UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported) February 14, 2006
NetFabric Holdings, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 0-21419 76-0307819
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(State or other jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
Three Stewart Court, Denville, NJ 07834
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code - (973) 887-2785
(Former Name or Former Address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 1.01 Entry into Material Definitive Agreement
See Item 2.03.
Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an
Off-Balance Sheet Arrangement of a Registrant
On February 14, 2006, NetFabric Holdings, Inc. (the "Company"), along with
its subsidiaries, entered into a Security Agreement, dated February 10, 2006
with LAURUS MASTER FUND, LTD., a Cayman Islands company ("Laurus"). Under the
Security Agreement, Laurus purchased from the Company a Secured Convertible Note
, with a maturity date of February 10, 2009,in the aggregate principal amount of
$1,500,000 and a Secured Non-Convertible Revolving Note in the aggregate
principal amount of $1,500,000. Availability under the notes is based on an
advance rate equal to 90% of eligible accounts receivable, and Laurus has agreed
to provide the Company an over advance for a specified period.
The Secured Convertible Note has a three-year term, and bears interest at
1% above the prime rate, with a minimum interest rate of 8%. Laurus shall have
the option, but not the obligation, at any time until the Maturity Date to
convert all or any portion of the Secured Convertible Note and accrued interest
into shares of the Company's common stock at an exercise price of $0.91 per
share. If converted in full the Company would be obligated to issue an aggregate
of 1,648,352shares of Common Stock. The Company has the option, but not the
obligation, to prepay the Secured Convertible Note by paying Laurus the
applicable redemption premium.
The Secured Non-Convertible Revolving Note has a three-year term, and bears
interest at 1% above the prime rate, with a minimum interest rate of 8%.
In connection with the borrowing, the Company issued to Laurus a common
stock purchase option ("Option") to purchase up to 4,256,550 shares of the
Company's common stock for a nominal consideration. Additionally, the Company
and Laurus entered into a registration rights agreement ("Registration Rights
Agreement") covering the registration common stock underlying the Secured
Convertible Note and the Option.
The Company's obligations under the Secured Convertible Note and Secured
Non-Convertible Note are secured by first liens on all assets of the Company,
and Laurus may accelerate all obligations under the notes upon an event of
default.
The Company utilized approximately $1.9 million of the initial borrowing to
repay all amounts owed to Cornell Capital Partners, LP pursuant to a Secured
Convertible Debenture.
Item 3.02 Unregistered Sales of Equity Securities
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See Item 2.03
Item 9.01 Financial Statements And Exhibits
(a) None
(b) None
(c) Exhibits
Exhibit No. Description
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Exhibit 99.1 Security Agreement, dated February 10, 2006, by and between the
Company and Laurus Master Fund, Ltd.
Exhibit 99.2 Secured Convertible Note, date February 10, 2006, by and between
the Company and Laurus Master Fund, Ltd.
Exhibit 99.3 Secured Non-Convertible Note, date February 10, 2006, by and
between the Company and Laurus Master Fund, Ltd.
Exhibit 99.4 Option, dated February 10, 2006, by the Company.
Exhibit 99.5 Registration Rights Agreement, dated February 10, 2006, by and
between the Company and Laurus Master Fund, Ltd.
Exhibit 99.6 Subsidiary Guaranty, dated February 10, 2006 from NetFabric
Corporation and UCA Services, Inc.
Exhibit 99.7 Letter agreement, dated February 10, 2006 between the Company and
Laurus Master Fund.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NETFABRIC HOLDINGS, INC.
Date: February 15, 2006 By: /s/Jeff Robinson
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Name: Jeff Robinson
Title: Chairman and CEO
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SECURITY AGREEMENT
This Security Agreement is made as of February 10, 2006 by and among LAURUS
MASTER FUND, LTD., a Cayman Islands company ("Laurus"), NETFABRIC HOLDINGS,
INC., a Delaware (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) Loans.
(i) Subject to the terms and conditions set forth herein and in the
Ancillary Agreements, Laurus may make loans (the "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 (the "Reserves") and
(y) an amount equal to (I) the Accounts Availability plus (II) the
Inventory Availability, minus (III) the Reserves. The amount derived at any
time from Section 2(a)(i)(y)(I) plus Section 2(a)(i)(y)(II) minus
2(a)(i)(y)(III) shall be referred to as the "Formula Amount." The Companies
shall, jointly and severally, execute and deliver to Laurus on the Closing
Date the Non Convertible Revolving Note and a Convertible Note evidencing
the Loans funded on the Closing Date.
(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/or Inventory Availability and each of the
Companies hereby consent to any such increases or decreases which may limit
or restrict advances requested by the Companies.
(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 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 Loan and
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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.
(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 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.
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
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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 Loans. Company Agent may by written notice request a
borrowing of 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 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 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 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. Any and
all Obligations due and owing hereunder may be charged to the Companies' account
and shall constitute 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.
(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).
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(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/Annual Payments. Upon execution of this Agreement by each
Company and Laurus, the Companies shall jointly and severally pay to Laurus
Capital Management, LLC a closing payment in an amount equal to three and
nine tenths percent (3.90%) of the Capital Availability Amount. Such
payment shall be deemed fully earned on the Closing Date and shall not be
subject to rebate or proration for any reason.
(ii) Overadvance Payment. Without affecting Laurus' rights hereunder
in the event the Loans exceed the Formula Amount (each such event, an
"Overadvance"), all such Overadvances shall bear additional interest at a
rate equal to two percent (2%) per month of the amount of such Overadvances
for all times such amounts shall be in excess of the Formula Amount. All
amounts that are incurred pursuant to this Section 5(b)(ii) 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.
(iii) Financial Information Default. Without affecting Laurus' other
rights and remedies, in the event any Company fails to deliver the
financial information required by Section 11 on or before the date required
by this Agreement, the Companies shall jointly and severally pay Laurus an
aggregate fee in the amount of $500.00 per week (or portion thereof) for
each such failure until such failure is cured to Laurus' satisfaction or
waived in writing by Laurus. 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 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 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 $35,000 for such
expenses referred to in this Section 5(b)(v).
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.
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(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 Loan
and made as of the time of each and every 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 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 the
filings and other actions listed on Schedule 7(c) (which, in the case of all
filings and other documents referred to in said Schedule, have been delivered to
Laurus in duly executed form) 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.
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(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 $25,000 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 five (5) 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.
(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 five (5)
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
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and/or Inventory as no longer constituting an Eligible Account or Eligible
Inventory, as the case may be; (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
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 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 bill 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 a discount or allowance
for prompt or early payment allowed by it in the ordinary course of its business
consistent with historical practice and as previously disclosed to Laurus in
writing.
(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).
(o) it shall maintain and keep the tangible Collateral at the addresses
listed in Schedule 12(bb), 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 $50,000
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.
(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.
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(q) All Inventory manufactured by it in the United States of America shall
be produced in accordance with the requirements of the Federal Fair Labor
Standards Act of 1938, as amended and all rules, regulations and orders related
thereto or promulgated thereunder.]
8. Payment of Accounts.
(a) Within thirty (30) days of the Closing Date, 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
North Fork Bank 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 as of February __, 2006. Within thirty (30) days of 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 three (3) 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 after Laurus' receipt of such proceeds in good funds in dollars of
the United States of America to an account designated by Laurus. Any amount
received by Laurus after 12:00 noon (New York time) on any Business Day shall be
deemed received on the next Business Day.
(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 hereunder) to Company Agent (for the
9
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 of the Parent's and each of its Subsidiaries' balance
sheet as at the end of such fiscal year and the related statements of each of
the Parent's and each of its Subsidiaries' income, retained earnings and cash
flows for the fiscal year then ended, prepared on a consolidating and
consolidated basis to include the Parent, each Subsidiary of the Parent and each
of their respective affiliates, all in reasonable detail and prepared in
accordance with GAAP, together with (i) if and when available, copies of any
management letters prepared by the Accountants; and (ii) a certificate of the
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 fiscal quarter of the Parent, an unaudited/internal balance
sheet and statements of income, retained earnings and cash flows of each of the
Parent's and each of its Subsidiaries' as at the end of and for such quarter and
10
for the year to date period then ended, prepared on a consolidating and
consolidated basis to include the Parent, each Subsidiary of the Parent and each
of their respective affiliates, in reasonable detail and stating in comparative
form the figures for the corresponding date and periods in the previous year,
all prepared in accordance with GAAP, subject to year-end adjustments and
accompanied by a certificate of the Parent's President, Chief Executive Officer
or Chief Financial Officer, stating (i) that such financial statements have been
prepared in accordance with GAAP, subject to year-end audit adjustments, and
(ii) whether or not such officer has knowledge of the occurrence of any Default
or Event of Default hereunder not theretofore reported and remedied and, if so,
stating in reasonable detail the facts with respect thereto;
(c) As soon as available and in any event within thirty (30) days after the
end of each calendar month, an unaudited/internal balance sheet and statements
of income, retained earnings and cash flows of each of the Parent and its
Subsidiaries as at the end of and for such month and for the year to date period
then ended, prepared on a consolidating and consolidated basis to include the
Parent, each Subsidiary of the Parent and each of their respective affiliates,
in reasonable detail and stating in comparative form the figures for the
corresponding date and periods in the previous year, all prepared in accordance
with GAAP, subject to year-end adjustments and accompanied by a certificate of
the Parent's President, Chief Executive Officer or Chief Financial Officer,
stating (i) that such financial statements have been prepared in accordance with
GAAP, subject to year-end audit adjustments, and (ii) whether or not such
officer has knowledge of the occurrence of any Default or Event of Default
hereunder not theretofore reported and remedied and, if so, stating in
reasonable detail the facts with respect thereto;
(d) Within fifteen (15) 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, Eligible Accounts, Inventory and/or Eligible Inventory, 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
fifteen (15) days from each such request to comply with Laurus' demand;
(e) 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.
(f) The Parent shall deliver, or cause the applicable Subsidiary of the
Parent to deliver, such other information as the Purchaser shall reasonably
request.
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
11
Option and the shares of Common Stock issuable upon conversion of the Option
(the "Option Shares"), (iv) to issue the 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.
(d) The authorized capital stock of the Parent, as of the date hereof
consists of 110,000,000 shares, of which 100,000,000 are shares of Common Stock,
par value $0.01 per share, 62,508,883 shares of which are issued and
outstanding, and 10,000,000 are shares of preferred stock, of which No shares of
preferred stock are issued and outstanding. The authorized, issued and
outstanding capital stock of each Subsidiary of each Company is set forth
onSchedule12(c).
(i) Except as disclosed on Schedule 12(c), 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 Option, or the issuance of any of the Note Shares or the
Option 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.
(ii) 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.
(iii) 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 Option 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.
12
(e) 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 and the Option has 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.
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 Option and the subsequent exercise of the Option for Option 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.
(f) Liabilities. Neither it nor any of its Subsidiaries has any
liabilities, except current liabilities incurred in the ordinary course of
business and liabilities disclosed in any Exchange Act Filings.
(g) Agreements; Action. Except as set forth on Schedule 12(f) or as
disclosed in any Exchange Act Filings:
(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 $50,000 (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 September 20, 2005 (the "Balance Sheet Date"), 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 $50,000 or, in the case of indebtedness and/or
liabilities individually less than $50,000, in excess of $100,000 in the
aggregate; (iii) made any loans or advances to any Person not in excess,
13
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.
(iv) the Parent maintains 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.
(v) The Parent makes and keeps books, records, and accounts, that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of its assets. It maintains internal control over financial
reporting ("Financial Reporting Controls") 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 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;
(4) transactions are recorded as necessary to maintain
accountability for assets; and
(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.
(vi) There is no weakness in any of its Disclosure Controls or
Financial Reporting Controls that is required to be disclosed in any of the
Exchange Act Filings, except as so disclosed.
14
(h) 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 or disclosed in any of the Parent's Exchange Act Filings.
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.
(i) Changes. Since the Balance Sheet Date, except as disclosed in any
Exchange Act Filing or in any Schedule to this Agreement or to any of the
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).
(j) 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 and each of its
16
Subsidiaries is in compliance with all material terms of each lease to which it
is a party or is otherwise bound.
(k) 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.
(l) Compliance with Other Instruments. 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.
(m) 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
17
any basis to assert any of the 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.
(n) 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.
(o) 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 in the Exchange Act Filings or 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
18
or any of its 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.
(p) Registration Rights and Voting Rights. Except as set forth on Schedule
12(o) and except as disclosed in Exchange Act Filings, 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) and except as
disclosed in Exchange Act Filings, 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.
(q) Compliance with Laws; Permits. Neither it nor any of its Subsidiaries
is in violation of the Sarbanes-Oxley Act of 2002 or any SEC related regulation
or rule or any rule of the Principal Market promulgated thereunder or any other
applicable statute, rule, regulation, order or restriction of any domestic or
foreign government or any instrumentality or agency thereof in respect of the
conduct of its business or the ownership of its properties which has had, or
could reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect. No governmental orders, permissions, consents,
approvals or authorizations are required to be obtained and no registrations or
declarations are required to be filed in connection with the execution and
delivery of this Agreement or any 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.
(r) Environmental and Safety Laws. 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), 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.
(s) 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
19
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.
(t) 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, including all information each Company and its
Subsidiaries believe is reasonably necessary to make such investment decision.
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. Any financial projections
and other estimates provided to Laurus by it or any of its Subsidiaries 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.
(u) 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.
(v) SEC Reports and Financial Statements. Except as set forth on Schedule
12(u), it and each of its Subsidiaries has filed all proxy statements, reports
and other documents required to be filed by it under the Exchange Act. The
Parent has furnished Laurus with copies of: (i) its Annual Report on Form 10-KSB
for its fiscal years ended December 31, 2004; and (ii) its Quarterly Reports on
Form 10-QSB for its fiscal quarter ended September 30, 2005, and the Form 8-K
filings which it has made during its fiscal year 2005 to date (collectively, the
"SEC Reports"). Except as set forth on Schedule 12(u), each SEC Report was, at
the time of its filing, in substantial compliance with the requirements of its
respective form and none of the SEC Reports, nor the financial statements (and
the notes thereto) included in the SEC Reports, as of their respective filing
dates, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Such financial statements 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 or may be condensed) and fairly present in all material respects the
financial condition, the results of operations and cash flows of the Parent and
its Subsidiaries, on a consolidated basis, as of, and for, the periods presented
in each such SEC Report.
(w) Listing. The Parent's Common Stock is listed or quoted, as applicable,
on the Principal Market and satisfies all requirements for the continuation of
such listing or quotation, as applicable, and the Parent shall do all things
necessary for the continuation of such listing or quotation, as applicable. The
Parent has not received any notice that its Common Stock will be delisted from,
20
or no longer quoted on, as applicable, the Principal Market or that its Common
Stock does not meet all requirements for such listing or quotation, as
applicable.
(x) 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 Affiliates or Subsidiaries take any action
or steps that would cause the offering of the Securities to be integrated with
other offerings.
(y) 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.
(z) Dilution. It specifically acknowledges that the Parent's obligation to
issue the shares of Common Stock upon conversion of the Notes and exercise of
the Option 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.
(aa) 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
21
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.
(bb) 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 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.
(cc) 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. It shall promptly secure the listing or quotation, as
applicable, of the shares of Common Stock issuable upon conversion of the Notes
and exercise of the Option on the Principal Market upon which shares of Common
Stock are listed or quoted, as applicable, (subject to official notice of
issuance) and shall maintain such listing or quotation, as applicable, so long
as any other shares of Common Stock shall be so listed or quoted, as applicable.
The Parent shall maintain the listing or quotation, as applicable, of its Common
Stock on the 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 exchanges, as
applicable.
22
(c) Market Regulations. It shall notify the SEC, NASD and applicable state
authorities, in accordance with their requirements, of the transactions
contemplated by this Agreement, and shall take all other necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation, for the legal and valid issuance of the Securities to Laurus and
promptly provide copies thereof to Laurus.
(d) Reporting Requirements. It shall timely file with the SEC all reports
required to be filed pursuant to the Exchange Act and refrain from terminating
its status as an issuer required by the Exchange Act to file reports thereunder
even if the Exchange Act or the rules or regulations thereunder would permit
such termination.
(e) Use of Funds. It shall use the proceeds of the Loans for general
working capital purposes only.
(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 directors, officers and
Accountants.
Notwithstanding the foregoing, neither it nor any of its Subsidiaries shall
provide any material, non-public information to Laurus unless Laurus signs a
confidentiality agreement and otherwise complies with Regulation FD, under the
federal securities laws.
(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.
23
(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 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.
24
(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.
(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 each Company's indebtedness to Laurus and as set
forth on Schedule 13(l)(i) attached hereto and made a part hereof; (ii) cancel
any debt owing to it in excess of $50,000 in the aggregate during any 12 month
period; (iii) assume, guarantee, endorse or otherwise become directly or
contingently liable in connection with any obligations of any other Person,
except the endorsement of negotiable instruments by 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 to Laurus and in the
ordinary course of business), or repurchase, redeem, retire or otherwise acquire
25
any indebtedness (other than to Laurus and in the ordinary course of business)
except to make scheduled payments of principal and interest thereof; (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; (xiii) bill
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) sales, leases,
transfer or dispositions by any Company to any other Company, (2) the sale of
Inventory in the ordinary course of business and (3) 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 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 39 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 necessary to
allow such resales provided the Parent and its counsel receive reasonably
requested representations from Laurus and broker, if any.
(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 Option.
(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
26
organization identification number, if any, issued by its state of organization,
(iv) its state of organization or (v) amend its certificate of incorporation,
by-laws or other organizational document.
(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 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 as previously disclosed in the SEC
Reports or in the Exchange Act Filings, or stock or stock options granted to its
employees or directors, 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, 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).
(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 Option.
(u) Financing Right of First Refusal.
(i) Each Company hereby grants to Laurus 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
27
the date hereof, prior to the incurrence of any additional convertible
indebtedness and/or the sale or issuance of any equity interests of the
Additional Financing Parties (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) 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
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.
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 contained in this
Agreement, including, without limitation, that Laurus is an "accredited
28
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 to be issued to it under this Agreement and the Securities acquired by
it upon the conversion of the Notes.
(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 bear the economic risk of this investment until the
Securities are sold pursuant to (i) an effective registration statement under
the Securities Act, or (ii) an exemption from registration is available.
(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. Laurus represents that 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 Notes, and
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 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 Convertible Note shall be
outstanding.
(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
29
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
Fixed Conversion Price (as defined in 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 payment or security that may come into Laurus'
possession; (ii) sign such Company's name on any invoice or bill 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) on or after the occurrence and during the continuation of an
Event of Default, 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.
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
30
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 (i) 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 and (ii) paid to Laurus an early payment fee in an
amount equal to (1) five percent (5%) of the Capital Availability Amount if such
payment occurs prior to the first anniversary of the Closing Date, (2) four
percent (4%) of the Capital Availability Amount if such payment occurs on or
after the first anniversary of the Closing Date and prior to the second
anniversary of the Closing Date and (3) three percent (3%) of the Capital
Availability Amount if such termination occurs thereafter during the Term; such
fee being intended to compensate Laurus for its costs and expenses incurred in
initially approving this Agreement or extending same. Such early payment fee
shall be due and payable jointly and severally by the Companies to Laurus upon
termination by acceleration of this Agreement by Laurus due to the occurrence
and continuance of an Event of Default.
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;
(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 fifteen (15) 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,
31
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 $50,000 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 $50,000 which shall not have been
vacated, discharged, stayed or bonded within thirty (30) days from the entry
thereof;
(g) any change in any Company's or any of its Subsidiary's condition or
affairs (financial or otherwise) which in Laurus' reasonable, good faith
opinion, could reasonably be expected to have a Material Adverse Effect;
(h) 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;
(i) 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;
(j) 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;
(k) 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;
(l) 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 the Parent on the date hereof), (ii) the
Board of Directors of the Parent shall cease to consist of a majority of the
32
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 (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;
(m) 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;
(n) an Event of Default shall occur under and as defined in any Note or in
any other Ancillary Agreement;
(o) 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);
(p) 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);
(q) 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 thirty (30) days of
the notice thereof or list the Common Stock on another Principal Market within
sixty (60) days of such notice; or
(r) 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 seven (7) Business Days.
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
33
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. The Companies shall remain
jointly and severally liable to Laurus for any deficiency. In addition, the
Companies shall jointly and severally pay Laurus a liquidation fee ("Liquidation
Fee") in the amount of five percent (5%) of the actual amount collected in
respect of each Account outstanding at any time during a Liquidation Period".
For purposes hereof, "Liquidation Period" means a period: (i) beginning on the
earliest date of (x) an event referred to in Section 19(i) or 19(j), or (y) the
cessation of any Company's business; and (ii) ending on the date on which Laurus
has actually received all Obligations due and owing it under this Agreement and
the Ancillary Agreements. The Liquidation Fee shall be paid on the date on which
Laurus collects the applicable Account by deduction from the proceeds thereof.
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 Section and 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 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
34
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'
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.
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 and any such
assignee shall succeed to all of Laurus' rights with respect thereto; provided
that Laurus shall not be permitted to effect any such assignment to a competitor
of any Company unless an Event of Default has occurred and is continuing. Upon
such assignment, 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
35
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. Each Company irrevocably waive 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 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. 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 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 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.
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
36
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 provided herein, reliance by Laurus on any request or instruction
from Company Agent or any other action taken by Laurus with respect to this
Paragraph 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
37
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.
Notices shall be provided as follows:
If to Laurus: Laurus Master Fund, Ltd.
c/o Laurus Capital Management, LLC
825 Third Avenue, 14th Fl.
New York, New York 10022
Attention: John E. Tucker, Esq.
Telephone: (212) 541-4434
Telecopier: (212) 541-5800
With a copy to:
-----------------------------------
Attention:
-----------------
Telephone:
-----------------
Facsimile:
-----------------
If to any Company
or Company Agent: NETFABRIC HOLDINGS, INC.
Three Stewart Court
Denville, NJ 07834
Attention: Chief Financial Officer
Facsimile: 973-442-0540
With a copy to:
Mr. Robert Matlin, Esq.
Kirkpatrick & Lockhart
Nicholson Graham LLP 599
Lexington Avenue New York,
New York 10022
Fax:212.536.3901
38
or such other address as may be designated in writing hereafter in accordance
with this Section 29 by such Person.
30. Governing Law, Jurisdiction and Waiver of Jury Trial.
(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 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
39
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.
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 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
40
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 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 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 PARENT THAT SUCH
REGISTRATION IS NOT REQUIRED."
41
(b) Any shares of Common Stock issued pursuant to conversion of the Notes
or exercise of the Option or the Shares, 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 PARENT THAT
SUCH REGISTRATION IS NOT REQUIRED."
(c) The Option shall bear substantially the following legend:
"THIS OPTION AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF
THIS OPTION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAWS. THIS OPTION AND THE COMMON SHARES ISSUABLE UPON
EXERCISE OF THIS OPTION MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS OPTION OR THE UNDERLYING
SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO PARENT THAT SUCH REGISTRATION IS NOT
REQUIRED."
[Balance of page intentionally left blank;
signature page follows.]
42
IN WITNESS WHEREOF, the parties have executed this Security Agreement as of
the date first written above.
NETFABRIC HOLDINGS, INC.
By:
-------------------------------------------------
Name:
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Title:
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NETFABRIC CORPORATION
By:
-------------------------------------------------
Name:
-----------------------------------------------
Title:
----------------------------------------------
UCA SERVICES, INC.
By:
-------------------------------------------------
Name:
-----------------------------------------------
Title:
-----------------------------------------------
LAURUS MASTER FUND, LTD.
By:
-------------------------------------------------
Name:
-----------------------------------------------
Title:
-----------------------------------------------
43
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.
"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 Option, 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).
------------------
1
"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 $3,000,000.
---------------------------
"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.
"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 Goods;
(e) all General Intangibles;
(f) all Accounts;
(g) all Deposit Accounts, other bank accounts and all funds on deposit
therein;
(h) all Investment Property;
(i) all Stock;
(j) all Chattel Paper;
2
(k) all Letter-of-Credit Rights;
(l) all Instruments;
(m) all commercial tort claims set forth on Schedule 1(A);
(n) all Books and Records;
(o) all Intellectual Property;
(p) all Supporting Obligations including letters of credit and
guarantees issued in support of Accounts, Chattel Paper, General
Intangibles and Investment Property;
(q) (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
(r) 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.
-------------
"Convertible Note" means that certain Secured Convertible term note dated
as of the Closing Date made by the Companies in favor of Laurus evidencing
$1,500,000 as the same may be amended, supplemented, restated and/or otherwise
modified from time to time.
"Default" means any act or event which, with the giving of notice or
passage of time or both, would constitute an Event of Default.
"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 12(f)(iv).
"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 warrants, dock receipts, warehouse receipts, and other documents
of title, whether negotiable or non-negotiable.
3
"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 five
percent (35%) of the unpaid amount of invoices due from such Account Debtor
remains unpaid more than ninety (90) 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; 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 bill 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 billings 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 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 Inventory" means Inventory owned by a Company which Laurus, in
its sole and absolute discretion, determines: (a) is subject to a first priority
perfected Lien in favor of Laurus and is subject to no other Liens whatsoever
4
(other than Permitted Liens); (b) is located on premises with respect to which
Laurus has received a landlord or mortgagee waiver acceptable in form and
substance to Laurus; (c) is not in transit; (d) is in good condition and meets
all standards imposed by any governmental agency, or department or division
thereof having regulatory Governmental Authority over such Inventory, its use or
sale including the Federal Fair Labor Standards Act of 1938 as amended, and all
rules, regulations and orders thereunder; (e) is currently either usable or
salable in the normal course of such Company's business; (f) is not placed by
such Company on consignment or held by such Company on consignment from another
Person; (g) is in conformity with the representations and warranties made by
such Company to Laurus with respect thereto; (h) is not subject to any
licensing, patent, royalty, trademark, trade name or copyright agreement with
any third parties; (i) does not require the consent of any Person for the
completion of manufacture, sale or other disposition of such Inventory and such
completion, manufacture or sale does not constitute a breach or default under
any contract or agreement to which such Company is a party or to which such
Inventory is or may be subject; (j) is not work-in-process; (k) is covered by
casualty insurance acceptable to Laurus and under which Laurus has been named as
a lender's loss payee and additional insured; and (l) not to be ineligible for
any other reason.
"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.
------------
"Exchange Act Filings" means the Parent's filings under the Exchange Act
made prior to the date of this Agreement.
"Financial Reporting Controls" has the meaning given such term in Section
12(f)(v).
"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).
--------------
5
"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, 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,
fixtures, 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.
"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
6
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.
"Inventory Availability" means up to thirty percent (30%) of the value of
Companies' Eligible Inventory (calculated on the basis of the lower of cost or
market, on a first-in first-out basis).
"Investment Property" means all "investment property", as such term is
defined in the UCC, now owned or hereafter acquired by any Person, wherever
located.
"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 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" has the meaning given such term in Section 2(a)(i) and shall
include all other extensions of credit hereunder and under any Ancillary
Agreement.
"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.
"NASD" has the meaning given such term in Section 13(b).
----
"Note Shares" has the meaning given such term in Section 12(a).
-----------
"Notes" means the Convertible Note and the Non Convertible Revolving Note
made by Companies in favor of Laurus in connection with the transactions
7
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.
"Option" means that certain Common Stock Purchase Option dated as of the
Closing Date made by the Parent in favor of Laurus and each other warrant made
by the Parent in favor Laurus, as each of the same may be amended, restated,
modified and/or supplemented from time to time.
"Option Shares" has the meaning given such term in Section 12(a).
-------------
"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. [Please revise to include leases on
equipment used in the ordinary course of business.]
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.
"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.
"Registration Rights Agreements" means that certain Convertible Note
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.
9
"Non Convertible 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 $1,500,000, as the same may be amended,
supplemented, restated and/or otherwise modified from time to time.
"SEC" means the Securities and Exchange Commission.
---
"SEC Reports" has the meaning given such term in Section 12(u).
-----------
"Securities" means the Notes, the Shares and the Option 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 Option.
"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.
"Shares" means the shares of Common Stock which may be issued to the
Purchaser pursuant hereto.
"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 Securities Exchange Act of
1934).
"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.
"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.
10
"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.
11
Exhibit A
---------
Eligible Subsidiaries
---------------------
NETFABRIC CORPORATION
UCA SERVICES, INC.
Exhibit B
---------
Borrowing Base Certificate
--------------------------
[To be inserted]
SECURITY AGREEMENT
LAURUS MASTER FUND, LTD.
and
NETFABRIC HOLDINGS, INC.
and
NETFABRIC CORPORATION
and
UCA SERVICES, INC.
Dated: February 10, 2006
TABLE OF CONTENTS
Page
1. General Definitions and Terms; Rules of Construction..................1
2. Loan Facility.........................................................2
3. Repayment of the Loans................................................3
4. Procedure for Loans...................................................4
5. Interest and Payments.................................................4
6. Security Interest.....................................................5
7. Representations, Warranties and Covenants Concerning the Collateral...6
8. Payment of Accounts...................................................9
9. Collection and Maintenance of Collateral..............................9
10. Inspections and Appraisals...........................................10
11. Financial Reporting..................................................10
12. Additional Representations and Warranties............................11
13. Covenants............................................................22
14. Further Assurances...................................................28
15. Representations, Warranties and Covenants of Laurus..................28
16. Power of Attorney....................................................30
17. Term of Agreement....................................................30
18. Termination of Lien..................................................31
19. Events of Default....................................................31
20. Remedies.............................................................33
21. Waivers..............................................................34
22. Expenses.............................................................35
23. Assignment By Laurus.................................................35
i
24. No Waiver; Cumulative Remedies.......................................36
25. Application of Payments..............................................36
26. Indemnity............................................................36
27. Revival..............................................................36
28. Borrowing Agency Provisions..........................................37
29. Notices..............................................................38
30. Governing Law, Jurisdiction and Waiver of Jury Trial.................39
31. Limitation of Liability..............................................40
32. Entire Understanding.................................................40
33. Severability.........................................................40
34. Captions.............................................................40
35. Counterparts; Telecopier Signatures..................................40
36. Construction.........................................................41
37. Publicity............................................................41
38. Joinder..............................................................41
39. Legends..............................................................41
ii
THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. THIS NOTE AND THE COMMON SHARES 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 UNDER SAID ACT
AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO NETFABRIC HOLDINGS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.
SECURED CONVERTIBLE NOTE
------------------------
FOR VALUE RECEIVED, each of NETFABRIC HOLDINGS, INC., a Delaware (the
"Parent"), and the other companies listed on Exhibit A attached hereto (such
other companies together with the Parent, each a "Company" and collectively, the
"Companies"), jointly and severally, promises to pay to LAURUS MASTER FUND,
LTD., c/o M&C Corporate Services Limited, P.O. Box 309 GT, Ugland House, South
Church Street, George Town, Grand Cayman, Cayman Islands, Fax: 345-949-8080 (the
"Holder") or its registered assigns or successors in interest, the sum of One
Million Five Hundred Thousand Dollars ($1,500,000) or, if different, the
aggregate principal amount of all Loans (as defined in the Security Agreement
referred to below), together with any accrued and unpaid interest hereon, on
February 10, 2009 (the "Maturity Date") if not sooner paid.
Capitalized terms used herein without definition shall have the meanings
ascribed to such terms in the Security Agreement among the Companies and the
Holder dated as of the date hereof (as amended, modified and/or supplemented
from time to time, the "Security Agreement").
The following terms shall apply to this Note (this "Note"):
ARTICLE I
CONTRACT RATE
1.1 Contract Rate. Subject to Sections 4.2 and 5.10, interest payable on
the outstanding principal amount of this Note (the "Principal Amount") shall
accrue at a rate per annum equal to the "prime rate" published in The Wall
Street Journal from time to time (the "Prime Rate"), plus one percent (1.0%)
(the "Contract Rate"). The Contract Rate shall be increased or decreased as the
case may be for each increase or decrease in the Prime Rate in an amount equal
to such increase or decrease in the Prime Rate; each change to be effective as
of the day of the change in the Prime Rate. Subject to Section 1.2, the Contract
Rate shall not at any time be less than eight percent (8.0%). Interest shall be
(i) calculated on the basis of a 360 day year, and (ii) payable monthly, in
arrears, commencing on March 1, 2006 on the first business day of each
consecutive calendar month thereafter through and including the Maturity Date
and on the Maturity Date, whether by acceleration or otherwise.
1
1.2 Contract Rate and Payments. The Contract Rate shall be calculated on
the last business day of each calendar month hereafter (other than for increases
or decreases in the Prime Rate which shall be calculated and become effective in
accordance with the terms of Section 1.1) until the Maturity Date (each a
"Determination Date")
ARTICLE II
LOANS; PAYMENTS UNDER THIS NOTE
2.1 Loans. All Loans evidenced by this Note shall be made in accordance
with the terms and provisions of the Security Agreement.
2.2 No Effective Registration. Notwithstanding anything to the contrary
herein, the Holder shall not be required to accept shares of Common Stock as
payment following a conversion by the Holder if there fails to exist an
effective current Registration Statement (as defined in the Registration Rights
Agreement) covering the shares of Common Stock to be issued, or if an Event of
Default hereunder exists and is continuing, unless such requirement is otherwise
waived in writing by the Holder in whole or in part at the Holder's option.
2.3 Optional Redemption in Cash. The Companies will have the option of
prepaying this Note ("Optional Redemption") by paying to the Holder a sum of
money equal to i) one hundred thirty percent (130%) of the principal amount of
this Note together with accrued but unpaid interest thereon and any and all
other sums due, accrued or payable to the Holder arising under this Note, the
Security Agreement, or any other Ancillary Agreement if such redemption is made
on or before February 10, 2007; ii) one hundred twenty five percent (125%) of
the principal amount of this Note together with accrued but unpaid interest
thereon and any and all other sums due, accrued or payable to the Holder arising
under this Note, the Security Agreement, or any other Ancillary Agreement if
such redemption is made after February 10, 2007 but on or before February 10,
2008 or iii) one hundred twenty percent (120%) of the principal amount of this
Note together with accrued but unpaid interest thereon and any and all other
sums due, accrued or payable to the Holder arising under this Note, the Security
Agreement, or any other Ancillary Agreement if such redemption is made after
February 10, 2008 but on or before February 10, 2009 (each such respective
amount being a "Redemption Amount") outstanding on the Redemption Payment Date
(as defined below). The Company shall deliver to the Holder a written notice of
redemption (the "Notice of Redemption") specifying the date for such Optional
Redemption (the "Redemption Payment Date"), which date shall be seven (7) days
after the date of the Notice of Redemption (the "Redemption Period"). A Notice
of Redemption shall not be effective with respect to any portion of this Note
for which the Holder has previously delivered a Notice of Conversion (defined
below) pursuant to Section 3.1, or for conversions elected to be made by the
Holder pursuant to Section 3.1 during the Redemption Period. The Redemption
Amount shall be determined as if such Holder's conversion elections had been
completed immediately prior to the date of the Notice of Redemption. On the
Redemption Payment Date, the Redemption Amount (plus any additional interest and
fees accruing on the Notes during the Redemption Period) must be irrevocably
paid in full in immediately available funds to the Holder. In the event the
Companies fail to pay the Redemption Amount on the Redemption Payment Date, then
such Redemption Notice shall be null and void.
2
ARTICLE III
CONVERSION RIGHTS AND FIXED CONVERSION PRICE
3.1 Optional Conversion. Subject to the terms of this Article III, the
Holder shall have the right, but not the obligation, at any time until the
Maturity Date, or during an Event of Default (as defined in Article IV), and,
subject to the limitations set forth in Section 3.2 hereof, to convert all or
any portion of the outstanding Principal Amount and/or accrued interest and fees
due and payable into fully paid and nonassessable shares of the Common Stock at
the Fixed Conversion Price. For purposes hereof, subject to Section 3.6 hereof,
the initial "Fixed Conversion Price" means $0.91. The shares of Common Stock to
be issued upon such conversion are herein referred to as the "Conversion
Shares."
3.2 Conversion Limitation. Notwithstanding anything contained herein to the
contrary, the Holder shall not be entitled to convert pursuant to the terms of
this Note an amount that would be convertible into that number of Conversion
Shares which would exceed the difference between (i) 9.99% of the outstanding
shares of Common Stock and (ii) the number of shares of Common Stock
beneficially owned by the Holder. For purposes of the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Exchange Act and Regulation 13d-3 thereunder. The Conversion Shares
limitation described in this Section 3.2 shall automatically become null and
void following notice to the Parent upon the occurrence and during the
continuance of an Event of Default, upon 75 days prior notice to the Parent, or
upon receipt by the Holder of a Notice of Redemption. Notwithstanding anything
contained herein to the contrary, the provisions of this Section 3.2 are
irrevocable and may not be waived by the Holder or any Company.
3.3 Mechanics of Holder's Conversion. In the event that the Holder elects
to convert this Note into Common Stock, the Holder shall give notice of such
election by delivering an executed and appropriately completed notice of
conversion in substantially the form of Exhibit B hereto ("Notice of
Conversion") to the Parent and such Notice of Conversion shall provide a
breakdown in reasonable detail of the Principal Amount and accrued and unpaid
interest and fees that are being converted. On each Conversion Date (as
hereinafter defined) and in accordance with its Notice of Conversion, the Holder
shall make the appropriate reduction to the Principal Amount and accrued and
unpaid interest and fees as entered in its records and shall provide written
notice thereof to the Parent within two (2) Business Days after the Conversion
Date. Each date on which a Notice of Conversion is delivered or telecopied to
the Parent in accordance with the provisions hereof shall be deemed a Conversion
Date (the "Conversion Date"). Pursuant to the terms of the Notice of Conversion,
the Parent will issue instructions to the transfer agent accompanied by an
opinion of counsel within two (2) Business Days of the date of the delivery to
the Parent of the Notice of Conversion and shall cause the transfer agent to
transmit the certificates representing the Conversion Shares to the Holder by
crediting the account of the Holder's designated broker with the Depository
Trust Corporation ("DTC") through its Deposit Withdrawal Agent Commission
("DWAC") system within [three (3) Business Days] after receipt by the Parent of
the Notice of Conversion (the "Delivery Date"). In the case of the exercise of
the conversion rights set forth herein the conversion privilege shall be deemed
to have been exercised and the Conversion Shares issuable upon such conversion
shall be deemed to have been issued upon the date of receipt by the Parent of
3
the Notice of Conversion. The Holder shall be treated for all purposes as the
record holder of the Conversion Shares, unless the Holder provides the Parent
written instructions to the contrary.
3.4 Late Payments. Each Company understands that a delay in the delivery of
the Conversion Shares in the form required pursuant to this Article beyond the
Delivery Date could result in economic loss to the Holder. As compensation to
the Holder for such loss, in addition to all other rights and remedies which the
Holder may have under this Note, applicable law or otherwise, the Companies
shall, jointly and severally, pay late payments to the Holder for any late
issuance of Conversion Shares in the form required pursuant to this Article III
upon conversion of this Note, in the amount equal to $500 per Business Day after
the Delivery Date. The Companies shall, jointly and severally, make any payments
incurred under this Section in immediately available funds upon demand.
3.5 Conversion Mechanics. The number of shares of Common Stock to be issued
upon each conversion of this Note shall be determined by dividing that portion
of the principal and interest and fees to be converted, if any, by the then
applicable Fixed Conversion Price.
3.6 Adjustment Provisions. The Fixed Conversion Price and number and kind
of shares or other securities to be issued upon conversion determined pursuant
to Section 3.1 shall be subject to adjustment from time to time upon the
occurrence of certain events during the period that this conversion right
remains outstanding, as follows:
(a) Reclassification. If the Parent at any time shall, by
reclassification or otherwise, change the Common Stock into the same or a
different number of securities of any class or classes, this Note, as to the
unpaid Principal Amount and accrued interest thereon, shall thereafter be deemed
to evidence the right to purchase an adjusted number of such securities and kind
of securities as would have been issuable as the result of such change with
respect to the Common Stock (i) immediately prior to or (ii) immediately after
such reclassification or other change at the sole election of the Holder.
(b) Stock Splits, Combinations and Dividends. If the shares of Common
Stock are subdivided or combined into a greater or smaller number of shares of
Common Stock, or if a dividend is paid on the Common Stock or any preferred
stock issued by the Parent in shares of Common Stock, the Fixed Conversion Price
shall be proportionately reduced in case of subdivision of shares or stock
dividend or proportionately increased in the case of combination of shares, in
each such case by the ratio which the total number of shares of Common Stock
outstanding immediately after such event bears to the total number of shares of
Common Stock outstanding immediately prior to such event.
3.7 Reservation of Shares. During the period the conversion right exists,
the Parent will reserve from its authorized and unissued Common Stock a
sufficient number of shares to provide for the issuance of Conversion Shares
4
upon the full conversion of this Note and the Option. The Parent represents that
upon issuance, the Conversion Shares will be duly and validly issued, fully paid
and non-assessable. The Parent agrees that its issuance of this Note shall
constitute full authority to its officers, agents, and transfer agents who are
charged with the duty of executing and issuing stock certificates to execute and
issue the necessary certificates for the Conversion Shares upon the conversion
of this Note.
3.8 Registration Rights. The Holder has been granted registration rights
with respect to the Conversion Shares as set forth in a Registration Rights
Agreement.
3.9 Issuance of New Note. Upon any partial conversion of this Note, a new
Note containing the same date and provisions of this Note shall, at the request
of the Holder, be issued by the Parent to the Holder for the principal balance
of this Note and accrued interest which shall not have been converted or paid.
Subject to the provisions of Article IV of this Note, the Parent shall not pay
any costs, fees or any other consideration to the Holder for the production and
issuance of a new Note.
ARTICLE IV
EVENTS OF DEFAULT AND DEFAULT RELATED PROVISIONS
4.1 Events of Default. The occurrence of an Event of Default under the
Security Agreement shall constitute an event of default ("Event of Default")
hereunder.
4.2 Default Interest. Following the occurrence and during the continuance
of an Event of Default, the Companies shall, jointly and severally, pay
additional interest on the outstanding principal balance of this Note in an
amount equal to two percent (2%) per month, and all outstanding Obligations,
including unpaid interest, shall continue to accrue interest at such additional
interest rate from the date of such Event of Default until the date such Event
of Default is cured or waived. In the event, an Event of Default is occuring for
a partial month, the default interest rate should only apply for such period.
4.3 Default Payment. Following the occurrence and during the continuance of
an Event of Default, the Holder, at its option, may elect, in addition to all
rights and remedies of the Holder under the Security Agreement and the Ancillary
Agreements and all obligations of each Company under the Security Agreement and
the Ancillary Agreements, to require the Companies, jointly and severally, to
make a Default Payment ("Default Payment"). The Default Payment shall be 120% of
the outstanding principal amount of the Note, plus accrued but unpaid interest,
all other fees then remaining unpaid, and all other amounts payable hereunder.
The Default Payment shall be applied first to any fees due and payable to the
Holder pursuant to the Notes and/or the Ancillary Agreements, then to accrued
and unpaid interest due on the Notes, the Security Agreement and then to the
outstanding principal balance of the Notes. The Default Payment shall be due and
payable immediately on the date that the Holder has exercised its rights
pursuant to this Section 4.3.
ARTICLE V
MISCELLANEOUS
5
5.1 Conversion Privileges. The conversion privileges set forth in Article
III shall remain in full force and effect immediately from the date hereof until
the date this Note is indefeasibly paid in full and irrevocably terminated.
5.2 Cumulative Remedies. The remedies under this Note shall be cumulative.
5.3 Failure or Indulgence Not Waiver. No failure or delay on the part of
the Holder hereof in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercise thereof or
of any other right, power or privilege. All rights and remedies existing
hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
5.4 Notices. Any notice herein required or permitted to be given shall be
in writing and shall be deemed effectively given: (a) upon personal delivery to
the party notified, (b) when sent by confirmed telex or facsimile if sent during
normal business hours of the recipient, if not, then on the next business day,
(c) five days after having been sent by registered or certified mail, return
receipt requested, postage prepaid, or (d) one day after deposit with a
nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications shall be sent to the
respective Company at the addresses provided for such Company in the Security
Agreement executed in connection herewith, and to the Holder at the address
provided in the Security Agreement for such Holder, with a copy to John E.
Tucker, Esq., 825 Third Avenue, 14th Floor, New York, New York 10022, facsimile
number (212) 541-4434, or at such other address as the respective Company or the
Holder may designate by ten days advance written notice to the other parties
hereto.
5.5 Amendment Provision. The term "Note" and all references thereto, as
used throughout this instrument, shall mean this instrument as originally
executed, or if later amended or supplemented, then as so amended or
supplemented, and any successor instrument as such successor instrument may be
amended or supplemented.
5.6 Assignability. This Note shall be binding upon each Company and its
successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns, and may be assigned by the Holder in accordance with the
requirements of the Security Agreement. No Company may assign any of its
obligations under this Note without the prior written consent of the Holder, any
such purported assignment without such consent being null and void.
5.7 Cost of Collection. In case of any Event of Default under this Note,
the Companies shall, jointly and severally, pay the Holder's reasonable costs of
collection, including reasonable attorneys' fees.
5.8 Governing Law, Jurisdiction and Waiver of Jury Trial.
(a) THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, 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 THE HOLDER, ON THE OTHER HAND, PERTAINING TO THIS NOTE, THE
SECURITY AGREEMENT OR ANY OF THE OTHER ANCILLARY
6
AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS NOTE,
THE SECURITY AGREEMENT OR ANY OF THE OTHER ANCILLARY AGREEMENTS; PROVIDED, THAT
EACH COMPANY ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE
HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK;
AND FURTHER PROVIDED, THAT NOTHING IN THIS NOTE SHALL BE DEEMED OR OPERATE TO
PRECLUDE THE HOLDER 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 THE HOLDER. 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 THE COMPANY AT THE ADDRESS SET FORTH IN THE SECURITY AGREEMENT AND
THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF THE COMPANY'S
ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER
POSTAGE PREPAID.
(c) EACH COMPANY DESIRES THAT ITS 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, EACH COMPANY HERETO WAIVES
ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO
RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE
HOLDER, AND/OR ANY COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL
TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS NOTE, THE
SECURITY AGREEMENT, ANY OTHER ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED
HERETO OR THERETO.
5.9 Severability. In the event that any provision of this Note is invalid
or unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any such provision which may prove invalid or unenforceable under any law
shall not affect the validity or enforceability of any other provision of this
Note.
7
5.10 Maximum Payments. Nothing contained herein shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest required to be paid or other charges hereunder exceed the maximum rate
permitted by such law, any payments in excess of such maximum rate shall be
credited against amounts owed by the Companies to the Holder and thus refunded
to the Companies.
5.11 Security Interest and Guarantee. The Holder has been granted a
security interest (i) in certain assets of the Companies as more fully described
in the Security Agreement and (ii) pursuant to the Stock Pledge Agreement dated
as of the date hereof. The obligations of the Companies under this Note are
guaranteed by certain Subsidiaries of the Companies pursuant to the Subsidiary
Guaranty dated as of the date hereof.
5.12 Construction. Each party acknowledges that its legal counsel
participated in the preparation of this Note and, therefore, stipulates that the
rule of construction that ambiguities are to be resolved against the drafting
party shall not be applied in the interpretation of this Note to favor any party
against the other.
5.13 Registered Obligation. This Note is intended to be a registered
obligation within the meaning of Treasury Regulation Section 1.871-14(c)(1)(i)
and the Company (or its agent) shall register the Note (and thereafter shall
maintain such registration) as to both principal and any stated interest.
Notwithstanding any document, instrument or agreement relating to this Note to
the contrary, transfer of this Note (or the right to any payments of principal
or stated interest thereunder) may only be effected by (i) surrender of this
Note and either the reissuance by the Company of this Note to the new holder or
the issuance by the Company of a new instrument to the new holder, or (ii)
transfer through a book entry system maintained by the Company (or its agent),
within the meaning of Treasury Regulation Section 1.871-14(c)(1)(i)(B).
[Balance of page intentionally left blank; signature page follows]
8
IN WITNESS WHEREOF, each Company has caused this Secured Convertible
Minimum Borrowing Note to be signed in its name effective as of this 10th day of
February, 2006.
NETFABRIC HOLDINGS, INC.
By:__________________________________
Name:
Title:
WITNESS:
- ----------------------------------
NETFABRIC CORPORATION
By:__________________________________
Name:
Title:
WITNESS:
- ----------------------------------
UCA SERVICES, INC.
By:__________________________________
Name:
Title:
WITNESS:
- ----------------------------------
9
EXHIBIT A
---------
OTHER COMPANIES
---------------
NetFabric Corporation, Inc.
UCA Services, Inc.
10
EXHIBIT B
---------
NOTICE OF CONVERSION
--------------------
(To be executed by the Holder in order to convert the Secured Convertible
Minimum Borrowing Note)
The undersigned hereby elects to convert $_________ of the principal and
$_________ of the interest due on the Secured Convertible Minimum Borrowing Note
dated as of _________, 200__ (the "Note") issued by NETFABRIC HOLDINGS, INC.
(the "Parent") and the other Companies named and as defined therein into shares
of Common Stock of the Parent in accordance with the terms and conditions set
forth in the Note, as of the date written below.
Date of Conversion: _______________________________________________________
Conversion Price: _______________________________________________________
Shares To Be Delivered: _______________________________________________________
Signature: _______________________________________________________
Print Name: _______________________________________________________
Address: _______________________________________________________
Holder DWAC instructions _______________________________________________________
11
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE SECURITIES LAWS. THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS
TO THIS NOTE UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO NETFABRIC HOLDINGS, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED.
SECURED NON-CONVERTIBLE REVOLVING NOTE
--------------------------------------
FOR VALUE RECEIVED, each of NETFABRIC HOLDINGS, INC., a Delaware (the
"Parent"), and the other companies listed on Exhibit A attached hereto (such
other companies together with the Parent, each a "Company" and collectively, the
"Companies"), jointly and severally, promises to pay to LAURUS MASTER FUND,
LTD., c/o M&C Corporate Services Limited, P.O. Box 309 GT, Ugland House, South
Church Street, George Town, Grand Cayman, Cayman Islands, Fax: 345-949-8080 (the
"Holder") or its registered assigns or successors in interest, the sum of One
Million Five Hundred Thousand Dollars ($1,500,000), without duplication of any
amounts owing by the Companies to the Holder under the Convertible Note (as
defined in the Security Agreement referred to below), or, if different, the
aggregate principal amount of all Loans (as defined in the Security Agreement
referred to below), together with any accrued and unpaid interest hereon, on
February 10, 2009 (the "Maturity Date") if not sooner indefeasibly paid in full.
Capitalized terms used herein without definition shall have the meanings
ascribed to such terms in the Security Agreement among the Companies and the
Holder dated as of the date hereof (as amended, modified and/or supplemented
from time to time, the "Security Agreement").
The following terms shall apply to this Secured Revolving Note (this
"Note"):
ARTICLE I
CONTRACT RATE AND MINIMUM BORROWING NOTE
1.1 Contract Rate. Subject to Sections 2.2 and 3.9, interest payable on the
outstanding principal amount of this Note (the "Principal Amount") shall accrue
at a rate per annum equal to the "prime rate" published in The Wall Street
Journal from time to time (the "Prime Rate"), plus one percent (1.0%) (the
"Contract Rate"). The Contract Rate shall be increased or decreased as the case
may be for each increase or decrease in the Prime Rate in an amount equal to
such increase or decrease in the Prime Rate; each change to be effective as of
the day of the change in the Prime Rate. Subject to Section 1.2, the Contract
Rate shall not at any time be less than eight percent (8.0%). Interest shall be
(i) calculated on the basis of a 360 day year, and (ii) payable monthly, in
arrears, commencing on March 1, 2006 on the first business day of each
consecutive calendar month thereafter through and including the Maturity Date,
and on the Maturity Date, whether by acceleration or otherwise.
1.2 Contract Rate and Payments. The Contract Rate shall be calculated on
the last business day of each calendar month hereafter (other than for increases
or decreases in the Prime Rate which shall be calculated and become effective in
accordance with the terms of Section 1.1) until the Maturity Date.
ARTICLE II
EVENTS OF DEFAULT AND DEFAULT RELATED PROVISIONS
2.1 Events of Default. The occurrence of an Event of Default under the
Security Agreement shall constitute an event of default ("Event of Default")
hereunder.
2.2 Default Interest. Following the occurrence and during the continuance
of an Event of Default, the Companies shall, jointly and severally, pay
additional interest on the outstanding principal balance of this Note in an
amount equal to two percent (2%) per month, and all outstanding Obligations,
including unpaid interest, shall continue to accrue interest at such additional
interest rate from the date of such Event of Default until the date such Event
of Default is cured or waived. In the event, an Event of Default is occurring
for a partial month, the default interest rate should only apply for such
period.
2.3 Default Payment. Following the occurrence and during the continuance of
an Event of Default, the Holder, at its option, may elect, in addition to all
rights and remedies of the Holder under the Security Agreement and the other
Ancillary Agreements and all obligations and liabilities of each Company under
the Security Agreement and the other Ancillary Agreements, to require the
Companies, jointly and severally, to make a Default Payment ("Default Payment").
The Default Payment shall be 120% of the outstanding principal amount of the
Note, plus accrued but unpaid interest, all other fees then remaining unpaid,
and all other amounts payable hereunder. The Default Payment shall be applied
first to any fees due and payable to the Holder pursuant to the Notes, the
Security Agreement and/or the Ancillary Agreements, then to accrued and unpaid
interest due on the Notes and then to the outstanding principal balance of the
Notes. The Default Payment shall be due and payable immediately on the date that
the Holder has exercised its rights pursuant to this Section 2.3.
ARTICLE III
MISCELLANEOUS
3.1 Cumulative Remedies. The remedies under this Note shall be cumulative.
3.2 Failure or Indulgence Not Waiver. No failure or delay on the part of
the Holder hereof in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercise thereof or
of any other right, power or privilege. All rights and remedies existing
hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
2
3.3 Notices. Any notice herein required or permitted to be given shall be
in writing and shall be deemed effective given (a) upon personal delivery to the
party notified, (b) when sent by confirmed telex or facsimile if sent during
normal business hours of the recipient, if not, then on the next business day,
(c) five days after having been sent by registered or certified mail, return
receipt requested, postage prepaid, or (d) one day after deposit with a
nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications shall be sent to the
respective Company at the address provided for such Company in the Security
Agreement executed in connection herewith, and to the Holder at the address
provided in the Security Agreement for the Holder, with a copy to John E.
Tucker, Esq., 825 Third Avenue, 14th Floor, New York, New York 10022, facsimile
number (212) 541-4434, or at such other address as the respective Company or the
Holder may designate by ten days advance written notice to the other parties
hereto. A Notice of Conversion shall be deemed given when made to the Parent
pursuant to the Security Agreement.
3.4 Amendment Provision. The term "Note" and all references thereto, as
used throughout this instrument, shall mean this instrument as originally
executed, or if later amended or supplemented, then as so amended or
supplemented, and any successor instrument as such successor instrument may be
amended or supplemented.
3.5 Assignability. This Note shall be binding upon each Company and its
successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns, and may be assigned by the Holder in accordance with the
requirements of the Security Agreement. No Company may assign any of its
obligations under this Note without the prior written consent of the Holder, any
such purported assignment without such consent being null and void.
3.6 Cost of Collection. In case of any Event of Default under this Note,
the Companies shall, jointly and severally, pay the Holder the Holder's
reasonable costs of collection, including reasonable attorneys' fees.
3.7 Governing Law, Jurisdiction and Waiver of Jury Trial.
(a) THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, 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 THE HOLDER, ON THE OTHER HAND, PERTAINING TO THIS NOTE, THE
SECURITY AGREEMENT OR ANY OF THE OTHER ANCILLARY AGREEMENTS OR TO ANY MATTER
ARISING OUT OF OR RELATED TO THIS NOTE, THE SECURITY AGREEMENT OR ANY OF THE
OTHER ANCILLARY AGREEMENTS; PROVIDED, THAT EACH COMPANY ACKNOWLEDGES 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
3
YORK; AND FURTHER PROVIDED, THAT NOTHING IN THIS NOTE SHALL BE DEEMED OR OPERATE
TO PRECLUDE THE HOLDER 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 THE HOLDER. 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 THE COMPANY AT THE ADDRESS SET FORTH IN THE SECURITY AGREEMENT AND
THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF THE COMPANY'S
ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER
POSTAGE PREPAID
(c) EACH COMPANY DESIRES THAT ITS 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, EACH COMPANY HERETO WAIVES
ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO
RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE
HOLDER, AND/OR ANY COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL
TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS NOTE, THE
SECURITY AGREEMENT, ANY OTHER ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED
HERETO OR THERETO.
3.8 Severability. In the event that any provision of this Note is invalid
or unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any such provision which may prove invalid or unenforceable under any law
shall not affect the validity or enforceability of any other provision of this
Note.
3.9 Maximum Payments. Nothing contained herein shall be deemed to establish
or require the payment of a rate of interest or other charges in excess of the
maximum permitted by applicable law. In the event that the rate of interest
required to be paid or other charges hereunder exceed the maximum rate permitted
by such law, any payments in excess of such maximum rate shall be credited
against amounts owed by the Companies to the Holder and thus refunded to the
Companies.
3.10 Security Interest and Guarantee. The Holder has been granted a
security interest (i) in certain assets of the Companies as more fully described
in the Security Agreement and (ii) pursuant to the dated as of the date hereof.
4
The obligations of the Companies under this Note are guaranteed by certain
Subsidiaries of the Companies pursuant to the Subsidiary Guaranty dated as of
the date hereof.
3.11 Construction. Each party acknowledges that its legal counsel
participated in the preparation of this Note and, therefore, stipulates that the
rule of construction that ambiguities are to be resolved against the drafting
party shall not be applied in the interpretation of this Note to favor any party
against the other.
3.12 Registered Obligation. This Note is intended to be a registered
obligation within the meaning of Treasury Regulation Section 1.871-14(c)(1)(i)
and the Company (or its agent) shall register the Note (and thereafter shall
maintain such registration) as to both principal and any stated interest.
Notwithstanding any document, instrument or agreement relating to this Note to
the contrary, transfer of this Note (or the right to any payments of principal
or stated interest thereunder) may only be effected by (i) surrender of this
Note and either the reissuance by the Company of this Note to the new holder or
the issuance by the Company of a new instrument to the new holder, or (ii)
transfer through a book entry system maintained by the Company (or its agent),
within the meaning of Treasury Regulation Section 1.871-14(c)(1)(i)(B).
[Balance of page intentionally left blank; signature page follows]
5
IN WITNESS WHEREOF, each Company has caused this Secured Revolving Note to
be signed in its name effective as of this 10th day of February 2006.
NETFABRIC HOLDINGS, INC.
By:__________________________________
Name:
Title:
WITNESS:
- ----------------------------------
NETFABRIC CORPORATION
By:__________________________________
Name:
Title:
WITNESS:
- ----------------------------------
UCA SERVICES, INC.
By:__________________________________
Name:
Title:
WITNESS:
- ----------------------------------
6
EXHIBIT A
---------
OTHER COMPANIES
---------------
THIS OPTION AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THE OPTION
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE SECURITIES LAWS. THIS OPTION AND THE COMMON STOCK ISSUABLE UPON EXERCISE
OF THIS OPTION MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS OPTION UNDER SAID ACT
AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO NETFABRIC HOLDINGS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.
Right to Purchase up to 4,256,550 Shares of Common Stock of
-----------------------------------------------------------
NETFABRIC HOLDINGS, INC.
----------------------------------------
(subject to adjustment as provided herein)
OPTION
No. _________________ Issue Date: February 10, 2006
NETFABRIC HOLDINGS, INC., a corporation organized under the laws of the
State of Delaware ("Company"), hereby certifies that, for value received, LAURUS
MASTER FUND, LTD., or assigns (the "Holder"), is entitled, subject to the terms
set forth below, to purchase from the Company (as defined herein) from and after
the Issue Date of this Option (this "Option") and at any time or from time to
time, up to 4,256,550 fully paid and nonassessable shares of Common Stock (as
hereinafter defined), $.001 par value per share, at the applicable Exercise
Price per share (as defined below). The number and character of such shares of
Common Stock and the applicable Exercise Price per share are subject to
adjustment as provided herein.
As used herein the following terms, unless the context otherwise requires,
have the following respective meanings:
(a) The term "Company" shall include NETFABRIC HOLDINGS, INC. and any
corporation that shall succeed, or assume the obligations of, NETFABRIC
HOLDINGS, INC. hereunder.
(b) The term "Common Stock" includes (i) the Company's Common Stock,
$.001 par value per share; and (ii) any other securities into which or for
which any of the securities described in (a) may be converted or exchanged
pursuant to a plan of recapitalization, reorganization, merger, sale of
assets or otherwise.
(c) The "Exercise Price" applicable under this Option shall be a price
of $.001 per share.
(d) The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate
or otherwise) which the Holder at any time shall be entitled to receive, or
shall have received, on the exercise of the Option, in lieu of or in
addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 4 or otherwise.
1. Exercise of Option.
1.1 Number of Shares Issuable upon Exercise. From and after the date
hereof, the Holder shall be entitled to receive, upon exercise of this Option in
whole or in part, by delivery of an original or fax copy of an exercise notice
in the form attached hereto as Exhibit A (the "Exercise Notice"), shares of
Common Stock of the Company, subject to adjustment pursuant to Section 4.
Notwithstanding anything contained herein to the contrary, the Holder shall not
be entitled to exercise this Option in connection with that number of shares of
Common Stock which would exceed the difference between (i) 9.99% of the issued
and outstanding shares of Common Stock and (ii) the number of shares of Common
Stock beneficially owned by the Holder. For the purposes of the immediately
preceding sentence, beneficial ownership shall be determined in accordance with
Section 13(d) of the Exchange Act and Regulation 13d-3 thereunder. The
limitation described in the second sentence of this Section 1.1 shall
automatically become null and void following notice to the Company upon the
occurrence and during the continuance beyond any applicable grace period of an
Event of Default under and as defined in that certain Note dated as of the date
hereof among the Holder and the Company, or upon 75 days prior notice to the
Company.
1.2 Fair Market Value. For purposes hereof, the "Fair Market Value" of
a share of Common Stock as of a particular date (the "Determination Date") shall
mean:
(a) If the Company's Common Stock is traded on the American Stock
Exchange or another national exchange or is quoted on the National or
SmallCap Market of The Nasdaq Stock Market, Inc. ("Nasdaq"), then the
closing or last sale price, respectively, reported for the last business
day immediately preceding the Determination Date.
(b) If the Company's Common Stock is not traded on the American Stock
Exchange or another national exchange or on the Nasdaq but is quoted on the
NASD Over The Counter Bulletin Board, then the mean of the average of the
closing bid and asked prices reported for the last business day immediately
preceding the Determination Date.
(c) Except as provided in clause (d) below, if the Company's Common
Stock is not publicly traded, then as the Holder and the Company agree or
in the absence of agreement by arbitration in accordance with the rules
then in effect of the American Arbitration Association, before a single
arbitrator to be chosen
2
from a panel of persons qualified by education and training to pass on the
matter to be decided.
(d) If the Determination Date is the date of a liquidation,
dissolution or winding up, or any event deemed to be a liquidation,
dissolution or winding up pursuant to the Company's charter, then all
amounts to be payable per share to holders of the Common Stock pursuant to
the charter in the event of such liquidation, dissolution or winding up,
plus all other amounts to be payable per share in respect of the Common
Stock in liquidation under the charter, assuming for the purposes of this
clause (d) that all of the shares of Common Stock then issuable upon
exercise of the Option are outstanding at the Determination Date.
1.3 Company Acknowledgment. The Company will, at the time of the exercise
of this Option, upon the request of the Holder hereof acknowledge in writing its
continuing obligation to afford to such Holder any rights to which such Holder
shall continue to be entitled after such exercise in accordance with the
provisions of this Option. If the Holder shall fail to make any such request,
such failure shall not affect the continuing obligation of the Company to afford
to such Holder any such rights.
1.4 Trustee for Option Holders. In the event that a bank or trust company
shall have been appointed as trustee for the Holder of the Option pursuant to
Section 3.2, such bank or trust company shall have all the powers and duties of
an option agent (as hereinafter described) and shall accept, in its own name for
the account of the Company or such successor person as may be entitled thereto,
all amounts otherwise payable to the Company or such successor, as the case may
be, on exercise of this Option pursuant to this Section 1.
2. Procedure for Exercise.
2.1 Delivery of Stock Certificates, Etc., on Exercise. The Company
agrees that the shares of Common Stock purchased upon exercise of this Option
shall be deemed to be issued to the Holder as the record owner of such shares as
of the close of business on the date on which this Option shall have been
surrendered and payment made for such shares in accordance herewith. As soon as
practicable after the exercise of this Option in full or in part, and in any
event within three (3) business days thereafter, the Company at its expense
(including the payment by it of any applicable issue taxes) will cause to be
issued in the name of and delivered to the Holder, or as such Holder (upon
payment by such Holder of any applicable transfer taxes) may direct in
compliance with applicable securities laws, a certificate or certificates for
the number of duly and validly issued, fully paid and nonassessable shares of
Common Stock (or Other Securities) to which such Holder shall be entitled on
such exercise, plus, in lieu of any fractional share to which such Holder would
otherwise be entitled, cash equal to such fraction multiplied by the then Fair
Market Value of one full share, together with any other stock or other
securities and property (including cash, where applicable) to which such Holder
is entitled upon such exercise pursuant to Section 1 or otherwise.
2.2 Exercise.
3
(a) Subject to subsection (b) below, payment shall be made in cash or
by certified or official bank check payable to the order of the Company
equal to the applicable aggregate Exercise Price for the number of Common
Shares specified in such Exercise Notice (as such exercise number shall be
adjusted to reflect any adjustment in the total number of shares of Common
Stock issuable to the Holder per the terms of this Option) and the Holder
shall thereupon be entitled to receive the number of duly authorized,
validly issued, fully-paid and non-assessable shares of Common Stock (or
Other Securities) determined as provided herein.
(b) Notwithstanding any provisions herein to the contrary, in the
event there is no effective registration statement with respect to the
shares issuable upon exercise of this Option or a Default or an Event of
Default (as such terms are defined in the Security Agreement dated as of
the date hereof among the Holder and the Company, as amended, modified,
restated and/or supplemented from time to time),) has occurred and is
continuing, if the Fair Market Value of one share of Common Stock is
greater than the Exercise Price (at the date of calculation as set forth
below), in lieu of exercising this Option for cash, the Holder may elect to
receive shares equal to the value (as determined below) of this Option (or
the portion thereof being exercised) by surrender of this Option at the
principal office of the Company together with the properly endorsed
Exercise Notice in which event the Company shall issue to the Holder a
number of shares of Common Stock computed using the following formula:
X=Y (A-B)
A
Where X = the number of shares of Common Stock to be issued to the Holder
Y = the number of shares of Common Stock purchasable under the
Option or, if only a portion of the Option is being exercised,
the portion of the Option being exercised (at the date of such
calculation)
A = the Fair Market Value of one share of the Company's Common Stock
(at the date of such calculation)
B = Exercise Price (as adjusted to the date of such calculation)
3. Effect of Reorganization, Etc.; Adjustment of Exercise Price.
3.1 Reorganization, Consolidation, Merger, Etc. In case at any time or
from time to time, the Company shall (a) effect a reorganization, (b)
consolidate with or merge into any other person, or (c) transfer all or
substantially all of its properties or assets to any other person under any plan
or arrangement contemplating the dissolution of the Company, then, in each such
case, as a condition to the consummation of such a transaction, proper and
adequate provision shall be made by the Company whereby the Holder, on the
exercise
4
hereof as provided in Section 1 at any time after the consummation of such
reorganization, consolidation or merger or the effective date of such
dissolution, as the case may be, shall receive, in lieu of the Common Stock (or
Other Securities) issuable on such exercise prior to such consummation or such
effective date, the stock and other securities and property (including cash) to
which such Holder would have been entitled upon such consummation or in
connection with such dissolution, as the case may be, if such Holder had so
exercised this Option, immediately prior thereto, all subject to further
adjustment thereafter as provided in Section 4.
3.2 Dissolution. In the event of any dissolution of the Company
following the transfer of all or substantially all of its properties or assets,
the Company, concurrently with any distributions made to holders of its Common
Stock, shall at its expense deliver or cause to be delivered to the Holder the
stock and other securities and property (including cash, where applicable)
receivable by the Holder pursuant to Section 3.1, or, if the Holder shall so
instruct the Company, to a bank or trust company specified by the Holder and
having its principal office in New York, NY as trustee for the Holder (the
"Trustee").
3.3 Continuation of Terms. Upon any reorganization, consolidation,
merger or transfer (and any dissolution following any transfer) referred to in
this Section 3, this Option shall continue in full force and effect and the
terms hereof shall be applicable to the shares of stock and other securities and
property receivable on the exercise of this Option after the consummation of
such reorganization, consolidation or merger or the effective date of
dissolution following any such transfer, as the case may be, and shall be
binding upon the issuer of any such stock or other securities, including, in the
case of any such transfer, the person acquiring all or substantially all of the
properties or assets of the Company, whether or not such person shall have
expressly assumed the terms of this Option as provided in Section 4. In the
event this Option does not continue in full force and effect after the
consummation of the transactions described in this Section 3, then the Company's
securities and property (including cash, where applicable) receivable by the
Holders will be delivered to Holder or the Trustee as contemplated by Section
3.2.
4. Extraordinary Events Regarding Common Stock. In the event that the
Company shall (a) issue additional shares of the Common Stock as a dividend or
other distribution on outstanding Common Stock or any preferred stock issued by
the Company, (b) subdivide its outstanding shares of Common Stock, or (c)
combine its outstanding shares of the Common Stock into a smaller number of
shares of the Common Stock (each of the preceding clauses (a) through (c),
inclusive, an "Event"), then, in each such event, the number of shares of Common
Stock that the Holder shall thereafter, on the exercise hereof as provided in
Section 1, be entitled to receive shall be increased or decreased to a number
determined by multiplying the number of shares of Common Stock that would,
immediately prior to such Event, be issuable upon the exercise of this Option by
a fraction of which (a) the numerator is the number of issued and outstanding
shares of Common Stock immediately after such Event, and (b) the denominator is
5
the number of issued and outstanding shares of Common Stock immediately prior to
such Event.
5. Certificate as to Adjustments. In each case of any adjustment or
readjustment in the shares of Common Stock (or Other Securities) issuable on the
exercise of this Option, the Company at its expense will promptly cause its
Chief Financial Officer or other appropriate designee to compute such adjustment
or readjustment in accordance with the terms of the Option and prepare a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (a) the consideration received or receivable by the Company for any
additional shares of Common Stock (or Other Securities) issued or sold or deemed
to have been issued or sold, (b) the number of shares of Common Stock (or Other
Securities) outstanding or deemed to be outstanding, and (c) the Exercise Price
and the number of shares of Common Stock to be received upon exercise of this
Option, in effect immediately prior to such adjustment or readjustment and as
adjusted or readjusted as provided in this Option. The Company will forthwith
mail a copy of each such certificate to the Holder and any Option agent of the
Company (appointed pursuant to Section 10 hereof).
6. Reservation of Stock, Etc., Issuable on Exercise of Option. The Company
will at all times reserve and keep available, solely for issuance and delivery
on the exercise of this Option, shares of Common Stock (or Other Securities)
from time to time issuable on the exercise of this Option.
7. Assignment; Exchange of Option. Subject to compliance with applicable
securities laws, this Option, and the rights evidenced hereby, may be
transferred by any registered holder hereof (a "Transferor") in whole or in
part. On the surrender for exchange of this Option, with the Transferor's
endorsement in the form of Exhibit B attached hereto (the "Transferor
Endorsement Form") and together with evidence reasonably satisfactory to the
Company demonstrating compliance with applicable securities laws, which shall
include, without limitation, the provision of a legal opinion from the
Transferor's counsel (at the Company's expense) that such transfer is exempt
from the registration requirements of applicable securities laws, and with
payment by the Transferor of any applicable transfer taxes) will issue and
deliver to or on the order of the Transferor thereof a new Option of like tenor,
in the name of the Transferor and/or the transferee(s) specified in such
Transferor Endorsement Form (each a "Transferee"), calling in the aggregate on
the face or faces thereof for the number of shares of Common Stock called for on
the face or faces of the Option so surrendered by the Transferor.
8. Replacement of Option. On receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of this Option and, in
the case of any such loss, theft or destruction of this Option, on delivery of
an indemnity agreement or security reasonably satisfactory in form and amount to
the Company or, in the case of any such mutilation, on surrender and
cancellation of this Option, the Company at its expense will execute and
deliver, in lieu thereof, a new Option of like tenor.
6
9. Registration Rights. The Holder has been granted certain registration
rights by the Company. These registration rights are set forth in a Registration
Rights Agreement entered into by the Company and Holder dated as of even date of
this Option.
10. Option Agent. The Company may, by written notice to each Holder of the
Option, appoint an agent for the purpose of issuing Common Stock (or Other
Securities) on the exercise of this Option pursuant to Section 1, exchanging
this Option pursuant to Section 7, and replacing this Option pursuant to Section
8, or any of the foregoing, and thereafter any such issuance, exchange or
replacement, as the case may be, shall be made at such office by such agent.
11. Transfer on the Company's Books. Until this Option is transferred on
the books of the Company, the Company may treat the registered holder hereof as
the absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.
12. Notices, Etc. All notices and other communications from the Company to
the Holder shall be mailed by first class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company in writing by
such Holder or, until any such Holder furnishes to the Company an address, then
to, and at the address of, the last Holder who has so furnished an address to
the Company.
13. Miscellaneous. THIS OPTION AND ANY TERM HEREOF MAY BE CHANGED, WAIVED,
DISCHARGED OR TERMINATED ONLY BY AN INSTRUMENT IN WRITING SIGNED BY THE PARTY
AGAINST WHICH ENFORCEMENT OF SUCH CHANGE, WAIVER, DISCHARGE OR TERMINATION IS
SOUGHT. THIS OPTION SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. Any
action brought concerning the transactions contemplated by this Option shall be
brought only in the state courts of New York or in the federal courts located in
the state of New York; provided, however, that the Holder may choose to waive
this provision and bring an action outside the state of New York. The
individuals executing this Option on behalf of the Company agree to submit to
the jurisdiction of such courts and waive trial by jury. The prevailing party
shall be entitled to recover from the other party its reasonable attorney's fees
and costs. In the event that any provision of this Option is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law. Any such
provision which may prove invalid or unenforceable under any law shall not
affect the validity or enforceability of any other provision of this Option. The
headings in this Option are for purposes of reference only, and shall not limit
or otherwise affect any of the terms hereof. The invalidity or unenforceability
of any provision hereof shall in no way affect the validity or enforceability of
any other provision hereof. The Company acknowledges that legal counsel
participated in the preparation of this Option and, therefore, stipulates that
the rule of construction that ambiguities are to be resolved against the
drafting party shall not be applied in the interpretation of this Option to
favor any party against the other party.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK;
SIGNATURE PAGE FOLLOWS.]
7
IN WITNESS WHEREOF, the Company has executed this Option as of the date
first written above.
NETFABRIC HOLDINGS, INC.
WITNESS:
By:
- ------------------------- -------------------------------------------
Name:
-------------------------------------------
Title:
-------------------------------------------
8
EXHIBIT A
FORM OF SUBSCRIPTION
(To Be Signed Only On Exercise Of Options)
TO: NETFABRIC HOLDINGS, INC.
Attention: Chief Financial Officer
The undersigned, pursuant to the provisions set forth in the attached
Option (No. ____), hereby irrevocably elects to purchase (check applicable box):
- ----- ----- shares of the Common Stock covered by such Option; or
- ----- the maximum number of shares of Common Stock covered by such
Option pursuant to the cashless exercise procedure set forth in
Section 2.
The undersigned herewith makes payment of the full Exercise Price for such
shares at the price per share provided for in such Option, which is
$-----------. Such payment takes the form of (check applicable box or boxes):
- ----- $----- in lawful money of the United States; and/or
- ----- the cancellation of such portion of the attached Option as is
exercisable for a total of ------- shares of Common Stock (using
a Fair Market Value of $------- per share for purposes of this
calculation); and/or
- ----- the cancellation of such number of shares of Common Stock as is
necessary, in accordance with the formula set forth in Section
2.2, to exercise this Option with respect to the maximum number
of shares of Common Stock purchasable pursuant to the cashless
exercise procedure set forth in Section 2.
The undersigned requests that the certificates for such shares be issued in
the name of, and delivered to -------------------------------------------- whose
address is -----------------------------------------------------------.
9
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable upon exercise of the within Option shall
be made pursuant to registration of the Common Stock under the Securities Act of
1933, as amended (the "Securities Act") or pursuant to an exemption from
registration under the Securities Act.
Dated:
-------------------------- ----------------------------------------
(Signature must conform to name of Holder
as specified on the face of the Option)
Address:
---------------------------------
---------------------------------
10
EXHIBIT B
- --------------------------------------------------------------------------------
FORM OF TRANSFEROR ENDORSEMENT
(To Be Signed Only On Transfer Of Option)
For value received, the undersigned hereby sells, assigns, and transfers
unto the person(s) named below under the heading "Transferees" the right
represented by the within Option to purchase the percentage and number of shares
of Common Stock of NETFABRIC HOLDINGS, INC. into which the within Option relates
specified under the headings "Percentage Transferred" and "Number Transferred,"
respectively, opposite the name(s) of such person(s) and appoints each such
person Attorney to transfer its respective right on the books of NETFABRIC
HOLDINGS, INC. with full power of substitution in the premises.
Percentage Number
Transferees Address Transferred Transferred
- --------------------------------------------------------------------------------
- ------------------ ---------------------- ----------- ----------
- ------------------ ---------------------- ----------- ----------
- ------------------ ---------------------- ----------- ----------
- ------------------ ---------------------- ----------- ----------
Dated:
-------------------------- ----------------------------------------
(Signature must conform to name of Holder as
specified on the face of the Option)
Address:
---------------------------------
---------------------------------
SIGNED IN THE PRESENCE OF:
---------------------------------
(Name)
ACCEPTED AND AGREED:
[TRANSFEREE]
- -----------------------------
(Name)
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and entered
into as of February 10, 2006, by and between NETFABRIC HOLDINGS, INC., a
Delaware (the "Company"), and Laurus Master Fund, Ltd. (the "Purchaser").
This Agreement is made pursuant to the Security Agreement, dated as of the
date hereof, by and among the Purchaser, the Company and various subsidiaries of
the Company (as amended, modified or supplemented from time to time, the
"Security Agreement"), and pursuant to the Notes and the Option referred to
therein.
The Company and the Purchaser hereby agree as follows:
1. Definitions. Capitalized terms used and not otherwise defined herein
that are defined in the Security Agreement shall have the meanings given such
terms in the Security Agreement. As used in this Agreement, the following terms
shall have the following meanings:
"Commission" means the Securities and Exchange Commission.
"Common Stock" means shares of the Company's common stock, par value $0.001
per share.
"Effectiveness Date" means, (i) with respect to the Registration Statement
required to be filed in connection with the Convertible Note issued on the
initial funding date under the Security Agreement and the Option issued on such
initial funding date, a date no later than one hundred fifty (150) days
following such initial funding date and (ii) with respect to each additional
Registration Statement required to be filed hereunder, a date no later than
forty five (45) days following the applicable Filing Date.
"Effectiveness Period" has the meaning set forth in Section 2(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
any successor statute.
"Filing Date" means, with respect to (1) the Registration Statement which
is required to be filed in connection with the shares of Common Stock issuable
upon conversion of the Convertible Note made on the initial funding date, the
date which is Seventy (70) days after the date hereof, (2) the Registration
Statement required to be filed in connection with the shares of Common Stock
issuable to the Holder upon exercise of an Option, the date which is seventy
(70) days after the issuance of such Option, and (3) the Registration Statement
required to be filed in connection with the shares of Common Stock issuable to
the Holder as a result of adjustments to the Fixed Conversion Price or the
Exercise Price, as the case may be, made pursuant to Section 3.6 of the
Convertible Note, Section 4 of the Option or otherwise, thirty (30) days after
the occurrence of such event or the date of the adjustment of the Fixed
Conversion Price or Exercise Price, as the case may be.
"Holder" or "Holders" means the Purchaser or any of its affiliates or
transferees to the extent any of them hold Registrable Securities, other then
those purchasing Registrable Securities in a market transaction.
"Indemnified Party" has the meaning set forth in Section 5(c).
"Indemnifying Party" has the meaning set forth in Section 5(c).
"Option" means the Common Stock purchase Option issued in connection with
the Security Agreement, whether on the date thereof or thereafter.
"Proceeding" means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in a Registration Statement
(including, without limitation, a prospectus that includes any information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated under the Securities Act), as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Registrable Securities covered by such
Registration Statement, and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.
"Registrable Securities" means the shares of Common Stock issued upon the
conversion of the each Note and issuable upon exercise of the Option.
"Registration Statement" means each registration statement required to be
filed hereunder, including the Prospectus therein, amendments and supplements to
such registration statement or Prospectus, including pre- and post-effective
amendments, all exhibits thereto, and all material incorporated by reference or
deemed to be incorporated by reference in such registration statement.
"Rule 144" means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended, and any
successor statute.
"Security Agreement" has the meaning given to such term in the Preamble
hereto.
"Shares" means shares of the Company's common stock, par value $0.01 per
share, issued to the Purchaser pursuant to the Security Agreement.
2
"Trading Market" means any of the NASD Over The Counter Bulletin Board,
NASDAQ SmallCap Market, the NASDAQ National Market, the American Stock Exchange
or the New York Stock Exchange
2. Registration.
(a) On or prior to each Filing Date, the Company shall prepare and
file with the Commission a Registration Statement covering the Registrable
Securities for a selling stockholder resale offering to be made on a
continuous basis pursuant to Rule 415. Each Registration Statement shall be
on Form S-3 (except if the Company is not then eligible to register for
resale the Registrable Securities on Form S-3, in which case such
registration shall be on another appropriate form in accordance herewith).
The Company shall cause each Registration Statement to become effective and
remain effective as provided herein. The Company shall use its reasonable
commercial efforts to cause each Registration Statement to be declared
effective under the Securities Act as promptly as possible after the filing
thereof, but in any event no later than the Effectiveness Date. The Company
shall use its reasonable commercial efforts to keep each Registration
Statement continuously effective under the Securities Act until the date
which is the earlier date of when (i) all Registrable Securities covered by
such Registration Statement have been sold or (ii) all Registrable
Securities covered by such Registration Statement may be sold immediately
without registration under the Securities Act and without volume
restrictions pursuant to Rule 144(k), as determined by the counsel to the
Company pursuant to a written opinion letter to such effect, addressed and
acceptable to the Company's transfer agent and the affected Holders (each,
an "Effectiveness Period").
(b) Within three business days of the Effectiveness Date, the Company
shall cause its counsel to issue a blanket opinion in the form attached
hereto as Exhibit A, to the transfer agent stating that the shares are
subject to an effective registration statement and can be reissued free of
restrictive legend upon notice of a sale by the Purchaser and confirmation
by the Purchaser that it has complied with the prospectus delivery
requirements, provided that the Company has not advised the transfer agent
orally or in writing that the opinion has been withdrawn. Copies of the
blanket opinion required by this Section 2(c) shall be delivered to the
Purchaser within the time frame set forth above.
3. Registration Procedures. If and whenever the Company is required by the
provisions hereof to effect the registration of any Registrable Securities under
the Securities Act, the Company will, as expeditiously as possible:
(a) prepare and file with the Commission a Registration Statement with
respect to such Registrable Securities, respond as promptly as possible to
any comments received from the Commission, and use its best efforts to
cause such Registration Statement to become and remain effective for the
Effectiveness Period with respect thereto, and promptly provide to the
Purchaser copies of all filings and Commission letters of comment relating
thereto;
(b) prepare and file with the Commission such amendments and
supplements to such Registration Statement and the Prospectus used in
connection therewith as may be necessary to comply with the provisions of
the Securities Act with respect to the disposition of all Registrable
3
Securities covered by such Registration Statement and to keep such
Registration Statement effective until the expiration of the Effectiveness
Period applicable to such Registration Statement;
(c) furnish to the Purchaser such number of copies of the Registration
Statement and the Prospectus included therein (including each preliminary
Prospectus) as the Purchaser reasonably may request to facilitate the
public sale or disposition of the Registrable Securities covered by such
Registration Statement;
(d) use its commercially reasonable efforts to register or qualify the
Purchaser's Registrable Securities covered by such Registration Statement
under the securities or "blue sky" laws of such jurisdictions within the
United States as the Purchaser may reasonably request, provided, however,
that the Company shall not for any such purpose be required to qualify
generally to transact business as a foreign corporation in any jurisdiction
where it is not so qualified or to consent to general service of process in
any such jurisdiction;
(e) list the Registrable Securities covered by such Registration
Statement with any securities exchange on which the Common Stock of the
Company is then listed;
(f) immediately notify the Purchaser at any time when a Prospectus
relating thereto is required to be delivered under the Securities Act, of
the happening of any event of which the Company has knowledge as a result
of which the Prospectus contained in such Registration Statement, as then
in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading in light of the circumstances then
existing; and
(g) make available for inspection by the Purchaser and any attorney,
accountant or other agent retained by the Purchaser, all publicly
available, non-confidential financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors and employees to supply all publicly available,
non-confidential information reasonably requested by the attorney,
accountant or agent of the Purchaser.
4. Registration Expenses. All expenses relating to the Company's compliance
with Sections 2 and 3 hereof, including, without limitation, all registration
and filing fees, printing expenses, fees and disbursements of counsel and
independent public accountants for the Company, fees and expenses (including
reasonable counsel fees) incurred in connection with complying with state
securities or "blue sky" laws, fees of the NASD, transfer taxes, fees of
transfer agents and registrars, fees of, and disbursements incurred by, one
counsel for the Holders are called "Registration Expenses." All selling
commissions applicable to the sale of Registrable Securities, including any fees
and disbursements of any special counsel to the Holders beyond those included in
Registration Expenses, are called "Selling Expenses." The Company shall only be
responsible for all Registration Expenses.
5. Indemnification.
(a) In the event of a registration of any Registrable Securities under
the Securities Act pursuant to this Agreement, the Company will indemnify
and hold harmless each Holder, and its officers, directors and each other
4
person, if any, who controls such Holder within the meaning of the
Securities Act, against any losses, claims, damages or liabilities, joint
or several, to which such Holder, or such persons may become subject under
the Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact
contained in any Registration Statement under which such Registrable
Securities were registered under the Securities Act pursuant to this
Agreement, any preliminary Prospectus or final Prospectus contained
therein, or any amendment or supplement thereof, or arise out of or are
based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse such Holder, and each such
person for any reasonable legal or other expenses incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable
in any such case if and to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission so made in conformity with
information furnished by or on behalf of the Purchaser or any such person
in writing specifically for use in any such document.
(b) In the event of a registration of the Registrable Securities under
the Securities Act pursuant to this Agreement, the Purchaser will indemnify
and hold harmless the Company, and its officers, directors and each other
person, if any, who controls the Company within the meaning of the
Securities Act, against all losses, claims, damages or liabilities, joint
or several, to which the Company or such persons may become subject under
the Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact which
was furnished in writing by the Purchaser to the Company expressly for use
in (and such information is contained in) the Registration Statement under
which such Registrable Securities were registered under the Securities Act
pursuant to this Agreement, any preliminary Prospectus or final Prospectus
contained therein, or any amendment or supplement thereof, or arise out of
or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company and each
such person for any reasonable legal or other expenses incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action, provided, however, that the Purchaser will be liable
in any such case if and only to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission so made in
conformity with information furnished in writing to the Company by or on
behalf of the Purchaser specifically for use in any such document.
Notwithstanding the provisions of this paragraph, the Purchaser shall not
be required to indemnify any person or entity in excess of the amount of
the aggregate net proceeds received by the Purchaser in respect of
Registrable Securities in connection with any such registration under the
Securities Act.
(c) Promptly after receipt by a party entitled to claim
indemnification hereunder (an "Indemnified Party") of notice of the
commencement of any action, such Indemnified Party shall, if a claim for
indemnification in respect thereof is to be made against a party hereto
obligated to indemnify such Indemnified Party (an "Indemnifying Party"),
notify the Indemnifying Party in writing thereof, but the omission so to
notify the Indemnifying Party shall not relieve it from any liability which
5
it may have to such Indemnified Party other than under this Section 5(c)
and shall only relieve it from any liability which it may have to such
Indemnified Party under this Section 5(c) if and to the extent the
Indemnifying Party is prejudiced by such omission. In case any such action
shall be brought against any Indemnified Party and it shall notify the
Indemnifying Party of the commencement thereof, the Indemnifying Party
shall be entitled to participate in and, to the extent it shall wish, to
assume and undertake the defense thereof with counsel satisfactory to such
Indemnified Party, and, after notice from the Indemnifying Party to such
Indemnified Party of its election so to assume and undertake the defense
thereof, the Indemnifying Party shall not be liable to such Indemnified
Party under this Section 5(c) for any legal expenses subsequently incurred
by such Indemnified Party in connection with the defense thereof; if the
Indemnified Party retains its own counsel, then the Indemnified Party shall
pay all fees, costs and expenses of such counsel, provided, however, that,
if the defendants in any such action include both the Indemnified Party and
the Indemnifying Party and the Indemnified Party shall have reasonably
concluded that there may be reasonable defenses available to it which are
different from or additional to those available to the Indemnifying Party
or if the interests of the Indemnified Party reasonably may be deemed to
conflict with the interests of the Indemnifying Party, the Indemnified
Party shall have the right to select one separate counsel and to assume
such legal defenses and otherwise to participate in the defense of such
action, with the reasonable expenses and fees of such separate counsel and
other expenses related to such participation to be reimbursed by the
Indemnifying Party as incurred.
(d) In order to provide for just and equitable contribution in the
event of joint liability under the Securities Act in any case in which
either (i) the Purchaser, or any officer, director or controlling person of
the Purchaser, makes a claim for indemnification pursuant to this Section 5
but it is judicially determined (by the entry of a final judgment or decree
by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may
not be enforced in such case notwithstanding the fact that this Section 5
provides for indemnification in such case, or (ii) contribution under the
Securities Act may be required on the part of the Purchaser or such
officer, director or controlling person of the Purchaser in circumstances
for which indemnification is provided under this Section 5; then, and in
each such case, the Company and the Purchaser will contribute to the
aggregate losses, claims, damages or liabilities to which they may be
subject (after contribution from others) in such proportion so that the
Purchaser is responsible only for the portion represented by the percentage
that the public offering price of its securities offered by the
Registration Statement bears to the public offering price of all securities
offered by such Registration Statement, provided, however, that, in any
such case, (A) the Purchaser will not be required to contribute any amount
in excess of the public offering price of all such securities offered by it
pursuant to such Registration Statement; and (B) no person or entity guilty
of fraudulent misrepresentation (within the meaning of Section 10(f) of the
Act) will be entitled to contribution from any person or entity who was not
guilty of such fraudulent misrepresentation.
6. Representations and Warranties.
(a) The Common Stock is registered pursuant to Section 12(b) or 12(g)
of the Exchange Act and, except with respect to certain matters which the
Company has disclosed to the Purchaser on Schedule 12(u) to the Security
Agreement, the Company has timely filed all proxy statements, reports,
schedules, forms, statements and other documents required to be filed by it
6
under the Exchange Act. The Company has filed (i) its Annual Report on Form
10-K for the fiscal year ended December 31, 2004 and (ii) its Quarterly
Report on Form 10-Q for the fiscal quarters ended September 30, 2005, June
30, 2005, and March 31, 2005 (collectively, the "SEC Reports"). Each SEC
Report was, at the time of its filing, in substantial compliance with the
requirements of its respective form and none of the SEC Reports, nor the
financial statements (and the notes thereto) included in the SEC Reports,
as of their respective filing dates, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Reports comply as to form in
all material respects with applicable accounting requirements and the
published rules and regulations of the Commission or other applicable rules
and regulations with respect thereto. Such financial statements have been
prepared in accordance with generally accepted accounting principles
("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 or may be condensed) and fairly present in
all material respects the financial condition, the results of operations
and the cash flows of the Company and its subsidiaries, on a consolidated
basis, as of, and for, the periods presented in each such SEC Report.
(b) The Common Stock is quoted on the NASD Over The Counter Bulletin
Board and satisfies all requirements for the continuation of such
quotation, and the Company shall do all things necessary for the
continuation of such quotation. The Company has not received any notice
that its Common Stock will no longer be quoted on NASD Over The Counter
Bulletin Board (except for prior notices which have been fully remedied) or
that the Common Stock does not meet all requirements for the continuation
of such listing
(c) Neither the Company, nor any of its affiliates, nor any person
acting on its or their behalf, has directly or indirectly made any offers
or sales of any security or solicited any offers to buy any security under
circumstances that would cause the offering of the Securities pursuant to
the Security Agreement to be integrated with prior offerings by the Company
for purposes of the Securities Act which would prevent the Company from
selling the Common Stock pursuant to Rule 506 under the Securities Act, or
any applicable exchange-related stockholder approval provisions, nor will
the Company or any of its affiliates or subsidiaries take any action or
steps that would cause the offering of the Common Stock to be integrated
with other offerings (other than such concurrent offering to the
Purchaser).
(d) The Option, the Notes and the shares of Common Stock which the
Purchaser may acquire pursuant to the Option and the Notes are all
restricted securities under the Securities Act as of the date of this
Agreement. The Company will not issue any stop transfer order or other
order impeding the sale and delivery of any of the Registrable Securities
at such time as such Registrable Securities are registered for public sale
or an exemption from registration is available, except as required by
federal or state securities laws.
(e) The Company understands the nature of the Registrable Securities
issuable upon the conversion of each Note and the exercise the Option and
recognizes that the issuance of such Registrable Securities may have a
potential dilutive effect. The Company specifically acknowledges that its
obligation to issue the Registrable Securities is binding upon the Company
7
and enforceable regardless of the dilution such issuance may have on the
ownership interests of other shareholders of the Company.
(f) Except for agreements made in the ordinary course of business,
there is no agreement that has not been filed with the Commission as an
exhibit to a registration statement or to a form required to be filed by
the Company under the Exchange Act, the breach of which could reasonably be
expected to have a material and adverse effect on the Company and its
subsidiaries, or would prohibit or otherwise interfere with the ability of
the Company to enter into and perform any of its obligations under this
Agreement in any material respect.
(g) The Company will at all times have authorized and reserved a
sufficient number of shares of Common Stock for the full conversion of each
Note and exercise of the Option.
7. Miscellaneous.
(a) Remedies. In the event of a breach by the Company or by a Holder,
of any of their respective obligations under this Agreement, each Holder or
the Company, as the case may be, in addition to being entitled to exercise
all rights granted by law and under this Agreement, including recovery of
damages, will be entitled to specific performance of its rights under this
Agreement.
(b) No Piggyback on Registrations. Except as and to the extent set
forth on Schedule 7(b) hereto, neither the Company nor any of its security
holders (other than the Holders in such capacity pursuant hereto) may
include securities of the Company in any Registration Statement other than
the Registrable Securities, and the Company shall not after the date hereof
enter into any agreement providing any such right for inclusion of shares
in the Registration Statement to any of its security holders. Except as and
to the extent specified in Schedule 7(b) hereto, the Company has not
previously entered into any agreement granting any registration rights with
respect to any of its securities to any Person that have not been fully
satisfied.
(c) Compliance. Each Holder covenants and agrees that it will comply
with the prospectus delivery requirements of the Securities Act as
applicable to it in connection with sales of Registrable Securities
pursuant to any Registration Statement.
(d) Discontinued Disposition. Each Holder agrees by its acquisition of
such Registrable Securities that, upon receipt of a notice from the Company
of the occurrence of a Discontinuation Event (as defined below), such
Holder will forthwith discontinue disposition of such Registrable
Securities under the applicable Registration Statement until such Holder's
receipt of the copies of the supplemented Prospectus and/or amended
Registration Statement or until it is advised in writing (the "Advice") by
the Company that the use of the applicable Prospectus may be resumed, and,
in either case, has received copies of any additional or supplemental
filings that are incorporated or deemed to be incorporated by reference in
such Prospectus or Registration Statement. The Company may provide
appropriate stop orders to enforce the provisions of this paragraph. For
purposes of this Agreement, a "Discontinuation Event" shall mean (i) when
the Commission notifies the Company whether there will be a "review" of
such Registration Statement and whenever the Commission comments in writing
8
on such Registration Statement (the Company shall provide true and complete
copies thereof and all written responses thereto to each of the Holders);
(ii) any request by the Commission or any other Federal or state
governmental authority for amendments or supplements to such Registration
Statement or Prospectus or for additional information; (iii) the issuance
by the Commission of any stop order suspending the effectiveness of such
Registration Statement covering any or all of the Registrable Securities or
the initiation of any Proceedings for that purpose; (iv) the receipt by the
Company of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction, or the initiation or threatening
of any Proceeding for such purpose; and/or (v) the occurrence of any event
or passage of time that makes the financial statements included in such
Registration Statement ineligible for inclusion therein or any statement
made in such Registration Statement or Prospectus or any document
incorporated or deemed to be incorporated therein by reference untrue in
any material respect or that requires any revisions to such Registration
Statement, Prospectus or other documents so that, in the case of such
Registration Statement or Prospectus, as the case may be, it will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading.
(e) Piggy-Back Registrations. If at any time during any Effectiveness
Period there is not an effective Registration Statement covering all of the
Registrable Securities required to be covered during such Effectiveness
Period and the Company shall determine to prepare and file with the
Commission a registration statement relating to an offering for its own
account or the account of others under the Securities Act of any of its
equity securities, other than on Form S-4 or Form S-8 (each as promulgated
under the Securities Act) or their then equivalents relating to equity
securities to be issued solely in connection with any acquisition of any
entity or business or equity securities issuable in connection with stock
option or other employee benefit plans, then the Company shall send to each
Holder written notice of such determination and, if within fifteen (15)
days after receipt of such notice, any such Holder shall so request in
writing, the Company shall include in such registration statement all or
any part of such Registrable Securities such Holder requests to be
registered, to the extent the Company may do so without violating
registration rights of others which exist as of the date of this Agreement,
subject to customary underwriter cutbacks applicable to all holders of
registration rights and subject to obtaining any required consent of any
selling stockholder(s) to such inclusion under such registration statement.
(f) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions
hereof may not be given, unless the same shall be in writing and signed by
the Company and the Holders of the then outstanding Registrable Securities.
Notwithstanding the foregoing, a waiver or consent to depart from the
provisions hereof with respect to a matter that relates exclusively to the
rights of certain Holders and that does not directly or indirectly affect
the rights of other Holders may be given by Holders of at least a majority
of the Registrable Securities to which such waiver or consent relates;
provided, however, that the provisions of this sentence may not be amended,
modified, or supplemented except in accordance with the provisions of the
immediately preceding sentence.
9
(g) Notices. Any notice or request hereunder may be given to the
Company or the Purchaser 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 7(g). Any notice or request hereunder shall be given by
registered or certified mail, return receipt requested, hand delivery,
overnight mail, Federal Express or other national overnight next day
carrier (collectively, "Courier") 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 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, in the case of a Courier, the next business day
following timely delivery of the package with the Courier, and, in the case
of a telecopy, when confirmed. The address for such notices and
communications shall be as follows:
If to the Company: NETFABRIC HOLDINGS, INC.
Three Stewart Court
Denville, NJ 07834
Attention: Chief Financial Officer
Facsimile: 973-442-0540
With a copy to:
Mr. Robert Matlin, Esq.
Kirkpatrick & Lockhart Nicholson
Graham LLP
599 Lexington Avenue
New York, New York 10022
Fax:212.536.3901
If to a Purchaser: To the address set forth under
such Purchaser name on the
signature pages hereto.
If to any other Person
who is then the registered
Holder: To the address of such Holder as it
appears in the stock transfer books
of the Company
or such other address as may be designated in writing hereafter in
accordance with this Section 7(g) by such Person.
(h) Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors and permitted assigns of each of the
parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written
consent of each Holder. Each Holder may assign their respective rights
10
hereunder in the manner and to the Persons as permitted under the Notes and
the Security Agreement.
(i) Execution and Counterparts. This Agreement may be executed in any
number of counterparts, each of which when so executed shall be deemed to
be an original and, all of which taken together shall constitute one and
the same agreement. In the event that any signature is delivered by
facsimile transmission, such signature shall create a valid binding
obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile
signature were the original thereof.
(j) Governing Law, Jurisdiction and Waiver of Jury Trial. THIS
AGREEMENT 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.
The Company hereby consents and agrees that the state or federal courts
located in the County of New York, State of New York shall have exclusion
jurisdiction to hear and determine any Proceeding between the Company, on
the one hand, and the Purchaser, on the other hand, pertaining to this
Agreement or to any matter arising out of or related to this Agreement;
provided, that the Purchaser and the Company acknowledge that any appeals
from those courts may have to be heard by a court located outside of the
County of New York, State of New York, and further provided, that nothing
in this Agreement shall be deemed or operate to preclude the Purchaser from
bringing a Proceeding 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 the Purchaser. The
Company expressly submits and consents in advance to such jurisdiction in
any Proceeding commenced in any such court, and the Company hereby waives
any objection which it may have based upon lack of personal jurisdiction,
improper venue or forum non conveniens. The Company hereby waives personal
service of the summons, complaint and other process issued in any such
Proceeding and agrees that service of such summons, complaint and other
process may be made by registered or certified mail addressed to the
Company at the address set forth in Section 7(g) and that service so made
shall be deemed completed upon the earlier of the Company's actual receipt
thereof or three (3) days after deposit in the U.S. mails, proper postage
prepaid. The parties hereto 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 Proceeding brought
to resolve any dispute, whether arising in contract, tort, or otherwise
between the Purchaser and/or the Company arising out of, connected with,
related or incidental to the relationship established between then in
connection with this Agreement. If either party hereto shall commence a
Proceeding to enforce any provisions of this Agreement, the Security
Agreement or any other Ancillary Agreement, then the prevailing party in
such Proceeding shall be reimbursed by the other party for its reasonable
attorneys' fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such Proceeding.
(k) Cumulative Remedies. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law.
11
(l) Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the
parties hereto shall use their reasonable efforts to find and employ an
alternative means to achieve the same or substantially the same result as
that contemplated by such term, provision, covenant or restriction. It is
hereby stipulated and declared to be the intention of the parties that they
would have executed the remaining terms, provisions, covenants and
restrictions without including any of such that may be hereafter declared
invalid, illegal, void or unenforceable.
(m) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
[Balance of page intentionally left blank; signature page follows]
12
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
NETFABRIC HOLDINGS, INC.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
LAURUS MASTER FUND, LTD.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
Address for Notices:
825 Third Avenue, 14th Floor
New York, New York 10022
Attention: David Grin
Facsimile: 212-541-4434
13
EXHIBIT A
____________, 200___
[Continental Stock Transfer
& Trust Company
Two Broadway
New York, New York 10004
Attn: William Seegraber]
Re: [Newco] Registration Statement on Form [S-3]
Ladies and Gentlemen:
As counsel to [Newco] , a _____________ (the "Company"), we have been
requested to render our opinion to you in connection with the resale by the
individuals or entitles listed on Schedule A attached hereto (the ----------
"Selling Stockholders"), of an aggregate of __________ shares (the "Shares") of
the Company's Common Stock.
A Registration Statement on Form [S-3] under the Securities Act of 1933, as
amended (the "Act"), with respect to the resale of the Shares was declared
effective by the Securities and Exchange Commission on [date]. Enclosed is the
Prospectus dated [date]. We understand that the Shares are to be offered and
sold in the manner described in the Prospectus.
Based upon the foregoing, upon request by the Selling Stockholders at any
time while the registration statement remains effective, it is our opinion that
the Shares have been registered for resale under the Act and new certificates
evidencing the Shares upon their transfer or re-registration by the Selling
Stockholders may be issued without restrictive legend. We will advise you if the
registration statement is not available or effective at any point in the future.
Very truly yours,
[Company counsel]
Schedule A to Exhibit A
Shares
Selling Stockholder R/N/O Being Offered
- ------------------- ----- -------------
SCHEDULE 7(b)
-------------
NETFABRIC HOLDINGS, INC.
Registration Rights
1. Fred Nazem and CCS Group LLC.
2. Former UCA Services, Inc.'s shareholders.
SUBSIDIARY GUARANTY
New York, New York February 10, 2006
FOR VALUE RECEIVED, and in consideration of note purchases from, or credit
otherwise extended or to be extended by Laurus Master Fund, Ltd. ("Laurus") to
or for the account of NETFABRIC HOLDINGS, INC., a Delaware corporation (the
"Parent") and NETFABRIC CORPORATION, a Delaware corporation ("NC"), and UCA
SERVICES, INC., a Delaware corporation ("UCA") (each of NC and UCA together with
the Parent, the "Companies" and each, a "Company") from time to time and at any
time and for other good and valuable consideration and to induce Laurus, in its
discretion, to purchase such notes or make other extensions of credit and to
make or grant such renewals, extensions, releases of collateral or
relinquishments of legal rights as Laurus may deem advisable, each of the
undersigned (and each of them if more than one, the liability under this
Guaranty being joint and several) (jointly and severally referred to as
"Guarantors" or "the undersigned") unconditionally guaranties to Laurus, its
successors, endorsees and assigns the prompt payment when due (whether by
acceleration or otherwise) of all present and future obligations and liabilities
of any and all kinds of each Company to Laurus and of all instruments of any
nature evidencing or relating to any such obligations and liabilities upon which
such Company or one or more parties and such Company is or may become liable to
Laurus, whether incurred by such Company as maker, endorser, drawer, acceptor,
guarantors, accommodation party or otherwise, and whether due or to become due,
secured or unsecured, absolute or contingent, joint or several, and however or
whenever acquired by Laurus, whether arising under, out of, or in connection
with (i) that certain Security Agreement dated as of the date hereof by and
among the Parent, the other Companies named therein and Laurus (the "Security
Agreement") and (ii) each Ancillary Agreement referred to in the Security
Agreement (the Security Agreement and each Ancillary Agreement, as each may be
amended, modified, restated and/or supplemented from time to time, are
collectively referred to herein as the "Documents"), or any documents,
instruments or agreements relating to or executed in connection with the
Documents or any documents, instruments or agreements referred to therein or
otherwise, or any other obligations or liabilities of such Company to Laurus,
whether now existing or hereafter arising, direct or indirect, liquidated or
unliquidated, absolute or contingent, due or not due and whether under, pursuant
to or evidenced by a note, agreement, guaranty, instrument or otherwise (all of
which are herein collectively referred to as the "Obligations"), and
irrespective of the genuineness, validity, regularity or enforceability of such
Obligations, or of any instrument evidencing any of the Obligations or of any
collateral therefor or of the existence or extent of such collateral, and
irrespective of the allowability, allowance or disallowance of any or all of the
Obligations in any case commenced by or against any Company under Title 11,
United States Code, including, without limitation, obligations or indebtedness
of any Company for post-petition interest, fees, costs and charges that would
have accrued or been added to the Obligations but for the commencement of such
case. Terms not otherwise defined herein shall have the meaning assigned such
terms in the Security Agreement. In furtherance of the foregoing, the
undersigned hereby agrees as follows:
1. No Impairment. Laurus may at any time and from time to time, either
before or after the maturity thereof, without notice to or further consent of
the undersigned, extend the time of payment of, exchange or surrender any
collateral for, renew or extend any of the Obligations or increase or decrease
the interest rate thereon, or any other agreement with any Company or with any
other party to or person liable on any of the Obligations, or interested
therein, for the extension, renewal, payment, compromise, discharge or release
thereof, in whole or in part, or for any modification of the terms thereof or of
any agreement between Laurus and any Company or any such other party or person,
or make any election of rights Laurus may deem desirable under the United States
Bankruptcy Code, as amended, or any other federal or state bankruptcy,
reorganization, moratorium or insolvency law relating to or affecting the
enforcement of creditors' rights generally (any of the foregoing, an "Insolvency
Law") without in any way impairing or affecting this Guaranty. This Guaranty
shall be effective regardless of the subsequent incorporation, merger or
consolidation of any Company, or any change in the composition, nature,
personnel or location of any Company and shall extend to any successor entity to
each Company, including a debtor in possession or the like under any Insolvency
Law.
2. Guaranty Absolute. Subject to Section 5(c) hereof, each of the
undersigned jointly and severally guarantees that the Obligations will be paid
strictly in accordance with the terms of the Documents and/or any other
document, instrument or agreement creating or evidencing the Obligations,
regardless of any law, regulation or order now or hereafter in effect in any
jurisdiction affecting any of such terms or the rights of any Company with
respect thereto. Guarantors hereby knowingly accept the full range of risk
encompassed within a contract of "continuing guaranty" which risk includes the
possibility that a Company will contract additional obligations and liabilities
for which Guarantors may be liable hereunder after such Company's financial
condition or ability to pay its lawful debts when they fall due has
deteriorated, whether or not such Company has properly authorized incurring such
additional obligations and liabilities. The undersigned acknowledge that (i) no
oral representations, including any representations to extend credit or provide
other financial accommodations to any Company, have been made by Laurus to
induce the undersigned to enter into this Guaranty and (ii) any extension of
credit to any Company shall be governed solely by the provisions of the
Documents. The liability of each of the undersigned under this Guaranty shall be
absolute and unconditional, in accordance with its terms, and shall remain in
full force and effect without regard to, and shall not be released, suspended,
discharged, terminated or otherwise affected by, any circumstance or occurrence
whatsoever, including, without limitation: (a) any waiver, indulgence, renewal,
extension, amendment or modification of or addition, consent or supplement to or
deletion from or any other action or inaction under or in respect of the
Documents or any other instruments or agreements relating to the Obligations or
any assignment or transfer of any thereof, (b) any lack of validity or
enforceability of any Document or other documents, instruments or agreements
relating to the Obligations or any assignment or transfer of any thereof, (c)
any furnishing of any additional security to Laurus or its assignees or any
acceptance thereof or any release of any security by Laurus or its assignees,
(d) any limitation on any party's liability or obligation under the Documents or
any other documents, instruments or agreements relating to the Obligations or
any assignment or transfer of any thereof or any invalidity or unenforceability,
in whole or in part, of any such document, instrument or agreement or any term
thereof, (e) any bankruptcy, insolvency, reorganization, composition,
adjustment, dissolution, liquidation or other like proceeding relating to any
Company, or any action taken with respect to this Guaranty by any trustee or
receiver, or by any court, in any such proceeding, whether or not the
undersigned shall have notice or knowledge of any of the foregoing, (f) any
exchange, release or nonperfection of any collateral, or any release, or
amendment or waiver of or consent to departure from any guaranty or security,
2
for all or any of the Obligations or (g) any other circumstance which might
otherwise constitute a defense available to, or a discharge of, the undersigned.
Any amounts due from the undersigned to Laurus shall bear interest until such
amounts are paid in full at the highest rate then applicable to the Obligations.
Obligations include post-petition interest whether or not allowed or allowable.
3. Waivers.
(a) This Guaranty is a guaranty of payment and not of collection. Laurus
shall be under no obligation to institute suit, exercise rights or remedies or
take any other action against any Company or any other person or entity liable
with respect to any of the Obligations or resort to any collateral security held
by it to secure any of the Obligations as a condition precedent to the
undersigned being obligated to perform as agreed herein and each of the
Guarantors hereby waives any and all rights which it may have by statute or
otherwise which would require Laurus to do any of the foregoing. Each of the
Guarantors further consents and agrees that Laurus shall be under no obligation
to marshal any assets in favor of Guarantors, or against or in payment of any or
all of the Obligations. Each of the undersigned hereby waives all suretyship
defenses and any rights to interpose any defense, counterclaim or offset of any
nature and description which the undersigned may have or which may exist between
and among Laurus, any Company and/or the undersigned with respect to the
undersigned's obligations under this Guaranty, or which any Company may assert
on the underlying debt, including but not limited to failure of consideration,
breach of warranty, fraud, payment (other than cash payment in full of the
Obligations), statute of frauds, bankruptcy, infancy, statute of limitations,
accord and satisfaction, and usury.
(b) Each of the undersigned further waives (i) notice of the acceptance of
this Guaranty, of the extensions of credit, and of all notices and demands of
any kind to which the undersigned may be entitled, including, without
limitation, notice of adverse change in any Company's financial condition or of
any other fact which might materially increase the risk of the undersigned and
(ii) presentment to or demand of payment from anyone whomsoever liable upon any
of the Obligations, protest, notices of presentment, non-payment or protest and
notice of any sale of collateral security or any default of any sort.
(c) Notwithstanding any payment or payments made by the undersigned
hereunder, or any setoff or application of funds of the undersigned by Laurus,
the undersigned shall not be entitled to be subrogated to any of the rights of
Laurus against any Company or against any collateral or guarantee or right of
offset held by Laurus for the payment of the Obligations, nor shall the
undersigned seek or be entitled to seek any contribution or reimbursement from
any Company in respect of payments made by the undersigned hereunder, until all
amounts owing to Laurus by each Company on account of the Obligations are
indefeasibly paid in full and Laurus' obligation to extend credit pursuant to
the Documents has been irrevocably terminated. If, notwithstanding the
3
foregoing, any amount shall be paid to the undersigned on account of such
subrogation rights at any time when all of the Obligations shall not have been
paid in full and Laurus' obligation to extend credit pursuant to the Documents
shall not have been terminated, such amount shall be held by the undersigned in
trust for Laurus, segregated from other funds of the undersigned, and shall
forthwith upon, and in any event within two (2) business days of, receipt by the
undersigned, be turned over to Laurus in the exact form received by the
undersigned (duly endorsed by the undersigned to Laurus, if required), to be
applied against the Obligations, whether matured or unmatured, in such order as
Laurus may determine, subject to the provisions of the Documents. Any and all
present and future obligations and liabilities of each Company to any of the
undersigned are hereby waived and postponed in favor of, and subordinated to the
full payment and performance of, all Obligations of each Company to Laurus.
4. Security. All sums at any time to the credit of the undersigned and any
property of the undersigned in Laurus' possession or in the possession of any
bank, financial institution or other entity that directly or indirectly, through
one or more intermediaries, controls or is controlled by, or is under common
control with, Laurus (each such entity, an "Affiliate") shall be deemed held by
Laurus or such Affiliate, as the case may be, as security for any and all of the
undersigned's obligations and liabilities to Laurus and to any Affiliate of
Laurus, no matter how or when arising and whether under this or any other
instrument, agreement or otherwise.
5. Representations and Warranties. Each of the undersigned hereby jointly
and severally represents and warrants (all of which representations and
warranties shall survive until all Obligations are indefeasibly satisfied in
full and the Documents have been irrevocably terminated), that:
(a) Corporate Status. It is a corporation, partnership or limited
liability company, as the case may be, duly formed, validly existing and in
good standing under the laws of its jurisdiction of formation indicated on
the signature page hereof and has full power, authority and legal right to
own its property and assets and to transact the business in which it is
engaged.
(b) Authority and Execution. It has full power, authority and legal
right to execute and deliver, and to perform its obligations under, this
Guaranty and has taken all necessary corporate, partnership or limited
liability company, as the case may be, action to authorize the execution,
delivery and performance of this Guaranty.
(c) Legal, Valid and Binding Character. This Guaranty constitutes its
legal, valid and binding obligation enforceable in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
affecting the enforcement of creditor's rights and general principles of
equity that restrict the availability of equitable or legal remedies.
(d) Violations. The execution, delivery and performance of this
Guaranty will not violate any requirement of law applicable to it or any
contract, agreement or instrument to which it is a party or by which it or
any of its property is bound or result in the creation or imposition of any
mortgage, lien or other encumbrance other than in favor of Laurus on any of
its property or assets pursuant to the provisions of any of the foregoing,
4
which, in any of the foregoing cases, could reasonably be expected to have,
either individually or in the aggregate, a Material Adverse Effect.
(e) Consents or Approvals. No consent of any other person or entity
(including, without limitation, any creditor of the undersigned) and no
consent, license, permit, approval or authorization of, exemption by,
notice or report to, or registration, filing or declaration with, any
governmental authority is required in connection with the execution,
delivery, performance, validity or enforceability of this Guaranty by it,
except to the extent that the failure to obtain any of the foregoing could
not reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect.
(f) Litigation. No litigation, arbitration, investigation or
administrative proceeding of or before any court, arbitrator or
governmental authority, bureau or agency is currently pending or, to the
best of its knowledge, threatened (i) with respect to this Guaranty or any
of the transactions contemplated by this Guaranty or (ii) against or
affecting it, or any of its property or assets, which, in each of the
foregoing cases, if adversely determined, could reasonably be expected to
have a Material Adverse Effect.
(g) Financial Benefit. It has derived or expects to derive a financial
or other advantage from each and every loan, advance or extension of credit
made under the Documents or other Obligation incurred by the Companies to
Laurus.
(h) Solvency. As of the date of this Guaranty, (a) the fair saleable
value of its assets exceeds its liabilities and (b) it is meeting its
current liabilities as they mature.
6. Acceleration.
----------------
(a) If any breach of any covenant or condition or other event of
default shall occur and be continuing under (i) the Security Agreement or
(ii) any of the Ancillary Agreements made by any Company or any of the
undersigned to Laurus, or either any Company or any of the undersigned
should at any time become insolvent, or make a general assignment, or if a
proceeding in or under any Insolvency Law shall be filed or commenced by,
or in respect of, any of the undersigned, or if a notice of any lien, levy,
or assessment is filed of record with respect to any assets of any of the
undersigned by the United States of America or any department, agency, or
instrumentality thereof, or if any taxes or debts owing at any time or
times hereafter to any one of them becomes a lien or encumbrance upon any
assets of the undersigned in Laurus' possession, or otherwise, any and all
Obligations shall for purposes hereof, at Laurus' option, be deemed due and
payable without notice notwithstanding that any such Obligation is not then
due and payable by the Companies.
(b) Each of the undersigned will promptly notify Laurus of any default
by such undersigned in its respective performance or observance of any term
or condition of any agreement to which the undersigned is a party if the
effect of such default is to cause, or permit the holder of any obligation
under such agreement to cause, such obligation to become due prior to its
stated maturity and, if such an event occurs, Laurus shall have the right
to accelerate such undersigned's obligations hereunder.
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7. Payments from Guarantors. Laurus, in its sole and absolute discretion,
with or without notice to the undersigned, may apply on account of the
Obligations any payment from the undersigned or any other guarantors, or amounts
realized from any security for the Obligations, or may deposit any and all such
amounts realized in a non-interest bearing cash collateral deposit account to be
maintained as security for the Obligations.
8. Costs. The undersigned shall pay on demand, all costs, fees and expenses
(including expenses for legal services of every kind) relating or incidental to
the enforcement or protection of the rights of Laurus hereunder or under any of
the Obligations.
9. No Termination. This is a continuing irrevocable guaranty and shall
remain in full force and effect and be binding upon the undersigned, and each of
the undersigned's successors and assigns, until all of the Obligations have been
indefeasibly paid in full and Laurus' obligation to extend credit pursuant to
the Documents has been irrevocably terminated. If any of the present or future
Obligations are guarantied by persons, partnerships, corporations or other
entities in addition to the undersigned, the death, release or discharge in
whole or in part or the bankruptcy, merger, consolidation, incorporation,
liquidation or dissolution of one or more of them shall not discharge or affect
the liabilities of any undersigned under this Guaranty.
10. Recapture. Anything in this Guaranty to the contrary notwithstanding,
if Laurus receives any payment or payments on account of the liabilities
guaranteed hereby, 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 Insolvency Law, common law or equitable doctrine, then to the extent of any
sum not finally retained by Laurus, the undersigned's obligations to Laurus
shall be reinstated and this Guaranty shall remain in full force and effect (or
be reinstated) until payment shall have been made to Laurus, which payment shall
be due on demand.
11. Books and Records. The books and records of Laurus showing the account
between Laurus and each Company shall be admissible in evidence in any action or
proceeding, shall be binding upon the undersigned for the purpose of
establishing the items therein set forth and shall constitute prima facie proof
thereof.
12. No Waiver. No failure on the part of Laurus to exercise, and no delay
in exercising, any right, remedy or power hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise by Laurus of any right, remedy
or power hereunder preclude any other or future exercise of any other legal
right, remedy or power. Each and every right, remedy and power hereby granted to
Laurus or allowed it by law or other agreement shall be cumulative and not
exclusive of any other, and may be exercised by Laurus at any time and from time
to time.
13. Waiver of Jury Trial. EACH OF THE UNDERSIGNED DESIRES THAT ITS 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, EACH
OF THE UNDERSIGNED HERETO WAIVES 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 OF THE UNDERSIGNED ARISING OUT OF,
6
CONNECTED WITH, RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN
THEM IN CONNECTION WITH THIS GUARANTY, ANY DOCUMENT OR THE TRANSACTIONS RELATED
HERETO OR THERETO.
14. Governing Law; Jurisdiction. THIS GUARANTY CANNOT BE CHANGED OR
TERMINATED ORALLY, AND SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE
AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
EACH OF THE UNDERSIGNED 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 OF THE
UNDERSIGNED, ON THE ONE HAND, AND LAURUS, ON THE OTHER HAND, PERTAINING TO THIS
GUARANTY OR ANY OF THE DOCUMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO
THIS GUARANTY OR ANY OF THE DOCUMENTS; PROVIDED, THAT EACH OF THE UNDERSIGNED
ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT
LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER
PROVIDED, THAT NOTHING IN THIS GUARANTY 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 OF THE UNDERSIGNED EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO
SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH
UNDERSIGNED HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF
PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. EACH OF THE
UNDERSIGNED 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 SUCH UNDERSIGNED IN ACCORDANCE WITH SECTION 18 AND THAT SERVICE SO
MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF SUCH UNDERSIGNED'S ACTUAL
RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER
POSTAGE PREPAID.
15. Understanding With Respect to Waivers and Consents. Each Guarantor
warrants and agrees that each of the waivers and consents set forth in this
Guaranty is made voluntarily and unconditionally after consultation with outside
legal counsel and with full knowledge of its significance and consequences, with
the understanding that events giving rise to any defense or right waived may
diminish, destroy or otherwise adversely affect rights which such Guarantor
otherwise may have against any Company, Laurus or any other person or entity or
against any collateral. If, notwithstanding the intent of the parties that the
terms of this Guaranty shall control in any and all circumstances, any such
waivers or consents are determined to be unenforceable under applicable law,
7
such waivers and consents shall be effective to the maximum extent permitted by
law.
16. Severability. To the extent permitted by applicable law, any provision
of this Guaranty which is prohibited or unenforceable in any jurisdiction shall,
as to such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
17. Amendments, Waivers. No amendment or waiver of any provision of this
Guaranty nor consent to any departure by the undersigned therefrom shall in any
event be effective unless the same shall be in writing executed by each of the
undersigned directly affected by such amendment and/or waiver and Laurus.
18. Notice. All notices, requests and demands to or upon the undersigned,
shall be in writing and shall be deemed to have been duly given or made (a) when
delivered, if by hand, (b) three (3) days after being sent, postage prepaid, if
by registered or certified mail, (c) when confirmed electronically, if by
facsimile, or (d) when delivered, if by a recognized overnight delivery service
in each event, to the numbers and/or address set forth beneath the signature of
the undersigned.
19. Successors. Laurus may, from time to time, without notice to the
undersigned, sell, assign, transfer or otherwise dispose of all or any part of
the Obligations and/or rights under this Guaranty. Without limiting the
generality of the foregoing, Laurus may assign, or grant participations to, one
or more banks, financial institutions or other entities all or any part of any
of the Obligations. In each such event, Laurus, its Affiliates and each and
every immediate and successive purchaser, assignee, transferee or holder of all
or any part of the Obligations shall have the right to enforce this Guaranty, by
legal action or otherwise, for its own benefit as fully as if such purchaser,
assignee, transferee or holder were herein by name specifically given such
right. Laurus shall have an unimpaired right to enforce this Guaranty for its
benefit with respect to that portion of the Obligations which Laurus has not
disposed of, sold, assigned, or otherwise transferred.
20. Joinder. It is understood and agreed that any person or entity that
desires to become a Guarantor hereunder, or is required to execute a counterpart
of this Guaranty after the date hereof pursuant to the requirements of any
Document, shall become a Guarantor hereunder by (x) executing a joinder
agreement in form and substance satisfactory to Laurus, (y) delivering
supplements to such exhibits and annexes to such Documents as Laurus shall
reasonably request and/or as may be required by such joinder agreement and (z)
taking all actions as specified in this Guaranty as would have been taken by
such such Guarantor had it been an original party to this Guaranty, 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.
21. Release. Nothing except indefeasible payment in full of the Obligations
shall release any of the undersigned from liability under this Guaranty.
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22. Remedies Not Exclusive. The remedies conferred upon Laurus in this
Guaranty are intended to be in addition to, and not in limitation of any other
remedy or remedies available to Laurus under applicable law or otherwise.
23. Limitation of Obligations under this Guaranty. Each Guarantor and
Laurus (by its acceptance of the benefits of this Guaranty) hereby confirms that
it is its intention that this Guaranty not constitute a fraudulent transfer or
conveyance for purposes of the Bankruptcy Code, the Uniform Fraudulent
Conveyance Act of any similar Federal or state law. To effectuate the foregoing
intention, each Guarantor and Laurus (by its acceptance of the benefits of this
Guaranty) hereby irrevocably agrees that the Obligations guaranteed by such
Guarantor shall be limited to such amount as will, after giving effect to such
maximum amount and all other (contingent or otherwise) liabilities of such
Guarantor that are relevant under such laws and after giving effect to any
rights to contribution pursuant to any agreement providing for an equitable
contribution among such Guarantor and the other Guarantors (including this
Guaranty), result in the Obligations of such Guarantor under this Guaranty in
respect of such maximum amount not constituting a fraudulent transfer or
conveyance.
[REMAINDER OF THIS PAGE IS BLANK.
SIGNATURE PAGE IMMEDIATELY FOLLOWS]
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IN WITNESS WHEREOF, this Guaranty has been executed by the undersigned as
of the date and year here above written.
NETFABRIC CORPORATION
By:
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Name:
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Title:
---------------------------------
Three Stewart Court
Denville, NJ 07834
Phone: 973-887-2785
Fax: 973-442-0540
State of Formation: Delaware
UCA SERVICES, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Three Stewart Court
Denville, NJ 07834
Phone: 973-887-2785
Fax: 973-442-0540
State of Formation: New Jersey
10
February 10, 2006
NetFabric Holdings, Inc.
Three Stewart Court
Denville, NJ 07834
Re: Overadvance Side Letter
Dear Sir or Madame:
Reference is hereby made to that certain Security Agreement dated as of
February 10, 2006 by and among Netfabric Holdings, Inc ("Netfabric") and such
other subsidiaries of Netfabric named in that certain Security Agreement or
which hereafter become a party thereto (collectively, the "Company") and Laurus
Master Fund, Ltd. ("Laurus") (as amended, modified and/or supplemented from time
to time, the "Security Agreement"). Capitalized terms used but not defined
herein shall have the meanings ascribed them in the Security Agreement. Laurus
is hereby notifying you of its decision to exercise the discretion granted to it
pursuant to Section 2(a)(ii) of the Security Agreement to make a Loan to the
Company in excess of the Formula Amount in effect on the date hereof (the
"Overadvance").
1. As of the date hereof, the Overadvance is equal to an aggregate
principal amount of $1,000,000.00. In connection with making the Overadvance,
from the date hereof until July 30, 2007 (the "Period"), except as provided in
Section 3 hereof, Laurus hereby waives compliance with Section 3 of the Security
Agreement, but solely as such provision relates to the immediate repayment
requirement for Overadvances.
2. Pursuant to the terms of the Security Agreement, Laurus is to receive
statements of Eligible Accounts from the Company on certain dates, including,
without limitation, July 30, 2006, September 30, 2006, December 31, 2006, March
31, 2007 and June 30, 2007 (each, a "Measurement Date"). Depending upon the
amount of the Eligible Accounts on each Measurement Date, the amount permitted
in the Overadvance shall be adjusted to the following (each, a "Permitted
Overadvance Amount"):
a. In the event that, on any Measurement Date, Eligible Accounts are
in excess of $1,800,000, then the Permitted Overadvance Amount shall remain
equal to $1,000,000;
b. In the event that, on any Measurement Date, Eligible Accounts are
equal to or greater than $1,400,000, but less than $1,800,000, then the
Permissable Overadvance Amount shall be adjusted to a total of $750,000;
c. In the event that, on any Measurement Date, Eligible Accounts are
equal to or greater than $1,000,000, but less than $1,400,000, then the
Permissible Overadvance Amount shall be adjusted to a total of $500,000;
d. In the event that, on any Measurement Date, Eligible Accounts are
equal to or greater than $600,000, but less than $1,000,000, then the
Permissible Overadvance Amount shall be adjusted to a total of $250,000;
and
e. In the event that, on any Measurement Date, Eligible Accounts are
less than $600,000, then the Permissible Overadvance Amount shall be
adjusted to a total of zero.
3. In the event that, on any given Measurement Date, there is a decrease in
the Permissible Overadvance Amount from the previous Measurement Date, the
Company shall pay the difference to Laurus (the "Return Payment") within three
(3) business days of Laurus's request therefor.
4. Laurus further agrees that solely for such Period (but not thereafter),
so long as no Return Payments are due, (i) the Overadvance shall not trigger an
Event of Default under Section 19(a) of the Security Agreement, and (ii) the
Overadvance rate set forth in Section 5(b)(ii) of the Security Agreement (the
"Overadvance Rate") shall be waived. However, in the event that a Return Payment
is due to Laurus and is not timely paid pursuant to Section 3 hereof, (i) the
Overadvance shall be considered an Event of Default under Section 19(a) of the
Security Agreement, and (ii) the Overadvance Rate shall no longer be waived. All
other terms and provisions of the Security Agreement and the Ancillary
Agreements remain in full force and effect.
5. This letter may not be amended or waived except by an instrument in
writing signed by the Company and Laurus. This letter may be executed in any
number of counterparts, each of which shall be an original and all of which,
when taken together, shall constitute one agreement. Delivery of an executed
signature page of this letter by facsimile transmission shall be effective as
delivery of a manually executed counterpart hereof or thereof, as the case may
be. This letter shall be governed by, and construed in accordance with, the laws
of the State of New York. This letter sets forth the entire agreement between
the parties hereto as to the matters set forth herein and supersede all prior
communications, written or oral, with respect to the matters herein.
If the foregoing meets with your approval please signify your acceptance of
the terms hereof by signing below.
LAURUS MASTER FUND, LTD.
By:_______________________________
Name: David Grin
Title: Director
Agreed and accepted on the date hereof:
NETFABRIC HOLDINGS, INC.
By:
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Name:
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Title:
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