EXHIBIT 10.39
SECURITIES PURCHASE
AGREEMENT
THIS SECURITIES PURCHASE
AGREEMENT (this “
Agreement ”) is dated as of November 24, 2003, by and
among PROLONG INTERNATIONAL CORPORATION , a Nevada
corporation (“ Parent ”), PROLONG SUPER
LUBRICANTS, INC. , a Nevada corporation (“
Borrower ”), PROLONG INTERNATIONAL HOLDINGS
LTD., a Cayman Islands company (“ Cayman Sub I
”), PROLONG INTERNATIONAL LTD. , a Cayman Islands
company (“ Cayman Sub II ”, and together with
Cayman Sub I, the “ Cayman Subsidiaries ”),
ST. CLOUD CAPITAL PARTNERS, LP, a Delaware limited
partnership, and its affiliates (“ St. Cloud ”),
BEDFORD OAK CAPITAL, L.P., a Delaware limited partnership
(“ Bedford I ”), BEDFORD OAK OFFSHORE,
LTD. , a Cayman Islands company (“ Bedford II
”), and ASPEN VENTURES LLC , a New York limited
liability company (“ Aspen ”), and collectively
with Bedford I and Bedford II, the “ Other Purchasers
”). St. Cloud and the Other Purchasers are each referred to
herein as “ Purchaser ” and collectively as
“ Purchasers ”. Parent, Borrower, Cayman Sub I
and Cayman Sub II are each referred to herein as a “
Credit Party ” and collectively as the “
Credit Parties ”.
FOR VALUE RECEIVED
, and in consideration of the
covenants and agreements contained herein, the parties agree as
follows:
1. DEFINITIONS.
1.1 Definitions.
1.1.1 For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise
requires,
(a) the terms defined in this
Section 1 shall have the meanings assigned to them in this
Section 1 and include the plural as well as the
singular,
(b) the words “herein,”
“hereof,” “hereto” and
“hereunder” and other words of similar import shall
refer to this Agreement as a whole and not to any particular
Section, Subsection or other subdivision, unless the context
otherwise requires, and
(c) all accounting terms not
otherwise defined herein shall have the meanings assigned under
GAAP.
As used in this Agreement, the
following definitions shall apply.
“Affiliate” shall mean, as applied to any Person, any other
Person directly or indirectly controlling, controlled by, or under
common control with, that Person. For the purposes of this
definition, “control” (including, with correlative
meanings, the terms “controlling,” “controlled
by” and “under common control with”), as applied
to any Person, means the possession, directly or indirectly, of the
power (i) to vote ten percent (10%) or more of the Securities
having ordinary voting power for the election of directors of such
Person or (ii) to direct or cause the direction of the management
and policies of that Person, whether through the ownership of
voting securities or by contract or otherwise.
1
“ Agreement ”
shall mean this Agreement (including all Schedules and exhibits),
as amended, modified or supplemented from time to time.
“ Aspen Note ”
shall mean that certain secured promissory note, dated as of the
date hereof, in the original principal amount of One Hundred Twenty
Five Thousand Dollars ($125,000), issued by Borrower in favor of
Aspen, as amended, modified or supplemented from time to
time.
“ Aspen Securities
” shall mean, collectively, the Aspen Note and the Aspen
Warrant.
“ Aspen Warrant ”
shall mean that certain warrant to purchase 297,896 shares of
Common Stock, issued by Parent to Aspen pursuant to this Agreement,
as amended, modified or supplemented from time to time.
“ Bedford I Note
” shall mean that certain secured promissory note, dated as
of the date hereof, in the original principal amount of One Hundred
Sixty Two Thousand Five Hundred Dollars ($162,500), issued by
Borrower in favor of Bedford I, as amended, modified or
supplemented from time to time.
“ Bedford I Securities
” shall mean, collectively, the Bedford I Note and the
Bedford I Warrant.
“ Bedford I Warrant
” shall mean that certain warrant to purchase 387,265 shares
of Common Stock, issued by Parent to Bedford I pursuant to this
Agreement, as amended, modified or supplemented from time to
time.
“Bedford II Note
” shall mean that certain
secured promissory note, dated as of the date hereof, in the
original principal amount of One Hundred Sixty Two Thousand Five
Hundred Dollars ($162,500), issued by Borrower in favor of Bedford
II, as amended, modified or supplemented from time to
time.
“ Bedford II Securities
” shall mean, collectively, the Bedford II Note and the
Bedford II Warrant.
“ Bedford II Warrant
” shall mean that certain warrant to purchase 387,265 shares
of Common Stock, issued by Parent to Bedford II pursuant to this
Agreement, as amended, modified or supplemented from time to
time.
“ Board ” shall
mean the board of directors of Parent.
“ Bridge Loan Amount
” shall mean One Hundred Six Thousand Six Hundred Fifty One
and 23/100 Dollars ($106,651.23), representing the outstanding
principal and accrued interest under the Bridge Note.
2
“ Bridge Note ”
shall mean that certain promissory note, dated as of October 15,
2003 in the original principal amount of One Hundred Five Thousand
Dollars ($105,000), issued by Parent in favor of St. Cloud, as
amended, modified or supplemented from time to time.
“Closing
” shall have the meaning set
forth in Section 2.3 .
“ Closing Date ”
shall mean November 24, 2003, or such other date as the Credit
Parties, on the one hand, and Purchasers, on the other hand
mutually agree upon.
“ Code ” shall
have the meaning set forth in Section 7.3 .
“ Commission ”
shall mean the Securities and Exchange Commission.
“ Common Stock ”
shall mean common stock, par value $0.001 per share, of
Parent.
“ Debt Service Payments
” shall mean, with respect to any period, the Credit
Parties’ total interest expense payments on all Indebtedness
(including, without limitation, the Notes) during such period plus
the Credit Parties’ scheduled principal payments on all
Indebtedness (including, without limitation, the Notes) during that
same period.
“ Default ” shall
mean any event which upon notice or lapse of time, or both notice
and a lapse of time, would be an Event of Default under the
Notes.
“ EBITDA ” shall
mean earnings before interest, taxes, depreciation and amortization
determined in accordance with GAAP.
“ Environment ”
means soil, land surface or subsurface strata, surface waters
(including navigable waters, ocean waters, streams, ponds, drainage
basins and wetlands), groundwater, drinking water supply, stream
sediments, ambient air (including indoor air), plant and animal
life and any other environmental medium or natural
resource.
“ Environmental and Safety
Requirements ” shall mean all federal, state, local and
foreign statutes, regulations, rules, ordinances, and similar
provisions having the force or effect of law, all judicial and
administrative orders, judgments, directives, and determinations,
all contractual obligations, permits, licenses and all common law,
in each case concerning public health and safety, worker health and
safety and pollution or protection of the environment (including,
without limitation, all those relating to the presence, use,
production, generation, handling, transportation, treatment,
storage, disposal, distribution, labeling, testing, processing,
discharge, release, threatened release, control or cleanup of any
hazardous or otherwise regulated materials, substances or wastes,
chemical substances or mixtures, pesticides, pollutants,
contaminants, toxic chemicals, petroleum products or byproducts,
asbestos, polychlorinated biphenyls, noise or radiation), each as
amended and as now or hereafter in effect.
“ ERISA ” shall
mean the Employee Retirement Income Security Act of 1974 (or any
successor legislation thereto), as amended from time to time and
any regulations promulgated thereunder.
3
“ ERISA Affiliates
” shall have the meaning set forth in Section 5.23.2
hereof.
“ Event of Default
” with respect to the Notes, shall have the meaning set forth
in the Notes.
“ Executive Management
Team ” shall mean Elton Alderman, Thomas Billstein and
Nico Rosier.
“ Existing Subordinated
Notes ” shall mean the subordinated notes listed on
Schedule 1 attached hereto.
“ Expiration Date
” shall mean, with respect to Section 7.4.11 and
Section 7.4.12 , the date when the Notes are repaid in full,
and with respect to each covenant in Section 7 other than
Section 7.4.11 and Section 7.4.12 , the date that is
the later to occur of (i) the date that the Notes are repaid in
full and (ii) the first date that St. Cloud or its Affiliates cease
to beneficially hold shares of Common Stock or Warrants
representing, in the aggregate, fifty percent (50%) of the total
number of shares of Underlying Common Stock originally issued to
St. Cloud (assuming exercise of the Warrant).
“ First Capital ”
shall mean First Capital Corporation, d/b/a FC Commercial
Corporation, an Oklahoma corporation.
“ First Capital Credit
Facility ” shall mean that certain Purchasing Agreement,
dated as of January 31, 2003, by and between Borrower and First
Capital, pursuant to which Borrower may obtain financing from First
Capital for up to One Million Five Hundred Thousand Dollars
($1,500,000) from First Capital Corporation.
“ GAAP ” shall
mean United States generally accepted accounting principles in
effect from time to time applied consistently throughout the period
involved.
“ Incremental Revenue
” shall mean, (i) with respect to the period from November
24, 2003 through December 31, 2003, an amount equal to the net
revenues of Parent and its Subsidiaries for such period, determined
in accordance with GAAP, minus Nine Hundred Twelve Thousand Four
Hundred Twenty Two Dollars ($912,422), and (ii) with respect to any
calendar quarter thereafter, an amount equal to the net revenues of
Parent and its Subsidiaries for such calendar quarter, determined
in accordance with GAAP, minus Two Million One Hundred Sixty One
Thousand Dollars ($2,161,000).
“ Indebtedness ”
shall mean (i) all indebtedness for borrowed money, including but
not limited to the Notes, (ii) any obligation evidenced by bonds,
debentures, notes or other similar instruments, (iii) any
obligation to pay the deferred purchase price of property or for
services (other than trade payables in the ordinary course of
business), (iv) any obligation or liability of others secured by a
lien on any asset of any Credit Party, whether or not such
obligation or liability is assumed, (v) any guarantee or indemnity
with respect to the indebtedness, obligations or liability of
another Person (other than those incurred in the ordinary course of
business), (vi) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to
property acquired by any Credit Party (even though the rights and
remedies of the seller or lender under such agreement in the event
of default are
4
limited to repossession or sale of such
property), (vii) all obligations of any Credit Party, contingent or
otherwise, to purchase, redeem, retire or otherwise acquire for
value any capital stock of any Credit Party, (viii) that portion of
obligations with respect to capitalized leases that is properly
classified as a liability on a balance sheet in conformity with
GAAP, and (ix) notes payable and drafts accepted representing
extensions of credit whether or not representing obligations for
borrowed money.
“ Investors’ Rights
Agreement ” shall mean that certain Investors’
Rights Agreement, dated as of the date hereof, by and among Parent,
Purchasers and the parties identified therein, as amended, modified
or supplemented from time to time.
“ Loan Documents
” shall mean, collectively, this Agreement, the Pledge and
Security Agreement, the Notes, the Warrants, the Investors’
Rights Agreement, the Parent Guaranty and each of the other
agreements contemplated hereby and executed by the
parties.
“Majority
Holders ” shall
mean, holders of at least fifty percent (50%) of the outstanding
principal balance under the Notes or, if the Notes have been
repaid, holders of at least fifty percent (50%) of the total number
of shares of Underlying Common Stock originally issued to
Purchasers (assuming exercise of the Warrants).
“Notes
” shall mean, collectively,
the St. Cloud Note and the Other Purchasers Notes.
“Other Purchaser
Notes ” shall mean,
collectively, the Bedford I Note, the Bedford II Note and the Aspen
Note.
“Other Purchaser
Warrants ” shall
mean, collectively, the Bedford I Warrant, the Bedford II Warrant
and the Aspen Warrant.
“Other Purchaser
Securities ” shall
mean, collectively, the Bedford I Securities, the Bedford II
Securities and the Aspen Securities.
“ Parent Guaranty
” shall mean that certain Guaranty, dated as of the date
hereof, executed by Parent in favor of St. Cloud, as agent for the
Purchasers, as amended, modified or supplemented from time to
time.
“ Permitted
Indebtedness ” shall mean any of the
following:
(A) Indebtedness incurred under the
First Capital Credit Facility up to an amount equal to Two Million
Dollars ($2,000,000), or any Indebtedness hereafter obtained and
owed to a replacement lender selected by the Parent in place of
First Capital, provided that such amount does not exceed Two
Million Dollars ($2,000,000) in the aggregate and is on terms no
less onerous to Borrower than the First Capital Credit
Facility;
(B) Indebtedness under the Existing
Subordinated Notes;
(C) any Indebtedness (other than as
described in (A) and (B) above) not to exceed $100,000 in the
aggregate at any given time;
5
(D) any Indebtedness in connection
with a Permitted Lien (as defined in the Pledge and Security
Agreement); and
(E) any Indebtedness of any Credit
Party to Borrower or Parent.
“ Person ” shall
mean any corporation, limited liability company, trust,
partnership, individual, association or other entity.
“ Pledge and Security
Agreement ” shall mean that certain Pledge and Security
Agreement, dated as of the date hereof, by and among Parent,
Borrower and St. Cloud, as agent for Purchasers, as amended,
modified or supplemented from time to time, granting Purchasers a
security interest in all of the assets of Borrower.
“ Preferred Stock
” shall mean preferred stock, par value $0.001 per share, of
Parent.
“ Regulatory Problem
” shall mean any transaction, circumstance or situation
whereby (i) a Person and such Person’s Affiliates would own,
control or have power over a quantity of securities of any kind
issued by Borrower or any Credit Party or any other entity greater
than is permitted under any requirement of any governmental
authority, or (ii) it has been asserted by any governmental
regulatory agency, or such Person believes, that such Person or its
Affiliates are not entitled to hold, or exercise any significant
right under or with respect to, the Securities or the Underlying
Common Stock held by such Person.
“ Regulatory Violation
” shall mean, with respect to St. Cloud, (i) a diversion of
the proceeds of the issuance by Borrower and Parent of the
Securities from the use reported thereof on the SBA form No. 1031
delivered at the Closing, if such diversion was effected without
obtaining the prior written consent of St. Cloud (which may be
withheld in its sole discretion) or (ii) a change in the principal
business activity of the Credit Parties to an ineligible business
activity (within the meaning of the SBIC Regulations) if such
change occurs within one year after the date of the initial
transactions hereunder.
“ Rights Agreement
” shall mean that certain Rights Agreement, dated as of
October 25, 2002, by and between Parent and Continental Stock
Transfer & Trust Company, as amended, modified or supplemented
from time to time.
“Royalty Catch-Up
Amount ” shall
mean, with respect to any calendar quarter, the amount by which the
aggregate Royalty Payments paid in all prior calendar quarters are
less than the aggregate amount that would have been paid to
Purchasers if the Maximum Quarterly Royalty Payment had been paid
in all prior calendar quarters.
“ Royalty Payment Date
” shall mean, with respect to any calendar quarter, the date
that is the earlier to occur of (i) the date that Parent’s
consolidated earnings for such calendar quarter are released, and
(ii) thirty (30) days following the end of such calendar
quarter.
“ SBIC ” shall
mean a small business investment company licensed under the SBIC
Act.
6
“ SBIC Act ”
shall mean the Small Business Investment Act of 1958, as
amended.
“ SBIC Regulations
” shall mean the Small Business Investment Company Act of
1958, as amended, and the regulations issued by the SBA thereunder,
codified at Title 13 of the Code of Federal Regulations (“
13 C.F.R. ”), 107 and 121, as amended.
“ SEC Reports ”
shall mean all forms, reports and documents filed by Parent with
the Commission.
“ Securities ”
shall mean, collectively, the St. Cloud Securities and the Other
Purchasers Securities.
“ St. Cloud Note
” shall mean that certain secured promissory note, dated as
of the date hereof, in the original principal amount of Two Million
Fifty Thousand Dollars ($2,050,000), issued by Borrower in favor of
St. Cloud, as amended, modified or supplemented from time to
time.
“ St. Cloud Securities
” shall mean, collectively, the St. Cloud Note and the St.
Cloud Warrant.
“ St. Cloud Warrant
” shall mean that certain warrant to purchase 4,885,492
shares of Common Stock, issued by Parent to St. Cloud pursuant to
this Agreement, as amended, modified or supplemented from time to
time.
“ Subsidiary ”
shall mean, with respect to any Person, any corporation, limited
liability company, partnership, association or other business
entity of which (i) if a corporation, a majority of the total
voting power of shares of stock entitled (without regard to the
occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more
of the other Subsidiaries of that Person or a combination thereof,
or (ii) if a limited liability company, partnership, association or
other business entity, a majority of the partnership or other
similar ownership interest thereof is at the time owned or
controlled, directly or indirectly, by any Person or one or more
Subsidiaries of that Person or a combination thereof. For purposes
hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a limited liability company, partnership,
association or other business entity if such Person or Persons
shall be allocated a majority of limited liability company,
partnership, association or other business entity gains or losses
or shall be or control (or have the power to be or control) a
managing director, manager or general partner of such limited
liability company, partnership, association or other business
entity.
“ Tangible Net Worth
” shall mean Parent’s consolidated net worth under GAAP
(excluding intangible assets and deferred tax assets of any Credit
Party).
“ Taxes ” shall
mean any tax, duty, fee, assessment or charge of any nature
whatsoever imposed by any taxing authority (including, without
limitation, any gross or net income, gross or net receipts,
franchise, sales, use, ad valorem, asset, value added, stamp,
transfer, franchise, withholding, payroll, employment, profit
sharing, capital, corporation, excise, occupation or property
taxes), together with any and all penalties, fines, additions to
tax or interest thereon.
7
“ Tax Return ”
shall mean any return, information report or filing with respect to
Taxes, including any schedules attached thereto and including any
amendment thereof.
“ Transaction Expenses
” shall mean and include (a) all out-of-pocket fees and
expenses incurred by Purchasers in connection with their due
diligence review of the Credit Parties (including, without
limitation, background checks), the preparation, negotiation,
execution and interpretation of this Agreement, the Securities, and
the other Loan Documents and the agreements contemplated hereby and
thereby, and the consummation of all of the transactions
contemplated hereby and thereby (including, without limitation, all
travel expenses incurred by representatives or agents of Purchasers
and all reasonable fees and expenses of legal counsel, accountants
and other third parties), which shall not exceed Ninety Thousand
Dollars ($90,000) in the aggregate, (b) all reasonable fees and
expenses incurred with respect to any amendments or waivers
(whether or not the same become effective) under or in respect of
each of the Loan Documents and the other agreements and instruments
contemplated hereby and thereby, (c) all recording and filing fees,
stamp and other Taxes which may be payable in respect of the
execution and delivery of this Agreement or the issuance, delivery
or acquisition of any Securities or the Underlying Common Stock,
and (d) the fees and expenses incurred by any Purchaser in any
required filing with any governmental agency with respect to its
investment hereunder or in any other required filing with any
governmental agency with respect to any Credit Party which mentions
such Purchaser.
“ Underlying Common
Stock ” shall mean (i) the Common Stock issued or
issuable upon exercise of the Warrants and (ii) any Common Stock
issued or issuable with respect to the securities referred to in
clause (i) above by way of stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization.
“ Warrants ”
shall mean, collectively, the St. Cloud Warrant and the Other
Purchasers Warrants.
2. PURCHASE AND SALE OF
SECURITIES.
2.1 Authorization.
Borrower and Parent have authorized
the issuance to Purchasers of the Securities.
2.2 Purchase and
Sale.
2.2.1 (a) Borrower agrees to borrow from and, in
confirmation thereof, Borrower and Parent agree to issue the St.
Cloud Securities to St. Cloud and, subject to the terms and
conditions set forth herein, St. Cloud agrees to lend to Borrower
Two Million Fifty Thousand Dollars ($2,050,000), (b) Borrower
agrees to borrow from and, in confirmation thereof, Borrower and
Parent agree to issue the Bedford I Securities to Bedford I and,
subject to the terms and conditions set forth herein, Bedford I
agrees to lend to Borrower One Hundred Sixty Two Thousand Five
Hundred Dollars ($162,500), (c) Borrower agrees to borrow
from
8
and, in confirmation thereof,
Borrower and Parent agree to issue the Bedford II Securities to
Bedford II and, subject to the terms and conditions set forth
herein, Bedford II agrees to lend to Borrower One Hundred Sixty Two
Thousand Five Hundred Dollars ($162,500), and (d) Borrower agrees
to borrow from and, in confirmation thereof, Borrower and Parent
agree to issue the Aspen Securities to Aspen and, subject to the
terms and conditions set forth herein, Aspen agrees to lend to
Borrower One Hundred Twenty Five Thousand Dollars ($125,000). The
Bridge Loan Amount and the St. Cloud Closing Fees shall be credited
against the loan to be made by St. Cloud with respect to the St.
Cloud Securities as set forth in Section 3.2 .
2.2.2 The Credit Parties and Purchasers, having
adverse interests and as a result of arms’ length
negotiation, agree that (a) the fair market value of the Notes, if
issued apart from the Warrants, is equal to Two Million Three
Hundred Seventy Four Thousand Two Hundred Two Dollars ($2,374,202),
(b) the fair market of the Warrants, if issued apart from the
Notes, is equal to One Hundred Twenty Six Thousand Dollars
($126,000), and (c) all Tax Returns and other information returns
of the parties relative to this Agreement, the Notes and the
Warrants shall consistently reflect the matters agreed to in
clauses (a) and (b) above.
2.3 Closing.
The closing of the transactions
contemplated herein (the “ Closing ”) will take
place at the offices of Latham & Watkins LLP, 633 West Fifth
Street, Los Angeles, California, on the Closing Date, or at such
other time and at such other place as the parties may agree to in
writing.
3. DELIVERIES AT CLOSING.
At the Closing, the parties will
deliver the following:
3.1 Deliveries by the Credit
Parties. The Credit
Parties will have delivered to each Purchaser or its counsel all of
the following documents:
3.1.1 This Agreement, signed by a duly authorized
officer of each Credit Party;
3.1.2 Each of the Notes of such Purchaser, signed by a
duly authorized officer of Borrower;
3.1.3 Each of the Warrants of such Purchaser, signed
by a duly authorized officer of Parent;
3.1.4 The Pledge and Security Agreement (and any
collateral documents necessary to perfect a security interest in
the Proprietary Information (as defined in Section 5.5.2
below) signed by a duly authorized officer of Parent and
Borrower;
3.1.5 The Investors’ Rights Agreement, signed by
a duly authorized officer of Parent and each member of the
Executive Management Team;
3.1.6 The Parent Guaranty, signed by a duly authorized
officer of Parent;
9
3.1.7 A certificate, dated as of the date hereof,
signed by the Chief Executive Officer and President of each of
Parent and Borrower in the form acceptable to each Purchaser;
certifying that the representations and warranties of each Credit
Party set forth in Section 5 hereof are true and correct in
all material respects as of the Closing Date (except for any
representations and warranties which are expressly as of another
date) and certifying a true and complete copy of (i) the Articles
of Incorporation and Bylaws (or any charter or similar
organizational document) of each Credit Party, (ii) resolutions of
the board of directors of each Credit Party, in each case,
authorizing the execution, delivery and performance of this
Agreement and the other Loan Documents and the consummation of the
transaction contemplated thereby, (iii) resolutions of the board of
directors of Parent, taking such requisite action so that neither
St. Cloud nor any Affiliates shall become an “Acquiring
Person,” and no “Stock Acquisition Date” or
“Distribution Date” (as such term is defined in the
Rights Agreement) will occur, by reason of the execution, delivery
and performance of this Agreement and the other Loan Documents and
the consummation of the transaction contemplated thereby; and (iv)
resolutions of the board of directors of Parent and Borrower,
fixing the size of each of their boards to consist of seven (7)
directors and electing each of Marshall S. Geller and Robert Lautz
to serve on such boards, effective on the date that Parent obtains
the directors and officers insurance policy contemplated by Section
4.1 of the Investors’ Rights Agreement or such earlier date
that St. Cloud may specify to Parent in writing;
3.1.8 A closing statement (in the form provided by
Purchasers) signed by a duly authorized officer of
Borrower;
3.1.9 The following closing fees (collectively
referred to hereafter as the “ St. Cloud Closing Fees
”): (i) a closing fee equal to Fifty Thousand Dollars
($50,000), which shall be payable to St. Cloud at the Closing and
deducted or withheld from the amount paid by St. Cloud to Borrower
for the St. Cloud Securities at the Closing; and (ii) the
Transaction Expenses, a written estimate (together with any
supporting documentation as Borrower reasonably requests) of which
shall be provided by St. Cloud to Borrower and deducted or withheld
from the amount paid by St. Cloud to Borrower for the St. Cloud
Securities at the Closing;
3.1.10 A Completed Small Business Administration
(“ SBA ”) forms No. 480 (Size Status
Declaration), No. 652 (Assurance of Compliance) and No. 1031
(Portfolio Financing Report, Parts A and B);
3.1.11 A certificate of insurance (which shall be
attached hereto as Schedule 3.1.11 ) for the insurance
described in Section 5.11 ;
3.1.12 A certificate (which shall be attached hereto as
Schedule 3.1.12 ), dated as of the date hereof, signed by
the Chief Executive Officer and President of Borrower, certifying
as to the use of proceeds from the issuance of the
Securities;
10
3.1.13 An opinion from Stradling Yocca Carlson &
Rauth, counsel to the Credit Parties, dated as of the Closing Date,
and addressed to each Purchaser, in the form reasonably acceptable
to St. Cloud;
3.1.14 Stock certificates representing all of the
capital stock of Borrower, accompanied by duly executed and undated
instruments of transfer;
3.1.15 An assignment of the rights of Cayman Sub I
under that certain Memorandum of Agreement (“ Cayman
Receivable Agreement ”), dated as of July 7, 2003, by and
among Cayman Sub I, Prolong Oil and Lubricant (“ Prolong
Oil ”) and The Trustees of The Nel Trust, No. IT3389/98
(the “ Nel Trust ”) to Borrower; and
3.1.16 Such other documents relating to the
transactions contemplated by this Agreement as any Purchaser or its
counsel may reasonably request.
3.2 Deliveries by St.
Cloud. St. Cloud will
have delivered to Borrower the following:
3.2.1 A wire transfer to the account listed in
Schedule 3.2.1 in an amount equal to Two Million Fifty
Thousand Dollars ($2,050,000) less (i) the Bridge Loan
Amount and less (ii) the St. Cloud Closing Fees (including
the aggregate amount of estimated Transaction Expenses) described
in Section 3.1.9 (it being understood by the parties that
St. Cloud shall provide Borrower with the final aggregate amount of
Transaction Expenses within thirty (30) days after the Closing and
supporting documentation for such Transaction Expenses as Borrower
may reasonably request and to the extent such final amount is less
than the estimated amount deducted at the Closing, such difference
shall be promptly paid by St. Cloud to Borrower, and to the extent
such final amount is greater than the estimated amount deducted at
the Closing, such difference shall be promptly paid by Borrower to
St. Cloud);
3.2.2 This Agreement, signed by a duly authorized
officer of St. Cloud;
3.2.3 The Investors’ Rights Agreement, signed by
a duly authorized officer of St. Cloud;
3.2.4 The Pledge and Security Agreement, signed by a
duly authorized officer of St. Cloud; and
3.2.4 An original copy of the Bridge Note, which shall
be cancelled by Parent.
3.3 Deliveries by Bedford
I. Bedford I will have
delivered to the Credit Parties the following:
3.3.1 A wire transfer to the account listed in
Schedule 3.2.1 in an amount equal to One Hundred Sixty Two
Thousand Five Hundred Dollars ($162,500);
11
3.3.2 This Agreement, signed by a duly authorized
officer of Bedford I; and
3.3.3 The Investors’ Rights Agreement, signed by
a duly authorized officer of Bedford I.
3.3 Deliveries by Bedford
II. Bedford II will have
delivered to the Credit Parties the following:
3.3.1 A wire transfer to the account listed in
Schedule 3.2.1 in an amount equal to One Hundred Sixty Two
Thousand Five Hundred Dollars ($162,500);
3.3.2 This Agreement, signed by a duly authorized
officer of Bedford II; and
3.3.3 The Investors’ Rights Agreement, signed by
a duly authorized officer of Bedford II.
3.4 Deliveries by
Aspen. Aspen will have
delivered to the Credit Parties the following:
3.4.1 A wire transfer to the account listed in
Schedule 3.2.1 in an amount equal to One Hundred Twenty Five
Thousand Dollars ($125,000);
3.4.2 This Agreement, signed by a duly authorized
officer of Aspen; and
3.4.3 The Investors’ Rights Agreement, signed by
a duly authorized officer of Aspen.
3.5 Security Filings.
All filings, recordings and other
actions which any Purchaser or its counsel deem necessary or
advisable to establish, preserve and perfect a priority security
interest on all of the existing and future assets of Parent and
Borrower shall have occurred and evidence, satisfactory in form and
substance to each Purchaser’s counsel, that all required
filings and recordings have been made and liens have been created
in favor of such Purchaser, shall have been delivered to each
Purchaser, including UCC-1 Financing Statements.
4. REPRESENTATIONS AND WARRANTIES OF
PURCHASERS. Each
Purchaser severally represents and warrants to the Credit Parties
as of the Closing as follows:
4.1 Due Authorization; Validity
and Binding Effect. Each
of the Loan Documents to which such Purchaser is a party has been
duly and validly authorized, executed and delivered on behalf of
such Purchaser and constitutes a valid and legally binding
obligation of such Purchaser, enforceable in accordance with its
terms, subject to bankruptcy and other laws of general application
affecting the rights and remedies of creditors and the availability
of equitable remedies.
4.2 Accredited Investor;
Investment Intent.
4.2.1 This Agreement is made with such Purchaser in
reliance upon such Purchaser’s representation to Borrower and
Parent, which by such Purchaser’s execution of this
Agreement, such Purchaser hereby confirms, that (A) the
12
Securities to be acquired by such
Purchaser are being acquired for investment for such
Purchaser’s own account, not as a nominee or agent, and not
with a view to the resale or distribution of any part thereof,
except that (without any limitation on such Purchaser’s
rights to sell, assign or otherwise transfer all or any part of the
Securities to be acquired by such Purchaser) such Purchaser may, in
its sole discretion grant one or more participation interests in
the Securities to be acquired by such Purchaser; and (B) such
Purchaser has full power and authority to enter into this
Agreement.
4.2.2 Such Purchaser has not been attracted to the
purchase of the Securities by any general publication or
advertising.
4.2.3 Such Purchaser has received all the information
it considers necessary or appropriate for deciding whether to
purchase the Securities to be acquired by such Purchaser, and
represents that it has had an opportunity to ask questions and
receive answers from Borrower and Parent regarding Borrower and
Parent, their business and prospects, and the terms and conditions
of the offering of the Securities. The foregoing, however, does not
limit or modify the representations and warranties of the Credit
Parties contained in this Agreement or any of the other Loan
Documents.
4.2.4 Such Purchaser has not been organized for the
purpose of acquiring the Securities and is an investor in
securities of privately-held companies and acknowledges that it is
able to protect its interests in connection with the purchase of
the Securities to be acquired by such Purchaser, can bear the
economic risk of its investment with full understanding that it can
lose its entire investment in the Securities without producing a
material adverse change in its financial condition, and has such
knowledge and experience in financial or business matters that it
is capable of evaluating the merits and risks of the investment in
the Securities to be acquired by such Purchaser.
4.2.5 Such Purchaser is an “accredited
investor” within the meaning of Rule 501 of Regulation D
promulgated by the Commission, as presently in effect and is a
small business investment company licensed by the Small Business
Administration.
4.2.6 Such Purchaser understands that (A) neither the
Securities to be acquired by such Purchaser nor the sale thereof to
it has been registered under the Securities Act of 1933, as amended
(the “ Securities Act ”), or under any state
securities law; (B) no registration statement has been filed with
the Commission, nor with any other regulatory authority and that,
as a result, any benefit which might normally accrue to an investor
such as such Purchaser by an impartial review of such a
registration statement by the Commission or other regulatory
commission will not be forthcoming; and (C) the Securities are
characterized as “restricted securities” under the
federal securities laws inasmuch as they are being acquired from
Borrower and Parent in a transaction not involving a public
offering and that under such laws and applicable regulations such
Securities may
13
be resold without registration under
the Securities Act only in certain limited circumstances. In this
connection, such Purchaser represents that it is familiar with the
Commission’s Rule 144, as presently in effect, and
understands the resale limitations imposed thereby and by the
Securities Act. Such Purchaser further represents that such
Purchaser shall not sell, assign or transfer the Securities except
for sales, assignments or transfers pursuant to an effective
registration statement or Rule 144 promulgated under the Securities
Act. Such Purchaser shall not knowingly transfer the Securities to
any Person who is a competitor of any Credit Party.
4.2.6 Such Purchaser understands that the Securities
are being offered and sold to it in reliance upon specific
exemptions from the registration requirements of United States
federal and state securities laws and that the Credit Parties are
relying upon the truth and accuracy of, and such Purchaser’s
compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Purchaser set forth
herein in order to determine the availability of such exemptions
and the eligibility of such Purchaser to acquire the
Securities.
4.3 Legend.
Such Purchaser understands that
until (a) the Securities may be sold by the Purchaser under Rule
144 or (b) such time as the resale of the Securities have been
registered under the Securities Act, the certificates representing
the Securities will bear a restrictive legend in substantially the
following form (and a stop-transfer order may be placed against
transfer of the certificates for such Securities):
“THE SECURITIES REPRESENTED BY
THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR
ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER APPLICABLE SECURITIES LAWS, OR UNLESS OFFERED,
SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THOSE LAWS.”
4.4 No Brokers.
Such Purchaser has taken no action
which would give rise to any claim by any person other than St.
Cloud for brokerage commissions, finder’s fees or similar
payments relating to this Agreement, or the transactions
contemplated hereby or thereby.
5. REPRESENTATIONS AND WARRANTIES OF THE CREDIT
PARTIES. The Credit
Parties, jointly and severally, represent and warrant to each
Purchaser as of the date hereof as follows:
5.1 Organization and Corporate
Power. Each of Parent and
Borrower is a corporation duly organized, validly existing and in
good standing under the laws of the state of Nevada, has all
requisite power and authority to own and operate its properties and
assets and to carry on its business as now conducted and as
proposed to be conducted, to execute and deliver the Loan
Documents, to issue the Securities and to carry out the provisions
of the Loan Documents. Each of the Cayman Subsidiaries is a company
duly organized, validly existing and !
14
in good standing under the laws of the Cayman
Islands, has all requisite power and authority to own and operate
its properties and assets and to carry on its business as now
conducted and as proposed to be conducted, to execute and deliver
the Loan Documents and to carry out the provisions of the Loan
Documents. Each of the Credit Parties has only one jurisdiction of
organization. Each Credit Party is duly qualified to do business as
a foreign corporation and is in good standing in each jurisdiction
in which the nature of property owned or leased by it or the
conduct of its business requires such qualification unless the
failure to be so qualified would not materially adversely affect
Borrower or the Credit Parties’ business, operations or
financial condition. The copies of the Bylaws and Articles of
Incorporation of each of Parent and Borrower and the organizational
documents of each of the Cayman Subsidiaries furnished to
Purchasers’ counsel reflect all amendments made thereto at
any time prior to the Closing and are correct and complete in all
respects.
5.2 Capitalization and Related
Matters.
5.2.1 As of November 24, 2003, the authorized capital
of Parent consists of 150,000,000 shares of Common Stock,
29,798,598 of which are issued and outstanding and 50,000,000
shares of Preferred Stock, no shares of which are issued and
outstanding. The authorized capital share of Borrower consists of
50,000,000 shares of common stock, par value $0.001 per share,
15,968,000 shares of which are issued and outstanding, and all of
which are directly owned and held of record by Parent. The
authorized capital share of Cayman Sub I consists of 50,000 shares
of common stock, par value $1.00 per share, 50,000 shares of which
are issued and outstanding, and all of which are directly owned and
held of record by Parent. The authorized capital share of Cayman
Sub II consists of 50,000 shares of common stock, par value $1.00
per share, 50,000 shares of which are issued and outstanding, and
all of which are directly owned and held of record by Cayman Sub
I.
5.2.2 Except as set forth in Section 5.2.1 or
on Schedule 5.2.2, no Credit Party has outstanding any stock
or securities convertible or exchangeable for any shares of its
capital stock or containing any profit participation features, or
has outstanding any rights or options to subscribe for or to
purchase its capital stock or any stock or securities convertible
into or exchangeable for its capital stock or any stock
appreciation rights or phantom stock plans. No Credit Party is
subject to any obligation (contingent or otherwise) to repurchase
or otherwise acquire or retire any shares of its capital stock or
any warrants, options or other rights to acquire its capital stock.
All of the outstanding shares of each Credit Party’s capital
stock are validly issued, fully paid and nonassessable. The
Underlying Common Stock has been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of the
Warrants and Parent’s Articles of Incorporation, will be duly
and validly issued, fully paid and nonassessable, and will be free
of restrictions on transfer other than restrictions on transfer
under applicable state and federal securities laws.
5.2.3 Assuming the truth and accuracy of the
representations and warranties of each Purchaser contained in this
Agreement, the offer, sale and issuance of the
15
Securities as contemplated by this
Agreement and the Underlying Common Stock are, or will be, exempt
from the registration and prospectus delivery requirements of the
Securities Act, and are, or will be, exempt from registration or
qualification under the registration, permit or qualification
requirements of all applicable state securities laws.
5.3 Subsidiaries.
(a) Except as set forth on
Schedule 5.3 , Parent does not own, directly or indirectly,
any securities of any Person, other than Borrower and Cayman Sub I,
(b) Borrower does not own, directly or indirectly, any securities
of any Person, (c) Cayman Sub I does not own, directly or
indirectly, any securities of any Person, other than Cayman Sub II,
(d) Cayman Sub II does not own, directly or indirectly, any
securities of any Person, and (e) none of the officers of any
Credit Party owns, directly or indirectly, any security or
financial interest in any other Person which competes with or does
business with the Credit Parties or which would be reasonably
likely to interfere with the performance by such officers of his or
her duties to the Credit Parties. All the business of the Credit
Parties is, and for the period covered by the Financial Statements
has been and the period from September 30, 2003 through the date
hereof, conducted through Borrower, and neither Parent nor any of
the Cayman Subsidiaries hold any assets except as described on
Schedule 5.3 .
5.4 Authorization; No
Breach. The execution and
delivery of each of the Loan Documents have been duly authorized by
each of the Credit Parties, to the extent a party thereto. Each
Loan Document constitutes a valid and binding obligation of each
Credit Party, to the extent a party thereto, enforceable in
accordance with its terms subject to bankruptcy and other laws of
general application affecting the rights and remedies of creditors
and the availability of equitable remedies. The execution, delivery
and compliance with and performance by each of the Credit Parties
of the Loan Documents does not and will not (i) conflict with or
result in a breach of the terms, conditions or provisions of; (ii)
constitute a default under; (iii) except as contemplated by the
Pledge and Security Agreement, result in the creation of any lien,
security interest, charge or encumbrance upon any Credit
Party’s capital stock or assets pursuant to; (iv) give any
third party the right to accelerate any material obligation under;
(v) result in a material violation of; or (vi) require any
authorization, consent, approval, permit, exemption or other action
by or notice to any court or administrative or governmental body
pursuant to (A) the Bylaws or the Articles of Incorporation (or any
charter or similar organizational document) of any Credit Party,
(B) any law, statute, rule or regulation to which any Credit Party
is subject or (C) any agreement (excluding the Loan Documents),
instrument, order, judgment or decree to which any Credit Party is
subject.
5.5 Assets.
5.5.1 No officer, Affiliate, consultant or employee of
any Credit Party owns or has any interest, directly or indirectly,
in any of the property owned by or leased by any Credit Party or in
any license or product development agreement with any Credit Party.
Except as set forth in Schedule 5.5.1 , Borrower has good
and marketable title to, or a valid leasehold interest in, all of
its properties of any kind other than Proprietary Information (as
defined below) and interests in such properties, which constitute
all the properties and interests in property other than Proprietary
Information that are used in the business of the Credit Parties
(as
16
conducted or as currently proposed
to be conducted), free and clear of restrictions or conditions on
transfer or assignment and free and clear of mortgages, liens,
pledges, charges, encumbrances, equities, claims, easements, rights
of way, covenants, conditions or restrictions.
5.5.2 Except as set forth on Schedule 5.5.2 ,
Borrower has good title to and exclusive ownership of all patents,
patent applications, trademarks, service marks and domain names,
together with the goodwill of the business associated therewith,
copyrights, trade names, mask works, proprietary information,
know-how, processes, models, designs, trade secrets, customer and
supplier lists, market surveys, plans, procedures and other
intellectual property rights (collectively the “
Proprietary Information ”), which are used or held for
use in the operation or conduct of the business of the Credit
Parties as presently conducted and currently proposed to be
conducted, free and clear of restrictions or conditions on transfer
or assignment and free and clear of payments and fees, mortgages,
liens, pledges, charges, encumbrances, equities, claims, covenants,
conditions or restrictions. The business of the Credit Parties as
presently conducted and as currently proposed to be conducted does
not and to the knowledge of the Credit Parties, will not conflict
or infringe with the Proprietary Information of others. No
Affiliate, officer, consultant or employee of any Credit Party has
any right in any of the Proprietary Information.
5.5.3 Each Credit Party has taken commercially
reasonable measures to protect the secrecy, value and
confidentiality of the Proprietary Information. No Credit Party has
disclosed the contents of any Proprietary Information to Persons
other than its officers and
