Exhibit 10.24
AMENDED AND RESTATED SECURITIES PURCHASE AGREEMENT
     AMENDED AND RESTATED SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated
as of June 19, 2007, by and among The Allied Defense Group, Inc., a Delaware
corporation with its corporate headquarters located at 8000 Towers Crescent
Drive, Suite 260, Vienna, Virginia 22182 (the “Company”), and the investors
listed on the Schedule of Buyers attached hereto (individually, a “Buyer” and
collectively, the “Buyers”).
     WHEREAS:
     A. The Company and the Buyers entered into that certain Securities Purchase
Agreement, dated as of March 9, 2006 (the “Original Closing Date”) (as amended
from time to time in accordance with its terms, the “Original Securities
Purchase Agreement”), whereby the Company, among other things, issued (i) that
aggregate principal amount of senior subordinated convertible notes (the
“Original Notes”), set forth opposite such Buyer’s name in column (3) on the
Schedule of Buyers and (ii) warrants (the “Warrants”), to acquire up to that
number of additional shares of the Company’s common stock, par value $0.10 per
share (the “Common Stock”) set forth opposite such Buyer’s name in column (9) of
the Schedule of Buyers (as exercised, collectively, the “Warrant Shares”).
     B. The Company has authorized a new series of senior secured convertible
notes of the Company, in substantially the form attached hereto as Exhibit A-2,
which shall be convertible into Common Stock in accordance with the terms of
such Notes.
     C. Each Buyer and the Company wishes to exchange in the Initial Closing (as
defined in Section 1(a)(i) below), upon the terms and conditions stated in this
Agreement, that aggregate principal amount of Original Notes set forth opposite
such Buyer’s name in column (3) on the Schedule of Buyers (which aggregate
amount for all Buyers is $30,000,000) for (i) that aggregate principal amount of
Notes, in substantially the form attached hereto as Exhibit A-2 (collectively,
the “Amended Notes”), as set forth opposite such Buyer’s name in column (4) on
the Schedule of Buyers (which aggregate amount for all Buyers shall be the sum
of (x) $27,132,192 and (y) the product of (I) the number of calendar days during
the period commencing on the date hereof and ending on the Initial Closing Date
and (II) $10,273.97) (the Common Stock received upon such conversion,
collectively, the “Amended Conversion Shares”), (ii) that aggregate number of
shares (the “144 Common Shares”) of the Common Stock, set forth opposite such
Buyer’s name in column (7) on the Schedule of Buyers attached hereto (which
aggregate amount for all Buyers shall be 613,142) and (iii) that aggregate
number of shares (the “Other Common Shares”, and together with the 144 Common
Shares, the “Common Shares”) of the Common Stock, set forth opposite such
Buyer’s name in column (8) on the Schedule of Buyers attached hereto (which
aggregate amount for all Buyers shall be 674,858).
     D. The issuance of the Amended Notes and Common Shares pursuant to this
Agreement in exchange for the surrender (and cancellation) of the Original Notes
is being made in reliance upon the exemption from registration provided by
Section 3(a)(9) of the Securities Act of 1933, as amended (the “1933 Act”).
     E. Each Buyer wishes to purchase, and the Company wishes to sell, upon the
terms and conditions stated in this Agreement, in the Initial Closing (as
defined in Section 1(a)(i) below), that aggregate principal amount of Notes, in
substantially the form attached hereto as Exhibit A-2 (collectively, the
“Initial Notes”), set forth opposite such Buyer’s name in column (5) on the
Schedule of Buyers (which aggregate amount for all Buyers shall be the sum of
(x) $5,000,000 and (y) the Legal Counsel Fee Amount) (as converted,
collectively, the “Initial Conversion Shares”).

 

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     F. Subject to the terms and conditions set forth in this Agreement, upon
the satisfaction of certain conditions, the Buyers shall have the right to
purchase or may be required to purchase in an Additional Closing (as defined in
Section 1(a)(ii) below), that aggregate principal amount of Notes, in
substantially the form attached hereto as Exhibit A-2 (collectively, the
“Additional Notes” and, together with the Amended Notes and Initial Notes, the
“Notes”), set forth opposite such Buyer’s name in column (6) on the Schedule of
Buyers (which aggregate amount for all Buyers shall be $10,000,000) (as
converted, collectively, the “Additional Conversion Shares” and, collectively
with the Amended Conversion Shares and Initial Conversion Shares, the
“Conversion Shares”).
     G. The Notes bear interest, which at the option of the Company, subject to
certain conditions, may be paid in shares of Common Stock (the “Interest
Shares”).
     H. The issuance of the Initial Notes and Additional Notes pursuant to this
Agreement is being made in reliance upon the exemption from registration
afforded by Section 4(2) of the 1933 Act and Rule 506 of Regulation D
(“Regulation D”) as promulgated by the United States Securities and Exchange
Commission (the “SEC”) under the 1933 Act.
     I. On or prior to the Initial Closing Date, unless the Company directs
otherwise in a written notice to the Buyers (an “Escrow Waiver Event”), the
parties hereto and Wilmington Trust Company, a financial institution chartered
under the laws of the State of Delaware, as escrow agent (the “Escrow Agent”)
are executing and delivering an escrow agreement, in the form attached hereto as
Exhibit K (the “Escrow Agreement”), pursuant to which the Buyers have agreed to
deposit with the Escrow Agent such amount set forth opposite such Buyer’s name
in column (12) on the Schedule of Buyers (which aggregate amount for all Buyers
shall be $5,000,000) (the “Escrow Amount”), which shall be held in escrow by the
Escrow Agent in accordance with the terms and conditions of the Escrow Agreement
and, subject to the satisfaction of certain conditions, applied as payment in
part of the Additional Purchase Price (as defined below) in the Additional
Closing.
     J. On the Initial Closing Date, the parties hereto are executing and
delivering an Amended and Restated Registration Rights Agreement, substantially
in the form attached hereto as Exhibit C (as amended or modified from time to
time in accordance with its terms, the “Registration Rights Agreement”),
pursuant to which the Company has agreed to provide certain registration rights
with respect to the Conversion Shares, the Warrant Shares under the 1933 Act and
the rules and regulations promulgated thereunder, and applicable state
securities laws. The Registration Rights Agreement amends and restates the terms
and conditions of that certain Registration Rights Agreement, by and among the
Company and the Buyers, dated as of the Original Closing Date.
     K. The Notes, the Conversion Shares, the Common Shares, the Interest
Shares, the Warrants and the Warrant Shares, collectively, are referred to
herein as the “Securities”.
     L. The Notes will rank senior to all outstanding and future indebtedness of
the Company, subject to Permitted Senior Indebtedness (as defined in the Notes),
and will be secured by a first priority, perfected security interest in all of
the assets of the Company and the stock and assets of each of the Company’s
United States subsidiaries and 65% of the stock of ARC Europe, S.A. and Allied
Research Corporation Limited, as evidenced by (i) a security agreement, in the
form attached hereto as Exhibit H (as amended or modified from time to time in
accordance with its terms, the “Security Agreement”), (ii) a pledge agreement,
in the form attached hereto as Exhibit I (as amended or modified from time to
time in accordance with its terms, the “Pledge Agreement”), and (iii) the
guarantees of certain subsidiaries of the Company in the form attached hereto as
Exhibit J (as amended or modified from time to time in accordance with its
terms, the “Guarantees” and together with the Pledge Agreement, the Security
Agreement, and any ancillary documents related thereto, collectively the
“Security Documents”).

 

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     NOW, THEREFORE, the Company and each Buyer hereby agree as follows:

1.   EXCHANGE OF ORIGINAL NOTES FOR AMENDED NOTES AND COMMON SHARES; PURCHASE
AND SALE OF ADDITIONAL NOTES.

          (a) Issuance of Notes and Common Shares.
               (i) Cancellation of Original Notes; Issuance of Amended Notes,
Initial Notes and Common Shares. Subject to the satisfaction (or waiver) of the
conditions set forth in Sections 6(a) and 7(a) below, on the Initial Closing
Date (as defined below), (I) (i) the Company shall issue, sell and deliver to
each applicable Buyer, and each such Buyer severally, but not jointly, agrees to
accept and purchase, (x) a principal amount of Amended Notes as is set forth
opposite such Buyer’s name in column (4) on the Schedule of Buyers and (y) that
aggregate number of Common Shares as is set forth opposite such Buyer’s name in
column (7) on the Schedule of Buyers, and (ii) each Buyer shall surrender to the
Company at the Initial Closing (as defined below) contemplated by this
Agreement, the Original Note issued to such Buyer and (II) the Company shall
issue and sell to, and each such Buyer severally, but not jointly, agrees to
purchase from the Company on the Initial Closing Date, such principal amount of
Initial Notes as is set forth opposite such Buyer’s name in column (5) on the
Schedule of Buyers (collectively, the “Initial Closing”).
               (ii) Additional Notes. Subject to the satisfaction (or waiver) of
the conditions set forth in Sections 1(c), 6(b) and 7(b) below, the Company
shall issue and sell to each Buyer required to participate in such Additional
Closing pursuant to Section 1(c) below, and each such Buyer severally, but not
jointly, agrees to purchase from the Company on such Additional Closing Date (as
defined below), a principal amount of Additional Notes as is set forth opposite
such Buyer’s name in column (6) on the Schedule of Buyers (each, an “Additional
Closing”).
               (iii) Closing. The Initial Closing and the Additional Closings
are each referred to in this Agreement as a “Closing”. Each Closing shall occur
on the applicable Closing Date at the offices of Schulte Roth & Zabel LLP, 919
Third Avenue, New York, New York 10022.
               (iv) Purchase Price. The Amended Notes and Common Shares shall be
issued to each Buyer in exchange for the Original Notes and without the payment
of any additional consideration. The purchase price for each Buyer of the
Initial Notes to be purchased by each such Buyer at the Initial Closing shall be
the amount set forth opposite such Buyer’s name in column (10) of the Schedule
of Buyers (collectively, the “Initial Purchase Price”). The purchase price for
each Buyer of the Additional Notes to be purchased by each such Buyer at the
Additional Closing shall be the amount set forth opposite such Buyer’s name in
column (11) of the Schedule of Buyers (collectively, the “Additional Purchase
Price”, and together with the Initial Purchase Price, the “Purchase Price”).
               (v) Escrow Agreement. Subject to the satisfaction (or waiver) of
the conditions set forth in Sections 6(a) and 7(a) below, on the Initial Closing
Date (as defined below), unless an Escrow Waiver Event has occurred prior to the
Initial Closing Date, each Buyer shall deposit its Escrow Amount with the Escrow
Agent. The parties hereto agree that if the Additional Closing does not occur
prior to the thirtieth (30th) calendar day after the Initial Closing Date (the
“Escrow Termination Date”) and an Escrow Waiver Event has not occurred prior to
the Initial Closing Date, such parties shall jointly instruct the Escrow Agent
to return the Escrow Amount to the Buyers. On the Additional Closing Date, if
any, unless an Escrow Waiver Event has occurred prior to the Initial Closing
Date, such parties shall jointly instruct the Escrow Agent to release the Escrow
Amount to the Company.
          (b) Initial Closing Date. The date and time of the Initial Closing
(the “Initial Closing Date”) shall be 10:00 a.m., New York City Time, on the
date hereof after notification of satisfaction (or waiver) of the conditions to
the Initial Closing set forth in Sections 6(a) and 7(a) below (or such later
date as is mutually agreed to by the Company and each Buyer).
          (c) Additional Closing Date.
               (i) The date and time of the Additional Closings (the “Additional
Closing Date,” and together with the Initial Closing Date, each a “Closing Date”
and collectively, the “Closing Dates”) shall be 10:00 a.m., New York City Time,
on the date specified in the applicable Additional Closing Notice (as defined
below), subject to satisfaction (or waiver) of the conditions to each Additional
Closing set forth in Sections 6(b) and 7(b) and the conditions contained in this
Section 1(c) (or such later date as is mutually agreed to by the Company and the
applicable Buyer).

 

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               (ii) Subject to the requirements of Sections 6(b) and 7(b) and
the conditions contained in this Section 1(c), following (x) the delivery of a
certificate of the Company in the form attached hereto as Exhibit L (the “MECAR
Certificate”), certifying that the MECAR Contract (I) has been duly executed and
delivered by the parties thereto (the date of the execution thereof, the “MECAR
Execution Date”) and (II) is a validly binding and enforceable agreement of the
parties thereto and (y) the public announcement of the execution of the MECAR
Contract (as defined in the MECAR Certificate) and the filing of the MECAR
Certificate as an exhibit to a filing by the Company with the SEC, at any time
prior to the Escrow Termination Date, the Company shall have the right to
require each Buyer to purchase, at one Closing, the principal amount of
Additional Notes as is set forth opposite such Buyer’s name in column (6) on the
Schedule of Buyers (as provided by the Company, a “Additional Closing Notice”);
provided, that if the Company elects to deliver a Additional Closing Notice to
any Buyer, it must deliver an identical Additional Closing Notice to all Buyers.
Any Additional Closing Notice delivered by the Company shall be irrevocable.
Notwithstanding anything herein to the contrary, at any time on or after the
MECAR Execution Date, upon the Company’s receipt of one or more written notices
by the holders of a majority of the Notes then outstanding, in the aggregate,
electing to cause the Additional Closing to occur, the Company shall within one
(1) Business Day thereafter deliver Additional Closing Notices to the Buyers.
Each Additional Closing Notice shall contain a proposed Additional Closing Date
that shall be at least five (5) Business Days but not more than ten
(10) Business Days following the date of delivery of such Additional Closing
Notice to the Buyers. Each Additional Closing Notice shall set forth (i) the
principal amount of Additional Notes to be purchased by each Buyer at the
Additional Closing and (ii) the proposed Additional Closing Date. As used
herein, “Business Day” means any day other than Saturday, Sunday or other day on
which commercial banks in The City of New York are authorized or required by law
to remain closed.
          (d) Form of Payment. On the Initial Closing Date, (i) each Buyer shall
deliver, or cause to be delivered, for cancellation, the Original Note of such
Buyer to the Company for the Amended Notes (in such principal amounts as such
Buyer has agreed, and in the manner the Buyer may reasonably request, in
accordance with Section 1 of this Agreement) and Common Shares (in such amounts
as such Buyer has agreed, and in the manner the Buyer may reasonably request, in
accordance with Section 1 of this Agreement) to by issued and sold to such Buyer
at the Initial Closing and (ii) each Buyer shall pay the Initial Purchase Price
(less, in the case of Kings Road Investments Ltd. and Castlerigg Master
Investments Ltd., the amounts withheld pursuant to Section 4(g) below) to the
Company for the Initial Notes to be issued and sold to such Buyer at the Initial
Closing by wire transfer of immediately available funds for such Initial
Purchase Price in accordance with the Company’s written wire instructions. The
parties acknowledge that the amount to be paid by the Buyers to the Company, in
the aggregate, on the Initial Closing Date from the Initial Purchase Price (net
of the amounts deducted to pay the Legal Counsel Fee Amount pursuant to Section
4(g) below) shall equal $5,000,000. On the Additional Closing Date, each Buyer
shall pay the Additional Purchase Price (less (x) the Escrow Amount if the
Escrow Waiver Event has not occurred prior to the Initial Closing Date and
(y) in the case of Kings Road Investments Ltd. and Castlerigg Master Investments
Ltd., the amounts withheld pursuant to Section 4(g)) to the Company for the
Additional Notes to be issued and sold to such Buyer at the Additional Closing
by wire transfer of immediately available funds for such Additional Purchase
Price (less the Escrow Amount) in accordance with the Company’s written wire
instructions. At each Closing, the Company shall deliver to each Buyer the Notes
(in the principal amounts as such Buyer is entitled, in such manner as the Buyer
may reasonably request) and, as applicable, the Common Shares (in such amounts
as such Buyer is entitled, in such manner as the Buyer may reasonably request)
which such Buyer is then purchasing duly executed on behalf of the Company and
registered in the name of such Buyer or its designee.
          (e) Holding Period. For the purposes of Rule 144, the Company
acknowledges that the holding period of the Amended Notes and the Common Shares
may be tacked onto the holding period of the Original Notes, and the Company
agrees not to take a position contrary to this Section 1(e), including, without
limitation, with respect to the application of the terms and conditions set
forth in Section 2(g) below. The Company acknowledges that the 144 Common Shares
shall be issued to each Buyer without any restrictive legend on the Initial
Closing Date in reliance upon the exemption from registration provided by
Section 3(a)(9) of the 1933 Act and Rule 144.

 

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          (f) Mutual Releases.
               (i) For purposes of this Agreement, “Existing Claims” shall mean
any and all claims, liabilities, rights and causes of action, whether known or
unknown, relating to the purported events of default set forth in any Event of
Default Notice (as defined in the Original Notes) delivered to the Company prior
to the Initial Closing Date and any other potential claims arising under, based
on or related to any fact, matter, act or omission, cause, transaction,
occurrence or thing arising under or related to any of the Transaction Documents
(as defined in the Original Securities Purchase Agreement) or any of the
transactions contemplated thereby. In consideration of the release set forth in
Section 1(f)(ii) and the transactions contemplated by this Agreement, effective
as of the Initial Closing, each Buyer, only on behalf of itself and, to the
extent permitted by law, its current and former heirs, executors,
administrators, devisees, trustees, partners, directors, officers, shareholders,
employees, consultants, representatives, predecessors, principals, agents,
parents, associates, affiliates, subsidiaries, attorneys, accountants,
successors, successors-in-interest and assignees (collectively, the “Buyer
Releasing Persons”), hereby waives and releases, to the fullest extent permitted
by law, any and all claims, rights and causes of action relating to the Existing
Claims that any of the Buyer Releasing Persons had, currently has or may have,
that are directly or indirectly related to, based upon, arise out of, or arise
in connection with any fact, matter, act or omission, cause, transaction,
occurrence or thing occurring up to the date of this release, including, without
limitation, any Existing Claims arising out of any of the Transaction Documents
(as defined pursuant to the Original Securities Purchase Agreement), against
(w) the Company, (x) any of the Company’s current or former parents, affiliates,
subsidiaries, predecessors, assigns, attorneys or counsel, accountants,
auditors, advisors, employees, consultants or representatives, (y) any of the
Company’s or such other persons’ or entities’ current or former officers,
directors, employees, agents, principals, and signatories or, (z) in the case of
any person or entity described in clauses (x) or (y) above (other than the
Company or any of its Subsidiaries), such other persons’ or entities’ current or
former officers, directors, members, partners, shareholders, employees, agents,
principals, Buyers, signatories, advisors, consultants, spouses, heirs, estates,
executors, attorneys, auditors and associates and members of their immediate
families (collectively, the “Company Released Persons”). For the avoidance of
doubt, claims that relate to events or circumstances occurring, or actions taken
or failed to be taken, after the date of this release are not waived or released
hereby. Any claims, rights or causes of action other than the Existing Claims
are not waived or released hereby either.
               (ii) In further consideration of each Buyer entering into this
Agreement, effective as of the date of this Agreement, the Company on behalf of
itself and, to the extent permitted by law, its current and former
administrators, devisees, trustees, partners, directors, officers, shareholders,
employees, consultants, representatives, predecessors, principals, agents,
parents, associates, affiliates, subsidiaries, attorneys, accountants,
successors, successors-in-interest and assignees (collectively, the “Company
Releasing Persons”), hereby waives and releases, to the fullest extent permitted
by law, any and all claims, rights and causes of action relating to the Existing
Claims that any of the Company Releasing Persons had, currently has or may have,
that are directly or indirectly related to, based upon, arise out of, or arise
in connection with any fact, matter, act or omission, cause, transaction,
occurrence or thing occurring up to the date of this release, including, without
limitation, any Existing Claims arising out of any of the Transaction Documents
(as defined pursuant to the Original Securities Purchase Agreement), against
(x) each Buyer, (y) each Buyer’s current or former parents, affiliates,
subsidiaries, predecessors, assigns, attorneys or counsel, accountants,
auditors, advisors, employees, consultants or representatives, members,
partners, shareholders, affiliates, subsidiaries, predecessors or assigns,
(z) any of such Buyer’s or such other persons’ or entities’ current or former
officers, directors, members, partners, shareholders, employees, agents,
principals, Buyers, signatories, advisors, consultants, spouses, heirs, estates,
executors, attorneys, auditors and associates and members of their immediate
families (collectively, the “Buyer Released Persons”). For the avoidance of
doubt, claims that relate to events or circumstances occurring, or actions taken
or failed to be taken, after the date of this release are not waived or released
hereby. Any claims, rights or causes of action other than the Existing Claims
are not waived or released hereby either.

 

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               (iii) Promptly after the consummation of the Initial Closing, and
in any event no later than ten (10) Business Days thereafter, Kings Road
Investments Ltd. shall dismiss with prejudice the suit filed against the Company
in the United States District Court for the Southern District of New York.
     2. BUYER’S REPRESENTATIONS AND WARRANTIES.
          Each Buyer represents and warrants, with respect to only itself, that:
          (a) No Public Sale or Distribution. Such Buyer is acquiring (or has
acquired, as applicable) the Notes, the Common Shares and the Warrants and upon
conversion of the Notes and exercise of the Warrants (other than pursuant to a
Cashless Exercise (as defined in the Warrants)) will acquire the Conversion
Shares issuable upon conversion of the Notes, the Interest Shares issuable
pursuant to the terms of the Notes and the Warrant Shares issuable upon exercise
of the Warrants for investment purposes, for its own account and not with a view
towards, or for resale in connection with, the public sale or distribution
thereof, except pursuant to sales registered or exempted under the 1933 Act;
provided, however, that by making the representations herein, such Buyer does
not agree to hold any of the Securities for any minimum or other specific term
and reserves the right to dispose of the Securities at any time in accordance
with or pursuant to a registration statement or an exemption under the 1933 Act.
Such Buyer is acquiring the Securities hereunder in the ordinary course of its
business. Such Buyer does not presently have any agreement or understanding,
directly or indirectly, with any Person to distribute any of the Securities.
          (b) Buyer Status. Such Buyer is an “accredited investor” as that term
is defined in Rule 501(a) of Regulation D. Such Buyer is not a registered
broker-dealer under Section 15 of the Securities Exchange Act of 1934, as
amended (the “1934 Act”).
          (c) Reliance on Exemptions. Such Buyer understands that the Securities
are being offered and sold to it in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying in part upon the truth and accuracy of, and such
Buyer’s compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire the Securities.
          (d) Information. Such Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
that have been requested by such Buyer. Such Buyer and its advisors, if any,
have been afforded the opportunity to ask questions of the Company and have
received what the Buyer believes to be satisfactory answers to any such
inquiries. Neither such inquiries nor any other due diligence investigations
conducted by such Buyer or its advisors, if any, or its representatives shall
modify, amend or affect such Buyer’s right to rely on the Company’s
representations and warranties contained herein. Such Buyer understands that its
investment in the Securities involves a high degree of risk. Such Buyer has
sought such accounting, legal and tax advice as it has considered necessary to
make an informed investment decision with respect to its acquisition of the
Securities.
          (e) No Governmental Review. Such Buyer understands that no United
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.

 

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          (f) Transfer or Resale. Such Buyer understands that, except as
provided in the Registration Rights Agreement: (i) the Securities have not been
and are not being registered under the 1933 Act or any state securities laws and
consequently such Buyer may have to bear the risk of owning the Securities for
an indefinite period (ii) such Buyer agrees that if it decides to offer, sell or
otherwise transfer any of the Notes, Conversion Shares, Other Common Shares,
Warrants or Warrant Shares, such Notes, Conversion Shares, Other Common Shares,
Warrants and Warrant Shares may be offered, sold or otherwise transferred only:
(A) pursuant to an effective registration statement under the 1933 Act; (B) to
the Company; (C) (1) in accordance with the exemption from registration under
the 1933 Act provided by Rule 144 or Rule 144A thereunder, if available, and in
compliance with any applicable state securities laws or (2) in a transaction
that does not require registration under the 1933 Act or applicable state
securities laws, and the seller has provided the Company with an opinion of
counsel reasonably acceptable to the Company, prior to such offer, sale or
transfer, that such Securities may be so offered, sold or transferred in a
transaction that does not require registration under the 1933 Act or applicable
state securities laws.
          (g) Legends. Such Buyer understands that the certificates or other
instruments representing the Notes, the Other Common Shares and the Warrants
and, until such time as the resale of the Conversion Shares, the Other Common
Shares, the Interest Shares and the Warrant Shares have been registered under
the 1933 Act as contemplated by the Registration Rights Agreement, the stock
certificates representing the Conversion Shares, the Interest Shares and the
Warrant Shares, except as set forth below, shall bear any legend as required by
the “blue sky” laws of any state and a restrictive legend in substantially the
following form (and a stop-transfer order may be placed against transfer of such
stock certificates):
[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE] [EXERCISABLE]
HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN]
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED(THE “1933 ACT”), OR
APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE,
SOLD OR TRANSFERRED OR ASSIGNED, UNLESS (A) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE 1933 ACT, OR (B) PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE 1933 ACT 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. NOTHING IN THE PRECEDING WILL PROHIBIT THE
PLEDGE OF THE SECURITIES IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if, unless otherwise required by state securities laws, (i) such
Securities are registered for resale under the 1933 Act, or (ii) following a
sale or transfer of such Securities pursuant to Rule 144 (assuming the
transferor is not an affiliate of the Company), (iii) while such Securities are
eligible for sale under Rule 144(k), or (iv) if such legend is not required
under applicable requirements of the 1933 Act (including judicial
interpretations and pronouncements issued by the Staff of the SEC).
If the Company shall fail for any reason or for no reason to issue to the holder
of the Securities within three (3) Trading Days (as defined in the Notes) after
the occurrence of, and notice of, any of (i) through (iv) above, a certificate
without such legend to the holder or to issue such Securities to such holder by
electronic delivery at the applicable balance account at DTC, and if on or after
such Trading Day the holder purchases (in an open market transaction or
otherwise) shares of Common Stock to deliver in satisfaction of a sale by the
holder of such Securities that the holder anticipated receiving without legend
from the Company (a “Buy-In”), then the Company shall, within three (3) Business
Days after such three (3) Trading Day period, and at the holder’s request and in
the holder’s discretion, either (i) pay cash to the holder in an amount equal to
the holder’s total purchase price (including brokerage commissions, if any) for
the shares of Common Stock so purchased (the “Buy-In Price”), at which point the
Company’s obligation to deliver such unlegended Securities shall terminate, or
(ii) promptly honor its obligation to deliver to the holder such unlegended
Securities as provided above and pay cash to the holder in an amount equal to
the excess (if any) of the Buy-In Price over the product of (A) such number of
shares of Common Stock, times (B) the Weighted Average Price (as defined in the
Notes) of the Common Stock on the date of exercise.

 

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          (h) Validity; Enforcement. This Agreement, the Escrow Agreement, the
Registration Rights Agreement and the Security Documents to which it is a party
have been duly and validly authorized, executed and delivered on behalf of such
Buyer and constitute the legal, valid and binding obligations of such Buyer
enforceable against such Buyer in accordance with their respective terms, except
as such enforceability may be limited by general principles of equity or to
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and
other similar laws relating to, or affecting generally, the enforcement of
applicable creditors’ rights and remedies.
          (i) No Conflicts. The execution, delivery and performance by such
Buyer of this Agreement, the Escrow Agreement, the Registration Rights Agreement
and the Security Documents to which it is a party and the consummation by such
Buyer of the transactions contemplated hereby and thereby will not (i) result in
a violation of the organizational documents of such Buyer or (ii) conflict with,
or constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which such Buyer is a party, or (iii) result in a violation of any
law, rule, regulation, order, judgment or decree applicable to such Buyer,
except in the case of clauses (ii) and (iii) above, for such conflicts,
defaults, rights or violations which would not, individually or in the
aggregate, reasonably be expected to have a material adverse effect on the
ability of such Buyer to perform its obligations hereunder.
          (j) Residency. Such Buyer is a resident of that jurisdiction specified
below its address on the Schedule of Buyers.
          (k) Certain Trading Activities. Neither the Buyer nor any of its
affiliates has directly or indirectly, and no Person acting on behalf of the
Buyer or its affiliates has directly or indirectly, engaged in any transactions
in the securities of the Company (including, without limitation, any Short Sales
involving the Company’s securities) since May 1, 2007, provided, however, that,
with respect to LB I Group, the foregoing representation is made solely by, and
shall apply solely to, the Global Trading Strategies group of Lehman Brothers
Inc. and not made by, or applicable to, any other persons, affiliates or
affiliated or associated business units of Lehman Brothers Holdings Inc. “Short
Sales” include, without limitation, all “short sales” as defined in Rule 200
promulgated under Regulation SHO under the 1934 Act and all types of direct and
indirect stock pledges, forward sale contracts, options, puts, calls, short
sales, swaps and similar arrangements (including on a total return basis), and
sales and other transactions through non-US broker dealers or foreign regulated
brokers. The Buyer covenants that neither it, its affiliates, nor any Person
acting on its or its affiliates’ behalf will engage in any transactions in the
securities of the Company (including Short Sales) prior to the time that the
transactions contemplated by this Agreement are publicly disclosed.
Notwithstanding the foregoing, for avoidance of doubt, nothing contained herein
shall constitute a representation or warranty, or preclude any actions, with
respect to the identification of the availability of, or securing of, available
shares to borrow in order to effect Short Sales or similar transactions in the
future.
          (l) General Solicitation. Such Buyer is not purchasing the Securities
as a result of any advertisement, article, notice or other communication
regarding the Securities published in any newspaper, magazine or similar media
or broadcast over television or radio or presented at any seminar.
          (m) No Known Event of Default. Buyer has no actual knowledge of any
Default or Event of Default (as defined in the Notes), after giving effect to
the terms of this Agreement, that has occurred and is continuing as of the time
immediately following the Initial Closing Date.

 

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     3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
          The Company represents and warrants to each of the Buyers as follows:
          (a) Organization and Qualification. The Company and its “Subsidiaries”
(which for purposes of this Agreement means any “Significant Subsidiary” as such
term is defined in Rule 1-02 of Regulation S-X of the 1933 Act) are entities
duly organized and validly existing and in good standing under the laws of the
jurisdiction in which they are formed, and have the requisite power and
authorization to own their properties and to carry on their business as now
being conducted. Each of the Company and its Subsidiaries is duly qualified as a
foreign entity to do business and is in good standing in every jurisdiction in
which its ownership of property or the nature of the business conducted by it
makes such qualification necessary, except to the extent that the failure to be
so qualified or be in good standing would not have a Material Adverse Effect. As
used in this Agreement, “Material Adverse Effect” means any of (i) a material
and adverse effect on the legality, validity or enforceability of any
Transaction Document (as defined in Section 3(b) below), (ii) a material and
adverse effect on the results of operations, assets, prospects, business or
condition (financial or otherwise) of the Company and the Subsidiaries, taken as
a whole, or (iii) an adverse impairment to the Company’s ability to perform on a
timely basis its obligations under any Transaction Document. The Company has no
Subsidiaries except as set forth on Schedule 3(a).
          (b) Authorization; Enforcement; Validity. The Company has the
requisite power and authority to enter into and perform its obligations under
this Agreement, the Notes, the Registration Rights Agreement, the Security
Documents, the Escrow Agreement, the Irrevocable Transfer Agent Instructions (as
defined in Section 5(b)), the Warrants and each of the other agreements entered
into by the parties hereto in connection with the transactions contemplated by
this Agreement (collectively, the “Transaction Documents”) and to issue the
Securities in accordance with the terms hereof and thereof. The execution and
delivery of the Transaction Documents by the Company and the consummation by the
Company of the transactions contemplated hereby and thereby, including, without
limitation, the issuance of the Notes, the Common Shares and the Warrants, the
reservation for issuance and the issuance of the Conversion Shares issuable upon
conversion or redemption of the Notes, the reservation for issuance and the
issuance of the Interest Shares issuable pursuant to the terms of the Notes and
the reservation for issuance and issuance of Warrant Shares issuable upon
exercise of the Warrants have been duly authorized by the Company’s Board of
Directors and, other than (i) the filing with the SEC of one or more
Registration Statements in accordance with the requirements of the Registration
Rights Agreement, (ii) the filing of a Form D with respect to the Notes and the
Warrants as required under Regulation D, (iii) such filings as are required by
the Principal Market (as defined below), which will be made prior to each
Closing, (iv) such filings required under applicable securities or “Blue Sky”
laws of the states of the United States and (v) the Stockholder Approval as
contemplated in Section 4(q) (all of the foregoing, the “Required Approvals”),
no further filing, consent, or authorization is required by the Company or of
its Board of Directors or its stockholders to enter into the Transaction
Documents and consummate the transactions contemplated by the Transaction
Documents, including, without limitation, the issuance of the Notes, the Common
Shares and the Warrants, the reservation for issuance and the issuance of the
Conversion Shares issuable upon conversion or redemption of the Notes, the
reservation for issuance and the issuance of the Interest Shares issuable
pursuant to the terms of the Notes and the reservation for issuance and issuance
of Warrant Shares issuable upon exercise of the Warrants. This Agreement and the
other Transaction Documents of even date herewith have been duly executed and
delivered by the Company and constitute the legal, valid and binding obligations
of the Company enforceable against the Company in accordance with their
respective terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation or similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights and remedies. Any of the Transaction
Documents dated after the date hereof, upon execution and delivery, will have
been duly executed and, when delivered by the Company, will constitute the
legal, valid and binding obligations of the Company, enforceable, subject to the
Required Approvals against the Company in accordance with their respective
terms, except as such enforceability may be limited by general principles of
equity or applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally, the enforcement
of applicable creditors’ rights and remedies.

 

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          (c) Issuance of Securities. The issuance of the Notes, the Common
Shares and the Warrants are (or were, as applicable) duly authorized and are
free from all taxes, liens and charges with respect to the issue thereof and,
upon the Company’s receipt of the applicable consideration therefor, the Common
Shares are fully paid and nonassessable. As of the Initial Closing, the Company
shall have reserved from its duly authorized capital stock not less than the sum
of 120% of the maximum number of shares of Common Stock (A) issuable upon
conversion of the Notes issuable at such Closing and issued at any prior Closing
(assuming for purposes hereof, that the Notes are convertible at the initial
Conversion Price and without taking into account any limitations on the
conversion of the Notes set forth in the Notes and assuming such conversion
occurred at such Closing), (B) issuable as Interest Shares pursuant to the terms
of the Notes and (C) issuable upon exercise of the Warrants (without taking into
account any limitations on the exercise of the Warrants set forth in the
Warrants and assuming such exercise occurred at such Closing). Upon issuance or
conversion and payment of all consideration then due from the holder in respect
thereof in accordance with the terms thereof, in accordance with the Notes or
exercise in accordance with the Warrants, as the case may be, the Conversion
Shares, the Interest Shares and the Warrant Shares, respectively, will be
validly issued, fully paid and nonassessable and free from all preemptive or
similar rights, taxes, liens and charges with respect to the issue thereof, with
the holders being entitled to all rights accorded to a holder of Common Stock.
Based in part upon the accuracy of the representations and warranties of the
Buyers’ set forth in Article 2, the offer and issuance by the Company of the
Notes, Warrants, the Interest Shares, the Common Shares, the Conversion Shares
and the Warrant Shares (when issued) are exempt from registration under the 1933
Act.
          (d) No Conflicts. Subject to the Required Approvals, the execution,
delivery and performance of the Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
(including, without limitation, the issuance of the Notes, the Common Shares and
the Warrants and reservation for issuance and issuance of the Conversion Shares,
the Interest Shares and the Warrant Shares) will not (i) result in a violation
of the Articles of Incorporation, any capital stock of the Company or any of its
Subsidiaries, the bylaws or any of the organizational documents of the Company
or any of its Subsidiaries or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its Subsidiaries is a party, or (iii) result in a violation of any law,
rule, regulation, order, judgment or decree (including federal and state
securities laws and regulations and the rules and regulations of the American
Stock Exchange (the “Principal Market”)) applicable to the Company or any of its
Subsidiaries or by which any property or asset of the Company or any of its
Subsidiaries is bound or affected; except in the case of each of clauses
(ii) and (iii), such as would not, individually or in the aggregate, have or
reasonably be expected to result in a Material Adverse Effect.
          (e) Consents. Other than the Required Approvals, neither the Company
nor any of its Subsidiaries is required to obtain any consent, authorization or
order of, or make any filing or registration with, any court, governmental
agency or any regulatory or self-regulatory agency or any other Person in order
for it to execute, deliver or perform any of its obligations under or
contemplated by the Transaction Documents, in each case in accordance with the
terms hereof or thereof. All consents, authorizations, orders, filings and
registrations (which the Company is required to obtain pursuant to the preceding
sentence) have been obtained or effected, or will have been obtained or
effected, on or prior to the Initial Closing Date, and the Company and its
Subsidiaries are unaware of any facts or circumstances that might prevent the
Company from obtaining or effecting any of the registration, application or
filings pursuant to the preceding sentence. Except as described in
Schedule 3(e), the Company is not in violation of the listing requirements of
the Principal Market and has no knowledge of any facts that would reasonably
lead to delisting or suspension of the Common Stock in the foreseeable future.

 

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          (f) Acknowledgment Regarding Buyer’s Purchase of Securities. The
Company acknowledges and agrees that each Buyer is acting solely in the capacity
of arm’s length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby and that no Buyer is (i) an officer
or director of the Company, (ii) to the Company’s knowledge, an “affiliate” of
the Company or any of its Subsidiaries (as defined in Rule 144 under the 1933
Act) or (iii) to the knowledge of the Company, a “beneficial owner” of more than
10% of the shares of Common Stock (as defined for purposes of Rule 13d-3 of the
1934 Act). The Company further acknowledges that no Buyer is acting as a
financial advisor or fiduciary of the Company or any of its Subsidiaries (or in
any similar capacity) with respect to the Transaction Documents and the
transactions contemplated hereby and thereby, and any advice given by a Buyer or
any of its representatives or agents in connection with the Transaction
Documents and the transactions contemplated hereby and thereby is merely
incidental to such Buyer’s purchase of the Securities. The Company further
represents to each Buyer that the Company’s decision to enter into the
Transaction Documents has been based solely on the independent evaluation by the
Company and its representatives.
          (g) No General Solicitation; Placement Agent’s Fees. Neither the
Company, nor any of its Subsidiaries or affiliates, nor any Person acting on its
or their behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D) in connection with the offer or
sale of the Securities. The Company shall be responsible for the payment of any
placement agent’s fees, financial advisory fees, or brokers’ commissions (other
than for Persons engaged by any Buyer or its investment advisor) relating to or
arising out of the transactions contemplated hereby.
          (h) No Integrated Offering. None of the Company, its Subsidiaries, any
of their affiliates, or any Person acting on 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 require registration of any of
the Securities under the 1933 Act or cause this offering of the Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable stockholder approval provisions, including, without limitation,
under the rules and regulations of the Principal Market such that the
representation set forth in the last sentence of either Section 3(c) or
Section 3(d)(iii) would not be accurate. None of the Company, its Subsidiaries,
their affiliates or any Person acting on their behalf will take any action or
steps referred to in the preceding sentence that would require registration
under the 1933 Act of any of the Securities to be issued by the Company at such
Closing prior to such issuance or cause the offering of the Securities to be
integrated with other offerings.
          (i) Dilutive Effect. The Company understands and acknowledges that the
number of Conversion Shares issuable upon conversion or redemption of the Notes
and the Warrant Shares issuable upon exercise of the Warrants will increase in
certain circumstances. The Company further acknowledges that its obligation to
issue Conversion Shares upon conversion or redemption of the Notes in accordance
with this Agreement and the Notes and its obligation to issue the Warrant Shares
upon exercise of the Warrants in accordance with this Agreement and the Warrants
is, in each case, absolute and unconditional regardless of the dilutive effect
that such issuance may have on the ownership interests of other stockholders of
the Company.
          (j) Application of Takeover Protections; Rights Agreement. 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 Articles of Incorporation or the laws of the
jurisdiction of its incorporation which is or would become applicable to any
Buyer as a result of the transactions contemplated by this Agreement, including,
without limitation, the Company’s issuance of the Securities and any Buyer’s
ownership of the Securities. Except as set forth on Schedule 3(j), the Company
has not adopted a stockholder rights plan or similar arrangement relating to
accumulations of beneficial ownership of Common Stock or a change in control of
the Company.

 

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          (k) SEC Documents; Financial Statements. During the two (2) years
prior to the date hereof, the Company has filed all reports, schedules, forms,
statements and other documents required to be filed by it with the SEC pursuant
to the reporting requirements of the 1934 Act (all of the foregoing filed prior
to the date hereof and all exhibits included therein and financial statements,
notes and schedules thereto and documents incorporated by reference therein
being hereinafter referred to as the “SEC Documents”). The Company has delivered
to the Buyers or their respective representatives true, correct and complete
copies of the SEC Documents not available on the EDGAR system. As of their
respective dates, the SEC Documents complied in all material respects with the
requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, 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. As of
their respective dates, the financial statements of the Company included in the
SEC Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied, during the
periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto, or (ii) in the case of unaudited interim
statements, to the extent they may exclude footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments). No other
information provided by or on behalf of the Company to the Buyers which is not
included in the SEC Documents, including, without limitation, information
referred to in Section 2(d) of this Agreement, contains any untrue statement of
a material fact or omits to state any material fact necessary in order to make
the statements therein, in the light of the circumstance under which they are or
were made, not misleading. The provisions of this Section 3(k) are qualified in
their entirety by the disclosure set forth on Schedule 3(k).
          (l) Absence of Certain Changes. Since the time the Company’s most
recently filed audited financial statements contained in a Form 10-K were filed,
there has been no material adverse change and no material adverse development in
the business, properties, operations, condition (financial or otherwise),
results of operations or prospects of the Company and the Subsidiaries
(excluding News/Sports Microwave Rental, Inc., Titan Systems, Inc., SeaSpace
Corporation, MECAR USA, Inc., and Global Microwave Systems, Inc.), taken as a
whole. Since the time the Company’s most recently filed audited financial
statements contained in a Form 10-K were filed, neither the Company nor any of
its Subsidiaries has (i) declared or paid any dividends, (ii) sold any assets,
individually or in the aggregate, in excess of $200,000 outside of the ordinary
course of business or (iii) capital expenditures, in the aggregate, have not
exceeded $3,200,000. The Company has no knowledge or reason to believe that its
creditors intend to initiate involuntary bankruptcy proceedings or any actual
knowledge of any fact that would reasonably lead a creditor to do so. The
Company and its Subsidiaries, on a consolidated basis, are not as of the date
hereof (following the closing of the Transaction Documents), and after giving
effect to the transactions contemplated hereby to occur at the applicable
Closing, will not be Insolvent (as defined below). For purposes of this Section
3(l), “Insolvent” means, with respect to the Company and its Subsidiaries on a
consolidated basis (the “Corporate Group”), (i) the present fair saleable value
of the Corporate Group’s assets is less than the amount required to pay the
Corporate Group’s total Indebtedness (as defined in Section 3(s)), (ii) the
Corporate Group is unable to pay its debts and liabilities, subordinated,
contingent or otherwise, as such debts and liabilities become absolute and
matured, (iii) the Corporate Group intends to incur or believes that it will
incur debts that would be beyond its ability to pay as such debts mature or
(iv) the Corporate Group has unreasonably small capital with which to conduct
the business in which it is engaged as such business is now conducted and is
proposed to be conducted.
          (m) No Undisclosed Events, Liabilities, Developments or Circumstances.
No event, liability, development or circumstance 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 on a registration
statement on Form S-1 filed with the SEC relating to an issuance and sale by the
Company of its Common Stock and which has not been publicly announced.

 

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          (n) Conduct of Business; Regulatory Permits. Neither the Company nor
its Subsidiaries is in violation of any term of or in default under its Articles
of Incorporation or Bylaws or their organizational charter or certificate of
incorporation or bylaws, respectively. Neither the Company nor any of its
Subsidiaries is in violation of any judgment, decree or order or any law,
statute, ordinance, rule or regulation applicable to the Company or its
Subsidiaries, and neither the Company nor any of its Subsidiaries will conduct
its business in violation of any of the foregoing, except for possible
violations that would not, individually or in the aggregate, have a Material
Adverse Effect. Without limiting the generality of the foregoing, except as set
forth in Schedule 3(n), the Company is not in violation of any of the rules,
regulations or requirements of the Principal Market and has no knowledge of any
facts or circumstances that would reasonably lead to delisting or suspension of
the Common Stock by the Principal Market in the foreseeable future. During the
two (2) years prior to the date hereof, (i) the Common Stock have been
designated for quotation on the Principal Market, (ii) trading in the Common
Stock has not been suspended by the SEC or the Principal Market and (iii) except
as set forth in Schedule 3(n), the Company has received no communication,
written or oral, from the SEC or the Principal Market regarding the suspension
or delisting of the Common Stock from the Principal Market. The Company and its
Subsidiaries possess all certificates, authorizations and permits issued by the
appropriate regulatory authorities necessary to conduct their respective
businesses, except where the failure to possess such certificates,
authorizations or permits would not have, individually or in the aggregate, a
Material Adverse Effect, and neither the Company nor any such Subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit.
          (o) Foreign Corrupt Practices. Neither the Company, nor any of its
Subsidiaries, nor any director, officer, agent, employee or other Person acting
on behalf of the Company or any of its Subsidiaries has, in the course of its
actions for, or on behalf of, the Company or any of its Subsidiaries (i) used
any corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity; (ii) made any direct or
indirect unlawful payment to any foreign or domestic government official or
employee from corporate funds; (iii) violated or is in violation of any
provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or
(iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or
other unlawful payment to any foreign or domestic government official or
employee.
          (p) Sarbanes-Oxley Act. The Company is in material compliance with any
and all applicable requirements of the Sarbanes-Oxley Act of 2002 that are
effective as of the date hereof, and any and all applicable rules and
regulations promulgated by the SEC thereunder that are effective as of the date
hereof.
          (q) Transactions With Affiliates. Except as set forth in the SEC
Documents filed at least ten days prior to the date hereof and other than the
grant of stock options disclosed on Schedule 3(q), none of the officers,
directors or employees of the Company or any of its Subsidiaries is presently a
party to any transaction with the Company or any of its Subsidiaries (other than
for ordinary course services as employees, officers or 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 such officer, director or
employee or, to the knowledge of the Company or any of its Subsidiaries, any
corporation, partnership, trust or other entity in which any such officer,
director, or employee has a substantial interest or is an officer, director,
trustee or partner.

 

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          (r) Equity Capitalization. As of the date hereof, the authorized
capital stock of the Company consists of (i) 30,000,000 shares of Common Stock,
of which as of the date hereof, 6,473,635 are issued and outstanding, 980,836
shares are reserved for issuance pursuant to the Company’s stock option and
purchase plans and 70,000 shares are reserved for issuance pursuant to
securities (other than the Original Notes, the Notes and the Warrants)
exercisable or exchangeable for, or convertible into, shares of Common Stock and
(ii) 1,000,000 shares of undesignated preferred stock, no par value, of which as
of the date hereof none of which is issued and outstanding or reserved for
issuance. All of such outstanding shares have been, or upon issuance will be,
validly issued and are fully paid and nonassessable. Except as disclosed in
Schedule 3(r): (i) none of the Company’s capital stock is subject to preemptive
rights or any other similar rights or any liens or encumbrances suffered or
permitted by the Company; (ii) there are no outstanding options, warrants,
scrip, rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, or exercisable or
exchangeable for, any capital stock of the Company or any of its Subsidiaries,
or contracts, commitments, understandings or arrangements by which the Company
or any of its Subsidiaries is or may become bound to issue additional capital
stock of the Company or any of its Subsidiaries or options, warrants, scrip,
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, or exercisable or
exchangeable for, any capital stock of the Company or any of its Subsidiaries;
(iii) there are no outstanding debt securities, notes, credit agreements, credit
facilities or other agreements, documents or instruments evidencing Indebtedness
(as defined in Section 3(s)) of the Company or any of its Subsidiaries or by
which the Company or any of its Subsidiaries is or may become bound; (iv) there
are no financing statements securing obligations in any material amounts, either
singly or in the aggregate, filed in connection with the Company or any of its
Subsidiaries; (v) there are no agreements or arrangements under which the
Company or any of its Subsidiaries is obligated to register the sale of any of
their securities under the 1933 Act (except pursuant to the Registration Rights
Agreement); (vi) there are no outstanding securities or instruments of the
Company or any of its Subsidiaries which contain any redemption or similar
provisions, and there are no contracts, commitments, understandings or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to redeem a security of the Company or any of its Subsidiaries;
(vii) there are no securities or instruments containing anti-dilution or similar
provisions that will be triggered by the issuance of the Securities; (viii) the
Company does not have any stock appreciation rights or “phantom stock” plans or
agreements or any similar plan or agreement; and (ix) the Company and its
Subsidiaries have no liabilities or obligations required to be disclosed in the
SEC Documents but not so disclosed in the SEC Documents, other than those
incurred in the ordinary course of the Company’s or its Subsidiaries’ respective
businesses and which, individually or in the aggregate, do not or would not
reasonably be expected to have a Material Adverse Effect. The Company has made
available to the Buyer true, correct and complete copies of the Company’s
Certificate of Incorporation, as amended and as in effect on the date hereof
(the “Articles of Incorporation”), and the Company’s Bylaws, as amended and as
in effect on the date hereof (the “Bylaws”), and the terms of all securities
convertible into, or exercisable or exchangeable for, shares of Common Stock and
the material rights of the holders thereof in respect thereto.
          (s) Indebtedness and Other Contracts. Except as disclosed in
Schedule 3(s), neither the Company nor any of its Subsidiaries (i) has any
outstanding Indebtedness (as defined below), (ii) is a party to any contract,
agreement or instrument, the violation of which, or default under which, by the
other party(ies) to such contract, agreement or instrument would reasonably be
expected to result in a Material Adverse Effect, (iii) is in violation of any
term of or in default under any contract, agreement or instrument relating to
any Indebtedness, except where such violations and defaults would not result,
individually or in the aggregate, in a Material Adverse Effect, or (iv) is a
party to any contract, agreement or instrument relating to any Indebtedness, the
performance of which, in the judgment of the Company’s officers, has or is
expected to have a Material Adverse Effect. Schedule 3(s) provides a description
of the material terms of any such outstanding Indebtedness. For purposes of this
Agreement: (x) “Indebtedness” of any Person means, without duplication (A) all
indebtedness for borrowed money, (B) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services, including
(without limitation) “capital leases” in accordance with generally accepted
accounting principles (other than trade payables entered into in the ordinary
course of business), (C) all reimbursement or payment obligations with respect
to letters of credit, surety bonds and other similar instruments, (D) all
obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (E) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (F) all monetary obligations under any
leasing or similar arrangement which, in connection with generally accepted
accounting principles, consistently applied for the periods covered thereby, is
classified as a capital lease, (G) all indebtedness referred to in clauses
(A) through (F) above secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any Person,
even though the Person which owns such assets or property has not assumed or
become liable for the payment of such indebtedness, and (H) all Contingent
Obligations in respect of indebtedness or obligations of others of the kinds
referred to in clauses (A) through (G) above; (y) “Contingent Obligation” means,
as to any Person, any direct or indirect liability, contingent or otherwise, of
that Person with respect to any indebtedness, lease, dividend or other
obligation of another Person if the primary purpose or intent of the Person
incurring such liability, or the primary effect thereof, is to provide assurance
to the obligee of such liability that such liability will be paid or discharged,
or that any agreements relating thereto will be complied with, or that the
holders of such liability will be protected (in whole or in part) against loss
with respect thereto; and (z) “Person” means an individual, a limited liability
company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization and a government or any department or agency
thereof.

 

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          (t) Absence of Litigation. Except as set forth in Schedule 3(t), there
is no action, suit, proceeding, inquiry or investigation before or by the
Principal Market, any court, public board, government agency, self-regulatory
organization or body pending or, to the knowledge of the Company, threatened
against or affecting the Company or any of its Subsidiaries, the Common Stock or
any of the Company’s Subsidiaries or any of the Company’s or its Subsidiaries’
officers or directors in their capacities as such, which would, individually or
in the aggregate, reasonably be expected to have a Material Adverse Effect.
          (u) Insurance. The Company and each of its Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company and its Subsidiaries are
engaged. Neither the Company nor any such Subsidiary, during the prior two
years, has been refused any insurance coverage sought or applied for and neither
the Company nor any such 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 at a cost that would not materially exceed market costs
for similar businesses to the Company.
          (v) Employee Relations. (i) Except as set forth in Schedule 3(v),
neither the Company nor any of its Subsidiaries is a party to any collective
bargaining agreement or employs any member of a union. Except as set forth in
Schedule 3(v), the Company and its Subsidiaries believe that their relations
with their employees are good. Except as set forth in Schedule 3(v), no
executive officer of the Company or any of its Subsidiaries (as defined in Rule
501(f) of the 1933 Act) has notified the Company or any such Subsidiary that
such officer intends to leave the Company or any such Subsidiary or otherwise
terminate such officer’s employment with the Company or any such Subsidiary. No
executive officer of the Company or any of its Subsidiaries, is, or is now
expected to be, in violation of any material term of any employment contract,
confidentiality, disclosure or proprietary information agreement,
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.
               (ii) The Company and its Subsidiaries are in compliance with all
federal, state, local and foreign laws and regulations respecting labor,
employment and employment practices and benefits, terms and conditions of
employment and wages and hours, except where failure to be in compliance would
not, either individually or in the aggregate, reasonably be expected to result
in a Material Adverse Effect.
          (w) Title. The Company and its Subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the Company
and its Subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such as do not materially affect the value of such property and
do not interfere with the use made and proposed to be made of such property by
the Company and any of its Subsidiaries. Any real property and facilities held
under lease by the Company or any of its Subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
property and buildings by the Company and its Subsidiaries.

 

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          (x) Intellectual Property Rights. The Company and its Subsidiaries own
or possess adequate rights or licenses to use all trademarks, service marks and
all applications and registrations therefor, trade names, patents, patent
rights, copyrights, original works of authorship, inventions, trade secrets,
licenses, approvals, governmental authorizations and other intellectual property
rights (“Intellectual Property Rights”) necessary to conduct their respective
businesses as now conducted. None of the Company’s or its Subsidiaries’
Intellectual Property Rights have expired, terminated or have been abandoned, or
are expected to expire, terminate or be abandoned, within three years from the
date of this Agreement. The Company does not have any knowledge of any
infringement by the Company or any of its Subsidiaries of Intellectual Property
Rights of others. There is no claim, action or proceeding being made or brought,
or to the knowledge of the Company, being threatened against the Company or any
of its Subsidiaries regarding its Intellectual Property Rights. Neither the
Company nor any of its Subsidiaries is aware of any facts or circumstances which
might give rise to any of the foregoing infringements or claims, actions or
proceedings. The Company and its Subsidiaries have taken reasonable security
measures to protect the secrecy, confidentiality and value of all of their
Intellectual Property Rights.
          (y) Environmental Laws. The Company and its Subsidiaries (i) are in
compliance with any and all Environmental Laws (as hereinafter defined),
(ii) have received all permits, licenses or other approvals required of them
under applicable Environmental Laws to conduct their respective businesses and
(iii) are in compliance with all terms and conditions of any such permit,
license or approval where, in each of the foregoing clauses (i), (ii) and (iii),
the failure to so comply would be reasonably expected to have, individually or
in the aggregate, a Material Adverse Effect. The term “Environmental Laws” means
all federal, state, local or foreign laws relating to pollution or protection of
human health or the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata), including,
without limitation, laws relating to emissions, discharges, releases or
threatened releases of chemicals, pollutants, contaminants, or toxic or
hazardous substances or wastes (collectively, “Hazardous Materials”) into the
environment, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous Materials,
as well as all authorizations, codes, decrees, demands or demand letters,
injunctions, judgments, licenses, notices or notice letters, orders, permits,
plans or regulations issued, entered, promulgated or approved thereunder.
          (z) Subsidiary Rights. Except as set forth in Schedule 3(z), the
Company or one of its Subsidiaries has the unrestricted right to vote, and
(subject to limitations imposed by applicable law) to receive dividends and
distributions on, all capital securities of its Subsidiaries as owned by the
Company or such Subsidiary.
          (aa) Tax Status. Except as set forth in Schedule 3(aa), the Company
and each of its Subsidiaries (i) has made or filed all foreign, federal and
state income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject, (ii) has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and (iii) has set aside on its books provision
reasonably adequate for the payment of all taxes for periods subsequent to the
periods to which such returns, reports or declarations apply. There are no
unpaid taxes in any material amount claimed to be due by the taxing authority of
any jurisdiction, and the officers of the Company know of no basis for any such
claim.
          (bb) Internal Accounting and Disclosure Controls. Except as set forth
in Schedule 3(bb), the Company and each of its Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management’s general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset and liability accountability,
(iii) access to assets or incurrence of liabilities is permitted only in
accordance with management’s general or specific authorization and (iv) the
recorded accountability for assets and liabilities is compared with the existing
assets and liabilities at reasonable intervals and appropriate action is taken
with respect to any difference. The Company maintains disclosure controls and
procedures (as such term is defined in Rule 13a-14 under the 1934 Act) that are
effective in ensuring that information required to be disclosed by the Company
in the reports that it files or submits under the 1934 Act is recorded,
processed, summarized and reported, within the time periods specified in the
rules and forms of the SEC, including, without limitation, controls and
procedures designed in to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the 1934 Act is
accumulated and communicated to the Company’s management, including its
principal executive officer or officers and its principal financial officer or
officers, as appropriate, to allow timely decisions regarding required
disclosure.

 

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          (cc) Off Balance Sheet Arrangements. There is no transaction,
arrangement, or other relationship between the Company and an unconsolidated or
other off balance sheet entity that is required to be disclosed by the Company
in its 1934 Act filings and is not so disclosed or that otherwise would be
reasonably likely to have a Material Adverse Effect.
          (dd) Ranking of Notes. Except as set forth in Schedule 3(dd) or as
otherwise permitted in the Transaction Documents, no Indebtedness of the Company
is senior to or ranks pari passu with the Notes in right of payment, whether
with respect of payment of redemptions, interest, damages or upon liquidation or
dissolution or otherwise.
          (ee) Transfer Taxes. On the applicable Closing Date, all stock
transfer or other taxes (other than income or similar taxes) which are required
to be paid in connection with the sale and transfer of the Securities to be sold
to each Buyer hereunder will be, or will have been, fully paid or provided for
by the Company, and all laws imposing such taxes will be or will have been
complied with.
          (ff) Acknowledgement Regarding Buyers’ Trading Activity. Except as set
forth in the Transaction Documents, it is understood and acknowledged by the
Company (i) that following the public disclosure of the transactions
contemplated by the Transaction Documents in accordance with the terms hereof,
none of the Buyers have been asked to agree, nor has any Buyer agreed, to desist
from purchasing or selling, long and/or short, securities of the Company, or
“derivative” securities based on securities issued by the Company or to hold the
Securities for any specified term; (ii) that any Buyer, and counter parties in
“derivative” transactions to which any such Buyer is a party, directly or
indirectly, which were established prior to their learning of the transactions
contemplated by the Transaction Documents, presently may have a “short” position
in the Common Stock, and (iii) that each Buyer shall not be deemed to have any
affiliation with or control over any arm’s length counter-party in any
“derivative” transaction. The Company further understands and acknowledges that
following the public disclosure of the transactions contemplated by the
Transaction Documents in accordance with the terms hereof, one or more Buyers
may engage in hedging and/or trading activities at various times during the
period that the Securities are outstanding and (b) such hedging and/or trading
activities, if any, can reduce the value of the existing stockholders’ equity
interest in the Company both at and after the time the hedging and/or trading
activities are being conducted. The Company acknowledges that such
aforementioned hedging and/or trading activities do not constitute a breach of
this Agreement, the Notes, the Warrants or any of the documents executed in
connection herewith.
          (gg) Form S-1 Eligibility. The Company is currently eligible to
register the Conversion Shares, the Interest Shares and the Warrant Shares for
resale by the Buyers using Form S-1 promulgated under the 1933 Act.
          (hh) Manipulation of Price. 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.
          (ii) Investment Company Status. The Company is not, and upon
consummation of the sale of the Securities will not be, an “investment company,”
a company controlled by an “investment company” or an “affiliated person” of, or
“promoter” or “principal underwriter” for, an “investment company” as such terms
are defined in the Investment Company Act of 1940, as amended.

 

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          (jj) U.S. Real Property Holding Corporation. The Company is not, nor
has ever been, a U.S. real property holding corporation within the meaning of
Section 897 of the Internal Revenue Code of 1986, as amended, and the Company
shall so certify upon Buyer’s request.
          (kk) Disclosure. The Company confirms that neither it nor any other
Person acting on its behalf has provided any of the Buyers or their agents or
counsel with any information that constitutes or would reasonably be expected to
constitute material, nonpublic information, except to the extent that the
knowledge of the transactions contemplated by the Transaction Documents may
constitute such information. The Company understands and confirms that each of
the Buyers will rely on the foregoing representations in effecting transactions
in the Securities. All disclosures provided to the Buyers regarding the Company
and its Subsidiaries, their business and the transactions contemplated hereby,
including the Schedules to this Agreement, furnished by or on behalf of the
Company are true and correct and do not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading. Each press release issued by the Company or its
Subsidiaries during the twelve (12) months preceding the date of this Agreement
did not at the time of release contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. No event or circumstance has occurred or
information exists with respect to the Company or any of its Subsidiaries or its
or their business, properties, prospects, operations or financial conditions,
which, under applicable law, rule or regulation, requires public disclosure or
announcement by the Company but which has not been so publicly announced or
disclosed.
          (ll) No Event of Default. The Company represents and warrants that
after giving effect to the terms of this Agreement, no Default or Event of
Default (as defined in the Notes) shall have occurred and be continuing as of
the time immediately following the applicable Closing Date.
     4. COVENANTS.
          (a) Best Efforts. Each party shall use its best efforts timely to
satisfy each of the conditions to be satisfied by it as provided in Sections 6
and 7 of this Agreement.
          (b) Form D and Blue Sky. The Company agrees to file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof to each Buyer promptly after such filing. The Company shall, on or
before each Closing Date, 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 Buyers at each Closing pursuant to this Agreement
under applicable securities or “Blue Sky” laws of the states of the United
States (or to obtain an exemption from such qualification), and shall provide
evidence of any such action so taken to the Buyers on or prior to each Closing
Date. The Company shall make all filings and reports relating to the offer and
sale of the Securities required under applicable securities or “Blue Sky” laws
of the states of the United States following each Closing Date.
          (c) Reporting Status. Except as set forth in Schedule 4(c), until the
date on which the Buyers shall have sold all the Conversion Shares, the Common
Shares, the Interest Shares and Warrant Shares and none of the Notes or Warrants
is outstanding (the “Reporting Period”), the Company shall timely file all
reports required to be filed with the SEC pursuant to the 1934 Act, and the
Company shall continue to timely file reports under the 1934 Act even if the
1934 Act or the rules and regulations thereunder would otherwise no longer
require such filings.
          (d) Use of Proceeds. The Company and its subsidiaries will use the
proceeds from the sale of the Securities for (A) professional fees and costs and
restructuring fees and costs, and (B) working capital purposes (including
payment of accounts payable), and except as set forth herein and in
Schedule 4(d), not for the (i) repayment of any other outstanding Indebtedness
of the Company or any of its Subsidiaries or (ii) redemption or repurchase of
any of its equity securities.

 

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          (e) Financial Information. The Company agrees to send the following to
each Investor (as defined in the Registration Rights Agreement) during the
Reporting Period (i) unless the following are filed with the SEC through EDGAR
and are available to the public through the EDGAR system, within one
(1) Business Day after the filing thereof with the SEC, a copy of its Annual
Reports and Quarterly Reports on Form 10-K, 10-KSB, 10-Q or 10-QSB, any interim
reports or any consolidated balance sheets, income statements, stockholders’
equity statements and/or cash flow statements for any period other than annual,
any Current Reports on Form 8-K and any registration statements (other than on
Form S-8) or amendments filed pursuant to the 1933 Act, (ii) on the same day as
the release thereof, facsimile copies of all press releases issued by the
Company or any of its Subsidiaries, which are attached to a Current Report on
Form 8-K, and (iii) copies of any notices and other information made available
or given to the stockholders of the Company generally, contemporaneously with
the making available or giving thereof to the stockholders. As used herein
“Business Day” means any other day other than a Saturday, Sunday, or other day
on which commercial banks in The City of New York are authorized or required by
law to remain closed.
          (f) Listing. The Company shall as promptly as permitted by the
Principal Market secure the listing of all of the Registrable Securities (as
defined in the Registration Rights Agreement) upon each national securities
exchange and automated quotation system, if any, upon which the Common Stock is
then listed (subject to official notice of issuance) and shall maintain such
listing of all Registrable Securities from time to time issuable under the terms
of the Transaction Documents. The Company shall use its best efforts to maintain
the authorization of the Common Stock for quotation on the Principal Market.
Neither the Company nor any of its Subsidiaries shall take any action which
would be reasonably expected to result in the delisting or suspension of the
Common Stock on the Principal Market; provided, however, that the Company makes
no covenant regarding the trading price of the Common Stock. The Company shall
pay all fees and expenses in connection with satisfying its obligations under
this Section 4(f).
          (g) Fees. Subject to Section 8 below, at each Closing, the Company
shall pay (i) an expense allowance to Kings Road Investments Ltd. (a Buyer) or
its designee(s) to cover the reasonable fees and expenses reasonably incurred by
Kings Road Investments Ltd. or any professionals engaged by Kings Road
Investments Ltd. in relation to due diligence, investment documentation and
enforcement of the Transaction Documents and the Transaction Documents (as
defined in the Original Securities Purchase Agreement) (less any other expense
amounts previously paid to Schulte Roth & Zabel LLP) (the “SRZ Legal Counsel Fee
Amount”), which amount may be withheld by such Buyer from its Purchase Price at
each Closing; provided, however that any fees and expenses with respect to any
litigation including in the SRZ Legal Counsel Fee Amount shall not exceed
$150,000 in the aggregate and (ii) an expense allowance to Castlerigg Master
Investments Ltd. (a Buyer) or its designee(s) to cover the reasonable fees and
expenses reasonably incurred by Castlerigg Master Investments Ltd. or any
professionals engaged by Castlerigg Master Investments Ltd. in relation to due
diligence, investment documentation and enforcement of the Transaction Documents
and the Transaction Documents (as defined in the Original Securities Purchase
Agreement) (less any other expense amounts previously paid to McDermott Will &
Emery LLP) (the “MWE Legal Counsel Fee Amount”, and together with the SRZ Legal
Counsel Fee Amount, the “Legal Counsel Fee Amount”), which amount may be
withheld by such Buyer from its Purchase Price at each Closing; provided,
however that any fees and expenses with respect to any litigation including in
the MWE Legal Counsel Fee Amount shall not exceed $50,000 in the aggregate. The
Company shall be responsible for the payment of any placement agent’s fees,
financial advisory fees, or broker’s commissions (other than for Persons engaged
by any Buyer) (collectively, “Possible Placement Fees”) relating to or arising
out of the transactions contemplated hereby. The Company shall pay, and hold
each Buyer harmless against, any liability, loss or expense (including, without
limitation, reasonable attorney’s fees and out-of-pocket expenses) arising in
connection with any claim relating to any such Possible Placement Fees. Except
as otherwise set forth in the Transaction Documents, each party to this
Agreement shall bear its own expenses in connection with the sale of the
Securities to the Buyers.

 

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          (h) Pledge of Securities. The Company acknowledges and agrees that the
Securities may be pledged by an Investor (as defined in the Registration Rights
Agreement) in connection with a bona fide margin agreement or other loan or
financing arrangement that is secured by the Securities. The pledge of
Securities shall not be deemed to be a transfer, sale or assignment of the
Securities hereunder, and no Investor effecting a pledge of Securities shall be
required to provide the Company with any notice thereof or otherwise make any
delivery to the Company pursuant to this Agreement or any other Transaction
Document. The Company hereby agrees to execute and deliver such documentation as
a pledgee of the Securities may reasonably request in connection with a pledge
of the Securities to such pledgee by an Investor. No legal opinion of legal
counsel to the pledgee, secured party or pledgor shall be required in connection
with the pledge, but such legal opinion may be required in connection with a
subsequent transfer following default by the Investor transferee of the pledge.
          (i) Disclosure of Transactions and Other Material Information. On or
before 8:30 a.m., New York time, on the first Business Day following the date on
which this Agreement is fully executed and delivered by the Company and all of
the Buyers, the Company shall issue a press release reasonably acceptable to the
Buyers disclosing all material terms of the transactions contemplated hereby. On
or before 8:30 a.m., New York time, on the second Business Day following the
date on which this Agreement is fully executed and delivered by the Company and
all of the Buyers, the Company shall file a Current Report on Form 8-K
describing the terms of the transactions contemplated by the Transaction
Documents in the form required by the 1934 Act and attaching the material
Transaction Documents (including, without limitation, this Agreement (and all
schedules to this Agreement), the form of each of the Notes, the forms of
Security Documents, the form of Escrow Agreement and the Registration Rights
Agreement) as exhibits to such filing (including all attachments, the “Initial
8-K Filing”). On or before 8:30 a.m., New York City Time, on the second Trading
Day following the MECAR Execution Date, the Company shall file a Current Report
on Form 8-K with the SEC describing the transactions contemplated by the MECAR
Contract and attaching the MECAR Certificate (the “MECAR 8-K Filing”). On or
before 8:30 a.m., New York City Time, on the first Trading Day following the
Additional Closing Date, the Company shall file a Current Report on Form 8-K
with the SEC describing the transaction consummated on such date (the
“Additional 8-K Filing,” and together with the Initial 8-K Filing and the MECAR
8-K Filing, the “8-K Filings”). From and after the Initial 8-K Filing with the
SEC, no Buyer shall be in possession of any material, nonpublic information
received from the Company or any of its Subsidiaries or any of its respective
officers, directors, employees or agents, that is not disclosed in the Initial
8-K Filing. The Company shall not, and shall cause each of its Subsidiaries and
its and each of their respective officers, directors, employees and agents, not
to, provide any Buyer with any material, nonpublic information regarding the
Company or any of its Subsidiaries from and after the Initial 8-K Filing with
the SEC without the express written consent of such Buyer. If a Buyer reasonably
believes that the Company or its agents have distributed to it any such
material, nonpublic information regarding the Company or any of its
Subsidiaries, it shall provide the Company with written notice thereof. The
Company shall, within five (5) Trading Days of receipt of such notice, make
public disclosure of such material, nonpublic information. In the event of a
breach of the foregoing covenant by the Company, any of its Subsidiaries, or any
of its or their respective officers, directors, employees and agents, in
addition to any other remedy provided herein or in the Transaction Documents, a
Buyer shall have the right to make a public disclosure, in the form of a press
release, public advertisement or otherwise, of such material, nonpublic
information without the prior approval by the Company, its Subsidiaries, or any
of its or their respective officers, directors, employees or agents. No Buyer
shall have any liability to the Company, its Subsidiaries, or any of its or
their respective officers, directors, employees, stockholders or agents for any
such disclosure. Subject to the foregoing, neither the Company, its Subsidiaries
nor any Buyer shall issue any press releases or any other public statements with
respect to the transactions contemplated hereby; provided, however, that the
Company shall be entitled, without the prior approval of any Buyer, to make any
press release or other public disclosure with respect to such transactions
(i) in substantial conformity with the Initial 8-K Filing and contemporaneously
therewith and (ii) as is required by applicable law and regulations (provided
that in the case of clause (i) each Buyer shall be consulted by the Company in
connection with any such press release or other public disclosure prior to its
release). Without the prior written consent of any applicable Buyer, neither the
Company nor any of its Subsidiaries shall disclose the name of any Buyer in any
filing, announcement or press release, unless such disclosure is required by
law, regulation or the Principal Market (and in such case, the Company shall
have consulted with such Buyer in connection with any such press release or
other public disclosure prior to its release).

 

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          (j) Restriction on Redemption and Dividends; Additional Registration
Statements. So long as any Notes or Warrants are outstanding, the Company shall
not, directly or indirectly, redeem, repurchase or otherwise acquire for value
or declare or pay any dividend or distribution on, the Common Stock without the
prior express written consent of the holders of Notes representing not less than
a majority of the aggregate principal amount of the then outstanding Notes.
Until the Effective Date (as defined in the Registration Rights Agreement), the
Company shall not file a registration statement under the 1933 Act relating to
securities that are not the Securities (other than on Form S-8).
          (k) Other Notes; Variable Securities; Dilutive Issuances. (i) So long
as any Notes remain outstanding, the Company will not issue any Notes (other
than to the Buyers as contemplated hereby) and the Company shall not issue any
other securities that would cause a breach or default under the Notes. For so
long as any Notes or Warrants remain outstanding, the Company shall not, in any
manner, issue or sell any rights, warrants or options to subscribe for or
purchase Common Stock or directly or indirectly convertible into or exchangeable
or exercisable for Common Stock at a price which varies or may vary with the
market price of the Common Stock, including by way of one or more reset(s) to
any fixed price unless the conversion, exchange or exercise price of any such
security cannot be less than the then applicable Conversion Price (as defined in
the Notes) with respect to the Common Stock into which any Note is convertible
or the then applicable Exercise Price (as defined in the Warrants) with respect
to the Common Stock into which any Warrant is exercisable. For so long as any
Notes or Warrants remain outstanding, the Company shall not, in any manner,
enter into or affect any Dilutive Issuance (as defined in the Notes) if the
effect of such Dilutive Issuance is to cause the Company to be required to issue
upon conversion of any Note or exercise of any Warrant any shares of Common
Stock in excess of that number of shares of Common Stock which the Company may
issue upon conversion of the Notes and exercise of the Warrants without
breaching the Company’s obligations under the rules or regulations of any
Eligible Market (as defined in the Notes). As of any date, unless either (i) the
Stockholder Approval has been obtained prior to such date and the Equity
Conditions (as defined in the Notes) are satisfied as of such date or (ii) no
Notes or Warrants remain outstanding, the Company shall not, in any manner,
enter into or affect any Dilutive Issuance if the effect of such Dilutive
Issuance would, but for the application of the Conversion Floor Price (as
defined in the Notes) or the Exercise Floor Price (as defined in the Warrant),
as applicable, cause either (i) the Conversion Price (as defined in the Notes)
to be reduced below the Conversion Floor Price or (ii) the Exercise Price (as
defined in the Warrant) to be reduced below the Exercise Floor Price.
               (ii) None of the Company, its Subsidiaries, any of their
affiliates, or any Person acting on their behalf shall, directly or indirectly,
make any offers or sales of any security or solicit any offers to buy any
security, under circumstances that would require registration of any of the
Securities under the 1933 Act or cause this offering of the Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable stockholder approval provisions, including, without limitation,
under the rules and regulations of the Principal Market such that the
representation set forth in the last sentence of either Section 3(c) or
Section 3(d)(iii) would not be accurate as if such representations were made as
of such time.
          (l) Corporate Existence. So long as any Notes are outstanding, the
Company shall not be party to any Fundamental Transaction (as defined in the
Notes) unless the Company is in compliance with the applicable provisions
governing Fundamental Transactions set forth in the Notes and the Warrants.
          (m) Reservation of Shares. The Company shall take all action necessary
to at all times have authorized, and reserved for the purpose of issuance, after
the Initial Closing Date, 120% of the maximum number of shares of Common Stock
(i) issuable upon conversion or redemption of the Notes issuable at such Closing
and issued at any prior Closing (assuming for purposes hereof, that the Notes
are convertible at the initial Conversion Price and without taking into account
any limitations on the conversion of the Notes set forth in the Notes and
assuming such conversion occurred at such Closing), (ii) issuable as Interest
Shares pursuant to the terms of the Notes and (iii) issuable upon exercise of
the Warrants (without taking into account any limitations on the exercise of the
Warrants set forth in the Warrants and assuming such exercise occurred at such
Closing) and (iii) any capital stock of the Company issued or issuable with
respect to the Conversion Shares, the Interest Shares, the Common Shares, the
Notes, the Warrant Shares or the Warrants.

 

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          (n) Conduct of Business. The business of the Company and its
Subsidiaries shall not be conducted in violation of any law, ordinance or
regulation of any governmental entity, except where such violations would not
result, either individually or in the aggregate, in a Material Adverse Effect.
          (o) Additional Issuances of Securities.
               (i) For purposes of this Section 4(o), the following definitions
shall apply.
                    (1) “Convertible Securities” means any stock or securities
(other than Options) convertible into or exercisable or exchangeable for shares
of Common Stock.
                    (2) “Options” means any rights, warrants or options to
subscribe for or purchase shares of Common Stock or Convertible Securities.
                    (3) “Common Share Equivalents” means, collectively, Options
and Convertible Securities.
                    (4) “Subsequent Placement” means any offer, sale, grant,
disposition or announcement by the Company, directly or indirectly, to offer,
sell or grant or any option to purchase, or otherwise dispose of (or announce
any offer, sale, grant or any option to purchase or other disposition of) any of
its or its Subsidiaries’ equity or equity equivalent securities, including,
without limitation, any debt, preferred stock or other instrument or security
that is, at any time during its life and under any circumstances, convertible
into or exchangeable or exercisable for shares of Common Stock or Common Share
Equivalents.
               (ii) As long as any applicable Buyer holds no less than 25% of
the original principal amount of the Notes issued to such Buyer at the Closings,
from the date hereof until the later of (x) the fifteen month anniversary of the
date hereof and (y) the Stockholder Approval Date (as defined below), the
Company will not, directly or indirectly, effect any Subsequent Placement unless
the Company shall have first complied with this Section 4(o)(ii).
                    (1) The Company shall deliver to each such Buyer by
facsimile a written notice (the “Offer Notice”) of any proposed or intended
issuance or sale or exchange (the “Offer”) of the securities being offered (the
“Offered Securities”) in a Subsequent Placement within one Business Day of the
determination of the terms of such Subsequent Placement, which Offer Notice
shall (w) identify and describe the Offered Securities, (x) describe the price
and other final terms upon which they are to be issued, sold or exchanged, and
the number or amount of the Offered Securities to be issued, sold or exchanged,
(y) identify the persons or entities (if known) to which or with which the
Offered Securities are to be offered, issued, sold or exchanged and (z) offer to
issue and sell to or exchange with such Buyers (which offer being
non-transferable to any successor to such Buyer) a pro rata portion of at least
thirty percent (30%) of the Offered Securities allocated among such Buyers
(a) based on such Buyer’s pro rata portion of the aggregate principal amount of
Notes purchased hereunder (the “Basic Amount”), and (b) with respect to each
Buyer that elects to purchase its Basic Amount, any additional portion of the
Offered Securities attributable to the Basic Amounts of other Buyers as such
Buyer shall indicate it will purchase or acquire should the other Buyers
subscribe for less than their Basic Amounts (the “Undersubscription Amount”).

 

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                    (2) To accept an Offer, in whole or in part, such Buyer must
deliver a written notice to the Company prior to the end of the second (2nd)
full Business Day after such Buyer’s receipt of the Offer Notice (for purposes
of this Section 4(a)(iii)(2), notwithstanding the provisions of Section 9(f),
receipt of the Offer Notice shall not be deemed to have occurred until the Buyer
shall have physically received such Offer Notice and until such Offer Notice
contains the final terms of the Offer) (the “Offer Period”), setting forth the
portion of such Buyer’s Basic Amount that such Buyer elects to purchase and, if
such Buyer shall elect to purchase all of its Basic Amount, the
Undersubscription Amount, if any, that such Buyer elects to purchase (in either
case, the “Notice of Acceptance”). If the Basic Amounts subscribed for by all
Buyers are less than the total of all of the Basic Amounts, then each Buyer who
has set forth an Undersubscription Amount in its Notice of Acceptance shall be
entitled to purchase, in addition to the Basic Amounts subscribed for, the
Undersubscription Amount it has subscribed for; provided, however, that if the
Undersubscription Amounts subscribed for exceed the difference between the total
of all the Basic Amounts and the Basic Amounts subscribed for (the “Available
Undersubscription Amount”), each Buyer who has subscribed for any
Undersubscription Amount shall be entitled to purchase only that portion of the
Available Undersubscription Amount as the Basic Amount of such Buyer bears to
the total Basic Amounts of all Buyers that have subscribed for Undersubscription
Amounts, subject to rounding by the Company to the extent it deems reasonably
necessary.
                    (3) The Company shall have ten (10) Business Days from the
expiration of the Offer Period above to offer, issue, sell or exchange all or
any part of such Offered Securities as to which a Notice of Acceptance has not
been given by the Buyers (the “Refused Securities”), but only to the offerees
described in the Offer Notice (if so described therein) and only upon terms and
conditions (including, without limitation, unit prices and interest rates) that
are not more favorable to the acquiring person or persons or less favorable to
the Company than those set forth in the Offer Notice.
                    (4) In the event the Company shall propose to sell less than
all the Refused Securities (any such sale to be in the manner and on the terms
specified in Section 4(o)(ii)(3) above), then each Buyer may, at its sole option
and in its sole discretion, reduce the number or amount of the Offered
Securities specified in its Notice of Acceptance to an amount that shall be not
less than the number or amount of the Offered Securities that such Buyer elected
to purchase pursuant to Section 4(o)(ii)(2) above multiplied by a fraction,
(i) the numerator of which shall be the number or amount of Offered Securities
the Company actually proposes to issue, sell or exchange (including Offered
Securities to be issued or sold to Buyers pursuant to Section 4(o)(ii)(3) above
prior to such reduction) and (ii) the denominator of which shall be the original
amount of the Offered Securities. In the event that any Buyer so elects to
reduce the number or amount of Offered Securities specified in its Notice of
Acceptance, the Company may not issue, sell or exchange more than the reduced
number or amount of the Offered Securities unless and until such securities have
again been offered to the Buyers in accordance with Section 4(o)(ii)(1) above.
                    (5) Upon the closing of the issuance, sale or exchange of
all or less than all of the Refused Securities, the Buyers shall acquire from
the Company, and the Company shall issue to the Buyers, the number or amount of
Offered Securities specified in the Notices of Acceptance, as reduced pursuant
to Section 4(o)(ii)(3) above if the Buyers have so elected, upon the terms and
conditions specified in the Offer. The purchase by the Buyers of any Offered
Securities is subject in all cases to (i) the preparation, execution and
delivery by the Company and the Buyers of a purchase agreement relating to such
Offered Securities reasonably satisfactory in form and substance to the Buyers
and their respective counsel, (ii) the Buyers’ satisfaction, in their sole
discretion, with the final terms and/or conditions that differ from those
contained in the Offer Notice, and (iii) the Buyers’ reasonable satisfaction
with the identity of the other persons or entities to which the Offered
Securities will be sold.
                    (6) Any Offered Securities not acquired by the Buyers or
other persons in accordance with this Section 4(o)(ii) may not be issued, sold
or exchanged until they are again offered to the Buyers under the procedures
specified in this Agreement.
               (iii) The restrictions contained in subsection (ii) of this
Section 4(o) shall not apply in connection with the issuance of any Excluded
Securities (as defined in the Notes).
          (p) Holding Period. For the purposes of Rule 144, the Company
acknowledges that under current regulations, the holding period of the
Conversion Shares may be tacked onto the holding period of the Notes (unless the
holder thereof is an affiliate of the Company) and the Company agrees not to
take a position contrary to this Section 4(p).

 

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          (q) Stockholder Approval. The Company shall provide each stockholder
entitled to vote at a special or annual meeting of stockholders of the Company
(the “Stockholder Meeting”), which initially shall be promptly called and held
not later than March 3, 2008 (the “Stockholder Meeting Deadline”), a proxy
statement, substantially in the form which has been previously reviewed by the
Buyers and a counsel of their choice at the expense of the Company, soliciting
each such stockholder’s affirmative vote at the Stockholder Meeting for approval
of resolutions (the “Resolutions”) providing for the Company’s issuance of all
of the Securities as described in the Transaction Documents in accordance with
applicable law and the rules and regulations of the Principal Market (such
affirmative approval being referred to herein as the “Stockholder Approval” and
the date such approval is obtained (the “Stockholder Approval Date”)), and the
Company shall use its reasonable best efforts to solicit its stockholders’
approval of the Resolutions and to cause the Board to recommend to the
stockholders that they approve the Resolutions. If, despite the Company’s best
efforts the Stockholder Approval is not obtained on or prior to the Stockholder
Meeting Deadline, the Company shall solicit the Stockholder Approval at each
subsequent special or annual meeting of stockholders of the Company until such
Stockholder Approval is obtained.
          (r) Collateral Agent. Each Buyer hereby (a) appoints Portside Growth &
Opportunity Fund, as the collateral agent hereunder and under the other Security
Documents (in such capacity, the “Collateral Agent”), and (b) authorizes the
Collateral Agent (and its officers, directors, employees and agents) to take
such action on such Buyer’s behalf in accordance with the terms hereof and
thereof. The Collateral Agent shall not have, by reason hereof or any of the
other Security Documents, a fiduciary relationship in respect of any Buyer.
Neither the Collateral Agent nor any of its officers, directors, employees and
agents shall have any liability to any Buyer for any action taken or omitted to
be taken in connection hereof or any other Security Document except to the
extent caused by its own gross negligence or willful misconduct, and each Buyer
agrees to defend, protect, indemnify and hold harmless the Collateral Agent and
all of its officers, directors, employees and agents (collectively, the
“Indemnitees”) from and against any losses, damages, liabilities, obligations,
penalties, actions, judgments, suits, fees, costs and expenses (including,
without limitation, reasonable attorneys’ fees, costs and expenses) incurred by
such Indemnitee, whether direct, indirect or consequential, arising from or in
connection with the performance by such Indemnitee of the duties and obligations
of Collateral Agent pursuant hereto or any of the Security Documents. The
Collateral Agent shall not be required to exercise any discretion or take any
action, but shall be required to act or to refrain from acting (and shall be
fully protected in so acting or refraining from acting) upon the instructions of
the holders of at least two-thirds in principal amount of the Notes then
outstanding, and such instructions shall be binding upon all holders of Notes;
provided, however, that the Collateral Agent shall not be required to take any
action which, in the reasonable opinion of the Agent, exposes the Agent to
liability or which is contrary to this Agreement or any other Transaction
Document or applicable law. The Collateral Agent shall be entitled to rely upon
any written notices, statements, certificates, orders or other documents or any
telephone message believed by it in good faith to be genuine and correct and to
have been signed, sent or made by the proper Person, and with respect to all
matters pertaining to this Agreement or any of the other Transaction Documents
and its duties hereunder or thereunder, upon advice of counsel selected by it.

 

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          (s) Successor Collateral Agent.
               (i) The Collateral Agent may resign from the performance of all
its functions and duties hereunder and under the other Transaction Documents at
any time by giving at least thirty (30) Business Days’ prior written notice to
the Company and each holder of Notes. Such resignation shall take effect upon
the acceptance by a successor Collateral Agent of appointment pursuant to
clauses (ii) and (iii) below or as otherwise provided below.
               (ii) Upon any such notice of resignation, the holders of at least
two-thirds in principal amount of the Notes then outstanding shall appoint a
successor collateral agent. Upon the acceptance of any appointment as collateral
agent hereunder by a successor agent, such successor collateral agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the collateral agent, and the Collateral Agent shall be discharged
from its duties and obligations under this Agreement and the other Transaction
Documents. After the Collateral Agent’s resignation hereunder as the collateral
agent, the provisions of this Section 4(s) shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was the Collateral Agent
under this Agreement and the other Transaction Documents.
               (iii) If a successor collateral agent shall not have been so
appointed within said thirty (30) Business Day period, the Collateral Agent
shall then appoint a successor collateral agent who shall serve as the
collateral agent until such time, if any, as the holders of at least two-thirds
in principal amount of the Notes then outstanding appoint a successor collateral
agent as provided above.
     5. REGISTER; TRANSFER AGENT INSTRUCTIONS.
          (a) Register. The Company shall maintain at its principal executive
offices (or such other office or agency of the Company as it may designate by
notice to each holder of Securities), a register for the Notes and the Warrants
in which the Company shall record the name and address of the Person in whose
name the Notes and the Warrants have been issued (including the name and address
of each transferee), the principal amount of Notes held by such Person, the
number of Conversion Shares issuable upon conversion of the Notes and the number
of Warrant Shares issuable upon exercise of the Warrants held by such Person.
The Company shall keep the register open and available at all times during
business hours for inspection of any Buyer or its legal representatives upon
reasonable notice.
          (b) Transfer Agent Instructions. The Company shall issue irrevocable
instructions to its transfer agent, and any subsequent transfer agent, to issue
certificates or credit shares to the applicable balance accounts at The
Depository Trust Company (“DTC”), registered in the name of each Buyer or its
respective nominee(s), for the Common Shares, the Conversion Shares, the
Interest Shares and the Warrant Shares issued upon conversion of the Notes or as
Interest Shares under the Notes or exercise of the Warrants in such amounts as
specified from time to time by each Buyer to the Company upon conversion of the
Notes or exercise of the Warrants in the form of Exhibit D-1 and Exhibit D-2
attached hereto (collectively, the “Irrevocable Transfer Agent Instructions”),
bearing the restrictive legend as and when specified in Section 2(g) of this
Agreement. The Company warrants that no instruction other than the Irrevocable
Transfer Agent Instructions referred to in this Section 5(b), and stop transfer
instructions to give effect to Section 2(g) hereof, will be given by the Company
to its transfer agent, and that the Securities shall otherwise be freely
transferable on the books and records of the Company as and to the extent
provided in this Agreement and the other Transaction Documents. If a Buyer
effects a sale, assignment or transfer of the Securities in accordance with
Section 2(f), the Company shall permit the transfer and the Company shall
promptly instruct its transfer agent to issue one or more certificates or credit
shares to the applicable balance accounts at DTC in such name and in such
denominations as specified by such Buyer to effect such sale, transfer or
assignment. In the event that such sale, assignment or transfer involves Common
Shares, Conversion Shares, Interest Shares or Warrant Shares sold, assigned or
transferred pursuant to an effective registration statement or pursuant to
Rule 144, the transfer agent shall issue such Securities to the Buyer, assignee
or transferee, as the case may be, without any restrictive legend to the extent
otherwise permitted by this Agreement, including Section 2(g). The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to a Buyer. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 5(b) will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5(b), that a Buyer shall be entitled,
in addition to all other available remedies, to an order and/or injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.

 

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     6. CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.
          (a) The obligation of the Company hereunder to exchange the Original
Notes for the Amended Notes and Common Shares and to issue and sell the Initial
Notes to each Buyer at the Initial Closing is subject to the satisfaction, at or
before the Initial Closing Date, of each of the following conditions, provided
that these conditions are for the Company’s sole benefit and may be waived by
the Company at any time in its sole discretion by providing each Buyer with
prior written notice thereof:
               (i) Such Buyer and each other Buyers shall have executed each of
the Transaction Documents to which it is a party and delivered the same to the
Company.
               (ii) Such Buyer and each other Buyer shall have delivered to the
Company the Initial Purchase Price (less, in the case of Kings Road Investments
Ltd. and Castlerigg Master Investments Ltd., the amounts withheld pursuant to
Section 4(g) above) for the Initial Notes being purchased by such Buyer at the
Initial Closing by wire transfer of immediately available funds pursuant to the
wire instructions provided by the Company, which wire transfers, in the
aggregate shall total $5,000,000.
               (iii) The representations and warranties of such Buyer shall be
true and correct in all material respects as of the date when made and as of the
Initial Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date), and such Buyer shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by such Buyer at or prior to the Initial Closing Date.
               (iv) No litigation, status, rule regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated, or
endorsed by or in any court or governmental authority of competent jurisdiction
or any self-regulatory organization having authority over the matters
contemplated hereby that prohibits the consummation of the transactions
contemplated by the Transaction Documents.
          (b) The obligation of the Company hereunder to issue and sell the
Additional Notes to each Buyer at the Additional Closing is subject to the
satisfaction, at or before the Additional Closing Date, of each of the following
conditions, provided that these conditions are for the Company’s sole benefit
and may be waived by the Company at any time in its sole discretion by providing
each Buyer with prior written notice thereof:
               (i) Such Buyer and each other Buyer shall have executed each of
the Transaction Documents to which it is a party and delivered the same to the
Company.
               (ii) Such Buyer and each other Buyer shall have delivered to the
Company the Additional Purchase Price (less (x) the Escrow Amount if the Escrow
Waiver Event has not occurred prior to the Initial Closing Date and (y) in the
case of Kings Road Investments Ltd., the amounts withheld pursuant to
Section 4(g)) for the Additional Notes being purchased by such Buyer at the
Additional Closing by wire transfer of immediately available funds pursuant to
the wire instructions provided by the Company.
               (iii) The representations and warranties of such Buyer shall be
true and correct in all material respects as of the date when made and as of the
Additional Closing Date as though made at that time (except for representations
and warranties that speak as of a specific date), and such Buyer shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by such Buyer at or prior to the Additional Closing Date.
               (iv) No litigation, status, rule regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated, or
endorsed by or in any court or governmental authority of competent jurisdiction
or any self-regulatory organization having authority over the matters
contemplated hereby that prohibits the consummation of the transactions
contemplated by the Transaction Documents.

 

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     7. CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE.
          (a) The obligation of each Buyer hereunder to exchange the Original
Notes for the Amended Notes and Common Shares and to purchase the Initial Notes
at the Initial Closing is subject to the satisfaction, at or before the Initial
Closing Date, of each of the following conditions, provided that these
conditions are for each Buyer’s sole benefit and may be waived by such Buyer at
any time in its sole discretion by providing the Company with prior written
notice thereof:
               (i) The Company shall have duly executed and delivered to such
Buyer: (A) (x) the Amended Notes (in such principal amounts as such Buyer has
agreed, and in the manner the Buyer may reasonably request, in accordance with
Section 1 of this Agreement) to be received by such Buyer at the Initial Closing
pursuant to this Agreement, (y) the Initial Notes (in such principal amounts as
such Buyer has agreed, and in the manner the Buyer may reasonably request, in
accordance with Section 1 of this Agreement) and (z) the Other Common Shares (in
such amounts as such Buyer shall request in accordance with Section 1 of this
Agreement) being purchased by such Buyer at the Initial Closing pursuant to this
Agreement and (B) each of the other Transaction Documents.
               (ii) The Company shall have delivered an irrevocable instruction
letter to the Transfer Agent directing the Transfer Agent, in conjunction with
the broker or agent (of each of the Buyers each a “Buyer Broker”), concurrently
with the Initial Closing, to effect the deposit of the 144 Common Shares (in
such amounts as such Buyer shall request) to be received by each Buyer at the
Initial Closing pursuant to this Agreement to the account of each Buyer Broker
at DTC through a Deposit/Withdrawal at Custodian with respect to such Common
Shares.
               (iii) Such Buyer shall have received the opinion of Baxter,
Baker, Sidle, Conn & Jones, the Company’s outside counsel, dated as of the
Initial Closing Date, in substantially the form of Exhibit E-1 attached hereto.
               (iv) The Company shall have delivered to such Buyer a copy of the
Irrevocable Transfer Agent Instructions, in the form of Exhibit D-1 attached
hereto, which instructions shall have been delivered to and acknowledged in
writing by the Company’s transfer agent.
               (v) The Company shall have delivered to such Buyer a certificate
evidencing the formation and good standing of the Company and each of its
domestic Subsidiaries in each such entity’s jurisdiction of formation issued by
the Secretary of State (or comparable office) of such jurisdiction, as of a date
within 10 days of the Initial Closing Date.
               (vi) The Company shall have delivered to such Buyer a certificate
evidencing the Company’s qualification as a foreign corporation and good
standing issued by the Secretary of State (or comparable office) of each
jurisdiction in which the Company, as applicable, conducts business, as of a
date within 10 days of the Initial Closing Date.
               (vii) The Company shall have delivered to such Buyer a certified
copy of the Certificate of Incorporation of the Company as certified by the
Secretary of State of Delaware within ten (10) days of the Initial Closing Date.
               (viii) The Company shall have delivered to such Buyer a
certificate, executed by the Secretary of the Company dated as of the Initial
Closing Date, as to (i) the resolutions consistent with Section 3(b) as adopted
by the Company’s Board of Directors in a form reasonably acceptable to such
Buyer, (ii) the Articles of Incorporation, as in effect at the Initial Closing
and (iii) the Bylaws, as in effect at the Initial Closing, in the form attached
hereto as Exhibit F.

 

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               (ix) The representations and warranties of the Company shall be
true and correct in all material respects (except for those representations and
warranties that are qualified by materiality or Material Adverse Effect, which
shall be true and correct in all respects) as of the date when made and as of
the Initial Closing Date as though made at that time (except for representations
and warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by the Transaction Documents to be performed,
satisfied or complied with by the Company at or prior to the Initial Closing
Date. Such Buyer shall have received a certificate, executed by an executive
officer of the Company, dated as of the Initial Closing Date, to the foregoing
effect and as to such other matters as may be reasonably requested by such Buyer
in the form attached hereto as Exhibit G.
               (x) The Company shall have delivered to such Buyer a letter from
the Company’s transfer agent certifying the number of shares of Common Stock
outstanding as of a date within five days of the Initial Closing Date.
               (xi) The Common Stock (i) shall be designated for quotation or
listed on the Principal Market and (ii) shall not have been suspended, as of the
Initial Closing Date, by the SEC or the Principal Market from trading on the
Principal Market nor shall suspension by the SEC or the Principal Market have
been threatened, as of the Initial Closing Date, either (A) in writing by the
SEC or the Principal Market or (B) by falling below the minimum listing
maintenance requirements of the Principal Market.
               (xii) The Company shall have obtained all governmental,
regulatory or third party consents and approvals, if any, necessary for the sale
of the Securities.
               (xiii) Within five (5) Business Days prior to the Closing, the
Company shall have delivered or caused to be delivered to each Buyer (i) true
copies of UCC search results, listing all effective financing statements which
name as debtor the Company or any of its domestic Subsidiaries filed in the
prior five years to perfect an interest in any assets thereof, together with
copies of such financing statements, none of which, except as otherwise agreed
in writing by the Buyers, shall cover any of the Collateral (as defined in the
Security Documents) and the results of searches for any tax lien and judgment
lien filed against such Person or its property, which results, except as
otherwise agreed to in writing by the Buyers shall not show any such Liens (as
defined in the Security Documents); and (ii) a perfection certificate, duly
completed and executed by the Company and each of its Subsidiaries, in form and
substance satisfactory to the Buyers.
               (xiv) The Company shall have delivered to such Buyer duly
executed voting agreements of Pirate Capital LLC and Wynnefield Capital, Inc.
(the “Stockholders”), in the form attached hereto as Exhibit M (the “Voting
Agreements”), whereby the Stockholders shall agree to vote in favor of the
Resolutions.
               (xv) No litigation, status, rule regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated, or
endorsed by or in any court or governmental authority of competent jurisdiction
or any self-regulatory organization having authority over the matters
contemplated hereby that prohibits the consummation of the transactions
contemplated by the Transaction Documents.
               (xvi) The Company shall have delivered to such Buyer such other
documents relating to the transactions contemplated by this Agreement as such
Buyer or its counsel may reasonably request.
          (b) The obligation of each Buyer hereunder to purchase the Additional
Notes at the Additional Closing is subject to the satisfaction, at or before the
Additional Closing Date, of each of the following conditions, provided that
these conditions are for each Buyer’s sole benefit and may be waived by such
Buyer at any time in its sole discretion by providing the Company with prior
written notice thereof:
               (i) The Company shall have duly executed and delivered to such
Buyer: (A) the Additional Notes (in such principal amounts as such Buyer has
agreed, and in the manner the Buyer may reasonably request, in accordance with
Section 1 of this Agreement) being purchased by such Buyer at the Additional
Closing pursuant to this Agreement and (B) each of the other Transaction
Documents.

 

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               (ii) Such Buyer shall have received the opinion of Baxter, Baker,
Sidle, Conn & Jones, the Company’s outside counsel, dated as of the Additional
Closing Date, in substantially the form of Exhibit E-2 attached hereto.
               (iii) The Company shall have delivered to such Buyer a copy of
the Irrevocable Transfer Agent Instructions, in the form of Exhibit D-2 attached
hereto, which instructions shall have been delivered to and acknowledged in
writing by the Company’s transfer agent.
               (iv) The Company shall have delivered to such Buyer a certificate
evidencing the formation and good standing of the Company and each of its
domestic Subsidiaries in each such entity’s jurisdiction of formation issued by
the Secretary of State (or comparable office) of such jurisdiction, as of a date
within 10 days of the Additional Closing Date.
               (v) The Company shall have delivered to such Buyer a certificate
evidencing the Company’s qualification as a foreign corporation and good
standing issued by the Secretary of State (or comparable office) of each
jurisdiction in which the Company, as applicable, conducts business, as of a
date within 10 days of the Additional Closing Date.
               (vi) The Company shall have delivered to such Buyer a certified
copy of the Certificate of Incorporation of the Company as certified by the
Secretary of State of Delaware within ten (10) days of the Additional Closing
Date.
               (vii) The Company shall have delivered to such Buyer a
certificate, executed by the Secretary of the Company dated as of the Additional
Closing Date, as to (i) the resolutions consistent with Section 3(b) as adopted
by the Company’s Board of Directors in a form reasonably acceptable to such
Buyer, (ii) the Articles of Incorporation, as in effect at the Additional
Closing and (iii) the Bylaws, as in effect at the Additional Closing, in the
form attached hereto as Exhibit F.
               (viii) The representations and warranties of the Company shall be
true and correct in all material respects (except for those representations and
warranties that are qualified by materiality or Material Adverse Effect, which
shall be true and correct in all respects) as of the date when made and as of
the Additional Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date) and the Company
shall have performed, satisfied and complied in all material respects with the
covenants, agreements and conditions required by the Transaction Documents to be
performed, satisfied or complied with by the Company at or prior to the
Additional Closing Date. Such Buyer shall have received a certificate, executed
by the Chief Executive Officer of the Company, dated as of the Additional
Closing Date, to the foregoing effect and as to such other matters as may be
reasonably requested by such Buyer in the form attached hereto as Exhibit G.
               (ix) The Company shall have delivered to such Buyer a letter from
the Company’s transfer agent certifying the number of shares of Common Stock
outstanding as of a date within five days of the Additional Closing Date.
               (x) The Common Stock (i) shall be designated for quotation or
listed on the Principal Market and (ii) shall not have been suspended, as of the
Additional Closing Date, by the SEC or the Principal Market from trading on the
Principal Market nor shall suspension by the SEC or the Principal Market have
been threatened, as of the Additional Closing Date, either (A) in writing by the
SEC or the Principal Market or (B) by falling below the minimum listing
maintenance requirements of the Principal Market.
               (xi) The Company shall have obtained all governmental, regulatory
or third party consents and approvals, if any, necessary for the sale of the
Securities.

 

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               (xii) No litigation, status, rule regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated, or
endorsed by or in any court or governmental authority of competent jurisdiction
or any self-regulatory organization having authority over the matters
contemplated hereby that prohibits the consummation of the transactions
contemplated by the Transaction Documents.
               (xiii) The Company shall have delivered to such Buyer such other
documents relating to the transactions contemplated by this Agreement as such
Buyer or its counsel may reasonably request.
     8. TERMINATION.
     In the event that the Initial Closing shall not have occurred with respect
to a Buyer on or before five (5) Business Days from the date hereof due to the
Company’s or such Buyer’s failure to satisfy the conditions set forth in
Sections 6(a) and 7(a) above (and the nonbreaching party’s failure to waive such
unsatisfied condition(s)), the nonbreaching party shall have the option to
terminate this Agreement with respect to such breaching party at the close of
business on such date without liability of any party to any other party;
provided, however, that if this Agreement is terminated pursuant to this
Section 8 due to the failure of the Company to satisfy any of the conditions to
Initial Closing set forth in Section 7(a), the Company shall remain obligated to
reimburse the non-breaching Buyers for the expenses described in Section 4(g)
above. In the event of termination of this Agreement pursuant to this Section 8,
this Agreement shall be null and void and all parties shall retain all rights,
remedies, claims, and obligations as if this Agreement had never been executed,
except as provided otherwise in this Paragraph 8.
     9. MISCELLANEOUS.
          (a) Governing Law; Jurisdiction; Jury Trial. All questions concerning
the construction, validity, enforcement and interpretation of this Agreement
shall be governed by the internal laws of the State of New York, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of New York or any other jurisdictions) that would cause the application
of the laws of any jurisdictions other than the State of New York. Each party
hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in The City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, 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 brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper. 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 to such
party at the address for such notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY
WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF
THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
          (b) Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which 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; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original, not
a facsimile signature.
          (c) Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
          (d) Severability. If any provision of this Agreement shall be invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
not affect the validity or enforceability of the remainder of this Agreement in
that jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.

 

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          (e) Entire Agreement; Amendments. This Agreement and the other
Transaction Documents supersede all other prior oral or written agreements
between the Buyers, the Company, their affiliates and Persons acting on their
behalf with respect to the matters discussed herein and therein, and this
Agreement, the other Transaction Documents and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this
Agreement may be amended other than by an instrument in writing signed by the
Company and the holders of at least a majority of the aggregate principal amount
of Notes issued and issuable hereunder, and any amendment to this Agreement made
in conformity with the provisions of this Section 9(e) shall be binding on all
Buyers and holders of Securities, as applicable. No provision hereof may be
waived other than by an instrument in writing signed by the party against whom
enforcement is sought. No such amendment shall be effective to the extent that
it applies to less than all of the holders of the applicable Securities then
outstanding. 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 also is offered to all of the parties to
the Transaction Documents, holders of Notes or holders of the Warrants, as the
case may be. The Company has not, directly or indirectly, made any agreements
with any Buyers relating to the terms or conditions of the transactions
contemplated by the Transaction Documents except as set forth in the Transaction
Documents. Without limiting the foregoing, the Company confirms that, except as
set forth in this Agreement, no Buyer has made any commitment or promise or has
any other obligation to provide any financing to the Company or otherwise.

 

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          (f) Notices. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered: (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one Business Day after deposit with
an overnight courier service, in each case properly addressed to the party to
receive the same. The addresses and facsimile numbers for such communications
shall be:

         
If to the Company:
   
The Allied Defense Group, Inc.
   
8000 Towers Crescent Drive
   
Suite 260
   
Vienna, Virginia 22182
   
Telephone:
   
Facsimile:
  (703) 847-5268
Attention:
   
 
       
 
       With a copy (for informational purposes only) to:    
 
       
 
       Baxter, Baker, Sidle, Conn & Jones    
 
       
 
       Sun Trust Building    
 
       
 
       Suite 2100    
 
       
 
       120 E. Baltimore Street    
 
       
 
       Baltimore, Maryland 21202    
 
       
 
       Tel: (410) 230-8122    
 
       
 
       Fax: (410) 230-3801    
 
       
 
       Attention: James E. Baker, Jr., Esq.    
 
       
 
  If to the Transfer Agent:    
 
       
 
       Mellon Investor Services, LLC    
 
       85 Challenger Road    
 
       Ridgefield, New Jersey 07660    

If to a Buyer, to its address and facsimile number set forth on the Schedule of
Buyers, with copies to such Buyer’s representatives as set
forth on the Schedule of Buyers,

         
with a copy (for informational purposes only) to:
       
Schulte Roth & Zabel LLP 919 Third Avenue
       
New York, New York 10022 Telephone:
      (212) 756-2000
Facsimile:
      (212) 593-5955
Attention:
  Eleazer N. Klein, Esq.    

or to such other address and/or facsimile number and/or to the attention of such
other Person as the recipient party has specified by written notice given to
each other party five (5) days prior to the effectiveness of such change.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender’s facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission or
(C) provided by an overnight courier service shall be rebuttable evidence of
personal service, receipt by facsimile or receipt from an overnight courier
service in accordance with clause (i), (ii) or (iii) above, respectively.
          (g) Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns,
including any purchasers of the Notes or the Warrants. The Company shall not
assign this Agreement or any rights or obligations hereunder without the prior
written consent of the holders of at least a majority of the aggregate principal
amount of Notes issued and issuable hereunder, including by way of a Fundamental
Transaction (unless the Company is in compliance with the applicable provisions
governing Fundamental Transactions set forth in the Notes and the Warrants). A
Buyer may assign some or all of its rights hereunder without the consent of the
Company in which event such assignee shall be deemed to be a Buyer hereunder
with respect to such assigned rights.
          (h) No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person.
          (i) Survival. Unless this Agreement is terminated under Section 8, the
representations and warranties of the Company and the Buyers contained in
Sections 2 and 3 and the agreements and covenants set forth in Sections 4, 5 and
9 shall survive the Closings. Each Buyer shall be responsible only for its own
representations, warranties, agreements and covenants hereunder.
          (j) Further Assurances. Each party shall do and perform, or cause to
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
any other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

 

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          (k) Indemnification. In consideration of each Buyer’s execution and
delivery of the Transaction Documents and acquiring the Securities thereunder
and in addition to all of the Company’s other obligations under the Transaction
Documents, the Company shall defend, protect, indemnify and hold harmless each
Buyer and each other holder of the Securities and all of their shareholders,
partners, members, officers, directors, employees and direct or indirect
investors and any of the foregoing Persons’ agents or other representatives
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the “Indemnitees”)
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorneys’ fees and disbursements (the “Indemnified Liabilities”), incurred by
any Indemnitee as a result of, or arising out of, or relating to (a) any
inaccuracy in any representation or warranty made by the Company in the
Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby, (b) any breach of any covenant, agreement or
obligation of the Company contained in the Transaction Documents or any other
certificate, instrument or document contemplated hereby or thereby or (c) any
cause of action, suit or claim brought or made against such Indemnitee by a
third party (including for these purposes a derivative action brought on behalf
of the Company) and arising out of or resulting from (i) the execution,
delivery, performance or enforcement of the Transaction Documents or any other
certificate, instrument or document contemplated hereby or thereby, (ii) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, (iii) any
disclosure made by such Buyer pursuant to Section 4(i), or (iv) the status of
such Buyer or holder of the Securities as an investor in the Company pursuant to
the transactions contemplated by the Transaction Documents. To the extent that
the foregoing undertaking by the Company may be unenforceable for any reason,
the Company shall make the maximum contribution to the payment and satisfaction
of each of the Indemnified Liabilities that is permissible under applicable law.
Except as otherwise set forth herein, the mechanics and procedures with respect
to the rights and obligations under this Section 9(k) shall be the same as those
set forth in Section 6 of the Registration Rights Agreement.
          (l) No Strict Construction. The language used in this Agreement will
be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
          (m) Remedies. Each Buyer and each holder of the Securities shall have
all rights and remedies set forth in the Transaction Documents and all rights
and remedies which such holders have been granted at any time under any other
agreement or contract and all of the rights which such holders have under any
law. Any Person having any rights under any provision of this Agreement shall be
entitled to enforce such rights specifically (without posting a bond or other
security), to recover damages by reason of any breach of any provision of this
Agreement and to exercise all other rights granted by law. Furthermore, the
Company recognizes that in the event that it fails to perform, observe, or
discharge any or all of its obligations under the Transaction Documents, any
remedy at law may prove to be inadequate relief to the Buyers. The Company
therefore agrees that the Buyers shall be entitled to seek temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages and without posting a bond or other security.
          (n) Rescission and Withdrawal Right. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Buyer 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 Buyer 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.
          (o) Payment Set Aside. To the extent that the Company makes a payment
or payments to the Buyers hereunder or pursuant to any of the other Transaction
Documents or the Buyers enforce or exercise their rights hereunder or
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, federal or state, foreign 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.
          (p) Independent Nature of Buyers’ Obligations and Rights. The
obligations of each Buyer under any Transaction Document are several and not
joint with the obligations of any other Buyer, and no Buyer shall be responsible
in any way for the performance of the obligations of any other Buyer under any
Transaction Document. Nothing contained herein or in any other Transaction
Document, and no action taken by any Buyer pursuant hereto or thereto, shall be
deemed to constitute the Buyers as a partnership, an association, a joint
venture or any other kind of entity, or create a presumption that the Buyers are
in any way acting in concert or as a group with respect to such obligations or
the transactions contemplated by the Transaction Documents and the Company
acknowledges that the Buyers are not acting in concert or as a group with
respect to such obligations or the transactions contemplated by the Transaction
Documents. Each Buyer confirms that it has independently participated in the
negotiation of the transaction contemplated hereby with the advice of its own
counsel and advisors. Each Buyer shall be entitled to independently protect and
enforce its rights, including, without limitation, the rights arising out of
this Agreement or out of any other Transaction Documents, and it shall not be
necessary for any other Buyer to be joined as an additional party in any
proceeding for such purpose.
[Signature Page Follows]

 

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     IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Amended and Restated Securities Purchase Agreement to be
duly executed as of the date first written above.
COMPANY:
THE ALLIED DEFENSE GROUP, INC.
By:
 

Name:
Title:
     IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Amended and Restated Securities Purchase Agreement to be
duly executed as of the date first written above.
BUYERS:
KINGS ROAD INVESTMENTS LTD.
By:
 

Name:
Title:
     IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Amended and Restated Securities Purchase Agreement to be
duly executed as of the date first written above.
BUYERS:
PORTSIDE GROWTH & OPPORTUNITY FUND
By:
 

Name:
Title:
     IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Amended and Restated Securities Purchase Agreement to be
duly executed as of the date first written above.
BUYERS:
CASTLERIGG MASTER INVESTMENTS LTD.
By:
 

Name:
Title:
     IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Amended and Restated Securities Purchase Agreement to be
duly executed as of the date first written above.
BUYERS:
LB I GROUP INC.
By:
 

Name:
Title:

 

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SCHEDULE OF BUYERS

                                                                             
(1)   (2)   (3)   (4)   (5)   (6)   (7)   (8)   (9)   (10)   (11)   (12)   (13)
    Address and   Aggregate Principal   Aggregate Principal   Aggregate
Principal   Aggregate Principal               Initial Warrant   Additional      
    Legal Representative's     Facsimile   Amount of Original   Amount of
Amended   Amount of Initial   Amount of   Number of 144   Number of Other  
Number of   Purchase   Purchase   Escrow   Address and Facsimile Buyer   Number
  Notes   Notes   Notes   Additional Notes   Common Shares   Common Shares  
Shares†   Price   Price   Amount   Number
Kings Road Investments Ltd.
  c/o Polygon Investment Partners LP 399 Park Avenue, 22nd Floor New York, NY
10022 Attention: Erik M.W. Caspersen and Brandon L. Jones Facsimile:
(212) 359-7303 Telephone: (212) 359-7300 Residence: Cayman Islands   $
12,500,000     $11,305.080**   $2,083,333*   $ 4,166,667       153,286      
383,381       141,985     $2,083,333*   $ 4,166,667     $ 2,083,333     Schulte
Roth & Zabel LLP
919 Third Avenue New York, New York 10022
Attention: Eleazer Klein, Esq. Facsimile: (212) 593-5955
Telephone: (212) 756-2376
Portside Growth &
Opportunity Fund
  c/o Ramius Capital Group, L.L.C. 666 Third Avenue, 26th Floor New York, New
York 10017 Attention: Jeffrey Smith Owen Littman Facsimile: (212) 845-7999
(212) 845-7995 Telephone: (212) 845-7955 (212) 201-4841 Residence: Cayman
Islands   $ 7,500,000     $6,783,048**   $1,250,000*   $ 2,500,000       153,286
      168,715       86,991     $1,250,000*   $ 2,500,000     $ 1,250,000     N/A
Castlerigg Master Investments Ltd.
  c/o Sandell Asset Management
40 West 57th St
26th Floor
New York, NY 10019
Attention: Cem Hacioglu /Matthew
Pliskin
Telephone: 212-603-5700
Fax: 212-603-5710
Residence: British Virgin Islands   $ 6,000,000     $5,426,438**   $1,000,000*  
$ 2,000,000       153,286       104,315       69,593     $1,000,000*   $
2,000,000     $ 1,000,000     McDermott Will & Emery LLP
340 Madison Avenue
New York, New York 10173-1922
Attention: Stephen Older, Esq. Facsimile: (212) 547-5444
Telephone: (212) 547-5649
LB I Group Inc.
  c/o Lehman Brothers Inc. 399 Park Ave NY, NY 10022 Attention: Will Yelsits    
                                                                 
 
  Eric Salzman   $ 4,000,000     $3,617,626**   $666,667*   $ 1,333,333      
153,286       18,448       46,395     $666,667*  
$ 1,333,333     $ 666,667             
 
 
 
 
 
 
 
   
 
     
 
   
 
 
 
 
 
   
 
     
TOTAL
      $ 30,000,000     $27,132,192**   $5,000,000*   $ 10,000,000       613,142
      674,858       347,963     $5,000,000*   $ 10,000,000     $ 5,000,000    
N/A

 

*   Legal Counsel Fee Amount as of Initial Closing Date (pro rata to each Buyer)
to be added.   **   The product of (I) the number of calendar days during the
period commencing on the date hereof and ending on the Initial Closing Date and
(II) $10,273.97 per calendar day (pro rata to each Buyer) to be added.   †  
Reflects antidilution adjustments to Warrants as of the date immediately
following the Initial Closing Date

 

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EXHIBITS

     
Exhibit A-1
  Form of Original Notes
Exhibit A-2
  Form of Notes
Exhibit B
  Form of Warrants
Exhibit C
  Form of Amended and Restated Registration Rights Agreement
Exhibit D-1
  Irrevocable Transfer Agent Instructions re: Initial Closing
Exhibit D-2
  Irrevocable Transfer Agent Instructions re: Additional Closing
Exhibit E-1
  Form of Counsel Opinion re: Initial Closing
Exhibit E-2
  Form of Counsel Opinion re: Additional Closing
Exhibit F
  Form of Secretary’s Certificate
Exhibit G
  Form of Officer’s Certificate
Exhibit H
  Form of Security Agreement
Exhibit I
  Form of Pledge Agreement
Exhibit J
  Form of Guarantee
Exhibit K
  Form of Escrow Agreement
Exhibit L
  MECAR Certificate
Exhibit M
  Form of Voting Agreement

SCHEDULES

     
Schedule 3(a)
  Subsidiaries
Schedule 3(d)
  No Conflicts
Schedule 3(j)
  Application of Takeover Protections; Rights Agreement
Schedule 3(k)
  SEC Documents; Financial Statements
Schedule 3(n)
  Conduct of Business; Regulatory Permits
Schedule 3(q)
  Transactions with Affiliates
Schedule 3(r)
  Equity Capitalization
Schedule 3(s)
  Indebtedness and Other Contracts
Schedule 3(t)
  Absence of Litigation
Schedule 3(v)
  Employee Relations
Schedule 3(z)
  Subsidiary Rights
Schedule 3(aa)
  Tax Status
Schedule 3(bb)
  Internal Accounting and Disclosure Controls
Schedule 3(dd)
  Ranking of Notes
Schedule 4(c)
  Reporting Status

Schedule 3(e)

 

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Consents

•   On March 23, 2007, the staff of the Division of Enforcement of the SEC
informed the Company that the staff is conducting an inquiry to determine
whether there have been any violations of the federal securities laws and
requested that the Company voluntarily produce information relating to the
Company’s Form 8-K filed with the SEC on February 9, 2007, which reported
certain errors in the Company’s financial statements for the three and nine
month periods ended September 30, 2006.   •   On May 23, 2007, the Company
received a letter from the Principal Market stating that the Company may not be
in compliance with the Principal Market’s listing requirements as a result of
the Company’s sustained losses and/or financial condition. On June 1, 2007, the
Company received a follow up letter from the Principal Market stating that,
based on the information furnished by the Company on May 30, 2007, the Principal
Market had rescinded its previous letter dated May 23, 2007.

Schedule 3(j)
Application of Takeover Protections; Rights Agreement
     The Board of Directors of the Company adopted a Rights Agreement in 2001
and amended the agreement in June 2006 and again in November 2006. The Rights
Agreement provides each stockholder of record a dividend distribution of one
“right” for each outstanding share of common stock. Rights become exercisable
the earlier of ten days following: (1) a public announcement that an acquiring
person has purchased or has the right to acquire 25% or more of the Company’s
common stock, or (2) the commencement of a tender offer which would result in an
offeror beneficially owning 25% or more of the outstanding common stock. All
rights held by an acquiring person or offeror expire on the announced
acquisition date and all rights expire at the close of business on May 31, 2011.
     Each right under the Rights Agreement entitles a stockholder to acquire at
a purchase price of $50, one-hundredth of a share of preferred stock which
carries voting and dividend rights similar to one share of common stock.
Alternatively, a right holder may elect to purchase for $50 an equivalent number
of common shares (or in certain circumstances, cash, property or other
securities of the Company) at a price per share equal to one-half of the average
market price for a specified period. In lieu of the purchase price, a right
holder may elect to acquire one-half of the common shares available under the
second option. The purchase price and the preferred share fractional amount are
subject to adjustment for certain events as described in the Rights Agreement.
     Rights also entitle the holder to receive a specified number of shares of
an acquiring company’s common stock in the event that the Company is not the
surviving corporation in a merger or if 50% or more of the Company’s assets are
sold or transferred.
     At the discretion of a majority of the Board of Directors of the Company
and within a specified time period, the Company may redeem all of the rights at
a price of $.01 per right. The Board may also amend any provision of the
Agreement prior to exercise of the rights. The Rights Agreement will not be
triggered by the transactions contemplated by the Transaction Documents.

 

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Schedule 3(k)
SEC Documents; Financial Statements
     In the Company’s 10-K for the fiscal year ended December 31, 2006, filed on
March 23, 2007, the Company summarized in Management’s Report on Internal
Controls over Financial Reporting (Item 9A) and reported by the auditors in the
Report of Independent Registered Public Accounting Firm, that the Company had
two material weaknesses outstanding in its internal control over financial
reporting. One weakness was that Mecar did not have proper maintenance of an
appropriate contract cost accounting ledger, and the other weakness related to
the Company’s financial reporting processes. While the Company has taken actions
to remediate these weaknesses, the Company has not completed its testing and
determined whether these weaknesses have been remediated as of the date hereof.
Therefore, these material weaknesses may continue to exist. In addition to the
material weaknesses reported by the Company, the Company’s internal control
testing identified two significant deficiencies in internal controls that exist
at the Company that were not required to be disclosed pursuant to the terms of
the Sarbanes-Oxley Act of 2002. These deficiencies relate to general IT controls
and a lack of segregation of duties. These deficiencies, if combined, could
create a material weakness in the Company’s internal controls.
Schedule 3(n)
Conduct of Business; Regulatory Permits
     During the two (2) years prior to the date hereof, the Company has had
communications from and with the SEC or Principal Market regarding the
suspension or delisting of the Common Stock from the Principal Market with
respect to the following:

•   In the period April through September 2006, the Company had numerous
communications with the Principal Market regarding a potential delisting as a
result of the Company’s failure to file timely SEC filings regarding the
Company’s financial results.   •   On May 23, 2007, the Company received a
letter from the Principal Market stating that the Company may not be in
compliance with the Principal Market’s listing requirements as a result of the
Company’s sustained losses and/or financial condition. On June 1, 2007, the
Company received a follow-up letter from the Principal Market stating that,
based on the information furnished by the Company on May 30, 2007, the Principal
Market had rescinded its previous letter dated May 23, 2007. However, the
Company may receive similar letters from the Principal Market in the future.   •
  On March 23, 2007, the staff of the Division of Enforcement of the SEC
informed the Company that the staff is conducting an inquiry to determine
whether there have been any violations of the federal securities laws and
requested that the Company voluntarily produce information relating to the
Company’s Form 8-K filed with the SEC on February 9, 2007, which reported
certain errors in the Company’s financial statements for the three and nine
month periods ended September 30, 2006.

Schedule 3(q)
Transactions with Affiliates
     The Company’s subsidiary, News/Sports Microwave Rental, Inc., has loaned
$100,000 to the subsidiary’s current president as evidenced by a note dated
March 1, 2004. The note accrues interest at 5% per annum and is forgivable based
on the president achieving certain performance goals at News/Sports Microwave
Rental, Inc. The principal and unpaid interest on the note is due March 1, 2009.

 

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Schedule 3(r)
Equity Capitalization
     The Company has the following agreements or arrangements under which the
Company or any of its Subsidiaries is obligated to register the sale of any of
their securities under the 1933 Act:

•   Those shares of Common Stock of the Company referenced in Schedules 2(c)(i)
and 2(c)(ii) of the Registration Rights Agreement   •   41,793 shares of the
Company’s Common Stock that are issuable upon the conversion of warrants issued
to Cowen and Company, LLC associated with the Original Securities Purchase
Agreement   •   28,000 shares of the Company’s Common Stock that are issuable
upon the conversion of warrants issued to Patriot Capital Funding, Inc. in 2004
and 2005.

Schedule 3(s)
Indebtedness and Other Contracts
     The material terms of the Company’s Indebtedness and disclosures related to
any contract, agreement or instrument the violation of which or default under
which, by the other party(ies) to such contract, agreement or instrument would
reasonably be expected to result in a Material Adverse Effect or is in violation
of any term of or in default under any contract, agreement, or instrument
relating to any Indebtedness, except where such violation and defaults would not
result, individually or in the aggregate, in a Material Adverse Effect or is a
party to any contract, agreement, or instrument relating to any Indebtedness,
the performance of which, in the judgment of the Company’s officers, has or is
expected to have a Material Adverse Effect, have been provided in the Company’s
Form 10-K filed with the SEC for December 31, 2006, including but not limited
to, the notes to the financial statements provided in the Form 10-K, as listed:

•   Note K — Bank Credit Facility   •   Note L — Accrued Losses on Contracts,
Deferred Compensation, and Warranty Reserves   •   Note M — Long Term Debt   •  
Note P — Contingencies and Commitments   •   Note Q — Fair Value of Financial
Instruments   •   Note R — Derivative Financial Instruments   •   Note U —
Income Taxes   •   Note Y — Off Balance Sheet Transaction

     The following are obligations for which financing statements or other
security documents have been filed to secure payment of the obligations:

              Entity   Party/ Description   Approximate Amount
Mecar USA, Inc.
  Wachovia Bank /        
 
  Performance Bond   $ 48,672  
Mecar USA, Inc.
  Bankcorp South   $ 31,250  
News/Sports Microwave Rental, Inc.
  TCF Equipment        
 
  Finance / Equipment        
 
  Lease   $ 81,683  

See also the Indebtedness enumerated in Schedule 3(d)(d)

 

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Schedule 3(t)
Absence of Litigation
     On March 23, 2007, the staff of the Division of Enforcement of the SEC
informed the Company that the staff is conducting an inquiry to determine
whether there have been any violations of the federal securities laws and
requested that the Company voluntarily produce information relating to the
Company’s Form 8-K filed with the SEC on February 9, 2007, which reported
certain errors in the Company’s financial statements for the three and nine
month periods ended September 30, 2006. The Company believes, at this time, that
the inquiry remains open.
     On April 24, 2007, Kings Road Investments Ltd. filed a Complaint against
the Company in the United States District Court for the Southern District of New
York (Civil Action No. 07-CV-03262), requesting money damages of not less than
$16,664,854 plus interest, costs and attorneys’ fees.
     Suit has been filed in Belgium against one of the members of the VSK Group
for alleged breach of contract, seeking damages of less than $150,000.
     A former employee filed suit in Belgium against the Company and Mecar S.A.
for unpaid severance and other amounts totaling less than $400,000.
Schedule 3(v)
Employee Relations
     Mecar USA, Inc.’s (“Mecar”) hourly workers are represented by a labor
union. The relations with the labor union are explained by the Company in the
Company’s Form 10-K filed with the SEC for the period ended December 31, 2006
under Item 1. Business.
Schedule 3(z)
Subsidiary Rights
     Mecar S.A.’s current credit facility arrangement prohibits Mecar S.A. from
making dividends.
Schedule 3(aa)
Tax Status
     As explained in the Company’s Form 10-K for the period ending December 31,
2006, Mecar S.A. is currently under examination by Belgian taxing authorities.
The audit covers the 2004 tax year and relates to undocumented management fees,
the calculation of inventory reserves and the calculation of interest expense
related to a timing difference on the recognition of unrealized/realized
currency exchange gains and losses. The audit is not expected to be completed
until the third quarter of 2007. Based on discussions with the tax inspector,
the Company believes that the appropriate supporting documentation for the
calculation of inventory reserves has been provided and no adjustment will be
required. However, management believes that it will be required to pay tax on
the unrealized/realized foreign currency gain in 2004, which will be offset by a
deduction in 2005 when the company recorded the gain in its statutory books.
Accordingly, as of December 31, 2006, the Company recorded a liability of
$3,194,000 for the tax on the foreign currency gains.

 

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Schedule 3(bb)
Internal Accounting and Disclosure Controls
     In the Company’s 10-K for the fiscal year ended December 31, 2006, filed on
March 23, 2007, the Company summarized in Management’s Report on Internal
Controls over Financial Reporting (Item 9A) and reported by the auditors in the
Report of Independent Registered Public Accounting Firm, that the Company had
two material weaknesses outstanding in its internal control over financial
reporting. One weakness was that Mecar did not have proper maintenance of an
appropriate contract cost accounting ledger, and the other weakness related to
the Company’s financial reporting processes. While the Company has taken actions
to remediate these weaknesses, the Company has not completed its testing and
determined whether these weaknesses have been remediated as of the date hereof.
Therefore, these material weaknesses may continue to exist. In addition to the
material weaknesses reported by the Company, the Company’s internal control
testing identified two significant deficiencies in internal controls that exist
at the Company that were not required to be disclosed pursuant to the terms of
the Sarbanes-Oxley Act of 2002. These deficiencies relate to general IT controls
and a lack of segregation of duties. These deficiencies, if combined, could
create a material weakness in the Company’s internal controls.
Schedule 3(dd)
Ranking of Notes
     Each of the following debts is senior to, or ranks pari passu with, the
Notes:

                              Description   Borrower   Amount     Agreement  
(Lender)   31-May-07  
 
  News/Sports                        
 
  Microwave Rental,                        
2003 Van
  Inc.   $ 26,732.00     07/01/03   GMAC   $ 6,237.81  
 
                     
 
  News/Sports                        
 
  Microwave Rental,               One Source/ TCF        
Forklift
  Inc.   $ 197,402.57     09/01/05   Eqpt Finance   $ 87,268.07  
 
                     
 
                  Crown Credit        
 
                  Company/ Crown        
Forklift
  SeaSpace Corporation   $ 18,390.00     08/01/05   Equipment Company   $
10,266.23  
 
                     
Intellectual Property
  SeaSpace Corporation   $ 250,000.00     08/01/05   LJT & Associates   $
250,000.00  
 
                     
 
  The Allied Defense                        
GMS Purchase
  Group, Inc.   $ 6,700,000.00     11/01/05   Sam Nasiri   $ 5,862,500.00  
 
                     
Telephone
  The Allied Defense               Inter-Tel Leasing,        
System
  Group, Inc.   $ 10,072.61     04/01/04   Inc.   $ 4,755.85  
 
                     
 
  The Allied Defense               Dell Financial        
Dell Computer
  Group, Inc.   $ 2,766.15     02/16/06   Services   $ 1,370.63  
 
                     
Dell
  The Allied Defense               Dell Financial        
Computer (5)
  Group, Inc.   $ 10,751.58     04/14/06   Services   $ 4,718.68  
 
                     
Dell
  The Allied Defense               Dell Financial        
Desktops (3)
  Group, Inc.   $ 3,549.54     04/19/06   Services   $ 3,414.18  
 
                     
Dell
  The Allied Defense               Dell Financial        
Computer (3)
  Group, Inc.   $ 6,570.96     08/30/06   Services   $ 6,320.38  
 
                     
 
  The Allied Defense               Dell Financial        
Dell Computer
  Group, Inc.   $ 1,499.93     04/01/07   Services   $ 1,378.25  
 
                     
CMS Purchase
  VSK Electronics N.V.   $ 400,000.00     08/01/04       $ 100,000.00  
 
                     
Vigitec Mortgage
  VIGITEC, S.A.     433,813.67 €     03/25/99   CBC Bank     103,073.00 €  
 
                     
Phone Lease
  VSK Electronics N.V.     43,948.00 €     03/29/02   Siemens     16,536.00 €  
 
                     
Scientific Research Loan
  VSK Electronics N.V.     107,283.00 €     1984???   Gvt Export Agency    
107,283.00 €  
 
                     

 

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Schedule 4(c)
Reporting Status
     For the 10-Q required for the period ending June 30, 2007, based on the
Initial Closing Date of this transaction and the bifurcation and valuation
services that will be required in order to properly reflect this transaction in
the financial statements, the Company may file its Form 10-Q after the SEC date
required for the filing of that Form. In view of potential transactions,
including this transaction, for the 10-Q required for the period ending
September 30, 2007, the Company may file its Form 10-Q after the SEC date
required for the filing of that form.
Schedule 4(d)
Use of Proceeds
     Senior Permitted Indebtedness, including the Company’s Note obligations to
Sam Nasiri.
     Payments required for capital leases.