EXHIBIT 10.1
SECURITIES PURCHASE AGREEMENT
     This Securities Purchase Agreement (this “Agreement”) is dated as of
September 21, 2007, among Xenonics Holdings, Inc., a Nevada corporation (the
“Company”), and Gemini Master Fund, Ltd. and any additional purchasers
identified on the signature pages hereto (each, including its successors and
assigns, a “Purchaser” and collectively the “Purchasers”).
     WHEREAS, subject to the terms and conditions set forth in this Agreement
and pursuant to Section 4(2) of the Securities Act of 1933, as amended (the
“Securities Act”), and Rule 506 promulgated thereunder, the Company desires to
issue and sell to each Purchaser, and each Purchaser, severally and not jointly,
desires to purchase from the Company, securities of the Company as more fully
described in this Agreement.
     NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and each Purchaser 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 have the
meanings set forth in this Section 1.1:
     “Action” shall have the meaning ascribed to such term in Section 3.1(j).
     “Affiliate” means any Person that, directly or indirectly through one or
more intermediaries, controls or is controlled by or is under common control
with a Person as such terms are used in and construed under Rule 144 under the
Securities Act. With respect to a Purchaser, any investment fund or managed
account that is managed on a discretionary basis by the same investment manager
as such Purchaser will be deemed to be an Affiliate of such Purchaser.
     “Business Day” means any day except Saturday, Sunday, any day which shall
be a federal legal holiday in the United States or any day on which banking
institutions in the State of New York 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 Section 2.1.
     “Closing Date” means the Trading Day when all of the Transaction Documents
have been executed and delivered by the applicable parties thereto, and all
conditions precedent to (i) the Purchasers’ obligations to pay the Subscription
Amount and (ii) the Company’s obligations to deliver the Securities have been
satisfied or waived.
     “Commission” means the Securities and Exchange Commission.

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     “Common Stock” means the common stock of the Company, par value $0.001 per
share, and any other class of securities into which such securities may
hereafter be reclassified or changed into.
     “Common Stock Equivalents” means any securities of the Company or the
Subsidiaries which would entitle the holder thereof to acquire at any time
Common Stock, including, without limitation, any debt, preferred stock, rights,
options, warrants or other instrument that is at any time convertible into or
exercisable or exchangeable for, or otherwise entitles the holder thereof to
receive, Common Stock.
     “Disclosure Schedules” means the Disclosure Schedules of the Company
delivered concurrently herewith.
     “Effective Date” means the date that the initial Registration Statement
filed by the Company pursuant to the Registration Rights Agreement is first
declared effective by the Commission.
     “Eligible Trading Market” means the following markets or exchanges: the
American Stock Exchange, the Nasdaq Capital Market, the Nasdaq Global Market,
the Nasdaq Global Select Market and the New York Stock Exchange.
     “Evaluation Date” shall have the meaning ascribed to such term in Section
3.1(r).
     “Exchange Act” means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
     “Exempt Issuance” means the issuance of (a) shares of Common Stock or
options to employees, officers or directors of the Company pursuant to any stock
or option plan duly adopted for such purpose, by a majority of the non-employee
members of the Board of Directors of the Company or a majority of the members of
a committee of non-employee directors established, (b) securities upon the
exercise or exchange of or conversion of any Securities issued hereunder and/or
other securities exercisable or exchangeable for or convertible into shares of
Common Stock issued and outstanding on the date of this Agreement, provided that
such securities have not been amended since the date of this Agreement to
increase the number of such securities or to directly or indirectly effectively
decrease the exercise, exchange or conversion price of such securities, and
(c) the Placement Agent Warrant and the Placement Agent Shares.
     “GAAP” shall have the meaning ascribed to such term in Section 3.1(h).
     “Indebtedness” shall have the meaning ascribed to such term in
Section 3.1(aa).
     “Intellectual Property Rights” shall have the meaning ascribed to such term
in Section 3.1(o).
     “Legend Removal Date” shall have the meaning ascribed to such term in
Section 4.1(c).

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     “Liens” means a lien, charge, security interest, encumbrance, right of
first refusal, preemptive right or other restriction.
     “Material Adverse Effect” shall have the meaning assigned to such term in
Section 3.1(b).
     “Material Permits” shall have the meaning ascribed to such term in Section
3.1(m).
     “MFN Transaction” means a transaction in which the Company issues or sells
any securities to an investor (the “New Investor”) in a capital raising
transaction or series of related transactions (the “New Offering”) which grants
to the New Investor the right to receive additional securities based upon future
capital raising transactions of the Company on terms more favorable than those
granted to the New Investor in the New Offering.
     “Per Share Purchase Price” equals $2.00, subject to adjustment for reverse
and forward stock splits, stock dividends, stock combinations and other similar
transactions of the Common Stock that occur after the date of this Agreement.
     “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.
     “Placement Agent” shall mean Granite Financial Group, Inc.
     “Placement Agent Shares” means such number of shares of Common Stock to be
issued to the Placement Agent hereunder equal to 16% of the aggregate number of
Shares purchased by the Purchasers pursuant to this Agreement (but not including
any Additional Shares issued to the Purchasers pursuant to Section 4.16 below).
     “Placement Agent Warrants” means Warrants registered in the name of the
Placement Agent, or its designees, to be issued to the Placement Agent
hereunder, including (a) A Warrants exercisable for up to such number of shares
of Common Stock as is equal to 30% of the number of Placement Agent Shares
issued to the Placement Agent hereunder, and (b) B Warrants exercisable for up
to such number of shares of Common Stock as is equal to 30% of the number of
Placement Agent Shares issued to the Placement Agent hereunder.
     “Placement Agent Warrant Shares” means the shares of Common Stock
underlying the Placement Agent Warrants.
     “Proceeding” means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
     “Purchaser Party” shall have the meaning ascribed to such term in
Section 4.9.

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     “Registration Rights Agreement” means the Registration Rights Agreement,
dated the date hereof, among the Company and the Purchasers, in the form of
Exhibit A attached hereto.
     “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 Shares and the Warrant Shares.
     “Required Approvals” shall have the meaning ascribed to such term in
Section 3.1(e).
     “Rule 144” means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
     “SEC Reports” shall have the meaning ascribed to such term in
Section 3.1(h).
     “Securities” means the Shares, the Warrants, the Warrant Shares, the
Placement Agent Shares, the Placement Agent Warrant and the Placement Warrant
Agent Shares.
     “Securities Act” means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
     “Shares” means the shares of Common Stock issued or issuable to each
Purchaser pursuant to this Agreement.
     “Short Sales” means all “short sales” as defined in Rule 200 of
Regulation SHO under the Exchange Act (but shall not be deemed to include the
location and/or reservation of borrowable shares of Common Stock).
     “Subscription Amount” means, as to each Purchaser, the aggregate amount to
be paid for Shares and Warrants purchased hereunder as specified below such
Purchaser’s name on the signature page of this Agreement and next to the heading
“Subscription Amount”, in United States dollars and in immediately available
funds.
     “Subsequent Issuance Selling Price” shall include the amount actually paid
by third parties for each share of Common Stock in a sale or issuance by the
Company. In the event a fee is paid by the Company in connection with such
transaction directly or indirectly to such third party or its affiliates, any
such fee shall be deducted from the selling price pro rata to all shares sold in
the transaction to arrive at the Subsequent Issuance Selling Price. A sale of
shares of Common Stock shall include the sale or issuance of rights, options,
warrants or convertible, exchangeable or exercisable securities under which the
Company is or may become obligated to issue shares of Common Stock, and in such
circumstances the Subsequent Issuance Selling Price of the Common Stock covered
thereby shall also include the exercise, exchange or conversion price thereof
(in addition to the consideration received by the Company upon such sale or
issuance less the fee amount as provided above). In case of any such security
issued in a

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Variable Rate Transaction or an MFN Transaction, the Subsequent Issuance Selling
Price shall be deemed to be the lowest conversion or exercise price at which
such securities are converted or exercised or could be converted or exercised in
the case of a Variable Rate Transaction, or the lowest adjustment price in the
case of an MFN Transaction, over the life of such securities. If shares are
issued for a consideration other than cash, the Subsequent Issuance Selling
Price shall be the fair value of such consideration as determined in good faith
by independent certified public accountants mutually acceptable to the Company
and the Purchaser. In the event the Company directly or indirectly effectively
reduces the conversion, exercise or exchange price for any Common Stock
Equivalents which are currently outstanding, then the Subsequent Issuance
Selling Price shall equal such effectively reduced conversion, exercise or
exchange price.
     “Subsidiary” means Xenonics, Inc., a Delaware corporation.
     “Trading Day” means a day on which the Common Stock is traded on a Trading
Market.
     “Trading Market” means the following markets or exchanges on which the
Common Stock is listed or quoted for trading on the date in question: the
American Stock Exchange, the Nasdaq Capital Market, the Nasdaq Global Market,
the Nasdaq Global Select Market, the New York Stock Exchange or the OTC Bulletin
Board.
     “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.
     “Transfer Agent” means the Person currently serving as the transfer agent
for the Company’s shares of Common Stock, and any successor transfer agent of
the Company’s Common Stock.
     “Variable Rate Transaction” shall mean a transaction in which the Company
issues or sells, or agrees to issue or sell (a) any debt or equity securities
that are convertible into, exchangeable or exercisable for, or include the right
to receive additional shares of, Common Stock either (x) at a conversion,
exercise or exchange rate or other price that is based upon and/or varies with
the trading prices of or quotations for the Common Stock at any time after the
initial issuance of such debt or equity securities, (y) with a fixed conversion,
exercise or exchange price that is subject to being reset at some future date
after the initial issuance of such debt or equity security or upon the
occurrence of specified or contingent events directly or indirectly related to
the business of the Company or the market for the Common Stock (but excluding
standard stock split anti-dilution provisions), or (z) under a warrant
exercisable for a number of shares based upon and/or varying with the trading
prices of or quotations for the Common Stock at any time after the initial
issuance of such warrant, or (b) any securities of the Company pursuant to an
“equity line” structure which provides for the sale, from time to time, of
securities of the Company which are registered for sale or resale pursuant to
the Securities Act (which for the purpose of this definition shall include a
sale of the

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Company’s securities “off the shelf” in a registered offering, whether or not
such offering is underwritten).
     “VWAP” means, for any date, the price determined by the first of the
following clauses that applies: (a) if the Common Stock is then listed or quoted
on an Eligible Trading Market, the daily volume weighted average price of the
Common Stock for such date (or the nearest preceding date) on the Eligible
Trading Market on which the Common Stock is then listed or quoted for trading as
reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City
time) to 4:02 p.m. (New York City time); (b) if the Common Stock is then listed
or quoted on the OTC Bulletin Board, the volume weighted average price of the
Common Stock for such date (or the nearest preceding date) on the OTC Bulletin
Board; (c) if the Common Stock is not then quoted for trading on the OTC
Bulletin Board and if prices for the Common Stock are then reported in the “Pink
Sheets” published by Pink Sheets, LLC (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid price per
share of the Common Stock so reported; or (d) in all other cases, the fair
market value of a share of Common Stock as determined by an independent
appraiser selected in good faith by the applicable Purchaser or Warrant holder,
as the case may be, and reasonably acceptable to the Company, the fees and
expenses of which shall be paid by the Company.
     “Warrants” means, collectively, the 5-year Common Stock purchase warrants
delivered to the Purchasers at the Closing in accordance with Section 2.2(a)
hereof in the form of Exhibit B attached hereto.
     “A Warrants” means, collectively, the Warrants delivered to each Purchaser
and Placement Agent at the Closing in accordance with Section 2.2 hereof (or
following adjustment in accordance with Section 4.16 hereof), which A Warrants
shall have an initial exercise price equal to $2.75 (subject to adjustment) and
be subject to forced conversion on the terms and conditions set forth therein.
     “B Warrants” means, collectively, the Warrants delivered to each Purchaser
and Placement Agent at the Closing in accordance with Section 2.2 hereof (or
following adjustment in accordance with Section 4.16 hereof), which B Warrants
shall have an initial exercise price equal to $3.25 (subject to adjustment) and
be exercisable following exercise in full of the A Warrant held by such
Purchaser or the Placement Agent, as the case may be.
     “Warrant Shares” means the shares of Common Stock issuable upon exercise of
the Warrants.
ARTICLE II.
PURCHASE AND SALE
     2.1 Closing. On the Closing Date, upon the terms and subject to the
conditions set forth herein, substantially concurrent with the execution and
delivery of this Agreement by the parties hereto, the Company agrees to sell,
and each Purchaser, severally and not jointly, agrees

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to purchase, Shares and Warrants, as determined pursuant to Section 2.2(a), for
an aggregate Subscription Amount of up to $3,000,000. Upon satisfaction of the
conditions set forth in Sections 2.2 and 2.3, the Closing shall occur at the
offices of Peter J. Weisman, P.C. or such other location as the parties shall
mutually agree.
     2.2 Deliveries.
     (a) At the Closing the Company shall:
     (i) issue to each Purchaser such number of Shares as is equal to such
Purchaser’s Subscription Amount divided by the Per Share Purchase Price;
     (ii) issue an A Warrant to such Purchaser to purchase up to a number of
shares of Common Stock equal to 30% of such Purchaser’s Shares;
     (iii) issue a B Warrant to such Purchaser to purchase up to a number of
shares of Common Stock equal to 30% of such Purchaser’s Shares; and
     (iv) deliver to each Purchaser the Registration Rights Agreement duly
executed by the Company.
     (b) At the Closing each Purchaser shall deliver or cause to be delivered to
the Company the following:
     (i) such Purchaser’s Subscription Amount in immediately available funds by
certified check or wire transfer (any expense amount due such Purchaser
hereunder may be offset from such payment by such Purchaser); and
     (ii) the Registration Rights Agreement duly executed by such Purchaser.
     (c) On or promptly following the Closing Date, the Company shall deliver or
cause to be delivered to each Purchaser (i) one or more certificates evidencing
the Shares purchased by such Purchaser, and (ii) the original Warrants purchased
by such Purchaser, in each case registered in the name of such Purchaser and in
such denominations as may be reasonably requested by such Purchaser.
     (d) On or promptly following the Closing Date, the Company shall deliver or
cause to be delivered to the Placement Agent the Placement Agent Shares and the
Placement Agent Warrants.
     2.3 Closing Conditions.
     (a) The obligations of the Company hereunder in connection with the Closing
are subject to the following conditions being met:
     (i) the accuracy in all material respects when made and on the Closing Date
of the representations and warranties of the Purchasers contained herein;

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     (ii) all obligations, covenants and agreements of the Purchasers required
to be performed at or prior to the Closing Date shall have been performed; and
     (iii) the delivery by the Purchasers of the items set forth in
Section 2.2(b) of this Agreement.
     (b) The respective obligations of the Purchasers hereunder in connection
with the Closing are subject to the following conditions being met:
     (i) the accuracy in all material respects on the Closing Date of the
representations and warranties of the Company contained herein;
     (ii) all obligations, covenants and agreements of the Company required to
be performed at or prior to the Closing Date shall have been performed;
     (iii) the delivery by the Company of the items set forth in Section 2.2(a)
of this Agreement;
     (iv) there shall have been no Material Adverse Effect with respect to the
Company since the date hereof; and
     (v) from the date hereof to the Closing Date, trading in the Common Stock
on the Company’s principal Eligible Trading Market shall not have been suspended
by the Commission or such Eligible Trading Market, and, at any time prior to the
Closing Date, trading in securities generally as reported by Bloomberg L.P.
shall not have been suspended or limited, or minimum prices shall not have been
established on securities whose trades are reported by such service, or on any
Eligible Trading Market, nor shall a banking moratorium have been declared
either by the United States or New York State authorities nor shall there have
occurred any material outbreak or escalation of hostilities or other national or
international calamity of such magnitude in its effect on, or any material
adverse change in, any financial market which, in each case, in the reasonable
judgment of each Purchaser, makes it impracticable or inadvisable to purchase
the Shares at the Closing.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
     3.1 Representations and Warranties of the Company. Except as set forth in
the Disclosure Schedules, which Disclosure Schedules shall be deemed a part
hereof and shall qualify any representation or warranty made herein to the
extent of the disclosure contained in the corresponding section of the
Disclosure Schedules, the Company hereby makes the following representations and
warranties to each Purchaser:
     (a) Subsidiaries. The only direct or indirect subsidiary of the Company is
Xenonics, Inc., a Delaware corporation in which the Company owns 98.6% of the
issued and outstanding capital stock. The Company owns such capital stock of
such Subsidiary

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free and clear of any Liens, and all of the issued and outstanding shares of
capital stock of such Subsidiary are validly issued and are fully paid,
non-assessable and free of preemptive and similar rights to subscribe for or
purchase securities.
     (b) Organization and Qualification. The Company and each of the
Subsidiaries is an entity duly incorporated or otherwise organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization (as applicable), with the requisite power and
authority to own and use its properties and assets and to carry on its business
as currently conducted. Neither the Company nor any Subsidiary is in violation
or default of any of the provisions of its respective certificate or articles of
incorporation, bylaws or other organizational or charter documents. Each of the
Company and the Subsidiaries is duly qualified to conduct business and is in
good standing as a foreign corporation or other entity in each jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not have or reasonably be expected to result
in (i) a material adverse effect on the legality, validity or enforceability of
any Transaction Document, (ii) a material adverse effect on the results of
operations, assets, business, prospects or condition (financial or otherwise) of
the Company and the Subsidiaries, taken as a whole, or (iii) a material adverse
effect on the Company’s ability to perform in any material respect on a timely
basis its obligations under any Transaction Document (any of (i), (ii) or (iii),
a “Material Adverse Effect”) and no Proceeding has been instituted in any such
jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or
curtail such power and authority or qualification.
     (c) Authorization; Enforcement. The Company has the requisite corporate
power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents and otherwise to carry out its
obligations hereunder and thereunder. The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary action on the part of the Company and no further action is required by
the Company, its board of directors or its stockholders in connection therewith
other than in connection with the Required Approvals. 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 and thereof, will constitute
the valid and binding obligation of the Company enforceable against the Company
in accordance with its terms except (i) as limited by general equitable
principles and applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors’ rights
generally, (ii) as limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies and (iii) insofar as
indemnification and contribution provisions may be limited by applicable law.
     (d) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company, the issuance and sale of the Shares and
Warrants and the consummation by the Company of the other transactions
contemplated hereby and thereby do not and will not (i) conflict with or violate
any provision of the Company’s or

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any Subsidiary’s certificate or articles of incorporation, bylaws or other
organizational or charter documents, or (ii) conflict with, or constitute a
default (or an event that with notice or lapse of time or both would become a
default) under, result in the creation of any Lien upon any of the properties or
assets of the Company or any Subsidiary, or give to others any rights of
termination, amendment, acceleration or cancellation (with or without notice,
lapse of time or both) of, any agreement, credit facility, debt or other
instrument (evidencing a Company or Subsidiary debt or otherwise) or other
understanding to which the Company or any Subsidiary is a party or by which any
property or asset of the Company or any Subsidiary is bound or affected, or
(iii) conflict with or result in a violation of any law, rule, regulation,
order, judgment, injunction, decree or other restriction of any court or
governmental authority to which the Company or a Subsidiary is subject
(including federal and state securities laws and regulations), or by which any
property or asset of the Company or a Subsidiary is bound or affected; except in
the case of each of clauses (ii) and (iii), such as could not have or reasonably
be expected to result in a Material Adverse Effect. The Company has furnished to
the Purchasers true, complete and accurate copies of the Articles of
Incorporation and By Laws of the Company, as amended to date.
     (e) Filings, Consents and Approvals. The Company is not required to obtain
any consent, waiver, authorization or order of, give any notice to, or make any
filing or registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents, other than
(i) filings required pursuant to Section 4.4 of this Agreement, (ii) the filing
with the Commission of the Registration Statement, (iii) application(s) to each
applicable Trading Market for the listing of the Securities for trading thereon
in the time and manner required thereby and (iv) the filing of Form D with the
Commission and such filings as are required to be made under applicable state
securities laws (collectively, the “Required Approvals”).
     (f) Issuance of the Securities. The Securities are duly authorized and,
when issued and paid for in accordance with the applicable Transaction
Documents, will be duly and validly issued, fully paid and nonassessable, free
and clear of all Liens imposed by the Company other than restrictions on
transfer provided for in the Transaction Documents. The Warrant Shares, when
issued in accordance with the terms of the Transaction Documents, will be
validly issued, fully paid and nonassessable, free and clear of all Liens
imposed by the Company. The Company has reserved from its duly authorized
capital stock the maximum number of shares of Common Stock issuable pursuant to
this Agreement and the Warrants and Placement Agent Warrants.
     (g) Capitalization. The capitalization of the Company is as set forth on
Schedule 3.1(g). The Company has not issued any capital stock since its most
recently filed periodic report under the Exchange Act, other than pursuant to
the exercise of employee stock options under the Company’s stock option plans,
the issuance of shares of Common Stock to employees pursuant to the Company’s
employee stock purchase plan and pursuant to the conversion or exercise of
Common Stock Equivalents outstanding as of the date of the most recently filed
periodic report under the Exchange Act. No Person has any right of first
refusal, preemptive right, right of participation, or

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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 the SEC Reports, there are no outstanding
options, warrants, script rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities, rights or obligations
convertible into or exercisable or exchangeable for, or giving any Person any
right to subscribe for or acquire, any shares of Common Stock, or contracts,
commitments, understandings or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of Common Stock or
Common Stock Equivalents. All of the outstanding shares of capital stock of the
Company are validly issued, fully paid and nonassessable, have been issued in
compliance with all federal and state securities laws, and none of such
outstanding shares was issued in violation of any preemptive rights or similar
rights to subscribe for or purchase securities. No further approval or
authorization of any stockholder, the Board of Directors of the Company or
others is required for the issuance and sale of the Securities. There are no
stockholders agreements, voting agreements or other similar agreements with
respect to the Company’s capital stock to which the Company is a party or, to
the knowledge of the Company, between or among any of the Company’s
stockholders.
     (h) SEC Reports; Financial Statements. The Company has filed all reports,
schedules, forms, statements and other documents required to be filed by the
Company under the Securities Act and the Exchange Act, including pursuant to
Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (or
such shorter period as the Company was required by law or regulation to file
such material) (the foregoing materials, including the exhibits thereto and
documents incorporated by reference therein, being collectively referred to
herein as the “SEC Reports”) on a timely basis or has received 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, the SEC Reports
complied in all material respects with the requirements of the Securities Act
and the Exchange Act, as applicable, 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 the light of the circumstances under which they were made, not
misleading. The financial statements of the Company included in the SEC Reports
comply in all material respects with applicable accounting requirements and the
rules and regulations of the Commission with respect thereto as in effect at the
time of filing. Such financial statements have been prepared in accordance with
United States generally accepted accounting principles applied on a consistent
basis during the periods involved (“GAAP”), except as may be otherwise specified
in such financial statements or the notes thereto and except that unaudited
financial statements may not contain all footnotes required by GAAP, and fairly
present in all material respects the financial position of the Company and its
consolidated subsidiaries as of and for the dates thereof and the results of
operations and cash flows for the periods then ended, subject, in the case of
unaudited statements, to normal, immaterial, year-end audit adjustments.
     (i) Material Changes; Undisclosed Events, Liabilities or Developments.
Since the date of the latest audited financial statements included within the
SEC Reports, except as specifically disclosed in a subsequent SEC Report filed
at least five Trading

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Days prior to the date hereof, (i) there has been no event, occurrence or
development that has had or that could reasonably be expected to result in a
Material Adverse Effect, (ii) the Company has not incurred any liabilities
(contingent or otherwise) other than (A) trade payables and accrued expenses
incurred in the ordinary course of business consistent with past practice and
(B) liabilities not required to be reflected in the Company’s financial
statements pursuant to GAAP or disclosed in filings made with the Commission,
(iii) the Company has not altered its method of accounting, (iv) the Company has
not declared or made any dividend or distribution of cash or other property to
its stockholders or purchased, redeemed or made any agreements to purchase or
redeem any shares of its capital stock, and (v) the Company has not issued any
Common Stock or Common Stock Equivalents 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. Except for the issuance of the Securities contemplated by this
Agreement or as set forth on Schedule 3.1(i), no event, liability or development
has occurred or exists with respect to the Company or its Subsidiaries or their
respective business, properties, operations or financial condition, that would
be required to be disclosed by the Company under applicable securities laws at
the time this representation is made that has not been publicly disclosed at
least 5 Trading Days prior to the date that this representation is made.
     (j) Litigation. Except as disclosed in the Company’s most recent Annual
Report filed on Form 10-KSB, there is no action, suit, inquiry, notice of
violation, proceeding or investigation pending or, to the knowledge of the
Company, threatened against or affecting the Company, any Subsidiary or any of
their respective properties before or by any court, arbitrator, governmental or
administrative agency or regulatory authority (federal, state, county, local or
foreign) (collectively, an “Action”) which (i) adversely affects or challenges
the legality, validity or enforceability of any of the Transaction Documents or
the Securities or (ii) could, if there were an unfavorable decision, have or
reasonably be expected to result in a Material Adverse Effect. To the Company’s
knowledge, neither the Company nor any Subsidiary, nor any director or officer
thereof, is or has been the subject of any Action involving a claim of violation
of or liability under federal or state securities laws or a claim of breach of
fiduciary duty. There has not been, and to the knowledge of the Company, there
is not pending or contemplated, any investigation by the Commission involving
the Company or any current or former director or officer of the Company. The
Commission has not issued any stop order or other order suspending the
effectiveness of any registration statement filed by the Company or any
Subsidiary under the Exchange Act or the Securities Act.
     (k) Labor Relations. No material labor dispute exists or, to the knowledge
of the Company, is imminent with respect to any of the employees of the Company
which could reasonably be expected to result in a Material Adverse Effect. None
of the Company’s or its Subsidiaries’ employees is a member of a union that
relates to such employee’s relationship with the Company, and neither the
Company or any of its Subsidiaries is a party to a collective bargaining
agreement, and the Company and its Subsidiaries believe that their relationships
with their employees are good. No executive officer, to the knowledge of the
Company, is, or is now expected to be, in violation of

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any material term of any employment contract, confidentiality, disclosure or
proprietary information agreement or non-competition agreement, or any other
contract or agreement or any restrictive covenant, and the continued employment
of each such executive officer does not subject the Company or any of its
Subsidiaries to any liability with respect to any of the foregoing matters. The
Company and its Subsidiaries are in compliance with all U.S. federal, state,
local and foreign laws and regulations relating to employment and employment
practices, terms and conditions of employment and wages and hours, except where
the failure to be in compliance could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
     (l) Compliance. To the Company’s knowledge, neither the Company nor any
Subsidiary (i) is in default under or in violation of (and no event has occurred
that has not been waived that, with notice or lapse of time or both, would
result in a default by the Company or any Subsidiary under), nor has the Company
or any Subsidiary received notice of a claim that it is in default under or that
it is in violation of, any indenture, loan or credit agreement or any other
agreement or instrument to which it is a party or by which it or any of its
properties is bound (whether or not such default or violation has been waived),
(ii) is in violation of any order of any court, arbitrator or governmental body,
or (iii) is or has been in violation of any statute, rule or regulation of any
governmental authority, including without limitation all foreign, federal, state
and local laws applicable to its business and all such laws that affect the
environment, except in each case as could not have or reasonably be expected to
result in a Material Adverse Effect.
     (m) Regulatory Permits. To the Company’s knowledge, the Company and the
Subsidiaries possess all material 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 could not have or
reasonably be expected to result in a Material Adverse Effect (“Material
Permits”), and neither the Company nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any Material Permit.
     (n) Title to Assets. The Company and the Subsidiaries have good and
marketable title in fee simple to all real property owned by them that is
material to the business of the Company and the Subsidiaries and good and
marketable title in all personal property owned by them that is material to the
business of the Company and the Subsidiaries, in each case free and clear of all
Liens, except for 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, Liens for the payment of
federal, state or other taxes, the payment of which is neither delinquent nor
subject to penalties, and UCC-1 Financing Statements filed by the Company’s
factor of accounts receivable in connection with factoring thereof. Any real
property and facilities held under lease by the Company and the Subsidiaries are
held by them under valid, subsisting and enforceable leases with which the
Company and the Subsidiaries are in compliance.

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     (o) Patents and Trademarks. To the Company’s knowledge, the Company and the
Subsidiaries have, or have rights to use, all patents, patent applications,
trademarks, trademark applications, service marks, trade names, trade secrets,
inventions, copyrights, licenses and other intellectual property rights and
similar rights necessary or material for use in connection with their respective
businesses as described in the SEC Reports and which the failure to so have
could have a Material Adverse Effect (collectively, the “Intellectual Property
Rights”). To the Company’s knowledge, neither the Company nor any Subsidiary has
received a notice (written or otherwise) that the Intellectual Property Rights
used by the Company or any Subsidiary violates or infringes upon the rights of
any Person. To the knowledge of the Company, all such Intellectual Property
Rights are enforceable and there is no existing infringement by another Person
of any of the Intellectual Property Rights. To the Company’s knowledge, the
Company and its Subsidiaries have taken reasonable security measures to protect
the secrecy, confidentiality and value of all of their intellectual properties,
except where failure to do so could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
     (p) Insurance. The Company and the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which the Company and
the Subsidiaries are engaged, including, but not limited to, directors and
officers insurance coverage at least equal to the aggregate Subscription Amount.
Neither the Company nor any Subsidiary has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be necessary
to continue its business without a significant increase in cost.
     (q) Transactions With Affiliates and Employees. Except as set forth in the
SEC Reports, none of the officers or directors of the Company and, to the
knowledge of the Company, none of the employees of the Company is presently a
party to any transaction with the Company or any Subsidiary (other than for
services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Company, any entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner, in each case in excess of $25,000 other than (i) for payment of salary
or consulting fees for services rendered, (ii) reimbursement for expenses
incurred on behalf of the Company and (iii) for other employee benefits,
including stock option agreements under any stock option plan of the Company.
     (r) Sarbanes-Oxley; Internal Accounting Controls. The Company is in
material compliance with all provisions of the Sarbanes-Oxley Act of 2002 which
are applicable to it as of the Closing Date. The Company and the Subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management’s general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of

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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 information required to be
disclosed by the Company in the reports it files or submits under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the Commission’s rules and forms. The Company’s certifying officers
have evaluated the effectiveness of the Company’s disclosure controls and
procedures as of the end of the period covered by the Company’s most recently
filed periodic report under the Exchange Act (such date, the “Evaluation Date”).
The Company presented in its most recently filed periodic report under the
Exchange Act the conclusions of the certifying officers about the effectiveness
of the disclosure controls and procedures based on their evaluations as of the
Evaluation Date. Since the Evaluation Date, there have been no changes in the
Company’s internal control over financial reporting (as such term is defined in
the Exchange Act) that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial reporting.
     (s) Certain Fees. Other than the Placement Agent Shares and Placement Agent
Warrants as set forth herein, 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 the Transaction Documents. The
Purchasers shall have no obligation with respect to any fees or with respect to
any claims made by or on behalf of other Persons for fees of a type contemplated
in this Section that may be due in connection with the transactions contemplated
by the Transaction Documents.
     (t) Private Placement. Assuming the accuracy of the Purchasers
representations and warranties set forth in Section 3.2, no registration under
the Securities Act is required for the offer and sale of the Securities by the
Company to the Purchasers as contemplated hereby. The issuance and sale of the
Securities hereunder does not contravene the rules and regulations of the
Company’s current Trading Market, except that approval of such Trading Market is
required.
     (u) Investment Company. The Company is not, and is not an Affiliate of, and
immediately after receipt of payment for the Securities, will not be or be an
Affiliate of, an “investment company” within the meaning of the Investment
Company Act of 1940, as amended. The Company shall conduct its business in a
manner so that it will not become subject to the Investment Company Act of 1940,
as amended.
     (v) Registration Rights. The Company has disclosed to the Purchasers each
Person who has any right to cause the Company to effect the registration under
the Securities Act of any securities of the Company.

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     (w) Listing and Maintenance Requirements. The Company’s Common Stock is
registered pursuant to Section 12(b) or 12(g) of the Exchange Act, and the
Company has taken no action designed to, or which to its knowledge is likely to
have the effect of, terminating the registration of the Common Stock under the
Exchange Act nor has the Company received any notification that the Commission
is contemplating terminating such registration. The Company has not, in the
12 months preceding the date hereof, received notice from any Trading Market on
which the Common Stock is or has been listed or quoted to the effect that the
Company is not in compliance with the listing or maintenance requirements of
such Trading Market. The Company is, and has no reason to believe that it will
not in the foreseeable future continue to be, in compliance with all such
listing and maintenance requirements.
     (x) Application of Takeover Protections. The Company and its Board of
Directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Company’s Certificate of Incorporation (or
similar charter documents) or the laws of its state of incorporation that is or
could become applicable to the Purchasers as a result of the Purchasers and the
Company fulfilling their obligations or exercising their rights under the
Transaction Documents, including without limitation as a result of the Company’s
issuance of the Securities and the Purchasers’ ownership of the Securities.
     (y) Disclosure. Except with respect to the material terms and conditions of
the transactions contemplated by the Transaction Documents, the Company confirms
that neither it nor any other Person acting on its behalf has provided any of
the Purchasers or their agents or counsel with any information that it believes
constitutes or might constitute material, non-public information. The Company
understands and confirms that the Purchasers will rely on the foregoing
representation in effecting transactions in securities of the Company. All
disclosure furnished by or on behalf of the Company to the Purchasers regarding
the Company, its business and the transactions contemplated hereby, including
the Disclosure Schedules to this Agreement, is true and correct and does not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading. The press releases
disseminated by the Company during the twelve months 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, in light of the circumstances under which they
were made and when made, not misleading. The Company acknowledges and agrees
that no Purchaser makes or has made any representations or warranties with
respect to the transactions contemplated hereby other than those specifically
set forth in Section 3.2 hereof.
     (z) No Integrated Offering. Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2, neither the Company,
nor any of its Affiliates, nor any Person acting on its or their behalf has,
directly or indirectly, made any offers or sales of any security or solicited
any offers to buy any security, under circumstances that would cause this
offering of the Securities to be integrated with prior

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offerings by the Company for purposes of the Securities Act or any applicable
shareholder approval provisions of any Trading Market on which any of the
securities of the Company are listed or designated.
     (aa) Solvency. Based on the financial condition of the Company as of the
Closing Date, after giving effect to the receipt by the Company of the proceeds
from the sale of the Securities hereunder, (i) the fair saleable value of the
Company’s 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 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 liabilities when such amounts are required to be paid.
The Company does not intend to incur debts beyond its ability to pay such debts
as they mature (taking into account the timing and amounts of cash to be payable
on or in respect of its debt). The Company has no knowledge of any facts or
circumstances which lead it to believe that it will file for reorganization or
liquidation under the bankruptcy or reorganization laws of any jurisdiction
within one year from the Closing Date. Schedule 3.1(aa) sets forth as of the
dates thereof all outstanding secured and unsecured Indebtedness of the Company
or any Subsidiary, or for which the Company or any Subsidiary has commitments.
For the purposes of this Agreement, “Indebtedness” shall mean (a) any
liabilities for borrowed money or amounts owed in excess of $50,000 (other than
trade accounts payable incurred in the ordinary course of business), (b) all
guaranties, endorsements and other contingent obligations in respect of
Indebtedness of others, whether or not the same are or should be reflected in
the Company’s balance sheet (or the notes thereto), except guaranties by
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business; and (c) the present value of
any lease payments in excess of $50,000 due under leases required to be
capitalized in accordance with GAAP. Neither the Company nor any Subsidiary is
in default with respect to any Indebtedness.
     (bb) Tax Status. Except for matters that would not, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect, the Company and each Subsidiary has filed all necessary federal, state
and foreign income and franchise tax returns and has paid or accrued all taxes
shown as due thereon, and the Company has no knowledge of a tax deficiency which
has been asserted or threatened against the Company or any Subsidiary.
     (cc) No General Solicitation. Neither the Company nor any person acting on
behalf of the Company has offered or sold any of the Securities by any form of
general solicitation or general advertising. The Company has offered the
Securities for sale only to the Purchasers and certain other “accredited
investors” within the meaning of Rule 501 under the Securities Act.

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     (dd) Foreign Corrupt Practices. Neither the Company, nor to the knowledge
of the Company, any agent or other person acting on behalf of the Company, has
(i) directly or indirectly, used any funds for unlawful contributions, gifts,
entertainment or other unlawful expenses related to foreign or domestic
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to any foreign or domestic political
parties or campaigns from corporate funds, (iii) failed to disclose fully any
contribution made by the Company (or made by any person acting on its behalf of
which the Company is aware) which is in violation of law, or (iv) violated in
any material respect any provision of the Foreign Corrupt Practices Act of 1977,
as amended.
     (ee) Accountants. The Company’s accounting firm is Eisner LLP. To the
knowledge and belief of the Company, such accounting firm is a registered public
accounting firm as required by the Exchange Act.
     (ee) No Disagreements with Accountants and Lawyers. There are no
disagreements of any kind presently existing, or reasonably anticipated by the
Company to arise, between the Company and the accountants and lawyers formerly
or presently employed by the Company.
     (ff) Acknowledgment Regarding Purchasers’ Purchase of Securities. The
Company acknowledges and agrees that each of the Purchasers is acting solely in
the capacity of an arm’s length purchaser with respect to the Transaction
Documents and the transactions contemplated thereby. The Company further
acknowledges that no Purchaser is acting as a financial advisor or fiduciary of
the Company (or in any similar capacity) with respect to the Transaction
Documents and the transactions contemplated thereby and any advice given by any
Purchaser or any of their respective representatives or agents in connection
with the Transaction Documents and the transactions contemplated thereby is
merely incidental to the Purchasers’ purchase of the Securities. The Company
further represents to each Purchaser that the Company’s decision to enter into
this Agreement and the other Transaction Documents has been based solely on the
independent evaluation of the transactions contemplated hereby by the Company
and its representatives.
     (gg) Regulation M Compliance. The Company has not, and to its knowledge no
one acting on its behalf has, (i) taken, directly or indirectly, any action
designed to cause or to result in the stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or, paid any compensation for
soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay
to any Person any compensation for soliciting another to purchase any other
securities of the Company, other than, in the case of clauses (ii) and (iii),
compensation paid to the Placement Agent in connection with the placement of the
Securities.
     3.2 Representations and Warranties of the Purchasers. Each Purchaser
hereby, for itself and for no other Purchaser, represents and warrants as of the
date hereof and as of the Closing Date to the Company as follows:

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     (a) Organization; Authority. Such Purchaser is an entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization with full right, corporate or partnership power and authority to
enter into and to consummate the transactions contemplated by the Transaction
Documents and otherwise to carry out its obligations hereunder and thereunder.
The execution, delivery and performance by such Purchaser of the transactions
contemplated by this Agreement have been duly authorized by all necessary
corporate or similar action on the part of such Purchaser. Each Transaction
Document to which it is a party has been duly executed by such Purchaser, and
when delivered by such Purchaser in accordance with the terms hereof, will
constitute the valid and legally binding obligation of such Purchaser,
enforceable against it in accordance with its terms, except (i) as limited by
general equitable principles and applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors’ rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief or other equitable
remedies and (iii) insofar as indemnification and contribution provisions may be
limited by applicable law.
     (b) Own Account. Such Purchaser understands that the Securities are
“restricted securities” and have not been registered under the Securities Act or
any applicable state securities law and is acquiring the Securities as principal
for its own account and not with a view to or for distributing or reselling such
Securities or any part thereof in violation of the Securities Act or any
applicable state securities law, has no present intention of distributing any of
such Securities in violation of the Securities Act or any applicable state
securities law and has no direct or indirect arrangement or understandings with
any other persons to distribute or regarding the distribution of such Securities
(this representation and warranty not limiting such Purchaser’s right to sell
the Securities pursuant to the Registration Statement or otherwise in compliance
with applicable federal and state securities laws) in violation of the
Securities Act or any applicable state securities law. Such Purchaser is
acquiring the Securities hereunder in the ordinary course of its business.
     (c) Purchaser Status. At the time such Purchaser was offered the
Securities, it was, and at the date hereof it is, and on each date on which it
exercises any Warrants, it will be either: (i) an “accredited investor” as
defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under the Securities
Act or (ii) a “qualified institutional buyer” as defined in Rule 144A(a) under
the Securities Act. Such Purchaser is not required to be registered as a
broker-dealer under Section 15 of the Exchange Act.
     (d) Experience of Such Purchaser. Such Purchaser, either alone or together
with its representatives, has such knowledge, sophistication and experience in
business and financial matters so as to be capable of evaluating the merits and
risks of the prospective investment in the Securities, and has so evaluated the
merits and risks of such investment. Such Purchaser is able to bear the economic
risk of an investment in the Securities and, at the present time, is able to
afford a complete loss of such investment.
     (e) General Solicitation. Such Purchaser is not purchasing the Securities
as a result of any advertisement, article, notice or other communication
regarding the

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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.
     (f) Short Sales and Confidentiality Prior To The Date Hereof. Other than
the transaction contemplated hereunder, such Purchaser has not, nor has any
Person acting on behalf of or pursuant to any understanding with such Purchaser,
directly or indirectly executed any transaction, including Short Sales, in the
securities of the Company during the period commencing from the time that such
Purchaser first received a term sheet (written or oral) from the Company or any
other Person setting forth the material terms of the transactions contemplated
hereunder until the date hereof (“Discussion Time”). Notwithstanding the
foregoing, in the case of a Purchaser that is a multi-managed investment vehicle
whereby separate portfolio managers manage separate portions of such Purchaser’s
assets and the portfolio managers have no direct knowledge of the investment
decisions made by the portfolio managers managing other portions of such
Purchaser’s assets, the representation set forth above shall only apply with
respect to the portion of assets managed by the portfolio manager that made the
investment decision to purchase the Securities covered by this Agreement. Other
than to other Persons party to this Agreement, such Purchaser has maintained the
confidentiality of all disclosures made to it in connection with this
transaction (including the existence and terms of this transaction).
ARTICLE IV.
OTHER AGREEMENTS OF THE PARTIES
     4.1 Transfer Restrictions.
     (a) The Securities may only be disposed of in compliance with state and
federal securities laws. In connection with any transfer of Securities other
than pursuant to an effective registration statement or Rule 144, to the Company
or to an Affiliate of a Purchaser or in connection with a pledge as contemplated
in Section 4.1(b), the Company may require the transferor thereof to provide to
the Company an opinion of counsel selected by the transferor and reasonably
acceptable to the Company, the form and substance of which opinion shall be
reasonably satisfactory to the Company, to the effect that such transfer does
not require registration of such transferred Securities under the Securities
Act. As a condition of transfer, any such transferee shall agree in writing to
be bound by the terms of this Agreement and shall have the rights of a Purchaser
under this Agreement and the Registration Rights Agreement.
     (b) The Purchasers agree to the imprinting, so long as is required by this
Section 4.1, of a legend on any of the Securities in the following form:
THIS SECURITY HAS 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

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OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION
NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN
ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION
OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE
REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN
WITH A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE
501(a) UNDER THE SECURITIES ACT OR OTHER LOAN SECURED BY SUCH SECURITIES.
     The Company acknowledges and agrees that a Purchaser may from time to time
pledge pursuant to a bona fide margin agreement with a registered broker-dealer
or grant a security interest in some or all of the Securities to a financial
institution that is an “accredited investor” as defined in Rule 501(a) under the
Securities Act and who agrees to be bound by the provisions of this Agreement
and the Registration Rights Agreement and, if required under the terms of such
arrangement, such Purchaser may transfer pledged or secured Securities to the
pledgees or secured parties. Such a pledge or transfer would not be subject to
approval of the Company and no legal opinion of legal counsel of the pledgee,
secured party or pledgor shall be required in connection therewith. Further, no
notice shall be required of such pledge. At the appropriate Purchaser’s expense,
the Company will execute and deliver such reasonable documentation as a pledgee
or secured party of Securities may reasonably request in connection with a
pledge or transfer of the Securities, including, if the Securities are subject
to registration pursuant to the Registration Rights Agreement, the preparation
and filing of any required prospectus supplement under Rule 424(b)(3) under the
Securities Act or other applicable provision of the Securities Act to
appropriately amend the list of Selling Stockholders thereunder.
     (c) Certificates evidencing the Shares and Warrant Shares shall not contain
any legend (including the legend set forth in Section 4.1(b)), (i) while a
registration statement (including the Registration Statement) covering the
resale of such security is effective under the Securities Act, or (ii) following
any sale of such Shares or Warrant Shares pursuant to Rule 144, or (iii) if such
Shares or Warrant Shares are eligible for sale under Rule 144(k), or (iv) if
such legend is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the staff of
the Commission). If all or any portion of a Warrant is exercised at a time when
there is an effective registration statement to cover the resale of the Warrant
Shares, such Warrant Shares shall be issued free of all legends. The Company
agrees that following the Effective Date or at such time as such legend is no
longer required under this Section 4.1(c), it will, no later than seven Trading
Days following the delivery by a Purchaser to the Company or the Transfer Agent
of a certificate representing Shares or Warrant Shares, as the case may be,
issued with a restrictive legend (such seventh Trading Day,

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the “Legend Removal Date”), deliver or cause to be delivered to such Purchaser a
certificate representing such shares that is free from all restrictive and other
legends. The Company may not make any notation on its records or give
instructions to any Transfer Agent of the Company that enlarge the restrictions
on transfer set forth in this Section. Certificates for Securities subject to
legend removal hereunder shall be transmitted by the Transfer Agent of the
Company to the Purchasers by crediting the account of the Purchaser’s prime
broker with the Depository Trust Company System.
     (d) Each Purchaser, severally and not jointly with the other Purchasers,
agrees that the removal of the restrictive legend from certificates representing
Securities as set forth in this Section 4.1 is predicated upon the Company’s
reliance that the Purchaser will sell any Securities pursuant to either the
registration requirements of the Securities Act, including any applicable
prospectus delivery requirements, or an exemption therefrom, and that if
Securities are sold pursuant to a Registration Statement, they will be sold in
compliance with the plan of distribution set forth therein.
     4.2 Furnishing of Information. As long as any Purchaser owns Securities,
the Company covenants to timely file (or obtain extensions in respect thereof
and file within the applicable grace period) all reports required to be filed by
the Company after the date hereof pursuant to the Exchange Act. As long as any
Purchaser owns Securities, if the Company is not required to file reports
pursuant to the Exchange Act, it will prepare and furnish to the Purchasers and
make publicly available in accordance with Rule 144(c) such information as is
required for the Purchasers to sell the Securities under Rule 144. The Company
further covenants that it will take such further action as any holder of
Securities may reasonably request, to the extent required from time to time to
enable such Person to sell such Securities without registration under the
Securities Act within the requirements of the exemption provided by Rule 144.
     4.3 Integration. The Company shall not sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or sale
of the Securities in a manner that would require the registration under the
Securities Act of the sale of the Securities to the Purchasers or that would be
integrated with the offer or sale of the Securities for purposes of the rules
and regulations of any Trading Market such that it would require shareholder
approval prior to the closing of such other transaction unless shareholder
approval is obtained before the closing of such subsequent transaction.
     4.4 Securities Laws Disclosure; Publicity. The Company shall, by 8:30 a.m.
New York City time on the third Trading Day immediately following the Closing
Date, file a Current Report on Form 8-K, disclosing the material terms of the
transactions contemplated hereby, and filing the Transaction Documents as
exhibits thereto. The Company and each Purchaser shall consult with each other
in issuing any press release (if any) with respect to the transactions
contemplated hereby. Notwithstanding the foregoing, the Company shall not
publicly disclose the name of any Purchaser, or include the name of any
Purchaser in any filing with the Commission or any regulatory agency or Trading
Market, without the prior written consent of such Purchaser, except (i) as
required by federal securities law in connection with (A) any registration
statement contemplated by the Registration Rights Agreement and (B) the filing
of

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final Transaction Documents (including signature pages thereto) with the
Commission and (ii) to the extent such disclosure is required by law or Trading
Market regulations, in which case the Company shall provide the Purchasers with
prior notice of such disclosure permitted under this subclause (ii).
     4.5 Shareholder Rights Plan. No claim will be made or enforced by the
Company or, with the consent of the Company, any other Person, that any
Purchaser is an “Acquiring Person” under any control share acquisition, business
combination, poison pill (including any distribution under a rights agreement)
or similar anti-takeover plan or arrangement in effect or hereafter adopted by
the Company, or that any Purchaser could be deemed to trigger the provisions of
any such plan or arrangement, by virtue of receiving Securities under the
Transaction Documents or under any other agreement between the Company and the
Purchasers.
     4.6 Non-Public Information. Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction Documents, the
Company covenants and agrees that neither it nor any other Person acting on its
behalf will provide any Purchaser or its agents or counsel with any information
that the Company believes constitutes material non-public information, unless
prior thereto such Purchaser shall have executed a written agreement regarding
the confidentiality and use of such information. The Company understands and
confirms that each Purchaser shall be relying on the foregoing representations
in effecting transactions in securities of the Company.
     4.7 Use of Proceeds. Except as may otherwise be set forth on Schedule 4.7
attached hereto, the Company shall use the net proceeds from the sale of the
Securities hereunder for working capital purposes and shall not use such
proceeds for the satisfaction of any portion of the Company’s debt (other than
payment of trade payables in the ordinary course of the Company’s business and
prior practices), or to redeem any Common Stock, or Common Stock Equivalents or
to settle any outstanding litigation.
     4.8 Reimbursement. If any Purchaser becomes involved in any capacity in any
Proceeding by or against any Person who is a stockholder of the Company (except
as a result of sales, pledges, margin sales and similar transactions by such
Purchaser to or with any other stockholder), solely as a result of such
Purchaser’s acquisition of the Securities under this Agreement, the Company will
reimburse such Purchaser 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. The
reimbursement obligations of the Company under this paragraph shall be in
addition to any liability which the Company may otherwise have, shall extend
upon the same terms and conditions to any Affiliates of the Purchasers who are
actually named in such action, proceeding or investigation, and partners,
directors, agents, employees and controlling persons (if any), as the case may
be, of the Purchasers and any such Affiliate, and shall be binding upon and
inure to the benefit of any successors, assigns, heirs and personal
representatives of the Company, the Purchasers and any such Affiliate and any
such Person. The Company also agrees that neither the Purchasers nor any such
Affiliates, partners, directors, agents, employees or controlling persons shall
have any liability to the Company or any Person asserting claims on behalf of or
in right of the Company solely as a result of acquiring the Securities under
this Agreement, except if such claim arises primarily from a breach of such
Purchaser’s representations, warranties or covenants under the

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Transaction Documents or any agreements or understandings such Purchaser may
have with any such stockholder or any violations by the Purchaser of state or
federal securities laws or any conduct by such Purchaser which constitutes
fraud, gross negligence, willful misconduct or malfeasance.
     4.9 Indemnification of Purchasers. Subject to the provisions of this
Section 4.9, the Company will indemnify and hold each Purchaser and its
directors, officers, shareholders, members, partners, employees and agents (and
any other Persons with a functionally equivalent role of a Person holding such
titles notwithstanding a lack of such title or any other title), each Person who
controls such Purchaser (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act), and the directors, officers, shareholders,
agents, members, partners or employees (and any other Persons with a
functionally equivalent role of a Person holding such titles notwithstanding a
lack of such title or any other title) of such controlling persons (each, a
“Purchaser Party”) harmless from any and all losses, liabilities, obligations,
claims, contingencies, damages, costs and expenses, including all judgments,
amounts paid in settlements, court costs and reasonable attorneys’ fees and
costs of investigation that any such Purchaser Party may suffer or incur as a
result of or relating to (a) any breach of any of the representations,
warranties, covenants or agreements made by the Company in this Agreement or in
the other Transaction Documents or (b) any action instituted against a
Purchaser, or any of them or their respective Affiliates, by any stockholder of
the Company who is not an Affiliate of such Purchaser, with respect to any of
the transactions contemplated by the Transaction Documents (unless such action
is based upon a breach of such Purchaser’s representations, warranties or
covenants under the Transaction Documents or any agreements or understandings
such Purchaser may have with any such stockholder or any violations by the
Purchaser of state or federal securities laws or any conduct by such Purchaser
which constitutes fraud, gross negligence, willful misconduct or malfeasance).
If any action shall be brought against any Purchaser Party in respect of which
indemnity may be sought pursuant to this Agreement, such Purchaser Party shall
promptly notify the Company in writing, and the Company shall have the right to
assume the defense thereof with counsel of its own choosing reasonably
acceptable to the Purchaser Party. Any Purchaser Party shall have the right to
employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Purchaser Party except to the extent that (i) the employment thereof has
been specifically authorized by the Company in writing, (ii) the Company has
failed after a reasonable period of time to assume such defense and to employ
counsel or (iii) in such action there is, in the reasonable opinion of such
separate counsel, a material conflict on any material issue between the position
of the Company and the position of such Purchaser Party, in which case the
Company shall be responsible for the reasonable fees and expenses of no more
than one such separate counsel. The Company will not be liable to any Purchaser
Party under this Agreement (i) for any settlement by a Purchaser Party effected
without the Company’s prior written consent, which shall not be unreasonably
withheld or delayed; or (ii) to the extent, but only to the extent that a loss,
claim, damage or liability is attributable to any Purchaser Party’s breach of
any of the representations, warranties, covenants or agreements made by such
Purchaser Party in this Agreement or in the other Transaction Documents.
     4.10 Reservation of Common Stock. As of the date hereof, the Company has
reserved and the Company shall continue to reserve and keep available at all
times, free of preemptive rights, a sufficient number of shares of Common Stock
for the purpose of enabling the Company

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to issue Shares pursuant to this Agreement and Warrant Shares pursuant to any
exercise of the Warrants and the Placement Agent Shares and Placement Agent
Warrant Shares to any exercise of the Placement Agent Warrants.
     4.11 Listing of Common Stock. The Company will take all action reasonably
necessary to maintain and continue the listing and trading of its Common Stock
on an Eligible Trading Market and will comply in all respects with the Company’s
reporting, filing and other obligations under the bylaws or rules of such
Eligible Trading Market. As soon as reasonably practicable following the Closing
(but not later than the earlier of the Effective Date and the first anniversary
of the Closing Date) the Company shall cause all of the Shares and Warrant
Shares to be listed on such Eligible Trading Market. The Company further agrees,
if the Company applies to have the Common Stock traded on any other Trading
Market, it will include in such application all of the Shares and Warrant
Shares, and will take such other action as is necessary to cause all of the
Shares and Warrant Shares to be listed on such other Trading Market as promptly
as possible.
     4.12 Equal Treatment of Purchasers. No consideration shall be offered or
paid to any Person to amend or consent to a waiver or modification of any
provision of any of the Transaction Documents unless the same consideration is
also offered to all of the parties to the Transaction Documents. For
clarification purposes, this provision constitutes a separate right granted to
each Purchaser by the Company and negotiated separately by each Purchaser, and
is intended to treat for the Company the Purchasers as a class and shall not in
any way be construed as the Purchasers acting in concert or as a group with
respect to the purchase, disposition or voting of Securities or otherwise.
     4.13 Short Sales and Confidentiality After The Date Hereof. Each Purchaser
severally and not jointly with the other Purchasers covenants that neither it
nor any Affiliate acting on its behalf or pursuant to any understanding with it
will execute any Short Sales during the period commencing at the Discussion Time
and ending at the time that the transactions contemplated by this Agreement are
first publicly announced as described in Section 4.4. Each Purchaser, severally
and not jointly with the other Purchasers, covenants that until such time as the
transactions contemplated by this Agreement are publicly disclosed by the
Company as described in Section 4.4, such Purchaser will maintain the
confidentiality of all disclosures made to it in connection with this
transaction (including the existence and terms of this transaction). Each
Purchaser understands and acknowledges, severally and not jointly with any other
Purchaser, that the Commission currently takes the position that coverage of
short sales of shares of the Common Stock “against the box” prior to the
Effective Date of the Registration Statement with the Securities is a violation
of Section 5 of the Securities Act, as set forth in Item 65, Section A, of the
Manual of Publicly Available Telephone Interpretations, dated July 1997,
compiled by the Office of Chief Counsel, Division of Corporation Finance.
Notwithstanding the foregoing, no Purchaser makes any representation, warranty
or covenant hereby that it will not engage in Short Sales in the securities of
the Company after the time that the transactions contemplated by this Agreement
are first publicly announced as described in Section 4.4, except that so long as
any Purchaser owns any Shares such Purchaser agrees that it will not be in a
“net short position” with respect to the Common Stock, where “net short
position” means having a contractual obligation to deliver a greater number of
shares of Common Stock than such Purchaser beneficially owns long, which
includes without limitation shares of Common Stock

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held long and shares of Common Stock issuable upon exercise, conversion or
exchange of Company securities held by such Purchaser (whether or not then
convertible, exercisable or exchangeable), including the Warrants.
Notwithstanding the foregoing, in the case of a Purchaser that is a
multi-managed investment vehicle whereby separate portfolio managers manage
separate portions of such Purchaser’s assets and the portfolio managers have no
direct knowledge of the investment decisions made by the portfolio managers
managing other portions of such Purchaser’s assets, the covenant set forth above
shall only apply with respect to the portion of assets managed by the portfolio
manager that made the investment decision to purchase the Securities covered by
this Agreement.
     4.14 Delivery of Securities After Closing. The Company shall deliver, or
cause to be delivered, the respective Securities purchased by each Purchaser to
such Purchaser within 5 Trading Days of the Closing Date.
     4.15 Form D; Blue Sky Filings. The Company agrees to timely file a Form D
with respect to the Securities as required under Regulation D and to provide a
copy thereof, promptly upon request of any Purchaser. The Company shall take
such action as the Company shall reasonably determine is necessary in order to
obtain an exemption for, or to qualify the Securities for, sale to the
Purchasers at the Closing under applicable securities or “Blue Sky” laws of the
states of the United States, and shall provide evidence of such actions promptly
upon request of any Purchaser.
     4.16 Purchase Price Adjustments.
          (a) Required Adjustments. If prior to the Effective Date the Company
issues or sells any shares of its Common Stock or Common Stock Equivalents
(other than Exempt Issuances) at a Subsequent Issuance Selling Price lower than
the Per Share Purchase Price, then, in each case, the Per Share Purchase Price
hereunder shall be adjusted downward to equal such lower Subsequent Issuance
Selling Price and the Purchasers shall be entitled to receive additional shares
of Common Stock (“Additional Shares”) and warrants (“Additional Warrants”) to
purchase shares of Common Stock (“Additional Warrant Shares”) as set forth in
Section 4.16(b) below, subject to Section 4.16(c) below. The Company shall
furnish to the Purchasers written notice of, and issue a press release
announcing, any such sale within 24 hours of the closing of any such issuance or
sale. The term “Shares”, “Warrants” and “Warrant Shares” as used in this
Agreement shall include the Additional Shares, Additional Warrants and
Additional Warrant Shares issued to the Purchasers pursuant to this
Section 4.16.
          (b) Adjustment Procedures. Subject to Section 4.16(c) below, if an
adjustment of the Per Share Purchase Price is required pursuant to
Section 4.16(a), then the Company shall deliver to each Purchaser, within ten
(10) Trading Day following the consummation of the transaction giving rise to
the adjustment (as may be adjusted pursuant to Section 4.16(c) below, “Delivery
Date”):
          (i) such number of Additional Shares equal to (1) the aggregate
Subscription Amount paid by such Purchaser divided by the adjusted Per Share
Purchase Price as required under Section 4.16(a), minus (2) the total number of
Shares previously

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delivered to such Purchaser under this Agreement, provided that the Company
shall effect such adjustment in cash to the extent required by Section 4.16(c);
          (ii) an additional A Warrant registered in the name of such Purchaser
to purchase up to a number of shares of Common Stock equal to 30% of such number
of Additional Shares, provided that the exercise price therein shall be equal to
137.5% of such Subsequent Issuance Selling Price; and
          (iii) an additional B Warrant registered in the name of such Purchaser
to purchase up to a number of shares of Common Stock equal to 30% of such number
of Additional Shares, provided that the exercise price therein shall be equal to
162.5% of such Subsequent Issuance Selling Price.
In the event the Company fails to deliver to any Purchaser such Additional
Shares or Additional Warrants (or cash, if applicable) by the Delivery Date, in
addition to such Purchaser’s other available remedies, the Company shall pay to
such Purchaser, in cash, as partial liquidated damages and not as a penalty, an
amount equal to 2% of such Purchaser’s Adjustment Amount per month, payable in
cash, where the “Adjustment Amount” equals the difference between the most
recent Per Share Purchase Price and such Subsequent Issuance Selling Price
multiplied by the number of Shares previously issued to such Purchaser.
     (c) Limitation on Number of Shares.
          (i) Notwithstanding anything herein to the contrary, except as
provided otherwise in this Section 4.16, the number of Additional Shares that
may be issued to any Purchaser under this Section 4.16 shall be limited to the
extent necessary to insure that, following such issuance, the number of shares
of Common Stock then beneficially owned by such Purchaser and its Affiliates and
any other persons or entities whose beneficial ownership of Common Stock would
be aggregated with such Purchaser’s for purposes of Section 13(d) of the
Exchange Act (including shares held by any “group” of which the holder is a
member, but excluding shares beneficially owned by virtue of the ownership of
securities or rights to acquire securities that have limitations on the right to
convert, exercise or purchase similar to the limitation set forth herein
(including the Warrants)), does not exceed 9.9% of the total number of shares of
Common Stock of the Company then issued and outstanding (the “Beneficial
Ownership Limitation”). For purposes hereof, “group” has the meaning set forth
in Section 13(d) of the Exchange Act and applicable regulations of the
Securities and Exchange Commission, and the percentage held by the holder shall
be determined in a manner consistent with the provisions of Section 13(d) of the
Exchange Act. If by way of any adjustment required by this Section 4.16 any
Purchaser would otherwise be entitled to receive a number of shares of Common
Stock such that the total number of such shares held by such Purchaser as of the
date of such adjustment would equal or exceed the Beneficial Ownership
Limitation, then the Company shall not issue Additional Shares as required by
this Section 4.16 only to the extent necessary to avoid causing the aforesaid
limitation to be exceeded. With respect to such Additional Shares which may not
be issued to such Purchaser on the Delivery Date due to the limitation contained
in this paragraph (“Excess Shares”), the Delivery Date for such Excess Shares,
or any portion thereof from time to time as

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specified by such Purchaser, shall be extended to such date which is ten
(10) days following delivery of written notice to the Company from such
Purchaser stating that the Excess Shares (or such portion thereof), are no
longer subject to the limitation contained in this paragraph since such Excess
Shares (or portion thereof) may be issued without violating the Beneficial
Ownership Limitation.
          (ii) In the event that the Company would be obligated to issue an
amount of Additional Shares and Additional Warrants which, when aggregated with
all Shares and Warrants issued, would constitute a breach of the Company’s
obligations under the rules or regulations of the Company’s Trading Market as
they apply to the Company, or any other principal securities exchange or market
upon which the Common Stock is or becomes traded (the “Cap Regulations”), the
Company shall not be obligated to issue any such Additional Shares or Additional
Warrants. Instead, the Company shall immediately seek shareholder approval of
this transaction (with voting in accordance with the Cap Regulations and other
applicable law) if such approval would, under the Cap Regulations, permit the
Company to issue such Additional Shares and Additional Warrants without
violation of the Cap Regulations. If such shareholder approval will not afford a
cure of the breach of the Cap Regulations, or if such shareholder approval is
not obtained within eighty (80) days, then the Company shall promptly pay cash
to each Purchaser cash equal to such Purchaser’s Adjustment Amount which cannot
be satisfied with Additional Shares and Additional Warrants.
          (d) Additional Provisions. In case of any stock split or reverse stock
split, stock dividend, reclassification of the common stock, recapitalization,
merger or consolidation, or like capital adjustment affecting the Common Stock
of the Company, the provisions of this Section 4.16 shall be applied in a fair,
equitable and reasonable manner so as to give effect, as nearly as may be, to
the purposes hereof. The Company agrees to take the position that, for purposes
of determining the holding period under Rule 144 for shares of Common Stock
issued pursuant to this Section 4.16, the holding period of such shares shall be
tacked to the holding period of the Shares.
ARTICLE V.
MISCELLANEOUS
     5.1 Termination. This Agreement may be terminated by any Purchaser, as to
such Purchaser’s obligations hereunder only and without any effect whatsoever on
the obligations between the Company and the other Purchasers, by written notice
to the other parties, if the Closing has not been consummated on or before
February 9, 2007; provided, however, that no such termination will affect the
right of any party to sue for any breach by the other party (or parties).
     5.2 Fees and Expenses. At the Closing, the Company has agreed to reimburse
Gemini Master Fund, Ltd. and/or the other Purchasers up to an aggregate amount
of $15,000 for legal fees and expenses of the Purchasers in connection with the
transactions contemplated hereby. Except as expressly set forth in the
Transaction Documents to the contrary, each party shall pay the fees and
expenses of its advisers, counsel, accountants and other experts, if any, and
all other expenses incurred by such party incident to the negotiation,
preparation, execution,

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delivery and performance of this Agreement. The Company shall pay all Transfer
Agent fees, stamp taxes and other taxes and duties levied in connection with the
delivery of any Securities to the Purchasers.
     5.3 Entire Agreement. The Transaction Documents, together with the exhibits
and schedules thereto, contain the entire understanding of the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.
     5.4 Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
set forth on the signature pages attached hereto prior to 5:30 p.m. (New York
City time) on a Trading Day, (b) the next Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number set forth on the signature pages attached hereto on a day that
is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading
Day, (c) the 2nd Trading Day following the date of mailing, if sent by U.S.
nationally recognized overnight courier service, or (d) upon actual receipt by
the party to whom such notice is required to be given. The address for such
notices and communications shall be as set forth on the signature pages attached
hereto.
     5.5 Amendments; Waivers. No provision of this Agreement may be waived or
amended except in a written instrument signed, in the case of an amendment, by
the Company and Purchasers holding at least 67% of the then outstanding
Securities or, in the case of a waiver, by the party against whom enforcement of
any such waived provision is sought; provided, however, that no such amendment
or waiver that adversely changes the specifically enumerated rights hereunder of
a Purchaser in a manner adversely different (other than differences that are de
minimus or inconsequential) from the manner in which such specifically
enumerated rights of any other Purchaser are being adversely changed by such
amendment or waiver may be effected without the consent of such Purchaser. Any
amendment or waiver approved as set forth above shall be binding upon each
Purchaser, whether or not such holder shall have approved such amendment or
waiver. 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 any party to
exercise any right hereunder in any manner impair the exercise of any such
right.
     5.6 Headings. 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.
     5.7 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their successors and permitted assigns. The
Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of each Purchaser (other than by merger). Any
Purchaser may assign any or all of its rights under this Agreement to any Person
to whom such Purchaser assigns or transfers any Securities, provided such
transferee agrees in writing to be bound, with respect to the transferred
Securities, by the

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provisions of the Transaction Documents that apply to the “Purchasers” (which,
for purposes of clarity, includes the representations and warranties in
Section 3.2 herein as to such transferee).
     5.8 No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.9.
     5.9 Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of the Transaction Documents shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. Each
party agrees that all legal proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by this Agreement and
any other Transaction Documents (whether brought against a party hereto or its
respective affiliates, directors, officers, shareholders, employees or agents)
may be commenced in the state and federal courts sitting in the City of New York
or in California. Each party hereby irrevocably submits to the non-exclusive
jurisdiction of the state and federal courts sitting in the City of New York,
borough of Manhattan, and California for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein (including with respect to the enforcement of any of the
Transaction Documents), and hereby irrevocably waives, and agrees not to assert
in any suit, action or proceeding, any claim that it is not personally subject
to the jurisdiction of any such court, that such suit, action or proceeding is
improper or is an inconvenient venue for such proceeding. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery)
to such party at the address in effect for notices to it under this Agreement
and agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to limit in
any way any right to serve process in any other manner permitted by law. The
parties hereby waive all rights to a trial by jury. If either party shall
commence an action or proceeding to enforce any provisions of the Transaction
Documents, then the prevailing party in such action or proceeding shall be
reimbursed by the other party for its reasonable attorneys’ fees and other costs
and expenses incurred with the investigation, preparation and prosecution of
such action or proceeding.
     5.10 Survival. The representations and warranties contained herein shall
survive the Closing and the delivery of the Shares and Warrant Shares.
     5.11 Execution. This Agreement may be executed in two or more counterparts,
all of which when taken together shall be considered one and the same agreement
and shall become effective when counterparts have been signed by each party and
delivered to the other party, it being understood that both parties need not
sign the same counterpart. In the event that any signature is delivered by
facsimile transmission or by e-mail delivery of a “.pdf” format data file, 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 or “.pdf” signature page were an original thereof.

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     5.12 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, illegal,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated, and the parties hereto shall use
their commercially reasonable efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.
     5.13 Rescission and Withdrawal Right. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) any of
the other 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; provided,
however, in the case of a rescission of an exercise of a Warrant, the Purchaser
shall be required to return any shares of Common Stock delivered in connection
with any such rescinded exercise notice.
     5.14 Replacement of Securities. If any certificate or instrument evidencing
any Securities is mutilated, lost, stolen or destroyed, the Company shall issue
or cause to be issued in exchange and substitution for and upon cancellation
thereof (in the case of mutilation), or in lieu of and substitution therefor, a
new certificate or instrument, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction. The applicant
for a new certificate or instrument under such circumstances shall also pay any
reasonable third-party costs (and provide customary indemnity) associated with
the issuance of such replacement Securities.
     5.15 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Purchasers and the Company will be entitled to specific performance under the
Transaction Documents. The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations contained in the Transaction Documents and hereby agrees to waive
and not to assert in any action for specific performance of any such obligation
the defense that a remedy at law would be adequate.
     5.16 Payment Set Aside. To the extent that the Company makes a payment or
payments to any Purchaser pursuant to any Transaction 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 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.

31

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     5.17 Independent Nature of Purchasers’ Obligations and Rights. If there
exists more than one Purchaser hereunder, 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 or non-performance of the obligations of any other Purchaser under
any Transaction Document. Nothing contained herein or in any other 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 Documents. Each Purchaser shall be
entitled to independently protect and enforce its rights, including without
limitation, the rights arising out of this Agreement or out of the other
Transaction Documents, and it shall not be necessary for any other Purchaser to
be joined as an additional party in any proceeding for such purpose. Each
Purchaser has been represented by its own separate legal counsel in their review
and negotiation of the Transaction Documents. For reasons of administrative
convenience only, Purchasers and their respective counsel have chosen to
communicate with the Company through Peter J. Weisman, P.C. Peter J. Weisman,
P.C. represents only Gemini Master Fund, Ltd. The Company has elected to provide
all Purchasers with the same terms and Transaction Documents for the convenience
of the Company and not because it was required or requested to do so by the
Purchasers.
     5.18 Liquidated Damages. The Company’s obligations to pay any partial
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of the Company and shall not terminate until all unpaid
partial liquidated damages and other amounts have been paid notwithstanding the
fact that the instrument or security pursuant to which such partial liquidated
damages or other amounts are due and payable shall have been canceled,
converted, transferred or for any other reason are no longer outstanding.
     5.19 Construction. The parties agree that each of them and/or their
respective counsel has reviewed and had an opportunity to revise the Transaction
Documents and, therefore, the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of the Transaction Documents or any amendments hereto.
(Signature Pages Follow)

32

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          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.

     
COMPANY:
   
 
   
XENONICS HOLDINGS, INC.
  Address for Notices:
 
   
 
  2236 Rutherford Road
 
  Suite 123
By: /s/ RICHARD S. KAY
  Carlsbad, CA 92008-7297
Print Name: RICHARD S. KAY
  Fax: 760-438-1184
Print Title: CHIEF FINANCIAL OFFICER
   

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOR PURCHASER FOLLOWS]

33

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PURCHASER:

     
TAPESTRY INVESTMENT PARTNERS, LP
  Address for Notices:
 
   
 
  Tapestry Investment Partners, LP
By: /s/ GARY S. SIPERSTEIN
  10 Wegbosset Street 401
Name: GARY S. SIPERSTEIN
  Providence, RI 02903
Title: GP
  Attn: Gary Sipperstein
 
   
Subscription Amount: $800,000
  Address for Delivery of Securities (if not
Shares: 400,000 shares
  same as above):
A Warrants: 120,000 shares
   
B Warrants: 120,000 shares
   

[PURCHASER SIGNATURE PAGE TO XXN SECURITIES PURCHASE AGREEMENT]

 

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

 

PURCHASER:

     
CALM WATERS PARTNERSHIP
  Address for Notices:
 
   
 
  Calm Waters Partnership
By: /s/ RICHARD S. STRONG
  115 S 84th Street Suite 200
Name: RICHARD S. STRONG
  Milwaukee, WI 53214
Title: MANAGING PARTNERSHIP
  Attn: Richard S. Strong
 
   
Subscription Amount: $400,000
  Address for Delivery of Securities (if
Shares: 200,000 shares
  not same as above):
A Warrants: 60,000 shares
   
B Warrants: 60,000 shares
   

 

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

 

     
PURCHASER:
   
 
   
MEADOWBROOK OPPORTUNITY FUND, LLC
  Address for Notices:
 
   
 
  c/o Meadowbrook Capital Management, LLC
By: /s/ MICHAEL RAGINS
  520 Lake Cook Road, Suite 690
Name: Michael Ragins
  Deerfield, IL 60015
Title: Manager
  Attn: Daniel Elekman, Executive Officer,
 
  and Michael Ragins, Manager
 
   
Subscription Amount: $250,000
  Address for Delivery of Securities (if not
Shares: 125,000 shares
  same as above):
A Warrants: 37,500 shares
   
B Warrants: 37,500 shares
   

 

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

 

     
PURCHASER:
   
 
  Address for Notices:
 
   
 
  James Schoenike
/s/ JAMES SCHOENIKE
  9022 West County Line Road
James Schoenike
  Mequon, WI 53097
 
   
Subscription Amount: $20,000
  Address for Delivery of Securities (if not
Shares: 10,000 shares
  same as above):
A Warrants: 3,000 shares
   
B Warrants: 3,000 shares
   

 

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

 

     
PURCHASER:
   
 
  Address for Notices:
 
   
 
  Mark D. Westman
/s/ MARK D. WESTMAN
  PO Box 4195
Mark D. Westman
  Telluride, CO 81435-4195
 
   
Subscription Amount: $30,000
  Address for Delivery of Securities (if not
Shares: 15,000 shares
  same as above):
A Warrants: 4,500 shares
   
B Warrants: 4,500 shares
   

 

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

 

     
PURCHASER:
   
 
  Address for Notices:
 
   
 
  Harvey Blitz
/s/ HARVEY BLITZ
  72-19 137th St.
Harvey Blitz
  Flushing, NY 11367
 
   
Subscription Amount: $150,000
  Address for Delivery of Securities (if not
Shares: 75,000 shares
  same as above):
A Warrants: 22,500 shares
   
B Warrants: 22,500 shares
   

 

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

 

     
PURCHASER:
   
 
  Address for Notices:
 
   
 
  Stephen J. Posner
/s/ STEPHEN J. POSNER
  218 Augusta Ct.
Stephen J. Posner
  Roslyn, NY 11576
 
   
Subscription Amount: $150,000
  Address for Delivery of Securities (if not
Shares: 75,000 shares
  same as above):
A Warrants: 22,500 shares
   
B Warrants: 22,500 shares
   

 

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

 

          PURCHASER:    
 
        GEMINI MASTER FUND, LTD.   Address for Notices:
 
       
By:
  GEMINI STRATEGIES, LLC, its investment    
 
  manager   c/o Gemini Strategies, LLC
 
      12220 El Camino Real, Ste. 400
 
      San Diego, CA 92130
 
  By: /s/ STEVEN WINTERS   Attn: Steven Winters
 
  Name: Steven Winters   Fax: (858) 509-8808
 
  Title: President    
 
       
 
      with a copy to:
 
       
 
      Peter J. Weisman, P.C.
 
      52 Vanderbilt Avenue, 17th Fl.
 
      New York, NY 10017
 
      Fax: (212) 317-8855
 
        Subscription Amount: $250,000   Address for Delivery of Securities (if
not Shares: 125,000 shares   same as above): A Warrants: 37,500 shares     B
Warrants: 37,500 shares    

 

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Disclosure Schedules
Schedule 3.1(g)
Summary of Stock Options Outstanding
8/29/2007

                      Option     No. of   Grant Date   Price     Options  
7/23/03
  $ 0.250       145,000  
7/29/03
  $ 0.875       400,000  
12/5/03
  $ 6.000       25,000  
8/9/04
  $ 3.500       25,000  
5/21/04
  $ 5.750       15,000  
10/11/04
  $ 3.750       154,000  
4/15/05
  $ 3.800       590,000  
12/9/05
  $ 1.830       34,000  
10/30/06
  $ 1.610       100,000  
1/16/07
  $ 1.980       25,000  
4/12/07
  $ 2.350       25,000  
5/31/07
  $ 2.580       100,000  
8/29/07
  $ —       450,000  
 
             
 
            2,088,000  
 
             

Summary of Warrants Outstanding

                      Warrant     No. of   Grant Date   Price     Warrants  
 
               
7/15/03
  $ 0.600       672,500  
7/15/03
  $ 0.825       422,500  
7/31/03
  $ 0.875       50,000  
7/31/03
  $ 1.050       97,168  
4/26/04
  $ 8.000       50,000  
7/1/04
  $ 5.050       25,000  
1/28/05
  $ 5.500       50,000  
4/13/06
  $ 2.200       250,000  
4/13/06
  $ 3.200       250,000  
9/5/06
  $ 1.600       500,000  
11/6/06
  $ 1.620       50,000  
2/2/07
  $ 2.750       300,000  
2/2/07
  $ 3.250       300,000  
2/2/07
  $ 2.750       30,000  
2/2/07
  $ 3.250       30,000  
 
             
 
            3,077,168  
 
             
 
               
Shares Outstanding - 8-27-07
            18,549,839  
 
             
 
               
Price of Common Stock - 8-27-07
          $ 2.51