SECURITIES PURCHASE AGREEMENT
-----------------------------
LAURUS MASTER FUND, LTD.
and
AUXILIO, INC.
Dated: April 7, 2006
TABLE OF CONTENTS
Page
1. Agreement to Sell and Purchase........................................1
2. Fees and Warrant. On the Closing Date:................................1
3. Closing, Delivery and Payment.........................................2
3.1 Closing.........................................................2
3.2 Delivery........................................................2
4. Representations and Warranties of the Company.........................2
4.1 Organization, Good Standing and Qualification...................2
4.2 Subsidiaries....................................................3
4.3 Capitalization; Voting Rights...................................4
4.4 Authorization; Binding Obligations..............................4
4.5 Liabilities.....................................................5
4.6 Agreements; Action..............................................5
4.7 Obligations to Related Parties..................................7
4.8 Changes.........................................................7
4.9 Title to Properties and Assets; Liens, Etc. ....................9
4.10 Intellectual Property...........................................9
4.11 Compliance with Other Instruments..............................10
4.12 Litigation.....................................................10
4.13 Tax Returns and Payments.......................................10
4.14 Employees......................................................11
4.15 Registration Rights and Voting Rights..........................11
4.16 Compliance with Laws; Permits..................................11
4.17 Environmental and Safety Laws..................................12
4.18 Valid Offering.................................................12
4.19 Full Disclosure................................................12
4.20 Insurance......................................................13
4.21 SEC Reports....................................................13
4.22 Listing........................................................13
4.23 No Integrated Offering.........................................13
4.24 Stop Transfer..................................................13
4.25 Dilution.......................................................13
4.26 Patriot Act....................................................14
4.27 ERISA..........................................................14
5. Representations and Warranties of the Purchaser......................15
5.1 No Shorting....................................................15
5.2 Requisite Power and Authority..................................15
5.3 Investment Representations.....................................15
5.4 The Purchaser Bears Economic Risk..............................15
5.5 Acquisition for Own Account....................................16
5.6 The Purchaser Can Protect Its Interest.........................16
5.7 Accredited Investor............................................16
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Page(s)
5.8 Legends........................................................16
6. Covenants of the Company.............................................17
6.1 Stop-Orders....................................................17
6.2 Listing........................................................17
6.3 Market Regulations.............................................17
6.4 Reporting Requirements.........................................17
6.5 Use of Funds...................................................19
6.6 Access to Facilities...........................................19
6.7 Taxes..........................................................19
6.8 Insurance......................................................20
6.9 Intellectual Property..........................................21
6.10 Properties.....................................................21
6.11 Confidentiality................................................21
6.12 Required Approvals.............................................21
6.13 Reissuance of Securities.......................................22
6.14 Opinion........................................................23
6.15 Margin Stock...................................................23
6.16 Authorization and Reservation of Shares........................23
6.17 Maintenance of Balance.........................................23
7. Covenants of the Purchaser...........................................23
7.1 Confidentiality................................................23
7.2 Non-Public Information.........................................23
7.3 Limitation on Acquisition of Common Stock of the Company.......23
8. Covenants of the Company and the Purchaser Regarding
Indemnification......................................................24
8.1 Company Indemnification........................................24
8.2 Purchaser's Indemnification....................................24
9. Conversion of Convertible Note.......................................25
9.1 Mechanics of Conversion........................................25
10. Registration Rights..................................................26
10.1 Registration Rights Granted....................................26
10.2 Offering Restrictions..........................................26
11. Miscellaneous........................................................27
11.1 Governing Law, Jurisdiction and Waiver of Jury Trial...........27
11.2 Severability...................................................28
11.3 Survival.......................................................28
11.4 Successors.....................................................28
11.5 Entire Agreement; Maximum Interest.............................28
11.6 Amendment and Waiver...........................................28
11.7 Delays or Omissions............................................29
11.8 Notices........................................................29
11.9 Attorneys' Fees................................................30
11.10 Titles and Subtitles...........................................30
11.11 Facsimile Signatures; Counterparts.............................30
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11.12 Broker's Fees..................................................30
11.13 Construction...................................................30
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LIST OF EXHIBITS
Form of Convertible Term Note........................................Exhibit A
Form of Warrant......................................................Exhibit B
Form of Opinion......................................................Exhibit C
Form of Escrow Agreement.............................................Exhibit D
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement") is made and entered
into as of April7, 2006, by and between AUXILIO, INC., a Nevada corporation (the
"Company"), and LAURUS MASTER FUND, LTD., a Cayman Islands company (the
"Purchaser").
RECITALS
WHEREAS, the Company has authorized the sale to the Purchaser of a Secured
Convertible Term Note in the aggregate principal amount of Three Million Dollars
($3,000,000) in the form of Exhibit A hereto (as amended, modified and/or
supplemented from time to time, the "Note"), which Note is convertible into
shares of the Company's common stock, $0.001 par value per share (the "Common
Stock") at an initial fixed conversion price determined pursuant to the terms of
the Note (as defined herein) (the "Fixed Conversion Price");
WHEREAS, the Company wishes to issue to the Purchaser a warrant in the
form of Exhibit B hereto (as amended, modified and/or supplemented from time to
time, the "Warrant") to purchase up to 478,527 shares of the Company's Common
Stock (subject to adjustment as set forth therein) in connection with the
Purchaser's purchase of the Note;
WHEREAS, the Purchaser desires to purchase the Note and the Warrant on the
terms and conditions set forth herein; and
WHEREAS, the Company desires to issue and sell the Note and Warrant to the
Purchaser on the terms and conditions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises, representations, warranties and covenants hereinafter set forth and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. Agreement to Sell and Purchase. Pursuant to the terms and conditions
set forth in this Agreement, on the Closing Date (as defined in Section 3), the
Company shall sell to the Purchaser, and the Purchaser shall purchase from the
Company, the Note. The sale of the Note on the Closing Date shall be known as
the "Offering." The Note will mature on the Maturity Date (as defined in the
Note). Collectively, the Note and Warrant and Common Stock issuable upon
conversion of the Note and upon exercise of the Warrant are referred to as the
"Securities."
2. Fees and Warrant. On the Closing Date:
(a) The Company will issue and deliver to the Purchaser the Warrant
to purchase up to 478,527 shares of Common Stock (subject to adjustment as set
forth therein) in connection with the Offering, pursuant to Section 1 hereof.
All the representations, covenants, warranties, undertakings, and
indemnification, and other rights made or granted to or for the benefit of the
Purchaser by the Company are hereby also made and granted for the benefit of the
holder of the Warrant and shares of the Company's Common Stock issuable upon
exercise of the Warrant (the "Warrant Shares")
(b) Subject to the terms of Section 2(d) below, the Company shall
pay to Laurus Capital Management, LLC, the manager of the Purchaser, a closing
payment in an amount equal to three and one half percent (3.50%) of the
aggregate principal amount of the Note. The foregoing fee is referred to herein
as the "Closing Payment."
(c) The Company shall reimburse the Purchaser for its reasonable
expenses (including legal fees and expenses) incurred in connection with the
preparation and negotiation of this Agreement and the Related Agreements (as
hereinafter defined), and expenses incurred in connection with the Purchaser's
due diligence review of the Company and its Subsidiaries (as defined in Section
4.2) and all related matters. Amounts required to be paid under this Section
2(c) will be paid on the Closing Date and shall be $40,000 for such expenses
referred to in this Section 2(c) (less the $15,000 deposit previously paid by
the Company).
(d) The Closing Payment and the expenses referred to in the
preceding clause (c) (net of deposits previously paid by the Company) shall be
paid at closing out of funds held pursuant to the Escrow Agreement (as defined
below) and a disbursement letter (the "Disbursement Letter").
3. Closing, Delivery and Payment.
3.1 Closing. Subject to the terms and conditions herein, the closing
of the transactions contemplated hereby (the "Closing"), shall take place on the
date hereof, at such time or place as the Company and the Purchaser may mutually
agree (such date is hereinafter referred to as the "Closing Date").
3.2 Delivery. Pursuant to the Escrow Agreement, at the Closing on
the Closing Date, the Company will deliver to the Purchaser, among other things,
this Agreement and the Related Agreements and the Purchaser will deliver to the
Company, among other things, the amounts set forth in the Disbursement Letter,
less the Lien Amount (as hereinafter defined) by certified funds or wire
transfer. The Company hereby acknowledges and agrees that Purchaser's obligation
to purchase the Note from the Company on the Closing Date shall be contingent
upon the satisfaction (or waiver by the Purchaser in its sole discretion) of the
items and matters set forth in the closing checklist provided by the Purchaser
to the Company on or prior to the Closing Date.
4. Representations and Warranties of the Company. Except as otherwise set
forth in the schedule of exceptions delivered by the Company to the Purchaser
simultaneously with the execution of this Agreement (the "Schedule of
Exceptions"), which identifies exceptions by specific Section references, the
Company hereby represents and warrants to the Purchaser that:
4.1 Organization, Good Standing and Qualification.
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(a) Each of the Company and each of its Subsidiaries is a
corporation, partnership or limited liability company, as the case may be, duly
organized, validly existing and in good standing under the laws of its
jurisdiction of organization. Each of the Company and each of its Subsidiaries
is duly qualified and is authorized to do business and is in good standing as a
foreign corporation, partnership or limited liability company, as the case may
be, in all jurisdictions in which the nature or location of its activities and
of its properties (both owned and leased) makes such qualification necessary,
except for those jurisdictions in which failure to do so has not, or could not
reasonably be expected to have, individually or in the aggregate, a material
adverse effect on the business, assets, liabilities, condition (financial or
otherwise), properties, operations or prospects of the Company and its
Subsidiaries, taken as a whole (a "Material Adverse Effect").
(b) Each of the Company and each of its Subsidiaries has the
corporate power and authority to own and operate its properties and assets and,
insofar as it is or shall be a party thereto, to (1) execute and deliver (i)
this Agreement, (ii) the Note and the Warrant to be issued in connection with
this Agreement, (iii) the Master Security Agreement dated as of the date hereof
between the Company, certain Subsidiaries of the Company and the Purchaser (as
amended, modified and/or supplemented from time to time, the "Master Security
Agreement"), (iv) the Registration Rights Agreement relating to the Securities
dated as of the date hereof between the Company and the Purchaser (as amended,
modified and/or supplemented from time to time, the "Registration Rights
Agreement"), (v) the Subsidiary Guaranty dated as of the date hereof made by
certain Subsidiaries of the Company (as amended, modified and/or supplemented
from time to time, the "Subsidiary Guaranty"), (vi) the Stock Pledge Agreement
dated as of the date hereof among the Company, certain Subsidiaries of the
Company and the Purchaser (as amended, modified and/or or supplemented from time
to time, the "Stock Pledge Agreement"), (vii) the Funds Escrow Agreement dated
as of the date hereof among the Company, the Purchaser and the escrow agent
referred to therein, substantially in the form of Exhibit D hereto (as amended,
modified and/or supplemented from time to time, the "Escrow Agreement") and
(viii) all other documents, instruments and agreements entered into in
connection with the transactions contemplated hereby and thereby (the preceding
clauses (ii) through (viii), collectively, the "Related Agreements"); and (2)
carry out the provisions of this Agreement and each Related Agreement it is a
party to and to carry on its business as presently conducted. The Company has
the corporate power and authority to (1) issue and sell the Note and the shares
of Common Stock issuable upon conversion of the Note (the "Note Shares"); and
(2) issue and sell the Warrant and the Warrant Shares.
4.2 Subsidiaries. Each direct and indirect Subsidiary of the Company, the
direct owner of such Subsidiary and its percentage ownership thereof, is set
forth on Schedule 4.2. For the purpose of this Agreement, a "Subsidiary" of any
person or entity means (i) a corporation or other entity whose shares of stock
or other ownership interests having ordinary voting power (other than stock or
other ownership interests having such power only by reason of the happening of a
contingency) to elect a majority of the directors of such corporation, or other
persons or entities performing similar functions for such person or entity, are
owned, directly or indirectly, by such person or entity or (ii) a corporation or
other entity in which such person or entity owns, directly or indirectly, more
than 50% of the equity interests at such time.
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4.3 Capitalization; Voting Rights.
(a) As of the date hereof, the authorized capital of the Company
consists of 33,333,333 shares of Common Stock, $0.001 par value per share. As of
March 31, 2006, there were 15,964,948 shares of Common Stock issued and
outstanding and no shares of Preferred Stock issued and outstanding. The
authorized, issued and outstanding capital stock of each Subsidiary of the
Company is set forth on Schedule 4.3.
(b) Except as disclosed on Schedule 4.3, other than: (i) the shares
reserved for issuance under the Company's stock option plans; and (ii) shares
which may be granted pursuant to this Agreement and the Related Agreements,
there are no outstanding options, warrants, rights (including conversion or
preemptive rights and rights of first refusal), proxy or stockholder agreements,
or arrangements or agreements of any kind for the purchase or acquisition from
the Company of any of its securities. Except as disclosed on Schedule 4.3,
neither the offer, issuance or sale of any of the Note or the Warrant, or the
issuance of any of the Note Shares or Warrant Shares, nor the consummation of
any transaction contemplated hereby will result in a change in the price or
number of any securities of the Company outstanding, under anti-dilution or
other similar provisions contained in or affecting any such securities.
(c) All issued and outstanding shares of the Company's Common Stock:
(i) have been duly authorized and validly issued and are fully paid and
nonassessable; and (ii) were issued in compliance with all applicable state and
federal laws concerning the issuance of securities.
(d) The rights, preferences, privileges and restrictions of the
shares of the Common Stock are as stated in the Company's Certificate of
Incorporation (the "Charter"). The Note Shares and Warrant Shares have been duly
and validly reserved for issuance. When issued in compliance with the provisions
of this Agreement and the Company's Charter, the Securities will be validly
issued, fully paid and nonassessable, and will be free of any liens or
encumbrances; provided, however, that the Securities may be subject to
restrictions on transfer under state and/or federal securities laws as set forth
herein or as otherwise required by such laws at the time a transfer is proposed.
4.4 Authorization; Binding Obligations. All corporate action on the part
of the Company and each of its Subsidiaries (including their respective officers
and directors) necessary for the authorization of this Agreement and the Related
Agreements, the performance of all obligations of the Company and its
Subsidiaries hereunder and each Related Agreements to which it is a party at the
Closing and, the authorization, sale, issuance and delivery of the Note and
Warrant has been taken or will be taken prior to the Closing. This Agreement and
the Related Agreements, when executed and delivered and to the extent it is a
party thereto, will be valid and binding obligations of each of the Company and
each of its Subsidiaries, enforceable against each such person or entity in
accordance with their terms, except:
(a) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting enforcement of
creditors' rights; and
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(b) general principles of equity that restrict the availability of
equitable or legal remedies.
The sale of the Note and the subsequent conversion of the Note into Note Shares
are not and will not be subject to any preemptive rights or rights of first
refusal that have not been properly waived or complied with. The issuance of the
Warrant and the subsequent exercise of the Warrant for Warrant Shares are not
and will not be subject to any preemptive rights or rights of first refusal that
have not been properly waived or complied with.
4.5 Liabilities. Except for liabilities that are disclosed in
Schedule 4.5, the Company and the Subsidiaries do not have any liabilities or
obligations (whether absolute, accrued, contingent, fixed or otherwise, or
whether due or to become due) of any nature that would be required by generally
accepted accounting principles to be reflected on a balance sheet of the Company
or the Subsidiaries (including the notes thereto), except liabilities or
obligations (i) which were incurred in the ordinary course of business
consistent with past practice or (ii) that do not exceed $25,000.
4.6 Agreements; Action. Except as set forth on Schedule 4.6 or as
disclosed in any Exchange Act Filings:
(a) there are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees to which the Company
or any of its Subsidiaries is a party or by which it is bound which may involve:
(i) obligations (contingent or otherwise) of, or payments to, the Company or any
of its Subsidiaries in excess of $100,000 (other than obligations of, or
payments to, the Company or any of its Subsidiaries arising from purchase or
sale agreements entered into in the ordinary course of business); or (ii) the
transfer or license of any patent, copyright, trade secret or other proprietary
right to or from the Company or any of its Subsidiaries (other than licenses
arising from the purchase of "off the shelf" or other standard products); or
(iii) provisions restricting the development, manufacture or distribution of the
Company's or any of its Subsidiaries products or services; or (iv)
indemnification by the Company or any of its Subsidiaries with respect to
infringements of proprietary rights.
(b) Since December 31, 2004 (the "Balance Sheet Date"), neither the
Company nor any of its Subsidiaries has: (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or series
of its capital stock; (ii) incurred any indebtedness for money borrowed or any
other liabilities (other than ordinary course obligations) individually in
excess of $100,000 or, in the case of indebtedness and/or liabilities
individually less than $100,000, in excess of $200,000 in the aggregate; (iii)
made any loans or advances to any person or entity not in excess, individually
or in the aggregate, of $100,000, other than ordinary course advances for travel
expenses; or (iv) sold, exchanged or otherwise disposed of any of its assets or
rights, other than the sale of its inventory in the ordinary course of business.
(c) For the purposes of subsections (a) and (b) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities the Company or any Subsidiary of the Company has reason to believe
are affiliated therewith) shall be aggregated for the purpose of meeting the
individual minimum dollar amounts of such subsections.
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(d) The Company maintains disclosure controls and procedures
("Disclosure Controls") designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized, and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission ("SEC").
(i) The Company makes and keep books, records, and accounts,
that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the Company's assets.
(e) There is no weakness in any of the Company's Disclosure Controls
that is required to be disclosed in any of the Exchange Act Filings, except as
so disclosed.
(f) Except to the extent qualified by Schedule 4.6(f), the Company
maintains such internal control over financial reporting as is required by the
SEC, if applicable ("Financial Reporting Controls") designed by, or under the
supervision of, the Company's principal executive and principal financial
officers, and effected by the Company's board of directors, management, and
other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles ("GAAP"),
including that:
(i) transactions are executed in accordance with management's
general or specific authorization;
(ii) unauthorized acquisition, use, or disposition of the
Company's assets that could have a material effect on the financial
statements are prevented or timely detected;
(iii) transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and
that the Company's receipts and expenditures are being made only in
accordance with authorizations of the Company's management and board
of directors;
(iv) transactions are recorded as necessary to maintain
accountability for assets; and
(v) the recorded accountability for assets is compared with
the existing assets at reasonable intervals, and appropriate action
is taken with respect to any differences.
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4.7 Obligations to Related Parties. Except as set forth on Schedule
4.7, there are no obligations of the Company or any of its Subsidiaries to
officers, directors, stockholders or employees of the Company or any of its
Subsidiaries other than:
(a) for payment of salary for services rendered and for bonus
payments;
(b) reimbursement for reasonable expenses incurred on behalf of the
Company and its Subsidiaries;
(c) for other standard employee benefits made generally available to
all employees (including stock option agreements outstanding under any stock
option plan approved by the Board of Directors of the Company and each
Subsidiary of the Company, as applicable); and
(d) obligations listed in the Company's and each of its Subsidiary's
financial statements or disclosed in any of the Company's Exchange Act Filings.
Except as described above or set forth on Schedule 4.7, none of the officers,
directors or, to the best of the Company's knowledge, key employees or
stockholders of the Company or any of its Subsidiaries or any members of their
immediate families, are indebted to the Company or any of its Subsidiaries,
individually or in the aggregate, in excess of $60,000 or have any direct or
indirect ownership interest in any firm or corporation with which the Company or
any of its Subsidiaries is affiliated or with which the Company or any of its
Subsidiaries has a business relationship, or any firm or corporation which
competes with the Company or any of its Subsidiaries, other than passive
investments in publicly traded companies (representing less than one percent
(1%) of such company) which may compete with the Company or any of its
Subsidiaries. Except as described above, no officer, director or stockholder of
the Company or any of its Subsidiaries, or any member of their immediate
families, is, directly or indirectly, interested in any material contract with
the Company or any of its Subsidiaries and no agreements, understandings or
proposed transactions are contemplated between the Company or any of its
Subsidiaries and any such person. Except as set forth on Schedule 4.7, neither
the Company nor any of its Subsidiaries is a guarantor or indemnitor of any
indebtedness of any other person or entity.
4.8 Changes. Since the Balance Sheet Date, except as disclosed in
any Exchange Act Filing or in any Schedule to this Agreement or to any of the
Related Agreements, there has not been:
(a) any change in the business, assets, liabilities, condition
(financial or otherwise), properties, operations or prospects of the Company or
any of its Subsidiaries, which individually or in the aggregate has had, or
could reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect;
(b) any resignation or termination of any officer, key employee or
group of employees of the Company or any of its Subsidiaries;
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(c) any material change, except in the ordinary course of business,
in the contingent obligations of the Company or any of its Subsidiaries by way
of guaranty, endorsement, indemnity, warranty or otherwise;
(d) any damage, destruction or loss, whether or not covered by
insurance, which has had, or could reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect;
(e) any waiver by the Company or any of its Subsidiaries of a
valuable right or of a material debt owed to it;
(f) any direct or indirect loans made by the Company or any of its
Subsidiaries to any stockholder, employee, officer or director of the Company or
any of its Subsidiaries, other than advances made in the ordinary course of
business;
(g) any material change in any compensation arrangement or agreement
with any employee, officer, director or stockholder of the Company or any of its
Subsidiaries;
(h) any declaration or payment of any dividend or other distribution
of the assets of the Company or any of its Subsidiaries;
(i) any labor organization activity related to the Company or any of
its Subsidiaries;
(j) any debt, obligation or liability incurred, assumed or
guaranteed by the Company or any of its Subsidiaries, except those for
immaterial amounts and for current liabilities incurred in the ordinary course
of business;
(k) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets owned by the Company or any
of its Subsidiaries;
(l) any change in any material agreement to which the Company or any
of its Subsidiaries is a party or by which either the Company or any of its
Subsidiaries is bound which either individually or in the aggregate has had, or
could reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect;
(m) any other event or condition of any character that, either
individually or in the aggregate, has had, or could reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect; or
(n) any arrangement or commitment by the Company or any of its
Subsidiaries to do any of the acts described in subsection (a) through (m)
above.
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4.9 Title to Properties and Assets; Liens, Etc. Except as set forth
on Schedule 4.9, each of the Company and each of its Subsidiaries has good and
marketable title to its properties and assets, and good title to its leasehold
interests, in each case subject to no mortgage, pledge, lien, lease, encumbrance
or charge, other than:
(a) those resulting from taxes which have not yet become delinquent;
(b) minor liens and encumbrances which do not materially detract
from the value of the property subject thereto or materially impair the
operations of the Company or any of its Subsidiaries, so long as in each such
case, such liens and encumbrances have no effect on the lien priority of the
Purchaser in such property; and
(c) those that have otherwise arisen in the ordinary course of
business, so long as they have no effect on the lien priority of the Purchaser.
All facilities, machinery, equipment, fixtures, vehicles and other
properties owned, leased or used by the Company and its Subsidiaries are in good
operating condition and repair and are reasonably fit and usable for the
purposes for which they are being used. Except as set forth on Schedule 4.9, the
Company and its Subsidiaries are in compliance with all material terms of each
lease to which it is a party or is otherwise bound.
4.10 Intellectual Property.
(a) Each of the Company and each of its Subsidiaries owns or
possesses sufficient legal rights to all patents, trademarks, service marks,
trade names, copyrights, trade secrets, licenses, information and other
proprietary rights and processes necessary for its business as now conducted
and, to the Company's knowledge, as presently proposed to be conducted (the
"Intellectual Property"), without any known infringement of the rights of
others. There are no outstanding options, licenses or agreements of any kind
relating to the Intellectual Property, nor is the Company or any of its
Subsidiaries bound by or a party to any options, licenses or agreements of any
kind with respect to the patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses, information and other proprietary rights
and processes of any other person or entity other than such licenses or
agreements arising from the purchase of "off the shelf" or standard products.
(b) Neither the Company nor any of its Subsidiaries has received any
communications alleging that the Company or any of its Subsidiaries has violated
any of the patents, trademarks, service marks, trade names, copyrights or trade
secrets or other proprietary rights of any other person or entity, nor is the
Company or any of its Subsidiaries aware of any basis therefor.
(c) The Company does not believe it is or will be necessary to
utilize any inventions, trade secrets or proprietary information of any of its
employees made prior to their employment by the Company or any of its
Subsidiaries, except for inventions, trade secrets or proprietary information
that have been rightfully assigned to the Company or any of its Subsidiaries.
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4.11 Compliance with Other Instruments. Neither the Company nor any
of its Subsidiaries is in violation or default of (x) any term of its Charter or
Bylaws, or (y) any provision of any indebtedness, mortgage, indenture, contract,
agreement or instrument to which it is party or by which it is bound or of any
judgment, decree, order or writ, which violation or default, in the case of this
clause (y), has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect. The execution,
delivery and performance of and compliance with this Agreement and the Related
Agreements to which it is a party, and the issuance and sale of the Note by the
Company and the other Securities by the Company each pursuant hereto and
thereto, will not, with or without the passage of time or giving of notice,
result in any such material violation, or be in conflict with or constitute a
default under any such term or provision, or result in the creation of any
mortgage, pledge, lien, encumbrance or charge upon any of the properties or
assets of the Company or any of its Subsidiaries or the suspension, revocation,
impairment, forfeiture or nonrenewal of any permit, license, authorization or
approval applicable to the Company, its business or operations or any of its
assets or properties.
4.12 Litigation. Except as set forth on Schedule 4.12 hereto, there
is no action, suit, proceeding or investigation pending or, to the Company's
knowledge, currently threatened against the Company or any of its Subsidiaries
that prevents the Company or any of its Subsidiaries from entering into this
Agreement or the other Related Agreements, or from consummating the transactions
contemplated hereby or thereby, or which has had, or could reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect or any change in the current equity ownership of the Company or any of
its Subsidiaries, nor is the Company aware that there is any basis to assert any
of the foregoing. Neither the Company nor any of its Subsidiaries is a party to
or subject to the provisions of any order, writ, injunction, judgment or decree
of any court or government agency or instrumentality. There is no action, suit,
proceeding or investigation by the Company or any of its Subsidiaries currently
pending or which the Company or any of its Subsidiaries intends to initiate.
4.13 Tax Returns and Payments. Each of the Company and each of its
Subsidiaries has timely filed all tax returns (federal, state and local)
required to be filed by it. All taxes shown to be due and payable on such
returns, any assessments imposed, and all other taxes due and payable by the
Company or any of its Subsidiaries on or before the Closing, have been paid or
will be paid prior to the time they become delinquent. Except as set forth on
Schedule 4.13, neither the Company nor any of its Subsidiaries has been advised:
(a) that any of its returns, federal, state or other, have been
or are being audited as of the date hereof; or
(b) of any adjustment, deficiency, assessment or court decision
in respect of its federal, state or other taxes.
The Company has no knowledge of any liability for any tax to be
imposed upon its properties or assets as of the date of this Agreement that is
not adequately provided for.
10
4.14 Employees. Except as set forth on Schedule 4.14, neither the
Company nor any of its Subsidiaries has any collective bargaining agreements
with any of its employees. There is no labor union organizing activity pending
or, to the Company's knowledge, threatened with respect to the Company or any of
its Subsidiaries. Except as disclosed in the Exchange Act Filings or on Schedule
4.14, neither the Company nor any of its Subsidiaries is a party to or bound by
any currently effective employment contract, deferred compensation arrangement,
bonus plan, incentive plan, profit sharing plan, retirement agreement or other
employee compensation plan or agreement. To the Company's knowledge, no employee
of the Company or any of its Subsidiaries, nor any consultant with whom the
Company or any of its Subsidiaries has contracted, is in violation of any term
of any employment contract, proprietary information agreement or any other
agreement relating to the right of any such individual to be employed by, or to
contract with, the Company or any of its Subsidiaries because of the nature of
the business to be conducted by the Company or any of its Subsidiaries; and to
the Company's knowledge the continued employment by the Company and its
Subsidiaries of their present employees, and the performance of the Company's
and its Subsidiaries' contracts with its independent contractors, will not
result in any such violation. Neither the Company nor any of its Subsidiaries is
aware that any of its employees is obligated under any contract (including
licenses, covenants or commitments of any nature) or other agreement, or subject
to any judgment, decree or order of any court or administrative agency that
would interfere with their duties to the Company or any of its Subsidiaries.
Neither the Company nor any of its Subsidiaries has received any notice alleging
that any such violation has occurred. Except for employees who have a current
effective employment agreement with the Company or any of its Subsidiaries, no
employee of the Company or any of its Subsidiaries has been granted the right to
continued employment by the Company or any of its Subsidiaries or to any
material compensation following termination of employment with the Company or
any of its Subsidiaries. Except as set forth on Schedule 4.14, the Company is
not aware that any officer, key employee or group of employees intends to
terminate his, her or their employment with the Company or any of its
Subsidiaries, nor does the Company or any of its Subsidiaries have a present
intention to terminate the employment of any officer, key employee or group of
employees.
4.15 Registration Rights and Voting Rights. Except as set forth on
Schedule 4.15 and except as disclosed in Exchange Act Filings, neither the
Company nor any of its Subsidiaries is presently under any obligation, and
neither the Company nor any of its Subsidiaries has granted any rights, to
register any of the Company's or its Subsidiaries' presently outstanding
securities or any of its securities that may hereafter be issued, except for
those securities issued in connection with the Offering, including the shares of
common stock issuable upon conversion of the Note and upon exercise of the
Warrant. Except as set forth on Schedule 4.15 and except as disclosed in
Exchange Act Filings, to the Company's knowledge, no stockholder of the Company
or any of its Subsidiaries has entered into any agreement with respect to the
voting of equity securities of the Company or any of its Subsidiaries.
4.16 Compliance with Laws; Permits. Neither the Company nor any of
its Subsidiaries is in violation of any provision of the ▇▇▇▇▇▇▇▇-▇▇▇▇▇ Act of
2002 or any SEC related regulation or rule or any rule of the Principal Market
(as hereafter defined) promulgated thereunder or any other applicable statute,
rule, regulation, order or restriction of any domestic or foreign government or
any instrumentality or agency thereof in respect of the conduct of its business
or the ownership of its properties which has had, or could reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect. No governmental orders, permissions, consents, approvals or
authorizations are required to be obtained and no registrations or declarations
are required to be filed in connection with the execution and delivery of this
Agreement or any other Related Agreement and the issuance of any of the
Securities, except such as have been duly and validly obtained or filed, or with
respect to any filings that must be made after the Closing, as will be filed in
a timely manner. Each of the Company and its Subsidiaries has all material
franchises, permits, licenses and any similar authority necessary for the
conduct of its business as now being conducted by it, the lack of which could,
either individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.
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4.17 Environmental and Safety Laws. Neither the Company nor any of
its Subsidiaries is in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety, and to its
knowledge, no material expenditures are or will be required in order to comply
with any such existing statute, law or regulation. Except as set forth on
Schedule 4.17, no Hazardous Materials (as defined below) are used or have been
used, stored, or disposed of by the Company or any of its Subsidiaries or, to
the Company's knowledge, by any other person or entity on any property owned,
leased or used by the Company or any of its Subsidiaries. For the purposes of
the preceding sentence, "Hazardous Materials" shall mean:
(a) materials which are listed or otherwise defined as "hazardous"
or "toxic" under any applicable local, state, federal and/or foreign laws and
regulations that govern the existence and/or remedy of contamination on
property, the protection of the environment from contamination, the control of
hazardous wastes, or other activities involving hazardous substances, including
building materials; or
(b) any petroleum products or nuclear materials.
4.18 Valid Offering. Assuming the accuracy of the representations
and warranties of the Purchaser contained in this Agreement, the offer, sale and
issuance of the Securities will be exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Securities Act"), and will have
been registered or qualified (or are exempt from registration and qualification)
under the registration, permit or qualification requirements of all applicable
state securities laws.
4.19 Full Disclosure. Each of the Company and each of its
Subsidiaries has provided the Purchaser with all information requested by the
Purchaser in connection with its decision to purchase the Note and Warrant,
including all information the Company and its Subsidiaries believe is reasonably
necessary to make such investment decision. Neither this Agreement, the Related
Agreements, the exhibits and schedules hereto and thereto nor any other document
delivered by the Company or any of its Subsidiaries to Purchaser or its
attorneys or agents in connection herewith or therewith or with the transactions
contemplated hereby or thereby, contain any untrue statement of a material fact
nor omit to state a material fact necessary in order to make the statements
contained herein or therein, in light of the circumstances in which they are
made, not misleading. Any financial projections and other estimates provided to
the Purchaser by the Company or any of its Subsidiaries were based on the
Company's and its Subsidiaries' experience in the industry and on assumptions of
fact and opinion as to future events which the Company or any of its
Subsidiaries, at the date of the issuance of such projections or estimates,
believed to be reasonable.
12
4.20 Insurance. Each of the Company and each of its Subsidiaries has
general commercial, product liability, fire and casualty insurance policies with
coverages which the Company believes are customary for companies similarly
situated to the Company and its Subsidiaries in the same or similar business.
4.21 SEC Reports. Except as set forth on Schedule 4.21, the Company
has filed all proxy statements, reports and other documents required to be filed
by it under the Securities ▇▇▇▇▇▇▇▇ ▇▇▇ ▇▇▇▇, as amended (the "Exchange Act").
The Company has furnished the Purchaser copies of: (i) its Annual Reports on
Form 10-KSB for its fiscal year ended December 31, 2004; and (ii) its Quarterly
Reports on Form 10-QSB for its fiscal quarters ended March 31, 2005, June 30,
2005 and September 30, 2005, and the Form 8-K filings which it has made during
the fiscal year 2006 to date (collectively, the "SEC Reports"). Except as set
forth on Schedule 4.21, each SEC Report was, at the time of its filing, in
substantial compliance with the requirements of its respective form and none of
the SEC Reports, nor the financial statements (and the notes thereto) included
in the SEC Reports, as of their respective filing dates, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
4.22 Listing. The Company's Common Stock is listed or quoted, as
applicable, on a Principal Market (as hereafter defined) and satisfies and at
all times hereafter will satisfy, all requirements for the continuation of such
listing or quotation, as applicable. The Company has not received any notice
that its Common Stock will be delisted from, or no longer quoted on, as
applicable, the Principal Market or that its Common Stock does not meet all
requirements for such listing or quotation, as applicable. For purposes hereof,
the term "Principal Market" means the NASD Over The Counter Bulletin Board,
NASDAQ Capital Market, NASDAQ National Markets System, American Stock Exchange
or New York Stock Exchange (whichever of the foregoing is at the time the
principal trading exchange or market for the Common Stock).
4.23 No Integrated Offering. Neither the Company, nor any of its
Subsidiaries or affiliates, nor any person acting on its or their behalf, has
directly or indirectly made any offers or sales of any security or solicited any
offers to buy any security under circumstances that would cause the offering of
the Securities pursuant to this Agreement or any of the Related Agreements to be
integrated with prior offerings by the Company for purposes of the Securities
Act which would prevent the Company from selling the Securities pursuant to Rule
506 under the Securities Act, or any applicable exchange-related stockholder
approval provisions, nor will the Company or any of its affiliates or
Subsidiaries take any action or steps that would cause the offering of the
Securities to be integrated with other offerings.
4.24 Stop Transfer. The Securities are restricted securities as of
the date of this Agreement. Neither the Company nor any of its Subsidiaries will
issue any stop transfer order or other order impeding the sale and delivery of
any of the Securities at such time as the Securities are registered for public
sale or an exemption from registration is available, except as required by state
and federal securities laws.
4.25 Dilution. The Company specifically acknowledges that its
obligation to issue the shares of Common Stock upon conversion of the Note and
exercise of the Warrant is binding upon the Company and enforceable regardless
of the dilution such issuance may have on the ownership interests of other
shareholders of the Company.
13
4.26 Patriot Act. The Company certifies that, to the best of
Company's knowledge, neither the Company nor any of its Subsidiaries has been
designated, nor is or shall be owned or controlled, by a "suspected terrorist"
as defined in Executive Order 13224. The Company hereby acknowledges that the
Purchaser seeks to comply with all applicable laws concerning money laundering
and related activities. In furtherance of those efforts, the Company hereby
represents, warrants and covenants that: (i) none of the cash or property that
the Company or any of its Subsidiaries will pay or will contribute to the
Purchaser has been or shall be derived from, or related to, any activity that is
deemed criminal under United States law; and (ii) no contribution or payment by
the Company or any of its Subsidiaries to the Purchaser, to the extent that they
are within the Company's and/or its Subsidiaries' control shall cause the
Purchaser to be in violation of the United States Bank Secrecy Act, the United
States International Money Laundering Control Act of 1986 or the United States
International Money Laundering Abatement and Anti-Terrorist Financing Act of
2001. The Company shall promptly notify the Purchaser if any of these
representations, warranties or covenants ceases to be true and accurate
regarding the Company or any of its Subsidiaries. The Company shall provide the
Purchaser all additional information regarding the Company or any of its
Subsidiaries that the Purchaser deems necessary or convenient to ensure
compliance with all applicable laws concerning money laundering and similar
activities. The Company understands and agrees that if at any time it is
discovered that any of the foregoing representations, warranties or covenants
are incorrect, or if otherwise required by applicable law or regulation related
to money laundering or similar activities, the Purchaser may undertake
appropriate actions to ensure compliance with applicable law or regulation,
including but not limited to segregation and/or redemption of the Purchaser's
investment in the Company. The Company further understands that the Purchaser
may release confidential information about the Company and its Subsidiaries and,
if applicable, any underlying beneficial owners, to proper authorities if the
Purchaser, in its sole discretion, determines that it is in the best interests
of the Purchaser in light of relevant rules and regulations under the laws set
forth in subsection (ii) above.
4.27 ERISA. Based upon the Employee Retirement Income Security Act
of 1974 ("ERISA"), and the regulations and published interpretations thereunder:
(i) neither the Company nor any of its Subsidiaries has engaged in any
Prohibited Transactions (as defined in Section 406 of ERISA and Section 4975 of
the Internal Revenue Code of 1986, as amended (the "Code")); (ii) each of the
Company and each of its Subsidiaries has met all applicable minimum funding
requirements under Section 302 of ERISA in respect of its plans; (iii) neither
the Company nor any of its Subsidiaries has any knowledge of any event or
occurrence which would cause the Pension Benefit Guaranty Corporation to
institute proceedings under Title IV of ERISA to terminate any employee benefit
plan(s); (iv) neither the Company nor any of its Subsidiaries has any fiduciary
responsibility for investments with respect to any plan existing for the benefit
of persons other than the Company's or such Subsidiary's employees; and (v)
neither the Company nor any of its Subsidiaries has withdrawn, completely or
partially, from any multi-employer pension plan so as to incur liability under
the Multiemployer Pension Plan Amendments Act of 1980.
14
5. Representations and Warranties of the Purchaser. The Purchaser
hereby represents and warrants to the Company as follows (such representations
and warranties do not lessen or obviate the representations and warranties of
the Company set forth in this Agreement):
5.1 No Shorting. The Purchaser or any of its affiliates and
investment partners has not, will not and will not cause any person or entity,
to directly engage in "short sales" of the Company's Common Stock as long as the
Note shall be outstanding.
5.2 Requisite Power and Authority. The Purchaser has all necessary
power and authority under all applicable provisions of law to execute and
deliver this Agreement and the Related Agreements and to carry out their
provisions. All corporate action on the Purchaser's part required for the lawful
execution and delivery of this Agreement and the Related Agreements have been or
will be effectively taken prior to the Closing. Upon their execution and
delivery, this Agreement and the Related Agreements will be valid and binding
obligations of the Purchaser, enforceable in accordance with their terms,
except:
(a) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting enforcement of
creditors' rights; and
(b) as limited by general principles of equity that restrict the
availability of equitable and legal remedies.
5.3 Investment Representations. The Purchaser understands that the
Securities are being offered and sold pursuant to an exemption from registration
contained in the Securities Act based in part upon the Purchaser's
representations contained in this Agreement, including, without limitation, that
the Purchaser is an "accredited investor" within the meaning of Regulation D
under the Securities Act of 1933, as amended (the "Securities Act"). The
Purchaser confirms that it has received or has had full access to all the
information it considers necessary or appropriate to make an informed investment
decision with respect to the Note and the Warrant to be purchased by it under
this Agreement and the Note Shares and the Warrant Shares acquired by it upon
the conversion of the Note and the exercise of the Warrant, respectively. The
Purchaser further confirms that it has had an opportunity to ask questions and
receive answers from the Company regarding the Company's and its Subsidiaries'
business, management and financial affairs and the terms and conditions of the
Offering, the Note, the Warrant and the Securities and to obtain additional
information (to the extent the Company possessed such information or could
acquire it without unreasonable effort or expense) necessary to verify any
information furnished to the Purchaser or to which the Purchaser had access.
5.4 The Purchaser Bears Economic Risk. The Purchaser has substantial
experience in evaluating and investing in private placement transactions of
securities in companies similar to the Company so that it is capable of
evaluating the merits and risks of its investment in the Company and has the
capacity to protect its own interests. The Purchaser must bear the economic risk
of this investment until the Securities are sold pursuant to: (i) an effective
registration statement under the Securities Act; or (ii) an exemption from
registration is available with respect to such sale.
15
5.5 Acquisition for Own Account. The Purchaser is acquiring the Note
and Warrant and the Note Shares and the Warrant Shares for the Purchaser's own
account for investment only, and not as a nominee or agent and not with a view
towards or for resale in connection with their distribution.
5.6 The Purchaser Can Protect Its Interest. The Purchaser represents
that by reason of its, or of its management's, business and financial
experience, the Purchaser has the capacity to evaluate the merits and risks of
its investment in the Note, the Warrant and the Securities and to protect its
own interests in connection with the transactions contemplated in this Agreement
and the Related Agreements. Further, the Purchaser is aware of no publication of
any advertisement in connection with the transactions contemplated in the
Agreement or the Related Agreements.
5.7 Accredited Investor. The Purchaser represents that it is an
accredited investor within the meaning of Regulation D under the Securities Act.
5.8 Legends.
(a) The Note shall bear substantially the following legend:
"THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS
NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS NOTE AND THE
COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES
UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO AUXILIO, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED."
(b) The Note Shares and the Warrant Shares, if not issued by DWAC
system (as hereinafter defined), shall bear a legend which shall be in
substantially the following form until such shares are covered by an
effective registration statement filed with the SEC:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES LAWS. THESE SHARES MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND APPLICABLE
STATE LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
AUXILIO, INC THAT SUCH REGISTRATION IS NOT REQUIRED."
16
(c) The Warrant shall bear substantially the following legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT
AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE
UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO AUXILIO, INC THAT SUCH REGISTRATION IS NOT
REQUIRED."
6. Covenants of the Company. The Company covenants and agrees with the
Purchaser as follows:
6.1 Stop-Orders. The Company will advise the Purchaser, promptly
after it receives notice of issuance by the SEC, any state securities commission
or any other regulatory authority of any stop order or of any order preventing
or suspending any offering of any securities of the Company, or of the
suspension of the qualification of the Common Stock of the Company for offering
or sale in any jurisdiction, or the initiation of any proceeding for any such
purpose.
6.2 Listing. The Company shall promptly secure the listing or
quotation, as applicable, of the shares of Common Stock issuable upon conversion
of the Note and upon the exercise of the Warrant on the Principal Market upon
which shares of Common Stock are listed or quoted for trading, as applicable
(subject to official notice of issuance) and shall maintain such listing or
quotation, as applicable, so long as any other shares of Common Stock shall be
so listed or quoted, as applicable. The Company will maintain the listing or
quotation, as applicable, of its Common Stock on the Principal Market, and will
comply in all material respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the National Association of Securities
Dealers ("NASD") and such exchanges, as applicable.
6.3 Market Regulations. The Company shall notify the SEC, NASD and
applicable state authorities, in accordance with their requirements, of the
transactions contemplated by this Agreement, and shall take all other necessary
action and proceedings as may be required and permitted by applicable law, rule
and regulation, for the legal and valid issuance of the Securities to the
Purchaser and promptly provide copies thereof to the Purchaser.
6.4 Reporting Requirements. The Company will deliver, or cause to be
delivered, to the Purchaser each of the following, which shall be in form and
detail acceptable to the Purchaser:
17
(a) As soon as available, and in any event within ninety (90) days
after the end of each fiscal year of the Company, each of the Company's and each
of its Subsidiaries' audited financial statements with a report of independent
certified public accountants of recognized standing selected by the Company and
acceptable to the Purchaser (the "Accountants"), which annual financial
statements shall be without qualification and shall include each of the
Company's and each of its Subsidiaries' balance sheet as at the end of such
fiscal year and the related statements of each of the Company's and each of its
Subsidiaries' income, retained earnings and cash flows for the fiscal year then
ended, prepared on a consolidating and consolidated basis to include the
Company, each Subsidiary of the Company and each of their respective affiliates,
all in reasonable detail and prepared in accordance with GAAP, together with (i)
if and when available, copies of any management letters prepared by the
Accountants; and (ii) a certificate of the Company's President, Chief Executive
Officer or Chief Financial Officer stating that such financial statements have
been prepared in accordance with GAAP and whether or not such officer has
knowledge of the occurrence of any Event of Default (as defined in the Note)
and, if so, stating in reasonable detail the facts with respect thereto;
(b) As soon as available and in any event within forty five (45)
days after the end of each fiscal quarter of the Company, an unaudited/internal
balance sheet and statements of income, retained earnings and cash flows of the
Company and each of its Subsidiaries as at the end of and for such quarter and
for the year to date period then ended, prepared on a consolidating and
consolidated basis to include all the Company, each Subsidiary of the Company
and each of their respective affiliates, in reasonable detail and stating in
comparative form the figures for the corresponding date and periods in the
previous year, all prepared in accordance with GAAP, subject to year-end
adjustments and accompanied by a certificate of the Company's President, Chief
Executive Officer or Chief Financial Officer, stating (i) that such financial
statements have been prepared in accordance with GAAP, subject to year-end audit
adjustments, and (ii) whether or not such officer has knowledge of the
occurrence of any Event of Default (as defined in the Note) not theretofore
reported and remedied and, if so, stating in reasonable detail the facts with
respect thereto;
(c) As soon as available and in any event within fifteen (15) days
after the end of each calendar month, an unaudited/internal balance sheet and
statements of income, retained earnings and cash flows of each of the Company
and its Subsidiaries as at the end of and for such month and for the year to
date period then ended, prepared on a consolidating and consolidated basis to
include the Company, each Subsidiary of the Company and each of their respective
affiliates, in reasonable detail and stating in comparative form the figures for
the corresponding date and periods in the previous year, all prepared in
accordance with GAAP, subject to year-end adjustments and accompanied by a
certificate of the Company's President, Chief Executive Officer or Chief
Financial Officer, stating (i) that such financial statements have been prepared
in accordance with GAAP, subject to year-end audit adjustments, and (ii) whether
or not such officer has knowledge of the occurrence of any Event of Default (as
defined in the Note) not theretofore reported and remedied and, if so, stating
in reasonable detail the facts with respect thereto;
(d) The Company shall timely file with the SEC all reports required
to be filed pursuant to the Exchange Act and refrain from terminating its status
as an issuer required by the Exchange Act to file reports thereunder even if the
Exchange Act or the rules or regulations thereunder would permit such
termination. Promptly after (i) the filing thereof, copies of the Company's most
recent registration statements and annual, quarterly, monthly or other regular
reports which the Company files with the Securities and Exchange Commission (the
"SEC"), and (ii) the issuance thereof, copies of such financial statements,
reports and proxy statements as the Company shall send to its stockholders; and
18
(e) The Company shall deliver, or cause the applicable Subsidiary of
the Company to deliver, such other information as the Purchaser shall reasonably
request.
6.5 Use of Funds. The Company shall use the proceeds of the sale of
the Note and the Warrant for general working capital purposes only.
6.6 Access to Facilities. Each of the Company and each of its
Subsidiaries will permit any representatives designated by the Purchaser (or any
successor of the Purchaser), upon reasonable notice and during normal business
hours, at such person's expense and accompanied by a representative of the
Company or any Subsidiary (provided that no such prior notice shall be required
to be given and no such representative of the Company or any Subsidiary shall be
required to accompany the Purchaser in the event that the Purchaser reasonably
believes that such access is necessary to preserve or protect the Collateral (as
defined in the Master Security Agreement) or following the occurrence and during
the continuance of an Event of Default (as defined in the Note)), to:
(a) visit and inspect any of the properties of the Company or any of
its Subsidiaries;
(b) examine the corporate and financial records of the Company or
any of its Subsidiaries (unless such examination is not permitted by federal,
state or local law or by contract) and make copies thereof or extracts
therefrom; and
(c) discuss the affairs, finances and accounts of the Company or any
of its Subsidiaries with the directors, officers and independent accountants of
the Company or any of its Subsidiaries.
Notwithstanding the foregoing, neither the Company nor any of its Subsidiaries
will provide any material, non-public information to the Purchaser unless the
Purchaser signs a confidentiality agreement and otherwise complies with
Regulation FD, under the federal securities laws.
6.7 Taxes. Each of the Company and each of its Subsidiaries will
promptly pay and discharge, or cause to be paid and discharged, when due and
payable, all taxes, assessments and governmental charges or levies imposed upon
the income, profits, property or business of the Company and its Subsidiaries;
provided, however, that any such tax, assessment, charge or levy need not be
paid currently if (i) the validity thereof shall currently and diligently be
contested in good faith by appropriate proceedings, (ii) such tax, assessment,
charge or levy shall have no effect on the lien priority of the Purchaser in any
property of the Company or any of its Subsidiaries and (iii) if the Company
and/or such Subsidiary shall have set aside on its books adequate reserves with
respect thereto in accordance with GAAP; and provided, further, that the Company
and its Subsidiaries will pay all such taxes, assessments, charges or levies
forthwith upon the commencement of proceedings to foreclose any lien which may
have attached as security therefor.
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6.8 Insurance. Each of the Company and its Subsidiaries will keep
its assets which are of an insurable character insured by financially sound and
reputable insurers against loss or damage by fire, explosion and other risks
customarily insured against by companies in similar business similarly situated
as the Company and its Subsidiaries; and the Company and its Subsidiaries will
maintain, with financially sound and reputable insurers, insurance against other
hazards and risks and liability to persons and property to the extent and in the
manner which the Company reasonably believes is customary for companies in
similar business similarly situated as the Company and its Subsidiaries and to
the extent available on commercially reasonable terms. The Company, and each of
its Subsidiaries, will jointly and severally bear the full risk of loss from any
loss of any nature whatsoever with respect to the assets pledged to the
Purchaser as security for their respective obligations hereunder and under the
Related Agreements. At the Company's and each of its Subsidiaries' joint and
several cost and expense in amounts and with carriers reasonably acceptable to
the Purchaser, each of the Company and each of its Subsidiaries shall (i) keep
all its insurable properties and properties in which it has an interest insured
against the hazards of fire, sprinkler leakage, those hazards covered by
extended coverage insurance and such other hazards, and for such amounts, as is
customary in the case of companies engaged in businesses similar to the
Company's or the respective Subsidiary's including business interruption
insurance; (ii) maintain a bond in such amounts as is customary in the case of
companies engaged in businesses similar to the Company's or the respective
Subsidiary's insuring against larceny, embezzlement or other criminal
misappropriation of insured's officers and employees who may either singly or
jointly with others at any time have access to the assets or funds of the
Company or any of its Subsidiaries either directly or through governmental
authority to draw upon such funds or to direct generally the disposition of such
assets; (iii) maintain public and product liability insurance against claims for
personal injury, death or property damage suffered by others; (iv) maintain all
such worker's compensation or similar insurance as may be required under the
laws of any state or jurisdiction in which the Company or the respective
Subsidiary is engaged in business; and (v) furnish the Purchaser with (x) copies
of all policies and evidence of the maintenance of such policies at least thirty
(30) days before any expiration date, (y) excepting the Company's workers'
compensation policy, endorsements to such policies naming the Purchaser as
"co-insured" or "additional insured" and appropriate loss payable endorsements
in form and substance satisfactory to the Purchaser, naming the Purchaser as
loss payee, and (z) evidence that as to the Purchaser the insurance coverage
shall not be impaired or invalidated by any act or neglect of the Company or any
Subsidiary and the insurer will provide the Purchaser with at least thirty (30)
days notice prior to cancellation. The Company and each Subsidiary shall
instruct the insurance carriers that in the event of any loss thereunder, the
carriers shall make payment for such loss to the Company and/or the Subsidiary
and the Purchaser jointly. In the event that as of the date of receipt of each
loss recovery upon any such insurance, the Purchaser has not declared an event
of default with respect to this Agreement or any of the Related Agreements, then
the Company and/or such Subsidiary shall be permitted to direct the application
of such loss recovery proceeds toward investment in property, plant and
equipment that would comprise "Collateral" secured by the Purchaser's security
interest pursuant to the Master Security Agreement or such other security
agreement as shall be required by the Purchaser, with any surplus funds to be
applied toward payment of the obligations of the Company to the Purchaser. In
the event that the Purchaser has properly declared an event of default with
respect to this Agreement or any of the Related Agreements, then all loss
recoveries received by the Purchaser upon any such insurance thereafter may be
applied to the obligations of the Company hereunder and under the Related
Agreements, in such order as the Purchaser may determine. Any surplus (following
satisfaction of all Company obligations to the Purchaser) shall be paid by the
Purchaser to the Company or applied as may be otherwise required by law. Any
deficiency thereon shall be paid by the Company or the Subsidiary, as
applicable, to the Purchaser, on demand.
20
6.9 Intellectual Property. Each of the Company and each of its
Subsidiaries shall maintain in full force and effect its existence, rights and
franchises and all licenses and other rights to use Intellectual Property owned
or possessed by it and reasonably deemed to be necessary to the conduct of its
business.
6.10 Properties. Each of the Company and each of its Subsidiaries
will keep its properties in good repair, working order and condition, reasonable
wear and tear excepted, and from time to time make all needful and proper
repairs, renewals, replacements, additions and improvements thereto; and each of
the Company and each of its Subsidiaries will at all times comply with each
provision of all leases to which it is a party or under which it occupies
property if the breach of such provision could, either individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.
6.11 Confidentiality. The Company will not, and will not permit any
of its Subsidiaries to, disclose, and will not include in any public
announcement, the name of the Purchaser, unless expressly agreed to by the
Purchaser or unless and until such disclosure is required by law or applicable
regulation, and then only to the extent of such requirement. Notwithstanding the
foregoing, the Company may disclose the Purchaser's identity and the terms of
this Agreement to its current and prospective debt and equity financing sources.
6.12 Required Approvals. (I) For so long as twenty-five percent
(25%) of the principal amount of the Note is outstanding, the Company, without
the prior written consent of the Purchaser shall not, and shall not permit any
of its Subsidiaries to:
(a) (i) directly or indirectly declare or pay any dividends, other
than dividends paid to the Company or any of its wholly-owned Subsidiaries, (ii)
issue any preferred stock that is manditorily redeemable prior to the one year
anniversary of the Maturity Date (as defined in the Note) or (iii) redeem any of
its preferred stock or other equity interests;
(b) liquidate, dissolve or effect a material reorganization (it
being understood that in no event shall the Company or any of its Subsidiaries
dissolve, liquidate or merge with any other person or entity (unless, in the
case of such a merger, the Company or, in the case of merger not involving the
Company, such Subsidiary, as applicable, is the surviving entity);
(c) become subject to (including, without limitation, by way of
amendment to or modification of) any agreement or instrument which by its terms
would (under any circumstances) restrict the Company's or any of its
Subsidiaries, right to perform the provisions of this Agreement, any Related
Agreement or any of the agreements contemplated hereby or thereby;
(d) materially alter or change the scope of the business of the
Company and its Subsidiaries taken as a whole; or
21
(e) (i) create, incur, assume or suffer to exist any indebtedness
(exclusive of trade debt and debt incurred to finance the purchase of equipment
(not in excess of five percent (5%) of the fair market value of the Company's
and its Subsidiaries' assets)) whether secured or unsecured other than (x) the
Company's obligations owed to the Purchaser and any refinancing thereof, (y)
indebtedness set forth on Schedule 6.12(e) attached hereto and made a part
hereof and any refinancings or replacements thereof on terms no less favorable
to the Purchaser than the indebtedness being refinanced or replaced, and (z) any
indebtedness incurred in connection with the purchase of assets (other than
equipment) in the ordinary course of business, or any refinancings or
replacements thereof on terms no less favorable to the Purchaser than the
indebtedness being refinanced or replaced, so long as any lien relating thereto
shall only encumber the fixed assets so purchased and no other assets of the
Company or any of its Subsidiaries; (ii) cancel any indebtedness owing to it in
excess of $50,000 in the aggregate during any 12 month period; (iii) assume,
guarantee, endorse or otherwise become directly or contingently liable in
connection with any obligations of any other person or entity, except the
endorsement of negotiable instruments by the Company or any Subsidiary thereof
for deposit or collection or similar transactions in the ordinary course of
business or guarantees of indebtedness otherwise permitted to be outstanding
pursuant to this clause (e); notwithstanding anything to the contrary in this
Section 6.12(e), the consent of Purchaser shall not be required in order for
Company to replace or refinance the Note through use of a third party lender,
provided that: (i) at least seven (7) days prior to such transaction, the
Company has given written notice to Purchaser of such refinancing or replacement
of the Note; and (ii) upon the consummation of such transaction, the Company
pays to Purchaser the Redemption Amount set forth in Section 2.3 of the Note;
and
(II) The Company, without the prior written consent of the
Purchaser, shall not, and shall not permit any of its Subsidiaries to, create or
acquire any Subsidiary after the date hereof unless (i) such Subsidiary is a
wholly-owned Subsidiary of the Company and (ii) such Subsidiary becomes a party
to the Master Security Agreement, the Stock Pledge Agreement and the Subsidiary
Guaranty (either by executing a counterpart thereof or an assumption or joinder
agreement in respect thereof) and, to the extent required by the Purchaser,
satisfies each condition of this Agreement and the Related Agreements as if such
Subsidiary were a Subsidiary on the Closing Date.
6.13 Reissuance of Securities. The Company agrees to reissue
certificates representing the Securities without the legends set forth in
Section 5.8 above at such time as:
(a) the holder thereof is permitted to dispose of such Securities
pursuant to Rule 144(k) under the Securities Act; or
(b) upon resale subject to an effective registration statement after
such Securities are registered under the Securities Act.
The Company agrees to cooperate with the Purchaser in connection with all
resales pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions
necessary to allow such resales provided the Company and its counsel receive
reasonably requested representations from the Purchaser and broker, if any.
22
6.14 Opinion. On the Closing Date, the Company will deliver to the
Purchaser an opinion acceptable to the Purchaser from the Company's external
legal counsel. The Company will provide, at the Company's expense, such other
legal opinions in the future as are deemed reasonably necessary by the Purchaser
(and acceptable to the Purchaser) in connection with the conversion of the Note
and exercise of the Warrant.
6.15 Margin Stock. The Company will not permit any of the proceeds
of the Note or the Warrant to be used directly or indirectly to "purchase" or
"carry" "margin stock" or to repay indebtedness incurred to "purchase" or
"carry" "margin stock" within the respective meanings of each of the quoted
terms under Regulation U of the Board of Governors of the Federal Reserve System
as now and from time to time hereafter in effect.
6.16 Authorization and Reservation of Shares. The Company shall at
all times have authorized and reserved a sufficient number of shares of Common
Stock to provide for the conversion of the Note and exercise of the Warrants.
6.17 Maintenance of Balance. The Company shall have aggregate cash
reserves at all times equal to $110,000.
7. Covenants of the Purchaser. The Purchaser covenants and agrees with the
Company as follows:
7.1 Confidentiality. The Purchaser will not disclose, and will not
include in any public announcement, the name of the Company, unless expressly
agreed to by the Company or unless and until such disclosure is required by law
or applicable regulation, and then only to the extent of such requirement.
7.2 Non-Public Information. The Purchaser will not effect any sales
in the shares of the Company's Common Stock while in possession of material,
non-public information regarding the Company if such sales would violate
applicable securities law.
7.3 Limitation on Acquisition of Common Stock of the Company.
Notwithstanding anything to the contrary contained in this Agreement, any
Related Agreement or any document, instrument or agreement entered into in
connection with any other transactions between the Purchaser and the Company,
the Purchaser may not acquire stock in the Company (including, without
limitation, pursuant to a contract to purchase, by exercising an option or
warrant, by converting any other security or instrument, by acquiring or
exercising any other right to acquire, shares of stock or other security
convertible into shares of stock in the Company, or otherwise, and such
contracts, options, warrants, conversion or other rights shall not be
enforceable or exercisable) to the extent such stock acquisition would cause any
interest (including any original issue discount) payable by the Company to the
Purchaser not to qualify as "portfolio interest" within the meaning of Section
881(c)(2) of the Code, by reason of Section 881(c)(3) of the Code, taking into
account the constructive ownership rules under Section 871(h)(3)(C) of the Code
(the "Stock Acquisition Limitation"). The Stock Acquisition Limitation shall
automatically become null and void without any notice to the Company upon the
earlier to occur of either (a) the Company's delivery to the Purchaser of a
Notice of Redemption (as defined in the Note) or (b) the existence of an Event
of Default (as defined in the Note) at a time when the average closing price of
the Company's common stock as reported by Bloomberg, L.P. on the Principal
Market for the immediately preceding five trading days is greater than or equal
to [150%] of the Fixed Conversion Price (as defined in the Note).
23
8. Covenants of the Company and the Purchaser Regarding Indemnification.
8.1 Company Indemnification.
(a) The Company agrees to indemnify, hold harmless, reimburse and
defend the Purchaser, each of the Purchaser's officers, directors, agents,
affiliates, control persons, and principal shareholders, against all claims,
costs, expenses, liabilities, obligations, losses or damages (including
reasonable legal fees) of any nature ("Losses"), incurred by or imposed upon the
Purchaser which result, arise out of or are based upon: (i) any
misrepresentation by the Company or any of its Subsidiaries or breach of any
warranty by the Company or any of its Subsidiaries in this Agreement, any other
Related Agreement or in any exhibits or schedules attached hereto or thereto; or
(ii) any breach or default in performance by Company or any of its Subsidiaries
of any covenant or undertaking to be performed by Company or any of its
Subsidiaries hereunder, under any other Related Agreement or any other agreement
entered into by the Company and/or any of its Subsidiaries and the Purchaser
relating hereto or thereto.
8.2 Purchaser's Indemnification.
(a) The Purchaser agrees to indemnify, hold harmless, reimburse and
defend the Company and each of the Company's officers, directors, agents,
affiliates, control persons and principal shareholders, at all times against any
claims, costs, expenses, liabilities, obligations, losses or damages (including
reasonable legal fees) of any nature, incurred by or imposed upon the Company
which result, arise out of or are based upon: (i) any misrepresentation by the
Purchaser or breach of any warranty by the Purchaser in this Agreement or in any
exhibits or schedules attached hereto or any Related Agreement; or (ii) any
breach or default in performance by the Purchaser of any covenant or undertaking
to be performed by the Purchaser hereunder, or any other agreement entered into
by the Company and the Purchaser relating hereto.
8.3 Indemnification Procedures. Promptly after receipt by a party
entitled to claim indemnification hereunder (an "Indemnified Party") of notice
of the commencement of any action, such Indemnified Party shall, if a claim for
indemnification in respect thereof is to be made against a party hereto
obligated to indemnify such Indemnified Party (an "Indemnifying Party"), notify
the Indemnifying Party in writing thereof, but the omission so to notify the
Indemnifying Party shall not relieve it from any liability which it may have to
such Indemnified Party other than under this Article 8 and shall only relieve it
from any liability which it may have to such Indemnified Party under this
Article 8 if and to the extent the Indemnifying Party is prejudiced by such
omission. In case any such action shall be brought against any Indemnified Party
and it shall notify the Indemnifying Party of the commencement thereof, the
Indemnifying Party shall be entitled to participate in and, to the extent it
shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such Indemnified Party, and, after notice from the Indemnifying
Party to such Indemnified Party of its election so to assume and undertake the
defense thereof, the Indemnifying Party shall not be liable to such Indemnified
Party under this Article 8 for any legal expenses subsequently incurred by such
Indemnified Party in connection with the defense thereof; if the Indemnified
Party retains its own counsel, then the Indemnified Party shall pay all fees,
costs and expenses of such counsel, provided, however, that, if the defendants
in any such action include both the Indemnified Party and the Indemnifying Party
and the Indemnified Party shall have reasonably concluded that there may be
reasonable defenses available to it which are different from or additional to
those available to the Indemnifying Party or if the interests of the Indemnified
Party reasonably may be deemed to conflict with the interests of the
Indemnifying Party, the Indemnified Party shall have the right to select one
separate counsel and to assume such legal defenses and otherwise to participate
in the defense of such action, with the reasonable expenses and fees of such
separate counsel and other expenses related to such participation to be
reimbursed by the Indemnifying Party as incurred
24
9. Conversion of Convertible Note.
9.1 Mechanics of Conversion.
(a) Provided the Purchaser has notified the Company of the Purchaser's
intention to sell the Note Shares and the Note Shares are included in an
effective registration statement or are otherwise exempt from registration when
sold: (i) upon the conversion of the Note or part thereof, the Company shall, at
its own cost and expense, take all necessary action (including the issuance of
an opinion of counsel reasonably acceptable to the Purchaser following a request
by the Purchaser) to assure that the Company's transfer agent shall issue shares
of the Company's Common Stock in the name of the Purchaser (or its nominee) or
such other persons as designated by the Purchaser in accordance with Section
9.1(b) hereof and in such denominations to be specified representing the number
of Note Shares issuable upon such conversion; and (ii) the Company warrants that
no instructions other than these instructions have been or will be given to the
transfer agent of the Company's Common Stock and that after the Effectiveness
Date (as defined in the Registration Rights Agreement) the Note Shares issued
will be freely transferable subject to the prospectus delivery requirements of
the Securities Act and the provisions of this Agreement, and will not contain a
legend restricting the resale or transferability of the Note Shares.
(b) The Purchaser will give notice of its decision to exercise its right
to convert the Note or part thereof by telecopying or otherwise delivering an
executed and completed notice of the number of shares to be converted to the
Company (the "Notice of Conversion"). The Purchaser will not be required to
surrender the Note until the Purchaser receives a credit to the account of the
Purchaser's prime broker through the DWAC system (as defined below),
representing the Note Shares or until the Note has been fully satisfied. Upon
proper delivery of the shares by the Company to the account of the Purchaser's
prime broker through the DWAC system, the principal amount of the Note shall be
reduced by the amount requested to be converted. Each date on which a Notice of
Conversion is telecopied or delivered to the Company in accordance with the
provisions hereof shall be deemed a "Conversion Date." Pursuant to the terms of
the Notice of Conversion, the Company will issue instructions to the transfer
agent accompanied by an opinion of counsel within three (3) business days of the
date of the delivery to the Company of the Notice of Conversion and shall cause
the transfer agent to transmit the certificates representing the Conversion
Shares to the Holder by crediting the account of the Holder's designated broker
with the Depository Trust Corporation ("DTC") through its Deposit Withdrawal
Agent Commission ("DWAC") system within three (3) business days of delivery of
the Company's request to the transfer agent (the "Delivery Date"). If the Notice
of Conversion is delivered during the period of time when a post-effective
amendment to the Registration Statement has yet to be declared effective by the
Commission, and, as a result, the Note Shares issued hereunder are not freely
transferable, the Purchaser shall have the option of either receiving the Note
Shares with the legend set forth in Section 5.8 hereof or receiving the Note
Shares within three (3) business days of the post-effective amendment being
declared effective by the Commission, which Note Shares shall contain no such
legend.
25
(c) The Company understands that a delay in the delivery of the Note
Shares in the form required pursuant to Section 9 hereof beyond the Delivery
Date could result in economic loss to the Purchaser. In the event that the
Company fails to direct its transfer agent to deliver the Note Shares to the
Purchaser via the DWAC system within the time frame set forth in Section 9.1(b)
above and the Note Shares are not delivered to the Purchaser by the Delivery
Date, as compensation to the Purchaser for such loss, the Company agrees to pay
late payments to the Purchaser for late issuance of the Note Shares in the form
required pursuant to Section 9 hereof upon conversion of the Note in the amount
equal to the greater of: (i) $250 per business day after the Delivery Date; or
(ii) the Purchaser's actual damages from such delayed delivery. The Company
shall pay any payments incurred under this Section in immediately available
funds upon demand and, in the case of actual damages, accompanied by reasonable
documentation of the amount of such damages. Such documentation shall show the
number of shares of Common Stock the Purchaser is forced to purchase (in an open
market transaction) which the Purchaser anticipated receiving upon such
conversion, and shall be calculated as the amount by which (A) the Purchaser's
total purchase price (including customary brokerage commissions, if any) for the
shares of Common Stock so purchased exceeds (B) the aggregate principal and/or
interest amount of the Note, for which such Conversion Notice was not timely
honored.
10. Registration Rights.
10.1 Registration Rights Granted. The Company hereby grants registration
rights to the Purchaser pursuant to the Registration Rights Agreement.
10.2 Offering Restrictions. Except as previously disclosed in the SEC
Reports or in the Exchange Act Filings, or stock or stock options granted to
employees or directors of the Company (these exceptions hereinafter referred to
as the "Excepted Issuances"), neither the Company nor any of its Subsidiaries
will, prior to the full exercise by Purchaser of the Warrants, (x) enter into
any equity line of credit agreement or similar agreement or (y) issue, or enter
into any agreement to issue, any securities with a variable/floating conversion
and/or pricing feature which are or could be (by conversion or registration)
free-trading securities (i.e. common stock subject to a registration statement);
provided that the Company may undertake a refinancing or replacement of the Note
through use of a third party lender, if: (i) at least seven (7) days prior to
such transaction, the Company has given written notice to Purchaser of such
refinancing or replacement of the Note; and (ii) upon the consummation of such
transaction, the Company pays to Purchaser the Redemption Amount set forth in
Section 2.3 of the Note.
26
11. Miscellaneous.
11.1 Governing Law, Jurisdiction and Waiver of Jury Trial.
(a) THIS AGREEMENT AND THE OTHER RELATED AGREEMENTS SHALL BE
GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
(b) THE COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL
COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE
JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE COMPANY,
ON THE ONE HAND, AND THE PURCHASER, ON THE OTHER HAND, PERTAINING TO THIS
AGREEMENT OR ANY OF THE RELATED AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR
RELATED TO THIS AGREEMENT OR ANY OF THE OTHER RELATED AGREEMENTS; PROVIDED, THAT
THE PURCHASER AND THE COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY
HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF
NEW YORK; AND FURTHER PROVIDED, THAT, NOTHING IN THIS AGREEMENT SHALL BE DEEMED
OR OPERATE TO PRECLUDE THE PURCHASER FROM BRINGING SUIT OR TAKING OTHER LEGAL
ACTION IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE
COLLATERAL (AS DEFINED IN THE MASTER SECURITY AGREEMENT) OR ANY OTHER SECURITY
FOR THE OBLIGATIONS (AS DEFINED IN THE MASTER SECURITY AGREEMENT), OR TO ENFORCE
A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE PURCHASER. THE COMPANY EXPRESSLY
SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT
COMMENCED IN ANY SUCH COURT, AND THE COMPANY HEREBY WAIVES ANY OBJECTION THAT IT
MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON
CONVENIENS. THE COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT
AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF
SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED
MAIL ADDRESSED TO THE COMPANY AT THE ADDRESS SET FORTH IN SECTION 11.9 AND THAT
SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF THE COMPANY'S
ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER
POSTAGE PREPAID.
(c) THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE
APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE
BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL
RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE
ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE
PURCHASER AND/OR THE COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR
INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS
AGREEMENT, ANY OTHER RELATED AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR
THERETO.
27
11.2 Severability. Wherever possible each provision of this
Agreement and the Related Agreements shall be interpreted in such manner as to
be effective and valid under applicable law, but if any provision of this
Agreement or any Related Agreement shall be prohibited by or invalid or illegal
under applicable law such provision shall be ineffective to the extent of such
prohibition or invalidity or illegality, without invalidating the remainder of
such provision or the remaining provisions thereof which shall not in any way be
affected or impaired thereby.
11.3 Survival. The representations, warranties, covenants and
agreements made herein shall survive any investigation made by the Purchaser and
the closing of the transactions contemplated hereby to the extent provided
therein. All statements as to factual matters contained in any certificate or
other instrument delivered by or on behalf of the Company pursuant hereto in
connection with the transactions contemplated hereby shall be deemed to be
representations and warranties by the Company hereunder solely as of the date of
such certificate or instrument. All indemnities set forth herein shall survive
the execution, delivery and termination of this Agreement and the Note and the
making and repayment of the obligations arising hereunder, under the Note and
under the other Related Agreements.
11.4 Successors. Except as otherwise expressly provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, heirs, executors and administrators of the parties hereto and shall
inure to the benefit of and be enforceable by each person or entity which shall
be a holder of the Securities from time to time, other than the holders of
Common Stock which has been sold by the Purchaser pursuant to Rule 144 or an
effective registration statement. The Purchaser shall not be permitted to assign
its rights hereunder or under any Related Agreement to a competitor of the
Company.
11.5 Entire Agreement; Maximum Interest. This Agreement, the Related
Agreements, the exhibits and schedules hereto and thereto and the other
documents delivered pursuant hereto constitute the full and entire understanding
and agreement between the parties with regard to the subjects hereof and no
party shall be liable or bound to any other in any manner by any
representations, warranties, covenants and agreements except as specifically set
forth herein and therein. Nothing contained in this Agreement, any Related
Agreement or in any document referred to herein or delivered in connection
herewith shall be deemed to establish or require the payment of a rate of
interest or other charges in excess of the maximum rate permitted by applicable
law. In the event that the rate of interest or dividends required to be paid or
other charges hereunder exceed the maximum rate permitted by such law, any
payments in excess of such maximum shall be credited against amounts owed by the
Company to the Purchaser and thus refunded to the Company.
11.6 Amendment and Waiver.
(a) This Agreement may be amended or modified only upon the written
consent of the Company and the Purchaser.
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(b) The obligations of the Company and the rights of the Purchaser
under this Agreement may be waived only with the written consent of the
Purchaser.
(c) The obligations of the Purchaser and the rights of the Company
under this Agreement may be waived only with the written consent of the Company.
11.7 Delays or Omissions. It is agreed that no delay or omission to
exercise any right, power or remedy accruing to any party, upon any breach,
default or noncompliance by another party under this Agreement or the Related
Agreements, shall impair any such right, power or remedy, nor shall it be
construed to be a waiver of any such breach, default or noncompliance, or any
acquiescence therein, or of or in any similar breach, default or noncompliance
thereafter occurring. All remedies, either under this Agreement or the Related
Agreements, by law or otherwise afforded to any party, shall be cumulative and
not alternative.
11.8 Notices. All notices required or permitted hereunder shall be
in writing and shall be deemed effectively given:
(a) upon personal delivery to the party to be notified;
(b) when sent by confirmed facsimile if sent during normal business
hours of the recipient, if not, then on the next business day;
(c) three (3) business days after having been sent by registered or
certified mail, return receipt requested, postage prepaid; or
(d) one (1) day after deposit with a nationally recognized overnight
courier, specifying next day delivery, with written verification of
receipt.
All communications shall be sent as follows:
If to the Company, Auxilio, Inc.
to:
▇▇▇▇▇ ▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: Chief Financial Officer
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
with a copy to:
▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇ & ▇▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
If to the Purchaser, Laurus Master Fund, Ltd.
to: c/o M&C Corporate Services Limited
▇.▇. ▇▇▇ ▇▇▇ GT
29
▇▇▇▇▇▇ House
▇▇▇▇▇▇ Town
South Church Street
Grand Cayman, Cayman Islands
Facsimile: ▇▇▇-▇▇▇-▇▇▇▇
with a copy to:
▇▇▇▇ ▇. ▇▇▇▇▇▇, Esq.
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Facsimile: ▇▇▇-▇▇▇-▇▇▇▇
or at such other address as the Company or the Purchaser may designate by
written notice to the other parties hereto given in accordance herewith.
11.9 Attorneys' Fees. In the event that any suit or action is
instituted to enforce any provision in this Agreement or any Related Agreement,
the prevailing party in such dispute shall be entitled to recover from the
losing party all fees, costs and expenses of enforcing any right of such
prevailing party under or with respect to this Agreement and/or such Related
Agreement, including, without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
11.10 Titles and Subtitles. The titles of the sections and
subsections of this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.
11.11 Facsimile Signatures; Counterparts. This Agreement may be
executed by facsimile signatures and in any number of counterparts, each of
which shall be an original, but all of which together shall constitute one
agreement.
11.12 Broker's Fees. Except as set forth on Schedule 11.12 hereof,
each party hereto represents and warrants that no agent, broker, investment
banker, person or firm acting on behalf of or under the authority of such party
hereto is or will be entitled to any broker's or finder's fee or any other
commission directly or indirectly in connection with the transactions
contemplated herein. Each party hereto further agrees to indemnify each other
party for any claims, losses or expenses incurred by such other party as a
result of the representation in this Section 11.12 being untrue.
11.13 Construction. Each party acknowledges that its legal counsel
participated in the preparation of this Agreement and the Related Agreements
and, therefore, stipulates that the rule of construction that ambiguities are to
be resolved against the drafting party shall not be applied in the
interpretation of this Agreement or any Related Agreement to favor any party
against the other.
30
IN WITNESS WHEREOF, the parties hereto have executed the SECURITIES PURCHASE
AGREEMENT as of the date set forth in the first paragraph hereof.
COMPANY: PURCHASER:
AUXILIO, INC LAURUS MASTER FUND, LTD.
By: By:
-------------------------------- --------------------------------
Name: Name:
------------------------------ --------------------------------
Title: Title:
----------------------------- --------------------------------
31
EXHIBIT A
FORM OF CONVERTIBLE NOTE
A-1
EXHIBIT B
FORM OF WARRANT
B-1
EXHIBIT C
FORM OF OPINION
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