Exhibit 10.1
EXECUTION COPY
SECURITIES PURCHASE AGREEMENT
     This Securities Purchase Agreement (this “Agreement”) is dated as of March
___, 2006, among Navarre Corporation, a Minnesota corporation (the “Company”),
and the purchasers identified on the signature pages hereto (each, a “Purchaser”
and collectively, the “Purchasers”).
     WHEREAS, subject to the terms and conditions set forth in this Agreement
and pursuant to Section 4(2) of the Securities Act (as defined below) and
Rule 506 promulgated thereunder, the Company desires to issue and sell to the
Purchasers, and the Purchasers, severally and not jointly, desire to purchase
from the Company certain securities of the Company, as more fully described in
this Agreement.
     NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and the Purchasers agree
as follows:
ARTICLE I.
DEFINITIONS
     1.1 Definitions. In addition to the terms defined elsewhere in this
Agreement, for all purposes of this Agreement, the following terms shall have
the meanings indicated in this Section 1.1:
          “Action” means any action, suit, inquiry, notice of violation,
proceeding (including any partial proceeding such as a deposition) or
investigation pending or threatened in writing against or affecting the Company,
any Subsidiary or any of their respective properties before or by any court,
arbitrator, governmental or administrative agency, regulatory authority
(federal, state, county, local or foreign), stock market, stock exchange or
trading facility.
          “Affiliate” means any Person that, directly or indirectly through one
or more intermediaries, controls or is controlled by or is under common control
with a Person, as such terms are used in and construed under Rule 144.
          “Business Day” means any day except Saturday, Sunday and any day which
shall be a federal legal holiday or a day on which banking institutions in the
State of New York or State of Minnesota are authorized or required by law or
other governmental action to close.
          “Closing” means the closing of the purchase and sale of the Securities
pursuant to Article II.
          “Closing Date” means the Business Day on which all the conditions set
forth in Sections 5.1 and 5.2 hereof are satisfied.
          “Commission” means the Securities and Exchange Commission.

 

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

 

          “Common Stock” means the common stock of the Company, no par value per
share, and any securities into which such common stock may hereafter be
reclassified.
          “Common Stock Equivalents” means any securities of the Company or any
Subsidiary which entitle the holder thereof to acquire Common Stock at any time,
including without limitation, any debt, preferred stock, rights, options,
warrants or other instrument that is at any time convertible into or
exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock or other securities that entitle the holder to receive, directly or
indirectly, Common Stock.
          “Company Counsel” means Winthrop & Weinstine, P.A.
          “Company Deliverables” has the meaning set forth in Section 2.2(a).
          “Disclosure Materials” has the meaning set forth in Section 3.1(h).
          “Effective Date” means the date that the Registration Statement
required by Section 2(a) of the Registration Rights Agreement is first declared
effective by the Commission.
          “Evaluation Date” has the meaning set forth in Section 3.1(s).
          “Exchange Act” means the Securities Exchange Act of 1934, as amended.
          “GAAP” means U.S. generally accepted accounting principles.
          “Intellectual Property Rights” has the meaning set forth in
Section 3.1(p).
          “Investment Amount” means, with respect to each Purchaser, the
investment amount indicated below such Purchaser’s name on the signature page of
this Agreement.
          “Lien” means any lien, charge, encumbrance, security interest, right
of first refusal or other restrictions of any kind.
          “Material Adverse Effect” means any of (i) a material and adverse
effect on the legality, validity or enforceability of any Transaction Document,
(ii) a material and adverse effect on the results of operations, assets,
prospects, business or condition (financial or otherwise) of the Company and the
Subsidiaries taken as a whole, or (iii) an adverse impairment to the Company’s
ability to perform on a timely basis any of its obligations under any
Transaction Document.
          “New York Courts” means the state and federal courts sitting in the
City of New York, Borough of Manhattan.
          “Per Unit Purchase Price” equals $3.50, subject to equitable
adjustment in the event of stock splits and similar occurrences with respect to
the Common Stock.

2

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

 

          “Person” means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or subdivision thereof)
or other entity of any kind.
          “Proceeding” means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
          “Purchaser Deliverables” has the meaning set forth in Section 2.2(b).
          “Registration Statement” means a registration statement meeting the
requirements set forth in the Registration Rights Agreement and covering the
resale by the Purchasers of the Registrable Securities (as defined in the
Registration Rights Agreement).
          “Registration Rights Agreement” means the Registration Rights
Agreement, dated as of the date of this Agreement, among the Company and the
Purchasers, in the form of Exhibit B.
          “Rule 144” means Rule 144 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
          “SEC Reports” has the meaning set forth in Section 3.1(h).
          “Securities” means the Shares, the Warrants and the Warrant Shares.
          “Securities Act” means the Securities Act of 1933, as amended.
          “Shares” means the shares of Common Stock issued or issuable to the
Purchasers at the Closing.
          “Short Sales” include, without limitation, all “short sales” as
defined in Rule 200 promulgated under Regulation SHO under the Exchange Act and
all types of direct and indirect stock pledges, forward sale contracts, options,
puts, calls, swaps and similar arrangements (including on a total return basis),
and sales and other transactions through non-US broker dealers or foreign
regulated brokers.
          “Subsidiary” means any “significant subsidiary” as defined in
Rule 1-02(w) of the Regulation S-X promulgated by the Commission under the
Exchange Act.
          “Trading Day” means (i) a day on which the Common Stock is traded on a
Trading Market (other than the OTC Bulletin Board), or (ii) if the Common Stock
is not listed on a Trading Market (other than the OTC Bulletin Board), a day on
which the Common Stock is traded in the over-the-counter market, as reported by
the OTC Bulletin Board, or (iii) if the Common Stock is not quoted on any
Trading Market, a day on which the Common Stock is quoted in the
over-the-counter market as reported by the Pink Sheets, LLC (or any similar

3

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

 

organization or agency succeeding to its functions of reporting prices);
provided, that in the event that the Common Stock is not listed or quoted as set
forth in (i), (ii) and (iii) hereof, then Trading Day shall mean a Business Day.
          “Trading Market” means whichever of the New York Stock Exchange, the
American Stock Exchange, the NASDAQ National Market, the NASDAQ Capital Market
or OTC Bulletin Board on which the Common Stock is listed or quoted for trading
on the date in question.
          “Transaction Documents” means this Agreement, the Warrants, the
Registration Rights Agreement, and any other documents or agreements executed in
connection with the transactions contemplated hereunder.
          “Warrants” means the Common Stock purchase warrants in the form of
Exhibit A, which are issuable to the Purchasers at the Closing.
          “Warrant Shares” means the shares of Common Stock issuable upon
exercise of the Warrants.
ARTICLE II.
PURCHASE AND SALE
     2.1 Closing. Subject to the terms and conditions set forth in this
Agreement, at the Closing the Company shall issue and sell to each Purchaser,
and each Purchaser shall, severally and not jointly, purchase from the Company,
the Shares and the Warrants representing such Purchaser’s Investment Amount. The
Closing shall take place at the offices of Bryan Cave LLP, 1290 Avenue of the
Americas, New York, NY 10104 on the Closing Date or at such other location or
time as the parties may agree.
     2.2 Closing Deliveries. (a) At the Closing, the Company shall deliver or
cause to be delivered to each Purchaser the following (the “Company
Deliverables”):
               (i) a certificate evidencing a number of Shares equal to such
Purchaser’s Investment Amount divided by the Per Unit Purchase Price, registered
in the name of such Purchaser;
               (ii) a Warrant, registered in the name of such Purchaser,
pursuant to which such Purchaser shall have the right to acquire the number of
shares of Common Stock equal to 25% of the number of Shares issuable to such
Purchaser in accordance with Section 2.2(a)(i);
               (iii) the legal opinion of Company Counsel, in agreed form,
addressed to the Purchasers;
               (iv) the Registration Rights Agreement duly executed by the
Company; and

4

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

 

               (v) an officer’s certificate, in accordance with Section 5.1(h).
          (b) At the Closing, each Purchaser shall deliver or cause to be
delivered to the Company the following (the “Purchaser Deliverables”):
               (i) such Purchaser’s Investment Amount, in United States dollars
and in immediately available funds, by wire transfer to an account designated in
writing by the Company for such purpose; and
               (ii) the Registration Rights Agreement duly executed by such
Purchaser.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
     3.1 Representations and Warranties of the Company. The Company hereby makes
the following representations and warranties to each Purchaser:
          (a) Subsidiaries. The Company has no direct or indirect Subsidiaries
other than as specified in the SEC Reports. Except as disclosed in
Schedule 3.1(a), the Company owns, directly or indirectly, all of the capital
stock of each Subsidiary free and clear of any and all Liens, and all the issued
and outstanding shares of capital stock of each Subsidiary are validly issued
and are fully paid, non-assessable and free of preemptive and similar rights.
          (b) Organization and Qualification. Each of the Company and each
Subsidiary is an entity duly incorporated or otherwise organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization (as applicable), with the requisite power and
authority to own and use its properties and assets and to carry on its business
as currently conducted. Neither the Company nor any Subsidiary is in violation
of any of the provisions of its respective certificate or articles of
incorporation, bylaws or other organizational or charter documents. Each of the
Company and each Subsidiary is duly qualified to conduct business and is in good
standing as a foreign corporation or other entity in each jurisdiction in which
the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not, individually or in the aggregate, have
or reasonably be expected to result in a Material Adverse Effect.
          (c) Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents and otherwise to carry out its
obligations thereunder. The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary action on the
part of the Company and no further action is required by the Company in
connection therewith. Each Transaction Document has been (or upon delivery will
have been) duly executed by the Company and, when delivered in accordance with
the terms hereof, will

5

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

 

constitute the valid and binding obligation of the Company enforceable against
the Company in accordance with its terms.
          (d) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of the Company’s or any Subsidiary’s certificate or
articles of incorporation, bylaws or other organizational or charter documents,
or (ii) conflict with, or constitute a default (or an event that with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation (with or without
notice, lapse of time or both) of, any agreement, credit facility, debt or other
instrument (evidencing a Company or Subsidiary debt or otherwise) or other
understanding to which the Company or any Subsidiary is a party or by which any
property or asset of the Company or any Subsidiary is bound or affected, or
(iii) result in a violation of any law, rule, regulation, order, judgment,
injunction, decree or other restriction of any court or governmental authority
to which the Company or a Subsidiary is subject (including federal and state
securities laws and regulations), or by which any property or asset of the
Company or a Subsidiary is bound or affected; except in the case of each of
clauses (ii) and (iii), such as could not, individually or in the aggregate,
have or reasonably be expected to result in a Material Adverse Effect.
          (e) Filings, Consents and Approvals. The Company is not required to
obtain any consent, waiver, authorization or order of, give any notice to, or
make any filing or registration with, any court or other federal, state, local
or other governmental authority or other Person in connection with the
execution, delivery and performance by the Company of the Transaction Documents,
other than: (i) the filing with the Commission of one or more Registration
Statements in accordance with the requirements of the Registration Rights
Agreement, (ii) any filings required by state securities laws, (iii) the filing
of a Notice of Sale of Securities on form D with the Commission under
Regulation D of the Securities Act, (iv) the filings required in accordance with
Section 4.5, and (v) those that have been made or obtained prior to the date of
this Agreement.
          (f) Issuance of the Securities. On the Closing Date, the Securities
shall have been duly authorized and, when issued and paid for in accordance with
the Transaction Documents, will be duly and validly issued, fully paid and
nonassessable, free and clear of all Liens. The Company has reserved from its
duly authorized capital stock a number of shares of Common Stock equal to the
sum of (x) the Shares issuable pursuant to this Agreement and (y) all of the
Warrant Shares issuable upon exercise of the Warrants (without taking into
account any limitations on the exercise of the Warrants set forth in the
Warrants and assuming such exercise occurred at Closing), in order to issue the
Shares and the Warrant Shares.
          (g) Capitalization. The number of shares and type of all authorized,
issued and outstanding capital stock of the Company, and all shares of Common
Stock reserved for issuance under the Company’s various option and incentive
plans, is set forth in Schedule 3.1(g). Except as set forth in Schedule 3.1(g),
no securities of the Company are entitled to preemptive or similar rights, and
no Person has any right of first refusal, preemptive right, right of
participation,

6

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

 

or any similar right to participate in the transactions contemplated by the
Transaction Documents. Except as a result of the purchase and sale of the
Securities and except as disclosed in Schedule 3.1(g), there are no outstanding
options, warrants, scrip rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities, rights or obligations
convertible into or exchangeable for, or giving any Person any right to
subscribe for or acquire, any shares of Common Stock, or contracts, commitments,
understandings or arrangements by which the Company or any Subsidiary is or may
become bound to issue additional shares of Common Stock, or securities or rights
convertible or exchangeable into shares of Common Stock. Except as set forth in
Schedule 3.1(g), the issue and sale of the Securities will not, immediately or
with the passage of time, obligate the Company to issue shares of Common Stock
or other securities to any Person (other than the Purchasers) and will not
result in a right of any holder of Company securities to adjust the exercise,
conversion, exchange or reset price under such securities.
          (h) SEC Reports; Financial Statements. The Company has filed all
reports required to be filed by it under the Securities Act and the Exchange
Act, including pursuant to Section 13(a) or 15(d) thereof, for the twelve months
preceding the date hereof (or such shorter period as the Company was required by
law to file such reports) (the foregoing materials being collectively referred
to herein as the “SEC Reports” and, together with the Schedules to this
Agreement, the “Disclosure Materials”) on a timely basis or has timely filed a
valid extension of such time of filing and has filed any such SEC Reports prior
to the expiration of any such extension. As of their respective dates and except
as specified in Schedule 3.1(h), the SEC Reports complied in all material
respects with the requirements of the Securities Act and the Exchange Act and
the rules and regulations of the Commission promulgated thereunder, and none of
the SEC Reports, when filed, contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading. Except as specified in Schedule 3.1(h),
the financial statements of the Company included in the SEC Reports comply in
all material respects with applicable accounting requirements and the rules and
regulations of the Commission with respect thereto as in effect at the time of
filing. Except as specified in Schedule 3.1(h), such financial statements have
been prepared in accordance with GAAP, except that unaudited financial
statements may not contain footnotes and except as may be otherwise specified in
such financial statements or the notes thereto, and fairly present in all
material respects the financial position of the Company and its consolidated
Subsidiaries as of and for the dates thereof and the results of operations and
cash flows for the periods then ended, subject, in the case of unaudited
statements, to normal, immaterial, year-end audit adjustments.
          (i) Press Releases. The press releases disseminated by the Company
during the three (3) years preceding the date of this Agreement taken as a whole
do not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.

7

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

 

          (j) Material Changes. Except as specifically disclosed in the SEC
Reports and Schedule 3.1(j), since the date of the latest audited financial
statements included within the SEC Reports, (i) there has been no event,
occurrence or development that has had or that could reasonably be expected to
result in a Material Adverse Effect, (ii) the Company has not incurred any
liabilities (contingent or otherwise) other than (A) trade payables and accrued
expenses incurred in the ordinary course of business consistent with past
practice and (B) liabilities (not to exceed $100,000) not required to be
reflected in the Company’s financial statements pursuant to GAAP or required to
be disclosed in filings made with the Commission, (iii) the Company has not
altered its method of accounting or the identity of its auditors, (iv) the
Company has not declared or made any dividend or distribution of cash or other
property to its shareholders or purchased, redeemed or made any agreements to
purchase or redeem any shares of its capital stock, and (v) the Company has not
issued any equity securities to any officer, director or Affiliate, except
pursuant to existing Company stock option plans. The Company does not have
pending before the Commission any request for confidential treatment of
information.
          (k) Litigation. There is no Action which (i) adversely affects or
challenges the legality, validity or enforceability of any of the Transaction
Documents or the Securities and (ii) except as specifically disclosed in the SEC
Reports could, if there were an unfavorable decision, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect. Neither the Company nor any Subsidiary, nor any director or officer
thereof, is or has been the subject of any Action involving a claim of violation
of or liability under federal or state securities laws or a claim of breach of
fiduciary duty, except as specifically disclosed in Schedule 3.1(k). Except as
disclosed in Schedule 3.1(k), there has not been, and to the knowledge of the
Company, there is not pending or contemplated, any investigation by the
Commission involving the Company or any current or former director or officer of
the Company. The Commission has not issued any stop order or other order
suspending the effectiveness of any registration statement filed by the Company
or any Subsidiary under the Exchange Act or the Securities Act.
          (l) Labor Relations. No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company.
          (m) Compliance. Neither the Company nor any Subsidiary (i) is in
default under or in violation of (and no event has occurred that has not been
waived that, with notice or lapse of time or both, would result in a default by
the Company or any Subsidiary under), nor has the Company or any Subsidiary
received notice of a claim that it is in default under or that it is in
violation of, any indenture, loan or credit agreement or any other agreement or
instrument to which it is a party or by which it or any of its properties is
bound (whether or not such default or violation has been waived), (ii) is in
violation of any order of any court, arbitrator or governmental body, or
(iii) is or has been in violation of any statute, rule or regulation of any
governmental authority, including without limitation all foreign, federal, state
and local laws relating to taxes, environmental protection, occupational health
and safety, product quality and safety and employment, labor matters and gaming
matters, except in each case as could not, individually or in the aggregate,
have or reasonably be expected to result in a Material Adverse Effect. The
Company is in compliance with the applicable requirements of the Sarbanes-Oxley

8

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

 

Act of 2002, as amended, and the applicable rules and regulations thereunder
promulgated by the Commission, except where such noncompliance could not have or
reasonably be expected to result in a Material Adverse Effect.
          (n) Regulatory Permits. The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports, except where the failure
to possess such permits would not, individually or in the aggregate, have or
reasonably be expected to result in a Material Adverse Effect (“Material
Permits”), and neither the Company nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any Material Permit.
          (o) Title to Assets. Except as set forth in Schedule 3.1(o), the
Company and the Subsidiaries have good and marketable title in fee simple to all
real property owned by them that is material to their respective businesses and
good and marketable title in all personal property owned by them that is
material to their respective businesses, in each case free and clear of all
Liens, except for Liens as do not materially affect the value of such property
and do not materially interfere with the use made and proposed to be made of
such property by the Company and the Subsidiaries. Any real property and
facilities held under lease by the Company and the Subsidiaries are held by them
under valid, subsisting and enforceable leases of which the Company and the
Subsidiaries are in compliance, except as could not, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect.
          (p) Patents and Trademarks. The Company and the Subsidiaries have, or
have rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, copyrights, licenses and other similar
rights that are necessary or material for use in connection with their
respective businesses as described in the SEC Reports and which the failure to
so have could, individually or in the aggregate, have or reasonably be expected
to result in a Material Adverse Effect (collectively, the “Intellectual Property
Rights”). Neither the Company nor any Subsidiary has received a written notice
claiming that the Intellectual Property Rights used by the Company or any
Subsidiary violates or infringes upon the rights of any Person, other than such
claims which would not reasonably have or be expected to result in a Material
Adverse Effect. Except as set forth in the SEC Reports, to the knowledge of the
Company, all such Intellectual Property Rights are enforceable and there is no
existing infringement by another Person of any of the Intellectual Property
Rights, other than such infringement by others which would not reasonably have
or be expected to result in a Material Adverse Effect.
          (q) Insurance. The Company and the Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in which the
Company and the Subsidiaries are engaged. The Company has no reason to believe
that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business on terms consistent with market for the
Company’s and such Subsidiaries’ respective lines of business.

9

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

 

          (r) Transactions With Affiliates and Employees. Except as set forth in
the SEC Reports and Schedule 3.1(r) hereto, none of the officers or directors of
the Company and, to the knowledge of the Company, none of the employees of the
Company is presently a party to any transaction with the Company or any
Subsidiary (other than for services as employees, officers and directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.
          (s) Internal Accounting Controls. The Company and the Subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management’s general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
GAAP and to maintain asset accountability, (iii) access to assets is permitted
only in accordance with management’s general or specific authorization, and
(iv) the recorded accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to any
differences. The Company has established disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and
designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its Subsidiaries, is made known
to the certifying officers by others within those entities, particularly during
the period in which the Company’s Form 10-K or 10-Q, as the case may be, is
being prepared. The Company’s certifying officers have evaluated the
effectiveness of the Company’s controls and procedures in accordance with
Item 307 of Regulation S-K under the Exchange Act for the Company’s most
recently ended fiscal quarter or fiscal year-end (such date, the “Evaluation
Date”). The Company presented in its most recently filed Form 10-K or Form 10-Q
the conclusions of the certifying officers about the effectiveness of the
disclosure controls and procedures based on their evaluations as of the
Evaluation Date. Since the Evaluation Date, there have been no significant
changes in the Company’s internal controls (as such term is defined in Item
308(c) of Regulation S-K under the Exchange Act) or, to the Company’s knowledge,
in other factors that could significantly affect the Company’s internal
controls.
          (t) Solvency. Based on the financial condition of the Company as of
the Closing Date (and assuming that the Closing shall have occurred), (i) the
Company’s fair saleable value of its assets exceeds the amount that will be
required to be paid on or in respect of the Company’s existing debts and other
liabilities (including known contingent liabilities) as they mature; (ii) the
Company’s assets do not constitute unreasonably small capital to carry on its
business for the current fiscal year as now conducted and as proposed to be
conducted including its capital needs taking into account the particular capital
requirements of the business conducted by the Company, and projected capital
requirements and capital availability thereof; and (iii) the current cash flow
of the Company, together with the proceeds the Company would receive, were it to
liquidate all of its assets, after taking into account all anticipated uses of
the cash, would be sufficient to pay all amounts on or in respect of its debt
when such amounts are required to be paid. The Company does not intend to incur
debts beyond its ability to pay such debts as they

10

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

 

mature (taking into account the timing and amounts of cash to be payable on or
in respect of its debt).
          (u) Certain Fees. Except as described in Schedule 3.1(u), no brokerage
or finder’s fees or commissions are or will be payable by the Company to any
broker, financial advisor or consultant, finder, placement agent, investment
banker, bank or other Person with respect to the transactions contemplated by
this Agreement. The Purchasers shall have no obligation with respect to any fees
or with respect to any claims (other than such fees or commissions owed by a
Purchaser pursuant to written agreements executed by such Purchaser which fees
or commissions shall be the sole responsibility of such Purchaser) made by or on
behalf of other Persons for fees of a type contemplated in this Section that may
be due in connection with the transactions contemplated by this Agreement.
          (v) Certain Registration Matters. Based in part upon the accuracy of
the Purchasers’ representations and warranties set forth in Section 3.2(b)-(i),
no registration under the Securities Act is required for the offer and sale of
the Securities by the Company to the Purchasers under the Transaction Documents.
The Company is eligible to register its Common Stock for resale by the
Purchasers under Form S-1 promulgated under the Securities Act. Except as
described in Schedule 3.1(v), the Company has not granted or agreed to grant to
any Person any rights (including “piggy-back” registration rights) to have any
securities of the Company registered with the Commission or any other
governmental authority that have not been satisfied.
          (w) Listing and Maintenance Requirements. Except as specified in the
SEC Reports, the Company has not, in the two years preceding the date hereof,
received notice from any Trading Market to the effect that the Company is not in
compliance with the listing or maintenance requirements thereof. The Company is,
and has no reason to believe that it will not in the foreseeable future continue
to be, in compliance with the listing and maintenance requirements for continued
listing of the Common Stock on the Trading Market on which the Common Stock is
currently listed or quoted. The issuance and sale of the Securities under the
Transaction Documents does not contravene the rules and regulations of the
Trading Market on which the Common Stock is currently listed or quoted, and no
approval of the shareholders of the Company thereunder is required for the
Company to issue and deliver to the Purchasers the Securities contemplated by
the Transaction Documents.
          (x) Investment Company. The Company is not, and is not an Affiliate
of, and immediately following the Closing will not have become, an “investment
company” within the meaning of the Investment Company Act of 1940, as amended.
          (y) Application of Takeover Protections. The Company has taken all
necessary action, if any, in order to render inapplicable any control share
acquisition, business combination, poison pill (including any distribution under
a rights agreement) or other similar anti-takeover provision under the Company’s
Certificate of Incorporation (or similar charter documents) or the laws of its
state of incorporation that is or could become applicable to the Purchasers or
shareholders of the Company prior to the Closing Date as a result of the
Purchasers and the Company fulfilling their obligations or exercising their
rights under the Transaction

11

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

 

Documents, including without limitation the Company’s issuance of the Securities
and the Purchasers’ ownership of the Securities.
          (z) No Additional Agreements. The Company does not have any agreement
or understanding with any Purchaser with respect to the transactions
contemplated by the Transaction Documents other than as specified in the
Transaction Documents.
          (aa) Consultation with Auditors. The Company has consulted its
independent auditors concerning the accounting treatment of the transactions
contemplated by the Transaction Documents, and in connection therewith has
furnished such auditors complete copies of the Transaction Documents. The
Company intends to account for the gross proceeds raised from the financing
which is the subject of this Agreement as equity in its financial statements.
          (bb) Disclosure. The Company confirms that neither it nor any Person
acting on its behalf has provided any Purchaser or its respective agents or
counsel with any information that the Company believes constitutes material,
non-public information except insofar as the existence and terms of the proposed
transactions hereunder may constitute such information. The Company understands
and confirms that the Purchasers will rely on the foregoing representations and
covenants in effecting transactions in securities of the Company. All disclosure
provided to the Purchasers regarding the Company, its business and the
transactions contemplated hereby, furnished by or on behalf of the Company
(including the Company’s representations and warranties set forth in this
Agreement) are true and correct and do not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.
     3.2 Representations and Warranties of the Purchasers. Each Purchaser
hereby, for itself and for no other Purchaser, represents and warrants to the
Company as follows:
          (a) Organization; Authority. Such Purchaser is an entity duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with the requisite corporate or partnership
power and authority to enter into and to consummate the transactions
contemplated by the applicable Transaction Documents and otherwise to carry out
its obligations thereunder. The execution, delivery and performance by such
Purchaser of the transactions contemplated by this Agreement has been duly
authorized by all necessary corporate or, if such Purchaser is not a
corporation, such partnership, limited liability company or other applicable
like action, on the part of such Purchaser. Each of this Agreement and the
Registration Rights Agreement has been duly executed by such Purchaser, and when
delivered by such Purchaser in accordance with terms hereof, will constitute the
valid and legally binding obligation of such Purchaser, enforceable against it
in accordance with its terms.
          (b) Investment Intent. Such Purchaser is acquiring the Securities as
principal for its own account for investment purposes only and not with a view
to or for distributing or reselling such Securities or any part thereof, without
prejudice, however, to such Purchaser’s right at all times to sell or otherwise
dispose of all or any part of such Securities in compliance with applicable
federal and state securities laws. Subject to the immediately preceding
sentence,

12

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

 

nothing contained herein shall be deemed a representation or warranty by such
Purchaser to hold the Securities for any period of time. Such Purchaser is
acquiring the Securities hereunder in the ordinary course of its business. Such
Purchaser does not have any agreement or understanding, directly or indirectly,
with any Person to distribute any of the Securities.
          (c) Purchaser Status. At the time such Purchaser was offered the
Securities, it was, and at the date hereof it is, and on each date on which it
exercises the Warrants it will be, an “accredited investor” as defined in Rule
501(a) under the Securities Act. Such Purchaser is not a registered
broker-dealer under Section 15 of the Exchange Act.
          (d) General Solicitation. Such Purchaser is not purchasing the
Securities as a result of any advertisement, article, notice or other
communication regarding the Securities published in any newspaper, magazine or
similar media or broadcast over television or radio or presented at any seminar
or any other general solicitation or general advertisement.
          (e) Access to Information. Such Purchaser acknowledges that it has
reviewed the Disclosure Materials and has been afforded (i) the opportunity to
ask such questions as it has deemed necessary of, and to receive answers from,
representatives of the Company concerning the terms and conditions of the
offering of the Securities and the merits and risks of investing in the
Securities; (ii) access to information about the Company and the Subsidiaries
and their respective financial condition, results of operations, business,
properties, management and prospects sufficient to enable it to evaluate its
investment; and (iii) the opportunity to obtain such additional information that
the Company possesses or can acquire without unreasonable effort or expense that
is necessary to make an informed investment decision with respect to the
investment. Neither such inquiries nor any other investigation conducted by or
on behalf of such Purchaser or its representatives or counsel shall modify,
amend or affect such Purchaser’s right to rely on the truth, accuracy and
completeness of the Disclosure Materials and the Company’s representations and
warranties contained in the Transaction Documents.
          (f) Certain Trading Activities. Such Purchaser has not, in violation
of the securities laws, directly or indirectly, nor has any Person acting on
behalf of or pursuant to any understanding with such Purchaser, engaged in any
transactions in the securities of the Company (including, without limitations,
any Short Sales involving the Company’s securities) since the time that such
Purchaser was first contacted by the Company or Craig-Hallum Capital Group LLC
regarding the investment in the Company contemplated by the Transaction
Documents. Such Purchaser covenants that neither it nor any Person acting on its
behalf or pursuant to any understanding with it will engage in any transactions
in the securities of the Company (including Short Sales) prior to the time that
the transactions contemplated by this Agreement are publicly disclosed.
          (g) Limited Ownership. The purchase by such Purchaser of the
Securities issuable to it at the Closing will not result in such Purchaser
(individually or together with other Person with whom such Purchaser has
identified, or will have identified, itself as part of a “group” in a public
filing made with the Commission involving the Company’s securities) acquiring,
or obtaining the right to acquire, in excess of 19.999% of the outstanding
shares of

13

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

 

Common Stock or the voting power of the Company on a post transaction basis that
assumes that the Closing shall have occurred. Such Purchaser does not presently
intend to, alone or together with others, make a public filing with the
Commission to disclose that it has (or that it together with such other Persons
have) acquired, or obtained the right to acquire, as a result of the Closing
(when added to any other securities of the Company that it or they then own or
have the right to acquire), in excess of 19.999% of the outstanding shares of
Common Stock or the voting power of the Company on a post transaction basis that
assumes that the Closing shall have occurred.
          (h) Independent Investment Decision. Such Purchaser has independently
evaluated the merits of its decision to purchase Securities pursuant to this
Agreement, and such Purchaser confirms that it has not relied on the advice of
any other Purchaser’s business and/or legal counsel in making such decision. If
such Purchaser is other than SF Capital Partners Ltd., such Purchaser represents
and warrants that Bryan Cave LLP has not acted as its legal counsel in
connection with the transactions contemplated by this Agreement.
          (i) Restricted Securities. Such Purchaser understands that the
Securities are “restricted securities” under Rule 144 and have not been
registered under the Securities Act. The blue sky state of residency for each
Purchaser is as listed on the signature page attached hereto.
          The Company acknowledges and agrees that each Purchaser does not make
or has not made any representations or warranties with respect to the
transactions contemplated hereby other than those specifically set forth in this
Section 3.2 and those set forth on the Selling Holder Questionnaire (as defined
in the Registration Rights Agreement).
ARTICLE IV.
OTHER AGREEMENTS OF THE PARTIES
     4.1 (a) Securities may only be disposed of in compliance with state and
federal securities laws. In connection with any transfer of the Securities other
than pursuant to an effective registration statement, to the Company, to an
Affiliate of a Purchaser or in connection with a pledge as contemplated in
Section 4.1(b), the Company may require the transferor thereof to provide to the
Company an opinion of counsel selected by the transferor, the form and substance
of which opinion shall be reasonably satisfactory to the Company, to the effect
that such transfer does not require registration of such transferred Securities
under the Securities Act.
          (b) Certificates evidencing the Securities will contain the following
legend, so long as is required by this Section 4.1(b) or Section 4.1(c):
[NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THESE
SECURITIES HAVE BEEN REGISTERED] [THESE SECURITIES HAVE NOT BEEN REGISTERED]WITH
THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE
IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO AN EFFECTIVE

14

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

 

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. [THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE
SECURITIES] [THESE SECURITIES] MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE
MARGIN ACCOUNT SECURED BY SUCH SECURITIES.
          The Company acknowledges and agrees that a Purchaser may from time to
time pledge, and/or grant a security interest in some or all of the Securities
pursuant to a bona fide margin agreement in connection with a bona fide margin
account and, if required under the terms of such agreement or account, such
Purchaser may transfer pledged or secured Securities to the pledgees or secured
parties. Such a pledge or transfer would not be subject to approval or consent
of the Company and no legal opinion of legal counsel to the pledgee, secured
party or pledgor shall be required in connection with the pledge, but such legal
opinion may be required in connection with a subsequent transfer following
default by the Purchaser transferee of the pledge. No notice shall be required
of such pledge. At the appropriate Purchaser’s expense, the Company will execute
and deliver such reasonable documentation as a pledgee or secured party of
Securities may reasonably request in connection with a pledge or transfer of the
Securities including the preparation and filing of any required prospectus
supplement under Rule 424(b)(3) of the Securities Act or other applicable
provision of the Securities Act to appropriately amend the list of Selling
Stockholders thereunder.
          (c) Certificates evidencing Shares and Warrant Shares shall not
contain any legend (including the legend set forth in Section 4.1(b)):
(i) following a sale or transfer of such Shares or Warrant Shares pursuant to an
effective registration statement (including a Registration Statement), or
(ii) following a sale or transfer of such Shares or Warrant Shares pursuant to
Rule 144 (assuming the transferee is not an Affiliate of the Company), or
(iii) while such Shares or Warrant Shares are eligible for sale under
Rule 144(k). If a Purchaser shall make a sale or transfer of Shares either
(x) pursuant to Rule 144 or (y) pursuant to a registration statement and in each
case shall have delivered to the Company or the Company’s transfer agent the
certificate representing Shares containing a restrictive legend which are the
subject of such sale or transfer and a representation letter in customary form
(the date of such sale or transfer and Share delivery being the “Share Delivery
Date”) and (1) the Company shall fail to deliver or cause to be delivered to
such Purchaser a certificate representing such Shares that is free from all
restrictive or other legends by the third Trading Day following the Share
Delivery Date and (2) following such third Trading Day after the Share Delivery
Date and prior to the time such Shares are received free from restrictive
legends, the Purchaser, or any third party on behalf of such Purchaser,
purchases (in an open market transaction or otherwise) shares of Common Stock to
deliver in satisfaction of a sale by the Purchaser of such Shares (a “Buy-In”),
then the Company shall pay in cash to the Purchaser (for costs incurred either
directly by such Purchaser or on

15

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

 

behalf of a third party) the amount by which the total purchase price paid for
Common Stock as a result of the Buy-In (including brokerage commissions, if any)
exceed the proceeds received by such Purchaser as a result of the sale to which
such Buy-In relates. The Purchaser shall provide the Company written notice
indicating the amounts payable to the Purchaser in respect of the Buy-In.
     4.2 Furnishing of Information. As long as any Purchaser owns the
Securities, the Company agrees to use its reasonable best efforts to timely file
(or obtain extensions in respect thereof and use its reasonable best efforts to
file within the applicable grace period) all reports required to be filed by the
Company after the date hereof pursuant to the Exchange Act. As long as any
Purchaser owns Securities, if the Company is not required to file reports
pursuant to such laws, it will prepare and furnish to the Purchasers and make
publicly available in accordance with Rule 144(c) such information as is
required for the Purchasers to sell the Shares and Warrant Shares under
Rule 144. The Company further covenants that it will take such further action as
any holder of Securities may reasonably request, all to the extent required from
time to time to enable such Person to sell such Shares and Warrant Shares
without registration under the Securities Act within the limitation of the
exemptions provided by Rule 144.
     4.3 Integration. Subsequent to the date hereof, the Company shall not and
shall use its reasonable best efforts to ensure that no Affiliate of the Company
shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in
respect of any security (as defined in Section 2 of the Securities Act) that
would be integrated with the offer or sale of the Securities in a manner that
would require the registration under the Securities Act of the sale of the
Securities to the Purchasers, or that would be integrated with the offer or sale
of the Securities for purposes of the rules and regulations of any Trading
Market in a manner that would require shareholder approval of the sale of the
Securities to the Purchasers.
     4.4 Subsequent Registrations. Other than pursuant to the Registration
Statement (which may include the securities specified in Schedule 3.1(v)), prior
to the Effective Date, the Company may not file any registration statement
(other than on Form S-8) with the Commission with respect to any securities of
the Company.
     4.5 Securities Laws Disclosure; Publicity. By 9:00 a.m. (New York time) on
the Trading Day following the execution of this Agreement, and by 9:00 a.m. (New
York time) on the Trading Day following the Closing Date, the Company shall
issue press releases in a form approved by the Purchasers disclosing the
transactions contemplated hereby and the Closing. On the Trading Day following
the execution of this Agreement the Company will file a Current Report on Form
8-K disclosing the material terms of the Transaction Documents (and attach as
exhibits thereto the Transaction Documents and the schedules thereto), and on
the Trading Day following the Closing Date the Company will file an additional
Current Report on Form 8-K to disclose the Closing. In addition, the Company
will make such other filings and notices in the manner and time required by the
Commission and the Trading Market on which the Common Stock is listed.
Notwithstanding the foregoing, the Company shall not publicly disclose the name
of any Purchaser, or include the name of any Purchaser in any filing with the
Commission (other than the Registration Statement and any exhibits to filings
made in respect of this

16

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

 

transaction in accordance with periodic filing requirements under the Exchange
Act) or any regulatory agency or Trading Market, without the prior written
consent of such Purchaser, except to the extent such disclosure is required by
law or Trading Market regulations.
     4.6 Limitation on Issuance of Future Priced Securities. During the six
months following the Closing Date, the Company shall not issue any “Future
Priced Securities” as such term is described by NASD IM-4350-1.
     4.7 Indemnification of Purchasers. In addition to the indemnity provided in
the Registration Rights Agreement, the Company will indemnify and hold the
Purchasers and their directors, officers, shareholders, partners, employees and
agents (each, a “Purchaser Party”) harmless from any and all losses,
liabilities, obligations, claims, contingencies, damages, costs and expenses,
including all judgments, amounts paid in settlements, court costs and reasonable
attorneys’ fees and costs of investigation (collectively, “Losses”) that any
such Purchaser Party may suffer or incur as a result of or relating to any
misrepresentation, breach or inaccuracy of any representation, warranty,
covenant or agreement made by the Company in any Transaction Document. In
addition to the indemnity contained herein, the Company will reimburse each
Purchaser Party for its reasonable legal and other expenses (including the cost
of any investigation, preparation and travel in connection therewith) incurred
in connection therewith, as such expenses are incurred. Except as otherwise set
forth herein, the mechanics and procedures with respect to the rights and
obligations under this Section 4.7 shall be the same as those set forth in
Section 5 of the Registration Rights Agreement.
     4.8 Participation Rights. If at any time prior to the twelve-month
anniversary of the Closing Date, the Company proposes to offer, issue, or sell
any equity Common Stock or Common Stock Equivalents (collectively, “New Issue
Securities”), the Company shall first offer the New Issue Securities to the
Purchasers in accordance with the following provisions:
          (a) The Company shall give a written notice to each Purchaser (the
“First Notice”) stating and including (i) its intention to issue the New Issue
Securities, (ii) the number and description of the New Issue Securities proposed
to be issued and (iii) the purchase price (calculated as of the proposed
issuance date) and the final documents and agreements setting forth and
governing the terms and conditions upon which the Company is offering the New
Issue Securities. The Company may not impose any terms or provisions upon either
the New Issue Securities nor within the transaction documents pertaining thereto
which would (i) require a Purchaser (or subsequent holder of any Securities) to
agree to any trading restrictions on any securities of the Company owned by such
Purchaser (or subsequent holder) prior to such subsequent placement under which
such New Issue Securities would be issued, (ii) require the purchaser of any New
Issue Securities to make any representations or warranties which are more
onerous than those set forth in this Agreement, (iii) otherwise treat an
existing stockholder of the Company differently than any other potential buyer
of such New Issue Securities, (iv) limit the number of shares of Common Stock
which a Purchaser (or subsequent holder of Securities) may beneficially own
(other than (i) to the extent that such ownership would result in a “change of
control” of the Company under the rules of the Nasdaq Stock Market or (ii) as
set forth in exercise limitations substantially similar to those contained in
the Transaction Documents), or

17

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

 

(v) provide registration rights which differ in any material respect to those
granted under the Registration Rights Agreement.
          (b) Transmittal of the First Notice to the Purchasers by the Company
shall constitute an offer by the Company to sell to each Purchaser (i) up to its
pro rata portion (based upon such Purchaser’s Investment Amount relative to the
aggregate Investment amount of all Purchasers party to this Agreement) of the
New Issue Securities (the “Basic Amount”) for the price and upon the terms and
conditions set forth in the First Notice and (ii) with respect to each Purchaser
that elects to purchase its Basic Amount, any additional portion of the New
Issue Securities attributable to the Basic Amounts of other Purchasers as such
Purchaser shall indicate it will purchase or acquire should the other Purchasers
subscribe for less than their Basic Amounts (the “Undersubscription Amount”).
For a period of five (5) Business Days after receipt of the First Notice, each
Purchaser shall have the option, exercisable by written notice to the Company,
to accept the Company’s offer as to all or any part of such Purchaser’s Basic
Amount and, if such Purchaser shall elect to purchase all of its Basic Amount,
the Undersubscription Amount, if any, that such Purchaser elects to purchase (in
either case, the “Notice of Acceptance”). If the Basic Amounts subscribed for by
all Purchasers are less than the total of all of the Basic Amounts, then each
Purchaser who has set forth an Undersubscription Amount in its Notice of
Acceptance shall be entitled to purchase, in addition to the Basic Amounts
subscribed for, the Undersubscription Amount it has subscribed for; provided,
however, that if the Undersubscription Amounts subscribed for exceed the
difference between the total of all the Basic Amounts and the Basic Amounts
subscribed for (the “Available Undersubscription Amount”), each Purchaser who
has subscribed for any Undersubscription Amount shall be entitled to purchase
that portion of the Available Undersubscription Amount as the Basic Amount of
such Purchaser bears to the total Basic Amounts of all Purchasers that have
subscribed for Undersubscription Amounts, subject to rounding by the Board of
Directors to the extent its deems reasonably necessary. If two or more types of
New Issue Securities are to be issued or New Issue Securities are to be issued
together with other types of securities, including, without limitation, debt
securities, in a single transaction or related transactions, the rights to
purchase New Issue Securities granted to the Purchasers under this Section must
be exercised to purchase all types of New Issue Securities and such other
securities in the same proportion as such New Issue Securities and other
securities are to be issued by the Company.
          (c) The Company shall have ten (10) Trading Days from the expiration
of the period set forth in Section 4.8(b) above to either (x)(1) publicly
disclose its intention to offer, issue or sell (as the case may be) New Issue
Securities in a manner such that Purchasers will not be in possession of
material, non-public information concerning the Company or such New Issue
Securities as a result of the notices and information delivered to them under
this Section, (2) issue, sell or exchange all or any part of such New Issue
Securities as to which a Notice of Acceptance has not been given by the
Purchasers (the “Refused Securities”), but only upon the terms and conditions
(including, without limitation, unit prices and interest rates) contained in the
First Notice, and (2) in connection therewith and as a requirement thereof, file
a Current Report on Form 8-K disclosing the material terms of such transaction
(and attach as exhibits thereto all documents and agreements pertaining thereto)
or (y) notify the Purchasers in writing that it has determined to abandon such
transaction. The Company understands and agrees that,

18

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

 

in the event the Company fails to make at least one of the two the Form 8-K
filings described in (x) above or deliver the letter described in (y) above,
then (1) the Company shall be deemed to have abandoned such transaction, (2) the
Purchasers will not be deemed to be in possession of any non-public information
as a result of the First Notice and the transactions contemplated thereby, and
(3) the Purchasers will be free to trade in the Company’s securities.
          (d) In the event the Company shall propose to sell less than all the
Refused Securities (any such sale to be in the manner and on the terms specified
in Section 4.8(c) above), then each Purchaser may, at its sole option and in its
sole discretion, reduce the number or amount of the New Issue Securities
specified in its Notice of Acceptance to an amount that shall be not less than
the number or amount of New Issue Securities that the Purchaser elected to
purchase pursuant to Section 4.8(b) above multiplied by a fraction, (i) the
numerator of which shall be the number or amount of New Issue Securities the
Company actually proposes to issue, sell or exchange (including prior to such
reduction) and (ii) the denominator of which shall be the original amount of the
New Issue Securities. In the event that any Purchaser so elects to reduce the
number or amount of New Issue Securities specified in its Notice of Acceptance,
the Company may not issue, sell or exchange more than the reduced number or
amount of the New Issue Securities unless and until such securities have again
been offered to the Purchasers in accordance with Section 4.8(a) above.
          (e) Upon the closing of the issuance, sale or exchange of all or less
than all of the Refused Securities, the Purchasers shall acquire from the
Company, and the Company shall issue to the Purchasers, the number or amount of
New Issue Securities specified in the Notices of Acceptance, as reduced pursuant
to Section 4.8(d) the Purchasers have so elected, upon the terms and conditions
specified in the First Notice. The purchase by the Purchasers of any New Issue
Securities is subject in all cases to the preparation, execution and delivery by
the Company and the Purchasers of a purchase agreement relating to such New
Issue Securities reasonably satisfactory in form and substance to the Purchasers
and the Company and their respective counsel.
          (f) The participation rights contained in this Section 4.8 shall not
apply to the issuance and sale by the Company of shares of Common Stock issued
as a result of: (i) the issuance of Warrant Shares, (ii) the grant of options or
warrants, or the issuance of additional securities, under any duly authorized
Company stock option, restricted stock plan or stock purchase plan whether now
existing or approved by the Company and its shareholders in the future, or
(iii) the issuance and sale by the Company of shares of Common Stock issued as
consideration for the acquisition of another company or business in which the
shareholders of the Company do not have an ownership interest, which acquisition
has been approved by the Board of Directors of the Company.
     4.9 Non-Public Information. The Company covenants and agrees that neither
it nor any other Person acting on its behalf will provide any Purchaser or its
agents or counsel with any information that the Company believes constitutes
material non-public information, unless prior thereto such Purchaser shall have
executed a written agreement regarding the confidentiality and

19

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

 

use of such information. The Company understands and confirms that each
Purchaser shall be relying on the foregoing representations in effecting
transactions in securities of the Company.
     4.10 Use of Proceeds. The Company will use the net proceeds from the sale
of the Securities hereunder to repay a portion of the Company’s debt (but not
debt which also would constitute a Common Stock Equivalent) and for general
working capital purposes, but not to redeem any Common Stock or Common Stock
Equivalents.
     4.11 Listing of Securities. The Company agrees, (i) if the Company applies
to have the Common Stock traded on any other Trading Market, it will include in
such application the Shares and Warrant Shares, and will take such other action
as is necessary or desirable to cause the Shares and Warrant Shares to be listed
on such other Trading Market as promptly as possible, and (ii) it will take all
action reasonably necessary to continue the listing and trading of its Common
Stock on a Trading Market and will comply in all material respects with the
Company’s reporting, filing and other obligations under the bylaws or rules of
the Trading Market.
     4.12 Reservation of Shares. The Company shall take all action necessary to
at all times have authorized, and reserved for the purpose of issuance, after
the Closing Date, the shares of Common Stock issuable upon exercise of the
Warrants (without taking into account any limitations on the conversion or
redemption of the Notes or exercise of the Warrants set forth in the Warrants)
and any capital stock of the Company issued or issuable with respect to the
Warrant Shares.
ARTICLE V.
CLOSING CONDITIONS
     5.1 Conditions Precedent to the Obligations of the Purchasers to Purchase
Securities on the Closing Date. The obligation of each Purchaser to acquire
Securities at the Closing is subject to the satisfaction or waiver by such
Purchaser, at or before the Closing, of each of the following conditions:
          (a) Representations and Warranties. The representations and warranties
of the Company contained herein shall be true and correct in all material
respects as of the date when made and as of the Closing as though made on and as
of such date;
          (b) Performance. The Company shall have performed, satisfied and
complied in all material respects with all covenants, agreements and conditions
required by the Transaction Documents to be performed, satisfied or complied
with by it at or prior to the Closing;
          (c) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction that
prohibits the consummation of any of the transactions contemplated by the
Transaction Documents;

20

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

 

          (d) Adverse Changes. Since the date of execution of this Agreement, no
event or series of events shall have occurred that reasonably could have or
result in a Material Adverse Effect;
          (e) No Suspensions of Trading in Common Stock; Listing. Trading in the
Common Stock shall not have been suspended by the Commission or any Trading
Market (except for any suspensions of trading of not more than one Trading Day
solely to permit dissemination of material information regarding the Company) at
any time since the date of execution of this Agreement, and the Common Stock
shall have been at all times since such date listed for trading on a Trading
Market;
          (f) Nasdaq Listing. The Nasdaq Stock Market shall have waived
application of the 15 day prior notice contained in NASD Marketplace
Rule 4310(17)(D) or such timeframe shall have expired without objection;
          (g) Company Deliverables. The Company shall have delivered the Company
Deliverables in accordance with Section 2.2(a);
          (h) Closing Officer’s Certificate. At the Closing, the Company shall
have delivered to each Purchaser an officer’s certificate to the effect that
each of the conditions specified in Sections 5.1(a)-5.1(f) is satisfied in all
respects; and
          (i) Termination. This Agreement shall not have been terminated as to
such Purchaser in accordance with Section 6.5 herein.
     5.2 Conditions Precedent to the Obligations of the Company to sell
Securities on the Closing Date. The obligation of the Company to sell Securities
at the Closing is subject to the satisfaction or waiver by the Company, at or
before the Closing, of each of the following conditions:
          (a) Representations and Warranties. The representations and warranties
of each Purchaser contained herein shall be true and correct in all material
respects as of the date when made and as of the Closing Date as though made on
and as of such date;
          (b) Performance. Each Purchaser shall have performed, satisfied and
complied in all material respects with all covenants, agreements and conditions
required by the Transaction Documents to be performed, satisfied or complied
with by such Purchaser at or prior to the Closing;
          (c) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction that
prohibits the consummation of any of the transactions contemplated by the
Transaction Documents;

21

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

 

          (d) Nasdaq Listing. The Nasdaq Stock Market shall have waived
application of the 15 day prior notice contained in NASD Marketplace
Rule 4310(17)(D) or such timeframe shall have expired without objection;
          (e) Purchaser Deliverables. Each Purchaser shall have delivered its
Purchaser Deliverables in accordance with Section 2.2(b); and
          (f) Termination. This Agreement shall not have been terminated as to
such Purchaser in accordance with Section 6.5 herein.
ARTICLE VI.
MISCELLANEOUS
     6.1 Fees and Expenses. At the Closing, the Company shall reimburse SF
Capital Partners Ltd. $25,000 in connection with its legal fees concerning the
transactions contemplated by the Transaction Documents (SF Capital Partners Ltd.
may deduct such amount from the portion of its Investment Amount deliverable to
the Company at the Closing), it being understood that Bryan Cave LLP has only
rendered legal advice to SF Capital Partners Ltd., and not to the Company or any
other Purchaser in connection with the transactions contemplated hereby, and
that each of the Company and each Purchaser has relied for such matters on the
advice of its own respective counsel. Except as specified in the immediately
preceding sentence and in the Registration Rights Agreement, each party shall
pay the fees and expenses of its advisers, counsel, accountants and other
experts, if any, and all other expenses incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of the Transaction
Documents. The Company shall pay all stamp and other taxes and duties levied in
connection with the sale of the Securities.
     6.2 Entire Agreement. The Transaction Documents, together with the Exhibits
and Schedules thereto, contain the entire understanding of the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.
     6.3 Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via facsimile (provided the sender
receives a machine-generated confirmation of successful transmission) at the
facsimile number specified in this Section prior to 6:30 p.m. (New York City
time) on a Trading Day, (b) the next Trading Day after the date of transmission,
if such notice or communication is delivered via facsimile at the facsimile
number specified in this Section on a day that is not a Trading Day or later
than 6:30 p.m. (New York City time) on any Trading Day, (c) the Trading Day
following the date of mailing, if sent by U.S. nationally recognized overnight
courier service, or (d) upon actual receipt by the party to whom such notice is
required to be given. The address for such notices and communications shall be
as follows:

22

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

 

     
If to the Company:
  Navarre Corporation

     
 
  7400 49th Avenue North
 
  New Hope, MN 55428
 
  Attn: Chief Financial Officer
 
  Facsimile No.: (763) 504-1107
 
   
With a copy to:
  Winthrop & Weinstine, P.A.
 
  225 South Sixth Street
 
  Suite 3500
 
  Minneapolis, MN 55402
 
  Attn: Philip T. Colton
 
  Facsimile No.: (612) 604-6929
 
   
If to SF Capital Partners Ltd.
  c/o Stark Investments
 
  3600 South Lake Drive
 
  St. Francis, WI 53235
 
  Facsimile: (414) 294-7692
 
  Attention: Todd M. W. Turall, Esq.
 
   
With a copy to:
  Bryan Cave LLP
 
  1290 Avenue of the Americas
 
  New York, NY 10104
 
  Facsimile: (212) 541-1432
 
  Attention: Eric L. Cohen, Esq.
 
   
If to any other Purchaser:
  To the address set forth under such Purchaser’s name on the signature pages
hereof;

or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
     6.4 Amendments; Waivers. No provision of this Agreement may be waived or
amended except in a written instrument signed, in the case of an amendment, by
the Company and the Purchaser or Purchasers holding no less than sixty-six and
two-thirds percent of the outstanding Shares or, in the case of a waiver, by the
party against whom enforcement of any such waiver is sought. No waiver of any
default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver of
any subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right. No
consideration shall be offered or paid to any Purchaser to amend or consent to a
waiver or modification of any provision of any Transaction Document unless the
same consideration is also offered to all Purchasers who then hold Securities.

23

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

 

     6.5 Termination. This Agreement may be terminated prior to Closing:
          (a) by written agreement of the Purchasers and the Company;
          (b) by the Company or a Purchaser (as to itself but no other
Purchaser) upon written notice to the other, if the Closing shall not have taken
place by 6:30 p.m. Eastern time on March 17, 2006; provided, that the right to
terminate this Agreement under this Section 6.5(b) shall not be available to any
Person whose failure to comply with its obligations under this Agreement has
been the cause of or resulted in the failure of the Closing to occur on or
before such time; or
          (c) by a Purchaser (as to itself but no other Purchaser) if it
concludes in good faith that any of the conditions precedent contained
Sections 5.1(c), (d) or (e) shall have been breached or shall not be capable of
being satisfied by March 17, 2006 despite the assumed best efforts of the
Company.
     In the event of a termination pursuant to this Section, the Company shall
promptly notify all non-terminating Purchasers and shall pay to SF Capital
Partners Ltd. all of the fees and expenses incurred by SF Capital Partners Ltd.
(including the legal fees and expenses set forth in Section 6.1) in connection
with this Agreement and the transactions contemplated by this Agreement through
the termination date. Other than as to the foregoing fees and expenses, upon a
termination in accordance with this Section 6.5, the Company and the terminating
Purchaser(s) shall not have any further obligation or liability (including as
arising from such termination) to the other and no Purchaser will have any
liability to any other Purchaser under the Transaction Documents as a result
therefrom.
     6.6 Construction. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party. This Agreement
shall be construed as if drafted jointly by the parties, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any provisions of this Agreement or any of the Transaction
Documents.
     6.7 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their successors and permitted assigns. The
Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of the Purchasers. Any Purchaser may assign
any or all of its rights under this Agreement to any Person to whom such
Purchaser assigns or transfers any Securities, provided (i) such transferee
agrees in writing to be bound, with respect to the transferred Securities, by
the provisions hereof that apply to the “Purchasers” and (ii) the Purchaser
provides notice to the Company for all such transfers other than those transfers
made under Rule 144 or pursuant to a registration statement.
     6.8 No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.7 (as to each
Purchaser Party).

24

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

 

     6.9 Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
agrees that all Proceedings concerning the interpretations, enforcement and
defense of the transactions contemplated by this Agreement and any other
Transaction Documents (whether brought against a party hereto or its respective
Affiliates, employees or agents) shall be commenced exclusively in the New York
Courts. Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the New York Courts for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein (including with respect to the enforcement of the any of the
Transaction Documents), and hereby irrevocably waives, and agrees not to assert
in any Proceeding, any claim that it is not personally subject to the
jurisdiction of any such New York Court, or that such Proceeding has been
commenced in an improper or inconvenient forum. Each party hereto hereby
irrevocably waives personal service of process and consents to process being
served in any such Proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. Each party hereto hereby
irrevocably waives, to the fullest extent permitted by applicable law, any and
all right to trial by jury in any legal proceeding arising out of or relating to
this Agreement or the transactions contemplated hereby. If either party shall
commence a Proceeding to enforce any provisions of a Transaction Document, then
the prevailing party in such Proceeding shall be reimbursed by the other party
for its attorney’s fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such Proceeding.
     6.10 Disclosure. Except as specifically otherwise provided in Section 4.8,
upon receipt or delivery by the Company of any notice in accordance with the
terms of this Agreement, unless the Company has in good faith determined that
the matters relating to such notice do not constitute material, nonpublic
information relating to the Company or its Subsidiaries, the Company shall
within one (1) Business Day after any such receipt or delivery publicly disclose
such material, nonpublic information on a Current Report on Form 8-K or
otherwise. In the event that the Company believes that a notice contains
material, nonpublic information relating to the Company or its Subsidiaries, the
Company shall indicate to the Purchaser contemporaneously with delivery of such
notice, and in the absence of any such indication, the Purchaser shall be
allowed to presume that all matters relating to such notice do not constitute
material, nonpublic information relating to the Company or its Subsidiaries.
     6.11 Survival. The representations and warranties contained herein shall
survive the Closing and the delivery of the Shares and Warrants for a period of
three years from the Closing. The agreements and covenants contained herein
shall survive the Closing in accordance with their respective terms.
     6.12 Execution. This Agreement may be executed in two or more counterparts,
all of which when taken together shall be considered one and the same agreement
and shall become

25

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

 

effective when counterparts have been signed by each party and delivered to the
other party, it being understood that both parties need not sign the same
counterpart. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid and binding obligation of the
party executing (or on whose behalf such signature is executed) with the same
force and effect as if such facsimile signature page were an original thereof.
     6.13 Severability. If any provision of this Agreement is held to be invalid
or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.
     6.14 Rescission and Withdrawal Right. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Purchaser exercises a right, election,
demand or option under a Transaction Document and the Company does not timely
perform its related obligations within the periods therein provided, then such
Purchaser may rescind or withdraw, in its sole discretion from time to time upon
written notice to the Company, any relevant notice, demand or election in whole
or in part without prejudice to its future actions and rights.
     6.15 Replacement of Securities. If any certificate or instrument evidencing
any Securities is mutilated, lost, stolen or destroyed, the Company shall issue
or cause to be issued in exchange and substitution for and upon cancellation
thereof, or in lieu of and substitution therefor, a new certificate or
instrument, but only upon receipt of an affidavit reasonably satisfactory to the
Company attesting to such loss, theft or destruction and customary and
reasonable indemnity, if requested. The applicants for a new certificate or
instrument under such circumstances shall also pay any reasonable third-party
costs associated with the issuance of such replacement Securities. If a
replacement certificate or instrument evidencing any Securities is requested due
to a mutilation thereof, the Company may require delivery of such mutilated
certificate or instrument as a condition precedent to any issuance of a
replacement.
     6.16 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Purchasers and the Company will be entitled to specific performance under the
Transaction Documents. The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations described in the foregoing sentence and hereby agree to waive in any
action for specific performance of any such obligation the defense that a remedy
at law would be adequate.
     6.17 Payment Set Aside. To the extent that the Company makes a payment or
payments to any Purchaser pursuant to any Transaction Document or a Purchaser
enforces or exercises its rights thereunder, and such payment or payments or the
proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered
from, disgorged by or are required to be refunded, repaid or otherwise restored
to the Company, a trustee, receiver or any other person under any

26

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

 

law (including, without limitation, any bankruptcy law, state or federal law,
common law or equitable cause of action), then to the extent of any such
restoration the obligation or part thereof originally intended to be satisfied
shall be revived and continued in full force and effect as if such payment had
not been made or such enforcement or setoff had not occurred.
     6.18 Independent Nature of Purchasers’ Obligations and Rights. The
obligations of each Purchaser under any Transaction Document are several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Document. The decision of each Purchaser to
purchase Securities pursuant to the Transaction Documents has been made by such
Purchaser independently of any other Purchaser. Nothing contained herein or in
any Transaction Document, and no action taken by any Purchaser pursuant thereto,
shall be deemed to constitute the Purchasers as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Document. Each
Purchaser acknowledges that no other Purchaser has acted as agent for such
Purchaser in connection with making its investment hereunder and that no
Purchaser will be acting as agent of such Purchaser in connection with
monitoring its investment in the Securities or enforcing its rights under the
Transaction Documents. Each Purchaser shall be entitled to independently protect
and enforce its rights, including without limitation the rights arising out of
this Agreement or out of the other Transaction Documents, and it shall not be
necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose. The Company acknowledges that each of the
Purchasers has been provided with the same Transaction Documents for the purpose
of closing a transaction with multiple Purchasers and not because it was
required or requested to do so by any Purchaser.
     6.19 Limitation of Liability. Notwithstanding anything herein to the
contrary, the Company acknowledges and agrees that the liability of any
Purchaser arising directly or indirectly, under any Transaction Document, of any
and every nature whatsoever, shall be satisfied solely out of the assets of such
Purchaser, and that no trustee, officer, other investment vehicle or any other
Affiliate of such Purchaser or any investor, shareholder or holder of shares of
beneficial interest of such a Purchaser shall be personally liable for any
liabilities of such Purchaser.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE TO FOLLOW]

27

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

 

     IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.

            NAVARRE CORPORATION
      By:           Name:           Title:        

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES FOR PURCHASERS FOLLOW]

 

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

 

     IN WITNESS WHEREOF, the parties have executed this Securities Purchase
Agreement as of the date first written above.

              NAME OF INVESTING ENTITY
 
             
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
            Investment Amount: $
 
            Address for Notice:
 
            Facsimile No.:     Attn:     Tax ID No.:     Blue Sky State of
Residency:

29