EXHIBIT 10Z

 

EXECUTION VERSION

 

SECURITY AGREEMENT

 

This Security Agreement is made as of March 9, 2004 by and between LAURUS MASTER FUND, LTD., a Cayman Islands corporation (“Laurus”) and MICRO COMPONENT TECHNOLOGY, INC., a Minnesota corporation (the “Company”).

 

BACKGROUND

 

Company has requested that Laurus make advances available to Company; and

 

Laurus has agreed to make such advances to Company 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:

 

(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.

 

Other Terms .  All other terms used in this Agreement and defined in the UCC, shall have the meaning given therein unless otherwise defined herein.

 

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.

 

Loans .

 

(a)  Subject to the terms and conditions set forth herein and in the Ancillary Agreements, Laurus may make loans (the “Loans”) to Company from time to time during the Term which, in the aggregate at any time outstanding, will not exceed the lesser of (i) (x) the Capital Availability Amount minus (y) such reserves as Laurus

 

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may reasonably in its good faith judgment deem proper and necessary from time to time (the “Reserves”) or (ii) an amount equal to (x) the Accounts Availability minus (y) the Reserves.  The amount derived at any time from Section 2(a)(ii)(x) minus 2(a)(ii)(y) shall be referred to as the “Formula Amount”.  Company shall execute and deliver to Laurus on the Closing Date a Minimum Borrowing Note and a Secured Revolving Note evidencing the Loans funded on the Closing Date.  From time to time thereafter, Company shall execute and deliver to Laurus immediately prior to the final funding of each additional $750,000 tranche of Loans (calculated on a cumulative basis for each such tranche) an additional Minimum Borrowing Note evidencing such tranche, in the form of Note delivered by Company to Laurus on the Closing Date. Notwithstanding anything herein to the contrary, whenever during the Term the outstanding balance on the Revolving Note should equal or exceed $2,250,000, to the extent that the outstanding balance on Minimum Borrowing Note shall be less than $750,000 (the difference of $750,000 less the actual balance of the Minimum Borrowing Note, the “Available Minimum Borrowing”), such portion of the balance of the Revolving Note as shall equal the Available Minimum Borrowing shall be deemed to be simultaneously extinguished on the Revolving Note and transferred to, and evidenced by, the Minimum Borrowing Note (e.g., the Available Minimum Borrowing shall be $0).

 

(b)

Notwithstanding the limitations set forth above, if requested by the Company, Laurus retains the right to lend to Company from time to time such amounts in excess of such limitations as Laurus may determine in its sole discretion.

 

If Company does not pay any interest, fees, costs or charges to Laurus when due, Company shall thereby be deemed to have requested, and Laurus is hereby authorized at its discretion to make and charge to Company’s account, a Loan to Company as of such date in an amount equal to such unpaid interest, fees, costs or charges.

 

If Company at any time fails to perform or observe any of the covenants contained in this Agreement or any Ancillary Agreement, Laurus may, but need not, perform or observe such covenant on behalf and in the name, place and stead of Company (or, at Laurus’ option, in Laurus’ name) and may, but need not, take any and all other actions which Laurus 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 Laurus in connection with or as a result of the performance or observance of such agreements or the taking of such action by Laurus shall be charged to Company’s account as a Loan and added to the Obligations.  To facilitate Laurus’ performance or observance of such covenants of Company, Company hereby irrevocably appoints Laurus, or Laurus’ delegate, acting alone, as 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 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 Company.

 

Laurus will account to Company monthly with a statement of all Loans and other advances, charges and payments made pursuant to this Agreement, and such account rendered by Laurus shall be deemed final, binding and conclusive unless Laurus is notified by Company 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.

 

During the Term, Company may borrow and prepay Loans in excess of the Minimum Borrowing Amount, all in accordance with the terms and conditions hereof.

 

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 if any Account Debtor asserts a deduction, dispute,

 

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contingency, set-off, or counterclaim with respect to any Eligible Account, (a “Delinquent Account”), the Company shall (i) reimburse Laurus for the amount of the Revolving Credit Advance made with respect to such Delinquent Account plus an adjustment fee in an amount equal to one-half of one percent (0.50%) of the gross face amount of such Eligible Account or (ii) immediately replace such Delinquent Account with an otherwise Eligible Account.

 

(c)            Following the occurrence of an Event of Default which continues to exist, Laurus may, at its option, elect to convert the credit facility contemplated hereby to an accounts receivable purchase facility.  Upon such election by Laurus (subsequent notice of which Laurus shall provide to Company), Company shall be deemed to hereby have sold, assigned, transferred, conveyed and delivered to Laurus, and Laurus shall be deemed to have purchased and received from Company, all right, title and interest of Company in and to all Accounts which shall at any time constitute Eligible Accounts (the “Receivables Purchase”).  All outstanding Loans hereunder shall be deemed obligations under such accounts receivable purchase facility.  The conversion to an accounts receivable purchase facility in accordance with the terms hereof shall not be deemed an exercise by Laurus of its secured creditor rights under Article 9 of the UCC.  Immediately following Laurus’ request, Company shall execute all such further documentation as may be required by Laurus to more fully set forth the accounts receivable purchase facility herein contemplated, including, without limitation, Laurus’ standard form of accounts receivable purchase agreement and account debtor notification letters, but Company’s failure to enter into any such documentation shall not impair or affect the Receivables Purchase in any manner whatsoever.

 

(d)            Minimum Borrowing Amount .  After a registration statement registering the Registrable Securities has been declared effective by the SEC, conversions of the Minimum Borrowing Amount into the Common Stock of the Company may be initiated as set forth in the Note. From and after the date upon which any outstanding principal of the Minimum Borrowing Amount (as evidenced by the first Minimum Borrowing Note) is converted into Common Stock (the “First Conversion Date”), (i) corresponding amounts of all outstanding Loans (not attributable to the then outstanding Minimum Borrowing Amount) existing on or made after the First Conversion Date will be aggregated until they reach the sum of $750,000 and (ii) the Company will issue a new (serialized) Minimum Borrowing Note to Laurus in respect of such $750,000 aggregation, and (iii) the Company shall prepare and file a subsequent registration statement with the SEC to register such subsequent Minimum Borrowing Note as set forth in the Registration Rights Agreement.

 

Repayment of the Loans . Company (a) may prepay the Obligations in excess of the Minimum Borrowing Amount from time to time in accordance with the terms and provisions of the Notes (and Section 16 hereof if such prepayment is due to a termination of this Agreement); and (b) shall repay on the expiration of the Term (i) the then aggregate outstanding principal balance of the Loans made by Laurus to Company hereunder together with accrued and unpaid interest, fees and charges and (ii) all other amounts owed Laurus under this Agreement and the Ancillary Agreements.  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.

 

Procedure for Loans .  Company may by written notice request a borrowing of Loans prior to 12:00 p.m.. (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 Laurus may request), Company shall deliver to Laurus a Borrowing Base Certificate in the form of Exhibit A, which shall be certified as true and correct by the Chief Executive Officer, Chief Financial Officer or the Controller of Company together with all supporting documentation relating thereto.  All Loans shall be disbursed from whichever office or other place Laurus may designate from time to time and shall be charged to Company’s account on Laurus’ books.  The proceeds of each Loan made by Laurus shall be made available to Company on the Business Day following the Business Day so requested in accordance with the terms of this Section 4 by way of credit to Company’s operating account maintained with such bank as Company designated to Laurus.  Any and all Obligations due and owing hereunder may be charged to Company’s account and shall constitute Loans.

 

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Interest, Payments and Warrants .

 

Interest .

 

Except as modified by Section 5(a)(iii) below, Company shall 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.

 

Interest and payments shall be computed on the basis of actual days elapsed in a year of 360 days.  At Laurus’ option, Laurus may charge Company account for said interest.

 

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 by five percent (5%) per annum (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.

 

In no event shall the aggregate interest payable hereunder 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).

 

Company shall 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.

 

Payments

 

Closing/Annual Payments .  Upon execution of this Agreement by Company and Laurus, Company shall pay to Laurus Capital Management, LLC a closing payment in an amount equal to $105,000.00 or three and one-half (3.5%) of the Capital Availability Amount. Such payment shall be deemed fully earned on the Closing Date and shall not be subject to rebate or proration for any reason.  In addition, on each anniversary of the Closing Date, the Company shall pay Laurus one-half of one percent (0.50%) of the Capital Availability Amount.

 

Unused Line Payment .  If, for any month, the average outstanding Loans (the “Average Loan Amount”) do not equal the Capital Availability Amount, Company shall pay to Laurus at the end of such month a payment (calculated on a per annum basis) in an amount equal to twenty basis points (0.2%) of the amount by which the Capital Availability Amount exceeds the Average Loan Amount. Notwithstanding the foregoing, any unpaid fee shall be immediately due and payable upon termination of this Agreement

 

Overadvance Payment .  Without affecting Laurus’ rights hereunder in the event the Loans exceed the amounts permitted by Section 2 (“Overadvances”), in the event an Overadvance occurs or is made by Laurus, all such Overadvances shall bear interest at an annual rate equal to six percent (6%) of the amount of such Overadvances for each month or portion thereof as such amounts shall be outstanding

 

Financial Information Default .  Without affecting Laurus’ other rights and remedies, in the event Company fails to deliver the financial information required by Section 11 on or before the date required by this Agreement, Company shall pay Laurus a fee in the amount of $500.00 per week (or portion thereof) for each such failure until such failure is cured to Laurus’ satisfaction or waived in writing by Laurus.  Such fee shall be charged to Company’s account upon the occurrence of each such failure.

 

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(c)            Warrants. On the Closing Date, Company shall issue and deliver to Laurus a Warrant to purchase up to 400,000 shares of the Company’s Common Stock in the form annexed hereto as Exhibit B.

 

All the representations, covenants, warranties, undertakings, and indemnification, and other rights made or granted to or for the benefit of Laurus by the Company are hereby also made and granted in respect of the Warrant and the shares of the Company’s Common Stock issuable upon exercise of the Warrant (the “Warrant Shares”).

 

Security Interest .

 

To secure the prompt payment to Laurus of the Obligations, Company hereby assigns, pledges and grants to Laurus a continuing security interest in and Lien upon all of the Collateral.  All of Company’s Books and Records relating to the Collateral shall, until delivered to or removed by Laurus, be kept by Company in trust for Laurus until all Obligations have been paid in full.  Each confirmatory assignment schedule or other form of assignment hereafter executed by Company shall be deemed to include the foregoing grant, whether or not the same appears therein.

 

Company hereby (i) authorizes Laurus to file any financing statements, continuation statements or amendments thereto that (x) indicate the Collateral (1) as all assets of 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 Laurus to have filed any initial financial statements, or amendments thereto if filed prior to the date hereof.  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 Laurus and agrees that it will not do so without the prior written consent of Laurus, subject to Company’s rights under Section 9-509(d)(2) of the UCC.

 

Company hereby grants to Laurus an irrevocable, non-exclusive license (exercisable upon the termination of this Agreement due to an occurrence and during the continuance of an Event of Default without payment of royalty or other compensation to Company) to use, transfer, license or sublicense any Intellectual Property now owned, licensed to, or hereafter acquired by 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 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 will terminate on the termination of this Agreement and the payment in full of all Obligations.

 

Representations, Warranties and Covenants Concerning the Collateral .  Company represents, warrants (each of which such representations and warranties shall be deemed repeated upon the making of each request for a Loan and made as of the time of each and every Loan hereunder) and covenants as follows:

 

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all of the Collateral (i) is owned by Company free and clear of all Liens (including any claims of infringement) except those in Laurus’ 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.

 

Company shall not encumber, mortgage, pledge, assign or grant any Lien in any Collateral of Company or any of Company’s other assets to anyone other than Laurus and except for Permitted Liens.

 

The Liens granted pursuant to this Agreement, upon completion of the filings and other actions listed on Exhibit 7(c) (which, in the case of all filings and other documents referred to in said Exhibit, have been delivered to Laurus in duly executed form) constitute valid perfected security interests in all of the Collateral in favor of Laurus as security for the prompt and complete payment and performance of the Obligations, enforceable in accordance with the terms hereof against any and all creditors of and any purchasers from Company and such security interest is prior to all other Liens in existence on the date hereof.

 

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.

 

Company 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 as listed on Schedule 7(e), 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 $25,000 and only to the extent that (i) the proceeds of any such disposition are used to acquire replacement Equipment which is subject to Laurus’ first priority security interest 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 Laurus to be held as cash collateral for the Obligations.

 

Company shall defend the right, title and interest of Laurus 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 Laurus “control” of any Investment Property, Deposit Accounts, Letter-of-Credit Rights or electronic Chattel Paper owned by Company, with any agreements establishing control to be in form and substance satisfactory to Laurus, (ii) the prompt (but in no event later than five (5) Business Days following Laurus’ request therefor) delivery to Laurus of all original Instruments, Chattel Paper, negotiable Documents and certificated Stock owned by the Company (in each case, accompanied by stock powers, allonges or other instruments of transfer executed in blank), (iii) notification of Laurus’ interest in Collateral at Laurus’ request, and (iv) the institution of litigation against third parties as shall be prudent in order to protect and preserve Company’s and Laurus’ respective and several interests in the Collateral.

 

Company shall promptly, and in any event within five (5)  Business Days after the same is acquired by it, notify Laurus of any commercial tort claim (as defined in the UCC) acquired by it and unless otherwise consented by Laurus, Company shall enter into a supplement to this Agreement granting to Laurus a Lien in such commercial tort claim.

 

Company shall place notations upon its Books and Records and any financial statement of Company to disclose Laurus’ Lien in the Collateral.

 

If Company retains possession of any Chattel Paper or Instrument with Laurus’ consent, upon Laurus’ 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 Laurus Master Fund, Ltd.”

 

Company shall perform in a reasonable time all other steps requested by Laurus to create and maintain in Laurus’ favor a valid perfected first Lien in all Collateral subject only to Permitted Liens.

 

Company shall notify Laurus promptly and in any event within three (3)  Business Days after obtaining knowledge thereof (i) of any event or circumstance that to Company’s knowledge would cause Laurus to consider any then existing Account as no longer constituting an Eligible Account; (ii) of any material delay in Company’s 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 Company to any Account Debtor; (v) of all material adverse information

 

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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.

 

All Eligible Accounts (i) which are billed on a construction completion basis but not payable until the project is completed, represent complete bona fide transactions which require no further act under any circumstances on Company’s 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 Company.  Company has not made, and will not make any agreement with any Account Debtor for any extension of time for the payment of any 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 Company in the ordinary course of its business consistent with historical practice and as previously disclosed to Laurus in writing.

 

 Company 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.  Company shall not permit any such items to become a Fixture to real estate or accessions to other personal property.

 

Company shall maintain and keep all of its Books and Records concerning the Collateral at Company’s executive offices listed in Exhibit 12(d) .

 

Company shall maintain and keep the tangible Collateral at the addresses listed in Exhibit 12(d) , provided, that Company may change such locations or open a new location, provided that Company provides Laurus 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 $50,000 will be located, Company executes and delivers to Laurus such agreements as Laurus may request, including landlord agreements, mortgagee agreements and warehouse agreements, each in form and substance satisfactory to Laurus.

 

Exhibit 7(p) lists all banks and other financial institutions at which Company maintains deposits and/or other accounts, and such Exhibit 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.  The Company shall not establish any depository or other bank account of any with any financial institution (other than the accounts set forth on Exhibit 7(p) ) without Laurus’ prior written consent.

 

Payment of Accounts .

 

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 lockbox maintained by Company (the “Lockbox”) with Wells Fargo Bank (the “Lockbox Bank”). On or prior to the Closing Date, Company shall and shall cause the Lockbox Bank to enter into all such documentation acceptable to Laurus 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 Laurus in writing and (b) comply only with the instructions or other directions of Laurus concerning the Lockbox. All of Company’s invoices, account statements and other written or oral communications directing, instructing, demanding or requesting payment of any Account of Company or any other amount constituting Collateral shall conspicuously direct that all payments be made to the Lockbox or such other address as Laurus may direct in writing.  If, notwithstanding the instructions to Account Debtors, Company receives any payments, Company shall immediately remit such payments to Laurus in their original form with all necessary endorsements.  Until so remitted, Company shall hold all such payments in trust for and as the property of Laurus and shall not commingle such payments with any of its other funds or property.

 

At Laurus’ election, following the occurrence of an Event of Default which is continuing, Laurus may notify Company’s Account Debtors of Laurus’ security interest in the Accounts, collect them directly and charge the collection costs and expenses thereof to Company’s account.

 

Collection and Maintenance of Collateral .

 

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Laurus may verify Company’s Accounts, Inventory and Purchase Orders 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 Laurus.

 

Proceeds of Accounts received by Laurus will be deemed received on the Business Day after Laurus’ receipt of such proceeds in good funds in dollars of the United States of America in Laurus’ account.  Any amount received by Laurus after 12:00 noon (New York time) on any Business Day shall be deemed received on the next Business Day.

 

As Laurus receives the proceeds of Accounts, it shall remit all such proceeds (net of interest, fees and other amounts then due and owing to Laurus hereunder) to Company 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, Laurus, at its option, may (a) apply such proceeds to the Obligations in such order as Laurus shall elect, (b) hold such proceeds as cash collateral for the Obligations and Company hereby grants to Laurus a security interest in such cash collateral amounts as security for the Obligations and/or (c) do any combination of the foregoing.

 

Inspections and Appraisals .  At all times during normal business hours, Laurus, and/or any agent of Laurus shall have the right to (a) have access to, visit, inspect, review, evaluate and make physical verification and appraisals of Company’s properties and the Collateral, (b) inspect, audit and copy (or take originals if necessary) and make extracts from Company’s Books and Records, including management letters prepared by independent accountants, and (c) discuss with Company’s principal officers, and independent accountants, Company’s business, assets, liabilities, financial condition, results of operations and business prospects.  Company will deliver to Laurus any instrument necessary for Laurus to obtain records from any service bureau maintaining records for Company.  If any internally prepared financial information, including that required under this Section is unsatisfactory in any manner to Laurus, Laurus may request that the Accountants review the same.

 

Financial Reporting .  Company will deliver, or cause to be delivered, to Laurus each of the following, which shall be in form and detail acceptable to Laurus:

 

As soon as available, and in any event within ninety (90) days after the end of each fiscal year of Company, Company’s audited financial statements with a report of independent certified public accountants of recognized standing selected by Company and acceptable to Laurus (the “Accountants”), which annual financial statements shall include Company’s balance sheet as at the end of such fiscal year and the related statements of Company’s income, retained earnings and cash flows for the fiscal year then ended, prepared, if Laurus so requests, on a consolidating and consolidated basis to include all Subsidiaries and Affiliates, all in reasonable detail and prepared in accordance with GAAP, together with (i) if and when available, copies of any management letters prepared by such accountants; and (ii) a certificate of Company’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;

 

As soon as available and in any event within forty five (45) days after the end of each quarter, an unaudited/internal balance sheet and statements of income, retained earnings and cash flows of Company as at the end of and for such quarter and for the year to date period then ended, prepared, if Laurus so requests, on a consolidating and consolidated basis to include all Subsidiaries and Affiliates, 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 Company’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;

 

Within thirty (30) days after the end of each month (or more frequently if Laurus so requests), agings of Company’s Accounts, unaudited trial balances and their accounts payable and a calculation of Company’s Accounts, Eligible Accounts and thirty (30) days after the end of each fiscal quarter an Inventory ledger, in summary form, as at the end of such month or shorter time period, provided, however, that if Laurus

 

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shall request the foregoing information more often than as set forth in the immediately preceding clause, the Company shall have thirty days from each such request to comply with Laurus’ demand; and

 

Promptly after (i) the filing thereof, copies of Company’s most recent registration statements and annual, quarterly, monthly or other regular reports which Company files with the Securities and Exchange Commission (the “SEC”), and (ii) the issuance thereof, copies of such financial statements, reports and proxy statements as Company shall send to its stockholders.

 

Additional Representations and Warranties .  Company represents and warrants (each of which such representations and warranties shall be deemed repeated upon the making of a request for a Loan and made as of the time of each Loan made hereunder), as follows:

 

Company is a corporation duly incorporated and validly existing under the laws of the jurisdiction of its incorporation and duly qualified and in good standing in every other state or jurisdiction in which the nature of Company’s business requires such qualification.

 

The execution, delivery and performance of this Agreement and the Ancillary Agreements (i) have been duly authorized, (ii) are not in contravention of Company’s certificate of incorporation, by-laws or of any indenture, agreement or undertaking to which Company is a party or by which Company is bound and (iii) are within Company’s corporate powers.

 

This Agreement and the Ancillary Agreements executed and delivered by Company are Company’s legal, valid and binding obligations, enforceable in accordance with their terms.

 

Exhibit 12(d) sets forth Company’s name as it appears in official filing in the state of its incorporation, the type of entity of Company, the organizational identification number issued by Company’s state of incorporation or a statement that no such number has been issued, Company’s state of incorporation, and the location of 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 Exhibit 12(d) , 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 Exhibit 12(d) , Company has not been known as or conducted business in any other name (including trade names).  Company has only one state of incorporation.

 

Based upon the Employee Retirement Income Security Act of 1974 (“ERISA”), and the regulations and published interpretations thereunder: (i) Company has not engaged in any Prohibited Transactions as defined in Section 406 of ERISA and Section 4975 of the Internal Revenue Code, as amended; (ii) Company has met all applicable minimum funding requirements under Section 302 of ERISA in respect of its plans; (iii) Company has no knowledge of any event or occurrence which would cause the Pension Benefit Guaranty Corporation to institute proceedings under Title IV of ERISA to terminate any employee benefit plan(s); (iv) Company has no fiduciary responsibility for investments with respect to any plan existing for the benefit of persons other than Company’s employees; and (v) except as disclosed in Exhibit 12(e) attached hereto, Company has not withdrawn, completely or partially, from any multi-employer pension plan so as to incur liability under the Multiemployer Pension Plan Amendments Act of 1980.

 

There is no pending or threatened litigation, court order, judgment, writ, suit, action or proceeding which could reasonably be expected to have a Material Adverse Effect.

 

All balance sheets and income statements which have been delivered to Laurus fairly, accurately and properly state Company’s financial condition on a basis consistent with that of previous financial statements and except as reflected in such financial statements there has been no material adverse change in Company’s financial condition as reflected in such statements since the balance sheet date of the statements last delivered to Laurus and such statements do not fail to disclose any fact or facts which might have a Material Adverse Effect on Company’s financial condition.

 

Company possesses or has licenses to use all of the Intellectual Property necessary to conduct its business.  There has been no assertion or claim of violation or infringement with respect to any Intellectual Property.  Exhibit 12(i) describes all Intellectual Property of Company.

 

Neither this Agreement, the exhibits and schedules hereto, the Ancillary Agreements nor any other document delivered by Company to Laurus or its attorneys or agents in connection herewith or therewith

 

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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.  The issuance of the Notes and the Warrants and the shares of common stock issued upon conversion of the Notes and exercise of the Warrants 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.  Neither Company nor any of its Affiliates, nor any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with the offer or sale of the Securities.

 

The common stock of the Company is registered pursuant to Section 12(b) or 12(g) of the Exchange Act and, except with respect to certain matters set forth on Exhibit 12(j) attached hereto, the Company has timely filed all proxy statements, reports, schedules, forms, statements and other documents required to be filed by it under the Exchange Act.  The Company has filed (i) its Annual Report on Form 10-K for the fiscal year ended December 31, 2002, (ii) its Quarterly Report on Form 10-Q for the fiscal quarters ended March 29, 2003, June 28, 2003 and September 27, 2003 and (iii) all Current Reports on Form 8-K which the Company were required to file (collectively, the “SEC Reports”).  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.  The financial statements of the Company included in the SEC Reports comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission or other applicable rules and regulations with respect thereto.  Such financial statements have been prepared in accordance with generally accepted accounting principles (“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 the cash flows of the Company and its subsidiaries, on a consolidated basis, as of, and for, the periods presented in each such SEC Report.

 

The common stock of the Company is listed for trading on the NASD Over the Counter Bulletin Board (“OTCBB”) and satisfies all requirements for the continuation of such listing.  The Company has not received any notice that its common stock will be delisted from the OTCBB or that the common stock does not meet all requirements for the continuation of such listing.

 

Neither the Company, 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 and the Ancillary Agreements to be integrated with prior offerings by the Company for purposes of the Securities Act which would prevent the Company from selling the Securities pursuant to Rule 506 under the Securities Act, or any applicable exchange-related stockholder approval provisions, nor will the Company 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 (other than such concurrent offering to Laurus).

 

  The Securities are all restricted securities under the Securities Act as of the date of this Agreement.  The Company will not issue any stop transfer order or other order impeding the sale and delivery of any of the Securities at such time as such Securities are registered for public sale or an exemption from registration is available, except as required by federal or state securities laws.

 

The Company understands the nature of the Securities issuable under the Ancillary Agreements and recognizes that the issuance of such Securities may have a potential dilutive effect.  The Company specifically acknowledges that its obligation to issue the Securities is binding upon the Company and enforceable regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Company.

 

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Except for agreements made in the ordinary course of business, there is no agreement that has not been filed with the Commission as an exhibit to a registration statement or to a form required to be filed by the Company under the Exchange Act, the breach of which could reasonably be expected to have a Material Adverse Effect or would prohibit or otherwise interfere with the ability of the Company to enter into and perform any of its obligations under this Agreement the Registration Rights Agreement executed by Company in favor of Laurus in any material respect.

 

Laurus or any of its affiliates and investment partners has not, will not and will not cause any person or entity, directly or indirectly, to engage in “short sales” of the Company’s Common Stock or any other hedging strategies as long as the Minimum Borrowing Note shall be outstanding.

 

Covenants .  Company covenants as follows:

 

Company will not, without the prior written consent of Laurus, change (i) its name as it appears in the official filings in the state of its incorporation or formation, (ii) the type of legal entity it is, (iii) its organization identification number, if any, issued by its state of incorporation, (iv) its state of incorporation or (v) amend its certificate of incorporation, by-laws or other organizational document.

 

The operation of Company’s business is and will continue to be in compliance in all material respects with all applicable federal, state and local laws, rules and ordinances, including to all laws, rules, regulations and orders relating to taxes, payment and withholding of payroll taxes, employer and employee contributions and similar items, securities, employee retirement and welfare benefits, employee health safety and environmental matters.

 

Company will pay or discharge when due all taxes, assessments and governmental charges or levies imposed upon Company or any of the Collateral unless such amounts are being diligently contested in good faith by appropriate proceedings provided that (i) adequate reserves with respect thereto are maintained on the books of Company in conformity with GAAP and (ii) the related Lien shall have no effect on the priority of the Liens in favor of Laurus or the value of the assets in which Laurus has a Lien.

 

Company will promptly inform Laurus in writing of: (i) the commencement of all proceedings and investigations by or before and/or the receipt of any notices from, any governmental or nongovernmental body and all actions and proceedings in any court or before any arbitrator against or in any way concerning any event which could reasonable be expected to have singly or in the aggregate, a Material Adverse Effect; (ii) any amendment of Company’s certificate of incorporation, by-laws or other organizational document; (iii) any change which has had or could reasonably be expected to have a Material Adverse Effect; (iv) any Event of Default or Default; (v) any default or any event which with the passage of time or giving of notice or both would constitute a default under any agreement for the payment of money to which Company is a party or by which Company or any of Company’s properties may be bound the breach of which would have a Material Adverse Effect and (vi) any change in Company’s name or any other name used in its business.

 

The Company will not (i) create, incur, assume or suffer to exist any indebtedness (exclusive of trade debt) whether secured or unsecured other than Company’s indebtedness to Laurus and as set forth on Exhibit 13(e)(i) attached hereto and made a part hereof; (ii) cancel any debt owing to it in excess of $50,000 in the aggregate during any 12 month period; (iii) assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligations of any other Person, except the endorsement of negotiable instruments by a Company for deposit or collection or similar transactions in the ordinary course of business; (iv) directly or indirectly declare, pay or make any dividend or distribution on any class of its Stock other than to pay dividends on shares of its outstanding Preferred Stock or apply any of its funds, property or assets to the purchase, redemption or other retirement of any Stock of the Company except as required under the terms of the Company’s outstanding Preferred Stock issued and outstanding on the date hereof; (v) purchase or hold beneficially any Stock or other securities or evidences of indebtedness of, make or permit to exist