EXHIBIT 10.1
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this "AGREEMENT") is dated as of
December 6, 2004, among Tarrant Apparel Group, a California corporation (the
"COMPANY"), and each purchaser identified on the signature pages hereto (each,
including its successors and assigns, a "PURCHASER" and collectively the
"PURCHASERS").
WHEREAS, subject to the terms and conditions set forth in this
Agreement and pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the "SECURITIES ACT") and Rule 506 promulgated thereunder, the Company desires
to issue and sell to each Purchaser, and each Purchaser, severally and not
jointly, desires to purchase from the Company, securities of the Company as more
fully described in this Agreement.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in
this Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and each Purchaser agrees
as follows:
ARTICLE I.
DEFINITIONS
1.1 DEFINITIONS. In addition to the terms defined elsewhere in
this Agreement: (a) capitalized terms that are not otherwise defined herein have
the meanings given to such terms in the Debentures (as defined herein), and (b)
the following terms have the meanings indicated in this Section 1.1:
"ACTION" shall have the meaning ascribed to such term in
Section 3.1(j).
"AFFILIATE" means any Person that, directly or indirectly
through one or more intermediaries, controls or is controlled by or is
under common control with a Person, as such terms are used in and
construed under Rule 144 under the Securities Act. With respect to a
Purchaser, any investment fund or managed account that is managed on a
discretionary basis by the same investment manager as such Purchaser
will be deemed to be an Affiliate of such Purchaser.
"CLOSING" means the closing of the purchase and sale of the
Securities pursuant to Section 2.1.
"CLOSING DATE" means the Trading Day when all of the
Transaction Documents have been executed and delivered by the
applicable parties thereto, and all conditions precedent to (i) the
Purchasers' obligations to pay the Subscription Amount and (ii) the
Company's obligations to deliver the Securities have been satisfied or
waived.
"CLOSING PRICE" means, for any date, the price determined by
the first of the following clauses that applies: (a) if the Common
Stock is then listed or quoted on a
Trading Market, the closing bid price of the Common Stock for such date
(or the nearest preceding date) on the Trading Market on which the
Common Stock is then listed or quoted as reported by Bloomberg
Financial L.P. (based on a Trading Day from 9:30 a.m. Eastern Time to
4:02 p.m. Eastern Time); (b) if the Common Stock is not then listed or
quoted on a Trading Market and if prices for the Common Stock are then
reported in the "Pink Sheets" published by the Pink Sheets, LLC (or a
similar organization or agency succeeding to its functions of reporting
prices), the most recent bid price per share of the Common Stock so
reported; or (c) in all other cases, the fair market value of a share
of Common Stock as determined by an independent appraiser selected in
good faith by the Purchasers and reasonably acceptable to the Company.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the common stock of the Company, no par
value per share, and any securities into which such common stock shall
hereinafter have been reclassified into.
"COMMON STOCK EQUIVALENTS" means any securities of the Company
or the Subsidiaries which would entitle the holder thereof to acquire
at any time Common Stock, including without limitation, any debt,
preferred stock, rights, options, warrants or other instrument that is
at any time convertible into or exchangeable for, or otherwise entitles
the holder thereof to receive, Common Stock.
"COMPANY COUNSEL" means ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ & Markiles, LLP.
"CONVERSION PRICE" shall have the meaning ascribed to such
term in the Debentures.
"DEBENTURES" means, the 6% Secured Convertible Debentures due,
subject to the terms therein, three years from their date of issuance,
issued by the Company to the Purchasers hereunder, in the form of
EXHIBIT A.
"DISCLOSURE SCHEDULES" shall have the meaning ascribed to such
term in Section 3.1.
"EFFECTIVE DATE" means the date that the initial Registration
Statement filed by the Company pursuant to the Registration Rights
Agreement is first declared effective by the Commission.
"ESCROW AGENT" shall have the meaning set forth in the Escrow
Agreement.
"ESCROW AGREEMENT" shall mean the Escrow Agreement in
substantially the form of EXHIBIT E hereto executed and delivered
contemporaneously with this Agreement.
"EVALUATION DATE" shall have the meaning ascribed to such term
in Section 3.1(r).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
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"EXEMPT ISSUANCE" means the issuance of (a) shares of Common
Stock or options to employees, officers, directors, consultants,
vendors or agents of the Company (except that, if to consultants or
agents, only up to a maximum of 250,000 shares of Common Stock in any
12 month period) pursuant to any stock or option plan duly adopted by a
majority of the non-employee members of the Board of Directors of the
Company or a majority of the members of a committee of non-employee
directors established for such purpose, (b) securities upon the
exercise of or conversion of any securities issued hereunder,
convertible securities, options or warrants issued and outstanding on
the date of this Agreement, provided that such securities have not been
amended since the date of this Agreement to increase the number of such
securities or to decrease the exercise or conversion price of any such
securities, (c) securities issued pursuant to acquisitions or strategic
transactions, provided any such issuance shall only be to a Person
which is, itself or through its subsidiaries, an operating company in a
business synergistic with the business of the Company and in which the
Company receives benefits in addition to the investment of funds, but
shall not include a transaction in which the Company is issuing
securities primarily for the purpose of raising capital or to an entity
whose primary business is investing in securities and (d) shares of
Common Stock issued in connection with, but not as primary
consideration for, any equipment loan or leasing arrangement, real
property leasing arrangement, commercial credit arrangement or debt
financing from a bank or similar financial institution approved by the
Board of Directors of the Company provided such issuance shall not
include a transaction in which the Company is issuing securities
primarily for the purpose of raising capital or to an entity whose
primary business is investing in securities;
"FORCE MAJEURE" shall mean any unusual event arising from
causes reasonably beyond the control of the Company that could not be
reasonably anticipated that causes a delay in or prevents the
performance of any obligation under this Agreement or the agreements
contemplated hereby, including but not limited to: acts of God; fire;
war; terrorism; insurrection; civil disturbance; explosion; adverse
weather conditions that could not be reasonably anticipated; unusual
delay in transportation; strikes or other labor disputes; restraint by
court order or order of public authority but specifically not including
any event resulting from the failure of the Commission or Company's
transfer agent to act or perform any function.
"FW" means ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ LLP with offices at ▇▇▇
▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇-▇▇▇▇.
"GAAP" shall have the meaning ascribed to such term in Section
3.1(h).
"INTELLECTUAL PROPERTY RIGHTS" shall have the meaning ascribed
to such term in Section 3.1(o).
"LEGEND REMOVAL DATE" shall have the meaning ascribed to such
term in Section 4.1(c).
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"LIENS" means a lien, charge, security interest, encumbrance,
right of first refusal, preemptive right or other restriction.
"MATERIAL ADVERSE EFFECT" shall have the meaning assigned to
such term in Section 3.1(b).
"MATERIAL PERMITS" shall have the meaning ascribed to such
term in Section 3.1(m).
"MAXIMUM RATE" shall have the meaning ascribed to such term in
Section 5.17.
"PARTICIPATION MAXIMUM" shall have the meaning ascribed to
such term in Section 4.13.
"PERMITTED LIENS" means (i) liens for the payment of federal,
state or other taxes, the payment of which is neither delinquent nor
subject to penalties or claims that are being contested in good faith,
(ii) statutory liens of landlords and warehousemen's, carriers',
mechanics', suppliers', materialmen's, repairmen's, or other like liens
(including landlords' liens) arising in the ordinary course of business
and with respect to amounts not yet delinquent, or with respect to
amounts being contested in good faith by appropriate proceedings; and
(iii) liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment
insurance and other similar types of social security.
"PERSON" means an individual or corporation, partnership,
trust, incorporated or unincorporated association, joint venture,
limited liability company, joint stock company, government (or an
agency or subdivision thereof) or other entity of any kind.
"PRE-NOTICE" shall have the meaning ascribed to such term in
Section 4.13.
"PROCEEDING" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"PURCHASER PARTY" shall have the meaning ascribed to such term
in Section 4.9 .
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated the date hereof, among the Company and the Purchasers,
in the form of EXHIBIT B attached hereto.
"REGISTRATION STATEMENT" means a registration statement
meeting the requirements set forth in the Registration Rights Agreement
and covering the resale of the Underlying Shares by each Purchaser as
provided for in the Registration Rights Agreement.
"REQUIRED APPROVALS" shall have the meaning ascribed to such
term in Section 3.1(e).
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"REQUIRED MINIMUM" means, as of any date, the maximum
aggregate number of shares of Common Stock then issued or potentially
issuable in the future pursuant to the Transaction Documents, including
any Underlying Shares issuable upon exercise or conversion in full of
all Warrants and Debentures (including Underlying Shares issuable as
payment of interest), ignoring any conversion or exercise limits set
forth therein, and assuming that the Conversion Price is at all times
on and after the date of determination 85% of the then Conversion Price
on the Trading Day immediately prior to the date of determination.
"RULE 144" means Rule 144 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time
to time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same effect as such Rule.
"SEC REPORTS" shall have the meaning ascribed to such term in
Section 3.1(h).
"SECURITIES" means the Debentures, the Warrants and the
Underlying Shares.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITY AGREEMENT" means the Security Agreement, dated the
date hereof, among the Company and the Purchasers, in the form of
EXHIBIT F attached hereto.
"SECURITY DOCUMENTS" shall mean the Security Agreement and any
other documents and filing required thereunder in order to grant the
Purchasers a security interest in the collateral described in the
Security Agreement, including all UCC-1 filing receipts.
"SHAREHOLDER APPROVAL" means such approval as may be required
by the applicable rules and regulations of the Trading Market (or any
successor entity) from the shareholders of the Company with respect to
the transactions contemplated by the Transaction Documents, including
the issuance of all of the Underlying Shares and shares of Common Stock
issuable upon exercise of the Warrants in excess of 19.99% of the
issued and outstanding Common Stock on the Closing Date.
"SUBSCRIPTION AMOUNT" means, as to each Purchaser, the
aggregate amount to be paid for Debentures and Warrants purchased
hereunder as specified below such Purchaser's name on the signature
page of this Agreement and next to the heading "Subscription Amount",
in United States Dollars and in immediately available funds.
"SUBSEQUENT FINANCING" shall have the meaning ascribed to such
term in Section 4.13.
"SUBSEQUENT FINANCING NOTICE" shall have the meaning ascribed
to such term in Section 4.13.
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"SUBSIDIARY" means any subsidiary of the Company as set forth
on SCHEDULE 3.1(A).
"TRADING DAY" means a day on which the Common Stock is traded
on a Trading Market
"TRADING MARKET" means the following markets or exchanges on
which the Common Stock is listed or quoted for trading on the date in
question: the Nasdaq SmallCap Market, the American Stock Exchange, the
New York Stock Exchange, the Nasdaq National Market or the OTC Bulletin
Board.
"TRANSACTION DOCUMENTS" means this Agreement, the Debentures,
the Security Agreement, the Escrow Agreement, the Warrants, the
Registration Rights Agreement and any other documents or agreements
executed in connection with the transactions contemplated hereunder.
"UNDERLYING SHARES" means the shares of Common Stock issuable
upon conversion of the Debentures and upon exercise of the Warrants and
issued and issuable in lieu of the cash payment of interest on the
Debentures.
"WARRANTS" means collectively the Common Stock purchase
warrants, in the form of EXHIBIT C delivered to the Purchasers at the
Closing in accordance with Section 2.2(a) hereof, which Warrants shall
be exercisable immediately and have a term of exercise equal to five
years.
"WARRANT SHARES" means the shares of Common Stock issuable
upon exercise of the Warrants.
ARTICLE II.
PURCHASE AND SALE
2.1 CLOSING. On the Closing Date, upon the terms and subject to
the conditions set forth herein, concurrent with the execution and delivery of
this Agreement by the parties hereto, the Company agrees to sell, and each
Purchaser agrees to purchase in the aggregate, severally and not jointly, up to
$10,000,000 principal amount of the Debentures. Each Purchaser shall deliver to
the Company via wire transfer or a certified check immediately available funds
equal to their Subscription Amount and the Company shall deliver to each
Purchaser their respective Debenture and Warrants as determined pursuant to
Section 2.2(a) and the other items set forth in Section 2.2 issuable at the
Closing. Upon satisfaction of the conditions set forth in Section 2.2, the
Closing shall occur at the offices of the Escrow Agent, or such other location
as the parties shall mutually agree.
2.2 DELIVERIES.
a) On the Closing Date, the Company shall deliver or
cause to be delivered to the Escrow Agent with
respect to each Purchaser the following:
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(i) this Agreement duly executed by the Company;
(ii) a Debenture with a principal amount equal to
such Purchaser's Subscription Amount,
registered in the name of such Purchaser;
(iii) a Warrant registered in the name of such
Purchaser to purchase up to a number of
shares of Common Stock equal to 25% of such
Purchaser's Subscription Amount divided by
the Conversion Price, with an exercise price
equal to $2.50, subject to adjustment
therein;
(iv) the Registration Rights Agreement duly
executed by the Company;
(v) the Security Agreement, duly executed by the
Company, along with all the Security
Documents;
(vi) the Escrow Agreement duly executed by the
Company; and
(vii) a legal opinion of Company Counsel, in the
form of EXHIBIT D attached hereto.
b) On the Closing Date, each Purchaser shall deliver or
cause to be delivered to the Escrow Agent the
following:
(i) this Agreement duly executed by such
Purchaser;
(ii) such Purchaser's Subscription Amount by wire
transfer to the account of the Escrow Agent;
(iii) the Security Agreement, duly executed by
such Purchaser;
(iv) the Escrow Agreement duly executed by such
Purchaser; and
(v) the Registration Rights Agreement duly
executed by such Purchaser.
2.3 CLOSING CONDITIONS.
a) The obligations of the Company hereunder in
connection with the Closing are subject to the
following conditions being met:
(i) the accuracy in all material respects when
made and on the Closing Date of the
representations and warranties of the
Purchasers contained herein;
(ii) all obligations, covenants and agreements of
the Purchasers required to be performed at
or prior to the Closing Date shall have been
performed;
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(iii) within 5 Trading Days of the date hereof,
the Company shall have obtained the consent
of GMAC Commercial Finance LLC and UPS
Capital Global Trade Finance Corporation to
the consummation of the Transaction
Documents; and
(iv) the delivery by the Purchasers of the items
set forth in Section 2.2(b) of this
Agreement.
b) The respective obligations of the Purchasers
hereunder in connection with the Closing are subject
to the following conditions being met:
(i) the accuracy in all material respects on the
Closing Date of the representations and
warranties of the Company contained herein;
(ii) all obligations, covenants and agreements of
the Company required to be performed at or
prior to the Closing Date shall have been
performed;
(iii) the delivery by the Company of the items set
forth in Section 2.2(a) of this Agreement;
(iv) there shall have been no Material Adverse
Effect with respect to the Company since the
date hereof;
(v) within 5 Trading Days of the date hereof,
the Company shall have obtained the consent
of GMAC Commercial Finance LLC and UPS
Capital Global Trade Finance Corporation to
the consummation of the Transaction
Documents; and
(vi) From the date hereof to the Closing Date,
trading in the Common Stock shall not have
been suspended by the Commission (except for
any suspension of trading of limited
duration agreed to by the Company, which
suspension shall be terminated prior to the
Closing), and, at any time prior to the
Closing Date, trading in securities
generally as reported by Bloomberg Financial
Markets shall not have been suspended or
limited, or minimum prices shall not have
been established on securities whose trades
are reported by such service, or on any
Trading Market, nor shall a banking
moratorium have been declared either by the
United States or New York State authorities
nor shall there have occurred any material
outbreak or escalation of hostilities or
other national or international calamity of
such magnitude in its effect on, or any
material adverse change in, any financial
market which, in each case, in the
reasonable judgment of each Purchaser, makes
it impracticable or inadvisable to purchase
the Debentures at the Closing.
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ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as set
forth under the corresponding section of the disclosure schedules delivered to
the Purchasers concurrently herewith (the "DISCLOSURE SCHEDULES") which
Disclosure Schedules shall be deemed a part hereof, the Company hereby makes the
representations and warranties set forth below to each Purchaser.
(a) SUBSIDIARIES. All of the direct and indirect
subsidiaries of the Company are set forth on SCHEDULE 3.1(A). The
Company owns, directly or indirectly, all of the capital stock or other
equity interests of each Subsidiary free and clear of any Liens other
than Permitted Liens, and all the issued and outstanding shares of
capital stock of each Subsidiary are validly issued and are fully paid,
non-assessable and free of preemptive and similar rights to subscribe
for or purchase securities. If the Company has no subsidiaries, then
references in the Transaction Documents to the Subsidiaries will be
disregarded.
(b) ORGANIZATION AND QUALIFICATION. Each of the Company
and the Subsidiaries is an entity duly incorporated or otherwise
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization (as applicable), with
the requisite power and authority to own and use its properties and
assets and to carry on its business as currently conducted. Neither the
Company nor any Subsidiary is in violation or default of any of the
provisions of its respective certificate or articles of incorporation,
bylaws or other organizational or charter documents. Each of the
Company and the Subsidiaries is duly qualified to conduct business and
is in good standing as a foreign corporation or other entity in each
jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, except where the
failure to be so qualified or in good standing, as the case may be,
could not have or reasonably be expected to result in (i) a material
adverse effect on the legality, validity or enforceability of any
Transaction Documents, (ii) a material adverse effect on the results of
operations, assets, business, prospects or financial condition of the
Company and the Subsidiaries, taken as a whole, or (iii) a material
adverse effect on the Company's ability to perform in any material
respect on a timely basis its obligations under any Transaction
Documents (any of (i), (ii) or (iii), a "MATERIAL ADVERSE EFFECT") and
no Proceeding has been instituted in any such jurisdiction revoking,
limiting or curtailing or seeking to revoke, limit or curtail such
power and authority or qualification.
(c) AUTHORIZATION; ENFORCEMENT. The Company has the
requisite corporate power and authority to enter into and to consummate
the transactions contemplated by each of the Transaction Documents and
otherwise to carry out its obligations thereunder. The execution and
delivery of each of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated thereby have been
duly authorized by all necessary action on the part of the Company and
no further action is required by the Company in connection therewith
other than in connection with the Required Approvals. Each Transaction
Document has been (or upon delivery will have
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been) duly executed by the Company and, when delivered in accordance
with the terms hereof, will constitute the valid and binding obligation
of the Company enforceable against the Company in accordance with its
terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application
affecting enforcement of creditors' rights generally and (ii) as
limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies.
(d) NO CONFLICTS. The execution, delivery and performance
of the Transaction Documents by the Company and the consummation by the
Company of the other transactions contemplated thereby do not and will
not: (i) conflict with or violate any provision of the Company's or any
Subsidiary's certificate or articles of incorporation, bylaws or other
organizational or charter documents, or (ii) conflict with, or
constitute a default (or an event that with notice or lapse of time or
both would become a default) under, result in the creation of any Lien
upon any of the properties or assets of the Company or any Subsidiary,
or give to others any rights of termination, amendment, acceleration or
cancellation (with or without notice, lapse of time or both) of, any
agreement, credit facility, debt or other instrument (evidencing a
Company or Subsidiary debt or otherwise) or other understanding to
which the Company or any Subsidiary is a party or by which any property
or asset of the Company or any Subsidiary is bound or affected, or
(iii) subject to the Required Approvals, conflict with or result in a
violation of any law, rule, regulation, order, judgment, injunction,
decree or other restriction of any court or governmental authority to
which the Company or a Subsidiary is subject (including federal and
state securities laws and regulations), or by which any property or
asset of the Company or a Subsidiary is bound or affected; except in
the case of each of clauses (ii) and (iii), such as would not have or
reasonably be expected to result in a Material Adverse Effect.
(e) FILINGS, CONSENTS AND APPROVALS. The Company is not
required to obtain any consent, waiver, authorization or order of, give
any notice to, or make any filing or registration with, any court or
other federal, state, local or other governmental authority or other
Person in connection with the execution, delivery and performance by
the Company of the Transaction Documents, other than (i) filings
required pursuant to Section 4.6, (ii) the filing with the Commission
of the Registration Statement, (iii) the notice and/or application(s)
to each applicable Trading Market for the issuance and sale of the
Debentures and Warrants and the listing of the Underlying Shares for
trading thereon in the time and manner required thereby, (iv) the
filing of Form D with the Commission and such filings as are required
to be made under applicable state securities laws and (vi) Shareholder
Approval (if required) (collectively, the "REQUIRED APPROVALS").
(f) ISSUANCE OF THE SECURITIES. The Securities are duly
authorized and, when issued and paid for in accordance with the
applicable Transaction Documents, will be duly and validly issued,
fully paid and nonassessable, free and clear of all Liens imposed by
the Company other than restrictions on transfer provided for in the
Transaction Documents. The Underlying Shares, when issued in accordance
with the terms of the Transaction Documents, will be validly issued,
fully paid and nonassessable, free and
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clear of all Liens imposed by the Company. The Company has reserved
from its duly authorized capital stock a number of shares of Common
Stock for issuance of the Underlying Shares at least equal to the
Required Minimum on the date hereof. The Company has not, and to the
knowledge of the Company, no Affiliate of the Company has sold, offered
for sale or solicited offers to buy or otherwise negotiated in respect
of any security (as defined in Section 2 of the Securities Act) that
would be integrated with the offer or sale of the Securities in a
manner that would require the registration under the Securities Act of
the sale of the Securities to the Purchasers, or that would be
integrated with the offer or sale of the Securities for purposes of the
rules and regulations of any Trading Market.
(g) CAPITALIZATION. The capitalization of the Company is
as described in the Company's most recent periodic report filed with
the Commission. The Company has not issued any capital stock since such
filing other than pursuant to the exercise of employee stock options
under the Company's stock option plans, the issuance of shares of
Common Stock to employees pursuant to the Company's employee stock
purchase plan and pursuant to the conversion or exercise of outstanding
Common Stock Equivalents. No Person has any right of first refusal,
preemptive right, right of participation, or any similar right to
participate in the transactions contemplated by the Transaction
Documents. Except as a result of the purchase and sale of the
Securities, there are no outstanding options, warrants, script rights
to subscribe to, calls or commitments of any character whatsoever
relating to, or securities, rights or obligations convertible into or
exchangeable for, or giving any Person any right to subscribe for or
acquire, any shares of Common Stock, or contracts, commitments,
understandings or arrangements by which the Company or any Subsidiary
is or may become bound to issue additional shares of Common Stock or
Common Stock Equivalents. The issuance and sale of the Securities will
not obligate the Company to issue shares of Common Stock or other
securities to any Person (other than the Purchasers) and will not
result in a right of any holder of Company securities to adjust the
exercise, conversion, exchange or reset price under such securities.
All of the outstanding shares of capital stock of the Company are
validly issued, fully paid and nonassessable, have been issued in
compliance with all federal and state securities laws, and none of such
outstanding shares was issued in violation of any preemptive rights or
similar rights to subscribe for or purchase securities. Other than the
Shareholder Approval, if required, no further approval or authorization
of any stockholder, the Board of Directors of the Company or others is
required for the issuance and sale of the Securities. There are no
stockholders agreements, voting agreements or other similar agreements
with respect to the Company's capital stock to which the Company is a
party or, to the knowledge of the Company, between or among any of the
Company's stockholders.
(h) SEC REPORTS; FINANCIAL STATEMENTS. The Company has
filed all reports required to be filed by it under the Securities Act
and the Exchange Act, including pursuant to Section 13(a) or 15(d)
thereof, for the two years preceding the date hereof (or such shorter
period as the Company was required by law to file such material) (the
foregoing materials, including the exhibits thereto, being collectively
referred to herein as the "SEC REPORTS") on a timely basis or has
received a valid extension of such time of
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filing and has filed any such SEC Reports prior to the expiration of
any such extension. As of their respective dates, the SEC Reports
complied in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of
the Commission promulgated thereunder, and none of the SEC Reports,
when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Reports comply in all
material respects with applicable accounting requirements and the rules
and regulations of the Commission with respect thereto as in effect at
the time of filing. Such financial statements have been prepared in
accordance with United States generally accepted accounting principles
applied on a consistent basis during the periods involved ("GAAP"),
except as may be otherwise specified in such financial statements or
the notes thereto and except that unaudited financial statements may
not contain all footnotes required by GAAP, and fairly present in all
material respects the financial position of the Company and its
consolidated subsidiaries as of and for the dates thereof and the
results of operations and cash flows for the periods then ended,
subject, in the case of unaudited statements, to normal year-end audit
adjustments.
(i) MATERIAL CHANGES. Since the date of the latest
audited financial statements included within the SEC Reports, except as
specifically disclosed in the SEC Reports, (i) there has been no event,
occurrence or development that has had or that could reasonably be
expected to result in a Material Adverse Effect, (ii) the Company has
not incurred any liabilities (contingent or otherwise) other than (A)
trade payables and accrued expenses incurred in the ordinary course of
business consistent with past practice and (B) liabilities not required
to be reflected in the Company's financial statements pursuant to GAAP
or required to be disclosed in filings made with the Commission, (iii)
the Company has not altered its method of accounting, (iv) the Company
has not declared or made any dividend or distribution of cash or other
property to its stockholders or purchased, redeemed or made any
agreements to purchase or redeem any shares of its capital stock and
(v) the Company has not issued any equity securities to any officer,
director or Affiliate, except pursuant to existing Company stock option
plans. The Company does not have pending before the Commission any
request for confidential treatment of information.
(j) LITIGATION. There is no action, suit, inquiry, notice
of violation, proceeding or investigation pending or, to the knowledge
of the Company, threatened against or affecting the Company, any
Subsidiary or any of their respective properties before or by any
court, arbitrator, governmental or administrative agency or regulatory
authority (federal, state, county, local or foreign) (collectively, an
"ACTION") which (i) adversely affects or challenges the legality,
validity or enforceability of any of the Transaction Documents or the
Securities or (ii) could, if there were an unfavorable decision, have
or reasonably be expected to result in a Material Adverse Effect.
Neither the Company nor any Subsidiary, nor any director or officer
thereof, is or has been the subject of any Action involving a claim of
violation of or liability under federal or state securities laws or a
claim of breach of fiduciary duty. There has not been, and to the
knowledge of the
12
Company, there is not pending or contemplated, any investigation by the
Commission involving the Company or any current or former director or
officer of the Company. The Commission has not issued any stop order or
other order suspending the effectiveness of any registration statement
filed by the Company or any Subsidiary under the Exchange Act or the
Securities Act.
(k) LABOR RELATIONS. No material labor dispute exists or,
to the knowledge of the Company, is imminent with respect to any of the
employees of the Company which could reasonably be expected to result
in a Material Adverse Effect.
(l) COMPLIANCE. Neither the Company nor any Subsidiary
(i) is in default under or in violation of (and no event has occurred
that has not been waived that, with notice or lapse of time or both,
would result in a default by the Company or any Subsidiary under), nor
has the Company or any Subsidiary received notice of a claim that it is
in default under or that it is in violation of, any indenture, loan or
credit agreement or any other agreement or instrument to which it is a
party or by which it or any of its properties is bound (whether or not
such default or violation has been waived), (ii) is in violation of any
order of any court, arbitrator or governmental body, or (iii) is or has
been in violation of any statute, rule or regulation of any
governmental authority, including without limitation all foreign,
federal, state and local laws applicable to its business except in each
case as would not have a Material Adverse Effect.
(m) REGULATORY PERMITS. The Company and the Subsidiaries
possess all certificates, authorizations and permits issued by the
appropriate federal, state, local or foreign regulatory authorities
necessary to conduct their respective businesses as described in the
SEC Reports, except where the failure to possess such permits would not
have or reasonably be expected to result in a Material Adverse Effect
("MATERIAL PERMITS"), and neither the Company nor any Subsidiary has
received any notice of proceedings relating to the revocation or
modification of any Material Permit.
(n) TITLE TO ASSETS. The Company and the Subsidiaries
have good and marketable title in fee simple to all real property owned
by them that is material to the business of the Company and the
Subsidiaries and good and marketable title in all personal property
owned by them that is material to the business of the Company and the
Subsidiaries, in each case free and clear of all Liens, except for
Permitted Liens and Liens as do not materially affect the value of such
property and do not materially interfere with the use made and proposed
to be made of such property by the Company and the Subsidiaries. Any
real property and facilities held under lease by the Company and the
Subsidiaries are held by them under valid, subsisting and enforceable
leases of which the Company and the Subsidiaries are in compliance.
(o) PATENTS AND TRADEMARKS. To the knowledge of the
Company, the Company and the Subsidiaries have, or have rights to use,
all patents, patent applications, trademarks, trademark applications,
service marks, trade names, copyrights, licenses and other similar
rights necessary or material for use in connection with their
respective businesses as described in the SEC Reports and which the
failure to so have could have a
13
Material Adverse Effect (collectively, the "INTELLECTUAL PROPERTY
RIGHTS"). Neither the Company nor any Subsidiary has received a written
notice that the Intellectual Property Rights used by the Company or any
Subsidiary violates or infringes upon the rights of any Person. To the
knowledge of the Company, all such Intellectual Property Rights are
enforceable and there is no existing infringement by another Person of
any of the Intellectual Property Rights.
(p) INSURANCE. The Company and the Subsidiaries are
insured by insurers of recognized financial responsibility against such
losses and risks and in such amounts as are prudent and customary in
the businesses in which the Company and the Subsidiaries are engaged,
including, but not limited to, directors and officers insurance
coverage at least equal to the aggregate Subscription Amount. Neither
the Company nor any Subsidiary has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as
may be necessary to continue its business without a significant
increase in cost.
(q) TRANSACTIONS WITH AFFILIATES AND EMPLOYEES. Except as
set forth in the SEC Reports, none of the officers or directors of the
Company and, to the knowledge of the Company, none of the employees of
the Company is presently a party to any transaction with the Company or
any Subsidiary (other than for services as employees, officers and
directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental
of real or personal property to or from, or otherwise requiring
payments to or from any officer, director or such employee or, to the
knowledge of the Company, any entity in which any officer, director, or
any such employee has a substantial interest or is an officer,
director, trustee or partner, in each case in excess of $60,000 other
than (i) for payment of salary or consulting fees for services
rendered, (ii) reimbursement for expenses incurred on behalf of the
Company and (iii) for other employee benefits, including stock option
agreements under any stock option plan of the Company.
(r) ▇▇▇▇▇▇▇▇-▇▇▇▇▇; INTERNAL ACCOUNTING CONTROLS. The
Company is in material compliance with all provisions of the
▇▇▇▇▇▇▇▇-▇▇▇▇▇ Act of 2002 which are applicable to it as of the Closing
Date. The Company and the Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with GAAP and
to maintain asset accountability, (iii) access to assets is permitted
only in accordance with management's general or specific authorization,
and (iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences. The Company has established disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the Company and designed such disclosure controls and
procedures to ensure that material information relating to the Company,
including its Subsidiaries, is made known to the certifying officers by
others within those entities, particularly during the period in which
the Company's most
14
recently filed periodic report under the Exchange Act, as the case may
be, is being prepared. The Company's certifying officers have evaluated
the effectiveness of the Company's controls and procedures as of the
date prior to the filing date of the most recently filed periodic
report under the Exchange Act (such date, the "EVALUATION DATE"). The
Company presented in its most recently filed periodic report under the
Exchange Act the conclusions of the certifying officers about the
effectiveness of the disclosure controls and procedures based on their
evaluations as of the Evaluation Date. Since the Evaluation Date, there
have been no significant changes in the Company's internal controls (as
such term is defined in Item 307(b) of Regulation S-K under the
Exchange Act) or, to the Company's knowledge, in other factors that
could significantly affect the Company's internal controls.
(s) CERTAIN FEES. No brokerage or finder's fees or
commissions are or will be payable by the Company to any broker,
financial advisor or consultant, finder, placement agent, investment
banker, bank or other Person with respect to the transactions
contemplated by this Agreement. The Purchasers shall have no obligation
with respect to any fees or with respect to any claims made by or on
behalf of other Persons for fees of a type contemplated in this Section
that may be due in connection with the transactions contemplated by
this Agreement.
(t) PRIVATE PLACEMENT. Assuming the accuracy of the
Purchasers representations and warranties set forth in Section 3.2, no
registration under the Securities Act is required for the offer and
sale of the Securities by the Company to the Purchasers as contemplated
hereby. The issuance and sale of the Securities hereunder does not
contravene the rules and regulations of the Trading Market.
(u) INVESTMENT COMPANY. The Company is not, and is not an
Affiliate of, and immediately after receipt of payment for the
Securities, will not be or be an Affiliate of, an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
The Company shall conduct its business in a manner so that it will not
become subject to the Investment Company Act.
(v) REGISTRATION RIGHTS. No Person has any right to cause
the Company to effect the registration under the Securities Act of any
securities of the Company.
(w) LISTING AND MAINTENANCE REQUIREMENTS. The Company's
Common Stock is registered pursuant to Section 12(g) of the Exchange
Act, and the Company has taken no action designed to, or which to its
knowledge is likely to have the effect of, terminating the registration
of the Common Stock under the Exchange Act nor has the Company received
any notification that the Commission is contemplating terminating such
registration. The Company has not, in the 12 months preceding the date
hereof, received notice from any Trading Market on which the Common
Stock is or has been listed or quoted to the effect that the Company is
not in compliance with the listing or maintenance requirements of such
Trading Market. The Company is, and has no reason to believe that it
will not in the foreseeable future continue to be, in compliance with
all such listing and maintenance requirements.
15
(x) APPLICATION OF TAKEOVER PROTECTIONS. The Company and
its Board of Directors have taken all necessary action, if any, in
order to render inapplicable any control share acquisition, business
combination, poison pill (including any distribution under a rights
agreement) or other similar anti-takeover provision under the Company's
Certificate of Incorporation (or similar charter documents) or the laws
of its state of incorporation that is or could become applicable to the
Purchasers as a result of the Purchasers and the Company fulfilling
their obligations or exercising their rights under the Transaction
Documents, including without limitation as a result of the Company's
issuance of the Securities and the Purchasers' ownership of the
Securities.
(y) DISCLOSURE. The Company confirms that neither it nor
any other Person acting on its behalf has provided any of the
Purchasers or their agents or counsel with any information that
constitutes or might constitute material, nonpublic information. The
Company understands and confirms that the Purchasers will rely on the
foregoing representations and covenants in effecting transactions in
securities of the Company. All disclosure provided to the Purchasers
regarding the Company, its business and the transactions contemplated
hereby, including the Disclosure Schedules to this Agreement, furnished
by or on behalf of the Company with respect to the representations and
warranties made herein are true and correct with respect to such
representations and warranties and do not contain any untrue statement
of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in light of the
circumstances under which they were made, not misleading. The Company
acknowledges and agrees that no Purchaser makes or has made any
representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in Section
3.2 hereof.
(z) NO INTEGRATED OFFERING. Assuming the accuracy of the
Purchasers' representations and warranties set forth in Section 3.2,
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 any security,
under circumstances that would cause this offering of the Securities to
be integrated with prior offerings by the Company for purposes of the
Securities Act or any applicable shareholder approval provisions,
including, without limitation, under the rules and regulations of any
exchange or automated quotation system on which any of the securities
of the Company are listed or designated.
(aa) SOLVENCY. Based on the financial condition of the
Company as of the Closing Date after giving effect to the receipt by
the Company of the proceeds from the sale of the Securities hereunder,
(i) the Company's fair saleable value of its assets exceeds the amount
that will be required to be paid on or in respect of the Company's
existing debts and other liabilities (including known contingent
liabilities) as they mature; (ii) the Company's assets do not
constitute unreasonably small capital to carry on its business for the
current fiscal year as now conducted and as proposed to be conducted
including its capital needs taking into account the particular capital
requirements of the business conducted by the Company, and projected
capital requirements and capital availability thereof; and (iii) the
current cash flow of the Company, together with the
16
proceeds the Company would receive, were it to liquidate all of its
assets, after taking into account all anticipated uses of the cash,
would be sufficient to pay all amounts on or in respect of its debt
when such amounts are required to be paid. The Company does not intend
to incur debts beyond its ability to pay such debts as they mature
(taking into account the timing and amounts of cash to be payable on or
in respect of its debt). The Company has no knowledge of any facts or
circumstances which lead it to believe that it will file for
reorganization or liquidation under the bankruptcy or reorganization
laws of any jurisdiction within one year from the Closing Date. The SEC
Reports set forth as of the dates thereof all outstanding secured and
unsecured Indebtedness of the Company or any Subsidiary, or for which
the Company or any Subsidiary has commitments. For the purposes of this
Agreement, "INDEBTEDNESS" shall mean (a) any liabilities for borrowed
money or amounts owed in excess of $50,000 (other than trade accounts
payable incurred in the ordinary course of business), (b) all
guaranties, endorsements and other contingent obligations in respect of
Indebtedness of others, whether or not the same are or should be
reflected in the Company's balance sheet (or the notes thereto), except
guaranties by endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business;
and (c) the present value of any lease payments in excess of $50,000
due under leases required to be capitalized in accordance with GAAP.
Neither the Company nor any Subsidiary is in default with respect to
any Indebtedness.
(bb) FORM S-3 ELIGIBILITY. The Company is eligible to
register the resale of the Underlying Shares for resale by the
Purchaser on Form S-3 promulgated under the Securities Act.
(cc) TAX STATUS. Except for matters that would not,
individually or in the aggregate, have or reasonably be expected to
result in a Material Adverse Effect, the Company and each Subsidiary
has filed all necessary federal, state and foreign income and franchise
tax returns and has paid or accrued all taxes shown as due thereon, and
the Company has no knowledge of a tax deficiency which has been
asserted or threatened against the Company or any Subsidiary.
(dd) NO GENERAL SOLICITATION. Neither the Company nor any
person acting on behalf of the Company has offered or sold any of the
Securities by any form of general solicitation or general advertising.
The Company has offered the Securities for sale only to the Purchasers
and certain other "accredited investors" within the meaning of Rule 501
under the Securities Act.
(ee) FOREIGN CORRUPT PRACTICES. Neither the Company, nor
to the knowledge of the Company, any agent or other person acting on
behalf of the Company, has (i) directly or indirectly, used any corrupt
funds for unlawful contributions, gifts, entertainment or other
unlawful expenses related to foreign or domestic political activity,
(ii) made any unlawful payment to foreign or domestic government
officials or employees or to any foreign or domestic political parties
or campaigns from corporate funds, (iii) failed to disclose fully any
contribution made by the Company (or made by any person acting on its
behalf of which the Company is aware) which is in violation of law, or
(iv) violated in
17
any material respect any provision of the Foreign Corrupt Practices Act
of 1977, as amended.
(ff) ACCOUNTANTS. The Company's accountants are set forth
on SCHEDULE 3.1(FF) of the Disclosure Schedule. To the Company's
knowledge, such accountants, who the Company expects will express their
opinion with respect to the financial statements to be included in the
Company's Annual Report on Form 10-K for the year ending December 31,
2004 are a registered public accounting firm as required by the
Securities Act.
(gg) LIENS. As of the Closing Date, there are no Liens on
the collateral identified in the Security Agreement other than
Permitted Liens, Liens for the benefit of the Holders and Liens in
favor of GMAC Commercial Finance LLC and UPS Capital Global Trade
Finance Corporation.
(hh) NO DISAGREEMENTS WITH ACCOUNTANTS AND LAWYERS. There
are no material disagreements presently existing between the
accountants and lawyers formerly or presently employed by the Company
and the Company is current with respect to any fees owed to its
accountants and lawyers.
(ii) ACKNOWLEDGMENT REGARDING PURCHASERS' PURCHASE OF
SECURITIES. The Company acknowledges and agrees that each of the
Purchasers is acting solely in the capacity of an arm's length
purchaser with respect to the Transaction Documents and the
transactions contemplated hereby. The Company further acknowledges that
no Purchaser is acting as a financial advisor or fiduciary of the
Company (or in any similar capacity) with respect to this Agreement and
the transactions contemplated hereby and any advice given by any
Purchaser or any of their respective representatives or agents in
connection with this Agreement and the transactions contemplated hereby
is merely incidental to the Purchasers' purchase of the Securities. The
Company further represents to each Purchaser that the Company's
decision to enter into this Agreement has been based solely on the
independent evaluation of the transactions contemplated hereby by the
Company and its representatives.
(jj) MEXICO OPERATIONS. Following the closing of the
transaction contemplated by that certain Agreement for Purchase and
Sale of Assets, dated as of August 13, 2004, as amended (the "APA"),
but in no event later than December 31, 2004, the Company will not,
either directly or indirectly through any of its subsidiaries, be
engaged in the business of manufacturing apparel products in Mexico.
3.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each
Purchaser hereby, for itself and for no other Purchaser, represents and warrants
as of the date hereof and as of the Closing Date to the Company as follows:
(a) ORGANIZATION; AUTHORITY. Such Purchaser is an entity
duly organized, validly existing and in good standing under the laws of
the jurisdiction of its organization with full right, corporate or
partnership power and authority to enter into and to
18
consummate the transactions contemplated by the Transaction Documents
and otherwise to carry out its obligations thereunder. The execution,
delivery and performance by such Purchaser of the transactions
contemplated by this Agreement have been duly authorized by all
necessary corporate or similar action on the part of such Purchaser.
Each Transaction Document to which it is a party has been duly executed
by such Purchaser, and when delivered by such Purchaser in accordance
with the terms hereof, will constitute the valid and legally binding
obligation of such Purchaser, enforceable against it in accordance with
its terms, except (i) as limited by general equitable principles and
applicable bankruptcy, insolvency, reorganization, moratorium and other
laws of general application affecting enforcement of creditors' rights
generally, (ii) as limited by laws relating to the availability of
specific performance, injunctive relief or other equitable remedies and
(iii) insofar as indemnification and contribution provisions may be
limited by applicable law.
(b) PURCHASER REPRESENTATION. Such Purchaser understands
that the Securities are "restricted securities" and have not been
registered under the Securities Act or any applicable state securities
law and is acquiring the Securities as principal for its own account
and not with a view to or for distributing or reselling such Securities
or any part thereof, has no present intention of distributing any of
such Securities and has no arrangement or understanding with any other
persons regarding the distribution of such Securities (this
representation and warranty not limiting such Purchaser's right to sell
the Securities pursuant to the Registration Statement or otherwise in
compliance with applicable federal and state securities laws). Such
Purchaser is acquiring the Securities hereunder in the ordinary course
of its business. Such Purchaser does not have any agreement or
understanding, directly or indirectly, with any Person to distribute
any of the Securities.
(c) PURCHASER STATUS. At the time such Purchaser was
offered the Securities, it was, and at the date hereof it is, and on
each date on which it exercises any Warrants or converts any Debentures
it will be either: (i) an "accredited investor" as defined in Rule
501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act or
(ii) a "qualified institutional buyer" as defined in Rule 144A(a) under
the Securities Act. Such Purchaser is not required to be registered as
a broker-dealer under Section 15 of the Exchange Act.
(d) EXPERIENCE OF SUCH PURCHASER. Such Purchaser, either
alone or together with its representatives, has such knowledge,
sophistication and experience in business and financial matters so as
to be capable of evaluating the merits and risks of the prospective
investment in the Securities, and has so evaluated the merits and risks
of such investment. Such Purchaser is able to bear the economic risk of
an investment in the Securities and, at the present time, is able to
afford a complete loss of such investment.
(e) GENERAL SOLICITATION. Such Purchaser is not
purchasing the Securities as a result of any advertisement, article,
notice or other communication regarding the Securities published in any
newspaper, magazine or similar media or broadcast over television or
radio or presented at any seminar or any other general solicitation or
general advertisement.
19
The Company acknowledges and agrees that each Purchaser does
not make or has not made any representations or warranties with respect
to the transactions contemplated hereby other than those specifically
set forth in this Section 3.2.
ARTICLE IV.
OTHER AGREEMENTS OF THE PARTIES
4.1 TRANSFER RESTRICTIONS.
(a) The Securities may only be disposed of in compliance
with state and federal securities laws. In connection with any transfer
of Securities other than pursuant to an effective registration
statement or Rule 144, to the Company or to an affiliate of a Purchaser
or in connection with a pledge as contemplated in Section 4.1(b), the
Company may require the transferor thereof to provide to the Company an
opinion of counsel selected by the transferor and reasonably acceptable
to the Company, the form and substance of which opinion shall be
reasonably satisfactory to the Company, to the effect that such
transfer does not require registration of such transferred Securities
under the Securities Act. As a condition of transfer, any such
transferee shall agree in writing to be bound by the terms of this
Agreement and shall have the rights of a Purchaser under this Agreement
and the Registration Rights Agreement.
(b) The Purchasers agree to the imprinting, so long as is
required by this Section 4.1(b), of a legend on any of the Securities
in the following form:
[NEITHER] THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE [EXERCISABLE] [CONVERTIBLE]] HAVE BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF
ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF
COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL
BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE
SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY
SUCH SECURITIES.
The Company acknowledges and agrees that a Purchaser may from
time to time pledge pursuant to a bona fide margin agreement with a
registered broker-dealer or grant a security interest in some or all of
the Securities to a financial institution that is an "accredited
investor" as defined in Rule 501(a) under the Securities Act and who
agrees
20
to be bound by the provisions of this Agreement and the Registration
Rights Agreement and, if required under the terms of such arrangement,
such Purchaser may transfer pledged or secured Securities to the
pledgees or secured parties. Such a pledge or transfer would not be
subject to approval of the Company and no legal opinion of legal
counsel of the pledgee, secured party or pledgor shall be required in
connection therewith. Further, no notice shall be required of such
pledge. At the appropriate Purchaser's expense, the Company will
execute and deliver such reasonable documentation as a pledgee or
secured party of Securities may reasonably request in connection with a
pledge or transfer of the Securities, including, if the Securities are
subject to registration pursuant to the Registration Rights Agreement,
the preparation and filing of any required prospectus supplement under
Rule 424(b)(3) under the Securities Act or other applicable provision
of the Securities Act to appropriately amend the list of Selling
Stockholders thereunder.
(c) Certificates evidencing the Underlying Shares shall
not contain any legend (including the legend set forth in Section
4.1(b) hereof): (i) while a registration statement (including the
Registration Statement) covering the resale of such security is
effective under the Securities Act, or (ii) following any sale of such
Underlying Shares pursuant to Rule 144, or (iii) if such Underlying
Shares are eligible for sale under Rule 144(k), or (iv) if such legend
is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the
staff of the Commission). The Company shall cause its counsel to issue
a legal opinion to the Company's transfer agent promptly after the
Effective Date if required by the Company's transfer agent to effect
the removal of the legend hereunder. If all or any portion of a
Debenture or Warrant is converted or exercised (as applicable) at a
time when there is an effective registration statement to cover the
resale of the Underlying Shares, or if such Underlying Shares may be
sold under Rule 144(k) or if such legend is not otherwise required
under applicable requirements of the Securities Act (including judicial
interpretations thereof) then such Underlying Shares shall be issued
free of all legends. The Company agrees that following the Effective
Date or at such time as such legend is no longer required under this
Section 4.1(c), it will, no later than three Trading Days following the
delivery by a Purchaser to the Company or the Company's transfer agent
of a certificate representing Underlying Shares, as applicable, issued
with a restrictive legend (such third Trading Day, the "LEGEND REMOVAL
DATE"), deliver or cause to be delivered to such Purchaser a
certificate representing such shares that is free from all restrictive
and other legends. The Company may not make any notation on its records
or give instructions to any transfer agent of the Company that enlarge
the restrictions on transfer set forth in this Section.
(d) In addition to such Purchaser's other available
remedies, the Company shall pay to a Purchaser, in cash, as partial
liquidated damages and not as a penalty, for each $2,000 of Underlying
Shares (based on the Closing Price of the Common Stock on the date such
Securities are submitted to the Company's transfer agent) delivered for
removal of the restrictive legend and subject to this Section 4.1(c),
$10 per Trading Day (increasing to $20 per Trading Day 5 Trading Days
after such damages have begun to accrue) for each Trading Day after the
2nd Trading Day following the Legend Removal
21
Date until such certificate is delivered without a legend; PROVIDED,
HOWEVER, that the Company shall not be obligated to pay any per Trading
Day liquidated damages with respect to delays directly caused by a
Force Majeure; PROVIDED, FURTHER, the Company shall use best efforts to
remedy or overcome such failures as promptly as possible. Nothing
herein shall limit such Purchaser's right to pursue actual damages for
the Company's failure to deliver certificates representing any
Securities as required by the Transaction Documents, and such Purchaser
shall have the right to pursue all remedies available to it at law or
in equity including, without limitation, a decree of specific
performance and/or injunctive relief.
(e) Each Purchaser, severally and not jointly with the
other Purchasers, agrees that the Purchaser will sell any Securities
pursuant to either the registration requirements of the Securities Act,
including any applicable prospectus delivery requirements, or an
exemption therefrom.
4.2 ACKNOWLEDGMENT OF DILUTION. The Company acknowledges that the
issuance of the Securities may result in dilution of the outstanding shares of
Common Stock, which dilution may be substantial under certain market conditions.
The Company further acknowledges that its obligations under the Transaction
Documents, including without limitation its obligation to issue the Underlying
Shares pursuant to the Transaction Documents, are unconditional and absolute and
not subject to any right of set off, counterclaim, delay or reduction,
regardless of the effect of any such dilution or any claim the Company may have
against any Purchaser and regardless of the dilutive effect that such issuance
may have on the ownership of the other stockholders of the Company.
4.3 FURNISHING OF INFORMATION. As long as any Purchaser owns
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to the
Exchange Act. As long as any Purchaser owns Securities, if the Company is not
required to file reports pursuant to the Exchange Act, it will prepare and
furnish to the Purchasers and make publicly available in accordance with Rule
144(c) such information as is required for the Purchasers to sell the Securities
under Rule 144. The Company further covenants that it will take such further
action as any holder of Securities may reasonably request, all to the extent
required from time to time to enable such Person to sell such Securities without
registration under the Securities Act within the limitation of the exemptions
provided by Rule 144.
4.4 INTEGRATION. The Company shall not sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any security (as
defined in Section 2 of the Securities Act) that would be integrated with the
offer or sale of the Securities in a manner that would require the registration
under the Securities Act of the sale of the Securities to the Purchasers or that
would be integrated with the offer or sale of the Securities for purposes of the
rules and regulations of any Trading Market.
4.5 CONVERSION AND EXERCISE PROCEDURES. The form of Notice of
Exercise included in the Warrants and the form of Notice of Conversion included
in the Debentures set forth the
22
totality of the procedures required of the Purchasers in order to exercise the
Warrants or convert the Debentures. No additional legal opinion or other
information or instructions shall be required of the Purchasers to exercise
their Warrants or convert their Debentures. The Company shall honor exercises of
the Warrants and conversions of the Debentures and shall deliver Underlying
Shares in accordance with the terms, conditions and time periods set forth in
the Transaction Documents.
4.6 SECURITIES LAWS DISCLOSURE; PUBLICITY. The Company shall, by
5:30 p.m. Eastern time on the fourth Trading Day following the date hereof,
issue a Current Report on Form 8-K, reasonably acceptable to each Purchaser
disclosing the material terms of the transactions contemplated hereby, and shall
attach the Transaction Documents thereto. The Company and each Purchaser shall
consult with each other in issuing any other press releases with respect to the
transactions contemplated hereby, and neither the Company nor any Purchaser
shall issue any such press release or otherwise make any such public statement
without the prior consent of the Company, with respect to any press release of
any Purchaser, or without the prior consent of each Purchaser, with respect to
any press release of the Company, which consent shall not unreasonably be
withheld, except if such disclosure is required by law, in which case the
disclosing party shall promptly provide the other party with prior notice of
such public statement or communication. Notwithstanding the foregoing, the
Company shall not publicly disclose the name of any Purchaser, or include the
name of any Purchaser in any filing with the Commission or any regulatory agency
or Trading Market, without the prior written consent of such Purchaser, except
(i) as required by federal securities law and (ii) to the extent such disclosure
is required by law or Trading Market regulations, in which case the Company
shall provide the Purchasers with prior notice of such disclosure permitted
under subclause (i) or (ii).
4.7 SHAREHOLDER RIGHTS PLAN. No claim will be made or enforced by
the Company or, to the knowledge of the Company, any other Person that any
Purchaser is an "Acquiring Person" under any shareholder rights plan or similar
plan or arrangement in effect or hereafter adopted by the Company, or that any
Purchaser could be deemed to trigger the provisions of any such plan or
arrangement, by virtue of receiving Securities under the Transaction Documents
or under any other agreement between the Company and the Purchasers. The Company
shall conduct its business in a manner so that it will not become subject to the
Investment Company Act.
4.8 NON-PUBLIC INFORMATION. The Company covenants and agrees that
neither it nor any other Person acting on its behalf will provide any Purchaser
or its agents or counsel with any information that the Company believes
constitutes material non-public information, unless prior thereto such Purchaser
shall have executed a written agreement regarding the confidentiality and use of
such information. The Company understands and confirms that each Purchaser shall
be relying on the foregoing representations in effecting transactions in
securities of the Company.
4.9 USE OF PROCEEDS. Except as set forth on SCHEDULE 4.9 attached
hereto, the Company shall use the net proceeds from the sale of the Securities
hereunder for working capital purposes and not for the satisfaction of any
portion of the Company's debt (other than payment of trade payables in the
ordinary course of the Company's business and prior practices), to redeem any
Common Stock or Common Stock Equivalents or to settle any outstanding
litigation.
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4.10 INTENTIONALLY OMITTED.
4.11 INDEMNIFICATION OF PURCHASERS. Subject to the provisions of
this Section 4.11, the Company will indemnify and hold the Purchasers and their
directors, officers, shareholders, partners, employees and agents (each, a
"PURCHASER Party") harmless from any and all losses, liabilities, obligations,
claims, contingencies, damages, costs and expenses, including all judgments,
amounts paid in settlements, court costs and reasonable attorneys' fees and
costs of investigation that any such Purchaser Party may suffer or incur as a
result of or relating to (a) any breach of any of the representations,
warranties, covenants or agreements made by the Company in this Agreement or in
the other Transaction Documents or (b) any action instituted against a
Purchaser, or any of them or their respective Affiliates, by any stockholder of
the Company who is not an Affiliate of such Purchaser, with respect to any of
the transactions contemplated by the Transaction Documents (unless such action
is based upon a breach of such Purchaser's representation, warranties or
covenants under the Transaction Documents or any agreements or understandings
such Purchaser may have with any such stockholder or any violations by the
Purchaser of state or federal securities laws or any conduct by such Purchaser
which constitutes fraud, gross negligence, willful misconduct or malfeasance).
If any action shall be brought against any Purchaser Party in respect of which
indemnity may be sought pursuant to this Agreement, such Purchaser Party shall
promptly notify the Company in writing, and the Company shall have the right to
assume the defense thereof with counsel of its own choosing. Any Purchaser Party
shall have the right to employ separate counsel in any such action and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Purchaser Party except to the extent that (i)
the employment thereof has been specifically authorized by the Company in
writing, (ii) the Company has failed after a reasonable period of time to assume
such defense and to employ counsel or (iii) in such action there is, in the
reasonable opinion of such separate counsel, a material conflict on any material
issue between the position of the Company and the position of such Purchaser
Party. The Company will not be liable to any Purchaser Party under this
Agreement (i) for any settlement by a Purchaser Party effected without the
Company's prior written consent, which shall not be unreasonably withheld or
delayed; or (ii) to the extent, but only to the extent that a loss, claim,
damage or liability is attributable to any Purchaser Party's breach of any of
the representations, warranties, covenants or agreements made by the Purchasers
in this Agreement or in the other Transaction Documents.
4.12 RESERVATION AND LISTING OF SECURITIES.
(a) The Company shall maintain a reserve from its duly
authorized shares of Common Stock for issuance pursuant to the
Transaction Documents in such amount as may be required to fulfill its
obligations in full under the Transaction Documents.
(b) If, on any date, the number of authorized but
unissued (and otherwise unreserved) shares of Common Stock is less than
the Required Minimum on such date, then the Board of Directors of the
Company shall use commercially reasonable efforts to amend the
Company's certificate or articles of incorporation to increase the
number of authorized but unissued shares of Common Stock to at least
the Required Minimum at such time, as soon as possible and in any event
not later than the 75th day after such date.
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(c) The Company shall, if applicable: (i) in the time and
manner required by the Trading Market, prepare and file with such
Trading Market an additional shares listing application covering a
number of shares of Common Stock at least equal to the Required Minimum
on the date of such application, (ii) take all steps necessary to cause
such shares of Common Stock to be approved for listing on the Trading
Market as soon as possible thereafter, (iii) provide to the Purchasers
evidence of such listing, and (iv) maintain the listing of such Common
Stock on any date at least equal to the Required Minimum on such date
on such Trading Market or another Trading Market.
4.13 PARTICIPATION IN FUTURE FINANCING. From the date hereof until
the Debentures are no longer outstanding, upon any financing by the Company or
any of its Subsidiaries of Common Stock or Common Stock Equivalents (a
"SUBSEQUENT FINANCING"), each Purchaser shall have the right to participate in
such Subsequent Financing in up to an amount to the extent that immediately
following such Subsequent Financing its percentage interest in the Company on a
fully diluted basis, ignoring for such purposes any conversion or exercise
limitations, is equal to such percentage interest in the Company immediately
prior to such issuance (the "PARTICIPATION MAXIMUM"). At least 5 Trading Days
prior to the closing of the Subsequent Financing, the Company shall deliver to
each Purchaser a written notice of its intention to effect a Subsequent
Financing ("PRE-NOTICE"), which Pre-Notice shall ask such Purchaser if it wants
to review the details of such financing (such additional notice, a "SUBSEQUENT
FINANCING NOTICE"). Upon the request of a Purchaser, and only upon a request by
such Purchaser, for a Subsequent Financing Notice, the Company shall promptly,
but no later than 1 Trading Day after such request, deliver a Subsequent
Financing Notice to such Purchaser. The Subsequent Financing Notice shall
describe in reasonable detail the proposed terms of such Subsequent Financing,
the amount of proceeds intended to be raised thereunder, if known, the Person
with whom such Subsequent Financing is proposed to be effected, and attached to
which shall be a term sheet or similar document relating thereto. If by 5:30
p.m. (New York City time) on the 5th Trading Day after all of the Purchasers
have received the Pre-Notice, notifications by a Purchaser of its willingness to
participate in the Subsequent Financing (or to cause their designees to
participate) is less than its Participation Maximum, then the Company may effect
the remaining portion of its Participation Maximum on the terms and to the
Persons (if included in the Subsequent Financing Notice) set forth in the
Subsequent Financing Notice. If the Company receives no notice from a Purchaser
as of such 5th Trading Day, such Purchaser shall be deemed to have notified the
Company that it does not elect to participate. The Company must provide the
Purchasers with a second Subsequent Financing Notice, and the Purchasers will
again have the right of participation set forth above in this Section 4.13, if
the Subsequent Financing subject to the initial Subsequent Financing Notice is
not consummated for any reason on the terms set forth in such Subsequent
Financing Notice within 60 Trading Days after the date of the initial Subsequent
Financing Notice. Notwithstanding the foregoing, this Section 4.13 shall not
apply in respect of an Exempt Issuance, (b) the issuance of up to 10,000,000
shares (adjusted for any stock splits, reverse splits, and the like) of Common
Stock or securities convertible or exercisable into Common Stock, or a
combination of both, for an effective per share purchase price of Common Stock
at least equal to the Conversion Price, to the potential investor identified in
SCHEDULE 4.15, or any of such investor's affiliates or (c) securities issued,
for an effective per share purchase price of Common Stock at least equal to the
Conversion Price, in connection with
25
or as part of the purchase by the investors of securities of any of the
Subsidiaries in a transaction primarily for the purpose of raising capital by
such Subsidiary and not the Company.
4.14 SUBSEQUENT EQUITY SALES. From the date hereof until 90 days
after the Effective Date, neither the Company nor any Subsidiary shall issue
shares of Common Stock or Common Stock Equivalents; provided, however, the 90
day period set forth in this Section 4.14 shall be extended for the number of
Trading Days during such period in which (y) trading in the Common Stock is
suspended by any Trading Market, or (z) following the Effective Date, the
Registration Statement is not effective or the prospectus included in the
Registration Statement may not be used by the Purchasers for the resale of the
Underlying Shares. In addition to the limitations set forth herein, from the
date hereof until such time as no Purchaser holds any of the Securities, the
Company shall be prohibited from effecting or entering into an agreement to
effect any Subsequent Financing involving a "VARIABLE RATE TRANSACTION" or an
"MFN TRANSACTION" (each as defined below). The term "VARIABLE RATE TRANSACTION"
shall mean a transaction in which the Company issues or sells (i) any debt or
equity securities that are convertible into, exchangeable or exercisable for, or
include the right to receive additional shares of Common Stock either (A) at a
conversion, exercise or exchange rate or other price that is based upon and/or
varies with the trading prices of or quotations for the shares of Common Stock
at any time after the initial issuance of such debt or equity securities, or (B)
with a conversion, exercise or exchange price that is subject to being reset at
some future date after the initial issuance of such debt or equity security or
upon the occurrence of specified or contingent events directly or indirectly
related to the business of the Company or the market for the Common Stock. The
term "MFN TRANSACTION" shall mean a transaction in which the Company issues or
sells any securities in a capital raising transaction or series of related
transactions which grants to an investor the right to receive additional shares
based upon future transactions of the Company on terms more favorable than those
granted to such investor in such offering. In addition, unless Shareholder
Approval has been obtained and deemed effective and allows for the removal of
the Floor Prices in the Debenture and Warrants, the Company shall not make any
issuance whatsoever of Common Stock or Common Stock Equivalents for an effective
price per share less than $______(1), subject to adjustment for reverse and
forward stock splits, stock dividends, stock combinations and other similar
transactions of the Common Stock that occur after the date of this Agreement.
Any Purchaser shall be entitled to obtain injunctive relief against the Company
to preclude any such issuance, which remedy shall be in addition to any right to
collect damages. Notwithstanding the foregoing, this Section 4.14 shall not
apply in respect of (a) an Exempt Issuance, except that no Variable Rate
Transaction or MFN Transaction shall be an Exempt Issuance, (b) the issuance of
up to 10,000,000 shares (adjusted for any stock splits, reverse splits, and the
like) of Common Stock or securities convertible or exercisable into Common
Stock, or a combination of both, for an effective per share purchase price of
Common Stock at least equal to the Conversion Price, to the potential investor
identified in SCHEDULE 4.15, or any of such investor's affiliates or (c)
securities issued, for an effective per share purchase price of Common Stock at
least equal to the Conversion Price, in connection with or as part of the
purchase by the investors of securities of any of the Subsidiaries in a
transaction primarily for the purpose of raising capital by such Subsidiary and
not the Company.
----------
(1) The Closing Price immediately prior to the date hereof.
26
4.15 EQUAL TREATMENT OF PURCHASERS. No consideration shall be
offered or paid to any person to amend or consent to a waiver or modification of
any provision of any of the Transaction Documents unless the same consideration
is also offered to all of the parties to the Transaction Documents. Further, the
Company shall not make any payment of principal or interest on the Debentures in
amounts which are disproportionate to the respective principal amounts
outstanding on the Debentures at any applicable time. For clarification
purposes, this provision constitutes a separate right granted to each Purchaser
by the Company and negotiated separately by each Purchaser, and is intended to
treat for the Company the Debenture holders as a class and shall not in any way
be construed as the Purchasers acting in concert or as a group with respect to
the purchase, disposition or voting of Securities or otherwise.
ARTICLE V.
MISCELLANEOUS
5.1 TERMINATION. This Agreement may be terminated by any
Purchaser, by written notice to the other parties, if the Closing has not been
consummated on or before December 13, 2004; provided that no such termination
will affect the right of any party to ▇▇▇ for any breach by the other party (or
parties).
5.2 FEES AND EXPENSES. At the Closing, the Company has agreed to
reimburse Bristol Investment Fund, Ltd. ("Bristol") up to $20,000, for its
actual, reasonable, out-of-pocket legal fees and expenses. Except as expressly
set forth in the Transaction Documents to the contrary, each party shall pay the
fees and expenses of its advisers, counsel, accountants and other experts, if
any, and all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement. The Company
shall pay all transfer agent fees, stamp taxes and other taxes and duties levied
in connection with the issuance of any Securities.
5.3 ENTIRE AGREEMENT. The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.
5.4 NOTICES. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (a) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number set forth on the signature pages attached hereto prior to 5:30
p.m. (New York City time) on a Trading Day, (b) the next Trading Day after the
date of transmission, if such notice or communication is delivered via facsimile
at the facsimile number set forth on the signature pages attached hereto on a
day that is not a Trading Day or later than 5:30 p.m. (New York City time) on
any Trading Day, (c) the second Trading Day following the date of mailing, if
sent by U.S. nationally recognized overnight courier service, or (d) upon actual
receipt by the party to whom such notice is required to be given. The address
for such notices and communications shall be as set forth on the signature pages
attached hereto.
27
5.5 AMENDMENTS; WAIVERS. No provision of this Agreement may be
waived or amended except in a written instrument signed, in the case of an
amendment, by the Company and each Purchaser or, in the case of a waiver, by the
party against whom enforcement of any such waiver is sought. No waiver of any
default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver of
any subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right.
5.6 CONSTRUCTION. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof. The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any party.
5.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors and permitted
assigns. The Company may not assign this Agreement or any rights or obligations
hereunder without the prior written consent of each Purchaser. Any Purchaser may
assign any or all of its rights under this Agreement to any Person to whom such
Purchaser assigns or transfers any Securities, provided such transferee agrees
in writing to be bound, with respect to the transferred Securities, by the
provisions hereof that apply to the "Purchasers".
5.8 NO THIRD-PARTY BENEFICIARIES. This Agreement is intended for
the benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.11.
5.9 GOVERNING LAW. All questions concerning the construction,
validity, enforcement and interpretation of the Transaction Documents shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York, without regard to the principles of conflicts of law
thereof. Each party agrees that all legal proceedings concerning the
interpretations, enforcement and defense of the transactions contemplated by
this Agreement and any other Transaction Documents (whether brought against a
party hereto or its respective affiliates, directors, officers, shareholders,
employees or agents) shall be commenced exclusively in the state and federal
courts sitting in the City of New York. Each party hereby irrevocably submits to
the exclusive jurisdiction of the state and federal courts sitting in the City
of New York, borough of Manhattan for the adjudication of any dispute hereunder
or in connection herewith or with any transaction contemplated hereby or
discussed herein (including with respect to the enforcement of any of the
Transaction Documents), and hereby irrevocably waives, and agrees not to assert
in any suit, action or proceeding, any claim that it is not personally subject
to the jurisdiction of any such court, that such suit, action or proceeding is
improper or inconvenient venue for such proceeding. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery)
to such party at the address in effect for notices to it under this Agreement
and agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing
28
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. The parties hereby waive all rights to a trial
by jury. If either party shall commence an action or proceeding to enforce any
provisions of the Transaction Documents, then the prevailing party in such
action or proceeding shall be reimbursed by the other party for its attorneys'
fees and other costs and expenses incurred with the investigation, preparation
and prosecution of such action or proceeding.
5.10 SURVIVAL. The representations and warranties contained herein
shall survive the Closing and the delivery, exercise and/or conversion of the
Securities, as applicable for the applicable statue of limitations.
5.11 EXECUTION. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.
5.12 SEVERABILITY. If any provision of this Agreement is held to be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.
5.13 RESCISSION AND WITHDRAWAL RIGHT. Notwithstanding anything to
the contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Purchaser exercises a right, election,
demand or option under a Transaction Documents and the Company does not timely
perform its related obligations within the periods therein provided, then such
Purchaser may rescind or withdraw, in its sole discretion from time to time
prior to the Company actual performance of the related obligation, upon written
notice to the Company, any relevant notice, demand or election in whole or in
part without prejudice to its future actions and rights; PROVIDED, HOWEVER, in
the case of a rescission of a conversion of a Debenture or exercise of a
Warrant, the Purchaser shall be required to return any shares of Common Stock
subject to any such rescinded conversion or exercise notice.
5.14 REPLACEMENT OF SECURITIES. If any certificate or instrument
evidencing any Securities is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon
cancellation thereof, or in lieu of and substitution therefor, a new certificate
or instrument, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction and customary and reasonable
indemnity, if requested. The applicants for a new certificate or instrument
under such circumstances shall also pay any reasonable third-party costs
associated with the issuance of such replacement Securities.
29
5.15 REMEDIES. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Purchasers and the Company will be entitled to specific performance under the
Transaction Documents. The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations described in the foregoing sentence and hereby agrees to waive in
any action for specific performance of any such obligation the defense that a
remedy at law would be adequate.
5.16 PAYMENT SET ASIDE. To the extent that the Company makes a
payment or payments to any Purchaser pursuant to any Transaction Documents or a
Purchaser enforces or exercises its rights thereunder, and such payment or
payments or the proceeds of such enforcement or exercise or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside,
recovered from, disgorged by or are required to be refunded, repaid or otherwise
restored to the Company, a trustee, receiver or any other person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.
5.17 USURY. To the extent it may lawfully do so, the Company hereby
agrees not to insist upon or plead or in any manner whatsoever claim, and will
resist any and all efforts to be compelled to take the benefit or advantage of,
usury laws wherever enacted, now or at any time hereafter in force, in
connection with any claim, action or proceeding that may be brought by any
Purchaser in order to enforce any right or remedy under any Transaction
Documents. Notwithstanding any provision to the contrary contained in any
Transaction Documents, it is expressly agreed and provided that the total
liability of the Company under the Transaction Documents for payments in the
nature of interest shall not exceed the maximum lawful rate authorized under
applicable law (the "MAXIMUM RATE"), and, without limiting the foregoing, in no
event shall any rate of interest or default interest, or both of them, when
aggregated with any other sums in the nature of interest that the Company may be
obligated to pay under the Transaction Documents exceed such Maximum Rate. It is
agreed that if the maximum contract rate of interest allowed by law and
applicable to the Transaction Documents is increased or decreased by statute or
any official governmental action subsequent to the date hereof, the new maximum
contract rate of interest allowed by law will be the Maximum Rate applicable to
the Transaction Documents from the effective date forward, unless such
application is precluded by applicable law. If under any circumstances
whatsoever, interest in excess of the Maximum Rate is paid by the Company to any
Purchaser with respect to indebtedness evidenced by the Transaction Documents,
such excess shall be applied by such Purchaser to the unpaid principal balance
of any such indebtedness or be refunded to the Company, the manner of handling
such excess to be at such Purchaser's election.
5.18 INDEPENDENT NATURE OF PURCHASERS' OBLIGATIONS AND RIGHTS. The
obligations of each Purchaser under any Transaction Documents are several and
not joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Documents. Nothing contained herein or in any
Transaction Documents, and no action taken by any Purchaser pursuant thereto,
30
shall be deemed to constitute the Purchasers as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Documents. Each
Purchaser shall be entitled to independently protect and enforce its rights,
including without limitation the rights arising out of this Agreement or out of
the other Transaction Documents, and it shall not be necessary for any other
Purchaser to be joined as an additional party in any proceeding for such
purpose. Each Purchaser has been represented by its own separate legal counsel
in their review and negotiation of the Transaction Documents. For reasons of
administrative convenience only, Purchasers and their respective counsel have
chosen to communicate with the Company through FW. FW does not represent all of
the Purchasers but only Bristol. The Company has elected to provide all
Purchasers with the same terms and Transaction Documents for the convenience of
the Company and not because it was required or requested to do so by the
Purchasers.
5.19 LIQUIDATED DAMAGES. The Company's obligations to pay any
partial liquidated damages or other amounts owing under the Transaction
Documents is a continuing obligation of the Company and shall not terminate
until all unpaid partial liquidated damages and other amounts have been paid
notwithstanding the fact that the instrument or security pursuant to which such
partial liquidated damages or other amounts are due and payable shall have been
canceled.
5.20 CONSTRUCTION. The parties agree that each of them and/or their
respective counsel has reviewed and had an opportunity to revise the Transaction
Documents and, therefore, the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of the Transaction Documents or any amendments hereto.
(SIGNATURE PAGES FOLLOW)
31
IN WITNESS WHEREOF, the parties hereto have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.
TARRANT APPAREL GROUP ADDRESS FOR NOTICE:
-------------------
By: /s/ ▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
------------------------------- ▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Name: ▇▇▇▇▇▇▇ ▇▇▇▇▇ Attn: Chief Financial Officer
Title: Chief Financial Officer
With a copy to (which shall not constitute notice):
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ & Markiles, LLP
▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇ ▇▇▇▇▇▇▇▇, Esq.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOR PURCHASER FOLLOWS]
32
[PURCHASER SIGNATURE PAGES TO TAGS SECURITIES PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the undersigned have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.
Name of Investing Entity: G. ▇▇▇▇▇ ▇▇▇▇▇▇▇ or Jasmine ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ TTEES
The ▇▇▇▇▇▇▇ Family Trust DTD 1-11-2000
SIGNATURE OF AUTHORIZED SIGNATORY OF INVESTING ENTITY: /s/ G. ▇▇▇▇▇ ▇▇▇▇▇▇▇
--------------------
Name of Authorized Signatory: G. ▇▇▇▇▇ ▇▇▇▇▇▇▇
Title of Authorized Signatory: Trustee
Email Address of Authorized Entity: ▇▇@▇▇▇▇▇▇▇▇▇.▇▇▇
Address for Notice of Investing Entity:
1999 Ave of the Stars, ▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Address for Delivery of Securities for Investing Entity (if not same as above):
Subscription Amount: $150,000.00
Warrant Shares: 18,750
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]
Name of Investing Entity: High Tide, LLC
SIGNATURE OF AUTHORIZED SIGNATORY OF INVESTING ENTITY: /s/ G. ▇▇▇▇▇ ▇▇▇▇▇▇▇
--------------------
Name of Authorized Signatory: G. ▇▇▇▇▇ ▇▇▇▇▇▇▇
Title of Authorized Signatory: Manager
Email Address of Authorized Entity: ▇▇@▇▇▇▇▇▇▇▇▇.▇▇▇
Address for Notice of Investing Entity:
1999 Ave of the Stars, ▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Address for Delivery of Securities for Investing Entity (if not same as above):
Subscription Amount: $200,000.00
Warrant Shares: 25,000
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]
[SIGNATURE PAGES CONTINUE]
33
Name of Investing Entity: Bear ▇▇▇▇▇▇▇ Securities Corp. Custodian FBO J. ▇▇▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇ ▇▇
SIGNATURE OF AUTHORIZED SIGNATORY OF INVESTING ENTITY: /s/ J. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
---------------------
Name of Authorized Signatory: J. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Title of Authorized Signatory: Sole Ben., Self Directed ▇▇▇
Email Address of Authorized Entity: ▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇@▇▇▇▇▇▇▇.▇▇▇
Address for Notice of Investing Entity:
▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇.
▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Address for Delivery of Securities for Investing Entity (if not same as above):
Bear ▇▇▇▇▇▇▇ Securities Corp.
Attn: ▇▇▇▇ ▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇ ▇▇ ▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Subscription Amount: $1,100,000.00
Warrant Shares: 137,500
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]
Name of Investing Entity: Bear ▇▇▇▇▇▇▇ Securities Corp. Custodian FBO J. ▇▇▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇
SIGNATURE OF AUTHORIZED SIGNATORY OF INVESTING ENTITY: /s/ J. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
---------------------
Name of Authorized Signatory: J. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Title of Authorized Signatory: Sole Ben., Self Directed ▇▇▇
Email Address of Authorized Entity: ▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇@▇▇▇▇▇▇▇.▇▇▇
Address for Notice of Investing Entity:
▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇.
▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Address for Delivery of Securities for Investing Entity (if not same as above):
Bear ▇▇▇▇▇▇▇ Securities Corp.
Attn: ▇▇▇▇ ▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇ ▇▇ ▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Subscription Amount: $800,000.00
Warrant Shares: 100,000
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]
34
Name of Investing Entity: Bristol Investment Fund, Ltd.
SIGNATURE OF AUTHORIZED SIGNATORY OF INVESTING ENTITY: /s/ ▇▇▇▇ ▇▇▇▇▇▇▇
----------------
Name of Authorized Signatory: ▇▇▇▇ ▇▇▇▇▇▇▇
Title of Authorized Signatory: Director
Email Address of Authorized Entity: ▇▇▇▇▇▇▇▇@▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇.▇▇▇,
▇▇▇@▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇.▇▇▇
Address for Notice of Investing Entity:
Address for Delivery of Securities for Investing Entity (if not same as above):
Subscription Amount: $2,000,000.00
Warrant Shares: 250,000
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]
Name of Investing Entity: MM & B Holdings, a California general partnership
SIGNATURE OF AUTHORIZED SIGNATORY OF INVESTING ENTITY: /s/ ▇▇▇▇▇ ▇▇▇▇▇▇▇
-----------------
Name of Authorized Signatory: ▇▇▇▇▇ ▇▇▇▇▇▇▇, TTEE of the ▇▇▇▇▇ ▇▇▇▇▇▇▇ 1994
Trust
Title of Authorized Signatory: General Partner
Email Address of Authorized Entity: ▇▇▇▇▇▇▇▇@▇▇▇▇▇▇▇.▇▇▇ and
[illegible]@▇▇▇▇▇▇▇.▇▇▇
Address for Notice of Investing Entity:
▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
Address for Delivery of Securities for Investing Entity (if not same as above):
Subscription Amount: $750,000.00
Warrant Shares: 93,750
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]
35
Name of Investing Entity: ▇▇▇▇▇▇▇▇ ▇▇▇▇ Investment Partnership, a CA general
partnership
SIGNATURE OF AUTHORIZED SIGNATORY OF INVESTING ENTITY:
/s/ ▇▇▇▇ ▇▇▇▇▇▇▇▇, Trustee
--------------------------
Name of Authorized Signatory: ▇▇▇▇ ▇▇▇▇▇▇▇▇, TTEE of the ▇▇▇▇▇▇▇▇ Family Trust
Title of Authorized Signatory: General Partner
Email Address of Authorized Entity: ▇▇▇▇▇▇▇▇▇@▇▇▇▇▇▇▇.▇▇▇ and
[illegible]@▇▇▇▇▇▇▇.▇▇▇
Address for Notice of Investing Entity:
▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇ ▇▇▇.
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
Address for Delivery of Securities for Investing Entity (if not same as above):
Same as above
Subscription Amount: $100,000.00
Warrant Shares: 12,500
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]
Name of Investing Entity: Union Finance International Corp.
SIGNATURE OF AUTHORIZED SIGNATORY OF INVESTING ENTITY: /s/ ▇▇▇▇▇ ▇▇▇▇▇
---------------
Name of Authorized Signatory: ▇▇▇▇▇ ▇▇▇▇▇
Title of Authorized Signatory: Director
Email Address of Authorized Entity: ▇▇▇▇▇▇@▇▇▇.▇▇▇
Address for Notice of Investing Entity:
Attn: ▇▇▇▇▇ ▇▇▇▇▇
▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇ ▇▇▇ ▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Address for Delivery of Securities for Investing Entity (if not same as above):
Subscription Amount: $1,000,000.00
Warrant Shares: 125,000
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]
36
Name of Investing Entity: JMG Triton Offshore Fund, Ltd.
SIGNATURE OF AUTHORIZED SIGNATORY OF INVESTING ENTITY: /s/ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
-------------------
Name of Authorized Signatory: ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
Title of Authorized Signatory: Member Manager of the Investment Manager
Email Address of Authorized Entity: _______________________________
Address for Notice of Investing Entity:
▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇., ▇▇▇. ▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Address for Delivery of Securities for Investing Entity (if not same as above):
Subscription Amount: $1,000,000.00
Warrant Shares: 125,000
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]
Name of Investing Entity: JMB Capital Partners
SIGNATURE OF AUTHORIZED SIGNATORY OF INVESTING ENTITY: /s/ ▇▇▇ ▇▇▇▇▇▇
--------------
Name of Authorized Signatory: ▇▇▇ ▇▇▇▇▇▇
Title of Authorized Signatory: General Partner
Email Address of Authorized Entity: ▇▇▇▇▇@▇▇▇▇▇▇▇▇▇▇.▇▇▇
Address for Notice of Investing Entity:
1999 Ave. of the Stars, ▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Address for Delivery of Securities for Investing Entity (if not same as above):
Subscription Amount: $1,900,000.00
Warrant Shares: 237,500
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]
37
Name of Investing Entity: JMB Capital Partners
SIGNATURE OF AUTHORIZED SIGNATORY OF INVESTING ENTITY: /s/ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
-------------------
Name of Authorized Signatory: ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
Title of Authorized Signatory: Member Manager of the [illegible]_
Email Address of Authorized Entity: _________________________
Address for Notice of Investing Entity:
▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇., ▇▇▇. ▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Address for Delivery of Securities for Investing Entity (if not same as above):
Subscription Amount: $1,000,000.00
Warrant Shares: 125,000
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]
38
EXHIBIT A
FORM OF DEBENTURE
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.
Original Issue Date: December ___, 2004
Original Conversion Price (subject to adjustment herein): $2.00
$---------------
6% SECURED CONVERTIBLE DEBENTURE
DUE DECEMBER ___, 2007
THIS DEBENTURE is one of a series of duly authorized and issued 6%
Secured Convertible Debentures of Tarrant Apparel Group, a California
corporation, having a principal place of business at
_____________________________ (the "COMPANY"), designated as its 6% Secured
Convertible Debenture, due December ___, 2007 (the "DEBENTURE(S)").
FOR VALUE RECEIVED, the Company promises to pay to
________________________ or its registered assigns (the "HOLDER"), the principal
sum of $_______________ on December ___, 2007 or such earlier date as the
Debentures are required or permitted to be repaid as provided hereunder (the
"MATURITY DATE"), and to pay interest to the Holder on the aggregate unconverted
and then outstanding principal amount of this Debenture in accordance with the
provisions hereof. This Debenture is subject to the following additional
provisions:
SECTION 1. DEFINITIONS. For the purposes hereof, in addition to the
terms defined elsewhere in this Debenture: (a) capitalized terms not otherwise
defined herein have the meanings given to such terms in the Purchase Agreement,
and (b) the following terms shall have the following meanings:
1
"ALTERNATE CONSIDERATION" shall have the meaning set forth in
Section 5(d).
"BASE CONVERSION PRICE" shall have the meaning set forth in
Section 5(b).
"BUSINESS DAY" means any day except Saturday, Sunday and any
day which shall be a federal legal holiday in the United States or a
day on which banking institutions in the State of New York are
authorized or required by law or other government action to close.
"BUY-IN" shall have the meaning set forth in Section 4(d)(v).
"CHANGE OF CONTROL TRANSACTION" means the occurrence after the
date hereof of any of (i) an acquisition after the date hereof by an
individual or legal entity or "group" (as described in Rule 13d-5(b)(1)
promulgated under the Exchange Act) of effective control (whether
through legal or beneficial ownership of capital stock of the Company,
by contract or otherwise) of in excess of 33% of the voting securities
of the Company, or (ii) a replacement at one time or within a three
year period of more than one-half of the members of the Company's board
of directors which is not approved by a majority of those individuals
who are members of the board of directors on the date hereof (or by
those individuals who are serving as members of the board of directors
on any date whose nomination to the board of directors was approved by
a majority of the members of the board of directors who are members on
the date hereof), or (iii) the execution by the Company of an agreement
to which the Company is a party or by which it is bound, providing for
any of the events set forth above in (i) or (ii); provided, however, a
Change of Control shall not have been deemed to occur on account of the
purchase by the potential investor identified in the Disclosure
Schedules, or any of such investor's affiliates, of up to 10,000,000
shares (adjusted for any stock splits, reverse splits and the like) of
Common Stock or securities convertible or exercisable into Common
Stock, or a combination of both.
"CLOSING PRICE" means, for any date, the price determined by
the first of the following clauses that applies: (a) if the Common
Stock is then listed or quoted on a Trading Market, the closing bid
price of the Common Stock for such date (or the nearest preceding date)
on the Trading Market on which the Common Stock is then listed or
quoted as reported by Bloomberg Financial L.P. (based on a Trading Day
from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b) if the
Common Stock is not then listed or quoted on a Trading Market and if
prices for the Common Stock are then reported in the "Pink Sheets"
published by the Pink Sheets, LLC (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid
price per share of the Common Stock so reported; or (c) in all other
cases, the fair market value of a share of Common Stock as determined
by an independent appraiser selected in good faith by the Holders and
reasonably acceptable to the Company.
2
"COMMON STOCK" means the common stock, no par value per share,
of the Company and stock of any other class into which such shares may
hereafter have been reclassified or changed.
"CONVERSION DATE" shall have the meaning set forth in Section
4(a).
"CONVERSION PRICE" shall have the meaning set forth in Section
4(b).
"CONVERSION SHARES" means the shares of Common Stock issuable
upon conversion of Debentures or as payment of interest in accordance
with the terms.
"DEBENTURE REGISTER" shall have the meaning set forth in
Section 2(c).
"DILUTIVE ISSUANCE" shall have the meaning set forth in
Section 5(b).
"DILUTIVE ISSUANCE NOTICE" shall have the meaning set forth in
Section 5(b).
"EFFECTIVENESS PERIOD" shall have the meaning given to such
term in the Registration Rights Agreement.
"EQUITY CONDITIONS" shall mean, during the period in question,
(i) the Company shall have duly honored all conversions and redemptions
scheduled to occur or occurring by virtue of one or more Notice of
Conversions, if any, (ii) all liquidated damages and other amounts
owing in respect of the Debentures for which written demand has been
made by the Holder shall have been paid; (iii) there is an effective
Registration Statement pursuant to which the Holder is permitted to
utilize the prospectus thereunder to resell all of the shares issuable
pursuant to the Transaction Documents (and the Company believes, in
good faith, that such effectiveness will continue uninterrupted for the
foreseeable future), (iv) the Common Stock is trading on the Trading
Market and all of the shares issuable pursuant to the Transaction
Documents are listed for trading on a Trading Market (and the Company
believes, in good faith, that trading of the Common Stock on a Trading
Market will continue uninterrupted for the foreseeable future), (v)
there is a sufficient number of authorized but unissued and otherwise
unreserved shares of Common Stock for the issuance of all of the shares
issuable pursuant to the Transaction Documents, (vi) there is then
existing no Event of Default or event which, with the passage of time
or the giving of notice, would constitute an Event of Default, (vii)
all of the shares issued or issuable pursuant to the transaction
proposed would not violate the limitations set forth in Sections
4(c)(i) and 4(c)(ii) and (viii) no public announcement of a pending or
proposed Fundamental Transaction or Change of Control Transaction has
occurred that has not been consummated or terminated.
"EVENT OF DEFAULT" shall have the meaning set forth in Section
8.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"FUNDAMENTAL TRANSACTION" shall have the meaning set forth in
Section 5(d).
3
"FORCED CONVERSION NOTICE" shall have the meaning set forth in
Section 4(e).
"FORCE CONVERSION NOTICE DATE" shall have the meaning set
forth in Section 4(e).
"INTEREST CONVERSION RATE" means 100% of the Closing Price
immediately prior to the applicable Interest Payment Date.
"INTEREST PAYMENT DATE" shall have the meaning set forth in
Section 2(a).
"LATE FEES" shall have the meaning set forth in Section 2(d).
"MANDATORY PREPAYMENT AMOUNT" for any Debentures shall equal
the sum of (i) the greater of: (A) 120% of the principal amount of
Debentures to be prepaid, plus all accrued and unpaid interest thereon,
or (B) the principal amount of Debentures to be prepaid, plus all other
accrued and unpaid interest hereon, divided by the Conversion Price on
(x) the date the Mandatory Prepayment Amount is demanded or otherwise
due or (y) the date the Mandatory Prepayment Amount is paid in full,
whichever is less, multiplied by the Closing Price on (x) the date the
Mandatory Prepayment Amount is demanded or otherwise due or (y) the
date the Mandatory Prepayment Amount is paid in full, whichever is
greater, and (ii) all other amounts, costs, expenses and liquidated
damages due in respect of such Debentures. Notwithstanding anything
herein to the contrary, if at the time the Holder delivers to the
Company a notice of an Event of Default (I) the Company has and is duly
honoring all conversions, if any, (II) there is an effective
Registration Statement pursuant to which the Holder is permitted to
utilize the prospectus thereunder to resell all of the shares issuable
pursuant to the Transaction Documents (and the Company believes, in
good faith, that such effectiveness will continue uninterrupted for the
foreseeable future), (III) the Common Stock is trading on the Trading
Market and all of the shares issuable pursuant to the Transaction
Documents are listed for trading on a Trading Market (and the Company
believes, in good faith, that trading of the Common Stock on a Trading
Market will continue uninterrupted for the foreseeable future), (IV)
there exists no other reason (other than the discretion of the Holder
or market conditions) which would otherwise deprive the Holder from
receiving (other than Section 4(c)(ii)) Conversion Shares or disposing
of the Conversion Shares on the Trading Market and (V) the Company
takes no action thereafter to directly or indirectly cause clauses (I)
through (IV) above to no longer be exist, then clause (B) above shall
not be available for the purpose of calculating the Mandatory
Prepayment Amount as to such notice of an Event of Default.
"NEW YORK COURTS" shall have the meaning set forth in Section
9(d).
"NOTICE OF CONVERSION" shall have the meaning set forth in
Section 4(a).
"ORIGINAL ISSUE DATE" shall mean the date of the first
issuance of the Debentures regardless of the number of transfers of any
Debenture and regardless of the number of instruments which may be
issued to evidence such Debenture.
4
"PERSON" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"PURCHASE AGREEMENT" means the Securities Purchase Agreement,
dated as of December ___, 2004, to which the Company and the original
Holder are parties, as amended, modified or supplemented from time to
time in accordance with its terms.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of the date of the Purchase Agreement, to which the
Company and the original Holder are parties, as amended, modified or
supplemented from time to time in accordance with its terms.
"REGISTRATION STATEMENT" means a registration statement
meeting the requirements set forth in the Registration Rights
Agreement, covering among other things the resale of the Conversion
Shares and naming the Holder as a "selling stockholder" thereunder.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"SHAREHOLDER APPROVAL" shall have the meaning given to such
term in the Purchase Agreement.
"SUBSIDIARY" shall have the meaning given to such term in the
Purchase Agreement.
"THRESHOLD PERIOD" shall have the meaning given to such term
in Section 4(e).
"TRADING DAY" means a day on which the Common Stock is traded
on a Trading Market.
"TRADING MARKET" means the following markets or exchanges on
which the Common Stock is listed or quoted for trading on the date in
question: the Nasdaq SmallCap Market, the American Stock Exchange, the
New York Stock Exchange, the Nasdaq National Market or the OTC Bulletin
Board.
"TRANSACTION DOCUMENTS" shall have the meaning set forth in
the Purchase Agreement.
SECTION 2. INTEREST.
a) PAYMENT OF INTEREST IN CASH OR KIND. The Company shall pay
interest to the Holder on the aggregate unconverted and then
outstanding principal amount of this Debenture at the rate of 6% per
annum, payable quarterly, in arrears, on March 31, June 30, September
30 and December 31, beginning on the first such date after the Original
5
Issue Date and on each Conversion Date (as to that principal amount
then being converted) and on the Maturity Date (except that, if any
such date is not a Business Day, then such payment shall be due on the
next succeeding Business Day) (each such date, an "INTEREST PAYMENT
DATE"), in cash or shares of Common Stock at the Interest Conversion
Rate, or a combination thereof; PROVIDED, HOWEVER, payment in shares of
Common Stock may only occur if (i) during the 20 Trading Days
immediately prior to the applicable Interest Payment Date all of the
Equity Conditions have been met, (ii) the Company shall have given the
Holder notice in accordance with the notice requirements set forth
below and (iii) the Interest Conversion Rate is equal to or exceeds
$_____(1), subject to adjustment for reverse and forward stock splits,
stock dividends, stock combinations and other similar transactions of
the Common Stock that occur after the date of the Purchase Agreement.
b) COMPANY'S ELECTION TO PAY INTEREST IN KIND. Subject to the
terms and conditions herein, the decision whether to pay interest
hereunder in shares of Common Stock or cash shall be at the discretion
of the Company. Not less than 20 Trading Days prior to each Interest
Payment Date, the Company shall provide the Holder with written notice
of its election to pay interest hereunder either in cash or shares of
Common Stock (the Company may indicate in such notice that the election
contained in such notice shall continue for later periods until
revised). Within 20 Trading Days prior to an Interest Payment Date, the
Company's election (whether specific to an Interest Payment Date or
continuous) shall be irrevocable as to such Interest Payment Date.
Subject to the aforementioned conditions, failure to timely provide
such written notice shall be deemed an election by the Company to pay
the interest on such Interest Payment Date in cash.
c) INTEREST CALCULATIONS. Interest shall be calculated on the
basis of a 360-day year and shall accrue daily commencing on the
Original Issue Date until payment in full of the principal sum,
together with all accrued and unpaid interest and other amounts which
may become due hereunder, has been made. Payment of interest in shares
of Common Stock shall otherwise occur pursuant to Section 4(d)(ii) and
only for purposes of the payment of interest in shares, the Interest
Payment Date shall be deemed the Conversion Date. Interest shall cease
to accrue with respect to any principal amount converted, provided that
the Company in fact delivers the Conversion Shares within the time
period required by Section 4(d)(ii). Interest hereunder will be paid to
the Person in whose name this Debenture is registered on the records of
the Company regarding registration and transfers of Debentures (the
"DEBENTURE REGISTER"). Except as otherwise provided herein, if at any
time the Company pays interest partially in cash and partially in
shares of Common Stock, then such payment shall be distributed ratably
among the Holders based upon the principal amount of Debentures held by
each Holder.
d) LATE FEE. All overdue accrued and unpaid interest to be
paid hereunder shall entail a late fee at the rate of 15% per annum (or
such lower maximum amount of interest permitted to be charged under
applicable law) ("LATE FEES") which will accrue daily, from the date
such interest is due hereunder through and including the date of
----------
(1) The Closing Price immediately prior to the date of the Purchase
Agreement.
6
payment. Notwithstanding anything to the contrary contained herein, if
on any Interest Payment Date the Company has elected to pay interest in
Common Stock and is not able to pay accrued interest in the form of
Common Stock because it does not then satisfy the conditions for
payment in the form of Common Stock set forth above, then, at the
option of the Holder, the Company, in lieu of delivering either shares
of Common Stock pursuant to this Section 2 or paying the regularly
scheduled cash interest payment, shall deliver, within three Trading
Days of each applicable Interest Payment Date, an amount in cash equal
to the product of the number of shares of Common Stock otherwise
deliverable to the Holder in connection with the payment of interest
due on such Interest Payment Date and the highest Closing Price during
the period commencing on the Interest Payment Date and ending on the
Trading Day prior to the date such payment is made.
e) PREPAYMENT. Except as otherwise set forth in this
Debenture, the Company may not prepay any portion of the principal
amount of this Debenture without the prior written consent of the
Holder.
SECTION 3. REGISTRATION OF TRANSFERS AND EXCHANGES.
a) DIFFERENT DENOMINATIONS. This Debenture is exchangeable for
an equal aggregate principal amount of Debentures of different
authorized denominations, as requested by the Holder surrendering the
same. No service charge will be made for such registration of transfer
or exchange.
b) INVESTMENT REPRESENTATIONS. This Debenture has been issued
subject to certain investment representations of the original Holder
set forth in the Purchase Agreement and may be transferred or exchanged
only in compliance with the Purchase Agreement and applicable federal
and state securities laws and regulations.
c) RELIANCE ON DEBENTURE REGISTER. Prior to due presentment to
the Company for transfer of this Debenture, the Company and any agent
of the Company may treat the Person in whose name this Debenture is
duly registered on the Debenture Register as the owner hereof for the
purpose of receiving payment as herein provided and for all other
purposes, whether or not this Debenture is overdue, and neither the
Company nor any such agent shall be affected by notice to the contrary.
SECTION 4. CONVERSION.
a) VOLUNTARY CONVERSION. At any time after the Original Issue
Date until this Debenture is no longer outstanding, this Debenture
shall be convertible into shares of Common Stock at the option of the
Holder, in whole or in part at any time and from time to time (subject
to the limitations on conversion set forth in Section 4(c) hereof). The
Holder shall effect conversions by delivering to the Company the form
of Notice of Conversion attached hereto as ANNEX A (a "NOTICE OF
CONVERSION"), specifying therein the principal amount of Debentures to
be converted and the date on which such conversion is to be effected (a
"CONVERSION DATE"). If no Conversion Date is specified in
7
a Notice of Conversion, the Conversion Date shall be the date that such
Notice of Conversion is provided hereunder. To effect conversions
hereunder, the Holder shall not be required to physically surrender
Debentures to the Company unless the entire principal amount of this
Debenture plus all accrued and unpaid interest thereon has been so
converted. Conversions hereunder shall have the effect of lowering the
outstanding principal amount of this Debenture in an amount equal to
the applicable conversion. The Holder and the Company shall maintain
records showing the principal amount converted and the date of such
conversions. The Company shall deliver any objection to any Notice of
Conversion within 1 Business Day of receipt of such notice. In the
event of any dispute or discrepancy, the records of the Holder shall be
controlling and determinative in the absence of manifest error. The
Holder and any assignee, by acceptance of this Debenture, acknowledge
and agree that, by reason of the provisions of this paragraph,
following conversion of a portion of this Debenture, the unpaid and
unconverted principal amount of this Debenture may be less than the
amount stated on the face hereof.
b) CONVERSION PRICE. The conversion price in effect on any
Conversion Date shall be equal to $2.00 (subject to adjustment
herein)(the "CONVERSION PRICE").
c) CONVERSION LIMITATIONS.
i. [INTENTIONALLY DELETED]
ii. HOLDER'S RESTRICTION ON CONVERSION. The Company
shall not effect any conversion of this Debenture, and the
Holder shall not have the right to convert any portion of this
Debenture, pursuant to Section 4(a) or otherwise, to the
extent that after giving effect to such conversion, the Holder
(together with the Holder's affiliates), as set forth on the
applicable Notice of Conversion, would beneficially own in
excess of 4.99% of the number of shares of the Common Stock
outstanding immediately after giving effect to such
conversion. For purposes of the foregoing sentence, the number
of shares of Common Stock beneficially owned by the Holder and
its affiliates shall include the number of shares of Common
Stock issuable upon conversion of this Debenture with respect
to which the determination of such sentence is being made, but
shall exclude the number of shares of Common Stock which would
be issuable upon (A) conversion of the remaining, nonconverted
portion of this Debenture beneficially owned by the Holder or
any of its affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of
the Company (including, without limitation, any other
Debentures or the Warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its
affiliates. Except as set forth in the preceding sentence, for
purposes of this Section 4(c)(ii), beneficial ownership shall
be calculated in accordance with Section 13(d) of the Exchange
Act. To the extent that the limitation contained in this
section applies, the determination of whether this Debenture
is convertible (in relation to other securities owned by the
Holder) and of which a portion of this Debenture is
convertible shall be in the sole discretion of such Holder. To
ensure compliance with this restriction,
8
the Holder will be deemed to represent to the Company each
time it delivers a Notice of Conversion that such Notice of
Conversion has not violated the restrictions set forth in this
paragraph and the Company shall have no obligation to verify
or confirm the accuracy of such determination. For purposes of
this Section 4(c)(ii), in determining the number of
outstanding shares of Common Stock, the Holder may rely on the
number of outstanding shares of Common Stock as reflected in
(x) the Company's most recent Form 10-Q or Form 10-K, as the
case may be, (y) a more recent public announcement by the
Company or (z) any other notice by the Company or the
Company's Transfer Agent setting forth the number of shares of
Common Stock outstanding. Upon the written or oral request of
the Holder, the Company shall within two Trading Days confirm
orally and in writing to the Holder the number of shares of
Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after
giving effect to the conversion or exercise of securities of
the Company, including this Debenture, by the Holder or its
affiliates since the date as of which such number of
outstanding shares of Common Stock was reported. The
provisions of this Section 4(c)(ii) may be waived by the
Holder upon, at the election of the Holder, not less than 61
days' prior notice to the Company, and the provisions of this
Section 4(c)(ii) shall continue to apply until such 61st day
(or such later date, as determined by the Holder, as may be
specified in such notice of waiver).
d) MECHANICS OF CONVERSION.
i. CONVERSION SHARES ISSUABLE UPON CONVERSION OF
PRINCIPAL AMOUNT. The number of shares of Common Stock
issuable upon a conversion hereunder shall be determined by
the quotient obtained by dividing (x) the outstanding
principal amount of this Debenture to be converted by (y) the
Conversion Price.
ii. DELIVERY OF CERTIFICATE UPON CONVERSION. Not
later than three Trading Days after any Conversion Date, the
Company will deliver to the Holder (A) a certificate or
certificates representing the Conversion Shares which shall be
free of restrictive legends and trading restrictions (other
than those required by the Purchase Agreement) representing
the number of shares of Common Stock being acquired upon the
conversion of Debentures (including, if so timely elected by
the Company, shares of Common Stock representing the payment
of accrued interest) and (B) a bank check in the amount of
accrued and unpaid interest (if the Company is required to pay
accrued interest in cash). The Company shall, if available and
if allowed under applicable securities laws, use its best
efforts to deliver any certificate or certificates required to
be delivered by the Company under this Section electronically
through the Depository Trust Corporation or another
established clearing corporation performing similar functions.
iii. FAILURE TO DELIVER CERTIFICATES. If in the case
of any Notice of Conversion such certificate or certificates
are not delivered to or as directed by the applicable Holder
by the fifth Trading Day after a Conversion Date, the
9
Holder shall be entitled by written notice to the Company at
any time on or before the Holder's receipt of such certificate
or certificates thereafter, to rescind such conversion, in
which event the Company shall immediately return the
certificates representing the principal amount of Debentures
tendered for conversion.
iv. OBLIGATION ABSOLUTE; PARTIAL LIQUIDATED DAMAGES.
If the Company fails for any reason to deliver to the Holder
such certificate or certificates pursuant to Section 4(d)(ii)
by the fifth Trading Day after the Conversion Date, the
Company shall pay to such Holder, in cash, as liquidated
damages and not as a penalty, for each $2,000 of principal
amount being converted, $10 per Trading Day (increasing to $20
per Trading Day after 5 Trading Days after such damages begin
to accrue) for each Trading Day after such fifth Trading Day
until such certificates are delivered; PROVIDED, HOWEVER, that
the Company shall not be obligated to pay any per Trading Day
liquidated damages with respect to delays directly caused by a
Force Majeure; PROVIDED, FURTHER, the Company shall use best
efforts to remedy or overcome such failures as promptly as
possible. The Company's obligations to issue and deliver the
Conversion Shares upon conversion of this Debenture in
accordance with the terms hereof are absolute and
unconditional, irrespective of any action or inaction by the
Holder to enforce the same, any waiver or consent with respect
to any provision hereof, the recovery of any judgment against
any Person or any action to enforce the same, or any setoff,
counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the Holder or any other Person of
any obligation to the Company or any violation or alleged
violation of law by the Holder or any other person, and
irrespective of any other circumstance which might otherwise
limit such obligation of the Company to the Holder in
connection with the issuance of such Conversion Shares;
PROVIDED, HOWEVER, such delivery shall not operate as a waiver
by the Company of any such action the Company may have against
the Holder. In the event a Holder of this Debenture shall
elect to convert any or all of the outstanding principal
amount hereof, the Company may not refuse conversion based on
any claim that the Holder or any one associated or affiliated
with the Holder of has been engaged in any violation of law,
agreement or for any other reason, unless, an injunction from
a court, on notice, restraining and or enjoining conversion of
all or part of this Debenture shall have been sought and
obtained and the Company posts a surety bond for the benefit
of the Holder in the amount of 150% of the principal amount of
this Debenture outstanding, which is subject to the
injunction, which bond shall remain in effect until the
completion of arbitration/litigation of the dispute and the
proceeds of which shall be payable to such Holder to the
extent it obtains judgment. In the absence of an injunction
precluding the same, the Company shall issue Conversion Shares
or, if applicable, cash, upon a properly noticed conversion.
Nothing herein shall limit a Holder's right to pursue actual
damages or declare an Event of Default pursuant to Section 8
herein for the Company's failure to deliver Conversion Shares
within the period specified herein and such Holder shall have
the right to pursue all remedies available to it at law or in
equity including, without limitation, a decree of specific
10
performance and/or injunctive relief. The exercise of any such
rights shall not prohibit the Holders from seeking to enforce
damages pursuant to any other Section hereof or under
applicable law.
v. COMPENSATION FOR BUY-IN ON FAILURE TO TIMELY
DELIVER CERTIFICATES UPON CONVERSION. In addition to any other
rights available to the Holder, if the Company fails for any
reason to deliver to the Holder such certificate or
certificates pursuant to Section 4(d)(ii) by the seventh
Trading Day after the Conversion Date, and if after such
seventh Trading Day the Holder is required by its brokerage
firm to purchase (in an open market transaction or otherwise)
Common Stock to deliver in satisfaction of a sale by such
Holder of the Conversion Shares which the Holder anticipated
receiving upon such conversion (a "BUY-IN"), then the Company
shall (A) pay in cash to the Holder (in addition to any
remedies available to or elected by the Holder) the amount by
which (x) the Holder's total purchase price (including
brokerage commissions, if any) for the Common Stock so
purchased exceeds (y) the product of (1) the aggregate number
of shares of Common Stock that such Holder anticipated
receiving from the conversion at issue multiplied by (2) the
actual sale price of the Common Stock at the time of the sale
(including brokerage commissions, if any) giving rise to such
purchase obligation and (B) at the option of the Holder,
either reissue Debentures in principal amount equal to the
principal amount of the attempted conversion or deliver to the
Holder the number of shares of Common Stock that would have
been issued had the Company timely complied with its delivery
requirements under Section 4(d)(ii). For example, if the
Holder purchases Common Stock having a total purchase price of
$11,000 to cover a Buy-In with respect to an attempted
conversion of Debentures with respect to which the actual sale
price of the Conversion Shares at the time of the sale
(including brokerage commissions, if any) giving rise to such
purchase obligation was a total of $10,000 under clause (A) of
the immediately preceding sentence, the Company shall be
required to pay the Holder $1,000. The Holder shall provide
the Company written notice indicating the amounts payable to
the Holder in respect of the Buy-In. Notwithstanding anything
contained herein to the contrary, if a Holder requires the
Company to make payment in respect of a Buy-In for the failure
to timely deliver certificates hereunder and the Company
timely pays in full such payment, the Company shall not be
required to pay such Holder liquidated damages under Section
4(d)(iv) in respect of the certificates resulting in such
Buy-In.
vi. RESERVATION OF SHARES ISSUABLE UPON CONVERSION.
The Company covenants that it will at all times reserve and
keep available out of its authorized and unissued shares of
Common Stock solely for the purpose of issuance upon
conversion of the Debentures and payment of interest on the
Debenture, each as herein provided, free from preemptive
rights or any other actual contingent purchase rights of
persons other than the Holders, not less than such number of
shares of the Common Stock as shall (subject to any additional
requirements of the Company as to reservation of such shares
set forth in the Purchase
11
Agreement) be issuable (taking into account the adjustments
and restrictions of Section 5) upon the conversion of the
outstanding principal amount of the Debentures and payment of
interest hereunder. The Company covenants that all shares of
Common Stock that shall be so issuable shall, upon issue, be
duly and validly authorized, issued and fully paid,
nonassessable and, if the Registration Statement is then
effective under the Securities Act, registered for public sale
in accordance with such Registration Statement.
vii. FRACTIONAL SHARES. Upon a conversion hereunder
the Company shall not be required to issue stock certificates
representing fractions of shares of the Common Stock, but may
if otherwise permitted, make a cash payment in respect of any
final fraction of a share based on the Closing Price at such
time. If the Company elects not, or is unable, to make such a
cash payment, the Holder shall be entitled to receive, in lieu
of the final fraction of a share, one whole share of Common
Stock.
viii. TRANSFER TAXES. The issuance of certificates
for shares of the Common Stock on conversion of the Debentures
shall be made without charge to the Holders thereof for any
documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided
that the Company shall not be required to pay any tax that may
be payable in respect of any transfer involved in the issuance
and delivery of any such certificate upon conversion in a name
other than that of the Holder of such Debentures so converted
and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting
the issuance thereof shall have paid to the Company the amount
of such tax or shall have established to the satisfaction of
the Company that such tax has been paid.
e) FORCED CONVERSION. Notwithstanding anything herein to the
contrary and subject to the conditions hereunder, if after the 12 month
anniversary of the date of the Purchase Agreement, the Closing Price
for each of any 20 consecutive Trading Days ("THRESHOLD PERIOD"), which
20 consecutive Trading Day period shall have commenced only after such
anniversary date, exceeds $3.50 and (ii) the average daily trading
volume for the same period exceeds 100,000 shares (both (i) and (ii)
hereof adjusted for any stock splits, reverse splits and the like
occurring after the Original Issue Date), then the Company may, within
two Trading Days of the end of any such period, deliver a notice to the
Holder (a "FORCED CONVERSION NOTICE" and the date such notice is
received by the Holder, the "FORCED CONVERSION NOTICE Date") to cause
the Holder to immediately convert all of the then outstanding principal
amount of Debentures pursuant to Section 4. The Company may only effect
a Forced Conversion Notice if all of the Equity Conditions are met
through the applicable Threshold Period until the date of the
applicable Forced Conversion. Any Forced Conversion shall be applied
ratably to all Holders based on their initial purchases of Debentures
pursuant to the Purchase Agreement. Notwithstanding anything herein to
the contrary, in the event the Company issues a Forced Conversion
Notice and, because of any limitation on issuance, it is unable to
force
12
the Holder to convert all of the outstanding principal amount of the
Debenture, the Company shall not have the right to issue another Forced
Conversion Notice for at least 30 days and at such time all conditions
hereunder must again be met, including the pricing condition and the
Equity Conditions. In addition, notwithstanding anything in this
Section 4(e) to the contrary, in the event the Company issues a Forced
Conversion Notice and, because of the limitation on issuance set forth
in Section 4(c)(ii), it is unable to force the Holder to convert all of
the outstanding principal amount of the Debenture, then: (i) the
portion of the unpaid principal amount of the Debenture that cannot be
converted (the "BLOCKED AMOUNT") shall remain outstanding (and the
Maturity Date with respect thereto shall be extended, if applicable)
until such time as the Holder converts the Blocked Amount into Common
Stock in accordance with this Debenture or the Company repays the
Blocked Amount or converts the Blocked Amount into Common Stock in
accordance with this Debenture; (ii) interest on the Blocked Amount
shall cease to accrue from and after the Forced Conversion Notice Date;
(iii) the Holder shall continue to have the right to convert the
Blocked Amount into Common Stock from and after the Forced Conversion
Notice Date in accordance with the terms of this Debenture; and (iv)
the Company shall have the right to convert the Blocked Amount, or
portion thereof, into shares of Common Stock in accordance with the
terms of this Debenture upon written notice to the Holder the first
moment after the Forced Conversion Notice Date when Section 4(c)(ii)
would not prevent such conversion, subject to the Equity Conditions.
SECTION 5. CERTAIN ADJUSTMENTS.
a) STOCK DIVIDENDS AND STOCK SPLITS. If the Company, at any
time while the Debentures are outstanding: (A) shall pay a stock
dividend or otherwise make a distribution or distributions on shares of
its Common Stock or any other equity or equity equivalent securities
payable in shares of Common Stock (which, for avoidance of doubt, shall
not include any shares of Common Stock issued by the Company pursuant
to this Debenture, including as interest thereon), (B) subdivide
outstanding shares of Common Stock into a larger number of shares, (C)
combine (including by way of reverse stock split) outstanding shares of
Common Stock into a smaller number of shares, or (D) issue by
reclassification of shares of the Common Stock any shares of capital
stock of the Company, then the Conversion Price shall be multiplied by
a fraction of which the numerator shall be the number of shares of
Common Stock (excluding treasury shares, if any) outstanding before
such event and of which the denominator shall be the number of shares
of Common Stock outstanding after such event. Any adjustment made
pursuant to this Section shall become effective immediately after the
record date for the determination of stockholders entitled to receive
such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
re-classification.
b) SUBSEQUENT EQUITY SALES. From the Original Issue Date until
the 18 month anniversary of the date of the Purchase Agreement, if the
Company or any Subsidiary thereof, as applicable, at any time while
Debentures are outstanding, shall offer, sell, grant any option to
purchase or offer, sell or grant any right to reprice the Company's
13
(but not the Subsidiary's) securities, or otherwise dispose of or issue
(or announce any offer, sale, grant or any option to purchase or other
disposition) any Common Stock or Common Stock Equivalents entitling any
Person to acquire shares of Common Stock, at an effective price per
share less than the then Conversion Price (such lower price, the "BASE
CONVERSION PRICE" and such issuances collectively, a "DILUTIVE
ISSUANCE"), as adjusted hereunder (if the holder of the Common Stock or
Common Stock Equivalents so issued shall at any time, whether by
operation of purchase price adjustments, reset provisions, floating
conversion, exercise or exchange prices or otherwise, or due to
warrants, options or rights per share which is issued in connection
with such issuance, but excluding adjustments resulting from customary
price-based anti-dilution provisions, be entitled to receive shares of
Common Stock at an effective price per share which is less than the
Conversion Price, such issuance shall be deemed to have occurred for
less than the Conversion Price), then the Conversion Price shall be
reduced by multiplying the Conversion Price by a fraction, the
numerator of which is the number of shares of Common Stock issued and
outstanding immediately prior to the Dilutive Issuance plus the number
of shares of Common Stock and Common Stock Equivalents which the
aggregate consideration received or receivable by the Corporation in
connection with such Dilutive Issuance would purchase at the then
effective Conversion Price, and the denominator of which shall be the
sum of the number of shares of Common Stock issued and outstanding
immediately prior to the Dilutive Issuance plus the number of shares of
Common Stock and Common Stock Equivalents so issued or issuable in
connection with the Dilutive Issuance; PROVIDED, HOWEVER, prior to the
date the Company obtains Shareholder Approval in accordance with the
rules and regulations of the Trading Market, in no event shall the
Conversion Price be adjusted under this Section 5(b) to less than
$_____(2), subject to adjustment for reverse and forward stock splits,
stock dividends, stock combinations and other similar transactions of
the Common Stock that occur after the date of this Agreement (the
"FLOOR PRICE"). The Company shall notify the Holder in writing, no
later than the third Business Day following the issuance of any Common
Stock or Common Stock Equivalents subject to this section, indicating
therein the applicable issuance price, or of applicable reset price,
exchange price, conversion price and other pricing terms (such notice
the "DILUTIVE ISSUANCE NOTICE"). For purposes of clarification, whether
or not the Company provides a Dilutive Issuance Notice pursuant to this
Section 5(b), upon the occurrence of any Dilutive Issuance, after the
date of such Dilutive Issuance the Holder is entitled to receive a
number of Conversion Shares based upon the Base Conversion Price
regardless of whether the Holder accurately refers to the Base
Conversion Price in the Notice of Conversion.
c) PRO RATA DISTRIBUTIONS. If the Company, at any time while
Debentures are outstanding, shall distribute to all holders of Common
Stock (and not to Holders) evidences of its indebtedness or assets or
rights or warrants to subscribe for or purchase any security, then in
each such case the Conversion Price shall be determined by multiplying
such Conversion Price in effect immediately prior to the record date
fixed for determination of stockholders entitled to receive such
distribution by a fraction of which
----------
(2) The Closing Price immediately prior to the date of the Purchase
Agreement.
14
the denominator shall be the Closing Price determined as of the record
date mentioned above, and of which the numerator shall be such Closing
Price on such record date less the then fair market value at such
record date of the portion of such assets or evidence of indebtedness
so distributed applicable to one outstanding share of the Common Stock
as determined by the Board of Directors in good faith. In either case
the adjustments shall be described in a statement provided to the
Holders of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of
Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the
record date mentioned above.
d) FUNDAMENTAL TRANSACTION. If, at any time while this
Debenture is outstanding, (A) the Company effects any merger or
consolidation of the Company with or into another Person, (B) the
Company effects any sale of all or substantially all of its assets in
one or a series of related transactions, (C) any tender offer or
exchange offer (whether by the Company or another Person) is completed
pursuant to which holders of Common Stock are permitted to tender or
exchange their shares for other securities, cash or property, or (D)
the Company effects any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is
effectively converted into or exchanged for other securities, cash or
property (in any such case, a "FUNDAMENTAL TRANSACTION"), then upon any
subsequent conversion of this Debenture, the Holder shall have the
right to receive, for each Conversion Share that would have been
issuable upon such conversion absent such Fundamental Transaction, the
same kind and amount of securities, cash or property as it would have
been entitled to receive upon the occurrence of such Fundamental
Transaction if it had been, immediately prior to such Fundamental
Transaction, the holder of one share of Common Stock (the "ALTERNATE
CONSIDERATION"). For purposes of any such conversion, the determination
of the Conversion Price shall be appropriately adjusted to apply to
such Alternate Consideration based on the amount of Alternate
Consideration issuable in respect of one share of Common Stock in such
Fundamental Transaction, and the Company shall apportion the Conversion
Price among the Alternate Consideration in a reasonable manner
reflecting the relative value of any different components of the
Alternate Consideration. If holders of Common Stock are given any
choice as to the securities, cash or property to be received in a
Fundamental Transaction, then the Holder shall be given the same choice
as to the Alternate Consideration it receives upon any conversion of
this Debenture following such Fundamental Transaction. To the extent
necessary to effectuate the foregoing provisions, any successor to the
Company or surviving entity in such Fundamental Transaction shall issue
to the Holder a new debenture consistent with the foregoing provisions
and evidencing the Holder's right to convert such debenture into
Alternate Consideration. The terms of any agreement pursuant to which a
Fundamental Transaction is effected shall include terms requiring any
such successor or surviving entity to comply with the provisions of
this paragraph (c) and insuring that this Debenture (or any such
replacement security) will be similarly adjusted upon any subsequent
transaction analogous to a Fundamental Transaction.
15
e) CALCULATIONS. All calculations under this Section 5 shall
be made to the nearest cent or the nearest 1/100th of a share, as the
case may be. The number of shares of Common Stock outstanding at any
given time shall not includes shares of Common Stock owned or held by
or for the account of the Company, and the description of any such
shares of Common Stock shall be considered on issue or sale of Common
Stock. For purposes of this Section 5, the number of shares of Common
Stock deemed to be issued and outstanding as of a given date shall be
the sum of the number of shares of Common Stock (excluding treasury
shares, if any) issued and outstanding.
f) EXEMPT ISSUANCE. Notwithstanding the foregoing, no
adjustment will be made under this Section 5 in respect of an Exempt
Issuance.
g) NOTICE TO HOLDERS.
i. ADJUSTMENT TO CONVERSION PRICE. Whenever the
Conversion Price is adjusted pursuant to any of this Section
5, the Company shall promptly mail to each Holder a notice
setting forth the Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such
adjustment.
ii. NOTICE TO ALLOW CONVERSION BY HOLDER. If (A) the
Company shall declare a dividend (or any other distribution)
on the Common Stock; (B) the Company shall declare a special
nonrecurring cash dividend on or a redemption of the Common
Stock; (C) the Company shall authorize the granting to all
holders of the Common Stock rights or warrants to subscribe
for or purchase any shares of capital stock of any class or of
any rights; (D) the approval of any stockholders of the
Company shall be required in connection with any
reclassification of the Common Stock, any consolidation or
merger to which the Company is a party, any sale or transfer
of all or substantially all of the assets of the Company, of
any compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property; (E) the
Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the
Company; then, in each case, the Company shall cause to be
filed at each office or agency maintained for the purpose of
conversion of the Debentures, and shall cause to be mailed to
the Holders at their last addresses as they shall appear upon
the stock books of the Company, at least 20 calendar days
prior to the applicable record or effective date hereinafter
specified, a notice stating (x) the date on which a record is
to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be
taken, the date as of which the holders of the Common Stock of
record to be entitled to such dividend, distributions,
redemption, rights or warrants are to be determined or (y) the
date on which such reclassification, consolidation, merger,
sale, transfer or share exchange is expected to become
effective or close, and the date as of which it is expected
that holders of the Common Stock of record shall be entitled
to exchange their shares of the Common Stock for securities,
cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange;
PROVIDED,
16
that the failure to mail such notice or any defect therein or
in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
Holders are entitled to convert Debentures during the 20-day
period commencing the date of such notice to the effective
date of the event triggering such notice.
SECTION 6. RESERVED.
SECTION 7. NEGATIVE COVENANTS. So long as any portion of this Debenture
is outstanding, the Company will not, directly or indirectly:
a) amend its certificate of incorporation, bylaws or other
charter documents so as to adversely affect any rights of the Holder;
b) except as permitted by Holders of a majority in principal
amount of all of the Debentures then outstanding, repay, repurchase or
offer to repay, repurchase or otherwise acquire more than a DE MINIMIS
number of shares of its Common Stock or other equity securities other
than as to the Conversion Shares to the extent permitted or required
under the Transaction Documents or as otherwise permitted by the
Transaction Documents; or
c) enter into any agreement with respect to any of the
foregoing.
SECTION 8. EVENTS OF DEFAULT.
a) "EVENT OF DEFAULT", wherever used herein, means any one of
the following events (whatever the reason and whether it shall be
voluntary or involuntary or effected by operation of law or pursuant to
any judgment, decree or order of any court, or any order, rule or
regulation of any administrative or governmental body):
i. any default in the payment of (A) the principal
amount of any Debenture, or (B) interest (including Late Fees)
on, or liquidated damages in respect of, any Debenture, in
each case free of any claim of subordination, as and when the
same shall become due and payable (whether on a Conversion
Date or the Maturity Date or by acceleration or otherwise)
which default, solely in the case of an interest payment or
other default under clause (B) above, is not cured, within 10
calendar days after notice of such default sent by the Holder
or by any other Holder;
ii. the Company shall materially fail to observe or
perform any other covenant or agreement contained in this
Debenture (other than a breach addressed separately under this
Section 8(a) as an Event of Default) which failure is not
cured, if possible to cure, within 25 calendar days after
notice of such default sent by the Holder or by any other
Holder;
17
iii. any representation or warranty made herein, in
any other Transaction Documents, in any written statement
pursuant hereto or thereto, or in any other report, financial
statement or certificate made or delivered to the Holder or
any other holder of Debentures shall be untrue or incorrect in
any material respect as of the date when made or deemed made;
iv. (i) the Company or any of its Subsidiaries
incorporated or organized outside of Mexico (each, a
"NON-MEXICO SUBSIDIARY") shall commence, or there shall be
commenced against the Company or any such Non-Mexico
Subsidiary, a case under any applicable bankruptcy or
insolvency laws as now or hereafter in effect or any successor
thereto, or the Company or any Non-Mexico Subsidiary commences
any other proceeding under any reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution, insolvency
or liquidation or similar law of any jurisdiction whether now
or hereafter in effect relating to the Company or any
Non-Mexico Subsidiary thereof or (ii) there is commenced
against the Company or any Non-Mexico Subsidiary thereof any
such bankruptcy, insolvency or other proceeding which remains
undismissed for a period of 60 days; or (iii) the Company or
any Non-Mexico Subsidiary thereof is adjudicated by a court of
competent jurisdiction insolvent or bankrupt; or any order of
relief or other order approving any such case or proceeding is
entered; or (iv) the Company or any Non-Mexico Subsidiary
thereof suffers any appointment of any custodian or the like
for it or any substantial part of its property which continues
undischarged or unstayed for a period of 60 days; or (v) the
Company or any Non-Mexico Subsidiary thereof makes a general
assignment for the benefit of creditors; or (vi) the Company
shall fail to pay, or shall state that it is unable to pay, or
shall be unable to pay, its debts generally as they become
due; or (vii) the Company or any Non-Mexico Subsidiary thereof
shall call a meeting of its creditors with a view to arranging
a composition, adjustment or restructuring of its debts; or
(viii) the Company or any Non-Mexico Subsidiary thereof shall
by any act or failure to act expressly indicate its consent
to, approval of or acquiescence in any of the foregoing; or
(ix) any corporate or other action is taken by the Company or
any Non-Mexico Subsidiary thereof for the purpose of effecting
any of the foregoing;
v. the Company or any Non-Mexico Subsidiary shall
default in any of its obligations under any mortgage, credit
agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued,
or by which there may be secured or evidenced any indebtedness
for borrowed money or money due under any long term leasing or
factoring arrangement of the Company in an amount exceeding
$_______________, whether such indebtedness now exists or
shall hereafter be created and such default shall result in
such indebtedness becoming or being declared due and payable
prior to the date on which it would otherwise become due and
payable;
18
vi. the Common Stock shall not be eligible for
quotation on or quoted for trading on a Trading Market and
shall not again be eligible for and quoted or listed for
trading thereon within five Trading Days;
vii. the Company shall be a party to any Change of
Control Transaction or shall agree to sell or dispose of all
or in excess of 45% of its assets in one or more transactions
(whether or not such sale would constitute a Change of Control
Transaction) or shall redeem or repurchase more than a de
minimis number of its outstanding shares of Common Stock or
other equity securities of the Company (other than to the
extent approved by Holders of a majority in principal amount
of all of the Debentures then outstanding, and other than
redemptions of Conversion Shares and repurchases of shares of
Common Stock or other equity securities of departing officers
and directors of the Company; provided such repurchases shall
not exceed $250,000, in the aggregate, for all officers and
directors during the term of this Debenture);
viii. a Registration Statement shall not have been
declared effective by the Commission on or prior to the 210th
calendar day after the Closing Date;
ix. if, during the Effectiveness Period (as defined
in the Registration Rights Agreement), the effectiveness of
the Registration Statement lapses for any reason or the Holder
shall not be permitted to resell Registrable Securities (as
defined in the Registration Rights Agreement) under the
Registration Statement, in either case, for more than 20
consecutive Trading Days or 25 non-consecutive Trading Days
during any 12 month period; PROVIDED, HOWEVER, that in the
event that the Company is negotiating a merger, consolidation,
acquisition or sale of all or substantially all of its assets
or a similar transaction and in the written opinion of counsel
to the Company, the Registration Statement, would be required
to be amended to include information concerning such
transactions or the parties thereto that is not available or
may not be publicly disclosed at the time, the Company shall
be permitted an additional 10 consecutive Trading Days during
any 12 month period relating to such an event; and
x. the Company shall fail for any reason to deliver
certificates to a Holder prior to the tenth Trading Day after
a Conversion Date pursuant to and in accordance with Section
4(d) or the Company shall provide notice to the Holder,
including by way of public announcement, at any time, of its
intention not to comply with requests for conversions of any
Debentures in accordance with the terms hereof. i.
b) REMEDIES UPON EVENT OF DEFAULT. If any Event of Default
occurs, the full principal amount of this Debenture, together with
interest and other amounts owing in respect thereof, to the date of
acceleration shall become, at the Holder's election delivered at any
time within 30 days of written notice by the Company or public
disclosure by the Company of the occurrence of such an Event of
Default, immediately
19
due and payable in cash. The aggregate amount payable upon an Event of
Default shall be equal to the Mandatory Prepayment Amount. Commencing 5
days after the occurrence of any Event of Default that results in the
eventual acceleration of this Debenture, the interest rate on this
Debenture shall accrue at the rate of 15% per annum, or such lower
maximum amount of interest permitted to be charged under applicable
law. All Debentures for which the full Mandatory Prepayment Amount
hereunder shall have been made in accordance herewith shall promptly be
surrendered to or as directed by the Company. The Holder need not
provide and the Company hereby waives any presentment, demand, protest
or other notice of any kind, and the Holder may immediately and without
expiration of any grace period enforce any and all of its rights and
remedies hereunder and all other remedies available to it under
applicable law. Such declaration may be rescinded and annulled by
Holder at any time prior to payment hereunder and the Holder shall have
all rights as a Debenture holder until such time, if any, as the full
payment under this Section shall have been received by it. No such
rescission or annulment shall affect any subsequent Event of Default or
impair any right consequent thereon.
SECTION 9. MISCELLANEOUS.
a) NOTICES. Any and all notices or other communications or
deliveries to be provided by the Holders hereunder, including, without
limitation, any Notice of Conversion, shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight
courier service, addressed to the Company, at the address set forth
above, facsimile number (▇▇▇) ▇▇▇-▇▇▇▇, ATTN: CHIEF FINANCIAL OFFICER
or such other address or facsimile number as the Company may specify
for such purposes by notice to the Holders delivered in accordance with
this Section. Any and all notices or other communications or deliveries
to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, sent by a nationally recognized
overnight courier service addressed to each Holder at the facsimile
telephone number or address of such Holder appearing on the books of
the Company, or if no such facsimile telephone number or address
appears, at the principal place of business of the Holder. Any notice
or other communication or deliveries hereunder shall be deemed given
and effective on the earliest of (i) the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 5:30 p.m. (New York
City time), (ii) the date after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section later than 5:30 p.m. (New
York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the second Business Day following the date of
mailing, if sent by nationally recognized overnight courier service, or
(iv) upon actual receipt by the party to whom such notice is required
to be given.
b) ABSOLUTE OBLIGATION. Except as expressly provided herein,
no provision of this Debenture shall alter or impair the obligation of
the Company, which is absolute and unconditional, to pay the principal
of, interest and liquidated damages (if any) on, this Debenture at the
time, place, and rate, and in the coin or currency, herein prescribed.
20
This Debenture is a direct debt obligation of the Company. This
Debenture ranks PARI PASSU with all other Debentures now or hereafter
issued under the terms set forth herein.
c) LOST OR MUTILATED DEBENTURE. If this Debenture shall be
mutilated, lost, stolen or destroyed, the Company shall execute and
deliver, in exchange and substitution for and upon cancellation of a
mutilated Debenture, or in lieu of or in substitution for a lost,
stolen or destroyed Debenture, a new Debenture for the principal amount
of this Debenture so mutilated, lost, stolen or destroyed but only upon
receipt of evidence of such loss, theft or destruction of such
Debenture, and of the ownership hereof, and indemnity, if requested,
all reasonably satisfactory to the Company.
d) GOVERNING LAW. All questions concerning the construction,
validity, enforcement and interpretation of this Debenture shall be
governed by and construed and enforced in accordance with the internal
laws of the State of New York, without regard to the principles of
conflicts of law thereof. Each party agrees that all legal proceedings
concerning the interpretations, enforcement and defense of the
transactions contemplated by any of the Transaction Documents (whether
brought against a party hereto or its respective affiliates, directors,
officers, shareholders, employees or agents) shall be commenced in the
state and federal courts sitting in the City of New York, Borough of
Manhattan (the "NEW YORK COURTS"). Each party hereto hereby irrevocably
submits to the exclusive jurisdiction of the New York Courts for the
adjudication of any dispute hereunder or in connection herewith or with
any transaction contemplated hereby or discussed herein (including with
respect to the enforcement of any of the Transaction Documents), and
hereby irrevocably waives, and agrees not to assert in any suit, action
or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, or such New York Courts are improper or
inconvenient venue for such proceeding. Each party hereby irrevocably
waives personal service of process and consents to process being served
in any such suit, action or proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it
under this Debenture and agrees that such service shall constitute good
and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. Each party hereto hereby irrevocably
waives, to the fullest extent permitted by applicable law, any and all
right to trial by jury in any legal proceeding arising out of or
relating to this Debenture or the transactions contemplated hereby. If
either party shall commence an action or proceeding to enforce any
provisions of this Debenture, then the prevailing party in such action
or proceeding shall be reimbursed by the other party for its attorneys
fees and other costs and expenses incurred with the investigation,
preparation and prosecution of such action or proceeding.
e) WAIVER. Any waiver by the Company or the Holder of a breach
of any provision of this Debenture shall not operate as or be construed
to be a waiver of any other breach of such provision or of any breach
of any other provision of this Debenture. The failure of the Company or
the Holder to insist upon strict adherence to any term of this
Debenture on one or more occasions shall not be considered a waiver or
deprive that
21
party of the right thereafter to insist upon strict adherence to that
term or any other term of this Debenture. Any waiver must be in
writing.
f) SEVERABILITY. If any provision of this Debenture is
invalid, illegal or unenforceable, the balance of this Debenture shall
remain in effect, and if any provision is inapplicable to any person or
circumstance, it shall nevertheless remain applicable to all other
persons and circumstances. If it shall be found that any interest or
other amount deemed interest due hereunder violates applicable laws
governing usury, the applicable rate of interest due hereunder shall
automatically be lowered to equal the maximum permitted rate of
interest. The Company covenants (to the extent that it may lawfully do
so) that it shall not at any time insist upon, plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay,
extension or usury law or other law which would prohibit or forgive the
Company from paying all or any portion of the principal of or interest
on this Debenture as contemplated herein, wherever enacted, now or at
any time hereafter in force, or which may affect the covenants or the
performance of this indenture, and the Company (to the extent it may
lawfully do so) hereby expressly waives all benefits or advantage of
any such law, and covenants that it will not, by resort to any such
law, hinder, delay or impeded the execution of any power herein granted
to the Holder, but will suffer and permit the execution of every such
as though no such law has been enacted.
g) NEXT BUSINESS DAY. Whenever any payment or other obligation
hereunder shall be due on a day other than a Business Day, such payment
shall be made on the next succeeding Business Day.
h) HEADINGS. The headings contained herein are for convenience
only, do not constitute a part of this Debenture and shall not be
deemed to limit or affect any of the provisions hereof.
i) SECURITY INTEREST. This Debenture is a direct debt
obligation of the Company and, pursuant to the Security Agreement is
secured by the collateral identified in the Security Agreement for the
benefit of the Holders.
*********************
22
IN WITNESS WHEREOF, the Company has caused this Debenture to be duly
executed by a duly authorized officer as of the date first above indicated.
TARRANT APPAREL GROUP
By:__________________________________________
Name:
Title:
23
ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal under the 6% Secured
Convertible Debenture of Tarrant Apparel Group, a California corporation (the
"COMPANY"), due on December __, 2007, into shares of common stock, no par value
per share (the "COMMON STOCK"), of the Company according to the conditions
hereof, as of the date written below. If shares are to be issued in the name of
a person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such certificates and
opinions as reasonably requested by the Company in accordance therewith. No fee
will be charged to the holder for any conversion, except for such transfer
taxes, if any.
By the delivery of this Notice of Conversion the undersigned represents
and warrants to the Company that its ownership of the Common Stock does not
exceed the amounts determined in accordance with Section 13(d) of the Exchange
Act, specified under Section 4 of this Debenture.
The undersigned agrees to comply with the prospectus delivery
requirements under the applicable securities laws in connection with any
transfer of the aforesaid shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:
Principal Amount of Debentures to be Converted:
Payment of Interest in Common Stock __ yes __ no
If yes, $_____ of Interest Accrued on
Account of Conversion at Issue.
Number of shares of Common Stock to
be issued:
Signature:
Name:
Address:
24
SCHEDULE 1
CONVERSION SCHEDULE
The 6% Secured Convertible Debentures due on December __, 2007, in the aggregate
principal amount of $____________ issued by Tarrant Apparel Group, a California
corporation. This Conversion Schedule reflects conversions made under Section 4
of the above referenced Debenture.
Dated:
Aggregate
Principal Amount
Remaining
Subsequent to
Date of Conversion Conversion
(or for first entry, Amount of (or original
Original Issue Date) Conversion Principal Amount) Company Attest
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EXHIBIT B
FORM OF REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "AGREEMENT") is made and
entered into as of December __, 2004, among Tarrant Apparel Group, a California
corporation (the "COMPANY"), and the purchasers signatory hereto (each such
purchaser is a "PURCHASER" and all such purchasers are, collectively, the
"PURCHASERS").
This Agreement is made pursuant to the Securities Purchase Agreement,
dated as of the date hereof among the Company and the Purchasers (the "PURCHASE
AGREEMENT").
The Company and the Purchasers hereby agree as follows:
1. DEFINITIONS
CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED HEREIN THAT ARE
DEFINED IN THE PURCHASE AGREEMENT SHALL HAVE THE MEANINGS GIVEN SUCH TERMS IN
THE PURCHASE AGREEMENT. As used in this Agreement, the following terms shall
have the following meanings:
"ADVICE" shall have the meaning set forth in Section 6(d).
"EFFECTIVENESS DATE" means, with respect to the initial
Registration Statement required to be filed hereunder, the 120th
calendar day following the date hereof and, with respect to any
additional Registration Statements which may be required pursuant to
Section 3(c), the 120th calendar day following the date on which the
Company first knows, or reasonably should have known, that such
additional Registration Statement is required hereunder; PROVIDED,
HOWEVER, if the Registration Statement is subject to review by the
Commission and the Company is unable using commercially reasonable
efforts to comply with Rule 3-12(b) of Regulation S-X, the
Effectiveness Date shall be the date ten (10) business days following
the date the Company files its Annual Report on Form 10-K for the year
ending December 31, 2004, but no later than April 14, 2005; PROVIDED,
FURTHER, in the event the Company is notified by the Commission that
one of the above Registration Statements will not be reviewed or is no
longer subject to further review and comments, the Effectiveness Date
as to such Registration Statement shall be the fifth Trading Day
following the date on which the Company is so notified if such date
precedes the dates required above.
"EFFECTIVENESS PERIOD" shall have the meaning set forth in
Section 2(a).
"EVENT" shall have the meaning set forth in Section 2(b).
"EVENT DATE" shall have the meaning set forth in Section 2(b).
"FILING DATE" means, with respect to the initial Registration
Statement required hereunder, the 30th calendar day following the date
hereof and, with respect to any
1
additional Registration Statements which may be required pursuant to
Section 3(c), the 30th day following the date on which the Company
first knows, or reasonably should have known that such additional
Registration Statement is required hereunder.
"HOLDER" or "HOLDERS" means the holder or holders, as the case
may be, from time to time of Registrable Securities.
"INDEMNIFIED PARTY" shall have the meaning set forth in
Section 5(c).
"INDEMNIFYING PARTY" shall have the meaning set forth in
Section 5(c).
"LOSSES" shall have the meaning set forth in Section 5(a).
"PLAN OF DISTRIBUTION" shall have the meaning set forth in
Section 2(a).
"PROCEEDING" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"PROSPECTUS" means the prospectus included in a Registration
Statement (including, without limitation, a prospectus that includes
any information previously omitted from a prospectus filed as part of
an effective registration statement in reliance upon Rule 430A
promulgated under the Securities Act), as amended or supplemented by
any prospectus supplement, with respect to the terms of the offering of
any portion of the Registrable Securities covered by a Registration
Statement, and all other amendments and supplements to the Prospectus,
including post-effective amendments, and all material incorporated by
reference or deemed to be incorporated by reference in such Prospectus.
"REGISTRABLE SECURITIES" means (i) all of the shares of Common
Stock issuable upon conversion in full of the Debentures, (ii) all
shares issuable as interest on the Debentures assuming all permissible
interest payments are made in shares of Common Stock and the Debentures
are held until maturity, (iii) all Warrant Shares, (iv) any securities
issued or issuable upon any stock split, dividend or other distribution
recapitalization or similar event with respect to the foregoing and (v)
any additional shares issuable in connection with any anti-dilution
provisions in the Debentures or the Warrants.
"REGISTRATION STATEMENT" means the registration statements
required to be filed hereunder and any additional registration
statements contemplated by Section 3(c), including (in each case) the
Prospectus, amendments and supplements to such registration statement
or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference or deemed
to be incorporated by reference in such registration statement.
"RULE 415" means Rule 415 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time
to time, or any similar rule or
2
regulation hereafter adopted by the Commission having substantially the
same purpose and effect as such Rule.
"RULE 424" means Rule 424 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time
to time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same purpose and effect as such
Rule.
"SELLING SHAREHOLDER QUESTIONNAIRE" shall have the meaning set
forth in Section 3(a).
2. SHELF REGISTRATION
(a) On or prior to each Filing Date, the Company shall prepare and file
with the Commission a "Shelf" Registration Statement covering the resale of 125%
of the portion of Registrable Securities included in clauses (i), (ii) and (iii)
of the definition thereof, calculated as of such Filing Date for an offering to
be made on a continuous basis pursuant to Rule 415. The Registration Statement
shall be on Form S-3 (except if the Company is not then eligible to register for
resale the Registrable Securities on Form S-3, in which case such registration
shall be on another appropriate form in accordance herewith) and shall contain
(unless otherwise directed by the Holders) substantially the "PLAN OF
DISTRIBUTION" attached hereto as ANNEX A. Subject to the terms of this
Agreement, the Company shall use its best efforts to cause the Registration
Statement to be declared effective under the Securities Act as promptly as
possible after the filing thereof, but in any event prior to the applicable
Effectiveness Date, and shall use its best efforts to keep such Registration
Statement continuously effective under the Securities Act until all Registrable
Securities covered by such Registration Statement have been sold or may be sold
without volume restrictions pursuant to Rule 144(k) as determined by the counsel
to the Company pursuant to a written opinion letter to such effect, addressed
and acceptable to the Company's transfer agent and the affected Holders (the
"EFFECTIVENESS PERIOD"). The Company shall immediately notify the Holders via
facsimile or email of the effectiveness of the Registration Statement on the
same day that the Company receives notification of the effectiveness from the
Commission. Failure to so notify the Holder by 9:00 p.m. EST on the same day
that the Company receives such notification shall be deemed an Event under
Section 2(b).
(b) If: (i) a Registration Statement is not filed on or prior to its
Filing Date (if the Company files a Registration Statement without affording the
Holders the opportunity to review and comment on the same as required by Section
3(a), the Company shall not be deemed to have satisfied this clause (i)), or
(ii) the Company fails to file with the Commission a request for acceleration in
accordance with Rule 461 promulgated under the Securities Act, within 5 Trading
Days of the date that the Company is notified (orally or in writing, whichever
is earlier) by the Commission that a Registration Statement will not be
"reviewed," or not subject to further review, or (iii) prior to its
Effectiveness Date, the Company fails to file a pre-effective amendment and
otherwise respond in writing to comments made by the Commission in respect of
such Registration Statement within 25 calendar days after the receipt of
comments by or notice from the Commission that such amendment is required in
order for a Registration
3
Statement to be declared effective, or (iv) a Registration Statement filed or
required to be filed hereunder is not declared effective by the Commission by
its Effectiveness Date, or (v) after the Effectiveness Date, a Registration
Statement ceases for any reason to remain continuously effective as to all
Registrable Securities for which it is required to be effective, or the Holders
are not permitted to utilize the Prospectus therein to resell such Registrable
Securities for 10 consecutive Trading Days but no more than an aggregate of 15
Trading Days during any 12-month period (which need not be consecutive Trading
Days) (any such failure or breach being referred to as an "EVENT", and for
purposes of clause (i) or (iv) the date on which such Event occurs, or for
purposes of clause (ii) the date on which such 5 Trading Day period is exceeded,
or for purposes of clause (iii) the date which such 25 calendar day period is
exceeded, or for purposes of clause (v) the date on which such 10 or 15 Trading
Day period, as applicable, is exceeded being referred to as "EVENT Date"), then
in addition to any other rights the Holders may have hereunder or under
applicable law, on each such Event Date and on each monthly anniversary of each
such Event Date (if the applicable Event shall not have been cured by such date)
until the applicable Event is cured, the Company shall pay to each Holder an
amount in cash, as partial liquidated damages and not as a penalty, equal to
1.0% of the aggregate purchase price paid by such Holder pursuant to the
Purchase Agreement for any Registrable Securities then held by such Holder. If
the Company fails to pay any partial liquidated damages pursuant to this Section
in full within seven days after the date payable, the Company will pay interest
thereon at a rate of 15% per annum (or such lesser maximum amount that is
permitted to be paid by applicable law) to the Holder, accruing daily from the
date such partial liquidated damages are due until such amounts, plus all such
interest thereon, are paid in full. The partial liquidated damages pursuant to
the terms hereof shall apply on a daily pro-rata basis for any portion of a
month prior to the cure of an Event.
3. REGISTRATION PROCEDURES
In connection with the Company's registration obligations hereunder,
the Company shall:
(a) Not less than three Trading Days prior to the filing of each
Registration Statement or any related Prospectus or any amendment or supplement
thereto, the Company shall, (i) furnish to each Holder copies of all such
documents proposed to be filed, which documents (other than those incorporated
or deemed to be incorporated by reference) will be subject to the review of such
Holders, and (ii) cause its officers and directors, counsel and independent
certified public accountants to respond to such inquiries as shall be necessary,
in the reasonable opinion of respective counsel to conduct a reasonable
investigation within the meaning of the Securities Act. The Company shall not
file the Registration Statement or any such Prospectus or any amendments or
supplements thereto to which the Holders of a majority of the Registrable
Securities shall reasonably object in good faith, provided that, the Company is
notified of such objection in writing no later than 2 Trading Days after the
Holders have been so furnished copies of such documents. Each Holder agrees to
furnish to the Company a completed Questionnaire in the form attached to this
Agreement as Annex B (a "SELLING SHAREHOLDER QUESTIONNAIRE") concurrently with
the execution and delivery of this Agreement.
4
(b) (i) Prepare and file with the Commission such amendments, including
post-effective amendments, to a Registration Statement and the Prospectus used
in connection therewith as may be necessary to keep a Registration Statement
continuously effective as to the applicable Registrable Securities for the
Effectiveness Period and prepare and file with the Commission such additional
Registration Statements in order to register for resale under the Securities Act
all of the Registrable Securities; (ii) cause the related Prospectus to be
amended or supplemented by any required Prospectus supplement (subject to the
terms of this Agreement), and as so supplemented or amended to be filed pursuant
to Rule 424; (iii) respond as promptly as reasonably possible to any comments
received from the Commission with respect to a Registration Statement or any
amendment thereto and as promptly as reasonably possible, upon request, provide
the Holders true and complete copies of all correspondence from and to the
Commission relating to a Registration Statement; and (iv) comply in all material
respects with the provisions of the Securities Act and the Exchange Act with
respect to the disposition of all Registrable Securities covered by a
Registration Statement during the applicable period in accordance (subject to
the terms of this Agreement) with the intended methods of disposition by the
Holders thereof set forth in such Registration Statement as so amended or in
such Prospectus as so supplemented.
(c) If during the Effectiveness Period, the number of Registrable
Securities at any time exceeds 90% of the number of shares of Common Stock then
registered in a Registration Statement, then the Company shall file as soon as
reasonably practicable but in any case prior to the applicable Filing Date, an
additional Registration Statement covering the resale by the Holders of not less
than 125% of the number of such Registrable Securities.
(d) Notify the Holders of Registrable Securities to be sold (which
notice shall, pursuant to clauses (ii) through (vi) hereof, be accompanied by an
instruction to suspend the use of the Prospectus until the requisite changes
have been made) as promptly as reasonably possible following the day (i)(A) when
a Prospectus or any Prospectus supplement or post-effective amendment to a
Registration Statement is proposed to be filed; (B) when the Commission notifies
the Company whether there will be a "review" of such Registration Statement and
whenever the Commission comments in writing on such Registration Statement (the
Company shall upon request provide true and complete copies thereof and all
written responses thereto to each of the Holders); and (C) with respect to a
Registration Statement or any post-effective amendment, when the same has become
effective; (ii) of any request by the Commission or any other Federal or state
governmental authority for amendments or supplements to a Registration Statement
or Prospectus or for additional information; (iii) of the issuance by the
Commission or any other federal or state governmental authority of any stop
order suspending the effectiveness of a Registration Statement covering any or
all of the Registrable Securities or the initiation of any Proceedings for that
purpose; (iv) of the receipt by the Company of any notification with respect to
the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction, or the initiation or
threatening of any Proceeding for such purpose; (v) of the occurrence of any
event or passage of time that makes the financial statements included in a
Registration Statement ineligible for inclusion therein or any statement made in
a Registration Statement or Prospectus or any document incorporated or deemed to
be incorporated therein by reference untrue in any material respect or that
requires any revisions to a Registration Statement, Prospectus or other
documents so that, in the case of a
5
Registration Statement or the Prospectus, as the case may be, it will not
contain any untrue statement of a material fact or omit to state any 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; and
(vi) the occurrence or existence of any pending corporate development with
respect to the Company that the Company believes may be material and that, in
the determination of the Company, makes it not in the best interest of the
Company to allow continued availability of the Registration Statement or
Prospectus; provided that any and all of such information shall remain
confidential to each Holder until such information otherwise becomes public,
unless disclosure by a Holder is required by law; PROVIDED, FURTHER,
notwithstanding each Holder's agreement to keep such information confidential,
the Holders make no acknowledgement that any such information is material,
non-public information.
(e) Use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of (i) any order suspending the effectiveness of a
Registration Statement, or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.
(f) Furnish to each Holder, without charge, to the extent requested by
such Holder, at least one conformed copy of each such Registration Statement and
each amendment thereto, including financial statements and schedules, all
documents incorporated or deemed to be incorporated therein by reference to the
extent requested by such Person, and all exhibits to the extent requested by
such Person (including those previously furnished or incorporated by reference).
(g) Promptly deliver to each Holder, without charge, as many copies of
the Prospectus or Prospectuses (including each form of prospectus) and each
amendment or supplement thereto as such Persons may reasonably request in
connection with resales by the Holder of Registrable Securities. Subject to the
terms of this Agreement, the Company hereby consents to the use of such
Prospectus and each amendment or supplement thereto by each of the selling
Holders in connection with the offering and sale of the Registrable Securities
covered by such Prospectus and any amendment or supplement thereto, except after
the giving on any notice pursuant to Section 3(d).
(h) Prior to any resale of Registrable Securities by a Holder, use its
commercially reasonable efforts to register or qualify or cooperate with the
selling Holders in connection with the registration or qualification (or
exemption from the Registration or qualification) of such Registrable Securities
for the resale by the Holder under the securities or Blue Sky laws of such
jurisdictions within the United States as any Holder reasonably requests in
writing, to keep each registration or qualification (or exemption therefrom)
effective during the Effectiveness Period and to do any and all other acts or
things reasonably necessary to enable the disposition in such jurisdictions of
the Registrable Securities covered by each Registration Statement; provided,
that the Company shall not be required to qualify generally to do business in
any jurisdiction where it is not then so qualified, subject the Company to any
material tax in any such jurisdiction where it is not then so subject or file a
general consent to service of process in any such jurisdiction.
6
(i) If requested by the Holders, cooperate with the Holders to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be delivered to a transferee pursuant to a
Registration Statement, which certificates shall be free, to the extent
permitted by the Purchase Agreement, of all restrictive legends, and to enable
such Registrable Securities to be in such denominations and registered in such
names as any such Holders may request.
(j) Upon the occurrence of any event contemplated by this Section 3, as
promptly as reasonably possible under the circumstances taking into account the
Company's good faith assessment of any adverse consequences to the Company and
its stockholders of the premature disclosure of such event, prepare a supplement
or amendment, including a post-effective amendment, to a Registration Statement
or a supplement to the related Prospectus or any document incorporated or deemed
to be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, neither a Registration Statement nor such
Prospectus will contain an untrue statement of a material fact or omit 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. If the Company notifies the Holders in accordance with clauses
(ii) through (v) of Section 3(d) above to suspend the use of any Prospectus
until the requisite changes to such Prospectus have been made, then the Holders
shall suspend use of such Prospectus. The Company will use its best efforts to
ensure that the use of the Prospectus may be resumed as promptly as is
practicable. The Company shall be entitled to exercise its right under this
Section 3(j) to suspend the availability of a Registration Statement and
Prospectus, subject to the payment of partial liquidated damages pursuant to
Section 2(b), for a period not to exceed 60 days (which need not be consecutive
days) in any 12 month period.
(k) Comply with all applicable rules and regulations of the Commission.
(l) The Company may require each selling Holder to furnish to the
Company a certified statement as to the number of shares of Common Stock
beneficially owned by such Holder and the person thereof that has voting and
dispositive control over the Registrable Securities. During any periods that the
Company is unable to meet its obligations hereunder with respect to the
registration of the Registrable Securities solely because any Holder fails to
furnish such information within three Trading Days of the Company's request, any
liquidated damages that are accruing at such time as to such Holder only shall
be tolled and any Event that may otherwise occur solely because of such delay
shall be suspended as to such Holder only, until such information is delivered
to the Company.
4. REGISTRATION EXPENSES. All fees and expenses incident to the
performance of or compliance with this Agreement by the Company shall be borne
by the Company whether or not any Registrable Securities are sold pursuant to
the Registration Statement. The fees and expenses referred to in the foregoing
sentence shall include, without limitation, (i) all registration and filing fees
(including, without limitation, fees and expenses (A) with respect to filings
required to be made with the Trading Market on which the Common Stock is then
listed for trading, (B) in compliance with applicable state securities or Blue
Sky laws reasonably agreed to by the Company in writing (including, without
limitation, fees and disbursements of counsel for the
7
Company in connection with Blue Sky qualifications or exemptions of the
Registrable Securities and determination of the eligibility of the Registrable
Securities for investment under the laws of such jurisdictions as requested by
the Holders) and (C) with respect to any filing that may be required to be made
by any broker through which a Holder intends to make sales of Registrable
Securities with NASD Regulation, Inc. pursuant to the NASD Rule 2710, so long as
the broker is receiving no more than a customary brokerage commission in
connection with such sale, (ii) printing expenses (including, without
limitation, expenses of printing certificates for Registrable Securities and of
printing prospectuses if the printing of prospectuses is reasonably requested by
the holders of a majority of the Registrable Securities included in a
Registration Statement), (iii) messenger, telephone and delivery expenses, (iv)
fees and disbursements of counsel for the Company, (v) Securities Act liability
insurance, if the Company so desires such insurance, and (vi) fees and expenses
of all other Persons retained by the Company in connection with the consummation
of the transactions contemplated by this Agreement. In addition, the Company
shall be responsible for all of its internal expenses incurred in connection
with the consummation of the transactions contemplated by this Agreement
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit and the fees and expenses incurred in connection with the listing of the
Registrable Securities on any securities exchange as required hereunder. In no
event shall the Company be responsible for any broker or similar commissions or,
except to the extent provided for in the Transaction Documents, any legal fees
or other costs of the Holders.
5. INDEMNIFICATION
(a) INDEMNIFICATION BY THE COMPANY. The Company shall, notwithstanding
any termination of this Agreement, indemnify and hold harmless each Holder, the
officers, directors, agents and employees of each of them, each Person who
controls any such Holder (within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act) and the officers, directors, agents and
employees of each such controlling Person, to the fullest extent permitted by
applicable law, from and against any and all losses, claims, damages,
liabilities, costs (including, without limitation, reasonable attorneys' fees)
and expenses (collectively, "LOSSES"), as incurred, arising out of or relating
to any untrue or alleged untrue statement of a material fact contained in a
Registration Statement, any Prospectus or any form of prospectus or in any
amendment or supplement thereto or in any preliminary prospectus, or arising out
of or relating to any omission or alleged omission of a material fact required
to be stated therein or necessary to make the statements therein (in the case of
any Prospectus or form of prospectus or supplement thereto, in light of the
circumstances under which they were made) not misleading, except to the extent,
but only to the extent, that (i) such untrue statements or omissions are based
solely upon information regarding such Holder furnished in writing to the
Company by such Holder expressly for use therein, or to the extent that such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in a Registration Statement, such
Prospectus or such form of Prospectus or in any amendment or supplement thereto
(it being understood that the Holder has approved Annex A hereto for this
purpose) or (ii) in the case of an occurrence of an event of the type specified
in Section 3(d)(ii)-(vi), the use by such Holder of an outdated or defective
Prospectus after the Company has notified such Holder in writing that the
Prospectus is outdated or defective and prior to the receipt by such Holder of
the Advice
8
contemplated in Section 6(d). The Company shall notify the Holders promptly of
the institution, threat or assertion of any Proceeding arising from or in
connection with the transactions contemplated by this Agreement of which the
Company is aware.
(b) INDEMNIFICATION BY HOLDERS. Each Holder shall, severally and not
jointly, indemnify and hold harmless the Company, its directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses, as
incurred, to the extent arising out of or based solely upon: (x) such Holder's
failure to comply with the prospectus delivery requirements of the Securities
Act or (y) any untrue or alleged untrue statement of a material fact contained
in any Registration Statement, any Prospectus, or any form of prospectus, or in
any amendment or supplement thereto or in any preliminary prospectus, or arising
out of or relating to any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading (i) to the extent, but only to the extent, that such untrue statement
or omission is contained in any information so furnished in writing by such
Holder to the Company specifically for inclusion in such Registration Statement
or such Prospectus or (ii) to the extent that (1) such untrue statements or
omissions are based solely upon information regarding such Holder furnished in
writing to the Company by such Holder expressly for use therein, or to the
extent that such information relates to such Holder or such Holder's proposed
method of distribution of Registrable Securities and was reviewed and expressly
approved in writing by such Holder expressly for use in the Registration
Statement (it being understood that the Holder has approved Annex A hereto for
this purpose), such Prospectus or such form of Prospectus or in any amendment or
supplement thereto or (2) in the case of an occurrence of an event of the type
specified in Section 3(d)(ii)-(vi), the use by such Holder of an outdated or
defective Prospectus after the Company has notified such Holder in writing that
the Prospectus is outdated or defective and prior to the receipt by such Holder
of the Advice contemplated in Section 6(d). In no event shall the liability of
any selling Holder hereunder be greater in amount than the dollar amount of the
net proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any Proceeding shall be
brought or asserted against any Person entitled to indemnity hereunder (an
"INDEMNIFIED PARTY"), such Indemnified Party shall promptly notify the Person
from whom indemnity is sought (the "INDEMNIFYING PARTY") in writing, and the
Indemnifying Party shall have the right to assume the defense thereof, including
the employment of counsel reasonably satisfactory to the Indemnified Party and
the payment of all fees and expenses incurred in connection with defense
thereof; provided, that the failure of any Indemnified Party to give such notice
shall not relieve the Indemnifying Party of its obligations or liabilities
pursuant to this Agreement, except (and only) to the extent that it shall be
finally determined by a court of competent jurisdiction (which determination is
not subject to appeal or further review) that such failure shall have prejudiced
the Indemnifying Party.
An Indemnified Party shall have the right to employ separate counsel in
any such Proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel
9
shall be at the expense of such Indemnified Party or Parties unless: (1) the
Indemnifying Party has agreed in writing to pay such fees and expenses; (2) the
Indemnifying Party shall have failed promptly to assume the defense of such
Proceeding and to employ counsel reasonably satisfactory to such Indemnified
Party in any such Proceeding; or (3) the named parties to any such Proceeding
(including any impleaded parties) include both such Indemnified Party and the
Indemnifying Party, and such Indemnified Party shall reasonably believe that a
material conflict of interest is likely to exist if the same counsel were to
represent such Indemnified Party and the Indemnifying Party (in which case, if
such Indemnified Party notifies the Indemnifying Party in writing that it elects
to employ separate counsel at the expense of the Indemnifying Party, the
Indemnifying Party shall not have the right to assume the defense thereof and
the reasonable fees and expenses of one separate counsel shall be at the expense
of the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party from
all liability on claims that are the subject matter of such Proceeding.
Subject to the terms of this Agreement, all reasonable fees and
expenses of the Indemnified Party (including reasonable fees and expenses to the
extent incurred in connection with investigating or preparing to defend such
Proceeding in a manner not inconsistent with this Section) shall be paid to the
Indemnified Party, as incurred, within ten Trading Days of written notice
thereof to the Indemnifying Party; provided, that the Indemnified Party shall
promptly reimburse the Indemnifying Party for that portion of such fees and
expenses applicable to such actions for which such Indemnified Party is not
entitled to indemnification hereunder, determined based upon the relative faults
of the parties.
(d) CONTRIBUTION. If a claim for indemnification under Section 5(a) or
5(b) is unavailable to an Indemnified Party (by reason of public policy or
otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in this Agreement, any reasonable attorneys' or
other reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the indemnification provided for in this Section was available to
such party in accordance with its terms.
10
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 5(d), no Holder shall be required
to contribute, in the aggregate, any amount in excess of the amount by which the
proceeds actually received by such Holder from the sale of the Registrable
Securities subject to the Proceeding exceeds the amount of any damages that such
Holder has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission, except in the case of fraud by
such Holder.
The indemnity and contribution agreements contained in this Section are
in addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties.
6. MISCELLANEOUS
(a) REMEDIES. In the event of a breach by the Company or by a Holder,
of any of their obligations under this Agreement, each Holder or the Company, as
the case may be, in addition to being entitled to exercise all rights granted by
law and under this Agreement, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. The Company and each
Holder agree that monetary damages would not provide adequate compensation for
any losses incurred by reason of a breach by it of any of the provisions of this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall waive the defense that
a remedy at law would be adequate.
(b) NO PIGGYBACK ON REGISTRATIONS. Except as set forth on SCHEDULE 6(B)
attached hereto, neither the Company nor any of its security holders (other than
the Holders in such capacity pursuant hereto) may include securities of the
Company in the Registration Statement other than the Registrable Securities. The
Company shall not file any other registration statements until the initial
Registration Statement required hereunder is declared effective by the
Commission, provided that this Section 6(b) shall not prohibit the Company from
filing amendments to registration statements already filed.
(c) COMPLIANCE. Each Holder covenants and agrees that it will comply
with the prospectus delivery requirements of the Securities Act as applicable to
it in connection with sales of Registrable Securities pursuant to the
Registration Statement.
(d) DISCONTINUED DISPOSITION. Each Holder agrees by its acquisition of
such Registrable Securities that, upon receipt of a notice from the Company of
the occurrence of any event of the kind described in Section 3(d), such Holder
will forthwith discontinue disposition of such Registrable Securities under a
Registration Statement until such Holder's receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement, or until it is
advised in writing (the "ADVICE") by the Company that the use of the applicable
Prospectus may be resumed, and, in either case, has received copies of any
additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement. The
Company will use its best efforts to ensure that the use of the Prospectus may
be
11
resumed as promptly as it practicable. The Company agrees and acknowledges that
any periods during which the Holder is required to discontinue the disposition
of the Registrable Securities hereunder shall be subject to the provisions of
Section 2(b).
(e) PIGGY-BACK REGISTRATIONS. If at any time during the Effectiveness
Period there is not an effective Registration Statement covering all of the
Registrable Securities and the Company shall determine to prepare and file with
the Commission a registration statement relating to an offering for its own
account or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with the stock option or other employee
benefit plans, then the Company shall send to each Holder a written notice of
such determination and, if within fifteen days after the date of such notice,
any such Holder shall so request in writing, the Company shall include in such
registration statement all or any part of such Registrable Securities such
holder requests to be registered; provided, that, the Company shall not be
required to register any Registrable Securities pursuant to this Section 6(e)
that are eligible for resale pursuant to Rule 144(k) promulgated under the
Securities Act or that are the subject of a then effective Registration
Statement.
(f) AMENDMENTS AND WAIVERS. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given, unless the same shall be in writing and signed by the Company and each
Holder of the then outstanding Registrable Securities. Notwithstanding the
foregoing, a waiver or consent to depart from the provisions hereof with respect
to a matter that relates exclusively to the rights of Holders and that does not
directly or indirectly affect the rights of other Holders may be given by
Holders of all of the Registrable Securities to which such waiver or consent
relates; PROVIDED, HOWEVER, that the provisions of this sentence may not be
amended, modified, or supplemented except in accordance with the provisions of
the immediately preceding sentence.
(g) NOTICES. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be delivered as set forth
in the Purchase Agreement.
(h) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of and be binding upon the successors and permitted assigns of each of the
parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
all of the Holders of the then-outstanding Registrable Securities. Each Holder
may assign their respective rights hereunder in the manner and to the Persons as
permitted under the Purchase Agreement.
(i) NO INCONSISTENT AGREEMENTS. Neither the Company nor any of its
subsidiaries has entered, as of the date hereof, nor shall the Company or any of
its subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities, that would have the effect of
impairing the rights granted to the Holders in this Agreement or otherwise
conflicts with the provisions hereof. Except as set forth on SCHEDULE 6(i),
neither the Company nor any of
12
its subsidiaries has previously entered into any agreement granting any
registration rights with respect to any of its securities to any Person that
have not been satisfied in full and are not included in an existing, effective
registration statement.
(j) EXECUTION AND COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile signature were the original
thereof.
(k) GOVERNING LAW. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be determined with the
provisions of the Purchase Agreement.
(l) CUMULATIVE REMEDIES. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law.
(m) SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their commercially reasonable efforts to find and employ an
alternative means to achieve the same or substantially the same result as that
contemplated by such term, provision, covenant or restriction. It is hereby
stipulated and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any of such that may be hereafter declared invalid, illegal, void or
unenforceable.
(n) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(o) INDEPENDENT NATURE OF HOLDERS' OBLIGATIONS AND RIGHTS. The
obligations of each Holder hereunder are several and not joint with the
obligations of any other Holder hereunder, and no Holder shall be responsible in
any way for the performance of the obligations of any other Holder hereunder.
Nothing contained herein or in any other agreement or document delivered at any
closing, and no action taken by any Holder pursuant hereto or thereto, shall be
deemed to constitute the Holders as a partnership, an association, a joint
venture or any other kind of entity, or create a presumption that the Holders
are in any way acting in concert with respect to such obligations or the
transactions contemplated by this Agreement. Each Holder shall be entitled to
protect and enforce its rights, including without limitation the rights arising
out of this Agreement, and it shall not be necessary for any other Holder to be
joined as an additional party in any proceeding for such purpose.
********************
13
IN WITNESS WHEREOF, the parties have executed this Registration
Rights Agreement as of the date first written above.
TARRANT APPAREL GROUP
By: ____________________________________
Name:
Title:
[SIGNATURE PAGE OF HOLDERS FOLLOWS]
14
[SIGNATURE PAGE OF HOLDERS TO TAGS Registration RIGHTS AGREEMENT]
Name of Investing Entity: __________________________
SIGNATURE OF AUTHORIZED SIGNATORY OF INVESTING ENTITY: _________________________
Name of Authorized Signatory: _________________________
Title of Authorized Signatory: __________________________
[SIGNATURE PAGES CONTINUE]
15
PLAN OF DISTRIBUTION
Each Selling Stockholder (the "SELLING STOCKHOLDERS") of the common
stock ("COMMON STOCK") of Tarrant Apparel Group, a California corporation (the
"COMPANY") and any of their pledgees, assignees and successors-in-interest may,
from time to time, sell any or all of their shares of Common Stock on the
Trading Market or any other stock exchange, market or trading facility on which
the shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. A Selling Stockholder may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales entered into after the date of this
prospectus;
o broker-dealers may agree with the Selling Stockholders to sell
a specified number of such shares at a stipulated price per
share;
o a combination of any such methods of sale;
o through the writing or settlement of options or other hedging
transactions, whether through an options exchange or
otherwise; or
o any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), if available, rather
than under this prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for
other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the Selling Stockholders (or, if any broker-dealer
acts as agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. Each Selling Stockholder does not expect these commissions and
discounts relating to its sales of shares to exceed what is customary in the
types of transactions involved.
In connection with the sale of our common stock or interests therein,
the Selling Stockholders may enter into hedging transactions with broker-dealers
or other financial
16
institutions, which may in turn engage in short sales of the common stock in the
course of hedging the positions they assume. The Selling Stockholders may also
sell shares of our common stock short and deliver these securities to close out
their short positions, or loan or pledge the common stock to broker-dealers that
in turn may sell these securities. The Selling Stockholders may also enter into
option or other transactions with broker-dealers or other financial institutions
or the creation of one or more derivative securities which require the delivery
to such broker-dealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as supplemented or amended to reflect such
transaction).
The Selling Stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Each Selling Stockholder has
informed the Company that it does not have any agreement or understanding,
directly or indirectly, with any person to distribute the Common Stock.
The Company is required to pay certain fees and expenses incurred by
the Company incident to the registration of the shares. The Company has agreed
to indemnify the Selling Stockholders against certain losses, claims, damages
and liabilities, including liabilities under the Securities Act.
Because Selling Stockholders may be deemed to be "underwriters" within
the meaning of the Securities Act, they will be subject to the prospectus
delivery requirements of the Securities Act. In addition, any securities covered
by this prospectus which qualify for sale pursuant to Rule 144 under the
Securities Act may be sold under Rule 144 rather than under this prospectus.
Each Selling Stockholder has advised us that they have not entered into any
agreements, understandings or arrangements with any underwriter or broker-dealer
regarding the sale of the resale shares. There is no underwriter or coordinating
broker acting in connection with the proposed sale of the resale shares by the
Selling Stockholders.
We agreed to keep this prospectus effective until the earlier of (i)
the date on which the shares may be resold by the Selling Stockholders without
registration and without regard to any volume limitations by reason of Rule
144(e) under the Securities Act or any other rule of similar effect or (ii) all
of the shares have been sold pursuant to the prospectus or Rule 144 under the
Securities Act or any other rule of similar effect. The resale shares will be
sold only through registered or licensed brokers or dealers if required under
applicable state securities laws. In addition, in certain states, the resale
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the resale shares may not simultaneously
engage in market making activities with respect to our common stock for a period
of two business days prior to the commencement of the distribution. In addition,
the Selling Stockholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including Regulation M,
which may limit the timing of purchases and sales of shares of our common stock
by the Selling Stockholders or any other person. We will make copies of this
prospectus available to the Selling Stockholders and have informed them of the
need to deliver a copy of this prospectus to each purchaser at or prior to the
time of the sale.
17
ANNEX B
TARRANT APPAREL GROUP
SELLING SECURITYHOLDER NOTICE AND QUESTIONNAIRE
The undersigned beneficial owner of common stock, no par value per
share (the "COMMON STOCK"), of Tarrant Apparel Group, a California corporation
(the "COMPANY"), (the "REGISTRABLE SECURITIES") understands that the Company has
filed or intends to file with the Securities and Exchange Commission (the
"COMMISSION") a registration statement on Form S-3 (the "REGISTRATION
STATEMENT") for the registration and resale under Rule 415 of the Securities Act
of 1933, as amended (the "SECURITIES ACT"), of the Registrable Securities, in
accordance with the terms of the Registration Rights Agreement, dated as of
December ___, 2004 (the "REGISTRATION RIGHTS AGREEMENT"), among the Company and
the Purchasers named therein. A copy of the Registration Rights Agreement is
available from the Company upon request at the address set forth below. All
capitalized terms not otherwise defined herein shall have the meanings ascribed
thereto in the Registration Rights Agreement.
Certain legal consequences arise from being named as a selling
securityholder in the Registration Statement and the related prospectus.
Accordingly, holders and beneficial owners of Registrable Securities are advised
to consult their own securities law counsel regarding the consequences of being
named or not being named as a selling securityholder in the Registration
Statement and the related prospectus.
NOTICE
The undersigned beneficial owner (the "SELLING SECURITYHOLDER") of
Registrable Securities hereby elects to include the Registrable Securities owned
by it and listed below in Item 3 (unless otherwise specified under such Item 3)
in the Registration Statement.
18
The undersigned hereby provides the following information to the Company and
represents and warrants that such information is accurate:
QUESTIONNAIRE
1. NAME.
(a) Full Legal Name of Selling Securityholder
--------------------------------------------------------------
(b) Full Legal Name of Registered Holder (if not the same as (a)
above) through which Registrable Securities Listed in Item 3
below are held:
--------------------------------------------------------------
(c) Full Legal Name of Natural Control Person (which means a
natural person who directly you indirectly alone or with
others has power to vote or dispose of the securities covered
by the questionnaire):
--------------------------------------------------------------
2. ADDRESS FOR NOTICES TO SELLING SECURITYHOLDER:
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Telephone:
----------------------------------------------------------------------
Fax:
---------------------------------------------------------------------------
Contact Person:
----------------------------------------------------------------
3. BENEFICIAL OWNERSHIP OF REGISTRABLE SECURITIES:
(a) Type and Principal Amount of Registrable Securities
beneficially owned:
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
19
4. BROKER-DEALER STATUS:
(a) Are you a broker-dealer?
Yes [_] No [_]
Note: If yes, the Commission's staff has indicated that you should
be identified as an underwriter in the Registration Statement.
(b) Are you an affiliate of a broker-dealer?
Yes [_] No [_]
(c) If you are an affiliate of a broker-dealer, do you certify
that you bought the Registrable Securities in the ordinary
course of business, and at the time of the purchase of the
Registrable Securities to be resold, you had no agreements or
understandings, directly or indirectly, with any person to
distribute the Registrable Securities?
Yes [_] No [_]
Note: If no, the Commission's staff has indicated that you should
be identified as an underwriter in the Registration Statement.
5. BENEFICIAL OWNERSHIP OF OTHER SECURITIES OF THE COMPANY OWNED BY THE
SELLING SECURITYHOLDER.
EXCEPT AS SET FORTH BELOW IN THIS ITEM 5, THE UNDERSIGNED IS NOT THE
BENEFICIAL OR REGISTERED OWNER OF ANY SECURITIES OF THE COMPANY OTHER
THAN THE REGISTRABLE SECURITIES LISTED ABOVE IN ITEM 3.
(a) Type and Amount of Other Securities beneficially owned by the
Selling Securityholder:
--------------------------------------------------------------
--------------------------------------------------------------
20
6. RELATIONSHIPS WITH THE COMPANY:
EXCEPT AS SET FORTH BELOW, NEITHER THE UNDERSIGNED NOR ANY OF ITS
AFFILIATES, OFFICERS, DIRECTORS OR PRINCIPAL EQUITY HOLDERS (OWNERS OF
5% OF MORE OF THE EQUITY SECURITIES OF THE UNDERSIGNED) HAS HELD ANY
POSITION OR OFFICE OR HAS HAD ANY OTHER MATERIAL RELATIONSHIP WITH THE
COMPANY (OR ITS PREDECESSORS OR AFFILIATES) DURING THE PAST THREE
YEARS.
State any exceptions here:
-----------------------------------------------------------------------
-----------------------------------------------------------------------
The undersigned agrees to promptly notify the Company of any
inaccuracies or changes in the information provided herein that may occur
subsequent to the date hereof at any time while the Registration Statement
remains effective.
By signing below, the undersigned consents to the disclosure of the
information contained herein in its answers to Items 1 through 6 and the
inclusion of such information in the Registration Statement and the related
prospectus. The undersigned understands that such information will be relied
upon by the Company in connection with the preparation or amendment of the
Registration Statement and the related prospectus.
IN WITNESS WHEREOF the undersigned, by authority duly given, has caused
this Notice and Questionnaire to be executed and delivered either in person or
by its duly authorized agent.
Dated: Beneficial Owner:
------------------- ---------------------------
By:
----------------------------------------
Name:
Title:
PLEASE FAX A COPY OF THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE, AND
RETURN THE ORIGINAL BY OVERNIGHT MAIL, TO:
21
EXHIBIT C
FORM OF WARRANT
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.
COMMON STOCK PURCHASE WARRANT
To Purchase __________ Shares of Common Stock of
TARRANT APPAREL GROUP
THIS COMMON STOCK PURCHASE WARRANT (the "WARRANT") certifies
that, for value received, _____________ (the "HOLDER"), is entitled, upon the
terms and subject to the limitations on exercise and the conditions hereinafter
set forth, at any time on or after June __, 2005 (the "INITIAL EXERCISE DATE")
and on or prior to the close of business on the five year anniversary of the
Initial Exercise Date (the "TERMINATION DATE") but not thereafter, to subscribe
for and purchase from Tarrant Apparel Group, a California corporation (the
"COMPANY"), up to ______ shares (the "WARRANT SHARES") of Common Stock, no par
value per share, of the Company (the "COMMON STOCK"). The purchase price of one
share of Common Stock under this Warrant shall be equal to the Exercise Price,
as defined in Section 2(b).
SECTION 1. DEFINITIONS. Capitalized terms used and not otherwise
defined herein shall have the meanings set forth in that certain Securities
Purchase Agreement (the "PURCHASE AGREEMENT"), dated December 6, 2004, among the
Company and the purchasers signatory thereto.
SECTION 2. EXERCISE.
a) EXERCISE OF WARRANT. Exercise of the purchase rights
represented by this Warrant may be made at any time or times on or
after the Initial Exercise Date and on or before the Termination Date
by delivery to the Company of a duly executed facsimile copy of the
Notice of Exercise Form annexed hereto (or such other office or agency
of
1
the Company as it may designate by notice in writing to the registered
Holder at the address of such Holder appearing on the books of the
Company); PROVIDED, HOWEVER, within 5 Trading Days of the date said
Notice of Exercise is delivered to the Company, the Holder shall have
surrendered this Warrant to the Company and the Company shall have
received payment of the aggregate Exercise Price of the shares thereby
purchased by wire transfer or cashier's check drawn on a United States
bank.
b) EXERCISE PRICE. The exercise price of the Common Stock
under this Warrant shall be $2.50, subject to adjustment hereunder (the
"EXERCISE PRICE").
c) CASHLESS EXERCISE. If at any time after one year from the
date of issuance of this Warrant there is no effective Registration
Statement registering the resale of the Warrant Shares by the Holder,
then this Warrant may also be exercised at such time by means of a
"cashless exercise" in which the Holder shall be entitled to receive a
certificate for the number of Warrant Shares equal to the quotient
obtained by dividing [(A-B) (X)] by (A), where:
(A) = the VWAP on the Trading Day immediately preceding the
date of such election;
(B) = the Exercise Price of this Warrant, as adjusted; and
(X) = the number of Warrant Shares issuable upon exercise
of this Warrant in accordance with the terms of this
Warrant by means of a cash exercise rather than a
cashless exercise.
Notwithstanding anything herein to the contrary, on the
Termination Date, this Warrant shall be automatically exercised via
cashless exercise pursuant to this Section 2(c).
d) EXERCISE LIMITATIONS.
i. HOLDER'S RESTRICTIONS. The Holder shall not have
the right to exercise any portion of this Warrant, pursuant to
Section 2(c) or otherwise, to the extent that after giving
effect to such issuance after exercise, the Holder (together
with the Holder's affiliates), as set forth on the applicable
Notice of Exercise, would beneficially own in excess of 4.99%
of the number of shares of the Common Stock outstanding
immediately after giving effect to such issuance. For purposes
of the foregoing sentence, the number of shares of Common
Stock beneficially owned by the Holder and its affiliates
shall include the number of shares of Common Stock issuable
upon exercise of this Warrant with respect to which the
determination of such sentence is being made, but shall
exclude the number of shares of Common Stock which would be
issuable upon (A) exercise of the remaining, nonexercised
portion of this Warrant beneficially owned by the Holder or
any of its affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of
the
2
Company (including, without limitation, any other Debentures
or Warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially
owned by the Holder or any of its affiliates. Except as set
forth in the preceding sentence, for purposes of this Section
2(d)(i), beneficial ownership shall be calculated in
accordance with Section 13(d) of the Exchange Act, it being
acknowledged by Holder that the Company is not representing to
Holder that such calculation is in compliance with Section
13(d) of the Exchange Act and Holder is solely responsible for
any schedules required to be filed in accordance therewith. To
the extent that the limitation contained in this Section
2(d)(i) applies, the determination of whether this Warrant is
exercisable (in relation to other securities owned by the
Holder) and of which a portion of this Warrant is exercisable
shall be in the sole discretion of such Holder, and the
submission of a Notice of Exercise shall be deemed to be such
Holder's determination of whether this Warrant is exercisable
(in relation to other securities owned by such Holder) and of
which portion of this Warrant is exercisable, in each case
subject to such aggregate percentage limitation, and the
Company shall have no obligation to verify or confirm the
accuracy of such determination. For purposes of this Section
2(d)(i), in determining the number of outstanding shares of
Common Stock, the Holder may rely on the number of outstanding
shares of Common Stock as reflected in (x) the Company's most
recent Form 10-Q or Form 10-K, as the case may be, (y) a more
recent public announcement by the Company or (z) any other
notice by the Company or the Company's Transfer Agent setting
forth the number of shares of Common Stock outstanding. Upon
the written or oral request of the Holder, the Company shall
within two Trading Days confirm orally and in writing to the
Holder the number of shares of Common Stock then outstanding.
In any case, the number of outstanding shares of Common Stock
shall be determined after giving effect to the conversion or
exercise of securities of the Company, including this Warrant,
by the Holder or its affiliates since the date as of which
such number of outstanding shares of Common Stock was
reported. The provisions of this Section 2(d)(i) may be waived
by the Holder upon, at the election of the Holder, not less
than 61 days' prior notice to the Company, and the provisions
of this Section 2(d)(i) shall continue to apply until such
61st day (or such later date, as determined by the Holder, as
may be specified in such notice of waiver).
ii. [INTENTIONALLY DELETED]
e) MECHANICS OF EXERCISE.
i. AUTHORIZATION OF WARRANT SHARES. The Company
covenants that all Warrant Shares which may be issued upon the
exercise of the purchase rights represented by this Warrant
will, upon exercise of the purchase rights represented by this
Warrant, be duly authorized, validly issued, fully paid and
nonassessable and free from all taxes, liens and
3
charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such
issue).
ii. DELIVERY OF CERTIFICATES UPON EXERCISE.
Certificates for shares purchased hereunder shall be
transmitted by the transfer agent of the Company to the Holder
by crediting the account of the Holder's prime broker with the
Depository Trust Company through its Deposit Withdrawal Agent
Commission ("DWAC") system if the Company is a participant in
such system, and otherwise by physical delivery to the address
specified by the Holder in the Notice of Exercise within 3
Trading Days from the delivery to the Company of the Notice of
Exercise Form, surrender of this Warrant and payment of the
aggregate Exercise Price as set forth above ("WARRANT SHARE
DELIVERY DATE"). This Warrant shall be deemed to have been
exercised on the date the Exercise Price is received by the
Company. The Warrant Shares shall be deemed to have been
issued, and Holder or any other person so designated to be
named therein shall be deemed to have become a holder of
record of such shares for all purposes, as of the date the
Warrant has been exercised by payment to the Company of the
Exercise Price and all taxes required to be paid by the
Holder, if any, pursuant to Section 2(e)(vii) prior to the
issuance of such shares, have been paid.
iii. DELIVERY OF NEW WARRANTS UPON EXERCISE. If this
Warrant shall have been exercised in part, the Company shall,
at the time of delivery of the certificate or certificates
representing Warrant Shares, deliver to Holder a new Warrant
evidencing the rights of Holder to purchase the unpurchased
Warrant Shares called for by this Warrant, which new Warrant
shall in all other respects be identical with this Warrant.
iv. RESCISSION RIGHTS. If the Company fails to cause
its transfer agent to transmit to the Holder a certificate or
certificates representing the Warrant Shares pursuant to this
Section 2(e)(iv) by the Warrant Share Delivery Date, then the
Holder shall be entitled, by written notice to the Company at
any time on or before the Holder's receipt of such certificate
or certificates, to rescind such exercise.
v. COMPENSATION FOR BUY-IN ON FAILURE TO TIMELY
DELIVER CERTIFICATES UPON EXERCISE. In addition to any other
rights available to the Holder, if the Company fails to cause
its transfer agent to transmit to the Holder a certificate or
certificates representing the Warrant Shares pursuant to an
exercise on or before the fourth Trading Day following the
Warrant Share Delivery Date, and if after such date the Holder
is required by its broker to purchase (in an open market
transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by the Holder of the Warrant Shares
which the Holder anticipated receiving upon such exercise (a
"BUY-IN"), then the Company shall (1) pay in cash to the
4
Holder the amount by which (x) the Holder's total purchase
price (including brokerage commissions, if any) for the shares
of Common Stock so purchased exceeds (y) the amount obtained
by multiplying (A) the number of Warrant Shares that the
Company was required to deliver to the Holder in connection
with the exercise at issue times (B) the price at which the
sell order giving rise to such purchase obligation was
executed, and (2) at the option of the Holder, either
reinstate the portion of the Warrant and equivalent number of
Warrant Shares for which such exercise was not honored or
deliver to the Holder the number of shares of Common Stock
that would have been issued had the Company timely complied
with its exercise and delivery obligations hereunder. For
example, if the Holder purchases Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to an
attempted exercise of shares of Common Stock with an aggregate
sale price giving rise to such purchase obligation of $10,000,
under clause (1) of the immediately preceding sentence the
Company shall be required to pay the Holder $1,000. The Holder
shall provide the Company written notice indicating the
amounts payable to the Holder in respect of the Buy-In,
together with applicable confirmations and other evidence
reasonably requested by the Company. Nothing herein shall
limit a Holder's right to pursue any other remedies available
to it hereunder, at law or in equity including, without
limitation, a decree of specific performance and/or injunctive
relief with respect to the Company's failure to timely deliver
certificates representing shares of Common Stock upon exercise
of the Warrant as required pursuant to the terms hereof.
vi. NO FRACTIONAL SHARES OR SCRIP. No fractional
shares or scrip representing fractional shares shall be issued
upon the exercise of this Warrant. As to any fraction of a
share which Holder would otherwise be entitled to purchase
upon such exercise, the Company shall pay a cash adjustment in
respect of such final fraction in an amount equal to such
fraction multiplied by the Exercise Price.
vii. CHARGES, TAXES AND EXPENSES. Issuance of
certificates for Warrant Shares shall be made without charge
to the Holder for any issue or transfer tax or other
incidental expense in respect of the issuance of such
certificate, all of which taxes and expenses shall be paid by
the Company, and such certificates shall be issued in the name
of the Holder or in such name or names as may be directed by
the Holder; PROVIDED, HOWEVER, that in the event certificates
for Warrant Shares are to be issued in a name other than the
name of the Holder, this Warrant when surrendered for exercise
shall be accompanied by the Assignment Form attached hereto
duly executed by the Holder; and the Company may require, as a
condition thereto, the payment of a sum sufficient to
reimburse it for any transfer tax incidental thereto.
5
viii. CLOSING OF BOOKS. The Company will not close
its stockholder books or records in any manner which prevents
the timely exercise of this Warrant, pursuant to the terms
hereof.
f) CALL PROVISION. Subject to the provisions of this Section 2(f), if
after the 12 month anniversary of the date of the Purchase Agreement, (i) the
VWAP for each of 20 consecutive Trading Days (the "MEASUREMENT PERIOD", which
period shall not have commenced until after the Effective Date) exceeds $4.00
(the "THRESHOLD PRICE") and (ii) the average daily trading volume for the
Threshold Period exceeds 100,000 shares (both adjusted for any stock splits,
reverse splits and the like occurring after the Initial Exercise Date), then the
Company may, within two Trading Days of the end of such period, call for
cancellation of all or any portion of this Warrant for which a Notice of
Exercise has not yet been delivered (such right, a "CALL"). To exercise this
right, the Company must deliver to the Holder an irrevocable written notice (a
"CALL NOTICE"), indicating therein the portion of unexercised portion of this
Warrant to which such notice applies. If the conditions set forth below for such
Call are satisfied from the period from the date of the Call Notice through and
including the Call Date (as defined below), then any portion of this Warrant
subject to such Call Notice for which a Notice of Exercise shall not have been
received by the Call Date will be cancelled at 6:30 p.m. (New York City time) on
the tenth Trading Day after the date the Call Notice is received by the Holder
(such date, the "CALL DATE"). Any unexercised portion of this Warrant to which
the Call Notice does not pertain will be unaffected by such Call Notice. In
furtherance thereof, the Company covenants and agrees that it will honor all
Notices of Exercise with respect to Warrant Shares subject to a Call Notice that
are tendered through 6:30 p.m. (New York City time) on the Call Date. The
parties agree that any Notice of Exercise delivered following a Call Notice
shall first reduce to zero the number of Warrant Shares subject to such Call
Notice prior to reducing the remaining Warrant Shares available for purchase
under this Warrant. For example, if (x) this Warrant then permits the Holder to
acquire 100 Warrant Shares, (y) a Call Notice pertains to 75 Warrant Shares, and
(z) prior to 6:30 p.m. (New York City time) on the Call Date the Holder tenders
a Notice of Exercise in respect of 50 Warrant Shares, then (1) on the Call Date
the right under this Warrant to acquire 25 Warrant Shares will be automatically
cancelled, (2) the Company, in the time and manner required under this Warrant,
will have issued and delivered to the Holder 50 Warrant Shares in respect of the
exercises following receipt of the Call Notice, and (3) the Holder may, until
the Termination Date, exercise this Warrant for 25 Warrant Shares (subject to
adjustment as herein provided and subject to subsequent Call Notices). Subject
again to the provisions of this Section 2(f), the Company may deliver subsequent
Call Notices for any portion of this Warrant for which the Holder shall not have
delivered a Notice of Exercise. Notwithstanding anything to the contrary set
forth in this Warrant, the Company may not deliver a Call Notice or require the
cancellation of this Warrant (and any Call Notice will be void), unless, from
the beginning of the 20th consecutive Trading Days used to determine whether the
Common Stock has achieved the Threshold Price through the Call Date, (i) the
Company shall have honored in accordance with the terms of this Warrant all
Notices of Exercise delivered by 6:30 p.m. (New York City time) on the Call
Date, (ii) the Registration Statement shall be effective as to all Warrant
Shares and the prospectus thereunder available for use by the Holder for the
resale of all such Warrant Shares and (iii) the Common Stock shall be listed or
quoted for trading on
6
the Trading Market. The Company's right to Call the Warrant shall be exercised
ratably among the Holders based on each Holder's initial purchase of Common
Stock pursuant to the Purchase Agreement.
SECTION 3. CERTAIN ADJUSTMENTS.
a) STOCK DIVIDENDS AND SPLITS. If the Company, at any time while this
Warrant is outstanding: (A) pays a stock dividend or otherwise make a
distribution or distributions on shares of its Common Stock or any other equity
or equity equivalent securities payable in shares of Common Stock (which, for
avoidance of doubt, shall not include any shares of Common Stock issued by the
Company pursuant to this Warrant), (B) subdivides outstanding shares of Common
Stock into a larger number of shares, (C) combines (including by way of reverse
stock split) outstanding shares of Common Stock into a smaller number of shares,
or (D) issues by reclassification of shares of the Common Stock any shares of
capital stock of the Company, then in each case the Exercise Price shall be
multiplied by a fraction of which the numerator shall be the number of shares of
Common Stock (excluding treasury shares, if any) outstanding before such event
and of which the denominator shall be the number of shares of Common Stock
outstanding after such event and the number of shares issuable upon exercise of
this Warrant shall be proportionately adjusted. Any adjustment made pursuant to
this Section 3(a) shall become effective immediately after the record date for
the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or re-classification.
b) SUBSEQUENT EQUITY SALES. From the Initial Exercise Date until the 18
month anniversary of the date of the Purchase Agreement, if the Company or any
Subsidiary thereof, as applicable, at any time while this Warrant is
outstanding, shall offer, sell, grant any option to purchase or offer, sell or
grant any right to reprice its securities, or otherwise dispose of or issue (or
announce any offer, sale, grant or any option to purchase or other disposition)
any Common Stock or Common Stock Equivalents entitling any Person to acquire
shares of Common Stock, at an effective price per share less than the then
Exercise Price (such lower price, the "BASE SHARE PRICE" and such issuances
collectively, a "DILUTIVE ISSUANCE"), as adjusted hereunder (if the holder of
the Common Stock or Common Stock Equivalents so issued shall at any time,
whether by operation of purchase price adjustments, reset provisions, floating
conversion, exercise or exchange prices or otherwise, or due to warrants,
options or rights per share which is issued in connection with such issuance,
but excluding adjustments resulting from customary price-based anti-dilution
provisions, be entitled to receive shares of Common Stock at an effective price
per share which is less than the Exercise Price, such issuance shall be deemed
to have occurred for less than the Exercise Price), then, the Exercise Price
shall be reduced by multiplying the Exercise Price by a fraction, the numerator
of which is the number of shares of Common Stock issued and outstanding
immediately prior to the Dilutive Issuance plus the number of shares of Common
Stock which the aggregate consideration received or receivable by the Company in
connection with such Dilutive Issuance would purchase at the then effective
Exercise Price, and the denominator of which shall be the sum of the number of
shares of Common Stock issued
7
and outstanding immediately prior to the Dilutive Issuance plus the number of
shares of Common Stock so issued or issuable in connection with the Dilutive
Issuance; PROVIDED, HOWEVER, prior to the date the Company obtains Shareholder
Approval in accordance with the rules and regulations of the Trading Market, in
no event shall the Exercise Price be adjusted under this Section 3(b) to less
than $1.95, subject to adjustment for reverse and forward stock splits, stock
dividends, stock combinations and other similar transactions of the Common Stock
that occur after the date of this Agreement (the "FLOOR PRICE"). The Company
shall notify the Holder in writing, no later than the third Trading Day
following the issuance of any Common Stock or Common Stock Equivalents subject
to this section, indicating therein the applicable issuance price, or of
applicable reset price, exchange price, conversion price and other pricing terms
(such notice the "DILUTIVE ISSUANCE NOTICE"). For purposes of clarification,
whether or not the Company provides a Dilutive Issuance Notice pursuant to this
Section 3(b), upon the occurrence of any Dilutive Issuance, after the date of
such Dilutive Issuance the Holder is entitled to receive a number of Warrant
Shares based upon the Base Share Price regardless of whether the Holder
accurately refers to the Base Share Price in the Notice of Exercise.
c) INTENTIONALLY OMITTED.
d) FUNDAMENTAL TRANSACTION. If, at any time while this Warrant is
outstanding, (A) the Company effects any merger or consolidation of the Company
with or into another Person, (B) the Company effects any sale of all or
substantially all of its assets in one or a series of related transactions, (C)
any tender offer or exchange offer (whether by the Company or another Person) is
completed pursuant to which holders of Common Stock are permitted to tender or
exchange their shares for other securities, cash or property, or (D) the Company
effects any reclassification of the Common Stock or any compulsory share
exchange pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property (in any such case, a
"FUNDAMENTAL TRANSACTION"), then, upon any subsequent conversion of this
Warrant, the Holder shall have the right to receive, for each Warrant Share that
would have been issuable upon such exercise absent such Fundamental Transaction,
at the option of the Holder, (a) upon exercise of this Warrant, the number of
shares of Common Stock of the successor or acquiring corporation or of the
Company, if it is the surviving corporation, and Alternate Consideration
receivable upon or as a result of such reorganization, reclassification, merger,
consolidation or disposition of assets by a Holder of the number of shares of
Common Stock for which this Warrant is exercisable immediately prior to such
event or (b) if the Company is acquired in an all cash transaction, cash equal
to the value of this Warrant as determined in accordance with the Black-Scholes
option pricing formula (the "ALTERNATE CONSIDERATION"). For purposes of any such
exercise, the determination of the Exercise Price shall be appropriately
adjusted to apply to such Alternate Consideration based on the amount of
Alternate Consideration issuable in respect of one share of Common Stock in such
Fundamental Transaction, and the Company shall apportion the Exercise Price
among the Alternate Consideration in a reasonable manner reflecting the relative
value of any different components of the Alternate Consideration. If holders of
Common Stock are given any choice as to the securities, cash or property to be
received in a Fundamental Transaction, then the Holder shall be given the same
choice as to the Alternate Consideration it receives upon any
8
exercise of this Warrant following such Fundamental Transaction. To the extent
necessary to effectuate the foregoing provisions, any successor to the Company
or surviving entity in such Fundamental Transaction shall issue to the Holder a
new warrant consistent with the foregoing provisions and evidencing the Holder's
right to exercise such warrant into Alternate Consideration. The terms of any
agreement pursuant to which a Fundamental Transaction is effected shall include
terms requiring any such successor or surviving entity to comply with the
provisions of this Section 3(d) and insuring that this Warrant (or any such
replacement security) will be similarly adjusted upon any subsequent transaction
analogous to a Fundamental Transaction.
e) EXEMPT ISSUANCE. Notwithstanding the foregoing, no adjustments,
Alternate Consideration nor notices shall be made, paid or issued under this
Section 3 in respect of an Exempt Issuance.
f) CALCULATIONS. All calculations under this Section 3 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be. The
number of shares of Common Stock outstanding at any given time shall not
includes shares of Common Stock owned or held by or for the account of the
Company, and the description of any such shares of Common Stock shall be
considered on issue or sale of Common Stock. For purposes of this Section 3, the
number of shares of Common Stock deemed to be issued and outstanding as of a
given date shall be the sum of the number of shares of Common Stock (excluding
treasury shares, if any) issued and outstanding.
g) VOLUNTARY ADJUSTMENT BY COMPANY. The Company may at any time during
the term of this Warrant reduce the then current Exercise Price to any amount
and for any period of time deemed appropriate by the Board of Directors of the
Company.
h) NOTICE TO HOLDERS.
i. ADJUSTMENT TO EXERCISE PRICE. Whenever the Exercise Price
is adjusted pursuant to this Section 3, the Company shall promptly mail
to each Holder a notice setting forth the Exercise Price after such
adjustment and setting forth a brief statement of the facts requiring
such adjustment.
ii. NOTICE TO ALLOW EXERCISE BY HOLDER. If (A) the Company
shall declare a dividend (or any other distribution) on the Common
Stock; (B) the Company shall declare a special nonrecurring cash
dividend on or a redemption of the Common Stock; (C) the Company shall
authorize the granting to all holders of the Common Stock rights or
warrants to subscribe for or purchase any shares of capital stock of
any class or of any rights; (D) the approval of any stockholders of the
Company shall be required in connection with any reclassification of
the Common Stock, any consolidation or merger to which the Company is a
party, any sale or transfer of all or substantially all of the assets
of the Company, of any compulsory share exchange whereby the Common
Stock is converted into other securities, cash or property; (E) the
Company shall authorize the voluntary or involuntary dissolution,
liquidation or winding up of the
9
affairs of the Company; then, in each case, the Company shall cause to
be mailed to the Holder at its last addresses as it shall appear upon
the Warrant Register of the Company, at least 20 calendar days prior to
the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose
of such dividend, distribution, redemption, rights or warrants, or if a
record is not to be taken, the date as of which the holders of the
Common Stock of record to be entitled to such dividend, distributions,
redemption, rights or warrants are to be determined or (y) the date on
which such reclassification, consolidation, merger, sale, transfer or
share exchange is expected to become effective or close, and the date
as of which it is expected that holders of the Common Stock of record
shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer or share
exchange; PROVIDED, that the failure to mail such notice or any defect
therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice. The Holder is
entitled to exercise this Warrant during the 20-day period commencing
the date of such notice to the effective date of the event triggering
such notice.
SECTION 4. TRANSFER OF WARRANT.
a) TRANSFERABILITY. Subject to compliance with any applicable
securities laws and the conditions set forth in Sections 5(a) and 4(d) hereof
and to the provisions of Section 4.1 of the Purchase Agreement, this Warrant and
all rights hereunder are transferable, in whole or in part, upon surrender of
this Warrant at the principal office of the Company, together with a written
assignment of this Warrant substantially in the form attached hereto duly
executed by the Holder or its agent or attorney and funds sufficient to pay any
transfer taxes payable upon the making of such transfer. Upon such surrender
and, if required, such payment, the Company shall execute and deliver a new
Warrant or Warrants in the name of the assignee or assignees and in the
denomination or denominations specified in such instrument of assignment, and
shall issue to the assignor a new Warrant evidencing the portion of this Warrant
not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if
properly assigned, may be exercised by a new holder for the purchase of Warrant
Shares without having a new Warrant issued.
b) NEW WARRANTS. This Warrant may be divided or combined with other
Warrants upon presentation hereof at the aforesaid office of the Company,
together with a written notice specifying the names and denominations in which
new Warrants are to be issued, signed by the Holder or its agent or attorney.
Subject to compliance with Section 4(a), as to any transfer which may be
involved in such division or combination, the Company shall execute and deliver
a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided
or combined in accordance with such notice.
c) WARRANT REGISTER. The Company shall register this Warrant, upon
records to be maintained by the Company for that purpose (the "WARRANT
REGISTER"), in the name
10
of the record Holder hereof from time to time. The Company may deem and treat
the registered Holder of this Warrant as the absolute owner hereof for the
purpose of any exercise hereof or any distribution to the Holder, and for all
other purposes, absent actual notice to the contrary.
d) TRANSFER RESTRICTIONS. If, at the time of the surrender of this
Warrant in connection with any transfer of this Warrant, the transfer of this
Warrant shall not be registered pursuant to an effective registration statement
under the Securities Act and under applicable state securities or blue sky laws,
the Company may require, as a condition of allowing such transfer (i) that the
Holder or transferee of this Warrant, as the case may be, furnish to the Company
a written opinion of counsel (which opinion shall be in form, substance and
scope customary for opinions of counsel in comparable transactions) to the
effect that such transfer may be made without registration under the Securities
Act and under applicable state securities or blue sky laws, (ii) that the holder
or transferee execute and deliver to the Company an investment letter in form
and substance acceptable to the Company and (iii) that the transferee be an
"accredited investor" as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or
(a)(8) promulgated under the Securities Act or a qualified institutional buyer
as defined in Rule 144A(a) under the Securities Act.
SECTION 5. MISCELLANEOUS.
a) TITLE TO WARRANT. Prior to the Termination Date and subject to
compliance with applicable laws and Section 4 of this Warrant, this Warrant and
all rights hereunder are transferable, in whole or in part, at the office or
agency of the Company by the Holder in person or by duly authorized attorney,
upon surrender of this Warrant together with the Assignment Form annexed hereto
properly endorsed. The transferee shall sign an investment letter in form and
substance reasonably satisfactory to the Company.
b) NO RIGHTS AS SHAREHOLDER UNTIL EXERCISE. This Warrant does not
entitle the Holder to any voting rights or other rights as a shareholder of the
Company prior to the exercise hereof. Upon the surrender of this Warrant and the
payment of the aggregate Exercise Price (or by means of a cashless exercise),
the Warrant Shares so purchased shall be and be deemed to be issued to such
Holder as the record owner of such shares as of the close of business on the
later of the date of such surrender or payment.
c) LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT. The Company
covenants that upon receipt by the Company of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of this Warrant or any stock
certificate relating to the Warrant Shares, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it (which, in
the case of the Warrant, shall not include the posting of any bond), and upon
surrender and cancellation of such Warrant or stock certificate, if mutilated,
the Company will make and deliver a new Warrant or stock certificate of like
tenor and dated as of such cancellation, in lieu of such Warrant or stock
certificate.
d) SATURDAYS, SUNDAYS, HOLIDAYS, ETC. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall be a
11
Saturday, Sunday or a legal holiday, then such action may be taken or such right
may be exercised on the next succeeding day not a Saturday, Sunday or legal
holiday.
e) AUTHORIZED SHARES.
The Company covenants that during the period the Warrant is
outstanding, it will reserve from its authorized and unissued Common
Stock a sufficient number of shares to provide for the issuance of the
Warrant Shares upon the exercise of any purchase rights under this
Warrant. The Company further covenants that its issuance of this
Warrant shall constitute full authority to its officers who are charged
with the duty of executing stock certificates to execute and issue the
necessary certificates for the Warrant Shares upon the exercise of the
purchase rights under this Warrant. The Company will take all such
reasonable action as may be necessary to assure that such Warrant
Shares may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of the Trading
Market upon which the Common Stock may be listed.
Except and to the extent as waived or consented to by the
Holder, the Company shall not by any action, including, without
limitation, amending its certificate of incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith assist in the carrying out
of all such terms and in the taking of all such actions as may be
necessary or appropriate to protect the rights of Holder as set forth
in this Warrant against impairment. Without limiting the generality of
the foregoing, the Company will (a) not increase the par value of any
Warrant Shares above the amount payable therefor upon such exercise
immediately prior to such increase in par value, (b) take all such
action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable Warrant Shares
upon the exercise of this Warrant, and (c) use commercially reasonable
efforts to obtain all such authorizations, exemptions or consents from
any public regulatory body having jurisdiction thereof as may be
necessary to enable the Company to perform its obligations under this
Warrant.
Before taking any action which would result in an adjustment
in the number of Warrant Shares for which this Warrant is exercisable
or in the Exercise Price, the Company shall obtain all such
authorizations or exemptions thereof, or consents thereto, as may be
necessary from any public regulatory body or bodies having jurisdiction
thereof.
f) JURISDICTION. All questions concerning the construction, validity,
enforcement and interpretation of this Warrant shall be determined in accordance
with the provisions of the Purchase Agreement.
12
g) RESTRICTIONS. The Holder acknowledges that the Warrant Shares
acquired upon the exercise of this Warrant, if not registered, will have
restrictions upon resale imposed by state and federal securities laws.
h) NONWAIVER AND EXPENSES. No course of dealing or any delay or failure
to exercise any right hereunder on the part of Holder shall operate as a waiver
of such right or otherwise prejudice Holder's rights, powers or remedies,
notwithstanding the fact that all rights hereunder terminate on the Termination
Date. If the Company willfully and knowingly fails to comply with any provision
of this Warrant, which results in any material damages to the Holder, the
Company shall pay to Holder such amounts as shall be sufficient to cover any
costs and expenses including, but not limited to, reasonable attorneys' fees,
including those of appellate proceedings, incurred by Holder in collecting any
amounts due pursuant hereto or in otherwise enforcing any of its rights, powers
or remedies hereunder.
i) NOTICES. Any notice, request or other document required or permitted
to be given or delivered to the Holder by the Company shall be delivered in
accordance with the notice provisions of the Purchase Agreement.
j) LIMITATION OF LIABILITY. No provision hereof, in the absence of any
affirmative action by Holder to exercise this Warrant or purchase Warrant
Shares, and no enumeration herein of the rights or privileges of Holder, shall
give rise to any liability of Holder for the purchase price of any Common Stock
or as a stockholder of the Company, whether such liability is asserted by the
Company or by creditors of the Company.
k) REMEDIES. Holder, in addition to being entitled to exercise all
rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Warrant. The Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of the provisions of this Warrant and hereby agrees to
waive the defense in any action for specific performance that a remedy at law
would be adequate.
l) SUCCESSORS AND ASSIGNS. Subject to applicable securities laws, this
Warrant and the rights and obligations evidenced hereby shall inure to the
benefit of and be binding upon the successors of the Company and the successors
and permitted assigns of Holder. The provisions of this Warrant are intended to
be for the benefit of all Holders from time to time of this Warrant and shall be
enforceable by any such Holder or holder of Warrant Shares.
m) AMENDMENT. This Warrant may be modified or amended or the provisions
hereof waived with the written consent of the Company and the Holder.
n) SEVERABILITY. Wherever possible, each provision of this Warrant
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provisions or the remaining provisions of this Warrant.
13
o) HEADINGS. The headings used in this Warrant are for the convenience
of reference only and shall not, for any purpose, be deemed a part of this
Warrant.
********************
14
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its officer thereunto duly authorized.
Dated: December __, 2004
TARRANT APPAREL GROUP
By: _______________________________________
Name:
Title:
15
NOTICE OF EXERCISE
To: TARRANT APPAREL GROUP
(1) The undersigned hereby elects to purchase ________ Warrant Shares of
the Company pursuant to the terms of the attached Warrant (only if
exercised in full), and tenders herewith payment of the exercise price
in full, together with all applicable transfer taxes, if any.
(2) Payment shall take the form of (check applicable box):
[_] in lawful money of the United States; or
[_] the cancellation of such number of Warrant Shares as is
necessary, in accordance with the formula set forth in
subsection 2(c), to exercise this Warrant with respect to the
maximum number of Warrant Shares purchasable pursuant to the
cashless exercise procedure set forth in subsection 2(c).
(3) Please issue a certificate or certificates representing said Warrant
Shares in the name of the undersigned or in such other name as is
specified below:
----------------------------------------
The Warrant Shares shall be delivered to the following:
----------------------------------------
----------------------------------------
----------------------------------------
(4) ACCREDITED INVESTOR. The undersigned is an "accredited investor" as
defined in Regulation D promulgated under the Securities Act of 1933,
as amended.
[SIGNATURE OF HOLDER]
Name of Investing Entity: ______________________________________________________
SIGNATURE OF AUTHORIZED SIGNATORY OF INVESTING ENTITY: _________________________
Name of Authorized Signatory: __________________________________________________
Title of Authorized Signatory: _________________________________________________
Date: __________________________________________________________________________
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to
_______________________________________________ whose address is
---------------------------------------------------------------
---------------------------------------------------------------
Dated: ______________, _______
Holder's Signature: ____________________________
Holder's Address: ____________________________
____________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
EXHIBIT E
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "AGREEMENT") is made as of
December 6, 2004, by and among Tarrant Apparel Group, a Nevada corporation (the
"COMPANY"), the purchasers signatory hereto (each a "PURCHASER" and together the
"PURCHASERS"), and ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ LLP, with an address at ▇▇▇ ▇▇▇▇▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇-▇▇▇▇ (the "ESCROW AGENT"). CAPITALIZED TERMS
USED BUT NOT DEFINED HEREIN SHALL HAVE THE MEANINGS SET FORTH IN THE SECURITIES
PURCHASE AGREEMENT REFERRED TO IN THE FIRST RECITAL.
W I T N E S S E T H:
WHEREAS, the Purchasers will be purchasing from the Company,
severally and not jointly with the other Purchasers, in the aggregate, up to
$10,000,000 in the aggregate, principal amount of 6% Secured Convertible
Debentures (the "DEBENTURES") and Warrants on the Closing Date as set forth in
the Securities Purchase Agreement (the "PURCHASE AGREEMENT") dated the date
hereof between the Purchasers and the Company, which securities will be issued
under the terms contained herein and in the Purchase Agreement; and
WHEREAS, it is intended that the purchase of the securities be
consummated in accordance with the requirements set forth in Regulation D
promulgated under the Securities Act of 1933, as amended; and
WHEREAS, the Company and the Purchasers have requested that
the Escrow Agent hold the Subscription Amounts in escrow until the Escrow Agent
has received the Release Notice in the form attached hereto from the Company and
each Purchaser;
NOW, THEREFORE, in consideration of the covenants and mutual
promises contained herein and other good and valuable consideration, the receipt
and legal sufficiency of which are hereby acknowledged and intending to be
legally bound hereby, the parties agree as follows:
ARTICLE 1
TERMS OF THE ESCROW
1.1. The parties hereby agree to establish an escrow account with the
Escrow Agent whereby the Escrow Agent shall hold the funds for the purchase of
up to $10,000,000 in the aggregate of Debentures and Warrants as contemplated by
the Purchase Agreement.
1.2. Upon the Escrow Agent's receipt of the aggregate Subscription
Amounts for the Closing into its master escrow account, together with executed
counterparts of this Agreement, the Purchase Agreement, the Registration Rights
Agreement and the Security Agreement, it shall telephonically advise the
Company, or the Company's designated attorney or agent, of the amount of funds
it has received into its master escrow account.
1
1.3. Wire transfers to the Escrow Agent shall be made as follows:
STERLING NATIONAL BANK
▇▇▇ ▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Account Name: ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ LLP
ABA ROUTING NO: ▇▇▇▇▇▇▇▇▇
ACCT NO: ▇▇▇▇▇▇▇▇▇▇
Remark: TAGS/[FUND NAME]
1.4 The Company, promptly following being advised by the Escrow Agent
that the Escrow Agent has received the Subscription Amounts for the Closing
along with facsimile copies of counterpart signature pages of the Purchase
Agreement, Registration Rights Agreement, the Security Agreement and this
Agreement from each Purchaser, shall deliver to the Escrow Agent the
certificates evidencing the Securities to be issued to each Purchaser at the
Closing together with:
(a) the Company's executed counterpart of the Purchase
Agreement;
(b) the Company's executed counterpart of the Registration
Rights Agreement;
(c) the executed opinion of Company Counsel, in the form of
EXHIBIT D to the Purchase Agreement;
(d) the Company's original executed counterpart of this Escrow
Agreement;
(e) the Company's original executed counterpart of the
Security Agreement; and
(f) a warrant registered in the name of ▇.▇. ▇▇▇▇▇▇▇ &
Company, LLC ("▇.▇. ▇▇▇▇▇▇▇"), and/or its designees, to purchase up to
a number of shares of Common Stock equal to 4% of the number of shares
of Common Stock issuable upon conversion of the Debentures, with an
exercise price equal to $2.50, subject to adjustment therein, otherwise
identical to the Warrant ("▇.▇. ▇▇▇▇▇▇▇ WARRANT").
1.5 In the event that the foregoing items are not in the Escrow Agent's
possession within five (5) Trading Days of the Escrow Agent notifying the
Company that the Escrow Agent has custody of the Subscription Amount for the
Closing, then each Purchaser shall have the right to demand the return of their
portion of the Subscription Amount.
1.6 Once the Escrow Agent receives a Release Notice in the form
attached hereto as EXHIBIT X (the "RELEASE NOTICE") executed by the Company and
each Purchaser (i) it shall wire 94% of the aggregate Subscription Amounts per
the written instructions of the Company, net of $20,000 per the written
instructions of Bristol Investment Fund, Ltd. ("BRISTOL") and (ii) it shall wire
the remaining 6% of the aggregate Subscription Amounts per the written
instructions of ▇.▇. ▇▇▇▇▇▇▇ as its fee in connection with the transaction
described herein.
2
1.7 Wire transfers to the Company shall be made pursuant to written
instructions from the Company provided to the Escrow Agent on the date of the
Purchase Agreement.
1.8 Once the funds (as set forth above) have been sent per the
Company's instructions, the Escrow Agent shall then arrange to have the Purchase
Agreement, the Debentures, the Registration Rights Agreement, the Escrow
Agreement, the Security Agreement the Warrants, the ▇.▇. ▇▇▇▇▇▇▇ Warrant and the
opinion of counsel delivered to the appropriate parties.
ARTICLE II
MISCELLANEOUS
2.1 No waiver or any breach of any covenant or provision herein
contained shall be deemed a waiver of any preceding or succeeding breach
thereof, or of any other covenant or provision herein contained. No extension of
time for performance of any obligation or act shall be deemed an extension of
the time for performance of any other obligation or act.
2.2 All notices or other communications required or permitted hereunder
shall be in writing, and shall be sent as set forth in the Purchase Agreement.
2.3 This Escrow Agreement shall be binding upon and shall inure to the
benefit of the permitted successors and permitted assigns of the parties hereto.
2.4 This Escrow Agreement is the final expression of, and contains the
entire agreement between, the parties with respect to the subject matter hereof
and supersedes all prior understandings with respect thereto. This Escrow
Agreement may not be modified, changed, supplemented or terminated, nor may any
obligations hereunder be waived, except by written instrument signed by the
parties to be charged or by its agent duly authorized in writing or as otherwise
expressly permitted herein.
2.5 Whenever required by the context of this Escrow Agreement, the
singular shall include the plural and masculine shall include the feminine. This
Escrow Agreement shall not be construed as if it had been prepared by one of the
parties, but rather as if all parties had prepared the same. Unless otherwise
indicated, all references to Articles are to this Escrow Agreement.
2.6 The parties hereto expressly agree that this Escrow Agreement shall
be governed by, interpreted under and construed and enforced in accordance with
the laws of the State of New York. Any action to enforce, arising out of, or
relating in any way to, any provisions of this Escrow Agreement shall only be
brought in a state or Federal court sitting in New York City.
2.7 The Escrow Agent's duties hereunder may be altered, amended,
modified or revoked only by a writing signed by the Company, each Purchaser and
the Escrow Agent.
2.8 The Escrow Agent shall be obligated only for the performance of
such duties as are specifically set forth herein and may rely and shall be
protected in relying or refraining from acting on any instrument reasonably
believed by the Escrow Agent to be genuine and to have
3
been signed or presented by the proper party or parties. The Escrow Agent shall
not be personally liable for any act the Escrow Agent may do or omit to do
hereunder as the Escrow Agent while acting in good faith and in the absence of
gross negligence, fraud and willful misconduct, and any act done or omitted by
the Escrow Agent pursuant to the advice of the Escrow Agent's attorneys-at-law
shall be conclusive evidence of such good faith, in the absence of gross
negligence, fraud and willful misconduct.
2.9 The Escrow Agent is hereby expressly authorized to disregard any
and all warnings given by any of the parties hereto or by any other person or
corporation, excepting only orders or process of courts of law and is hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case the Escrow Agent obeys or complies with any such order, judgment
or decree, the Escrow Agent shall not be liable to any of the parties hereto or
to any other person, firm or corporation by reason of such decree being
subsequently reversed, modified, annulled, set aside, vacated or found to have
been entered without jurisdiction.
2.10 The Escrow Agent shall not be liable in any respect on account of
the identity, authorization or rights of the parties executing or delivering or
purporting to execute or deliver the Purchase Agreement or any documents or
papers deposited or called for thereunder in the absence of gross negligence,
fraud and willful misconduct.
2.11 The Escrow Agent shall be entitled to employ such legal counsel
and other experts as the Escrow Agent may deem necessary properly to advise the
Escrow Agent in connection with the Escrow Agent's duties hereunder, may rely
upon the advice of such counsel, and may pay such counsel reasonable
compensation; provided that the costs of such compensation shall be borne by the
Escrow Agent. THE ESCROW AGENT HAS ACTED AS LEGAL COUNSEL FOR BRISTOL, AND MAY
CONTINUE TO ACT AS LEGAL COUNSEL FOR BRISTOL FROM TIME TO TIME, NOTWITHSTANDING
ITS DUTIES AS THE ESCROW AGENT HEREUNDER. THE COMPANY AND THE PURCHASERS CONSENT
TO THE ESCROW AGENT IN SUCH CAPACITY AS LEGAL COUNSEL FOR BRISTOL AND WAIVES ANY
CLAIM THAT SUCH REPRESENTATION REPRESENTS A CONFLICT OF INTEREST ON THE PART OF
THE ESCROW AGENT. THE COMPANY AND THE PURCHASERS UNDERSTAND THAT BRISTOL AND THE
ESCROW AGENT ARE RELYING EXPLICITLY ON THE FOREGOING PROVISION IN ENTERING INTO
THIS ESCROW AGREEMENT.
2.12 The Escrow Agent's responsibilities as escrow agent hereunder
shall terminate if the Escrow Agent shall resign by giving written notice to the
Company and the Purchasers. In the event of any such resignation, the Purchasers
and the Company shall appoint a successor Escrow Agent and the Escrow Agent
shall deliver to such successor Escrow Agent any escrow funds and other
documents held by the Escrow Agent.
2.13 If the Escrow Agent reasonably requires other or further
instruments in connection with this Escrow Agreement or obligations in respect
hereto, the necessary parties hereto shall join in furnishing such instruments.
2.14 It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the documents
or the escrow funds held by the Escrow Agent hereunder, the Escrow Agent is
authorized and directed in the Escrow Agent's sole discretion (1) to retain in
the Escrow Agent's possession without liability to anyone all or
4
any part of said documents or the escrow funds until such disputes shall have
been settled either by mutual written agreement of the parties concerned by a
final order, decree or judgment or a court of competent jurisdiction after the
time for appeal has expired and no appeal has been perfected, but the Escrow
Agent shall be under no duty whatsoever to institute or defend any such
proceedings or (2) to deliver the escrow funds and any other property and
documents held by the Escrow Agent hereunder to a state or Federal court having
competent subject matter jurisdiction and located in the City of New York in
accordance with the applicable procedure therefore
2.15 The Company and each Purchaser agree jointly and severally to
indemnify and hold harmless the Escrow Agent and its partners, employees, agents
and representatives from any and all claims, liabilities, costs or expenses in
any way arising from or relating to the duties or performance of the Escrow
Agent hereunder or the transactions contemplated hereby or by the Purchase
Agreement other than any such claim, liability, cost or expense to the extent
the same shall have been determined by final, unappealable judgment of a court
of competent jurisdiction to have resulted from the gross negligence, fraud or
willful misconduct of the Escrow Agent.
************************
5
IN WITNESS WHEREOF, the parties hereto have executed this
Escrow Agreement as of date first written above.
TARRANT APPAREL GROUP
By: _______________________________________
Name:
Title:
With a copy to (which shall not constitute notice):
ESCROW AGENT:
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ LLP
By: _______________________________________
Name:
Title:
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[SIGNATURE PAGE OF PURCHASERS TO TAGS ESCROW AGREEMENT]
Name of Investing Entity: __________________________
SIGNATURE OF AUTHORIZED SIGNATORY OF INVESTING ENTITY: _________________________
Name of Authorized Signatory: _________________________
Title of Authorized Signatory: __________________________
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Exhibit X to
Escrow Agreement
RELEASE NOTICE
The UNDERSIGNED, pursuant to the Escrow Agreement, dated as of
December __, 2004, among Tarrant Apparel Group, a Nevada corporation, the
Purchasers signatory thereto and ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ LLP, as Escrow Agent (the
"ESCROW AGREEMENT"; capitalized terms used herein and not defined shall have the
meaning ascribed to such terms in the Escrow Agreement), hereby notify the
Escrow Agent that each of the conditions precedent to the purchase and sale of
the Securities set forth in the Securities Purchase Agreement have been
satisfied. The Company and the undersigned Purchaser hereby confirm that all of
their respective representations and warranties contained in the Purchase
Agreement remain true and correct and authorize the release by the Escrow Agent
of the funds and documents to be released at the Closing as described in the
Escrow Agreement. This Release Notice shall not be effective until executed by
the Company and the Purchasers.
This Release Notice may be signed in one or more counterparts,
each of which shall be deemed an original.
IN WITNESS WHEREOF, the undersigned have caused this Release
Notice to be duly executed and delivered as of this __ day of December, 2004.
TARRANT APPAREL GROUP
By: _______________________________________
Name:
Title:
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[SIGNATURE PAGE OF PURCHASERS TO TAGS RELEASE NOTICE]
Name of Investing Entity: __________________________
SIGNATURE OF AUTHORIZED SIGNATORY OF INVESTING ENTITY: _________________________
Name of Authorized Signatory: _________________________
Title of Authorized Signatory: __________________________
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EXHIBIT F
FORM OF SECURITY AGREEMENT
SECURITY AGREEMENT, dated as of December ___, 2004 (this
"AGREEMENT"), among Tarrant Apparel Group, a California corporation (the
"COMPANY" or the "DEBTOR") and the holder or holders of the Company's 6% Secured
Convertible Debentures due December __, 2007 in the original aggregate principal
amount of $10,000,000 (the "DEBENTURES"), signatory hereto, their endorsees,
transferees and assigns (collectively referred to as, the "SECURED PARTIES").
W I T N E S S E T H:
WHEREAS, pursuant to the Purchase Agreement and the Debentures, the
Secured Parties have severally agreed to extend the loans to the Company
evidenced by the Debenture; and
WHEREAS, in order to induce the Secured Parties to extend the loans
evidenced by the Debentures, the Debtor has agreed to execute and deliver to the
Secured Parties this Agreement and to grant the Secured Parties, PARI PASSU with
each other Secured Party, a perfected security interest in certain property of
such Debtor to secure the prompt payment, performance and discharge in full of
all of the Company's obligations under the Debenture.
NOW, THEREFORE, in consideration of the agreements herein contained
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto hereby agree as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement, the following
terms shall have the meanings set forth in this Section 1. Terms used but not
otherwise defined in this Agreement that are defined in Article 9 of the UCC
(such as "account", "chattel paper", "commercial tort claim", "deposit account",
"document", "equipment", "fixtures", "general intangibles", "goods",
"instruments", "inventory", "investment property", "letter-of-credit rights",
"proceeds" and "supporting obligations") shall have the respective meanings
given such terms in Article 9 of the UCC.
(a) "COLLATERAL" means the collateral in which the Secured
Parties are granted a security interest by this Agreement and which
shall consist of all of Debtor's present and future Accounts, Chattel
Paper and Instruments, and all Supporting Obligations, General
Intangibles and Documents arising out of or relating to the foregoing;
Retained Goods; credit balances and other property of Debtor held or
received by Secured Parties; rights of stoppage in transit, replevin,
repossession, reclamation and other rights and remedies of an unpaid
vendor; and all of Debtor's Records relating to and all proceeds of the
foregoing property and rights.
Notwithstanding the foregoing, nothing herein shall be deemed to
constitute an assignment of any asset which, in the event of an assignment,
becomes void by operation of applicable law or the assignment of which is
otherwise prohibited by applicable law (in each case to the extent that such
applicable law is not overridden by Sections 9-406, 9-407 and/or 9-408 of the
UCC or other similar applicable law); provided, however, that to the extent
permitted
by applicable law, this Agreement shall create a valid security interest in such
asset and, to the extent permitted by applicable law, this Agreement shall
create a valid security interest in the proceeds of such asset.
(b) "MAJORITY IN INTEREST" shall mean, at any time of
determination, the majority in interest (based on then-outstanding
principal amounts of Debentures at the time of such determination) of
the Secured Parties.
(c) "Intercreditor Agreement" means that certain Intercreditor
Agreement, dated as of the date hereof, among GMAC Commercial Finance
LLC, UPS Capital Global Trade Finance Corporation, the Agent, and
Debtor.
(d) "OBLIGATIONS" means all of the Debtor's obligations under
this Agreement, the Purchase Agreement, the Debentures, and any other
instruments, agreements or other documents executed and/or delivered in
connection herewith or therewith, in each case, whether now or
hereafter existing, voluntary or involuntary, direct or indirect,
absolute or contingent, liquidated or unliquidated, whether or not
jointly owed with others, and whether or not from time to time
decreased or extinguished and later increased, created or incurred, and
all or any portion of such obligations or liabilities that are paid, to
the extent all or any part of such payment is avoided or recovered
directly or indirectly from any of the Secured Parties as a preference,
fraudulent transfer or otherwise as such obligations may be amended,
supplemented, converted, extended or modified from time to time.
Without limiting the generality of the foregoing, the term
"Obligations" shall include, without limitation: (i) principal of, and
interest on the Debentures and the loans extended pursuant thereto;
(ii) any and all other fees, indemnities, costs, obligations and
liabilities of the Debtor from time to time under or in connection with
this Agreement, the Debentures, and any other instruments, agreements
or other documents executed and/or delivered in connection herewith or
therewith; and (iii) all amounts (including but not limited to
post-petition interest) in respect of the foregoing that would be
payable but for the fact that the obligations to pay such amounts are
unenforceable or not allowable due to the existence of a bankruptcy,
reorganization or similar proceeding involving the Debtor.
(e) "ORGANIZATIONAL DOCUMENTS" means with respect to the
Debtor, the documents by which Debtor was organized (such as a
certificate of incorporation, certificate of limited partnership or
articles of organization, and including, without limitation, any
certificates of designation for preferred stock or other forms of
preferred equity) and which relate to the internal governance of Debtor
(such as bylaws, a partnership agreement or an operating, limited
liability or members agreement).
(f) "UCC" means the Uniform Commercial Code of the State of
California and or any other applicable law of any state or states which
has jurisdiction with respect to all, or any portion of, the Collateral
or this Agreement, from time to time. It is the intent of the parties
that defined terms in the UCC should be construed in their broadest
sense so that the term "Collateral" will be construed in its broadest
sense. Accordingly if there are, from time to time, changes to defined
terms in the UCC that broaden the
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definitions, they are incorporated herein and if existing definitions
in the UCC are broader than the amended definitions, the existing ones
shall be controlling.
2. GRANT OF PERFECTED SECURITY INTEREST. As an inducement for the
Secured Parties to extend the loans as evidenced by the Debentures and to secure
the complete and timely payment, performance and discharge in full, as the case
may be, of all of the Obligations, Debtor hereby unconditionally and irrevocably
pledges, grants and hypothecates to the Secured Parties a continuing and
perfected security interest in and to, a lien upon and a right of set-off
against all of their respective right, title and interest of whatsoever kind and
nature in and to, the Collateral (the "SECURITY INTEREST").
3. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS OF THE DEBTOR.
Debtor represents and warrants to, and covenants and agrees with, the Secured
Parties as follows:
(a) Debtor has the requisite corporate power and authority to
enter into this Agreement and otherwise to carry out its obligations
hereunder. The execution, delivery and performance by Debtor of this
Agreement and the filings contemplated therein have been duly
authorized by all necessary action on the part of Debtor and no further
action is required by Debtor. This Agreement has been duly executed by
Debtor. This Agreement constitutes the legal, valid and binding
obligation of Debtor, enforceable against Debtor in accordance with its
terms except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization and similar laws of general
application relating to or affecting the rights and remedies of
creditors and by general principles of equity.
(b) The Debtor has no place of business or offices where its
books of account and records are kept (other than temporarily at the
offices of its attorneys or accountants) or places where Collateral is
stored or located, except as set forth on SCHEDULE A attached hereto.
Except as disclosed on SCHEDULE A, none of such Collateral is in the
possession of any consignee, bailee, warehouseman, agent or processor.
(c) Except for Permitted Liens (as defined in the Debentures)
and except as set forth on SCHEDULE B attached hereto, the Debtor is
the sole owner of the Collateral (except for non-exclusive licenses
granted by any Debtor in the ordinary course of business), free and
clear of any liens, security interests, encumbrances, rights or claims,
and is fully authorized to grant the Security Interest (subject to
obtaining the consent of (i) GMAC under that certain Factoring
Agreement by and among GMAC, Debtor and certain of its Affiliates,
dated as of September 29, 2004, as amend to date (the " FACTORING
AGREEMENT") and (ii) UPS Capital Global Trade Finance ("UPS") under
that certain Guaranty and Security Agreement by and among Debtor,
certain of its Affiliates and UPS, dated as of May 30, 2002, as amended
to date (the "GUARANTY"). There is not on file in any governmental or
regulatory authority, agency or recording office an effective financing
statement, security agreement, license or transfer or any notice of any
of the foregoing (other than those that will be filed in favor of the
Secured Parties pursuant to this Agreement and pursuant to the
Factoring Agreement and Guaranty) covering or affecting any of the
Collateral. So long as this Agreement shall be in effect, except as
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otherwise provided herein, the Debtor shall not execute and shall not
knowingly permit to be on file in any such office or agency any such
financing statement or other document or instrument (except to the
extent filed or recorded in favor of the Secured Parties pursuant to
the terms of this Agreement or in favor of GMAC or UPS pursuant to the
Factoring Agreement or Guaranty).
(d) No written claim has been received that any Collateral or
Debtor's use of any Collateral violates the rights of any third party.
There has been no adverse decision to any Debtor's claim of ownership
rights in or exclusive rights to use the Collateral in any jurisdiction
or to Debtor's right to keep and maintain such Collateral in full force
and effect, and there is no proceeding involving said rights pending
or, to the best knowledge of Debtor, threatened before any court,
judicial body, administrative or regulatory agency, arbitrator or other
governmental authority.
(e) Debtor shall at all times maintain its books of account
and records relating to the Collateral at its principal place of
business and its Collateral at the locations set forth on SCHEDULE A
attached hereto and may not relocate such books of account and records
or tangible Collateral unless it delivers to the Secured Parties at
least 30 days prior to such relocation (i) written notice of such
relocation and the new location thereof (which must be within the
United States) and (ii) evidence that appropriate financing statements
under the UCC and other necessary documents have been filed and
recorded and other steps have been taken to perfect the Security
Interest to create in favor of the Secured Parties a valid, perfected
and continuing perfected lien in the Collateral.
(f) This Agreement creates in favor of the Secured Parties a
valid security interest in the Collateral, subject only to Permitted
Liens (as defined in the Debentures) and the liens in favor of GMAC and
UPS, securing the payment and performance of the Obligations. Upon
making the filings described in the immediately following paragraph,
all security interests created hereunder in any Collateral which may be
perfected by filing Uniform Commercial Code financing statements shall
have been duly perfected. Except for the filing of the Uniform
Commercial Code financing statements referred to in the immediately
following paragraph no action is necessary to create, perfect or
protect the security interests created hereunder. Without limiting the
generality of the foregoing, except for the filing of said financing
statements, obtaining the consent of GMAC under the Factoring
Agreement, the consent of UPS under the Guaranty, no consent of any
third parties and no authorization, approval or other action by, and no
notice to or filing with, any governmental authority or regulatory body
is required for (i) the execution, delivery and performance of this
Agreement, (ii) the creation or perfection of the Security Interests
created hereunder in the Collateral or (iii) the enforcement of the
rights of the Secured Parties hereunder.
(g) Debtor hereby authorizes the Secured Parties, or any of
them, to file one or more financing statements under the UCC, with
respect to the Security Interest with the proper filing and recording
agencies in any jurisdiction deemed proper by them.
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(h) The execution, delivery and performance of this Agreement
by the Debtor does not (i) violate any of the provisions of any
Organizational Documents of Debtor or any judgment, decree, order or
award of any court, governmental body or arbitrator or any applicable
law, rule or regulation applicable to Debtor or (ii) conflict with, or
constitute a default (or an event that with notice or lapse of time or
both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation (with or without
notice, lapse of time or both) of, any agreement, credit facility, debt
or other instrument (evidencing Debtor's debt or otherwise) or other
understanding to which Debtor is a party or by which any property or
asset of Debtor is bound or affected (except for any conflict under the
Factoring Agreement and the Guaranty, which conflicts will be resolved
by consents obtained from GMAC and UPS concurrent with the closing of
this Agreement).
(i) Debtor shall at all times maintain the liens and Security
Interest provided for hereunder as valid and perfected liens and
security interests in the Collateral in favor of the Secured Parties
until this Agreement and the Security Interest hereunder shall be
terminated pursuant to Section 11 hereof. Debtor hereby agrees to
defend the same against the claims of any and all persons and entities.
Debtor shall safeguard and protect all Collateral for the account of
the Secured Parties. At the request of the Secured Parties, Debtor will
sign and deliver to the Secured Parties at any time or from time to
time one or more financing statements pursuant to the UCC in form
reasonably satisfactory to the Secured Parties and will pay the cost of
filing the same in all public offices wherever filing is, or is deemed
by the Secured Parties to be, necessary or desirable to effect the
rights and obligations provided for herein. Without limiting the
generality of the foregoing, Debtor shall pay all fees, taxes and other
amounts necessary to maintain the Collateral and the Security Interest
hereunder, and Debtor shall obtain and furnish to the Secured Parties
from time to time, upon demand, such releases and/or subordinations of
claims and liens which may be required to maintain the priority of the
Security Interest hereunder.
(j) Debtor will not transfer, pledge, hypothecate, encumber,
license, sell or otherwise dispose of any of the Collateral (except for
non-exclusive licenses granted by Debtor in its ordinary course of
business) without the prior written consent of a Majority in Interest;
provided that nothing herein shall limit or restrict GMAC's or UPS's
rights with respect to the Collateral.
(k) Debtor shall keep and preserve its equipment, inventory
and other tangible Collateral in good condition, repair and order and
shall not operate or locate any such Collateral (or cause to be
operated or located) in any area excluded from insurance coverage.
(l) Debtor shall maintain with financially sound and reputable
insurers, insurance with respect to the Collateral against loss or
damage of the kinds and in the amounts customarily insured against by
entities of established reputation having similar properties similarly
situated and in such amounts as are customarily carried under similar
circumstances by other such entities and otherwise as is prudent for
entities engaged in
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similar businesses but in any event sufficient to cover the full
replacement cost thereof. Debtor shall cause each insurance policy
issued in connection herewith to provide, and the insurer issuing such
policy to certify to the Agent that (a) the Agent will be named as
lender loss payee and additional insured under each such insurance
policy; (b) if such insurance be proposed to be cancelled or materially
changed for any reason whatsoever, such insurer will promptly notify
the Agent and such cancellation or change shall not be effective as to
the Agent for at least thirty (30) days after receipt by the Agent of
such notice, unless the effect of such change is to extend or increase
coverage under the policy; and (c) the Agent will have the right (but
no obligation) at its election to remedy any default in the payment of
premiums within thirty (30) days of notice from the insurer of such
default. If no Event of Default (as defined in the Debenture) exists
and if the proceeds arising out of any claim or series of related
claims do not exceed $100,000, loss payments in each instance will be
applied by the applicable Debtor to the repair and/or replacement of
property with respect to which the loss was incurred to the extent
reasonably feasible, and any loss payments or the balance thereof
remaining, to the extent not so applied, shall be payable to the
applicable Debtor, provided, however, that payments received by any
Debtor after an Event of Default occurs and is continuing or in excess
of $100,000 for any occurrence or series of related occurrences shall
be paid to the Agent and, if received by such Debtor, shall be held in
trust for and immediately paid over to the Agent unless otherwise
directed in writing by the Agent. Copies of such policies or the
related certificates, in each case, naming the Agent as lender loss
payee and additional insured shall be delivered to the Agent at least
annually and at the time any new policy of insurance is issued.
(m) Debtor shall, within ten (10) days of obtaining knowledge
thereof, advise the Secured Parties promptly, in sufficient detail, of
any substantial change in the Collateral, and of the occurrence of any
event which would have a material adverse effect on the value of the
Collateral or on the Secured Parties' security interest therein.
(n) Debtor shall promptly execute and deliver to the Secured
Parties such further deeds, mortgages, assignments, security
agreements, financing statements or other instruments, documents,
certificates and assurances and take such further action as the Secured
Parties may from time to time request and may in its sole discretion
deem necessary to perfect, protect or enforce its security interest in
the Collateral.
(o) Debtor shall permit the Secured Parties and their
representatives and agents to inspect the Collateral at any time, and
to make copies of records pertaining to the Collateral as may be
requested by a Secured Party from time to time.
(p) Debtor shall take all steps reasonably necessary to
diligently pursue and seek to preserve, enforce and collect any rights,
claims, causes of action and accounts receivable in respect of the
Collateral.
(q) Debtor shall promptly notify the Secured Parties in
sufficient detail upon becoming aware of any attachment, garnishment,
execution or other legal process levied against any Collateral and of
any other information received by Debtor that may
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materially affect the value of the Collateral, the Security Interest or
the rights and remedies of the Secured Parties hereunder.
(r) All information heretofore, herein or hereafter supplied
to the Secured Parties by or on behalf of Debtor with respect to the
Collateral is accurate and complete in all material respects as of the
date furnished.
(s) The Debtor shall at all times preserve and keep in full
force and effect its valid existence and good standing and any rights
and franchises material to its business.
(t) Debtor will not change its name, type of organization,
jurisdiction of organization, organizational identification number (if
it has one), legal or corporate structure, or identity, or add any new
fictitious name unless it provides at least 30 days prior written
notice to the Secured Parties of such change and, at the time of such
written notification, Debtor provides any financing statements or
fixture filings necessary to perfect and continue perfected the
perfected security Interest granted and evidenced by this Agreement.
(u) Debtor may not relocate its chief executive office to a
new location without providing 30 days prior written notification
thereof to the Secured Parties and so long as, at the time of such
written notification, Debtor provides any financing statements or
fixture filings necessary to perfect and continue perfected the
perfected security Interest granted and evidenced by this Agreement.
(v) Debtor was organized and remains organized solely under
the laws of the state set forth next to such Debtor's name in the first
paragraph of this Agreement. SCHEDULE D attached hereto sets forth
Debtor's organizational identification number.
(w) (i) The actual name of Debtor is the name set forth in the
preamble above; (ii) Debtor has no trade names other than "Fashion
Resource"; (iii) Debtor has not used any name other than that stated in
the preamble hereto or "Fashion Resource" for the preceding five years;
and (iv) no entity has merged into Debtor or been acquired by Debtor
within the past five years.
(x) At any time and from time to time that any Collateral
consists of instruments, certificated securities or other items that
require or permit possession by the secured party to perfect the
security interest created hereby, the Debtor shall deliver such
Collateral to the Agent.
(y) To the extent that any Collateral is in the possession of
any third party, the Debtor shall join with the Secured Parties in
notifying such third party of the Secured Parties' security interest in
such Collateral and shall use its best efforts to obtain an
acknowledgement and agreement from such third party with respect to the
Collateral, in form and substance satisfactory to the Secured Parties.
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(z) If any Debtor shall at any time hold or acquire a
commercial tort claim, such Debtor shall promptly notify the Secured
Parties in a writing signed by such Debtor of the particulars thereof
and grant to the Secured Parties in such writing a security interest
therein and in the proceeds thereof, all upon the terms of this
Agreement, with such writing to be in form and substance satisfactory
to the Secured Parties.
(aa) Debtor will from time to time, at the expense of the
Debtor, promptly execute and deliver all such further instruments and
documents, and take all such further action as may be necessary or
desirable, or as the Secured Parties may reasonably request, in order
to perfect and protect any security interest granted or purported to be
granted hereby or to enable the Secured Parties to exercise and enforce
their rights and remedies hereunder and with respect to any Collateral
or to otherwise carry out the purposes of this Agreement.
(bb) None of the account debtors or other persons or entities
obligated on any of the Collateral is a governmental authority covered
by the Federal Assignment of Claims Act or any similar federal, state
or local statute or rule in respect of such Collateral.
4. DEFAULTS. The following events shall be "EVENTS OF DEFAULT":
(a) The occurrence of an Event of Default (as defined in the
Debentures) under the Debentures;
(b) Any representation or warranty of Debtor in this Agreement
shall prove to have been incorrect in any material respect when made;
(c) The failure by Debtor to observe or perform any of its
obligations hereunder for five (5) days after delivery to such Debtor
of notice of such failure by or on behalf of a Secured Party unless
such default is capable of cure but cannot be cured within such time
frame and such Debtor is using best efforts to cure same in a timely
fashion; or
(d) If any provision of this Agreement shall at any time for
any reason be declared to be null and void, or the validity or
enforceability thereof shall be contested by Debtor, or a proceeding
shall be commenced by Debtor, or by any governmental authority having
jurisdiction over Debtor, seeking to establish the invalidity or
unenforceability thereof, or Debtor shall deny that Debtor has any
liability or obligation purported to be created under this Agreement.
5. DUTY TO HOLD IN TRUST.
(a) Upon the occurrence of any Event of Default and at any
time thereafter, Debtor shall, upon receipt of any revenue, income,
dividend, interest or other sums subject to the Security Interest,
whether payable pursuant to the Debenture or otherwise, or of any
check, draft, note, trade acceptance or other instrument evidencing an
obligation to pay any such sum, hold the same in trust for the Secured
Parties and shall forthwith
8
endorse and transfer any such sums or instruments, or both, to the
Secured Parties, pro-rata in proportion to their initial purchases of
Debentures for application to the satisfaction of the Obligations (and
if any Debenture is not outstanding, pro-rata in proportion to the
initial purchases of the remaining Debentures).
6. RIGHTS AND REMEDIES UPON DEFAULT.
(a) Upon the occurrence of any Event of Default and at any
time thereafter, the Secured Parties, acting through any agent
appointed by them for such purpose, shall have the right to exercise
all of the remedies conferred hereunder and under the Debentures, and
the Secured Parties shall have all the rights and remedies of a secured
party under the UCC. Without limitation, the Secured Parties shall have
the following rights and powers:
(i) The Secured Parties shall have the right to take
possession of the Collateral and, for that purpose, enter,
with the aid and assistance of any person, any premises where
the Collateral, or any part thereof, is or may be placed and
remove the same, and Debtor shall assemble the Collateral and
make it available to the Secured Parties at places which the
Secured Parties shall reasonably select, whether at Debtor's
premises or elsewhere, and make available to the Secured
Parties, without rent, all of Debtor's respective premises and
facilities for the purpose of the Secured Parties taking
possession of, removing or putting the Collateral in saleable
or disposable form.
(ii) Upon notice to the Debtor by Agent, all rights
of Debtor to exercise the voting and other consensual rights
which it would otherwise be entitled to exercise and all
rights of Debtor to receive the dividends and interest which
it would otherwise be authorized to receive and retain, shall
cease. Upon such notice, Agent shall have the right to receive
any interest, cash dividends or other payments on the
Collateral and, at the option of Agent, to exercise in such
Agent's discretion all voting rights pertaining thereto.
Without limiting the generality of the foregoing, Agent shall
have the right (but not the obligation) to exercise all rights
with respect to the Collateral as if it were the sole and
absolute owner thereof.
(iii) The Secured Parties shall have the right to
assign, sell, lease or otherwise dispose of and deliver all or
any part of the Collateral, at public or private sale or
otherwise, either with or without special conditions or
stipulations, for cash or on credit or for future delivery, in
such parcel or parcels and at such time or times and at such
place or places, and upon such terms and conditions as the
Secured Parties may deem commercially reasonable, all without
(except as shall be required by applicable statute and cannot
be waived) advertisement or demand upon or notice to Debtor or
right of redemption of Debtor, which are hereby expressly
waived. Upon each such sale, lease, assignment or other
transfer of Collateral, the Secured Parties may, unless
prohibited by applicable law which cannot be waived, purchase
all or any part of the Collateral being sold,
9
free from and discharged of all trusts, claims, right of
redemption and equities of Debtor, which are hereby waived and
released.
(iv) The Secured Parties shall have the right (but
not the obligation) to notify any account debtors and any
obligors under instruments or accounts to make payments
directly to the Secured Parties and to enforce the Debtors'
rights against such account debtors and obligors.
(b) The Agent may comply with any applicable law in connection
with a disposition of Collateral and such compliance will not be
considered adversely to affect the commercial reasonableness of any
sale of the Collateral. The Agent may sell the Collateral without
giving any warranties and may specifically disclaim such warranties. If
the Agent sells any of the Collateral on credit, the Debtor will only
be credited with payments actually made by the purchaser. In addition,
Debtor waives any and all rights that it may have to a judicial hearing
in advance of the enforcement of any of the Agent's rights and remedies
hereunder, including, without limitation, its right following an Event
of Default to take immediate possession of the Collateral and to
exercise its rights and remedies with respect thereto.
7. APPLICATIONS OF PROCEEDS. The proceeds of any such sale, lease or
other disposition of the Collateral hereunder shall be applied first, to the
expenses of retaking, holding, storing, processing and preparing for sale,
selling, and the like (including, without limitation, any taxes, fees and other
costs incurred in connection therewith) of the Collateral, to the reasonable
attorneys' fees and expenses incurred by the Secured Parties in enforcing their
rights hereunder and in connection with collecting, storing and disposing of the
Collateral, and then to satisfaction of the Obligations pro rata among the
Secured Parties (based on then-outstanding principal amounts of Debentures at
the time of any such determination), and to the payment of any other amounts
required by applicable law, after which the Secured Parties shall pay to the
Debtor any surplus proceeds. If, upon the sale, license or other disposition of
the Collateral, the proceeds thereof are insufficient to pay all amounts to
which the Secured Parties are legally entitled, the Debtor will be liable for
the deficiency, together with interest thereon, at the rate of 10% per annum or
the lesser amount permitted by applicable law (the "Default Rate"), and the
reasonable fees of any attorneys employed by the Secured Parties to collect such
deficiency. To the extent permitted by applicable law, Debtor waives all claims,
damages and demands against the Secured Parties arising out of the repossession,
removal, retention or sale of the Collateral, unless due solely to the gross
negligence or willful misconduct of the Secured Parties as determined by a final
judgment (not further appealed) of a court of competent jurisdiction.
8. COSTS AND EXPENSES. Debtor agrees to pay all reasonable
out-of-pocket fees, costs and expenses incurred in connection with any filing
required hereunder, including without limitation, any financing statements
pursuant to the UCC, continuation statements, partial releases and/or
termination statements related thereto or any expenses of any searches
reasonably required by the Secured Parties. Debtor shall also pay all other
claims and charges which in the reasonable opinion of the Secured Parties might
prejudice, imperil or otherwise affect the
10
Collateral or the Security Interest therein. Debtor will also, upon demand, pay
to the Secured Parties the amount of any and all reasonable expenses, including
the reasonable fees and expenses of its counsel and of any experts and agents,
which the Secured Parties may incur in connection with (i) the enforcement of
this Agreement, (ii) the custody or preservation of, or the sale of, collection
from, or other realization upon, any of the Collateral, or (iii) the exercise or
enforcement of any of the rights of the Secured Parties under the Debentures.
Until so paid, any fees payable hereunder shall be added to the principal amount
of the Debentures and shall bear interest at the Default Rate.
9. RESPONSIBILITY FOR COLLATERAL. The Debtor assumes all liabilities
and responsibility in connection with all Collateral, and the Obligations shall
in no way be affected or diminished by reason of the loss, destruction, damage
or theft of any of the Collateral or its unavailability for any reason. Without
limiting the generality of the foregoing, (a) neither the Agent nor any Secured
Party (i) has any duty (either before or after an Event of Default) to collect
any amounts in respect of the Collateral or to preserve any rights relating to
the Collateral, or (ii) has any obligation to clean-up or otherwise prepare the
Collateral for sale, and (b) Debtor shall remain obligated and liable under each
contract or agreement included in the Collateral to be observed or performed by
Debtor thereunder. Neither the Agent nor any Secured Party shall have any
obligation or liability under any such contract or agreement by reason of or
arising out of this Agreement or the receipt by the Agent or any Secured Party
of any payment relating to any of the Collateral, nor shall the Agent or any
Secured Party be obligated in any manner to perform any of the obligations of
Debtor under or pursuant to any such contract or agreement, to make inquiry as
to the nature or sufficiency of any payment received by the Agent or any Secured
Party in respect of the Collateral or as to the sufficiency of any performance
by any party under any such contract or agreement, to present or file any claim,
to take any action to enforce any performance or to collect the payment of any
amounts which may have been assigned to the Agent or to which the Agent or any
Secured Party may be entitled at any time or times.
10. SECURITY INTEREST ABSOLUTE. All rights of the Secured Parties and
all obligations of the Debtor hereunder, shall be absolute and unconditional,
irrespective of: (a) any lack of validity or enforceability of this Agreement,
the Debentures or any agreement entered into in connection with the foregoing,
or any portion hereof or thereof; (b) any change in the time, manner or place of
payment or performance of, or in any other term of, all or any of the
Obligations, or any other amendment or waiver of or any consent to any departure
from the Debentures or any other agreement entered into in connection with the
foregoing; (c) any exchange, release or nonperfection of any of the Collateral,
or any release or amendment or waiver of or consent to departure from any other
collateral for, or any guaranty, or any other security, for all or any of the
Obligations; (d) any action by the Secured Parties to obtain, adjust, settle and
cancel in its sole discretion any insurance claims or matters made or arising in
connection with the Collateral; or (e) any other circumstance which might
otherwise constitute any legal or equitable defense available to Debtor, or a
discharge of all or any part of the Security Interest granted hereby. Until the
Obligations shall have been paid and performed in full, the rights of the
Secured Parties shall continue even if the Obligations are barred for any
reason, including, without limitation, the running of the statute of limitations
or bankruptcy. Debtor expressly waives presentment, protest, notice of protest,
demand, notice of nonpayment
11
and demand for performance. In the event that at any time any transfer of any
Collateral or any payment received by the Secured Parties hereunder shall be
deemed by final order of a court of competent jurisdiction to have been a
voidable preference or fraudulent conveyance under the bankruptcy or insolvency
laws of the United States, or shall be deemed to be otherwise due to any party
other than the Secured Parties, then, in any such event, Debtor's obligations
hereunder shall survive cancellation of this Agreement, and shall not be
discharged or satisfied by any prior payment thereof and/or cancellation of this
Agreement, but shall remain a valid and binding obligation enforceable in
accordance with the terms and provisions hereof. Debtor waives all right to
require the Secured Parties to proceed against any other person or entity or to
apply any Collateral which the Secured Parties may hold at any time, or to
marshal assets, or to pursue any other remedy. Debtor waives any defense arising
by reason of the application of the statute of limitations to any obligation
secured hereby.
11. TERM OF AGREEMENT. This Agreement and the Security Interest
shall terminate on the date on which all payments under the Debentures have been
indefeasibly paid in full and all other Obligations have been paid or
discharged; provided, however, that all indemnities of the Debtor contained in
this Agreement (including, without limitation, Annex A hereto) shall survive and
remain operative and in full force and effect regardless of the termination of
this Agreement.
12. POWER OF ATTORNEY; FURTHER ASSURANCES.
(a) Debtor authorizes the Secured Parties, and does hereby
make, constitute and appoint the Secured Parties and their respective
officers, agents, successors or assigns with full power of
substitution, as such Debtor's true and lawful attorney-in-fact, with
power, in the name of the various Secured Parties or Debtor, to, after
the occurrence and during the continuance of an Event of Default, (i)
endorse any note, checks, drafts, money orders or other instruments of
payment (including payments payable under or in respect of any policy
of insurance) in respect of the Collateral that may come into
possession of the Secured Parties; (ii) to sign and endorse any
financing statement pursuant to the UCC or any invoice, freight or
express ▇▇▇▇, ▇▇▇▇ of lading, storage or warehouse receipts, drafts
against debtors, assignments, verifications and notices in connection
with accounts, and other documents relating to the Collateral; (iii) to
pay or discharge taxes, liens, security interests or other encumbrances
at any time levied or placed on or threatened against the Collateral;
(iv) to demand, collect, receipt for, compromise, settle and ▇▇▇ for
monies due in respect of the Collateral; and (v) generally, at the
option of the Secured Parties, and at the expense of the Debtor, at any
time, or from time to time, to execute and deliver any and all
documents and instruments and to do all acts and things which the
Secured Parties deem necessary to protect, preserve and realize upon
the Collateral and the Security Interest granted therein in order to
effect the intent of this Agreement and the Debentures all as fully and
effectually as the Debtor might or could do; and Debtor hereby ratifies
all that said attorney shall lawfully do or cause to be done by virtue
hereof. This power of attorney is coupled with an interest and shall be
irrevocable for the term of this Agreement and thereafter as long as
any of the Obligations shall be outstanding.
(b) On a continuing basis, Debtor will make, execute,
acknowledge, deliver, file and record, as the case may be, with the
proper filing and recording agencies in any jurisdiction, including,
without limitation, the jurisdictions indicated on SCHEDULE C attached
hereto, all such
12
instruments, and take all such action as may reasonably be deemed
necessary or advisable, or as reasonably requested by the Secured
Parties, to perfect the Security Interest granted hereunder and
otherwise to carry out the intent and purposes of this Agreement, or
for assuring and confirming to the Secured Parties the grant or
perfection of a perfected security interest in all the Collateral under
the UCC.
(c) Debtor hereby irrevocably appoints the Secured Parties as
Debtor's attorney-in-fact, with full authority in the place and instead
of Debtor and in the name of Debtor, from time to time in the Secured
Parties' discretion, to take any action and to execute any instrument
which the Secured Parties may deem necessary or advisable to accomplish
the purposes of this Agreement, including the filing, in its sole
discretion, of one or more financing or continuation statements and
amendments thereto, relative to any of the Collateral without the
signature of Debtor where permitted by law. This power of attorney is
coupled with an interest and shall be irrevocable for the term of this
Agreement and thereafter as long as any of the Obligations shall be
outstanding.
13. NOTICES. All notices, requests, demands and other communications
hereunder shall be subject to the notice provision of the Purchase Agreement (as
such term is defined in the Debentures).
14. OTHER SECURITY. To the extent that the Obligations are now or
hereafter secured by property other than the Collateral or by the guarantee,
endorsement or property of any other person, firm, corporation or other entity,
then the Secured Parties shall have the right, in their sole discretion, to
pursue, relinquish, subordinate, modify or take any other action with respect
thereto, without in any way modifying or affecting any of the Secured Parties'
rights and remedies hereunder.
15. APPOINTMENT OF AGENT. The Secured Parties hereby appoint
_________________ (the "AGENT") to act as their agent for purposes of exercising
any and all rights and remedies of the Secured Parties hereunder. Additionally,
the Secured Parties hereby appoint the Agent to act as their agent for purposes
of negotiating and binding the Secured Parties to the Intercreditor Agreement by
and among Agent, Debtor, GMAC and UPS, substantially in the form of EXHIBIT A
attached hereto (the "INTERCREDITOR AGREEMENT"), which Intercreditor Agreement
shall be binding on the Secured Parties, their successors and assigns, by virtue
of Agent's signature thereto. Such appointment shall continue until revoked in
writing by a Majority in Interest, at which time a Majority in Interest shall
appoint a new Agent; PROVIDED, that _________ may not be removed as Agent unless
__________________ shall then hold less than $____________ principal amount of
Debentures; provided further that such removal may occur only if each of the
other Secured Parties shall then hold not less than $______________ principal
amount of Debentures. The Agent shall have the rights, responsibilities and
immunities set forth in ANNEX A hereto.
16. AGREEMENT TO SUBORDINATE TO SENIOR INDEBTEDNESS. The Secured
Parties hereby agree that if Debtor desires to incur additional secured
indebtedness from any of GMAC Commercial Finance LLC, UPS Capital Global Trade
Finance Corporation or DBS Bank (Hong Kong) Limited (formerly known as ▇▇▇ ▇▇▇▇
Bank), or any of their respective affiliates
13
("EXISTING SENIOR LENDERS"), or to replace existing secured indebtedness held by
any of the Existing Senior Lenders (such additional or replacement indebtedness,
the "SENIOR INDEBTEDNESS"), the Secured Parties shall (i) consent to the
incurrence of such Senior Indebtedness, and (ii) subordinate their right to
payment of the Secured Obligations to the prior payment in full of the Senior
Indebtedness, and subordinate their rights in the Collateral to the prior rights
in the Collateral of the holder or holders of Senior Indebtedness on terms
substantially similar to the payment and Collateral subordination terms set
forth in the Intercreditor Agreement; provided that (W) the holder of such
Senior Indebtedness is an Existing Senior Lender or, in the case of a
replacement of Senior Indebtedness, one or more commercial banks or other
financial institutions whose primary business is not investing in equity
securities, (X) the Secured Parties shall not be obligated to subordinate their
rights to receive payment to the prior payment of any of the Senior Indebtedness
unless and until the occurrence of, and then only for the continuation of, an
event of default under the Senior Indebtedness, and (Y) any indebtedness
incurred to replace existing secured indebtedness shall be pursuant to a credit
facility primarily to fund working capital.
17. MISCELLANEOUS.
(a) No course of dealing between the Debtor and the Secured
Parties, nor any failure to exercise, nor any delay in exercising, on
the part of the Secured Parties, any right, power or privilege
hereunder or under the Debentures shall operate as a waiver thereof;
nor shall any single or partial exercise of any right, power or
privilege hereunder or thereunder preclude any other or further
exercise thereof or the exercise of any other right, power or
privilege.
(b) All of the rights and remedies of the Secured Parties with
respect to the Collateral, whether established hereby or by the
Debentures or by any other agreements, instruments or documents or by
law shall be cumulative and may be exercised singly or concurrently.
(c) This Agreement constitutes the entire agreement of the
parties with respect to the subject matter hereof and is intended to
supersede all prior negotiations, understandings and agreements with
respect thereto. Except as specifically set forth in this Agreement, no
provision of this Agreement may be modified or amended except by a
written agreement specifically referring to this Agreement and signed
by the parties hereto.
(d) In the event any provision of this Agreement is held to be
invalid, prohibited or unenforceable in any jurisdiction for any
reason, unless such provision is narrowed by judicial construction,
this Agreement shall, as to such jurisdiction, be construed as if such
invalid, prohibited or unenforceable provision had been more narrowly
drawn so as not to be invalid, prohibited or unenforceable. If,
notwithstanding the foregoing, any provision of this Agreement is held
to be invalid, prohibited or unenforceable in any jurisdiction, such
provision, as to such jurisdiction, shall be ineffective to the extent
of such invalidity, prohibition or unenforceability without
invalidating the remaining portion of such provision or the other
14
provisions of this Agreement and without affecting the validity or
enforceability of such provision or the other provisions of this
Agreement in any other jurisdiction.
(e) No waiver of any breach or default or any right under this
Agreement shall be considered valid unless in writing and signed by the
party giving such waiver, and no such waiver shall be deemed a waiver
of any subsequent breach or default or right, whether of the same or
similar nature or otherwise.
(f) This Agreement shall be binding upon and inure to the
benefit of each party hereto and its successors and assigns.
(g) Each party shall take such further action and execute and
deliver such further documents as may be necessary or appropriate in
order to carry out the provisions and purposes of this Agreement.
(h) All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by
and construed and enforced in accordance with the internal laws of the
State of New York, without regard to the principles of conflicts of law
thereof. Debtor agrees that all proceedings concerning the
interpretations, enforcement and defense of the transactions
contemplated by this Agreement and the Debenture (whether brought
against a party hereto or its respective affiliates, directors,
officers, shareholders, partners, members, employees or agents) shall
be commenced exclusively in the state and federal courts sitting in the
[City of New York, Borough of Manhattan]. Each Debtor hereby
irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the [City of New York, Borough of Manhattan]
for the adjudication of any dispute hereunder or in connection herewith
or with any transaction contemplated hereby or discussed herein, and
hereby irrevocably waives, and agrees not to assert in any proceeding,
any claim that it is not personally subject to the jurisdiction of any
such court, that such proceeding is improper. Each party hereto hereby
irrevocably waives personal service of process and consents to process
being served in any such proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it
under this Agreement and agrees that such service shall constitute good
and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. Each party hereto hereby irrevocably
waives, to the fullest extent permitted by applicable law, any and all
right to trial by jury in any legal proceeding arising out of or
relating to this Agreement or the transactions contemplated hereby. If
any party shall commence a proceeding to enforce any provisions of this
Agreement, then the prevailing party in such proceeding shall be
reimbursed by the other party for its reasonable attorneys' fees and
other costs and expenses incurred with the investigation, preparation
and prosecution of such proceeding.
(i) This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the
same Agreement. In the event that any signature is
15
delivered by facsimile transmission, such signature shall create a
valid binding obligation of the party executing (or on whose behalf
such signature is executed) the same with the same force and effect as
if such facsimile signature were the original thereof.
(j) Debtor shall indemnify, reimburse and hold harmless the
Secured Parties and their respective partners, members, shareholders,
officers, directors, employees and agents (collectively, "INDEMNITEES")
from and against any and all losses, claims, liabilities, damages,
penalties, suits, costs and expenses, of any kind or nature, (including
fees relating to the cost of investigating and defending any of the
foregoing) imposed on, incurred by or asserted against such Indemnitee
in any way related to or arising from or alleged to arise from this
Agreement or the Collateral, except any such losses, claims,
liabilities, damages, penalties, suits, costs and expenses which result
from the gross negligence or willful misconduct of the Indemnitee as
determined by a final, nonappealable decision of a court of competent
jurisdiction. This indemnification provision is in addition to, and not
in limitation of, any other indemnification provision in the
Debentures, the Purchase Agreement (as such term is defined in the
Debentures) or any other agreement, instrument or other document
executed or delivered in connection herewith or therewith.
[SIGNATURE PAGES FOLLOW]
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IN WITNESS WHEREOF, the parties hereto have caused this Security
Agreement to be duly executed on the day and year first above written.
TARRANT APPAREL GROUP
By: _______________________________________
Name:
Title:
[SIGNATURE PAGE OF HOLDERS FOLLOWS]
17
[SIGNATURE PAGE OF HOLDERS TO TAGS SECURITY AGREEMENT]
Name of Investing Entity: __________________________
SIGNATURE OF AUTHORIZED SIGNATORY OF INVESTING ENTITY: _________________________
Name of Authorized Signatory: _________________________
Title of Authorized Signatory: __________________________
[SIGNATURE PAGE OF HOLDERS FOLLOWS]
18
EXHIBIT A
INTERCREDITOR AGREEMENT
19
SCHEDULE A
Principal Place of Business of Debtor:
Locations Where Collateral is Located or Stored:
20
SCHEDULE B
21
SCHEDULE C
22
SCHEDULE D
Organizational Identification Number
23
ANNEX A
TO
SECURITY
AGREEMENT
THE AGENT
1. APPOINTMENT. The Secured Parties (all capitalized terms
used herein and not otherwise defined shall have the respective
meanings provided in the Security Agreement to which this Annex A is
attached (the "AGREEMENT")), by their acceptance of the benefits of the
Agreement, hereby designate __________ (the "Agent") as the Agent to
act as specified herein and in the Agreement. Each Secured Party shall
be deemed irrevocably to authorize the Agent to take such action on its
behalf under the provisions of the Agreement and any other Transaction
Document (as such term is defined in the Debentures) and to exercise
such powers and to perform such duties hereunder and thereunder as are
specifically delegated to or required of the Agent by the terms hereof
and thereof and such other powers as are reasonably incidental thereto.
The Agent may perform any of its duties hereunder by or through its
agents or employees.
2. NATURE OF DUTIES. The Agent shall have no duties or
responsibilities except those expressly set forth in the Agreement.
Neither the Agent nor any of its partners, members, shareholders,
officers, directors, employees or agents shall be liable for any action
taken or omitted by it as such under the Agreement or hereunder or in
connection herewith or therewith, be responsible for the consequence of
any oversight or error of judgment or answerable for any loss, unless
caused solely by its or their gross negligence or willful conduct as
determined by a final judgment (not subject to further appeal) of a
court of competent jurisdiction. The duties of the Agent shall be
mechanical and administrative in nature; the Agent shall not have by
reason of the Agreement or any other Transaction Document a fiduciary
relationship in respect of any Debtor or any Secured Party; and nothing
in the Agreement or any other Transaction Document, expressed or
implied, is intended to or shall be so construed as to impose upon the
Agent any obligations in respect of the Agreement or any other
Transaction Document except as expressly set forth herein and therein.
3. LACK OF RELIANCE ON THE AGENT. Independently and without
reliance upon the Agent, each Secured Party, to the extent it deems
appropriate, has made and shall continue to make (i) its own
independent investigation of the financial condition and affairs of the
Company and its subsidiaries in connection with such Secured Party's
investment in the Debtor, the creation and continuance of the
Obligations, the transactions contemplated by the Transaction
Documents, and the taking or not taking of any action in connection
therewith, and (ii) its own appraisal of the creditworthiness of the
Company and its subsidiaries, and of the value of the Collateral from
time to time, and the Agent shall have no duty or responsibility,
either initially or on a continuing basis, to provide any Secured Party
with any credit, market or other information with respect thereto,
whether coming into its possession before any Obligations are incurred
or at any time or times thereafter. The Agent shall not be responsible
to the Debtor or any Secured Party for any recitals, statements,
information, representations or warranties herein or in any document,
certificate or other writing delivered in connection herewith, or for
the execution,
24
effectiveness, genuineness, validity, enforceability, perfection,
collectibility, priority or sufficiency of the Agreement or any other
Transaction Document, or for the financial condition of the Debtor or
the value of any of the Collateral, or be required to make any inquiry
concerning either the performance or observance of any of the terms,
provisions or conditions of the Agreement or any other Transaction
Document, or the financial condition of the Debtor, or the value of any
of the Collateral, or the existence or possible existence of any
default or Event of Default under the Agreement, the Debentures or any
of the other Transaction Documents.
4. CERTAIN RIGHTS OF THE AGENT. The Agent shall have the right
to take any action with respect to the Collateral, on behalf of all of
the Secured Parties. To the extent practical, the Agent shall request
instructions from the Secured Parties with respect to any material act
or action (including failure to act) in connection with the Agreement
or any other Transaction Document, and shall be entitled to act or
refrain from acting in accordance with the instructions of Secured
Parties holding a majority in principal amount of Debentures (based on
then-outstanding principal amounts of Debentures at the time of any
such determination); if such instructions are not provided despite the
Agent's request therefor, the Agent shall be entitled to refrain from
such act or taking such action, and if such action is taken, shall be
entitled to appropriate indemnification from the Secured Parties in
respect of actions to be taken by the Agent; and the Agent shall not
incur liability to any person or entity by reason of so refraining.
Without limiting the foregoing, (a) no Secured Party shall have any
right of action whatsoever against the Agent as a result of the Agent
acting or refraining from acting hereunder in accordance with the terms
of the Agreement or any other Transaction Document, and the Debtor
shall have no right to question or challenge the authority of, or the
instructions given to, the Agent pursuant to the foregoing and (b) the
Agent shall not be required to take any action which the Agent believes
(i) could reasonably be expected to expose it to personal liability or
(ii) is contrary to this Agreement, the Transaction Documents or
applicable law.
5. RELIANCE. The Agent shall be entitled to rely, and shall be
fully protected in relying, upon any writing, resolution, notice,
statement, certificate, telex, teletype or telecopier message,
cablegram, radiogram, order or other document or telephone message
signed, sent or made by the proper person or entity, and, with respect
to all legal matters pertaining to the Agreement and the other
Transaction Documents and its duties thereunder, upon advice of counsel
selected by it and upon all other matters pertaining to this Agreement
and the other Transaction Documents and its duties thereunder, upon
advice of other experts selected by it.
6. INDEMNIFICATION. To the extent that the Agent is not
reimbursed and indemnified by the Debtor, the Secured Parties will
jointly and severally reimburse and indemnify the Agent, in proportion
to their initially purchased respective principal amounts of
Debentures, from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses
or disbursements of any kind or nature whatsoever which may be imposed
on, incurred by or asserted against the Agent in performing its duties
hereunder or under the Agreement or any other Transaction Document, or
in any way relating to or arising out of the Agreement or any other
Transaction Document except for those determined by a final judgment
(not subject to further appeal) of a court of competent jurisdiction to
have resulted solely from the Agent's own gross negligence or willful
misconduct. Prior to taking any action hereunder as Agent, the Agent
may require each Secured Party to deposit with it sufficient
25
sums as it determines in good faith is necessary to protect the Agent
for costs and expenses associated with taking such action.
7. RESIGNATION BY THE AGENT.
(a) The Agent may resign from the performance of all its
functions and duties under the Agreement and the other Transaction
Documents at any time by giving 30 days' prior written notice (as
provided in the Agreement) to the Debtor and the Secured Parties. Such
resignation shall take effect upon the appointment of a successor Agent
pursuant to clauses (b) and (c) below.
(b) Upon any such notice of resignation, the Secured Parties,
acting by a Majority in Interest, shall appoint a successor Agent
hereunder.
(c) If a successor Agent shall not have been so appointed
within said 30-day period, the Agent shall then appoint a successor
Agent who shall serve as Agent until such time, if any, as the Secured
Parties appoint a successor Agent as provided above. If a successor
Agent has not been appointed within such 30-day period, the Agent may
petition any court of competent jurisdiction or may interplead the
Debtor and the Secured Parties in a proceeding for the appointment of a
successor Agent, and all fees, including, but not limited to,
extraordinary fees associated with the filing of interpleader and
expenses associated therewith, shall be payable by the Debtor on
demand.
8. RIGHTS WITH RESPECT TO COLLATERAL. Each Secured Party
agrees with all other Secured Parties and the Agent (i) that it shall
not, and shall not attempt to, exercise any rights with respect to its
security interest in the Collateral, whether pursuant to any other
agreement or otherwise (other than pursuant to this Agreement), or take
or institute any action against the Agent or any of the other Secured
Parties in respect of the Collateral or its rights hereunder (other
than any such action arising from the breach of this Agreement) and
(ii) that such Secured Party has no other rights with respect to the
Collateral other than as set forth in this Agreement and the other
Transaction Documents.
26