Exhibit 10.1
PACIFIC BIOMETRICS, INC.
SECURITIES PURCHASE AGREEMENT
May 28, 2004
Table of Contents
Page
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1. Agreement to Sell and Purchase.............................................1
2. Fees and Warrant...........................................................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...................3
4.2 Subsidiaries....................................................3
4.3 Capitalization; Voting Rights...................................3
4.4 Authorization; Binding Obligations..............................4
4.5 Liabilities.....................................................5
4.6 Agreements; Action..............................................5
4.7 Obligations to Related Parties..................................6
4.8 Changes.........................................................6
4.9 Title to Properties and Assets; Liens, Etc......................7
4.10 Intellectual Property...........................................8
4.11 Compliance with Other Instruments...............................8
4.12 Litigation......................................................9
4.13 Tax Returns and Payments........................................9
4.14 Employees.......................................................9
4.15 Registration Rights and Voting Rights..........................10
4.16 Compliance with Laws; Permits..................................10
4.17 Environmental and Safety Laws..................................10
4.18 Valid Offering.................................................11
4.19 Full Disclosure................................................11
4.20 Insurance......................................................11
4.21 SEC Reports....................................................11
4.22 Listing........................................................12
4.23 No Integrated Offering.........................................12
4.24 Stop Transfer..................................................12
4.25 Dilution.......................................................12
4.26 Patriot Act
12
5. Representations and Warranties of the Purchaser...........................13
5.1 No Shorting....................................................13
5.2 Requisite Power and Authority..................................13
5.3 Investment Representations.....................................13
5.4 Purchaser Bears Economic Risk..................................14
5.5 Acquisition for Own Account....................................14
5.6 Purchaser Can Protect Its Interest.............................14
5.7 Accredited Investor............................................14
5.8 Legends........................................................14
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6. Covenants of the Company..................................................16
6.1 Stop-Orders....................................................16
6.2 Listing........................................................16
6.3 Market Regulations.............................................16
6.4 Reporting Requirements.........................................17
6.5 Use of Funds...................................................17
6.6 Access to Facilities...........................................17
6.7 Taxes..........................................................17
6.8 Insurance......................................................17
6.9 Intellectual Property..........................................18
6.10 Properties.....................................................18
6.11 Confidentiality................................................19
6.12 Required Approvals.............................................19
6.13 Reissuance of Securities.......................................20
6.14 Opinion........................................................20
6.15..... Margin Stock..................................................19
7. Covenants of the Purchaser................................................20
7.1 Confidentiality................................................20
7.2 Non-Public Information.........................................21
8. Covenants of the Company and Purchaser Regarding Indemnification..........21
8.1 Company Indemnification........................................21
8.2 Purchaser's Indemnification....................................21
9. Conversion of Convertible Note............................................21
9.1 Mechanics of Conversion........................................21
10. Registration Rights.......................................................23
10.1 Registration Rights Granted....................................23
10.2 Offering Restrictions..........................................23
11. Miscellaneous.............................................................23
11.1 Governing Law..................................................23
11.2 Survival.......................................................23
11.3 Successors.....................................................24
11.4 Entire Agreement...............................................24
11.5 Severability...................................................24
11.6 Amendment and Waiver...........................................24
11.7 Delays or Omissions............................................24
11.8 Notices........................................................24
11.9 Attorneys' Fees................................................25
11.10 Titles and Subtitles...........................................26
11.11 Facsimile Signatures; Counterparts.............................26
11.12 Broker's Fees..................................................26
11.13 Construction...................................................26
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LIST OF EXHIBITS
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Form of Convertible Term Note....................................... Exhibit A
Form of Warrant..................................................... Exhibit B
Form of Opinion..................................................... Exhibit C
Form of Escrow Agreement............................................ Exhibit D
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SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement") is made and
entered into as of May 28, 2004, by and between PACIFIC BIOMETRICS, INC., a
Delaware 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
Convertible Term Note in the aggregate principal amount of Two Million Five
Hundred Thousand ($2,500,000.00) (the "Note"), which Note is convertible into
shares of the Company's common stock, $0.01 par value per share (the "Common
Stock") at an initial fixed conversion price of $1.06 per share of Common Stock
("Fixed Conversion Price");
WHEREAS, the Company wishes to issue a warrant to the Purchaser to
purchase up to 681,818 shares of the Company's Common Stock (subject to
adjustment as set forth therein) in connection with Purchaser's purchase of the
Note;
WHEREAS, Purchaser desires to purchase the Note and the Warrant (as
defined in Section 2) on the terms and conditions set forth herein; and
WHEREAS, the Company desires to issue and sell the Note and Warrant to
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 agrees to sell to the Purchaser, and the Purchaser hereby agrees to
purchase from the Company, a Note in the aggregate principal amount of
$2,500,000.00 convertible in accordance with the terms thereof into shares of
the Company's Common Stock in accordance with the terms of the Note and this
Agreement. The offer and sale of the Note being purchased on the Closing Date
shall be known as the "Offering." A form of the Note is annexed hereto as
Exhibit A. The Note will mature on the Maturity Date (as defined in the Note).
Collectively, the Note and Warrant and Common Stock issuable in payment of the
Note, 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 a Warrant to
purchase up to 681,818 shares of Common Stock in connection with the
Offering (the "Warrant") pursuant to Section 1 hereof. The Warrant
must be delivered on the Closing Date. A form of Warrant is annexed
hereto as Exhibit B. All the representations, covenants, warranties,
undertakings, and indemnification, and other rights made or granted to
or for the benefit of the Purchaser by the Company are hereby also
made and granted as of the date hereof in respect 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 6.8) and all related
matters. Amounts required to be paid under this Section 2(c) will be
paid on the Closing Date and shall be $29,500.00 for such expenses
referred to in this Section 2(c).
(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 a Funds Escrow Agreement
of even date herewith among the Company, Purchaser, and an Escrow
Agent in the form attached hereto as Exhibit C (the "Funds Escrow
Agreement") 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 Purchaser may mutually
agree (such date is hereinafter referred to as the "Closing Date").
3.2 Delivery. Pursuant to the Funds Escrow Agreement , at the Closing
on the Closing Date, the Company will deliver to the Purchaser, among other
things, a Note in the form attached as Exhibit A representing the aggregate
principal amount of $2,500,000.00 and a Warrant in the form attached as Exhibit
B in the Purchaser's name representing 681,818 Warrant Shares and the Purchaser
will deliver to the Company, among other things, the amounts set forth in the
Disbursement Letter by certified funds or wire transfer of immediately available
funds as set forth in the Disbursement Letter.
4. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Purchaser as follows (which representations and
warranties are qualified by the information contained in the Company's filings
under either the Securities Exchange Act of 1934 or the Securities Act of 1933,
(each as amended) (collectively, the "Exchange Act Filings"), copies of which
have been made available to the Purchaser at ▇▇▇.▇▇▇.▇▇▇).
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4.1 Organization, Good Standing and Qualification. Each of the Company
and each of its Subsidiaries is a corporation,, 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 has the corporate power and authority
(a) own and operate its properties and assets, (b) to execute and deliver (to
the extent it is a party thereto) (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 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, (v) the Subsidiary Guaranty dated
as of the date hereof made by certain Subsidiaries of the Company (as amended,
modified 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 or
supplemented from time to time, the "Stock Pledge Agreement"), (vii) the Escrow
Agreement dated as of the date hereof among the Company, the Purchaser and the
escrow agent referred to therein and (viii) all other agreements related to this
Agreement and the Note and referred to herein (the preceding clauses (ii)
through (viii), collectively, the "Related Agreements") and (c) to carry out the
provisions of this Agreement and the Related Agreements and to carry on its
respective business as presently conducted. The Company has the corporate power
and authority to issue and sell the Note and the shares of Common Stock issuable
upon conversion of the Note (the "Note Shares"), to issue and sell the Warrant
and the Warrant Shares. 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 in all jurisdictions in which the nature 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 it
Subsidiaries, taken individually and as a whole (a "Material Adverse Effect").
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.
4.3 Capitalization; Voting Rights.
(a) The authorized capital stock of the Company, as of the date
hereof consists of 35,000,000 shares, of which 30,000,000 are
shares of Common Stock, par value $0.01 per share, 13,061,721
shares of which were issued and outstanding on May 20, 2004 , and
5,000,000 are shares of preferred stock, par value $0.01 per
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share of which 1,550,000 shares are designated as Series A
convertible preferred stock all of which are issued and
outstanding) and 1,666,667 shares are designated Series B
convertible preferred stock (33,666.66 shares of which are issued
and outstanding). The authorized capital stock of each Subsidiary
of the Company is set forth on Schedule 4.3.
(b) Except as disclosed on Schedule 4.3 or in the Exchange Act
Filings,, other than: (i) the shares reserved for issuance under
the Company's stock incentive 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, as amended through the date hereof
(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 corporateaction on the part
of the Company and each of its Subsidiaries (including the 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 under the other Related Agreements 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 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) general principles of equity that restrict the availability of
equitable or legal remedies.
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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. Neither the Company nor any of its Subsidiaries has
any known contingent liabilities, except current liabilities incurred in the
ordinary course of business and liabilities disclosed in any Exchange Act
Filings, and except as would not have a Material Adverse Effect.
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 in excess of
$50,000 (other than obligations of, or payments to, the Company
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 (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 products or services; or (iv)
indemnification by the Company with respect to infringements of
proprietary rights.
(b) Since March 31, 2004, 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 and expenses incurred in
connection with the transactions contemplated by this Agreement)
individually in excess of $50,000 or, in the case of indebtedness
and/or liabilities individually less than $50,000, in excess of
$100,000 in the aggregate; (iii) made any loans or advances to
any person 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 (other than inter-company transfers
set forth on Schedule 4.6(b)(iv) hereto).
(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
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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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
(d) obligations listed in the Company's financial statements or
disclosed in ahny of its 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 members of their immediate families, are
indebted to the Company, individually or in the aggregate, in excess of $50,000
or have any direct or indirect ownership interest in any firm or corporation
with which the Company is affiliated or with which the Company has a business
relationship, or any firm or corporation which competes with the Company, other
than passive investments in publicly traded companies (representing less than
one percent (1%) of such company) which may compete with the Company. Except as
described above, no officer, director or to the best of the Company's knowledge
any stockholder, or any member of their immediate families, is, directly or
indirectly, interested in any material contract with the Company and no
agreements, understandings or proposed transactions are contemplated between the
Company and any such person. Except as set forth on Schedule 4.7 or disclosed in
its Exchange Act Filings, the Company is not a guarantor or indemnitor of any
indebtedness of any other person, firm or corporation.
4.8 Changes. Since March 31, 2004, 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 hhas 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;
(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;
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(d) any damage, destruction or loss, whether or not covered by
insurance, 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 (other than inter-company
transfers set forth on Schedule 4.6(b)(iv) hereof);
(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.
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 owned properties and assets, and valid and enforceable
title to its leasehold interests in its leased property, in each case subject to
no mortgage, pledge, lien, lease, encumbrance or charge, other than:
(a) Statutory landlord liens and liens those resulting from taxes
which have not yet become delinquent;
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(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; and
(c) those that have otherwise arisen in the ordinary course of
business.
All facilities, machinery, equipment, fixtures, vehicles and other personal
properties owned, leased or used by the Company and its Subsidiaries are in good
operating condition and repair (ordinary wear and tear excepted) 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 foregoing proprietary rights, 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.
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) of 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
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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. 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. Except as set forth in
the Exchange Act filings, neither the Company nor any of its Subsidiaries is a
party 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. Except as set forth on Schedule 4.13
hereto, 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 deficiency in assessment or proposed judgment to its
federal, state or other taxes.
The Company has no knowledge of any liability of any tax to be imposed upon its
properties or assets as of the date of this Agreement that is not adequately
provided for.
4.14 Employees. 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, 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
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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 or any of its Subsidiaries of its 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. 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 or 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 as set
forth on Schedule 4.15 or 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 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 has
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.
4.17 Environmental and Safety Laws. Neither the Company nor any of its
Subsidiaries has received notice of any violation of any applicable statute, law
10
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 (except
as would not have a Material Adverse Effect) 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. 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.
4.20 Insurance. Each of the Company and each of its Subsidiaries has
general commercial, fire and casualty insurance policies with coverages which
the Company believes are adequate .
4.21 SEC Reports. Except as set forth on Schedule 4.21 or as disclosed
in its Exchange Act Filings, 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 made available to the
Purchaser at ▇▇▇.▇▇▇.▇▇▇ copies of: (i) its Annual Report on Form 10-KSB for its
fiscal years ended June 30, 2003; and (ii) its Quarterly Report on Form 10-QSB
11
for its fiscal quarter ended March 31, 2004, and (iii) the Form 8-K filings
which it has made during the fiscal year 2004 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 Trading. The Company's Common Stock is traded on the NASD
Over-the-Counter Market ("OTC:BB") and satisfies all requirements for the
continuation of such trading . The Company has not received any notice that its
Common Stock will not be eligible to trade on the OTC:BB or that its Common
Stock does not meet all requirements for the continuation of such trading.
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, 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 or pursuant to the Registration Rights Agreement.
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.
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,
and is not 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 agrees 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
12
promptly notify the Purchaser if any of these representations ceases to be true
and accurate regarding the Company or any of its Subsidiaries. The Company
agrees to provide the Purchaser any 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 are incorrect, or if
otherwise required by applicable law or regulation related to money laundering
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, pursuant to a court order,
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 required under relevant
rules and regulations under the laws set forth in subsection (ii) above provided
that the Purchaser shall first provide the Company with notice of such court
order and an opportunity to seek a protective order.
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, directly or
indirectly, to 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 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 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. 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 Purchaser's representations
contained in the 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 or payment
on the Note and the exercise of the Warrant, respectively.
13
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 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.
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 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, 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. Purchaser represents that it is an accredited
investor within the meaning of Regulation D under the Securities Act.
Purchaser's principal place of business is in the State of New York.
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 PACIFIC BIOMETRICS, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED."
14
(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 PACIFIC BIOMETRICS, INC.
THAT SUCH REGISTRATION IS NOT REQUIRED."
(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 PACIFIC
BIOMETRICS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED."
5.9 Patriot Act. Purchaser certifies that, to the best of Purchaser's
knowledge, the Purchaser has not been designated, and is not owned or
controlled, by a "suspected terrorist" as defined in Executive Order 13224. The
Purchaser hereby acknowledges that the Purchaser and the Company seek to comply
with all applicable laws concerning money laundering and related activities. In
furtherance of those efforts, the Purchaser hereby represents, warrants and
agrees that: (i) none of the cash or property that the Purchaser will pay or
will contribute to the Company 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 Purchaser to the Company to the extent that they
are within the Purchaser's control shall cause the Purchaser or the Company 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
15
2001. The Purchaser shall promptly notify the Company if any of these
representations ceases to be true and accurate. The Purchaser agrees to provide
the Company any additional information regarding the Purchaser that the Company
deems necessary or convenient to ensure compliance with all applicable laws
concerning money laundering and similar activities. The Purchaser understands
and agrees that if at any time it is discovered that any of the foregoing
representations are incorrect, or if otherwise required by applicable law or
regulation related to money laundering similar activities, the Company 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 Purchaser further understands that
the Purchaser may, pursuant to a court order, release confidential information
about the Purchaser and, if applicable, any underlying beneficial owners, to
proper authorities if the Company , in its sole discretion, determines that it
is required under relevant rules and regulations under the laws set forth in
subsection (ii) above provided that the Company shall first provide the
Purchaser with notice of such court order and an opportunity to seek a
protective order.
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 Securities and Exchange Commission (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 Trading . The Company shall maintain the trading of its Common
Stock issuable upon conversion of the Note and upon the exercise of the Warrant
on the OTC:BB (the "Principal Market") upon which shares of Common Stock are
traded . The Company will maintain the trading 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.
16
6.4 Reporting Requirements. The Company will 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.
6.5 Use of Funds. The Company agrees that it will 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, 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 lawful 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 if the validity thereof shall currently be contested in good
faith by appropriate proceedings and if the Company and/or such Subsidiary shall
have set aside on its books adequate reserves with respect thereto, 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.
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 in such amounts as the Company shall
reasonably determine appropriate; 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
17
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 its 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
Purchaser, 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, flood, 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
public and product liability insurance against claims for personal injury, death
or property damage suffered by others; (iii) 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 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 Purchaser as "co-insured" or "additional
insured" and appropriate loss payable endorsements in form and substance
satisfactory to Purchaser, naming Purchaser as loss payee, and (z) evidence that
as to 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
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 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 Purchaser's security interest pursuant to its security agreement,
with any surplus funds to be applied toward payment of the obligations of the
Company to Purchaser. In the event that 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 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 Purchaser) shall be paid by 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
Purchaser, on demand.
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
18
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 agrees that it will not 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 (i) is
required by law or applicable regulation, and then only to the extent of such
requirement or (ii) the Purchaser has previously agreed to the language of the
proposed disclosure. Purchaser acknowledges that promptly following Closing, the
Company will file with the SEC a Form 8-K Current Report with respect to this
Agreement, the Related Agreements and the transactions contemplated hereunder
and thereunder, and the Purchaser shall cooperate with the Company in connection
with such required disclosure. Notwithstanding the foregoing, the Company may
disclose Purchaser's identity and the terms of this Agreement to its current and
prospective debt and equity financing sources.
6.12 Required Approvals. 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 (which consent shall not be unreasonably
withheld), shall not, and shall not permit any of its Subsidiaries to:
(a) directly or indirectly declare or pay any dividends, other than
dividends paid to the Company or any of its wholly-owned
Subsidiaries;
(b) liquidate, dissolve or effect a material reorganization (it being
understood that in no event shall the Company dissolve, liquidate
or merge with any other person or entity (unless the Company 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;
(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 ten ( percent (10%) per
annum of the fair market value of the Company's assets) whether
secured or unsecured other than (x) the Company's indebtedness to
Laurus, or other indebtedness issued by the Company on a pari
passu basis with Laurus as contemplated in that certain letter
agreement dated as of May 28, 2004 between the Company and the
Purchaser (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
19
than the indebtedness being refinanced or replaced, and (z) any
debt incurred in connection with the purchase of assets 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; (ii) cancel any debt
owing to it in excess of $50,000 in the aggregate during any 12
month period; (iii) assume, guarantee, endorse or otherwise
become directly or contingently liable in connection with any
obligations of any other Person, except the endorsement of
negotiable instruments by the Company 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); and
(f) 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 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 selling Purchaser and broker, if
any.
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.
7. Covenants of the Purchaser. The Purchaser covenants and agrees with
the Company as follows:
7.1 Confidentiality. The Purchaser agrees that it will not disclose,
and will not include in any public announcement, the name of the Company, unless
20
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 agrees not to 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.
8. Covenants of the Company and Purchaser Regarding Indemnification.
8.1 Company Indemnification. 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 any claim, cost, expense, liability, obligation, loss or damage
(including reasonable legal fees) of any nature, incurred by or imposed upon the
Purchaser which results, arises out of or is based upon: (i) any material
misrepresentation by the Company or any of its Subsidiaries or material 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 material 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
Purchaser relating hereto or thereto.
8.2 Purchaser's Indemnification. 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 claim, cost, expense, liability, obligation, loss or
damage (including reasonable legal fees) of any nature, incurred by or imposed
upon the Company which results, arises out of or is based upon: (i) any material
misrepresentation by Purchaser or breach of any material warranty by Purchaser
in this Agreement or in any exhibits or schedules attached hereto or any Related
Agreement; or (ii) any material breach or default in performance by Purchaser of
any covenant or undertaking to be performed by Purchaser hereunder or under any
Related Agreement, or any other agreement entered into by the Company and
Purchaser relating hereto.
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
21
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, subject to Section 7(d) of the Registration Rights
Agreement, 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) 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. 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 one (1) business day 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
Purchaser's prime broker with the Depository Trust Company
("DTC") through its Deposit Withdrawal Agent Commission ("DWAC")
system within three (3) business days after receipt by the
Company of the Notice of Conversion (the "Delivery Date").
(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) $500 per business day after the Delivery Date; or (ii)
the Purchaser's actual damages from such delayed delivery.
Notwithstanding the foregoing, the Company will not owe the
Purchaser any late payments if the delay in the delivery of the
Note Shares beyond the Delivery Date is solely out of the control
of the Company and the Company is actively trying to cure the
cause of the delay. 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.
22
Nothing contained herein 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 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 amount permitted by such
law, any payments in excess of such maximum shall be credited against amounts
owed by the Company to a Purchaser and thus refunded to the Company.
10. Registration Rights.
10.1 Registration Rights Granted. The Company hereby grants
registration rights to the Purchaser pursuant to a Registration Rights Agreement
dated as of even date herewith between the Company and the Purchaser.
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 issue any securities with a continuously variable/floating conversion
feature which are or could be (by conversion or registration) free-trading
securities (i.e. common stock subject to a registration statement) prior to the
full repayment or conversion of the Note (together with all accrued and unpaid
interest and fees related thereto) (the "Exclusion Period").
11. Miscellaneous.
11.1 Governing Law. THIS AGREEMENT AND EACH RELATED AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. ANY ACTION BROUGHT BY EITHER
PARTY AGAINST THE OTHER CONCERNING THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT AND EACH RELATED AGREEMENT SHALL BE BROUGHT ONLY IN THE STATE COURTS
OF NEW YORK OR IN THE FEDERAL COURTS LOCATED IN THE STATE OF NEW YORK. BOTH
PARTIES AND THE INDIVIDUALS EXECUTING THIS AGREEMENT AND THE RELATED AGREEMENTS
ON BEHALF OF THE COMPANY AGREE TO SUBMIT TO THE JURISDICTION OF SUCH COURTS AND
WAIVE TRIAL BY JURY. IN THE EVENT THAT ANY PROVISION OF THIS AGREEMENT OR ANY
RELATED AGREEMENT DELIVERED IN CONNECTION HEREWITH IS INVALID OR UNENFORCEABLE
UNDER ANY APPLICABLE STATUTE OR RULE OF LAW, THEN SUCH PROVISION SHALL BE DEEMED
INOPERATIVE TO THE EXTENT THAT IT MAY CONFLICT THEREWITH AND SHALL BE DEEMED
MODIFIED TO CONFORM WITH SUCH STATUTE OR RULE OF LAW. ANY SUCH PROVISION WHICH
MAY PROVE INVALID OR UNENFORCEABLE UNDER ANY LAW SHALL NOT AFFECT THE VALIDITY
OR ENFORCEABILITY OF ANY OTHER PROVISION OF THIS AGREEMENT OR ANY RELATED
AGREEMENT.
11.2 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
23
therein for three (3) years from the Closing Date. 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.
11.3 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 who 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. Purchaser may not assign its rights hereunder to a
competitor of the Company.
11.4 Entire Agreement. 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.
11.5 Severability. In case any provision of the Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
11.6 Amendment and Waiver.
(a) This Agreement may be amended or modified only upon the written
consent of the Company and the Purchaser.
(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;
24
(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, to: PACIFIC BIOMETRICS, INC.
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: Chief Executive Officer
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
with a copy to:
Cairncross & Hemplemann, P.S.
▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, Esq.
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
If to the Purchaser, to: Laurus Master Fund, Ltd.
c/o Ironshore Corporate Services ltd.
▇.▇. ▇▇▇ ▇▇▇▇ G.T.
Queensgate House, 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, 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
25
respect to this 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
instrument.
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 to favor any party against the other.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK
26
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:
PACIFIC BIOMETRICS, INC. LAURUS MASTER FUND, LTD.
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇ By: /s/
----------------------------- ---------------------------------
Name: ▇▇▇▇▇▇ ▇. ▇▇▇▇ Name:
----------------------------- ---------------------------------
Title: Chief Executive Officer Title:
----------------------------- ---------------------------------
27
A-1
EXHIBIT A
FORM OF CONVERTIBLE NOTE
▇-▇
▇-▇
EXHIBIT B
FORM OF WARRANT
B-1
EXHIBIT C
FORM OF OPINION
1. Each of the Company and each of its Subsidiaries is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware [other jurisdiction] and has all requisite corporate power and
authority to own, operate and lease its properties and to carry on its business
as it is now being conducted.
2. Each of the Company and each of its Subsidiaries has the requisite
corporate power and authority to execute, deliver and perform its obligations
under the Agreement and the Related Agreements. All corporate action on the part
of the Company and each of its Subsidiaries and its officers, directors and
stockholders necessary has been taken for: (i) the authorization of the
Agreement and the Related Agreements and the performance of all obligations of
the Company and each of its Subsidiaries thereunder; and (ii) the authorization,
sale, issuance and delivery of the Securities pursuant to the Agreement and the
Related Agreements. The Note Shares and the Warrant Shares, when issued pursuant
to and in accordance with the terms of the Agreement and the Related Agreements
and upon delivery shall be validly issued and outstanding, fully paid and non
assessable.
3. The execution, delivery and performance by each of the Company and
each of its Subsidiaries of the Agreement and the Related Agreements to which it
is a party and the consummation of the transactions on its part contemplated by
any thereof, will not, with or without the giving of notice or the passage of
time or both:
(a) Violate the provisions of their respective Charter or bylaws; or
(b) Violate any judgment, decree, order or award of any court binding upon
the Company or any of its Subsidiaries; or
(c) Violate any [insert jurisdictions in which counsel is qualified] or
federal law
4. The Agreement and the Related Agreements will constitute, valid and
legally binding obligations of each of the Company and each of its Subsidiaries
(to the extent such person is a party thereto), and are enforceable against each
of the Company and each of its Subsidiaries in accordance with their respective
terms, except:
(a) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting enforcement
of creditors' rights; and
(b) general principles of equity that restrict the availability of
equitable or legal remedies.
5. To such counsel's knowledge, the sale of the Note and the subsequent
conversion of the Note into Note Shares are not subject to any preemptive rights
or rights of first refusal that have not been properly waived or complied with.
To such counsel's knowledge, the sale of the Warrant and the subsequent exercise
C-1
of the Warrant for Warrant Shares are not subject to any preemptive rights or,
to such counsel's knowledge, rights of first refusal that have not been properly
waived or complied with.
6. Assuming the accuracy of the representations and warranties of the
Purchaser contained in the Agreement, the offer, sale and issuance of the
Securities on the Closing Date will be exempt from the registration requirements
of the Securities Act. To such counsel's knowledge, neither the Company, nor any
of its affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy and security under circumstances that would cause the offering of the
Securities pursuant to the Agreement or any Related Agreement 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.
7. There is no action, suit, proceeding or investigation pending or, to
such counsel's knowledge, currently threatened against the Company or any of its
Subsidiaries that prevents the right of the Company or any of its Subsidiaries
to enter into this Agreement or any of the Related Agreements, or to consummate
the transactions contemplated thereby. To such counsel's knowledge, the Company
is not a party or subject to the provisions of any order, writ, injunction,
judgment or decree of any court or government agency or instrumentality; nor is
there any action, suit, proceeding or investigation by the Company currently
pending or which the Company intends to initiate.
8. The terms and provisions of the Master Security Agreement and the
Stock Pledge Agreement create a valid security interest in favor of Laurus, in
the respective rights, title and interests of the Company and its Subsidiaries
in and to the Collateral (as defined in each of the Master Security Agreement
and the Stock Pledge Agreement). Each UCC-1 Financing Statement naming the
Company or any Subsidiary thereof as debtor and Laurus as secured party are in
proper form for filing and assuming that such UCC-1 Financing Statements have
been filed with the Secretary of State of [Delaware], the security interest
created under the Master Security Agreement will constitute a perfected security
interest under the Uniform Commercial Code in favor of Laurus in respect of the
Collateral that can be perfected by filing a financing statement. After giving
effect to the delivery to Laurus of the stock certificates representing the
ownership interests of each Subsidiary of the Company (together with effective
endorsements) and assuming the continued possession by Laurus of such stock
certificates in the State of New York, the security interest created in favor of
Laurus under the Stock Pledge Agreement constitutes a valid and enforceable
first perfected security interest in such ownership interests (and the proceeds
thereof) in favor of Laurus, subject to no other security interest. No filings,
registrations or recordings are required in order to perfect (or maintain the
perfection or priority of) the security interest created under the Stock Pledge
Agreement in respect of such ownership interests. .
C-2
EXHIBIT D
FORM OF ESCROW AGREEMENT
D-1