exv10w32



 







Exhibit
10.32




SECURITIES PURCHASE AGREEMENT




     This Securities Purchase Agreement (this “Agreement”) is dated as of August 7, 2006, among
Uroplasty, Inc., a Minnesota corporation (the “Company”), and the investors identified on the
signature pages hereto (each, an “Investor” and collectively, the “Investors”).



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



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



ARTICLE I.

DEFINITIONS




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



          “Action” means any action, claim, suit, inquiry, notice of violation, proceeding (including,
without limitation, any investigation or partial proceeding such as a deposition) or investigation
pending or threatened in writing against or affecting the Company, any Subsidiary or any of their
respective properties before or by any court, arbitrator, governmental or administrative agency,
regulatory authority (Federal, state, provincial, county, local or foreign), stock market, stock
exchange or trading facility.




          “Additional Shares” has the meaning set forth in Section 4.6.




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




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




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




 









 








          “Closing Date” means the Business Day immediately following the date on which all of the
conditions set forth in Sections 5.1 and 5.2 hereof are satisfied, or such other date as the
parties may agree.




          “Commission” means the Securities and Exchange Commission.




          “Common Stock” means the common stock of the Company, par value $.01 per share, and any
securities into which such common stock may hereafter be reclassified, converted or exchanged.




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




          “Company Counsel” means Messerli & Kramer P.A.




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




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




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




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




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




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




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




          “Investment Amount” means, with respect to each Investor, the dollar amount that such Investor
is investing in the Securities at Closing, as indicated on such Investor’s signature page to this
Agreement under the line “Investment Amount.”




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




          “Investor Party” has the meaning set forth in Section 4.7.




          “Lien” means any lien, charge, encumbrance, security interest, right of first refusal or other
restrictions of any kind, other than restrictions applicable to the resale of the Securities under
the Securities Act and applicable state securities laws.




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          “Losses” has the meaning set forth in Section 4.7.




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




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




          “Outside Date” means August 15, 2006.




          “Per Share Purchase Price” equals $1.50.




          “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.




          “Registration Rights Agreement” means the Registration Rights Agreement, dated as of the
Closing Date, among the Company and the Investors, in the form of Exhibit B hereto.




          “Registration Statement” means a registration statement meeting the requirements set forth in
the Registration Rights Agreement and covering the resale by the Investors of the Shares and the
Warrant Shares.




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




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




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




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




          “Shares” means the shares of Common Stock issued or issuable to the Investors pursuant to this
Agreement, including any Additional Shares.




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






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          “Subsidiary” means any subsidiary of the Company required to be identified in Schedule
3.1(a).




          “Threshold Price” means the Per Share Purchase Price (subject to equitable adjustment for
stock splits, recombinations and similar events that may occur following the Closing Date and prior
to the date in question).




          “Trading Day” means (i) a day on which the Common Stock is traded on a Trading Market, or (ii)
if the Common Stock is not quoted on any Trading Market, a day on which the Common Stock is quoted
in the over-the-counter market as reported by the Pink Sheets, LLC (or any similar organization or
agency succeeding to its functions of reporting prices); provided, that in the event that the
Common Stock is not listed or quoted as set forth in (i) and (ii) hereof, then Trading Day shall
mean a Business Day.




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




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




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




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




ARTICLE II.

PURCHASE AND SALE




     2.1 Closing. The Closing shall take place at such time and place on the Closing Date
as the parties may agree.



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



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



               (ii) a Warrant, registered in the name of such Investor, pursuant to which such Investor shall
have the right to acquire 50% (rounded up to the nearest whole share) of the number of Shares
issuable to such Investor pursuant to Section 2.2(a)(i);



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



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



               (v) an officer’s certificate, pursuant to Section 5.1(g) herein.



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




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



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



ARTICLE III.

REPRESENTATIONS AND WARRANTIES




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



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




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




          (c) Authorization; Enforcement. The Company has the requisite corporate power and
authority to enter into and to consummate the transactions contemplated by each of






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the Transaction
Documents and otherwise to carry out its obligations thereunder. The execution and delivery of
each of the Transaction Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary action on the part of the Company
and no further action is required by the Company in connection therewith. Each Transaction
Document has been (or upon delivery will have been) duly executed by the Company and, when
delivered in accordance with the terms hereof, will constitute the valid and binding obligation of
the Company enforceable against the Company in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally the enforcement of, creditors’
rights and remedies or by other equitable principles of general application.




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




          (e) Filings, Consents and Approvals. The Company is not required to obtain any
consent, waiver, authorization or order of, give any notice to, or make any filing or registration
with, any court or other Federal, state, local or other governmental authority or other Person in
connection with the execution, delivery and performance by the Company of the Transaction
Documents, other than (i) the filing with the Commission of one or more Registration Statements in
accordance with the requirements Registration Rights Agreement, (ii) filings required by state
securities laws, (iii) the filing of a Notice of Sale of Securities on Form
D with the Commission under Regulation D of the Securities Act, (iv) the filings required in
accordance with Section 4.5 and 4.10, and (v) those that have been made or obtained prior to the
date of this Agreement.




          (f) Issuance of the Securities. The Securities have been duly authorized and, when
issued and paid for in accordance with the Transaction Documents, will be duly and validly issued,
fully paid and nonassessable, free and clear of all Liens. The Company has reserved from its duly
authorized capital stock the shares of Common Stock issuable pursuant to





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this Agreement and the
Warrants in order to issue the Shares and the Warrant Shares, including the Additional Shares
referred to in Section 4.6 below.




          (g) Capitalization. The number of shares and type of all authorized, issued and
outstanding capital stock of the Company, and all shares of Common Stock reserved for issuance
under the Company’s various option and incentive plans, is specified in the SEC Reports and on
Schedule 3.1(g). Except as specified in the SEC Reports and on Schedule 3.1(g), no
securities of the Company are entitled to preemptive or similar rights, and no Person has any right
of first refusal, preemptive right, right of participation, or any similar right to participate in
the transactions contemplated by the Transaction Documents. Except as specified in the SEC Reports
and on Schedule 3.1(g), there are no outstanding options, warrants, scrip rights to
subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights
or obligations convertible into or exchangeable for, or giving any Person any right to subscribe
for or acquire, any shares of capital stock of the Company, or contracts, commitments,
understandings or arrangements by which the Company or any Subsidiary is or may become bound to
issue additional shares of capital stock of the Company, or securities or rights convertible or
exchangeable into shares of capital stock of the Company. The issue and sale of the Securities
will not, immediately or with the passage of time, obligate the Company to issue shares of capital
stock of the Company or other securities to any Person (other than the Investors under the
Transaction Documents) and will not result in a right of any holder of Company securities to adjust
the exercise, conversion, exchange or reset price under such securities.




          (h) SEC Reports; Financial Statements. The Company has filed all reports, forms or
other information required to be filed by it under the Securities Act and the Exchange Act,
including pursuant to Section 13(a) or 15(d) thereof, for the twelve months preceding the date
hereof (or such shorter period as the Company was required by law to file such reports, forms or
other information) (the foregoing materials being collectively referred to herein as the “SEC
Reports” and, together with the Schedules to this Agreement (if any), the “Disclosure Materials”).
As of their respective dates (except as to SEC Reports amended by the Company, as of the respective
dates of such amendment filings), the SEC Reports (as amended) 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 (as amended), when filed (except
for amended SEC Reports, when they were so 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 (as amended) 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 (being the time of SEC Report amendment filings, if applicable). Such financial
statements (as amended) have been prepared in accordance with GAAP applied on a consistent basis
during the periods involved, except as may be otherwise specified in such financial statements or
the notes thereto, and fairly present in all material respects the financial position of the
Company and its consolidated Subsidiaries as of and for the dates thereof and the results of
operations and cash flows for the periods then ended, subject, in the case of unaudited









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statements,
to normal, immaterial, year-end audit adjustments. For purposes of this Agreement, any reports,
forms or other information provided to the Commission, whether by filing, furnishing or otherwise
providing, is included in the term “filed” (or any derivations thereof).




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




          (j) 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, accrued expenses and other liabilities incurred in the
ordinary course of business consistent with past practice and (B) liabilities (not to exceed
$100,000) not required to be reflected in the Company’s financial statements pursuant to GAAP or
required to be disclosed in filings made with the Commission, (iii) the Company has not altered its
method of accounting or the identity of its auditors, (iv) the Company has not declared or made any
dividend or distribution of cash or other property to its shareholders or purchased, redeemed or
made any agreements to purchase or redeem any shares of its capital stock, and (v) the Company has
not issued any equity securities, except pursuant to existing Company stock option plans and
consistent with past practice. The Company does not have pending before the Commission any request
for confidential treatment of information.




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




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




          (m) Compliance. Neither the Company nor any Subsidiary (i) is in default under or in
violation of (and no event has occurred that has not been waived that, with notice or lapse of time
or both, would result in a default by the Company or any Subsidiary under), nor has





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the Company or
any Subsidiary received notice of a claim that it is in default under or that it is in violation
of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a
party or by which it or any of its properties is bound (whether or not such default or violation
has been waived), (ii) is in violation of any order of any court, arbitrator or governmental body,
or (iii) is or has been in violation of any statute, rule or regulation of any governmental
authority, including without limitation all foreign, Federal, state and local laws relating to
taxes, environmental protection, occupational health and safety, product quality and safety and
employment and labor matters, except in each case as could not, individually or in the aggregate,
have or reasonably be expected to result in a Material Adverse Effect. The Company is in compliance
with all effective requirements of the Sarbanes-Oxley Act of 2002, as amended, and the rules and
regulations thereunder, that are applicable to it, except where such noncompliance could not have
or reasonably be expected to result in a Material Adverse Effect.




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




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




          (p) Patents and Trademarks. The Company and the Subsidiaries have, or have rights to
use, all patents, patent applications, trademarks, trademark applications, service marks, trade
names, copyrights, licenses and other similar rights that are necessary or material for use in
connection with their respective businesses as described in the SEC Reports and which the
failure to so have could, individually or in the aggregate, have or reasonably be expected to
result in a Material Adverse Effect (collectively, the “Intellectual Property Rights”). Neither
the Company nor any Subsidiary has received a written notice that the Intellectual Property Rights
used by the Company or any Subsidiary violates or infringes upon the rights of any Person. Except
as set forth in the SEC Reports, to the knowledge of the Company, all such Intellectual Property
Rights are enforceable and there is no existing infringement by another Person of any of the
Intellectual Property Rights.






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




          (r) 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.




          (s) Internal Accounting Controls. The Company and the Subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable assurance that (i) transactions
are executed in accordance with management’s general or specific authorizations, (ii) transactions
are recorded as necessary to permit preparation of financial statements in conformity with GAAP and
to maintain asset accountability, (iii) access to assets is permitted only in accordance with
management’s general or specific authorization, and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences. The Company has established disclosure controls and procedures (as
defined in Exchange Act rules 13a-15(e) and 15(d)-15(e) for the Company and designed such
disclosure controls and procedures to ensure that material information relating to the Company,
including its Subsidiaries, is made known to the certifying officers by others within those
entities, particularly during the period in which the Company’s Form 10-KSB or 10-QSB, 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 last day of the period covered by the Form 10-QSB
for the Company’s most recently ended fiscal quarter (such date, the “Evaluation Date”). The
Company presented in its most recently filed Form 10-KSB or Form 10-QSB 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 described in Item 308(c) of Regulation S-K under the Exchange Act) or, to the
Company’s knowledge, without inquiry, in other factors that could significantly affect the
Company’s internal controls.




          (t) Solvency. Based on the financial condition of the Company as of the Closing Date
(and assuming that the Closing shall have occurred), (i) the Company’s fair saleable value of its
assets exceeds the amount that will be required to be paid on or in
respect of





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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 debts 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 debts).




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




          (v) Certain Registration Matters. Assuming the accuracy of the Investors’
representations and warranties set forth in Section 3.2(b)-(e), no registration under the
Securities Act is required for the offer and sale of the Shares, Warrants and Warrant Shares by the
Company to the Investors under the Transaction Documents. The Company is eligible to register the
resale of its Common Stock by the Investors on Form SB-2 promulgated under the Securities Act.
Except as specified in Schedule 3.1(v), the Company has not granted or agreed to grant to
any Person any rights (including “piggy-back” registration rights) to have any securities of the
Company registered with the Commission or any other governmental authority that have not been
satisfied or exercised.




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






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




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




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




          (aa) Disclosure. The Company confirms that neither it nor any Person acting on its
behalf has provided any Investor or its respective agents or counsel with any information that the
Company believes constitutes material, non-public information except insofar as the existence and
terms of the proposed transactions hereunder may constitute such information. The Company
understands and confirms that the Investors will rely on the foregoing representations and
covenants in effecting transactions in securities of the Company. Except as corrected by a
subsequent disclosure prior to the date hereof made in the SEC Reports, all disclosure provided to
the Investors regarding the Company, its business and the transactions contemplated hereby,
furnished by or on behalf of the Company are true and correct and do not contain any untrue
statement of a material fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were made, not misleading.




          (bb) Currently Intended Accounting for Transaction. The Company intends to account
for the net proceeds raised from the financing which is the subject of this Agreement as equity in
its consolidated financial statements.




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



          (a) Organization; Authority. If applicable, such Investor is an entity duly
organized, validly existing and in good standing under the laws of the jurisdiction of its
organization with the requisite corporate or partnership power and authority to enter into and to
consummate the transactions contemplated by the applicable Transaction Documents and otherwise to
carry out its obligations thereunder. The execution, delivery and performance by such Investor of
the transactions contemplated by this Agreement has been duly authorized by all necessary corporate
or, if such Investor is not a corporation, such partnership, limited liability






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company or other
applicable like action, on the part of such Investor. Each of this Agreement and the Registration
Rights Agreement has been duly executed by such Investor, and when delivered by such Investor in
accordance with terms hereof, will constitute the valid and legally binding obligation of such
Investor, enforceable against it in accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar
laws relating to, or affecting generally the enforcement of, creditors’ rights and remedies or by
other equitable principles of general application.




          (b) Investment Intent. Such Investor is acquiring the Securities as principal for its
own account for investment purposes only and not with a view to or for distributing or reselling
such Securities or any part thereof, without prejudice, however, to such Investor’s right at all
times to sell or otherwise dispose of all or any part of such Securities in compliance with
applicable Federal and state securities laws. Subject to the immediately preceding sentence,
nothing contained herein shall be deemed a representation or warranty by such Investor to hold the
Securities for any period of time. Such Investor is acquiring the Securities hereunder in the
ordinary course of its business. Such Investor does not have any agreement or understanding,
directly or indirectly, with any Person to distribute any of the Securities.




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




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




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




          (f) Certain Trading Activities. Such Investor has not directly or indirectly, nor has
any Person acting on behalf of or pursuant to any understanding with such Investor, engaged in any
transactions in the securities of the Company (including, without limitations, any





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Short Sales
involving the Company’s securities) since the earlier to occur of (1) the time that such Investor
was first contacted by the Company or any other Person regarding an investment in the Company and
(2) the 20th day prior to the public announcement of the transactions contemplated by
this Agreement. Such Investor covenants that neither it nor any Person acting on its behalf or
pursuant to any understanding with it will engage in any transactions in the securities of the
Company (including Short Sales) prior to the time that the transactions contemplated by this
Agreement are publicly disclosed.




          (g) Independent Investment Decision. Such Investor has independently evaluated the
merits of its decision to purchase Securities pursuant to this Agreement.




The Company acknowledges and agrees that no Investor has made or makes 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 (a) Securities may only be disposed of in compliance with state and Federal securities
laws. In connection with any transfer of the Securities other than pursuant to an effective
registration statement, to the Company, to an Affiliate of an Investor or in connection with a
pledge as contemplated in Section 4.1(b), the Company may require the transferor thereof to provide
to the Company an opinion of counsel selected by the transferor, the form and substance of which
opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not
require registration of such transferred Securities under the Securities Act.



          (b) Certificates evidencing the Securities will contain the following legend, until such time
as they are not required under Section 4.1(c):




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






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SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES]
[THESE SECURITIES] MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT
SECURED BY SUCH SECURITIES.



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




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





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     4.2 Furnishing of Information. As long as any Investor owns the 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 Investor owns Securities, if the Company is not
required to file reports pursuant to such laws, it will prepare and furnish to the Investors and
make publicly available in accordance with Rule 144(c) such information as is required for the
Investors to sell the Shares and Warrant Shares under Rule 144. The Company further covenants that
it will take such further action as any holder of Securities may reasonably request, all to the
extent required from time to time to enable such Person to sell the Shares and Warrant Shares
without registration under the Securities Act within the limitation of the exemptions provided by
Rule 144.



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



     4.4 Subsequent Registrations. Other than pursuant to the Registration Statement,
prior to the Effective Date, the Company may not file any registration statement (other than on
Form S-8 or amendments to previously filed registration statements) with the Commission with
respect to any securities of the Company.



     4.5 Securities Laws Disclosure; Publicity. By 9:00 a.m. (New York time) on the
Trading Day following the execution of this Agreement, and by 9:00 a.m. (New York time) on the
Trading Day following the Closing Date, the Company shall issue press releases in a form approved
by the Investors disclosing the transactions contemplated hereby and the Closing. On the Trading
Day following the execution of this Agreement, the Company will file a Current Report on Form 8-K
disclosing the material terms of the Transaction Documents (and attach as exhibits thereto the
Transaction Documents), and on the Trading Day following the Closing Date the Company will file an
additional Current Report on Form 8-K to disclose the Closing. In addition, the Company will make
such other filings and notices in the manner and time required by the Commission and the Trading
Market on which the Common Stock is listed.
Notwithstanding the foregoing, the Company shall not publicly disclose the name of any
Investor, or include the name of any Investor in any filing with the Commission (other than the
Registration Statement and any exhibits to filings made in respect of this transaction in
accordance with periodic filing requirements under the Exchange Act) or any regulatory agency or
Trading Market, without the prior written consent of such Investor, except to the extent such
disclosure is required by law or Trading Market regulations.



-16-









 





     4.6 Additional Shares. In the event that during the Anti-Dilution Testing Period (as
defined below), the Company proposes to engage in a transaction that, by giving effect to this
Section 4.6, would require the Company to issue Additional Shares (as defined below), the Company
agrees that it will not engage in any such transaction unless it first receives pre-approval to
give effect to this Section 4.6 from the Company’s shareholders at a duly held regular or special
meeting thereof held in accordance with the Rules of the American Stock Exchange. Accordingly, the
Investors acknowledge and agree that this Section 4.6 will only apply to a transaction for which
the Company’s shareholders have so given their pre-approval.



          (a) If, prior to the one-year anniversary of the Closing Date (such one-year period being the
“Anti-Dilution Testing Period”), the Company issues (or agrees to issue) any shares of Common Stock
or if the Company or any Subsidiary issues (or agrees to issue) any Common Stock Equivalents
entitling any Person to acquire shares of Common Stock at a price per share less than the Threshold
Price (if the holder of the Common Stock or Common Stock Equivalent so issued shall at any time
during the Anti-Dilution Testing Period, whether by operation of purchase price adjustments, reset
provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants,
options or rights issued in connection with such issuance, be entitled to receive shares of Common
Stock at a price less than the Threshold Price, such issuance shall be deemed to have occurred for
less than the Threshold Price), then, with each such issuance of Common Stock or Common Stock
Equivalents for a purchase price that is less than the Threshold Price, the Company shall
immediately issue additional shares of Common Stock (the “Additional Shares”) to each Investor for
no additional consideration. The number of Additional Shares issuable to each Investor will equal
the number of shares of Common Stock that such Investor’s Investment Amount would have purchased at
the Adjusted Per Share Purchase Price (as defined below) minus the number of shares of Common Stock
issued to such Investor pursuant to Section 2.2(a)(i) herein. The “Adjusted Per Share Purchase
Price” shall equal:




PSPP x [(N+v)/(N+n)]



where:



PSPP = the Per Share Purchase Price.



N = the number of shares of Common Stock outstanding immediately

prior to the issuance of such shares of Common Stock or such Common

Stock Equivalents.



v = the number of shares of Common Stock which the aggregate

consideration receivable by the Company (determined in accordance

with subsection (c) below) would purchase at the Per Share Purchase

Price.



n = the number of shares of Common Stock issuable in connection with

such subsequent issuance.





-17-









 







The Company shall notify the Investors in writing, no later than the Trading Day following the
issuance of any Common Stock or Common Stock Equivalent subject to this section, indicating therein
the applicable issuance price. The Additional Shares shall be entitled to the registration and
other rights set forth in the Registration Rights Agreement and any Additional Shares not
registered for resale shall also be afforded general piggyback registration rights (until such time
as the affected Investor can resell its Additional Shares pursuant to Rule 144(k)) such that such
Additional Shares may be included in any registration statement (other than on Form S-8) filed by
the Company. Notwithstanding the foregoing, no issuances of Additional Shares will be made under
this Section as a result of: (i) the issuance of Warrant Shares, (ii) to the extent consistent
with past practice, the grant of options or warrants, or the issuance of additional securities,
under any duly authorized Company stock option, restricted stock plan or stock purchase plan
whether now existing or approved by the Company and its shareholders in the future (but not as to
any amendments or other modifications to the number of Common Stock issuable thereunder, the terms
set forth therein, or the exercise price set forth therein, unless such amendments or other
modifications are approved by the Company’s shareholders), (iii) the issuance and sale by the
Company of shares of Common Stock or Common Stock Equivalents issued as consideration for the
acquisition of another company or business (including the grant of up to 100,000 options or
warrants to officers, employees and directors in connection with such an acquisition) if no
executive officer, director or 10% beneficial shareholder of the Company is an executive officer,
director or 10% beneficial shareholder of such other company or business, and if the acquisition
has been approved by the Board of Directors of the Company, (iv) the issuance of up to 200,000
shares of Common Stock or Common Stock Equivalents to a financial institution or leasing company
primarily in connection with any debt or lease financing transaction or the establishment or
maintenance of any line of credit (other than equity lines or similar transactions) or (v) the
issuance of any Common Stock or Common Stock Equivalents upon the exercise, conversion or exchange
of Options or Convertible Securities (as those terms are defined in subsection (c)(i) below)
outstanding on the date hereof. If during the Anti-Dilution Testing Period, the Company enters
into any understanding or agreement to issue or sell securities that would, if such issuance or
sale were to occur during the Anti-Dilution Testing Period, trigger an obligation to issue
Additional Shares, then notwithstanding the fact that such actual issuance of Common Stock or
Common Stock Equivalents occurs after the Anti-Dilution Testing Period, such issuance will obligate
the Company to issue Additional Shares under this Section.




          (b) Certain Limitations.




               (i) Notwithstanding anything to the contrary contained herein, the number of Additional Shares
that may be acquired at any given time by an Investor pursuant to this Section shall be limited to
the extent necessary to insure that, following such issuance, the total number of shares of Common
Stock then beneficially owned by such Investor and its Affiliates and any other Persons whose
beneficial ownership of Common Stock would be aggregated with the Holder’s for purposes of Section
13(d) of the Exchange Act, does not exceed 4.9% of the total number of issued and outstanding
shares of Common Stock (including for such purpose the issuance of Additional Shares). For such
purposes, beneficial ownership shall be



-18-









 




determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder. By written notice to the Company, an Investor may waive the provisions of
this Section 4.6(b) as to itself but any such waiver will not be effective until the
61st day after delivery thereof and such waiver shall have no effect on any other
Investor.




               (ii) Notwithstanding anything to the contrary contained herein, the number of Additional
Shares that may be acquired by an Investor pursuant to this Section shall be limited to the extent
necessary to insure that, following such issuance, the total number of shares of Common Stock then
beneficially owned by such Investor and its Affiliates and any other Persons whose beneficial
ownership of Common Stock would be aggregated with the Holder’s for purposes of Section 13(d) of
the Exchange Act, does not exceed 9.9% of the total number of issued and outstanding shares of
Common Stock (including for such purpose the issuance of Additional Shares). For such purposes,
beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and
the rules and regulations promulgated thereunder. This restriction may not be waived.



               (iii) The Company and each Investor agree that, if and to the extent Sections 4.6(b)(i)-(ii)
would restrict the ability of an Investor to receive any Additional Shares, then notwithstanding
anything to the contrary set forth herein, the Company shall deliver those Additional Shares as may
be acquired by such Investor in accordance with Sections 4.6(b)(i)-(ii). An Investor will promptly
notify the Company in writing if the issuance of Additional Shares would be restricted by Sections
4.6(b)(i)-(ii), specifying therein the Additional Shares so restricted. Such Investor shall
deliver a notice to the Company when it is able to acquire any remaining Additional Shares not
previously deliverable to such Investor due to the applicability of Sections 4.6(b)(i)-(ii),
however, such notice shall not take effect until the 61st day following delivery
thereof.



          (c) For purposes of this Section 4.6, the following subsections (c)(i) to (c)(vi) shall also
be applicable:




               (i) Issuance of Rights or Options. If at any time the Company shall in any manner
grant (directly and not by assumption in a merger or otherwise) any warrants or other rights to
subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or
security convertible into or exchangeable for Common Stock (such warrants, rights or options being
called “Options” and such convertible or exchangeable stock or securities being called “Convertible
Securities”) whether or not such Options or the right to convert or exchange any such Convertible
Securities are immediately exercisable, and the price per share for which Common Stock is issuable
upon the exercise of such Options or upon the conversion or exchange of such Convertible Securities
(determined by dividing (i) the sum (which sum shall constitute the applicable consideration) of
(x) the total amount, if any, received or receivable by the Company as consideration for the
granting of such Options, plus (y) the aggregate amount of additional consideration payable to the
Company upon the exercise of all such Options, plus (z), in the case of such Options which relate
to Convertible Securities, the aggregate amount of additional consideration, if any, payable upon
the issue or sale of such Convertible Securities and



-19-









 




upon the conversion or exchange thereof, by (ii) the total maximum number of shares of Common
Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options) shall be less than the Threshold
Price in effect immediately prior to the time of the granting of such Options, then the total
number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or
exchange of the total amount of such Convertible Securities issuable upon the exercise of such
Options shall be deemed to have been issued for such price per share as of the date of granting of
such Options or the issuance of such Convertible Securities and thereafter shall be deemed to be
outstanding for purposes of adjusting the Per Share Purchase Price. Except as otherwise provided
in subsection 4.6(c)(iii), no adjustment of the Per Share Purchase Price shall be made upon the
actual issue of such Common Stock or of such Convertible Securities upon exercise of such Options
or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible
Securities.




               (ii) Issuance of Convertible Securities. If the Company shall in any manner issue
(directly and not by assumption in a merger or otherwise) or sell any Convertible Securities,
whether or not the rights to exchange or convert any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable upon such conversion or
exchange (determined by dividing (i) the sum (which sum shall constitute the applicable
consideration) of (x) the total amount received or receivable by the Company as consideration for
the issue or sale of such Convertible Securities, plus (y) the aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or exchange thereof, by (ii) the
total number of shares of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities) shall be less than the Threshold Price in effect immediately prior to the
time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities shall be deemed to have been issued for
such price per share as of the date of the issue or sale of such Convertible Securities and
thereafter shall be deemed to be outstanding for purposes of calculating the Per Share Purchase
Price, provided that (a) except as otherwise provided in subsection 4.6(c)(iii), no adjustment of
the Per Share Purchase Price shall be made upon the actual issuance of such Common Stock upon
conversion or exchange of such Convertible Securities and (b) no further adjustment of the Per
Share Purchase Price shall be made by reason of the issue or sale of Convertible Securities upon
exercise of any Options to purchase any such Convertible Securities for which adjustments of the
Per Share Purchase Price have been made pursuant to the other provisions of subsection 4.6(c).



               (iii) Change in Option Price or Conversion Rate. Upon the happening of any of the
following events, namely, if the purchase price provided for in any Option referred to in
subsection 4.6(c)(i) hereof, the additional consideration, if any, payable upon the conversion or
exchange of any Convertible Securities referred to in subsections 4.6(c)(i) or 4.6(c)(ii), or the
rate at which Convertible Securities referred to in subsections 4.6(c)(i) or 4.6(c)(ii) are
convertible into or exchangeable for Common Stock shall change at any time (including, but not
limited to, changes under or by reason of provisions designed to protect against dilution), the Per
Share Purchase Price in effect at the time of such event shall forthwith



-20-









 




be readjusted to the Per Share Purchase Price which would have been in effect at such time had
such Options or Convertible Securities still outstanding provided for such changed purchase price,
additional consideration or conversion rate, as the case may be, at the time initially granted,
issued or sold. On the termination of any Option for which any adjustment was made pursuant to
this subsection 4.6(c) or any right to convert or exchange Convertible Securities for which any
adjustment was made pursuant to this subsection 4.6(c) (including without limitation upon the
redemption or purchase for consideration of such Convertible Securities by the Company), the Per
Share Purchase Price then in effect hereunder shall forthwith be changed to the Per Share Purchase
Price which would have been in effect at the time of such termination had such Option or
Convertible Securities, to the extent outstanding immediately prior to such termination, never been
issued.




               (iv) Stock Dividends. Subject to the provisions of this Section 4.6(c), if the
Company shall declare a dividend or make any other distribution upon any stock of the Company
(other than the Common Stock) payable in Common Stock, Options or Convertible Securities, then any
Common Stock, Options or Convertible Securities, as the case may be, issuable in payment of such
dividend or distribution shall be deemed to have been issued or sold without consideration.



               (v) Consideration for Stock. If any shares of Common Stock, Options or Convertible
Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to
be the net amount received by the Company therefor, after deduction therefrom of any expenses
incurred or any underwriting commissions or concessions paid or allowed by the Company in
connection therewith. If any shares of Common Stock, Options or Convertible Securities shall be
issued or sold for a consideration other than cash, the amount of the consideration other than cash
received by the Company shall be deemed to be the fair value of such consideration as determined in
good faith by the Board of Directors of the Company, after deduction of any expenses incurred or
any underwriting commissions or concessions paid or allowed by the Company in connection therewith.
If any Options shall be issued in connection with the issue and sale of other securities of the
Company, together comprising one integral transaction in which no specific consideration is
allocated to such Options by the parties thereto, such Options shall be deemed to have been issued
for such consideration as determined in good faith by the Board of Directors of the Company. If
Common Stock, Options or Convertible Securities shall be issued or sold by the Company and, in
connection therewith, other Options or Convertible Securities (the “Additional Rights”) are issued,
then the consideration received or deemed to be received by the Company shall be reduced by the
fair market value of the Additional Rights (as determined using the Black-Scholes option pricing
model or another method mutually agreed to by the Company and the Investors). The Board of
Directors of the Company shall respond promptly, in writing, to an inquiry by the Investors as to
the fair market value of the Additional Rights. In the event that the Board of Directors of the
Company and the Investors are unable to agree upon the fair market value of the Additional Rights,
the Company and the Investors shall jointly select an appraiser, who is experienced in such
matters. The decision of such appraiser shall be final and conclusive, and the cost of such
appraiser shall be borne evenly by the Company and the Investors.



-21-









 





               (vi) Record Date. If the Company shall take a record of the holders of its Common
Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in
Common Stock, Options or Convertible Securities or (ii) to subscribe for or purchase Common Stock,
Options or Convertible Securities, then such record date shall be deemed to be the date of the
issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration
of such dividend or the making of such other distribution or the date of the granting of such right
of subscription or purchase, as the case may be.



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



     4.8 Indemnification of Investors. In addition to the indemnity provided in the
Registration Rights Agreement, the Company will indemnify and hold the Investors and their
directors, officers, shareholders, partners, employees and agents (each, an “Investor Party”)
harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs
and expenses, including all judgments, amounts paid in settlements, court costs and reasonable
attorneys’ fees and costs of investigation (collectively, “Losses”) that any such Investor Party
may suffer or incur as a result of or relating to any misrepresentation, breach or inaccuracy of
any representation, warranty, covenant or agreement made by the Company in any Transaction
Document. In addition to the indemnity contained herein, the Company will reimburse each Investor
Party for its reasonable legal and other expenses (including the cost of any investigation,
preparation and travel in connection therewith) incurred in connection therewith, as such expenses
are incurred.



     4.9 Non-Public Information. The Company covenants and agrees that neither it nor any
other Person acting on its behalf will provide any Investor or its agents or counsel with any
information that the Company believes constitutes material non-public information, unless prior
thereto such Investor shall have executed a written agreement regarding the confidentiality and use
of such information. The Company understands and confirms that each Investor shall be relying on
the foregoing representations in effecting transactions in securities of the Company.



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



     4.11 Use of Proceeds. The Company will 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 and accrued expenses in the ordinary



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course of the Company’s business and consistent with prior practices), or to redeem any Common
Stock or Common Stock Equivalents.




ARTICLE V.

CONDITIONS PRECEDENT TO CLOSINGS




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



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




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




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




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




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




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




          (g) Closing Officer’s Certificate. At the Closing, the Company shall have delivered
to each Investor an officer’s certificate to the effect that each of the conditions specified in
Sections 5.1(a) — 5.1(e) is satisfied in all respects.




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



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




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




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




          (d) Investors Deliverables. Each Investor shall have delivered its Investors
Deliverables in accordance with Section 2.2(b).




ARTICLE VI.

MISCELLANEOUS




     6.1 Fees and Expenses. Each party shall pay the fees and expenses of its advisers,
counsel, accountants and other experts, if any, and all other expenses incurred by such party
incident to the negotiation, preparation, execution, delivery and performance of the Transaction
Documents. The Company shall pay all stamp and other taxes and duties levied in connection with
the sale of the Securities.



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



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



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	If to the Company:

	 	Uroplasty, Inc.
	 

	 	5420 Feltl Road
	 

	 	Minnetonka, Minnesota 55343
	 

	 	Facsimile: (952) 426-6199
	 

	 	Attn.: David B. Kaysen, President and CEO
	 
	 	 
	With a copy to:

	 	Messerli & Kramer P.A.
	 

	 	150 South Fifth Street, Suite 1800
	 

	 	Minneapolis, MN 55402
	 

	 	Facsimile: (612) 672-3777
	 

	 	Attn.: Jeffrey C. Robbins, Esq.
	 
	 	 
	If to an Investor:

	 	To the address set forth under such Investor’s name
	 

	 	on the signature pages hereof; or such other address as may be
	 

	 	designated in writing hereafter, in the same manner, by such
	 

	 	Person.






     6.4 Amendments; Waivers; No Additional Consideration. No provision of this Agreement
may be waived or amended except in a written instrument signed by the Company and the Investors
holding a majority of the Shares. No waiver of any default with respect to any provision,
condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future
or a waiver of any subsequent default or a waiver of any other provision, condition or requirement
hereof, nor shall any delay or omission of either party to exercise any right hereunder in any
manner impair the exercise of any such right. No consideration shall be offered or paid to any
Investor to amend or consent to a waiver or modification of any provision of any Transaction
Document unless the same consideration is also offered to all Investors who then hold Shares.



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



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




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




          (c) by an Investor (as to itself but no other Investor) if it concludes in good faith that any
of the conditions precedent contained in Section 5.1(c), (d) or (e) shall have been breached or
shall not be capable of being satisfied by the Outside Date despite the assumed best efforts of the
Company.




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     In the event of a termination pursuant to this Section, the Company shall promptly notify all
non-terminating Investors. Upon a termination in accordance with this Section 6.5, the Company and
the terminating Investor(s) shall not have any further obligation or liability (including as
arising from such termination) to the other and no Investor will have any liability to any other
Investor under the Transaction Documents as a result therefrom.



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



     6.7 Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties and their successors and permitted assigns. The Company may not assign this
Agreement or any rights or obligations hereunder without the prior written consent of the
Investors. Any Investor may assign any or all of its rights under this Agreement to any Person to
whom such Investor 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
“Investors.”



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



     6.9 Governing Law. All questions concerning the construction, validity, enforcement
and interpretation of this Agreement shall be governed by and construed and enforced in accordance
with the internal laws of the State of New York, without regard to the principles of conflicts of
law thereof. Each party agrees that all Actions concerning the interpretations, enforcement and
defense of the transactions contemplated by this Agreement and any other Transaction Documents
(whether brought against a party hereto or its respective Affiliates, employees or agents) shall be
commenced exclusively in the New York Courts. Each party hereto hereby irrevocably submits to the
exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed herein (including with
respect to the enforcement of the any of the Transaction Documents), and hereby irrevocably waives,
and agrees not to assert in any Action, any claim that it is not personally subject to the
jurisdiction of any such New York Court, or that such Action has been commenced in an improper or
inconvenient forum. Each party hereto hereby irrevocably waives personal service of process and
consents to process being served in any such Action 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



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process and notice thereof. Nothing contained herein shall be deemed to limit in any way any
right to serve process in any manner permitted by law. Each party hereto hereby irrevocably
waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in
any legal proceeding arising out of or relating to this Agreement or the transactions contemplated
hereby. If either party shall commence an Action to enforce any provisions of a Transaction
Document, then the prevailing party in such Action shall be reimbursed by the other party for its
reasonable attorneys’ fees and other costs and expenses incurred with the investigation,
preparation and prosecution of such Action.




     6.10 Survival. The representations, warranties, agreements and covenants contained
herein shall survive the Closing and the delivery of the Securities.



     6.11 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.



     6.12 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.



     6.13 Rescission and Withdrawal Right. Notwithstanding anything to the contrary
contained in (and without limiting any similar provisions of) the Transaction Documents, whenever
any Investor 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 Investor may rescind or withdraw, in its sole discretion from time to time upon written notice
to the Company, any relevant notice, demand or election in whole or in part without prejudice to
its future actions and rights.



     6.14 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. If a replacement certificate or instrument evidencing any Securities is
requested due to a mutilation thereof, the Company may require delivery of such mutilated
certificate or instrument as a condition precedent to any issuance of a replacement.



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     6.15 Remedies. In addition to being entitled to exercise all rights provided herein
or granted by law, including recovery of damages, each of the Investors 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.



     6.16 Payment Set Aside. To the extent that the Company makes a payment or payments to
any Investor pursuant to any Transaction Document or an Investor 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.



     6.17 Independent Nature of Investors’ Obligations and Rights. The obligations of each
Investor under any Transaction Document are several and not joint with the obligations of any other
Investor, and no Investor shall be responsible in any way for the performance of the obligations of
any other Investor under any Transaction Document. The decision of each Investor to purchase
Securities pursuant to the Transaction Documents has been made by such Investor independently of
any other Investor. Nothing contained herein or in any Transaction Document, and no action taken
by any Investor pursuant thereto, shall be deemed to constitute the Investors as a partnership, an
association, a joint venture or any other kind of entity, or create a presumption that the
Investors 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 Investor acknowledges that no other
Investor has acted as agent for such Investor in connection with making its investment hereunder
and that no Investor will be acting as agent of such Investor in connection with monitoring its
investment in the Securities or enforcing its rights under the Transaction Documents. Each
Investor 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 Investor to be joined as an additional party in any
proceeding for such purpose. The Company acknowledges that each of the Investors has been provided
with the same Transaction Documents for the purpose of closing a transaction with multiple
Investors and not because it was required or requested to do so by any Investor.



     6.18 Limitation of Liability. Notwithstanding anything herein to the contrary, the
Company acknowledges and agrees that the liability of an Investor arising directly or indirectly,
under any Transaction Document of any and every nature whatsoever shall be satisfied solely out of
the assets of such Investor, and that no trustee, officer, other investment vehicle or any other



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Affiliate of such Investor or any investor, shareholder or holder of shares of beneficial
interest of such a Investor shall be personally liable for any liabilities of such Investor.




[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGES FOLLOW]







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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.



	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 
	 	 	UROPLASTY, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	David B. Kaysen, President	 	 
	 

	 	 	 	     and Chief Executive Officer	 	 






[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGES FOR INVESTORS FOLLOW]





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



	 	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 
	 	 	NAME OF INVESTOR	 	 
	 
	 
	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 
	 	 	By:	 	      Name:	 	 
	 	 	 	 	      Title:	 	 
	 
	 	 	Investment Amount: $	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 
	 
	 	 	Tax ID No.:	 	 	 	 
	 	 	
 
	 





	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 
	 	 	ADDRESS FOR NOTICE	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	c/o:	 	 	 	 	 	 
	 	 	
 
	 	 
	 
	 

	 	Street: 	 	 	 	 	 	 
	 	 	 	 	 	 
	 
	 	 	City/State/Zip:	 	 	 	 
	 

	 	 	 	 	 	 	 
	 
	 	 	Attention:	 	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 

	 	Tel:	 	 	 	 	 	 
	 	 	 	 	 	 
	 
	 

	 	Fax:	 	 	 	 	 	 
	 	 	 	 	 	 





	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 
	 	 	DELIVERY INSTRUCTIONS	 	 
	 	 	(if different from above)	 	 
	 
	 

	 	c/o:	 	 	 	 	 	 
	 	 	 	 	 	 
	 
	 	 	Street:	 	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	City/State/Zip:	 	 	 	 
	 

	 	 	 	 	 	 	 	 
	 
	 	 	Attention:	 	 	 	 
	 	 	
 
	 	 	 
	 
	 

	 	Tel:	 	 	 	 	 	 
	 	 	 	 	 	 






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