Exhibit 10.32
SECURITY AGREEMENT
This Security
Agreement is made as of August 31, 2007 by and among KALLINA
CORPORATION, a Delaware corporation (“ Lender
”), DIGITAL ANGEL CORPORATION, a Delaware corporation (the
“ Parent ”), and each party listed on
Exhibit A attached hereto (each an “ Eligible
Subsidiary ” and collectively, the “ Eligible
Subsidiaries ”) the Parent and each Eligible Subsidiary,
each a “ Company ” and collectively, the “
Companies ”).
BACKGROUND
The Companies
have requested that Lender make advances available to the
Companies; and
Lender has
agreed to make such advances on the terms and conditions set forth
in this Agreement.
AGREEMENT
NOW,
THEREFORE, in consideration of the mutual covenants and
undertakings and the terms and conditions contained herein, the
parties hereto agree as follows:
1. General
Definitions and Terms; Rules of Construction .
(a)
General Definitions . Capitalized terms used in this
Agreement shall have the meanings assigned to them in Annex
A .
(b)
Accounting Terms . Any accounting terms used in this
Agreement which are not specifically defined shall have the
meanings customarily given them in accordance with GAAP and all
financial computations shall be computed, unless specifically
provided herein, in accordance with GAAP consistently
applied.
(c)
Other Terms . All other terms used in this Agreement and
defined in the UCC, shall have the meaning given therein unless
otherwise defined herein.
(d)
Rules of Construction . All Schedules, Addenda, Annexes and
Exhibits hereto or expressly identified to this Agreement are
incorporated herein by reference and taken together with this
Agreement constitute but a single agreement. The words
“herein”, “hereof” and
“hereunder” or other words of similar import refer to
this Agreement as a whole, including the Exhibits, Addenda, Annexes
and Schedules thereto, as the same may be from time to time
amended, modified, restated or supplemented, and not to any
particular section, subsection or clause contained in this
Agreement. Wherever from the context it appears appropriate, each
term stated in either the singular or plural shall include the
singular and the plural, and pronouns stated in the masculine,
feminine or neuter gender shall include the masculine, the feminine
and the neuter. The term “or” is not exclusive. The
term “including” (or any form thereof) shall not be
limiting or exclusive. All references to statutes and related
regulations
shall include any amendments of same and any successor statutes and
regulations. All references in this Agreement or in the Schedules,
Addenda, Annexes and Exhibits to this Agreement to sections,
schedules, disclosure schedules, exhibits, and attachments shall
refer to the corresponding sections, schedules, disclosure
schedules, exhibits, and attachments of or to this Agreement. All
references to any instruments or agreements, including references
to any of this Agreement or the Ancillary Agreements shall include
any and all modifications or amendments thereto and any and all
extensions or renewals thereof.
2. Loan
Facility .
(a) Loans.
(i) Subject to the terms and conditions set forth herein and
in the Ancillary Agreements, Lender may make loans (the “
Loans ”) to the Companies from time to time during the
Term which, in the aggregate at any time outstanding, will not
exceed the lesser of (x) (I) the Capital Availability Amount
minus (II) such reserves as Lender may deem proper and
necessary from time to time in its commercially reasonable judgment
(the “ Reserves ”) and (y) an amount equal
to (I) the Accounts Availability plus (II) the Inventory
Availability, minus (III) the Reserves. The amount derived at
any time from Section 2(a)(i)(y)(I) plus
Section 2(a)(i)(y)(II) minus 2(a)(i)(y)(III) shall be referred
to as the “ Formula Amount .” The Companies
shall, jointly and severally, execute and deliver to Lender on the
Closing Date the Note evidencing the Loans funded on the Closing
Date. The Companies hereby each acknowledge and agree that
Lender’s obligation to purchase the Note from the Companies
on the Closing Date shall be contingent upon the satisfaction (or
waiver by Lender) of the items and matters set forth in the closing
checklist provided by Lender to the Companies on or prior to the
Closing Date. The Companies hereby each further acknowledge and
agree that, immediately prior to each borrowing hereunder and
immediately after giving effect thereto, the Companies shall be
deemed to have certified to Lender that at the time of each such
proposed borrowing and also after giving effect thereto
(i) there shall exist no Event of Default, (ii) all
representations, warranties and covenants made by the Companies in
connection with this Agreement and the Ancillary Agreements are
true, correct and complete in all material respects and
(iii) all of each Company’s and its respective
Subsidiaries’ covenant requirements under this Agreement and
the Ancillary Agreements have been met in all material respects.
The Companies hereby agree to provide a certificate confirming the
foregoing concurrently with each request for a borrowing
hereunder.
(ii) Notwithstanding the limitations set forth above, if
requested by any Company, Lender retains the right to lend to such
Company from time to time such amounts in excess of such
limitations as Lender may determine in its sole discretion (each, a
“ Permitted Overadvance ”). In connection with
each such request by one or more Companies, the Companies shall be
deemed to have certified, as of the time of such proposed borrowing
and immediately after giving effect thereto, to the satisfaction of
all Overadvance Conditions. For purposes hereof, “Overadvance
Conditions” means (i) no Event of Default shall exist
and be continuing as of such date; (ii) all representations,
warranties and covenants made by the Companies in connection with
the Security Agreement and the Ancillary Agreements shall be true,
correct and complete in all material respects as of such date; and
(iii) the Companies and their respective Subsidiaries shall
have taken all action necessary to grant Lender
“control” over all of the Companies’ and their
respective Subsidiaries’ Deposit Accounts (the “
Control
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Accounts ”), with any agreements establishing
“control” to be in form and substance satisfactory to
Lender. “Control” over such Control Accounts shall be
released upon the indefeasible repayment in full and termination of
the Permitted Overadvance (together with all accrued interest and
fees which remain unpaid in respect thereof). The Companies hereby
agree to provide a certificate confirming the satisfaction of the
Overadvance Conditions concurrently with the request for
same.
(iii) If
any interest, fees, costs or charges payable to Lender hereunder
are not paid when due, each of the Companies shall thereby be
deemed to have requested, and Lender is hereby authorized at its
discretion to make and charge to the Companies’ account, a
Loan as of such date in an amount equal to such unpaid interest,
fees, costs or charges.
(iv) If
any Company at any time fails to perform or observe any of the
covenants contained in this Agreement or any Ancillary Agreement,
Lender may, but need not, perform or observe such covenant on
behalf and in the name, place and stead of such Company (or, at
Lender’s option, in Lender’s name) and may, but need
not, take any and all other actions which Lender may deem necessary
to cure or correct such failure (including the payment of taxes,
the satisfaction of Liens, the performance of obligations owed to
Account Debtors, lessors or other obligors, the procurement and
maintenance of insurance, the execution of assignments, security
agreements and financing statements, and the endorsement of
instruments). The amount of all monies expended and all costs and
expenses (including attorneys’ fees and legal expenses)
incurred by Lender in connection with or as a result of the
performance or observance of such agreements or the taking of such
action by Lender shall be charged to the Companies’ account
as a Loan and added to the Obligations. To facilitate
Lender’s performance or observance of such covenants by each
Company, each Company hereby irrevocably appoints Lender, or
Lender’s delegate, acting alone, as such Company’s
attorney in fact (which appointment is coupled with an interest)
with the right (but not the duty) from time to time to create,
prepare, complete, execute, deliver, endorse or file in the name
and on behalf of such Company any and all instruments, documents,
assignments, security agreements, financing statements,
applications for insurance and other agreements and writings
required to be obtained, executed, delivered or endorsed by such
Company.
(v) Lender will account to Company Agent monthly with a
statement of all Loans and other advances, charges and payments
made pursuant to this Agreement, and such account rendered by
Lender shall be deemed final, binding and conclusive unless Lender
is notified by Company Agent in writing to the contrary within
thirty (30) days of the date each account was rendered
specifying the item or items to which objection is made.
(vi) During the Term, the Companies may borrow and prepay
Loans in accordance with the terms and conditions hereof.
(vii) (x) If any Eligible Account is not paid by the
Account Debtor within ninety (90) days after the date that
such Eligible Account was invoiced or within 180 days if such
Eligible Account is covered by credit default insurance acceptable
to the Lender or (y) if any Account Debtor asserts a
deduction, dispute, contingency, set-off, or counterclaim with
respect to any Eligible Account, (each, a “ Delinquent
Account ”), the Companies shall jointly and severally (i)
reimburse Lender for the amount of the Loans made with respect to
such Delinquent Account or (ii) immediately replace such
Delinquent Account with an otherwise Eligible Account.
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3.
Repayment of the Loans . The Companies (a) may prepay
the Obligations from time to time in accordance with the terms and
provisions of the Note (and Section 17 hereof if such
prepayment is due to a termination of this Agreement);
(b) shall repay on the expiration of the Term (i) the
then aggregate outstanding principal balance of the Loans together
with accrued and unpaid interest, fees and charges and;
(ii) all other amounts owed Lender under this Agreement and
the Ancillary Agreements; and (c) absent approval of Permitted
Overadvance by Lender pursuant to Section 2(a)(ii), shall
repay on any day on which the then aggregate outstanding principal
balance of the Loans are in excess of the Formula Amount at such
time, Loans in an amount equal to such excess and (d) shall
repay any Permitted Overadvance on the date specified by Lender
upon approval of such Permitted Overadvance. Any payments of
principal, interest, fees or any other amounts payable hereunder or
under any Ancillary Agreement shall be made prior to 12:00 noon
(New York time) on the due date thereof in immediately available
funds.
4.
Procedure for Loans . Company Agent may by written notice
request a borrowing of Loans prior to 12:00 noon (New York time) on
the Business Day of its request to incur, on the next Business Day,
a Loan. Together with each request for a Loan (or at such other
intervals as Lender may request), Company Agent shall deliver to
Lender a Borrowing Base Certificate in the form of
Exhibit B attached hereto, which shall be certified as
true and correct by the Chief Executive Officer or Chief Financial
Officer, Corporate Controller or Animal Applications Segment
Corporate Controller of Company Agent together with all supporting
documentation relating thereto. All Loans shall be disbursed from
whichever office or other place Lender may designate from time to
time and shall be charged to the Companies’ account on
Lender’s books. The proceeds of each Loan made by Lender
shall be made available to Company Agent on the Business Day
following the Business Day so requested in accordance with the
terms of this Section 4 by way of credit to the applicable
Company’s operating account maintained with such bank as
Company Agent designated to Lender. Any and all Obligations due and
owing hereunder may be charged to the Companies’ account and
shall constitute Loans.
5. Interest
and Payments .
(a)
Interest .
(i) Except as modified by Section 5(a)(iii) below, the
Companies shall jointly and severally pay interest at the Contract
Rate on the unpaid principal balance of each Loan until such time
as such Loan is collected in full in good funds in dollars of the
United States of America.
(ii) Interest and payments shall be computed on the basis of
actual days elapsed in a year of 360 days. At Lender’s
option, Lender may charge the Companies’ account for said
interest.
(iii) Effective upon the occurrence of any Event of Default
and for so long as any Event of Default shall be continuing, the
Contract Rate shall automatically be increased as set forth in the
Note (such increased rate, the “ Default Rate
”), and all outstanding Obligations, including unpaid
interest, shall continue to accrue interest from the date of such
Event of Default at the Default Rate applicable to such
Obligations.
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(iv) In
no event shall the aggregate interest payable hereunder or under
the Note exceed the maximum rate permitted under any applicable law
or regulation, as in effect from time to time (the “
Maximum Legal Rate ”), and if any provision of this
Agreement or any Ancillary Agreement is in contravention of any
such law or regulation, interest payable under this Agreement and
each Ancillary Agreement shall be computed on the basis of the
Maximum Legal Rate (so that such interest will not exceed the
Maximum Legal Rate).
(v) The
Companies shall jointly and severally pay principal, interest and
all other amounts payable hereunder, or under any Ancillary
Agreement, without any deduction whatsoever, including any
deduction for any set-off or counterclaim.
(b)
Payment; Certain Closing Conditions .
(i)
Payment . Upon execution of this Agreement by each Company
and Lender, the Companies shall jointly and severally pay to Laurus
Capital Management, LLC, the investment manager of Lender
(“LCM”), a non-refundable payment in an amount equal to
$237,692.30 plus outside counsel fees, which payment is intended to
defray certain of LCM’s due diligence, legal and other
expenses incurred in connection with the entering into of this
Agreement and the Ancillary Agreements and all related matters. All
amounts required to be paid under this Section 5(b)(i) will be
paid on the Closing Date.
(ii)
Overadvance Payment . Without affecting Lender’s
rights hereunder in the event the Loans exceed the Formula Amount
and such excess is not a Permitted Overadvance (each such event, an
“Unpermitted Overadvance ”), the amounts which
the Unpermitted Overadvance exceeds the Formula Amount (the
“Overadvance Amount”) all such Overadvances shall bear
additional interest at a rate equal to two percent (2%) per annum
for all times that the Overadvance Amount shall be in excess of the
Formula Amount. All interest amounts that are incurred pursuant to
this Section 5(b)(ii) shall be due and payable by the Companies
monthly, in arrears, on the first business day of each calendar
month and upon expiration of the Term.
(iii)
Financial Information Default . Without affecting
Lender’s other rights and remedies, in the event any Company
fails to deliver the financial information required by Section 11
on or before the date required by this Agreement, the Companies
shall jointly and severally pay Lender an aggregate fee in the
amount of $500.00 per week (or portion thereof) for each such
failure until such failure is cured to Lender’s satisfaction
or waived in writing by Lender. All amounts that are incurred
pursuant to this Section 5(b)(iii) shall be due and payable by
the Companies monthly, in arrears, on the first business of each
calendar month and upon expiration of the Term.
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6. Security
Interest .
(a) To
secure the prompt payment to Lender of the Obligations, each
Company hereby assigns, pledges and grants to Lender a continuing
security interest in and Lien upon all of the Collateral. All of
each Company’s Books and Records relating to the Collateral
shall, until delivered to or removed by Lender, be kept by such
Company in trust for Lender until all Obligations have been paid in
full. Each confirmatory assignment schedule or other form of
assignment hereafter executed by each Company shall be deemed to
include the foregoing grant, whether or not the same appears
therein.
(b) Each
Company hereby (i) authorizes Lender to file any financing
statements, continuation statements or amendments thereto that
(x) indicate the Collateral (1) as all assets and
personal property of such Company or words of similar effect,
regardless of whether any particular asset comprised in the
Collateral falls within the scope of Article 9 of the UCC of
such jurisdiction, or (2) as being of an equal or lesser scope
or with greater detail, and (y) contain any other information
required by Part 5 of Article 9 of the UCC for the
sufficiency or filing office acceptance of any financing statement,
continuation statement or amendment and (ii) ratifies its
authorization for Lender to have filed any initial financial
statements, or amendments thereto if filed prior to the date
hereof. Each Company acknowledges that it is not authorized to file
any financing statement or amendment or termination statement with
respect to any financing statement without the prior written
consent of Lender and agrees that it will not do so without the
prior written consent of Lender, subject to such Company’s
rights under Section 9-509(d)(2) of the UCC.
(c) Upon
termination of this Agreement for an Event of Default (taking into
consideration any period for the cure of any breach or Event of
Default), each Company hereby grants to Lender an irrevocable,
non-exclusive license (exercisable only during the continuance of
an Event of Default without payment of royalty or other
compensation to such Company) to use, transfer, license or
sublicense any Intellectual Property now owned, licensed to, or
hereafter acquired by such Company, and wherever the same may be
located, and including in such license access to all media in which
any of the licensed items may be recorded or stored and to all
computer and automatic machinery software and programs used for the
compilation or printout thereof, and represents, promises and
agrees, subject to the proviso below, that any such license or
sublicense is not and will not be in conflict with the contractual
or commercial rights of any third Person; provided, that such
license is subject to and expressly excludes any Intellectual
Property that is the subject of the exclusive licenses and
international distributorship agreements and any third party
Intellectual Property to which the Companies do not have the right
to sublicense; and provided that such license or other transfer
will terminate on the termination of this Agreement and the payment
in full of all Obligations under the Note.
7.
Representations, Warranties and Covenants Concerning the
Collateral . Each Company represents, warrants (each of which
such representations and warranties shall be deemed to be true and
correct in all material respects upon the making of each request
for a Loan and as of the time of each and every Loan hereunder,
subject to the terms of this Agreement) and covenants as
follows:
(a) Except as set forth in Schedule 7(a), all of the
Collateral (i) is owned by it free and clear of all Liens
(including any claims of infringement) except those in
Lender’s favor and Permitted Liens and (ii) is not
subject to any agreement prohibiting the granting of a Lien or
requiring notice of or consent to the granting of a Lien.
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(b) it
shall not encumber, mortgage, pledge, assign or grant any Lien in
any Collateral or any other assets to anyone other than Lender and
except for Permitted Liens.
(c) the
Liens granted pursuant to this Agreement, upon due completion of
the filings of UCC-1 financing statements in respect of each
grantor of such Liens in the applicable filing offices of the
states of organization of such grantor and the completion of the
other filings and actions listed on Schedule 7(c)
(which, in the case of all filings and other documents referred to
in said Schedule, have been delivered to Lender in duly executed
form) constitute valid perfected security interests in all of the
Collateral in favor of Lender as security for the prompt and
complete payment and performance of the Obligations, enforceable in
accordance with the terms hereof against any and all of its
creditors and purchasers and such security interest is prior to all
other Liens in existence on the date hereof, other than Permitted
Liens.
(d) no
effective security agreement, mortgage, deed of trust, financing
statement, equivalent security or Lien instrument or continuation
statement covering all or any part of the Collateral is or will be
on file or of record in any public office, except those relating to
Permitted Liens.
(e) it
shall not dispose of any of the Collateral whether by sale, lease
or otherwise except for the sale of Inventory in the ordinary
course of business and for the disposition or transfer in the
ordinary course of business during any fiscal year of obsolete and
worn-out Equipment having an aggregate fair market value of not
more than $100,000 and only to the extent that (i) the proceeds of
any such disposition are used to acquire replacement Equipment
which is subject to Lender’s first priority security interest
(subject to Permitted Liens) or are used to repay Loans or to pay
general corporate expenses, or (ii) following the occurrence
of an Event of Default which continues to exist the proceeds of
which are remitted to Lender to be held as cash collateral for the
Obligations.
(f) it
shall defend the right, title and interest of Lender in and to the
Collateral against the claims and demands of all Persons
whomsoever, and take such actions, including (i) all actions
necessary to grant Lender “control” of any Investment
Property, Deposit Accounts, Letter-of-Credit Rights or electronic
Chattel Paper owned by it, with any agreements establishing control
to be in form and substance satisfactory to Lender, (ii) the
prompt (but in no event later than five (5) Business Days following
Lender’s request therefor) delivery to Lender of all original
Instruments, Chattel Paper, negotiable Documents and certificated
Stock owned by it (in each case, accompanied by stock powers,
allonges or other instruments of transfer executed in blank),
(iii) notification of Lender’s interest in Collateral at
Lender’s request, and (iv) the institution of litigation
against third parties as shall be prudent in order to protect and
preserve its and/or Lender’s respective and several interests
in the Collateral.
(g) it
shall promptly, and in any event within five (5) Business Days
after the same is acquired by it, notify Lender of any commercial
tort claim (as defined in the UCC) acquired by it and unless
otherwise consented by Lender, it shall enter into a supplement to
this Agreement granting to Lender a Lien in such commercial tort
claim.
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(h) it
shall place notations upon its Books and Records and any of its
financial statements to disclose Lender’s Lien in the
Collateral.
(i) if it
retains possession of any Chattel Paper or Instrument with
Lender’s consent, upon Lender’s request such Chattel
Paper and Instruments shall be marked with the following legend:
“This writing and obligations evidenced or secured hereby are
subject to the security interest of Kallina Corporation”
Notwithstanding the foregoing, upon the reasonable request of
Lender, such Chattel Paper and Instruments shall be delivered to
Lender.
(j) it
shall perform in a reasonable time all other steps requested by
Lender to create and maintain in Lender’s favor a valid
perfected first Lien in all Collateral subject only to Permitted
Liens.
(k) it
shall notify Lender promptly and in any event within three
(3) Business Days after obtaining knowledge thereof
(i) of any event or circumstance that, to its knowledge, would
cause Lender to consider any then existing Account and/or Inventory
as no longer constituting an Eligible Account or Eligible
Inventory, as the case may be; (ii) of any material delay in
its performance of any of its obligations to any Account Debtor;
(iii) of any assertion by any Account Debtor of any material
claims, offsets or counterclaims; (iv) of any allowances,
credits and/or monies granted by it to any Account Debtor;
(v) of all material adverse information relating to the
financial condition of an Account Debtor; (vi) of any material
return of goods; and (vii) of any loss, damage or destruction
of any of the Collateral.
(l) all
Eligible Accounts (i) represent complete bona fide
transactions which require no further act under any circumstances
on its part to make such Accounts payable by the Account Debtors,
(ii) are not subject to any present, future contingent offsets
or counterclaims, and (iii) do not represent bill and hold
sales, consignment sales, guaranteed sales, sale or return or other
similar understandings or obligations of any Affiliate or
Subsidiary of such Company. It has not made, nor will it make, any
agreement with any Account Debtor with respect to any Eligible
Account for any extension of time for the payment of any Eligible
Account, any compromise or settlement for less than the full amount
thereof, any release of any Account Debtor from liability therefor,
or any deduction therefrom except a discount or allowance for
prompt or early payment allowed by it in the ordinary course of its
business consistent with historical practice and as previously
disclosed to Lender in writing.
(m) it
shall keep and maintain its Equipment in good operating condition,
except for ordinary wear and tear, and shall make all necessary
repairs and replacements thereof so that the value and operating
efficiency shall at all times be maintained and preserved. It shall
not permit any such items to become a Fixture to real estate or
accessions to other personal property.
(n) it
shall maintain and keep all of its Books and Records concerning the
Collateral at its executive offices listed in
Schedule 12(aa) .
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(o) it
shall maintain and keep the tangible Collateral at the addresses
listed in Schedule 12(aa) , provided, that it may
change such locations or open a new location, provided that it
provides Lender at least thirty (30) days prior written notice
of such changes or new location and (ii) prior to such change
or opening of a new location where Collateral having a value of
more than $250,000 will be located, it executes and delivers to
Lender such agreements deemed reasonably necessary or prudent by
Lender, including landlord agreements, mortgagee agreements and
warehouse agreements, each in form and substance satisfactory to
Lender, to adequately protect and maintain Lender’s security
interest in such Collateral.
(p)
Schedule 7(p) lists all banks and other financial
institutions at which it maintains deposits and/or other accounts,
and such Schedule correctly identifies the name, address and
telephone number of each such depository, the name in which the
account is held, a description of the purpose of the account, and
the complete account number. It shall not establish any depository
or other bank account with any financial institution (other than
the accounts set forth on Schedule 7(p) ) without
Lender’s prior written consent.
(q) All
Inventory manufactured by it in the United States of America shall
be produced in accordance with the requirements of the Federal Fair
Labor Standards Act of 1938, as amended and all rules, regulations
and orders related thereto or promulgated thereunder.
8. Payment
of Accounts .
(a) Each
Company will irrevocably direct all of its present and future
Account Debtors and other Persons obligated to make payments
constituting Collateral to make such payments directly to the
lockboxes maintained by such Company (the “ Lockboxes
”) with [North Fork] Bank or such other financial institution
accepted by Lender in writing as may be selected by such Company
(the “ Lockbox Bank ”) pursuant to the terms of
the certain agreements among one or more Companies, Lender and/or
the Lockbox Bank dated as of [ _____ , 200
_____ ]. On or prior to the Closing Date, each Company
shall and shall cause the Lockbox Bank to enter into all such
documentation acceptable to Lender pursuant to which, among other
things, the Lockbox Bank agrees to: (a) sweep the Lockbox on a
daily basis and deposit all checks received therein to an account
designated by Lender in writing and (b) comply only with the
instructions or other directions of Lender concerning the Lockbox.
All of each Company’s invoices, account statements and other
written or oral communications directing, instructing, demanding or
requesting payment of any Account of any Company or any other
amount constituting Collateral shall conspicuously direct that all
payments be made to the Lockbox or such other address as Lender may
direct in writing. If, notwithstanding the instructions to Account
Debtors, any Company receives any payments, such Company shall
immediately remit such payments to Lender in their original form
with all necessary endorsements. Until so remitted, such Company
shall hold all such payments in trust for and as the property of
Lender and shall not commingle such payments with any of its other
funds or property.
(b) At
Lender’s election, following the occurrence of an Event of
Default which is continuing, Lender may notify each Company’s
Account Debtors of Lender’s security interest in the
Accounts, collect them directly and charge the collection costs and
expenses thereof to Company’s and the Eligible Subsidiaries
joint and several account.
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9.
Collection and Maintenance of Collateral .
(a) Lender may verify each Company’s Accounts from time
to time, but not more often than once every three (3) months,
unless an Event of Default has occurred and is continuing,
utilizing an audit control company or any other agent of
Lender.
(b) Proceeds of Accounts received by Lender will be deemed
received on the Business Day after Lender’s receipt of such
proceeds in good funds in dollars of the United States of America
to an account designated by Lender. Any amount received by Lender
after 12:00 noon (New York time) on any Business Day shall be
deemed received on the next Business Day.
(c) As
Lender receives the proceeds of Accounts of any Company, it shall
(i) apply such proceeds, as required, to amounts outstanding
under the Note, and (ii) remit all such remaining proceeds
(net of interest, fees and other amounts then due and owing to
Lender hereunder) to Company Agent (for the benefit of the
applicable Companies) upon request (but no more often than twice a
week). Notwithstanding the foregoing, following the occurrence and
during the continuance of an Event of Default, Lender, at its
option, may (a) apply such proceeds to the Obligations in such
order as Lender shall elect, (b) hold all such proceeds as
cash collateral for the Obligations and each Company hereby grants
to Lender a security interest in such cash collateral amounts as
security for the Obligations and/or (c) do any combination of
the foregoing.
10.
Inspections and Appraisals . At all times during normal
business hours, Lender, and/or any agent of Lender shall have the
right to (a) have access to, visit, inspect, review, evaluate
and make physical verification and appraisals of each
Company’s properties and the Collateral, (b) inspect,
audit and copy (or take originals if necessary) and make extracts
from each Company’s Books and Records, including management
letters prepared by the Accountants, and (c) discuss with each
Company’s directors, principal officers, and independent
accountants, each Company’s business, assets, liabilities,
financial condition, results of operations and business prospects.
Each Company will deliver to Lender any instrument necessary for
Lender to obtain records from any service bureau maintaining
records for such Company. If any internally prepared financial
information, including that required under this Section is
unsatisfactory in any manner to Lender, Lender may request that the
Accountants review the same.
11.
Financial Reporting . Company Agent will deliver, or cause
to be delivered, to Lender each of the following, which shall be in
form and detail acceptable to Lender:
(a) As
soon as available, and in any event within ninety (90) days
after the end of each fiscal year of the Parent the Parent’s
audited financial statements with a report of independent certified
public accountants of recognized standing selected by the Parent
and reasonably acceptable to Lender (the “ Accountants
”), which annual financial statements shall be without
qualification and shall include each of the Parent’s and each
of its Subsidiaries’ balance sheet as at the end of such
fiscal year and the related statements of each of the
Parent’s and each of its Subsidiaries’ income, retained
earnings and cash flows for the fiscal year then ended, prepared on
a consolidating and consolidated basis to include the Parent, each
Subsidiary of the Parent and each of their respective affiliates,
prepared in accordance with
10
GAAP, together with (i) if and when available, copies of any
management letters prepared by the Accountants; and (ii) a
certificate of the Parent’s President, Chief Executive
Officer or Chief Financial Officer stating that such financial
statements have been prepared in accordance with GAAP and whether
or not such officer has knowledge of the occurrence of any Default
or Event of Default hereunder and, if so, stating in reasonable
detail the facts with respect thereto; provided, however that if
the ADSX Merger is consummated, then the Company shall deliver
audited annual financials statements of Applied Digital which shall
include consolidated and consolidating balance sheets as at the end
of such fiscal year and results of operations for the fiscal year
then ended for each of the Applied Digital subsidiaries, including
the Parent, with a report of independent certified public
accountants of recognized standing selected by Applied Digital and
reasonably acceptable to Lender which annual financial statements
shall be without qualification, all in reasonable detail and
prepared in accordance with GAAP, together with (i) if and
when available, copies of any management letters prepared by the
Accountants; and (ii) a certificate of the Applied
Digital’s President, Chief Executive Officer or Chief
Financial Officer stating that such financial statements have been
prepared in accordance with GAAP and whether or not such officer
has knowledge of the occurrence of any Default or Event of Default
hereunder and, if so, stating in reasonable detail the facts with
respect thereto
(b) As
soon as available and in any event within forty five (45) days
after the end of each fiscal quarter of the Parent, an
unaudited/internal balance sheet and statements of income, retained
earnings and cash flows of each of the Parent’s and each of
its Subsidiaries’ as at the end of and for such quarter and
for the year to date period then ended, prepared on a consolidating
and consolidated basis to include the Parent, each Subsidiary of
the Parent and each of their respective affiliates, all prepared in
accordance with GAAP, subject to year-end adjustments and
accompanied by a certificate of the Parent’s President, Chief
Executive Officer or Chief Financial Officer, stating (i) that
such financial statements have been prepared in accordance with
GAAP, subject to year-end audit adjustments, and (ii) whether
or not such officer has knowledge of the occurrence of any Default
or Event of Default hereunder not theretofore reported and remedied
and, if so, stating in reasonable detail the facts with respect
thereto; ; provided, however that if the ADSX Merger is
consummated, then the Company shall deliver unaudited/internal
balance sheet and statements of income, retained earnings and cash
flows of Applied Digital which shall include consolidated and
consolidating balance sheets as at the end of such fiscal quarter
and results of operations for the fiscal quarter then ended for
each of the Applied Digital subsidiaries, including the Parent, in
reasonable detail and stating in comparative form the figures for
the corresponding date and periods in the previous year, all
prepared in accordance with GAAP, subject to year-end adjustments
and accompanied by a certificate of Applied Digital’s
President, Chief Executive Officer or Chief Financial Officer,
stating (i) that such financial statements have been prepared in
accordance with GAAP, subject to year-end audit adjustments, and
(ii) whether or not such officer has knowledge of the
occurrence of any Default or Event of Default hereunder not
theretofore reported and remedied and, if so, stating in reasonable
detail the facts with respect thereto;
(c) As
soon as available and in any event within thirty (30) days
after the end of each calendar month, an unaudited/internal balance
sheet and statements of income, retained earnings of each of the
Parent and its Eligible Subsidiaries as at the end of and for such
month and for the year to date period then ended, prepared on a
consolidating and consolidated basis to include the Parent, each
Subsidiary of the Parent and each of their respective affiliates,
all
11
prepared in accordance with GAAP, subject to year-end adjustments
and accompanied by a certificate of the Parent’s President,
Chief Executive Officer or Chief Financial Officer, stating
(i) that such financial statements have been prepared in
accordance with GAAP, subject to year-end audit adjustments, and
(ii) whether or not such officer has knowledge of the
occurrence of any Default or Event of Default hereunder not
theretofore reported and remedied and, if so, stating in reasonable
detail the facts with respect thereto;
(d) Within thirty (30) days after the end of each month
(or more frequently if Lender so requests, provided that, so long
as there is no Event of Default, the Company shall not be required
to produce such report more than twice per month), agings of each
Company’s Accounts, unaudited trial balances and their
accounts payable and a calculation of each Company’s
Accounts, Eligible Accounts, Inventory and/or Eligible Inventory,
provided, however, that if Lender shall request the foregoing
information more often than as set forth in the immediately
preceding clause, each Company shall have fifteen (15) days
from each such request to comply with Lender’s demand;
(e) Promptly after (i) the filing thereof, copies of the
Parent’s most recent registration statements and annual,
quarterly, monthly or other regular reports which the Parent files
with the Securities and Exchange Commission (the “ SEC
”), and (ii) the issuance thereof, copies of such
financial statements, reports and proxy statements as the Parent
shall send to its stockholders.
(f) The
Parent shall deliver, or cause the applicable Subsidiary of the
Parent to deliver, such other information as Lender shall
reasonably request.
12.
Additional Representations and Warranties . Each Company
hereby represents and warrants to Lender as follows:
(a)
Organization, Good Standing and Qualification . (i) It
and each of its Eligible Subsidiaries is a corporation, partnership
or limited liability company, as the case may be, duly organized,
validly existing and in good standing under the laws of its
jurisdiction of organization. It and each of its Eligible
Subsidiaries has the corporate, limited liability company or
partnership, as the case may be, power and authority to own and
operate its properties and assets and, insofar as it is or shall be
a party thereto, to (i) execute and deliver this Agreement and
the Ancillary Agreements, (ii) to issue and sell the Note,
(iii) to issue and sell the Warrants and the shares of Common
Stock issuable upon exercise of the Warrants (the “
Warrant Shares ”), and to (iv) carry out the
provisions of this Agreement and the Ancillary Agreements and to
carry on its business as presently conducted. It and each of its
Eligible Subsidiaries is duly qualified and is authorized to do
business and is in good standing as a foreign corporation,
partnership or limited liability company, as the case may be, in
all jurisdictions in which the nature or location of its activities
and of its properties (both owned and leased) makes such
qualification necessary, except for those jurisdictions in which
failure to do so has not had, or could not reasonably be expected
to have, individually or in the aggregate, a Material Adverse
Effect.
12
(ii) Holdings is a limited liability company duly organized,
validly existing and in good standing under the laws of its
jurisdiction of organization. Holdings has the limited liability
company power and authority to own and operate its properties and
assets and, insofar as it is or shall be a party thereto and to
carry on its business as presently conducted. Holdings It and each
of its Eligible Subsidiaries is duly qualified and is authorized to
do business and is in good standing as a limited liability company
in all jurisdictions in which the nature or location of its
activities and of its properties (both owned and leased) makes such
qualification necessary, except for those jurisdictions in which
failure to do so has not had, or could not reasonably be expected
to have, individually or in the aggregate, a Material Adverse
Effect
(b)
Subsidiaries . Each of its direct and indirect Subsidiaries,
the direct owner of each such Subsidiary and its percentage
ownership thereof, is set forth on Schedule 12(b) . No
Inactive Subsidiary owns any assets (other than immaterial assets)
or has any significant operations.
(c)
Capitalization; Voting Rights .
(i) The
authorized capital stock of the Parent, as of the date hereof
consists of 96,000,000 shares, of which 95,000,000 are shares of
Common Stock, par value $0.005 per share, 44,641,388shares of which
are issued and outstanding, and 1,000,000 are shares of preferred
stock, par value $1.75 per share of which no shares are issued and
outstanding. The authorized, issued and outstanding capital stock
of each Subsidiary of each Company is set forth on Schedule
12(c) .
(ii) Except as disclosed on Schedule 12(c) , other
than: (i) the shares reserved for issuance under the
Parent’s stock option plans; and (ii) shares which may
be issued pursuant to this Agreement and the Ancillary Agreements,
there are no outstanding options, warrants, rights (including
conversion or preemptive rights and rights of first refusal), proxy
or stockholder agreements, or arrangements or agreements of any
kind for the purchase or acquisition from the Parent of any of its
securities. Except as disclosed on Schedule 12(c) ,
neither the offer or issuance of any of the Note or the Warrants,
or the issuance of any of the Warrant Shares, nor the consummation
of any transaction contemplated hereby will result in a change in
the price or number of any securities of the Parent outstanding,
under anti-dilution or other similar provisions contained in or
affecting any such securities.
(iii) All issued and outstanding shares of the Parent’s
Common Stock: (i) have been duly authorized and validly issued
and are fully paid and nonassessable; and (ii) were issued in
compliance with all applicable state and federal laws concerning
the issuance of securities.
(iv) The
rights, preferences, privileges and restrictions of the shares of
the Common Stock are as stated in the Parent’s Certificate of
Incorporation (the “ Charter ”). The Warrant
Shares have been duly and validly reserved for issuance. When
issued in compliance with the provisions of this Agreement and the
Parent’s Charter, the Securities will be validly issued,
fully paid and nonassessable, and will be free of any liens or
encumbrances; provided , however , that the
Securities may be subject to restrictions on transfer under state
and/or federal securities laws as set forth herein or as otherwise
required by such laws at the time a transfer is proposed.
13
(d)
Authorization; Binding Obligations . All corporate,
partnership or limited liability company, as the case may be,
action on its and its Eligible Subsidiaries’ part (including
their respective officers and directors) necessary for the
authorization of this Agreement and the Ancillary Agreements, the
performance of all of its and its Eligible Subsidiaries’
obligations hereunder and under the Ancillary Agreements on the
Closing Date and, the authorization, issuance and delivery of the
Note and the Warrants has been taken or will be taken prior to the
Closing Date. This Agreement and the Ancillary Agreements, when
executed and delivered and to the extent it is a party thereto,
will be its and its Eligible Subsidiaries’ valid and binding
obligations enforceable against each such Person in accordance with
their terms, except:
(i) as
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting
enforcement of creditors’ rights; and
(ii) general principles of equity that restrict the
availability of equitable or legal remedies.
The
issuance of the Note is not and will not be subject to any
preemptive rights or rights of first refusal that have not been
properly waived or complied with. The issuance of the Warrants and
the subsequent exercise of the Warrants for Warrant Shares are not
and will not be subject to any preemptive rights or rights of first
refusal that have not been properly waived or complied with.
(e)
Liabilities; Solvency . (i) Except as set forth in
Schedule 12(e) , neither it nor any of its Eligible
Subsidiaries has any liabilities, except current liabilities
incurred in the ordinary course of business and liabilities
disclosed in any Exchange Act Filings.
(ii) Both
before and after giving effect to (a) the Loans incurred on
the Closing Date or such other date as Loans requested hereunder
are made or incurred, (b) the disbursement of the proceeds of,
or the assumption of the liability in respect of, such Loans
pursuant to the instructions or agreement of any Company and
(c) the payment and accrual of all transaction costs in
connection with the foregoing, each Company and each Eligible
Subsidiary of each Company, is and will be, Solvent.
(f)
Agreements; Action . Except as set forth on
Schedule 12(f) or as disclosed in any Exchange Act
Filings:
(i) There are no agreements, understandings, instruments,
contracts, proposed transactions, judgments, orders, writs or
decrees to which it or any of its Eligible Subsidiaries is a party
or to its knowledge by which it is bound which may involve:
(i) obligations (contingent or otherwise) of, or payments to,
it or any of its Eligible Subsidiaries in excess of $250,000 (other
than obligations of, or payments to, it or any of its Eligible
Subsidiaries arising from purchase or sale agreements entered into
in the ordinary course of business); or (ii) the transfer of
any patent, copyright, trademark, trade secret or the transfer or
license of any other proprietary right material to the business of
the Parent to or from it (other than licenses arising from the
purchase of “off the shelf” or other standard products
or licenses that would not materially impair the security interest
granted to Lender pursuant to the IP Security Agreement); or
(iii) provisions restricting the development, manufacture or
distribution of its or any of its Eligible Subsidiaries’
products or services; or (iv) indemnification by it or any of its
Eligible Subsidiaries with respect to infringements of proprietary
rights.
14
(ii) Since June 30, 2007 (the “ Balance Sheet
Date ”) neither it nor any of its Eligible Subsidiaries
has: (i) declared or paid any dividends, or authorized or made
any distribution upon or with respect to any class or series of its
capital stock; (ii) incurred any indebtedness for money
borrowed or any other liabilities (other than ordinary course
obligations) individually in excess of $250,000 or, in the case of
indebtedness and/or liabilities individually less than $250,000, in
excess of $500,000 in the aggregate; (iii) made any loans or
advances to any Person not in excess, individually or in the
aggregate, of $100,000, other than ordinary advances for travel
expenses; or (iv) sold, exchanged or otherwise disposed of any
of its assets or rights, other than the sale of its Inventory in
the ordinary course of business.
(iii) For the purposes of subsections (i) and
(ii) of this Section 12(f), all indebtedness,
liabilities, agreements, understandings, instruments, contracts and
proposed transactions involving the same Person (including Persons
it or any of its applicable Subsidiaries has reason to believe are
affiliated therewith or with any Subsidiary thereof) shall be
aggregated for the purpose of meeting the individual minimum dollar
amounts of such subsections; provided, however that for purposes of
subsections (i) and (ii) indebtedness, liabilities,
agreements, understandings, instruments, contracts and proposed
transactions of the Non-Eligible Subsidiaries shall not be
consolidated with the Parent.
(iv) the
Parent maintains disclosure controls and procedures (“
Disclosure Controls ”) designed to ensure that
information required to be disclosed by the Parent in the reports
that it files or submits under the Exchange Act is recorded,
processed, summarized, and reported, within the time periods
specified in the rules and forms of the SEC.
(v) The
Parent makes and keeps books, records, and accounts, that, in
reasonable detail, accurately and fairly reflect the transactions
and dispositions of its assets. It maintains internal control over
financial reporting (“ Financial Reporting Controls
”) designed by, or under the supervision of, its principal
executive and principal financial officers, and effected by its
board of directors, management, and other personnel, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with GAAP, including that:
(1) transactions are executed in accordance with
management’s general or specific authorization;
(2) unauthorized acquisition, use, or disposition of the
Parent’s assets that could have a material effect on the
financial statements are prevented or timely detected;
(3) transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and
that its receipts and expenditures are being made only in
accordance with authorizations of the Parent’s management and
board of directors;
15
(4) transactions are recorded as necessary to maintain
accountability for assets; and
(5) the
recorded accountability for assets is compared with the existing
assets at reasonable intervals, and appropriate action is taken
with respect to any differences.
(vi) There is no weakness in any of its Disclosure Controls or
Financial Reporting Controls that is required to be disclosed in
any of the Exchange Act Filings, except as so disclosed.
(g)
Obligations to Related Parties . Except as set forth on
Schedule 12(g) , neither it nor any of its Eligible
Subsidiaries has any obligations to their respective officers,
directors, stockholders or employees other than:
(i) for
payment of salary for services rendered and for bonus
payments;
(ii) reimbursement for reasonable expenses incurred on its or
its Eligible Subsidiaries’ behalf;
(iii) for other standard employee benefits made generally
available to all employees (including stock option agreements
outstanding under any stock option plan approved by its and its
Eligible Subsidiaries’ Board of Directors, as applicable);
and
(iv) obligations listed in its and each of its
Subsidiary’s financial statements or disclosed in any of the
Parent’s Exchange Act Filings.
Except as described above or set forth on
Schedule 12(g) , none of its officers, directors or, to
the best of its knowledge, key employees or stockholders, any of
its Eligible Subsidiaries or any members of their immediate
families, are indebted to it or any of its Eligible Subsidiaries,
individually or in the aggregate, in excess of $50,000 or have any
direct or indirect ownership interest in any Person with which it
or any of its Eligible Subsidiaries is affiliated or with which it
or any of its Eligible Subsidiaries has a business relationship, or
any Person which competes with it or any of its Eligible
Subsidiaries, other than passive investments in publicly traded
companies (representing less than one percent (1%) of such company)
which may compete with it or any of its Eligible Subsidiaries.
Except as described above, none of its officers, directors or
stockholders, or any member of their immediate families, is,
directly or indirectly, interested in any material contract with it
or any of its Eligible Subsidiaries and no agreements,
understandings or proposed transactions are contemplated between it
or any of its Eligible Subsidiaries and any such Person. Except as
set forth on Schedule 12(g) , neither it nor any of its
Eligible Subsidiaries is a guarantor or indemnitor of any
indebtedness of any other Person.
16
(h)
Changes . Except as set forth on Schedule 12(h)
, since the Balance Sheet Date, except as disclosed in any Exchange
Act Filing or in any Schedule to this Agreement or to any of the
Ancillary Agreements, there has not been:
(i) any
change in its or any of its Eligible Subsidiaries’ business,
assets, liabilities, condition (financial or otherwise),
properties, operations or prospects, which, individually or in the
aggregate, has had, or could reasonably be expected to have, a
Material Adverse Effect;
(ii) any
resignation or termination of any of its or its Eligible
Subsidiaries’ officers, key employees or groups of
employees;
(iii) any material change, except in the ordinary course of
business, in its or any of its Eligible Subsidiaries’
contingent obligations by way of guaranty, endorsement, indemnity,
warranty or otherwise;
(iv) any
damage, destruction or loss, whether or not covered by insurance,
which has had, or could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect;
(v) any
waiver by it or any of its Eligible Subsidiaries of a valuable
right or of a material debt owed to it;
(vi) any
direct or indirect material loans made by it or any of its Eligible
Subsidiaries to any of its or any of its Eligible
Subsidiaries’ stockholders, employees, officers or directors,
other than advances made in the ordinary course of business;
(vii) any material change in any compensation arrangement or
agreement with any employee, officer, director or
stockholder;
(viii) any declaration or payment of any dividend or other
distribution of its or any of its Eligible Subsidiaries’
assets;
(ix) any
labor organization activity related to it or any of its Eligible
Subsidiaries;
(x) any
debt, obligation or liability incurred, assumed or guaranteed by it
or any of its Eligible Subsidiaries, except those for immaterial
amounts and for current liabilities incurred in the ordinary course
of business;
(xi) any
sale, assignment or transfer of any Intellectual Property or other
intangible assets;
(xii) any change in any material agreement to which it or any
of its Eligible Subsidiaries is a party or by which either it or
any of its Eligible Subsidiaries is bound which, either
individually or in the aggregate, has had, or could reasonably be
expected to have, individually or in the aggregate, a Material
Adverse Effect;
17
(xiii) any other event or condition of any character that,
either individually or in the aggregate, has had, or could
reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect; or
(xiv) any arrangement or commitment by it or any of its
Eligible Subsidiaries to do any of the acts described in subsection
(i) through (xiii) of this Section 12(h).
(i)
Title to Properties and Assets; Liens, Etc . Except as set
forth on Schedule 12(i) , it and each of its Eligible
Subsidiaries has good and marketable title to their respective
properties and assets, and good title to its leasehold interests,
in each case subject to no Lien, other than Permitted Liens.
All
facilities, Equipment, Fixtures, vehicles and other properties
owned, leased or used by it or any of its Eligible Subsidiaries are
in good operating condition and repair and are reasonably fit and
usable for the purposes for which they are being used. Except as
set forth on Schedule 12(i) , it and each of its Eligible
Subsidiaries is in compliance with all material terms of each lease
to which it is a party or is otherwise bound.
(j)
Intellectual Property .
(i) To
its knowledge, except as set forth in Schedule 12(j), it and
each of its Eligible Subsidiaries owns or possesses sufficient
legal rights to all Intellectual Property necessary for their
respective businesses as now conducted and, to its knowledge as
presently proposed to be conducted, without any known infringement
of the rights of others. With the exception of the licenses and
distributor agreements set forth in Schedules I, II and III of the
Intellectual Property Security Agreement, , there are no
outstanding options, licenses or agreements of any kind relating to
its or any of its Eligible Subsidiary’s Intellectual
Property, nor is it or any of its Eligible Subsidiaries bound by or
a party to any options, licenses or agreements of any kind, that
are material to its business or operations, with respect to the
Intellectual Property of any other Person other than such licenses
or agreements arising from the purchase of “off the
shelf” or standard products.
(ii) Except as set forth in Schedule 12(j), neither it
nor any of its Eligible Subsidiaries has received any
communications alleging that it or any of its Eligible Subsidiaries
has violated any of the Intellectual Property or other proprietary
rights of any other Person, nor is it or any of its Eligible
Subsidiaries aware of any basis therefor.
(iii) Except as set forth in Schedule 12(j), neither it
nor any of its Eligible Subsidiaries believes it is or will be
necessary to utilize any inventions, trade secrets or proprietary
information of any of its employees made prior to their employment
by it or any of its Eligible Subsidiaries, except for inventions,
trade secrets or proprietary information that have been rightfully
assigned to it or any of its Eligible Subsidiaries.
(k)
Compliance with Other Instruments . Except as set forth on
Schedule 12(k) , neither it nor any of its Eligible
Subsidiaries is in violation or default of (x) any term of its
Charter or any material term of its Bylaws, or (y) any
provision of any indebtedness, mortgage, indenture, contract,
agreement or instrument to which it is party or by which it is
bound or of any judgment, decree, order or writ, which violation or
default, in the case of this
18
clause (y), has had, or could reasonably be expected to have,
either individually or in the aggregate, a Material Adverse Effect.
The execution, delivery and performance of and compliance with this
Agreement and the Ancillary Agreements to which it is a party, and
the issuance of the Note and the other Securities each pursuant
hereto and thereto, will not, with or without the passage of time
or giving of notice, result in any such material violation, or be
in conflict with or constitute a default under any such term or
provision, or result in the creation of any Lien upon any of its or
any of its Eligible Subsidiary’s properties or assets or the
suspension, revocation, impairment, forfeiture or nonrenewal of any
permit, license, authorization or approval applicable to it or any
of its Eligible Subsidiaries, their businesses or operations or any
of their assets or properties.
(l)
Litigation . Except as set forth on
Schedule 12(l) , there is no action, suit, proceeding
or investigation pending or, to its knowledge, currently threatened
against it or any of its Eligible Subsidiaries that prevents it or
any of its Eligible Subsidiaries from entering into this Agreement
or the Ancillary Agreements, or from consummating the transactions
contemplated hereby or thereby, or which has had, or could
reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect, or could result in any change
in its or any of its Eligible Subsidiaries’ current equity
ownership, nor is it aware that there is any basis to assert any of
the foregoing. Neither it nor any of its Eligible Subsidiaries is a
party to or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or
investigation by it or any of its Eligible Subsidiaries currently
pending or which it or any of its Eligible Subsidiaries intends to
initiate.
(m)
Tax Returns and Payments . Except as set forth on
Schedule 12(m) , it and each of its Eligible
Subsidiaries has timely filed all tax returns (federal, state and
local) required to be filed by it. All taxes shown to be due and
payable on such returns, any assessments imposed, and all other
taxes due and payable by it and each of its Eligible Subsidiaries
on or before the Closing Date, have been paid or will be paid prior
to the time they become delinquent. Except as set forth on
Schedule 12(m) , neither it nor any of its Eligible
Subsidiaries has been advised:
(i) that
any of its returns, federal, state or other, have been or are being
audited as of the date hereof; or
(ii) of
any adjustment, deficiency, assessment or court decision in respect
of its federal, state or other taxes.
Neither it nor any of its Eligible Subsidiaries has any knowledge
of any liability of any tax to be imposed upon its properties or
assets as of the date of this Agreement that is not adequately
provided for.
(n)
Employees . Except as set forth on
Schedule 12(n) , neither it nor any of its Eligible
Subsidiaries has any collective bargaining agreements with any of
its employees. There is no labor union organizing activity pending
or, to its knowledge, threatened with respect to it or any of its
Eligible Subsidiaries. Except as disclosed in the Exchange Act
Filings or on Schedule 12(n) , neither it nor any of
its Eligible Subsidiaries is a party to or bound by any
19
currently effective employment contract, deferred compensation
arrangement, bonus plan, incentive plan, profit sharing plan,
retirement agreement or other employee compensation plan or
agreement. To its knowledge, none of its or any of its Eligible
Subsidiaries’ employees, nor any consultant with whom it or
any of its Eligible Subsidiaries has contracted, is in violation of
any term of any employment contract, proprietary information
agreement or any other agreement relating to the right of any such
individual to be employed by, or to contract with, it or any of its
Eligible Subsidiaries because of the nature of the business to be
conducted by it or any of its Eligible Subsidiaries; and to its
knowledge the continued employment by it and its Eligible
Subsidiaries of their present employees, and the performance of its
and its Eligible Subsidiaries contracts with its independent
contractors, will not result in any such violation. Neither it nor
any of its Eligible Subsidiaries is aware that any of its or any of
its Eligible Subsidiaries’ employees is obligated under any
contract (including licenses, covenants or commitments of any
nature) or other agreement, or subject to any judgment, decree or
order of any court or administrative agency that would interfere
with their duties to it or any of its Eligible Subsidiaries.
Neither it nor any of its Eligible Subsidiaries has received any
notice alleging that any such violation has occurred. Except for
employees who have a current effective employment agreement with it
or any of its Eligible Subsidiaries, none of its or any of its
Eligible Subsidiaries’ employees has been granted the right
to continued employment by it or any of its Eligible Subsidiaries
or to any material compensation following termination of employment
with it or any of its Eligible Subsidiaries. Except as set forth on
Schedule 12(n) , neither it nor any of its Eligible
Subsidiaries is aware that any officer, key employee or group of
employees intends to terminate his, her or their employment with it
or any of its Eligible Subsidiaries, as applicable, nor does it or
any of its Eligible Subsidiaries have a present intention to
terminate the employment of any officer, key employee or group of
employees.
(o)
Registration Rights and Voting Rights . Except as set forth
on Schedule 12(o) and except as disclosed in Exchange Act
Filings, neither it nor any of its Eligible Subsidiaries is
presently under any obligation, and neither it nor any of its
Eligible Subsidiaries has granted any rights, to register any of
its or any of its Eligible Subsidiaries’ presently
outstanding securities or any of its securities that may hereafter
be issued. Except as set forth on Schedule 12(o) and
except as disclosed in Exchange Act Filings, to its knowledge, none
of its or any of its Eligible Subsidiaries’ stockholders has
entered into any agreement with respect to its or any of its
Eligible Subsidiaries’ voting of equity securities.
(p)
Compliance with Laws; Permits . Neither it nor any of its
Eligible Subsidiaries is in violation of the Sarbanes-Oxley Act of
2002 or any SEC related regulation or rule or any rule of the
Principal Market promulgated thereunder or any other applicable
statute, rule, regulation, order or restriction of any domestic or
foreign government or any instrumentality or agency thereof in
respect of the conduct of its business or the ownership of its
properties which has had, or could reasonably be expected to have,
either individually or in the aggregate, a Material Adverse Effect.
No governmental orders, permissions, consents, approvals or
authorizations are required to be obtained and no registrations or
declarations are required to be filed in connection with the
execution and delivery of this Agreement or any Ancillary Agreement
and the issuance of any of the Securities, except such as have been
duly and validly obtained or filed, or with respect to any filings
that must be made after the Closing Date, as will be filed in a
timely manner. It and each of its Eligible Subsidiaries has all
material franchises, permits, licenses and any similar authority
necessary for the conduct of its business as now being conducted by
it, the lack of which could, either individually or in the
aggregate, reasonably be expected to have a Material Adverse
Effect.
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(q)
Environmental and Safety Laws . Neither it nor any of its
Eligible Subsidiaries is in violation of any applicable statute,
law or regulation relating to the environment or occupational
health and safety, and to its knowledge, no material expenditures
are or will be required in order to comply with any such existing
statute, law or regulation. Except as set forth on
Schedule 12(q) , no Hazardous Materials (as defined
below) are used or have been used, stored, or disposed of by it or
any of its Eligible Subsidiaries or, to its knowledge, by any other
Person on any property owned, leased or used by it or any of its
Eligible Subsidiaries. For the purposes of the preceding sentence,
“ Hazardous Materials ” shall mean:
(i) materials which are listed or otherwise defined as
“hazardous” or “toxic” under any applicable
local, state, federal and/or foreign laws and regulations that
govern the existence and/or remedy of contamination on property,
the protection of the environment from contamination, the control
of hazardous wastes, or other activities involving hazardous
substances, including building materials; and
(ii) any
petroleum products or nuclear materials.
(r)
Valid Offering . Assuming the accuracy of the
representations and warranties of Lender contained in this
Agreement, the offer and issuance of the Securities will be exempt
from the registration requirements of the Securities Act of 1933,
as amended (the “ Securities Act ”), and will
have been registered or qualified (or are exempt from registration
and qualification) under the registration, permit or qualification
requirements of all applicable state securities laws.
(s)
Full Disclosure . It and each of its Subsidiaries has
provided Lender with all information requested by Lender in
connection with Lender’s decision to enter into this
Agreement, including all information each Company and its
Subsidiaries believe is reasonably necessary to make such
investment decision. Neither this Agreement, the Ancillary
Agreements nor the exhibits and schedules hereto (including, where
referenced therein, when read in conjunction with Parent’s
Exchange Act Filings) and thereto nor any other document delivered
by it or any of its Subsidiaries to Lender or its attorneys or
agents in connection herewith or therewith or with the transactions
contemplated hereby or thereby, contain any untrue statement of a
material fact nor omit to state a material fact necessary in order
to make the statements contained herein or therein, in light of the
circumstances in which they are made, not misleading. Any financial
projections and other estimates provided to Lender by it or any of
its Subsidiaries were based on its and its Subsidiaries’
experience in the industry and on assumptions of fact and opinion
as to future events which it or any of its Subsidiaries, at the
date of the issuance of such projections or estimates, believed to
be reasonable.
(t)
Insurance . It and each of its Eligible Subsidiaries has
general commercial, product liability, fire and casualty insurance
policies with coverages which it believes are customary for
companies similarly situated to it and its Eligible Subsidiaries in
the same or similar business.
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(u)
SEC Reports and Financial Statements . Except as set forth
on Schedule 12(u) , it and each of its Eligible Subsidiaries
has filed all proxy statements, reports and other documents
required to be filed by it under the Exchange Act. The Parent has
furnished Lender with copies of: (i) its Annual Report on Form
10-K for its fiscal year ended December 31, 2006; and
(ii) its Quarterly Reports on Form 10-Q for its fiscal
quarters ended March 31, 2007 and June 30, 2007, and the
Form 8-K filings which it has made during its fiscal year 2007 to
date (collectively, the “ SEC Reports ”). Except
as set forth on Schedule 12(u) , each SEC Report was,
at the time of its filing, in substantial compliance with the
requirements of its respective form and none of the SEC Reports,
nor the financial statements (and the notes thereto) included in
the SEC Reports, as of their respective filing dates, contained any
untrue statement of a material fact or omitted 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. Such financial statements have been
prepared in accordance with GAAP applied on a consistent basis
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 not include footnotes or may be condensed) and
fairly present in all material respects the financial condition,
the results of operations and cash flows of the Parent and its
Subsidiaries, on a consolidated basis, as of, and for, the periods
presented in each such SEC Report.
(v)
Listing . The Parent’s Common Stock is listed or
quoted, as applicable, on the Principal Market and satisfies all
requirements for the continuation of such listing or quotation, as
applicable, and until such time as the ADSX Merger is consummated
pursuant to the terms of the ADSX Agreement, the Parent shall do
all things necessary for the continuation of such listing or
quotation, as applicable. The Parent has not received any notice
that its Common Stock will be delisted from, or no longer quoted
on, as applicable, the Principal Market or that its Common Stock
does not meet all requirements for such listing or quotation, as
applicable.
(w)
No Integrated Offering . Neither it, nor any of its
Subsidiaries nor any of its Affiliates, nor any Person acting on
its or their behalf, has directly or indirectly made any offers or
sales of any security or solicited any offers to buy any security
under circumstances that would cause the offering of the Securities
pursuant to this Agreement or any Ancillary Agreement to be
integrated with prior offerings by it for purposes of the
Securities Act which would prevent it from issuing the Securities
pursuant to Rule 506 under the Securities Act, or any
applicable exchange-related stockholder approval provisions, nor
will it or any of its Affiliates or Subsidiaries take any action or
steps that would cause the offering of the Securities to be
integrated with other offerings.
(x)
Stop Transfer . The Securities are restricted securities as
of the date of this Agreement. Neither it nor any of its
Subsidiaries will issue any stop transfer order or other order
impeding the sale and delivery of any of the Securities at such
time as the Securities are registered for public sale or an
exemption from registration is available, except as required by
state and federal securities laws.
(y)
Dilution . It specifically acknowledges that the
Parent’s obligation to issue the shares of Common Stock upon
exercise of the Warrants is binding upon the Parent and enforceable
regardless of the dilution such issuance may have on the ownership
interests of other shareholders of the Parent.
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(z)
Patriot Act . It certifies that, to the best of its
knowledge, neither it nor any of its Subsidiaries has been
designated, nor is or shall be owned or controlled, by a
“suspected terrorist” as defined in Executive Order
13224. It hereby acknowledges that Lender seeks to comply with all
applicable laws concerning money laundering and related activities.
In furtherance of those efforts, it hereby represents, warrants and
covenants that: (i) none of the cash or property that it or
any of its Subsidiaries will pay or will contribute to Lender has
been or shall be derived from, or related to, any activity that is
deemed criminal under United States law; and (ii) no
contribution or payment by it or any of its Subsidiaries to Lender,
to the extent that they are within its or any such
Subsidiary’s control shall cause Lender to be in violation of
the United States Bank Secrecy Act, the United States International
Money Laundering Control Act of 1986 or the United States
International Money Laundering Abatement and Anti-Terrorist
Financing Act of 2001. It shall promptly notify Lender if any of
these representations, warranties and covenants ceases to be true
and accurate regarding it or any of its Subsidiaries. It shall
provide Lender with any additional information regarding it and
each Subsidiary thereof that Lender deems necessary or convenient
to ensure compliance with all applicable laws concerning money
laundering and similar activities. It understands and agrees that
if at any time it is discovered that any of the foregoing
representations, warranties and covenants are incorrect, or if
otherwise required by applicable law or regulation related to money
laundering or similar activities, Lender may undertake appropriate
actions to ensure compliance with applicable law or regulation,
including but not limited to segregation and/or redemption of
Lender’s investment in it. It further understands that Lender
may release confidential information about it and its Subsidiaries
and, if applicable, any underlying beneficial owners, to proper
authorities if Lender, in its sole discretion, determines that it
is in the best interests of Lender in light of relevant rules and
regulations under the laws set forth in subsection
(ii) above.
(aa)
Company Name; Locations of Offices, Records and Collateral .
Schedule 12(aa) sets forth each Company’s name as it
appears in official filings in the state of its organization, the
type of entity of each Company, the organizational identification
number issued by each Company’s state of organization or a
statement that no such number has been issued, each Company’s
state of organization, and the location of each Company’s
chief executive office, corporate offices, warehouses, other
locations of Collateral and locations where records with respect to
Collateral are kept (including in each case the county of such
locations) and, except as set forth in such
Schedule 12(aa) , such locations have not changed
during the preceding twelve months. As of the Closing Date, during
the prior five years, except as set forth in
Schedule 12(aa) , no Company has been known as or
conducted business in any other name (including trade names). Each
Company has only one state of organization.
(bb)
ERISA . Based upon the Employee Retirement Income Security
Act of 1974 (“ ERISA ”), and the regulations and
published interpretations thereunder: (i) neither it nor any
of its Subsidiaries has engaged in any Prohibited Transactions (as
defined in Section 406 of ERISA and Section 4975 of the
Code); (ii) it and each of its Subsidiaries has met all
applicable minimum funding requirements under Section 302 of
ERISA in respect of its plans; (iii) neither it nor any of
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