishes to sell to each Investor, and each Investor wishes to purchase, upon the terms and subject to the conditions set forth in this Agreement, (i) a 8% Senior Convertible Note in the form attached hereto as Exhibit A (a " Note " and, collectively with the other Notes issued hereunder, the " Notes ") and (ii) a warrant in the form of Exhibit B hereto (a " Warrant " and, collectively with the other warrants issued hereunder, the " Warrants "). The Notes will be convertible under certain conditions into shares of the Company’s common stock, no par value (the " Common Stock "). The shares of Common Stock into which the Notes are convertible are referred to herein as the " Conversion Shares " and the shares of Common Stock into which the Warrants are exercisable are referred to herein as the " Warrant Shares ". The Notes, the Conversion Shares, the Warrants and the Warrant Shares are collectively referred to herein as the " Securities ".

B. Each Warrant will (i) entitle an Investor to purchase a number of Warrant Shares equal to thirty percent (30%) of the number of Conversion Shares that would be issuable upon conversion of the Note purchased by such Investor at the Closing (as defined below), at the Conversion Price (as defined below) in effect on the date of such Closing and without regard to any restrictions on such conversion, (ii) have an exercise price equal to one dollar and ten cents ($1.10), subject to adjustment as provided therein, and (iii) expire on the fifth (5th) anniversary of the Closing Date.

C. The Company has agreed to effect the registration of the Conversion Shares and the Warrant Shares for resale by the holders thereof under the Securities Act of 1933, as amended (the " Securities Act "), pursuant to a Registration Rights Agreement in the form attached hereto as Exhibit C (the " Registration Rights Agreement ").

D. The sale of the Notes and the Warrants by the Company to the Investors will be effected in reliance upon the exemption from securities registration afforded by the provisions of Regulation D (" Regulation D "), as promulgated by the Commission (as defined below) under the Securities Act.

In consideration of the mutual promises made herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and each Investor hereby agree as follows:

 

 

1.  PURCHASE AND SALE OF NOTES AND WARRANTS.  

1.1  Closing . Upon the terms and subject to the satisfaction or waiver of the conditions set forth herein, the Company agrees to sell and each Investor agrees to purchase (i) a Note (a " Note ") with a principal amount equal to the amount set forth below such Investor’s name on the signature pages hereof and (ii) a Warrant exercisable into the number of shares of Common Stock set forth below such Investor’s name on the signature pages hereof. The date on which the closing of such purchase and sale occurs (the " Closing ") is hereinafter referred to as the " Closing Date ". The Closing will be deemed to occur at the offices of Mazzeo Song LLP, 708 Third Avenue, 19 th Floor, New York, New York 10017 when (A) this Agreement and the other Transaction Documents (as defined below) have been executed and delivered by the Company and each Investor, (B) each of the conditions to the Closing described in this Agreement has been satisfied or waived as specified therein and (C) payment of each Investor’s Purchase Price (as defined below) payable with respect to the Note and Warrant being purchased by such Investor at the Closing has been made by wire transfer of immediately available funds ( provided , that the aggregate amount of the Purchase Price paid by all of the Investors is not less than $1,500,000 and the total number of Investors is not greater than six (6)). At the Closing, the Company shall deliver to each Investor duly executed instruments representing the Note and Warrant purchased by such Investor at the Closing.

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 securities, through representation on such Person’s board of directors or other management committee or group, by contract or otherwise.

" Board of Directors " means the Company’s board of directors.

" Business Day " means any day other than a Saturday, a Sunday or a day on which the Principal Market is closed or on which banks in the City of New York are required or authorized by law to be closed.

" Closing " and " Closing Date " have the respective meanings specified in Section 1.1 of this Agreement.

" Commission " means the Securities and Exchange Commission, and any successor regulatory agency.

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" Common Stock " has the meaning specified in the recitals to this Agreement.

" Conversion Shares " has the meaning specified in the recitals of this Agreement.

" Debt " means, as to any Person at any time: (a) all indebtedness, liabilities and obligations of such Person for borrowed money; (b) all indebtedness, liabilities and obligations of such Person to pay the deferred purchase price of Property or services, except trade accounts payable of such Person arising in the ordinary course of business that are not past due by more than 90 days; (c) all capital lease obligations of such Person; (d) all Debt of others guaranteed by such Person; (e) all indebtedness, liabilities and obligations secured by a Lien (other than a Permitted Lien) existing on Property owned by such Person, 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 such Person (whether contingent or otherwise) in respect of letters of credit, bankers’ acceptances, surety or other bonds and similar instruments; and (g) all liabilities and obligations of such Person to redeem or retire shares of capital stock of such Person (other than the Company’s obligation to redeem the Securities under the circumstances specified therein).

" Disclosure Documents " means all SEC Documents filed with the Commission at least five (5) Business Days prior to the Execution Date.

" DTC " means The Depositary Trust Company (and any successor entity).

 

" Effective Date " has the meaning specified in the Registration Rights Agreement.

" 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.

" Event of Default " has the meaning specified in the Notes.

"Exchange" has the meaning specified in Section 4.16 of this Agreement.

 

" 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).

"Exchange Closing Date," "Exchange Documents," "Exchange Election Notice," "Exchange Notice," and "Exchange Securities" have the respective meanings specified in Section 4.16 of this Agreement.

 

" Execution Date " means the date of this Agreement.

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" GAAP " means 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.

" 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.

" 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 3.25 of this Agreement.

" Investor Party " has the meaning specified in Section 4.10 of this Agreement.

" Key Employee " has the meaning specified in Section 3.16 of this Agreement.

" 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).

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" Material Adverse Effect " means an effect that is material and adverse to (i) the consolidated business, properties, assets, operations, results of operations, financial condition, credit worthiness or prospects of the Company and the Company Subsidiaries taken as a whole, (ii) the ability of the Company to perform its obligations under this Agreement or the other Transaction Documents or (iii) the rights and benefits to which an Investor is entitled under this Agreement, the Notes and the other Transaction Documents.

 

" Material Contracts " means, as to the Company and the Company Subsidiaries, 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.

" Obligations " means any and all indebtedness, liabilities and obligations of the Company to the Investor evidenced by and/or arising pursuant to this Agreement to pay amounts due on the Notes or to make other cash payments, 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, to pay interest on the Notes (including, without limitation, interest accruing after any bankruptcy, insolvency, reorganization or other similar filing) and to pay all fees, indemnities, costs and expenses (including attorneys’ fees) provided for in this Agreement or the Notes. 

" 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;

(c) Subordinated Debt;

(d) Debt consisting of capitalized lease obligations and purchase money indebtedness incurred in connection with acquisition of capital assets and obligations 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 its Subsidiaries other than the assets so leased; and

(e) Debt obtained from banking or other financial institutions engaged primarily in the business of lending transactions, provided that (i) such Debt shall not be

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convertible into any capital stock or other equity securities of the Company or its Subsidiaries, and (ii) no warrants or other equity securities of the Company or any of its Subsidiaries shall be issued in connection with obtaining such Debt.

" Permitted Liens " means each of the following:

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

(b) Liens on (and limited solely to) assets acquired through purchase money indebtedness to secure such purchase money indebtedness (and no other Debt);

(c) Liens to secure any Debt described in clause (e) of the definition of " Permitted Debt ";

(d) 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;

(e) Liens for taxes, assessments or other governmental charges (including without limitation in connection with workers’ compensation and unemployment insurance) 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;

(f) 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; and

(g) mortgages on real Property in existence on the Execution Date and disclosed on Schedule 3.22 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.

" Principal Market " means the principal exchange, market or quotation system on which the Common Stock is listed, traded or quoted.

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" 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 at the Closing by (ii) the aggregate principal amount of the Notes purchased hereunder by all of the Investors at the Closing.

" Purchase Price " means, with respect to Securities purchased at the Closing, the original principal amount of the Note purchased at the Closing.

" Registration Rights Agreement " has the meaning specified in the recitals to this Agreement.

" Registration Statement " has the meaning specified in the Registration Rights Agreement.

" Registrable Securities " has the meaning specified in the Registration Rights Agreement.

" Regulation D " has the meaning specified in the recitals to this Agreement.

" Reserved Amount " has the meaning specified in Section 4.3 of 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 the benefit of) any shares of any class of capital stock of the Company or 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 Affiliates now or hereafter outstanding, except the Securities; (c) any prepayment 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) other than the Securities; and (d) any loan, advance or payment to any officer, director or stockholder of the Company or any of its Affiliates, exclusive of reasonable compensation and reimbursements paid to officers or directors in the ordinary course of business.

 

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

 

" SEC Documents " means all reports, schedules, registration statements and definitive proxy statements filed by the Company with the Commission.

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" Securities " means the Notes, the Conversion Shares, the Warrants and the Warrant Shares. 

 

" Securities Act " has the meaning specified in the recitals of this Agreement.

" Subordinated Debt " means Debt of the Company which meets each of the following requirements: (a) such Debt is wholly unsecured; (b) such Debt is contractually subordinated, as to payment and liquidation, to the payment in full of the Notes on such terms and pursuant to written agreements in such form and substance as are reasonably acceptable to the holders of a majority in principal amount of the Notes, that restrict the Company from pre-paying any amounts in respect of the principal of such Debt (upon acceleration or otherwise) prior to the scheduled maturity thereof, and that restrict the subordinated creditor from commencing any judicial or other collection efforts or exercising any other remedies prior to the date that is ninety-one (91) days following the payment in full of the Notes; and (c) such Debt does not mature prior to the date that is ninety-one (91) days following the latest Maturity Date (as defined in the Notes) of the Notes then outstanding.

 

"Subsequent Placement " means any issuance, sale or exchange by the Company or any Subsidiary of the Company at any time after the Closing Date, or any agreement or obligation of the Company or any Subsidiary of the Company to issue, sell or exchange, at any time after the Closing Date, (i) any shares of common stock of the Company or any Subsidiary of the Company, (ii) any other equity security of the Company or any Subsidiary of the Company, including without limitation preferred stock, (iii) any other security of the Company or any Subsidiary of the Company which by its terms is convertible into or exchangeable or exercisable for any equity security of the Company or any Subsidiary of the Company, (iv) any option, warrant or other right to subscribe for, purchase or otherwise acquire any such security described in the foregoing clauses (i) through (iii) , or (v) any debt instruments or securities, including promissory notes and convertible debt instruments; provided, however , that the term " Subsequent Placement " shall not be deemed to include any issuance, sale or exchange of Excluded Securities (as defined in the Notes).

" Subsidiary " means, with respect to any Person, any corporation or other entity of which 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 corporation or entity (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) is at the time directly or indirectly owned or controlled by such Person or one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries.

" Termination Date " means the first date on which there are no Notes outstanding.

 

" Trading Day " means any day on which shares of Common Stock are purchased and sold on the Principal Market.

" Transaction Documents " means (i) this Agreement, (ii) the Notes, (iii) the Warrants, (iv) the Registration Rights Agreement, and (v) all other agreements, documents and other instruments executed and delivered by or on behalf of the Company or any of its officers at the Closing.

" Transfer Agent " has the meaning specified in Section 2.5 of this Agreement.

" Variable Rate Security " means any security that is convertible into, exchangeable for or that requires the Company to issue shares of Common Stock at a conversion, exercise or exchange ratio or price that varies with the market price of the Common Stock.

" VWAP " on a Trading Day means the volume weighted average price of the Common Stock for such Trading Day on the Principal Market as reported by Bloomberg Financial Markets or, if Bloomberg Financial Markets is not then reporting such prices, by a comparable

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reporting service of national reputation selected by the Investors and reasonably satisfactory to the Company. If the VWAP cannot be calculated for the Common Stock on such Trading Day on any of the foregoing bases, then the Company shall submit such calculation to an independent investment banking firm of national reputation reasonably acceptable to each Investor, and shall cause such investment banking firm to perform such determination and notify the Company and each Investor of the results of determination no later than two (2) Business Days from the time such calculation was submitted to it by the Company. All such determinations shall be appropriately adjusted for any stock dividend, stock split or other similar transaction during such period.

 

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 contained in 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 Notes and Warrants 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 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  Accredited Investor . Such Investor (i) is an "accredited investor" as that term is defined in Rule 501 of Regulation D, (ii) was not formed or organized for the specific purpose of making an investment in the Company, and (iii) is acquiring the Securities 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 and/or sales registered under the Securities Act; provided, however, that in making such representation, such Investor does not agree to hold the Securities for any minimum or specific term and reserves the right to sell, transfer or otherwise dispose of the Securities 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 Securities 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 Securities.

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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 in order for such Investor to make an informed decision with respect to its investment in the Securities. Neither such information nor any other investigation conducted by such 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, except as provided in the Registration Rights Agreement, the Securities 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. 

 

2.5  Legend . Such Investor understands that the certificates representing the Securities 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 any state securities laws, 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 respect thereto, or an exemption from registration under the Securities Act and applicable state securities laws is available in connection with such offer or sale. These securities and the securities issuable upon conversion or exercise hereof (i) may be pledged or hypothecated in connection with a bona fide margin account or other financing secured by such securities or (ii) may be transferred or assigned to an affiliate of the holder hereof without the necessity of an opinion of counsel or the consent of the issuer hereof."

Notwithstanding the foregoing, it is agreed that, as long as (A) the resale or transfer (including without limitation a pledge) of any of the Securities is registered pursuant to an effective registration statement, (B) such Securities 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) such Securities are eligible for resale under Rule 144(k) or any successor provision, such Securities shall be issued without any legend or other restrictive language and, with respect to Securities upon which such legend is stamped, the Company shall issue new certificates without such legend to the holder upon request. The Company shall execute and deliver written instructions to the transfer agent for its Common Stock (the " Transfer Agent ") as may be necessary to satisfy any request by an Investor for removal of such legends no later than the close of business on the third (3 rd ) Business Day following the receipt of the request from an Investor to the extent such legends may be removed in accordance with this Section 2.5 .

2.6  Reliance on Exemptions . Such Investor understands that the Securities are being offered and sold to it in reliance upon specific exemptions from the registration requirements of U.S. 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

 

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to determine the availability of such exemptions and the eligibility of such Investor to acquire the Securities. Such Investor acknowledges that it did not purchase the Securities based upon any advertisement in any publication of general circulation. Such Investor is relying on the representations, acknowledgements and agreements made by the Company in Section 3 and elsewhere in this Agreement in making investing, trading and/or other decisions concerning the Company’s securities.

 

2.7  Non-Affiliate Status; Common Stock Ownership . Such Investor is not an Affiliate of the Company or of any other Investor and is not acting in association or concert with any other Person in regard to its purchase of the Securities or otherwise in respect of the Company. Such Investor’s investment in the Securities is not for the purpose of acquiring, directly or indirectly, control of, and it has no intent to acquire or exercise control of, the Company or to influence the decisions or policies of the Board of Directors.

2.8   Fees . Such Investor has not agreed to pay any compensation or other fee, cost or related expenditure to any underwriter, broker, agent or other representative in connection with the transactions contemplated hereby.

 

2.9 No Conflicts . The execution and performance of this Agreement and the other Transaction Documents to which it is a party do not conflict in any material respect with any agreement to which such Investor is a party or is bound, any court order or judgment applicable to such Investor, or the constituent documents of such Investor.

 

2.10  No Governmental Review . Such Investor understands that no U.S. federal or state agency or any other Governmental Authority has passed on or made any recommendation or endorsement of the Securities or the fairness or suitability of an investment in the Securities nor have such authorities passed upon the accuracy of any information provided to such Investor or made any findings or determinations as to the merits of the offering of the Securities.

 

3.  REPRESENTATIONS AND WARRANTIES OF THE COMPANY . The Company hereby represents and warrants to each Investor and agrees with each Investor that, as of the Execution Date:

3.1  Organization, Good Standing and Qualification . Each of the Company and its 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 its 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.

3.2  Authorization; Consents . The Company has the requisite corporate power and authority to enter into and perform its obligations under the Transaction Documents, to issue and sell the Notes and the Warrants to the Investors in accordance with the terms hereof and thereof, and to issue the Conversion Shares upon conversion of the Notes and the Warrant Shares upon exercise of the Warrants. 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

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Company of its obligations under, the Transaction Documents has been taken, and no further consent or authorization of the Company, its Board of Directors, shareholders, any Governmental Authority or organization (other than such approval as may be required under the Securities Act and applicable state laws in respect of the Registration Rights Agreement, or any other person or entity) is required (pursuant to any rule of the Principal Market or otherwise). The Board of Directors has determined that the sale and issuance of the Securities, and the consummation of the transactions contemplated hereby and by the other Transaction Documents (including without limitation the issuance of the Notes and Warrants, the issuance of Conversion Shares in accordance with the terms of the Notes and the issuance of Warrant Shares in accordance with the terms of the Warrants), are in the best interests of the Company.

3.3   Enforcement . This Agreement has been and, at or prior to the Closing, each other Transaction Document required to be delivered by the terms hereof at such Closing will be, duly executed and delivered by the Company. This Agreement constitutes and, upon the execution and delivery thereof by the Company, each other Transaction Document will constitute the valid and legally binding obligation of the Company, enforceable against the Company in accordance with their respective 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 is subject to the reporting requirements of the Exchange Act and, except as described on Schedule 3.4 , the Company has, to the best of its knowledge, filed with the Commission all SEC Documents that the Company was required to file with the Commission on or after December 31, 2005. 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 filed on or after December 31, 2005, 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, to the best of the Company’s knowledge, in all material respects with the requirements of 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, to the best of the Company’s knowledge, 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. To the best of the Company’s knowledge, all documents required to be filed as exhibits to the SEC Documents filed on or after December 31, 2005 have been filed as required. Except as set forth in the Disclosure Documents, the Company has no liabilities, contingent or otherwise, other than liabilities incurred in the ordinary course of business which, under GAAP, are not required to be reflected in the financial statements included in the Disclosure Documents and which, individually or in the aggregate, are not material to the consolidated business or financial condition of the Company and its Subsidiaries taken as a whole. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission with respect thereto. To the

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best of the Company’s knowledge, such financial statements have been prepared in accordance with GAAP consistently applied at the times and during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end adjustments). The Company will prepare the financial statements to be included in any reports, schedules, registration statements and definitive proxy statements that the Company is required to file or files with the Commission after the date hereof in accordance with GAAP (except in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements).

 

3.5  Capitalization; Debt Schedule . The capitalization of the Company, including its authorized capital stock, the number of shares issued and outstanding, the number of shares issuable and reserved for issuance pursuant to the Company’s stock option plans and agreements, the number of shares issuable and reserved for issuance pursuant to securities (other than the Notes and Warrants) exercisable for, or convertible into or exchangeable for any shares of Common Stock and the number of shares initially to be reserved for issuance upon conversion of the Notes and exercise of the Warrants, is set forth on Schedule 3.5 hereto. All outstanding shares of capital stock of the Company have been, or upon issuance will be, validly issued, fully paid and non-assessable. All Subsidiaries of the Company are disclosed on Schedule 3.5 hereto. Except as disclosed on Schedule 3.5 hereto, the Company or a wholly-owned Subsidiary of the Company owns all of the capital stock of each Subsidiary of the Company, which capital stock is validly issued, fully paid and non-assessable, and no shares of the capital stock of the Company or any of its Subsidiaries are subject to preemptive rights or any other similar rights of the shareholders of the Company or any such Subsidiary or any Liens created by or through the Company or any such Subsidiary. Except as disclosed on Schedule 3.5 or as contemplated herein, there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exercisable or exchangeable for, any shares of capital stock of the Company or any of its Subsidiaries, or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its Subsidiaries (whether pursuant to anti-dilution, "reset" or other similar provisions). Schedule 3.5 identifies all Debt of the Company and/or its Subsidiaries currently outstanding in excess of $25,000 as of the date hereof.

3.6  Due Authorization; Valid Issuance . The Notes are duly authorized and, when issued, sold and delivered in accordance with the terms of this Agreement, will be duly and validly issued, free and clear of any Liens imposed by or through the Company. The Warrants are duly authorized and, when issued, sold and delivered in accordance with the terms of this Agreement, will be duly and validly issued, free and clear of any Liens imposed by or through the Company. The Conversion Shares issuable under the Notes and the Warrant Shares issuable under the Warrants are duly authorized and reserved for issuance and, when issued and delivered in accordance with the terms of the Notes or the Warrants, as the case may be, will be duly and validly issued, fully paid and nonassessable, free and clear of any Liens imposed by or through the Company. Assuming the accuracy of each Investor’s representations contained herein, the issuance

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and sale of the Notes and Warrants under this Agreement will be effected in compliance with all applicable Federal and state securities laws.

 

3.7  Form SB-2 . The Company is eligible to register the Conversion Shares and Warrant Shares for resale in a secondary offering by each Investor on a registration statement on Form SB-2 under the Securities Act. To the Company’s knowledge, as of the date hereof and as of the Closing Date, there exist no facts or circumstances (including without limitation any required approvals or waivers of any circumstances that may delay or prevent the obtaining of accountant’s consents) that could reasonably be expected to prohibit or dela


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