Exhibit 10.1

 

 

IMPLANT SCIENCES CORPORATION

 

SECURITIES PURCHASE AGREEMENT

 

September 30, 2005

 

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IMPLANT SCIENCES CORPORATION
SECURITIES PURCHASE AGREEMENT

 

THIS SECURITIES PURCHASE AGREEMENT (the “Agreement”) is made and entered into as
of September 30, 2005, by and between Implant Sciences Corporation, a
Massachusetts corporation (the “Company”), and Laurus Master Fund, Ltd. a Cayman
Islands company (the “Purchaser”).

 

RECITALS

 

WHEREAS, the Company has authorized the sale of Series D Convertible Preferred
Stock, $0.10 par value, (the “Preferred Stock”), for the aggregate purchase
price of FIVE MILLION DOLLARS ($5,000,000), convertible into shares of the
Company’s common stock, $0.10 par value per share (the “Common Stock”);

 

WHEREAS, the Company wishes to issues a warrant (the “Warrant”) to the Purchaser
to purchase shares of the Company’s Common Stock in connection with Purchaser’s
purchase of the Preferred Stock; WHEREAS, Purchaser desires to purchase the
Preferred Stock and Warrant on the terms and conditions set forth herein; and

 

WHEREAS, the Company desires to issue and sell the Preferred Stock and Warrant
to the Purchaser on the terms and conditions set forth herein.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises, representations, warranties and covenants hereinafter set forth and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:

 

1.             AGREEMENT TO SELL AND PURCHASE.  PURSUANT TO THE TERMS AND
CONDITIONS SET FORTH IN THIS AGREEMENT, ON THE CLOSING DATE (AS DEFINED IN
SECTION 3), THE COMPANY AGREES TO SELL TO THE PURCHASER, AND THE PURCHASER
HEREBY AGREES TO PURCHASE FROM THE COMPANY, PREFERRED STOCK IN THE STATED AMOUNT
OF FIVE MILLION DOLLARS ($5,000,000), CONVERTIBLE IN ACCORDANCE WITH THE TERMS
THEREOF INTO SHARES OF THE COMPANY’S COMMON STOCK.  THE PREFERRED STOCK
PURCHASED ON THE CLOSING DATE SHALL BE KNOWN AS THE “OFFERING.”  THE CERTIFICATE
OF VOTE OF DIRECTORS ESTABLISHING A CLASS OR SERIES OF STOCK FOR THE PREFERRED
STOCK (THE “CERTIFICATE OF VOTE OF DIRECTORS”) IS ANNEXED HERETO AS EXHIBIT A. 
THE PREFERRED STOCK WILL HAVE A MANDATORY REDEMPTION DATE (AS DEFINED IN THE
PREFERRED STOCK) THREE YEARS FROM THE DATE OF ISSUANCE.  COLLECTIVELY, THE
PREFERRED STOCK AND WARRANT (AS DEFINED IN SECTION 2) AND COMMON STOCK ISSUABLE
UPON CONVERSION OF THE PREFERRED STOCK AND EXERCISE OF THE WARRANT ARE REFERRED
TO AS THE “SECURITIES.”

 

2.             FEES AND WARRANT.

 

(A)           THE COMPANY WILL ISSUE AND DELIVER TO THE PURCHASER A WARRANT TO
PURCHASE 50,000 SHARES OF COMMON STOCK AT A PURCHASE PRICE OF $10.20 PER SHARE
OF COMMON

 

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STOCK IN CONNECTION WITH THE OFFERING (THE “WARRANT”) PURSUANT TO SECTION 1
HEREOF.  THE COMPANY SHALL REIMBURSE THE PURCHASER FOR ITS REASONABLE EXPENSES,
INCLUDING LEGAL FEES FOR SERVICES RENDERED TO THE PURCHASER IN PREPARATION OF
THIS AGREEMENT AND THE RELATED AGREEMENTS, AND EXPENSES IN CONNECTION WITH THE
PURCHASER’S DUE DILIGENCE REVIEW OF THE COMPANY AND ITS SUBSIDIARIES (AS DEFINED
IN SECTION 4.2) AND RELEVANT MATTERS.  AMOUNTS REQUIRED TO BE PAID HEREUNDER
WILL BE PAID AT THE CLOSING AND SHALL NOT EXCEED $5,000.

 

(B)           THE WARRANT MUST BE DELIVERED ON THE CLOSING DATE.  A FORM OF
WARRANT IS ATTACHED HERETO AS EXHIBIT B.  ALL THE REPRESENTATIONS, COVENANTS,
WARRANTIES, UNDERTAKINGS, AND INDEMNIFICATION, AND OTHER RIGHTS MADE OR GRANTED
TO OR FOR THE BENEFIT OF THE PURCHASER BY THE COMPANY ARE HEREBY ALSO MADE AND
GRANTED IN RESPECT OF THE WARRANT AND SHARES OF THE COMPANY’S COMMON STOCK
ISSUABLE UPON EXERCISE OF THE WARRANT (THE “WARRANT SHARES”).  A FORM OF CLOSING
PAYMENT AND THE EXPENSES REFERRED TO IN THE PRECEDING CLAUSE (A) (NET OF
DEPOSITS PREVIOUSLY PAID BY THE COMPANY) SHALL BE PAID AT CLOSING OUT OF FUNDS
HELD PURSUANT TO THE ESCROW AGREEMENT (DEFINED BELOW) AND A DISBURSEMENT LETTER
(THE “DISBURSEMENT LETTER”).

 

(C)           THE COMPANY SHALL REIMBURSE THE PURCHASER FOR ITS REASONABLE LEGAL
FEES FOR SERVICES RENDERED TO THE PURCHASER IN PREPARATION OF THIS AGREEMENT AND
THE RELATED AGREEMENTS, AND EXPENSES IN CONNECTION WITH THE PURCHASER’S DUE
DILIGENCE REVIEW OF THE COMPANY AND RELEVANT MATTERS.  AMOUNTS REQUIRED TO BE
PAID HEREUNDER WILL BE PAID AT THE CLOSING AND SHALL BE [$5,000.]

 

(D)           THE COMPANY WILL PAY A CASH FEE IN THE AMOUNT OF $90,000 (THE
“FUND MANAGEMENT FEE”) TO LAURUS CAPITAL MANAGEMENT, L.L.C., A DELAWARE LIMITED
LIABILITY COMPANY.  THE FUND MANAGEMENT FEE MUST BE PAID ON THE CLOSING DATE. 
THE AFOREMENTIONED FUND MANAGEMENT FEE AND LEGAL FEES WILL BE PAYABLE AT THE
CLOSING OUT OF FUNDS HELD PURSUANT TO A FUNDS ESCROW AGREEMENT TO BE ENTERED
INTO BY THE COMPANY, PURCHASER AND AN ESCROW AGENT.

 

3.             CLOSING, DELIVERY AND PAYMENT.

 

3.1          CLOSING.  SUBJECT TO THE TERMS AND CONDITIONS HEREIN, THE CLOSING
OF THE TRANSACTIONS CONTEMPLATED HEREBY (THE “CLOSING”), WHICH CLOSING IS
COMPRISED OF PURCHASER’S PURCHASE OF THE PREFERRED STOCK IN THE AGGREGATE
PRINCIPAL AMOUNT OF $5,000,000, SHALL TAKE PLACE ON THE DATE HEREOF, AT SUCH
OTHER TIME OR PLACE AS THE COMPANY AND PURCHASER MAY MUTUALLY AGREE (SUCH DATE
IS HEREINAFTER REFERRED TO AS THE “CLOSING DATE”).

 

3.2          DELIVERY.  AT THE CLOSING, SUBJECT TO THE TERMS AND CONDITIONS
HEREOF, THE COMPANY WILL DELIVER TO THE PURCHASER THE CERTIFICATE OF VOTE OF
DIRECTORS IN THE FORM ATTACHED AS EXHIBIT A REPRESENTING THE STATED AMOUNT OF
$5,000,000 OF PREFERRED STOCK AND A COMMON STOCK PURCHASE WARRANT IN THE FORM
ATTACHED AS EXHIBIT B IN THE PURCHASER’S NAME REPRESENTING THE RIGHT TO PURCHASE
UP TO 50,000 WARRANT SHARES AND THE PURCHASER WILL DELIVER TO THE COMPANY
(I) THAT CERTAIN SECURED CONVERTIBLE TERM NOTE IN THE PRINCIPAL AMOUNT OF
$3,000,000 DATED JULY 6, 2005 (THE “$3,000,000 NOTE”), AND $2,000,000, LESS FEES
AND EXPENSES SET FORTH IN SECTION 2 HEREOF, BY CERTIFIED FUNDS OR WIRE TRANSFER
MADE PAYABLE TO THE ORDER OF THE COMPANY.

 

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4.             REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

 

The Company hereby represents and warrants to the Purchaser as of the date of
this Agreement as set forth below.  As used herein, the term SEC Reports shall
mean the Company’s Annual Report on Form 10-KSB for the fiscal year ended
June 30, 2004 and the Company’s Quarterly Report on Form 10-QSB/A for the
quarter ended March 31, 2005.

 

4.1          ORGANIZATION, GOOD STANDING AND QUALIFICATION.  EACH OF THE COMPANY
AND EACH OF ITS SUBSIDIARIES IS A CORPORATION DULY ORGANIZED, VALIDLY EXISTING
AND IN GOOD STANDING UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS,
DELAWARE AND CALIFORNIA AS APPLICABLE.  EACH OF THE COMPANY AND EACH OF ITS
SUBSIDIARIES HAS ALL REQUISITE CORPORATE POWER AND AUTHORITY TO OWN AND OPERATE
ITS PROPERTIES AND ASSETS, TO EXECUTE AND DELIVER (I) THIS AGREEMENT, (II) THE
PREFERRED STOCK TO BE ISSUED IN CONNECTION WITH THIS AGREEMENT, (III) THE
WARRANT, (IV) THE MASTER SECURITY AGREEMENT DATED AS OF THE DATE HEREOF BETWEEN
THE COMPANY, CERTAIN SUBSIDIARIES OF THE COMPANY AND THE PURCHASER (AS AMENDED,
MODIFIED AND/OR SUPPLEMENTED FROM TIME TO TIME, THE “MASTER SECURITY
AGREEMENT”), (V) THE REGISTRATION RIGHTS AGREEMENT RELATING TO THE SECURITIES
DATED AS OF THE DATE HEREOF BETWEEN THE COMPANY AND THE PURCHASER (AS AMENDED,
MODIFIED AND/OR SUPPLEMENTED FROM TIME TO TIME, THE “REGISTRATION RIGHTS
AGREEMENT”), (VI) THE SUBSIDIARY GUARANTY DATED AS OF THE DATE HEREOF MADE BY
CERTAIN SUBSIDIARIES OF THE COMPANY (AS AMENDED, MODIFIED AND/OR SUPPLEMENTED
FROM TIME TO TIME, THE “SUBSIDIARY GUARANTY”), (VII) THE STOCK PLEDGE AGREEMENT
DATED AS OF THE DATE HEREOF AMONG THE COMPANY, CERTAIN SUBSIDIARIES OF THE
COMPANY AND THE PURCHASER (AS AMENDED, MODIFIED AND/OR OR SUPPLEMENTED FROM TIME
TO TIME, THE “STOCK PLEDGE AGREEMENT”), (VIII) THE FUNDS ESCROW AGREEMENT DATED
AS OF THE DATE HEREOF AMONG THE COMPANY, THE PURCHASER AND THE ESCROW AGENT
REFERRED TO THEREIN, SUBSTANTIALLY IN THE FORM OF EXHIBIT D HERETO (AS AMENDED,
MODIFIED AND/OR SUPPLEMENTED FROM TIME TO TIME, THE “ESCROW AGREEMENT”) AND
(IX) ALL OTHER DOCUMENTS, INSTRUMENTS AND AGREEMENTS ENTERED INTO IN CONNECTION
WITH THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY (THE PRECEDING CLAUSES
(II) THROUGH (IX), COLLECTIVELY, THE “RELATED AGREEMENTS”) TO ISSUE AND SELL THE
PREFERRED STOCK AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THE
PREFERRED STOCK (THE “CONVERSION SHARES”), TO ISSUE AND SELL THE WARRANT AND THE
SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THE WARRANT, AND TO CARRY OUT
THE PROVISIONS OF THIS AGREEMENT AND THE RELATED AGREEMENTS AND TO CARRY ON ITS
BUSINESS AS PRESENTLY CONDUCTED AND AS PRESENTLY PROPOSED TO BE CONDUCTED.  EACH
OF THE COMPANY AND EACH OF ITS SUBSIDIARIES IS DULY QUALIFIED AND IS AUTHORIZED
TO DO BUSINESS AND IS IN GOOD STANDING AS A FOREIGN CORPORATION IN ALL
JURISDICTIONS IN WHICH THE NATURE OF ITS ACTIVITIES AND OF ITS PROPERTIES (BOTH
OWNED AND LEASED) MAKES SUCH QUALIFICATION NECESSARY, EXCEPT FOR THOSE
JURISDICTIONS IN WHICH FAILURE TO DO SO WOULD NOT HAVE A MATERIAL ADVERSE EFFECT
ON THE COMPANY AND ITS SUBSIDIARIES, TAKEN INDIVIDUALLY AND AS A WHOLE OR THEIR
RESPECTIVE BUSINESSES A (“MATERIAL ADVERSE EFFECT”).

 

4.2          SUBSIDIARIES.  EACH DIRECT AND INDIRECT SUBSIDIARY OF THE COMPANY,
THE DIRECT OWNER OF SUCH SUBSIDIARY AND ITS PERCENTAGE OWNERSHIP THEREOF, IS SET
FORTH ON SCHEDULE 4.2.  FOR THE PURPOSE OF THIS AGREEMENT, A “SUBSIDIARY” OF ANY
PERSON OR ENTITY MEANS (I) A CORPORATION OR OTHER ENTITY WHOSE SHARES OF STOCK
OR OTHER OWNERSHIP INTERESTS HAVING ORDINARY VOTING POWER (OTHER THAN STOCK OR
OTHER OWNERSHIP INTERESTS HAVING SUCH POWER ONLY BY REASON OF THE HAPPENING OF A
CONTINGENCY) TO ELECT A MAJORITY OF THE DIRECTORS OF SUCH CORPORATION, OR OTHER

 

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PERSONS OR ENTITIES PERFORMING SIMILAR FUNCTIONS FOR SUCH PERSON OR ENTITY, ARE
OWNED, DIRECTLY OR INDIRECTLY, BY SUCH PERSON OR ENTITY OR (II) A CORPORATION OR
OTHER ENTITY IN WHICH SUCH PERSON OR ENTITY OWNS, DIRECTLY OR INDIRECTLY, MORE
THAN 50% OF THE EQUITY INTERESTS AT SUCH TIME.

 

4.3          CAPITALIZATION; VOTING RIGHTS.

 

(A)           THE AUTHORIZED CAPITAL STOCK OF THE COMPANY, IMMEDIATELY PRIOR TO
THE CLOSING, CONSISTS OF (I) 20,000,000 SHARES OF COMMON STOCK, PAR VALUE $0.10
PER SHARE, 10,756,842 SHARES OF WHICH ARE ISSUED AND OUTSTANDING AS OF JUNE 30,
2005, AND (II) 5,000,000 SHARES OF PREFERRED STOCK, PAR VALUE $0.10 PER SHARE,
NONE OF WHICH ARE ISSUED AND OUTSTANDING ON THE DATE HEREOF.  THE AUTHORIZED,
ISSUED AND OUTSTANDING CAPITAL STOCK OF EACH SUBSIDIARY IS SET FORTH ON
SCHEDULE 4.3 HERETO.

 

(B)           OTHER THAN (I) THE SHARES RESERVED FOR ISSUANCE UNDER THE
COMPANY’S STOCK OPTION PLANS, STOCK GRANT AGREEMENTS AND OUTSTANDING WARRANTS;
AND (II) SHARES WHICH MAY BE GRANTED PURSUANT TO THIS AGREEMENT AND THE RELATED
AGREEMENTS, THERE ARE NO OUTSTANDING OPTIONS, WARRANTS, RIGHTS (INCLUDING
CONVERSION OR PREEMPTIVE RIGHTS AND RIGHTS OF FIRST REFUSAL), PROXY OR
STOCKHOLDER AGREEMENTS, OR ARRANGEMENTS OR AGREEMENTS OF ANY KIND FOR THE
PURCHASE OR ACQUISITION FROM THE COMPANY OF ANY OF ITS SECURITIES, EXCEPT AS SET
FORTH IN THE SEC REPORTS OR AS LISTED IN SCHEDULE 4.3 (A).  NEITHER THE OFFER,
ISSUANCE OR SALE OF ANY OF THE PREFERRED STOCK OR WARRANT, OR THE ISSUANCE OF
ANY OF THE CONVERSION SHARES OR WARRANT SHARES, NOR THE CONSUMMATION OF ANY
TRANSACTION CONTEMPLATED HEREBY WILL RESULT IN A CHANGE IN THE PRICE OR NUMBER
OF ANY SECURITIES OF THE COMPANY OUTSTANDING, UNDER ANTI-DILUTION OR OTHER
SIMILAR PROVISIONS CONTAINED IN OR AFFECTING ANY SUCH SECURITIES OTHER THAN AS
LISTED IN SCHEDULE 4.3 (A).

 

(C)           ALL ISSUED AND OUTSTANDING SHARES OF THE COMPANY’S COMMON STOCK
(I) HAVE BEEN DULY AUTHORIZED AND VALIDLY ISSUED AND ARE FULLY PAID AND
NONASSESSABLE AND (II) WERE ISSUED IN COMPLIANCE WITH ALL APPLICABLE STATE AND
FEDERAL LAWS CONCERNING THE ISSUANCE OF SECURITIES.

 

(D)           THE RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF THE SHARES
OF THE COMMON STOCK ARE AS STATED IN THE AMENDED AND RESTATED ARTICLES OF
ORGANIZATION (THE “CHARTER”).  THE CONVERSION SHARES AND WARRANT SHARES HAVE
BEEN DULY AND VALIDLY RESERVED FOR ISSUANCE.  WHEN ISSUED IN COMPLIANCE WITH THE
PROVISIONS OF THIS AGREEMENT AND THE COMPANY’S CHARTER, THE SECURITIES WILL BE
VALIDLY ISSUED, FULLY PAID AND NONASSESSABLE, AND WILL BE FREE OF ANY LIENS OR
ENCUMBRANCES; PROVIDED, HOWEVER, THAT THE SECURITIES MAY BE SUBJECT TO
RESTRICTIONS ON TRANSFER UNDER STATE AND/OR FEDERAL SECURITIES LAWS AS SET FORTH
HEREIN OR AS OTHERWISE REQUIRED BY SUCH LAWS AT THE TIME A TRANSFER IS PROPOSED.

 

(E)           EXCEPT AS SET FORTH IN THE SEC REPORTS, NO STOCK PLAN, STOCK
PURCHASE, STOCK OPTION OR OTHER AGREEMENT OR UNDERSTANDING BETWEEN THE COMPANY
AND ANY HOLDER OF ANY EQUITY SECURITIES OR RIGHTS TO PURCHASE EQUITY SECURITIES
PROVIDES FOR ACCELERATION OR OTHER CHANGES IN THE VESTING PROVISIONS OR OTHER
TERMS OF SUCH AGREEMENT OR UNDERSTANDING AS THE RESULT OF ANY MERGER,
CONSOLIDATED SALE OF STOCK OR ASSETS, CHANGE IN CONTROL OR ANY OTHER
TRANSACTION(S) BY THE COMPANY, INCLUDING THE TRANSACTIONS CONTEMPLATED
HEREUNDER.

 

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4.4          AUTHORIZATION; BINDING OBLIGATIONS.  ALL CORPORATE ACTION ON THE
PART OF THE COMPANY AND EACH OF ITS SUBSIDIARIES, INCLUDING THEIR RESPECTIVE
OFFICERS, DIRECTORS AND STOCKHOLDERS NECESSARY FOR THE AUTHORIZATION OF THIS
AGREEMENT AND THE RELATED AGREEMENTS, THE PERFORMANCE OF ALL OBLIGATIONS OF THE
COMPANY AND ITS SUBSIDIARIES HEREUNDER AT EACH CLOSING AND THE AUTHORIZATION,
SALE, ISSUANCE AND DELIVERY OF THE SECURITIES PURSUANT HERETO AND THE RELATED
AGREEMENTS HAS BEEN TAKEN OR WILL BE TAKEN PRIOR TO THE CLOSING.  THE AGREEMENT
AND THE RELATED AGREEMENTS, WHEN EXECUTED AND DELIVERED, WILL BE VALID AND
BINDING OBLIGATIONS OF THE COMPANY AND EACH OF ITS SUBSIDIARIES 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) GENERAL PRINCIPLES OF EQUITY
THAT RESTRICT THE AVAILABILITY OF EQUITABLE REMEDIES.  THE SALE OF THE PREFERRED
STOCK AND THE SUBSEQUENT CONVERSION OF THE PREFERRED STOCK INTO COMMON STOCK 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 SALE OF THE WARRANTS
AND THE SUBSEQUENT EXERCISE OF THE WARRANTS FOR COMMON STOCK 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 CERTIFICATE OF VOTE OF DIRECTORS AND
THE WARRANTS , WHEN EXECUTED AND DELIVERED IN ACCORDANCE WITH THE TERMS OF THIS
AGREEMENT, WILL BE VALID AND BINDING OBLIGATIONS OF THE COMPANY AND EACH OF ITS
SUBSIDIARIES, ENFORCEABLE IN ACCORDANCE WITH THEIR RESPECTIVE TERMS.

 

4.5          LIABILITIES.  EXCEPT AS SET FORTH IN THE SEC REPORTS AND
SCHEDULE 4.5 HERETO, NEITHER THE COMPANY NOR ANY OF ITS SUBSIDIARIES HAS ANY
MATERIAL LIABILITIES AND, TO THE BEST OF ITS KNOWLEDGE, KNOWS OF NO MATERIAL
CONTINGENT LIABILITIES, EXCEPT CURRENT LIABILITIES INCURRED IN THE ORDINARY
COURSE OF BUSINESS WHICH HAVE NOT BEEN, EITHER IN ANY INDIVIDUAL CASE OR IN THE
AGGREGATE, MATERIALLY ADVERSE.

 

4.6          AGREEMENTS; ACTION.

 

(A)           EXCEPT AS SET FORTH IN THE SEC REPORTS AND SCHEDULE 4.6 HERETO,
THERE ARE NO AGREEMENTS, UNDERSTANDINGS, INSTRUMENTS, CONTRACTS, PROPOSED
TRANSACTIONS, JUDGMENTS, ORDERS, WRITS OR DECREES TO WHICH EITHER THE COMPANY 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,
THE COMPANY OR ANY OF ITS SUBSIDIARIES IN EXCESS OF $50,000 (OTHER THAN
OBLIGATIONS OF, OR PAYMENTS TO, THE COMPANY OR ANY OF ITS SUBSIDIARIES ARISING
FROM PURCHASE OR SALE AGREEMENTS ENTERED INTO IN THE ORDINARY COURSE OF
BUSINESS), OR (II) THE TRANSFER OR LICENSE OF ANY PATENT, COPYRIGHT, TRADE
SECRET OR OTHER PROPRIETARY RIGHT TO OR FROM THE COMPANY OR ANY OF ITS
SUBSIDIARIES (OTHER THAN LICENSES ARISING FROM THE PURCHASE OF “OFF THE SHELF”
OR OTHER STANDARD PRODUCTS), OR (III) PROVISIONS RESTRICTING THE DEVELOPMENT,
MANUFACTURE OR DISTRIBUTION OF THE COMPANY’S OR ANY OF ITS SUBSIDIARIES’
PRODUCTS OR SERVICES, OR (IV) INDEMNIFICATION BY THE COMPANY OR ANY OF ITS
SUBSIDIARIES WITH RESPECT TO INFRINGEMENTS OF PROPRIETARY RIGHTS.

 

(B)           EXCEPT AS SET FORTH IN THE SEC REPORTS, NEITHER THE COMPANY NOR OR
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 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, OTHER THAN ORDINARY
ADVANCES FOR

 

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TRAVEL EXPENSES, OR (IV) SOLD, EXCHANGED OR OTHERWISE DISPOSED OF ANY OF ITS
ASSETS OR RIGHTS, OTHER THAN THE SALE OF ITS INVENTORY IN THE ORDINARY COURSE OF
BUSINESS.

 

(C)           FOR THE PURPOSES OF SUBSECTIONS (A) AND (B) ABOVE, ALL
INDEBTEDNESS, LIABILITIES, AGREEMENTS, UNDERSTANDINGS, INSTRUMENTS, CONTRACTS
AND PROPOSED TRANSACTIONS INVOLVING THE SAME PERSON OR ENTITY (INCLUDING PERSONS
OR ENTITIES THE COMPANY OR ANY OF ITS SUBSIDIARIES HAS REASON TO BELIEVE ARE
AFFILIATED THEREWITH) SHALL BE AGGREGATED FOR THE PURPOSE OF MEETING THE
INDIVIDUAL MINIMUM DOLLAR AMOUNTS OF SUCH SUBSECTIONS.

 

(D)           THE COMPANY MAINTAINS DISCLOSURE CONTROLS AND PROCEDURES
(“DISCLOSURE CONTROLS”) DESIGNED TO ENSURE THAT INFORMATION REQUIRED TO BE
DISCLOSED BY THE COMPANY IN THE REPORTS THAT IT FILES OR SUBMITS UNDER THE
EXCHANGE ACT IS RECORDED, PROCESSED, SUMMARIZED, AND REPORTED, WITHIN THE TIME
PERIODS SPECIFIED IN THE RULES AND FORMS OF THE SECURITIES AND EXCHANGE
COMMISSION (“SEC”).

 

(E)           THE COMPANY MAKES AND KEEP BOOKS, RECORDS, AND ACCOUNTS, THAT, IN
REASONABLE DETAIL, ACCURATELY AND FAIRLY REFLECT THE TRANSACTIONS AND
DISPOSITIONS OF THE COMPANY’S ASSETS.  THE COMPANY MAINTAINS INTERNAL CONTROL
OVER FINANCIAL REPORTING (“FINANCIAL REPORTING CONTROLS”) DESIGNED BY, OR UNDER
THE SUPERVISION OF, THE COMPANY’S PRINCIPAL EXECUTIVE AND PRINCIPAL FINANCIAL
OFFICERS, AND EFFECTED BY THE COMPANY’S BOARD OF DIRECTORS, MANAGEMENT, AND
OTHER PERSONNEL, TO PROVIDE REASONABLE ASSURANCE REGARDING THE RELIABILITY OF
FINANCIAL REPORTING AND THE PREPARATION OF FINANCIAL STATEMENTS FOR EXTERNAL
PURPOSES IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (“GAAP”),
INCLUDING THAT:

 

(I)            TRANSACTIONS ARE EXECUTED IN ACCORDANCE WITH MANAGEMENT’S GENERAL
OR SPECIFIC AUTHORIZATION;

 

(II)           UNAUTHORIZED ACQUISITION, USE, OR DISPOSITION OF THE COMPANY’S
ASSETS THAT COULD HAVE A MATERIAL EFFECT ON THE FINANCIAL STATEMENTS ARE
PREVENTED OR TIMELY DETECTED;

 

(III)          TRANSACTIONS ARE RECORDED AS NECESSARY TO PERMIT PREPARATION OF
FINANCIAL STATEMENTS IN ACCORDANCE WITH GAAP, AND THAT THE COMPANY’S RECEIPTS
AND EXPENDITURES ARE BEING MADE ONLY IN ACCORDANCE WITH AUTHORIZATIONS OF THE
COMPANY’S MANAGEMENT AND BOARD OF DIRECTORS;

 

(IV)          TRANSACTIONS ARE RECORDED AS NECESSARY TO MAINTAIN ACCOUNTABILITY
FOR ASSETS; AND

 

(V)           THE RECORDED ACCOUNTABILITY FOR ASSETS IS COMPARED WITH THE
EXISTING ASSETS AT REASONABLE INTERVALS, AND APPROPRIATE ACTION IS TAKEN WITH
RESPECT TO ANY DIFFERENCES.

 

(F)          THERE IS NO WEAKNESS IN ANY OF THE COMPANY’S DISCLOSURE CONTROLS OR
FINANCIAL REPORTING CONTROLS THAT IS REQUIRED TO BE DISCLOSED IN ANY OF THE
EXCHANGE ACT FILINGS, EXCEPT AS SO DISCLOSED.

 

(G)         THE COMPANY HAS NOT ENGAGED IN THE PAST TWO YEARS IN ANY DISCUSSION
(I) WITH ANY REPRESENTATIVE OF ANY CORPORATION OR CORPORATIONS REGARDING THE
CONSOLIDATION OR MERGER OF THE COMPANY WITH OR INTO ANY SUCH CORPORATION OR
CORPORATIONS, (II)

 

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WITH ANY CORPORATION, PARTNERSHIP, ASSOCIATION OR OTHER BUSINESS ENTITY OR ANY
INDIVIDUAL REGARDING THE SALE, CONVEYANCE OR DISPOSITION OF ALL OR SUBSTANTIALLY
ALL OF THE ASSETS OF THE COMPANY, OR A TRANSACTION OR SERIES OF RELATED
TRANSACTIONS IN WHICH MORE THAN 50% OF THE VOTING POWER OF THE COMPANY IS
DISPOSED OF OR (III) REGARDING ANY OTHER FORM OF ACQUISITION, LIQUIDATION,
DISSOLUTION OR WINDING UP OF THE COMPANY.

 

4.7.           OBLIGATIONS TO RELATED PARTIES.  EXCEPT AS SET FORTH IN THE SEC
REPORTS, THERE ARE NO OBLIGATIONS OF THE COMPANY OR ANY OF ITS SUBSIDIARIES TO
OFFICERS, DIRECTORS, STOCKHOLDERS OR EMPLOYEES OF THE COMPANY OR ANY OF ITS
SUBSIDIARIES OTHER THAN (A) FOR PAYMENT OF SALARY FOR SERVICES RENDERED,
(B) REIMBURSEMENT FOR REASONABLE EXPENSES INCURRED ON BEHALF OF THE COMPANY OR
ANY OF ITS SUBSIDIARIES AND (C) FOR OTHER STANDARD EMPLOYEE BENEFITS MADE
GENERALLY AVAILABLE TO ALL EMPLOYEES (INCLUDING STOCK OPTION AGREEMENTS
OUTSTANDING UNDER ANY STOCK OPTION PLAN APPROVED BY THE BOARD OF DIRECTORS OF
THE COMPANY).  EXCEPT AS SET FORTH IN THE SEC REPORTS, NONE OF THE OFFICERS,
DIRECTORS OR STOCKHOLDERS OF THE COMPANY OR ANY OF ITS SUBSIDIARIES, OR ANY
MEMBERS OF THEIR IMMEDIATE FAMILIES, ARE INDEBTED TO THE COMPANY OR ANY OF ITS
SUBSIDIARIES.  EXCEPT AS SET FORTH IN THE SEC REPORTS, NONE OF THE OFFICERS,
DIRECTORS OR, TO THE BEST OF THE COMPANY’S AND ITS SUBSIDIARIES KNOWLEDGE, KEY
EMPLOYEES OR STOCKHOLDERS OF THE COMPANY OR ANY MEMBERS OF THEIR IMMEDIATE
FAMILIES, ARE INDEBTED TO THE COMPANY OR ANY OF ITS SUBSIDIARIES OR HAVE ANY
DIRECT OR INDIRECT OWNERSHIP INTEREST IN ANY FIRM OR CORPORATION WITH WHICH THE
COMPANY OR ANY OF ITS SUBSIDIARIES IS AFFILIATED OR WITH WHICH THE COMPANY OR
ANY OF ITS SUBSIDIARIES HAS A BUSINESS RELATIONSHIP, OR ANY FIRM OR CORPORATION
WHICH COMPETES WITH THE COMPANY OR ANY OF ITS SUBSIDIARIES, OTHER THAN PASSIVE
INVESTMENTS IN PUBLICLY TRADED COMPANIES (REPRESENTING LESS THAN 1% OF SUCH
COMPANY) WHICH MAY COMPETE WITH THE COMPANY OR ANY OF ITS SUBSIDIARIES.  EXCEPT
AS SET FORTH IN THE SEC REPORTS, NO OFFICER, DIRECTOR OR STOCKHOLDER, OR ANY
MEMBER OF THEIR IMMEDIATE FAMILIES, IS, DIRECTLY OR INDIRECTLY, INTERESTED IN
ANY MATERIAL CONTRACT WITH THE COMPANY OR ANY OF ITS SUBSIDIARIES AND NO
AGREEMENTS, UNDERSTANDINGS OR PROPOSED TRANSACTIONS ARE CONTEMPLATED BETWEEN THE
COMPANY OR ANY OF ITS SUBSIDIARIES AND ANY SUCH PERSON.  EXCEPT AS SET FORTH IN
THE SEC REPORTS, NEITHER THE COMPANY NOR ANY OF ITS SUBSIDIARIES IS A GUARANTOR
OR INDEMNITOR OF ANY INDEBTEDNESS OF ANY OTHER PERSON, FIRM OR CORPORATION.

 

4.8            CHANGES.  EXCEPT AS SET FORTH IN THE SEC REPORTS, SINCE MARCH 31,
2005 THERE HAS NOT BEEN:

 

(A)           ANY CHANGE IN THE ASSETS, LIABILITIES, FINANCIAL CONDITION,
PROSPECTS OR OPERATIONS OF THE COMPANY OR ANY OF ITS SUBSIDIARIES, OTHER THAN
CHANGES IN THE ORDINARY COURSE OF BUSINESS, NONE OF WHICH INDIVIDUALLY OR IN THE
AGGREGATE HAS HAD OR IS REASONABLY EXPECTED TO HAVE A MATERIAL ADVERSE EFFECT ON
SUCH ASSETS, LIABILITIES, FINANCIAL CONDITION, PROSPECTS OR OPERATIONS OF THE
COMPANY OR ANY OF ITS SUBSIDIARIES;

 

(B)           ANY RESIGNATION OR TERMINATION OF ANY OFFICER, KEY EMPLOYEE OR
GROUP OF EMPLOYEES OF THE COMPANY OR ANY OF ITS SUBSIDIARIES;

 

(C)           ANY MATERIAL CHANGE, EXCEPT IN THE ORDINARY COURSE OF BUSINESS, IN
THE CONTINGENT OBLIGATIONS OF THE COMPANY OR ANY OF ITS SUBSIDIARIES BY WAY OF
GUARANTY, ENDORSEMENT, INDEMNITY, WARRANTY OR OTHERWISE;

 

7

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(D)           ANY DAMAGE, DESTRUCTION OR LOSS, WHETHER OR NOT COVERED BY
INSURANCE, MATERIALLY AND ADVERSELY AFFECTING THE PROPERTIES, BUSINESS OR
PROSPECTS OR FINANCIAL CONDITION OF THE COMPANY OR ANY OF ITS SUBSIDIARIES;

 

(E)           ANY WAIVER BY THE COMPANY OR ANY OF ITS SUBSIDIARIES OF A VALUABLE
RIGHT OR OF A MATERIAL DEBT OWED TO IT;

 

(F)            ANY DIRECT OR INDIRECT LOANS MADE BY THE COMPANY OR ANY OF ITS
SUBSIDIARIES TO ANY STOCKHOLDER, EMPLOYEE, OFFICER OR DIRECTOR OF THE COMPANY OR
ANY OF ITS SUBSIDIARIES, OTHER THAN ADVANCES MADE IN THE ORDINARY COURSE OF
BUSINESS;

 

(G)           ANY MATERIAL CHANGE IN ANY COMPENSATION ARRANGEMENT OR AGREEMENT
WITH ANY EMPLOYEE, OFFICER, DIRECTOR OR STOCKHOLDER;

 

(H)           ANY DECLARATION OR PAYMENT OF ANY DIVIDEND OR OTHER DISTRIBUTION
OF THE ASSETS OF THE COMPANY OR ANY OF ITS SUBSIDIARIES;

 

(I)            ANY LABOR ORGANIZATION ACTIVITY RELATED TO THE COMPANY OR ANY OF
ITS SUBSIDIARIES;

 

(J)            ANY DEBT, OBLIGATION OR LIABILITY INCURRED, ASSUMED OR GUARANTEED
BY THE COMPANY OR ANY OF ITS SUBSIDIARIES, EXCEPT THOSE FOR IMMATERIAL AMOUNTS
AND FOR CURRENT LIABILITIES INCURRED IN THE ORDINARY COURSE OF BUSINESS;

 

(K)           ANY SALE, ASSIGNMENT OR TRANSFER OF ANY PATENTS, TRADEMARKS,
COPYRIGHTS, TRADE SECRETS OR OTHER INTANGIBLE ASSETS;

 

(L)            ANY CHANGE IN ANY MATERIAL AGREEMENT TO WHICH THE COMPANY OR ANY
OF ITS SUBSIDIARIES IS A PARTY OR BY WHICH IT IS BOUND WHICH MAY MATERIALLY AND
ADVERSELY AFFECT THE BUSINESS, ASSETS, LIABILITIES, FINANCIAL CONDITION,
OPERATIONS OR PROSPECTS OF THE COMPANY OR ANY OF ITS SUBSIDIARIES ;

 

(M)          ANY OTHER EVENT OR CONDITION OF ANY CHARACTER THAT, EITHER
INDIVIDUALLY OR CUMULATIVELY, HAS OR MAY MATERIALLY AND ADVERSELY AFFECT THE
BUSINESS, ASSETS, LIABILITIES, FINANCIAL CONDITION, PROSPECTS OR OPERATIONS OF
THE COMPANY OR ANY OF ITS SUBSIDIARIES; OR

 

(N)           ANY ARRANGEMENT OR COMMITMENT BY THE COMPANY OR ANY OF ITS
SUBSIDIARIES TO DO ANY OF THE ACTS DESCRIBED IN SUBSECTION (A) THROUGH (M)
ABOVE.

 

4.9.         TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. EXCEPT AS SET FORTH IN
THE SEC REPORTS, LIENS GRANTED IN FAVOR OF PURCHASER AND THE LIENS SET FORTH ON
SCHEDULE 4.9 HERETO, THE COMPANY AND EACH OF ITS SUBSIDIARIES HAS GOOD AND
MARKETABLE TITLE TO ITS PROPERTIES AND ASSETS, AND GOOD TITLE TO ITS LEASEHOLD
ESTATES, IN EACH CASE SUBJECT TO NO MORTGAGE, PLEDGE, LIEN, LEASE, ENCUMBRANCE
OR CHARGE, OTHER THAN (A) THOSE RESULTING FROM TAXES WHICH HAVE NOT YET BECOME
DELINQUENT, (B) MINOR LIENS AND ENCUMBRANCES WHICH DO NOT MATERIALLY DETRACT
FROM THE VALUE OF THE PROPERTY SUBJECT THERETO OR MATERIALLY IMPAIR THE
OPERATIONS OF THE COMPANY OR ANY OF ITS SUBSIDIARIES AND (C) THOSE THAT HAVE
OTHERWISE ARISEN IN THE ORDINARY COURSE OF BUSINESS.  ALL

 

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FACILITIES, MACHINERY, EQUIPMENT, FIXTURES, VEHICLES AND OTHER PROPERTIES OWNED,
LEASED OR USED BY THE COMPANY AND EACH 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.  THE COMPANY AND EACH OF ITS SUBSIDIARIES IS IN
COMPLIANCE WITH ALL MATERIAL TERMS OF EACH LEASE TO WHICH IT IS A PARTY OR IS
OTHERWISE BOUND.

 

4.10.       INTELLECTUAL PROPERTY.

 

(O)           THE COMPANY AND EACH OF ITS SUBSIDIARIES OWNS OR POSSESSES
SUFFICIENT LEGAL RIGHTS TO ALL PATENTS, TRADEMARKS, SERVICE MARKS, TRADE NAMES,
COPYRIGHTS, TRADE SECRETS, LICENSES, INFORMATION AND OTHER PROPRIETARY RIGHTS
AND PROCESSES NECESSARY FOR ITS BUSINESS AS NOW CONDUCTED AND TO THE COMPANY’S
KNOWLEDGE AS PRESENTLY PROPOSED TO BE CONDUCTED (THE “INTELLECTUAL PROPERTY”),
WITHOUT ANY KNOWN INFRINGEMENT OF THE RIGHTS OF OTHERS.  EXCEPT AS SET FORTH IN
THE SEC REPORTS, THERE ARE NO OUTSTANDING OPTIONS, LICENSES OR AGREEMENTS OF ANY
KIND RELATING TO THE FOREGOING PROPRIETARY RIGHTS, NOR IS THE COMPANY OR ANY OF
ITS SUBSIDIARIES BOUND BY OR A PARTY TO ANY OPTIONS, LICENSES OR AGREEMENTS OF
ANY KIND WITH RESPECT TO THE PATENTS, TRADEMARKS, SERVICE MARKS, TRADE NAMES,
COPYRIGHTS, TRADE SECRETS, LICENSES, INFORMATION AND OTHER PROPRIETARY RIGHTS
AND PROCESSES OF ANY OTHER PERSON OR ENTITY OTHER THAN SUCH LICENSES OR
AGREEMENTS ARISING FROM THE PURCHASE OF “OFF THE SHELF” OR STANDARD PRODUCTS.

 

(P)           NEITHER THE COMPANY NOR OR ANY OF ITS SUBSIDIARIES HAS RECEIVED
ANY COMMUNICATIONS ALLEGING THAT THE COMPANY OR ANY OF ITS SUBSIDIARIES HAS
VIOLATED ANY OF THE PATENTS, TRADEMARKS, SERVICE MARKS, TRADE NAMES, COPYRIGHTS
OR TRADE SECRETS OR OTHER PROPRIETARY RIGHTS OF ANY OTHER PERSON OR ENTITY, NOR
IS THE COMPANY OR ANY OF ITS SUBSIDIARIES AWARE OF ANY BASIS THEREFOR.

 

(Q)           NEITHER THE COMPANY NOR OR ANY OF ITS SUBSIDIARIES BELIEVES THAT
IT IS OR WILL BE NECESSARY TO UTILIZE ANY INVENTIONS, TRADE SECRETS OR
PROPRIETARY INFORMATION OF ANY OF ITS EMPLOYEES MADE PRIOR TO THEIR EMPLOYMENT
BY THE COMPANY OR ANY OF ITS SUBSIDIARIES, EXCEPT FOR INVENTIONS, TRADE SECRETS
OR PROPRIETARY INFORMATION THAT HAVE BEEN RIGHTFULLY ASSIGNED TO THE COMPANY OR
ANY OF ITS SUBSIDIARIES.

 

4.11.       COMPLIANCE WITH OTHER INSTRUMENTS.  EXCEPT AS SET FORTH IN THE SEC
REPORTS, NEITHER THE COMPANY NOR OR ANY OF ITS SUBSIDIARIES IS IN VIOLATION OR
DEFAULT OF ANY TERM OF THEIR RESPECTIVE CHARTER OR BYLAWS, OR OF ANY PROVISION
OF ANY MORTGAGE, INDENTURE, CONTRACT, AGREEMENT, INSTRUMENT OR CONTRACT TO WHICH
IT IS PARTY OR BY WHICH IT IS BOUND OR OF ANY JUDGMENT, DECREE, ORDER OR WRIT. 
THE EXECUTION, DELIVERY AND PERFORMANCE OF AND COMPLIANCE WITH THIS AGREEMENT
AND THE RELATED AGREEMENTS, AND THE ISSUANCE AND SALE OF SECURITIES PURSUANT
HERETO, WILL NOT, WITH OR WITHOUT THE PASSAGE OF TIME OR GIVING OF NOTICE,
RESULT IN ANY SUCH MATERIAL VIOLATION, OR BE IN CONFLICT WITH OR CONSTITUTE A
DEFAULT UNDER ANY SUCH TERM OR PROVISION, OR RESULT IN THE CREATION OF ANY
MORTGAGE, PLEDGE, LIEN, ENCUMBRANCE OR CHARGE UPON ANY OF THE PROPERTIES OR
ASSETS OF THE COMPANY OR ANY OF ITS SUBSIDIARIES OR THE SUSPENSION, REVOCATION,
IMPAIRMENT, FORFEITURE OR NONRENEWAL OF ANY PERMIT, LICENSE, AUTHORIZATION OR
APPROVAL APPLICABLE TO THE COMPANY, ITS BUSINESS OR OPERATIONS OR ANY OF ITS
ASSETS OR PROPERTIES.

 

4.12.       LITIGATION.  EXCEPT AS SET FORTH IN THE SEC REPORTS, THERE IS NO
ACTION, SUIT, PROCEEDING OR INVESTIGATION PENDING OR, TO THE COMPANY’S
KNOWLEDGE, CURRENTLY THREATENED

 

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AGAINST THE COMPANY OR ANY OF ITS SUBSIDIARIES THAT QUESTIONS THE VALIDITY OF
THIS AGREEMENT OR THE RELATED AGREEMENTS OR THE RIGHT OF THE COMPANY OR ANY OF
ITS SUBSIDIARIES TO ENTER INTO ANY OF SUCH AGREEMENTS, OR TO CONSUMMATE THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, OR WHICH MIGHT RESULT, EITHER
INDIVIDUALLY OR IN THE AGGREGATE, IN ANY MATERIAL ADVERSE CHANGE IN THE ASSETS,
CONDITION, AFFAIRS OR PROSPECTS OF THE COMPANY OR ANY OF ITS SUBSIDIARIES,
FINANCIALLY OR OTHERWISE, OR ANY CHANGE IN THE CURRENT EQUITY OWNERSHIP OF THE
COMPANY OR ANY OF ITS SUBSIDIARIES, NOR IS THE COMPANY OR ANY OF ITS
SUBSIDIARIES AWARE THAT THERE IS ANY BASIS FOR ANY OF THE FOREGOING. NEITHER THE
COMPANY NOR ANY OF ITS SUBSIDIARIES IS A PARTY OR SUBJECT TO THE PROVISIONS OF
ANY ORDER, WRIT, INJUNCTION, JUDGMENT OR DECREE OF ANY COURT OR GOVERNMENT
AGENCY OR INSTRUMENTALITY.  EXCEPT AS SET FORTH IN THE SEC REPORTS, THERE IS NO
ACTION, SUIT, PROCEEDING OR INVESTIGATION BY THE COMPANY OR ANY OF ITS
SUBSIDIARIES CURRENTLY PENDING OR WHICH THE COMPANY OR ANY OF ITS SUBSIDIARIES
INTENDS TO INITIATE.

 

4.13.       TAX RETURNS AND PAYMENTS.  EACH OF THE COMPANY AND EACH OF ITS
SUBSIDIARIES HAS TIMELY FILED ALL TAX RETURNS (FEDERAL, STATE AND LOCAL)
REQUIRED TO BE FILED BY IT.  ALL TAXES SHOWN TO BE DUE AND PAYABLE ON SUCH
RETURNS, ANY ASSESSMENTS IMPOSED, AND TO THE COMPANY’S KNOWLEDGE ALL OTHER TAXES
DUE AND PAYABLE BY THE COMPANY OR ANY OF ITS SUBSIDIARIES ON OR BEFORE THE
CLOSING, HAVE BEEN PAID OR WILL BE PAID PRIOR TO THE TIME THEY BECOME
DELINQUENT.  NEITHER THE COMPANY NOR ANY OF ITS SUBSIDIARIES HAS BEEN ADVISED
(A) THAT ANY OF THEIR RESPECTIVE RETURNS, FEDERAL, STATE OR OTHER, HAVE BEEN OR
ARE BEING AUDITED AS OF THE DATE HEREOF, OR (B) OF ANY DEFICIENCY IN ASSESSMENT
OR PROPOSED JUDGMENT TO ITS FEDERAL, STATE OR OTHER TAXES.  EXCEPT AS SET FORTH
ON SCHEDULE 4.13 HERETO, NEITHER THE COMPANY 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.

 

4.14.       EMPLOYEES.  NEITHER THE COMPANY NOR ANY OF ITS SUBSIDIARIES HAS ANY
COLLECTIVE BARGAINING AGREEMENTS WITH ANY OF THEIR RESPECTIVE EMPLOYEES.  THERE
IS NO LABOR UNION ORGANIZING ACTIVITY PENDING OR, TO THE COMPANY’S KNOWLEDGE,
THREATENED WITH RESPECT TO THE COMPANY OR ANY OF ITS SUBSIDIARIES.  EXCEPT AS
SET FORTH IN THE SEC REPORTS, NEITHER THE COMPANY NOR ANY OF ITS SUBSIDIARIES IS
A PARTY TO OR BOUND BY ANY CURRENTLY EFFECTIVE EMPLOYMENT CONTRACT, DEFERRED
COMPENSATION ARRANGEMENT, BONUS PLAN, INCENTIVE PLAN, PROFIT SHARING PLAN,
RETIREMENT AGREEMENT OR OTHER EMPLOYEE COMPENSATION PLAN OR AGREEMENT.  TO THE
COMPANY’S KNOWLEDGE, NO EMPLOYEE OF THE COMPANY OR ANY OF ITS SUBSIDIARIES, NOR
ANY CONSULTANT WITH WHOM THE COMPANY OR ANY OF ITS SUBSIDIARIES HAS CONTRACTED,
IS IN VIOLATION OF ANY TERM OF ANY EMPLOYMENT CONTRACT, PROPRIETARY INFORMATION
AGREEMENT OR ANY OTHER AGREEMENT RELATING TO THE RIGHT OF ANY SUCH INDIVIDUAL TO
BE EMPLOYED BY, OR TO CONTRACT WITH, THE COMPANY OR ANY OF ITS SUBSIDIARIES
BECAUSE OF THE NATURE OF THE BUSINESS TO BE CONDUCTED BY THE COMPANY OR ANY OF
ITS SUBSIDIARIES; AND TO THE COMPANY’S KNOWLEDGE THE CONTINUED EMPLOYMENT BY THE
COMPANY OR ANY OF ITS SUBSIDIARIES OF THEIR RESPECTIVE PRESENT EMPLOYEES, AND
THE PERFORMANCE OF THE COMPANY’S AND EACH OF ITS SUBSIDIARIES CONTRACTS WITH ITS
INDEPENDENT CONTRACTORS, WILL NOT RESULT IN ANY SUCH VIOLATION.  NEITHER THE
COMPANY NOR ANY OF ITS SUBSIDIARIES IS AWARE THAT ANY OF ITS EMPLOYEES IS
OBLIGATED UNDER ANY CONTRACT (INCLUDING LICENSES, COVENANTS OR COMMITMENTS OF
ANY NATURE) OR OTHER AGREEMENT, OR SUBJECT TO ANY JUDGMENT, DECREE OR ORDER OF
ANY COURT OR ADMINISTRATIVE AGENCY, THAT WOULD INTERFERE WITH THEIR DUTIES TO
THE COMPANY OR ANY OF ITS SUBSIDIARIES.  NEITHER THE COMPANY NOR ANY OF ITS
SUBSIDIARIES HAS RECEIVED ANY NOTICE ALLEGING THAT ANY SUCH VIOLATION HAS
OCCURRED.  EXCEPT AS SET FORTH IN THE SEC REPORTS, NO EMPLOYEE OF THE COMPANY OR
ANY OF ITS SUBSIDIARIES HAS BEEN GRANTED THE RIGHT TO CONTINUED EMPLOYMENT BY
THE

 

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COMPANY OR ANY OF ITS SUBSIDIARIES OR TO ANY MATERIAL COMPENSATION FOLLOWING
TERMINATION OF EMPLOYMENT WITH THE COMPANY OR ANY OF ITS SUBSIDIARIES.  NEITHER
THE COMPANY 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 THE
COMPANY OR ANY OF ITS SUBSIDIARIES, NOR DOES THE COMPANY OR ANY OF ITS
SUBSIDIARIES HAVE A PRESENT INTENTION TO TERMINATE THE EMPLOYMENT OF ANY
OFFICER, KEY EMPLOYEE OR GROUP OF EMPLOYEES.

 

4.15.       REGISTRATION RIGHTS AND VOTING RIGHTS.  EXCEPT AS SET FORTH IN THE
SEC REPORTS AND ON SCHEDULE 4.15 ATTACHED HERETO, NEITHER THE COMPANY NOR ANY OF
ITS SUBSIDIARIES IS PRESENTLY UNDER ANY OBLIGATION, AND HAS NOT GRANTED ANY
RIGHTS, TO REGISTER ANY OF THE COMPANY’S PRESENTLY OUTSTANDING SECURITIES OR ANY
OF ITS SECURITIES THAT MAY HEREAFTER BE ISSUED.  TO THE COMPANY’S KNOWLEDGE, NO
STOCKHOLDER OF THE COMPANY OR ANY OF ITS SUBSIDIARIES HAS ENTERED INTO ANY
AGREEMENT WITH RESPECT TO THE VOTING OF EQUITY SECURITIES OF THE COMPANY OR ANY
OF ITS SUBSIDIARIES.

 

4.16.       COMPLIANCE WITH LAWS; PERMITS.  TO ITS KNOWLEDGE, NEITHER THE
COMPANY NOR ANY OF ITS SUBSIDIARIES IS IN VIOLATION OF ANY APPLICABLE STATUTE,
RULE, REGULATION, ORDER OR RESTRICTION OF ANY DOMESTIC OR FOREIGN GOVERNMENT OR
ANY INSTRUMENTALITY OR AGENCY THEREOF IN RESPECT OF THE CONDUCT OF ITS BUSINESS
OR THE OWNERSHIP OF ITS PROPERTIES WHICH VIOLATION WOULD MATERIALLY AND
ADVERSELY AFFECT THE BUSINESS, ASSETS, LIABILITIES, FINANCIAL CONDITION,
OPERATIONS OR PROSPECTS OF THE COMPANY OR ANY OF ITS SUBSIDIARIES.  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 AND THE
ISSUANCE OF ANY OF THE SECURITIES, EXCEPT SUCH AS HAS BEEN DULY AND VALIDLY
OBTAINED OR FILED, OR WITH RESPECT TO ANY FILINGS THAT MUST BE MADE AFTER THE
CLOSING, AS WILL BE FILED IN A TIMELY MANNER.  THE COMPANY AND EACH OF ITS
SUBSIDIARIES HAS ALL 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 MATERIALLY AND ADVERSELY AFFECT THE BUSINESS, PROPERTIES,
PROSPECTS OR FINANCIAL CONDITION OF THE COMPANY AND EACH OF ITS SUBSIDIARIES.

 

4.17.       ENVIRONMENTAL AND SAFETY LAWS.  NEITHER THE COMPANY NOR ANY OF ITS
SUBSIDIARIES IS IN VIOLATION OF ANY APPLICABLE STATUTE, LAW OR REGULATION
RELATING TO THE ENVIRONMENT OR OCCUPATIONAL HEALTH AND SAFETY, AND TO ITS
KNOWLEDGE, NO MATERIAL EXPENDITURES ARE OR WILL BE REQUIRED IN ORDER TO COMPLY
WITH ANY SUCH EXISTING STATUTE, LAW OR REGULATION.  EXCEPT AS SET FORTH IN THE
SEC REPORTS, NO HAZARDOUS MATERIALS (AS DEFINED BELOW) ARE USED OR HAVE BEEN
USED, STORED, OR DISPOSED OF BY THE COMPANY OR ANY OF ITS SUBSIDIARIES OR, TO
THE COMPANY’S KNOWLEDGE, BY ANY OTHER PERSON OR ENTITY ON ANY PROPERTY OWNED,
LEASED OR USED BY THE COMPANY OR ANY OF ITS SUBSIDIARIES.  FOR THE PURPOSES OF
THE PRECEDING SENTENCE, “HAZARDOUS MATERIALS” SHALL MEAN (A) MATERIALS WHICH ARE
LISTED OR OTHERWISE DEFINED AS “HAZARDOUS” OR “TOXIC” UNDER ANY APPLICABLE
LOCAL, STATE, FEDERAL AND/OR FOREIGN LAWS AND REGULATIONS THAT GOVERN THE
EXISTENCE AND/OR REMEDY OF CONTAMINATION ON PROPERTY, THE PROTECTION OF THE
ENVIRONMENT FROM CONTAMINATION, THE CONTROL OF HAZARDOUS WASTES, OR OTHER
ACTIVITIES INVOLVING HAZARDOUS SUBSTANCES, INCLUDING BUILDING MATERIALS, OR
(B) ANY PETROLEUM PRODUCTS OR NUCLEAR MATERIALS.

 

4.18.       VALID OFFERING.  ASSUMING THE ACCURACY OF THE REPRESENTATIONS AND
WARRANTIES OF THE PURCHASER CONTAINED IN THIS AGREEMENT, THE OFFER, SALE AND
ISSUANCE OF THE

 

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SECURITIES WILL BE EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND WILL HAVE BEEN REGISTERED OR
QUALIFIED (OR ARE EXEMPT FROM REGISTRATION AND QUALIFICATION) UNDER THE
REGISTRATION, PERMIT OR QUALIFICATION REQUIREMENTS OF ALL APPLICABLE STATE
SECURITIES LAWS.  NEITHER THE COMPANY, ANY OF ITS SUBSIDIARIES, NOR ANY AGENT ON
THEIR RESPECTIVE BEHALF HAS SOLICITED OR WILL SOLICIT ANY OFFERS TO SELL OR HAS
OFFERED TO SELL OR WILL OFFER TO SELL ALL OR ANY PART OF THE SECURITIES TO ANY
PERSON OR PERSONS SO AS TO BRING THE SALE OF SUCH SECURITIES BY THE COMPANY OR
ANY OF ITS SUBSIDIARIES WITHIN THE REGISTRATION PROVISIONS OF THE SECURITIES ACT
OR ANY STATE SECURITIES LAWS.

 

4.19.       FULL DISCLOSURE.  EACH OF THE COMPANY AND EACH OF ITS SUBSIDIARIES
HAS PROVIDED THE PURCHASER WITH ALL INFORMATION REQUESTED BY THE PURCHASER IN
CONNECTION WITH ITS DECISION TO PURCHASE THE PREFERRED STOCK, INCLUDING ALL
INFORMATION THE COMPANY BELIEVES IS REASONABLY NECESSARY TO MAKE SUCH INVESTMENT
DECISION.  TO THE COMPANY’S KNOWLEDGE, NEITHER THIS AGREEMENT, THE EXHIBITS AND
SCHEDULES HERETO, THE RELATED AGREEMENTS NOR ANY OTHER DOCUMENT DELIVERED BY THE
COMPANY OR ANY OF ITS SUBSIDIARIES TO PURCHASER OR ITS ATTORNEYS OR AGENTS IN
CONNECTION HEREWITH OR THEREWITH OR WITH THE TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY, CONTAIN ANY UNTRUE STATEMENT OF A MATERIAL FACT NOR OMIT TO STATE A
MATERIAL FACT NECESSARY IN ORDER TO MAKE THE STATEMENTS CONTAINED HEREIN OR
THEREIN, IN LIGHT OF THE CIRCUMSTANCES IN WHICH THEY ARE MADE, NOT MISLEADING. 
ANY FINANCIAL PROJECTIONS AND OTHER ESTIMATES PROVIDED TO THE PURCHASER BY THE
COMPANY AND EACH OF ITS SUBSIDIARIES WERE BASED ON THE COMPANY’S AND EACH OF ITS
SUBSIDIARIES’ EXPERIENCE IN THE INDUSTRY AND ASSUMPTIONS OF FACT AND OPINION AS
TO FUTURE EVENTS WHICH THE COMPANY AND EACH OF ITS SUBSIDIARIES, AT THE DATE OF
THE ISSUANCE OF SUCH PROJECTIONS OR ESTIMATES, BELIEVED TO BE REASONABLE.  AS OF
THE DATE HEREOF NO FACTS HAVE COME TO THE ATTENTION OF THE COMPANY OR ANY OF ITS
SUBSIDIARIES THAT WOULD, IN ITS OPINION, REQUIRE THE COMPANY TO REVISE OR
AMPLIFY IN ANY MATERIAL RESPECT THE ASSUMPTIONS UNDERLYING SUCH PROJECTIONS AND
OTHER ESTIMATES OR THE CONCLUSIONS DERIVED THEREFROM.  ANY FINANCIAL PROJECTIONS
ARE SUBJECT TO FUTURE EVENTS AND NEITHER THE COMPANY NOR ANY OF ITS SUBSIDIARIES
CAN GIVE ANY ASSURANCE THAT IT WILL MEET ITS FINANCIAL PROJECTIONS.

 

4.20.       INSURANCE.  EACH OF THE COMPANY AND EACH OF ITS SUBSIDIARIES HAS
GENERAL COMMERCIAL, PRODUCT LIABILITY, FIRE AND CASUALTY INSURANCE POLICIES WITH
COVERAGE CUSTOMARY FOR COMPANIES SIMILARLY SITUATED TO THE COMPANY AND EACH OF
ITS SUBSIDIARIES.

 

4.21.       SEC REPORTS.  THE COMPANY HAS FILED ALL PROXY STATEMENTS, REPORTS
AND OTHER DOCUMENTS REQUIRED TO BE FILED BY IT UNDER THE EXCHANGE ACT OF 1934,
AS AMENDED (THE “EXCHANGE ACT”).    EACH SEC REPORT WAS 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 DATES, CONTAINED ANY UNTRUE STATEMENT OF A
MATERIAL FACT OR OMITTED TO STATE A MATERIAL FACT REQUIRED TO BE STATED THEREIN
OR NECESSARY TO MAKE THE STATEMENTS THEREIN, IN LIGHT OF THE CIRCUMSTANCES UNDER
WHICH THEY WERE MADE, NOT MISLEADING.

 

4.22.       NO MARKET MANIPULATION.  THE COMPANY HAS NOT TAKEN, AND WILL NOT
TAKE, DIRECTLY OR INDIRECTLY, ANY ACTION DESIGNED TO, OR THAT MIGHT REASONABLY
BE EXPECTED TO, CAUSE OR RESULT IN STABILIZATION OR MANIPULATION OF THE PRICE OF
THE COMMON STOCK OF THE COMPANY TO FACILITATE THE SALE OR RESALE OF ANY OF THE
SECURITIES BEING OFFERED HEREBY OR AFFECT THE PRICE AT WHICH ANY OF THE
SECURITIES BEING OFFERED HEREBY MAY BE ISSUED.

 

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4.23.       LISTING.  THE COMPANY’S COMMON STOCK IS LISTED FOR TRADING ON THE
AMERICAN STOCK EXCHANGE AND SATISFIES ALL REQUIREMENTS FOR THE CONTINUATION OF
SUCH LISTING.  THE COMPANY HAS NOT RECEIVED ANY NOTICE THAT ITS COMMON STOCK
WILL BE DELISTED FROM THE AMERICAN STOCK EXCHANGE OR THAT THE COMMON STOCK DOES
NOT MEET ALL REQUIREMENTS FOR THE CONTINUATION OF SUCH LISTING.

 

4.24.       NO INTEGRATED OFFERING.  EXCEPT FOR THE COMPANY’S PRIVATE PLACEMENT
OF COMMON STOCK AND WARRANTS IN THE AGGREGATE AMOUNT OF $7,803,230 ON OR ABOUT
MARCH 8, 2005 AND THE $3,000,000 NOTE ISSUED TO THE PURCHASER ON OR ABOUT
JULY 6, 2005, 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 THIS
AGREEMENT TO BE INTEGRATED WITH PRIOR OFFERINGS BY THE COMPANY FOR PURPOSES OF
THE SECURITIES ACT WHICH WOULD PREVENT THE COMPANY FROM SELLING THE SECURITIES
PURSUANT TO RULE 506 UNDER THE SECURITIES ACT, OR ANY APPLICABLE
EXCHANGE-RELATED STOCKHOLDER APPROVAL PROVISIONS.  NOR WILL THE COMPANY OR ANY
OF ITS AFFILIATES OR SUBSIDIARIES TAKE ANY ACTION OR STEPS THAT WOULD CAUSE THE
OFFERING OF THE SECURITIES TO BE INTEGRATED WITH OTHER OFFERINGS.

 

4.25.       STOP TRANSFER.  THE SECURITIES ARE RESTRICTED SECURITIES 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 SECURITIES AT SUCH TIME
AS THE SECURITIES ARE REGISTERED FOR PUBLIC SALE OR AN EXEMPTION FROM
REGISTRATION IS AVAILABLE, EXCEPT AS REQUIRED BY FEDERAL SECURITIES LAWS.

 

4.26.       DILUTION.  THE COMPANY UNDERSTANDS THE NATURE OF THE SECURITIES
BEING SOLD HEREBY AND RECOGNIZES THAT THEY MAY HAVE A POTENTIAL DILUTIVE
EFFECT.  THE COMPANY SPECIFICALLY ACKNOWLEDGES THAT ITS OBLIGATION TO ISSUE THE
CONVERSION SHARES IS BINDING UPON THE COMPANY AND ENFORCEABLE REGARDLESS OF THE
DILUTION SUCH ISSUANCE MAY HAVE ON THE OWNERSHIP INTERESTS OF OTHER SHAREHOLDERS
OF THE COMPANY.

 

5.     REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASER.

 

The Purchaser hereby represents and warrants to the Company with respect to
itself or himself as follows (such representations and warranties do not lessen
or obviate the representations and warranties of the Company set forth in this
Agreement):

 

5.1.         REQUISITE POWER AND AUTHORITY.  PURCHASER HAS ALL NECESSARY POWER
AND AUTHORITY UNDER ALL APPLICABLE PROVISIONS OF LAW TO EXECUTE AND DELIVER THIS
AGREEMENT AND THE RELATED AGREEMENTS AND TO CARRY OUT THEIR PROVISIONS.  ALL
ACTION ON PURCHASER’S PART REQUIRED FOR THE LAWFUL EXECUTION AND DELIVERY OF
THIS AGREEMENT AND THE RELATED AGREEMENTS HAVE BEEN OR WILL BE EFFECTIVELY TAKEN
PRIOR TO THE CLOSING.  UPON THEIR EXECUTION AND DELIVERY, THIS AGREEMENT AND THE
RELATED AGREEMENTS WILL BE VALID AND BINDING OBLIGATIONS OF PURCHASER,
ENFORCEABLE IN ACCORDANCE WITH THEIR TERMS, EXCEPT (A) AS LIMITED BY APPLICABLE
BANKRUPTCY, INSOLVENCY, REORGANIZATION, MORATORIUM OR OTHER LAWS OF GENERAL
APPLICATION AFFECTING ENFORCEMENT OF CREDITORS’ RIGHTS, AND (B) AS LIMITED BY
GENERAL PRINCIPLES OF EQUITY THAT RESTRICT THE AVAILABILITY OF EQUITABLE
REMEDIES.

 

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5.1          INVESTMENT REPRESENTATIONS.  PURCHASER UNDERSTANDS THAT THE
SECURITIES ARE BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM REGISTRATION
CONTAINED IN THE SECURITIES ACT BASED IN PART UPON PURCHASER’S REPRESENTATIONS
CONTAINED IN THE AGREEMENT.

 

5.2          PURCHASER BEARS ECONOMIC RISK.   PURCHASER HAS SUBSTANTIAL
EXPERIENCE IN EVALUATING AND INVESTING IN PRIVATE PLACEMENT TRANSACTIONS OF
SECURITIES IN COMPANIES SIMILAR TO THE COMPANY SO THAT IT IS CAPABLE OF
EVALUATING THE MERITS AND RISKS OF ITS INVESTMENT IN THE COMPANY AND HAS THE
CAPACITY TO PROTECT ITS OWN INTERESTS.  PURCHASER MUST BEAR THE ECONOMIC RISK OF
THIS INVESTMENT UNTIL THE SECURITIES ARE REGISTERED PURSUANT TO THE SECURITIES
ACT, OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE.

 

5.3          ACQUISITION FOR OWN ACCOUNT.  PURCHASER IS ACQUIRING THE PREFERRED
STOCK FOR PURCHASER’S OWN ACCOUNT FOR INVESTMENT ONLY, AND NOT WITH A VIEW
TOWARDS THEIR DISTRIBUTION.

 

5.4          PURCHASER CAN PROTECT ITS INTEREST.   PURCHASER REPRESENTS THAT BY
REASON OF ITS, OR OF ITS MANAGEMENT’S, BUSINESS OR FINANCIAL EXPERIENCE,
PURCHASER HAS THE CAPACITY TO PROTECT ITS OWN INTERESTS IN CONNECTION WITH THE
TRANSACTIONS CONTEMPLATED IN THIS AGREEMENT, AND THE RELATED AGREEMENTS. 
FURTHER, PURCHASER IS AWARE OF NO PUBLICATION OF ANY ADVERTISEMENT IN CONNECTION
WITH THE TRANSACTIONS CONTEMPLATED IN THE AGREEMENT.

 

5.5          ACCREDITED INVESTOR.   PURCHASER REPRESENTS THAT IT IS AN
ACCREDITED INVESTOR WITHIN THE MEANING OF REGULATION D UNDER THE SECURITIES ACT.

 

5.6          LEGENDS.

 

(A)           THE PREFERRED STOCK SHALL BEAR THE FOLLOWING LEGEND UNTIL THE
PREFERRED STOCK AND CONVERSION SHARES ARE SOLD PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (THE
“SEC”):

 

“THESE SHARES OF PREFERRED STOCK AND THE COMMON STOCK ISSUABLE UPON CONVERSION
OF THE PREFERRED STOCK HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR, IF APPLICABLE, STATE SECURITIES LAWS.  THESE SHARES OF
PREFERRED STOCK AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE PREFERRED
STOCK MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE PREFERRED STOCK OR COMMON STOCK
ISSUABLE UPON CONVERSION OF PREFERRED STOCK UNDER SAID ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IMPLANT
SCIENCES CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

(B)           THE CONVERSION SHARES AND THE WARRANT SHARES SHALL BEAR A LEGEND
WHICH SHALL BE IN SUBSTANTIALLY THE FOLLOWING FORM UNTIL SUCH SHARES ARE SOLD
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED WITH THE SEC:

 

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“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR IF APPLICABLE, STATE SECURITIES LAWS.
THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND
APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
IMPLANT SCIENCES CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

(C) THE WARRANTS SHALL BEAR THE FOLLOWING LEGEND:

 

“THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE
OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE
UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES
LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IMPLANT SCIENCES
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

The Purchaser covenants and agrees with the Company as follows:

 

5.7          SECURITY INTEREST.  PURCHASER AGREES TO TERMINATE ITS SECURITY
INTEREST IN THE ASSETS, AS FULLY DESCRIBED IN THE SECURITY AGREEMENT BETWEEN THE
COMPANY AND PURCHASER OF EVEN DATE HEREWITH (THE “SECURITY AGREEMENT”), UPON THE
COMPANY TENDERING THE FINAL PAYMENT IN SATISFACTION OF THE OBLIGATIONS AS
DEFINED IN THE SECURITY AGREEMENT.  PURCHASER AGREES TO JOIN WITH THE COMPANY IN
EXECUTING TERMINATION STATEMENTS AND OTHER INSTRUMENTS PURSUANT TO THE UNIFORM
COMMERCIAL CODE AS ENACTED AND IN EFFECT FROM TIME TO TIME IN THE COMMONWEALTH
OF MASSACHUSETTS IN FORM SATISFACTORY TO THE COMPANY AND IN EXECUTING SUCH OTHER
DOCUMENTS OR INSTRUMENTS AS MAY BE REQUIRED OR DEEMED NECESSARY BY THE COMPANY
FOR PURPOSES OF TERMINATING THE SECURITY INTEREST IN THE COLLATERAL.

 

5.8          PROSPECTUS.  PURCHASER SHALL FURNISH COPIES OF THE PROSPECTUS IN
CONNECTION WITH A PUBLIC SALE OR DISPOSITION OF THE COMMON STOCK.

 

5.9          PREFERRED STOCK CERTIFICATE.  WHEN PURCHASER ELECTS TO CONVERT
SHARES OF PREFERRED STOCK IN ACCORDANCE WITH SECTION 8 BELOW, PURCHASER SHALL
SURRENDER THE PREFERRED STOCK CERTIFICATE UPON RECEIPT OF A CREDIT TO THE
ACCOUNT OF THE PURCHASER’S PRIME BROKER THROUGH THE DWAC SYSTEM (AS DEFINED
BELOW), REPRESENTING THE CONVERSION SHARES OR UPON COMPLETE SATISFACTION OF THE
PREFERRED STOCK.

 

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5.10        CERTAIN TRADING RESTRICTIONS.  PURCHASER AGREES THAT, AS LONG AS IT
HOLDS ANY SHARES OF PREFERRED STOCK, NEITHER IT NOR ANY OF ITS AFFILIATES SHALL
ENTER INTO ANY SHORT SALES (AS DEFINED HEREIN).  FOR PURPOSES OF THIS
SECTION 5.11, A “SHORT SALE” SHALL MEAN A SALE OF COMMON STOCK BY PURCHASER THAT
WOULD BE REQUIRED TO BE MARKED AS A “SHORT SALE” BY THE BROKER EXECUTING THE
SALE PURSUANT TO THE PROVISIONS OF RULES 10A-1(C) AND 10A-1(D)(1) UNDER THE
EXCHANGE ACT IF SUCH RULES APPLIED TO THE SALE (WHETHER OR NOT THEY IN FACT
APPLY TO THE SALE), AND THAT IS MADE AT A TIME WHEN IMMEDIATELY AFTER THE SALE,
AND GIVING EFFECT TO ALL OTHER SALES BY THE PURCHASER, THERE WOULD BE NO
EQUIVALENT OFFSETTING LONG POSITION IN COMMON STOCK HELD BY PURCHASER.  FOR THE
PURPOSE OF DETERMINING UNDER THIS SECTION 5.11 WHETHER THERE IS AN EQUIVALENT
OFFSETTING LONG POSITION IN COMMON STOCK HELD BY PURCHASER, ONLY THOSE
CONVERSION SHARES THAT ARE (I) ISSUABLE UPON CONVERSION OF THE PREFERRED STOCK
FOR WHICH A CONVERSION NOTICE HAS BEEN DELIVERED BY PURCHASER ON OR PRIOR TO A
TRADING DAY OR (II) ISSUABLE AS A RESULT OF THE DELIVERY BY THE COMPANY OF A
REPAYMENT ELECTION NOTICE, AS DEFINED IN THE CERTIFICATE OF VOTE OF DIRECTORS,
SHALL BE DEEMED TO BE HELD LONG BY PURCHASER ON SUCH TRADING DAY.

 

5.11        REPORTING REQUIREMENTS.  PURCHASER WILL TIMELY FILE WITH THE SEC ALL
REPORTS REQUIRED TO BE FILED PURSUANT TO THE EXCHANGE ACT.  PURCHASER WILL
RESPOND TIMELY, ACCURATELY AND COMPLETELY TO ANY INQUIRY BY THE SEC, NASD, OR
ANY STOCK EXCHANGE UPON WHICH THE COMPANY MAINTAINS A LISTING, RELATING TO THE
OFFERING.

 

5.12        SUBORDINATION AGREEMENTS PURCHASER AGREES THAT IT WILL EXECUTE A
SUBORDINATION AGREEMENT WITH EACH OF COMERICA BANK AND BRIDGE BANK ON THE DATE
HEREOF.

 

6      COVENANTS OF THE COMPANY.   THE COMPANY COVENANTS AND AGREES WITH THE
PURCHASER AS FOLLOWS:

 

6.1          STOP-ORDERS. THE COMPANY WILL ADVISE THE PURCHASER, PROMPTLY AFTER
IT RECEIVES NOTICE OF ISSUANCE BY THE SEC, ANY STATE SECURITIES COMMISSION OR
ANY OTHER REGULATORY AUTHORITY OF ANY STOP ORDER OR OF ANY ORDER PREVENTING OR
SUSPENDING ANY OFFERING OF ANY SECURITIES OF THE COMPANY, OR OF THE SUSPENSION
OF THE QUALIFICATION OF THE COMMON STOCK OF THE COMPANY FOR OFFERING OR SALE IN
ANY JURISDICTION, OR THE INITIATION OF ANY PROCEEDING FOR ANY SUCH PURPOSE.

 

6.2          LISTING.   THE COMPANY SHALL PROMPTLY SECURE THE LISTING OF THE
SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THE PREFERRED STOCK AND UPON
THE EXERCISE OF THE WARRANT ON THE PINK SHEETS, THE NASD OTC BULLETIN BOARD,
NASDAQ SMALLCAP MARKET, NASDAQ NATIONAL MARKET, AMERICAN STOCK EXCHANGE OR NEW
YORK STOCK EXCHANGE (THE “PRINCIPAL MARKET”) UPON WHICH SHARES OF COMMON STOCK
ARE THEN LISTED (SUBJECT TO OFFICIAL NOTICE OF ISSUANCE) AND SHALL MAINTAIN SUCH
LISTING SO LONG AS ANY OTHER SHARES OF COMMON STOCK SHALL BE SO LISTED.  THE
COMPANY WILL MAINTAIN THE LISTING OF ITS COMMON STOCK ON A PRINCIPAL MARKET, AND
WILL COMPLY IN ALL MATERIAL RESPECTS WITH THE COMPANY’S REPORTING, FILING AND
OTHER OBLIGATIONS UNDER THE BYLAWS OR RULES OF THE NATIONAL ASSOCIATION OF
SECURITIES DEALERS (“NASD”) AND SUCH EXCHANGES, AS APPLICABLE.  THE COMPANY WILL
PROVIDE THE PURCHASER COPIES OF ALL NOTICES IT RECEIVES NOTIFYING THE COMPANY OF
THE THREATENED AND ACTUAL DELISTING OF THE COMMON STOCK FROM ANY PRINCIPAL
MARKET.

 

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6.3          MARKET REGULATIONS.   THE COMPANY SHALL NOTIFY THE SEC, NASD AND
APPLICABLE STATE AUTHORITIES, IN ACCORDANCE WITH THEIR REQUIREMENTS, OF THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, AND SHALL TAKE ALL OTHER NECESSARY
ACTION AND PROCEEDINGS AS MAY BE REQUIRED AND PERMITTED BY APPLICABLE LAW,
RULE AND REGULATION, FOR THE LEGAL AND VALID ISSUANCE OF THE SECURITIES TO
PURCHASER AND PROMPTLY PROVIDE COPIES THEREOF TO PURCHASER.

 

6.4          REPORTING REQUIREMENTS.   THE COMPANY WILL TIMELY FILE WITH THE SEC
ALL REPORTS REQUIRED TO BE FILED PURSUANT TO THE EXCHANGE ACT AND REFRAIN FROM
TERMINATING ITS STATUS AS AN ISSUER REQUIRED BY THE EXCHANGE ACT TO FILE REPORTS
THEREUNDER EVEN IF THE EXCHANGE ACT OR THE RULES OR REGULATIONS THEREUNDER WOULD
PERMIT SUCH TERMINATION.  IN ADDITION, WITHIN 20 DAYS AFTER THE END OF EACH
CALENDAR MONTH, THE COMPANY WILL PROVIDE TO THE PURCHASER A MONTHLY CASH FLOW
STATEMENT, BALANCE SHEET AND INCOME STATEMENT FOR THE IMMEDIATELY PRECEDING
MONTH.  PURCHASER UNDERSTANDS THAT THE PROVISION OF THE INFORMATION DESCRIBED
HEREIN MAY CONSTITUTE MATERIAL NON-PUBLIC INFORMATION AND SUCH INFORMATION WILL
ONLY BE PROVIDED UPON THE EXECUTION BY PURCHASER OF A CONFIDENTIALITY AGREEMENT.

 

6.5          USE OF FUNDS.   THE COMPANY SHALL USE THE PROCEEDS OF THE SALE OF
THE PREFERRED STOCK AND WARRANT FOR TO PAY THE $3,000,000 NOTE, PAYABLE TO THE
PURCHASER.  THE BALANCE OF THE FUNDS WILL BE USED FOR WORKING CAPITAL.

 

6.6          ACCESS TO FACILITIES.   THE COMPANY AND EACH OF ITS SUBSIDIARIES
WILL PERMIT ANY REPRESENTATIVES DESIGNATED BY THE PURCHASER (OR ANY TRANSFEREE
OF THE PURCHASER), SO LONG AS SUCH PERSON HOLDS ANY SECURITIES UPON REASONABLE
NOTICE AND DURING NORMAL BUSINESS HOURS, AT SUCH PERSON’S EXPENSE AND
ACCOMPANIED BY A REPRESENTATIVE OF THE COMPANY, TO (A) VISIT AND INSPECT ANY OF
THE PROPERTIES OF THE COMPANY AND EACH OF ITS SUBSIDIARIES, (B) EXAMINE THE
CORPORATE AND FINANCIAL RECORDS OF THE COMPANY AND EACH OF ITS SUBSIDIARIES
(UNLESS SUCH EXAMINATION IS NOT PERMITTED BY FEDERAL, STATE OR LOCAL LAW OR BY
CONTRACT) AND MAKE COPIES THEREOF OR EXTRACTS THEREFROM AND (C) DISCUSS THE
AFFAIRS, FINANCES AND ACCOUNTS OF ANY SUCH CORPORATIONS WITH THE DIRECTORS,
OFFICERS AND INDEPENDENT ACCOUNTANTS OF THE COMPANY AND EACH OF ITS
SUBSIDIARIES.

 

6.7          TAXES.   EACH OF THE COMPANY AND EACH OF ITS SUBSIDIARIES WILL
PROMPTLY PAY AND DISCHARGE, OR CAUSE TO BE PAID AND DISCHARGED, WHEN DUE AND
PAYABLE, ALL LAWFUL TAXES, ASSESSMENTS AND GOVERNMENTAL CHARGES OR LEVIES
IMPOSED UPON THE INCOME, PROFITS, PROPERTY OR BUSINESS OF THE COMPANY AND EACH
OF ITS SUBSIDIARIES; PROVIDED, HOWEVER, THAT ANY SUCH TAX, ASSESSMENT, CHARGE OR
LEVY NEED NOT BE PAID IF THE VALIDITY THEREOF SHALL CURRENTLY BE CONTESTED IN
GOOD FAITH BY APPROPRIATE PROCEEDINGS AND THE COMPANY AND EACH OF ITS
SUBSIDIARIES SHALL HAVE SET ASIDE ON ITS BOOKS ADEQUATE RESERVES WITH RESPECT
THERETO, AND PROVIDED, FURTHER, THAT THE COMPANY AND EACH OF ITS SUBSIDIARIES
WILL PAY ALL SUCH TAXES, ASSESSMENTS, CHARGES OR LEVIES FORTHWITH UPON THE
COMMENCEMENT OF PROCEEDINGS TO FORECLOSE ANY LIEN WHICH MAY HAVE ATTACHED AS
SECURITY THEREFOR.

 

6.8          INSURANCE.   EACH OF THE COMPANY AND EACH OF ITS SUBSIDIARIES WILL
KEEP ITS ASSETS WHICH ARE OF AN INSURABLE CHARACTER INSURED BY FINANCIALLY SOUND
AND REPUTABLE INSURERS AGAINST LOSS OR DAMAGE BY FIRE, EXPLOSION AND OTHER RISKS
CUSTOMARILY INSURED AGAINST BY COMPANIES IN THE COMPANY’S AND EACH OF THE ITS
SUBSIDIARIES’ LINE OF BUSINESS, IN AMOUNTS SUFFICIENT TO PREVENT THE COMPANY AND
EACH OF ITS SUBSIDIARIES FROM BECOMING A CO-INSURER AND

 

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NOT IN ANY EVENT LESS THAN 100% OF THE INSURABLE VALUE OF THE PROPERTY INSURED;
AND THE COMPANY AND EACH OF ITS SUBSIDIARIES WILL MAINTAIN, WITH FINANCIALLY
SOUND AND REPUTABLE INSURERS, INSURANCE AGAINST OTHER HAZARDS AND RISKS AND
LIABILITY TO PERSONS AND PROPERTY TO THE EXTENT AND IN THE MANNER CUSTOMARY FOR
COMPANIES IN SIMILAR BUSINESSES SIMILARLY SITUATED AND TO THE EXTENT AVAILABLE
ON COMMERCIALLY REASONABLE TERMS.

 

6.9          BOOKS AND RECORDS.   EACH OF THE COMPANY AND EACH OF ITS
SUBSIDIARIES WILL KEEP TRUE RECORDS AND BOOKS OF ACCOUNT IN WHICH FULL, TRUE AND
CORRECT ENTRIES WILL BE MADE OF ALL DEALINGS OR TRANSACTIONS IN RELATION TO ITS
BUSINESS AND AFFAIRS IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
APPLIED ON A CONSISTENT BASIS.  PURCHASER UNDERSTANDS THAT THE PROVISION OF THE
INFORMATION DESCRIBED HEREIN MAY CONSTITUTE MATERIAL NON-PUBLIC INFORMATION AND
SUCH INFORMATION WILL ONLY BE PROVIDED UPON THE EXECUTION BY PURCHASER OF A
CONFIDENTIALITY AGREEMENT, AND IN ACCORDANCE WITH APPLICABLE SECURITIES LAW.

 

6.10        INTELLECTUAL PROPERTY.   EACH OF THE COMPANY AND EACH OF ITS
SUBSIDIARIES SHALL 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 THEIR RESPECTIVE BUSINESSES.

 

6.11        CONFIDENTIALITY.  EACH OF THE COMPANY AND EACH OF ITS SUBSIDIARIES
AGREES THAT THEY WILL NOT DISCLOSE, AND WILL NOT INCLUDE IN ANY PUBLIC
ANNOUNCEMENT, THE NAME OF THE PURCHASER, UNLESS EXPRESSLY AGREED TO BY THE
PURCHASER OR UNLESS AND UNTIL SUCH DISCLOSURE IS REQUIRED BY LAW OR APPLICABLE
REGULATION, AND THEN ONLY TO THE EXTENT OF SUCH REQUIREMENT.

 

6.12        CORPORATE EXISTENCE.  EACH OF THE COMPANY AND EACH OF ITS
SUBSIDIARIES SHALL MAINTAIN THEIR RESPECTIVE CORPORATE EXISTENCE, AND WILL NOT
LIQUIDATE, DISSOLVE OR EFFECT A RECAPITALIZATION, RECLASSIFICATION OR
REORGANIZATION IN ANY FORM OF TRANSACTION.  IN ADDITION, NEITHER THE COMPANY NOR
ANY OF ITS SUBSIDIARIES SHALL SELL ALL OR SUBSTANTIALLY ALL OF THE COMPANY’S OR
ANY OF ITS SUBSIDIARIES’ ASSETS, EXCEPT IN THE EVENT OF A MERGER OR
CONSOLIDATION OR SALE OR TRANSFER OF ALL OR SUBSTANTIALLY ALL OF THE COMPANY’S
OR ANY OF ITS SUBSIDIARIES’ ASSETS, WHERE THE SURVIVING OR SUCCESSOR ENTITY IN
SUCH TRANSACTION (I) ASSUMES THE COMPANY’S AND EACH OF ITS SUBSIDIARIES’
OBLIGATIONS HEREUNDER AND THE RELATED AGREEMENTS AND (II) IS A PUBLICLY TRADED
COMPANY WHOSE COMMON STOCK IS QUOTED OR LISTED ON A PRINCIPAL MARKET OR 
(III) SIMULTANEOUSLY WITH THE CONSUMMATION OF SUCH TRANSACTION IRREVOCABLY PAYS
IN FULL ALL OF THE OBLIGATIONS DUE AND OWING TO PURCHASER FROM THE COMPANY UNDER
THIS AGREEMENT AND/OR THE SECURITIES.

 

6.13        REISSUANCE OF SECURITIES.  THE COMPANY AGREES TO REISSUE
CERTIFICATES REPRESENTING THE SECURITIES WITHOUT THE LEGENDS SET FORTH IN
SECTION 5.7 ABOVE AT SUCH TIME AS (A) THE HOLDER THEREOF HAS DISPOSED OF SUCH
SECURITIES PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT,
OR (B) UPON RESALE SUBJECT TO AN EFFECTIVE REGISTRATION STATEMENT AFTER SUCH
SECURITIES ARE REGISTERED UNDER THE SECURITIES ACT.  THE COMPANY AGREES TO
COOPERATE WITH THE PURCHASER IN CONNECTION WITH ALL RESALES PURSUANT TO
RULE 144(D) AND RULE 144(K) AND PROVIDE LEGAL OPINIONS NECESSARY TO ALLOW SUCH
RESALES PROVIDED THE COMPANY AND ITS COUNSEL RECEIVE REASONABLY REQUESTED
REPRESENTATIONS FROM THE SELLING PURCHASER AND BROKER, IF ANY.  THE PURCHASER
COVENANTS TO COMPLY WITH APPLICABLE PROSPECTUS DELIVERY REQUIREMENTS.

 

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6.14        OPINION. ON THE CLOSING DATE, THE COMPANY WILL DELIVER TO THE
PURCHASER AN OPINION ACCEPTABLE TO THE PURCHASER FROM THE COMPANY’S LEGAL
COUNSEL IN THE FORM ANNEXED HERETO AS EXHIBIT C.  THE COMPANY WILL PROVIDE, AT
THE COMPANY’S EXPENSE, SUCH OTHER LEGAL OPINIONS IN THE FUTURE AS ARE REASONABLY
NECESSARY FOR THE CONVERSION OF THE PREFERRED STOCK.

 

6.15        Margin Stock.      The Company will not permit any of the proceeds
of the Note to be used directly or indirectly to “purchase” or “carry” “margin
stock” or to repay indebtedness incurred to “purchase” or “carry” “margin stock”
within the respective meanings of each of the quoted terms under Regulation U of
the Board of Governors of the Federal Reserve System as now and from time to
time hereafter in effect.

 

6.16.       RESERVED.

 

6.17        Authorization and Reservation of Shares.  The Company shall at all
times have authorized and reserved a sufficient number of shares of Common Stock
to provide for the Conversion Shares.

 

6.18        Financing Right of First Refusal.    The Company hereby grants the
Purchaser a right of first refusal for as long as Purchaser holds any shares of
Preferred Stock to enter into a financing arrangement with the Company. The
Company shall submit a fully executed term sheet setting out the terms,
conditions and pricing of any proposed financing (such financing to be
negotiated on “arm’s length” terms) to be entered into by the Company. Purchaser
shall have the right, but not the obligation, to offer financing, to the Company
on terms no less favorable than those outlined in the previously negotiated term
sheet (which such term sheet shall be negotiated in good faith) within five
business days of receipt of such proposed term sheet. If the provisions of the
Purchaser’s term sheet shall be at least as favorable to the Company, the
Company shall enter into the financing arrangement outlined in the Purchaser’s
term sheet.  If the Purchaser declines to exercise it right of first refusal
hereunder, it hereby agrees to enter into such documentation as shall be
reasonably requested by Company in order to subordinate its rights hereunder or
under the Preferred Stock to the subsequent financier.

 

7      COVENANTS OF THE COMPANY AND PURCHASER REGARDING INDEMNIFICATION.

 

7.1          COMPANY INDEMNIFICATION.  THE COMPANY AGREES TO INDEMNIFY, HOLD
HARMLESS, REIMBURSE AND DEFEND PURCHASER, EACH OF PURCHASER’S OFFICERS,
DIRECTORS, AGENTS, AFFILIATES, CONTROL PERSONS, AND PRINCIPAL SHAREHOLDERS,
AGAINST ANY CLAIM, COST, EXPENSE, LIABILITY, OBLIGATION, LOSS OR DAMAGE
(INCLUDING REASONABLE LEGAL FEES) OF ANY NATURE, INCURRED BY OR IMPOSED UPON THE
PURCHASER WHICH RESULTS, ARISES OUT OF OR IS BASED UPON (I) ANY
MISREPRESENTATION BY COMPANY OR BREACH OF ANY WARRANTY BY COMPANY IN THIS
AGREEMENT OR IN ANY EXHIBITS OR SCHEDULES ATTACHED HERETO OR ANY RELATED
AGREEMENT, OR (II) ANY BREACH OR DEFAULT IN PERFORMANCE BY COMPANY OF ANY
COVENANT OR UNDERTAKING TO BE PERFORMED BY COMPANY HEREUNDER, OR ANY OTHER
AGREEMENT ENTERED INTO BY THE COMPANY AND PURCHASER RELATING HERETO.

 

7.2          PURCHASER’S INDEMNIFICATION.  PURCHASER AGREES TO INDEMNIFY, HOLD
HARMLESS, REIMBURSE AND DEFEND THE COMPANY AND EACH OF THE COMPANY’S OFFICERS,
DIRECTORS, AGENTS, AFFILIATES, CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS, AT
ALL TIMES AGAINST ANY CLAIM, COST,

 

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EXPENSE, LIABILITY, OBLIGATION, LOSS OR DAMAGE (INCLUDING REASONABLE LEGAL FEES)
OF ANY NATURE, INCURRED BY OR IMPOSED UPON THE COMPANY WHICH RESULTS, ARISES OUT
OF OR IS BASED UPON (I) ANY MISREPRESENTATION BY PURCHASER OR BREACH OF ANY
WARRANTY BY PURCHASER IN THIS AGREEMENT OR IN ANY EXHIBITS OR SCHEDULES ATTACHED
HERETO OR ANY RELATED AGREEMENT; OR (II) ANY BREACH OR DEFAULT IN PERFORMANCE BY
PURCHASER OF ANY COVENANT OR UNDERTAKING TO BE PERFORMED BY PURCHASER HEREUNDER,
OR ANY OTHER AGREEMENT ENTERED INTO BY THE COMPANY AND PURCHASER RELATING
HERETO.

 

7.3          PROCEDURES.  THE PROCEDURES AND LIMITATIONS SET FORTH IN
SECTION 9.6 SHALL APPLY TO THE INDEMNIFICATIONS SET FORTH IN SECTIONS 7.1 AND
7.2 ABOVE.

 

8      CONVERSION OF PREFERRED STOCK.

 

8.1  MECHANICS OF CONVERSION.

 

(A)           PROVIDED THE PURCHASER HAS NOTIFIED THE COMPANY OF THE PURCHASER’S
INTENTION TO SELL THE CONVERSION SHARES AND THE CONVERSION SHARES ARE INCLUDED
IN AN EFFECTIVE REGISTRATION STATEMENT OR ARE OTHERWISE EXEMPT FROM REGISTRATION
WHEN SOLD:  (I) UPON THE CONVERSION OF THE PREFERRED STOCK OR PART THEREOF, THE
COMPANY SHALL, AT ITS OWN COST AND EXPENSE, TAKE ALL NECESSARY ACTION (INCLUDING
THE ISSUANCE OF AN OPINION OF COUNSEL) TO ASSURE THAT THE COMPANY’S TRANSFER
AGENT SHALL ISSUE THE CONVERSION SHARES IN THE NAME OF THE PURCHASER (OR ITS
NOMINEE) OR SUCH OTHER PERSONS AS DESIGNATED BY THE PURCHASER IN ACCORDANCE WITH
SECTION 8.1(B) HEREOF AND IN SUCH DENOMINATIONS TO BE SPECIFIED REPRESENTING THE
NUMBER OF CONVERSION SHARES ISSUABLE UPON SUCH CONVERSION; AND (II) THE COMPANY
WARRANTS THAT NO INSTRUCTIONS OTHER THAN THESE INSTRUCTIONS HAVE BEEN OR WILL BE
GIVEN TO THE TRANSFER AGENT OF THE COMPANY’S COMMON STOCK AND THAT AFTER THE
EFFECTIVE DATE (AS HEREINAFTER DEFINED) THE CONVERSION SHARES ISSUED WILL BE
FREELY TRANSFERABLE SUBJECT TO THE PROSPECTUS DELIVERY REQUIREMENTS OF THE
SECURITIES ACT AND THE PROVISIONS OF THIS AGREEMENT, AND WILL NOT CONTAIN A
LEGEND RESTRICTING THE RESALE OR TRANSFERABILITY OF THE CONVERSION SHARES, OTHER
THAN AS REQUIRED BY LAW.

 

(B)           PURCHASER WILL GIVE NOTICE OF ITS DECISION TO EXERCISE ITS RIGHT
TO CONVERT THE PREFERRED STOCK OR PART THEREOF BY TELECOPYING OR OTHERWISE
DELIVERING AN EXECUTED AND COMPLETED NOTICE OF THE NUMBER OF SHARES TO BE
CONVERTED TO THE COMPANY (THE “NOTICE OF CONVERSION”). THE PURCHASER WILL NOT BE
REQUIRED TO SURRENDER THE PREFERRED STOCK CERTIFICATE UNTIL THE PURCHASER
RECEIVES A CREDIT TO THE ACCOUNT OF THE PURCHASER’S PRIME BROKER THROUGH THE
DWAC SYSTEM (AS DEFINED BELOW), REPRESENTING THE CONVERSION SHARES OR UNTIL THE
PREFERRED STOCK HAS BEEN FULLY SATISFIED.  EACH DATE ON WHICH A NOTICE OF
CONVERSION IS TELECOPIED OR DELIVERED TO THE COMPANY IN ACCORDANCE WITH THE
PROVISIONS HEREOF SHALL BE DEEMED A “CONVERSION DATE.”  THE COMPANY WILL CAUSE
THE TRANSFER AGENT TO TRANSMIT THE CONVERSION SHARES (AND A CERTIFICATE
REPRESENTING THE BALANCE OF THE PREFERRED STOCK NOT SO CONVERTED, IF REQUESTED
BY PURCHASER) TO THE PURCHASER BY CREDITING THE ACCOUNT OF THE PURCHASER’S PRIME
BROKER WITH THE DEPOSITORY TRUST COMPANY (“DTC”) THROUGH ITS DEPOSIT WITHDRAWAL
AGENT COMMISSION (“DWAC”) SYSTEM WITHIN THREE (3) BUSINESS DAYS AFTER RECEIPT BY
THE COMPANY OF THE NOTICE OF CONVERSION (THE “DELIVERY DATE”).

 

(C)           THE COMPANY UNDERSTANDS THAT A DELAY IN THE DELIVERY OF THE
CONVERSION SHARES IN THE FORM REQUIRED PURSUANT TO SECTION 8 HEREOF BEYOND THE
DELIVERY DATE COULD RESULT IN ECONOMIC LOSS TO THE PURCHASER.  IN THE EVENT THAT
THE COMPANY FAILS TO DIRECT ITS

 

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TRANSFER AGENT TO DELIVER THE CONVERSION SHARES TO THE PURCHASER VIA THE DWAC
SYSTEM WITHIN THE TIME FRAME SET FORTH IN SECTION 8.1(B) ABOVE AND THE
CONVERSION SHARES ARE NOT DELIVERED TO THE PURCHASER BY THE DELIVERY DATE
THROUGH ANY ACT OR FAILURE TO ACT ON THE PART OF THE COMPANY, AS COMPENSATION TO
THE PURCHASER FOR SUCH LOSS, THE COMPANY AGREES TO PAY LATE PAYMENTS TO THE
PURCHASER FOR LATE ISSUANCE OF THE CONVERSION SHARES IN THE FORM REQUIRED
PURSUANT TO SECTION 8 HEREOF UPON CONVERSION OF THE PREFERRED STOCK IN THE
AMOUNT EQUAL TO THE GREATER OF (I) $500 PER BUSINESS DAY AFTER THE DELIVERY DATE
OR (II) THE PURCHASER’S ACTUAL DAMAGES FROM SUCH DELAYED DELIVERY. THE COMPANY
SHALL PAY ANY PAYMENTS INCURRED UNDER THIS SECTION IN IMMEDIATELY AVAILABLE
FUNDS UPON DEMAND AND, IN THE CASE OF ACTUAL DAMAGES, ACCOMPANIED BY REASONABLE
DOCUMENTATION OF THE AMOUNT OF SUCH DAMAGES.  SUCH DOCUMENTATION SHALL SHOW THE
NUMBER OF SHARES OF COMMON STOCK THE PURCHASER IS FORCED TO PURCHASE (IN AN OPEN
MARKET TRANSACTION) WHICH THE PURCHASER ANTICIPATED RECEIVING UPON SUCH
CONVERSION, AND SHALL BE CALCULATED AS THE AMOUNT BY WHICH (A) THE PURCHASER’S
TOTAL PURCHASE PRICE (INCLUDING CUSTOMARY BROKERAGE COMMISSIONS, IF ANY) FOR THE
SHARES OF COMMON STOCK SO PURCHASED EXCEEDS (B) THE AGGREGATE STATED VALUE (AS
DEFINED IN THE CERTIFICATE OF VOTE OF DIRECTORS) AND/OR DIVIDEND AMOUNT OF THE
PREFERRED STOCK, FOR WHICH SUCH CONVERSION NOTICE WAS NOT TIMELY HONORED.

 

(D)           NOTHING CONTAINED HEREIN OR IN ANY DOCUMENT REFERRED TO HEREIN OR
DELIVERED IN CONNECTION HEREWITH SHALL BE DEEMED TO ESTABLISH OR REQUIRE THE
PAYMENT OF A RATE OF INTEREST OR OTHER CHARGES IN EXCESS OF THE MAXIMUM
PERMITTED BY APPLICABLE LAW.  IN THE EVENT THAT THE RATE OF INTEREST OR
DIVIDENDS REQUIRED TO BE PAID OR OTHER CHARGES HEREUNDER EXCEED THE MAXIMUM
AMOUNT PERMITTED BY SUCH LAW, ANY PAYMENTS IN EXCESS OF SUCH MAXIMUM SHALL BE
CREDITED AGAINST AMOUNTS OWED BY THE COMPANY TO A PURCHASER AND THUS REFUNDED TO
THE COMPANY.

 

8.2          MAXIMUM CONVERSION.  NOTWITHSTANDING ANYTHING CONTAINED IN THE
CERTIFICATE OF VOTE OF DIRECTORS TO THE CONTRARY, THE HOLDER SHALL NOT BE
ENTITLED TO CONVERT PURSUANT TO THE TERMS OF THIS SERIES D PREFERRED STOCK AN
AMOUNT THAT WOULD BE CONVERTIBLE INTO THAT NUMBER OF CONVERSION SHARES WHICH
WOULD EXCEED THE DIFFERENCE BETWEEN (I) 4.99% OF THE ISSUED AND OUTSTANDING
SHARES OF COMMON STOCK AND (II) THE NUMBER OF SHARES OF COMMON STOCK
BENEFICIALLY OWNED BY THE HOLDER FOR 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 SHARE LIMITATION DESCRIBED IN THIS SECTION 8.2  SHALL AUTOMATICALLY
BECOME NULL AND VOID FOLLOWING NOTICE TO THE COMPANY UPON THE OCCURRENCE AND
DURING THE CONTINUANCE OF AN EVENT OF DEFAULT, UPON 75 DAYS PRIOR NOTICE TO THE
COMPANY, OR UPON RECEIPT BY THE HOLDER OF A NOTICE OF REDEMPTION, EXCEPT THAT AT
NO TIME SHALL THE NUMBER OF SHARES OF COMMON STOCK BENEFICIALLY OWNED BY THE
HOLDER A EXCEED 19.99% OF THE OUTSTANDING SHARES OF COMMON STOCK. 
NOTWITHSTANDING ANYTHING CONTAINED HEREIN TO THE CONTRARY, THE NUMBER OF SHARES
OF COMMON STOCK ISSUABLE BY THE COMPANY AND ACQUIRABLE BY THE HOLDER AT A PRICE
BELOW $[6.32] PER SHARE PURSUANT TO THE TERMS OF THIS SERIES D PREFERRED STOCK,
THE WARRANT, THE PURCHASE AGREEMENT OR ANY OTHER RELATED AGREEMENT, SHALL NOT
EXCEED AN AGGREGATE OF 2,151,260 SHARES OF COMMON STOCK (SUBJECT TO APPROPRIATE
ADJUSTMENT FOR STOCK SPLITS, STOCK DIVIDENDS, OR OTHER SIMILAR RECAPITALIZATIONS
AFFECTING THE COMMON STOCK) (THE “MAXIMUM COMMON STOCK ISSUANCE”), UNLESS THE
ISSUANCE OF COMMON STOCK HEREUNDER IN EXCESS OF THE MAXIMUM COMMON STOCK
ISSUANCE SHALL FIRST BE APPROVED BY THE COMPANY’S SHAREHOLDERS.  IF AT ANY POINT
IN TIME AND FROM TIME TO TIME THE NUMBER OF SHARES OF COMMON STOCK ISSUED
PURSUANT TO THE TERMS OF THIS SERIES D PREFERRED STOCK, THE PURCHASE AGREEMENT
OR ANY OTHER RELATED

 

21

--------------------------------------------------------------------------------

 

AGREEMENT, TOGETHER WITH THE NUMBER OF SHARES OF COMMON STOCK THAT WOULD THEN BE
ISSUABLE BY THE COMPANY TO THE HOLDER IN THE EVENT OF A CONVERSION OR EXERCISE
PURSUANT TO THE TERMS OF THIS SERIES D PREFERRED STOCK, THE PURCHASE AGREEMENT
OR ANY OTHER RELATED AGREEMENT, WOULD EXCEED THE MAXIMUM COMMON STOCK ISSUANCE
BUT FOR THIS SECTION 8.2, THE COMPANY SHALL PROMPTLY CALL A SHAREHOLDERS MEETING
TO SOLICIT SHAREHOLDER APPROVAL FOR THE ISSUANCE OF THE SHARES OF COMMON STOCK
HEREUNDER IN EXCESS OF THE MAXIMUM COMMON STOCK ISSUANCE.  NOTWITHSTANDING
ANYTHING CONTAINED HEREIN TO THE CONTRARY, THE PROVISIONS OF THIS SECTION 8.2
ARE IRREVOCABLE AND MAY NOT BE WAIVED BY THE HOLDER OR THE COMPANY..

 

8.3          OPTIONAL REDEMPTION.  THE COMPANY WILL HAVE THE OPTION OF REDEEMING
ANY OUTSTANDING STATED VALUE OF THE PREFERRED STOCK (“OPTIONAL REDEMPTION”) BY
PAYING TO THE PURCHASER 130% OF SUCH AMOUNT, TOGETHER WITH ACCRUED BUT UNPAID
DIVIDENDS THEREON AND ANY AND ALL OTHER SUMS DUE, ACCRUED OR PAYABLE TO THE
PURCHASER ARISING UNDER THIS AGREEMENT, CERTIFICATE OF VOTE OF DIRECTORS OR ANY
OTHER DOCUMENT DELIVERED HEREWITH (“REDEMPTION AMOUNT”) OUTSTANDING ON THE DAY
NOTICE OF REDEMPTION (“NOTICE OF REDEMPTION”) IS DELIVERED TO A PURCHASER
(“REDEMPTION DATE”).  A NOTICE OF REDEMPTION MAY NOT BE GIVEN IN CONNECTION WITH
ANY PORTION OF PREFERRED STOCK FOR WHICH A NOTICE OF CONVERSION HAS BEEN GIVEN
BY THE PURCHASER AT ANY TIME BEFORE RECEIPT OF A NOTICE OF REDEMPTION.  THE
REDEMPTION AMOUNT MUST BE PAID IN IMMEDIATELY AVAILABLE FUNDS TO THE PURCHASER
NO LATER THAN THE SEVENTH (7TH) BUSINESS DAY AFTER THE REDEMPTION DATE
(“OPTIONAL REDEMPTION PAYMENT DATE”).  IN THE EVENT THE COMPANY FAILS TO PAY THE
REDEMPTION AMOUNT BY THE OPTIONAL REDEMPTION PAYMENT DATE, THEN THE REDEMPTION
NOTICE WILL BE NULL AND VOID.  A NOTICE OF REDEMPTION MAY BE GIVEN BY THE
COMPANY, PROVIDED NO EVENT OF DEFAULT AS DESCRIBED IN THE CERTIFICATE OF VOTE OF
DIRECTORS SHALL HAVE OCCURRED OR BE CONTINUING.

 

9              OFFERING RESTRICTIONS.   Except as previously disclosed in the
SEC Reports or stock or stock options granted to employees or directors of the
Company or any of its Subsidiaries; or equity or debt issued in connection with
an acquisition of a business or assets by the Company or any of its
Subsidiaries; or the issuance by the Company or any of its Subsidiaries of stock
in connection with the establishment of a joint venture partnership or licensing
arrangement (these exceptions hereinafter referred to as the “Excepted
Issuances”), neither the Company nor any of its Subsidiaries will issue any
securities with a floorless variable/floating conversion feature, otherwise
known as a “floorless convertible security” which are or could be (by conversion
or registration) free-trading securities prior to the repayment in full or
conversion in full of the Preferred Stock.

 

10           SECURITY INTEREST.  As a condition of Closing, the Company and each
of its Subsidiaries will grant to the Purchaser a security interest in their
respective assets pursuant to a Master Security Agreement and Subsidiary
Guarantee.  The Company and each of its Subsidiaries will also execute all such
documents reasonably necessary to memorialize and further protect the security
interest described above.

 

11           MISCELLANEOUS.

 

11.1        Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without regard to principles
of conflicts of laws.  Any action brought by either party against the other
concerning the transactions

 

22

--------------------------------------------------------------------------------

 

contemplated by this Agreement 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 Purchaser may choose to waive this provision and bring an
action outside the state of New York.  Both parties and the individuals
executing this Agreement and other agreements 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
Agreement or any other agreement delivered in connection herewith is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law.  Any such
provision which may prove invalid or unenforceable under any law shall not
affect the validity or enforceability of any other provision of any agreement.

 

11.2        Survival.  The representations, warranties, covenants and agreements
made herein shall survive any investigation made by the Purchaser and the
closing of the transactions contemplated hereby. All statements as to factual
matters contained in any certificate or other instrument delivered by or on
behalf of the Company pursuant hereto in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties by the
Company hereunder solely as of the date of such certificate or instrument.

 

11.3        Successors and Assigns.  Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of the Securities from time to time.

 

11.4        Entire Agreement.  This Agreement, the exhibits and schedules
hereto, the Related Agreements and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and no party shall be liable or bound to any
other in any manner by any representations, warranties, covenants and agreements
except as specifically set forth herein and therein.

 

11.5        Severability.  In case any provision of the Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.

 

11.6        Amendment and Waiver. This Agreement may be amended or modified only
upon the written consent of the Company and the Purchaser. The obligations of
the Company and the rights of the holders of the Securities under the Agreement
may be waived only with the written consent of such holders of Securities.  The
rights of the holder of Preferred Stock may be waived only with the written
consent of such holder.

 

11.7        Delays or Omissions.  It is agreed that no delay or omission to
exercise any right, power or remedy accruing to any party, upon any breach,
default or noncompliance by another party under this Agreement or the Related
Agreements, shall impair any such right, power or remedy, nor shall it be
construed to be a waiver of any such breach, default or noncompliance, or any
acquiescence therein, or of or in any similar breach, default or noncompliance
thereafter occurring.  It is further agreed that any waiver, permit, consent or

 

23

--------------------------------------------------------------------------------

 

approval of any kind or character on the Purchaser’s part of any breach, default
or noncompliance under this Agreement, the Preferred Stock or the Related
Agreements or any waiver on such party’s part of any provisions or conditions of
the Agreement, the Certificate of Vote of Directors or the Related Agreements
must be in writing and shall be effective only to the extent specifically set
forth in such writing.  All remedies, either under this Agreement, the Preferred
Stock or the Related Agreements, by law or otherwise afforded to any party,
shall be cumulative and not alternative.

 

11.8        Notices.  All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (a) upon personal delivery to the
party to be notified, (b) when sent by confirmed 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
Company at the address as set forth on the signature page hereof, with a copy to
Ellenoff Grossman and Schole LLP, 370 Lexington Avenue New York, New York 10017
Attention: David Selengut, Esq. Facsimile number (212) 370-7889 and to the
Purchaser at the address set forth on the signature page hereto for such
Purchaser, with a copy in the case of the Purchaser to John Tucker, Esq., 825
Third Avenue, 14th Floor, New York, NY 10022, facsimile number (212) 541-4434,
or at such other address as the Company or the Purchaser may designate by ten
days advance written notice to the other parties hereto.

 

11.9        Attorneys’ Fees.  In the event that any suit or action is instituted
to enforce any provision in this Agreement, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including, without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.

 

11.10      Titles and Subtitles.  The titles of the sections and subsections of
the Agreement are for convenience of reference only and are not to be considered
in construing this Agreement.

 

11.11      Counterparts.  This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.

 

11.12      Broker’s Fees.  Each party hereto represents and warrants that no
agent, broker, investment banker, person or firm acting on behalf of or under
the authority of such party hereto is or will be entitled to any broker’s or
finder’s fee or any other commission directly or indirectly in connection with
the transactions contemplated herein, except as specified herein with respect to
the Purchaser.  Each party hereto further agrees to indemnify each other party
for any claims, losses or expenses incurred by such other party as a result of
the representation in this Section 12.12 being untrue.

 

24

--------------------------------------------------------------------------------

 

11.13      Construction.  Each party acknowledges that its legal counsel
participated in the preparation of this Agreement and, therefore, stipulates
that the rule of construction that ambiguities are to be resolved against the
drafting party shall not be applied in the interpretation of this Agreement to
favor any party against the other.

 

[Remainder of page intentionally left blank.]

 

25

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, the parties hereto have executed the SECURITIES PURCHASE
AGREEMENT as of the date set forth in the first paragraph hereof.

 

 

COMPANY:

 

PURCHASER:

 

 

 

IMPLANT SCIENCES CORPORATION

 

LAURUS MASTER FUND, LTD.

 

 

 

By: /s/ Anthony J. Armini

 

 

By: /s/ Laurus Master Fund

 

Name: Anthony J. Armini
Title: President
Address:
107 Audobon Road #5
Wakefield, Massachusetts 01880

 

Name:
Address:LAURUS MASTER FUND, LTD.
c/o Ironshore Corporate Services Ltd.
P.O. Box 1234 G.T., Queensgate House,
South Church Street
Grand Cayman, Cayman Islands

 

26

--------------------------------------------------------------------------------

 

LIST OF EXHIBITS

 

Form of Offering Certificate of Vote of Directors

Exhibit A

 

 

Form of Opinion

Exhibit B

 

--------------------------------------------------------------------------------

 

EXHIBIT A

 

CERTIFICATE OF VOTE OF DIRECTORS

 

--------------------------------------------------------------------------------

 

EXHIBIT B

 

FORM OF OPINION

 

--------------------------------------------------------------------------------

 

TABLE OF CONTENTS

 

1.

AGREEMENT TO SELL AND PURCHASE

 

 

 

 

 

2.

FEES.

 

 

 

 

 

3.

CLOSING, DELIVERY AND PAYMENT.

 

 

 

 

 

 

3.1

Closing

 

 

 

 

 

 

3.2

Delivery.

 

 

 

 

 

4.

REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

 

 

 

 

 

 

4.1

Organization, Good Standing and Qualification

 

 

 

 

 

 

4.2

Subsidiaries.

 

 

 

 

 

 

4.3

Capitalization; Voting Rights.

 

 

 

 

 

 

4.4

Authorization; Binding Obligations.

 

 

 

 

 

 

4.5

Liabilities.

 

 

 

 

 

 

4.6

Agreements; Action.

 

 

 

 

 

 

4.7

Obligations to Related Parties.

 

 

 

 

 

 

4.8

Changes.

 

 

 

 

 

 

4.9

Title to Properties and Assets; Liens, Etc.

 

 

 

 

 

 

4.10

Intellectual Property.

 

 

 

 

 

 

4.11

Compliance with Other Instruments.

 

 

 

 

 

 

4.12

Litigation.

 

 

 

 

 

 

4.13

Tax Returns and Payments.

 

 

 

 

 

 

4.14

Employees.

 

 

 

 

 

 

4.15

Registration Rights and Voting Rights.

 

 

 

 

 

 

4.16

Compliance with Laws; Permits.

 

 

 

 

 

 

4.17

Environmental and Safety Laws

 

 

 

 

 

 

4.18

Valid Offering

 

 

 

 

 

 

4.19

Full Disclosure.

 

 

 

 

 

 

4.20

Insurance.

 

 

 

 

 

 

4.21

SEC Reports

 

 

 

 

 

 

4.22

No Market Manipulation.

 

 

 

 

 

 

4.23

Listing.

 

 

i

--------------------------------------------------------------------------------

 

 

4.24

No Integrated Offering.

 

 

 

 

 

 

4.25

Stop Transfer.

 

 

 

 

 

 

4.26

Dilution.

 

 

 

 

 

5.

REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASER.

 

 

 

 

 

 

5.1

Requisite Power and Authority.

 

 

 

 

 

 

5.2

Investment Representations.

 

 

 

 

 

 

5.3

Purchaser Bears Economic Risk.

 

 

 

 

 

 

5.4

Acquisition for Own Account.

 

 

 

 

 

 

5.5

Purchaser Can Protect Its Interest.

 

 

 

 

 

 

5.6

Accredited Investor.

 

 

 

 

 

 

5.7

Legends.

 

 

 

 

 

 

5.8

Security Interest

 

 

 

 

 

 

5.9

Prospectus.

 

 

 

 

 

 

5.10

Preferred Stock Certificate.

 

 

 

 

 

 

5.11

Certain Trading Restrictions

 

 

 

 

 

 

5.12

Reporting Requirements.

 

 

 

 

 

6.

COVENANTS OF THE COMPANY.

 

 

 

 

 

 

6.1

Stop-Orders.

 

 

 

 

 

 

6.2

Listing

 

 

 

 

 

 

6.3

Market Regulations.

 

 

 

 

 

 

6.4

Reporting Requirements.

 

 

 

 

 

 

6.5

Use of Funds

 

 

 

 

 

 

6.6

Access to Facilities.

 

 

 

 

 

 

6.7

Taxes.

 

 

 

 

 

 

6.8

Insurance.

 

 

 

 

 

 

6.9

Books and Records.

 

 

 

 

 

 

6.10

Intellectual Property.

 

 

 

 

 

 

6.11

Confidentiality.

 

 

 

 

 

 

6.12

Corporate Existence.

 

 

 

 

 

 

6.13

Reissuance of Securities.

 

 

 

 

 

 

6.14

Opinion.

 

 

ii

--------------------------------------------------------------------------------

 

 

6.15

Financial Covenants.

 

 

 

 

 

7.

COVENANTS OF THE COMPANY AND PURCHASER REGARDING INDEMNIFICATION.

 

 

 

 

 

 

7.1

Company Indemnification.

 

 

 

 

 

 

7.2

Purchaser’s Indemnification.

 

 

 

 

 

 

7.3

Procedures.

 

 

 

 

 

8.

CONVERSION OF PREFERRED STOCK.

 

 

 

 

 

 

8.1

Mechanics of Conversion.

 

 

 

 

 

 

8.2

Maximum Conversion.

 

 

 

 

 

 

8.3

Optional Redemption

 

 

 

 

 

9.

REGISTRATION RIGHTS.

 

 

 

 

 

 

9.1

Registration Rights Granted.

 

 

 

 

 

 

9.2

Registration Procedures.

 

 

 

 

 

 

9.3

Provision of Documents.

 

 

 

 

 

 

9.4

Non-Registration Events

 

 

 

 

 

 

9.5

Expenses

 

 

 

 

 

 

9.6

Indemnification and Contribution.

 

 

 

 

 

10.

OFFERING RESTRICTIONS

 

 

 

 

 

11.

SECURITY INTEREST.

 

 

 

 

 

12.

MISCELLANEOUS.

 

 

 

 

 

 

12.1

Governing Law.

 

 

 

 

 

 

12.2

Survival.

 

 

 

 

 

 

12.3

Successors and Assigns.

 

 

 

 

 

 

12.4

Entire Agreement.

 

 

 

 

 

 

12.5

Severability.

 

 

 

 

 

 

12.6

Amendment and Waiver.

 

 

 

 

 

 

12.7

Delays or Omissions.

 

 

 

 

 

 

12.8

Notices.

 

 

 

 

 

 

12.9

Attorneys’ Fees.

 

 

 

 

 

 

12.10

Titles and Subtitles.

 

 

iii

--------------------------------------------------------------------------------

 

 

12.11

Counterparts.

 

 

 

 

 

 

12.12

Broker’s Fees.

 

 

 

 

 

 

12.13

Construction.

 

 

iv

--------------------------------------------------------------------------------

 

Schedules

 

4.2           Subsidiaries:

 

Name/Address

 

Percent of Ownership

 

 

 

 

 

C Acquisition Corp

 

100

%

dba Core Systems

 

 

 

1050 Kifer Road

 

 

 

Sunnyvale, CA 94086

 

 

 

 

 

 

 

Accurel Systems International Corp.

 

100

%

485 Lucerne Drive

 

 

 

Sunnyvale, CA 94085

 

 

 

 

4.3           Capitalization:  Voting Rights

 

THE AUTHORIZED CAPITAL STOCK OF THE COMPANY, AS OF THE DATE HEREOF CONSISTS OF
25,000,000 SHARES, OF WHICH 20,000,000 ARE SHARES OF COMMON STOCK, PAR VALUE
$0.10 PER SHARE, 10,784,834 SHARES OF WHICH ARE ISSUED AND OUTSTANDING,  AND
5,000,000 ARE SHARES OF PREFERRED STOCK, PAR VALUE $0.10 PER SHARE OF WHICH    
-0-  SHARES OF PREFERRED STOCK ARE ISSUED AND OUTSTANDING.

 

Additional shares may be issued to the shareholders of Core Systems based on an
earn out, however, their issuance is unlikely.

 

SUBJECT TO CERTAIN EXCEPTIONS, INVESTORS IN A MARCH 2005 PRIVATE PLACEMENT HAVE
THE RIGHT OF FIRST REFUSAL, SUBJECT TO LAURUS MASTER FUND, LTD.’S PRIOR RIGHT OF
FIRST REFUSAL.

 

THE AUTHORIZED, ISSUED AND OUTSTANDING CAPITAL STOCK OF EACH SUBSIDIARY OF THE
COMPANY IS:

 

 

 

# Shares

 

 

 

Issued and

 

Name

 

Authorized

 

Par Value

 

Outstanding

 

 

 

 

 

 

 

 

 

C Acquisition Corp.

 

1,000

 

.001

 

100

 

 

 

 

 

 

 

 

 

Accurel Systems

 

15,000,000

 

none

 

2,000,000

 

 

v

--------------------------------------------------------------------------------

 

Other shares subject to issue:

 

 

2004 Stock Option Plan

 

 

 

 

 

 

 

Balance available to Grant

 

28,574

 

 

 

 

 

Granted but unexercised

 

471,426

 

 

 

 

 

2000 Stock Option Plan

 

 

 

 

 

 

 

Balance available to Grant

 

59,000

 

 

 

 

 

Granted but unexercised

 

1,171,105

 

 

 

 

 

1998 Stock Option Plan

 

 

 

 

 

 

 

Balance available to Grant

 

11,503

 

 

 

 

 

Granted but unexercised

 

125,500

 

 

 

 

 

1992 Stock Option Plan

 

 

 

 

 

 

 

Balance available to Grant

 

0

 

 

 

 

 

Granted but unexercised

 

54,000

 

 

 

 

 

Warrants

 

 

 

 

 

 

 

Balance Outstanding

 

2,574,389

* 

 

--------------------------------------------------------------------------------

*Includes 250,000 warrants from $3.0M Laurus note

 

 

 

 

AIR’s

 

611,765

 

 

vi

--------------------------------------------------------------------------------

 

4.5           Term Note with Comerica Bank

Line of Credit with Bridge Bank

Laurus Master Fund – short term note

 

4.6           a)    Holdback payments to be disbursed per Stock Purchase
Agreements with Accurel Shareholders

 

b)    See 4.5

$3.0M short term note with Laurus Master Fund

New capital equipment lease  ~ $50,000

Refinance of a short term loan to employee with maturity date of 12/31/05

 

4.8           Changes

 

a)

 

Loan to Accurel Shareholders paid in full

 

 

Rapiscan agreement in dispute

f)

 

Refinance of loan to Richard Sahagian, employee and shareholder - $35,000

 

 

Loan to Donna Prunier, employee – balance due ~ $675

g)

 

Walter Wriggins – General Manager, Core Systems

 

 

John Munro – VP Brachytherapy Products

j)

 

See 4.5

k)

 

Rapiscan Systems has manufacturing and distribution rights.

l)

 

Rapiscan agreement is in dispute

 

4.9           Liens

See 4.5

Lease schedules as of 6/30/05

 

 

 

Debt and
Capital
Leases (1)

 

Operating
Lease

 

Total

 

Year ending June 30:

 

 

 

 

 

 

 

2006

 

$

2,052,000

 

$

1,620,000

 

$

3,672,000

 

2007

 

386,000

 

1,673,000

 

2,059,000

 

2008

 

377,000

 

1,713,000

 

2,090,000

 

2009

 

131,000

 

1,454,000

 

1,585,000

 

2010

 

3,000

 

838,000

 

841,000

 

 

 

 

 

 

 

 

 

Total

 

$

2,949,000

 

$

7,298,000

 

$

10,247,000

 

 

Includes the $795,000 long term lease liability for Accurel’s facility lease,
which is being amortized over the life of the lease

 

4.12         Claim by the Company against Accurel Shareholders ~ This claim
relates to the Accurel selling shareholders’ misrepresentation of certain items
which the company believes

 

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would adjust the purchase price and also identifies certain other undisclosed
liabilities.  This claim is being pursued in order to preserve our interests,
specifically in respect to the escrow payment being withheld from the payoff of
the loan from the shareholders, due this week.  This is not a claim against the
company.  It is a claim against the Accurel selling shareholders.

 

The Company received a letter from an entity making a frivolous claim that they
have the right of first refusal with respect to a previous Laurus financing. 
The company believes tha such claim is frivolous in nature as the relevant
agreement clearly states that such rights are subject to Laurus’ rights of first
refusal.  The Company is in discussions which involve offering the claimant an
insignificant amount of warrants to purchase shares of the Company’s common
stock to drop the frivolous claim.

 

Claim by the Company against Rapiscan Systems relating to Rapiscan being in
default of the Distribution and Manufacturing Agreement.

 

Claim by the Company against former employee relating to the misappropriation of
company property.

 

4.13         California Sales Tax Audit being completed at Accurel Systems

 

4.14         The following investors have registration rights:

 

RAM Capital

 

AIR’s

 

611,765 shares

 

4.17          a)   All locations use approved toxic chemicals in semiconductor
services

b)   Wakefield has radioactive materials, regulated by Commonwealth of MA

 

4.21         To file 12b-25 September 29, 2005

 

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