Unassociated Document







SECURITIES
PURCHASE AGREEMENT

 

This
Securities Purchase Agreement (this “Agreement”) is
dated as of April 12, 2005, by and among DDS Technologies USA, Inc., a Nevada
corporation (the “Company”), and
the purchasers identified on the signature pages hereto (each, including its
successors and assigns, a “Purchaser” and
collectively the “Purchasers”).

 

WHEREAS,
subject to the terms and conditions set forth in this Agreement and pursuant to
Section 4(2) of the Securities Act of 1933, as amended (the “Securities
Act”) and
Rule 506 promulgated thereunder, the Company desires to issue and sell to each
Purchaser, and each Purchaser, severally and not jointly, desires to purchase
from the Company, securities of the Company as more fully described in this
Agreement.

 

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

 

 

ARTICLE
I

DEFINITIONS

 

1.1 Definitions. In
addition to the terms defined elsewhere in this Agreement: (a) capitalized terms
that are not otherwise defined herein have the meanings given to such terms in
the Certificate of Designation (as defined herein), and (b) the following terms
have the meanings indicated in this Section 1.1:

 

“Action” shall
have the meaning ascribed to such term in Section 3.1(j).

 

“Actual
Minimum” means,
as of any date, the maximum aggregate number of shares of Common Stock then
issued or potentially issuable in the future pursuant to the Transaction
Documents, including any Underlying Shares issuable upon exercise or conversion
in full of all Warrants and shares of Preferred Stock, ignoring any conversion
or exercise limits set forth therein, and assuming that any previously
unconverted shares of Preferred Stock are held until the second anniversary of
the Closing Date and all dividends are paid in shares of Common Stock until such
second anniversary.

 

“Affiliate” means
any Person that, directly or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with a Person, as such
terms are used in and construed under Rule 144 under the Securities Act. With
respect to a Purchaser, any investment fund or managed account that is managed
on a discretionary basis by the same investment manager as such Purchaser will
be deemed to be an Affiliate of such Purchaser.

 

“Certificate
of Designation” means
the Certificate of Designation to be filed prior to the Closing by the Company
with the Secretary of State of Nevada, in the form of Exhibit
A attached
hereto.

 







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“Closing” means
the closing of the purchase and sale of the Securities pursuant to Section
2.1.

 

“Closing
Date” means
the Trading Day when all of the Transaction Documents have been executed and
delivered by the applicable parties thereto, and all conditions precedent to (i)
the Purchasers’ obligations to pay the Subscription Amount and (ii) the
Company’s obligations to deliver the Securities have been satisfied or
waived.

 

“Commission” means
the Securities and Exchange Commission.

 

“Common
Stock” means
the common stock of the Company, par value $0.0001 per share, and any other
class of securities into which such securities may hereafter have been
reclassified or changed into.

 

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

 

“Company
Counsel” means
Greenberg Traurig, P.A.

 

“Conversion
Price” shall
have the meaning ascribed to such term in the Certificate of
Designation.

 

“Disclosure
Schedules” shall
have the meaning ascribed to such term in Section 3.1.

 

“Effective
Date” means
the date that the initial Registration Statement filed by the Company pursuant
to the Registration Rights Agreement is first declared effective by the
Commission.

 

“Exchange
Act” means
the Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.




“Exempt
Issuance” means
the issuance of (a) shares of Common Stock or options to employees, officers or
directors of the Company pursuant to any stock or option plan duly adopted by a
majority of the non-employee members of the Board of Directors of the Company or
a majority of the members of a committee of non-employee directors established
for such purpose, (b) securities issued upon the exercise of or conversion of or
as dividends on any Securities issued hereunder, convertible securities, options
or warrants issued and outstanding on the date of this Agreement, provided that
such securities have not been amended since the date of this Agreement to
increase the number of such securities or to decrease the exercise or conversion
price of any such securities, and (c) securities issued pursuant to acquisitions
or strategic transactions, provided any such issuance shall only be to a Person
which is, itself or through its subsidiaries, an operating company in a business
synergistic with the business of the Company and in which the Company receives
benefits in addition to the investment of funds, but shall not include a
transaction in which the Company is issuing securities primarily for the purpose
of raising capital or to an entity whose primary business is investing in
securities.










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“FW” means
Feldman Weinstein LLP with offices located at 420 Lexington Avenue, Suite 2620,
New York, New York 10170-0002.




“GAAP” shall
have the meaning ascribed to such term in Section 3.1(h).




“Intellectual
Property Rights” shall
have the meaning ascribed to such term in Section 3.1(o).




“Legend
Removal Date” shall
have the meaning ascribed to such term in Section 4.1(c). 




“Liens” means a
lien, charge, security interest, encumbrance, right of first refusal, preemptive
right or other restriction.




“Long
Term Warrant” means
the Common Stock purchase warrants, in the form of Exhibit C
delivered to the Purchasers at the Closing in accordance with Section 2.2(a)
hereof, which Warrants shall be exercisable immediately and have a term of
exercise equal to five years.




“Material
Adverse Effect” shall
have the meaning assigned to such term in Section 3.1(b).




“Material
Permits” shall
have the meaning ascribed to such term in Section 3.1(m).




“Maximum
Rate” shall
have the meaning ascribed to such term in Section 5.17.




“Participation
Maximum” shall
have the meaning ascribed to such term in Section 4.13. 




“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.




“Preferred
Stock” means
the up to 4,000 shares of the Company’s 6% Series A Convertible Preferred Stock
issued hereunder having the rights, preferences and privileges set forth in the
Certificate of Designation.




“Pre-Notice” shall
have the meaning ascribed to such term in Section 4.13. 










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




“Purchaser
Party” shall
have the meaning ascribed to such term in Section 4.11.




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




“Registration
Statement” means a
registration statement meeting the requirements set forth in the Registration
Rights Agreement and covering the resale of the Underlying Shares by each
Purchaser as provided for in the Registration Rights Agreement.




“Required
Approvals” shall
have the meaning ascribed to such term in Section 3.1(e).




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




“SEC
Reports” shall
have the meaning ascribed to such term in Section 3.1(h).




“Securities” means
the Preferred Stock, the Warrants and the Underlying Shares.




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




“Short
Term Warrant” means
the warrant to purchase additional shares of Preferred Stock and Long Term
Warrants, in the form of Exhibit E
delivered to the Purchasers at the Closing in accordance with Section 2.2(a)
hereof, which Short Term Warrants shall be exercisable immediately and have a
term of exercise of one year from the Closing Date.




“Short
Sales” shall
include all “short sales” as defined in Rule 200 of Regulation SHO under the
Exchange Act. 

 

“Stated
Value” means
$1,000 per share of Preferred Stock.




“Subscription
Amount” shall
mean, as to each Purchaser, the amount to be paid for the Preferred Stock
purchased hereunder as specified below such Purchaser’s name on the signature
page of this Agreement and next to the heading “Subscription Amount”, in United
States Dollars and in immediately available funds.










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“Subsequent
Financing” shall
have the meaning ascribed to such term in Section 4.13.




“Subsequent
Financing Notice” shall
have the meaning ascribed to such term in Section 4.13. 




“Subsidiary” means
any subsidiary of the Company as set forth on Schedule
3.1(a).




“Trading
Day” means a
day on which the Common Stock is traded on a Trading Market.




“Trading
Market” means
the following markets or exchanges on which the Common Stock is listed or quoted
for trading on the date in question: the Nasdaq SmallCap Market, the American
Stock Exchange, the New York Stock Exchange, the Nasdaq National Market or the
OTC Bulletin Board.




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




“Underlying
Shares” means
the shares of Common Stock issuable upon conversion of the Preferred Stock, upon
exercise of the Warrants and issued and issuable in lieu of the cash payment of
dividends on the Preferred Stock.




“Voting
Agreements” shall
mean the Voting Agreements described in Section 2.2(a)(vi) in the form of
Exhibit F hereto.




“VWAP” means,
for any date, the price determined by the first of the following clauses that
applies: (a) if the Common Stock is then listed or quoted on a Trading Market,
the daily volume weighted average price of the Common Stock for such date (or
the nearest preceding date) on the primary Trading Market on which the Common
Stock is then listed or quoted as reported by Bloomberg Financial L.P. (based on
a Trading Day from 9:30 a.m. EST to 4:02 p.m. Eastern Time) using the VAP
function; (b) if the Common Stock is not then listed or quoted on the
Trading Market and if prices for the Common Stock are then reported in the “Pink
Sheets” published by the Pink Sheets, LLC (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid price per
share of the Common Stock so reported; or (c) in all other cases, the fair
market value of a share of Common Stock as determined by a nationally
recognized-independent appraiser selected in good faith by Purchasers holding a
majority of the Stated Value of the shares of Preferred Stock then
outstanding.

 

“Warrants” means
the Short Term Warrant and the Long Term Warrant.




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

 







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ARTICLE
II

PURCHASE
AND SALE

 

2.1  Closing. On the
Closing Date, upon the terms and subject to the conditions set forth herein,
concurrent with the execution and delivery of this Agreement by the parties
hereto, the Company agrees to sell, and each Purchaser agrees to purchase in the
aggregate, severally and not jointly, up to $4,000,000 in the aggregate, of
shares of Preferred Stock with an aggregated Stated Value equal to such
Purchaser’s Subscription Amount and Warrants as determined by pursuant to
Sections 2.2(a)(iii) - (iv). The aggregate number of shares of Preferred Stock
sold hereunder shall be up to 4,000. Each Purchaser shall deliver to the Company
via wire transfer or a certified check of immediately available funds equal to
their Subscription Amount and the Company shall deliver to each Purchaser their
respective shares of Preferred Stock and Warrants as determined pursuant to
Section 2.2(a) and the other items set forth in Section 2.2 issuable at the
Closing. Upon satisfaction of the conditions set forth in Sections 2.2 and 2.3,
the Closing shall occur at the offices of FW, or such other location as the
parties shall mutually agree.

 

	2.2  	
      Deliveries.



 

	a)  	
      On
      the Closing Date, the Company shall deliver or cause to be delivered to
      each Purchaser the following:



 

	(i)  	
      this
      Agreement duly executed by the Company;



 

	(ii)  	
      a
      certificate evidencing a number of shares of Preferred Stock equal to such
      Purchaser’s Subscription Amount divided by the Stated Value, registered in
      the name of such Purchaser;



 

	(iii)  	
      a
      Long Term Warrant registered in the name of such Purchaser to purchase up
      to a number of shares of Common Stock equal to 75% of such Purchaser’s
      Subscription Amount divided by the Conversion Price, with an exercise
      price equal to $___1
      125% of the Conversion Price.,
      subject to adjustment therein;



 

	(iv)  	
      a
      Short Term Warrant registered in the name of such Purchaser, with an
      exercise price equal to the Stated Value of the number of shares of
      Preferred Stock being purchased, to purchase up to (A) a number of shares
      of Preferred Stock equal to 100% of such Purchaser’s Subscription Amount
      (valued at the Stated Value), except that such Preferred Stock shall have
      a conversion price equal to $0.85, subject to adjustment therein and
      otherwise identical to the Preferred Stock issued at the Closing, and (B)
      a number of Long Term Warrants equal to 35% of the shares of Common Stock
      issuable upon conversion of such Preferred Stock, with an exercise price
      equal to $1.00, subject to adjustment therein, and otherwise identical to
      the Long Term Warrants issued at the Closing;



 

	(v)  	
      the
      Registration Rights Agreement duly executed by the Company;
    



 

	(vi)  	
      a
      Voting Agreement, in the form attached hereto as Exhibit
      F,
      executed by each officer and director of the Company and such other number
      of shareholders, such that such Voting Agreements shall amount to no less
      than 51% of the issued and outstanding Common Stock as of the Closing
      Date; 



_______________________________

1 125% of
the Conversion Price

 







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	(vii)  	
      a
      lock-up agreement, in the form attached hereto as Exhibit
      G,
      executed by each officer and director of the Company;
  and



 

	(viii)  	
      a
      legal opinion of Company Counsel, in the form of Exhibit
      D
      attached hereto.



 

	b)  	
      On
      the Closing Date, each Purchaser shall deliver or cause to be delivered to
      the Company the following: 



 

	(i)  	
      this
      Agreement duly executed by such Purchaser;



 

	(ii)  	
      such
      Purchaser’s Subscription Amount by wire transfer to the account as
      specified in writing by the Company; and



 

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



 

	2.3  	
      Closing
      Conditions.



 

	a)  	
      The
      obligations of the Company hereunder in connection with the Closing are
      subject to the following conditions being met:



 

	(i)  	
      the
      accuracy in all material respects when made and on the Closing Date of the
      representations and warranties of the Purchasers contained
      herein;



 

	(ii)  	
      all
      obligations, covenants and agreements of the Purchasers required to be
      performed at or prior to the Closing Date shall have been performed;
      and



 

	(iii)  	
      the
      delivery by the Purchasers of the items set forth in Section 2.2(b) of
      this Agreement.



 

	b)  	
      The
      respective obligations of the Purchasers hereunder in connection with the
      Closing are subject to the following conditions being
  met:



 

 







7












 

	(i)  	
      the
      accuracy in all material respects on the Closing Date of the
      representations and warranties of the Company contained
      herein;



 

	(ii)  	
      all
      obligations, covenants and agreements of the Company required to be
      performed at or prior to the Closing Date shall have been performed;
      



 

	(iii)  	
      the
      delivery by the Company of the items set forth in Section 2.2(a) of this
      Agreement; 



 

	(iv)  	
      there
      shall have been no Material Adverse Effect with respect to the Company
      since the date hereof; and



 

	(v)  	
      From
      the date hereof to the Closing Date, trading in the Common Stock shall not
      have been suspended by the Commission (except for any suspension of
      trading of limited duration agreed to by the Company, which suspension
      shall be terminated prior to the Closing), and, at any time prior to the
      Closing Date, trading in securities generally as reported by Bloomberg
      Financial Markets shall not have been suspended or limited, or minimum
      prices shall not have been established on securities whose trades are
      reported by such service, or on any Trading Market, nor shall a banking
      moratorium have been declared either by the United States or New York
      State authorities nor shall there have occurred any material outbreak or
      escalation of hostilities or other national or international calamity of
      such magnitude in its effect on, or any material adverse change in, any
      financial market which, in each case, in the reasonable judgment of each
      Purchaser, makes it impracticable or inadvisable to purchase the Preferred
      Stock at the Closing.



 




 

 

ARTICLE
III

REPRESENTATIONS
AND WARRANTIES

 

3.1Representations
and Warranties of the Company. Except
as set forth under the corresponding section of the disclosure schedules
delivered to the Purchasers concurrently herewith (the “Disclosure
Schedules”) which
Disclosure Schedules shall be deemed a part hereof, the Company hereby makes the
representations and warranties set forth below to each Purchaser.

 

(a)  Subsidiaries. All of
the direct and indirect subsidiaries of the Company are set forth on
Schedule
3.1(a). The
Company owns, directly or indirectly, all of the capital stock or other equity
interests of each Subsidiary free and clear of any 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 to
subscribe for or purchase securities. If the Company has no subsidiaries, then
references in the Transaction Documents to the Subsidiaries will be
disregarded.

 







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(b)  Organization
and Qualification. The
Company and each of the Subsidiaries is an entity duly incorporated or otherwise
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization (as applicable), with the
requisite power and authority to own and use its properties and assets and to
carry on its business as currently conducted. Neither the Company nor any
Subsidiary is in violation or default of any of the provisions of its respective
certificate or articles of incorporation, bylaws or other organizational or
charter documents. Each of the Company and the Subsidiaries is duly qualified to
conduct business and is in good standing as a foreign corporation or other
entity in each jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary, except where the
failure to be so qualified or in good standing, as the case may be, could not
have or reasonably be expected to result in (i) a material adverse effect on the
legality, validity or enforceability of any Transaction Document, (ii) a
material adverse effect on the results of operations, assets, business,
prospects or financial condition of the Company and the Subsidiaries, taken as a
whole, or (iii) a material adverse effect on the Company’s ability to perform in
any material respect on a timely basis its obligations under any Transaction
Document (any of (i), (ii) or (iii), a “Material
Adverse Effect”) and no
Proceeding has been instituted in any such jurisdiction revoking, limiting or
curtailing or seeking to revoke, limit or curtail such power and authority or
qualification.

 

(c)  Authorization;
Enforcement. The
Company has the requisite corporate power and authority to enter into and to
consummate the transactions contemplated by each of the Transaction Documents
and otherwise to carry out its obligations 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 other than in
connection with the Required Approvals. Each Transaction Document has been (or
upon delivery will have been) duly executed by the Company and, when delivered
in accordance with the terms hereof, will constitute the valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors’ rights generally and (ii) as limited by laws relating
to the availability of specific performance, injunctive relief or other
equitable remedies.

 

(d)  No
Conflicts. The
execution, delivery and performance of the Transaction Documents by the Company
and the consummation by the Company of the other 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, result in the creation of any Lien upon any of
the properties or assets of the Company or any Subsidiary, or give to others any
rights of termination, amendment, acceleration or cancellation (with or without
notice, lapse of time or both) of, any agreement, credit facility, debt or other
instrument (evidencing a Company or Subsidiary debt or otherwise) or other
understanding to which the Company or any Subsidiary is a party or by which any
property or asset of the Company or any Subsidiary is bound or affected, or
(iii) subject to the Required Approvals, conflict with or result in a violation
of any law, rule, regulation, order, judgment, injunction, decree or other
restriction of any court or governmental authority to which the Company or a
Subsidiary is subject (including federal and state securities laws and
regulations), or by which any property or asset of the Company or a Subsidiary
is bound or affected; except in the case of each of clauses (ii) and (iii), such
as could not have or reasonably be expected to result in a Material Adverse
Effect.

 







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(e)  Filings,
Consents and Approvals. The
Company is not required to obtain any consent, waiver, authorization or order
of, give any notice to, or make any filing or registration with, any court or
other federal, state, local or other governmental authority or other Person in
connection with the execution, delivery and performance by the Company of the
Transaction Documents, other than (i) filings required pursuant to Section 4.6,
(ii) the filing with the Commission of the Registration Statement, (iii) the
notice and/or application(s) to each applicable Trading Market for the issuance
and sale of the Preferred Stock and Warrants and the listing of the Underlying
Shares for trading thereon in the time and manner required thereby and (iv) the
filing of Form D with the Commission and such filings as are required to be made
under applicable state securities laws (collectively, the “Required
Approvals”).

 

(f)  Issuance
of the Securities. The
Securities are duly authorized and, when issued and paid for in accordance with
the applicable Transaction Documents, will be duly and validly issued, fully
paid and nonassessable, free and clear of all Liens imposed by the Company other
than restrictions on transfer provided for in the Transaction Documents. The
Underlying Shares, when issued in accordance with the terms of the Transaction
Documents, will be validly issued, fully paid and nonassessable, free and clear
of all Liens imposed by the Company. The Company has reserved from its duly
authorized capital stock a number of shares of Common Stock for issuance of the
Underlying Shares at least equal to the Actual Minimum on the date hereof.


 

(g)  Capitalization. The
capitalization of the Company is as set forth on Schedule
3.1(g). The
Company has not issued any capital stock since its most
recently filed periodic report under the Exchange Act, other
than pursuant to the exercise of employee stock options under the Company’s
stock option plans, the issuance of shares of Common Stock to employees pursuant
to the Company’s employee stock purchase plan and pursuant to the conversion or
exercise of outstanding Common Stock Equivalents. No Person has any right of
first refusal, preemptive right, right of participation, 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, there are no
outstanding options, warrants, script rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities, rights or
obligations convertible into or exchangeable for, or giving any Person any right
to subscribe for or acquire, any shares of Common Stock, or contracts,
commitments, understandings or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of Common Stock or
Common Stock Equivalents. The issuance and sale of the Securities will not
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. All of the outstanding shares of capital stock of
the Company are validly issued, fully paid and nonassessable, have been issued
in compliance with all federal and state securities laws, and none of such
outstanding shares was issued in violation of any preemptive rights or similar
rights to subscribe for or purchase securities. No further approval or
authorization of any stockholder, the Board of Directors of the Company or
others is required for the issuance and sale of the shares of Preferred Stock.
There are no stockholders agreements, voting agreements or other similar
agreements with respect to the Company’s capital stock to which the Company is a
party or, to the knowledge of the Company, between or among any of the Company’s
stockholders.

 







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(h)  SEC
Reports; Financial Statements. The
Company has filed all reports, schedules, forms, statements and other documents
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 two years
preceding the date hereof (or such shorter period as the Company was required by
law to file such material) (the foregoing materials, including the exhibits
thereto and documents incorporated by reference therein, being collectively
referred to herein as the “SEC
Reports”) on a
timely basis or has received a valid extension of such time of filing and has
filed any such SEC Reports prior to the expiration of any such extension. As of
their respective dates, the SEC Reports complied in all material respects with
the requirements of the Securities Act and the Exchange Act 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. The financial statements of the Company included
in the SEC Reports comply in all material respects with applicable accounting
requirements and the rules and regulations of the Commission with respect
thereto as in effect at the time of filing. Such financial statements have been
prepared in accordance with United States generally accepted accounting
principles applied on a consistent basis during the periods involved
(“GAAP”),
except as may be otherwise specified in such financial statements or the notes
thereto and except that unaudited financial statements may not contain all
footnotes required by GAAP, and fairly present in all material respects the
financial position of the Company and its consolidated subsidiaries as of and
for the dates thereof and the results of operations and cash flows for the
periods then ended, subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments. 

 

(i)  Material
Changes. Since
the date of the latest audited financial statements included within the SEC
Reports, except as specifically disclosed in 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 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, (iv) the Company has not declared or made any dividend or
distribution of cash or other property to its stockholders or purchased,
redeemed or made any agreements to purchase or redeem any shares of its capital
stock and (v) the Company has not issued any 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.

 







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(j)  Litigation. There
is no action, suit, inquiry, notice of violation, proceeding or investigation
pending or, to the knowledge of the Company, threatened against or affecting the
Company, any Subsidiary or any of their respective properties before or by any
court, arbitrator, governmental or administrative agency or regulatory authority
(federal, state, county, local or foreign) (collectively, an “Action”) which
(i) adversely affects or challenges the legality, validity or enforceability of
any of the Transaction Documents or the Securities or (ii) could, if there were
an unfavorable decision, have or reasonably be expected to result in a Material
Adverse Effect. Neither the Company nor any Subsidiary, nor any director or
officer thereof, is or has been the subject of any Action involving a claim of
violation of or liability under federal or state securities laws or a claim of
breach of fiduciary duty. There has not been, and to the knowledge of the
Company, there is not pending or contemplated, any investigation by the
Commission involving the Company or any current or former director or officer of
the Company. The Commission has not issued any stop order or other order
suspending the effectiveness of any registration statement filed by the Company
or any Subsidiary under the Exchange Act or the Securities Act.

 

(k)  Labor
Relations. No
material labor dispute exists or, to the knowledge of the Company, is imminent
with respect to any of the employees of the Company which could reasonably be
expected to result in a Material Adverse Effect.

 

(l)  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 applicable to its business
except in each case as could not have a Material Adverse Effect. 

 







12












(m)  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 could not have or
reasonably be expected to result in a Material Adverse Effect (“Material
Permits”), and
neither the Company nor any Subsidiary has received any notice of proceedings
relating to the revocation or modification of any Material Permit.

 

(n)  Title
to Assets. The
Company and the Subsidiaries have good and marketable title in fee simple to all
real property owned by them that is material to the business of the Company and
the Subsidiaries and good and marketable title in all personal property owned by
them that is material to the business of the Company and the Subsidiaries, in
each case free and clear of all Liens, except for Liens as do not materially
affect the value of such property and do not materially interfere with the use
made and proposed to be made of such property by the Company and the
Subsidiaries and Liens for the payment of federal, state or other taxes, the
payment of which is neither delinquent nor subject to penalties. 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.

 

(o)  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 have a Material Adverse Effect
(collectively, the “Intellectual
Property Rights”).
Neither the Company nor any Subsidiary has received a written notice that the
Intellectual Property Rights used by the Company or any Subsidiary violates or
infringes upon the rights of any Person. To the knowledge of the Company, all
such Intellectual Property Rights are enforceable and there is no existing
infringement by another Person of any of the Intellectual Property Rights of
others.

 

(p)  Insurance. The
Company and the Subsidiaries are insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which the Company and the Subsidiaries are
engaged, including, but not limited to, directors and officers insurance
coverage at least equal to the aggregate Subscription Amount. To the best of
Company’s knowledge, such insurance contracts and policies are accurate and
complete. Neither the Company nor any Subsidiary has any reason to believe that
it will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business without a significant increase in
cost.

 

(q)  Transactions
With Affiliates and Employees. Except
as set forth in the SEC Reports, none of the officers or directors of the
Company and, to the knowledge of the Company, none of the employees of the
Company is presently a party to any transaction with the Company or any
Subsidiary (other than for services as employees, officers and directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner, in each case in excess of $60,000
other than (i) for payment of salary or consulting fees for services rendered,
(ii) reimbursement for expenses incurred on behalf of the Company and (iii) for
other employee benefits, including stock option agreements under any stock
option plan of the Company.

 







13












(r)  Sarbanes-Oxley;
Internal Accounting Controls. The
Company is in material compliance with all provisions of the Sarbanes-Oxley Act
of 2002 which are applicable to it as of the Closing Date. The
Company and the Subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management’s general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of 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 most recently
filed periodic report under the Exchange Act, as the case may be, is being
prepared. The Company’s certifying officers have evaluated the effectiveness of
the Company’s controls and procedures as of the date prior to the filing date of
the most recently filed periodic report under the Exchange Act (such date, the
“Evaluation
Date”). The
Company presented in its most recently filed periodic report under the Exchange
Act the conclusions of the certifying officers about the effectiveness of the
disclosure controls and procedures based on their evaluations as of the
Evaluation Date. Since the Evaluation Date, there have been no significant
changes in the Company’s internal controls (as such term is defined in Item
307(b) 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.

 

(s)  Certain
Fees. 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 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.

 







14












(t)  Private
Placement.
Assuming the accuracy of the Purchasers representations and warranties set forth
in Section 3.2, no registration under the Securities Act is required for the
offer and sale of the Securities by the Company to the Purchasers as
contemplated hereby. The issuance and sale of the Securities hereunder does not
contravene the rules and regulations of the Trading Market.

 

(u)  Investment
Company. The
Company is not, and is not an Affiliate of, and immediately after receipt of
payment for the shares of Preferred Stock, will not be or be an Affiliate of, an
“investment company” within the meaning of the Investment Company Act of 1940,
as amended. The Company shall conduct its business in a manner so that it will
not become subject to the Investment Company Act.

 

(v)  Registration
Rights. Other
than each of the Purchasers, no Person has any right to cause the Company to
effect the registration under the Securities Act of any securities of the
Company.

 

(w)  Listing
and Maintenance Requirements. The
Company’s Common Stock is registered pursuant to Section 12(g) of the Exchange
Act, and the Company has taken no action designed to, or which to its knowledge
is likely to have the effect of, terminating the registration of the Common
Stock under the Exchange Act nor has the Company received any notification that
the Commission is contemplating terminating such registration. The Company has
not, in the 12 months preceding the date hereof, received notice from any
Trading Market on which the Common Stock is or has been listed or quoted to the
effect that the Company is not in compliance with the listing or maintenance
requirements of such Trading Market. The Company is, and has no reason to
believe that it will not in the foreseeable future continue to be, in compliance
with all such listing and maintenance requirements.

 

(x)  Application
of Takeover Protections. The
Company and its Board of Directors have taken all necessary action, if any, in
order to render inapplicable any control share acquisition, business
combination, poison pill (including any distribution under a rights agreement)
or other similar anti-takeover provision under the Company’s Certificate of
Incorporation (or similar charter documents) or the laws of its state of
incorporation that is or could become applicable to the Purchasers as a result
of the Purchasers and the Company fulfilling their obligations or exercising
their rights under the Transaction Documents, including without limitation the
Company’s issuance of the Securities and the Purchasers’ ownership of the
Securities.

 

(y)  Disclosure. The
Company confirms that neither it nor any other Person acting on its behalf has
provided any of the Purchasers or their agents or counsel with any information
that constitutes or might constitute material, nonpublic 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, including the Disclosure
Schedules to this Agreement, furnished by or on behalf of the Company with
respect to the representations and warranties made herein are true and correct
with respect to such representations and warranties 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. The Company acknowledges and agrees
that no Purchaser makes or has made any representations or warranties with
respect to the transactions contemplated hereby other than those specifically
set forth in Section 3.2 hereof.

 







15












(z)  No
Integrated Offering. Assuming
the accuracy of the Purchasers’ representations and warranties set forth in
Section 3.2, neither the Company, nor any of its affiliates, nor any Person
acting on its or their behalf has, directly or indirectly, made any offers or
sales of any security or solicited any offers to buy any security, under
circumstances that would cause this offering of the Securities to be integrated
with prior offerings by the Company for purposes of the Securities Act or any
applicable shareholder approval provisions, including, without limitation, under
the rules and regulations of any Trading Market on which any of the securities
of the Company are listed or designated. 

 

(aa)  Solvency. Based
on the financial condition of the Company as of the Closing Date after giving
effect to the receipt by the Company of the proceeds from the sale of the
Securities hereunder, (i) the 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 mature (taking into account the timing and
amounts of cash to be payable on or in respect of its debt). The Company has no
knowledge of any facts or circumstances which lead it to believe that it will
file for reorganization or liquidation under the bankruptcy or reorganization
laws of any jurisdiction within one year from the Closing Date. The SEC Reports
set forth as of the dates thereof all outstanding secured and unsecured
Indebtedness of the Company or any Subsidiary, or for which the Company or any
Subsidiary has commitments. For the purposes of this Agreement, “Indebtedness” shall
mean (a) any liabilities for borrowed money or amounts owed in excess of $50,000
(other than trade accounts payable incurred in the ordinary course of business),
(b) all guaranties, endorsements and other contingent obligations in respect of
Indebtedness of others, whether or not the same are or should be reflected in
the Company’s balance sheet (or the notes thereto), except guaranties by
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business; and (c) the present value of
any lease payments
in excess of $50,000 due under leases required to be capitalized in accordance
with GAAP. Neither
the Company nor any Subsidiary is in default with respect to any
Indebtedness.

 







16












(bb)  Form
S-3 Eligibility.The
Company is eligible to register the resale of the Underlying Shares for resale
by the Purchaser on Form S-3 promulgated under the Securities Act.

 

(cc)  Tax
Status. Except
for matters that would not, individually or in the aggregate, have or reasonably
be expected to result in a Material Adverse Effect, the Company and each
Subsidiary has filed all necessary federal, state and foreign income and
franchise tax returns and has paid or accrued all taxes shown as due thereon,
and the Company has no knowledge of a tax deficiency which has been asserted or
threatened against the Company or any Subsidiary.

 

(dd)  No
General Solicitation. Neither
the Company nor any person acting on behalf of the Company has offered or sold
any of the Securities by any form of general solicitation or general
advertising. The Company has offered the Securities for sale only to the
Purchasers and certain other “accredited investors” within the meaning of Rule
501 under the Securities Act.

 

(ee)  Foreign
Corrupt Practices. Neither
the Company, nor to the knowledge of the Company, any agent or other person
acting on behalf of the Company, has (i) directly or indirectly, used any funds
for unlawful contributions, gifts, entertainment or other unlawful expenses
related to foreign or domestic political activity, (ii) made any unlawful
payment to foreign or domestic government officials or employees or to any
foreign or domestic political parties or campaigns from corporate funds, (iii)
failed to disclose fully any contribution made by the Company (or made by any
person acting on its behalf of which the Company is aware) which is in violation
of law, or (iv) violated in any material respect any provision of the Foreign
Corrupt Practices Act of 1977, as amended.

 

(ff)  Accountants. The
Company’s accountants are set forth on Schedule
3.1(ff) of the
Disclosure Schedule. To the Company’s knowledge, such accountants, who the
Company expects will express their opinion with respect to the financial
statements to be included in the Company’s Annual Report on Form 10-KSB for the
year ended December 31, 2004 are a registered public accounting firm as required
by the Securities Act.

 

(gg)  Seniority. As of
the Closing Date, no indebtedness or other equity of the Company is senior to
the Preferred Stock in right of payment, whether with respect to interest or
upon liquidation or dissolution, or otherwise, other than indebtedness secured
by purchase money security interests (which is senior only as to underlying
assets covered thereby) and capital lease obligations (which is senior only as
to the property covered thereby).

 

(hh)  No
Disagreements with Accountants and Lawyers. There
are no disagreements of any kind presently existing, or reasonably anticipated
by the Company to arise, between the accountants and lawyers formerly or
presently employed by the Company and the Company is current with respect to any
fees owed to its accountants and lawyers.

 







17












(ii)  Acknowledgment
Regarding Purchasers’ Purchase of Securities. The
Company acknowledges and agrees that each of the Purchasers is acting solely in
the capacity of an arm’s length purchaser with respect to the Transaction
Documents and the transactions contemplated hereby. The Company further
acknowledges that no Purchaser is acting as a financial advisor or fiduciary of
the Company (or in any similar capacity) with respect to this Agreement and the
transactions contemplated hereby and any advice given by any Purchaser or any of
their respective representatives or agents in connection with this Agreement and
the transactions contemplated hereby is merely incidental to the Purchasers’
purchase of the Securities. The Company further represents to each Purchaser
that the Company’s decision to enter into this Agreement has been based solely
on the independent evaluation of the transactions contemplated hereby by the
Company and its representatives.

 

(jj)  Acknowledgement
Regarding Purchasers’ Trading Activity.
Anything in this Agreement or elsewhere herein to the contrary notwithstanding
(except for Section 4.16 hereof), it is understood and agreed by the Company (i)
that none of the Purchasers have been asked to agree, nor has any Purchaser
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 past or
future open market or other transactions by any Purchaser, including Short
Sales, and specifically including, without limitation, Short Sales or
“derivative” transactions, before or after the closing of this or future private
placement transactions, may negatively impact the market price of the Company’s
publicly-traded securities; (iii) that any Purchaser, and counter parties in
“derivative” transactions to which any such Purchaser is a party, directly or
indirectly, presently may have a “short” position in the Common Stock, and (iv)
that each Purchaser shall not be deemed to have any affiliation with or control
over any arm’s length counter-party in any “derivative”
transaction.

 

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

 

(a) Organization;
Authority. Such
Purchaser is an entity duly organized, validly existing and in good standing
under the laws of the jurisdiction of its organization with full right,
corporate or partnership power and authority to enter into and to consummate the
transactions contemplated by the Transaction Documents and otherwise to carry
out its obligations thereunder. The execution, delivery and performance by such
Purchaser of the transactions contemplated by this Agreement have been duly
authorized by all necessary corporate or similar action on the part of such
Purchaser. Each Transaction Document to which it is a party has been duly
executed by such Purchaser, and when delivered by such Purchaser in accordance
with the terms hereof, will constitute the valid and legally binding obligation
of such Purchaser, enforceable against it in accordance with its terms, except
(i) as limited by general equitable principles and applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors’ rights generally, (ii) as limited by laws
relating to the availability of specific performance, injunctive relief or other
equitable remedies and (iii) insofar as indemnification and contribution
provisions may be limited by applicable law.

 







18












(b) Own
Account. Such
Purchaser understands that the Securities are “restricted securities” and have
not been registered under the Securities Act or any applicable state securities
law and is acquiring the Securities as principal for its own account and not
with a view to or for distributing or reselling such Securities or any part
thereof in violation of the Securities Act or any applicable state securities
law, has no present intention of distributing any of such Securities in
violation of the Securities Act or any applicable state securities law and has
no arrangement or understanding with any other persons regarding the
distribution of such Securities (this representation and warranty not limiting
such Purchaser’s right to sell the Securities pursuant to the Registration
Statement or otherwise in compliance with applicable federal and state
securities laws) in violation of the Securities Act or any applicable state
securities law. Such Purchaser is acquiring the Securities hereunder in the
ordinary course of its business. 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 any Warrants, it will be either:
(i) an “accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3),
(a)(7) or (a)(8) under the Securities Act or (ii) a “qualified institutional
buyer” as defined in Rule 144A(a) under the Securities Act. Such Purchaser is
not required to be registered as a broker-dealer under Section 15 of the
Exchange Act.

 

(d) Experience
of Such Purchaser. Such
Purchaser, either alone or together with its representatives, has such
knowledge, sophistication and experience in business and financial matters so as
to be capable of evaluating the merits and risks of the prospective investment
in the Securities, and has so evaluated the merits and risks of such investment.
Such Purchaser is able to bear the economic risk of an investment in the
Securities and, at the present time, is able to afford a complete loss of such
investment.

 

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

 

(f)  Short
Sales and Confidentiality. Other
than the transaction contemplated hereunder, such Purchaser has not directly or
indirectly, nor has any Person acting on behalf of or pursuant to any
understanding with such Purchaser, executed any disposition, including Short
Sales (but not including the location and/or reservation of borrowable shares of
Common Stock), in the securities of the Company during the period
commencing from the time that such Purchaser first received a term sheet from
the Company or any other Person setting forth the material terms of the
transactions contemplated hereunder until the date hereof (“Discussion
Time”).
Notwithstanding the foregoing, in the case of a Purchaser that is a
multi-managed investment vehicle whereby separate portfolio managers manage
separate portions of such Purchaser's assets and the portfolio managers have no
direct knowledge of the investment decisions made by the portfolio managers
managing other portions of such Purchaser's assets, the representation set forth
above shall only apply with respect to the portion of assets managed by the
portfolio manager that made the investment decision to purchase the Securities
covered by this Agreement. Other than to other Persons party to this Agreement,
such Purchaser has maintained the confidentiality of all disclosures made to it
in connection with this transaction (including the existence and terms of this
transaction).

 







19












(g)  Access
to Information.
Such
Purchaser has been afforded the opportunity to ask questions of, and receive
answers from, the Company and its executive officers and directors and to obtain
any additional information, to the extent that the Company possesses such
information or could have acquired it and such information is deemed by such
Purchaser necessary to verify the accuracy of the information contained in the
documents delivered to such Purchaser. Such Purchaser has in general had access
to all information such Purchaser has deemed material to an investment decision
with respect to such Purchaser’s acquisition of the Securities. Such Purchaser
has had access to each of the SEC Reports.

 

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.

 

 

ARTICLE
IV

OTHER
AGREEMENTS OF THE PARTIES

 

4.1 Transfer
Restrictions.

 

(a) The
Securities may only be disposed of in compliance with state and federal
securities laws. In connection with any transfer of Securities other than
pursuant to an effective registration statement or Rule 144, to the Company or
to an affiliate of a Purchaser or in connection with a pledge as contemplated in
Section 4.1(b), the Company may require the transferor thereof to provide to the
Company an opinion of counsel selected by the transferor and reasonably
acceptable to the Company, the form and substance of which opinion shall be
reasonably satisfactory to the Company, to the effect that such transfer does
not require registration of such transferred Securities under the Securities
Act. As a condition of transfer, any such transferee shall agree in writing to
be bound by the terms of this Agreement and shall have the rights of a Purchaser
under this Agreement and the Registration Rights Agreement.

 







20












(b) The
Purchasers agree to the imprinting, so long as is required by this Section
4.1(b), of a legend on any of the Securities in the following form:


 

[NEITHER]
THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
[EXERCISABLE] [CONVERTIBLE]] HAVE 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 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 MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE
MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

 

The
Company acknowledges and agrees that a Purchaser may from time to time pledge
pursuant to a bona fide margin agreement with a registered broker-dealer or
grant a security interest in some or all of the Securities to a financial
institution that is an “accredited investor” as defined in Rule 501(a) under the
Securities Act and who agrees to be bound by the provisions of this Agreement
and the Registration Rights Agreement and, if required under the terms of such
arrangement, such Purchaser may transfer pledged or secured Securities to the
pledgees or secured parties. Such a pledge or transfer would not be subject to
approval of the Company and no legal opinion of legal counsel of the pledgee,
secured party or pledgor shall be required in connection therewith. Further, no
notice shall be required of such pledge. At the appropriate Purchaser’s expense,
the Company will execute and deliver such reasonable documentation as a pledgee
or secured party of Securities may reasonably request in connection with a
pledge or transfer of the Securities, including, if the Securities are subject
to registration pursuant to the Registration Rights Agreement, the preparation
and filing of any required prospectus supplement under Rule 424(b)(3) under the
Securities Act or other applicable provision of the Securities Act to
appropriately amend the list of Selling Stockholders thereunder.

 

(c) Certificates
evidencing the Underlying Shares shall not contain any legend (including the
legend set forth in Section 4.1(b) hereof): (i) while a registration statement
(including the Registration Statement) covering the resale of such security is
effective under the Securities Act, or (ii) following any sale of such
Underlying Shares pursuant to Rule 144, or (iii) if such Underlying Shares are
eligible for sale under Rule 144(k), or (iv) if such legend is not required
under applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission). The
Company shall cause its counsel to issue a legal opinion to the Company’s
transfer agent promptly after the Effective Date if required by the Company’s
transfer agent to effect the removal of the legend hereunder. If all or any
shares of Preferred Stock or any portion of a Warrant is converted or exercised
(as applicable) at a time when there is an effective registration statement to
cover the resale of the Underlying Shares, or if such Underlying Shares may be
sold under Rule 144(k) or if such legend is not otherwise required under
applicable requirements of the Securities Act (including judicial
interpretations thereof) then such Underlying Shares shall be issued free of all
legends. The Company agrees that following the Effective Date or at such time as
such legend is no longer required under this Section 4.1(c), it will, no later
than three Trading Days following the delivery by a Purchaser to the Company or
the Company’s transfer agent of a certificate representing Underlying Shares, as
applicable, issued with a restrictive legend (such third Trading Day, the
“Legend
Removal Date”),
deliver or cause to be delivered to such Purchaser a certificate representing
such shares that is free from all restrictive and other legends. The Company may
not make any notation on its records or give instructions to any transfer agent
of the Company that enlarge the restrictions on transfer set forth in this
Section. Certificates for Securities subject to legend removal hereunder shall
be transmitted by the transfer agent of the Company to the Purchasers by
crediting the account of the Purchaser’s prime broker with the Depository Trust
Company System.










21












(d) In
addition to such Purchaser’s other available remedies, the Company shall pay to
a Purchaser, in cash, as partial liquidated damages and not as a penalty, for
each $1,000 of Underlying Shares (based on the VWAP of the Common Stock on the
date such Securities are submitted to the Company’s transfer agent) delivered
for removal of the restrictive legend and subject to Section 4.1(c), $10 per
Trading Day (increasing to $20 per Trading Day 10 Trading Days after such
damages have begun to accrue) for each Trading Day after the Legend Removal Date
until such certificate is delivered without a legend. Nothing herein shall limit
such Purchaser’s right to pursue actual damages for the Company’s failure to
deliver certificates representing any Securities as required by the Transaction
Documents, and such Purchaser shall have the right to pursue all remedies
available to it at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief.




(e)  Each
Purchaser, severally and not jointly with the other Purchasers, agrees that the
removal of the restrictive legend from certificates representing Securities as
set forth in this Section 4.1 is predicated upon the Company’s reliance that the
Purchaser will sell any Securities pursuant to either the registration
requirements of the Securities Act, including any applicable prospectus delivery
requirements, or an exemption therefrom.




(f) Until the
one year anniversary of the Effective Date, the Company shall not undertake a
reverse or forward stock split or reclassification of the Common Stock without
the prior written consent of the Purchasers holding a majority in interest of
the shares of Preferred Stock.




4.2Acknowledgment
of Dilution. The
Company acknowledges that the issuance of the Securities may result in dilution
of the outstanding shares of Common Stock, which dilution may be substantial
under certain market conditions. The Company further acknowledges that its
obligations under the Transaction Documents, including without limitation its
obligation to issue the Underlying Shares pursuant to the Transaction Documents,
are unconditional and absolute and not subject to any right of set off,
counterclaim, delay or reduction, regardless of the effect of any such dilution
or any claim the Company may have against any Purchaser and regardless of the
dilutive effect that such issuance may have on the ownership of the other
stockholders of the Company.

 







22












4.3Furnishing
of Information. As long
as any Purchaser owns Securities, the Company covenants to timely file (or
obtain extensions in respect thereof and file within the applicable grace
period) all reports required to be filed by the Company after the date hereof
pursuant to the Exchange Act. As long as any Purchaser owns Securities, if the
Company is not required to file reports pursuant to the Exchange Act, it will
prepare and furnish to the Purchasers and make publicly available in accordance
with Rule 144(c) such information as is required for the Purchasers to sell the
Securities under Rule 144. The Company further covenants that it will take such
further action as any holder of Securities may reasonably request, all to the
extent required from time to time to enable such Person to sell such Securities
without registration under the Securities Act within the limitation of the
exemptions provided by Rule 144.

 

4.4Integration. The
Company shall not sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as defined in Section 2 of the Securities
Act) that would be integrated with the offer or sale of the Securities in a
manner that would require the registration under the Securities Act of the sale
of the Securities to the Purchasers or that would be integrated with the offer
or sale of the Securities for purposes of the rules and regulations of any
Trading Market.

 

4.5Conversion
and Exercise Procedures. The
form of Notice of Exercise included in the Warrants and the Notice of Conversion
included in the Certificate of Designation set forth the totality of the
procedures required of the Purchasers in order to exercise the Warrants or
convert the Preferred Stock. No additional legal opinion or other information or
instructions shall be required of the Purchasers to exercise their Warrants or
convert their Preferred Stock. The Company shall honor exercises of the Warrants
and conversions of the Preferred Stock and shall deliver Underlying Shares in
accordance with the terms, conditions and time periods set forth in the
Transaction Documents.

 

4.6Securities
Laws Disclosure;
Publicity. The
Company shall, by 8:30 a.m. Eastern time on the Trading Day following the date
hereof, issue a Current Report on Form 8-K, disclosing the material terms of the
transactions contemplated hereby, and shall attach the Transaction Documents
thereto as exhibits. The Company and each Purchaser shall consult with each
other in issuing any other press releases with respect to the transactions
contemplated hereby, and neither the Company nor any Purchaser shall issue any
such press release or otherwise make any such public statement without the prior
consent of the Company, with respect to any press release of any Purchaser, or
without the prior consent of each Purchaser, with respect to any press release
of the Company, which consent shall not unreasonably be withheld, except if such
disclosure is required by law, in which case the disclosing party shall promptly
provide the other party with prior notice of such public statement or
communication. Notwithstanding the foregoing, the Company shall not publicly
disclose the name of any Purchaser, or include the name of any Purchaser in any
filing with the Commission or any regulatory agency or Trading Market, without
the prior written consent of such Purchaser, except (i) as required by federal
securities law in connection with the registration statement contemplated by the
Registration Rights Agreement and (ii) to the extent such disclosure is required
by law or Trading Market regulations, in which case the Company shall provide
the Purchasers with prior notice of such disclosure permitted under subclause
(i) or (ii).

 







23












4.7 Shareholder
Rights Plan. No
claim will be made or enforced by the Company or, to the knowledge of the
Company, any other Person that any Purchaser is an “Acquiring Person” under any
shareholder rights plan or similar plan or arrangement in effect or hereafter
adopted by the Company, or that any Purchaser could be deemed to trigger the
provisions of any such plan or arrangement, by virtue of receiving Securities
under the Transaction Documents or under any other agreement between the Company
and the Purchasers. The Company shall conduct its business in a manner so that
it will not become subject to the Investment Company Act.

 

4.8
 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 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.

 

4.9 Use of
Proceeds. Except
as set forth on Schedule
4.9 attached
hereto, the Company shall use the net proceeds from the sale of the Securities
hereunder for working capital purposes and not for the satisfaction of any
portion of the Company’s debt (other than payment of trade payables in the
ordinary course of the Company’s business and prior practices), to redeem Common
Stock or Common Stock Equivalents or to settle any outstanding litigation.


 

4.10 Reimbursement. If any
Purchaser becomes involved in any capacity in any Proceeding by or against any
Person who is a stockholder of the Company (except as a result of sales,
pledges, margin sales and similar transactions by such Purchaser to or with any
current stockholder), solely as a result of such Purchaser’s acquisition of the
Securities under this Agreement, the Company will reimburse such Purchaser for
its reasonable legal and other expenses (including the cost of any investigation
preparation and travel in connection therewith) incurred in connection
therewith, as such expenses are incurred. The reimbursement obligations of the
Company under this paragraph shall be in addition to any liability which the
Company may otherwise have, shall extend upon the same terms and conditions to
any Affiliates of the Purchasers who are actually named in such action,
proceeding or investigation, and partners, directors, agents, employees and
controlling persons (if any), as the case may be, of the Purchasers and any such
Affiliate, and shall be binding upon and inure to the benefit of any successors,
assigns, heirs and personal representatives of the Company, the Purchasers and
any such Affiliate and any such Person. The Company also agrees that neither the
Purchasers nor any such Affiliates, partners, directors, agents, employees or
controlling persons shall have any liability to the Company or any Person
asserting claims on behalf of or in right of the Company solely as a result of
acquiring the Securities under this Agreement.

 







24












4.11 Indemnification
of Purchasers. Subject
to the provisions of this Section 4.11, 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 that any such Purchaser Party may suffer or incur as a result of
or relating to (a) any breach of any of the representations, warranties,
covenants or agreements made by the Company in this Agreement or in the other
Transaction Documents or (b) any action instituted against a Purchaser, or any
of them or their respective Affiliates, by any stockholder of the Company who is
not an Affiliate of such Purchaser, with respect to any of the transactions
contemplated by the Transaction Documents (unless such action is based upon a
breach of such Purchaser’s representation, warranties or covenants under the
Transaction Documents or any agreements or understandings such Purchaser may
have with any such stockholder or any violations by the Purchaser of state or
federal securities laws or any conduct by such Purchaser which constitutes
fraud, gross negligence, willful misconduct or malfeasance). If any action shall
be brought against any Purchaser Party in respect of which indemnity may be
sought pursuant to this Agreement, such Purchaser Party shall promptly notify
the Company in writing, and the Company shall have the right to assume the
defense thereof with counsel of its own choosing. Any Purchaser Party shall have
the right to employ separate counsel in any such action and participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Purchaser Party except to the extent that (i) the employment
thereof has been specifically authorized by the Company in writing, (ii) the
Company has failed after a reasonable period of time to assume such defense and
to employ counsel or (iii) in such action there is, in the reasonable opinion of
such separate counsel, a material conflict on any material issue between the
position of the Company and the position of such Purchaser Party. The Company
will not be liable to any Purchaser Party under this Agreement (i) for any
settlement by a Purchaser Party effected without the Company’s prior written
consent, which shall not be unreasonably withheld or delayed; or (ii) to the
extent, but only to the extent that a loss, claim, damage or liability is
attributable to any Purchaser Party’s breach of any of the representations,
warranties, covenants or agreements made by the Purchasers in this Agreement or
in the other Transaction Documents.

 

4.12 Reservation
and Listing of Securities.

 

(a) On the
date hereof, the Company does not have sufficient authorized shares of Common
Stock to maintain a reserve from its duly authorized shares of Common Stock for
issuance pursuant to the Transaction Documents in such amount as may be required
to fulfill its obligations in full under the Transaction Documents. The Company
will obtain the approval of its shareholders to increase the number of shares of
authorized Common Stock to 50,000,000 shares, and shall file a Certificate of
Amendment to its Articles of Incorporation to effect such increase, within 31
calendar days from the Closing Date, or the Company shall immediately after such
date refund to each Purchaser 10% of their respective Subscription Amounts as
compensation for such failure. The Company shall continue to seek shareholder
approval for such increase at least once a quarter thereafter, until such
increase becomes authorized. Following such amendment of the Company’s Articles
of Incorporation, the Company shall maintain a reserve from its duly authorized
shares of Common Stock for issuance pursuant to the Transaction Documents in
such amount as may be required to fulfill its obligations in full under the
Transaction Documents. Notwithstanding anything to contrary set forth in this
Agreement (except as immediately set forth above) or in any other Transaction
Document, until such time as the Company has received the requisite approval
from its shareholders to increase the authorized shares of Common Stock and has
been provided a commercially reasonable time thereafter to file an amendment to
its Articles of Incorporation, the Company shall deemed in compliance with all
representations, warranties, covenants and other provisions set forth in the
Transaction Documents which require the Company to reserve shares of Common
Stock for issuance upon conversion or exercise of the Preferred Stock or
Warrants, respectively.

 







25












(b) If, on
any date, the number of authorized but unissued (and otherwise unreserved)
shares of Common Stock is less than 130% of (i) the Actual Minimum on such
date, minus (ii) the number of shares of Common Stock previously issued pursuant
to the Transaction Documents, then the Board of Directors of the Company shall
use commercially reasonable efforts to amend the Company’s certificate or
articles of incorporation to increase the number of authorized but unissued
shares of Common Stock to at least the Actual Minimum at such time (minus the
number of shares of Common Stock previously issued pursuant to the Transaction
Documents), as soon as possible and in any event not later than the 75th day
after such date; provided that the Company will not be required at any time to
authorize a number of shares of Common Stock greater than the maximum remaining
number of shares of Common Stock that could possibly be issued after such time
pursuant to the Transaction Documents.

 

(c) The
Company shall, if applicable: (i) in the time and manner required by the Trading
Market, prepare and file with such Trading Market an additional shares listing
application covering a number of shares of Common Stock at least equal to the
Actual Minimum on the date of such application, (ii) take all steps necessary to
cause such shares of Common Stock to be approved for listing on the Trading
Market as soon as possible thereafter, (iii) provide to the Purchasers evidence
of such listing, and (iv) maintain the listing of such Common Stock on any date
at least equal to the Actual Minimum on such date on such Trading Market or
another Trading Market. 

 

4.13 Participation
in Future Financing.


 

(a)  From the
date hereof until the date that is the Preferred Stock is no longer outstanding,
upon any financing by the Company or any of its Subsidiaries of Common Stock or
Common Stock Equivalents other than a firm-commitment underwritten public
offering (a “Subsequent
Financing”), each
Purchaser shall have the right to participate in up to an amount of the
Subsequent Financing equal to a percentage, the numerator of which is equal to
the aggregate Stated Value of all Preferred Stock sold at the Closing and the
denominator of which is equal to the dollar amount proposed to be raised in the
Subsequent Financing of the Subsequent Financing; provided, that such percentage
may never be greater than 100% (the “Participation
Maximum”).


 







26












(b)  At least
5 Trading Days prior to the closing of the Subsequent Financing, the Company
shall deliver to each Purchaser a written notice of its intention to effect a
Subsequent Financing (“Pre-Notice”), which
Pre-Notice shall ask such Purchaser if it wants to review the details of such
financing (such additional notice, a “Subsequent
Financing Notice”). Upon
the request of a Purchaser, and only upon a request by such Purchaser, for a
Subsequent Financing Notice, the Company shall promptly, but no later than 1
Trading Day after such request, deliver a Subsequent Financing Notice to such
Purchaser. The Subsequent Financing Notice shall describe in reasonable detail
the proposed terms of such Subsequent Financing, the amount of proceeds intended
to be raised thereunder, the Person with whom such Subsequent Financing is
proposed to be effected, and attached to which shall be a term sheet or similar
document relating thereto. 




(c)  Any
Purchaser desiring to participate in such Subsequent Financing must provide
written notice to the Company by not later than 5:30 p.m. (New York City time)
on the fifth Trading Day after all of the Purchasers have received the
Pre-Notice that the Purchaser is willing to participate in the Subsequent
Financing, the amount of the Purchaser’s participation, and that the Purchaser
has such funds ready, willing, and available for investment on the terms set
forth in the Subsequent Financing Notice. If the Company receives no notice from
a Purchaser as of such 5th Trading
Day, such Purchaser shall be deemed to have notified the Company that it does
not elect to participate. 




(d)  If by
5:30 p.m. (New York City time) on the fifth Trading
Day after all of the Purchasers have received the Pre-Notice, notifications by
the Purchasers of their willingness to participate in the Subsequent Financing
(or to cause their designees to participate) are, in the aggregate, less than
the total amount of the Subsequent Financing, then the Company may effect the
remaining portion of such Subsequent Financing on the terms and to the Persons
set forth in the Subsequent Financing Notice. 




(e)  If by
5:30 p.m. (New York City time) on the fifth Trading Day after all of the
Purchasers have received the Pre-Notice, the Company receives responses to a
Subsequent Financing Notice from Purchasers seeking to purchase more than the
aggregate amount of the Participation Maximum, each such Purchaser shall have
the right to purchase the greater of (a) its Pro Rata Portion (as defined below)
of the Participation Maximum and (b) the difference between the Participation
Maximum and the aggregate amount of participation by all other Purchasers. 
“Pro
Rata Portion” is the
ratio of (x) the Subscription Amount of Securities purchased on the Closing Date
by a Purchaser participating under this Section 4.13 and (y) the sum of the
aggregate Subscription Amounts of Securities purchased on the Closing Date by
all Purchasers participating under this Section 4.13.










27












(f)  The
Company must provide the Purchasers with a second Subsequent Financing Notice,
and the Purchasers will again have the right of participation set forth above in
this Section 4.13, if the Subsequent Financing subject to the initial Subsequent
Financing Notice is not consummated for any reason on the terms set forth in
such Subsequent Financing Notice within 60 Trading Days after the date of the
initial Subsequent Financing Notice. 




(g)  Notwithstanding
the foregoing, this Section 4.13 shall not apply in respect of an Exempt
Issuance.




4.14 Subsequent
Equity Sales.





(a)  From the
date hereof until 90 days after the Effective Date, neither the Company nor any
Subsidiary shall issue shares of Common Stock or Common Stock Equivalents;
provided, however, the 90 day period set forth in this Section 4.14 shall be
extended for the number of Trading Days during such period in which (i) trading
in the Common Stock is suspended by any Trading Market, or (ii) following the
Effective Date, the Registration Statement is not effective or the prospectus
included in the Registration Statement may not be used by the Purchasers for the
resale of the Underlying Shares. 




(b)  From the
date hereof until such time as no Purchaser holds any of the Securities, the
Company shall be prohibited from effecting or entering into an agreement to
effect any Subsequent Financing involving a “Variable Rate Transaction”. The
term “Variable
Rate Transaction” shall
mean a transaction in which the Company issues or sells (i) any debt or equity
securities that are convertible into, exchangeable or exercisable for, or
include the right to receive additional shares of Common Stock either (A) at a
conversion, exercise or exchange rate or other price that is based upon and/or
varies with the trading prices of or quotations for the shares of Common Stock
at any time after the initial issuance of such debt or equity securities, or (B)
with a conversion, exercise or exchange price that is subject to being reset at
some future date after the initial issuance of such debt or equity security or
upon the occurrence of specified or contingent events directly or indirectly
related to the business of the Company or the market for the Common Stock or
(ii) enters into any agreement, including, but not limited to, an equity line of
credit, whereby the Company may sell securities at a future determined price.





(c)  Notwithstanding
the foregoing, this Section 4.14 shall not apply in respect of an Exempt
Issuance, except that no Variable Rate Transaction shall be an Exempt
Issuance.




4.15  Equal
Treatment of Purchasers. No
consideration shall be offered or paid to any person to amend or consent to a
waiver or modification of any provision of any of the Transaction Documents
unless the same consideration is also offered to all of the parties to the
Transaction Documents. For clarification purposes, this provision constitutes a
separate right granted to each Purchaser by the Company and negotiated
separately by each Purchaser, and is intended to treat for the Company the
Purchasers as a class and shall not in any way be construed as the Purchasers
acting in concert or as a group with respect to the purchase, disposition or
voting of Securities or otherwise.

 







28












4.16  Short
Sales and Confidentiality. Each
Purchaser severally and not jointly with the other Purchasers covenants that
neither it nor any affiliates acting on its behalf or pursuant to any
understanding with it will execute any Short Sales during the period after the
Discussion Time and ending at the time that the transactions contemplated by
this Agreement are first publicly announced as described in Section
4.6. Each
Purchaser, severally and not jointly with the other Purchasers, covenants that
until such time as the transactions contemplated by this Agreement are publicly
disclosed by the Company as described in Section 4.6, such Purchaser will
maintain, the confidentiality of all disclosures made to it in connection with
this transaction (including the existence and terms of this transaction). Each
Purchaser understands and acknowledges, severally and not jointly with any other
Purchaser, that the Commission currently takes the position that coverage of
short sales of shares of the Common Stock “against the box” prior to the
Effective Date of the Registration Statement with the Securities is a violation
of Section 5 of the Securities Act, as set forth in Item 65, Section 5 under
Section A, of the Manual of Publicly Available Telephone Interpretations, dated
July 1997, compiled by the Office of Chief Counsel, Division of Corporation
Finance. Notwithstanding
the foregoing, no Purchaser makes any representation, warranty or covenant
hereby that it will not engage in Short Sales in the securities of the Company
after the time that the transactions contemplated by this Agreement are first
publicly announced as described in Section 4.6. Notwithstanding
the foregoing, in the case of a Purchaser that is a multi-managed investment
vehicle whereby separate portfolio managers manage separate portions of such
Purchaser's assets and the portfolio managers have no direct knowledge of the
investment decisions made by the portfolio managers managing other portions of
such Purchaser's assets, the covenant set forth above shall only apply with
respect to the portion of assets managed by the portfolio manager that made the
investment decision to purchase the Securities covered by this
Agreement.

 

4.17  Certificate
of Designation for Short Term Warrant. Within
7 Trading Days of any exercise of the Short Term Warrant by any Purchaser, the
Company shall file, with the Secretary of State of Nevada, a certificate of
designation, otherwise identical to the Certificate of Designation attached
hereto as Exhibit
A, except
that the Conversion Price, as it is defined in Section 6(b) of the Certificate
of Designation, shall be equal to $0.85, subject to adjustment therein.


 

 

ARTICLE
V

MISCELLANEOUS

 

5.1Termination. 
This Agreement may be terminated by any Purchaser, as to such Purchaser’s
obligations hereunder only and without any effect whatsoever on the obligations
between the Company and the other Purchasers, by written notice to the other
parties, if the Closing has not been consummated on or before April 30, 2005;
provided,
however, that no
such termination will affect the right of any party to sue for any breach by the
other party (or parties).

 







29












5.2Fees
and Expenses. At the
Closing, the Company has agreed to reimburse Crestview Capital Master Fund, LLC
(“Crestview”) up to
$25,000, for its actual, reasonable, out-of-pocket legal fees and expenses. The
Company shall deliver, prior to the Closing, a completed and executed copy of
the Closing Statement, attached hereto as Annex
A. Except
as expressly set forth in the Transaction Documents to the contrary, each party
shall pay the fees and expenses of its advisers, counsel, accountants and other
experts, if any, and all other expenses incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of this Agreement.
The Company shall pay all transfer agent fees, stamp taxes and other taxes and
duties levied in connection with the delivery of any Securities.

 

5.3Entire
Agreement. The
Transaction Documents, together with the exhibits and schedules thereto, contain
the entire understanding of the parties with respect to the subject matter
hereof and supersede all prior agreements and understandings, oral or written,
with respect to such matters, which the parties acknowledge have been merged
into such documents, exhibits and schedules.

 

5.4 Notices. Any and
all notices or other communications or deliveries required or permitted to be
provided hereunder shall be in writing and shall be deemed given and effective
on the earliest of (a) the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile number set forth on the signature
pages attached hereto prior to 5:30 p.m. (New York City time) on a Trading Day,
(b) the next Trading Day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number set forth on
the signature pages attached hereto on a day that is not a Trading Day or later
than 5:30 p.m. (New York City time) on any Trading Day, (c) the second Trading
Day following the date of mailing, if sent by U.S. nationally recognized
overnight courier service, or (d) upon actual receipt by the party to whom such
notice is required to be given. The address for such notices and communications
shall be as set forth on the signature pages attached hereto.

 

5.5 Amendments;
Waivers. No
provision of this Agreement may be waived or amended except in a written
instrument signed, in the case of an amendment, by the Company and each
Purchaser 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.

 

5.6 Headings. The
headings herein are for convenience only, do not constitute a part of this
Agreement and shall not be deemed to limit or affect any of the provisions
hereof. 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.

 

5.7 Successors
and Assigns. This
Agreement shall be binding upon and inure to the benefit of the parties and
their successors and permitted assigns. The Company may not assign this
Agreement or any rights or obligations hereunder without the prior written
consent of each Purchaser. Any Purchaser may assign any or all of its rights
under this Agreement to any Person to whom such Purchaser assigns or transfers
any Securities, provided such transferee agrees in writing to be bound, with
respect to the transferred Securities, by the provisions hereof that apply to
the “Purchasers”.

 







30












5.8 No
Third-Party Beneficiaries. This
Agreement is intended for the benefit of the parties hereto and their respective
successors and permitted assigns and is not for the benefit of, nor may any
provision hereof be enforced by, any other Person, except as otherwise set forth
in Section 4.9.

 

5.9 Governing
Law. All
questions concerning the construction, validity, enforcement and interpretation
of the Transaction Documents shall be governed by and construed and enforced in
accordance with the internal laws of the State of New York, without regard to
the principles of conflicts of law thereof. Each party agrees that all legal
proceedings concerning the interpretations, enforcement and defense of the
transactions contemplated by this Agreement and any other Transaction Documents
(whether brought against a party hereto or its respective affiliates, directors,
officers, shareholders, employees or agents) shall be commenced exclusively in
the state and federal courts sitting in the City 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 (including with respect to
the enforcement of any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper or inconvenient venue for such
proceeding. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof via registered or certified mail or overnight delivery
(with evidence of delivery) to such party at the address in effect for notices
to it under this Agreement and agrees that such service shall constitute good
and sufficient service of process and notice thereof. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any manner
permitted by law. The parties hereby waive all rights to a trial by jury. If
either party shall commence an action or proceeding to enforce any provisions of
the Transaction Documents, then the prevailing party in such action or
proceeding shall be reimbursed by the other party for its attorneys’ fees and
other costs and expenses incurred with the investigation, preparation and
prosecution of such action or proceeding.

 

5.10 Survival. The
representations and warranties contained herein shall survive the Closing and
the delivery, exercise and/or conversion of the Securities, as applicable for
the applicable statue of limitations.

 

5.11 Execution. This
Agreement may be executed in two or more counterparts, all of which when taken
together shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the
other party, it being understood that both parties need not sign the same
counterpart. In the event that any signature is delivered by facsimile
transmission, 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.

 







31












5.12 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.

 

5.13 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 Documents and
the Company does not timely perform its related obligations within the periods
therein provided, then such Purchaser may rescind or withdraw, in its sole
discretion from time to time upon written notice to the Company, any relevant
notice, demand or election in whole or in part without prejudice to its future
actions and rights; provided,
however, in the
case of a rescission of a conversion of the Preferred Stock or exercise of a
Warrant, the Purchaser shall be required to return any shares of Common Stock
subject to any such rescinded conversion or exercise notice.

 

5.14 Replacement
of Securities. If any
certificate or instrument evidencing any Securities is mutilated, lost, stolen
or destroyed, the Company shall issue or cause to be issued in exchange and
substitution for and upon cancellation thereof, or in lieu of and substitution
therefor, a new certificate or instrument, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction 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.

 

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

 

5.16 Payment
Set Aside. To the
extent that the Company makes a payment or payments to any Purchaser pursuant to
any Transaction Document or a Purchaser enforces or exercises its rights
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a trustee,
receiver or any other person under any law (including, without limitation, any
bankruptcy law, state or federal law, common law or equitable cause of action),
then to the extent of any such restoration the obligation or part thereof
originally intended to be satisfied shall be revived and continued in full force
and effect as if such payment had not been made or such enforcement or setoff
had not occurred.

 







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5.17Usury. To the
extent it may lawfully do so, the Company hereby agrees not to insist upon or
plead or in any manner whatsoever claim, and will resist any and all efforts to
be compelled to take the benefit or advantage of, usury laws wherever enacted,
now or at any time hereafter in force, in connection with any claim, action or
proceeding that may be brought by any Purchaser in order to enforce any right or
remedy under any Transaction Document. Notwithstanding any provision to the
contrary contained in any Transaction Document, it is expressly agreed and
provided that the total liability of the Company under the Transaction Documents
for payments in the nature of interest shall not exceed the maximum lawful rate
authorized under applicable law (the “Maximum
Rate”), and,
without limiting the foregoing, in no event shall any rate of interest or
default interest, or both of them, when aggregated with any other sums in the
nature of interest that the Company may be obligated to pay under the
Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum
contract rate of interest allowed by law and applicable to the Transaction
Documents is increased or decreased by statute or any official governmental
action subsequent to the date hereof, the new maximum contract rate of interest
allowed by law will be the Maximum Rate applicable to the Transaction Documents
from the effective date forward, unless such application is precluded by
applicable law. If under any circumstances whatsoever, interest in excess of the
Maximum Rate is paid by the Company to any Purchaser with respect to
indebtedness evidenced by the Transaction Documents, such excess shall be
applied by such Purchaser to the unpaid principal balance of any such
indebtedness or be refunded to the Company, the manner of handling such excess
to be at such Purchaser’s election.

 

5.18 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. 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 Documents. Each
Purchaser shall be entitled to independently protect and enforce its rights,
including without limitation, the rights arising out of this Agreement or out of
the other Transaction Documents, and it shall not be necessary for any other
Purchaser to be joined as an additional party in any proceeding for such
purpose. Each Purchaser has been represented by its own separate legal counsel
in their review and negotiation of the Transaction Documents. For reasons of
administrative convenience only, Purchasers and their respective counsel have
chosen to communicate with the Company through FW. FW does not represent any of
the Purchasers but only Crestview. The Company has elected to provide all
Purchasers with the same terms and Transaction Documents for the convenience of
the Company and not because it was required or requested to do so by the
Purchasers.

 

5.19 Liquidated
Damages. The
Company’s obligations to pay any partial liquidated damages or other amounts
owing under the Transaction Documents is a continuing obligation of the Company
and shall not terminate until all unpaid partial liquidated damages and other
amounts have been paid notwithstanding the fact that the instrument or security
pursuant to which such partial liquidated damages or other amounts are due and
payable shall have been canceled.

 







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5.20 Construction. The
parties agree that each of them and/or their respective counsel has reviewed and
had an opportunity to revise the Transaction Documents and, therefore, the
normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the interpretation
of the Transaction Documents or any amendments hereto.

 




 

[SIGNATURE
PAGE FOLLOWS]





 






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

 





	
      DDS
      TECHNOLOGIES USA, INC.
	
      Address
      for Notice:

	 	 
	
      By:__________________________________________

      Name:

      Title:
	 
	
      With
      a copy to (which shall not constitute notice):

       

       
	 















[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE
PAGE FOR PURCHASER FOLLOWS]

 





 






35













[PURCHASER
SIGNATURE PAGES TO DDSU SECURITIES PURCHASE AGREEMENT]




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

 

Name of
Purchaser: __________________________

Signature
of Authorized Signatory of Purchaser:
__________________________

Name of
Authorized Signatory: _________________________

Title of
Authorized Signatory: __________________________

Email
Address of Purchaser:________________________________




Address
for Notice of Purchaser:













Address
for Delivery of Securities for Purchaser (if not same as above):
















Subscription
Amount:

Shares of
Preferred Stock:

Long Term
Warrant Shares:

Short
Term Warrant Shares:

EIN
Number: [PROVIDE
THIS UNDER SEPARATE COVER]




[SIGNATURE
PAGES CONTINUE]

 





 






36













Annex
A 




CLOSING
STATEMENT




Pursuant
to the attached Securities Purchase Agreement, dated as of the date hereto, the
purchasers shall purchase up to $4,000,000 of Preferred Stock and Warrants from
DDS Technologies USA, Inc., a Nevada corporation (the “Company”). All
funds will be wired into a trust account maintained by Greenberg Traurig, P.A.,
counsel to the Company. All funds will be disbursed in accordance with this
Closing Statement. 




Disbursement
Date: April
___, 2005







	
      I.
      PURCHASE
      PRICE
	 
	
      Gross
      Proceeds to be Received in Trust
	
      $

	 	 
	
      II. DISBURSEMENTS
	 
	
       
	
      $

	
       
	
      $

	 	
      $

	 	
      $

	 	
      $

	 	 
	
      Total
      Amount Disbursed:
	
      $

	 	 
	 	 
	 	 
	
      WIRE
      INSTRUCTIONS:
	 
	
       

      To:
      _____________________________________

       

       

       
	 
	
       

      To:
      _____________________________________

       

       

       

       
	 
















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