exv4w2



 






Exhibit 4.2




EXECUTION COPY




SECURITIES PURCHASE AGREEMENT




     This
Securities Purchase Agreement (this “Agreement”) is dated as of March ___, 2006, among
Navarre Corporation, a Minnesota corporation (the
“Company”), and the purchasers identified on the
signature pages hereto (each, a “Purchaser” and
collectively, the “Purchasers”).



     WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to
Section 4(2) of the Securities Act (as defined below) and Rule 506 promulgated thereunder, the
Company desires to issue and sell to the Purchasers, and the Purchasers, severally and not jointly,
desire to purchase from the Company certain securities of the Company, as more fully described in
this Agreement.



     NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for
other good and valuable consideration the receipt and adequacy of which are hereby acknowledged,
the Company and the Purchasers agree as follows:



ARTICLE I.

DEFINITIONS




     1.1 Definitions. In addition to the terms defined elsewhere in this Agreement, for
all purposes of this Agreement, the following terms shall have the meanings indicated in this
Section 1.1:



          “Action” means any action, suit, inquiry, notice of violation, proceeding (including any
partial proceeding such as a deposition) or investigation pending or threatened in writing against
or affecting the Company, any Subsidiary or any of their respective properties before or by any
court, arbitrator, governmental or administrative agency, regulatory authority (federal, state,
county, local or foreign), stock market, stock exchange or trading facility.




          “Affiliate” means any Person that, directly or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with a Person, as such terms are used in
and construed under Rule 144.




          “Business Day” means any day except Saturday, Sunday and any day which shall be a federal
legal holiday or a day on which banking institutions in the State of New York or State of Minnesota
are authorized or required by law or other governmental action to close.




          “Closing” means the closing of the purchase and sale of the Securities pursuant to Article
II.




          “Closing Date” means the Business Day on which all the conditions set forth in Sections 5.1
and 5.2 hereof are satisfied.




          “Commission” means the Securities and Exchange Commission.




 









 





          “Common Stock” means the common stock of the Company, no par value per share, and any
securities into which such common stock may hereafter be reclassified.




          “Common Stock Equivalents” means any securities of the Company or any Subsidiary which entitle
the holder thereof to acquire Common Stock at any time, including without limitation, any debt,
preferred stock, rights, options, warrants or other instrument that is at any time convertible into
or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock or other
securities that entitle the holder to receive, directly or indirectly, Common Stock.




          “Company Counsel” means Winthrop & Weinstine, P.A.




          “Company Deliverables” has the meaning set forth in Section 2.2(a).




          “Disclosure Materials” has the meaning set forth in Section 3.1(h).




          “Effective Date” means the date that the Registration Statement required by Section 2(a) of
the Registration Rights Agreement is first declared effective by the Commission.




          “Evaluation Date” has the meaning set forth in Section 3.1(s).




          “Exchange Act” means the Securities Exchange Act of 1934, as amended.




          “GAAP” means U.S. generally accepted accounting principles.




          “Intellectual Property Rights” has the meaning set forth in Section 3.1(p).




          “Investment Amount” means, with respect to each Purchaser, the investment amount indicated
below such Purchaser’s name on the signature page of this Agreement.




          “Lien” means any lien, charge, encumbrance, security interest, right of first refusal or other
restrictions of any kind.




          “Material Adverse Effect” means any of (i) a material and adverse effect on the legality,
validity or enforceability of any Transaction Document, (ii) a material and adverse effect on the
results of operations, assets, prospects, business or condition (financial or otherwise) of the
Company and the Subsidiaries taken as a whole, or (iii) an adverse impairment to the Company’s
ability to perform on a timely basis any of its obligations under any Transaction Document.




          “New York Courts” means the state and federal courts sitting in the City of New York, Borough
of Manhattan.




          “Per Unit Purchase Price” equals $3.50, subject to equitable adjustment in the event of stock
splits and similar occurrences with respect to the Common Stock.




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          “Person” means an individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint stock company,
government (or an agency or subdivision thereof) or other entity of any kind.




          “Proceeding” means an action, claim, suit, investigation or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition), whether commenced or
threatened.




          “Purchaser Deliverables” has the meaning set forth in Section 2.2(b).




          “Registration Statement” means a registration statement meeting the requirements set forth in
the Registration Rights Agreement and covering the resale by the Purchasers of the Registrable
Securities (as defined in the Registration Rights Agreement).




          “Registration Rights Agreement” means the Registration Rights Agreement, dated as of the date
of this Agreement, among the Company and the Purchasers, in the form of Exhibit B.




          “Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as
such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by
the Commission having substantially the same effect as such Rule.




          “SEC Reports” has the meaning set forth in Section 3.1(h).




          “Securities” means the Shares, the Warrants and the Warrant Shares.




          “Securities Act” means the Securities Act of 1933, as amended.




          “Shares” means the shares of Common Stock issued or issuable to the Purchasers at the Closing.




          “Short Sales” include, without limitation, all “short sales” as defined in Rule 200
promulgated under Regulation SHO under the Exchange Act and all types of direct and indirect stock
pledges, forward sale contracts, options, puts, calls, swaps and similar arrangements (including on
a total return basis), and sales and other transactions through non-US broker dealers or foreign
regulated brokers.




          “Subsidiary” means any “significant subsidiary” as defined in Rule 1-02(w) of the Regulation
S-X promulgated by the Commission under the Exchange Act.




          “Trading Day” means (i) a day on which the Common Stock is traded on a Trading Market (other
than the OTC Bulletin Board), or (ii) if the Common Stock is not listed on a Trading Market (other
than the OTC Bulletin Board), a day on which the Common Stock is traded in the over-the-counter
market, as reported by the OTC Bulletin Board, or (iii) if the Common Stock is not quoted on any
Trading Market, a day on which the Common Stock is quoted in the over-the-counter market as
reported by the Pink Sheets, LLC (or any similar




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organization or agency succeeding to its functions
of reporting prices); provided, that in the event that the Common Stock is not listed or quoted as set forth in (i), (ii) and (iii)
hereof, then Trading Day shall mean a Business Day.




          “Trading Market” means whichever of the New York Stock Exchange, the American Stock Exchange,
the NASDAQ National Market, the NASDAQ Capital Market or OTC Bulletin Board on which the Common
Stock is listed or quoted for trading on the date in question.




          “Transaction Documents” means this Agreement, the Warrants, the Registration Rights Agreement,
and any other documents or agreements executed in connection with the transactions contemplated
hereunder.




          “Warrants” means the Common Stock purchase warrants in the form of Exhibit A, which
are issuable to the Purchasers at the Closing.




          “Warrant Shares” means the shares of Common Stock issuable upon exercise of the Warrants.




ARTICLE II.

PURCHASE AND SALE




     2.1 Closing. Subject to the terms and conditions set forth in this Agreement, at the
Closing the Company shall issue and sell to each Purchaser, and each Purchaser shall, severally and
not jointly, purchase from the Company, the Shares and the Warrants representing such Purchaser’s
Investment Amount. The Closing shall take place at the offices of Bryan Cave LLP, 1290 Avenue of
the Americas, New York, NY 10104 on the Closing Date or at such other location or time as the
parties may agree.



     2.2 Closing Deliveries. (a) At the Closing, the Company shall deliver or cause to be
delivered to each Purchaser the following (the “Company
Deliverables”):



               (i) a certificate evidencing a number of Shares equal to such Purchaser’s Investment Amount
divided by the Per Unit Purchase Price, registered in the name of such Purchaser;



               (ii) a Warrant, registered in the name of such Purchaser, pursuant to which such Purchaser
shall have the right to acquire the number of shares of Common Stock equal to 25% of the number of
Shares issuable to such Purchaser in accordance with Section 2.2(a)(i);



               (iii) the legal opinion of Company Counsel, in agreed form, addressed to the Purchasers;



               (iv) the Registration Rights Agreement duly executed by the Company; and



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               (v) an officer’s certificate, in accordance with Section 5.1(h).



          (b) At the Closing, each Purchaser shall deliver or cause to be delivered to the Company the
following (the “Purchaser Deliverables”):




               (i) such Purchaser’s Investment Amount, in United States dollars and in immediately available
funds, by wire transfer to an account designated in writing by the Company for such purpose; and



               (ii) the Registration Rights Agreement duly executed by such Purchaser.



ARTICLE III.

REPRESENTATIONS AND WARRANTIES




     3.1 Representations and Warranties of the Company. The Company hereby makes the
following representations and warranties to each Purchaser:



          (a) Subsidiaries. The Company has no direct or indirect Subsidiaries other than as
specified in the SEC Reports. Except as disclosed in Schedule 3.1(a), the Company owns,
directly or indirectly, all of the capital stock of each Subsidiary free and clear of any and all
Liens, and all the issued and outstanding shares of capital stock of each Subsidiary are validly
issued and are fully paid, non-assessable and free of preemptive and similar rights.




          (b) Organization and Qualification. Each of the Company and each Subsidiary is an
entity duly incorporated or otherwise organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or organization (as applicable), with the requisite
power and authority to own and use its properties and assets and to carry on its business as
currently conducted. Neither the Company nor any Subsidiary is in violation of any of the
provisions of its respective certificate or articles of incorporation, bylaws or other
organizational or charter documents. Each of the Company and each Subsidiary is duly qualified to
conduct business and is in good standing as a foreign corporation or other entity in each
jurisdiction in which the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good standing, as the
case may be, could not, individually or in the aggregate, have or reasonably be expected to result
in a Material Adverse Effect.




          (c) Authorization; Enforcement. The Company has the requisite corporate power and
authority to enter into and to consummate the transactions contemplated by each of the Transaction
Documents and otherwise to carry out its obligations thereunder. The execution and delivery of
each of the Transaction Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary action on the part of the Company
and no further action is required by the Company in connection therewith. Each Transaction
Document has been (or upon delivery will have been) duly executed by the Company and, when
delivered in accordance with the terms hereof, will




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constitute the valid and binding obligation of
the Company enforceable against the Company in accordance with its terms.




          (d) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the transactions contemplated
thereby do not and will not (i) conflict with or violate any provision of the Company’s or any
Subsidiary’s certificate or articles of incorporation, bylaws or other organizational or charter
documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of
time or both would become a default) under, or give to others any rights of termination, amendment,
acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement,
credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise) or
other understanding to which the Company or any Subsidiary is a party or by which any property or
asset of the Company or any Subsidiary is bound or affected, or (iii) result in a violation of any
law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or
governmental authority to which the Company or a Subsidiary is subject (including federal and state
securities laws and regulations), or by which any property or asset of the Company or a Subsidiary
is bound or affected; except in the case of each of clauses (ii) and (iii), such as could not,
individually or in the aggregate, have or reasonably be expected to result in a Material Adverse
Effect.




          (e) Filings, Consents and Approvals. The Company is not required to obtain any
consent, waiver, authorization or order of, give any notice to, or make any filing or registration
with, any court or other federal, state, local or other governmental authority or other Person in
connection with the execution, delivery and performance by the Company of the Transaction
Documents, other than: (i) the filing with the Commission of one or more Registration Statements in
accordance with the requirements of the Registration Rights Agreement, (ii) any filings required by
state securities laws, (iii) the filing of a Notice of Sale of Securities on form D with the
Commission under Regulation D of the Securities Act, (iv) the filings required in accordance with
Section 4.5, and (v) those that have been made or obtained prior to the date of this Agreement.




          (f) Issuance of the Securities. On the Closing Date, the Securities shall have been
duly authorized and, when issued and paid for in accordance with the Transaction Documents, will be
duly and validly issued, fully paid and nonassessable, free and clear of all Liens. The Company
has reserved from its duly authorized capital stock a number of shares of Common Stock equal to the
sum of (x) the Shares issuable pursuant to this Agreement and (y) all of the Warrant Shares
issuable upon exercise of the Warrants (without taking into account any limitations on the exercise
of the Warrants set forth in the Warrants and assuming such exercise occurred at Closing), in order
to issue the Shares and the Warrant Shares.




          (g) Capitalization. The number of shares and type of all authorized, issued and
outstanding capital stock of the Company, and all shares of Common Stock reserved for issuance
under the Company’s various option and incentive plans, is set forth in Schedule 3.1(g).
Except as set forth in Schedule 3.1(g), no securities of the Company are entitled to
preemptive or similar rights, and no Person has any right of first refusal, preemptive right, right
of participation,




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or any similar right to participate in the transactions contemplated by the
Transaction Documents. Except as a result of the purchase and sale of the Securities and except as
disclosed in Schedule 3.1(g), there are no outstanding options, warrants, scrip rights to
subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights
or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or
acquire, any shares of Common Stock, or contracts, commitments, understandings or arrangements by
which the Company or any Subsidiary is or may become bound to issue additional shares of Common
Stock, or securities or rights convertible or exchangeable into shares of Common Stock. Except as
set forth in Schedule 3.1(g), the issue and sale of the Securities will not, immediately or
with the passage of time, obligate the Company to issue shares of Common Stock or other securities
to any Person (other than the Purchasers) and will not result in a right of any holder of Company
securities to adjust the exercise, conversion, exchange or reset price under such securities.




          (h) SEC Reports; Financial Statements. The Company has filed all reports required to
be filed by it under the Securities Act and the Exchange Act, including pursuant to Section 13(a)
or 15(d) thereof, for the twelve months preceding the date hereof (or such shorter period as the
Company was required by law to file such reports) (the foregoing materials being collectively
referred to herein as the “SEC Reports” and, together with the Schedules to this Agreement, the
“Disclosure Materials”) on a timely basis or has timely filed a valid extension of such time of
filing and has filed any such SEC Reports prior to the expiration of any such extension. As of
their respective dates and except as specified in Schedule 3.1(h), the SEC Reports complied
in all material respects with the requirements of the Securities Act and the Exchange Act and the
rules and regulations of the Commission promulgated thereunder, and none of the SEC Reports, when
filed, contained any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Except as specified in Schedule
3.1(h), the financial statements of the Company included in the SEC Reports comply in all
material respects with applicable accounting requirements and the rules and regulations of the
Commission with respect thereto as in effect at the time of filing. Except as specified in
Schedule 3.1(h), such financial statements have been prepared in accordance with GAAP,
except that unaudited financial statements may not contain footnotes and except as may be otherwise
specified in such financial statements or the notes thereto, and fairly present in all material
respects the financial position of the Company and its consolidated Subsidiaries as of and for the
dates thereof and the results of operations and cash flows for the periods then ended, subject, in
the case of unaudited statements, to normal, immaterial, year-end audit adjustments.




          (i) Press Releases. The press releases disseminated by the Company during the three
(3) years preceding the date of this Agreement taken as a whole do not contain any untrue statement
of a material fact or omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which they were made, not
misleading.




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          (j) Material Changes. Except as specifically disclosed in the SEC Reports and
Schedule 3.1(j), since the date of the latest audited financial statements included within
the SEC Reports, (i) there has been no event, occurrence or development that has had or that could
reasonably be expected to result in a Material Adverse Effect, (ii) the Company has not incurred
any liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses
incurred in the ordinary course of business consistent with past practice and (B) liabilities (not
to exceed $100,000) not required to be reflected in the Company’s financial statements pursuant
to GAAP or required to be disclosed in filings made with the Commission, (iii) the Company has not
altered its method of accounting or the identity of its auditors, (iv) the Company has not declared
or made any dividend or distribution of cash or other property to its shareholders or purchased,
redeemed or made any agreements to purchase or redeem any shares of its capital stock, and (v) the
Company has not issued any equity securities to any officer, director or Affiliate, except pursuant
to existing Company stock option plans. The Company does not have pending before the Commission any
request for confidential treatment of information.




          (k) Litigation. There is no Action which (i) adversely affects or challenges the
legality, validity or enforceability of any of the Transaction Documents or the Securities and (ii)
except as specifically disclosed in the SEC Reports could, if there were an unfavorable decision,
individually or in the aggregate, have or reasonably be expected to result in a Material Adverse
Effect. Neither the Company nor any Subsidiary, nor any director or officer thereof, is or has
been the subject of any Action involving a claim of violation of or liability under federal or
state securities laws or a claim of breach of fiduciary duty, except as specifically disclosed in
Schedule 3.1(k). Except as disclosed in Schedule 3.1(k), there has not been, and
to the knowledge of the Company, there is not pending or contemplated, any investigation by the
Commission involving the Company or any current or former director or officer of the Company. The
Commission has not issued any stop order or other order suspending the effectiveness of any
registration statement filed by the Company or any Subsidiary under the Exchange Act or the
Securities Act.




          (l) Labor Relations. No material labor dispute exists or, to the knowledge of the
Company, is imminent with respect to any of the employees of the Company.




          (m) Compliance. Neither the Company nor any Subsidiary (i) is in default under or in
violation of (and no event has occurred that has not been waived that, with notice or lapse of time
or both, would result in a default by the Company or any Subsidiary under), nor has the Company or
any Subsidiary received notice of a claim that it is in default under or that it is in violation
of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a
party or by which it or any of its properties is bound (whether or not such default or violation
has been waived), (ii) is in violation of any order of any court, arbitrator or governmental body,
or (iii) is or has been in violation of any statute, rule or regulation of any governmental
authority, including without limitation all foreign, federal, state and local laws relating to
taxes, environmental protection, occupational health and safety, product quality and safety and
employment, labor matters and gaming matters, except in each case as could not, individually or in
the aggregate, have or reasonably be expected to result in a Material Adverse Effect. The Company
is in compliance with the applicable requirements of the Sarbanes-Oxley




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Act of 2002, as amended,
and the applicable rules and regulations thereunder promulgated by the Commission, except where
such noncompliance could not have or reasonably be expected to result in a Material Adverse Effect.




          (n) Regulatory Permits. The Company and the Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state, local or foreign regulatory
authorities necessary to conduct their respective businesses as described in the SEC Reports, except where the failure to possess such permits would not, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse Effect (“Material
Permits”), and neither the Company nor any Subsidiary has received any notice of proceedings
relating to the revocation or modification of any Material Permit.




          (o) Title to Assets. Except as set forth in Schedule 3.1(o), the Company and
the Subsidiaries have good and marketable title in fee simple to all real property owned by them
that is material to their respective businesses and good and marketable title in all personal
property owned by them that is material to their respective businesses, in each case free and clear
of all Liens, except for Liens as do not materially affect the value of such property and do not
materially interfere with the use made and proposed to be made of such property by the Company and
the Subsidiaries. Any real property and facilities held under lease by the Company and the
Subsidiaries are held by them under valid, subsisting and enforceable leases of which the Company
and the Subsidiaries are in compliance, except as could not, individually or in the aggregate, have
or reasonably be expected to result in a Material Adverse Effect.




          (p) Patents and Trademarks. The Company and the Subsidiaries have, or have rights to
use, all patents, patent applications, trademarks, trademark applications, service marks, trade
names, copyrights, licenses and other similar rights that are necessary or material for use in
connection with their respective businesses as described in the SEC Reports and which the failure
to so have could, individually or in the aggregate, have or reasonably be expected to result in a
Material Adverse Effect (collectively, the “Intellectual
Property Rights”). Neither the Company
nor any Subsidiary has received a written notice claiming that the Intellectual Property Rights
used by the Company or any Subsidiary violates or infringes upon the rights of any Person, other
than such claims which would not reasonably have or be expected to result in a Material Adverse
Effect. Except as set forth in the SEC Reports, to the knowledge of the Company, all such
Intellectual Property Rights are enforceable and there is no existing infringement by another
Person of any of the Intellectual Property Rights, other than such infringement by others which
would not reasonably have or be expected to result in a Material Adverse Effect.




          (q) Insurance. The Company and the Subsidiaries are insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as are prudent and
customary in the businesses in which the Company and the Subsidiaries are engaged. The Company has
no reason to believe that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as may be necessary to
continue its business on terms consistent with market for the Company’s and such Subsidiaries’
respective lines of business.




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          (r) Transactions With Affiliates and Employees. Except as set forth in the SEC
Reports and Schedule 3.1(r) hereto, none of the officers or directors of the Company and,
to the knowledge of the Company, none of the employees of the Company is presently a party to any
transaction with the Company or any Subsidiary (other than for services as employees, officers and
directors), including any contract, agreement or other arrangement providing for the furnishing of
services to or by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has
a substantial interest or is an officer, director, trustee or partner.




          (s) Internal Accounting Controls. The Company and the Subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable assurance that (i) transactions
are executed in accordance with management’s general or specific authorizations, (ii) transactions
are recorded as necessary to permit preparation of financial statements in conformity with GAAP and
to maintain asset accountability, (iii) access to assets is permitted only in accordance with
management’s general or specific authorization, and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences. The Company has established disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such disclosure
controls and procedures to ensure that material information relating to the Company, including its
Subsidiaries, is made known to the certifying officers by others within those entities,
particularly during the period in which the Company’s Form 10-K or 10-Q, as the case may be, is
being prepared. The Company’s certifying officers have evaluated the effectiveness of the
Company’s controls and procedures in accordance with Item 307 of Regulation S-K under the Exchange
Act for the Company’s most recently ended fiscal quarter or fiscal year-end (such date, the
“Evaluation Date”). The Company presented in its most recently filed Form 10-K or Form 10-Q the
conclusions of the certifying officers about the effectiveness of the disclosure controls and
procedures based on their evaluations as of the Evaluation Date. Since the Evaluation Date, there
have been no significant changes in the Company’s internal controls (as such term is defined in
Item 308(c) of Regulation S-K under the Exchange Act) or, to the Company’s knowledge, in other
factors that could significantly affect the Company’s internal controls.




          (t) Solvency. Based on the financial condition of the Company as of the Closing Date
(and assuming that the Closing shall have occurred), (i) the Company’s fair saleable value of its
assets exceeds the amount that will be required to be paid on or in respect of the Company’s
existing debts and other liabilities (including known contingent liabilities) as they mature; (ii)
the Company’s assets do not constitute unreasonably small capital to carry on its business for the
current fiscal year as now conducted and as proposed to be conducted including its capital needs
taking into account the particular capital requirements of the business conducted by the Company,
and projected capital requirements and capital availability thereof; and (iii) the current cash
flow of the Company, together with the proceeds the Company would receive, were it to liquidate all
of its assets, after taking into account all anticipated uses of the cash, would be sufficient to
pay all amounts on or in respect of its debt when such amounts are required to be paid. The
Company does not intend to incur debts beyond its ability to pay such debts as they




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mature (taking into account the timing and amounts of cash to be payable on or in respect of its debt).




          (u) Certain Fees. Except as described in Schedule 3.1(u), no brokerage or
finder’s fees or commissions are or will be payable by the Company to any broker, financial advisor
or consultant, finder, placement agent, investment banker, bank or other Person with respect to the
transactions contemplated by this Agreement. The Purchasers shall have no obligation with respect
to any fees or with respect to any claims (other than such fees or commissions owed by a Purchaser pursuant to written agreements executed by such Purchaser
which fees or commissions shall be the sole responsibility of such Purchaser) made by or on behalf
of other Persons for fees of a type contemplated in this Section that may be due in connection with
the transactions contemplated by this Agreement.




          (v) Certain Registration Matters. Based in part upon the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2(b)-(i), no registration under the
Securities Act is required for the offer and sale of the Securities by the Company to the
Purchasers under the Transaction Documents. The Company is eligible to register its Common Stock
for resale by the Purchasers under Form S-1 promulgated under the Securities Act. Except as
described in Schedule 3.1(v), the Company has not granted or agreed to grant to any Person
any rights (including “piggy-back” registration rights) to have any securities of the Company
registered with the Commission or any other governmental authority that have not been satisfied.




          (w) Listing and Maintenance Requirements. Except as specified in the SEC Reports, the
Company has not, in the two years preceding the date hereof, received notice from any Trading
Market to the effect that the Company is not in compliance with the listing or maintenance
requirements thereof. The Company is, and has no reason to believe that it will not in the
foreseeable future continue to be, in compliance with the listing and maintenance requirements for
continued listing of the Common Stock on the Trading Market on which the Common Stock is currently
listed or quoted. The issuance and sale of the Securities under the Transaction Documents does not
contravene the rules and regulations of the Trading Market on which the Common Stock is currently
listed or quoted, and no approval of the shareholders of the Company thereunder is required for the
Company to issue and deliver to the Purchasers the Securities contemplated by the Transaction
Documents.




          (x) Investment Company. The Company is not, and is not an Affiliate of, and
immediately following the Closing will not have become, an “investment company” within the meaning
of the Investment Company Act of 1940, as amended.




          (y) Application of Takeover Protections. The Company has taken all necessary action,
if any, in order to render inapplicable any control share acquisition, business combination, poison
pill (including any distribution under a rights agreement) or other similar anti-takeover provision
under the Company’s Certificate of Incorporation (or similar charter documents) or the laws of its
state of incorporation that is or could become applicable to the Purchasers or shareholders of the
Company prior to the Closing Date as a result of the Purchasers and the Company fulfilling their
obligations or exercising their rights under the Transaction




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Documents, including without limitation the Company’s issuance of the Securities and the Purchasers’ ownership of the
Securities.




          (z) No Additional Agreements. The Company does not have any agreement or
understanding with any Purchaser with respect to the transactions contemplated by the Transaction
Documents other than as specified in the Transaction Documents.




          (aa) Consultation with Auditors. The Company has consulted its independent auditors
concerning the accounting treatment of the transactions contemplated by the Transaction Documents, and in connection therewith has furnished such auditors complete copies of the
Transaction Documents. The Company intends to account for the gross proceeds raised from the
financing which is the subject of this Agreement as equity in its financial statements.




          (bb) Disclosure. The Company confirms that neither it nor any Person acting on its
behalf has provided any Purchaser or its respective agents or counsel with any information that the
Company believes constitutes material, non-public information except insofar as the existence and
terms of the proposed transactions hereunder may constitute such information. The Company
understands and confirms that the Purchasers will rely on the foregoing representations and
covenants in effecting transactions in securities of the Company. All disclosure provided to the
Purchasers regarding the Company, its business and the transactions contemplated hereby, furnished
by or on behalf of the Company (including the Company’s representations and warranties set forth in
this Agreement) are true and correct and do not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements made therein, in light of
the circumstances under which they were made, not misleading.




     3.2 Representations and Warranties of the Purchasers. Each Purchaser hereby, for
itself and for no other Purchaser, represents and warrants to the Company as follows:



          (a) Organization; Authority. Such Purchaser is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its organization with the
requisite corporate or partnership power and authority to enter into and to consummate the
transactions contemplated by the applicable Transaction Documents and otherwise to carry out its
obligations thereunder. The execution, delivery and performance by such Purchaser of the
transactions contemplated by this Agreement has been duly authorized by all necessary corporate or,
if such Purchaser is not a corporation, such partnership, limited liability company or other
applicable like action, on the part of such Purchaser. Each of this Agreement and the Registration
Rights Agreement has been duly executed by such Purchaser, and when delivered by such Purchaser in
accordance with terms hereof, will constitute the valid and legally binding obligation of such
Purchaser, enforceable against it in accordance with its terms.




          (b) Investment Intent. Such Purchaser is acquiring the Securities as principal for
its own account for investment purposes only and not with a view to or for distributing or
reselling such Securities or any part thereof, without prejudice, however, to such Purchaser’s
right at all times to sell or otherwise dispose of all or any part of such Securities in compliance
with applicable federal and state securities laws. Subject to the immediately preceding sentence,




12









 




nothing contained herein shall be deemed a representation or warranty by such Purchaser to hold the
Securities for any period of time. Such Purchaser is acquiring the Securities hereunder in the
ordinary course of its business. Such Purchaser does not have any agreement or understanding,
directly or indirectly, with any Person to distribute any of the Securities.




          (c) Purchaser Status. At the time such Purchaser was offered the Securities, it was,
and at the date hereof it is, and on each date on which it exercises the Warrants it will be, an
“accredited investor” as defined in Rule 501(a) under the Securities Act. Such Purchaser is not a
registered broker-dealer under Section 15 of the Exchange Act.




          (d) General Solicitation. Such Purchaser is not purchasing the Securities as a result
of any advertisement, article, notice or other communication regarding the Securities published in
any newspaper, magazine or similar media or broadcast over television or radio or presented at any
seminar or any other general solicitation or general advertisement.




          (e) Access to Information. Such Purchaser acknowledges that it has reviewed the
Disclosure Materials and has been afforded (i) the opportunity to ask such questions as it has
deemed necessary of, and to receive answers from, representatives of the Company concerning the
terms and conditions of the offering of the Securities and the merits and risks of investing in the
Securities; (ii) access to information about the Company and the Subsidiaries and their respective
financial condition, results of operations, business, properties, management and prospects
sufficient to enable it to evaluate its investment; and (iii) the opportunity to obtain such
additional information that the Company possesses or can acquire without unreasonable effort or
expense that is necessary to make an informed investment decision with respect to the investment.
Neither such inquiries nor any other investigation conducted by or on behalf of such Purchaser or
its representatives or counsel shall modify, amend or affect such Purchaser’s right to rely on the
truth, accuracy and completeness of the Disclosure Materials and the Company’s representations and
warranties contained in the Transaction Documents.




          (f) Certain Trading Activities. Such Purchaser has not, in violation of the
securities laws, directly or indirectly, nor has any Person acting on behalf of or pursuant to any
understanding with such Purchaser, engaged in any transactions in the securities of the Company
(including, without limitations, any Short Sales involving the Company’s securities) since the time
that such Purchaser was first contacted by the Company or Craig-Hallum Capital Group LLC regarding
the investment in the Company contemplated by the Transaction Documents. Such Purchaser covenants
that neither it nor any Person acting on its behalf or pursuant to any understanding with it will
engage in any transactions in the securities of the Company (including Short Sales) prior to the
time that the transactions contemplated by this Agreement are publicly disclosed.




          (g) Limited Ownership. The purchase by such Purchaser of the Securities issuable to it
at the Closing will not result in such Purchaser (individually or together with other Person with
whom such Purchaser has identified, or will have identified, itself as part of a “group” in a
public filing made with the Commission involving the Company’s securities) acquiring, or obtaining
the right to acquire, in excess of 19.999% of the outstanding shares of




13









 




Common Stock or the voting
power of the Company on a post transaction basis that assumes that the Closing shall have occurred.
Such Purchaser does not presently intend to, alone or together with others, make a public filing
with the Commission to disclose that it has (or that it together with such other Persons have)
acquired, or obtained the right to acquire, as a result of the Closing (when added to any other
securities of the Company that it or they then own or have the right to acquire), in excess of
19.999% of the outstanding shares of Common Stock or the voting power of the Company on a post
transaction basis that assumes that the Closing shall have occurred.




          (h) Independent Investment Decision. Such Purchaser has independently evaluated the
merits of its decision to purchase Securities pursuant to this Agreement, and such Purchaser
confirms that it has not relied on the advice of any other Purchaser’s business and/or legal counsel in making such decision. If such Purchaser is other than SF Capital Partners
Ltd., such Purchaser represents and warrants that Bryan Cave LLP has not acted as its legal counsel
in connection with the transactions contemplated by this Agreement.




          (i) Restricted Securities. Such Purchaser understands that the Securities are
“restricted securities” under Rule 144 and have not been registered under the Securities Act. The
blue sky state of residency for each Purchaser is as listed on the signature page attached hereto.




          The Company acknowledges and agrees that each Purchaser does not make or has not made any
representations or warranties with respect to the transactions contemplated hereby other than those
specifically set forth in this Section 3.2 and those set forth on the Selling Holder Questionnaire
(as defined in the Registration Rights Agreement).




ARTICLE IV.

OTHER AGREEMENTS OF THE PARTIES




     4.1 (a) Securities may only be disposed of in compliance with state and federal securities
laws. In connection with any transfer of the Securities other than pursuant to an effective
registration statement, to the Company, to an Affiliate of a Purchaser or in connection with a
pledge as contemplated in Section 4.1(b), the Company may require the transferor thereof to provide
to the Company an opinion of counsel selected by the transferor, the form and substance of which
opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not
require registration of such transferred Securities under the Securities Act.



          (b) Certificates evidencing the Securities will contain the following legend, so long as is
required by this Section 4.1(b) or Section 4.1(c):





[NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THESE
SECURITIES HAVE BEEN REGISTERED] [THESE SECURITIES HAVE NOT BEEN REGISTERED]WITH THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE



14









 






REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT
TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH
EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.
[THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES]
[THESE SECURITIES] MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT
SECURED BY SUCH SECURITIES.



          The Company acknowledges and agrees that a Purchaser may from time to time pledge, and/or
grant a security interest in some or all of the Securities pursuant to a bona fide margin agreement
in connection with a bona fide margin account and, if required under the terms of such agreement or
account, such Purchaser may transfer pledged or secured Securities to the pledgees or secured
parties. Such a pledge or transfer would not be subject to approval or consent of the Company and
no legal opinion of legal counsel to the pledgee, secured party or pledgor shall be required in
connection with the pledge, but such legal opinion may be required in connection with a subsequent
transfer following default by the Purchaser transferee of the pledge. No notice shall be required
of such pledge. At the appropriate Purchaser’s expense, the Company will execute and deliver such
reasonable documentation as a pledgee or secured party of Securities may reasonably request in
connection with a pledge or transfer of the Securities including the preparation and filing of any
required prospectus supplement under Rule 424(b)(3) of the Securities Act or other applicable
provision of the Securities Act to appropriately amend the list of Selling Stockholders thereunder.




          (c) Certificates evidencing Shares and Warrant Shares shall not contain any legend (including
the legend set forth in Section 4.1(b)): (i) following a sale or transfer of such Shares or Warrant
Shares pursuant to an effective registration statement (including a Registration Statement), or
(ii) following a sale or transfer of such Shares or Warrant Shares pursuant to Rule 144 (assuming
the transferee is not an Affiliate of the Company), or (iii) while such Shares or Warrant Shares
are eligible for sale under Rule 144(k). If a Purchaser shall make a sale or transfer of Shares
either (x) pursuant to Rule 144 or (y) pursuant to a registration statement and in each case shall
have delivered to the Company or the Company’s transfer agent the certificate representing Shares
containing a restrictive legend which are the subject of such sale or transfer and a representation
letter in customary form (the date of such sale or transfer and Share delivery being the
“Share Delivery Date”) and (1) the Company shall fail to deliver or cause to be delivered to such
Purchaser a certificate representing such Shares that is free from all restrictive or other legends
by the third Trading Day following the Share Delivery Date and (2) following such third Trading Day
after the Share Delivery Date and prior to the time such Shares are received free from restrictive
legends, the Purchaser, or any third party on behalf of such Purchaser, purchases (in an open
market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the
Purchaser of such Shares (a “Buy-In”), then the Company shall pay in cash to the Purchaser (for
costs incurred either directly by such Purchaser or on




15









 




behalf of a third party) the amount by which
the total purchase price paid for Common Stock as a result of the Buy-In (including brokerage
commissions, if any) exceed the proceeds received by such Purchaser as a result of the sale to
which such Buy-In relates. The Purchaser shall provide the Company written notice indicating the
amounts payable to the Purchaser in respect of the Buy-In.




     4.2 Furnishing of Information. As long as any Purchaser owns the Securities, the
Company agrees to use its reasonable best efforts to timely file (or obtain extensions in respect
thereof and use its reasonable best efforts to file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to the Exchange Act. As long as
any Purchaser owns Securities, if the Company is not required to file reports pursuant to such
laws, it will prepare and furnish to the Purchasers and make publicly available in accordance with
Rule 144(c) such information as is required for the Purchasers to sell the Shares and Warrant Shares under Rule 144. The Company further covenants that it will take such further
action as any holder of Securities may reasonably request, all to the extent required from time to
time to enable such Person to sell such Shares and Warrant Shares without registration under the
Securities Act within the limitation of the exemptions provided by Rule 144.



     4.3 Integration. Subsequent to the date hereof, the Company shall not and shall use
its reasonable best efforts to ensure that no Affiliate of the Company shall, sell, offer for sale
or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2
of the Securities Act) that would be integrated with the offer or sale of the Securities in a
manner that would require the registration under the Securities Act of the sale of the Securities
to the Purchasers, or that would be integrated with the offer or sale of the Securities for
purposes of the rules and regulations of any Trading Market in a manner that would require
shareholder approval of the sale of the Securities to the Purchasers.



     4.4 Subsequent Registrations. Other than pursuant to the Registration Statement (which
may include the securities specified in Schedule 3.1(v)), prior to the Effective Date, the
Company may not file any registration statement (other than on Form S-8) with the Commission with
respect to any securities of the Company.



     4.5 Securities Laws Disclosure; Publicity. By 9:00 a.m. (New York time) on the
Trading Day following the execution of this Agreement, and by 9:00 a.m. (New York time) on the
Trading Day following the Closing Date, the Company shall issue press releases in a form approved
by the Purchasers disclosing the transactions contemplated hereby and the Closing. On the Trading
Day following the execution of this Agreement the Company will file a Current Report on Form 8-K
disclosing the material terms of the Transaction Documents (and attach as exhibits thereto the
Transaction Documents and the schedules thereto), and on the Trading Day following the Closing Date
the Company will file an additional Current Report on Form 8-K to disclose the Closing. In
addition, the Company will make such other filings and notices in the manner and time required by
the Commission and the Trading Market on which the Common Stock is listed. Notwithstanding the
foregoing, the Company shall not publicly disclose the name of any Purchaser, or include the name
of any Purchaser in any filing with the Commission (other than the Registration Statement and any
exhibits to filings made in respect of this



16









 




transaction in accordance with periodic filing
requirements under the Exchange Act) or any regulatory agency or Trading Market, without the prior
written consent of such Purchaser, except to the extent such disclosure is required by law or
Trading Market regulations.




     4.6 Limitation on Issuance of Future Priced Securities. During the six months
following the Closing Date, the Company shall not issue any “Future Priced Securities” as such term
is described by NASD IM-4350-1.



     4.7 Indemnification of Purchasers. In addition to the indemnity provided in the
Registration Rights Agreement, the Company will indemnify and hold the Purchasers and their
directors, officers, shareholders, partners, employees and agents
(each, a “Purchaser Party”)
harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs
and expenses, including all judgments, amounts paid in settlements, court costs and reasonable
attorneys’ fees and costs of investigation (collectively,
“Losses”) that any such Purchaser Party may suffer or incur as a result of or relating to any misrepresentation, breach or inaccuracy
of any representation, warranty, covenant or agreement made by the Company in any Transaction
Document. In addition to the indemnity contained herein, the Company will reimburse each Purchaser
Party for its reasonable legal and other expenses (including the cost of any investigation,
preparation and travel in connection therewith) incurred in connection therewith, as such expenses
are incurred. Except as otherwise set forth herein, the mechanics and procedures with respect to
the rights and obligations under this Section 4.7 shall be the same as those set forth in Section 5
of the Registration Rights Agreement.



     4.8 Participation Rights. If at any time prior to the twelve-month anniversary of the
Closing Date, the Company proposes to offer, issue, or sell any equity Common Stock or Common Stock
Equivalents (collectively, “New Issue Securities”), the Company shall first offer the New Issue
Securities to the Purchasers in accordance with the following provisions:



          (a) The
Company shall give a written notice to each Purchaser (the
“First Notice”) stating and
including (i) its intention to issue the New Issue Securities, (ii) the number and description of
the New Issue Securities proposed to be issued and (iii) the purchase price (calculated as of the
proposed issuance date) and the final documents and agreements setting forth and governing the
terms and conditions upon which the Company is offering the New Issue Securities. The Company may
not impose any terms or provisions upon either the New Issue Securities nor within the transaction
documents pertaining thereto which would (i) require a Purchaser (or subsequent holder of any
Securities) to agree to any trading restrictions on any securities of the Company owned by such
Purchaser (or subsequent holder) prior to such subsequent placement under which such New Issue
Securities would be issued, (ii) require the purchaser of any New Issue Securities to make any
representations or warranties which are more onerous than those set forth in this Agreement, (iii)
otherwise treat an existing stockholder of the Company differently than any other potential buyer
of such New Issue Securities, (iv) limit the number of shares of Common Stock which a Purchaser (or
subsequent holder of Securities) may beneficially own (other than (i) to the extent that such
ownership would result in a “change of control” of the Company under the rules of the Nasdaq Stock
Market or (ii) as set forth in exercise limitations substantially similar to those contained in the
Transaction Documents), or




17









 




(v) provide registration rights which differ in any material respect to those granted under the Registration Rights Agreement.




          (b) Transmittal of the First Notice to the Purchasers by the Company shall constitute an offer
by the Company to sell to each Purchaser (i) up to its pro rata portion (based upon such
Purchaser’s Investment Amount relative to the aggregate Investment amount of all Purchasers party
to this Agreement) of the New Issue Securities (the “Basic
Amount”) for the price and upon the
terms and conditions set forth in the First Notice and (ii) with respect to each Purchaser that
elects to purchase its Basic Amount, any additional portion of the New Issue Securities
attributable to the Basic Amounts of other Purchasers as such Purchaser shall indicate it will
purchase or acquire should the other Purchasers subscribe for less than their Basic Amounts (the
“Undersubscription Amount”). For a period of five (5) Business Days after receipt of the First
Notice, each Purchaser shall have the option, exercisable by written notice to the Company, to
accept the Company’s offer as to all or any part of such Purchaser’s Basic Amount and, if such
Purchaser shall elect to purchase all of its Basic Amount, the Undersubscription Amount, if any, that such Purchaser elects to purchase (in either case, the
“Notice of Acceptance”). If the Basic Amounts subscribed for by all Purchasers are less than the
total of all of the Basic Amounts, then each Purchaser who has set forth an Undersubscription
Amount in its Notice of Acceptance shall be entitled to purchase, in addition to the Basic Amounts
subscribed for, the Undersubscription Amount it has subscribed for; provided, however, that
if the Undersubscription Amounts subscribed for exceed the difference between the total of all the
Basic Amounts and the Basic Amounts subscribed for (the
“Available Undersubscription Amount”), each
Purchaser who has subscribed for any Undersubscription Amount shall be entitled to purchase that
portion of the Available Undersubscription Amount as the Basic Amount of such Purchaser bears to
the total Basic Amounts of all Purchasers that have subscribed for Undersubscription Amounts,
subject to rounding by the Board of Directors to the extent its deems reasonably necessary. If two
or more types of New Issue Securities are to be issued or New Issue Securities are to be issued
together with other types of securities, including, without limitation, debt securities, in a
single transaction or related transactions, the rights to purchase New Issue Securities granted to
the Purchasers under this Section must be exercised to purchase all types of New Issue Securities
and such other securities in the same proportion as such New Issue Securities and other securities
are to be issued by the Company.




          (c) The Company shall have ten (10) Trading Days from the expiration of the period set forth
in Section 4.8(b) above to either (x)(1) publicly disclose its intention to offer, issue or sell
(as the case may be) New Issue Securities in a manner such that Purchasers will not be in
possession of material, non-public information concerning the Company or such New Issue Securities
as a result of the notices and information delivered to them under this Section, (2) issue, sell or
exchange all or any part of such New Issue Securities as to which a Notice of Acceptance has not
been given by the Purchasers (the “Refused Securities”), but only upon the terms and conditions
(including, without limitation, unit prices and interest rates) contained in the First Notice, and
(2) in connection therewith and as a requirement thereof, file a Current Report on Form 8-K
disclosing the material terms of such transaction (and attach as exhibits thereto all documents and
agreements pertaining thereto) or (y) notify the Purchasers in writing that it has determined to
abandon such transaction. The Company understands and agrees that,




18









 




in the event the Company fails to make at least one of the two the Form 8-K filings described in (x) above or deliver the letter
described in (y) above, then (1) the Company shall be deemed to have abandoned such transaction,
(2) the Purchasers will not be deemed to be in possession of any non-public information as a result
of the First Notice and the transactions contemplated thereby, and (3) the Purchasers will be free
to trade in the Company’s securities.




          (d) In the event the Company shall propose to sell less than all the Refused Securities (any
such sale to be in the manner and on the terms specified in Section 4.8(c) above), then each
Purchaser may, at its sole option and in its sole discretion, reduce the number or amount of the
New Issue Securities specified in its Notice of Acceptance to an amount that shall be not less than
the number or amount of New Issue Securities that the Purchaser elected to purchase pursuant to
Section 4.8(b) above multiplied by a fraction, (i) the numerator of which shall be the number or
amount of New Issue Securities the Company actually proposes to issue, sell or exchange (including
prior to such reduction) and (ii) the denominator of which shall be the original amount of the New
Issue Securities. In the event that any Purchaser so elects to reduce the number or amount of New
Issue Securities specified in its Notice of Acceptance, the Company may not issue, sell or exchange more than the reduced number or amount of the New
Issue Securities unless and until such securities have again been offered to the Purchasers in
accordance with Section 4.8(a) above.




          (e) Upon the closing of the issuance, sale or exchange of all or less than all of the Refused
Securities, the Purchasers shall acquire from the Company, and the Company shall issue to the
Purchasers, the number or amount of New Issue Securities specified in the Notices of Acceptance, as
reduced pursuant to Section 4.8(d) the Purchasers have so elected, upon the terms and conditions
specified in the First Notice. The purchase by the Purchasers of any New Issue Securities is
subject in all cases to the preparation, execution and delivery by the Company and the Purchasers
of a purchase agreement relating to such New Issue Securities reasonably satisfactory in form and
substance to the Purchasers and the Company and their respective counsel.




          (f) The participation rights contained in this Section 4.8 shall not apply to the issuance and
sale by the Company of shares of Common Stock issued as a result of: (i) the issuance of Warrant
Shares, (ii) the grant of options or warrants, or the issuance of additional securities, under any
duly authorized Company stock option, restricted stock plan or stock purchase plan whether now
existing or approved by the Company and its shareholders in the future, or (iii) the issuance and
sale by the Company of shares of Common Stock issued as consideration for the acquisition of
another company or business in which the shareholders of the Company do not have an ownership
interest, which acquisition has been approved by the Board of Directors of the Company.




     4.9 Non-Public Information. The Company covenants and agrees that neither it nor any
other Person acting on its behalf will provide any Purchaser or its agents or counsel with any
information that the Company believes constitutes material non-public information, unless prior
thereto such Purchaser shall have executed a written agreement regarding the confidentiality and



19









 




use of such information. The Company understands and confirms that each Purchaser shall be relying
on the foregoing representations in effecting transactions in securities of the Company.




     4.10 Use of Proceeds. The Company will use the net proceeds from the sale of the
Securities hereunder to repay a portion of the Company’s debt (but not debt which also would
constitute a Common Stock Equivalent) and for general working capital purposes, but not to redeem
any Common Stock or Common Stock Equivalents.



     4.11 Listing of Securities. The Company agrees, (i) if the Company applies to have
the Common Stock traded on any other Trading Market, it will include in such application the Shares
and Warrant Shares, and will take such other action as is necessary or desirable to cause the
Shares and Warrant Shares to be listed on such other Trading Market as promptly as possible, and
(ii) it will take all action reasonably necessary to continue the listing and trading of its Common
Stock on a Trading Market and will comply in all material respects with the Company’s reporting,
filing and other obligations under the bylaws or rules of the Trading Market.



     4.12 Reservation of Shares. The Company shall take all action necessary to at all
times have authorized, and reserved for the purpose of issuance, after the Closing Date, the shares
of Common Stock issuable upon exercise of the Warrants (without taking into account any limitations
on the conversion or redemption of the Notes or exercise of the Warrants set forth in the Warrants)
and any capital stock of the Company issued or issuable with respect to the Warrant Shares.



ARTICLE V.

CLOSING CONDITIONS




     5.1 Conditions Precedent to the Obligations of the Purchasers to Purchase Securities on
the Closing Date. The obligation of each Purchaser to acquire Securities at the Closing is
subject to the satisfaction or waiver by such Purchaser, at or before the Closing, of each of the
following conditions:



          (a) Representations and Warranties. The representations and warranties of the
Company contained herein shall be true and correct in all material respects as of the date when
made and as of the Closing as though made on and as of such date;




          (b) Performance. The Company shall have performed, satisfied and complied in all
material respects with all covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by it at or prior to the Closing;




          (c) No Injunction. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction that prohibits the consummation of any of the transactions
contemplated by the Transaction Documents;





20










 






          (d) Adverse Changes. Since the date of execution of this Agreement, no event
or series of events shall have occurred that reasonably could have or result in a Material Adverse
Effect;




          (e) No Suspensions of Trading in Common Stock; Listing. Trading in the Common Stock
shall not have been suspended by the Commission or any Trading Market (except for any suspensions
of trading of not more than one Trading Day solely to permit dissemination of material information
regarding the Company) at any time since the date of execution of this Agreement, and the Common
Stock shall have been at all times since such date listed for trading on a Trading Market;




          (f) Nasdaq Listing. The Nasdaq Stock Market shall have waived application of the 15
day prior notice contained in NASD Marketplace Rule 4310(17)(D) or such timeframe shall have
expired without objection;




          (g) Company Deliverables. The Company shall have delivered the Company Deliverables
in accordance with Section 2.2(a);




          (h) Closing Officer’s Certificate. At the Closing, the Company shall have delivered
to each Purchaser an officer’s certificate to the effect that each of the conditions specified in
Sections 5.1(a)-5.1(f) is satisfied in all respects; and




          (i) Termination. This Agreement shall not have been terminated as to such Purchaser
in accordance with Section 6.5 herein.




     5.2 Conditions Precedent to the Obligations of the Company to sell Securities on the
Closing Date. The obligation of the Company to sell Securities at the Closing is subject to
the satisfaction or waiver by the Company, at or before the Closing, of each of the following
conditions:



          (a) Representations and Warranties. The representations and warranties of each
Purchaser contained herein shall be true and correct in all material respects as of the date when
made and as of the Closing Date as though made on and as of such date;




          (b) Performance. Each Purchaser shall have performed, satisfied and complied in all
material respects with all covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by such Purchaser at or prior to the Closing;




          (c) No Injunction. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction that prohibits the consummation of any of the transactions
contemplated by the Transaction Documents;




21









 








          (d) Nasdaq Listing. The Nasdaq Stock Market shall have waived application of the 15
day prior notice contained in NASD Marketplace Rule 4310(17)(D) or such timeframe shall have
expired without objection;




          (e) Purchaser Deliverables. Each Purchaser shall have delivered its Purchaser
Deliverables in accordance with Section 2.2(b); and




          (f) Termination. This Agreement shall not have been terminated as to such Purchaser
in accordance with Section 6.5 herein.




ARTICLE VI.

MISCELLANEOUS




     6.1 Fees and Expenses. At the Closing, the Company shall reimburse SF Capital
Partners Ltd. $25,000 in connection with its legal fees concerning the transactions contemplated by
the Transaction Documents (SF Capital Partners Ltd. may deduct such amount from the portion of its
Investment Amount deliverable to the Company at the Closing), it being understood that Bryan Cave
LLP has only rendered legal advice to SF Capital Partners Ltd., and not to the Company or any other
Purchaser in connection with the transactions contemplated hereby, and that each of the Company and
each Purchaser has relied for such matters on the advice of its own respective counsel. Except as
specified in the immediately preceding sentence and in the Registration Rights Agreement, each
party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if
any, and all other expenses incurred by such party incident to the negotiation, preparation,
execution, delivery and performance of the Transaction Documents. The Company shall pay all stamp
and other taxes and duties levied in connection with the sale of the Securities.



     6.2 Entire Agreement. The Transaction Documents, together with the Exhibits and
Schedules thereto, contain the entire understanding of the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, oral or written, with respect
to such matters, which the parties acknowledge have been merged into such documents, exhibits and
schedules.



     6.3 Notices. Any and all notices or other communications or deliveries required or
permitted to be provided hereunder shall be in writing and shall be deemed given and effective on
the earliest of (a) the date of transmission, if such notice or communication is delivered via
facsimile (provided the sender receives a machine-generated confirmation of successful
transmission) at the facsimile number specified in this Section prior to 6:30 p.m. (New York City
time) on a Trading Day, (b) the next Trading Day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified in this Section on a day
that is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, (c) the
Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier
service, or (d) upon actual receipt by the party to whom such notice is required to be given. The
address for such notices and communications shall be as follows:






22









 








	 	 	 
	If to the Company:

	 	Navarre Corporation










	 	 	 
	 

	 	7400 49th Avenue North
	 

	 	New Hope, MN 55428
	 

	 	Attn: Chief Financial Officer
	 

	 	Facsimile No.: (763) 504-1107
	 
	 	 
	With a copy to:

	 	Winthrop & Weinstine, P.A.
	 

	 	225 South Sixth Street
	 

	 	Suite 3500
	 

	 	Minneapolis, MN 55402
	 

	 	Attn: Philip T. Colton
	 

	 	Facsimile No.: (612) 604-6929
	 
	 	 
	If to SF Capital Partners Ltd.

	 	c/o Stark Investments
	 

	 	3600 South Lake Drive
	 

	 	St. Francis, WI 53235
	 

	 	Facsimile: (414) 294-7692
	 

	 	Attention: Todd M. W. Turall, Esq.
	 
	 	 
	With a copy to:

	 	Bryan Cave LLP
	 

	 	1290 Avenue of the Americas
	 

	 	New York, NY 10104
	 

	 	Facsimile: (212) 541-1432
	 

	 	Attention: Eric L. Cohen, Esq.
	 
	 	 
	If to any other Purchaser:

	 	To the address set forth under such Purchaser’s name on the signature pages hereof;





or such other address as may be designated in writing hereafter, in the same manner, by such
Person.




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




23









 





     6.5 Termination. This Agreement may be terminated prior to Closing:




          (a) by written agreement of the Purchasers and the Company;




          (b) by the Company or a Purchaser (as to itself but no other Purchaser) upon written notice to
the other, if the Closing shall not have taken place by 6:30 p.m. Eastern time on March 17, 2006;
provided, that the right to terminate this Agreement under this Section 6.5(b) shall not be
available to any Person whose failure to comply with its obligations under this Agreement has been
the cause of or resulted in the failure of the Closing to occur on or before such time; or




          (c) by a Purchaser (as to itself but no other Purchaser) if it concludes in good faith that
any of the conditions precedent contained Sections 5.1(c), (d) or (e) shall have been breached or
shall not be capable of being satisfied by March 17, 2006 despite the assumed best efforts of the
Company.




     In the event of a termination pursuant to this Section, the Company shall promptly notify all
non-terminating Purchasers and shall pay to SF Capital Partners Ltd. all of the fees and expenses
incurred by SF Capital Partners Ltd. (including the legal fees and expenses set forth in Section
6.1) in connection with this Agreement and the transactions contemplated by this Agreement through
the termination date. Other than as to the foregoing fees and expenses, upon a termination in
accordance with this Section 6.5, the Company and the terminating Purchaser(s) shall not have any
further obligation or liability (including as arising from such termination) to the other and no
Purchaser will have any liability to any other Purchaser under the Transaction Documents as a
result therefrom.



     6.6 Construction. The headings herein are for convenience only, do not constitute a
part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.
The language used in this Agreement will be deemed to be the language chosen by the parties to
express their mutual intent, and no rules of strict construction will be applied against any party.
This Agreement shall be construed as if drafted jointly by the parties, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any
provisions of this Agreement or any of the Transaction Documents.



     6.7 Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties and their successors and permitted assigns. The Company may not assign this
Agreement or any rights or obligations hereunder without the prior written consent of the
Purchasers. Any Purchaser may assign any or all of its rights under this Agreement to any Person to
whom such Purchaser assigns or transfers any Securities, provided (i) such transferee agrees in
writing to be bound, with respect to the transferred Securities, by the provisions hereof that
apply to the “Purchasers” and (ii) the Purchaser provides notice to the Company for all such
transfers other than those transfers made under Rule 144 or pursuant to a registration statement.



     6.8 No Third-Party Beneficiaries. This Agreement is intended for the benefit of the
parties hereto and their respective successors and permitted assigns and is not for the benefit of,
nor may any provision hereof be enforced by, any other Person, except as otherwise set forth in
Section 4.7 (as to each Purchaser Party).



24









 





     6.9 Governing Law. All questions concerning the construction, validity, enforcement
and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles
of conflicts of law thereof. Each party agrees that all Proceedings concerning the
interpretations, enforcement and defense of the transactions contemplated by this Agreement and any
other Transaction Documents (whether brought against a party hereto or its respective Affiliates,
employees or agents) shall be commenced exclusively in the New York Courts. Each party hereto
hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the
adjudication of any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein (including with respect to the enforcement of the any of
the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any
Proceeding, any claim that it is not personally subject to the jurisdiction of any such New York
Court, or that such Proceeding has been commenced in an improper or inconvenient forum. Each party
hereto hereby irrevocably waives personal service of process and consents to process being served
in any such Proceeding by mailing a copy thereof via registered or certified mail or overnight
delivery (with evidence of delivery) to such party at the address in effect for notices to it under
this Agreement and agrees that such service shall constitute good and sufficient service of process
and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to
serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the
fullest extent permitted by applicable law, any and all right to trial by jury in any legal
proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
If either party shall commence a Proceeding to enforce any provisions of a Transaction Document,
then the prevailing party in such Proceeding shall be reimbursed by the other party for its
attorney’s fees and other costs and expenses incurred with the investigation, preparation and
prosecution of such Proceeding.



     6.10 Disclosure. Except as specifically otherwise provided in Section 4.8, upon
receipt or delivery by the Company of any notice in accordance with the terms of this Agreement,
unless the Company has in good faith determined that the matters relating to such notice do not
constitute material, nonpublic information relating to the Company or its Subsidiaries, the Company
shall within one (1) Business Day after any such receipt or delivery publicly disclose such
material, nonpublic information on a Current Report on Form 8-K or otherwise. In the event that the
Company believes that a notice contains material, nonpublic information relating to the Company or
its Subsidiaries, the Company shall indicate to the Purchaser contemporaneously with delivery of
such notice, and in the absence of any such indication, the Purchaser shall be allowed to presume
that all matters relating to such notice do not constitute material, nonpublic information relating
to the Company or its Subsidiaries.



     6.11 Survival. The representations and warranties contained herein shall survive the
Closing and the delivery of the Shares and Warrants for a period of three years from the Closing.
The agreements and covenants contained herein shall survive the Closing in accordance with their
respective terms.



     6.12 Execution. This Agreement may be executed in two or more counterparts, all of
which when taken together shall be considered one and the same agreement and shall become



25









 




effective when counterparts have been signed by each party and delivered to the other party, it being
understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is executed) with the
same force and effect as if such facsimile signature page were an original thereof.




     6.13 Severability. If any provision of this Agreement is held to be invalid or
unenforceable in any respect, the validity and enforceability of the remaining terms and provisions
of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt
to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon
so agreeing, shall incorporate such substitute provision in this Agreement.



     6.14 Rescission and Withdrawal Right. Notwithstanding anything to the contrary
contained in (and without limiting any similar provisions of) the Transaction Documents, whenever
any Purchaser exercises a right, election, demand or option under a Transaction Document and the
Company does not timely perform its related obligations within the periods therein provided, then
such Purchaser may rescind or withdraw, in its sole discretion from time to time upon written
notice to the Company, any relevant notice, demand or election in whole or in part without
prejudice to its future actions and rights.



     6.15 Replacement of Securities. If any certificate or instrument evidencing any
Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued
in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution
therefor, a new certificate or instrument, but only upon receipt of an affidavit reasonably
satisfactory to the Company attesting to such loss, theft or destruction and customary and
reasonable indemnity, if requested. The applicants for a new certificate or instrument under such
circumstances shall also pay any reasonable third-party costs associated with the issuance of such
replacement Securities. If a replacement certificate or instrument evidencing any Securities is
requested due to a mutilation thereof, the Company may require delivery of such mutilated
certificate or instrument as a condition precedent to any issuance of a replacement.



     6.16 Remedies. In addition to being entitled to exercise all rights provided herein
or granted by law, including recovery of damages, each of the Purchasers and the Company will be
entitled to specific performance under the Transaction Documents. The parties agree that monetary
damages may not be adequate compensation for any loss incurred by reason of any breach of
obligations described in the foregoing sentence and hereby agree to waive in any action for
specific performance of any such obligation the defense that a remedy at law would be adequate.



     6.17 Payment Set Aside. To the extent that the Company makes a payment or payments to
any Purchaser pursuant to any Transaction Document or a Purchaser enforces or exercises its rights
thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any
part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside,
recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the
Company, a trustee, receiver or any other person under any



26









 




law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent
of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as
if such payment had not been made or such enforcement or setoff had not occurred.




     6.18 Independent Nature of Purchasers’ Obligations and Rights. The obligations of
each Purchaser under any Transaction Document are several and not joint with the obligations of any
other Purchaser, and no Purchaser shall be responsible in any way for the performance of the
obligations of any other Purchaser under any Transaction Document. The decision of each Purchaser
to purchase Securities pursuant to the Transaction Documents has been made by such Purchaser
independently of any other Purchaser. Nothing contained herein or in any Transaction Document, and
no action taken by any Purchaser pursuant thereto, shall be deemed to constitute the Purchasers as
a partnership, an association, a joint venture or any other kind of entity, or create a presumption
that the Purchasers are in any way acting in concert or as a group with respect to such obligations
or the transactions contemplated by the Transaction Document. Each Purchaser acknowledges that no
other Purchaser has acted as agent for such Purchaser in connection with making its investment
hereunder and that no Purchaser will be acting as agent of such Purchaser in connection with
monitoring its investment in the Securities or enforcing its rights under the Transaction
Documents. Each Purchaser shall be entitled to independently protect and enforce its rights,
including without limitation the rights arising out of this Agreement or out of the other
Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an
additional party in any proceeding for such purpose. The Company acknowledges that each of the
Purchasers has been provided with the same Transaction Documents for the purpose of closing a
transaction with multiple Purchasers and not because it was required or requested to do so by any
Purchaser.



     6.19 Limitation of Liability. Notwithstanding anything herein to the contrary, the
Company acknowledges and agrees that the liability of any Purchaser arising directly or indirectly,
under any Transaction Document, of any and every nature whatsoever, shall be satisfied solely out
of the assets of such Purchaser, and that no trustee, officer, other investment vehicle or any
other Affiliate of such Purchaser or any investor, shareholder or holder of shares of beneficial
interest of such a Purchaser shall be personally liable for any liabilities of such Purchaser.



[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK
 SIGNATURE PAGE TO FOLLOW]




27









 





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



	 	 	 	 	 
	 	NAVARRE CORPORATION

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 



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




 









 






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



	 	 	 	 	 
	 	 	NAME OF INVESTING ENTITY
	 
	 	 	 	 
	 	 	 
	 
	 	 	 	 
	 

	 	By:	 	 
	 

	 	 	 	 
	 

	 	 	 	Name:
	 

	 	 	 	Title:
	 
	 	 	 	 
	 	 	Investment Amount: $
	 
	 	 	 	 
	 	 	Address for Notice:
	 
	 	 	 	 
	 	 	Facsimile No.:
	 	 	Attn:
	 	 	Tax ID No.:
	 	 	Blue Sky State of Residency:






29