SECURITIES PURCHASE AGREEMENT
Securities Purchase Agreement (together with the schedules and exhibits
hereto, this "Agreement"), dated as of March 15, 2005, by and between Electronic
Game Card, Inc., a Nevada corporation (the "Company"), and each of the Persons
(as defined below) who has executed a signature page to this Agreement (each a
"Purchaser," and together, the "Purchasers").
W I T N E S S E T H:
WHEREAS, the Company desires to issue and sell to the Purchasers, and the
Purchasers desire to purchase from the Company, certain securities as set forth
below.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants and agreements hereinafter contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
intending to be legally bound, the parties hereto hereby agree as follows:
1. Offer and Sale of Securities.
1.1 The Offering. The Company is offering for sale in this offering the
Company's convertible promissory notes (the "Convertible Promissory Notes").
Each Convertible Promissory Note will automatically convert, with respect to
each $48,000 of the principal amount of the same, into 32,000 shares of the
Company's Series A Convertible Preferred Stock, par value $0.001 per share (the
"Shares" or "Series A Preferred" or the "Series A Preferred Stock") upon the
effectiveness of actions by the Company's shareholders to authorize the Series A
Preferred. The Company covenants to complete those actions as soon as
practicable. Each share of the Series A Preferred is initially convertible into
1 share of the Company's common stock, par value $0.001 per share (the "Common
Stock"), which equates to an initial conversion price of $1.50 per share of
Common Stock. (Each Promissory Note, therefore, is ultimately convertible into
an aggregate of 32,000 shares of Common Stock.) At the option of the holder,
each Convertible Promissory Note is also convertible directly into shares of
Common Stock on an as-converted-into-Series-A-Preferred basis, whether or not
the Series A Preferred is ever authorized or issued. The Purchaser will also
receive one (1) warrant (a "Warrant") substantially in the form of Exhibit C to
acquire one (1) share of the Series A Preferred for every 2 shares of the Series
A Preferred into which the Convertible Promissory Note(s) acquired by such
Purchaser are initially convertible, or 16,000 additional shares of Series A
Preferred in the aggregate with respect to each $48,000 initial principal amount
of Convertible Promissory Note(s) purchased (but there will be no fractional
Warrants). The Warrants, which shall not be transferable, shall be exercisable
as soon as the Series A Preferred Stock is authorized by the Company's
shareholders. The Warrants shall be initially exercisable at $1.85 per share of
Series A Preferred Stock, subject to adjustment, and shall be exercisable for a
period of 5 years. At the option of the holder, each Warrant is also immediately
exercisable directly to acquire shares of Common Stock on an
as-converted-from-Series-A-Preferred basis, whether or not the Series A
Preferred is ever authorized or issued. Unexercised Warrants shall expire
earlier upon notice by the Company to the holders of the Warrants following any
consecutive 30-day trading period during which the Common Stock trades on its
principal market at a price at or above three (3) times the then applicable
exercise price with average daily volume of at least 100,000 shares (subject to
adjustment of such trading volume threshold in the event of stock splits,
reverse stock splits, stock dividends, recapitalizations or similar events). The
"Minimum Offering" shall be Three Million Dollars ($3,000,000) of Convertible
Promissory Notes. The "Maximum Offering" shall be Eight Million One Hundred
Thousand Dollars ($8,100,000) of Convertible Promissory Notes; provided, that
the Company, in its sole discretion, may increase the Maximum Offering, at any
time during the Offering and without prior notice, by up to ten per cent (10%).
Once the Company is prepared to accept subscriptions for at least the Minimum
Offering, the Company may accept and close upon subscriptions from time to time
in its sole discretion during the offering period referred to in this Agreement.
The shares of Common Stock into which the Series A Preferred Stock is
convertible are sometimes hereafter referred to as the "Conversion Shares"). The
Series A Preferred which may be acquired upon exercise of a Warrant are
sometimes hereinafter referred to as the "Warrant Shares". The shares of Common
Stock which may be acquired upon conversion of the Warrant Shares are sometimes
hereafter referred to as the "Common Stock Warrant Shares". Notwithstanding the
foregoing, the Warrant Shares shall not be authorized, the Warrants shall not be
exercisable as to the Warrant Shares, and the Company shall not be required to
reserve Warrant Shares (or the underlying Common Stock Warrant Shares) for
issuance upon exercise of Warrants until the Company has amended its Certificate
of Incorporation in order to authorize sufficient Series A Preferred Stock to
reserve for issuance upon exercise of the Warrants and such amendment is
effective under applicable law, including securities laws. The Company covenants
to promptly obtain the necessary shareholder consents for the amendment and to
promptly thereafter file an Information Statement with the U.S. Securities and
Exchange Commission and, as soon as permissible thereafter, mail the Information
Statement to shareholders in order that the amendment may become effective.. The
Series A Preferred shall have the powers, designations, preferences, rights,
qualifications, limitations and restrictions contained in the Certificate of
Designations of the Series A Preferred Stock, in the form of Exhibit A hereto
(the "Certificate of Designations"). The Convertible Promissory Notes offered
hereby, and the accompanying Warrants are sometimes referred to herein as the
"Securities". The Purchasers of the Convertible Promissory Notes shall have the
benefit of certain registration rights in respect of the Conversion Shares and
the Common Stock Warrant Shares and the shares of Common Stock which may be
acquired directly upon conversion of the Convertible Promissory Notes and
directly upon exercise of the Warrants on the terms and conditions of a
Registration Rights Agreement, substantially in the form of Exhibit B hereto
(the "Registration Rights Agreement").
The Company is offering the Securities (the "Offering") for sale only to
individuals, entities or groups, including, without limitation, corporations,
limited liability companies, limited or general partnerships, joint ventures,
associations, joint stock companies, trusts, unincorporated organizations, or
governments or any agencies or political subdivisions thereof (each, a "Person")
who are "accredited investors" (as defined herein). The Company is making the
Offering of the Securities directly through certain of its officers and its
directors, but may engage a placement agent (the "Placement Agent") and other
registered broker-dealers ("Other Participating Agents") may also place
Securities. If the Company should engage a Placement Agent or any Other
Participating Agent, the Company presently intends to pay to the Placement Agent
and to Other Participating Agents, if any, commissions equal to up to 10% of the
gross sales price of the Convertible Promissory Notes sold in the offering by
the applicable Placement Agent or Other Participating Agent. In addition, the
Company presently intends to issue to any such Placement Agent or Other
Participating Agent, if any, at each Closing warrants (the "Placement Agent
Warrants") granting to such person warrant coverage equal to up to Ten Per Cent
(10%) of the Common Stock initially issuable upon exercise of the Series A
Preferred Stock initially issuable upon conversion of the Convertible Promissory
Notes sold by such placement agent to investors introduced by such placement
agent. The Company has agreed to indemnify the Placement Agent and the Other
Participating Agents, if any, against certain liabilities. The Company will also
pay its own costs of the Offering. The Company will also reimburse the Placement
Agent for its documented fees and expenses (including without limitation legal
fees and expenses) in connection with the Offering, subject to pre-approval of
significant expenses. The Placement Agent, in the Placement Agent's sole
discretion, may share the consideration described in this paragraph with the
Other Participating Agents. There will be no Placement Agent Warrants with
respect to Warrants, Warrant Shares, Common Stock Warrant Shares, or the shares
of Common Stock which may be acquired directly upon conversion of Convertible
Promissory Notes or the exercise of Warrants. The Placement Agent Warrants shall
initially be exercisable at $1.85 per share of Common Stock, subject to
adjustment, commencing upon the date of issuance and continuing for Five (5)
years after issuance or until the date which is ten (10) days after the Company
furnishes written notice to the Warrant holder that the market price of the
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Common Stock has been at least 300% of the then applicable exercise price of the
Warrant for a period of at least thirty (30) days, and the average trading
volume of the Common Stock has been at least 100,000 shares per day (subject to
adjustment of such trading volume threshold in the event of stock splits,
reverse stock splits, stock dividends, recapitalizations or similar events). The
shares of Common Stock which may be acquired upon exercise of a Warrant are
sometimes hereinafter referred to as the "Placement Agent Warrant Shares"). The
Placement Agent Warrants shall contain a cashless exercise provision. The
Placement Agent Warrants shall be transferable by the Placement Agent or Other
Participating Agent receiving the same only to its officers, directors,
shareholders and employees, as well as by such persons to their immediate family
affiliates in connection with estate planning, provided that no such transfer or
disposition may be made other than in compliance with applicable securities laws
and furnishing satisfactory evidence of such compliance to the Company. All
subscription proceeds in the Offering will be paid at Closing to the account or
accounts specified in or pursuant to Section 1.2 herein, provided that in the
event that a Placement Agent is utilized, the Company will utilize an escrow
agent (the "Escrow Agent") for receipt of funds if required under applicable
law. All references in this Agreement to the Escrow Agent shall be deemed to be
references to the Company in the event that there is no third party Escrow
Agent.
1.2 Subscription. Subject to the terms and conditions hereinafter set
forth in this Agreement, each Purchaser hereby offers to purchase, the initial
principal amount of Convertible Promissory Notes, together with the accompanying
Warrants, at the applicable Closing Date, set forth beneath each such
Purchaser's name on the signature pages of this Agreement, for an aggregate
purchase price (the "Purchase Price") equal to the principal amount of the
Convertible Promissory Notes so purchased (in multiples of $48,000) in the
amount set forth on the signature page beneath such Purchaser's name, to be paid
as set forth in this Agreement to such account or accounts as the Company may
specify by written notice to the Purchaser.
1.3 Subscription Procedures. To submit this Subscription, each Purchaser
must deliver (i) this Agreement, including, without limitation, the related
Purchaser Questionnaire, both duly completed and executed and (ii) an executed
Registration Rights Agreement to the following address, unless otherwise advised
by the Company:
Electronic Game Card, Inc.
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Attention: Private Placement
(with any questions to be raised with ▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇ (▇▇▇) ▇▇▇-▇▇▇▇).
The Company may accept or reject subscriptions, in whole or in part, or
accept subscriptions for less than the $48,000 minimum subscription, in its sole
discretion. The Company shall notify each Purchaser of the portion, if any, of
such Purchaser's subscription which has been accepted, payment instructions for
the Purchase Price, including wire transfer instructions and instructions for
delivery of payment by checks, if applicable, and the date upon which the
applicable Closing shall be held and payment must be made. At each applicable
Closing, each Purchaser acquiring Securities at such Closing shall deliver and
pay the applicable Purchase Price in full for the Securities being purchased by
such Purchaser at such Closing, for which such Purchaser's subscription has been
accepted, in U.S. dollars, in immediately available funds, in accordance with
the payment instructions contained in the notification to such Purchaser by the
Company.
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2. Closing. Upon acceptance of subscriptions for the Securities offered
hereby, the Company shall hold one or more closings (each one a "Closing", with
the first one being the "Initial Closing" and the final one being the "Final
Closing"). Each Closing shall be held at such location as the Company may
determine. The Final Closing Date will be that date which is the earlier to
occur of (i) March 18, 2005 or (ii) the sale of all of the Securities being
offered hereby, unless the Offering is extended without notice to investors, by
the Company in its sole discretion, for up to thirty (30) additional days (the
Final Closing Date is sometimes hereafter also referred to as the "Termination
Date"). At the Closing with respect to the subscription by each Purchaser, to
the extent the same is accepted by the Company, the Company will record on its
stock ledger in the name of each such Purchaser the Securities being purchased
by such Purchaser in accordance with the information on the applicable signature
page of this Agreement.
2.1 Escrow. In the event that the Company engages a Placement Agent for
this Offering, which the Company may not choose to do, then, and only in such
case, pending each Closing all funds paid in respect of this Agreement with
regard to such Closing shall be deposited in an escrow account (the "Escrow
Account") maintained by the Escrow Agent in accordance with Rule 15c2-4 under
the Exchange Act (as defined herein). The Escrow Account shall not be interest
bearing. In such a case, if the Company accepts subscriptions at or prior to the
Initial Closing Date or the Final Closing Date, as the case may be, then all
subscription proceeds received for subscriptions accepted by the Company prior
to such Closing Date shall be paid over to the Company at each Closing, net of
the Placement Agent fees, if any, and other offering expenses, which shall be
paid to the appropriate parties at each such Closing. In any event, if the
Company shall not have received and accepted each Purchaser's subscription, then
that subscription shall be void and all funds paid hereunder by such Purchaser
with respect to such unaccepted subscription, without deduction therefrom or
interest thereon, shall be promptly returned to such Purchaser within three (3)
business days after the Termination Date.
2.2. Return of Funds. Each Purchaser hereby authorizes and directs both
the Company and the Escrow Agent, if any, jointly and severally, to return or
direct the return of any funds from the Escrow Account, if any, without
deduction therefrom or interest thereon, to the same account from which the
funds were originally drawn, to the extent that such Purchaser's subscription is
not accepted prior to the termination of the Offering.
3. Conditions to the Obligations of each Purchaser at Closing.
The obligation of each Purchaser to purchase and pay for the Securities
subscribed for by such Purchaser at the applicable Closing is subject to the
satisfaction on or prior to the applicable Closing Date or the Final Closing
Date, as the case may be, of the following conditions, each of which may be
waived by the applicable Purchaser:
3.1 Representations and Warranties. The representations and warranties of
the Company contained in this Agreement which are qualified as to materiality
must be true and correct in all respects, and the representations and warranties
of the Company contained in this Agreement which are not qualified as to
materiality must be true and correct in all material respects, in each case as
of the applicable Closing Date except to the extent that the representations and
warranties relate to a different date in which case the representations and
warranties must be true and correct as written or true and correct in all
material respects, as the case may be, as of the different date.
3.2 Performance of Covenants. The Company shall have performed or complied
with in all material respects all covenants and agreements required to be
performed by it on or prior to the applicable Closing pursuant to this
Agreement, including, without limitation, the delivery of certificates
evidencing the Securities issued to the Purchasers at the Closing.
3.3 No Injunctions; etc. No court or governmental injunction, order or
decree prohibiting the purchase and sale of the Securities, the Conversion
Shares, the Warrant Shares, the Common Stock Warrant Shares or the shares of
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Common Stock which may be acquired directly upon conversion of the Convertible
Promissory Notes or exercise of the Warrants will be in effect. There will not
be in effect any law, rule or regulation prohibiting or restricting the sale or
requiring any consent or approval of any Person that has not been obtained to
issue and sell the Securities, the Conversion Shares, the Warrant Shares, the
Common Stock Warrant Shares or the shares of Common Stock which may be acquired
directly upon conversion of the Convertible Promissory Notes or exercise of the
Warrants to the Purchasers except as contemplated by this Agreement.
3.4 Closing Documents. At each Closing, the Company shall have delivered
to each applicable Purchaser the following:
(a) a certificate of the President of the Company certifying that the
conditions in Sections 3.1 and 3.2 have been satisfied;
(b) A certificate of the Secretary of the Company, dated as of that
Closing Date, certifying (i) the attached copies of the Certificate of
Incorporation and By-laws of the Company, (ii) the resolutions of the Board of
Directors of the Company (the "Board") authorizing the execution, delivery and
performance of this Agreement and the issuance of the Securities (including, but
not limited to, for purposes of Nevada corporations law) and recommending to
shareholders the creation of the Series A Preferred, and (iii) the incumbency of
the officers duly authorized to execute this Agreement and the other documents
contemplated by this Agreement;
(c) a certificate of the Secretary of State of the State of Nevada, dated
as of a recent date (but no more than five business days) prior to the date of
the applicable Closing, to the effect that the Company is in good standing in
the State of Nevada and that all annual reports, if any, have been filed as
required and that all taxes and fees have been paid in connection therewith;
(d) a copy of the Certificate of Designations to be filed with the
Secretary of State of the State of Nevada;
(e) a certificate evidencing the Convertible Promissory Notes purchased by
such Purchaser;
(f) a certificate evidencing the Warrants purchased by each Purchaser;
(g) an opinion of counsel, reasonably satisfactory in form and in
substance to the Placement Agent; and
(h) a Registration Rights Agreement duly executed by the Company.
3.5 Waivers and Consents. The Company will have obtained all consents and
waivers necessary to execute and deliver this Agreement and all related
documents and agreements and to issue and deliver the Securities, and all
consents and waivers will be in full force and effect; provided, that the
Warrant Shares shall not be authorized, the Company will not be required to
reserve Warrant Shares for exercise of the Warrants, and the Warrants shall not
be exercisable as to Warrant Shares, until the Company has amended its
Certificate of Incorporation in order to authorize sufficient Series A Preferred
Stock to reserve for issuance upon exercise of the Warrants and such amendment
has become effective under applicable laws, including securities laws.
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4. Conditions to the Obligations of the Company at Closing.
The obligation of the Company to issue and sell the Securities to any
Purchaser is subject to the satisfaction on or prior to each Closing Date of the
following conditions, each of which may be waived by the Company:
4.1 Receipt of Purchase Price. The Company shall have received payment in
full in immediately available funds in U.S. dollars of the Purchase Price for
the Securities with respect to which the Company has accepted the Subscription
made by such Purchaser by means of this Agreement.
4.2 Representations and Warranties. The representations and warranties of
each applicable Purchaser contained in this Agreement which are qualified as to
materiality must be true and correct in all respects, and the representations
and warranties of each applicable Purchaser contained in this Agreement which
are not qualified as to materiality must be true and correct in all material
respects, in each case as of the applicable Closing Date except to the extent
that the representations and warranties relate to a different date in which case
the representations and warranties must be true and correct as of the different
date.
4.3 Performance of Covenants. The Purchasers will have performed or
complied with in all material respects all covenants and agreements required to
be performed by the Purchasers on or prior to the Closing pursuant to this
Agreement.
4.4 Purchaser Questionnaire. All of the information furnished by each
Purchaser in the confidential purchaser questionnaire accompanying this
Agreement (the "Purchaser Questionnaire") shall have been accurate and complete
in all material respects.
4.5 No Injunctions. No court or governmental injunction, order or decree
prohibiting the purchase or sale of the Securities, the Conversion Shares, the
Warrant Shares, the Common Stock Warrant Shares or the shares of Common Stock
which may be acquired directly upon conversion of the Convertible Promissory
Notes or exercise of the Warrants will be in effect.
4.6 Closing Document. The Purchasers will have delivered to the Company a
Registration Rights Agreement duly executed by the Purchasers.
5. Representations and Warranties of each Purchaser.
Each Purchaser, in order to induce the Company to perform this Agreement,
hereby represents and warrants, severally and not jointly, as follows:
5.1 Due Authorization. Each Purchaser represents for such Purchaser to the
Company that such Purchaser has full power and authority and has taken all
action necessary to authorize such Purchaser to execute, deliver and perform
such Purchaser's obligations under this Agreement and the other agreements to be
executed and delivered by such Purchaser in connection herewith. This Agreement,
and each other such agreement, is the legal, valid and binding obligation of
such Purchaser in accordance with its terms.
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5.2 Accredited Investor. Each Purchaser represents that such Purchaser is
an Accredited Investor as that term is defined in Regulation D promulgated under
the Securities Act of 1933, as amended (the "Securities Act").
5.3 No Investment Advice. The Company has not made any other
representations or warranties to such Purchaser other than as set forth herein
or incorporated herein by reference with respect to the Company or rendered any
investment advice.
5.4 Investment Experience. Each Purchaser represents that such Purchaser
has not authorized any Person to act as such Purchaser's Purchaser
Representative (as that term is defined in Regulation D of the General Rules and
Regulations under the Securities Act) in connection with this transaction. Such
Purchaser has such knowledge and experience in financial, investment and
business matters that such Purchaser is capable of evaluating the merits and
risks of the prospective investment in the securities of the Company. Such
Purchaser has consulted with such independent legal counsel or other advisers as
such Purchaser has deemed appropriate to assist such Purchaser in evaluating the
proposed investment in the Company.
5.5 Adequate Means. Each Purchaser represents as to such Purchaser that
such Purchaser (i) has adequate means of providing for such Purchaser's current
financial needs and possible contingencies; and (ii) can afford (a) to hold
unregistered securities for an indefinite period of time as required; and (b)
sustain a complete loss of the entire amount of the subscription.
5.6 Access to Information. Each Purchaser represents that such Purchaser
has been afforded the opportunity to ask questions of, and receive answers from
the officers and/or directors of the Company acting on its behalf concerning the
terms and conditions of this transaction and to obtain any additional
information, to the extent that the Company possesses such information or can
acquire it without unreasonable effort or expense, necessary to verify the
accuracy of the information furnished; and has had such opportunity to the
extent such Purchaser considers appropriate in order to permit such Purchaser to
evaluate the merits and risks of an investment in the Company. It is understood
that all documents, records and books pertaining to this investment have been
made available for inspection, and that the books and records of the Company
will be available upon reasonable notice for inspection by investors during
reasonable business hours at its principal place of business. The foregoing
shall in no way be deemed to limit the ability of each Purchaser to rely on the
representations and warranties set forth herein or incorporated herein by
reference.
5.7 No Endorsement. Each Purchaser further acknowledges that the offer and
sale of the Securities, the Conversion Shares, the Warrant Shares, the Common
Stock Warrant Shares and the shares of Common Stock which may be acquired
directly upon conversion of the Convertible Promissory Notes or exercise of the
Warrants has not been passed upon or the merits thereof endorsed or approved by
any state or federal authorities.
5.8 Non-Registered Securities. Each Purchaser acknowledges that neither
the offer and sale of the Securities at the Closing, or the sale of the
Conversion Shares, the Warrant Shares, the Common Stock Warrant Shares, or the
shares of Common Stock which may be acquired directly upon conversion of the
Convertible Promissory Notes or exercise of the Warrants, to the extent
permissible thereafter, has been registered under the Securities Act or any
state securities laws and the Securities, and the Conversion Shares, the Warrant
Shares, the Common Stock Warrant Shares and or the shares of Common Stock which
may be acquired directly upon conversion of the Convertible Promissory Notes or
exercise of the Warrants may be resold only if registered pursuant to the
provisions thereunder or if an exemption from registration is available and such
resale is otherwise permitted by law and contract. Each Purchaser understands
that the offer and sale of the Securities at the Closing, and the sale of the
Conversion Shares, the Warrant Shares, the Common Stock Warrant Shares or the
shares of Common Stock which may be acquired directly upon conversion of the
Convertible Promissory Notes or exercise of the Warrants, to the extent
permissible thereafter, is intended to be exempt from registration under the
Securities Act, based, in part, upon the representations, warranties and
agreements of such Purchaser contained in this Agreement.
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5.9 No Resale. Each Purchaser represents that the Securities being
subscribed for, and the securities underlying the subscription, are being
acquired solely for the account of such Purchaser for such Purchaser's
investment and not with a view to, or for resale in connection with, any
distribution in any jurisdiction where such sale or distribution would be
precluded. By such representation, such Purchaser means that, other than as
disclosed on both the signature page of this Agreement and in the Purchaser
Questionnaire, no other Person has a beneficial interest in the Securities or
the securities underlying the subscription, and that no other Person has
furnished or will furnish directly or indirectly, any part of or guarantee the
payment of any part of the consideration to be paid by such Purchaser to the
Company in connection therewith. Such Purchaser does not intend to dispose of
all or any part of the Securities or the securities underlying the subscription
except in compliance with the provisions of the Securities Act and applicable
state securities laws, and understands that the Securities and the securities
underlying the subscription are being offered pursuant to a specific exemption
under the provisions of the Securities Act, which exemption(s) depends, among
other things, upon the compliance with the provisions of the Securities Act.
5.10 Legend. Each Purchaser hereby acknowledges and agrees that until
either (i) a registration statement covering the resale of the securities is
effective under the Securities Act and such securities have been disposed of
thereunder, (ii) such securities are disposed of under Rule 144 and are no
longer required to be legended under Rule 144, or (iii) such securities are
eligible for sale under Rule 144(k) promulgated under the Securities Act, and,
in either case, the holder properly requests that the legend be removed in
accordance therewith, the Company may insert the following or similar legend on
the face of the certificates evidencing the Securities, the Conversion Shares,
the Warrant Shares, the Common Stock Warrant Shares and/or the shares of Common
Stock which may be acquired directly upon conversion of the Convertible
Promissory Notes or exercise of the Warrants, as the case may be, if the Company
deems the same to be necessary or appropriate in order to ensure compliance with
the Securities Act or state securities laws:
"These securities have not been registered under the Securities Act of
1933, as amended (the "Securities Act"), or any state securities laws and
may not be sold or otherwise transferred or disposed of except pursuant to
an effective registration statement under the Securities Act and any
applicable state securities laws, or an opinion of counsel satisfactory to
counsel to the issuer that an exemption from registration under the
Securities Act and any applicable state securities laws is available."
In addition, the Company may insert a legend to the effect that the Warrants are
non-transferable.
5.11 Broker's or Finder's Commissions. Other than the Placement Agent (as
placement agent on behalf of the Company) or any Other Participating Agent, if
any, no finder, broker, agent, financial person or other intermediary has acted
on behalf of any Purchaser in connection with the sale of the Securities by the
Company or the consummation of this Agreement or any of the transactions
contemplated hereby.
Each Purchaser certifies that each of the foregoing representations and
warranties by such Purchaser set forth in this Section 5 are true as of the date
hereof and shall survive such date.
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6. Representations and Warranties of the Company.
The Company represents and warrants to the Purchasers as follows as of
each applicable Closing, each such representation and warranty being made
subject to such disclosures as are made pursuant to this Agreement or any
schedule or exhibit delivered in connection herewith at the applicable Closing,
and the consummation of additional Closings as contemplated by this Agreement:
6.1 Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Nevada. The Company has full corporate power and authority to
own and hold its properties and to conduct its business. The Company is duly
licensed or qualified to do business, and in good standing, in each jurisdiction
in which the nature of its business requires licensing, qualification or good
standing, except for any failure to be so licensed or qualified or in good
standing that would not have a material adverse effect on the Company or its
results of operations, assets, business or financial condition or on its ability
to perform its obligations under this Agreement or to issue the Securities (a
"Material Adverse Effect").
6.2 Capitalization. As of the date of this Agreement, the authorized
capital stock of the Company consists of 100,000,000 shares of Common Stock and
no shares of preferred stock. However, the Company is in the process of
effecting an amendment to its Certificate of Incorporation to authorize
10,000,000 shares of preferred stock, $0.001 per share par value. Except for the
Securities, the Conversion Shares, the Warrant Shares, the Common Stock Warrant
Shares, the shares of Common Stock which may be acquired directly upon
conversion of the Convertible Promissory Notes or exercise of the Warrants, the
Placement Agent Warrants and the Placement Agent Warrant Shares contemplated by
this Agreement, the capitalization of the Company as of March 1, 2005 is as set
forth on Schedule 6.2 to this Agreement, and there were no other securities
outstanding or reserved for issuance. All the outstanding securities of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable and free of preemptive rights created by or through the Company,
and have been issued in compliance with all federal and state securities laws,
and were not issued in violation of any preemptive rights or similar rights to
subscribe for or purchase securities. Except as set forth on Schedule 6.2, as of
March 1, 2005 there are no other options, warrants or other rights, convertible
debt, agreements, arrangements or commitments of any character obligating the
Company to issue or sell any shares of capital stock of or other equity
interests in the Company, and the Company is not obligated to retire, redeem,
repurchase or otherwise reacquire any of its capital stock or other securities.
Except as identified on Schedule 6.2 or as contemplated by this Agreement, if at
all, there are no stockholders agreements, voting agreements or other similar
agreements with respect to the Company's securities to which the Company is a
party and has material continuing obligations. The Company has not adopted a
stockholders rights plan, poison pill or similar arrangement. The consummation
of the transactions contemplated by this Agreement will not accelerate the
vesting schedule of any Company option or warrant. As used in this Agreement,
the term "Commission Documents" shall mean all reports, schedules, forms,
statements and other documents filed by the Company with the United States
Securities and Exchange Commission (the "Commission" or the "SEC") pursuant to
the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), including all exhibits included therein and financial
statements and schedules thereto and documents or instruments incorporated by
reference therein.
6.3 Corporate Power, Authorization; Enforceability. The Company has full
corporate power and authority to execute, deliver and enter into this Agreement,
the Warrants, the Placement Agent Warrants (if any), the Certificate of
Designations, and the Registration Rights Agreement (collectively, the
"Transaction Documents") and to consummate the transactions contemplated hereby
9
and thereby; except that, the Warrant Shares shall not be authorized, the
Warrants shall not be exercisable as to the Warrant Shares, and the Company
shall not be required to reserve Warrant Shares (or underlying Common Stock
Warrant Shares) for issuance upon exercise of the Warrants, until the Company
has amended its Certificate of Incorporation in order to authorize sufficient
Series A Preferred Stock to reserve for issuance upon exercise of the Warrants,
and such amendment is effective in accordance with applicable law, including
securities laws. All action on the part of the Company, its directors or
stockholders necessary for (i) the authorization, execution, delivery and
performance of the Transaction Documents by the Company, (ii) the authorization,
sale, issuance and delivery of the Securities as contemplated hereby, (iii) the
reservation of the securities underlying the Securities, and (iv) the
performance of the Company's obligations hereunder and thereunder has been
taken; except that, notwithstanding the foregoing, the Warrant Shares shall not
be authorized, the Warrants shall not be exercisable as to the Warrant Shares,
and the Company shall not be required to reserve Warrant Shares or the Common
Stock Warrant Shares for issuance upon exercise of the Warrant, until the
Company has amended its Certificate of Incorporation in order to authorize
sufficient Series A Preferred Stock to reserve for issuance upon exercise of the
Warrants and such amendment is effective in accordance with applicable laws
including, without limitation, securities laws. The Securities to be purchased
on each the Closing Date and the related Placement Agent Warrants, and the
underlying Conversion Shares, Warrant Shares, Common Stock Warrant Shares,
shares of Common Stock which may be acquired directly upon conversion of the
Convertible Promissory Notes or exercise of the Warrants, and Placement Agent
Warrant Shares have been duly authorized and, when issued in accordance with
this Agreement or the Warrants or the Placement Agent Warrants, as the case may
be, will be validly issued, fully paid and nonassessable and will be free and
clear of any mortgage, deed of trust, pledge, hypothecation, assignment,
encumbrance, lien (statutory or other) or preference, priority, right or other
security interest or preferential arrangement of any kind or nature whatsoever
(collectively, "Liens") imposed by or through the Company other than
restrictions imposed by this Agreement, the Warrants, the Placement Agent
Warrants, the Certificate of Designations, and the Registration Rights
Agreement, as the case may be, and applicable securities laws; except that,
notwithstanding the foregoing, the Warrant Shares shall not be authorized, the
Warrants shall not be exercisable as to the Warrant Shares, and the Company
shall not be required to reserve Warrant Shares or the Common Stock Warrant
Shares for issuance upon exercise of the Warrants, until the Company has amended
its Certificate of Incorporation in order to authorize sufficient Series A
Preferred Stock to reserve for issuance upon exercise of the Warrants and such
amendment is effective in accordance with applicable laws including, without
limitation, securities laws. No preemptive or other rights to subscribe for or
purchase equity securities of the Company exists with respect to the issuance
and sale of the Securities, the Warrant Shares, the Common Stock Warrant Shares,
the shares of Common Stock which may be acquired directly upon conversion of the
Convertible Promissory Notes or exercise of the Warrants, or the Placement Agent
Warrant Shares. The Transaction Documents have been duly executed and delivered
by the Company, and constitute the legal, valid and binding obligations of the
Company, enforceable against the Company in accordance with their terms, except
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance or transfer, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity relating to enforceability (regardless of whether
considered in a proceeding at law or in equity).
6.4 No Conflict; Governmental Consents. (a) The execution and delivery by
the Company of the Transaction Documents and the consummation of the
transactions contemplated hereby and thereby will not (i) result in the
violation of any provision of the Certificate of Incorporation or By-laws or
other organizational documents of the Company or any subsidiary of the Company,
(ii) result in any violation of Requirements of Law to or by which the Company
or any subsidiary of the Company is bound, or (iii) conflict with, or result in
a breach or violation of, any of the terms or provisions of, or constitute (with
due notice or lapse of time or both) a default under, any bond, debenture, note
10
or other evidence of indebtedness, or any material lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other agreement or
instrument to which the Company or any subsidiary of the Company is a party or
by which it or its property is bound, nor result in the creation or imposition
of any Lien upon any of the properties or assets of the Company, except for, in
the case of clauses (ii) and (iii) of this subsection (a), any violation,
conflict, breach or default which would not have a Material Adverse Effect. For
purposes of this Agreement, "Requirements of Law" means, as to any Person, any
law, statute, treaty, rule, regulation, right, privilege, qualification, license
or franchise or determination of an arbitrator or a court or other government of
any nation, state, city, locality or other political subdivision thereof, any
entity exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, and any corporation or other entity
owned or controlled, through stock or capital ownership or otherwise, by any of
the foregoing (each, a "Governmental Authority") or stock exchange, in each case
applicable or binding upon such Person or any of its property or to which such
Person or any of its property is subject or pertaining to any or all of the
transactions contemplated or referred to herein.
(b) No material consent, approval, license, permit, order or authorization
of, or registration, declaration or filing with, any court, administrative
agency or commission or other Governmental Authority or Person, and no lapse of
any waiting period under any Requirements of Law, remains to be obtained (or
lapsed) or is otherwise required to be obtained by the Company or any subsidiary
of the Company in connection with the authorization, execution and delivery of
the Transaction Documents or the consummation of the transactions contemplated
hereby or thereby, including, without limitation the issue and sale of the
Securities as disclosed in this Agreement, and except filings, if any, as may be
required to be made by the Company after each Closing with (i) the Commission,
(ii) the National Association of Securities Dealers, Inc. ("NASD"), (iii) the
Nasdaq Stock Market, Inc. and (iv) state blue sky or other securities regulatory
authorities; except that, notwithstanding the foregoing, the Warrant Shares
shall not be authorized, the Warrants shall not be exercisable as to the Warrant
Shares, and the Company shall not be required to reserve Warrant Shares or
Common Stock Warrant Shares for issuance upon exercise of the Warrants, until
the Company has amended its Certificate of Incorporation in order to authorize
sufficient Series A Preferred Stock to reserve for issuance upon exercise of the
Warrants and such amendment becomes effective in accordance with applicable laws
including, without limitation, securities laws.
6.5 Litigation. There are no claims, actions, suits, investigations or
proceedings pending or, to the Company's knowledge, threatened against the
Company or any subsidiary of the Company or its respective assets, at law or in
equity, by or before any Governmental Authority, or by or on behalf of any third
party, except for any claim, action, suit, investigation or proceeding which
would not have a Material Adverse Effect. There are no claims, actions, suits,
investigations or proceedings pending or, to the Company's knowledge, threatened
proceedings against the Company or any subsidiary of the Company contesting the
right of the Company to use, sell, import, license, or make available to any
Person any of the Company's or any subsidiary's products or services currently
or previously sold, offered, licensed or made available to any Person or used by
the Company or opposing or attempting to cancel any of the Company's
Intellectual Property (as such term is hereafter defined) rights, except for any
claim, action, suit, investigation or proceeding which would not have a Material
Adverse Effect.
6.6 Compliance with Laws; No Default or Violation; Contracts. The Company
and each subsidiary of the Company is in compliance in all material respects
with all Requirements of Law and all orders issued by any court or Governmental
Authority against the Company in all material respects. To the Company's
knowledge, there is no existing or currently proposed Requirement of Law which
could reasonably be expected to prohibit or restrict the Company or any
subsidiary from, or otherwise materially adversely affect the Company or any
subsidiary in, conducting its business in any jurisdiction in which it now
conducts or proposes to conduct such business. The Company and each subsidiary
of the Company have all licenses, permits and approvals of any Governmental
Authority (collectively, "Permits") that are necessary for the conduct of the
business of the Company and each subsidiary of the Company, respectively; (ii)
such Permits are in full force and effect; and (iii) no violations are or have
11
been recorded in respect of any Permit, in each case except such as would not be
reasonably expected to have a Material Adverse Effect. No material expenditure
is presently required by the Company to comply with any existing Requirements of
Law or order. Except as would not be reasonably expected to have a Material
Adverse Effect, neither the Company nor any subsidiary of the Company is (i) in
default under or in violation of any indenture, loan or credit agreement or any
other agreement or instrument to which it is a party of by which it or any of
its properties is bound or (ii) in violation of any order, decree or judgment of
any court, arbitrator or other Governmental Authority. The contracts described
in the Commission Documents or incorporated by reference therein that are
material to the Company (collectively, the "Contractual Obligations") are in
full force and effect on the date hereof, and neither the Company or any
subsidiary's nor, to the Company's knowledge, any other party to such contracts
is in breach of or default under any of such contracts nor, to the Company's
knowledge, does any condition exist that with notice or lapse of time or both
would constitute a default by such other party thereunder, in each case except
such as would not be reasonably expected to have a Material Adverse Effect.
Neither the Company nor any subsidiary of the Company has not received notice of
a default and is not in default under, or with respect to, any Contractual
Obligation nor, to the Company's knowledge, does any condition exist that with
notice or lapse of time or both would constitute a default thereunder, in each
case except such as would not be reasonably expected to have a Material Adverse
Effect. All of such Contractual Obligations are valid, subsisting, in full force
and effect and binding upon the Company or each subsidiary that is a party
thereto and, to the Company's knowledge, the other parties thereto, and the
Company has paid in full or accrued all amounts due thereunder and has satisfied
in full or provided for all of its liabilities and obligations thereunder.
6.7 Environmental Matters. The Company and each subsidiary of the Company
is in compliance, in all material respects, with all applicable Environmental
Laws. There is no civil, criminal or administrative judgment, action, suit,
demand, claim, hearing, notice of violation, investigation, proceeding, notice
or demand letter pending or, to the Company's knowledge, threatened against the
Company pursuant to Environmental Laws. To the Company's knowledge, there are no
past or present events, conditions, circumstances, activities, practices,
incidents, agreements, actions or plans which could reasonably be expected to
prevent compliance with, or which have given rise to or will give rise to
liability which would have a Material Adverse Effect, under Environmental Laws.
For purposes of the foregoing, "Environmental Laws" means federal, state, local
and foreign laws, principles of common laws, civil laws, regulations, and codes,
as well as orders, decrees, judgments or injunctions, issued, promulgated,
approved or entered thereunder relating to pollution, protection of the
environment or public health and safety.
6.8 Taxes. The Company and each subsidiary of the Company has filed all
required Tax returns and has paid or caused to be paid, or has established
reserves in accordance with GAAP for all Tax liabilities applicable to such
entity except as would not have a Material Adverse Effect. No additional Tax
assessment against the Company or its subsidiaries has been heretofore proposed
or, to the Company's knowledge, threatened by any Governmental Authority for
which provision has not been made on its balance sheet.
No tax audit is currently in progress and there is no unassessed
deficiency proposed or, to the Company's knowledge, threatened against the
Company or any subsidiary. The Company has no knowledge of any change in the
rates or basis of assessment of any Tax (other than federal income tax), of the
Company or any subsidiary which would reasonably be expected to have a Material
Adverse Effect. The Company has not agreed to or is required to make any
adjustments under section 481 of the Code by reason of a change of accounting
method or otherwise. None of the assets of the Company or any subsidiary is
required to be treated as being owned by any Person, other than the Company or
any of its subsidiaries, pursuant to the "safe harbor" leasing provisions of
Section 168(f)(8) of the Code. The company is not a "United States real property
holding corporation" (a "USRPHC") as that term is defined in Section 897(c)(2)
of the Code and the regulations promulgated thereunder.
12
For purposes of this Agreement, "Code" means the Internal Revenue Code of
1986, as amended, and "Taxes" means any federal, state, provincial, county,
local, foreign and other taxes (including, without limitation, income, profits,
windfall profits, alternative, minimum, accumulated earnings, personal holding
company, capital stock, premium, estimated, excise, sales, use, occupancy, gross
receipts, franchise, ad valorem, severance, capital levy, production, transfer,
withholding, employment, unemployment compensation, payroll and property taxes,
import duties and other governmental charges and assessments), whether or not
measured in whole or in part by net income, and including deficiencies,
interest, additions to tax or interest, and penalties with respect thereto, and
including expenses associated with contesting any proposed adjustments related
to any of the foregoing.
6.9 Intellectual Property.
(a) "Intellectual Property" shall mean all of the following as they are
necessary in connection with the business of the Company or its subsidiaries as
presently conducted and as they exist in all jurisdictions throughout the world,
in each case, to the extent owned by or licensed to the Company or its
subsidiaries: (i) patents, patent applications and inventions, designs and
improvements described and claimed therein, patentable inventions and other
patent rights (including any divisions, continuations, continuations-in-part,
reissues, reexaminations, or interferences thereof, whether or not patents are
issued on any such applications and whether or not any such applications are
modified, withdrawn, or resubmitted) ("Patents"); (ii) trademarks, service
marks, trade dress, trade names, brand names, designs, logos, or corporate
names, whether registered or unregistered, and all registrations and
applications for registration thereof ("Trademarks"); (iii) copyrights and mask
works, including all renewals and extensions thereof, copyright registrations
and applications for registration thereof, and non-registered copyrights
("Copyrights"); (iv) trade secrets, inventions, know-how, process technology,
databases, confidential business information, customer lists, technical data and
other proprietary information and rights ("Trade Secrets"); (v) computer
software programs, including, without limitation, all source code, object code,
and documentation related thereto ("Software"); (vi) Internet addresses, domain
names, web sites, web pages and similar rights and items ("Internet Assets");
and (vii) all licenses, sublicenses and other agreements or permissions
including the right to receive royalties, or any other consideration related to
the property described in (i)-(vi). The Intellectual Property contains all of
the intellectual property necessary to operate the business of the Company as
currently conducted.
(b) The Company or its subsidiaries exclusively own (or otherwise have the
right to use the Intellectual Property pursuant to a valid license, sublicense
or other agreement), free and clear of all Liens, and has the unrestricted right
(subject to any such license terms, if applicable) to use, sell, license, or
sublicense all Intellectual Property.
(c) As used in this Agreement, the term "IP Licenses" means all material
licenses, sublicenses, distributor agreements and other agreements or
permissions under which the Company or any of its subsidiaries is a (i)
licensor, or (ii) licensee, distributor, or reseller, except such licenses,
sublicenses and other agreements relating to off-the-shelf software which is
commercially available on a retail basis for less than $15,000 per license and
$100,000 in the aggregate and used solely on the computers of the Company
("Off-the-Shelf Software"). To the knowledge of the Company, all of the IP
Licenses are valid, enforceable, and in full force and effect, and, with respect
to the Company and its applicable subsidiaries, will continue to be on identical
terms immediately following the completion of the transactions contemplated by
this Agreement.
(d) All products made, used or sold by the Company or any of its
subsidiaries under the Patents have been marked with the proper patent notice.
13
(e) All products and materials made, used or sold by the Company or its
subsidiaries containing Trademarks bear the proper federal registration notice
where permitted by law.
(f) All works encompassed by the Copyrights and used by the Company or its
subsidiaries have been marked with the proper copyright notice.
(g) To the Company's knowledge, upon reasonable inquiry in accordance with
sound business practice and business judgment, all the Company's Intellectual
Property rights are valid and enforceable. The Company has taken all reasonably
necessary actions to maintain and protect each item of Intellectual Property
owned by the Company or its subsidiaries.
(h) The Company and each subsidiary of the Company has taken all
reasonable precautions to protect the secrecy, confidentiality, and value of its
Trade Secrets and the proprietary nature and value of its Intellectual Property.
To the best of the Company's knowledge, none of the Trade Secrets, wherever
located, the value of which is contingent upon maintenance of confidentiality
thereof, have been disclosed to any employee, representative or agent of the
Company or any other person not obligated to maintain such Trade Secret in
confidence pursuant to a confidentiality agreement entered into with the
Company, except as required pursuant to the filing of a patent application by
the Company.
(i) The Company or a subsidiary of the Company, as applicable, is
diligently prosecuting all Patent applications it has filed, as instructed by
patent counsel. The Company or a subsidiary of the Company, as applicable, is
diligently filing and preparing to file Patent applications for all inventions
in a manner and within a sufficient time period to avoid statutory
disqualification of any potential Patent application.
(j) The Company or a subsidiary of the Company, as applicable, is
diligently filing and preparing to file Patent applications for all inventions
in a manner and within a sufficient time period to avoid statutory
disqualification of any potential Patent application.
(k) Unless otherwise disclosed by the Company or pursuant to a current
license, it is not necessary for the Company's business to use any Intellectual
Property owned by any present or past director, officer, employee or consultant
of the Company (or persons the Company presently intends to hire). To the actual
knowledge of the Company's executive officers, at no time during the conception
or reduction to practice of any of the Company's Intellectual Property was any
developer, inventor or other contributor to such Intellectual Property operating
under any grants from any Governmental Authority or subject to any employment
agreement, invention and assignment, nondisclosure agreement or other
Contractual Obligation with any Person that could adversely affect the Company's
rights to its Intellectual Property.
(l) To the actual knowledge of the Company, none of the Intellectual
Property, products or services owned, used, developed, provided, sold or
licensed by the Company, or made for, used or sold by or licensed to the Company
by any person infringes upon or otherwise violates any Intellectual Property
rights of others.
(m) To the actual knowledge of the Company, no Person is infringing upon
or otherwise violating the Intellectual Property rights of the Company.
6.10 Employee Benefit Plans.
(a) Neither the Company nor any entity which is or was under common
control within the meaning of Section 414(b), (c), (m) or (o) of the Code
maintains or contributes to, or has within the preceding six years maintained or
contributed to, or may have any liability with respect to any employee benefit
plan subject to Title IV of Employee Retirement Income Security Act of 1974, as
14
amended ("ERISA"), or Section 412 of the Code or any "multiple employer plan"
within the meaning of the Code or ERISA. Each employee benefit plan,
arrangement, policy, program, agreement or commitment which the Company
maintains, contributes to or may have any liability in respect to (each, a
"Plan") has been established and administered in accordance with its terms, and
complies in form and in operation with the applicable requirements of ERISA, the
Code and other applicable Requirements of Law. No claim with respect to the
administration or the investment of the assets of any Plan (other than routine
claims for benefits) is pending. No event has occurred in connection with which
the Company or any Plan, directly or indirectly, could be subject to any
material liability under ERISA, the Code or any other law, regulation or
governmental order applicable to any Plan, or under any agreement, instrument,
statute, rule of law or regulation pursuant to or under which the Company has
agreed to indemnify any person against liability incurred under, or for a
violation or failure to satisfy the requirement of, any such statute, regulation
or order. The Company has no liability, whether absolute or contingent,
including any obligations under any Plan, with respect to any misclassification
of any person as an independent contractor rather than as an employee.
(b) Neither the Company nor any subsidiary of the Company has any
obligations to provide or any direct or indirect liability, whether contingent
or otherwise, with respect to the provision of health or death benefits to or in
respect of any former employee, except as may be required pursuant to Section
4980B of the Code and the corresponding provisions of ERISA and the cost of
which are fully paid by such former employees.
(c) There are no unfunded obligations under any Plan which are not fully
reflected on the Financial Statements.
(d) The consummation of the transactions contemplated by this Agreement
will not (i) entitle any Company (or subsidiary) employee to severance pay or
(ii) accelerate the time of payment or vesting or trigger any payment or funding
(though a grantor trust or otherwise) of compensation or benefits under,
increase the amount payable or trigger any other material obligations pursuant
to, any Plan.
6.11 Investment Company. The Company is not an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter" for an
investment company, within the meaning of the Investment Company Act of 1940, as
amended.
6.12 Compliance. The Common Stock is registered pursuant to the Exchange
Act and the Common Stock is listed on the OTC Bulletin Board, and the Company
has taken no action designed to, or likely to have the effect of, terminating
the registration of the Common Stock under the Exchange Act or delisting the
Common Stock from the OTC Bulletin Board. The Company has not taken and will
not, in violation of applicable law, take, any action designed to or that might
reasonably be expected to cause or result in unlawful manipulation of the price
of the Common Stock to facilitate the sale or resale of the Securities.
6.13 Private Offerings. Assuming the truth of each Purchaser's
representations and acknowledgments contained in Section 5 hereof and in the
Purchaser's Questionnaire delivered by such Purchaser in connection herewith,
neither the Company nor any Person acting on its behalf (other than the
Purchasers, as to whom the Company makes no representations) has offered or sold
the Securities by means of any general solicitation or general advertising
within the meaning of Rule 502(c) under the Securities Act and this offering is
exempt from the registration requirements of the Securities Act. The Company has
not sold the Securities to anyone other than the subscribers to this Agreement.
Each Security shall bear substantially the same legend set forth in Section 8
hereof for at least so long as required by the Securities Act.
15
6.14 Broker's or Finder's Commissions. Other than certain of the Company's
officers and directors, if at all, and the Placement Agent (as placement agent
on behalf of the Company) or any Other Participating Agent, if any are engaged
by the Company, no finder, broker, agent, financial person or other intermediary
has acted on behalf of the Company in connection with the sale of the Securities
by the Company or the consummation of this Agreement or any of the transactions
contemplated hereby. The Company has not had any direct or indirect contact with
any other investment banking firm (or similar firm) with respect to the offer of
the Securities by the Company to the Purchasers or the Purchasers' subscriptions
for the Securities.
6.15 Disclosure. The Transaction Documents do not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements contained herein or therein, in the light of the
circumstances under which they were made, not misleading. The Company does not
have any knowledge of any fact that has specific application to the Company
(other than general economic or industry conditions) and that can reasonably be
foreseen to cause a Material Adverse Effect that has not been set forth in the
Transaction Documents or the Commission Documents. Since December 31, 2003, the
Company has filed all Commission Documents required to be filed by it with the
Commission pursuant to the reporting requirements of the Exchange Act, and all
such Commission Documents were filed within the time periods specified in the
Exchange Act. As of their respective filing dates, each Commission Document
complied in all material respects with the requirements of the Securities Act or
the Exchange Act, as applicable, and the rules and regulations of the Commission
thereunder applicable to the Commission Documents, and no Commission Document
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein.
The Company certifies that each of the foregoing representations and
warranties by the Company sets forth in this Section 6 are true as of the date
hereof and shall survive such date as contemplated in Section 7.1.
7. Indemnification.
7.1 (a) The Company agrees to indemnify and hold harmless the Purchasers,
their affiliates and each of their respective directors, officers, general and
limited partners, principals, members, agents and attorneys (individually, an
"Indemnified Party" and collectively, the "Indemnified Parties") from and
against any and all losses, claims, damages, liabilities, costs (including
reasonable attorneys' fees) and expenses (collectively, "Losses") to which any
Indemnified Party may become subject, insofar as such Losses arise out of, in
any way relate to, or result from (i) any breach of any representation or
warranty made by the Company contained in or made pursuant to Article 6 of this
Agreement, or (ii) the failure of the Company to fulfill any agreement or
covenant contained in or made pursuant to this Agreement. In no event, however,
shall the Company be liable for indirect, incidental or consequential or special
damages of any kind. All of the representations and warranties of the Company
made herein shall survive the execution and delivery of this Agreement until the
date that is one hundred eighty (180) days after the date of this Agreement,
16
except for (a) Sections 6.1 (Organization, Good Standing and Qualification), 6.2
(Capitalization), 6.3 (Corporate Power, Authorization; Enforceability), 6.13
(Private Offerings) and 6.14 (Broker's or Finder's Commission), which
representations and warranties shall survive indefinitely (or if indefinite
survival is not permitted by law, then for the maximum period permitted by
applicable law), (b) Section 6.8 (Taxes), which representation and warranty
shall survive until the later to occur of (i) the lapse of the statute of
limitations with respect to the assessment of any tax to which such
representation and warranty relates (including any extensions or waivers
thereof) and (ii) sixty (60) days after the final administrative or judicial
determination of the Taxes to which such representation and warranty relates,
and no claim with respect to Section 6.8 may be asserted thereafter with the
exception of claims arising out of any fact, circumstance, action or proceeding
to which the party asserting such claim shall have given notice to the other
parties to this Agreement prior to the termination of such period of reasonable
belief that a tax liability will subsequently arise therefrom, and (c) Section
6.7 (Environmental Matters), which representation and warranty shall survive
until the lapse of the applicable statute of limitations. Except as set forth
herein, all of the covenants, agreements and obligations of the Company shall
survive the Final Closing indefinitely (or if indefinite survival is not
permitted by law, then for the maximum period permitted by applicable law).
(b) Each Purchaser severally, and not jointly, agrees to indemnify and
hold harmless the Company, its affiliates and each of their respective
directors, officers, general and limited partners, principals, agents and
attorneys from and against any and all Losses to which any such Person may
become subject, insofar as such Losses arise out of, in any way relate to, or
result from (i) any breach of any representation or warranty made by such
Purchaser contained in or made pursuant to Article 5 of this Agreement, or (ii)
the failure of such Person to fulfill any agreement or covenant contained in or
made pursuant to this Agreement. In no event, however, shall any Purchaser be
liable for indirect, incidental or consequential or special damages of any kind.
All of the representations and warranties of each Purchaser made herein shall
survive the execution and delivery of this Agreement for the maximum period
permitted by applicable law with respect to the statute of limitations
applicable to survival of contractual claims for indemnification. Except as set
forth herein, all of the covenants, agreements and obligations of the Purchasers
shall survive the Final Closing for the maximum period permitted by applicable
law with respect to the statute of limitations applicable to survival of
contractual claims for indemnification. Furthermore, in no event shall any
Purchaser be required to make indemnification pursuant to this Section in excess
of the gross Purchase Price of the Securities acquired by such Purchaser in the
Offering.
7.2 Promptly after receipt by any Person entitled to seek indemnification
under Section 7.1 of this Agreement (individually, an "Indemnified Party" and
collectively, the "Indemnified Parties") of notice of any claim as to which
indemnity may be sought, including, without limitation, the commencement of any
action or proceeding, the Indemnified Party will, if a claim in respect thereof
may be made against a Person required to provide indemnification under Section
7.1 of this Agreement (individually, an "Indemnifying Party" and collectively,
the "Indemnifying Parties"), promptly notify the Indemnifying Party in writing
of the commencement thereof; provided that the failure of the Indemnified Party
to so notify the Indemnifying Party will not relieve the Indemnifying Party from
its obligations under this Section unless, and only to the extent that, such
omission results in the Indemnifying Party's forfeiture of substantive rights or
defenses or being materially prejudiced by the Indemnified Person's failure to
give such notice. In case any action or proceeding is brought against any
Indemnified Party, and it notifies the Indemnifying Party of the commencement
thereof, the Indemnifying Party shall be entitled to assume the defense thereof
at its own expense, with counsel reasonably satisfactory to such Indemnified
Party, which approval will not be unreasonably withheld or delayed unreasonably;
provided, however, that any Indemnified Party may, at its own expense, retain
separate counsel to participate in such defense at its own expense. After notice
from the Indemnifying Party to the Indemnified Party of its election to so
assume the defense thereof, the Indemnifying Party will not be liable to the
Indemnified Party under that Section 7 for any legal or any other expenses
subsequently incurred by the Indemnified Party in connection with the defense
17
thereof (other than reasonable costs of investigation) unless incurred at the
written request of the Indemnifying Party. Notwithstanding the above, the
Indemnified Party will have the right to employ counsel of its own choice in any
action or proceeding (and be reimbursed by the Indemnifying Party for the
reasonable fees and expenses of the counsel and other reasonable costs of the
defense) if, in the written opinion of such Indemnified Party's counsel,
representation of the Indemnified Party by the counsel retained by the
Indemnifying Party would be inappropriate due to actual or potential differing
interests or conflicts between the Indemnified Party and any other party
represented by the counsel in the action; provided, however, that the
Indemnifying Party will not in connection with any one action or proceeding or
separate but substantially similar actions or proceedings arising out of the
same general allegations, be liable for the reasonable fees and expenses of more
than one separate firm of attorneys at any time for all Indemnified Parties,
except to the extent that local counsel, in addition to regular counsel, is
required in order to effectively defend against the action or proceeding. An
Indemnifying Party will not be liable to any Indemnified Party for any
settlement or entry of judgment concerning any action or proceeding effected
without the consent of the Indemnifying Party, which consent shall not be
unreasonably withheld. The Indemnifying Party agrees that it will not, without
the prior written consent of the Indemnified Party, settle, compromise or
consent to the entry of any judgment in any pending or threatened claim relating
to the matters contemplated hereby (if any Indemnified Party is a party thereto
or has been actually threatened to be made a party thereto) unless such
settlement, compromise or consent includes an unconditional release of each
Indemnified Party from all liability arising or that may arise out of such
claim. The rights accorded to an Indemnified Party hereunder shall be in
addition to any rights that any Indemnified Party may have at common law, by
separate agreement or otherwise; provided, however, that notwithstanding the
foregoing or anything to the contrary contained in this Agreement, (a) nothing
in this Section 7 shall restrict or limit any rights that any Indemnified Party
may have to seek equitable relief and (b) this Section 7 shall be the sole
remedy for any breach of the Company's representations and warranties contained
in this Agreement and for any breach of any Purchaser's representations and
warranties contained in this Agreement except, in either case, with respect to
claims arising out of fraud or willful misconduct.
8. Covenants.
8.1 Use of Proceeds. The Company will use the proceeds from this Offering
for general working purposes.
8.2 Conduct of the Company's Business. Except as contemplated by this
Agreement, during the period from the date hereof to the Closing Date, the
Company will conduct its business and operations solely in the ordinary course
of business consistent with past practice and use reasonable commercial efforts
to keep available the services of its officers and employees and preserve its
current relationships with customers, suppliers, licensors, creditors and others
having business dealings with it, except as would not be reasonably expected to
have a Material Adverse Effect.
8.3 Reasonable Best Efforts. Subject to the terms and conditions of this
Agreement, each of the parties hereto will use its reasonable best efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate the transactions contemplated by this Agreement at the earliest
practicable date.
8.4 Tax Matters.
(a) The Company covenants that it will use commercially reasonable efforts
not to become a USRPHC at any time while any Purchaser owns any of the Series A
Preferred Stock or the Common Stock into which such Series A Preferred Stock is
convertible.
(b) In the event that a Purchaser desires to sell or dispose of any of the
Securities or the underlying securities as permitted under this Agreement and
applicable law, and upon demand by such Purchaser, the Company agrees to deliver
to such Purchaser a letter (the "Letter") which complies with Sections
1.1445-2(c)(3) and 1.897-2(h) of the Treasury Regulations, addressed to such
Purchaser, stating whether or not the Company is a USRPHC. The Letter shall be
delivered to the Purchaser one business day prior to the close of any such
permitted sale or disposition by the Purchaser (the "Delivery Date"). The Letter
shall be dated as of the Delivery Date and signed by a corporate officer who
must verify under penalties of perjury that the statement is correct to his
knowledge and belief pursuant to Section 1.897-2(h) of the Treasury Regulations.
18
8.5 Furnishing of Information. As long as any Purchaser owns Securities,
the Company covenants that it will use its commercially reasonable efforts to
timely file (or obtain extensions in respect thereof and file within the
applicable grace period) all reports required to be filed by the Company after
the date hereof pursuant to the Exchange Act. As long as any Purchaser owns
Securities, if the Company is not required to file reports pursuant to such
laws, it will use its commercially reasonable efforts to prepare and furnish to
the Purchasers and make publicly available in accordance with Rule 144(c) such
information as is required for the Purchasers to sell the Securities under Rule
144.
8.6 Non-Public Information. The Company represents and warrants that
neither it nor, to the best of its knowledge, any other Person acting on its
behalf, has provided any Purchaser or its agents or counsel with any information
that the Company believes constitutes material non-public information, unless
prior thereto such Purchaser shall have executed a written agreement regarding
the confidentiality and use of such information. The Company understands and
acknowledges that each Purchaser is relying on the foregoing representations in
effecting transactions in securities of the Company.
9. FOR RESIDENTS OF ALL STATES: NEITHER THE SECURITIES OFFERED HEREBY OR
THE UNDERLYING SECURITIES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND ARE BEING OFFERED AND SOLD
IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND
SUCH LAWS. THE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SAID ACT
AND SUCH LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD
BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS
INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE WARRANTS ARE NON-TRANSFERABLE.
10. No Waiver.
Notwithstanding any of the representations, warranties, acknowledgments or
agreements made herein by the Purchasers, the Purchasers do not thereby or in
any manner waive any rights granted to the Purchasers under federal or state
securities laws.
11. Miscellaneous.
11.1 Notices. Any notice or other communication given hereunder by any
party hereto to any other party hereto shall be in writing and delivered
personally or by facsimile transmission or sent by registered or certified mail
or by any express mail or overnight courier service, postage or fees prepaid:
If to the Company:
Electronic Game Card, Inc.
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: Private Placement
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
19
If to the Purchasers:
To each Purchaser at such Purchaser's name and address set
forth on the signature page to this Agreement.
Any notice that is delivered personally or by facsimile transmission
in the manner provided herein shall be deemed to have been duly given to the
party to whom it is directed upon actual receipt by such party or its agent. Any
notice that is addressed and mailed, postage prepaid for most rapid method of
delivery, or sent by courier in the manner herein provided shall be conclusively
presumed to have been duly given to the party to which it is addressed at the
close of business, local time of the recipient, on the fourth business day after
the day it is so placed in the mail or, if earlier, the date and time of actual
receipt.
11.2 Successors and Assigns. This Agreement will be binding upon and inure
to the benefit of the parties hereto and to their respective heirs, legal
representatives, successors and assigns, provided, that no party may assign this
Agreement without the prior written consent of the other party, such consent not
to be unreasonably withheld; provided that any transfer of Securities or
securities underlying such Securities must be in compliance with the Transaction
Documents and all applicable law.
11.3 Entire Agreement. This Agreement sets forth the entire agreement and
understanding among the parties as to the subject matter hereof and merges and
supersedes all prior discussions, agreements and understandings of any and every
nature among them; provided that any confidentiality agreement between the
Company and any Purchaser shall remain in effect. This Agreement may be amended
only by mutual written agreement of the Company and a majority in interest of
the Purchasers, and the Company may take any action herein prohibited or omit to
take any action herein required to be performed by it, and any breach of any
covenant, agreement, warranty or representation may be waived, only if the
Company has obtained the written consent or waiver of the Purchasers purchasing
a majority of the Securities offered hereby.
11.4 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York with respect to contracts made
and to be fully performed therein, without regard to the conflicts of laws
principles thereof. The parties hereto hereby agree that any suit or proceeding
arising under this Agreement, or in connection with the consummation of the
transactions contemplated hereby, shall be brought solely in a federal or state
court located in the County of New York and State of New York. By its execution
hereof, both the Company and the Purchasers hereby consent and irrevocably
submit to the in personam jurisdiction of the federal and state courts located
in the County of New York and State of New York and agree that any process in
any suit or proceeding commenced in such courts under this Agreement may be
served upon it personally or by certified or registered mail, return receipt
requested, or by Federal Express or other courier service, with the same force
and effect as if personally served upon the applicable party in New York and in
the city or county in which such other court is located. The parties hereto each
waive any claim that any such jurisdiction is not a convenient forum for any
such suit or proceeding and any defense of lack of in personam jurisdiction with
respect thereto.
11.5 Severability. The holding of any provision of this Agreement to be
invalid or unenforceable by a court of competent jurisdiction will not affect
any other provision of this Agreement, which will remain in full force and
effect. If any provision of this Agreement is declared by a court of competent
20
jurisdiction to be invalid, illegal or incapable of being enforced in whole or
in part, the provision will be interpreted so as to remain enforceable to the
maximum extent permissible consistent with applicable law and the remaining
conditions and provisions or portions thereof will nevertheless remain in full
force and effect and enforceable to the extent they are valid, legal and
enforceable, and no provisions will be deemed dependent upon any other covenant
or provision unless so expressed herein.
11.6 No Waiver. A waiver by either party of a breach of any provision of
this Agreement will not operate, or be construed, as a waiver of any subsequent
breach by that same party.
11.7 Further Assurances. The parties agree to execute and deliver all
further documents, agreements and instruments and take further action as may be
necessary or appropriate to carry out the purposes and intent of this Agreement.
11.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which will
together constitute the same instrument.
11.9 No Third Party Beneficiaries. Nothing in this Agreement creates in
any Person not a party to this Agreement any legal or equitable right, remedy or
claim under this Agreement, and this Agreement is for the exclusive benefit of
the parties hereto. The parties expressly recognize that this Agreement is not
intended to create a partnership, joint venture or other similar arrangement
between any of the parties or their respective affiliates.
11.10 Headings. The headings in this Agreement are solely for convenience
of reference and shall be given no effect in the construction or interpretation
of this Agreement.
11.11 Securities Laws Disclosure; Publicity Restrictions. The Company
shall issue a press release by 8:30 a.m. Eastern time on the trading day
following each applicable Closing, or file a Current Report on Form 8-K
disclosing the consummation of the transactions consummated on such Closing by
8:30 a.m. Eastern time on the fourth day following each applicable Closing.
Except as may be required by applicable Requirements of Law, none of the parties
hereto shall issue a publicity release or public announcement or otherwise make
any disclosure concerning this Agreement, the transactions contemplated hereby
without prior approval by the other party hereto, and no investor may be named
in any such press release without such investor's specific consent; provided
that each Purchaser may disclose on its worldwide web pages and its offering
materials, if any, the name of the Company, the name of the Chief Executive
Officer of the Company, a brief description of the business of the Company
consistent with the Commission Documents or the Company's press releases or
other public statements, the Company's logo and the aggregate amount of such
Purchaser's investment in the Company. If any announcement is required by
applicable law or the rules of any securities exchange or market on which such
shares of Common Stock are traded to be made by any party hereto, prior to
making such announcement such party will deliver a draft of such announcement to
the other parties and shall give the other parties reasonable opportunity to
comment thereon. The parties agree to attribute and otherwise indicate ownership
of the other party's trademarks and logos.
11.12 Certification. Each Purchaser certifies that such Purchaser has read
this entire Agreement and that every statement on such Purchaser's part made and
set forth herein is true and complete.
[Remainder of page intentionally left blank.]
21
IN WITNESS WHEREOF, the undersigned has executed this Securities Purchase
Agreement on the date his signature has been subscribed and sworn to below.
The Convertible Promissory Notes and the Warrants are to be issued in:
---------------------------------------
Print Name of Investor
____________ principal amount of
____ individual name Convertible Promissory Notes
subscribed for (multiple of $48,000
Subscription price paid herewith:
$____________(being the principal
____ tenants in the entirety amount of the Convertible Promissory
Notes listed above)
---------------------------------------
____ corporation (an officer must sign) Print Name of Joint Investor
(if applicable)
---------------------------------------
____ partnership (all general partners Signature of Investor
must sign)
---------------------------------------
____ trust Signature of Joint Investor
____ limited liability company
---------------------------------------
(with a copy to:)
---------------------------------------
---------------------------------------
Address of Investor
Accepted as of the 24th day of March, 2005 as to _______________ principal
amount of the Company's Convertible Promissory Notes (a multiple of $48,000),
the Purchase Price for which is $______________, being the principal amount of
such Convertible Promissory Notes as to which this Subscription is accepted,
subject to receipt of the entire Purchase Price in United States Dollars by wire
transfer of immediately available funds to the Company at its requested account
or accounts and performance of other closing conditions set forth in this
Agreement :
ELECTRONIC GAME CARD, INC.
By: ___________________________________________
Name:
Title:
22
[Insert Purchaser Questionnaire]
23
Exhibit A
Form of Certificate of Designations
24
Exhibit B
Form of Registration Rights Agreement
25
Exhibit C
Form of Warrant
26
Schedule 6.2
As of March 1, 2005, the capitalization of the Company was as follows:
25,468,439 shares of Common Stock issued and outstanding.
1,396,950 options and warrants issued and outstanding to investors
1,396,950 options issued and outstanding to employees
27