SECURITY AND PURCHASE AGREEMENT LAURUS MASTER FUND, LTD. MAGNETECH INTEGRATED SERVICES CORP., MAGNETECH INDUSTRIAL SERVICES, INC., MARTELL ELECTRIC, LLC, and HK ENGINE COMPONENTS, LLC HK MACHINED PARTS, LLC HK WESTON PROPERTIES, LLC HK CAST PRODUCTS,...
Exhibit
10.9
LAURUS
MASTER FUND, LTD.
MAGNETECH
INTEGRATED SERVICES CORP.,
MAGNETECH
INDUSTRIAL SERVICES, INC.,
▇▇▇▇▇▇▇
ELECTRIC, LLC,
and
HK
ENGINE
COMPONENTS, LLC
HK
MACHINED PARTS, LLC
▇▇
▇▇▇▇▇▇
PROPERTIES, LLC
HK
CAST
PRODUCTS, LLC
Dated:
August 24, 2005
TABLE
OF CONTENTS
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Page
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1.
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General
Definitions and Terms; Rules of Construction
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1
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2.
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Loan
Facility
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2
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3.
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Repayment
of the Loans
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5
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4.
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Procedure
for Loans
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5
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5.
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Interest
and Payments
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5
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6.
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Security
Interest
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7
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7.
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Representations,
Warranties and Covenants Concerning the Collateral
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7
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8.
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Payment
of Accounts
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10
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9.
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Collection
and Maintenance of ▇▇▇▇▇▇▇▇▇▇
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▇▇
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▇▇.
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Inspections
and Appraisals
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11
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11.
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Financial
Reporting
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11
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12.
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Additional
Representations and Warranties
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12
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13.
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Covenants
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22
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14.
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Further
Assurances
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29
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15.
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Representations,
Warranties and Covenants pf Laurus
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30
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16.
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Power
of Attorney
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31
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17.
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Term
of Agreement
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32
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18.
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▇▇▇▇▇▇▇▇▇▇▇
▇▇ ▇▇▇▇
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▇▇
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▇▇.
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Events
of Default
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32
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20.
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Remedies
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35
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i
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Page
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21.
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Waivers
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35
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22.
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Expenses
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36
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23.
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Assignment
by Laurus
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36
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24.
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No
Waiver; Cumulative Remedies
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37
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25.
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Application
of Payments
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37
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26.
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Indemnity
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37
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27.
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▇▇▇▇▇▇▇
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▇▇
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▇▇.
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Borrowing
Agency Provisions
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38
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29.
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Notices
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39
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30.
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Governing
Law, Jurisdiction and Waiver of Jury Trial
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40
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31.
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Limitation
of Liability
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41
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32.
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Entire
Understanding
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41
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33.
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Severability
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42
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34.
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Captions
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42
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35.
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Counterparts;
Telecopier Signature
|
42
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36.
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Construction
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42
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37.
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Publicity
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42
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38.
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Joinder
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42
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39
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Legends
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43
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ii
This
Security and Purchase Agreement is made as of August 24, 2005 by and among
LAURUS MASTER FUND, LTD., a Cayman Islands corporation (“Laurus”),
Magnetech Integrated Services Corp., an Indiana corporation (“the
Parent”),
and
each party listed on Exhibit
A
attached
hereto (each an “Eligible
Subsidiary”
and
collectively, the “Eligible
Subsidiaries”;
the
Parent and each Eligible Subsidiary, each a “Company” and collectively, the
“Companies”).
BACKGROUND
The
Companies have requested that Laurus make advances available to the Companies;
and
Laurus
has agreed to make such advances on the terms and conditions set forth in
this
Agreement.
AGREEMENT
NOW,
THEREFORE, in consideration of the mutual covenants and undertakings and
the
terms and conditions contained herein, the parties hereto agree as
follows:
1. General
Definitions and Terms; Rules of Construction.
(a) General
Definitions.
Capitalized terms used in this Agreement shall have the meanings assigned
to
them in Annex
A.
(b) Accounting
Terms.
Any
accounting terms used in this Agreement which are not specifically defined
shall
have the meanings customarily given them in accordance with GAAP and all
financial computations shall be computed, unless specifically provided herein,
in accordance with GAAP consistently applied.
(c) Other
Terms.
All
other terms used in this Agreement and defined in the UCC, shall have the
meaning given therein unless otherwise defined herein.
(d) Rules
of Construction.
All
Schedules, Addenda, Annexes and Exhibits hereto or expressly identified to
this
Agreement are incorporated herein by reference and taken together with this
Agreement constitute but a single agreement. The words “herein”, “hereof” and
“hereunder” or other words of similar import refer to this Agreement as a whole,
including the Exhibits, Addenda, Annexes and Schedules thereto, as the same
may
be from time to time amended, modified, restated or supplemented, and not
to any
particular section, subsection or clause contained in this Agreement. Wherever
from the context it appears appropriate, each term stated in either the singular
or plural shall include the singular and the plural, and pronouns stated
in the
masculine, feminine or neuter gender shall include the masculine, the feminine
and the neuter. The term “or” is not exclusive. The term “including” (or any
form thereof) shall not be limiting or exclusive. All references to statutes
and
related regulations shall include any amendments of same and any successor
statutes and regulations. All references in this
Agreement
or in the Schedules, Addenda, Annexes and Exhibits to this Agreement to
sections, schedules, disclosure schedules, exhibits, and attachments shall
refer
to the corresponding sections, schedules, disclosure schedules, exhibits,
and
attachments of or to this Agreement. All references to any instruments or
agreements, including references to any of this Agreement or the Ancillary
Agreements shall include any and all modifications or amendments thereto
and any
and all extensions or renewals thereof.
2. Loan
Facility.
(a) Revolving
Loans.
(i)
Subject to the terms and conditions set forth herein and in the Ancillary
Agreements, Laurus may make revolving loans (the “Revolving
Loans”)
to
Companies from time to time during the Term which, in the aggregate at any
time
outstanding, will not exceed the lesser of (x) (I) the Capital Availability
Amount minus (II) such reserves as Laurus may reasonably in its good faith
judgment deem proper and necessary from time to time based on the occurrence
of
significant business developments of any Company (the “Reserves”)
and
(y) an amount equal to (I) the Accounts Availability minus (II) the Reserves.
The amount derived at any time from Section 2(a)(i)(y)(I) minus
2(a)(i)(y)(II) shall be referred to as the “Formula
Amount.”
The
Companies shall, jointly and severally, execute and deliver to Laurus on
the
Closing Date the Revolving Note and a Minimum Borrowing Note evidencing the
Revolving Loans funded on the Closing Date. From time to time thereafter,
the
Companies shall jointly and severally execute and deliver to Laurus immediately
prior to the final funding of each additional $4,000,000 tranche of Revolving
Loans allocated to any Minimum Borrowing Note issued after the date hereof
(calculated on a cumulative basis for each such tranche) an additional Minimum
Borrowing Note evidencing such tranche, substantially in the form of the
Minimum
Borrowing Note delivered by the Companies to Laurus on the Closing Date.
Notwithstanding anything herein to the contrary, whenever during the Term
the
outstanding balance on the Minimum Borrowing Note shall be less than the
Minimum
Borrowing Amount (such difference being referred to herein as the “Transferable
Amount”)
to the
extent that the outstanding balance on the Revolving Note should equal or
exceed
$1,000,000, that portion of the balance of the Revolving Note that exceeds
$1,000,000, but does not exceed the Transferable Amount, shall be segregated
from the outstanding balance under the Revolving Note and allocated to and
aggregated with the then existing balance of the next unissued serialized
Minimum Borrowing Note (the “Next
Unissued Serialized Note”);
provided that such segregated amount shall remain subject to the terms and
conditions of such Revolving Note (including the repayment provisions of
the
Revolving Note) until a new serialized Minimum Borrowing Note is issued as
set
forth below. The Next Unissued Serialized Note shall remain in book entry
form
until the balance thereunder shall equal the Minimum Borrowing Amount, at
which
time a new serialized Minimum Borrowing Note in the face amount equal to
the
Minimum Borrowing Amount will be issued and registered as set forth in the
Registration Rights Agreement (and the outstanding balance under the Revolving
Note shall at such time be correspondingly reduced in the amount equal to
the
Minimum Borrowing Amount as a result of the issuance of such new serialized
Minimum Borrowing Note). Notwithstanding anything to the contrary contained
in
this Agreement or the Ancillary Agreement, the aggregate principal amount
of all
Minimum Borrowing Notes issued shall not exceed $7,000,000 without the consent
of the Parent.
2
(ii)
Notwithstanding the limitations set forth above, if requested by any Company,
Laurus retains the right to lend to such Company from time to time such amounts
in excess of such limitations as Laurus may determine in its sole
discretion.
(iii)
The
Companies acknowledge that the exercise of Laurus’ discretionary rights
hereunder may result during the Term in one or more increases or decreases
in
the advance percentages used in determining Accounts Availability and each
of
the Companies hereby consent to any such increases or decreases which may
limit
or restrict advances requested by the Companies, provided that in the case
of
any such decrease in the advance percentages the events giving rise to such
decrease and Laurus’ use of such discretion are attributable to a significant
change in the assets, liabilities, condition (financial or otherwise),
properties, operations, prospects or Eligible Accounts in the reasonable
good
faith judgment of Laurus.
(iv)
If
any interest, fees, costs or charges payable to Laurus hereunder are not
paid
when due, each of the Companies shall thereby be deemed to have requested,
and
Laurus is hereby authorized at its discretion to make and charge to the
Companies’ account, a Loan as of such date in an amount equal to such unpaid
interest, fees, costs or charges.
(v)
If
any Company at any time after three (3) days written notice to such Company
from
Laurus (provided however that such written notice to such Company shall not
be
required in the event that an Event of Default has occurred and is continuing)
fails to perform or observe any of the covenants contained in this Agreement
or
any Ancillary Agreement, Laurus may, but need not, perform or observe such
covenant on behalf and in the name, place and stead of such Company (or,
at
Laurus’ option, in Laurus’ name) and may, but need not, take any and all other
actions which Laurus may deem necessary to cure or correct such failure
(including the payment of taxes, the satisfaction of Liens, the performance
of
obligations owed to Account Debtors, lessors or other obligors, the procurement
and maintenance of insurance, the execution of assignments, security agreements
and financing statements, and the endorsement of instruments). The amount
of all
monies expended and all costs and expenses (including attorneys’ fees and legal
expenses) incurred by Laurus in connection with or as a result of the
performance or observance of such agreements or the taking of such action
by
Laurus shall be charged to the Companies’ account as a Revolving Loan and added
to the Obligations. To facilitate Laurus’ performance or observance of such
covenants by each Company, each Company hereby irrevocably appoints Laurus,
or
Laurus’ delegate, acting alone, as such Company’s attorney in fact (which
appointment is coupled with an interest) with the right (but not
the
duty) from time to time to create, prepare, complete, execute, deliver, endorse
or file in the name and on behalf of such Company any and all instruments,
documents, assignments, security agreements, financing statements, applications
for insurance and other agreements and writings required to be obtained,
executed, delivered or endorsed by such Company.
(vi)
Laurus will account to Company Agent monthly with a statement of all Loans
and
other advances, charges and payments made pursuant to this Agreement, and
such
account rendered by Laurus shall be deemed final, binding and conclusive
unless
Laurus is notified by Company Agent in writing to the contrary within thirty
(30) days of the date each account was rendered specifying the item or items
to
which objection is made.
3
(vii)
During the Term, the Companies may borrow and prepay Loans in accordance
with
the terms and conditions hereof.
(viii)
If
any Eligible Account is not paid by the Account Debtor within ninety (90)
days
after the date that such Eligible Account was invoiced or if any Account
Debtor
asserts a deduction, dispute, contingency, set-off, or counterclaim with
respect
to any Eligible Account, (a “Delinquent
Account”),
the
Companies shall jointly and severally (i) reimburse Laurus for the amount
of the
Loans made with respect to such Delinquent Account plus an adjustment fee
in an
amount equal to a fifteenth of one percent (0.15%) of the gross face amount
of
such Eligible Account or (ii) immediately replace such Delinquent Account
with
an otherwise Eligible Account.
(b) Receivables
Purchase.
Following the occurrence and during the continuance of an Event of Default,
Laurus may, at its option, elect to convert the credit facility contemplated
hereby to an accounts receivable purchase facility. Upon such election by
Laurus
(subsequent notice of which Laurus shall provide to Company Agent), the
Companies shall be deemed to hereby have sold, assigned, transferred, conveyed
and delivered to Laurus, and Laurus shall be deemed to have purchased and
received from the Companies, all right, title and interest of the Companies
in
and to all Accounts which shall at any time constitute Eligible Accounts
(the
“Receivables
Purchase”).
All
outstanding Loans hereunder shall be deemed obligations under such accounts
receivable purchase facility. The conversion to an accounts receivable purchase
facility in accordance with the terms hereof shall not be deemed an exercise
by
Laurus of its secured creditor rights under Article 9 of the UCC. Immediately
following Laurus’ request, the Companies shall execute all such further
documentation as may be required by Laurus to more fully set forth the accounts
receivable purchase facility herein contemplated, including, without limitation,
Laurus’ standard form of accounts receivable purchase agreement and account
debtor notification letters, but any Company’s failure to enter into any such
documentation shall not impair or affect the Receivables Purchase in any
manner
whatsoever.
(c) Minimum
Borrowing Amount.
After a
registration statement registering the Registrable Securities (as defined
in the
Registration Rights Agreement) has been declared effective by the SEC,
conversions of the Minimum Borrowing Amount into the Common Stock may be
initiated as set forth in the respective Minimum Borrowing Note. From and
after
the date upon which any outstanding principal of the Minimum Borrowing Amount
(as evidenced by the first Minimum Borrowing Note) is converted into Common
Stock (the “First
Conversion Date”),
(i)
corresponding amounts of all outstanding Loans (not attributable to the then
outstanding Minimum Borrowing Amount) existing on or made after the First
Conversion Date will be aggregated in accordance with Section 2(a)(i) and
(ii)
the Companies will issue a new (serialized) Minimum Borrowing Note to Laurus
in
accordance with Section 2(a)(i), and (iii) the Parent shall prepare and file
a
subsequent registration statement with the SEC to register the shares of
common
stock into which such subsequent Minimum Borrowing Note is convertible as
set
forth in the Registration Rights Agreement.
(d) Term
Loan.
Subject
to the terms and conditions set forth herein and in the Ancillary Agreements,
Laurus shall make a term loan (the “Term
Loan”)
to the
Parent (for the benefit of Companies) in an aggregate amount equal to
$3,000,000. The Term Loan shall be advanced on the Closing Date and shall
be,
with respect to principal, payable in consecutive
4
monthly
installments of principal commencing on March 1, 2006 and on the first day
of
each month thereafter, subject to acceleration upon the occurrence of an
Event
of Default or termination of this Agreement. The first twenty-nine principal
installments shall each be in the amount of $100,000 and the thirtieth and
final
installment shall be in an amount equal to the unpaid principal balance of
the
Term Loan plus all accrued and unpaid interest thereon. The Term Loan shall
be
evidenced by the Term Note
3. Repayment
of the Loans.
The
Companies (a) may prepay the Obligations from time to time in accordance
with
the terms and provisions of the Notes (and Section 17 hereof if such prepayment
is due to a termination of this Agreement); (b) shall repay on the expiration
of
the Term (i) the then aggregate outstanding principal balance of the Loans
together with accrued and unpaid interest, fees and charges and; (ii) all
other
amounts owed Laurus under this Agreement and the Ancillary Agreements; and
(c)
subject to Section 2(a)(ii), shall repay on any day on which the then aggregate
outstanding principal balance of the Loans are in excess of the Formula Amount
at such time, Loans in an amount equal to such excess. Any payments of
principal, interest, fees or any other amounts payable hereunder or under
any
Ancillary Agreement shall be made prior to 12:00 noon (New York time) on
the due
date thereof in immediately available funds.
4. Procedure
for Revolving Loans.
Company
Agent may by written notice request a borrowing of Revolving Loans prior
to
12:00 noon (New York time) on the Business Day of its request to incur, on
the
next Business Day, a Loan. Together with each request for a Revolving Loan
(or
at such other intervals as Laurus may request), Company Agent shall deliver
to
Laurus a Borrowing Base Certificate in the form of Exhibit
B
attached
hereto, which shall be certified as true and correct by the Chief Executive
Officer or Chief Financial Officer of Company Agent together with all supporting
documentation relating thereto. All Revolving Loans shall be disbursed from
whichever office or other place Laurus may designate from time to time and
shall
be charged to the Companies’ account on Laurus’ books. The proceeds of each
Revolving Loan made by Laurus shall be made available to Company Agent on
the
Business Day following the Business Day so requested in accordance with the
terms of this Section 4 by way of credit to the applicable Company’s operating
account maintained with such bank as Company Agent designated to Laurus.
Interest will begin to accrue on such Revolving Loans on the day the applicable
Company receives the proceeds of such Revolving Loan. Any and all Obligations
due and owing hereunder may be charged to the Companies’ account and shall
constitute Revolving Loans.
5. Interest
and Payments.
(a) Interest.
(i) Except
as
modified by Section 5(a)(iii) below, the Companies shall jointly and severally
pay interest at the Contract Rate on the unpaid principal balance of each
Loan
until such time as such Loan is collected in full in good
funds in
dollars of the United States of America.
5
(ii) Interest
and payments shall be computed on the basis of actual days elapsed in a year
of
360 days. At Laurus’ option, Laurus may charge the Companies’ account for said
interest.
(iii) Effective
upon the occurrence of any Event of Default and for so long as any Event
of
Default shall be continuing, the Contract Rate shall automatically be increased
as set forth in the Notes (such increased rate, the “Default
Rate”),
and
all outstanding Obligations, including unpaid interest, shall continue to
accrue
interest from the date of such Event of Default at the Default Rate applicable
to such Obligations.
(iv) In
no
event shall the aggregate interest payable hereunder exceed the maximum rate
permitted under any applicable law or regulation, as in effect from time
to time
(the “Maximum
Legal Rate”),
and
if any provision of this Agreement or any Ancillary Agreement is in
contravention of any such law or regulation, interest payable under this
Agreement and each Ancillary Agreement shall be computed on the basis of
the
Maximum Legal Rate (so that such interest will not exceed the Maximum Legal
Rate).
(v) The
Companies shall jointly and severally pay principal, interest and all other
amounts payable hereunder, or under any Ancillary Agreement, without any
deduction whatsoever, including any deduction for any set-off or
counterclaim.
(b) Payments;
Certain Closing Conditions.
(i) Closing
Payment; Grant Shares.
Upon
execution of this Agreement by each Company and Laurus: (x) the Companies
shall
jointly and severally pay to Laurus Capital Management, LLC a closing payment
in
an amount equal to three and six tenths percent (3.60%) of the Total Investment
Amount (the “Closing
Payment”);
and
(y) the Parent shall issue to Laurus 6,163,588 fully paid and non-assessable
shares of Common Stock (the “Grant
Shares”).
The
Closing Payment and Grant Shares shall be deemed fully earned on the Closing
Date and shall not be subject to rebate or proration for any
reason.
(ii) Unused
Line Payment.
None.
(iii) Overadvance
Payment.
Without
affecting Laurus’ rights hereunder in the event (x) the Loans exceed the Formula
Amount (each such event, an “Overadvance”)
without the written consent of Laurus, all such Overadvances shall bear
additional interest at a rate of 1.0% per month for all times such amounts
shall
be in excess of the Formula Amount and (y) an Overadvance exists following
the
receipt by the Companies of the written consent of Laurus, all such Overadvances
shall bear additional interest at a rate mutually acceptable to Laurus and
Parent for all times such amounts shall be in excess of the Formula Amount.
All
amounts that are incurred pursuant to this Section 5(b)(iii) shall be due
and
payable by the Companies monthly, in arrears, on the first business day of
each
calendar month and upon expiration of the Term.
(iv) Expenses.
The
Companies shall jointly and severally reimburse Laurus for its expenses
(including reasonable legal fees and expenses) incurred in connection with
the
preparation and negotiation of this Agreement and the Ancillary Agreements,
and
expenses incurred in connection with Laurus’ due diligence review of each
Company and its
6
Subsidiaries
and all related matters. Amounts required to be paid under this Section 5(b)(iv)
will be paid on the Closing Date and shall be $51,500 for such expenses referred
to in this Section 5(b)(iv), plus the cost of local real estate counsel for
Laurus.
6. Security
Interest.
(a) To
secure
the prompt payment to Laurus of the Obligations, each Company hereby assigns,
pledges and grants to Laurus a continuing security interest in and Lien upon
all
of the Collateral. All of each Company’s Books and Records relating to the
Collateral shall, until delivered to or removed by Laurus, be kept by such
Company in trust for Laurus until all Obligations have been paid in full.
Each
confirmatory assignment schedule or other form of assignment hereafter executed
by each Company shall be deemed to include the foregoing grant, whether or
not
the same appears therein.
(b) Each
Company hereby (i) authorizes Laurus to file any financing statements,
continuation statements or amendments thereto that (x) indicate the Collateral
(1) as all assets and personal property of such Company or words of similar
effect, regardless of whether any particular asset comprised in the Collateral
falls within the scope of Article 9 of the UCC of such jurisdiction, or (2)
as
being of an equal or lesser scope or with greater detail, and (y) contain
any
other information required by Part 5 of Article 9 of the UCC for the sufficiency
or filing office acceptance of any financing statement, continuation statement
or amendment and (ii) ratifies its authorization for Laurus to have filed
any
initial financial statements, or amendments thereto if filed prior to the
date
hereof. Each Company acknowledges that it is not authorized to file any
financing statement or amendment or termination statement with respect to
any
financing statement without the prior written consent of Laurus and agrees
that
it will not do so without the prior written consent of Laurus, subject to
such
Company’s rights under Section 9-509(d)(2) of the UCC.
(c) Each
Company hereby grants to Laurus an irrevocable, non-exclusive license
(exercisable upon the termination of this Agreement due to an occurrence
and
during the continuance of an Event of Default without payment of royalty
or
other compensation to such Company) to use, transfer, license or sublicense
any
Intellectual Property now owned, licensed to, or hereafter acquired by such
Company, and wherever the same may be located, and including in such license
access to all media in which any of the licensed items may be recorded or
stored
and to all computer and automatic machinery software and programs used for
the
compilation or printout thereof, and represents, promises and agrees that
any
such license or sublicense is not and will not be in conflict with the
contractual or commercial rights of any third Person; provided, that such
license will terminate
on the termination of this Agreement and the payment in full of all
Obligations.
7. Representations,
Warranties and Covenants Concerning the Collateral.
Each
Company represents, warrants (each of which such representations and warranties
shall be deemed repeated upon the making of each request for a Revolving
Loan
and made as of the time of each and every Revolving Loan hereunder) and
covenants as follows:
(a) all
of
the Collateral (i) is owned by it free and clear of all Liens (including
any
claims of infringement) except those in Laurus’ favor and Permitted Liens and
(ii) is not
7
subject
to any agreement prohibiting the granting of a Lien or requiring notice of
or
consent to the granting of a Lien.
(b) it
shall
not encumber, mortgage, pledge, assign or grant any Lien in any Collateral
or
any other assets to anyone other than Laurus and except for Permitted
Liens.
(c) the
Liens
granted pursuant to this Agreement, upon completion of all filings and other
actions necessary to perfect such liens in the Collateral under applicable
law,
constitute valid perfected security interests in all of the Collateral in
favor
of Laurus as security for the prompt and complete payment and performance
of the
Obligations, enforceable in accordance with the terms hereof against any
and all
of its creditors and purchasers and such security interest is prior to all
other
Liens in existence on the date hereof.
(d) no
effective security agreement, mortgage, deed of trust, financing statement,
equivalent security or Lien instrument or continuation statement covering
all or
any part of the Collateral is or will be on file or of record in any public
office, except those relating to Permitted Liens.
(e) it
shall
not dispose of any of the Collateral whether by sale, lease or otherwise
except
for the sale of Inventory in the ordinary course of business and for the
disposition or transfer in the ordinary course of business during any fiscal
year of obsolete and worn-out Equipment having an aggregate fair market value
of
not more than $200,000 and only to the extent that (i) the proceeds of any
such
disposition are used to acquire replacement Equipment which is subject to
Laurus’ first priority security interest or are used to repay Loans or to pay
general corporate expenses, or (ii) following the occurrence of an Event
of
Default which continues to exist the proceeds of which are remitted to Laurus
to
be held as cash collateral for the Obligations.
(f) it
shall
defend the right, title and interest of Laurus in and to the Collateral against
the claims and demands of all Persons whomsoever, and take such actions,
including (i) all actions necessary to grant Laurus “control” of any
Investment Property, Deposit Accounts, Letter-of-Credit Rights or electronic
Chattel Paper owned by it, with any agreements establishing control to be
in
form and substance satisfactory to Laurus, (ii) the prompt (but in no event
later than five (5) Business Days following Laurus’ request therefor) delivery
to Laurus of all original Instruments, Chattel Paper, negotiable Documents
and
certificated Stock owned by it (in each case, accompanied by stock powers,
allonges or other instruments of transfer executed in blank), (iii) notification
of Laurus’ interest in Collateral at Laurus’ request, and (iv) the institution
of litigation against third parties as shall be prudent in order to protect
and
preserve its and/or Laurus’ respective and several interests in the Collateral.
(g) it
shall
promptly, and in any event within ten (10) Business Days after the same is
acquired by it, notify Laurus of any commercial tort claim (as defined in
the
UCC) acquired by it and unless otherwise consented by Laurus, it shall enter
into a supplement to this Agreement granting to Laurus a Lien in such commercial
tort claim.
(h) it
shall
place notations upon its Books and Records and any of its financial statements
to disclose Laurus’ Lien in the Collateral.
8
(i) if
it
retains possession of any Chattel Paper or Instrument with Laurus’ consent, upon
Laurus’ request such Chattel Paper and Instruments shall be marked with the
following legend: “This writing and obligations evidenced or secured hereby are
subject to the security interest of Laurus Master Fund, Ltd.” Notwithstanding
the foregoing, upon the reasonable request of Laurus, such Chattel Paper
and
Instruments shall be delivered to Laurus.
(j) it
shall
perform in a reasonable time all other steps requested by Laurus to create
and
maintain in Laurus’ favor a valid perfected first Lien in all Collateral subject
only to Permitted Liens.
(k) it
shall
notify Laurus promptly and in any event within ten (10) Business Days after
obtaining knowledge thereof (i) of any event or circumstance that, to its
knowledge, would cause Laurus to consider any then existing Account as no
longer
constituting an Eligible Account; (ii) of any material delay in its performance
of any of its obligations to any Account Debtor; (iii) of any assertion by
any
Account Debtor of any material claims, offsets or counterclaims; (iv) of
any
material allowances, credits and/or monies granted by it to any Account Debtor;
(v) of all material adverse information relating to the financial condition
of
an Account Debtor; (vi) of any material return of goods; and (vii) of any
material loss, damage or destruction of any of the Collateral.
(l) all
Eligible Accounts (i) represent complete bona fide transactions which require
no
further act under any circumstances on its part to make such Accounts payable
by
the Account Debtors, (ii) are not subject to any present, future contingent
offsets or counterclaims, and (iii) do not represent ▇▇▇▇ and hold sales,
consignment sales, guaranteed sales, sale or return or other similar
understandings or obligations of any Affiliate or Subsidiary of such Company.
It
has not made, nor will it make, any agreement with any Account Debtor for
any
extension of time for the payment of any Account, any compromise or settlement
for less than the full amount thereof, any release of any Account Debtor
from
liability therefor, or any deduction therefrom except in the ordinary course
of
its business consistent with historical practice.
(m) it
shall
keep and maintain its Equipment in good operating condition, except for ordinary
wear and tear, and shall make all necessary repairs and replacements thereof
so
that the value and operating efficiency shall at all times be maintained
and
preserved. It shall not permit any such items to become a Fixture to real
estate
or accessions to other personal property.
(n) it
shall
maintain and keep all of its Books and Records concerning the Collateral
at its
executive offices listed in Schedule
12(aa)
except
as noted on Schedule
12(aa).
(o) it
shall
maintain and keep the tangible Collateral at the addresses listed in
Schedule
12(aa),
provided, that it may change such locations or open a new location, provided
that it provides Laurus at least thirty (30) days prior written notice of
such
changes or new location and (ii) prior to such change or opening of a new
location where Collateral having a value of more than $200,000 will be located,
it executes and delivers to Laurus such agreements deemed reasonably necessary
or prudent by Laurus, including landlord agreements, mortgagee agreements
and
warehouse agreements, each in form and substance satisfactory to Laurus,
to
adequately protect and maintain Laurus’ security interest in such
Collateral.
9
(p) Schedule
7(p)
lists
all banks and other financial institutions at which it maintains deposits
and/or
other accounts, and such Schedule correctly identifies the name, address
and
telephone number of each such depository, the name in which the account is
held,
a description of the purpose of the account, and the complete account number.
It
shall not establish any depository or other bank account with any financial
institution (other than the accounts set forth on Schedule
7(p))
without
Laurus’ prior written consent.
8. Payment
of Accounts.
(a) Each
Company will irrevocably direct all of its present and future Account Debtors
and other Persons obligated to make payments constituting Collateral to make
such payments directly to the lockboxes maintained by such Company (the
“Lockboxes”)
with
MFB Financial or such other financial institution accepted by Laurus in writing
as may be selected by such Company (the “Lockbox
Bank”)
pursuant to the terms of the certain agreements among one or more Companies,
Laurus and/or the Lockbox Bank dated on or about the date hereof. On or prior
to
the Closing Date, each Company shall and shall cause the Lockbox Bank to
enter
into all such documentation acceptable to Laurus pursuant to which, among
other
things, the Lockbox Bank agrees to: (a) sweep the Lockbox on a daily
basis
and deposit all checks received therein to an account designated by Laurus
in
writing and (b) comply only with the instructions or other directions of
Laurus
concerning the Lockbox. All of each Company’s invoices, account statements and
other written or oral communications directing, instructing, demanding or
requesting payment of any Account of any Company or any other amount
constituting Collateral shall conspicuously direct that all payments be made
to
the Lockbox or such other address as Laurus may direct in writing. If,
notwithstanding the instructions to Account Debtors, any Company receives
any
payments, such Company shall immediately remit such payments to Laurus in
their
original form with all necessary endorsements. Until so remitted, such Company
shall hold all such payments in trust for and as the property of Laurus and
shall not commingle such payments with any of its other funds or
property.
(b) At
Laurus’ election, following the occurrence of an Event of Default which is
continuing, Laurus may notify each Company’s Account Debtors of Laurus’ security
interest in the Accounts, collect them directly and charge the collection
costs
and expenses thereof to Company’s and the Eligible Subsidiaries joint and
several account.
9. Collection
and Maintenance of Collateral.
(a) Laurus
may verify each Company’s Accounts from time to time, but not more often than
once every six (6) months, unless an Event of Default has occurred and is
continuing, utilizing an audit control company or any other agent of
Laurus.
(b) Proceeds
of Accounts received by Laurus will be deemed received on the Business Day
of
Laurus’ receipt of such proceeds in good funds in dollars of the United States
of America to an account designated by Laurus.
(c) As
Laurus
receives the proceeds of Accounts of any Company, it shall (i) apply
such
proceeds, as required, to amounts outstanding under the Notes, and (ii) remit
all such remaining proceeds (net of interest, fees and other amounts then
due
and owing to Laurus
10
hereunder)
to Company Agent (for the benefit of the applicable Companies) upon request
(but
no more often than twice a week). Notwithstanding the foregoing, following
the
occurrence and during the continuance of an Event of Default, Laurus, at
its
option, may (a) apply such proceeds to the Obligations in such order as Laurus
shall elect, (b) hold all such proceeds as cash collateral for the Obligations
and each Company
hereby grants to Laurus a security interest in such cash collateral amounts
as
security for the Obligations and/or (c) do any combination of the
foregoing.
10. Inspections
and Appraisals.
At all
times during normal business hours, Laurus, and/or any agent of Laurus shall
have the right to (a) have access to, visit, inspect, review, evaluate and
make
physical verification and appraisals of each Company’s properties and the
Collateral, (b) inspect, audit and copy (or take originals if necessary)
and
make extracts from each Company’s Books and Records, including management
letters prepared by the Accountants, and (c) discuss with each Company’s
directors, principal officers, and independent accountants, each Company’s
business, assets, liabilities, financial condition, results of operations
and
business prospects. Each Company will deliver to Laurus any instrument necessary
for Laurus to obtain records from any service bureau maintaining records
for
such Company. If any internally prepared financial information, including
that
required under this Section is unsatisfactory in any manner to Laurus, Laurus
may request that the Accountants review the same.
11. Financial
Reporting.
Company
Agent will deliver, or cause to be delivered, to Laurus each of the following,
which shall be in form and detail acceptable to Laurus:
(a) As
soon
as available, and in any event within ninety (90) days after the end of each
fiscal year of the Parent, each Company’s audited financial statements with a
report of independent certified public accountants of recognized standing
selected by the Parent and acceptable to Laurus (the “Accountants”),
which
annual financial statements shall be without qualification and shall include
each Company’s balance sheet as at the end of such fiscal year and the related
statements of each Company’s income, retained earnings
and cash
flows for the fiscal year then ended, prepared, if Laurus so requests, on
a
consolidating and consolidated basis to include all Subsidiaries and Affiliates
of each Company, all in reasonable detail and prepared in accordance with
GAAP,
together with (i) if and when available, copies of any management letters
prepared by the Accountants; and (ii) a certificate of the Parent’s President,
Chief Executive Officer or Chief Financial Officer stating that such financial
statements have been prepared in accordance with GAAP and whether or not
such
officer has knowledge of the occurrence of any Default or Event of Default
hereunder and, if so, stating in reasonable detail the facts with respect
thereto;
(b) As
soon
as available and in any event within forty five (45) days after the end of
each
quarter, an unaudited/internal balance sheet and statements of income, retained
earnings and cash flows of each Company as at the end of and for such quarter
and for the year to date period then ended, prepared, if Laurus so requests,
on
a consolidating and consolidated basis to include all Subsidiaries and
Affiliates of each Company, in reasonable detail and stating in comparative
form
the figures for the corresponding date and periods in the previous year,
all
prepared in accordance with GAAP (without footnotes), subject to year-end
adjustments and accompanied by a certificate of the Parent’s President, Chief
Executive Officer or Chief
11
Financial
Officer, stating (i) that such financial statements have been prepared in
accordance with GAAP (without footnotes), subject to year-end audit adjustments,
and (ii) whether or not such officer has knowledge of the occurrence of any
Default or Event of Default hereunder not theretofore reported and remedied
and,
if so, stating in reasonable detail the facts with respect thereto;
(c) Within
thirty (30) days after the end of each month (or more frequently if Laurus
so
requests), agings of each Company’s Accounts, unaudited trial balances and their
accounts payable and a calculation of each Company’s Accounts and/or Eligible
Accounts, provided, however, that if Laurus shall request the foregoing
information more often than as set forth in the immediately preceding clause,
each Company shall have thirty (30) days from each such request to comply
with
Laurus’ demand; and
(d) Promptly
after (i) the filing thereof,
copies of the Parent’s most recent registration statements and annual,
quarterly, monthly or other regular reports which the Parent files with the
Securities and Exchange Commission (the “SEC”),
and
(ii) the issuance thereof, copies of such financial statements, reports and
proxy statements as the Parent shall send to its stockholders.
12. Additional
Representations and Warranties.
Each
Company hereby represents and warrants to Laurus as follows:
(a) Organization,
Good Standing and Qualification.
It and
each of its Subsidiaries is a corporation, partnership or limited liability
company, as the case may be, duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization. It and each
of its
Subsidiaries has the corporate, limited liability
company
or partnership, as the case may be, power and authority to own and operate
its
properties and assets and, insofar as it is or shall be a party thereto,
to (i)
execute and deliver this Agreement and the Ancillary Agreements, (ii) to
issue
the Notes and the shares of Common Stock issuable upon conversion of the
Notes
(the “Note
Shares”),
(iii)
to issue the Warrants and the shares of Common Stock issuable upon conversion
of
the Warrants (the “Warrant
Shares”),
(iv)
to issue and sell the Grant Shares, and to (v) carry out the provisions of
this
Agreement and the Ancillary Agreements and to carry on its business as presently
conducted. It and each of its Subsidiaries is duly qualified and is authorized
to do business and is in good standing as a foreign corporation, partnership
or
limited liability company, as the case may be, in all jurisdictions in which
the
nature or location of its activities and of its properties (both owned and
leased) makes such qualification necessary, except for those jurisdictions
in
which failure to do so has not had, or could not reasonably be expected to
have,
individually or in the aggregate, a Material Adverse Effect.
(b) Subsidiaries.
Each of
its direct and indirect Subsidiaries, the direct owner of each such Subsidiary
and its percentage ownership thereof, is set forth on Schedule
12(b).
(c) Capitalization;
Voting Rights.
(i) The
authorized capital stock of the Parent, as of the date hereof, consists of
200,000,000 shares of Common Stock, par value $0.01 per share, of which
97,330,006 shares are issued and outstanding (excluding the Grant Shares
to be
issued to Laurus
12
pursuant
to this Agreement), and 20,000,000 shares of preferred stock, par value $0.01
per share, none of which is outstanding. The authorized, issued and outstanding
capital stock of each Subsidiary of each Company is set forth on Schedule
12(c).
(ii) Except
as
disclosed on Schedule
12(c),
and
other than: (i) the shares reserved for issuance under the Parent’s stock option
plans; and (ii) shares which may be issued pursuant to this Agreement and
the
Ancillary Agreements, there are no outstanding options, warrants, rights
(including conversion or preemptive rights and rights of first refusal),
proxy
or stockholder agreements, or arrangements or agreements of any kind for
the
purchase or acquisition from the Parent of any of its securities. Except
as
disclosed on Schedule
12(c),
neither
the offer or issuance of any of the Notes or the Warrants, or the issuance
of
any of the Note Shares, the Warrant Shares or the Grant Shares, nor the
consummation of any transaction contemplated hereby will result in a change
in
the price or number of any securities of the Parent outstanding, under
anti-dilution or other similar provisions contained in or affecting any such
securities.
(iii) All
issued and outstanding shares of the Parent’s Common Stock: (i) have been duly
authorized and validly issued and are fully paid and nonassessable; and
(ii) were issued in compliance with all applicable state and federal
laws
concerning the issuance of securities.
(iv) The
rights, preferences, privileges and restrictions of the shares of the Common
Stock are as stated in the Parent’s Certificate of Incorporation (the
“Charter”).
The
Note Shares and the Warrant Shares have been duly and validly reserved for
issuance. When issued in compliance with the provisions of this Agreement
and
the Parent’s Charter, the Securities will be validly issued, fully paid and
nonassessable, and will be free of any liens or encumbrances; provided,
however,
that
the Securities may be subject to restrictions on transfer under state and/or
federal securities laws as set forth herein or as otherwise required by such
laws at the time a transfer is proposed.
(d) Authorization;
Binding Obligations.
All
corporate, partnership or limited liability company, as the case may be,
action
on its and its Subsidiaries’ part (including their respective officers and
directors) necessary for the authorization of this Agreement and the Ancillary
Agreements, the performance of all of its and its Subsidiaries’ obligations
hereunder and under the Ancillary Agreements on the Closing Date and, the
authorization, issuance and delivery of the Notes, the Warrant and the Grant
Shares have been taken or will be taken prior to the Closing Date. This
Agreement and the Ancillary Agreements, when executed and delivered and to
the
extent it is a party thereto, will be its and its Subsidiaries’ valid and
binding obligations enforceable against each such Person in accordance with
their terms, except:
(i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium
or
other laws of general application affecting enforcement of creditors’ rights;
and
(ii) general
principles of equity that restrict the availability of equitable or legal
remedies.
13
The
issuance of the Notes and the subsequent conversion of the Notes into Note
Shares are not and will not be subject to any preemptive rights or rights
of
first refusal that have not been properly waived or complied with. The issuance
of the Warrants, the subsequent exercise of the Warrants for Warrant Shares,
and
the issuance of the Grant Shares are not and will not be subject to any
preemptive rights or rights of first refusal that have not been properly
waived
or complied with.
(e) Liabilities.
Except
as listed on Schedule
12(e),
neither
it nor any of its Subsidiaries has any liabilities, except current liabilities
incurred in the ordinary course of business.
(f) Agreements;
Action.
Except
as set forth on Schedule
12(f):
(i) There
are
no agreements, understandings, instruments, contracts, proposed transactions,
judgments, orders, writs or decrees to which it or any of its Subsidiaries
is a
party or to its knowledge by which it is bound which may involve: (i)
obligations (contingent or otherwise) of, or payments to, it or any of its
Subsidiaries in excess of $200,000 (other than obligations of, or payments
to,
it or any of its Subsidiaries arising from purchase or sale agreements entered
into in the ordinary course of business); or (ii) the transfer or license
of any
patent, copyright, trade secret or other proprietary right to or from it
(other
than licenses arising from the purchase of “off the shelf” or other standard
products); or (iii) provisions restricting the development, manufacture or
distribution of its or any of its Subsidiaries’ products or services; or (iv)
indemnification by it or any of its Subsidiaries with respect to infringements
of proprietary rights.
(ii) Since
December 31, 2004 (the “Balance
Sheet Date”)
and
except as listed on Schedule
12(f),
neither
it nor any of its Subsidiaries has: (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or
series
of its capital stock; (ii) incurred any indebtedness for money borrowed or
any
other liabilities (other than ordinary course obligations) individually in
excess of $200,000 or, in the case of indebtedness and/or liabilities
individually less than $200,000, in excess of $400,000 in the aggregate;
(iii)
made any loans or advances to any Person not in excess, individually or in
the
aggregate, of $100,000, other than ordinary advances for travel expenses;
or
(iv) sold, exchanged or otherwise disposed of any of its assets or rights,
other
than the sale of its Inventory in the ordinary course of business.
(iii)For
the
purposes of subsections (i) and (ii) of this Section 12(f), all indebtedness,
liabilities, agreements, understandings, instruments, contracts and proposed
transactions involving the same Person (including Persons it or any of its
applicable Subsidiaries has reason to believe are affiliated therewith or
with
any Subsidiary thereof) shall be aggregated for the purpose of meeting the
individual minimum dollar amounts of such subsections.
14
(g)Obligations
to Related Parties.
Except
as set forth on Schedule
12(g),
neither
it nor any of its Subsidiaries has any obligations to their respective officers,
directors, stockholders or employees other than:
(i) for
payment of salary for services rendered and for bonus payments;
(ii) reimbursement
for reasonable expenses incurred on its or its Subsidiaries’
behalf;
(iii) for
other
standard employee benefits made generally available to all employees (including
stock option agreements outstanding under any stock option plan approved
by its
and its Subsidiaries’ Board of Directors, as applicable); and
(iv) obligations
listed in its and each of its Subsidiary’s financial statements.
Except
as
described above or set forth on Schedule
12(g),
none of
its officers, directors or, to the best of its knowledge, key employees or
stockholders, any of its Subsidiaries or any members of their immediate
families, are indebted to it or any of its Subsidiaries, individually or
in the
aggregate, in excess of $50,000 or have any direct or indirect ownership
interest in any Person with which it or any of its Subsidiaries is affiliated
or
with which it or any of its Subsidiaries has a business relationship, or
any
Person which competes with it or any of its Subsidiaries, other than passive
investments in publicly traded companies (representing less than one percent
(1%) of such company) which may compete with it or any of its Subsidiaries.
Except as described above, none of its officers, directors or stockholders,
or
any member of their immediate families, is, directly or indirectly, interested
in any material contract with it or any of its Subsidiaries and no agreements,
understandings or proposed transactions are contemplated between it or any
of
its Subsidiaries and any such Person. Except as set forth on Schedule
12(g),
neither
it nor any of its Subsidiaries is a guarantor or indemnitor of any indebtedness
of any other Person.
(h) Changes.
Since
the Balance Sheet Date, except as disclosed in any Schedule to this Agreement
(including Schedule
12(h))
or to
any of the Ancillary Agreements, there has not been:
(i) any
change in its or any of its Subsidiaries’ business, assets, liabilities,
condition (financial or otherwise), properties, operations or prospects,
which,
individually or in the aggregate, has had, or could reasonably be expected
to
have, a Material Adverse Effect;
(ii) any
resignation or termination of any of its or its Subsidiaries’ officers, key
employees or groups of employees;
(iii) any
material change, except in the ordinary course of business, in its or any
of its
Subsidiaries’ contingent obligations by way of guaranty, endorsement, indemnity,
warranty or otherwise;
15
(iv) any
damage, destruction or loss, whether or not covered by insurance, which has
had,
or could reasonably be expected to have, individually or in the aggregate,
a
Material Adverse Effect;
(v) any
waiver by it or any of its Subsidiaries of a valuable right or of a material
debt owed to it;
(vi) any
direct or indirect material loans made by it or any of its Subsidiaries to
any
of its or any of its Subsidiaries’ stockholders, employees, officers or
directors, other than advances made in the ordinary course of
business;
(vii) any
material change in any compensation arrangement or agreement with any employee,
officer, director or stockholder;
(viii) any
declaration or payment of any dividend or other distribution of its or any
of
its Subsidiaries’ assets;
(ix) any
labor
organization activity related to it or any of its Subsidiaries;
(x) any
debt,
obligation or liability incurred, assumed or guaranteed by it or any of its
Subsidiaries, except those for immaterial amounts and for current liabilities
incurred in the ordinary course of business;
(xi) any
sale,
assignment or transfer of any Intellectual Property or other intangible
assets;
(xii) any
change in any material agreement to which it or any of its Subsidiaries is
a
party or by which either it or any of its Subsidiaries is bound which, either
individually or in the aggregate, has had, or could reasonably be expected
to
have, individually or in the aggregate, a Material Adverse Effect;
(xiii) any
other
event or condition of any character that, either individually or in the
aggregate, has had, or could reasonably be expected to have, individually
or in
the aggregate, a Material Adverse Effect; or
(xiv) any
arrangement or commitment by it or any of its Subsidiaries to do any of the
acts
described in subsection (i) through (xiii) of this Section 12(h).
(i) Title
to Properties and Assets; Liens, Etc.
Except
as set forth on Schedule 12(i),
it and
each of its Subsidiaries has good and marketable title to their respective
properties and assets, and good title to its leasehold interests, in each
case
subject to no Lien, other than Permitted Liens.
All
facilities, Equipment, Fixtures, vehicles and other properties owned, leased
or
used by it or any of its Subsidiaries are in good operating condition and
repair
and are reasonably fit and usable for the purposes for which they are being
used. Except as set forth on Schedule
12(i),
it
16
and
each
of its Subsidiaries is in compliance with all material terms of each lease
to
which it is a party or is otherwise bound.
(j) Intellectual
Property.
(i) It
and
each of its Subsidiaries owns or possesses sufficient legal rights to all
Intellectual Property necessary for their respective businesses as now conducted
and, to its knowledge as presently proposed to be conducted, without any
known
infringement of the rights of others. There are no outstanding options, licenses
or agreements of any kind relating to its or any of its Subsidiary’s
Intellectual Property, nor is it or any of its Subsidiaries bound by or a
party
to any options, licenses or agreements of any kind with respect to the
Intellectual Property of any other Person other than such licenses or agreements
arising from the purchase of “off the shelf” or standard products.
(ii) Neither
it nor any of its Subsidiaries has received any communications alleging that
it
or any of its Subsidiaries has violated any of the Intellectual Property
or
other proprietary rights of any other Person, nor is it or any of its
Subsidiaries aware of any basis therefor.
(iii) Neither
it nor any of its Subsidiaries believes it is or will be necessary to utilize
any inventions, trade secrets or proprietary information of any of its employees
made prior to their employment by it or any of its Subsidiaries, except for
inventions, trade secrets or proprietary information that have been rightfully
assigned to it or any of its Subsidiaries.
(k) Compliance
with Other Instruments.
Except
as set forth in Schedule
12(k),
neither
it nor any of its Subsidiaries is in violation or default of (x) any term
of its
Charter or Bylaws, or (y) any provision of any indebtedness, mortgage,
indenture, contract, agreement or instrument to which it is party or by which
it
is bound or of any judgment, decree, order or writ, which violation or default,
in the case of this clause (y), has had, or could reasonably be expected
to
have, either individually or in the aggregate, a Material Adverse Effect.
The
execution, delivery and performance of and compliance with this Agreement
and
the Ancillary Agreements to which it is a party, and the issuance of the
Notes
and the other Securities each pursuant hereto and thereto, will not, with
or
without the passage of time or giving of notice, result in any such material
violation, or be in conflict with or constitute a default under any such
term or
provision, or result in the creation of any Lien upon any of its or any of
its
Subsidiary’s properties or assets or the suspension, revocation, impairment,
forfeiture or nonrenewal of any permit, license, authorization or approval
applicable to it or any of its Subsidiaries, their businesses or operations
or
any of their assets or properties.
(l) Litigation.
Except
as set forth on Schedule
12(l),
there
is no action, suit, proceeding or investigation pending or, to its knowledge,
currently threatened against it or any of its Subsidiaries that prevents
it or
any of its Subsidiaries from entering into this Agreement or the Ancillary
Agreements, or from consummating the transactions contemplated hereby or
thereby, or which has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect, or could result
in
any change in its or any of its Subsidiaries’ current equity ownership, nor is
it aware that there is any basis to assert any of the
17
foregoing.
Neither it nor any of its Subsidiaries is a party to or subject to the
provisions of any order, writ, injunction, judgment or decree of any court
or
government agency or instrumentality. There is no action, suit, proceeding
or
investigation by it or any of its Subsidiaries currently pending or which
it or
any of its Subsidiaries intends to initiate.
(m) Tax
Returns and Payments.
It and
each of its Subsidiaries has timely filed all tax returns (federal, state
and
local) required to be filed by it. All taxes shown to be due and payable
on such
returns, any assessments imposed, and all other taxes due and payable by
it and
each of its Subsidiaries on or before the Closing Date, have been paid or
will
be paid prior to the time they become delinquent. Except as set forth on
Schedule
12(m),
neither
it nor any of its Subsidiaries has been advised:
(i) that
any
of its returns, federal, state or other, have been or are being audited as
of
the date hereof; or
(ii) of
any
adjustment, deficiency, assessment or court decision in respect of its federal,
state or other taxes.
Neither
it nor any of its Subsidiaries has any knowledge of any liability of any
tax to
be imposed upon its properties or assets as of the date of this Agreement
that
is not adequately provided for.
(n) Employees.
Except
as set forth on Schedule
12(n),
neither
it nor any of its Subsidiaries has any collective bargaining agreements with
any
of its employees. There is no labor union organizing activity pending or,
to its
knowledge, threatened with respect to it or any of its Subsidiaries. Except
as
disclosed on Schedule
12(n),
neither
it nor any of its Subsidiaries is a party to or bound by any currently effective
employment contract, deferred compensation arrangement, bonus plan, incentive
plan, profit sharing plan, retirement agreement or other employee compensation
plan or agreement. To its knowledge, none of its or any of its Subsidiaries’
employees, nor any consultant with whom it or any of its Subsidiaries has
contracted, is in violation of any term of any employment contract, proprietary
information agreement or any other agreement relating to the right of any
such
individual to be employed by, or to contract with, it or any of its Subsidiaries
because of the nature of the business to be conducted by it or any of its
Subsidiaries; and to its knowledge the continued employment by it and its
Subsidiaries of their present employees, and the performance of its and its
Subsidiaries contracts with its independent contractors, will not result
in any
such violation. Neither it nor any of its Subsidiaries is aware that any
of its
or any of its Subsidiaries’ employees is obligated under any contract (including
licenses, covenants or commitments of any nature) or other agreement, or
subject
to any judgment, decree or order of any court or administrative agency that
would interfere with their duties to it or any of its Subsidiaries. Neither
it
nor any of its Subsidiaries has received any notice alleging that any such
violation has occurred. Except for employees who have a current effective
employment agreement with it or any of its Subsidiaries, none of its or any
of
its Subsidiaries’ employees has been granted the right to continued employment
by it or any of its Subsidiaries or to any material compensation following
termination of employment with it or any of its Subsidiaries. Except as set
forth on Schedule 12(n),
neither
it nor any of its Subsidiaries is aware that any officer, key employee or
group
of employees intends to terminate his, her or their employment with it or
any of
its
18
Subsidiaries,
as applicable, nor does it or any of its Subsidiaries have a present intention
to terminate the employment of any officer, key employee or group of
employees.
(o) Registration
Rights and Voting Rights.
Except
as set forth on Schedule 12(o),
neither
it nor any of its Subsidiaries is presently under any obligation, and neither
it
nor any of its Subsidiaries has granted any rights, to register any of its
or
any of its Subsidiaries’ presently outstanding securities or any of its
securities that may hereafter be issued. Except as set forth on Schedule 12(o),
to its
knowledge, none of its or any of its Subsidiaries’ stockholders has entered into
any agreement with respect to its or any of its Subsidiaries’ voting of equity
securities.
(p) Compliance
with Laws; Permits.
Except
as disclosed in Schedule
12(p)
or
another Schedule to this Agreement, neither it nor any of its Subsidiaries
is in
violation of the ▇▇▇▇▇▇▇▇-▇▇▇▇▇ Act of 2002 or any SEC related regulation
or
rule (to the extent they apply to the Parent or any of its Subsidiaries)
or any
other applicable statute, rule, regulation, order or restriction of any domestic
or foreign government or any instrumentality or agency thereof in respect
of the
conduct of its business or the ownership of its properties which has had,
or
could reasonably be expected to have, either individually or in the aggregate,
a
Material Adverse Effect. No governmental orders, permissions, consents,
approvals or authorizations are required to be obtained and no registrations
or
declarations are required to be filed in connection with the execution and
delivery of this Agreement or any Ancillary Agreement and the issuance of
any of
the Securities, except such as have been duly and validly obtained or filed,
or
with respect to any filings that must be made after the Closing Date, as
will be
filed in a timely manner. It and each of its Subsidiaries has all material
franchises, permits, licenses and any similar authority necessary for the
conduct of its business as now being conducted by it, the lack of which could,
either individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.
(q) Environmental
and Safety Laws.
Except
as set forth in Schedule
12(q),
neither
it nor any of its Subsidiaries is in violation of any applicable statute,
law or
regulation relating to the environment or occupational health and safety,
and to
its knowledge, no material expenditures are or will be required in order
to
comply with any such existing statute, law or regulation. Except as set forth
on
Schedule
12(q),
and
except as used by it in the normal and customary operation of its business
for
manufacturing, processing, maintenance and landscaping activities, no Hazardous
Materials (as defined below) are used or have been used, stored, or disposed
of
by it or any of its Subsidiaries or, to its knowledge, by any other Person
on
any property owned, leased or used by it or any of its Subsidiaries. For
the
purposes of the preceding sentence, “Hazardous
Materials”
shall
mean:
(i) materials
which are listed or otherwise defined as “hazardous” or “toxic” under any
applicable local, state, federal and/or foreign laws and regulations that
govern
the existence and/or remedy of contamination on property, the protection
of the
environment from contamination, the control of hazardous wastes, or other
activities involving hazardous substances, including building materials;
and
(ii) any
petroleum products or nuclear materials.
19
(r) Valid
Offering.
Assuming the accuracy of the representations and warranties of Laurus contained
in this Agreement, the offer and issuance of the Securities will be exempt
from
the registration requirements of the Securities Act of 1933, as amended (the
“Securities
Act”),
and
will have been registered or qualified (or are exempt from registration and
qualification) under the registration, permit or qualification requirements
of
all applicable state securities laws.
(s) Full
Disclosure.
It and
each of its Subsidiaries has provided Laurus with all information requested
by
Laurus in connection with Laurus’ decision to enter into this Agreement. Neither
this Agreement, the Ancillary Agreements nor the exhibits and schedules hereto
and thereto nor any other document delivered by it or any of its Subsidiaries
to
Laurus or its attorneys or agents in connection herewith or therewith or
with
the transactions contemplated hereby or thereby, contain any untrue statement
of
a material fact nor omit to state a material fact necessary in order to make
the
statements contained herein or therein, in light of the circumstances in
which
they are made, not misleading. The financial projections and other estimates
attached as Schedule
12(s)
were
based on its and its Subsidiaries’ experience in the industry and on assumptions
of fact and opinion as to future events which it or any of its Subsidiaries,
at
the date of the issuance of such projections or estimates, believed to be
reasonable.
(t) Insurance.
It and
each of its Subsidiaries has general commercial, product liability, fire
and
casualty insurance policies with coverages which it believes are customary
for
companies similarly situated to it and its Subsidiaries in the same or similar
business.
(u) Financial
Statements.
Except
as set forth on Schedule
12(u),
the
audited consolidated balance sheet, income statement, statement of retained
earnings and statement of cash flows of the Parent and its Subsidiaries as
of
and for the fiscal years ended December 31, 2004 and 2003, and the interim,
unaudited consolidated balance sheet, income statement, statement of retained
earnings and statement of cash flows of the Parent and its Subsidiaries as
of
and for the six months ended June 30, 2005, have been prepared in accordance
with GAAP applied on a consistent basis during the periods involved (except
(i)
as may be otherwise indicated in such financial statements or the notes thereto
or (ii) in the case of unaudited interim statements, to the extent they may
not
include footnotes, may be condensed and/or exclude year-end adjustments)
and
fairly present in all material respects the financial condition, the results
of
operations, retained earnings and cash flows of the Parent and its Subsidiaries,
on a consolidated basis, as of, and for, the periods presented in such
statements.
(v) Intentionally
Deleted.
(w) No
Integrated Offering.
Neither
it, nor any of its Subsidiaries 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 the offering of the Securities pursuant to this Agreement
or
any Ancillary Agreement to be integrated with prior offerings by it for purposes
of the Securities Act which would prevent it from issuing the Securities
pursuant to Rule 506 under the Securities Act, or any applicable
exchange-related stockholder approval provisions, nor will it or any of its
20
Affiliates
or Subsidiaries take any action or steps that would cause the offering of
the
Securities to be integrated with other offerings.
(x) Stop
Transfer.
The
Securities are restricted securities as of the date of this Agreement. Neither
it nor any of its Subsidiaries will issue any stop transfer order or other
order
impeding the sale and delivery of any of the Securities at such time as the
Securities are registered for public sale or an exemption from registration
is
available, except as required by state and federal securities laws.
(y) Dilution.
It
specifically acknowledges that the Parent’s obligation to issue the Grant Shares
and the shares of Common Stock upon conversion of the Notes and exercise
of the
Warrants is binding upon the Parent and enforceable regardless of the dilution
such issuance may have on the ownership interests of other shareholders of
the
Parent.
(z) Patriot
Act.
It
certifies that, to the best of its knowledge, neither it nor any of its
Subsidiaries has been designated, nor is or shall be owned or controlled,
by a
“suspected terrorist” as defined in Executive Order 13224. It hereby
acknowledges that Laurus seeks to comply with all applicable laws concerning
money laundering and related activities. In furtherance of those efforts,
it
hereby represents, warrants and covenants that: (i) none of the cash or property
that it or any of its Subsidiaries will pay or will contribute to Laurus
has
been or shall be derived from, or related to, any activity that is deemed
criminal under United States law; and (ii) no contribution or payment by
it or
any of its Subsidiaries to Laurus, to the extent that they are within its
or any
such Subsidiary’s control shall cause Laurus to be in violation of the United
States Bank Secrecy Act, the United States International Money Laundering
Control Act of 1986 or the United States International Money Laundering
Abatement and Anti-Terrorist Financing Act of 2001. It shall promptly notify
Laurus if any of these representations, warranties and covenants ceases to
be
true and accurate regarding it or any of its Subsidiaries. It shall provide
Laurus with any additional information regarding it and each Subsidiary thereof
that Laurus deems necessary or convenient to ensure compliance with all
applicable laws concerning money laundering and similar activities. It
understands and agrees that if at any time it is discovered that any of the
foregoing representations, warranties and covenants are incorrect, or if
otherwise required by applicable law or regulation related to money laundering
or similar activities, Laurus may undertake appropriate actions to ensure
compliance with applicable law or regulation, including but not limited to
segregation and/or redemption of Laurus’ investment in it. It further
understands that Laurus may release confidential information about it and
its
Subsidiaries and, if applicable, any underlying beneficial owners, to proper
authorities if Laurus, in its sole discretion, determines that it is in the
best
interests of Laurus in light of relevant rules and regulations under the
laws
set forth in subsection (ii) above.
(aa) Company
Name; Locations of Offices, Records and Collateral.
Schedule 12(aa)
sets
forth each Company’s name as it appears in official filings in the state of its
organization, the type of entity of each Company, the organizational
identification number issued by each Company’s state of organization or a
statement that no such number has been issued, each Company’s state of
organization, and the location of each Company’s chief executive office,
corporate offices, warehouses, other locations of Collateral and locations
where
records with respect to Collateral are kept (including in each case the county
of such locations) and, except as set forth in such Schedule
12(aa),
such
locations have not changed during the
21
preceding
twelve months. As of the Closing Date, during the prior five years, except
as
set forth in Schedule
12(aa),
no
Company has been known as or conducted business in any other name (including
trade names). Each Company has only one state of organization.
(bb) ERISA.
Based
upon the Employee Retirement Income Security Act of 1974 (“ERISA”),
and
the regulations and published interpretations thereunder: (i) neither it
nor any
of its Subsidiaries has engaged in any Prohibited Transactions (as defined
in
Section 406 of ERISA and Section 4975 of the Code); (ii) it and each of its
Subsidiaries has met all applicable minimum funding requirements under Section
302 of ERISA in respect of its plans; (iii) neither it nor any of its
Subsidiaries has any knowledge of any event or occurrence which would cause
the
Pension Benefit Guaranty Corporation to institute proceedings under Title
IV of
ERISA to terminate any employee benefit plan(s); (iv) neither it nor any
of its
Subsidiaries has any fiduciary responsibility for investments with
respect to any plan existing for the benefit of persons other than its or
such
Subsidiary’s employees; and (v) neither it nor any of its Subsidiaries has
withdrawn, completely or partially, from any multi-employer pension plan
so as
to incur liability under the Multiemployer Pension Plan Amendments Act of
1980.
13. Covenants.
Each
Company, as applicable, covenants and agrees with Laurus as
follows:
(a) Stop-Orders.
It
shall advise Laurus, promptly after it receives notice of issuance by the
SEC,
any state securities commission or any other regulatory authority of any
stop
order or of any order preventing or suspending any offering of any securities
of
the Parent, or of the suspension of the qualification of the Common Stock
of the
Parent for offering or sale in any jurisdiction, or the initiation of any
proceeding for any such purpose.
(b) Listing.
Following the date on which the SEC has declared effective the initial
registration of the Common Stock under the Exchange Act, the Parent shall,
no
later than sixty (60) days after such declaration of effectiveness, secure
the
listing
or quotation, as applicable, of the Grant Shares and the shares of Common
Stock
issuable upon conversion of the Notes and exercise of the Warrants on a
Principal Market selected by the Parent (subject to official notice of issuance)
and, until one year after all obligations under the Notes have been paid
in
full, the Parent shall maintain the listing or quotation, as applicable,
of its
Common Stock on the same or another Principal Market, and will comply in
all
material respects with the Parent’s reporting, filing and other obligations
under the bylaws or rules of the National Association of Securities Dealers
(“NASD”)
and
such Principal Market, as applicable.
(c) Valid
Issuance.
It
shall take all necessary action and proceedings as may be required and permitted
by applicable law, rule and regulation, for the legal and valid issuance
of the
Securities to Laurus.
(d) Reporting
Requirements.
Until
one year after all obligations under the Notes have been paid in full, it
shall
timely file with the SEC all reports required to be filed by the Company
pursuant to the Exchange Act and refrain from terminating its status as an
issuer required by the Exchange Act to file reports thereunder even if the
Exchange Act or the rules or regulations thereunder would permit such
termination.
22
(e) Use
of
Funds.
It
shall use (i) up to $5,522,443.78 of the proceeds of the Loans to refinance
its
existing senior credit facility and (ii) the remainder of the proceeds of
the
Loans and the proceeds of the Warrants and the Grant Shares for general working
capital purposes.
(f) Access
to Facilities.
It
shall, and shall cause each of its Subsidiaries to, permit any representatives
designated by Laurus (or any successor of Laurus), upon reasonable notice
and
during normal business hours, at Company’s expense and accompanied by a
representative of Company Agent (provided that no such prior notice shall
be
required to be given and no such representative shall be required to accompany
Laurus in the event Laurus believes such access is necessary to preserve
or
protect the Collateral or following the occurrence and during the continuance
of
an Event of Default), to:
(i) visit
and
inspect any of its or any such Subsidiary’s properties;
(ii) examine
its or any such Subsidiary’s corporate and financial records (unless such
examination is not permitted by federal, state or local law or by contract)
and
make copies thereof or extracts therefrom; and
(iii) discuss
its or any such Subsidiary’s affairs, finances and accounts with its or any such
Subsidiary’s chief executive officer and/or chief financial
officer.
Laurus
agrees to, and to cause its Affiliates to, maintain the confidentiality of
and
not disclose any material, non-public information concerning the Parent or
its
Subsidiaries or other Affiliates, unless required by applicable law or legal
process (and in such event shall provide the Parent prompt notice of such
required disclosure), to not trade in any of the Parent’s securities on the
basis of such material, non-public information, and to otherwise comply with
federal securities laws, rules and regulations.
(g) Taxes.
It
shall, and shall cause each of its Subsidiaries to, promptly pay and discharge,
or cause to be paid and discharged, when due and payable, all lawful taxes,
assessments and governmental charges or levies imposed upon it and its
Subsidiaries’ income, profits, property or business, as the case may be;
provided, however, that any such tax, assessment, charge or levy need not
be
paid currently if (i) the validity thereof shall currently and diligently
be
contested in good faith by appropriate proceedings, (ii) such tax, assessment,
charge or levy shall have no effect on the Lien priority of Laurus in the
Collateral, and (iii) if it and/or such Subsidiary, as applicable, shall
have
set aside on its and/or such Subsidiary’s books adequate reserves with respect
thereto in accordance with GAAP; and provided, further, that it shall, and
shall
cause each of its Subsidiaries to, pay all such taxes, assessments, charges
or
levies forthwith upon the commencement of proceedings to foreclose any lien
which may have attached as security therefor.
(h) Insurance.
It
shall bear the full risk of loss from any loss of any nature whatsoever with
respect to the Collateral. It and each of its Subsidiaries shall keep its
assets
which are of an insurable character insured by financially sound and reputable
insurers against loss or damage by fire, explosion and other risks customarily
insured against by companies in similar business similarly situated as it
and
its Subsidiaries; and it and its Subsidiaries shall
23
maintain,
with financially sound and reputable insurers, insurance against other hazards
and risks and liability to persons and property to the extent and in the
manner
which it and/or such Subsidiary thereof reasonably believes is customary
for
companies in similar business similarly situated as it and its Subsidiaries
and
to the extent available on commercially reasonable terms. It and each of
its
Subsidiaries will jointly and severally bear the full risk of loss from any
loss
of any nature whatsoever with respect to the assets pledged to Laurus as
security for its obligations hereunder and under the Ancillary Agreements.
At
its own cost and expense in amounts and with carriers reasonably acceptable
to
Laurus, it and each of its Subsidiaries shall (i) keep all their insurable
properties and properties in which they have an interest insured against
the
hazards of fire, flood, sprinkler leakage, those hazards covered by extended
coverage insurance and such other hazards, and for such amounts, as is customary
in the case of companies engaged in businesses similar to it or the respective
Subsidiary’s including business interruption insurance; (ii) maintain a bond in
such amounts as is customary in the case of companies engaged in businesses
similar to it and its Subsidiaries’ insuring against larceny, embezzlement or
other criminal misappropriation of insured’s officers and employees who may
either singly or jointly with others at any time have access to its or any
of
its Subsidiaries assets or funds either directly or through governmental
authority to draw upon such funds or to direct generally the disposition
of such
assets; (iii) maintain public and product liability insurance against claims
for
personal injury, death or property damage suffered by others; (iv) maintain
all
such worker’s compensation or similar insurance as may be required under the
laws of any state or jurisdiction in which it or any of its Subsidiaries
is
engaged in business; and (v) furnish Laurus with (x) copies of all
policies
and evidence of the maintenance of such policies at least thirty (30) days
before any expiration date, (y) excepting its and its Subsidiaries’ workers’
compensation policy, endorsements to such policies naming Laurus as “co-insured”
or “additional insured” and appropriate loss payable endorsements in form and
substance satisfactory to Laurus, naming Laurus as lenders loss payee, and
(z)
evidence that as to Laurus the insurance coverage shall not be impaired or
invalidated by any act or neglect of any Company or any of its Subsidiaries
and
the insurer will provide Laurus with at least thirty (30) days notice prior
to
cancellation. It shall instruct the insurance carriers that in the event
of any
loss thereunder, the carriers shall make payment for such loss to Laurus
and not
to any Company or any of its Subsidiaries and Laurus jointly. If any insurance
losses are paid by check, draft or other instrument payable to any Company
and/or any of its Subsidiaries and Laurus jointly, Laurus may endorse, as
applicable, such Company’s and/or any of its Subsidiaries’ name thereon and do
such other things as Laurus may deem advisable to reduce the same to cash.
Laurus is hereby authorized to adjust and compromise claims. All loss recoveries
received by Laurus upon any such insurance may be applied to the Obligations,
in
such order as Laurus in its sole discretion shall determine or shall otherwise
be delivered to Company Agent for the benefit of the applicable Company and/or
its Subsidiaries. Any surplus shall be paid by Laurus to Company Agent for
the
benefit of the applicable Company and/or its Subsidiaries, or applied as
may be
otherwise required by law. Any deficiency thereon shall be paid, as applicable,
by Companies and their Subsidiaries to Laurus, on demand.
(i) Intellectual
Property.
It
shall, and shall cause each of its Subsidiaries to, maintain in full force
and
effect its corporate existence, rights and franchises and all licenses and
other
rights to use Intellectual Property owned or possessed by it and reasonably
deemed to be necessary to the conduct of its business.
24
(j) Properties.
It
shall, and shall cause each of its Subsidiaries to, keep its properties in
good
repair, working order and condition, reasonable wear and tear excepted, and
from
time to time make all needful and proper repairs, renewals, replacements,
additions and improvements thereto; and it shall, and shall cause each of
its
Subsidiaries to, at all times comply with each provision of all leases to
which
it is a party or under which it occupies property if the breach of such
provision could reasonably be expected to have a Material Adverse
Effect.
(k) Confidentiality.
It
shall not, and shall not permit any of its Subsidiaries to, disclose, and
will
not include in any public announcement, the name of Laurus, unless expressly
agreed to by Laurus or unless and until such disclosure is required by law
or
applicable regulation, and then only to the extent of such requirement.
Notwithstanding the foregoing, each Company and its Subsidiaries may disclose
Laurus’ identity and the terms of this Agreement to its current and prospective
debt and equity financing sources.
(l) Required
Approvals.
It
shall not, and shall not permit any of its Subsidiaries to, without the prior
written consent of Laurus, (i) create, incur, assume or suffer to exist any
indebtedness (exclusive of trade debt) whether secured or unsecured other
than
(x) operating leases to the extent constituting indebtedness, (y) Purchase
Money
Indebtedness not to exceed $200,000 in the aggregate principal amount
outstanding at any time for the purchase of vehicles which indebtedness may
be
secured solely by Purchase Money Liens, (z) each Company’s indebtedness to
Laurus, (xx) as set forth on Schedule 13(l)(i)
attached
hereto and made a part hereof and (yy) indebtedness in addition to the other
indebtedness permitted in this clause (i) not to exceed $250,000 in aggregate
principal amount outstanding at any time, so long as such indebtedness referred
to in this clause (yy) is either (I) unsecured or (II) subject to a security
interest subordinated to the security interest of Laurus with respect to
the
Obligations, on terms and conditions satisfactory to Laurus; (ii) cancel
any
debt owing to it in excess of $200,000 in the aggregate during any 12 month
period; (iii) assume, guarantee, endorse or otherwise become directly or
contingently liable in connection with any obligations of any other Person,
except the endorsement of negotiable instruments by it or its Subsidiaries
for
deposit or collection or similar transactions in the ordinary course of
business; (iv) directly or indirectly declare, pay or make any dividend or
distribution on any class of its Stock or apply any of its funds, property
or
assets to the purchase, redemption or other retirement of any of its or its
Subsidiaries’ Stock outstanding on the date hereof, or issue any preferred
stock; (v) purchase or hold beneficially any Stock or other securities or
evidences of indebtedness of, make or permit to exist any loans or advances
to,
or make any investment or acquire any interest whatsoever in, any other Person,
including any partnership or joint venture, except (x) travel advances, (y)
loans to its and its Subsidiaries’ officers and employees not exceeding at any
one time an aggregate of $10,000, and (z) loans to its existing Subsidiaries
so
long as such Subsidiaries are designated as either a co-borrower hereunder
or
has entered into such guaranty and security documentation required by Laurus,
including, without limitation, to grant to Laurus a first priority perfected
security interest in substantially all of such Subsidiary’s assets to secure the
Obligations; (vi) create or permit to exist any Subsidiary, other than any
Subsidiary in existence on the date hereof and listed in Schedule
12(b)
unless
such new Subsidiary is a wholly-owned Subsidiary and is designated by Laurus
as
either a co-borrower or guarantor hereunder and such Subsidiary shall have
entered into all such documentation required by Laurus, including, without
limitation, to grant to Laurus a first priority perfected security interest
in
substantially all of such Subsidiary’s assets to secure the Obligations; (vii)
directly or indirectly, prepay any indebtedness (other than
25
to
Laurus
and in the ordinary course of business), or repurchase, redeem, retire or
otherwise acquire any indebtedness (other than to Laurus and in the ordinary
course of business) except to make scheduled payments of principal and interest
thereof and except for the conversion of certain indebtedness owed to ▇▇▇▇
▇.
▇▇▇▇▇▇▇ by the Parent into Common Stock as described on Schedule
12(c);
(viii)
enter into any merger, consolidation or other reorganization with or into
any
other Person or acquire all or a portion of the assets or Stock of any Person
or
permit any other Person to consolidate with or merge with it, unless
(1) such Company is the surviving entity of such merger or consolidation,
(2) no Event of Default shall exist immediately prior to and after giving
effect
to such merger or consolidation, (3) such Company shall have provided
Laurus copies of all documentation relating to such merger or consolidation
and
(4) such Company shall have provided Laurus with at least thirty (30) days’
prior written notice of such merger or consolidation; (ix) materially change
the
nature of the business in which it is presently engaged; (x) become subject
to
(including, without limitation, by way of amendment to or modification of)
any
agreement or instrument which by its terms would (under any circumstances)
restrict its or any of its Subsidiaries’ right to perform the provisions of this
Agreement or any of the Ancillary Agreements; (xi) change its fiscal year
or
make any changes in accounting treatment and reporting practices without
prior
written notice to Laurus except as required by GAAP or in the tax reporting
treatment or except as required by law; (xii) enter into any transaction
with
any employee, director or Affiliate, except in the ordinary course on
arms-length terms and except for the granting of an option to ▇▇▇▇ ▇. ▇▇▇▇▇▇▇
to
convert the Parent’s indebtedness to him into Common Stock as described on
Schedule
12(c);
(xiii)
▇▇▇▇ Accounts under any name except the present name of such Company; or
(xiv)
sell, lease, transfer or otherwise dispose of any of its properties or assets,
or any of the properties or assets of its Subsidiaries, except for (1) the
sale
of Inventory in the ordinary course of business and (2) the disposition or
transfer in the ordinary course of business during any fiscal year of obsolete
and worn-out Equipment and only to the extent that (x) the proceeds of any
such
disposition or transfer in excess of $150,000 in any fiscal year of the Parent
are used to acquire replacement Equipment which is subject to Laurus’ first
priority security interest or are used to repay Loans or to pay general
corporate expenses, or (y) following the occurrence of an Event of Default
which
continues to exist, the proceeds of which are remitted to Laurus to be held
as
cash collateral for the Obligations.
(m) Reissuance
of Securities.
The
Parent shall reissue certificates representing the Securities without the
legends set forth in Section 40 below at such time as:
(i) the
holder thereof is permitted to dispose of such Securities pursuant to Rule
144(k) under the Securities Act; or
(ii) upon
resale subject to an effective registration statement after such Securities
are
registered under the Securities Act.
The
Parent agrees to cooperate with Laurus in connection with all resales pursuant
to Rule 144(d) and Rule 144(k) and provide legal opinions reasonably necessary
to allow such resales provided the Parent and its counsel receive reasonably
requested representations from Laurus and broker, if any, as well as any
other
information reasonably requested by the Parent or its counsel.
26
(n) Opinion.
On the
Closing Date, it shall deliver to Laurus an opinion acceptable to Laurus
from
each Company’s legal counsel. Each Company will provide, at the Companies’ joint
and several expense, such other legal opinions in the future as are reasonably
necessary for the conversion of the Notes and the exercise of the
Warrants.
(o) Legal
Name, etc.
It
shall not, without providing Laurus with 30 days prior written notice, change
(i) its name as it appears in the official filings in the state of its
organization, (ii) the type of legal entity it is, (iii) its organization
identification number, if any, issued by its state of organization, or (iv)
its
state of organization. In addition, without providing Laurus with 7 days
prior
written notice, the Parent will not amend its certificate of incorporation,
by-laws or other organizational document. Parent has notified Laurus that
it
intends to change its corporate name to “MISCOR Group, Ltd.”; the foregoing
30-day notice period shall not apply to this name change, and Parent shall
notify Laurus two business days before the effective date of this name change.
(p) Compliance
with Laws.
The
operation of each of its and each of its Subsidiaries’ business is and shall
continue to be in compliance in all material respects with all applicable
federal, state and local laws, rules and ordinances, including to all laws,
rules, regulations and orders relating to taxes, payment and withholding
of
payroll taxes, employer and employee contributions and similar items,
securities, employee retirement and welfare benefits, employee health and
safety
and environmental matters.
(q) Notices.
It and
each of its Subsidiaries shall promptly inform Laurus in writing of: (i)
the
commencement of all proceedings and investigations by or before and/or the
receipt of any notices from, any governmental or nongovernmental body and
all
actions and proceedings in any court or before any arbitrator against or
in any
way concerning any event which could reasonably be expected to have singly
or in
the aggregate, a Material Adverse Effect; (ii) any change which has had,
or
could reasonably be expected to have, a Material Adverse Effect; (iii) any
Event
of Default or Default; and (iv) any default or any event which with the passage
of time or giving of notice or both would constitute a default under any
agreement for the payment of money to which it or any of its Subsidiaries
is a
party or by which it or any of its Subsidiaries or any of its or any such
Subsidiary’s properties may be bound the breach of which would have a Material
Adverse Effect.
(r) Margin
Stock.
It
shall not permit any of the proceeds of the Loans made hereunder, the Grant
Shares, the Warrants or any Note to be used directly or indirectly to “purchase”
or “carry”“margin stock” or to repay indebtedness incurred to “purchase” or
“carry”“margin stock” within the respective meanings of each of the quoted terms
under Regulation U of the Board of Governors of the Federal Reserve System
as
now and from time to time hereafter in effect.
(s) Offering
Restrictions.
Except
for stock or stock options granted to its employees, officers or directors,
and
except for the granting of an option to ▇▇▇▇ ▇. ▇▇▇▇▇▇▇ to convert the Parent’s
indebtedness to him into Common Stock as described on Schedule
12(c), neither
it nor any of its Subsidiaries shall, prior to the full repayment or conversion
of the Notes (together with all accrued and unpaid interest and fees related
thereto), (x) enter into any equity line of credit agreement or similar
agreement or (y) issue, or enter into any agreement to issue,
27
any
securities with a variable/floating conversion and/or pricing feature which
are
or could be (by conversion or registration) free-trading securities (i.e.
common
stock subject to a registration statement). In addition, before the time
that
the Common Stock is first quoted or listed, as applicable, on a Principal
Market, the Parent shall not, without the written consent of Laurus, issue
any
Common Stock to any Person other than (i) pursuant to any options, warrants,
other convertible securities or other obligations to issue shares of Common
Stock outstanding on the date of this Agreement as disclosed to Laurus in
writing, (ii) up to 5,000,000 shares of Common Stock pursuant to any equity
incentive plan for directors, officers and employees adopted by the Parent,
(iii) pursuant to conversion or exercise, as applicable, of the Notes or
the
Warrants, (iv) up to 500,000 shares of Common Stock to members of the Board
of
Directors of Parent or any Eligible Subsidiaries, or (v) to ▇▇▇▇ ▇. ▇▇▇▇▇▇▇
in
connection with the conversion of certain indebtedness owed to him by the
Parent
as described on Schedule
12(c).
(t) Authorization
and Reservation of Shares.
The
Parent shall at all times have authorized and reserved a sufficient number
of
shares of Common Stock to provide for the conversion of the Notes and exercise
of the Warrants.
(u) Financing
Right of First Refusal.
(i) Until
all
obligations under the Notes have been paid in full, Laurus shall have a right
of
first refusal to provide any Additional Financing (as defined below) to be
issued by any Company and/or any of its Subsidiaries (the “Additional
Financing Parties”),
subject to the following terms and conditions. From and after the date hereof,
prior to the incurrence of any additional indebtedness which has a
convertibility feature (an “Additional
Financing”),
Company Agent shall notify Laurus of such Additional Financing. In connection
therewith, Company Agent shall submit a fully executed term sheet (a
“Proposed
Term Sheet”)
to
Laurus setting forth the terms, conditions and pricing of any such Additional
Financing (such financing to be negotiated on “arm’s length” terms and the terms
thereof to be negotiated in good faith) proposed to be entered into by the
Additional Financing Parties. Laurus shall have the right, but not the
obligation, to deliver to Company Agent its own proposed term sheet (the
“Laurus
Term Sheet”)
setting forth the terms and conditions upon which Laurus would be willing
to
provide such Additional Financing to the Additional Financing Parties. The
Laurus Term Sheet shall contain terms no less favorable to the Additional
Financing Parties than those outlined in Proposed Term Sheet. Laurus shall
deliver to Company Agent the Laurus Term Sheet within ten Business Days of
receipt of each such Proposed Term Sheet. If the provisions of the Laurus
Term
Sheet are at least as favorable to the Additional Financing Parties as the
provisions of the Proposed Term Sheet, the Additional Financing Parties shall
enter into and consummate the Additional Financing transaction outlined in
the
Laurus Term Sheet.
(ii) Until
all
obligations under the Notes have been paid in full, it shall not, and shall
not
permit its Subsidiaries to, agree, directly or indirectly, to any restriction
with any Person which limits the ability of Laurus to consummate an Additional
Financing with it or any of its Subsidiaries.
(v) Certain
Controls.
After
the Company has registered its Common Stock with the SEC under the Exchange
Act,
it shall, to the extent required by the Exchange Act, the ▇▇▇▇▇▇▇▇-▇▇▇▇▇
Act of
2002 or any related SEC regulation or rule:
28
(i) maintain
disclosure controls and procedures (“Disclosure Controls”) designed to ensure
that information required to be disclosed by the Parent in the reports that
it
files or submits under the Exchange Act is recorded, processed, summarized,
and
reported, within the time periods specified in the rules and forms of the
SEC;
and
(ii) maintain
internal controls over financial reporting designed by, or under the supervision
of, its principal executive and principal financial officers, and effected
by
its Board of Directors, management, and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting (“Financial Reporting
Controls”) and the preparation of financial statements for external purposes in
accordance with GAAP, including that:
(1) transactions
are executed in accordance with management’s general or specific
authorization;
(2) unauthorized
acquisition, use, or disposition of the Parent’s assets that could have a
material effect on the financial statements are prevented or timely
detected;
(3) transactions
are recorded as necessary to permit preparation of financial statements in
accordance with GAAP, and that its receipts and expenditures are being made
only
in accordance with authorizations of the Parent’s management and board of
directors;
(5) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals, and appropriate action is taken with respect to any
differences.
(iii) The
Parent and its Subsidiaries shall ensure that there is no weakness in any
of the
Parent’s and its Subsidiaries’ Disclosure Controls or Financial Reporting
Controls that is required to be disclosed in any of the Exchange Act Filings
following the implementation thereof.
14. Further
Assurances.
At any
time and from time to time, upon the written request of Laurus and at the
sole
expense of Companies, each Company shall promptly and duly execute and deliver
any and all such further instruments and documents and take such further
action
as Laurus may request (a) to obtain the full benefits of this Agreement and
the
Ancillary Agreements, (b) to protect, preserve and maintain Laurus’ rights in
the Collateral and under this Agreement or any Ancillary Agreement, and/or
(c)
to enable Laurus to exercise all or any of the rights and powers herein granted
or any Ancillary Agreement.
Laurus
agrees to comply with applicable securities laws in connection with the transfer
of the Securities.
29
15. Representations,
Warranties and Covenants of Laurus.
Laurus
hereby represents, warrants and covenants to each Company as
follows:
(a) Requisite
Power and Authority.
Laurus
has all necessary power and authority under all applicable provisions of
law to
execute and deliver this Agreement and the Ancillary Agreements and to carry
out
their provisions. All corporate action on Laurus’ part required for the lawful
execution and delivery of this Agreement and the Ancillary Agreements have
been
or will be effectively taken prior to the Closing
Date.
Upon their execution and delivery, this Agreement and the Ancillary Agreements
shall be valid and binding obligations of Laurus, enforceable in accordance
with
their terms, except (a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors’ rights, and (b) as limited by general principles of
equity that restrict the availability of equitable and legal
remedies.
(b) Investment
Representations.
Laurus
understands that the Securities are being offered pursuant to an exemption
from
registration contained in the Securities Act based in part upon Laurus’
representations and warranties contained in this Agreement, including, without
limitation, that Laurus is an “accredited investor” within the meaning of
Regulation D under the Securities Act. Laurus has received or has had full
access to all the information it considers necessary or appropriate to make
an
informed investment decision with respect to the Notes, the Warrants and
the
Grant Shares to be issued to it under this Agreement and the Securities acquired
by it upon the conversion of the Notes and the exercise of the
Warrants.
(c) Laurus
Bears Economic Risk.
Laurus
has substantial experience in evaluating and investing in private placement
transactions of securities in companies similar to the Parent so that it
is
capable of evaluating the merits and risks of its investment in the Parent
and
has the capacity to protect its own interests. Laurus must and is financially
able to bear the economic risk of this investment including without limitation
the entire loss of this investment.
(d) Investment
for Own Account.
The
Securities are being issued to Laurus for its own account for investment
only,
and not as a nominee or agent and not with a view towards or for resale in
connection with their distribution.
(e) Laurus
Can Protect Its Interest.
By
reason of its, or of its management’s, business and financial experience, Laurus
has the capacity to evaluate the merits and risks of its investment in the
Securities and to protect its own interests in connection with the transactions
contemplated in this Agreement, and the Ancillary Agreements. Further, Laurus
is
aware of no publication of any advertisement in connection with the transactions
contemplated in the Agreement or the Ancillary Agreements.
(f) Accredited
Investor.
Laurus
represents and warrants that it is an accredited investor within the meaning
of
Regulation D under the Securities Act.
(g) Shorting.
Neither
Laurus nor any of its Affiliates or investment partners has, will, or will
cause
any Person, to directly engage in “short sales” of the Parent’s Common Stock as
long as any Note shall be outstanding and for a period of one year after
all
obligations under the Notes have been paid in full.
30
(h) Patriot
Act.
Laurus
certifies that, to the best of Laurus’ knowledge, Laurus has not been
designated, and is not owned or controlled, by a “suspected terrorist” as
defined in Executive Order 13224. Laurus seeks to comply with all applicable
laws concerning money laundering and related activities. In furtherance of
those
efforts, Laurus hereby represents, warrants and covenants that: (i) none
of the
cash or property that Laurus will use to make the Loans has been or shall
be
derived from, or related to, any activity that is deemed criminal under United
States law; and (ii) no disbursement by Laurus to any Company to the extent
within Laurus’ control, shall cause Laurus to be in violation of the United
States Bank Secrecy Act, the United States International Money Laundering
Control Act of 1986 or the United States International Money Laundering
Abatement and Anti-Terrorist Financing Act of 2001. Laurus shall promptly
notify
the Company Agent if any of these representations ceases to be true and accurate
regarding Laurus. Laurus agrees to provide the Company any additional
information regarding Laurus that the Company deems necessary or convenient
to
ensure compliance with all applicable laws concerning money laundering and
similar activities. Laurus understands and agrees that if at any time it
is
discovered that any of the foregoing representations are incorrect, or if
otherwise required by applicable law or regulation related to money laundering
similar activities, Laurus may undertake appropriate actions to ensure
compliance with applicable law or regulation, including but not limited to
segregation and/or redemption of Laurus’ investment in the Parent. Laurus
further understands that the Parent may release information about Laurus
and, if
applicable, any underlying beneficial owners, to proper authorities if the
Parent, in its sole discretion, determines that it is in the best interests
of
the Parent in light of relevant rules and regulations under the laws set
forth
in subsection (ii) above.
(i) Limitation
on Acquisition of Common Stock.
Notwithstanding anything to the contrary contained in this Agreement, any
Ancillary Agreement, or any document, instrument or agreement entered into
in
connection with any other transaction entered into by and between Laurus
and any
Company (and/or Subsidiaries or Affiliates of any Company), Laurus shall
not
acquire stock in the Parent
(including, without limitation, pursuant to a contract to purchase, by
exercising an option or warrant, by converting any other security or instrument,
by acquiring or exercising any other right to acquire, shares of stock or
other
security convertible into shares of stock in the Parent, or otherwise, and
such
options, warrants, conversion or other rights shall not be exercisable) to
the
extent such stock acquisition would cause any interest (including any original
issue discount) payable by any Company to Laurus not to qualify as portfolio
interest, within the meaning of Section 881(c)(2) of the Internal Revenue
Code
of 1986, as amended (the “Code”)
by
reason of Section 881(c)(3) of the Code, taking into account the constructive
ownership rules under Section 871(h)(3)(C) of the Code (the “Stock
Acquisition Limitation”).
The
Stock Acquisition Limitation shall automatically become null and void without
any notice to any Company upon the earlier to occur of either (a) the Parent’s
delivery to Laurus of a Notice of Redemption (as defined in the Notes) or
(b)
the existence of an Event of Default at a time when the average closing price
of
the Common Stock as reported by Bloomberg, L.P. on the Principal Market for
the
immediately preceding five trading days is greater than or equal to 150%
of the
lowest Fixed Conversion Price (as defined in the Notes) then in effect under
the
Notes.
16. Power
of Attorney.
Each
Company hereby appoints Laurus, or any other Person whom Laurus may designate
as
such Company’s attorney, with power to: (i) endorse such Company’s name on any
checks, notes, acceptances, money orders, drafts or other forms of
31
payment
or security that may come into Laurus’ possession; (ii) sign such Company’s name
on any invoice or ▇▇▇▇ of lading relating to any Accounts, drafts against
Account Debtors, schedules and assignments of Accounts, notices of assignment,
financing statements and other public records, verifications of Account and
notices to or from Account Debtors; (iii) verify the validity, amount or
any
other matter relating to any Account by mail, telephone, telegraph or otherwise
with Account Debtors; (iv) do all things necessary to carry out this Agreement,
any Ancillary Agreement and all related documents; and (v) notify the post
office authorities to change the address for delivery of such Company’s mail to
an address designated by Laurus, and to receive, open and dispose of all
mail
addressed to such Company. Each Company hereby ratifies and approves all
acts of
the attorney. Neither Laurus, nor the attorney will be liable for any acts
or
omissions or for any error of judgment or mistake of fact or law, except
for
gross negligence or willful misconduct. This power, being coupled with an
interest, is irrevocable so long as Laurus has a security interest and until
the
Obligations have been fully satisfied.
Notwithstanding anything to the contrary contained in this Section 16, this
power of attorney shall only be exercisable following the occurrence and
during
the continuation of an Event of Default, except with respect to the filing
of
financing statements, in which case such power of attorney shall be exercisable
on and after the date hereof.
17. Term
of Agreement.
Laurus’
agreement to make Loans and extend financial accommodations under and in
accordance with the terms of this Agreement or any Ancillary Agreement shall
continue in full force and effect until the expiration of the Term. At Laurus’
election following the occurrence of an Event of Default, Laurus may terminate
this Agreement. The termination of the Agreement shall not affect any of
Laurus’
rights hereunder or any Ancillary Agreement and the provisions hereof and
thereof shall continue to be fully operative until all transactions entered
into, rights or interests created and the Obligations have been irrevocably
disposed of, concluded or liquidated. Notwithstanding the foregoing, Laurus
shall release its security interests at any time after thirty (30) days notice
upon irrevocable payment to it of all Obligations if each Company shall have
provided Laurus with an executed release of any and all claims which such
Company may have or thereafter have under this Agreement and all Ancillary
Agreements
18. Termination
of Lien.
The
Liens and rights granted to Laurus hereunder and any Ancillary Agreements
and
the financing statements filed in connection herewith or therewith shall
continue in full force and effect, notwithstanding the termination of this
Agreement or the fact that any Company’s account may from time to time be
temporarily in a zero or credit position, until all of the Obligations have
been
indefeasibly paid or performed in full after the termination of this Agreement.
Laurus shall not be required to send termination statements to any Company,
or
to file them with any filing office, unless and until this Agreement and
the
Ancillary Agreements shall have been terminated in accordance with their
terms
and all Obligations indefeasibly paid in full in immediately available
funds.
19. Events
of Default.
The
occurrence of any of the following shall constitute an “Event
of Default”:
(a) failure
to make payment of any of the Obligations when required hereunder, and, in
any
such case, such failure shall continue for a period of five (5) days following
the date upon which any such payment was due;
32
(b) failure
by any Company or any of its Subsidiaries to pay any taxes when due unless
such
taxes are being contested in good faith
by
appropriate proceedings and with respect to which adequate reserves have
been
provided on such Company’s and/or such Subsidiary’s books;
(c) failure
to perform under, and/or committing any breach of, in any material respect,
this
Agreement or any covenant contained herein, which failure or breach shall
continue without remedy for a period of thirty (30) days after the occurrence
thereof;
(d) any
representation, warranty or statement made by any Company or any of its
Subsidiaries hereunder, in any Ancillary Agreement, any certificate, statement
or document delivered pursuant to the terms hereof, or in connection with
the
transactions contemplated by this Agreement should prove to be false or
misleading in any material respect on the date as of which made or deemed
made;
(e) the
occurrence of any default (or similar term) in the observance or performance
of
any other agreement or condition relating to any indebtedness or contingent
obligation of any Company or any of its Subsidiaries beyond the period of
grace
(if any), the effect of which default is to cause, or permit the holder or
holders of such indebtedness or beneficiary or beneficiaries of such contingent
obligation to cause, such indebtedness to become due prior to its stated
maturity or such contingent obligation to become payable;
(f) attachments
or levies in excess of $200,000 in the aggregate are made upon any Company’s
assets or a judgment is rendered against any Company’s property involving a
liability of more than $200,000 which shall not have been vacated, discharged,
stayed or bonded within thirty (30) days from the entry thereof;
(g) any
Lien
created hereunder or under any Ancillary Agreement for any reason ceases
to be
or is not a valid and perfected Lien having a first priority
interest;
(h) any
Company or any of its Subsidiaries shall (i) apply for, consent to
or
suffer to exist the appointment of, or the taking of possession by, a receiver,
custodian, trustee or liquidator of itself or of all or a substantial part
of
its property, (ii) make a general assignment for the benefit of creditors,
(iii) commence a voluntary case under the federal bankruptcy laws (as now
or
hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file
a
petition seeking to take advantage of any other law providing for the relief
of
debtors, (vi) acquiesce to without challenge within ten (10) days of the
filing
thereof, or failure to have dismissed within thirty (30) days, any petition
filed against it in any involuntary case under such bankruptcy laws, or (vii)
take any action for the purpose of effecting any of the foregoing;
(i) any
Company or any of its Subsidiaries shall admit in writing its inability,
or be
generally unable, to pay its debts as they become due or cease operations
of its
present business;
(j) any
Company or any of its Subsidiaries directly or indirectly sells, assigns,
transfers, conveys, or suffers or permits to occur any sale, assignment,
transfer or conveyance of any assets of such Company or any interest therein,
except as permitted herein;
33
(k) any
“Person” or “group” (as such terms are defined in Sections 13(d) and 14(d) of
the Exchange Act, as in effect on the date hereof), other than the Holder,
is or
becomes the “beneficial owner” (as defined in Rules 13(d)-3 and 13(d)-5 under
the Exchange Act), directly or indirectly, of 35% or more on a fully diluted
basis of the then outstanding voting equity interest of the Parent (other
than a
“Person” or “group” that beneficially owns 35% or more of such outstanding
voting equity interests of Parent on the date hereof), (ii) the Board of
Directors of the Parent shall cease to consist of a majority of the Board
of
Directors of the Parent on the date hereof (or directors appointed by a majority
of the Board of Directors in effect immediately prior to such appointment
or by
any “Person” or “group” that beneficially owns more than fifty percent (50%) of
the outstanding voting equity interests of Parent on the date
hereof)
or (iii)
the Parent or any of its Subsidiaries merges or consolidates with, or sells
all
or substantially all of its assets to, any other person or entity other than
an
entity that is party to this Agreement (other than Laurus);
(l) the
indictment or threatened indictment of any Company or any of its Subsidiaries
or
any executive officer of any Company or any of its Subsidiaries under any
criminal statute, or commencement or threatened commencement of criminal
or
civil proceeding against any Company or any of its Subsidiaries or any executive
officer of any Company or any of its Subsidiaries pursuant to which statute
or
proceeding penalties or remedies sought or available include forfeiture of
any
of the property of any Company or any of its Subsidiaries;
(m) an
Event
of Default shall occur under and as defined in any Note or in any other
Ancillary Agreement;
(n) any
Company or any of its Subsidiaries shall breach any term or provision of
any
Ancillary Agreement to which it is a party, in any material respect which
breach
is not cured within any applicable cure or grace period provided in respect
thereof (if any);
(o) any
Company or any of its Subsidiaries attempts to terminate, challenges the
validity of, or its liability under this Agreement or any Ancillary Agreement,
or any proceeding shall be brought to challenge the validity, binding effect
of
any Ancillary Agreement or any Ancillary Agreement ceases to be a valid,
binding
and enforceable obligation of such Company or any of its Subsidiaries (to
the
extent such Persons are a party thereto);
(p) an
SEC
stop trade order or Principal Market trading suspension of the Common Stock
shall be in effect for five (5) consecutive days or five (5) days during
a
period of ten (10) consecutive days, excluding in all cases a suspension
of all
trading on a Principal Market, provided that the Parent shall not have been
able
to cure such trading suspension within sixty (60) days of the notice thereof
or
list the Common Stock on another Principal Market within sixty (60) days
of such
notice;
(q) The
Parent’s failure to deliver Common Stock to Laurus pursuant to and in the form
required by the Notes and this Agreement, if such failure to deliver Common
Stock shall not be cured within two (2) Business Days or any Company is required
to issue a replacement Note to Laurus and such Company shall fail to deliver
such replacement Note within fifteen (15) Business Days; or
34
(r) The
Parent’s failure to cause the Common Stock to be quoted or listed, as
applicable, on a Principal Market on or before the date that is 210 days
after
the date of this Agreement.
20. Remedies.
Following the occurrence of an Event of Default, Laurus shall have the right
to
demand repayment in full of all Obligations, whether or not otherwise due.
Until
all Obligations have been fully and indefeasibly satisfied, Laurus shall
retain
its Lien in all Collateral. Laurus shall have, in addition to all other rights
provided herein and in each Ancillary Agreement, the rights and remedies
of a
secured party under the UCC, and under other applicable law, all other legal
and
equitable rights to which Laurus may be entitled, including the right to
take
immediate possession of the Collateral, to require each Company to assemble
the
Collateral, at Companies’ joint and several expense, and to make it available to
Laurus at a place designated by Laurus which is reasonably convenient to
both
parties and to enter any of the premises of any Company or wherever the
Collateral shall be located, with or without force or process of law, and
to
keep and store the same on said premises until sold (and if said premises
be the
property of any Company, such Company agrees not to charge Laurus for storage
thereof), and the right to apply for the appointment of a receiver for such
Company’s property. Further, Laurus may, at any time or times after the
occurrence of an Event of Default, sell and deliver all Collateral held by
or
for Laurus at public or private sale for cash, upon credit or otherwise,
at such
prices and upon such terms as Laurus, in Laurus’ sole discretion, deems
advisable or Laurus may otherwise recover upon the Collateral in any
commercially reasonable manner as Laurus, in its sole discretion, deems
advisable. The requirement of reasonable notice shall be met if such notice
is
mailed postage prepaid to Company Agent at Company Agent’s address as shown in
Laurus’ records, at least ten (10) days before the time of the event of which
notice is being given. Laurus may be the purchaser at any sale, if it is
public.
In connection with the exercise of the foregoing remedies, Laurus is granted
permission to use all of each Company’s Intellectual Property. The proceeds of
sale shall be applied first to all costs and expenses of sale, including
attorneys’ fees, and second to the payment (in whatever order Laurus elects) of
all Obligations. After the indefeasible payment and satisfaction in full
of all
of the Obligations, and after the payment by Laurus of any other amount required
by any provision of law, including Section 9-608(a)(1) of the UCC
(but only
after Laurus has received what Laurus considers reasonable proof of a
subordinate party’s security interest), the surplus, if any, shall be paid to
Company Agent (for the benefit of the applicable Companies) or its
representatives or to whosoever may be lawfully entitled to receive the same,
or
as a court of competent jurisdiction may direct. Each Company and Laurus
acknowledge that the actual damages that would be incurred by Laurus after
the
occurrence of an Event of Default would be difficult to quantify and that
such
Company and Laurus have agreed that the fees and obligations set forth in
this
Agreement would constitute fair and appropriate liquidated damages in the
event
of any such termination.
21. Waivers.
To the
full extent permitted by applicable law, each Company hereby waives (a)
presentment, demand and protest, and notice of presentment, dishonor, intent
to
accelerate, acceleration, protest, default, nonpayment, maturity, release,
compromise, settlement, extension or renewal of any or all of this Agreement
and
the Ancillary Agreements or any other notes, commercial paper, Accounts,
contracts, Documents, Instruments, Chattel Paper and guaranties at any time
held
by Laurus on which such Company may in any way be liable, and hereby ratifies
and confirms whatever Laurus may do in this regard; (b) all rights to notice
35
and
a
hearing prior to Laurus’ taking possession or control of, or to Laurus’ replevy,
attachment or levy upon, any Collateral or any bond or security that might
be
required by any court prior to allowing Laurus to exercise any of its remedies;
and (c) the benefit of all valuation, appraisal and exemption laws. Each
Company
acknowledges that it has been advised by counsel of its choices and decisions
with respect to this Agreement, the Ancillary Agreements and the transactions
evidenced hereby and thereby.
22. Expenses.
The
Companies shall jointly and severally pay all of Laurus’ reasonable
out-of-pocket costs and expenses, including reasonable fees and disbursements
of
in-house or outside counsel and appraisers, in connection with the preparation,
execution and delivery of this Agreement and the Ancillary Agreements, and
in
connection with the prosecution or defense of any action, contest, dispute,
suit
or proceeding concerning any matter in any way arising out of, related to
or
connected with this Agreement or any Ancillary Agreement. The Companies shall
also jointly and severally pay all of Laurus’ reasonable fees, charges,
out-of-pocket costs and expenses, including fees and disbursements of counsel
and appraisers, in connection with (a) the preparation, execution and delivery
of any waiver, any amendment thereto or consent proposed or executed in
connection with the transactions contemplated by this Agreement or the Ancillary
Agreements, (b) Laurus’ obtaining performance of the Obligations under this
Agreement and any Ancillary Agreements, including, but not limited to, the
enforcement or defense of Laurus’ security interests, assignments of rights and
Liens hereunder as valid perfected security interests, (c) any attempt to
inspect, verify, protect, collect, sell, liquidate or otherwise dispose of
any
Collateral, (d) any appraisals or re-appraisals of any property (real or
personal) pledged to Laurus by any Company or any of its Subsidiaries as
Collateral for, or any other Person as security for, the Obligations hereunder
and (e) any consultations in connection with any of the foregoing. The Companies
shall also jointly and severally pay Laurus’ customary bank charges for all bank
services (including wire transfers) performed or caused to be performed by
Laurus for any Company or any of its Subsidiaries at any Company’s or such
Subsidiary’s request or in connection with any Company’s loan account with
Laurus. All such costs and expenses together with all filing, recording and
search fees, taxes and interest payable by the Companies to Laurus shall
be
payable on demand and shall be secured by the Collateral. If any tax by any
Governmental Authority is or may be imposed on or as a result of any transaction
between any Company and/or any Subsidiary thereof, on the one hand, and Laurus
on the other hand, which Laurus is or may be required to withhold or pay,
the
Companies hereby jointly and severally indemnifies and holds Laurus harmless
in
respect of such taxes, and the Companies will repay to Laurus the amount
of any
such taxes which shall be charged to the Companies’ account; and until the
Companies shall furnish Laurus with indemnity therefor (or supply Laurus
with
evidence satisfactory to it that due provision for the payment thereof has
been
made), Laurus may hold without interest any balance standing to each Company’s
credit and Laurus shall retain its Liens in any and all Collateral.
Notwithstanding the foregoing, in connection with a litigation between Laurus,
on the one hand, and one or more Companies, on the other hand, the
prevailing party in such action, as determined by the applicable court, shall
be
entitled to attorneys fees actually incurred, and costs and necessary
disbursements incurred, in each case, in connection with any such
action.
23. Assignment
By Laurus.
Laurus
may assign any or all of the Obligations together with any or all of the
security therefor to any Person which is not a competitor of any
36
Company
and any such transferee shall succeed to all of Laurus’ rights with respect
thereto. Upon such transfer, Laurus shall be released from all responsibility
for the Collateral to the extent same is assigned to any transferee. Laurus
may
from time to time sell or otherwise grant participations in any of the
Obligations and the holder of any such participation shall, subject to the
terms
of any agreement between Laurus and such holder, be entitled to the same
benefits as Laurus with respect to any security for the Obligations in which
such holder is a participant. Each Company agrees that each such holder may
exercise any and all rights of banker’s lien, set-off and counterclaim with
respect to its participation in the Obligations as fully as though such Company
were directly indebted to such holder in the amount of such
participation.
24. No
Waiver; Cumulative Remedies.
Failure
by Laurus to exercise any right, remedy or option under this Agreement, any
Ancillary Agreement or any supplement hereto or thereto or any other agreement
between or among any Company and Laurus or delay by Laurus in exercising
the
same, will not operate as a waiver; no waiver by Laurus will be effective
unless
it is in writing and then only to the extent specifically stated. Laurus’ rights
and remedies under this Agreement and the Ancillary Agreements will be
cumulative and not exclusive of any other right or remedy which Laurus may
have.
25. Application
of Payments.
Except
as provided in Section 3.3 of the Revolving Note, Section 4.3 of the Minimum
Borrowing Notes and Section 4.3 of the Term Note: (a) after the occurrence
and
during the continuance of an Event of Default, each Company irrevocably waives
the right to direct the application of any and all payments at any time or
times
hereafter received by Laurus from or on such Company’s behalf; and (b),
notwithstanding whether or not an Event of Default has occurred and is
continuing, each Company hereby irrevocably agrees that Laurus shall have
the
continuing exclusive right to apply and reapply any and all payments received
at
any time or times hereafter against the Obligations hereunder in such manner
as
Laurus may deem advisable notwithstanding any entry by Laurus upon any of
Laurus’ books and records.
26. Indemnity.
(a) General
Indemnity.
Each
Company hereby jointly and severally indemnify and hold Laurus, and its
respective affiliates, employees, attorneys and agents (each, an “Indemnified
Person”),
harmless from and against any and all suits, actions, proceedings, claims,
damages, losses, liabilities and expenses of any kind or nature whatsoever
(including reasonable attorneys’ fees and disbursements and other costs of
investigation or defense, including those incurred upon any appeal) which
may be
instituted or asserted against or incurred by any such Indemnified Person
as the
result of credit having been extended, suspended or terminated under this
Agreement or any of the Ancillary Agreements or with respect to the execution,
delivery, enforcement, performance and administration of, or in any other
way
arising out of or relating to, this Agreement, the Ancillary Agreements or
any
other documents or transactions contemplated by or referred to herein or
therein
and any actions or failures to act with respect to any of the foregoing,
except
to the extent that any such indemnified liability is finally determined by
a
court of competent jurisdiction to have resulted solely from such Indemnified
Person’s gross negligence or willful misconduct. NO INDEMNIFIED PERSON SHALL BE
RESPONSIBLE OR LIABLE TO ANY COMPANY OR TO ANY OTHER PARTY OR TO ANY SUCCESSOR,
ASSIGNEE OR THIRD PARTY BENEFICIARY OR
37
ANY
OTHER
PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE,
EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT
HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR ANY
ANCILLARY AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED
HEREUNDER OR THEREUNDER.
(b) Vertical/Key
Command Indemnity.
Each
Company and each of its Subsidiaries, successors and assigns hereby agrees
to
fully indemnify, hold harmless, reimburse and defend each Indemnified Person
against any and all claims, costs, expenses, liabilities, judgments,
obligations, losses or damage, including without limitation reasonable attorneys
fees, incurred by or imposed upon any Indemnified Person which results, arises
out of, or is based upon any charges or claims by Vertical Capital Partners,
Inc., Key Command International Corp., or any of their corporate parents,
subsidiaries, affiliates, successors, assigns, officers, directors, employees,
representatives or agents (collectively, the “Vertical Persons”) concerning in
any manner the transactions related to this Agreement and/or the Ancillary
Agreements, including without limitation any and all introductions, negotiations
or discussions among any Indemnified Person, any Vertical Person , any Company,
any Subsidiary of any Company and/or any successor or assign of any Company
or
any Subsidiary of any Company, prior to the entering into of this Agreement
and/or the Ancillary Agreements, except to the extent that any such indemnified
liability results solely from any commitment or agreement actually made by
any
Indemnified Person to any Vertical Person.
27. Revival.
The
Companies further agree that to the extent any Company makes a payment or
payments to Laurus, which payment or payments or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set
aside
and/or required to be repaid to a trustee, receiver or any other party under
any
bankruptcy act, state or federal law, common law or equitable cause, then,
to
the extent of such payment or repayment, the obligation or part thereof intended
to be satisfied shall be revived and continued in full force and effect as
if
said payment had not been made.
28. Borrowing
Agency Provisions.
(a) Each
Company hereby irrevocably designates Company Agent to be its attorney and
agent
and in such capacity to borrow, sign and endorse notes, and execute and deliver
all instruments, documents, writings and further assurances now or hereafter
required hereunder, on behalf of such Company, and hereby authorizes Laurus
to
pay over or credit all loan proceeds hereunder in accordance with the request
of
Company Agent.
(b) The
handling of this credit facility as a co-borrowing facility with a borrowing
agent in the manner set forth in this Agreement is solely as an accommodation
to
the Companies and at their request. Laurus shall not incur any liability
to any
Company as a result thereof. To induce Laurus to do so and in consideration
thereof, each Company hereby indemnifies Laurus and holds Laurus harmless
from
and against any and all liabilities, expenses, losses, damages and claims
of
damage or injury asserted against Laurus by any Person arising from or incurred
by reason of the handling of the financing arrangements of the Companies
as
38
provided
herein, reliance by Laurus on any request or instruction from Company Agent
or
any other action taken by Laurus with respect to this Section 28.
(c) All
Obligations shall be joint and several, and the Companies shall make payment
upon the maturity of the Obligations by acceleration or otherwise, and such
obligation and liability on the part of the Companies shall in no way be
affected by any extensions, renewals and forbearance granted by Laurus to
any
Company, failure of Laurus to give any Company notice of borrowing or any
other
notice, any failure of Laurus to pursue to preserve its rights against any
Company, the release by Laurus of any Collateral now or thereafter acquired
from
any Company, and such agreement by any Company to pay upon any notice issued
pursuant thereto is unconditional and unaffected by prior recourse by Laurus
to
any Company or any Collateral for such Company’s Obligations or the lack
thereof.
(d) Each
Company expressly waives any and all rights of subrogation, reimbursement,
indemnity, exoneration, contribution or any other claim which such Company
may
now or hereafter have against the other or other Person directly or contingently
liable for the Obligations, or against or with respect to any other’s property
(including, without limitation, any property which is Collateral for the
Obligations), arising from the existence or performance of this Agreement,
until
all Obligations have been indefeasibly paid in full and this Agreement has
been
irrevocably terminated.
(e) Each
Company represents and warrants to Laurus that (i) Companies have one or
more
common shareholders, directors and officers, (ii) the businesses and corporate
activities of Companies are closely related to, and substantially benefit,
the
business and corporate activities of Companies, (iii) the financial and other
operations of Companies are performed on a combined basis as if Companies
constituted a consolidated corporate group, (iv) Companies will receive a
substantial economic benefit from entering into this Agreement and will receive
a
substantial economic benefit from the application of each Loan hereunder,
in
each case, whether or not such amount is used directly by any Company and
(v)
all requests for Loans hereunder by the Company Agent are for the exclusive
and
indivisible benefit of the Companies as though, for purposes of this Agreement,
the Companies constituted a single entity.
29. Notices.
Any
notice or request hereunder may be given to any Company, Company Agent or
Laurus
at the respective addresses set forth below or as may hereafter be specified
in
a notice designated as a change of address under this Section. Any notice
or
request hereunder shall be given by registered or certified mail, return
receipt
requested, hand delivery, overnight mail or telecopy (confirmed by mail).
Notices and requests shall be, in the case of those by hand delivery, deemed
to
have been given when delivered to any officer of the party to whom it is
addressed, in the case of those by mail or overnight mail, deemed to have
been
given three (3) Business Days after the date when deposited in the mail or
with
the overnight mail carrier, and, in the case of a telecopy, when
confirmed.
39
Notices
shall be provided as follows:
|
If
to Laurus:
|
Laurus
Master Fund, Ltd.
c/o
Laurus Capital Management, LLC
▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇ ▇▇.
▇▇▇
▇▇▇▇, ▇▇▇
▇▇▇▇ ▇▇▇▇▇
Attention:
▇▇▇▇ ▇. ▇▇▇▇▇▇, Esq.
Telephone:
(▇▇▇) ▇▇▇-▇▇▇▇
Telecopier:
(▇▇▇) ▇▇▇-▇▇▇▇
|
||
|
If
to any Company, or Company Agent:
|
Magnetech
Integrated Services Corp.
▇▇▇▇
▇. ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇
▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention:
▇▇▇▇ ▇▇▇▇▇▇▇
Telephone:
▇▇▇-▇▇▇-▇▇▇▇
Facsimile:
▇▇▇-▇▇▇-▇▇▇▇
|
||
|
With
a copy to:
|
▇▇▇▇▇▇
& ▇▇▇▇▇▇▇▇▇ LLP
600
1st
Source Bank Center
▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇▇▇
▇▇▇▇▇
▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention:
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Esq.
Telephone:
▇▇▇-▇▇▇-▇▇▇▇
Facsimile:
▇▇▇-▇▇▇-▇▇▇▇
|
||
or
such
other address as may be designated in writing hereafter in accordance with
this
Section 29 by such Person.
(a) THIS
AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED
AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE
TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES
OF
CONFLICTS OF LAW.
(b) EACH
COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED
IN
THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION
TO
HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY COMPANY, ON THE ONE
HAND,
AND LAURUS, ON THE OTHER HAND, PERTAINING TO THIS AGREEMENT OR ANY OF THE
ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS
AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS; PROVIDED,
THAT
LAURUS AND EACH COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY
HAVE
TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF
NEW
YORK; AND FURTHER
40
PROVIDED,
THAT
NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LAURUS FROM
BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT
THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE
OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LAURUS.
EACH COMPANY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION
IN
ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH COMPANY HEREBY WAIVES
ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION,
IMPROPER VENUE OR FORUM
NON CONVENIENS.
EACH
COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER
PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH
SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED
MAIL
ADDRESSED TO COMPANY AGENT AT THE ADDRESS SET FORTH IN SECTION 29 AND THAT
SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF COMPANY AGENT’S
ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS,
PROPER
POSTAGE PREPAID.
(c) THE
PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH
APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS
OF
THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS
TO
TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE,
WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN LAURUS, AND/OR ANY
COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT,
ANY
ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.
31. Limitation
of Liability.
Each
Company acknowledges and understands that in order to assure repayment of
the
Obligations hereunder Laurus may be required to exercise any and all of Laurus’
rights and remedies hereunder and agrees that, except as limited by applicable
law, neither Laurus nor any of Laurus’ agents shall be liable for acts taken or
omissions made in connection herewith or therewith except for actual bad
faith,
gross negligence or willful misconduct .
32. Entire
Understanding; Maximum Interest.
This
Agreement and the Ancillary Agreements contain the entire understanding among
each Company and Laurus as to the subject matter hereof and thereof and any
promises, representations, warranties or guarantees not herein contained
shall
have no force and effect unless in writing, signed by each Company’s and Laurus’
respective officers. Neither this Agreement, the Ancillary Agreements, nor
any
portion or provisions thereof may be changed, modified, amended, waived,
supplemented, discharged, cancelled or terminated orally or by any course
of
dealing, or in any manner other than by an agreement in writing, signed by
the
party to be charged.
Nothing
contained in this Agreement, any Ancillary Agreement or in any document referred
to herein or delivered in connection herewith shall be deemed to establish
or
require the payment of a rate of interest or other charges in excess of the
maximum rate permitted by applicable law. In the event that the
41
rate
of
interest or dividends required to be paid or other charges hereunder exceed
the
maximum rate permitted by such law, any payments in excess of such maximum
shall
be credited against amounts owed by the Companies to Laurus and thus refunded
to
the Companies.
33. Severability.
Wherever possible each provision of this Agreement or the Ancillary Agreements
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement or the Ancillary
Agreements 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 provision or the remaining provisions
thereof.
34. Survival.
The
representations, warranties, covenants and agreements made herein shall survive
any investigation made by Laurus and the closing of the transactions
contemplated hereby to the extent provided therein. All statements as to
factual
matters contained in any certificate or other instrument delivered by
or
on
behalf of the Companies pursuant hereto in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties
by the
Companies hereunder solely as of the date of such certificate or instrument.
All
indemnities set forth herein shall survive the execution, delivery and
termination of this Agreement and the Ancillary Agreements and the making
and
repaying of the Obligations.
35. Captions.
All
captions are and shall be without substantive meaning or content of any kind
whatsoever.
36. Counterparts;
Telecopier Signatures.
This
Agreement may be executed in one or more counterparts, each of which shall
constitute an original and all of which taken together shall constitute one
and
the same agreement. Any signature delivered by a party via telecopier
transmission shall be deemed to be any original signature hereto.
37. Construction.
The
parties acknowledge that each party and its counsel have reviewed this Agreement
and that 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 this Agreement or any amendments, schedules or exhibits
thereto.
38. Publicity.
Each
Company hereby authorizes Laurus to make, subject to Section 13(f) and to
any
limitations that the Parent determines to be necessary or appropriate to
comply
with applicable publicity or disclosure restrictions arising in connection
with
the registration of the Common Stock under the Securities Act, appropriate
announcements of the financial arrangement entered into by and among each
Company and Laurus, including, without limitation, announcements which are
commonly known as tombstones, in such publications and to such selected parties
as Laurus shall in its sole and absolute discretion deem appropriate, or
as
required by applicable law.
39. Joinder.
It is
understood and agreed that any Person that desires to become a Company
hereunder, or is required to execute a counterpart of this Agreement after
the
date hereof pursuant to the requirements of this Agreement or any Ancillary
Agreement, shall become a Company hereunder by (a) executing a Joinder Agreement
in form and substance
42
satisfactory
to Laurus, (b) delivering supplements to such exhibits and annexes to this
Agreement and the Ancillary Agreements as Laurus shall reasonably request
and
(c) taking all actions as specified in this Agreement as would have been
taken
by such Company had it been an original party to this Agreement, in each
case
with all documents required above to be delivered to Laurus and with all
documents and actions required above to be taken to the reasonable satisfaction
of Laurus.
40. Legends.
The
Securities shall bear legends as follows;
(a) The
Notes
shall bear substantially the following legend:
“THIS
NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE,
STATE SECURITIES LAWS. THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION
OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES
UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO MAGNETECH INTEGRATED SERVICES CORP. THAT SUCH
REGISTRATION IS NOT REQUIRED.”
(b) The
Grant
Shares and any shares of Common Stock issued pursuant to conversion of the
Notes
or exercise of the Warrants shall bear a legend which shall be in substantially
the following form until such shares are covered by an effective registration
statement filed with the SEC:
“THE
SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS.
THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT
AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO MAGNETECH INTEGRATED SERVICES CORP. THAT SUCH REGISTRATION
IS
NOT REQUIRED.”
(c) The
Warrants shall bear substantially the following legend:
“THIS
WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT
BEEN
43
REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT
MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE UNDERLYING SHARES
OF
COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION
OF COUNSEL REASONABLY SATISFACTORY TO MAGNETECH INTEGRATED SERVICES CORP.
THAT
SUCH REGISTRATION IS NOT REQUIRED.”
[Balance
of page intentionally left blank; signature page follows.]
44
IN
WITNESS WHEREOF, the parties have executed this Security and Purchase Agreement
as of the date first written above.
|
MAGNETECH
INTEGRATED SERVICES CORP.
|
|||
|
By:
|
/s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇ | ||
|
Name:
|
▇▇▇▇ ▇. ▇▇▇▇▇▇▇ | ||
|
Title:
|
President & CEO | ||
|
MAGNETECH
INDUSTRIAL SERVICES, INC.
|
|||
|
By:
|
/s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇ | ||
|
Name:
|
▇▇▇▇ ▇. ▇▇▇▇▇▇▇ | ||
|
Title:
|
President | ||
|
▇▇▇▇▇▇▇
ELECTRIC, LLC
|
|||
|
By:
|
/s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇ | ||
|
Name:
|
▇▇▇▇ ▇. ▇▇▇▇▇▇▇ | ||
|
Title:
|
President | ||
|
HK
ENGINE COMPONENTS, LLC
|
|||
|
By:
|
/s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇ | ||
|
Name:
|
▇▇▇▇ ▇. ▇▇▇▇▇▇▇ | ||
|
Title:
|
Manager | ||
|
HK
MACHINED PARTS, LLC
|
|||
|
By:
|
/s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇ | ||
|
Name:
|
▇▇▇▇ ▇. ▇▇▇▇▇▇▇ | ||
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Title:
|
Manager | ||
45
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▇▇
▇▇▇▇▇▇ PROPERTIES, INC.
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|||
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By:
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/s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇ | ||
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Name:
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▇▇▇▇ ▇. ▇▇▇▇▇▇▇ | ||
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Title:
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Manager | ||
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HK
CAST PRODUCTS, LLC
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|||
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By:
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/s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇ | ||
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Name:
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▇▇▇▇ ▇. ▇▇▇▇▇▇▇ | ||
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Title:
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Manager | ||
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LAURUS
MASTER FUND, LTD.
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|||
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By:
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/s/ ▇▇▇▇▇ Grin | ||
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Name:
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▇▇▇▇▇ Grin | ||
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Title:
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Director |
46
Annex
A -
Definitions
“Account
Debtor”
means
any Person who is or may be obligated with respect to, or on account of,
an
Account.
“Accountants”
has the
meaning given to such term in Section 11(a).
“Accounts”
means
all “accounts”, as such term is defined in the UCC, now owned or hereafter
acquired by any Person, including: (a) all accounts receivable, other
receivables, book debts and other forms of obligations (other than forms
of
obligations evidenced by Chattel Paper or Instruments) (including any such
obligations that may be characterized as an account or contract right under
the
UCC); (b) all of such Person’s rights in, to and under all purchase orders or
receipts for goods or services; (c) all of such Person’s rights to any goods
represented by any of the foregoing (including unpaid sellers’ rights of
rescission, replevin, reclamation and stoppage in transit and rights to
returned, reclaimed or repossessed goods); (d) all rights to payment due
to such
Person for Goods or other property sold, leased, licensed, assigned or otherwise
disposed of, for a policy of insurance issued or to be issued, for a secondary
obligation incurred or to be incurred, for energy provided or to be provided,
for the use or hire of a vessel under a charter or other contract, arising
out
of the use of a credit card or charge card, or for services rendered or to
be
rendered by such Person or in connection with any other transaction (whether
or
not yet earned by performance on the part of such Person); and (e) all
collateral security of any kind given by any Account Debtor or any other
Person
with respect to any of the foregoing.
“Accounts
Availability”
means
up to ninety percent (90%) of the net face amount of Eligible
Accounts.
“Additional
Financing Parties”
has the
meaning given to such term in Section 13(u).
“Affiliate”
means,
with respect to any Person, (a) any other Person (other than a Subsidiary)
which, directly or indirectly, is in control of, is controlled by, or is
under
common control with such Person or (b) any other Person who is a director
or
officer (i) of such Person, (ii) of any Subsidiary of such Person or (iii)
of
any Person described in clause (a) above. For the purposes of this definition,
control of a Person shall mean the power (direct or indirect) to direct or
cause
the direction of the management and policies of such Person whether by contract
or otherwise.
“Ancillary
Agreements”
means
the Notes, the Warrants, the Registration Rights Agreements, each Security
Document and all other agreements, instruments, documents, mortgages, pledges,
powers of attorney, consents, assignments, contracts, notices, security
agreements, trust agreements and guarantees whether heretofore, concurrently,
or
hereafter executed by or on behalf of any Company, any of its Subsidiaries
or
any other Person or delivered to Laurus, relating to this Agreement or to
the
transactions contemplated by this Agreement or otherwise relating to the
relationship between or among any Company and Laurus, as each of the same
may be
amended, supplemented, restated or otherwise modified from time to
time.
“Balance
Sheet Date”
has the
meaning given such term in Section 12(f)(ii).
“Books
and Records”
means
all books, records, board minutes, contracts, licenses, insurance policies,
environmental audits, business plans, files, computer files, computer discs
and
other data and software storage and media devices, accounting books and records,
financial statements (actual and pro forma), filings with Governmental
Authorities and any and all records and instruments relating to the Collateral
or otherwise necessary or helpful in the collection thereof or the realization
thereupon.
“Business
Day”
means a
day on which Laurus is open for business and that is not a Saturday, a Sunday
or
other day on which banks are required or permitted to be closed in the State
of
New York.
“Capital
Availability Amount”
means
$7,000,000.
“Charter”
has the
meaning given such term in Section 12(c)(iv).
“Chattel
Paper”
means
all “chattel paper,” as such term is defined in the UCC, including electronic
chattel paper, now owned or hereafter acquired by any Person.
“Closing
Date”
means
the date on which any Company shall first receive proceeds of the initial
Loans
or the date hereof, if no Loan is made under the facility on the date
hereof.
“Closing
Payment”
has the
meaning given such term in Section 5(b)(i).
“Code”
has the
meaning given such term in Section 15(i).
“Collateral”
means
all of each Company’s property and assets, whether real or personal, tangible or
intangible, and whether now owned or hereafter acquired, or in which it now
has
or at any time in the future may acquire any right, title or interests including
all of the following property in which it now has or at any time in the future
may acquire any right, title or interest:
(a) all
Inventory;
(b) all
Equipment;
(c) all
Fixtures;
(d) all
General Intangibles;
(e) all
Accounts;
(f) all
Deposit Accounts, other bank accounts and all funds on deposit
therein;
(g) all
Investment Property;
(h) all
Stock;
2
(i) all
Chattel Paper;
(j) all
Letter-of-Credit Rights;
(k) all
Instruments;
(l) all
commercial tort claims set forth on Schedule
1(A);
(m) all
Books
and Records;
(n) all
Intellectual Property;
(o) all
Supporting Obligations including letters of credit and guarantees issued
in
support of Accounts, Chattel Paper, General Intangibles and Investment
Property;
(p) (i)
all
money, cash and cash equivalents and (ii) all cash held as cash collateral
to
the extent not otherwise constituting Collateral, all other cash or property
at
any time on deposit with or held by Laurus for the account of any Company
(whether for safekeeping, custody, pledge, transmission or otherwise);
and
(q) all
products and Proceeds of all or any of the foregoing, tort claims and all
claims
and other rights to payment including (i) insurance claims against third
parties
for loss of, damage to, or destruction of, the foregoing Collateral and (ii)
payments due or to become due under leases, rentals and hires of any or all
of
the foregoing and Proceeds payable under, or unearned premiums with respect
to
policies of insurance in whatever form.
“Common
Stock”
means
the shares of stock representing the Parent’s common equity
interests.
“Company
Agent”
means
the Parent.
“Contract
Rate”
has the
meaning given such term in the respective Note.
“Default”
means
any act or event which, with the giving of notice or passage of time or both,
would constitute an Event of Default.
“Default
Rate”
has the
meaning given such term in Section 5(a)(iii).
“Delinquent
Account”
has the
meaning given such term in Section 2(a)(viii).
“Deposit
Accounts”
means
all “deposit accounts” as such term is defined in the UCC, now or hereafter held
in the name of any Person, including, without limitation, the
Lockboxes.
“Disclosure
Controls”
has the
meaning given such term in Section 13(v)(i)
“Documents”
means
all “documents”, as such term is defined in the UCC, now owned or hereafter
acquired by any Person, wherever located, including all bills of lading,
dock
3
warrants,
dock receipts, warehouse receipts, and other documents of title, whether
negotiable or non-negotiable.
“Eligible
Accounts”
means
each Account of each Company which conforms to the following criteria: (a)
shipment of the merchandise or the rendition of services has been completed;
(b)
no return, rejection or repossession of the merchandise has occurred;
(c) merchandise or services shall not have been rejected or disputed
by the
Account Debtor and there shall not have been asserted any offset, defense
or
counterclaim; (d) continues to be in full conformity with the representations
and warranties made by such Company to Laurus with respect thereto; (e) Laurus
is, and continues to be, satisfied with the credit standing of the Account
Debtor in relation to the amount of credit extended; (f) there are no facts
existing or threatened which are likely to result in any adverse change in
an
Account Debtor’s financial condition; (g) is documented by an invoice in a form
approved by Laurus and shall not be unpaid more than ninety (90) days from
invoice date; (h) not more than thirty percent (30%) of the unpaid amount
of
invoices due from such Account Debtor remains unpaid more than one hundred
fifteen (115) days from invoice date; (i) is not evidenced by chattel paper
or
an instrument of any kind with respect to or in payment of the Account unless
such instrument is duly endorsed to and in possession of Laurus or represents
a
check in payment of an Account; (j) the Account Debtor is located in the
United
States; or if such Account Debtor is not located in the United States, the
Accounts of such Account Debtor be insured by Export-Import Bank of the United
States; provided,
however,
Laurus
may, from time to time, in the exercise of its sole discretion and based
upon
satisfaction of certain conditions to be determined at such time by Laurus,
deem
certain Accounts as Eligible Accounts notwithstanding that such Account is
due
from an Account Debtor located outside of the United States; (k) Laurus has
a
first priority perfected Lien in such Account and such Account is not subject
to
any Lien other than Permitted Liens; (l) does not arise out of transactions
with any employee, officer, director, stockholder or Affiliate of any Company;
(m) is payable to such Company; (n) does not arise out of a ▇▇▇▇ and hold
sale
prior to shipment and does not arise out of a sale to any Person to which
such
Company is indebted; (o) is net of any returns, discounts, claims, credits
and
allowances; (p) if the Account arises out of contracts between such Company,
on
the one hand, and the United States, on the other hand, any state, or any
department, agency or instrumentality of any of them, such Company has so
notified Laurus, in writing, prior to the creation of such Account, and there
has been compliance with any governmental notice or approval requirements,
including compliance with the Federal Assignment of Claims Act; (q) is a
good
and valid account representing an undisputed bona fide indebtedness incurred
by
the Account Debtor therein named, for a fixed sum as set forth in the invoice
relating thereto with respect to an unconditional sale and delivery upon
the
stated terms of goods sold by such Company or work, labor and/or services
rendered by such Company; (r) does not arise out of progress ▇▇▇▇▇▇▇▇ prior
to
completion of the order; (s) the total unpaid Accounts from such Account
Debtor
does not exceed twenty-five percent (25%) of all Eligible Accounts; (t) such
Company’s right to payment is absolute and not contingent upon the fulfillment
of any condition whatsoever; (u) such Company is able to bring suit and enforce
its remedies against the Account Debtor through judicial process; (v) does
not
represent interest payments, late or finance charges owing to such Company,
and
(w) is otherwise satisfactory to Laurus as determined by Laurus in the exercise
of its sole discretion. In the event any Company requests that Laurus include
within Eligible Accounts certain Accounts of one or more of such Company’s
acquisition targets, Laurus shall at the time of such request consider such
inclusion, but any such inclusion shall be at the sole option of Laurus and
shall at all times be subject to the
4
execution
and delivery to Laurus of all such documentation (including, without limitation,
guaranty and security documentation) as Laurus may require in its sole
discretion.
“Eligible
Subsidiary”
means
each Subsidiary of the Parent set forth on Exhibit
A hereto,
as the same may be updated from time to time with Laurus’ written
consent.
“Equipment”
means
all “equipment” as such term is defined in the UCC, now owned or hereafter
acquired by any Person, wherever located, including any and all machinery,
apparatus, equipment, fittings, furniture, Fixtures, motor vehicles and other
tangible personal property (other than Inventory) of every kind and description
that may be now or hereafter used in such Person’s operations or that are owned
by such Person or in which such Person may have an interest, and all parts,
accessories and accessions thereto and substitutions and replacements
therefor.
“ERISA”
has the
meaning given such term in Section 12(bb).
“Event
of Default”
means
the occurrence of any of the events set forth in Section 19.
“Exchange
Act”
means
the Securities Exchange Act of 1934, as amended.
“Financial
Reporting Controls”
has the
meaning given such term in Section 13(v)(ii).
“First
Conversion Date”
has the
meaning given such term in Section 2(c).
“Fixtures”
means
all “fixtures” as such term is defined in the UCC, now owned or hereafter
acquired by any Person.
“Formula
Amount”
has the
meaning given such term in Section 2(a)(i).
“GAAP”
means
generally accepted accounting principles, practices and procedures in effect
from time to time in the United States of America.
“General
Intangibles”
means
all “general intangibles” as such term is defined in the UCC, now owned or
hereafter acquired by any Person including all right, title and interest
that
such Person may now or hereafter have in or under any contract, all Payment
Intangibles, customer lists, Licenses, Intellectual Property, interests in
partnerships, joint ventures and other business associations, permits,
proprietary or confidential information, inventions (whether or not patented
or
patentable), technical information, procedures, designs, knowledge, know-how,
Software, data bases, data, skill, expertise, experience, processes, models,
drawings, materials, Books and Records, Goodwill (including the Goodwill
associated with any Intellectual Property), all rights and claims in or under
insurance policies (including insurance for fire, damage, loss, and casualty,
whether covering personal property, real property, tangible rights or intangible
rights, all liability, life, key-person, and business interruption insurance,
and all unearned premiums), uncertificated securities, choses in action,
deposit
accounts, rights to receive tax refunds and other payments, rights to received
dividends, distributions, cash,
5
Instruments
and other property in respect of or in exchange for pledged Stock and Investment
Property, and rights of indemnification.
“Goods”
means
all “goods”, as such term is defined in the UCC, now owned or hereafter acquired
by any Person, wherever located, including embedded software to the extent
included in “goods” as defined in the UCC, manufactured homes, standing timber
that is cut and removed for sale and unborn young of animals.
“Goodwill”
means
all goodwill, trade secrets, proprietary or confidential information, technical
information, procedures, formulae, quality control standards, designs, operating
and training manuals, customer lists, and distribution agreements now owned
or
hereafter acquired by any Person.
“Governmental
Authority”
means
any nation or government, any state or other political subdivision thereof,
and
any agency, department or other entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
“Grant
Shares”
has the
meaning given such term in Section 5(b)(i).
“Hazardous
Materials”
has the
meaning given such term in Section 12(q).
“Indemnified
Person”
has the
meaning given such term in Section 26.
“Instruments”
means
all “instruments”, as such term is defined in the UCC, now owned or hereafter
acquired by any Person, wherever located, including all certificated securities
and all promissory notes and other evidences of indebtedness, other than
instruments that constitute, or are a part of a group of writings that
constitute, Chattel Paper.
“Intellectual
Property”
means
any and all patents, trademarks, service marks, trade names, copyrights,
trade
secrets, Licenses, information and other proprietary rights and
processes.
“Inventory”
means
all “inventory”, as such term is defined in the UCC, now owned or hereafter
acquired by any Person, wherever located, including all inventory, merchandise,
goods and other personal property that are held by or on behalf of such Person
for sale or lease or are furnished or are to be furnished under a contract
of
service or that constitute raw materials, work in process, finished goods,
returned goods, or materials or supplies of any kind, nature or description
used
or consumed or to be used or consumed in such Person’s business or in the
processing, production, packaging, promotion, delivery or shipping of the
same,
including all supplies and embedded software.
“Investment
Property”
means
all “investment property”, as such term is defined in the UCC, now owned or
hereafter acquired by any Person, wherever located.
“Laurus
Term Sheet”
has the
meaning given such term in Section 13(u).
“Letter-of-Credit
Rights”
means
“letter-of-credit rights” as such term is defined in the UCC, now owned or
hereafter acquired by any Person, including rights to payment or
6
performance
under a letter of credit, whether or not such Person, as beneficiary, has
demanded or is entitled to demand payment or performance.
“License”
means
any rights under any written agreement now or hereafter acquired by any Person
to use any trademark, trademark registration, copyright, copyright registration
or invention for which a patent is in existence or other license of rights
or
interests now held or hereafter acquired by any Person.
“Lien”
means
any mortgage, security deed, deed of trust, pledge, hypothecation, assignment,
security interest, lien (whether statutory or otherwise), charge, claim or
encumbrance, or preference, priority or other security agreement or preferential
arrangement held or asserted in respect of any asset of any kind or nature
whatsoever including any conditional sale or other title retention agreement,
any lease having substantially the same economic effect as any of the foregoing,
and the filing of, or agreement to give, any financing statement under the
UCC
or comparable law of any jurisdiction.
“Loans”
means
the loans under each Minimum Borrowing Note, the Revolving Note and the Term
Note and shall include all other extensions of credit hereunder and under
any
Ancillary Agreement.
“Lockbox
Bank”
has the
meaning given such term in Section 8(a).
“Lockboxes”
has the
meaning given such term in Section 8(a).
“Material
Adverse Effect”
means a
material adverse effect on (a) the business, assets, liabilities, condition
(financial or otherwise), properties, operations or prospects of any Company
or
any of its Subsidiaries (taken individually and as a whole), (b) any Company’s
or any of its Subsidiary’s ability to pay or perform the Obligations in
accordance with the terms hereof or any Ancillary Agreement, (c) the value
of
the Collateral, the Liens on the Collateral or the priority of any such Lien
or
(d) the practical realization of the benefits of Laurus’ rights and remedies
under this Agreement and the Ancillary Agreements.
“Maximum
Legal Rate”
has the
meaning given such term in Section 5(a)(iv).
“Minimum
Borrowing Amount”
means
Four Million Dollars ($4,000,000).
“Minimum
Borrowing Notes”
means
that certain Secured Convertible Minimum Borrowing Note dated as of the Closing
Date made by the Companies in favor of Laurus evidencing the Minimum Borrowing
Amount and each other Secured Convertible Minimum Borrowing Note made by
the
Companies in favor of Laurus which evidences the Minimum Borrowing Amount,
as
each of the same may be amended, supplemented, restated and/or otherwise
modified from time to time.
“NASD”
has the
meaning given such term in Section 13(b).
“Next
Unissued Serialized Note”
has the
meaning given such term in Section 2(a)(i).
7
“Note
Shares”
has the
meaning given such term in Section 12(a).
“Notes”
means
the Minimum Borrowing Notes, the Term Note and the Revolving Note made by
Companies in favor of Laurus in connection with the transactions contemplated
hereby, as each of the same may be amended, supplemented, restated and/or
otherwise modified from time to time.
“Obligations”
means
all Loans, all advances, debts, liabilities, obligations, covenants and duties
owing by each Company and each of its Subsidiaries to Laurus (or any corporation
that directly or indirectly controls or is controlled by or is under common
control with Laurus) of every kind and description (whether or not evidenced
by
any note or other instrument and whether or not for the payment of money
or the
performance or non-performance of any act), direct or indirect, absolute
or
contingent, due or to become due, contractual or tortious, liquidated or
unliquidated, whether existing by operation of law or otherwise now existing
or
hereafter arising including any debt, liability or obligation owing from
any
Company and/or each of its Subsidiaries to others which Laurus may have obtained
by assignment or otherwise and further including all interest (including
interest accruing at the then applicable rate provided in this Agreement
after
the maturity of the Loans and interest accruing at the then applicable rate
provided in this Agreement after the filing of any petition in bankruptcy,
or
the commencement of any insolvency, reorganization or like proceeding, whether
or not a claim for post-filing or post-petition interest is allowed or allowable
in such proceeding), charges or any other payments each Company and each
of its
Subsidiaries is required to make by law or otherwise arising under or as
a
result of this Agreement, the Ancillary Agreements or otherwise, together
with
all reasonable expenses and reasonable attorneys’ fees chargeable to the
Companies’ or any of their Subsidiaries’ accounts or incurred by Laurus in
connection therewith.
“Overadvance”
has the
meaning given such term in Section 5(b)(ii).
“Payment
Intangibles”
means
all “payment intangibles” as such term is defined in the UCC, now owned or
hereafter acquired by any Person, including, a General Intangible under which
the Account Debtor’s principal obligation is a monetary obligation.
“Permitted
Liens”
means
(a) Liens of carriers, warehousemen, artisans, bailees, mechanics and
materialmen incurred in the ordinary course of business securing sums not
overdue; (b) Liens incurred in the ordinary course of business in connection
with worker’s compensation, unemployment insurance or other forms of
governmental insurance or benefits, relating to employees, securing sums
(i) not
overdue or (ii) being diligently contested in good faith provided that adequate
reserves with respect thereto are maintained on the books of the Companies
and
their Subsidiaries, as applicable, in conformity with GAAP; (c) Liens
in
favor of Laurus; (d) Liens for taxes (i) not yet due or (ii) being diligently
contested in good faith by appropriate proceedings, provided that adequate
reserves with respect thereto are maintained on the books of the Companies
and
their Subsidiaries, as applicable, in conformity with GAAP; and which have
no
effect on the priority of Liens in favor of Laurus or the value of the assets
in
which Laurus has a Lien; (e) Purchase Money Liens securing Purchase Money
Indebtedness to the extent permitted in this Agreement and (f) Liens specified
on Schedule
2
hereto.
8
“Person”
means
any individual, sole proprietorship, partnership, limited liability partnership,
joint venture, trust, unincorporated organization, association, corporation,
limited liability company, institution, public benefit corporation, entity
or
government (whether federal, state, county, city, municipal or otherwise,
including any instrumentality, division, agency, body or department thereof),
and shall include such Person’s successors and assigns.
“Principal
Market”
means
the NASD Over The Counter Bulletin Board, NASDAQ SmallCap Market, NASDAQ
National Market System, American Stock Exchange or New York Stock Exchange
(whichever of the foregoing is at the time the principal trading exchange
or
market for the Common Stock).
“Proceeds”
means
“proceeds”, as such term is defined in the UCC and, in any event, shall include:
(a) any and all proceeds of any insurance, indemnity, warranty or guaranty
payable to any Company or any other Person from time to time with respect
to any
Collateral; (b) any and all payments (in any form whatsoever) made or due
and
payable to any Company from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of any Collateral by any
governmental body, governmental authority, bureau or agency (or any person
acting under color of governmental authority); (c) any claim of any Company
against third parties (i) for past, present or future infringement of any
Intellectual Property or (ii) for past, present or future infringement
or
dilution of any trademark or trademark license or for injury to the goodwill
associated with any trademark, trademark registration or trademark licensed
under any trademark License; (d) any recoveries by any Company against third
parties with respect to any litigation or dispute concerning any Collateral,
including claims arising out of the loss or nonconformity of, interference
with
the use of, defects in, or infringement of rights in, or damage to, Collateral;
(e) all amounts collected on, or distributed on account of, other Collateral,
including dividends, interest, distributions and Instruments with respect
to
Investment Property and pledged Stock; and (f) any and all other amounts,
rights
to payment or other property acquired upon the sale, lease, license, exchange
or
other disposition of Collateral and all rights arising out of
Collateral.
“Proposed
Term Sheet”
has the
meaning given such term in Section 13(u).
“Purchase
Money Indebtedness”
means
(a) any indebtedness incurred for the payment of all or any part of the purchase
price of any fixed asset, including indebtedness under capitalized leases,
(b)
any indebtedness incurred for the sole purpose of financing or refinancing
all
or any part of the purchase price of any fixed asset, and (c) any renewals,
extensions or refinancings thereof (but not any increases in the principal
amounts thereof outstanding at that time).
“Purchase
Money Lien”
means
any Lien upon any fixed assets that secures the Purchase Money Indebtedness
related thereto but only if such Lien shall at all times be confined solely
to
the asset the purchase price of which was financed or refinanced through
the
incurrence of the Purchase Money Indebtedness secured by such Lien and only
if
such Lien secures only such Purchase Money Indebtedness.
“Receivables
Purchase”
has the
meaning given such term in Section 2(b).
9
“Registration
Rights Agreements”
means
that certain Registration Rights Agreement dated as of the Closing Date by
and
between the Parent and Laurus and each other registration rights agreement
by
and between the Parent and Laurus, as each of the same may be amended, modified
and supplemented from time to time.
“Revolving
Loan”
shall
have the meaning given such term in Section 2(a)(i).
“Revolving
Note”
means
that certain Secured Revolving Note dated as of the Closing Date made by
the
Companies in favor of Laurus in the original principal amount of $7,000,000,
as
the same may be amended, supplemented, restated and/or otherwise modified
from
time to time.
“SEC”
has the
meaning given such term in Section 12(d).
“Securities”
means
the Grant Shares, the Notes, the Warrants and the shares of Common Stock
which
may be issued pursuant to conversion of such Notes in whole or in part or
exercise of such Warrants.
“Securities
Act”
has the
meaning given such term in Section 12(r).
“Security
Documents”
means
all security agreements, mortgages, cash collateral deposit letters, pledges
and
other agreements which are executed by any Company or any of its Subsidiaries
in
favor of Laurus.
“Software”
means
all “software” as such term is defined in the UCC, now owned or hereafter
acquired by any Person, including all computer programs and all supporting
information provided in connection with a transaction related to any
program.
“Stock”
means
all certificated and uncertificated shares, options, warrants, membership
interests, general or limited partnership interests, participation or other
equivalents (regardless of how designated) of or in a corporation, partnership,
limited liability company or equivalent entity whether voting or nonvoting,
including common stock, preferred stock, or any other “equity security” (as such
term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated
by the SEC under the Exchange Act).
“Stock
Acquisition Limitation”
has the
meaning given such term in Section 15(i).
“Subsidiary”
means,
with respect to any Person, (i) any other Person whose shares of stock or
other
ownership interests having ordinary voting power (other than stock or other
ownership interests having such power only by reason of the happening of
a
contingency) to elect a majority of the directors or other governing body
of
such other Person, are owned, directly or indirectly, by such Person or (ii)
any
other Person in which such Person owns, directly or indirectly, more than
50% of
the equity interests at such time.
“Supporting
Obligations”
means
all “supporting obligations” as such term is defined in the
UCC.
10
“Term”
means
the Closing Date through the close of business on the day immediately preceding
the third anniversary of the Closing Date, subject to acceleration at the
option
of Laurus upon the occurrence of an Event of Default hereunder or other
termination hereunder.
“Term
Loan”
shall
have the meaning set forth in Section 2(d).
“Term
Note”
means
that certain Secured Convertible Term Note dated as of the Closing Date made
by
the Companies in favor of Laurus in the original principal amount of $3,000,000
as the same may amended, supplemented, restated and/or otherwise modified
from
time to time.
“Total
Investment Amount”
means
$10,000,000.
“Transferable
Amount”
has the
meaning given such term in Section 2(a)(i).
“UCC”
means
the Uniform Commercial Code as the same may, from time to time be in effect
in
the State of New York; provided, that in the event that, by reason of mandatory
provisions of law, any or all of the attachment, perfection or priority of,
or
remedies with respect to, Laurus’ Lien on any Collateral is governed by the
Uniform Commercial Code as in effect in a jurisdiction other than the State
of
New York, the term “UCC” shall mean the Uniform Commercial Code as in effect in
such other jurisdiction for purposes of the provisions of this Agreement
relating to such attachment, perfection, priority or remedies and for purposes
of definitions related to such provisions; provided further, that to the
extent
that UCC is used to define any term herein or in any Ancillary Agreement
and
such term is defined differently in different Articles or Divisions of the
UCC,
the definition of such term contained in Article or Division 9 shall
govern.
“Warrant
Shares”
has the
meaning given such term in Section 12(a).
“Warrants”
means
that certain Common Stock Purchase Warrant dated as of the Closing Date made
by
the Parent in favor of Laurus, to purchase up to 7,352,941 shares of Common
Stock at an exercise price of $0.34 per share (subject to adjustment as provided
therein), as the same may be amended, restated, modified and/or supplemented
from time to time.
11
Exhibit
A
Eligible
Subsidiaries
Magnetech
Industrial Services, Inc., an Indiana corporation
▇▇▇▇▇▇▇
Electric, LLC, an Indiana limited liability company
HK
Engine
Components, LLC, an Indiana limited liability company
HK
Machined Parts, LLC, an Indiana limited liability company
▇▇
▇▇▇▇▇▇
Properties, LLC, an Indiana limited liability company
HK
Cast
Products, LLC, an Indiana limited liability company
Exhibit
B
Magnetech
Integrated Services Corp.
Borrowing
Base
8/22/2005
|
|
(000's)
|
Magnetech
|
▇▇▇▇▇▇▇
|
▇▇
Engine
|
Combined
|
|
Accounts
Receivable per 08/22/05 Agings
|
$4,251
|
$3,182
|
$1,928
|
$9,361
|
|
|
Ineligibles
|
|||||
|
Past
Due accounts (> 90 days)
|
▇▇▇
|
▇▇▇
|
▇▇▇
|
$1,193
|
|
|
Cross-age
(>30% past due)
|
152
|
25
|
52
|
$229
|
|
|
Credit
Balances > 90 days
|
82
|
71
|
4
|
$157
|
|
|
a
|
Retention
▇▇▇▇▇▇▇▇
|
394
|
$394
|
||
|
b
|
Less:
Uninsured Foreign
|
0
|
1097
|
$1,097
|
|
|
Contra
Offset-4 a/c-see last page of A/R aging
|
0
|
$0
|
|||
|
c
|
Cash
Sales-Ohio (# CASHBO) 1-90 days
|
0
|
$0
|
||
|
Total
Ineligibles
|
$853
|
$738
|
$1,479
|
$3,070
|
|
|
Eligible
Accounts Receivable
|
$3,398
|
$2,444
|
$449
|
$6,291
|
|
|
Proposed
Advance Rate
|
90.0%
|
90.0%
|
90.0%
|
90.0%
|
|
|
Available
Accounts Receivable
|
$3,058
|
$2,200
|
$404
|
$5,662
|
|
|
Inventory
per 07/31/05 F/S
|
$5,198
|
$43
|
$1,728
|
$6,969
|
|
|
Ineligibles
|
|||||
|
Work-in-Process
Inventory
|
2,486
|
0
|
408
|
$2,894
|
|
|
Excess/Slow-Moving
|
|||||
|
Supplies/Packaging
|
|||||
|
Other
|
|||||
|
Other
|
|||||
|
Other
|
|||||
|
Other
|
|
|
|
|
|
|
Total
Ineligible
|
$2,486
|
$0
|
$408
|
$2,894
|
|
|
Eligible
Inventory
|
$2,712
|
$43
|
$1,320
|
$4,075
|
|
|
d
|
Proposed
Advance Rate
|
0.0%
|
0.0%
|
0.0%
|
0.0%
|
|
Available
Inventory
|
$0
|
$0
|
$0
|
$0
|
|
|
Total
Availability
|
$3,058
|
$2,200
|
$404
|
$5,662
|
|
|
e
|
Add
Term Loan
|
3,000
|
|||
|
8,662
|
|||||
|
Excess
(Deficit) Availability
|
|
|
a
|
▇▇▇▇▇▇▇
is an electrical contractor that undertakes large construction
jobs as a
sub-contractor and often bills on a progress (estimated % of
completion)
basis. Most invoices include a 10% retention factor plus the
final billing
at the end of the job is also treated as a retention by the Company's
customers.
|
|
b
|
There
are no advances to be made against inventory included in this
transaction.
|
|
c
|
[list
any additions]
|
|
d
|
[describe
any fees to be deducted]
|
|
|
Wire
Request
|
|
|
Amount:
|
$
|
|
|
Bank
Name:
|
||
|
Account
Name:
|
||
|
ABA#:
|
||
|
Account
Number:
|
|
The
undersigned hereby certifies that all of the foregoing information
regarding the Eligible Accounts and Eligible Inventory are true
and
correct on the date hereof and all such Accounts and Inventory
listed as
Eligible are Eligible within the meaning given such term in the
Security
Agreement dated 8/24/05 between Borrower and Laurus Master Fund,
Ltd.
|
|
BORROWER
|
|
By:
_________________________________
|
|
Name:
|
|
Title:
|
Schedules
to Security and Purchase Agreement
The
Schedules attached hereto constitute the Schedules to that certain Security
and
Purchase Agreement (the “Agreement”), by and among LAURUS MASTER FUND, LTD.,
MAGNETECH INTEGRATED SERVICES CORP. and certain other parties. All capitalized
terms used in these Schedules but not defined herein shall have the meanings
set
forth in the Agreement. Any matter or item disclosed on one Schedule shall
be
deemed to have been disclosed on any other Schedule where such disclosure
could
be deemed or would be required.
SCHEDULE
12(b)
SUBSIDIARIES
Magnetech
Integrated Services Corp
Capital
Stock as of 7/20/05
SCHEDULE
12(b)
SCHEDULE
12(c)
|
Type
|
Authorized
|
Issued
|
Outstanding
|
|
|
Magnetech
Integrated Services Corp
|
Preferred
Common
|
20,000,000
200,000,000
|
97330006*
|
97330006*
|
|
Magnetech
Industrial Services Inc.
|
Common
|
1,000
|
1,000
|
1,000
|
|
100%
owned by Magnetech Integrated Services Corp
|
||||
|
▇▇▇▇▇▇▇
Engine Components, LLC
|
Membership
Interest Shares
|
100
|
100
|
100
|
|
100%
owned by Magnetech Industries Services Inc.
|
||||
|
HK
Engine Components, LLC
|
Membership
Interest Shares
|
100%
owned by Magnetech Integrated Services Corp
|
||
|
HK
Machine Parts, LLC
|
Membership
Interest Shares
|
100%
owned by HK Engine Components LLC
|
||
|
▇▇
▇▇▇▇▇▇ Properties, LLC
|
Membership
Interest Shares
|
100%
owned by HK Engine Components LLC
|
||
|
HK
Cast Products, LLC
|
Membership
Interest Shares
|
100%
owned by HK Engine Components LLC
|
||
*Includes
50,000 shares to be issued to ▇▇▇▇▇▇▇ Steinen (▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇) in the
near
future.
SCHEDULE
12(c)
CAPITALIZATION:VOTING
RIGHTS
See
attached excel SCHEDULE 12(c)
The
Company intends to establish a Stock Option Plan, Restricted Stock Purchase
Plan
and Performance Share Plan in the near future. The Company may issue options,
restricted stock, or performance shares for up to 5,000,000 shares of its
common
stock in connection with such plans.
As
of
July 20, 2005, the following warrants and convertible debentures were
outstanding:
| 1. |
4,500,000
common stock purchase warrants issued in conjunction with a private
stock
offering with an exercise price of $0.0001 per share, pursuant
to a
certain Warrant Agreement by and among Magnetech Integrated Services
Corp., Magnetech Industrial Services, Inc. and Strasbourger ▇▇▇▇▇▇▇
Tulcin
▇▇▇▇▇ Incorporated (the “Warrant Agreement”). The exercise price and
number of shares of common stock purchasable upon exercise of
the warrants
may be subject to adjustment under the terms of the Warrant Agreement
as a
result of the transactions contemplated
hereby.
|
| 2. |
4,255,601
common stock purchase warrants issued in conjunction with a private
debt
offering with an exercise price of $0.001 per
share.
|
| 3. |
6,182,992
common stock purchase warrants issued in conjunction with a private
debt
offering with an exercise price of $0.001 per
share.
|
| 4. |
11,821,108
shares of common stock are reserved for issuance upon conversion
of the
debentures issued in conjunction with a private debt
offering.
|
After
the
closing, the Parent intends to grant a Conversion Option to ▇▇▇▇ ▇. ▇▇▇▇▇▇▇,
pursuant to which ▇▇. ▇▇▇▇▇▇▇ would have the option to convert any or all
of the
Company’s indebtedness to him into shares of its common stock at a conversion
price of $0.10 per share.
SCHEDULE
12(e)
LIABILITIES
|
Lender
|
Amount
|
Interest
Rate
|
Encumbrances
|
|
MFB
Bank
|
$5,500,000
|
Prime
+ .375%
|
All
assets
|
|
Note:
MFB to be paid off at closing.
|
|||
|
Debentures
|
4,025,000
|
6%
|
All
assets
|
|
▇▇▇▇
▇▇▇▇▇▇▇
|
$3,000,000
|
Prime
-1%
|
Unsecured
|
|
▇▇▇▇
▇▇▇▇▇▇▇
|
$
150,000
|
-
|
Unsecured
|
|
▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇
|
$
20,000
|
-
|
Unsecured
|
Note:
Above continuing Lenders are subject to a Subordination Agreement with
Laurus.
SCHEDULE
12(f)
AGREEMENTS
OUTSTANDING
INDEBTEDNESS
(As
of
June 26, 2005)
|
Lender
|
Amount
|
Interest
Rate
|
Encumbrances
|
|
MFB
Bank
|
$5,500,000
|
Prime
+ .375%
|
All
assets
|
|
Note:
MFB to be paid off at closing.
|
|||
|
Debentures
|
$4,025,000
|
6%
|
All
assets
|
|
▇▇▇▇
▇▇▇▇▇▇▇
|
$3,000,000
|
Prime
-1%
|
Unsecured
|
|
▇▇▇▇
▇▇▇▇▇▇▇
|
$
150,000
|
Unsecured
|
|
|
▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇
|
$
20,000
|
-
|
Unsecured
|
Note:
Above continuing Lenders are subject to a Subordination Agreement with
Laurus.
In
conjunction with the initial purchase of assets from Delta Star Electric,
Inc.,
the Company was assigned two patents for lifting magnets. The assignment
required that the Company produce a working prototype within three years.
The
Company did not produce a working prototype and will re-assign the patents,
as
required.
SCHEDULE
12(g)
OBLIGATIONS
TO RELATED PARTIES
(As
of
June 26, 2005)
|
Lender
|
Amount
|
Interest
Rate
|
Encumbrances
|
|
▇▇▇▇
▇▇▇▇▇▇▇
|
$3,000,000
|
Prime
-1%
|
Unsecured
|
|
▇▇▇▇
▇▇▇▇▇▇▇
|
$
500
|
-
|
Unsecured
|
|
▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇
|
$
20,000
|
-
|
Unsecured
|
The
Company intends to grant a Conversion Option to ▇▇▇▇ ▇. ▇▇▇▇▇▇▇, pursuant
to
which ▇▇. ▇▇▇▇▇▇▇ would have the option to convert any or all of the Company’s
indebtedness to him into shares of its common stock at a conversion price
of
$0.10 per share.
The
Company leases real property from the following related parties:
|
Lessor
|
Address
|
Expiration
Date
|
Monthly
Rent
|
|
JAM
Summer Properties LLC
|
Hammond,
IN
|
/2/10
|
$7,500
|
|
JAM
▇▇▇ Properties LLC
|
▇▇▇▇▇▇▇▇,
OH
|
5/5/12
|
4,400
|
|
JAM
Walnut Properties LLC
|
South
Bend, IN
|
5/5/12
|
$7,200
|
|
JAM
▇▇▇▇▇▇ Properties LLC
|
Mobile,
AL
|
3/1/06
|
$4,100
|
SCHEDULE
12(h)
CHANGES
|
1.
|
In
March 2005 the Vice President of Operations for ▇▇▇▇▇▇▇ Electric,
LLC
resigned and was replaced in April
2005.
|
|
2.
|
The
Company issued Debentures in 2005. The Debentures are convertible
into
approximately 11,821,108 shares of common stock of the Company.
In
connection with the issuance of the Debentures, the Company also
issued
50,000 shares of common stock and warrants for up to 10,438,593
shares of
its common stock.
|
|
3.
|
In
connection with the acquisition of certain assets of Hatch & ▇▇▇▇,
Inc. and HK Castings, Inc. in March, 2005, the Company has or
will issue
up to 330,000 shares of its common stock.
|
|
4.
|
In
April 2005, the Company negotiated an increase in its line of
credit with
MFB Bank from $3,000,000 to $5,500,000. Note: MFB Bank to be
paid off at
closing.
|
|
5.
|
The
Company plans to establish a Stock Option Plan, a Restricted
Stock
Purchase Plan and a Performance Share Plan in the near future.
The Company
may issue options, restricted stock, restricted or performance
shares for
up to 5,000,000 shares of common
stock.
|
|
6.
|
Effective
August 2005, the Company or its Subsidiaries intends to enter
into
Employment Contracts with the following
executives:
|
|
a.
▇▇▇▇ ▇▇▇▇▇▇▇-CEO and President-Magnetech Integrated Services
Corp.
|
b.
▇▇▇▇▇▇▇ ▇▇▇▇▇▇-Vice President and CFO-Magnetech Integrated Services Corp.
c.
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇-Vice President-Magnetech Industrial Services, Inc.
d.
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇-Vice President-▇▇▇▇▇▇▇ Electric, LLC
e.
▇▇▇▇▇▇
▇▇▇▇▇▇▇▇-Vice President-HK Engine Components, LLC
|
7.
|
Magnetech
Industrial Services, Inc. is involved in negotiations for a new
collective
bargaining agreement with IUE-CWA Local 1001 at its Indianapolis
facility.
Two collective bargaining agreements expired in April and June,
2005 in
Huntington, WV and Hammond, IN. The Company and the collective
bargaining
units are working without a contract until such time as an agreement
can
be reached at each location.
|
|
8.
|
The
Company entered into a $500,000 Commercial Fleet Lease line of
credit with
Ford Motor Credit Company for the lease of automobiles and trucks.
Total
commitments under this arrangement at July 20, 2005 was approximately
$160,000.
|
SCHEDULE
12(i)
TITLE
TO
PROPERTIES AND ASSETS; LIENS
|
1.
|
MFB
Bank holds a blanket security interest in all of the assets of
the Parent
and/or Magnetech Industrial Services, Inc., Indiana financing
statements
#200400010073835, 200500004282689 and 200500004282467. Note:
Lender to be
paid off at closing.
|
|
2.
|
The
Company has granted a security interest in all assets of the
Company to
secure payment of the Company’s indebtedness under the Debentures. Note:
Debenture holders are subject to a Subordination Agreement with
Laurus.
|
|
3.
|
Magnetech
Industrial Services, Inc. equipment leases/financing statements
as
follows:
|
a.
Toyota
Motor Credit Corporation - leased forklift, Serial #68232; Indiana financing
statement #20020003805050.
b.
Toyota
Motor Credit Corporation - leased forklift, Serial #77921; Indiana financing
statement #200200003741433/2004000005321946.
c.
Toyota
Motor Credit Corporation - leased forklift, Serial #62974; Indiana financing
statement #200200003696684.
c.
Citicorp Leasing, Inc. - leased forklift, Serial #P232L.
d.
Neopost Leasing - leased postage meter, Serial #1J35BAI.
e.
Baldor
Electric Company (“Baldor”) - inventory, equipment and goods manufactured by or
distributed by Baldor and all related accounts receivable, Indiana financing
statement #200400011179661. The security interest is limited to outstanding
obligations between Baldor and Magnetech Industrial Services. Without the
prior
written consent of Laurus, the Company will not incur obligations to Baldor
outstanding at any one time in excess of $350,000.
|
▇.
▇▇▇▇▇ Engineering Company - capital lease for relay test set
(F2253 with
F2910 and F2875).
|
g.
Railmotive, Inc.- capital lease for ▇▇▇▇▇▇ forklift, Serial
#C7P3343A.
▇.
▇▇▇▇
Motor Credit Company-$500,000 Commercial Fleet Lease Line covering the
following
vehicles: Vin#▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇,
▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇,
▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇.
|
i.
United States Steel LLC -- Electric motors and electro-lifting
magnets
owned by United States Steel and delivered to the Company’s plant for
repair and service; Indiana Secretary of State File Numbers
200100004549227 and 200100004549661
|
|
▇.
▇▇▇▇▇▇▇ Bank National Association - Inventory owned by Headco
Industries
and delivered to the Company on consignment and all proceeds
thereof;
Indiana Secretary of State File Number
200300004806881.
|
|
▇.
▇▇▇▇▇▇ Leasing - leased forklift.
|
AmSouth
Leasing Corporation also has a financing statement on file with the Indiana
Secretary of State (File Number 200200005391204). All amounts owed by the
Company to AmSouth have been paid in full and no further amounts are owed
by the
Company to AmSouth with respect to such financing statement. The Company
will
use its best efforts to obtain the termination of this financing statement
within ten (10) days after the closing.
SCHEDULE
12(k)
COMPLIANCE
WITH OTHER INSTRUMENTS
Pursuant
to the Registration Rights Agreements entered into by the Parent in connection
with the Debenture offering and described on Schedule 12(o), the Parent
agreed
to use its reasonable best efforts to file an S-1 Registration Statement
to
register its shares of common stock underlying the debentures and the warrants
by April 30, 2005. In the event the Parent did not file the registration
statement by such time, the Parent agreed to pay the debenture and warrant
holders liquidated damages equal to 1% of the total issued share capital
of the
Parent. However, the Parent is not required to pay such liquidated damages
if
the Parent provides the debenture and warrant holders with a certificate
signed
by the Chief Executive Officer of the Parent (“CEO Certificate”) stating that in
the good faith judgment of the Board of Directors of the Parent, it would
be
seriously detrimental to the Parent and its stockholder for such registration
statement to be filed due to a material pending transaction or other issue
and,
therefore, it is essential to defer the filing. The Parent has not yet
provided
the CEO Certificate to the debenture and warrant holders, but intends to
do so
in the near future. Nevertheless, a debenture and warrant holder could
claim
that the Parent was in breach of the agreement.
The
Registration Rights Agreements entered into by the Parent in the private
placement of its common stock also required the Parent to use its best
efforts
to file the registration statement within a certain period of time. A CEO
Certificate has been sent to these shareholders.
Pursuant
to that certain Placement Agency Agreement dated April 26, 2004 between
the
Parent and Strasbourger ▇▇▇▇▇▇▇ Tulcin ▇▇▇▇▇ Incorporated (“Strasbourger”), the
Board of Directors of the Parent was to be increased to 5 members following
the
closing of the first private placement offering, with 2 members designated
by
Strasbourger. The Parent has not yet increased the size of the Board or
appointed Strasbourger’s designees to the Board, but intends to do so after the
closing.
SCHEDULE
12(l)
LEGAL
PROCEEDINGS
|
1.
|
Square
D Company v. ▇▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇ and Magnetech Industrial Services,
Inc.,
U.S. District Court, E.D. Wis. (Green Bay Division), Case No.
04-C-775.
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Magnetech
also is Cross-Claim Plaintiff in this matter.
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2.
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Jupiter
Aluminum Corporation ▇. ▇▇▇▇▇▇ Electric, Inc. v. Magnetech Industrial
Services, Inc., Lake Superior Court, Cause No.
45D10-0411-PL-00153
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3.
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▇▇▇▇
Electric Services, Inc., ▇. ▇▇▇▇▇▇ Electric, Inc. v. Magnetech
Industrial
Services, Inc., Lake Superior Court, Cause No.
45D05-0409-CC-00252
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4.
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Wood
Group Generator Services, Inc. v. Magnetech Industrial Services,
Inc, U.S.
District Court, S.D. W.V. (Huntington Division), Civil No.
3:04-1319.
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5.
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Magnetech
Integrated Services Corp., et ▇▇ ▇. ▇▇▇▇▇ & ▇▇▇▇, Inc., St. ▇▇▇▇▇▇
County Superior Court, Cause No.
71D06-0506-PL-00208.
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Note:
None of the above legal proceedings are expected to have a materially adverse
impact on the financial condition of the Company.
Threatened
Litigation
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6.
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In
conjunction with the acquisition of certain assets from Hatch
& ▇▇▇▇
on March 7, 2005, the Company received a letter dated March 18,
2005 from
▇▇▇▇▇▇▇▇ & ▇▇▇▇▇'▇ attorney requesting the Magnetech "make
arrangements to interplead the amount demanded [$162,658] in
order to
avoid any further involvement in the litigation." ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇
claims that they are due brokers’ commissions for work performed on behalf
of Hatch & ▇▇▇▇.
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7.
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Further
in conjunction with the acquisition of certain assets from Hatch
&
▇▇▇▇ on ▇▇▇▇▇ ▇, ▇▇▇▇, ▇▇▇▇▇▇, Inc.'s attorney sent a bulk sales
letter
dated March 23, 2005 to the Company. We responded indicating
that
Maryland's Bulk Sales Act was
inapplicable.
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8.
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By
letter dated August 9, 2005 to ▇▇▇▇▇▇ Ro at Laurus and ▇▇▇▇ ▇▇▇▇▇▇▇,
Vertical Capital Partners, Inc. claimed that it is entitled to
a payment
of $250,000 and warrants for 1,000,000 shares of common stock
of the
Parent, exercisable at Laurus’ lowest exercise price, at the closing of
the transactions contemplated by this Agreement.
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SCHEDULE
12(m)
TAX
RETURNS and PAYMENTS
None.
SCHEDULE
12(n)
EMPLOYEES
Collective
Bargaining Agreements:
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1.
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Magnetech
Industrial Services, Inc. is party to a collective bargaining
agreement
with the International Union of Electronic, Electrical, Salaried,
Machine
and Furniture Workers, and Communication Workers of America (AFL-CIO).
The
Agreement expired April 30, 2005 but both parties agreed to extend
the
current agreement to August 1, 2005. Both parties are working
without a
contract until such time as a new agreement can be
reached.
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2.
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Magnetech
Industrial Services, Inc. is party to a collective bargaining
agreement
with Local Union 697, IBEW. The agreement expired June 26, 2005.
The union
is working without a contract. The parties have agreed to non-binding
mediation to reach agreement on a new
contract.
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3.
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Magnetech
Industrial Services, Inc. is party to a collective bargaining
agreement
with Local Union #1392, IBEW. The agreement expires May 31,
2007.
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4.
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Magnetech
Industrial Services, Inc. is involved in negotiations for a new
collective
bargaining agreement with IUE-CWA Local 1001 at its Indianapolis
facility.
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CONTRACTS
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5.
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The
Company or its Subsidiaries intend to enter into Employment Contracts
with
the following executives:
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a.
▇▇▇▇ ▇▇▇▇▇▇▇-CEO and President-Magnetech Integrated Services
Corp.
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b.
▇▇▇▇▇▇▇ ▇▇▇▇▇▇-Vice President and CFO-Magnetech Integrated Services Corp.
c.
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇-Vice President-Magnetech Industrial Services, Inc.
d.
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇-Vice President-▇▇▇▇▇▇▇ Electric, LLC
e.
▇▇▇▇▇▇
▇▇▇▇▇▇▇▇-Vice President-HK Engine Components, LLC
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6.
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The
Company intends to establish a Stock Option Plan, a Restricted
Stock
Purchase Plan and a Performance Share Plan in the near future.
The Company
may issue options, restricted stock, or performance shares for
up to
5,000,000 shares of its common stock in connection with such
plans.
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7.
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Magnetech
401(K) Plan & Trust
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8.
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Magnetech
Bargaining Units 401(K) Plan &
Trust
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9.
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Magnetech
Flexible Benefits Plan
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10.
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After
the closing of the transactions contemplated by this Agreement,
the
Company intends to grant a Conversion Option to ▇▇▇▇ ▇. ▇▇▇▇▇▇▇,
pursuant
to which ▇▇. ▇▇▇▇▇▇▇ would have the option to convert any or
all of the
Company’s indebtedness to him into shares of its common stock at a
conversion price of $0.10 per
share.
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SCHEDULE
12(o)
REGISTRATION
RIGHTS and VOTING RIGHTS
The
Company is obligated to register for resale shares of its Common Stock
that:
a) were
issued upon the conversion of shares of Series A Preferred Stock issued
by
Magnetech Industrial Services, Inc. in a private offering occurring in
February
2004;
b)
were
issued in a private offering that commenced in May 2004;
c) are
issuable upon conversion of warrants and subordinated convertible debentures
issued in a private offering that commenced in January 2005;
d) were
issued to ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ Inc.; and
e) are
issuable upon conversion of outstanding warrants issued to Strasbourger
▇▇▇▇▇▇▇
Tulcin ▇▇▇▇▇ Incorporated (“Strasbourger”) or its designees pursuant to the
Company’s placement agency agreements with Strasbourger.
SCHEDULE
12(p)
COMPLIANCE
WITH LAWS; PERMITS
None.
SCHEDULE
12(q)
ENVIRONMENTAL
and SAFETY LAWS
None.
SCHEDULE
12(s)
FULL
DISCLOSURE
None,
except to the extent the financial projections have been revised as provided
in
the attached excel spreadsheet.
Magnetech
Integrated Services Corp.
EBITDA
2002
through 2006
(000’s
Omitted)
Schedule
12(s)
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2002
Actual
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2003
Actual
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2004
Actual
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2005
Forecast
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2006
Forecast
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Revised
2005 Forecast
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Revised
2006 Forecast
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Net
Income
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(1,238)
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(1,137)
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(189)
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883
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3,290
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(370)
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2,200
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Interest
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117
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188
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183
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1,620
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2,660
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1,700
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2,750
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Depreciation
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212
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303
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431
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809
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1,250
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700
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1,250
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▇▇▇▇▇▇▇▇▇▇▇▇
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▇▇
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▇▇
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▇▇
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▇▇
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-
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▇▇
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-
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▇▇▇▇▇▇
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(889)
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(626)
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445
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3,325
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7,200
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2,043
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6,200
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Note:
2005
Forecast is revised downward due to the following:
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-
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Initial
forecast assumed the balance of H&K would be acquired in May 2005.
That acquisition will not take place. Also, the initial forecast
assumed
we would begin shipping product to Alstom in July. This represents
new
business we expected to add to HK Engine Components. Shipments
did not
commence until August and will likely ramp up slower in 2005
than
expected.
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-
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The
financing process and S-1 vs. reverse merger process has taken
considerably longer than expected. This has had a negative impact
on
operations.
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2006
Forecast is revised downward due to the following:
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-
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As
noted above, the second phase of the H&K acquisition did not take
place.
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SCHEDULE
12(u)
SEC
REPORTS and FINANCIAL STATEMENTS
None.
SCHEDULE
12(aa)
COMPANY
NAME; LOCATIONS of OFFICES, RECORDS and COLLATERAL
Magnetech
Integrated Services Corp
Capital
Stock
As
of 7/31/05
SCHEDULE
12(aa)
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State
& Org. I.D. #
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Location
of Chief
Exec. Officer
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Warehouses
& Other Locations
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Collateral
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Books
& Records
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Magnetech
Integrated Services Corp
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Indiana
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▇▇▇▇
▇. ▇▇▇▇▇▇ ▇▇.
▇▇▇▇▇
▇▇▇▇, ▇▇ ▇▇▇▇▇
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All
other books & records
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Magnetech
Industrial Services Inc.
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Indiana
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▇▇▇▇
▇. ▇▇▇▇▇▇ ▇▇.
▇▇▇▇▇
▇▇▇▇, ▇▇ ▇▇▇▇▇
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▇▇▇▇
▇. ▇▇▇▇▇▇ ▇▇.
▇▇▇▇▇
▇▇▇▇, ▇▇ ▇▇▇▇▇
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Inventory,
PPE
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Shipping
& receiving documentation
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▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇,
▇▇ ▇▇▇▇▇
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Inventory,
PPE
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Shipping
& receiving documentation
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||||
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▇▇▇
▇. ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇▇▇▇,
▇▇ ▇▇▇▇▇
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Inventory,
PPE
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Shipping
& receiving documentation
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||||
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▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇,
▇▇ ▇▇▇▇▇
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Inventory,
PPE
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Shipping
& receiving documentation
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||||
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▇▇▇
▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇,
▇▇ ▇▇▇▇▇
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Inventory,
PPE
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Shipping
& receiving documentation
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||||
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▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇.
▇▇▇▇▇▇▇▇▇▇,
▇▇ ▇▇▇▇▇
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Inventory,
PPE
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Shipping
& receiving documentation
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||||
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▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇.
▇▇▇▇▇▇▇▇▇▇,
▇▇ ▇▇▇▇▇
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Inventory,
PPE
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Shipping
& receiving documentation
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||||
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▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇
▇.
▇▇▇▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
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Inventory,
PPE
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Shipping
& receiving documentation
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||||
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▇▇▇▇
▇. ▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇▇▇▇▇▇,
▇▇ ▇▇▇▇▇
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Inventory,
PPE
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Shipping
& receiving documentation
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||||
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▇▇▇▇▇▇▇
Electric, LLC
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Indiana
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▇▇▇▇
▇. ▇▇▇▇▇▇ ▇▇.
▇▇▇▇▇
▇▇▇▇, ▇▇ ▇▇▇▇▇
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▇▇▇▇
▇. ▇▇▇▇▇▇ ▇▇. ▇▇▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
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Inventory,
PPE
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Shipping
& receiving documentation
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▇▇▇▇▇
▇ ▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇,
▇▇ ▇▇▇▇▇
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Inventory,
PPE
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Shipping
& receiving documentation
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||||
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HK
Engine Components, LLC
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Indiana
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▇▇▇▇
▇. ▇▇▇▇▇▇ ▇▇.
▇▇▇▇▇
▇▇▇▇, ▇▇ ▇▇▇▇▇
|
▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇▇▇▇,
▇▇ ▇▇▇▇▇
|
Inventory,
PPE
|
Shipping
& receiving documentation
|
|
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▇▇▇
▇▇ ▇▇▇▇▇▇▇ ▇▇ ▇
▇▇▇▇▇▇,
▇▇ ▇▇▇▇▇
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Inventory,
PPE, Land & Building
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Shipping
& receiving documentation
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||||
|
▇▇▇▇
▇▇▇ ▇▇▇▇▇▇, ▇▇
▇▇▇▇▇
▇▇▇ #▇▇
▇▇▇▇▇▇▇,
▇▇ ▇▇▇▇▇
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PPE
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Shipping
& receiving documentation
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||||
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HK
Machine Parts, LLC*
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Indiana
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▇▇▇▇
▇. ▇▇▇▇▇▇ ▇▇.
▇▇▇▇▇
▇▇▇▇, ▇▇ ▇▇▇▇▇
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||||
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▇▇
▇▇▇▇▇▇ Properties, LLC*
|
Indiana
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▇▇▇▇
▇. ▇▇▇▇▇▇ ▇▇.
▇▇▇▇▇
▇▇▇▇, ▇▇ ▇▇▇▇▇
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||||
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HK
Cast Products, LLC*
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Indiana
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▇▇▇▇
▇. ▇▇▇▇▇▇ ▇▇.
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||||
*
sub of
HK Engine Components LLC, no separate location.
SCHEDULE
13(l)(i)
REQUIRED
APPROVALS
Existing
Indebtedness:
|
Debentures
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$4,025,000
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6%
|
All
assets
|
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▇▇▇▇
▇▇▇▇▇▇▇
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$3,000,000
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Prime
-1%
|
Unsecured
|
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▇▇▇▇
▇▇▇▇▇▇▇
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$
150,000
|
Unsecured
|
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▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇
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$
20,000
|
-
|
Unsecured
|
Note:
Above continuing Lenders are subject to a Subordination Agreement with
Laurus.
Ford
Motor Credit Company-$500,000 Commercial Fleet Lease Line covering the
following
vehicles: Vin#▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇,
▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇,
▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇.
ANNEX
A -
DEFINITIONS
SCHEDULE
1(A)
COMMERCIAL
TORT CLAIMS
Magnetech
Industrial Services, Inc. is a cross-claim plaintiff in Square D Company
v.
▇▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇ and Magnetech Industrial Services, Inc., U.S. District
Court,
E.D. Wis. (Green Bay Division), Case No. 04-C-775.
SCHEDULE
2
LIENS
Other
Permitted Liens:
|
1.
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Liens
described on Section 12(i).
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2.
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Liens
relating to the outstanding indebtedness of the Company subject
to a
Subordination Agreement with Laurus set forth on Schedule 12(f),
other
than the security interest of MFB Bank which will be released
upon pay-off
of the indebtedness owed to MFB Bank upon the closing of the
transactions
contemplated hereby.
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3.
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Title
of a lessor under a capital or operating
lease.
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4.
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Zoning,
entitlement and other land use and environmental regulations
by any
governmental or regulatory authority.
|
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5.
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Other
imperfections in title, charges, easements, restrictions and
encumbrances
which would not reasonably be expected to result in a Material
Adverse
Effect.
|