Exhibit 10.1
INVESTMENT AGREEMENT
This INVESTMENT AGREEMENT (the "Agreement") is made and entered
into as
of July 15, 2005, by and among MedSolutions, Inc., a Texas corporation, on
behalf of itself and its subsidiaries
(MedSolutions,
Inc. and its
Subsidiaries
are collectively referred to herein as the
"Company") and Tate Investments, LLC,
a Wisconsin limited liability company (the
"Investor").
RECITALS:
WHEREAS, the
Company desires to raise capital to retire certain
existing indebtedness of the Company and
its subsidiaries, and to make strategic
acquisitions;
WHEREAS, the Investor
has agreed to invest
up to Two Million
Dollars
($2,000,000) in the Company for such purposes through both debt and equity
investments on the terms and conditions set
forth in this Agreement;
NOW, THEREFORE,
in consideration of
the promises and mutual covenants
contained in this Agreement, the Company
and the Investor agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Defined
Terms. Capitalized
terms used in this
Agreement
which are not otherwise defined herein
shall have the following meanings:
(a) "Accounts"
shall mean all of the Company's and its
Subsidiaries' rights to payment for goods (including freight and
taxes)
sold or leased or services performed thereby, whether now in existence
or arising from time to time hereafter, including without limitation,
rights evidenced by an account, note, contract, security agreement,
chattel paper,
or other evidence of indebtedness or security, together
with (i) all security pledged, assigned, hypothecated or granted to or
held by the Company or any of its Subsidiaries to secure the
foregoing,
(ii) all of the Company's and each of its Subsidiaries' right, title
and interest in and to any goods, the sale of which gave rise
thereto,
(iii) all guarantees,
endorsements and indemnifications on, or of, any
of the foregoing, (iv)
all powers of attorney for the execution of any
evidence of
indebtedness or
security or other
writing in
connection
therewith, (v) all
books, records, ledger cards, and invoices relating
thereto, (vi) all
evidences of the filing of financing statements and
other statements
and the registration of other instruments in
connection therewith and amendments thereto, notices to other
creditors
or secured parties,
and certificates from filing or other registration
officers, (vii) all credit information, reports and memoranda relating
thereto, and
(viii) all other writings related in any way to the
foregoing.
(b) "Additional
Stock" shall mean any
shares of Common Stock
issued (or
deemed
to have been issued pursuant to Section
3.2(i)(ii)(C)(V)
hereof) after the Issue Date, other than: (i) Common
Stock issued
pursuant
to a transaction described in Section
3.2(i)(ii)(D) hereof,
(ii) shares issued or
to be issued pursuant
to
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the Investment Agreement; (iii) Common Stock issued in
connection with
the acquisition by the
Company or any of its
Subsidiaries of
another
entity; or (iv) up to
106,666 shares of Common Stock issuable pursuant
to stock options with
exercise prices of
$0.75 per share to be issued
to Mr. Alan
Larosee and Mr. David Mack as finders' fees for the
transactions contemplated by the Investment Agreement.
(c) "Advance"
shall mean each sum
loaned by the Investor
to
the Company under the Note from time to time pursuant to a Draw
Notice.
(d) "Affiliate"
shall mean with
respect to any Person,
any
other Person directly
or indirectly
controlling,
controlled
by, or
under common control
with, such first
Person, except a
Subsidiary of
the Company shall not be an Affiliate of the Company. A Person
shall be
deemed to control a
corporation
or entity if such
Person possesses
directly or
indirectly, the power
to direct or cause the direction of
the management
and policies of such
corporation
or entity,
whether
through the ownership of voting securities, by contract, or
otherwise.
(e) "Articles" shall mean the Articles of Incorporation of the
Company or a Subsidiary as the same may be amended from time to
time.
(f) "Bylaws" shall mean the corporate bylaws of the Company or
Subsidiary as the same may be amended from time to time.
(g) "Capital
Call" shall mean each sum requested by the
Company under the Subscription Agreement from time to time
pursuant to
a Capital Call Notice.
(h) "Capital Call Notice" shall mean a written notice from the
Company to the
Investor that the Company is requesting that the
Investor purchase a
specified number of Common Shares (as defined
below) pursuant to the Subscription Agreement. Each Capital Call
Notice
shall set forth the number of Common Shares the Company is tendering
for sale, the current
Purchase Price per
share, the date the
Company
desires to effectuate
the sale, which date shall not be earlier
than
fifteen (15) days after the date the Company delivers the Capital Call
Notice to the
Investor, and
shall contain a certification by the
Company's Chief
Executive Officer that (i) the Company has
complied
with all of the
conditions precedent
to a Capital
Call set forth in
Section 4.2(d)(i)
hereof, and (ii) the Company is in
compliance with
all of its covenants under this Agreement.
(i) "Common Stock" shall mean and include all shares of Common
Stock of the Company,
and any rights,
options or warrants to purchase
Common Stock,
and all other
securities
of the Company
which may be
issued in exchange
for or in respect of
such shares of Common
Stock
(whether by
way of stock split, stock dividend, combination,
reclassification, reorganization or any other means).
(j) "Deed of Trust" shall mean that certain deed of trust from
the Company to the Investor granting the Investor a continuing
second
priority security interest in the Real Property.
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(k) "Draw Notice" shall mean a written notice from the Company
to the Investor that
the Company is
requesting an Advance
under the
Note. Each Draw
Notice shall set forth the amount of the Advance
requested, the date such Advance is requested, which date shall not be
earlier than fifteen (15) days after the date the Company
delivers the
Draw Notice to the Investor, and shall contain a certification
by the
Company's Chief
Executive Officer that (i) the Company has
complied
with all of the
conditions precedent
to an Advance as set forth in
Sections
3.2(b) and (c),
as applicable, and (ii) the Company is in
compliance with all of its covenants under this Agreement.
(l) "EBITDA" shall mean income (or loss) from operations, plus
net interest
expense, income tax and depreciation, calculated in
accordance with GAAP. For purposes of this definition, income (or
loss)
from operations
does not include any gain from the sale of
assets or
the forgiveness, extinguishment or reclassification of debt (other
than
gain resulting
from the agreement by a vendor who provided
goods or
services to the
Company in the
ordinary course of
business to accept
less than the face
amount of an invoice previously issued by the
vendor).
(m) "Event of Default"
shall have the
meaning set forth in
Article IX hereof.
(n) "Initial Capital
Call Notice" shall mean the Capital Call
Notice submitted
to the Investor at the Closing
pursuant to
Section
4.2(c) hereof.
(o) "Initial
Advance" shall mean the Advance made at the
Closing pursuant to the Initial Draw Notice.
(p) "Initial Capital Call" shall mean the Capital Call made in
connection with the
Closing pursuant to the Initial Capital Call
Notice.
(q) "Initial Draw Notice" shall mean the Draw Notice submitted
to the Investor at the Closing pursuant to Section 3.2(b)
hereof.
(r) "Interest
Period" shall mean any one of consecutive
one-month periods,
the first of which shall begin on the date the
initial Advance
is made under the Note
and end on the last day of the
month in which the initial Advance is made and the rest of
which shall
each begin on the
first day of each full month thereafter and end on
the last day of that month.
(s) "Issue Date" shall
mean the date upon which any shares of
Common Stock were
issued to the Investor
pursuant to this
Agreement
and/or the Subscription Agreement.
(t) "Knowledge."
An individual shall be deemed to have
"Knowledge" of a particular fact or other matter if (i) such
individual
is actually
aware of such fact or other matter, or (ii) a person
serving in the same
capacity as such
individual would be
expected to
discover
or otherwise become aware, after due inquiry, of such fact or
other matter in the course of performing the official duties of such
individual. A
corporation
shall be deemed to
have "Knowledge"
of a
particular fact or other matter if the chief executive officer or the
chief financial
officer of the corporation has Knowledge (as set forth
above) of such fact or other matter.
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(u)
"Net Income" shall mean revenues minus expenses,
depreciation, interest
and taxes, calculated
in accordance with GAAP.
For purposes of this definition, revenues do not include any gain
from
the sale
of assets or the forgiveness, extinguishment or
reclassification of
debt (other than gain resulting from the agreement
by a vendor who
provided goods or services to the Company in the
ordinary course of
business to accept
less than the face amount of an
invoice previously issued by the vendor).
(v) "Note"
shall mean the Company's One Million Dollar
($1,000,000) 10% Senior Convertible Note in the form attached
hereto as
Exhibit B, which will be issued by the Company to the Investor at the
Closing.
(w) "Outstanding
Principal"
shall mean, at any time, the
aggregate sum of all
Advances previously made under the Note, plus
accrued but unpaid interest, less all amounts repaid under the
Note.
(x) "Projected
EBITDA" shall mean,
for fiscal year 2005, the
projected EBITDA for the Company and its Subsidiaries on a
consolidated
basis, set
forth in the
Company's pro forma financial statements
attached hereto as Exhibit A and incorporated herein by reference,
and
for each fiscal year
thereafter,
the projected EBITDA set forth in
Exhibit A shall be adjusted annually for each such fiscal year by
the
mutual agreement of
the Company and the Investor on or before January
31st of each such
fiscal year;
provided, however, that in no event
shall the projected
EBITDA for any such
fiscal year reflect less than
5% internal growth for such fiscal year over the immediately
preceding
fiscal year. Projected EBITDA shall not include any expenses
(including
without
limitation,
expenses
incurred in
connection
with
the
transactions
contemplated hereby),
which are capitalized on the
Company's year end financial statements. The Projected EBITDA shall be
further adjusted as set forth in Section 3.2(i).
(y) "Projected
Net Income" shall
mean, for fiscal year 2005,
the projected
Net Income for the
Company and its
Subsidiaries
on a
consolidated basis,
set forth in the
Company's pro forma financial
statements attached
hereto as Exhibit A and incorporated herein by
reference, and for
each fiscal year
thereafter,
the projected Net
Income set forth in Exhibit A shall be adjusted annually for each such
fiscal year by the mutual agreement of the Company and the
Investor on
or before January
31st of each such
fiscal year; provided,
however,
that in no event shall
the projected
Net Income for any
such fiscal
year reflect less than 5% internal growth for such fiscal year over
the
immediately preceding
fiscal year.
The Projected Net
Income shall be
further adjusted for
acquisitions
and dispositions, if any, as set
forth in Section 3.2(i). For purposes of this definition, projected
net
income does not
include any gain from the sale of assets or the
forgiveness,
extinguishment or
reclassification
of debt (other
than
gain resulting
from the agreement by a vendor who provided
goods or
services to the
Company in the
ordinary course of
business to accept
less than the face
amount of an invoice previously issued by the
vendor). Projected
Net Income
shall also not include any expense
(including, without
limitation,
expenses incurred in
connection with
the transactions contemplated by this Agreement), which are
capitalized
on the Company's year end financial statements).
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(z) "Real Property"
shall mean the
Company's real estate,
improvements, permits
and approvals associated with the Company's
treatment/transfer
facility in
Garland, Texas, which is more fully
described in Exhibit C hereto.
(aa) "Related Party" shall mean (i) any officer or director of
the Company or any
Subsidiary, (ii) any
Person directly or indirectly
owning any shares of capital stock of the Company or any Subsidiary,
(iii) any Person who is related by blood, adoption or marriage to any
Person described in
clause (i) or (ii), or
(iv) any Affiliate of
the
Company or any Affiliate of any Person described in clause (i),
(ii) or
(iii); provided,
however, that the Company and any
Subsidiary of the
Company shall not be Related Parties.
(bb) "Subscription
Agreement"
shall mean the Subscription
Agreement in the form attached hereto as Exhibit D, to be
executed and
delivered by the Investor to the Company as set forth in Article
IV.
(cc) "Subsequent
Advance"
shall mean any Advance made
subsequent to the Initial Advance.
(dd) "Subsequent
Capital Call" shall mean any Capital
Call
made subsequent to the Initial Capital Call.
(ee) "Subsidiary"
shall mean any
corporation or other entity
of which the Company
either directly or
indirectly owns
greater than
fifty percent (50%) of the total combined voting power of all classes
of equity securities, at the time any determination is made.
ARTICLE II
INVESTMENT
Section 2.1 Agreement to Invest. The Investor hereby agrees to invest
up to Two Million Dollars ($2,000,000) in the Company, on the terms and
conditions set forth herein. Such
investment will be structured as follows: (a)
the Company will sell to the Investor, and the Investor will purchase
from the
Company, the Company's Up to One Million Dollar ($1,000,000) 10% Senior
Convertible Note (the "Note"), and (b) the
Investor will subscribe for up to One
Million Dollars ($1,000,000) of the
Company's common stock, par value $.001 (the
"Common Stock") at a purchase price of sixty-five cents ($0.65) per share,
subject to adjustment at the time of each
Capital Call as set forth herein.
Section
2.2 Closing. The closing of the transactions contemplated
herein (the "Closing") shall take place at the offices of the Investor's
counsel, Davis & Kuelthau, s.c., 300 N. Corporate Drive,
Suite 150, Brookfield,
WI 53045 on July 15, 2005 at 10:00 a.m.,
or at such other time
and place as the
Company and the Investor shall mutually
agree.
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ARTICLE III
TERMS OF THE DEBT INVESTMENT
Section 3.1
Debt Investment. In consideration for the Company's
issuance to the Investor of the Note, the
Investor hereby agrees
to lend to the
Company up to One Million Dollars ($1,000,000) on the terms and
conditions set
forth herein.
Section 3.2 Terms of the Debt Investment.
(a) The Advances. The
Investor agrees to lend to the Company,
in a series of
Advances, such amounts
as the Company may request from
time to time in one or more Draw Notices, until the earlier of October
15, 2006, or such time as the aggregate amount of Advances made under
the Note shall equal One Million Dollars ($1,000,000).
(b) Initial Advance.
At the Closing, the
Company may deliver
to the Investor an Initial Draw Notice in an amount up to Three
Hundred
Thousand Dollars
($300,000).
The amount of the Initial Advance
requested and the amount of the initial Capital Call requested shall
not, in the aggregate,
exceed Six Hundred Thousand Dollars ($600,000).
The proceeds of the Initial Advance and the Initial Capital
Call shall
only be used to satisfy the Company's and its Subsidiaries
liabilities
to the
Internal Revenue
Service for federal
payroll tax arrearages in
an amount sufficient to discharge at a minimum all federal tax
liens on
the assets of the
Company with any
shortfall representing only the
expected adjustment
to penalties
anticipated
by the Company's tax
advisors, and with the
balance being used to pay the Company's and its
Subsidiaries'
scheduled trade
payables detailed on Schedule 3.2
(including $37,500
for the Investor's legal fees related to the
transactions contemplated herein); provided, however, that in the
event
that the Company does not receive a favorable adjustment to its
federal
tax penalties as described above, the Company shall promptly pay any
outstanding federal tax obligations then due.
(c) Subsequent Advances.
(i) Subsequent
Advances under the
Note will be made
only upon the satisfaction of all of the following conditions:
(A) The Company shall
deliver a Draw Notice
to the Company no later than fifteen (15) days prior
to the date on which the Company desires the Advance
to be made.
(B) Any Draw Notice shall be accompanied by
a Capital Call Notice in an amount equal to the
amount
requested pursuant to such Draw Notice, until
such time as the
aggregate amount of all Capital
Calls shall equal One Million Dollars ($1,000,000).
(C) All
of the representations and
warranties made by the
Company in this Agreement are
true, complete and
correct in all material respects
on the date of such Draw Notice with the same effect
as though such
representations and
warranties
had
been made on and as of the date of such Draw Notice.
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(D) On the date of
such Draw Notice, the
Company shall
have complied with and shall be in
compliance with all
covenants of the Company in this
Agreement.
(E) There shall be no
continuing
Event of
Default.
(F) The Advance
requested pursuant to the
Draw Notice
shall be made only for the specific
purpose of making a strategic acquisition approved in
writing by the
Investor, and is only
in such amount
as the Company
requires (in combination with any
amounts
requested
pursuant to
the accompanying
Capital Call Notice)
to effectuate
such strategic
acquisition; provided
however, that the Investor
shall be deemed to have approved any such strategic
acquisition if it has not provided written notice of
its disapproval
and the reasons therefor to the
Company within
fifteen (15) days of its receipt of
the Draw Notice.
(G) The Company
shall have
submitted its
acquisition plan to
the Investor
for review, and
shall have received
the Investor's prior written
approval for such
acquisition;
provided, however,
that the Investor
shall be deemed to
have approved
any such acquisition plan if it has not provided
written notice of its
disapproval
and the reasons
therefor to the Company within fifteen (15) days of
its receipt of such acquisition plan.
(H) The Company and the Investor shall have
reached a written agreement with respect to the
adjustments to the
Projected Net Income,
Projected
EBITDA and Schedule 8.11 to reflect the impact of the
proposed acquisition.
(ii) Each Advance (including any Initial Advance made
at Closing) shall
reduce the amount
available for Subsequent
Advances under the
Note by the amount of such Advance, such
that the aggregate
amount of all Advances made under the Note
may never exceed an aggregate of One Million Dollars
($1,000,000).
Amounts repaid
under the Note shall not
reinstate any
amount available for Draws under the Note,
except
that amounts of the
Initial Advance
which are repaid
when due shall be reinstated and available for Draws under the
Note.
(d) Payment of Advances. Upon fulfillment of the conditions
precedent to Closing
set forth in Article
VII hereof with
respect to
any Initial Advance,
and Section 3.2(c)(i)
hereof with respect to any
Subsequent Advance,
the Investor shall
make available to the Company,
in immediately
available funds, on the date set forth in the Draw
Notice the amount of the Advance requested. The Investor shall make
such funds available
to the Company by wire transfer to the account
specified in such Draw
Notice or in such other manner as the Investor
and the Company shall agree.
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(e) Interest. All
Outstanding Principal due and payable under
the Note shall bear
interest at a rate equal to ten percent (10%) per
annum, compounded annually. Interest shall accrue on the amount of
each
Advance from the time the proceeds of such Advance are made
available
to the Company until such time as such amounts are repaid.
(f) Repayment.
The Initial
Advance will be
payable in three
(3) equal monthly
installments of interest only commencing thirty (30)
days from the date of the Initial Advance and twelve (12) equal
monthly
installments of
principal and interest commencing thereafter.
Subsequent Advances
will be payable in thirty-six (36) installments as
follows: thirty-five
(35) monthly payments of interest only on the
first day of each calendar month commencing with the first day of the
month (the "First
Payment Date") that
falls at least thirty (30) days
after the date the first Subsequent Advance is made by the Investor
under the Note,
and a final
installment
in an amount equal to the
Outstanding Principal
and any accrued but unpaid interest on the third
anniversary of the
First Payment Date. Any monthly interest payments
shall be in an
amount equal to interest actually accrued on the
Outstanding Principal
under the Note during the immediately preceding
Interest Period. All
payments by the Company to the Investor hereunder
shall be made in lawful currency of the United States of America
and in
immediately available
funds no later than 1:00 p.m., Milwaukee,
Wisconsin time,
on the due date at the address specified by the
Investor from time to time.
(g)
Prepayment.
On or after the eighteen (18) month
anniversary of the
Closing, the Company may prepay any or all
of the
Outstanding Principal
under the Note, and any accrued and unpaid
interest thereon,
at any time and from
time to time without the prior
written consent of the
Investor and without any premium or
penalty;
provided, however, that (i) the Company shall provide the Investor
with
thirty (30) days' prior written notice of its intent to prepay any
or
all of such
Outstanding Principal,
and (ii) such notice shall be
accompanied by either an irrevocable written commitment from a lender
or other financing
source to provide
financing for the
prepayment or
evidence reasonably
satisfactory
to the Investor of the Company's
ability to make the
proposed prepayment. The Investor may, after
receipt of such
prepayment
notice, elect to convert, pursuant to
Section 3.2(i) below, any or all of such Outstanding Principal
proposed
to be prepaid
by providing written notice to the Company of the
Investor's intent
to convert prior to the effective date of such
prepayment. Notice of
prepayment pursuant to this Section 3.2(g) shall
be irrevocable, and in the event the Company fails to prepay the
amount
specified in the
prepayment notice (or
to effectuate any
conversion
requested by the Investor in connection therewith) upon the expiration
of thirty (30) days from the date of the delivery of such
notice, the
Outstanding Principal
under the note,
together with any accrued and
unpaid interest thereon, shall become immediately due and
payable.
(h) Recordation of Advances and Repayments. The Investor shall
record on Schedule 1
of the Note the date and amount of each Advance
and the date and amount of each repayment of interest or Outstanding
Principal. The
failure to record or
any error in recording
any such
Advance or repayment shall not, however, affect the obligations of the
Company hereunder or under the Note to repay the Outstanding
Principal
amount of the Note together with all interest accruing thereon, nor
shall such failure or error affect any rights of the Company
hereunder
or under applicable
law. Schedule 1 to the
Note, as maintained by the
Investor shall,
absent manifest error
or omission,
constitute prima
facie evidence of the amounts outstanding under the Note.
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(i) Conversion.
(i) Right to Convert.
The Investor,
at its option,
may, from time to time
or at any time,
convert any or all of
the Outstanding
Principal of the Note into fully-paid and
non-assessable shares
of the Company's Common Stock (the
"Conversion Shares"),
at an initial conversion price of
sixty-five cents ($0.65) per share (the "Conversion Price").
(ii) Adjustment of Conversion Price. The Conversion
Price shall be adjusted as follows:
(A) At the time the Company's audited
financial statements
for any given
fiscal year are
filed with the
Securities and
Exchange Commission
("SEC"), if the Company did not realize its Projected
EBITDA or Projected
Net Income for such fiscal year,
the Conversion
Price for Conversion Shares issued
during and subsequent
to the fiscal year
covered by
the audited financial
statements
shall be adjusted
downward by a percentage equal to the greater of (I)
the percentage
difference between
Projected EBITDA
and actual EBITDA for
such fiscal
year or (II) the
percentage difference
between Projected Net Income
and actual Net Income for such fiscal year. Within
ten (10) days after the Company's audited financial
statements are filed
with the SEC, the Company shall
issue a
stock
certificate
to the Investor
representing any
additional
Conversion
Shares
issuable as a result
of the adjustment
under this
Section 3.2(i)(ii).
(B) At the
time the Company proposes a
strategic acquisition
to the Investor,
the Company
and
the Investor shall mutually agree on an
appropriate
adjustment to
Projected EBITDA and
Projected Net Income
to reflect the added
value to
the Company realized by such acquisition.
(C) Upon the Issuance Of Additional Stock.
(I) If the
Company shall issue,
after the Issue Date, any Additional Stock
without
consideration, or for a
consideration
per share less than the
Conversion Price in effect immediately prior
to the issuance of
such Additional
Stock,
the Conversion Price
in effect
immediately
prior to such issuance
shall
automatically
be reduced
to the per
share price of the
Additional Stock.
(II) No
adjustment
of
the
Conversion Price shall
be made in an amount
less than one cent ($0.01) per share,
provided that any adjustments which are not
required to
be made by reason of this
sentence shall be carried forward and shall
be taken into account in any subsequent
adjustment made
prior to three
(3) years
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from the date giving rise to the adjustment.
Except to the limited extent provided for in
Section 3.2(i)(ii)(E)
hereof no
adjustment
of the Conversion
Price pursuant to this
Section 3.2(i)(ii)(C)
shall have the effect
of increasing the Conversion Price above the
Conversion Price in effect immediately prior
to such adjustment.
(III) In the case of
the issuance
of Additional
Stock
for cash, the
consideration shall
be deemed to be the
amount of
cash paid therefor before
deducting
any
reasonable
discounts,
commissions or other expenses allowed, paid
or incurred
by the Company for any
underwriting or otherwise in connection with
the issuance and sale thereof.
(IV) In the case of the issuance of
Additional Stock
for a consideration in
whole or in part other than cash, the
consideration
other than
cash shall be
deemed to be
the fair value thereof as
determined by
the Company's independent
certified public accountants.
(V) In the
case of the issuance
(whether before,
on or after the
Issuance
Date) of options to
purchase or rights to
subscribe for Common
Stock, securities by
their terms convertible into or exchangeable
for Common Stock or
options to purchase
or
rights to subscribe for such convertible or
exchangeable
securities, the
following
provisions shall apply
for all purposes
of
this Section 3.2(i)(ii)(C):
(a) The
aggregate
maximum number
of shares of Common
Stock
deliverable upon
exercise
(assuming the
satisfaction
of any
conditions to
exercise, including
without limitation,
the passage of
time, but without
taking into account
potential
anti-dilution
adjustments)
of such options to
purchase or rights
to
subscribe for Common Stock shall be
deemed to have been issued at the time
such options or rights were issued and
for a consideration equal to the
consideration
(determined in
the
manner provided
in
Section
3.2(i)(ii)(C)(III)
and
Section
3.2(i)(ii)(C)(IV), if any, received by
the Company upon the
issuance of such
options or
rights plus the minimum
exercise price
provided
in such
options or rights (without taking into
account
potential
anti-dilution
adjustments) for
the Common Stock
covered thereby.
(b) The
aggregate
maximum number of shares of Common
Stock deliverable upon
the conversion
of or
exchange
(assuming
the
satisfaction of
any conditions to
conversion or
exchange, including
without limitation,
the passage of
time, but without
taking into account
10
<PAGE>
potential
anti-dilution
adjustments)
for any
such
convertible or
exchangeable
securities or upon
the
exercise of
options to
purchase or
rights to
subscribe
for
such
convertible or
exchangeable securities
and the subsequent conversion or
exchange therefor
shall be deemed to
have been issued at the time such
securities were issued or such options
or rights were issued and for a
consideration equal
to
the
consideration, if any, received by the
Company for any
such securities or
related options or
rights (excluding
any cash received on account of
accrued interest
or
accrued
dividends), plus
the
minimum
additional
consideration, if any,
to
be received by the
Company (without
taking
into
account
potential
anti-dilution
adjustments) upon
the
conversion or
exchange
of such
securities or
the exercise of any
related
options
or rights (the
consideration in
each case to be
determined in the
manner provided in
Section 3.2(i)(ii)(C)(III) and Section
3.2(i)(ii)(C)(IV) hereof.
(c) In the event of
any
change in the
number of shares of
Common Stock
deliverable
or in the
consideration payable
to the Company
upon exercise
of such options or
rights or upon conversion of or in
exchange for
such convertible or
exchangeable
securities,
including,
but not limited to, a change resulting
from anti-dilution
adjustments,
the
Conversion Price, to the extent in any
way affected by or computed using such
options, rights or
securities, shall
be recomputed to
reflect such change,
but no further
adjustment
shall be
made for the actual issuance of Common
Stock or
any payment of such
consideration upon the exercise of any
such options
or rights or the
conversion or
exchange
of such
securities.
(d) Upon the
expiration
of any such options
or rights, the
termination of
any such rights to
convert or exchange or the expiration
of any options
or rights related to
such convertible
or exchangeable
securities, the
Conversion Price,
to
the extent in any way
affected by or
computed using such options, rights or
securities or
options
or rights
related to such
securities, shall
be
recomputed to reflect
the issuance of
only the number
of shares of Common
Stock (and convertible or exchangeable
securities which
remain in effect)
actually issued upon
the exercise of
such options
or rights, upon the
conversion or
exchange
of such
securities or upon the exercise of the
options or
rights related to such
securities.
11
<PAGE>
(e) The number of shares
of Common Stock deemed
issued and the
consideration
deemed paid
therefor
pursuant to Sections
3.2(i)(ii)(C)(V)
(a) and 3.2(i)(ii)(C)(V)(b) shall be
appropriately adjusted
to reflect any
change, termination
or expiration of
the type
described
in Section
3.2(i)(ii)(C)(V)(c) and Section
3.2(i)(ii)(C)(V)(d).
(D) Stock Splits,
Subdivisions,
Dividends,
Etc. In the event the
Company shall at any time or
from time to time
after the Issue Date
fix a record
date for the
effectuation of a
split or subdivision
of the outstanding
shares of Common Stock or the
determination of
holders of Common Stock entitled to
receive a dividend or other distribution payable in
additional shares of Common Stock or other securities
or rights convertible
into, or entitling the
holder
thereof to receive directly or indirectly, additional
shares of Common Stock
(hereinafter
referred to as
"Common Stock
Equivalents")
without the payment
of
any consideration
by such holder for the
additional
shares of Common Stock
or Common Stock
Equivalents
(including the
additional
shares of Common Stock
issuable upon conversion or exercise thereof), then,
as of such record date (or the date of such dividend,
distribution, split or
subdivision if no record date
is fixed),
the
Conversion
Price
shall
be
appropriately
decreased so that the number of shares
of Common Stock issuable upon a conversion under the
Investment
Agreement and
a purchase under the
Subscription
Agreement shall
be increased in
proportion to such
increase in the aggregate number
of shares of Common Stock outstanding and those
issuable with
respect
to such Common Stock
Equivalents determined
from time to time in the
manner provided
for deemed issuances in Section
3.2(i)(ii)(C)(V) hereof.
(E) Combinations. If the number of shares of
Common Stock
outstanding at any time after the Issue
Date is decreased by a combination of the outstanding
shares of Common
Stock, then
following the record
date of such combination, the Conversion Price shall
be appropriately
increased so that the number of
shares of Common Stock issuable on conversion of each
share of such series shall be decreased in proportion
to such decrease in outstanding shares.
(F) Other Recapitalizations. If at any time
or from
time
to time there shall be a
recapitalization of
the Common Stock
(other than a
subdivision,
combination or
other
transaction
provided for elsewhere
herein), provision
shall be
made so that the Investor shall thereafter be
entitled to receive, upon a conversion hereunder, the
number of shares of stock or other securities or
property of the
Company or otherwise,
to which the
Investor would
have
been
entitled
on such
recapitalization, if
such conversion
had occurred
prior to such
recapitalization. In
any such case,
12
<PAGE>
appropriate
adjustment shall
be made in the
application of the
provisions of this Section 3.2(i)
with respect to the rights of the Investor after the
recapitalization to
the end that the
provisions of
hereof
(including adjustment
of the Conversion Price
then in effect) shall be applicable after the event
as nearly equivalent as may be practicable.
(j) Security.
As collateral security for the prompt and
complete payment and performance when due of the Company's
obligations
under this Agreement
and the Note,
the Company does
hereby grant the
Investor a continuing
first priority
security interest in
and to the
Accounts of the Company and its Subsidiaries, and a continuing
mortgage
interest in and to the Real Property (collectively the "Collateral").
The Deed of Trust
shall be subject and
subordinate only to
the first
mortgage lien of First
American Bank in the
principal amount not to
exceed Two Hundred Eight Thousand Dollars ($208,000) plus accrued and
unpaid interest
thereon, and shall be pari passu with the second
mortgage liens of The
Estate of Vivian
Erikson and Ajit Brar
and/or
Ajit and Saroj Brar in
the aggregate
principal amount not to exceed
$792,000 plus accrued and unpaid interest thereon. At the Closing,
the
Company will
deliver to the
Investor the Deed of Trust, a Security
Agreement and
all such other financing statements, documents,
instruments and
agreements as the Investor may reasonably request to
create and perfect its security interest in the Collateral.
ARTICLE IV
TERMS OF THE EQUITY INVESTMENT
Section 4.1 Equity Investment. The Investor hereby agrees to
subscribe
for and purchase an aggregate amount up to One Million Dollars
($1,000,000) of
the Company's Common Stock (the "Common
Shares") on the terms and conditions set
forth herein.
Section 4.2 Terms of Equity Investment.
(a) Subscription
for Common
Shares. Concurrently with the
execution of this
Agreement, the
Investor will execute and deliver to
the Company the Subscription Agreement pursuant to which the Investor
will subscribe for and agree to purchase the Common Shares.
(b) The Capital Calls.
The Investor agrees to purchase the
Common Shares
in a series
of transactions in such amounts as the
Company may
request from time to time in one or more
Capital Call
Notices, until the
earlier of September
30, 2006, or such time as the
aggregate amount of Capital Calls made under the Subscription
Agreement
shall equal One Million Dollars ($1,000,000.00).
(c) Initial Capital
Call. At the Closing, the Company may
deliver to the Investor an Initial Capital Call Notice in an amount
up
to Three Hundred Thousand Dollars ($300,000.00), provided that at the
Closing the Company
must also deliver to
the Investor an Initial Draw
Notice in an amount
not less than Three Hundred Thousand Dollars
($300,000.00). The amount of the Initial Capital Call and the
amount of
the Initial Advance
shall not, in the
aggregate,
exceed Six Hundred
13
<PAGE>
Thousand Dollars
($600,000.00).
The proceeds of the
Initial Capital
Call and the
Initial Advance shall only be used for the purposes
specified in Section 3.2(b) hereof.
(d) Subsequent Capital Calls.
(i) Subsequent Capital
Calls under the
Subscription
Agreement will be made
only upon the
satisfaction of all
of
the following conditions:
(A) The Company shall deliver a Capital Call
Notice to the Investor
no later than
fifteen (15)
days prior to the date on which the Company desires
the Capital Call to be subscribed.
(B) Any Capital Call Notice shall be
accompanied by a Draw
Notice in an amount
equal to
the amount requested
pursuant to such
Capital Call
Notice, until such
time as the aggregate
amount of
Capital Calls
shall equal One Million Dollars
($1,000,000).
(C) The
conditions
precedent
to the
Investor's
making of an Advance in Sections
3.2(c)(i)(C)-(H) shall
apply to the Capital
Call in
the same manner.
(ii) Each Capital Call (including any Initial Capital
Call at Closing) shall reduce the amount available for
Subsequent Capital
Calls under the Subscription Agreement by
the amount of such Capital Call, such that the amount of all
Capital Calls made under the Subscription Agreement may never
exceed an aggregate of One Million Dollars ($1,000,000.00).
(e) Payment of Capital
Calls. Upon the fulfillment of the
conditions precedent
to Closing
set forth in Article
VII hereof with
respect to any Initial Capital Call and Section 4.2(d)(i) with respect
to any Subsequent Capital Call, the Investor shall, against the tender
by the Company of a stock certificate or stock certificates
representing the
number of Common Shares being purchased pursuant to
such Capital
Call, make available to the Company, in immediately
available funds, on the date set forth in the Capital Call Notice,
the
amount of the Capital
Call requested.
The Investor shall make such
funds available
to the Company by wire transfer to the account
specified in the
Capital Call
Notice or in such
other manner as
the
Investor and the Company shall agree.
(f) Adjustment of the Purchase Price. The Purchase Price shall
be
adjusted as follows:
(i) At the
time the Company's audited financial
statements for any
given fiscal year are
filed with the SEC,
if the Company
did not realize its Projected EBITDA or
Projected Net Income for such fiscal year, the Purchase Price
for Shares issued to the Investor during, and subsequent to,
the fiscal year
covered by the audited
statements, shall
be
adjusted downward by a
percentage equal to the greater of (A)
the percentage
difference between Projected EBITDA and actual
EBITDA for such fiscal year, or (B) the percentage difference
between Projected
Net Income and actual Net Income for
such
fiscal year.
Within ten (10) days after the filing of the
14
<PAGE>
Company's audited
financial statements with the SEC, the
Company shall
issue a stock certificate to the Investor
representing any additional Shares issuable as a result of the
adjustment under this Section 4.2(f)(i).
(ii) At the time the
Company proposes
a strategic
acquisition to the
Investor, the Company and the Investor
shall mutually
agree on an appropriate adjustment to the
Projected EBITDA
and Projected Net Income to reflect the added
value to the Company realized by such acquisition.
(iii) In the event of (A) the issuance of Additional
Stock in a
transaction
of the type described in Section
3.2(i)(ii)(C); (B) the issuance of Common Stock Equivalents in
a transaction
described in Section 3.2(i)(ii)(D); (C) the
occurrence of
a transaction
described
in Section
3.2(i)(ii)(E);
or (D) the occurrence of a transaction
described in Section
3.2(i)(ii)(F), the
Purchase Price shall
be adjusted in the same manner as and concurrently with the
corresponding
adjustment of the Conversion Price pursuant to
such sections.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchaser as
follows;
provided, however, that any disclosures
contained in the Company's annual report
on Form 10-KSB as filed with the SEC for
the fiscal year ended December 31, 2004
and the Company's quarterly report on Form 10-QSB as
filed with the SEC for the
three months ended March 31, 2005 shall be
deemed incorporated herein and in the
disclosure schedules attached hereto for
all purposes:
Section 5.1
Organization,
Qualification
and Corporate Power. The
Company is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of
Texas and each of its
Subsidiaries are
corporations duly incorporated,
validly existing and
in good standing under the
laws of the states of their respective
incorporations.
The Company and each
of
its Subsidiaries are duly licensed or qualified to transact business as a
foreign corporation and are in good
standing in each
jurisdiction in which the
nature of the business transacted by it or
the character of the properties owned
or leased by it requires such licensing or qualification, except for
jurisdictions in which failure to so qualify or
to so be in good standing could
not reasonably be expected to have a
material adverse effect on the Company as a
whole. The Company has the corporate power and authority to own and hold its
properties and to carry on its business as
now conducted and as
proposed to be
conducted, to execute, deliver and perform this Agreement, the Note, the
Subscription Agreement, the Investor's Rights Agreement,
the Security Agreement
and the Deed of Trust with the Investor (this Agreement, the Note, the
Subscription Agreement, the Security Agreement, the Deed of Trust, the
Investor's Rights Agreement and the other agreements and documents to be
executed and delivered under this Agreement shall hereinafter be collectively
referred to as the "Transaction Documents"), and to perform its obligations
thereunder.
15
<PAGE>
Section 5.2 Authorization of Agreements, Etc.
(a) The execution and delivery by the Company of the
Transaction Documents,
and the performance by the Company of its
obligations
thereunder, have been
duly authorized
by all requisite
corporate action and
will not violate any
provision of law, any order
of any court or other agency of government, the Company's Articles or
Bylaws, or
any provision of any indenture, agreement or other
instrument to which
the Company or any of its properties or assets is
bound, conflict
with, result in a breach of or
constitute (with
due
notice or lapse of
time or both) a default under any such indenture,
agreement or other instrument, or result in the creation or
imposition
of any lien, charge,
restriction,
claim or encumbrance
of any nature
whatsoever upon any of
the properties or
assets of the Company or any
of its Subsidiaries.
(b) The Common Shares
have been duly
authorized
and, when
issued in accordance with this Agreement, will be validly issued,
fully
paid and nonassessable
shares of the
Company's Common Stock with no
personal liability
attaching to the ownership thereof and will be free
and clear of all liens, charges, restrictions, claims and encumbrances
imposed by or through the Company.
Section 5.3
Validity. This Agreement has been duly executed and
delivered by the Company and constitutes
the legal, valid and binding obligation
of the Company, enforceable in accordance with its
terms, except as
limited by
applicable bankruptcy, insolvency,
reorganization,
moratorium, and similar laws
affecting the enforcement of creditors'
rights generally and
the application of
general principles of equity and judicial
discretion.
The other Transaction
Documents, when executed and delivered in
accordance with this Agreement, will
constitute the legal, valid and binding
obligations of the
Company
enforceable
in accordance with each of their respective terms, except as limited by
applicable bankruptcy, insolvency,
reorganization,
moratorium, and similar laws
affecting the enforcement of creditors'
rights generally and
the application of
general principles of equity and judicial
discretion.
Section 5.4 Authorized
Capital Stock. The authorized capital stock of
the Company consists of (a) 100,000,000
shares of preferred
stock, par value
$.001, 500,000 of which have been designated as Series A 10% Convertible
Preferred Stock (so called herein),
and (b) 100,000,000
shares of Common Stock.
Immediately prior to the Closing, 283,172
shares of Series A Preferred Stock are
issued and outstanding and 18,332,948 shares of Common Stock are issued and
18,320,748 shares are outstanding, fully
paid and nonassessable with no personal
liability attaching to the ownership
thereof. The powers,
preferences,
rights,
qualifications, limitations and restrictions in respect of the
Preferred Stock
and Common Stock are set forth in the Company's Articles, Bylaws, and the
Certificate of Designation of the Series A
Preferred Stock, and all such powers,
preferences, rights, qualification, limitations and restrictions are valid,
binding and enforceable in accordance with all
applicable laws.
Except as set
forth in the attached Schedule 5.4, (i) no person owns of record
any shares of
Preferred Stock or Common Stock other than as set forth on the Company's
shareholder list, (ii) no subscription,
warrant, option,
convertible
security,
or other right (contingent or other) to purchase or otherwise
acquire equity
securities of the Company is authorized
or outstanding, and (iii) there is no
commitment by the Company to issue
shares, subscriptions, warrants, options,
convertible securities, or other rights or to distribute to holders of any
of
16
<PAGE>
its equity securities or any evidence of
indebtedness or asset.
Except as set
forth in the Company's Articles, the Company has no obligation
(contingent or
otherwise) to purchase, redeem, or otherwise acquire any of its equity
securities or any interest therein or to pay any dividend or make any other
distribution in respect thereof. To the
Company's Knowledge, there are no voting
trusts or agreements, pledge agreements, buy-sell agreements, rights of first
refusal, preemptive rights or proxies
relating to any securities of the Company
(whether or not the Company is a party thereto). All of the outstanding
securities of the Company were issued in
compliance with all applicable federal
and state securities laws.
Section 5.5 Financial
Statements.
The Company has
furnished to the
Investor the audited financial statements of the Company for the fiscal
year
ended December 31, 2004 and the
unaudited financial
statements of the
Company
for the period ending March 31, 2005
(collectively, the "Financial Statements").
The Financial Statements are complete and correct in all material
respects,
present fairly, in accordance with generally accepted accounting principles
consistently applied, except for customary
year end adjustments that may be made
to the March 31, 2005 unaudited
financial statements, the financial condition
and results of operation of the Company and the
Subsidiaries
for the periods
shown. Neither the Company nor any
Subsidiary has any liability, contingent or
otherwise, which is not reflected in or reserved against in the Financial
Statements in accordance with GAAP that could materially and adversely
affect
the financial condition of the Company or
such Subsidiary. Since the date of the
most recent Financial Statement, (a) there has been no change in
the assets,
liabilities or financial condition of the Company or its
Subsidiaries from that
reflected in the balance sheet (except for changes in the
ordinary course of
business) which in the aggregate have been
materially adverse,
and (b) none of
the business, prospects, financial
condition, operations, property or affairs of
the Company or its Subsidiaries has been materially
adversely affected by any
occurrence or development, individually or in the aggregate, whether or not
insured against.
Section 5.6 Events Subsequent to March 31, 2005. Except as set
forth on
Schedule 5.6, since March 31, 2005, the Company has not: (a) issued
any stock,
bond, or other corporate security; (b)
borrowed any amount or incurred or become
subject to any liability (absolute, accrued or contingent), except current
liabilities incurred and liabilities under contracts entered into in the
ordinary course of business; (c) discharged
or satisfied any lien or encumbrance
or incurred or paid any obligation or liability (absolute, accrued or
contingent) other than current liabilities shown on the balance sheet and
current liabilities incurred since the date
of the balance sheet in the ordinary
course of business; (d) declared or made any payment or distribution to
shareholders or purchased or redeemed any
shares of its capital
stock or other
security; (e) mortgaged, pledged, encumbered or subjected to lien
any of its
assets, tangible or intangible,
other than liens of
current real property taxes
not yet due and payable; (f) sold,
assigned, or
transferred any of its tangible
assets except in the ordinary course of
business or cancelled any debt or claim;
(g) sold, assigned, transferred any or granted any exclusive license with
respect to any patent, trademark, trade name, service mark,
copyright,
trade
secret or other intangible asset; (h) suffered any loss of property
or waived
any right of substantial value whether or not in the ordinary course of
business; (i) made any change in officer
compensation
except in the
ordinary
course of business and consistent with past practice; (j) made any material
change in the manner of business or
operations of the Company or any Subsidiary;
(k) entered into any transaction except in
the ordinary course of business or as
otherwise contemplated hereby; or (l)
entered into any commitment (contingent or
otherwise) to do any of the foregoing.
17
<PAGE>
Section 5.7
Litigation. Except as
disclosed on Schedule 5.7, there is
no (a) action, suit, claim, proceeding or investigation pending or, to the
Company's Knowledge, threatened against or affecting
the Company or any of its
Subsidiaries, at law or in equity, or before or by any federal, state,
municipal, or other governmental
department,
commission, board,
bureau, agency
or instrumentality, domestic or foreign; (b)
arbitration proceeding relating to
the Company or any of its Subsidiaries
pending; (c) governmental inquiry pending
or, to the Company's Knowledge, threatened against or affecting
the Company or
any of its Subsidiaries (including without limitation any inquiry as to the
qualification of the Company or any of its
Subsidiaries to hold
or receive any
license or permit); (d) outstanding order,
judgment, writ or
decree against the
Company or any of its Subsidiaries, and, to
the Company's Knowledge, there is no
basis for any of the foregoing.
Neither the Company
nor any of its Subsidiaries
have received an opinion or memorandum or
legal advice from legal counsel to the
effect that it is exposed, from a legal standpoint, to any liability or
disadvantage which may be material to its business, prospects, financial
condition, operations, property or affairs.
The Company and its Subsidiaries are
not in default with respect to any order,
writ, injunction or decree known to or
served upon the Company or any of its Subsidiaries of any court or of any
federal, state, municipal or other
governmental department, commission, board,
bureau, agency, or instrumentality,
domestic or foreign.
There is no action or
suit by the Company or any of its
Subsidiaries
pending, or, to the Company's
Knowledge, threatened or contemplated
against others.
Section 5.8 Compliance With Laws. The Company and its Subsidiaries
have
complied, in all material respects, with
all laws, rules, regulations and orders
applicable to their respective businesses, operations, properties, assets,
products and services. The Company and its Subsidiaries have all necessary
permits, licenses and other authorizations
required to conduct their respective
businesses as conducted and as proposed to
be conducted, and the Company and its
Subsidiaries have been operating their
respective businesses
pursuant to and in
compliance with the terms of all such permits, licenses and other
authorizations, except where such non-compliance would not have a material
adverse effect on the Company's or its
Subsidiaries'
respective
businesses as
currently conducted. There is no existing law, rule,
regulation or order,
and
the Company and its Subsidiaries after due
inquiry are not aware of any proposed
law, rule or regulation or order, whether
federal, state, county or local, which
would prohibit or restrict the Company or any of its
Subsidiaries
from, or
otherwise materially adversely affect the
Company or any of its Subsidiaries in,
conducting their respective businesses in
any jurisdiction in which they are now
conducting business or in which they
propose to conduct business.
Section 5.9 Proprietary Information of Third Parties. To
the Company's
Knowledge, no third party has claimed or has reason to claim that any
person
employed by or affiliated with the Company or any of its
Subsidiaries
has (a)
violated or may be violating any of the
terms or conditions of
his employment,
non-competition or non-disclosure agreement
with such third party, (b) disclosed
or may be disclosing or utilized or may be utilizing any trade secret or
proprietary information or documentation of such third party
or (c) interfered
or may be interfering in the employment relationship between such third party
and any of its present or former employees. No third party has requested
information from the Company or any of its
Subsidiaries which suggests that such
a claim might be contemplated. To the Company's actual knowledge, no person
employed by or affiliated with the Company or any of its Subsidiaries has
18
<PAGE>
employed or proposed to employ any trade secret or any information or
documentation proprietary to any former
employer, and to the Company's actual
knowledge, no person employed by or affiliated
with the Company or
any of its
Subsidiaries has violated any confidential
relationship
which such person
may
have had with any third party, in
connection with the development or sale of any
service or proposed service of the Company
or any of its
Subsidiaries, and
the
Company has no reason to believe there will
be any such employment or violation.
To the Company's Knowledge, neither the
execution or delivery of this Agreement,
or the carrying on of the business of the
Company or any of its Subsidiaries, or
the conduct or proposed conduct of the business of the Company or any of
its
Subsidiaries will conflict with or result in a
breach of the terms,
conditions
or provisions of or constitute a default under any contract, covenant or
instrument under which any such person is
obligated.
Section 5.10 Intellectual Property. Set forth in Schedule 5.10
attached
hereto is a list and brief description of all domestic and foreign patents,
patent rights, patent applications,
trademarks, trademark
applications, service
marks, service mark applications, trade names and copyrights, and all
applications for such which are in the process
of being prepared,
owned by or
registered in the name of the Company or any
of its Subsidiaries,
or of which
the Company or any of its Subsidiaries is a
licensor or licensee or in which the
Company or any of its Subsidiaries has any right. The Company and its
Subsidiaries own or possess adequate licenses or other rights to use all
patents, patent applications, trademarks,
trademark applications, service marks,
service mark applications, trade names, copyrights, manufacturing processes,
formulae, trade secrets, customer lists and
know how (collectively "Intellectual
Property") necessary or desirable to the conduct of its
business as conducted
and proposed to be conducted and no claim is pending or, to the Company's
Knowledge, threatened to the effect that
the operations of the Company or any of
its Subsidiaries infringe upon or conflict
with the asserted rights of any other
person under any Intellectual Property, and
there is no basis for any such claim
(whether or not pending or threatened).
To the Company's
Knowledge, no claim is
pending or threatened to the effect that
any such Intellectual Property owned or
licensed by the Company or any of its
Subsidiaries, or which
the Company or any
of its Subsidiaries otherwise has a right
to use, is invalid or unenforceable by
the Company or any of its Subsidiaries, and
there is no basis for any such claim
(whether pending or threatened). All prior
art known to the Company which may be
or may have been pertinent to the examination of any United States patent or
patent application listed in Schedule 5.10 has been
cited to the United States
Patent and Trademark office. To the Company's Knowledge, all technical
information developed by and belonging to
the Company or any of its Subsidiaries
which has not been patented has been kept
confidential.
Section 5.11 Title to Properties. The Company and its Subsidiaries
have
good, clear and marketable title to their respective properties and assets
reflected on the Financial Statements or acquired since the date of the
Financial Statements (other than properties and assets disposed of in the
ordinary course of business since the date of the most recent Financial
Statement), and all such properties and assets
are free and clear of mortgages,
pledges, security interests, liens, charges, claims, restrictions and other
encumbrances (including without limitation,
easements and
licenses), except
as
disclosed in Schedule 5.11 hereto. To the Company's Knowledge, there are no
condemnation, environmental, zoning or other land use
regulation
proceedings,
either instituted or planned to be
instituted, which
would adversely affect the
use or operation of the Company's or its
Subsidiaries' properties and assets for
their respective intended uses and purposes,
or the value of such
properties,
and the Company has not received
notice of any special
assessment
proceedings
which would affect such properties and
assets.
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Section 5.12 Leasehold Interests. Each lease or agreement to which
the
Company or any of its Subsidiaries is a party under
which it is a lessee of any
property, real or personal, is a valid and
subsisting agreement, duly authorized
and entered into by the Company or any
Subsidiary,
as the case may be,
without
any default of the Company or any of its Subsidiaries thereunder and to the
Company's Knowledge, without any default thereunder of
any other party thereto.
No event has occurred and is continuing
which, with due notice
or lapse of time
or both, would constitute a default or
event of default by the Company or any of
its Subsidiaries under any such lease or agreement or, to the Company's
Knowledge, by any other party thereto. The Company's or its Subsidiaries'
possession of such property has not been disturbed and, to the Company's
Knowledge, no claim has been asserted against the Company or any of its
Subsidiaries adverse to its rights in such
leasehold interests.
Section 5.13 Taxes.
Except as otherwise
disclosed in Schedule 5.13
hereto, the Company and each of its Subsidiaries has filed all tax returns,
federal, state, county and local, required to be filed by it, and
the Company
and each of its Subsidiaries has paid all taxes
shown to be due by such returns
as well as all other taxes, assessments and governmental charges which have
become due or payable, including without limitation all
taxes which the Company
and each of its Subsidiaries is obligated to withhold from amounts owing to
employees, creditors and third parties. The
Company and each of its Subsidiaries
has established adequate reserves for all taxes
accrued but not yet payable. To
the Company's Knowledge, the federal income tax returns of
the Company and each
of its Subsidiaries have never been audited
by the Internal Revenue Service. No
deficiency assessment with respect to or
proposed adjustment of the Company's or
any of its Subsidiaries federal,
state, county or local
taxes is pending or, to
the Company's Knowledge, threatened. Except as otherwise disclosed in
Schedule
5.13, there is no tax lien (other than for current taxes not yet due and
payable), whether imposed by any federal, state, county, or local taxing
authority, outstanding against the assets, properties or business of the
Company.
Section 5.14 Accounts.
(a) Accuracy
of Records. So long as this Agreement is in
effect and until all of its obligations hereunder and under the Note
shall have been fully
discharged, all
records, papers and
documents
relating to the
Accounts are genuine
and in all
respects what they
purport to be, and all papers and documents relating thereto (i) will
represent the genuine,
legal, valid and binding obligation (subject as
to enforcement to bankruptcy, insolvency, reorganization and other
laws
of general applicability relating to or affecting creditors' rights
and
to general
equity principles) of the account debtor evidencing
indebtedness unpaid
and owed by such account debtor arising out of the
performance of labor
or services or the sale or lease and delivery of
the merchandise listed therein, or both, (ii) will be the only
original
writings evidencing and embodying such obligation of the account
debtor
named therein
(other than
copies created for purposes other than
general accounting
purposes),
(iii) will evidence true and valid
obligations,
enforceable in
accordance with their
respective
terms
(subject as to enforcement to bankruptcy, insolvency, reorganization
and other laws of general applicability relating to or affecting
creditors' rights and to general equity principles), and (iv) will be
in compliance with and
will conform in all material respects with all
applicable federal,
state and local laws
and applicable
laws of any
relevant foreign jurisdiction.
20
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(b) Maintenance of Records. The Company will keep and maintain
at its own cost and expense satisfactory and complete records of the
Accounts, including,
but not limited to, records of all payments
received, all credits granted thereon, all merchandise returned and
all
other dealings therewith, and the Company will make the same
available
to the Investor for
inspection at the principal executive offices of
the Company, at the
Company's own cost and expense, during regular
business hours upon demand. Upon the Investor's request, the Company
shall, at its own cost
and expense, deliver
all tangible evidence
of
the Accounts (including, without limitation, all documents evidencing
the Accounts)
to the Investor or to its representatives (copies of
which evidence
may be retained
by the Company) at any time upon its
demand.
(c) Assignment of Payments. Upon the occurrence of an Event of
Default hereunder, and
if the Investor so directs, the Company agrees
to cause all payments on the Accounts to be made directly to the
Investor.
(d) Modification
of Terms. The Company shall not rescind,
subject to Section 5.14(e) or cancel any indebtedness evidenced by any
Account or modify any term thereof or make any adjustment
with respect
thereto, or
extend or renew the
same, or compromise or settle any
dispute, claim, suit
or legal proceeding relating thereto, or sell any
Account or interest
therein, without the
prior written consent of the
Investor. The Company
will duly fulfill all obligations on its part to
be fulfilled
under or in
connection
with the Accounts and will do
nothing to impair the rights of the Investor in the Accounts.
(e) Collection.
The Company shall endeavor to cause to be
collected from
the account debtor named in each of the Company's
Accounts, as and when
due (including,
without limitation, Accounts
which are delinquent,
such Accounts to be collected in accordance with
generally accepted
lawful collection
procedures) any and
all amounts
owing under or on account of such Accounts, and apply forthwith upon
receipt thereof all such amounts as are so collected to the
outstanding
balance of such
Accounts, except that,
prior to the
occurrence of an
Event of Default,
the Company may allow in the ordinary course of
business as
adjustments
to amounts owing under its Accounts, an
extension or renewal of the time or times of payment, or settlement
for
less than the total unpaid balance, which the Company finds
appropriate
in accordance
with sound business judgment.
Section 5.15 Loans and Advances. Except as set forth in Schedule
5.15,
neither the Company nor any of its
Subsidiaries
have any outstanding
loans or
advances to any person and are not
obligated to make any such loans or advances.
Section 5.16 Assumptions, Guaranties, Etc. Neither the Company, nor
any
of its Subsidiaries have assumed, guaranteed, endorsed or otherwise become
directly or contingently liable on any indebtedness of any other person
(excluding the Subsidiaries in the case of the Company) (including without
limitation, liability by way of any
agreement,
contingent
or otherwise, to
purchase, to provide funds for payment,
to supply funds to or
otherwise invest
in the debtor, or otherwise to assure the
creditor against
loss), except for
guaranties by endorsement or negotiable
instruments for deposit or collection in
the ordinary course of business.
21
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Section 5.17
Governmental
Approvals.
Subject to the
accuracy of the
representations and warranties of the Investor set forth in Article VI, no
registration or filing with, or consent or approval of or other
action by, any
federal, state or other governmental agency or instrumentality is or will be
necessary for the valid execution, delivery and performance by the Company of
the Transaction Documents, other than filings pursuant to federal and state
securities laws (all of which filings have
been made by the Company, other than
those which are required to be made after the Closing and which will be duly
made on a timely basis) in connection with
the transactions contemplated hereby.
Section 5.18
Disclosure. Neither
this Agreement, nor
any Schedule or
Exhibit to this Agreement, contains an untrue statement of a material fact
or
omits a material fact necessary to make the statements contained herein or
therein not misleading. None of the
statements, documents, certificates or other
items prepared or supplied by the Company with respect to the transactions
contemplated hereby contains an untrue
statement of a
material fact or omits a
material fact necessary to make the
statements contained therein not misleading.
There is no fact which the Company has not
disclosed to the Investor and its
counsel in writing and of which the Company is aware which materially and
adversely affects or could materially and adversely affect the business,
prospects, financial condition,
operations,
property or affairs of
the Company
or its Subsidiaries.
Section 5.19
Transactions
with Affiliates. Except as disclosed in
Schedule 5.19 hereto, no director, officer, employee or shareholder of the
Company or any of its Subsidiaries,
or member of the
family of any such person,
or any corporation, partnership, trust or
other entity in which any such person,
or any member of the family of any such
person, has a substantial interest or is
an officer, director, trustee, partner or holder of more
than five (5%) of the
outstanding capital stock thereof, is a party to any transaction with the
Company or any of its Subsidiaries,
including any
contract, agreement or
other
arrangement providing for the employment of,
furnishing of services
by, rental
of real or personal property from or otherwise
requiring payments to any such
person or firm, other than employment-at-will arrangements in the ordinary
course of business.
Section
5.20 Offering of the Common Shares. Except as set forth on
Schedule 5.20, neither the Company nor any person
authorized or employed by the
Company as agent, broker, dealer or
otherwise in connection with the offering or
sale of the Common Shares or any security of the
Company convertible
into the
Common Shares has offered the Common
Shares or any such
similar security for
sale to, or solicited any offer to buy the Common
Shares or any such
similar
security from, or otherwise approached or negotiated with
respect thereto with,
any person or persons, and neither the Company nor any person
acting on its
behalf has taken or will take any other
action (including,
without
limitation,
any offer, issuance or sale of any security
of the Company under
circumstances
which might require the integration of such security with the Common Shares
under the Securities Act or the rules and
regulations
promulgated
thereunder),
in either case so as to subject the offering, the issuance, or sale of the
Common Shares to the registration
requirements of the Securities Act.
Section 5.21 Foreign
Corrupt Practices Act.
The Company has not taken
any action which would
