Exhibit 10.1


 


SECURITIES PURCHASE AGREEMENT


 


This Securities Purchase Agreement (this “Agreement”)
is dated as of December 16, 2004, among Wave Systems Corp., a Delaware
corporation (the “Company”), and each purchaser identified on the
signature pages hereto (each, including its successors and assigns, a “Purchaser”
and collectively the “Purchasers”); and


 


WHEREAS, subject to the terms and conditions set forth
in this Agreement, the Company desires to issue and sell to each Purchaser, and
each Purchaser, severally and not jointly, desires to purchase from the Company
in the aggregate, up to $5,759,028 of shares of Common Stock on the Closing
Date pursuant to an effective Registration Statement on Form S-3, file no.
333-114476.


 


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 agrees as follows:


 


ARTICLE I.

DEFINITIONS


 


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


 


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


 


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


 


“Closing” means
the closing of the purchase and sale of the Common Stock 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.


 


“Closing Price”
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 closing bid price of the Common Stock for such date (or the nearest
preceding date) on the 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. Eastern Time to 4:02 p.m. Eastern Time); (b)  if the Common
Stock is not then listed or quoted on a Trading Market and if prices for the
Common Stock are then quoted on the OTC Bulletin Board, the closing bid price
of the Common Stock for such date (or the


 


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nearest preceding date)
on the OTC Bulletin Board; (c) if the Common Stock is not then listed or quoted
on the OTC Bulletin Board and if prices for the Common Stock are then reported
in the “Pink Sheets” published by the National Quotation Bureau Incorporated
(or a similar organization or agency succeeding to its functions of reporting
prices), the most recent bid price per share of the Common Stock so reported;
or (d) in all other cases, the fair market value of a share of Common
Stock as determined by an independent appraiser selected in good faith by the
Purchasers and reasonably acceptable to the Company.


 


“Commission” means
the Securities and Exchange Commission.


 


“Common Stock” means the Class A common stock
of the Company, par value $0.01 per share, and any securities into which such
common stock may hereafter be reclassified.


 


“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 Bingham McCutchen LLP.


 


“Disclosure Schedules” means the Disclosure
Schedules of the Company delivered concurrently herewith.


 


“Effective Date”
means the date that the Registration Statement was first declared effective by
the Commission.


 


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


 


“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 upon the exercise of or conversion of 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, other than by express mechanics contained in such convertible
securities, options or warrants prior to the date of this Agreement,  (c) securities issued pursuant to
acquisitions or strategic transactions, including such a transaction involving
Wavexpress, Inc., 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; and (d) up to, in the


 


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aggregate, 250,000 shares of Common Stock or Common
Stock Equivalents in any 12 month period to consultants as payment for services
rendered.


 


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


 


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


 


“Market Price”
means the Closing Price immediately prior to the date in question.


 


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


 


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


 


“Per Share Purchase
Price” equals $1.05, subject to
adjustment for reverse and forward stock splits, stock dividends, stock
combinations and other similar transactions of the Common Stock that occur
after the date of this Agreement.


 


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


 


“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.


 


“Registration
Statement” means the registration statement of the Company, Commission File
No. 333-114476 covering the sale to the Purchasers of the Shares.


 


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


 


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


 


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


 


“Securities” means
the Shares.


 


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


 


“Shares” means the
shares of Common Stock issued or issuable to each Purchaser pursuant to this
Agreement.


 


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“Subscription Amount”
means, as to each Purchaser, the amounts set forth below such Purchaser’s
signature block on the signature page hereto, in United States dollars and in
immediately available funds.


 


“Subsidiary” shall
mean the subsidiaries of the Company, if any, set forth in the Company’s SEC
Reports.


 


“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, or the Nasdaq National
Market.


 


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


 


ARTICLE II.

PURCHASE AND SALE


 


2.1                                 Closing.  On the Closing Date, each Purchaser shall
purchase from the Company, severally and not jointly with the other Purchasers,
and the Company shall issue and sell to each Purchaser a number of Shares equal
to such Purchaser’s Subscription Amount divided by the Per Share Purchase
Price.  The aggregate Subscription
Amounts for Shares sold hereunder shall be up to $5,759,028.  Upon satisfaction of the conditions set forth
in Section 2.2, the Closing shall occur at the offices of Company Counsel
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)                                              the
receipt by each Purchaser, via the DTC DWAC system, of the number of Shares
equal to such Purchaser’s Subscription Amount divided by the Per Share Purchase
Price, registered in the name of such Purchaser;


 


(iii)                                           an
officer’s certificate of the Company’s Chief Executive Officer or Chief Financial
Officer, in form reasonably acceptable to the Purchasers, certifying the
continuing accuracy of the Company’s representations and warranties made in
this Agreement and the Company’s performance of the covenants to be performed
by it pursuant to this Agreement at or prior to Closing; and


 


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(iv)                                          a
legal opinion of Company Counsel, in the form of Exhibit B 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; and


 


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


 


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:


 


(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, which shall not have been reasonably cured by the Company; 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


 


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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 Shares at the Closing.


 


ARTICLE III.

REPRESENTATIONS AND WARRANTIES


 


3.1                                 Representations
and Warranties of the Company. 
Except as set forth under the corresponding section of 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 in the SEC Reports as filed with the
Commission.  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.


 


(b)                                 Organization
and Qualification.  Each of the
Company and 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.


 


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(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, the issuance and
sale of the Shares 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, or (iv) conflict with or
violate the terms of any agreement by which the Company or any Subsidiary is
bound or to which any property or asset of the Company or any 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.


 


(e)                                  Filings,
Consents and Approvals.  The Company
is not required to obtain any consent, waiver, authorization or order of, give
any notice to, or make any filing or registration with, any court or other
federal, state, local or other governmental authority or other Person in
connection with the execution, delivery and performance by the Company of the
Transaction Documents, other than (i) the Notification Form: Listing of
Additional Shares required by the NASDAQ Stock Market, (ii) filings required
pursuant to Section 4.3 of this Agreement, and (iii) such filings as are
required to be made under applicable state securities laws (collectively, the “Required
Approvals”).


 


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(f)                                    Issuance
of the Securities.  The Shares are
duly authorized and, when issued and paid for in accordance with the
Transaction Documents, will be duly and validly issued, fully paid and
nonassessable, free and clear of all Liens imposed by the Company other than
restrictions on transfer provided for in the Transaction Documents.  The Company has reserved from its duly
authorized capital stock the maximum number of shares of Common Stock issuable
pursuant to this Agreement.


 


(g)                                 Capitalization.  The capitalization of the Company is as
described in the Company’s most recent periodic report filed with the
Commission.  The Company has not issued
any capital stock since such filing 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.  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
securities or rights convertible or exchangeable into shares of Common
Stock.  The issue 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.  There are no stockholders agreements, voting
agreements or other similar agreements with respect to the Company’s capital
stock to which the Company is a party or, to the knowledge of the Company,
between or among any of the Company’s stockholders.


 


(h)                                 SEC
Reports; Financial Statements.  The
Company has filed all reports 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, 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


 


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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, except as has been reasonably cured by the
Company (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.


 


(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.


 


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(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.


 


(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 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.


 


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(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 of $5,000,000.  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.


 


(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 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,
other than a fee to Corpfin Inc. in connection with the


 


11





















 


sale of the Shares at Closing.  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.


 


(t)                                    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 in compliance with all such
listing and maintenance requirements.


 


(u)                                 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.


 


(v)                                 Disclosure.  The Company confirms that, neither the
Company nor any officer, director or employee of the Company acting on its
behalf has provided any of the Purchasers or their agents or counsel with any
information that constitutes or might constitute material, non-public
information.   The Company understands
and confirms that the Purchasers will rely on the foregoing representations and
covenants in effecting transactions in securities of the Company.  All disclosure provided to the Purchasers
regarding the Company, its business and the transactions contemplated hereby
furnished by or on behalf of the Company 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.


 


(w)                               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, to
the best of the Company’s knowledge, cause this offering of


 


12





















 


the Securities,
when, and if, integrated with prior offerings by the Company, to require
shareholder approval, including, without limitation, under the rules and
regulations of any exchange or automated quotation system on which any of the
securities of the Company are listed or designated.


 


(x)                                   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 through the current fiscal year, 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.


 


(y)                                 Effective
Registration Statement.  The
Registration Statement has been declared effective by the Commission and the
Company knows of no reason why the Registration Statement will not continue to
remain effective for the foreseeable future.


 


(z)                                   Taxes.  Except for matters that would not,
individually or in the aggregate, have, or reasonably be expected to result in,
a Material Adverse Effect, to the best of the Company’s knowledge, 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.


 


13





















 


(aa)                            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 corrupt
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.


 


(bb)                          Acknowledgment
Regarding Purchasers’ Purchase of Shares. 
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 Shares.  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.


 


(cc)                            Approvals.  The issuance and listing on the Nasdaq
National Market of the Shares requires no further approvals, including but not
limited to, the approval of shareholders.


 


(dd)                          Accountants.  The Company’s accountants are set forth on Schedule 3.1(dd)
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-K for the year ending December 31,
2004, are a registered public accounting firm as required by the Securities
Act.


 


(ee)                            Acknowledgement
Regarding Purchasers’ Trading Activity.  Anything in this Agreement or elsewhere
herein to the contrary notwithstanding, 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


 


14





















 


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.


 


(b)                                 Purchaser
Representation.  Such Purchaser does
not have any agreement or understanding, directly or indirectly, with any
Person to distribute any of the Securities. Such Purchaser is not required to
be registered as a broker-dealer under Section 15 of the Exchange Act.


 


(c)                                  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.


 


(d)                                 Short
Sales.  Each Purchaser represents
that from the date that it was approached (on or about December 16, 2004)
to participate in the transaction contemplated by this Agreement through the
Closing Date, neither it nor any of its Affiliates over which Purchaser
exercises investment discretion have made any net short sales of, or granted
any option for the purchase of or entered into any hedging or similar
transaction with the same economic effect as a net short sale, in the Common
Stock.


 


(e)                                  Securities
Laws.  If a Purchaser engaged in any
of the trading activities described in Section 3.1(d) above, such
Purchaser did so in compliance with federal securities laws.


 


15





















 


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                                 No
Transfer Restrictions.


 


(a)                                  Certificates
evidencing the Shares shall not contain any legend restricting their
transferability by the Purchaser. The Company shall cause its counsel to issue
a legal opinion to the Company’s transfer agent if required by the Company’s
transfer agent to effect a transfer of any of the Securities.


 


(b)                                 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 Shares (based on the Market Price of the Common Stock on the
date such Securities are submitted to the Company’s transfer agent) for
transfer, $10 per Trading Day (increasing to $20 per Trading Day five (5)
Trading Days after such damages have begun to accrue) for each Trading Day
after three (3) Trading Days until such Securities are delivered. 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.


 


4.2           Furnishing of Information.  As long as any Purchaser owns Securities, the
Company covenants to timely file (or obtain extensions in respect thereof and
file within the applicable grace period) all reports required to be filed by
the Company after the date hereof pursuant to the Exchange Act.  As long as any Purchaser owns Securities, if
the Company is not required to file reports pursuant to the Exchange Act, it
will prepare and furnish to the Purchasers and make publicly available in
accordance with Rule 144(c) such information as is required for the Purchasers
to sell the Securities under Rule 144. The Company further covenants that it
will take such further action as any holder of Securities may reasonably
request, 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.


4.3                                 Securities
Laws Disclosure; Publicity.  The
Company shall, by 9:00 a.m. Eastern time on the Trading Day following the date
hereof file a Current Report on Form 8-K which attaches as exhibits all
agreements relating to this transaction, in each case reasonably acceptable to
each Purchaser, if such Purchaser is readily available to review such Form 8-K
in a timely manner, disclosing the material terms of the transactions
contemplated hereby.  Notwithstanding the
foregoing, the Company shall not publicly disclose the name of any Purchaser,
or include the name of any Purchaser in any filing with the Commission or any
regulatory agency or Trading Market, except as set forth in the exhibits to be
attached to the Form 8-K contemplated above, without the prior written consent
of such Purchaser (such consent not to be unreasonably


 


16





















 


withheld), except (i) as required by federal
securities law 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).


 


4.4                                 Shareholders
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 shareholders
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.


 


4.5                                 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.


 


4.6                                 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.


 


4.7                                 Indemnification
of Purchasers.   Subject to the
provisions of this Section 4.7, 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


 


17





















 


Transaction Documents (unless such action is based upon a breach of
such Purchaser’s representations, warranties or covenants under the Transaction
Documents or any agreements or understandings such Purchaser may have with any
such stockholder or any violations by the Purchaser of state or federal
securities laws or any conduct by such Purchaser which constitutes fraud, gross
negligence, willful misconduct or malfeasance). 
If any action shall be brought against any Purchaser Party in respect of
which indemnity may be sought pursuant to this Agreement, such Purchaser Party
shall promptly notify the Company in writing, and the Company shall have the
right to assume the defense thereof with counsel of its own choosing.  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.


 


4.8                                 Reservation
of Common Stock. As of the date hereof, the Company has reserved and the
Company shall continue to reserve and keep available at all times, free of
preemptive rights, a sufficient number of shares of Common Stock for the
purpose of enabling the Company to issue Shares pursuant to this
Agreement.   


 


4.9                                 Listing
of Common Stock.  The Company hereby
agrees to use best efforts to maintain the listing of the Common Stock on a
Trading Market. The Company further agrees, if the Company applies to have the
Common Stock traded on any other Trading Market, it will include in such
application all of the Shares and will take such other action as is necessary
to cause all of the Shares to be listed on such other Trading Market as
promptly as possible.  The Company will
take all action reasonably necessary to continue the listing and trading of its
Common Stock on a Trading Market and will comply in all respects with the
Company’s reporting, filing and other obligations under the bylaws or rules of
the Trading Market.


 


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


 


4.11                           Subsequent
Equity Sales.  From the date hereof
until 30 days after the Closing Date, neither the Company nor any Subsidiary
shall issue shares of Common Stock or Common


 


18





















 


Stock Equivalents; without the prior written consent of each Purchaser
(such consent not to be unreasonably withheld). 
Notwithstanding the foregoing, this Section 4.11 shall not apply in
respect of an Exempt Issuance or in respect of shares of Common Stock and
Common Stock Equivalents which the Company is not permitted to register under
the Securities Act for at least 12 months following the Closing Date.


 


4.12                           Approval
of Subsequent Equity Sales.  The
Company shall not issue shares of Common Stock or Common Stock Equivalents if
such issuance would require shareholder approval pursuant to Rule 4350 of the
NASD Marketplace Rules, unless and until such shareholder approval is obtained.


 


4.13                           Participation
in Future Financing.  From the date
hereof until 6 months after the Closing Date, upon any financing by the Company
of its Common Stock or Common Stock Equivalents (a “Subsequent Financing”),
each Purchaser shall have the right to participate in up to 100% of such
Subsequent Financing (the “Participation Maximum”).  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 a proposed 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.    If by 6:30 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) is, 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.  If the Company receives no notice from a Purchaser as of such
fifth Trading Day, such Purchaser shall be deemed to have notified the Company
that it does not elect to participate.  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. In the event the Company receives responses to
Subsequent Financing Notices from Purchasers seeking to purchase more than the
aggregate amount of the Subsequent Financing, each such Purchaser shall have
the right to purchase their Pro Rata Portion (as defined below) of the
Participation Maximum.  “Pro Rata Portion” is the ratio of (x) the
Subscription Amount of Securities purchased by a participating Purchaser and
(y) the sum of the aggregate Subscription Amount of all participating
Purchasers.  Notwithstanding the foregoing, this Section 4.13 shall
not apply in respect of an Exempt Issuance.


 


19





















 


ARTICLE V.

MISCELLANEOUS


 


5.1                                 Termination.  This Agreement may be terminated by any
Purchaser, as applied to such Purchaser, by written notice to the other parties,
if the Closing has not been consummated on or before December 31, 2004,
provided however that no such termination will affect the right of any party to
sue for any breach by the other party (or parties).


 


5.2                                 Fees
and Expenses.  The Company shall deliver,
prior to the Closing, a completed and executed copy of the Closing Statement,
attached hereto as Annex A. Except as otherwise set forth in this
Agreement, each party shall pay the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement.  The
Company shall pay all stamp and other taxes and duties levied in connection
with the sale of the Securities.


 


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


 


5.4                                 Notices.  Any and all notices or other communications
or deliveries required or permitted to be provided hereunder shall be in
writing and shall be deemed given and effective on the earliest of (a) the date
of transmission, if such notice or communication is delivered via facsimile at
the facsimile number set forth on the signature pages attached hereto prior to
6:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile number set forth on the signature pages attached
hereto on a day that is not a Trading Day or later than 6:30 p.m. (New York
City time) on any Trading Day, (c) the 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                                 Construction.  The headings herein are for convenience only,
do not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.  The
language used in this Agreement will be deemed to be the language chosen by the
parties to express their mutual intent, and no rules of strict construction
will be applied against any party.


 


20





















 


5.6                                 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”.


 


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


 


5.8                                 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.


 


5.9                                 Survival.  The representations and warranties herein
shall survive the Closing and delivery of the Shares.


 


5.10                           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


 


21





















 


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.


 


5.11                           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.


 


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


 


5.13                           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.


 


5.14                           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.


 


5.15                           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.


 


5.16                           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


 


22





















 


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 Document.  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 Feldman Weinstein
LLP (“FW”).  FW does not represent
all of the Purchasers but only Corpfin Inc., who has acted as placement agent
to the transaction.  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.


 


5.17                           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.


 


5.18                           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)


 


23





















 


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.


 


 


	
  Wave Systems Corp.

  	
  Address for Notice:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  Wave Systems Corp

  
	
  Name: Gerard T. Feeney

  	
  480 Pleasant Street

  
	
  Title: Chief Financial Officer

  	
  Lee, MA 01238

  
	
   

  	
   

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

  	
   

  
					



 


 


[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK


SIGNATURE PAGES FOR PURCHASERS FOLLOW]


 


24





















 


[PURCHASER SIGNATURE PAGES TO WAVX 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 Investing Entity:


Signature
of Authorized Signatory of Investing Entity:


Name of Authorized
Signatory:


Title of Authorized
Signatory:


Email Address of
Authorized Entity:


 


Address for Notice of
Investing Entity:


 


 


 


 


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


 


 


DWAC Instructions for
Common Stock:


 


 


Subscription Amount: $   ,000,000


 


EIN Number:  [PROVIDE THIS UNDER
SEPARATE COVER]


 


[SIGNATURE PAGES CONTINUE]


 


25





















 


Annex A


 


CLOSING STATEMENT


 


Pursuant to the attached
Securities Purchase Agreement, dated as of the date hereto, the purchasers
shall purchase up to $   ,000,000 of Common Stock from Wave
Systems Corp., a Delaware corporation (the “Company”).  All funds will be wired into the Company’s
account.  All funds will be disbursed in
accordance with this Closing Statement.


 


Disbursement Date:  December      ,
2004


 


 


	
  I.

  	
  PURCHASE
  PRICE

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Gross
  Proceeds to be Received

  	
  $

  	
   

  
	
   

  	
   

  	
   

  
	
  II.

  	
  DISBURSEMENTS

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Corpfin Inc.

  	
  $

  	
   

  
	
   

  	
  $

  	
   

  
	
   

  	
  $

  	
   

  
	
   

  	
  $

  	
   

  
	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  
	
  Total
  Amount Disbursed:

  	
  $

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  WIRE
  INSTRUCTIONS:

  	
   

  	
   

  	
   

  
	
  See
  attached

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  To:

  	
   

  	
   

  	
   

  	
   

  
											



 


26





















 


SCHEDULE 3.1(g) to the


SECURITIES PURCHASE AGREEMENT DATED DECEMBER 16,
2004


 


FOR


WAVE SYSTEMS CORP.


 


OPTIONS AND WARRANTS
OUTSTANDING:


 


	
  Options granted pursuant to Employee and
  Non-employee

  	
   

  	
   

  	
   

  
	
  Director Stock Option plans

  	
   

  	
  11,522,357

  	
   

  
	
  Warrants Outstanding(1)

  	
   

  	
  5,754,823

  	
   

  
	
  Total

  	
   

  	
  17,277,180

  	
   

  



 










(1) Includes warrants
granted in connection with the August 2, 2004 offering, to purchase
3,529,412 Class A Common Shares initially granted with an exercise price of
$1.15 adjusted to an exercise price of $1.1428 pursuant to a Series A Common
Stock Purchase Warrant and 882,353 Class A Common Shares initially granted with
an exercise price of $1.30 adjusted to an exercise price of $1.2820 pursuant to
a Series B Common Stock Purchase Warrant. 
The Series A and Series B Stock Purchase Warrants contained a provision
whereby their exercise price would be adjusted in the event that Wave sold additional
shares at prices below the exercise prices contained therein.


 


27





















 


SCHEDULE 3.1(j) to the


SECURITIES PURCHASE AGREEMENT DATED DECEMBER 16,
2004


 


FOR


WAVE SYSTEMS CORP.


 


LITIGATION:


 


Securities and Exchange
Commission Investigation


 


On December 17, 2003, Wave received an Order by
the Securities and Exchange Commission (the “Commission”) regarding a formal
investigation.  The focus of this
investigation is on certain public statements made by Wave during and around August 2003,
as well as certain trading in Wave’s securities during such time.  The Commission has not concluded that there
has been any wrongdoing and Wave is cooperating fully with the Commission on
this matter.  Wave cannot predict the
potential effect on Wave as a result of this investigation at this time.


 


Purported
Class Actions


 


Several (9 known) similar purported class action
complaints have been filed between January 23, 2004, and February 23,
2004, most in the United States District Court for the District of
Massachusetts, seven (7) of which name Wave, its Chief Executive Officer, its
Chief Financial Officer and two (2) of which also name Wave’s Chairman of the
Board, as defendants.


 


The purported class action complaints have been filed
by alleged purchasers of Wave’s Class A Common Stock during the purported class
period July 31, 2003, through February 2, 2004.  The plaintiffs have since filed consolidated
amended complaints.  The complaints claim
that Wave and the named individuals violated the federal securities laws by publicly
disseminating materially false and misleading statements regarding Wave,
relating to Intel and IBM agreements, resulting in the artificial inflation of
Wave’s Class A Common Stock price during the purported class periods.  The complaints do not specify the amount of
alleged damages plaintiffs seek to recover.


 


Wave intends to defend the actions vigorously.  At this time, Wave is unable to predict the
outcome of these actions.


 


Derivative Actions


 


Wave has learned of three
(3) other complaints filed in the United States District Court for the District
of Massachusetts.  The plaintiffs have
since filed consolidated amended complaints. 
Wave believes that the complaints name all of its directors as
defendants and allege claims for breach of fiduciary duties and other
claims.  The allegations are very similar
to the allegations made in the purported securities class actions because the
allegations concern the very same alleged statements alleged in the purported
class actions.  Wave is also named as a
nominal defendant, although the actions are derivative in nature and
purportedly asserted on behalf of Wave. 
Wave is in the process of evaluating these claims.


 


Wave intends to defend
the actions vigorously.  At this time,
Wave is unable to predict the outcome of these actions.


 


28





















 


SCHEDULE 3.1(t)
to the


SECURITIES PURCHASE AGREEMENT DATED DECEMBER 16,
2004


 


FOR


WAVE SYSTEMS CORP.


LISTING & MAINTENANCE
REQUIREMENTS:


 


On September 14,
2004, Wave Systems Corp. received notification from The Nasdaq Stock Market
indicating that for the last 30 consecutive business days, the bid price of
Wave’s common stock has closed below the minimum $1.00 per share requirement
for continued inclusion under Marketplace Rule 4450(b)(4).  The Nasdaq notice indicated that in
accordance with Marketplace Rule 4450(e)(2), Wave will be provided 180 calendar
days, or until March 14, 2005, to regain compliance by having its shares
close above $1.00 for a minimum of 10 consecutive trading days.  The Nasdaq notice further provided that, if
Wave’s shares have not regained compliance during this period, but otherwise
meet the applicable initial listing requirements, Wave may qualify for a second
180 day compliance period.  Thereafter,
if Wave has not regained compliance by July 26, 2005, Nasdaq will issue a
letter notifying Wave of its continued non-compliance, the pending expiration
of the compliance period, and its right to request a hearing.  If Wave does not regain compliance by March 14,
2005 and is not eligible for an additional compliance period, Nasdaq will
provide written notification that Wave’s common stock will be delisted or moved
to The Nasdaq SmallCap Market.  At that
time, Wave may appeal the determination to delist its securities to a Listings
Qualifications Panel.


 


29





















 


SCHEDULE 3.1(x) to the


SECURITIES PURCHASE AGREEMENT DATED DECEMBER 16,
2004


 


FOR


WAVE SYSTEMS CORP.


 


Solvency:


 


As used in the second
full sentence of section 3.1(x) of the purchase agreement, “debt” shall
exclude trade accounts payable, accrued expenses incurred in the normal course
of business, deferred revenue and commitments on operating leases.


 


30





















 


SCHEDULE 3.1(dd) to the


SECURITIES PURCHASE AGREEMENT DATED DECEMBER 16,
2004


 


FOR


WAVE SYSTEMS CORP.


ACCOUNTANTS:


KPMG, LLP


 


31