Document:

EXHIBIT 10.18

 

SECURITIES PURCHASE AGREEMENT

 

SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of March 7,
2008, by and among American Defense Systems, Inc., a Delaware corporation,
with headquarters located at 230 Duffy Avenue, Unit C, Hicksville, New York 11801  (the “Company”), and the investors listed on the
Schedule of Buyers attached hereto (individually, a “Buyer” and collectively, the “Buyers”).

 

WHEREAS:

 

A.    The Company and each Buyer
is executing and delivering this Agreement in reliance upon the exemption from
securities registration afforded by Section 4(2) of the Securities
Act of 1933, as amended (the “1933 Act”),
and Rule 506 of Regulation D (“Regulation D”)
as promulgated by the United States Securities and Exchange Commission (the “SEC”) under the 1933 Act.

 

B.    The Company has authorized a
new series of convertible preferred stock of the Company designated as Series A
Convertible Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”), the terms of which are set
forth in the certificate of designation for such series of preferred stock (the
“Certificate of Designations”) in the
form attached hereto as Exhibit A, which preferred stock shall be
convertible into the Company’s common stock, par value $0.001 per share (the “Common Stock”), in accordance with the terms of the
Certificate of Designations.

 

C.    Each Buyer wishes to
purchase, and the Company wishes to sell, in an Initial Closing (as defined
below) and upon the terms and conditions stated in this Agreement, (i) that
number of shares of Series A Preferred Stock (the “Preferred
Shares” and as converted, collectively, the “Conversion
Shares”) set forth opposite such Buyer’s name in column (3) on
the Schedule of Buyers (with an aggregate number of Preferred Shares for all
Buyers of 15,000 shares and an aggregate purchase price for all Buyer’s of
$15,000,000), and (ii) warrants in substantially the form attached hereto
as Exhibit B (the “Warrants”), to
acquire up to that number of additional shares of Common Stock set forth
opposite such Buyer’s name in column (4) on the Schedule of Buyers (as
exercised, collectively, the “Warrant Shares”).

 

D.    The Preferred Shares may be
entitled to dividends, which, at the option of the Company and subject to
certain conditions, may be paid in shares of Common Stock that have been
registered for resale (the “Dividend Shares”)
or in cash.

 

E.     Each Buyer shall purchase,
and the Company shall sell, in an Additional Closing (as defined below) and
upon the terms and conditions stated in this Agreement, that number of shares
of Common Stock (the “Common Shares”)
set forth opposite such Buyer’s name in column (5) on the Schedule of
Buyers (with an aggregate number of Common Shares for all Buyers of 100,000
shares and an aggregate purchase price for all Buyers of $500,000).

 

F.     The Preferred Shares, the
Conversion Shares, the Dividend Shares, the Common Shares, the Warrants and the
Warrant Shares are collectively referred to herein as the “Securities”.

 

 

 

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

 

3.             PURCHASE AND
SALE OF PREFERRED SHARES, WARRANTS AND COMMON SHARES.

 

(a)           Preferred Shares, Warrants and Common Shares.

 

(i)            Preferred Shares and
Warrants.  Subject to
the satisfaction (or waiver) of the conditions set forth in Sections 6(a) and
7(a) below, the Company agrees to issue and sell to each Buyer, and each
Buyer severally, but not jointly, agrees to purchase from the Company on the
Initial Closing Date (as defined below), (A) that number of Preferred
Shares, as is set forth opposite such Buyer’s name in column (3) on the
Schedule of Buyers, except that the Company will issue to West Coast
Opportunity Fund, LLC (“West Coast”)
10,000 shares on the Initial Closing Date and an additional 4,025 shares on March 31,
2008, and (B) Warrants to acquire up to that number of Warrant Shares as
is set forth opposite such Buyer’s name in column (4) on the Schedule of
Buyers, except that the Company will issue to West Coast Warrants to acquire up
to 2,499,956 Warrant Shares on the Initial Closing Date and Warrants to acquire
up to 1,006,294 Warrant Shares on March 31. 2008.

 

(ii)           Common Shares.  Subject to the satisfaction (or waiver) of
the conditions set forth in Sections 1(d)(ii), 6(b) and 7(b) below,
the Company agrees to issue and sell to each Buyer, and each Buyer severally,
but not jointly, agrees to purchase from the Company on the Additional Closing
Date (as defined below), that number of Common Shares as is set forth opposite
such Buyer’s name in column (5) on the Schedule of Buyers (the “Additional Closing”).

 

(b)           Closing.  The Initial Closing and the Additional
Closing are each referred to in this Agreement as a “Closing”.  Each Closing
shall occur on the applicable Closing Date (as defined below) at the offices of
Schulte Roth & Zabel LLP, 919 Third Avenue, New York, New York 10022.

 

(c)           Purchase Price.

 

(i)            Preferred Shares and
Warrants.  The
aggregate purchase price for the Preferred Shares and the Warrants to be
purchased by each Buyer at the Initial Closing (the “Initial
Purchase Price”) shall be the amount set forth opposite such Buyer’s
name in column (6) on the Schedule of Buyers, except that West Coast shall
pay $10,000,000 on the Initial Closing Date and an additional $4,025,000 on March 31,
2008.  Each Buyer shall pay $1,000 for
each Preferred Share and related Warrants to be purchased by such Buyer at the
Initial Closing.

 

(ii)           Common Shares.  The aggregate purchase price for the Common
Shares to be purchased by each Buyer at the Additional Closing (the “Additional Purchase Price”, and together
with the Initial Purchase Price, the “Purchase
Price”) shall be the amount set forth opposite such Buyer’s name in
column (7) on the Schedule of Buyers. 
Each Buyer shall pay $5.00 for each Common Share to be purchased by such
Buyer at the Additional Closing.

 

 

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(d)           Closing Date.

 

(i)            Initial Closing Date.  The date and time of the Initial Closing (the
“Initial Closing Date”) shall be
10:00 a.m., New York City time, on the date hereof after notification of
satisfaction (or waiver) of the conditions to the Initial Closing set forth in
Sections 6(a) and 7(a) below (or such later date as is mutually
agreed to by the Company and each Buyer).

 

(ii)           Additional Closing Date.  The date and time of the Additional Closing
(the “Additional Closing Date,”
and together with the Initial Closing Date, each a “Closing Date” and collectively, the “Closing Dates”) shall be 10:00 a.m.,
New York City time, on the date specified in the Additional Closing Notice (as
defined below), subject to satisfaction (or waiver) of the conditions to
Additional Closing set forth in Sections 6(b) and 7(b) and the
conditions contained in this Section 1(d)(ii) (or such later date as
is mutually agreed to by the Company and each Buyer).  If the Listing Date (as defined below),
occurs prior to June 30, 2008, the Company shall, within five (5) Business
Days of the Listing Date, deliver written notice to each Buyer (the “Additional Closing Notice”) (i) notifying
each Buyer that the Listing Date has occurred prior to June 30, 2008, (ii) setting
forth the Additional Closing Date, and (iii) certifying that the Equity
Conditions (as defined below) are satisfied.  The Additional Closing Date shall not be
earlier than the fifth Business Day following the delivery of the Additional
Closing Notice by the Company.  As used
herein, “Business Day” means any
day other than Saturday, Sunday or other day on which commercial banks in the
City of New York are authorized or required by law to remain closed.

 

 

(e)           Form of Payment.

 

(i)            Initial Closing.  On the Initial Closing Date, (A) each
Buyer shall pay its Initial Purchase Price to the Company for the Preferred
Shares and the Warrants to be issued and sold to such Buyer at the Initial
Closing, except that West Coast shall pay $10,000,000 on the Initial Closing
Date and an additional $4,025,000 on March 31, 2008, (less, in the case of
West Coast, the amount withheld pursuant to Section 4(g)), by wire
transfer of immediately available funds in accordance with the Company’s
written wire instructions and (B) the Company shall deliver to each Buyer (I) the
Preferred Shares (in such denominations as is set forth opposite such Buyer’s
name in column (3) on the Schedule of Buyers, except that the Company
shall issue to West Coast 10,000 shares on the Initial Closing Date and an
additional 4,025 shares on March 31, 2008, and (II) the Warrants
(exercisable for the number of shares of Common Stock as is set forth opposite
such Buyer’s name in column (4) on the Schedule of Buyers, except that the
Company will issue to West Coast Warrants exercisable for 2,499,956 Warrant
Shares on the Initial Closing Date and Warrants exercisable for 1,006,294
Warrant Shares on March 31. 2008), each duly executed on behalf of the
Company and registered in the name of such Buyer or its designee.

 

(ii)           Additional Closing.  On the Additional Closing Date, (A) each
Buyer shall pay its Additional Purchase Price to the Company for the Common
Shares to be issued and sold to such Buyer at the Additional Closing by wire
transfer of immediately available funds in accordance with the Company’s
written wire instructions and (B) the Company shall deliver to each Buyer
the Common Shares (in such denominations as is set forth opposite such Buyer’s
name in column (5) on the Schedule of Buyers) duly executed on behalf of
the Company and registered in the name of such Buyer or its designee.

 

 

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2.             BUYER’S
REPRESENTATIONS AND WARRANTIES.

 

Each Buyer, severally and
not jointly, represents and warrants with respect to only itself, as of the
date hereof and as of each applicable Closing Date, that:

 

(a)           Organization; Authority.  Such Buyer is an entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization with the requisite power and authority to enter into and to
consummate the transactions contemplated by the Transaction Documents (as
defined below) to which it is a party and otherwise to carry out its
obligations hereunder and thereunder.

 

(b)           No Public Sale or Distribution.  Such Buyer is (i) acquiring the
Preferred Shares, the Warrants, and the Common Shares, and (ii) upon
conversion of the Preferred Shares, issuance of the Dividend Shares and
exercise of the Warrants will acquire the Conversion Shares, the Dividend
Shares and the Warrant Shares (less any Warrants Shares forfeited upon a
Cashless Exercise (as defined in the Warrants)), in each case, for its own
account and not with a view towards, or for resale in connection with, the
public sale or distribution thereof, except pursuant to sales registered or
exempted under the 1933 Act; provided, however, that by making the
representations herein, such Buyer does not agree to hold any of the Securities
for any minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the 1933 Act. 
Such Buyer is acquiring the Securities hereunder in the ordinary course
of its business.  Such Buyer does not
presently have any agreement or understanding, directly or indirectly, with any
Person to distribute any of the Securities.

 

(c)           Accredited Investor Status.  Such Buyer is an “accredited investor” as
that term is defined in Rule 501(a) of Regulation D.

 

(d)           Reliance on Exemptions.  Such Buyer understands that the Securities
are being offered and sold to it in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws
and that the Company is relying in part upon the truth and accuracy of, and
such Buyer’s compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire the Securities.

 

(e)           Information.  Such Buyer and its advisors, if any, have
been furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
that have been requested by such Buyer. 
Such Buyer and its advisors, if any, have been afforded the opportunity
to ask questions of the Company.  Neither
such inquiries nor any other due diligence investigations conducted by such
Buyer or its advisors, if any, or its representatives shall modify, amend or
affect such Buyer’s right to rely on the Company’s representations and
warranties contained herein.  Such Buyer
understands that its investment in the Securities involves a high degree of
risk.  Such Buyer has sought such
accounting, legal and tax advice as it has considered necessary to make an
informed investment decision with respect to its acquisition of the Securities.

 

 

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(f)            No Governmental Review.  Such Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.

 

(g)           Transfer or Resale.  Such Buyer understands that: (i) the
Securities have not been and are not being registered under the 1933 Act or any
state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (A) subsequently registered thereunder, (B) such
Buyer shall have delivered to the Company an opinion of counsel, in a generally
acceptable form, to the effect that such Securities to be sold, assigned or
transferred may be sold, assigned or transferred pursuant to an exemption from
such registration, or (C) such Buyer provides the Company with reasonable
assurance that such Securities can be sold, assigned or transferred pursuant to
Rule 144 or Rule 144A promulgated under the 1933 Act, as amended, (or
a successor rule thereto) (collectively, “Rule 144”); (ii) any sale of the Securities made in
reliance on Rule 144 may be made only in accordance with the terms of Rule 144
and further, if Rule 144 is not applicable, any resale of the Securities
under circumstances in which the seller (or the Person (as defined in Section 3(r))
through whom the sale is made) may be deemed to be an underwriter (as that term
is defined in the 1933 Act) may require compliance with some other exemption
under the 1933 Act or the rules and regulations of the SEC thereunder; and
(iii) neither the Company nor any other Person is under any obligation to
register the Securities under the 1933 Act or any state securities laws or to
comply with the terms and conditions of any exemption thereunder.

 

(h)           Legends.  Such Buyer understands that the certificates
or other instruments representing the Preferred Shares, the Warrants and the
Common Shares and, until such time as the resale of the Conversion Shares, the
Warrant Shares, Dividend Shares and the Common Shares have been registered
under the 1933 Act, the stock certificates representing the Conversion Shares,
the Warrant Shares, the Dividend Shares and the Common Shares, except as set
forth below, shall bear any legend that is required by the “blue sky” laws of
any state and a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of such stock certificates):

 

[NEITHER THE ISSUANCE AND
SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO
WHICH THESE SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE BEEN][THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN] REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR
SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE
FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND APPLICABLE STATE
SECURITIES LAWS OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A
UNDER SAID ACT.

 

 

5

 

NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE
MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.

 

The legend set forth above
shall be removed and the Company shall issue a certificate without such legend
to the holder of the Securities upon which it is stamped or issue to such
holder by electronic delivery at the applicable balance account at The
Depository Trust Company (“DTC”), if,
unless otherwise required by state securities laws, (i) such Securities
are registered for resale under the 1933 Act and are sold pursuant to an effective registration statement, (ii) in
connection with a sale, assignment or other transfer, such holder provides the
Company with an opinion of counsel, in a generally acceptable form, to the
effect that such sale, assignment or transfer of the Securities may be made
without registration under the applicable requirements of the 1933 Act and such
legend may be removed, or (iii) such holder provides the Company with
reasonable assurances of the holder’s belief that the Securities can be sold,
assigned or transferred sold without the requirement to be in compliance with Rule 144(c)(1) and
otherwise without restriction or limitation pursuant to Rule 144 or Rule 144A.  The Company shall be responsible for the fees
of its transfer agent and all DTC fees associated with such issuance.

 

(i)            Validity; Enforcement.  This Agreement has been, and when the other
Transaction Documents to which such Buyer is a party are executed and delivered
in accordance with the terms and conditions contemplated hereby and thereby,
such documents shall have been, duly and validly authorized, executed and
delivered on behalf of such Buyer and shall constitute the legal, valid and
binding obligations of such Buyer enforceable against such Buyer in accordance
with their respective terms, except as such enforceability may be limited by
general principles of equity or to applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation and other similar laws relating to, or
affecting generally, the enforcement of applicable creditors’ rights and
remedies.

 

(j)            No Conflicts.  The execution, delivery and performance by
such Buyer of this Agreement and the consummation by such Buyer of the
transactions contemplated hereby will not (i) result in a violation of the
organizational documents of such Buyer or (ii) conflict with, or constitute
a default (or an event which with notice or lapse of time or both would become
a default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to
which such Buyer is a party, or (iii) result in a violation of any law,
rule, regulation, order, judgment  or
decree (including federal and state securities laws) applicable to such Buyer,
except in the case of clauses (ii) and (iii) above, for such
conflicts, defaults, rights or violations which would not, individually or in
the aggregate, reasonably be expected to have a material adverse effect on the
ability of such Buyer to perform its obligations hereunder.

 

(k)           Residency.  Such Buyer is a resident of the jurisdiction
specified below its address on the Schedule of Buyers.

 

 

6

 

3.             REPRESENTATIONS
AND WARRANTIES OF THE COMPANY.

 

The Company represents and
warrants to each of the Buyers that, as of the date hereof and as of each
applicable Closing Date:

 

(a)           Organization and Qualification.  The Company and its “Subsidiaries”
(which for purposes of this Agreement means any entity in which the Company,
directly or indirectly, owns any of the capital stock or holds an equity or similar
interest) are entities duly organized and validly existing and, to the extent
legally applicable, in good standing under the laws of the jurisdiction in
which they are formed, and have the requisite power and authority to own their
properties and to carry on their business as now being conducted.  Each of the Company and its Subsidiaries is
duly qualified as a foreign entity to do business and, to the extent legally
applicable, is in good standing in every jurisdiction in which its ownership of
property or the nature of the business conducted by it makes such qualification
necessary, except to the extent that the failure to be so qualified or be in
good standing would not reasonably be expected to have a Material Adverse
Effect.  As used in this Agreement, “Material Adverse Effect” means any material
adverse effect on the business, properties, assets, operations, results of
operations, condition (financial or otherwise) of the Company individually or
the Company and its Subsidiaries taken as a whole, or on the transactions
contemplated hereby or in the other Transaction Documents or by the agreements
and instruments to be entered into in connection herewith or therewith, or on
the authority or ability of the Company to perform its obligations under the Transaction
Documents (as defined below).  The
Company has no Subsidiaries, except as set forth on Schedule 3(a).

 

(b)           Authorization; Enforcement;
Validity.  The Company has the
requisite corporate power and authority to enter into and perform its obligations
under this Agreement and each of the other agreements entered into by the
parties hereto in connection with the transactions contemplated by this
Agreement to which the Company is a party (such documents together with the
Certificate of Designations, the Warrants, the Irrevocable Transfer Agent
Instructions (as defined below) and each of the other agreements to be entered
into by the parties hereto in connection with the transactions contemplated
hereby shall be collectively referred to as the “Transaction Documents”) and to issue the Securities in
accordance with the terms hereof and thereof. 
The execution and delivery of the Transaction Documents by the Company
and the consummation by the Company of the transactions contemplated hereby and
thereby, including, without limitation, the issuance of the Preferred Shares,
the reservation for issuance and the issuance of the Conversion Shares issuable
upon conversion of the Preferred Shares, the issuance of the Warrants and the
reservation for issuance and issuance of the Warrant Shares issuable upon
exercise of the Warrants and the issuance of the Common Shares, have been duly
authorized by the Company’s board of directors and (other than any filings as
may be required by any state securities agencies) no further filing, consent,
or authorization is required by the Company, its board of directors or its
stockholders.  This Agreement and the
other Transaction Documents of even date herewith have been duly executed and
delivered by the Company, and constitute the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation or similar laws relating to, or affecting generally,
the enforcement of applicable creditors’ rights and remedies.  The Certificate of Designations in the form
attached hereto as

 

 

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Exhibit A has  been filed with the Secretary of State of the
State of Delaware and is in full force and effect, enforceable against the
Company in accordance with its terms and has not have been amended.

 

(c)           Issuance of Securities.  The issuance of the Preferred Shares, the
Warrants, and the Common Shares are duly authorized and upon issuance in
accordance with the terms of the Transaction Documents shall be free from all
taxes, liens and charges with respect to the issue thereof, and the Preferred Shares
shall be entitled to the rights and preferences set forth in the Certificate of
Designations.  As of the Initial Closing,
the Company shall have reserved from its duly authorized capital stock not less
than the sum of 130% of (i) the maximum number of shares of Common Stock
issuable upon conversion of the Preferred Shares (assuming for purposes hereof,
that the Preferred Shares are convertible at the Initial Conversion Price and
without taking into account any limitations on the conversion of the Preferred
Shares set forth in the Certificate of Designations), (ii) the maximum
number of Dividend Shares issuable pursuant to the terms of the Certificate of
Designations from the Initial Closing Date through the third anniversary of the
Initial Closing Date, determined as if the Dividend Conversion Price is equal
to the Initial Conversion Price, and (iii) the maximum number of shares of
Common Stock issuable upon exercise of the Warrants (without taking into
account any limitations on the exercise of the Warrants set forth in the
Warrants).  Upon issuance or conversion
in accordance with the Certificate of Designations or exercise in accordance
with the Warrants, as the case may be, the Conversion Shares and the Warrant Shares,
respectively, will be validly issued, fully paid and nonassessable and free
from all preemptive or similar rights, taxes, liens and charges with respect to
the issue thereof, with the holders being entitled to all rights accorded to a
holder of Common Stock.  Assuming the
accuracy of each of the representations and warranties set forth in Section 2
of this Agreement, the offer and issuance by the Company of the Securities is
exempt from registration under the 1933 Act.

 

(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 hereby and thereby (including, without
limitation, the issuance of the Preferred Shares, the Warrants and the Common
Shares and reservation for issuance and issuance of the Conversion Shares and
the Warrant Shares) will not (i) result in a violation of any certificate
of incorporation, any certificate of formation, any certificate of designations
or other constituent documents of the Company or any of its Subsidiaries, any
capital stock of the Company or any of its Subsidiaries or the bylaws of the
Company or any of its Subsidiaries or (ii) conflict with, or constitute a
default (or an event which with notice or lapse of time or both would become a
default) in any respect under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its Subsidiaries is a party, or (iii) result
in a violation of any law, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations and the rules and
regulations of any Eligible Market (as defined below) applicable to the Company
or any of its Subsidiaries or by which any property or asset of the Company or
any of its Subsidiaries is bound or affected.

 

(e)           Consents.  Neither the Company nor any of its
Subsidiaries is required to obtain any consent, authorization or order of, or
make any filing or registration with, any court, governmental agency or any
regulatory or self-regulatory agency or any other Person in order for

 

 

8

 

it to execute, deliver or
perform any of its obligations under or contemplated by the Transaction
Documents, in each case in accordance with the terms hereof or thereof, except
for the following consents, authorizations, orders, filings and registrations: (i) the
current report on Form 8-K that may be required to be filed by the Company
after the Initial Closing pursuant to Section 4(i) and (ii) the Form D
filing required to be made by the Company following the Initial Closing and the
Additional Closing, if any.

 

(f)            Acknowledgment Regarding Buyer’s
Purchase of Securities.  The Company
acknowledges and agrees that each Buyer is acting solely in the capacity of an
arm’s length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby and that no Buyer is (i) an
officer or director of the Company, (ii) an “affiliate” of the Company or
any of its Subsidiaries (as defined in Rule 144) or (iii) to the
knowledge of the Company, a “beneficial owner” of more than 10% of the shares
of Common Stock (as defined for purposes of Rule 13d-3 of the Securities
Exchange Act of 1934, as amended (the “1934
Act”)).  The Company further
acknowledges that no Buyer is acting as a financial advisor or fiduciary of the
Company or any of its Subsidiaries (or in any similar capacity) with respect to
the Transaction Documents and the transactions contemplated hereby and thereby,
and any advice given by a Buyer or any of its representatives or agents in
connection with the Transaction Documents and the transactions contemplated
hereby and thereby is merely incidental to such Buyer’s purchase of the Securities.  The Company further represents to each Buyer
that the decision of the Company and each of its Subsidiaries to enter into the
Transaction Documents, as applicable, has been based solely on the independent
evaluation by the Company, its Subsidiaries and its representatives.

 

(g)           No General Solicitation; Placement
Agent’s Fees.  None of the Company,
any of its Subsidiaries or affiliates, or any Person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D) in connection with the offer or sale of
the Securities.  The Company shall be
responsible for the payment of any placement agent’s fees, financial advisory
fees, or brokers’ commissions (other than for persons engaged by any Buyer or
its investment advisor) relating to or arising out of the transactions
contemplated hereby including, without limitation, placement agent fees payable
to Midtown Partners as placement agent (the “Agent”)
in connection with the sale of the Securities. 
The Company shall pay, and hold each Buyer harmless against, any
liability, loss or expense (including, without limitation, attorney’s fees and
out-of-pocket expenses) arising in connection with any such claim.  The Company acknowledges that it has engaged
the Agent in connection with the sale of the Securities.  Other than the Agent, neither the Company nor
any of its Subsidiaries has engaged any placement agent or other agent in
connection with the sale of the Securities.

 

(h)           No Integrated Offering.  None of the Company, its Subsidiaries, any of
their affiliates, and any Person acting on their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of the
issuance of any of the Securities under the 1933 Act, whether through
integration with prior offerings or otherwise, or cause this offering of the
Securities to require approval of stockholders of the Company for purposes of
any applicable stockholder approval provisions, including, without limitation,
under the rules and regulations of any exchange or automated quotation
system on which any of the securities of the Company are 

 

 

9

 

listed or designated.  None of the Company, its Subsidiaries, their
affiliates and any Person acting on their behalf will take any action or steps
referred to in the preceding sentence that would require registration of the
issuance of any of the Securities under the 1933 Act or cause the offering of
the Securities to be integrated with other offerings for purposes of any such
applicable stockholder approval provisions.

 

(i)            Dilutive Effect.  The Company understands and acknowledges that
the number of Conversion Shares issuable upon conversion of the Preferred
Shares, and, the Warrant Shares issuable upon exercise of the Warrants, will
increase in certain circumstances.  The
Company further acknowledges that its obligation to issue Conversion Shares
upon conversion of the Preferred Shares and the Dividend Shares in accordance
with this Agreement and the Certificate of Designations and its obligation to
issue the Warrant Shares upon exercise of the Warrants in accordance with this
Agreement and the Warrants is, in each case, absolute and unconditional
regardless of the dilutive effect that such issuance may have on the ownership
interests of other stockholders of the Company.

 

(j)            Application of Takeover
Protections; Rights Agreement.  The
Company and its board of directors have taken all necessary action, if any, in
order to render inapplicable any control share acquisition, business
combination, poison pill (including any distribution under a rights agreement)
or other similar anti-takeover provision under the Certificate of
Incorporation, any certificates of designations or the laws of the jurisdiction
of its formation or incorporation which is or could become applicable to any
Buyer as a result of the transactions contemplated by this Agreement,
including, without limitation, the Company’s issuance of the Securities and any
Buyer’s ownership of the Securities.  The
Company and its board of directors have taken all necessary action, if any, in
order to render inapplicable any stockholder rights plan or similar arrangement
relating to accumulations of beneficial ownership of Common Stock or a change
in control of the Company.

 

(k)           Financial Statements.  As of their filing date, the financial
statements (the “Financials”) of the Company
included in the Company’s Form 10 filed with the SEC on February 11,
2008 (the “Form 10”) complied as to form
in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto.  The Financials have been prepared in
accordance with United States generally accepted accounting principles (“GAAP”), consistently applied, during the periods involved
(except (i) as may be otherwise indicated in such financial statements or
the notes thereto, or (ii) in the case of unaudited interim statements, to
the extent they may exclude footnotes or may be condensed or summary
statements) and fairly present in all material respects the financial position
of the Company as of the dates thereof and the results of its operations and cash
flows for the periods then ended (subject, in the case of unaudited statements,
to normal year-end audit adjustments). 
At the time the Form 10 was filed with the SEC, it (including the
Financials included therein) did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.  No other information provided by or on behalf
of the Company in writing to the Buyers which is not included in the Form 10,
including, without limitation, information referred to in Section 2(e) of
this Agreement or in any of the disclosure schedules, contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements therein, in the light of the circumstance

 

 

10

 

 

under which they are or were
made, not misleading.  Except for
liabilities and obligations incurred in the ordinary course of business and
consistent with past practice, liabilities and obligations reflected on or reserved
against the Financials and as otherwise disclosed on Schedule 3(i),
since September 30, 2007, the Company has not incurred any liabilities or
obligations that would be required to be reflected or reserved against in a
balance sheet of the Company prepared in accordance with the principals used in
preparation of the Financials.

 

(l)            Absence of Certain Changes.  Since September 30, 2007, there has been
no material adverse change and no material adverse development in the business,
assets, properties, operations, condition (financial or otherwise) or results
of operations of the Company or its Subsidiaries.  Except as disclosed in Schedule 3(l),
since September 30, 2007, neither the Company nor any of its Subsidiaries
has (i) declared or paid any dividends, (ii) sold any assets,
individually or in the aggregate, in excess of $100,000 outside of the ordinary
course of business or (iii) had capital expenditures, individually or in
the aggregate, in excess of $100,000. 
Neither the Company nor any of its Subsidiaries has taken any steps to
seek protection pursuant to any bankruptcy law nor does the Company have any
knowledge or reason to believe that its creditors intend to initiate
involuntary bankruptcy proceedings or any actual knowledge of any fact that
would reasonably lead a creditor to do so. 
The Company and its Subsidiaries, individually and on a consolidated
basis, are not as of the date hereof, and after giving effect to the
transactions contemplated hereby to occur at the Closing, will not be Insolvent
(as defined below).  For purposes of this
Section 3(l), “Insolvent”
means, with respect to any Person, (i) the present fair saleable value of
such Person’s assets is less than the amount required to pay such Person’s
total Indebtedness (as defined in Section 3(r)), (ii) such Person is
unable to pay its debts and liabilities, subordinated, contingent or otherwise,
as such debts and liabilities become absolute and matured, (iii) such
Person intends to incur or believes that it will incur debts that would be
beyond its ability to pay as such debts mature or (iv) such Person has
unreasonably small capital with which to conduct the business in which it is
engaged as such business is now conducted and is proposed to be conducted.

 

(m)          No Undisclosed Events, Liabilities,
Developments or Circumstances.  Since
February 11, 2007, no event, liability, development or circumstance has
occurred or exists, or is contemplated to occur with respect to the Company,
its Subsidiaries or their respective business, properties, prospects,
operations or financial condition, that would be required to be disclosed by
the Company under applicable securities laws on a registration statement on Form S-1
filed with the SEC relating to an issuance and sale by the Company of its
Common Stock and which has not been publicly announced.

 

(n)           Conduct of Business; Regulatory
Permits.  Neither the Company nor any
of its Subsidiaries is in violation of any term of or in default under its
certificate of incorporation, certificate of designation, any certificate of
designations or other constituent documents or its bylaws.  Neither the Company nor any of its
Subsidiaries is in violation of any judgment, decree or order or any statute,
ordinance, rule or regulation applicable to the Company or its
Subsidiaries and so long as any Securities are outstanding, neither the Company
nor any of its Subsidiaries will conduct its business in violation of any of
the foregoing, except for possible violations which would not, individually or
in the aggregate, have a Material Adverse Effect.  The Company and its Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate regulatory
authorities necessary to conduct their respective businesses, except 

 

11

 

where the failure to possess
such certificates, authorizations or permits would not have, individually or in
the aggregate, a Material Adverse Effect, and neither the Company nor any such
Subsidiary has received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit.

 

(o)           Foreign Corrupt Practices.  Neither the Company nor any of its
Subsidiaries nor any director, officer, agent, employee or other Person acting
on behalf of the Company or any of its Subsidiaries has, in the course of its
actions for, or on behalf of, the Company or any of its Subsidiaries (i) used
any corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity; (ii) made any direct or
indirect unlawful payment to any foreign or domestic government official or
employee from corporate funds; (iii) violated or is in violation of any
provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (iv) made
any unlawful bribe, rebate, payoff, influence payment, kickback or other
unlawful payment to any foreign or domestic government official or employee.

 

(p)           Transactions With Affiliates.  Except as set forth on Schedule 3(p),
none of the officers, directors or employees of the Company or any of its
Subsidiaries is presently a party to any transaction with the Company or any of
its Subsidiaries (other than for ordinary course services as employees,
officers or directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real
or personal property to or from, or otherwise requiring payments to or from any
such officer, director or employee or, to the knowledge of the Company or any
of its Subsidiaries, any corporation, partnership, trust or other entity in
which any such officer, director, or employee has a substantial interest or is
an officer, director, trustee or partner.

 

(q)           Equity Capitalization.  As of the date hereof, the authorized capital
stock of the Company consists of (i) 100,000,000 shares of Common Stock,
of which as of the date hereof, 39,311,450 are issued and outstanding, 5,000,000 shares are reserved for
issuance pursuant to the Company’s stock option and purchase plans and 804,462 shares are reserved for
issuance pursuant to securities (other than the aforementioned options, the
Preferred Shares and the Warrants) exercisable or exchangeable for, or
convertible into, shares of Common Stock and (ii) 5,000,000 shares of
preferred stock, $0.001 par value, none of which, as of the date hereof, are
issued and outstanding.  All of such
outstanding shares have been, or upon issuance will be, validly issued and are
fully paid and nonassessable.  Except as
disclosed in Schedule 3(q):  (i) none
of the Company’s capital stock is subject to preemptive rights or any other
similar rights or any liens or encumbrances suffered or permitted by the
Company; (ii) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any
capital stock of the Company or any of its Subsidiaries, or contracts,
commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to issue additional capital stock of the
Company or any of its Subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any
capital stock of the Company or any of its Subsidiaries; (iii) there are
no outstanding debt securities, notes, credit agreements, credit facilities or
other agreements, documents or instruments evidencing Indebtedness of the
Company or any of its Subsidiaries or by which the Company or any of its
Subsidiaries is or may

 

12

 

become bound; (iv) there
are no financing statements securing obligations in any material amounts,
either singly or in the aggregate, filed in connection with the Company or any
of its Subsidiaries; (v) there are no agreements or arrangements under
which the Company or any of its Subsidiaries is obligated to register the sale
of any of their securities under the 1933 Act; (vi) there are no
outstanding securities or instruments of the Company or any of its Subsidiaries
which contain any redemption or similar provisions, and there are no contracts,
commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to redeem a security of the Company or any
of its Subsidiaries; (vii) there are no securities or instruments
containing anti-dilution or similar provisions that will be triggered by the
issuance of the Securities; (viii) the Company does not have any stock
appreciation rights or “phantom stock” plans or agreements or any similar plan
or agreement; and (ix) the Company and its Subsidiaries have no
liabilities or obligations required to be disclosed in the Form 10 but not
so disclosed in the Form 10, other than those incurred in the ordinary
course of the Company’s or its Subsidiaries’ respective businesses and which,
individually or in the aggregate, do not or would not have a Material Adverse
Effect.  The Company has furnished to the
Buyers true, correct and complete copies of the Company’s Certificate of
Incorporation, as amended and as in effect on the date hereof (the “Certificate of Incorporation”), the Company’s
Bylaws, as amended and as in effect on the date hereof (the “Bylaws”), and all agreements relating to
securities convertible into, or exercisable or exchangeable for, shares of
Common Stock and the material rights of the holders thereof in respect thereto.

 

(r)            Indebtedness and Other Contracts.  Except as disclosed in Schedule 3(r),
neither the Company nor any of its Subsidiaries (i) has any outstanding
Indebtedness (as defined below), (ii) is a party to any contract,
agreement or instrument, the violation of which, or default under which, by the
other party(ies) to such contract, agreement or instrument would result in a
Material Adverse Effect, (iii) is in violation of any term of or in
default under any contract, agreement or instrument relating to any Indebtedness,
except where such violations and defaults would not result, individually or in
the aggregate, in a Material Adverse Effect, or (iv) is a party to any
contract, agreement or instrument relating to any Indebtedness, the performance
of which, in the judgment of the Company’s officers, has or is expected to have
a Material Adverse Effect.  Schedule 3(r) provides
a detailed description of the material terms of any such outstanding
Indebtedness.  For purposes of this
Agreement:  (x) “Indebtedness” of any Person means, without
duplication (A) all indebtedness for borrowed money, (B) all
obligations issued, undertaken or assumed as the deferred purchase price of
property or services including, without limitation, “capital leases” in
accordance with GAAP (other than trade payables entered into in the ordinary
course of business), (C) all reimbursement or payment obligations with
respect to letters of credit, surety bonds and other similar instruments, (D) all
obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (E) all indebtedness created or arising
under any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (F) all monetary obligations under
any leasing or similar arrangement which, in connection with GAAP, consistently
applied for the periods covered thereby, is classified as a capital lease, (G) all
indebtedness referred to in clauses (A) through (F) above secured by
(or for which the holder of such Indebtedness has an existing right, contingent
or otherwise, to be secured by) any mortgage, lien, pledge, charge, security

 

13

 

interest or other
encumbrance upon or in any property or assets (including accounts and contract
rights) owned by any Person, even though the Person which owns such assets or
property has not assumed or become liable for the payment of such indebtedness,
and (H) all Contingent Obligations in respect of indebtedness or
obligations of others of the kinds referred to in clauses (A) through (G) above;
(y) “Contingent Obligation”
means, as to any Person, any direct or indirect liability, contingent or
otherwise, of that Person with respect to any indebtedness, lease, dividend or
other obligation of another Person if the primary purpose or intent of the
Person incurring such liability, or the primary effect thereof, is to provide
assurance to the obligee of such liability that such liability will be paid or
discharged, or that any agreements relating thereto will be complied with, or
that the holders of such liability will be protected (in whole or in part)
against loss with respect thereto; and (z) “Person” means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization or a government or any department or agency thereof.

 

(s)           Absence of Litigation.  There is no action, suit, proceeding, inquiry
or investigation that is material, individually or in the aggregate, before or
by any securities market or exchange, any court, public board, government
agency, self-regulatory organization or body pending or, to the knowledge of
the Company, threatened against or affecting the Company or any of its
Subsidiaries, the Common Stock or any of the Company’s Subsidiaries or any of
the Company’s or its Subsidiaries’ officers or directors.

 

(t)            Insurance.  The Company and each of its Subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its
Subsidiaries are engaged.  Neither the
Company nor any such Subsidiary has been refused any insurance coverage sought
or applied for and neither the Company nor any such Subsidiary has any reason
to believe that it will not be able to renew its existing insurance coverage as
and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would not
have a Material Adverse Effect.

 

(u)           Employee Relations.

 

(i)            Neither the Company nor any
of its Subsidiaries is a party to any collective bargaining agreement or
employs any member of a union.  The
Company and its Subsidiaries believe that their relations with their employees
are good.  No executive officer of the
Company or any of its Subsidiaries (as defined in Rule 501(f) of the
1933 Act) has notified the Company or any such Subsidiary that such officer
intends to leave the Company or any such Subsidiary or otherwise terminate such
officer’s employment with the Company or any such Subsidiary.  No executive officer of the Company or any of
its Subsidiaries, to the knowledge of the Company and its Subsidiaries, is, or
is expected to be, in violation of any material term of any employment
contract, confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any
restrictive covenant, and the continued employment of each such executive
officer does not subject the Company or any of its Subsidiaries to any
liability with respect to any of the foregoing matters.

 

14

 

(ii)           The Company and its
Subsidiaries are in compliance with all federal, state, local and foreign laws
and regulations respecting labor, employment and employment practices and
benefits, terms and conditions of employment and wages and hours, except where
failure to be in compliance would not, either individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect.

 

(v)           Title.  The Company and its Subsidiaries have good
and marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them which is material to the business
of the Company and its Subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as do not materially affect the value of
such property and do not interfere with the use made and proposed to be made of
such property by the Company and any of its Subsidiaries.   Any real property and facilities held under
lease by the Company or any of its Subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company and its Subsidiaries.

 

(w)          Intellectual Property Rights.  The Company and its Subsidiaries own or
possess adequate rights or licenses to use all trademarks, service marks, trade
names, patents, patent rights, copyrights, original works of authorship,
inventions, licenses, approvals, governmental authorizations, trade secrets and
other intellectual property rights and all applications and registrations
therefor necessary to conduct their respective businesses as now conducted (“Intellectual Property Rights”).  None of the Company’s registered, or applied
for, Intellectual Property Rights have expired or terminated or have been
abandoned, or are expected to expire or terminate or expected to be abandoned,
within three years from the date of this Agreement.  The Company does not have any knowledge of
any infringement by the Company or its Subsidiaries of Intellectual Property
Rights of others.  There is no claim,
action or proceeding being made or brought, or to the knowledge of the Company
or its Subsidiaries, being threatened, against the Company or its Subsidiaries
regarding its Intellectual Property Rights. 
Neither the Company nor any of its Subsidiaries is aware of any facts or
circumstances which might give rise to any of the foregoing infringements or
claims, actions or proceedings.  The
Company and its Subsidiaries have taken reasonable security measures to protect
the secrecy, confidentiality and value of all of their Intellectual Property
Rights.

 

(x)            Environmental Laws.  The Company and its Subsidiaries (i) are
in compliance with any and all applicable Environmental Laws (as hereinafter
defined), (ii) have received all permits, licenses or other approvals
required of them under applicable Environmental Laws to conduct their
respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval where, in each of the
foregoing clauses (i), (ii) and (iii), the failure to so comply could be
reasonably expected to have, individually or in the aggregate, a Material
Adverse Effect.  The term “Environmental Laws” means all federal,
state, local or foreign laws relating to pollution or protection of human
health or the environment (including, without limitation, ambient air, surface
water, groundwater, land surface or subsurface strata), including, without
limitation, laws relating to emissions, discharges, releases or threatened
releases of chemicals, pollutants, contaminants, or toxic or hazardous
substances or wastes (collectively, “Hazardous
Materials”)  into the
environment, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials, as well as all authorizations, codes, decrees,

 

15

 

demands or demand letters,
injunctions, judgments, licenses, notices or notice letters, orders, permits,
plans or regulations issued, entered, promulgated or approved thereunder.

 

(y)           Subsidiary Rights.  The Company or one of its Subsidiaries has
the unrestricted right to vote, and (subject to limitations imposed by
applicable law) to receive dividends and distributions on, all capital
securities of its Subsidiaries as owned by the Company or such Subsidiary.

 

(z)            Tax Status.  The Company and each of its Subsidiaries (i) has
made or filed all foreign, federal and state income and all other tax returns,
reports and declarations required by any jurisdiction to which it is subject, (ii) has
paid all taxes and other governmental assessments and charges that are material
in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set
aside on its books provision reasonably adequate for the payment of all taxes
for periods subsequent to the periods to which such returns, reports or
declarations apply.  There are no unpaid
taxes in any material amount claimed to be due by the taxing authority of any
jurisdiction, and the officers of the Company know of no basis for any such
claim.

 

(aa)         Internal Accounting Controls.  The Company and each of its Subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management’s general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with GAAP and to maintain asset and liability accountability, (iii) access
to assets or incurrence of liabilities is permitted only in accordance with
management’s general or specific authorization and (iv) the recorded
accountability for assets and liabilities is compared with the existing assets
and liabilities at reasonable intervals and appropriate action is taken with
respect to any difference.

 

(bb)         Off Balance Sheet Arrangements.  There is no transaction, arrangement, or
other relationship between the Company and an unconsolidated or other off
balance sheet entity that is required to be disclosed by the Company in its
1934 Act filings and is not so disclosed or that otherwise would be reasonably
likely to have a Material Adverse Effect.

 

(cc)         Investment Company Status.  The Company is not, and upon consummation of
the sale of the Securities will not be, an “investment company,” a company
controlled by an “investment company” or an “affiliated person” of, or “promoter”
or “principal underwriter” for, an “investment company” as such terms are
defined in the Investment Company Act of 
1940, as amended.

 

(dd)         U.S. Real Property Holding
Corporation.  The Company is not, has
never been, and so long as any Preferred Shares remain outstanding, shall not
become, a U.S. real property holding corporation within the meaning of Section 897
of the Internal Revenue Code of 1986, as amended, and the Company shall so
certify upon any Buyer’s request.

 

(ee)         Bank Holding Company Act.  Neither the Company nor any of its
Subsidiaries is subject to the Bank Holding Company Act of 1956, as amended
(the “BHCA”) and to regulation by the Board
of Governors of the Federal Reserve System (the “Federal

 

16

 

Reserve”).  Neither the Company nor any of its
Subsidiaries or affiliates owns or controls, directly or indirectly, five
percent (5%) or more of the outstanding shares of any class of voting securities
or twenty-five percent (25%) or more of the total equity of a bank or any
equity that is subject to the BHCA and to regulation by the Federal
Reserve.  Neither the Company nor any of
its Subsidiaries or affiliates exercises a controlling influence over the
management or policies of a bank or any entity that is subject to the BHCA and
to regulation by the Federal Reserve.

 

(ff)           Disclosure.  Other than the transactions contemplated
hereby and by the other Transaction Documents, the Company confirms that
neither it nor any other Person acting on its behalf has provided any of the
Buyers or their agents or counsel with any information that constitutes or
could reasonably be expected to constitute material, nonpublic information.  The Company understands and confirms that
each of the Buyers will rely on the foregoing representations in effecting
transactions in securities of the Company. 
All disclosure provided to the Buyers regarding the Company or any of
its Subsidiaries, their business and the transactions contemplated hereby,
including the Schedules to this Agreement, furnished by or on behalf of the
Company is true and correct and does not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in the light of the circumstances under which they
were made, not misleading.  No event or
circumstance has occurred or information exists with respect to the Company or
any of its Subsidiaries or its or their business, properties, prospects,
operations or financial conditions, which, under applicable law, rule or
regulation, requires public disclosure or announcement by the Company but which
has not been so publicly announced or disclosed.

 

4.             COVENANTS.

 

(a)           Reasonable Best Efforts.  Each party shall use its best efforts timely
to satisfy each of the conditions to be satisfied by it as provided in Sections
6 and 7 of this Agreement.

 

(b)           Form D and Blue Sky.  The Company agrees to file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof to each Buyer promptly after such filing.  The Company shall, on or before such
applicable Closing Date, take such action as the Company shall reasonably determine
is necessary in order to obtain an exemption for or to qualify the Securities
for sale to the Buyers at such Closing pursuant to this Agreement under
applicable securities or “Blue Sky” laws of the states of the United States (or
to obtain an exemption from such qualification), and shall provide evidence of
any such action so taken to the Buyers on or prior to such Closing Date.  The Company shall make all filings and
reports relating to the offer and sale of the Securities required under
applicable securities or “Blue Sky” laws of the states of the United States
following such Closing Date.

 

(c)           Reporting Status.  From the Public Company Date (as defined in
the Certificate of Designations) until the date on which each Buyer or any
transferee or assignee thereof to whom a Buyer assigns its rights as a holder
of Securities under this Agreement, the Certificate of Designations and/or the
Warrants (each an “Investor”, and
collectively, the “Investors”)
shall have sold all the Conversion Shares, Dividend Shares and Warrant Shares  and none of the Preferred Shares  or Warrants is outstanding (the “Reporting Period”), the Company shall
timely file all reports required to be filed with the SEC pursuant to the 1934
Act, and the

 

17

 

Company shall not terminate
its status as an issuer required to file reports under the 1934 Act even if the
1934 Act or the rules and regulations thereunder would otherwise permit
such termination.

 

(d)           Use of Proceeds. 
The Company will use the proceeds from the sale of the Securities for
general corporate purposes, including general and administrative expenses and
not for (i) the repayment of any outstanding Indebtedness of the Company
or any of its Subsidiaries or (ii) the redemption or repurchase of any of
its or its Subsidiaries’ equity securities (other than the repurchase of
securities owned by employees of the Company or its Subsidiaries upon
termination of their employment).

 

(e)           Financial Information.  As long as any Preferred Shares or Warrants
are outstanding, the Company agrees to send the following to each Investor: (i) unless
the following are filed with the SEC through EDGAR and are available to the
public through the EDGAR system, within one (1) Business Day after the
filing thereof with the SEC, a copy of its Annual Reports and Quarterly Reports
on Form 10-K, 10-KSB, 10-Q or 10-QSB, any interim reports or any
consolidated balance sheets, income statements, stockholders’ equity statements
and/or cash flow statements for any period other than annual, any Current Reports
on Form 8-K and any registration statements (other than on Form S-8)
or amendments filed pursuant to the 1933 Act, (ii) on the same day as the
release thereof, facsimile or e-mailed copies of all press releases issued by
the Company or any of its Subsidiaries, and (iii) copies of any notices
and other information made available or given to the stockholders of the
Company generally, contemporaneously with the making available or giving
thereof to the stockholders.

 

(f)            Listing.  On or prior to May 30, 2008 the Company
shall secure the listing of the Common Stock, including, without limitation, (i) the
Conversion Shares issued or issuable upon conversion of the Preferred Shares, (ii) the
Warrant Shares issued or issuable upon exercise of the Warrants, (iii) the
Dividend Shares issuable pursuant to the terms of the Certificate of
Designations and (iv) any capital stock of the Company issued or issuable,
with respect to the Conversion Shares, the Warrant Shares, the Preferred
Shares, the Dividend Shares and the Warrants as a result of any stock split,
stock dividend, recapitalization, exchange or similar event or otherwise,
without regard to any limitations on conversion or exercise, as applicable, of
the Preferred Shares, the Warrants (the “Listed Securities”),
with an Eligible Market (subject to official notice of issuance) (the date the
Common Stock is so listed, the “Listing Date”)
and shall maintain, in accordance with the Certificate of Designations and the
Warrants, such listing of all Listed Securities from time to time issuable
under the terms of the Transaction Documents. 
So long as any Securities are outstanding, the Company shall use its
reasonable best efforts to maintain the Common Stocks’ authorization for
quotation on such Eligible Market.  Neither
the Company nor any of its Subsidiaries shall take any action which would be
reasonably expected to result in the delisting or suspension of the Common
Stock on such Eligible Market.  The
Company shall pay all fees and expenses in connection with satisfying its
obligations under this Section 4(f). 
As used herein, “Eligible Market”
means the American Stock Exchange, The NASDAQ Global Market, The NASDAQ Global
Select Market, The NASDAQ Capital Market, or The New York Stock Exchange, Inc.

 

(g)           Fees.  Subject to Section 8 below, at the
Initial Closing, the Company shall pay an expense allowance to West Coast or
its designee(s) for all reasonable costs and expenses

 

18

 

incurred in connection with
the transactions contemplated by the Transaction Documents (including all
reasonable legal fees and disbursements in connection therewith, documentation
and implementation of the transactions contemplated by the Transaction
Documents and due diligence in connection therewith), not to exceed $60,000,
which amount shall be withheld by West Coast from its Initial Purchase Price at
the Initial Closing.  The Company shall
be responsible for the payment of any placement agent’s fees, financial
advisory fees, or broker’s commissions relating to or arising out of the
transactions contemplated hereby, including, without limitation, any fees
payable to the Agent.  The Company shall
pay, and hold each Buyer harmless against, any liability, loss or expense
(including, without limitation, reasonable attorney’s fees and out-of-pocket
expenses) arising in connection with any claim relating to any such
payment.  Except as otherwise set forth
in the Transaction Documents, each party to this Agreement shall bear its own
expenses in connection with the sale of the Securities to the Buyers.

 

(h)           Pledge of Securities.  The Company acknowledges and agrees that the
Securities may be pledged by an Investor in connection with a bona fide margin
agreement or other loan or financing arrangement that is secured by the
Securities.  The pledge of Securities
shall not be deemed to be a transfer, sale or assignment of the Securities
hereunder, and no Investor effecting a pledge of Securities shall be required
to provide the Company with any notice thereof or otherwise make any delivery
to the Company pursuant to this Agreement or any other Transaction Document,
including, without limitation, Section 2(f) hereof:  provided that an Investor and its pledge
shall be required to comply with the provisions of Section 2(f) hereof
in order to effect a sale, transfer or assignment of Securities to such
pledgee.  The Company hereby agrees to
execute and deliver such documentation as a pledgee of the Securities may
reasonably request in connection with a pledge of the Securities to such
pledgee by an Investor.

 

(i)            Disclosure of Transactions and
Other Material Information.  If the
Company has not previously filed an amendment to the Form 10 (the “Form 10 Amendment”) describing the terms of the
transactions contemplated by the Transaction Documents and attaching the
material Transaction Documents (including, without limitation, this Agreement,
the Certificate of Designations and the form of Warrant) as exhibits to such
amendment to the Form 10, then on or before 8:30 a.m., New York City
time, on the first Business Day following the Public Company Date, the Company
shall issue a press release (the “Press Release”)
describing the material terms of the transactions contemplated by the
Transaction Documents.  On or before 8:30 a.m.,
New York City time, on the second Business Day following the Public Company
Date, the Company shall file a Current Report on Form 8-K describing the
terms of the transactions contemplated by the Transaction Documents and
attaching the material Transaction Documents as exhibits to such filing (the “8-K Filing”).  From and after the issuance of the 8-K Filing
or Form 10 Amendment, as applicable, no Buyer shall be in possession of
any material, nonpublic information received from the Company, any of its
Subsidiaries or any of their respective officers, directors, employees or
agents, that is not disclosed in the 8-K Filing or Form 10 Amendment, as
applicable.  The Company shall not, and
shall cause each of its Subsidiaries and its and each of their respective
officers, directors, employees and agents, not to, provide any Buyer with any
material, nonpublic information regarding the Company or any of its
Subsidiaries from and after the issuance of the 8-K Filing or Form 10
Amendment, as applicable, without the express prior written consent of such
Buyer.  If a Buyer has, or reasonably
believes it has, received any such material, nonpublic information regarding
the Company or any of its

 

19

 

Subsidiaries, it shall
provide the Company with written notice thereof.  The Company shall, within two (2) Trading
Days (as defined in the Notes) of receipt of such notice, make public
disclosure of such material, nonpublic information.  In the event of a breach of the foregoing
covenant by the Company, any of its Subsidiaries, or any of its or their
respective officers, directors, employees and agents, in addition to any other
remedy provided herein or in the Transaction Documents, a Buyer shall have the
right to make a public disclosure, in the form of a press release, public
advertisement or otherwise, of such material, nonpublic information without the
prior approval by the Company, its Subsidiaries, or any of its or their
respective officers, directors, employees or agents.  No Buyer shall have any liability to the
Company, its Subsidiaries, or any of its or their respective officers,
directors, employees, stockholders or agents for any such disclosure.  Subject to the foregoing, neither the
Company, its Subsidiaries nor any Buyer shall issue any press releases or any
other public statements with respect to the transactions contemplated hereby;
provided, however, that the Company shall be entitled, without the prior
approval of any Buyer, to make any press release or other public disclosure
with respect to such transactions (i) in substantial conformity with the
8-K Filing and contemporaneously therewith and (ii) as is required by
applicable law and regulations (provided that in the case of clause (i) each
Buyer shall be consulted by the Company in connection with any such press
release or other public disclosure prior to its release).  Without the prior written consent of any
applicable Buyer, neither the Company nor any of its Subsidiaries or affiliates
shall disclose the name of such Buyer in any filing, announcement, release or
otherwise except where such disclosure is required by applicable law and
regulations (including the rules and regulations of  any applicable Eligible Market).

 

(j)            Additional Preferred Shares;
Variable Securities; Dilutive Issuances. 
So long as any Buyer beneficially owns any Securities, the Company will
not, without the prior written consent of Buyers holding a majority of the
Preferred Shares, issue any shares of Series A Preferred Stock and the Company
shall not issue any other securities that would cause a breach or default under
the Certificate of Designations or the Warrants.  For so long as any Preferred Shares or
Warrants remain outstanding, the Company shall not, in any manner, issue or
sell any rights, warrants or options to subscribe for or purchase Common Stock
or directly or indirectly convertible into or exchangeable or exercisable for
Common Stock at a conversion, exchange or exercise price which varies or may
vary after issuance with the market price of the Common Stock, including by way
of one or more reset(s) to any fixed price unless the conversion, exchange
or exercise price of any such security cannot be less than the then applicable
Conversion Price (as defined in the Certificate of Designations) with respect
to the Common Stock into which any Preferred Shares are convertible or the then
applicable Exercise Price (as defined in the Warrants) with respect to the
Common Stock into which any Warrant is exercisable.  For so long as any Preferred Shares or
Warrants remain outstanding, the Company shall not, in any manner, enter into
or affect any Dilutive Issuance (as defined in the Certificate of Designations)
if the effect of such Dilutive Issuance is to cause the Company to be required
to issue upon conversion of any Preferred Shares or exercise of any Warrant any
shares of Common Stock in excess of that number of shares of Common Stock which
the Company may issue upon conversion of the Preferred Shares and exercise of
the Warrants without breaching the Company’s obligations under the rules or
regulations of the Eligible Market on which the Common Stock is listed,
including, without limitation, any and all discounted issuance rules, if
applicable.

 

20

 

(k)           Corporate Existence.  So long as any Buyer beneficially owns any
Securities, the Company shall maintain its corporate existence and shall not
sell all or substantially all of the Company’s assets and shall not be party to
any Fundamental Transaction (as defined in the Certificate of Designations)
unless the Company is in compliance with the applicable provisions governing
Fundamental Transactions set forth in the Certificate of Designations and the
Warrants.

 

(l)            Reservation of Shares.  The Company shall take all action necessary
to at all times have authorized, and reserved for the purpose of issuance, no
less than 130% of (i) the maximum number of shares of Common Stock
issuable upon conversion of the Preferred Shares (assuming for purposes hereof,
that the Preferred Shares are convertible at the Conversion Price and without
taking into account any limitations on the conversion of the Preferred Shares
set forth in the Certificate of Designations), (ii) the maximum number of
Dividend Shares issuable pursuant to the terms of the Certificate of
Designations from the Closing Date through the fifth anniversary of the Closing
Date, determined as if issued as of the trading day immediately preceding the
applicable date of determination and (iii) the maximum number of shares of
Common Stock issuable upon exercise of the Warrants (without taking into
account any limitations on the exercise of the Warrants set forth in the
Warrants).

 

(m)          Conduct of Business.  The business of the Company and its
Subsidiaries shall not be conducted in violation of any law, ordinance or
regulation of any governmental entity, except where such violations would not
result, either individually or in the aggregate, in a Material Adverse Effect.

 

(n)           Additional Issuances of Securities.

 

(i)            For purposes of this Section 4(n),
the following definitions shall apply.

 

(1)           “Convertible Securities”
means any stock or securities (other than Options) convertible into or
exercisable or exchangeable for shares of Common Stock.

 

(2)           “Options”
means any rights, warrants or options to subscribe for or purchase shares of
Common Stock or Convertible Securities.

 

(3)           “Common Stock Equivalents”
means, collectively, Options and Convertible Securities.

 

(ii)           From the date hereof until
the two (2) year anniversary of the Closing date, the Company will not,
directly or indirectly, offer, sell, grant any option to purchase, or otherwise
dispose of (or announce any offer, sale, grant or any option to purchase or
other disposition of) any of its or its Subsidiaries’ equity or equity
equivalent securities, including without limitation any debt, preferred stock
or other instrument or security that is, at any time during its life and under
any circumstances, convertible into or exchangeable or exercisable for shares of
Common Stock or Common Stock Equivalents (any such
offer, sale, grant, disposition or announcement being referred to as a “Subsequent Placement”) unless the Company
shall have first complied with this Section 4(n)(ii).

 

21

 

(1)           The Company shall deliver to each Buyer a written
notice (the “Offer Notice”)
of any proposed or intended issuance or sale or exchange (the “Offer”) of the securities being offered
(the “Offered Securities”) in a
Subsequent Placement, which Offer Notice shall (A) identify and describe
the Offered Securities, (B) describe the price and other terms upon which
they are to be issued, sold or exchanged, and the number or amount of the
Offered Securities to be issued, sold or exchanged, (C) identify the
persons or entities (if known) to which or with which the Offered Securities
are to be offered, issued, sold or exchanged and (D) offer to issue and
sell to or exchange with such Buyers a pro rata portion of at least 40% of the
Offered Securities (I) based on such Buyer’s pro rata portion of the
aggregate principal amount of Certificate
of Designations purchased hereunder (the “Basic Amount”), and (II) with respect to each Buyer that
elects to purchase its Basic Amount, any additional portion of the Offered
Securities attributable to the Basic Amounts of other Buyers as such Buyer
shall indicate it will purchase or acquire should the other Buyers subscribe
for less than their Basic Amounts (the “Undersubscription
Amount”).

 

(2)           To accept an Offer, in whole or in part, such Buyer
must deliver a written notice to the Company prior to the end of the tenth (10th)
Business Day after such Buyer’s receipt of the Offer Notice (the “Offer Period”), setting forth the portion of such Buyer’s
Basic Amount that such Buyer elects to purchase and, if such Buyer shall elect
to purchase all of its Basic Amount, the Undersubscription Amount, if any, that
such Buyer elects to purchase (in either case, the “Notice of Acceptance”). 
If the Basic Amounts subscribed for by all Buyers are less than the
total of all of the Basic Amounts, then each Buyer who has set forth an
Undersubscription Amount in its Notice of Acceptance shall be entitled to
purchase, in addition to the Basic Amounts subscribed for, the Undersubscription
Amount it has subscribed for; provided, however, that if the
Undersubscription Amounts subscribed for exceed the difference between the
total of all the Basic Amounts and the Basic Amounts subscribed for (the “Available Undersubscription Amount”), each
Buyer who has subscribed for any Undersubscription Amount shall be entitled to
purchase only that portion of the Available Undersubscription Amount as the
Basic Amount of such Buyer bears to the total Basic Amounts of all Buyers that
have subscribed for Undersubscription Amounts, subject to rounding by the
Company to the extent its deems reasonably necessary, which process shall be
repeated until the Buyers shall have an opportunity to subscribe for any
remaining Undersubscription Amount.

 

(3)           The Company shall have fifteen (15) Business Days
from the expiration of the Offer Period above to (i) offer, issue, sell or
exchange all or any part of such Offered Securities as to which a Notice of
Acceptance has not been given by the Buyers (the “Refused Securities”) pursuant to a definitive agreement(s) (the
“Subsequent Placement Agreement”), but
only to the offerees described in the Offer Notice (if so described therein)
and only upon terms and conditions (including, without limitation, unit prices
and interest rates) that are not more favorable to the acquiring person or
persons or less favorable to the Company than those set forth in the Offer
Notice and (ii) to publicly announce (a) the execution of such
Subsequent Placement Agreement, and (b) either (x) the consummation
of the transactions contemplated by such Subsequent Placement Agreement or (y) the
termination of such Subsequent Placement

 

22

 

Agreement, which shall be
filed with the SEC on a Current Report on Form 8 K with such Subsequent
Placement Agreement and any documents contemplated therein filed as exhibits
thereto..

 

(4)           In the event the Company shall propose to sell less
than all the Refused Securities (any such sale to be in the manner and on the terms
specified in Section 4(n)(ii)(3) above), then each Buyer may, at its
sole option and in its sole discretion, reduce the number or amount of the
Offered Securities specified in its Notice of Acceptance to an amount that
shall be not less than the number or amount of the Offered Securities that such
Buyer elected to purchase pursuant to Section 4(n)(ii)(2) above
multiplied by a fraction, (i) the numerator of which shall be the number
or amount of Offered Securities the Company actually proposes to issue, sell or
exchange (including Offered Securities to be issued or sold to Buyers pursuant
to Section 4(n)(ii)(3) above prior to such reduction) and (ii) the
denominator of which shall be the original amount of the Offered
Securities.  In the event that any Buyer
so elects to reduce the number or amount of Offered Securities specified in its
Notice of Acceptance, the Company may not issue, sell or exchange more than the
reduced number or amount of the Offered Securities unless and until such
securities have again been offered to the Buyers in accordance with Section 4(n)(ii)(1) above.

 

(5)           Upon the closing of the issuance, sale or exchange
of all or less than all of the Refused Securities, the Buyers shall acquire
from the Company, and the Company shall issue to the Buyers, the number or
amount of Offered Securities specified in the Notices of Acceptance, as reduced
pursuant to Section 4(n)(ii)(3) above if the Buyers have so elected,
upon the terms and conditions specified in the Offer.  The purchase by the Buyers of any Offered
Securities is subject in all cases to the preparation, execution and delivery
by the Company and the Buyers of a purchase agreement relating to such Offered
Securities reasonably satisfactory in form and substance to the Buyers and their
respective counsel.

 

(6)           Any Offered Securities not acquired by the Buyers or
other persons in accordance with Section 4(n)(ii)(3) above may not be
issued, sold or exchanged until they are again offered to the Buyers under the
procedures specified in this Agreement.

 

(7)           The Company and the Buyers agree that if any Buyer
elects to participate in the Offer, neither the Subsequent Placement Agreement
with respect to such Offer nor any other transaction documents related thereto
(collectively, the “Subsequent Placement
Documents”) shall include any term or provisions whereby any Buyer
shall be required to agree to any restrictions in trading as to any securities
of the Company owned by such Buyer prior to such Subsequent Placement.

 

(8)           Notwithstanding anything to the contrary in this Section 4(n) and
unless otherwise agreed to by the Buyers, the Company shall either confirm in
writing to the Buyers that the transaction with respect to the Subsequent
Placement has been abandoned or shall publicly disclose its intention to issue
the Offered Securities, in either case in such a manner such that the Buyers
will not be in possession of material 

 

23

 

non-public information, by
the fifteenth (15th) Business Day following delivery of the Offer
Notice.  If by the fifteenth (15th)  Business Day following delivery of the Offer
Notice no public disclosure regarding a transaction with respect to the Offered
Securities has been made, and no notice regarding the abandonment of such
transaction has been received by the Buyers, such transaction shall be deemed
to have been abandoned and the Buyers shall not be deemed to be in possession
of any material, non-public information with respect to the Company.  Should the Company decide to pursue such
transaction with respect to the Offered Securities, the Company shall provide
each Buyer with another Offer Notice and each Buyer will again have the right
of participation set forth in this Section 4(n)(ii).  The Company shall not be permitted to deliver
more than one such Offer Notice to the Buyers in any 60 day period.

 

(i)            The restrictions contained
in subsections (ii) and (iii) of this Section 4(n) shall
not apply in connection with the issuance of any Excluded Securities (as
defined in the Certificate of Designations) or any bona fide firm commitment
underwritten public offering with a nationally recognized underwriter pursuant
to an effective registration statement under the 1933 Act.

 

(o)           Public Information. 
At any time during the period commencing on the six (6) month
anniversary of the Initial Closing Date and ending at such time that all of the
Securities can be sold without the requirement to be in compliance with Rule 144(c)(1) and
otherwise without restriction or limitation pursuant to Rule 144, if a
registration statement is not available for the resale of all of the Securities
and the Company shall fail for any reason to satisfy the current public
information requirement under Rule 144 for a period in excess of ten (10) Business
Days (a “Public Information Failure”) then, as partial relief for the damages
to any holder of Securities by reason of any such delay in or reduction of its
ability to sell the Securities (which remedy shall not be exclusive of any
other remedies available at law or in equity), and subject to the Limitation on
Damages (as such term is defined in the Certificate of Designations), the
Company shall pay to each such holder an amount in cash equal to one percent
(1.0%) of the aggregate Purchase Price of such holder’s Securities on the day
of a Public Information Failure and on every thirtieth day (pro rated for
periods totaling less than thirty days) thereafter until the earlier of (i) the
date such Public Information Failure is cured and (ii) such time that such
public information is no longer required pursuant to Rule 144.  The payments to which a holder shall be
entitled pursuant to this Section 4(o) are referred to herein as “Public
Information Failure Payments.”  Public
Information Failure Payments shall be paid on the earlier of (I) the last
day of the calendar month during which such Public Information Failure Payments
are incurred and (II) the third Business Day after the event or failure
giving rise to the Public Information Failure Payments is cured.  In the event the Company fails to make Public
Information Failure Payments in a timely manner, such Public Information
Failure Payments shall bear interest at the rate of 1.5% per month (prorated
for partial months) until paid in full.

 

(p)           Additional Relief.  If the Company shall fail for any reason or
for no reason to issue to the Buyer unlegended certificates or issue Common
Shares to such Buyer by electronic delivery at the applicable balance account
at DTC within five (5) Trading Days after the receipt of documents
necessary for the removal of the legend set forth in Section 2(h) above
(the “Removal Date”), then in
addition to all other remedies available to the Buyer, if on or after the
Trading Day immediately following such five (5) Trading Day period, the
Buyer purchases 

 

24

 

(in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction of
a sale by the Buyer of such Common Shares that the Buyer anticipated receiving
without legend from the Company (a “Buy-In”),
then the Company shall, within three (3) Business Days after the Buyer’s
request and in the Buyer’s discretion, either (i) pay cash to the Buyer in
an amount equal to the Buyer’s total purchase price (including brokerage
commissions, if any) for the shares of Common Stock so purchased (the “Buy-In Price”), at which point the Company’s
obligation to deliver such unlegended Common Shares shall terminate, or (ii) promptly
honor its obligation to deliver to the Buyer such unlegended shares of Common
Stock as provided above and pay cash to the Buyer in an amount equal to the
excess (if any) of the Buy-In Price over the product of (A) such number of
shares of Common Stock, times (B) the Closing Bid Price (as defined in the
Warrants) on the Removal Date.

 

(q)           Form 10.  The Company shall use its reasonable best
efforts to cause the Form 10 to be declared effective by the SEC as soon
as possible.

 

(r)            Lock-Up.  Without the prior written consent of the
holders of a majority of the Preferred Shares, the Company shall not amend or
waive any provision of any of the Lock-Up Agreements (as defined below) except
to extend the term of the lock-up period.

 

(s)           Closing Documents.  On or prior to fourteen (14) calendar days
after each Closing Date, the Company agrees to deliver, or cause to be
delivered, to each Buyer and Schulte Roth & Zabel LLP executed copies
of the Transaction Documents, Securities and other document required to be
delivered to any party pursuant to Section 7 hereof.

 

5.             REGISTER;
TRANSFER AGENT INSTRUCTIONS.

 

(a)           Register.  The Company shall maintain at its principal
executive offices (or such other office or agency of the Company as it may
designate by notice to each holder of Securities), a register for the Preferred
Shares, the Warrants and the Common Shares in which the Company shall record
the name and address of the Person in whose name the Preferred Shares,  the Warrants and the Common Shares have
been issued (including the name and address of each transferee), the number of
Preferred Shares held by such Person, the number of Conversion Shares issuable
upon conversion of the Preferred Shares, the number of Dividend Shares issuable
with respect to the Preferred Shares, Warrant Shares issuable upon exercise of
the Warrants held by such Person and the number of Common Shares held by such
person.  The Company shall keep the
register open and available at all times during business hours for inspection
of any Buyer or its legal representatives.

 

(b)           Transfer Agent Instructions.  As soon as possible after the Company has
retained a transfer agent, the Company shall issue irrevocable instructions to
its transfer agent, and any subsequent transfer agent, to issue certificates or
credit shares to the applicable balance accounts at The Depository Trust
Company (“DTC”), registered in the name of each
Buyer or its respective nominee(s), for the Conversion Shares, the Dividend
Shares, the Warrant Shares and the Common Shares in such amounts as specified
from time to time by each Buyer to the Company upon conversion of the Preferred
Shares or exercise of the Warrants in the form of Exhibit C
attached hereto (the “Irrevocable Transfer
Agent Instructions”).  The
Company warrants that no instruction other than the Irrevocable Transfer Agent
Instructions referred to in 

 

25

 

this Section 5(b), and
stop transfer instructions to give effect to Section 2(g) hereof,
will be given by the Company to its transfer agent, and that the Securities
shall otherwise be freely transferable on the books and records of the Company
as and to the extent provided in this Agreement and the other Transaction
Documents.  If a Buyer effects a sale,
assignment or transfer of the Securities in accordance with Section 2(g),
hereof the Company shall permit the transfer and shall promptly instruct its
transfer agent to issue one or more certificates or credit shares to the
applicable balance accounts at DTC in such name and in such denominations as
specified by such Buyer to effect such sale, transfer or assignment.  In the event that such sale, assignment or
transfer involves Common Shares, Conversion Shares, Dividend Shares or Warrant
Shares sold, assigned or transferred pursuant to an effective registration
statement or pursuant to Rule 144, the transfer agent shall issue such
Securities to the Buyer, assignee or transferee, as the case may be, without
any restrictive legend.  The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to a Buyer. 
Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Section 5(b) will be inadequate
and agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Section 5(b), that a Buyer shall be entitled, in
addition to all other available remedies, to an order and/or injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.

 

6.             CONDITIONS
TO THE COMPANY’S OBLIGATION TO SELL.

 

(a)           Initial Closing.  The obligation of the Company hereunder to
issue and sell the Preferred Shares  and the
related Warrants to each Buyer at the Closing is subject to the satisfaction,
at or before the Initial Closing Date, of each of the following conditions,
provided that these conditions are for the Company’s sole benefit and may be
waived by the Company at any time in its sole discretion by providing each
Buyer with prior written notice thereof:

 

(i)            Such Buyer shall have
executed each of the Transaction Documents to which it is a party and delivered
the same to the Company.

 

(ii)           Such Buyer and each other
Buyer shall have delivered to the Company the Initial Purchase Price for the
Preferred Shares and related Warrants (less, in the case of West Coast, the
amount withheld pursuant to Section 4(g)) being purchased by such Buyer at
the Initial Closing by wire transfer of immediately available funds pursuant to
the wire instructions provided by the Company.

 

(iii)          The representations and
warranties of such Buyer shall be true and correct in all material respects
(except for those representations and warranties that are qualified by
materiality or Material Adverse Effect which shall be true and correct in all
respects) as of the date when made and as of the Initial Closing Date as though
made at that time (except for representations and warranties that speak as of a
specific date, which shall remain true and correct as of such specified date),
and such Buyer shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by such Buyer at or prior
to the Initial Closing Date.

 

26

 

(b)           Additional Closing.  The obligation of the Company hereunder to
issue and sell the Common Shares to each Buyer at the Additional Closing is
subject to the satisfaction, at or before the Additional Closing Date, of each
of the following conditions, provided that these conditions are for the Company’s
sole benefit and may be waived by the Company at any time in its sole
discretion by providing each Buyer with prior written notice thereof:

 

(i)            Such Buyer and each other
Buyer shall have delivered to the Company the Additional Purchase Price for the
Common Shares being purchased by such Buyer at the Additional Closing by wire
transfer of immediately available funds pursuant to the wire instructions
provided by the Company.

 

(ii)           The representations and
warranties of such Buyer shall be true and correct in all material respects
(except for those representations and warranties that are qualified by
materiality or Material Adverse Effect, which shall be true and correct in all
respects) as of the date when made and as of the Additional Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date, which shall remain true and correct as of such specified
date), and such Buyer shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by
this Agreement to be performed, satisfied or complied with by such Buyer at or
prior to the Additional Closing Date.

 

7.             CONDITIONS
TO EACH BUYER’S OBLIGATION TO PURCHASE.

 

(a)           Initial Closing.  The obligation of each Buyer hereunder to
purchase the Preferred Shares  and the
related Warrants at the Initial Closing is subject to the satisfaction, at or
before the Initial Closing Date, of each of the following conditions, provided
that these conditions are for each Buyer’s sole benefit and may be waived by
such Buyer at any time in its sole discretion by providing the Company with
prior written notice thereof:

 

(i)            The Company shall have duly
executed and delivered to such Buyer (A) each of the Transaction Documents
and (B) the certificates evidencing the number of Preferred Shares being
purchased by such Buyer at the Initial Closing pursuant to this Agreement and (C) the
Warrants being purchased by such Buyer at the Initial Closing pursuant to this
Agreement.

 

(ii)           Such Buyer shall have
received the opinion of Greenberg Traurig, LLP, the Company’s outside counsel,
dated as of the Initial Closing Date, in substantially the form of Exhibit D
attached hereto.

 

(iii)          The Company shall have
delivered to such Buyer a certificate evidencing the formation and good
standing of the Company and each of its Subsidiaries in each such entity’s
jurisdiction of formation issued by the Secretary of State (or comparable
office) of such jurisdiction of formation as of a date within ten (10) days
of the Initial Closing Date.

 

(iv)          The Company shall have
delivered to such Buyer a certificate evidencing the Company’s qualification as
a foreign corporation and good standing issued by the Secretary of State (or
comparable office) of each jurisdiction in which the Company conducts 

 

27

 

business and is required to
so qualify, as of a date within ten (10) days of the Initial Closing Date.

 

(v)           The Company shall have
delivered to such Buyer a certified copy of the Certificate of Incorporation as
certified by the Secretary of State of the State of Delaware within ten (10) days
of the Initial Closing Date.

 

(vi)          The Company shall have
delivered to such Buyer a certificate, executed by the Secretary of the Company
and dated as of the Initial Closing Date, as to (i) the resolutions
consistent with Section 3(b) as adopted by the Company’s board of
directors, (ii) the Certificate of Incorporation and (iii) the
Bylaws, each as in effect at the Initial Closing, in the form attached hereto
as Exhibit E.

 

(vii)         The representations and
warranties of the Company shall be true and correct in all material respects
(except for those representations and warranties that are qualified by
materiality or Material Adverse Effect, which shall be true and correct in all
respects) as of the date when made and as of the Initial Closing Date as though
made at that time (except for representations and warranties that speak as of a
specific date, which shall remain true and correct as of such specified date)
and the Company shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by the
Company at or prior to the Initial Closing Date.  Such Buyer shall have received a certificate,
executed by the Chief Executive Officer of the Company, dated as of the Initial
Closing Date, to the foregoing effect and as to such other matters set forth in
the form attached hereto as Exhibit F.

 

(viii)        The Company’s executive
officers shall have entered into a Lock-Up Agreement in the form attached
hereto as Exhibit G (the “Lock-Up Agreements”).

 

(ix)           The Company shall have
obtained all governmental, regulatory or third party consents and approvals, if
any, necessary for the sale of the Securities.

 

(x)            The Certificate of
Designations in the form attached hereto as Exhibit A shall have
been filed with the Secretary of State of the State of Delaware and shall be in
full force and effect, enforceable against the Company in accordance with its
terms and shall not have been amended.

 

(b)           Additional Closing.  The obligation of each Buyer hereunder to
purchase the Common Shares at the Additional Closing is subject to the
satisfaction, at or before the Additional Closing Date, of each of the
following conditions, provided that these conditions are for each Buyer’s sole
benefit and may be waived by such Buyer at any time in its sole discretion by
providing the Company with prior written notice thereof:

 

(i)            The Company shall have duly
executed and delivered to such Buyer certificates evidencing the number of the
Common Shares being purchased by such Buyer at the Additional Closing pursuant
to this Agreement.

 

28

 

(ii)           Such Buyer shall have
received the opinion of Greenberg Traurig, LLP, the Company’s outside counsel,
dated as of the Additional Closing Date, in substantially the form of Exhibit H
attached hereto.

 

(iii)          The Company shall have
delivered to such Buyer a certificate, executed by the Secretary of the Company
and dated as of the Additional Closing Date, as to (i) the resolutions
consistent with Section 3(b) as adopted by the Company’s board of
directors in a form reasonably acceptable to such Buyer, (ii) the
Certificate of Incorporation and (iii) the Bylaws, each as in effect at
the Additional Closing, in the form attached hereto as Exhibit E.

 

(iv)          (A)  The
representations and warranties of the Company shall be true and correct in all
material respects (except for those representations and warranties that are
qualified by materiality or Material Adverse Effect, which shall remain true
and correct in all respects) as of the date when made and as of the Additional
Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date, which shall remain true and
correct as of such specified date) and; (B) the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by the Transaction Documents to be
performed, satisfied or complied with by the Company at or prior to the
Additional Closing Date; (C) on each day during the period beginning on
the Initial Closing Date and ending on and including the applicable date of
determination (the “Equity Conditions
Measuring Period”), the Company shall have delivered Common Stock
upon conversion of the Preferred Shares and upon exercise of the Warrants to
the Buyers on a timely basis as set forth in Section 2(d)(ii) of the
Certificate of Designations and Section 1(a) of the Warrants,
respectively; and (D) during the Equity Conditions Measuring Period, there
shall not have occurred either (I) the public announcement of a pending,
proposed or intended Fundamental Transaction which has not been abandoned,
terminated or consummated or (II) a Triggering Event (as defined in the
Certificate of Designations) or an event that with the passage of time or
giving of notice would constitute a Triggering Event, and (iii) the
Company otherwise shall have been in compliance with and shall not be in breach
of any material provision, covenant, representation or warranty of any
Transaction Document (clauses (C) and (D), the “Equity
Conditions”).  Such Buyer
shall have received a certificate, executed by the Chief Executive Officer of
the Company, dated as of the Additional Closing Date, to the foregoing effect
and as to such other matters as set forth in the form attached hereto as Exhibit F.

 

(v)           The Company shall have
delivered to such Buyer a letter from the Company’s transfer agent certifying
the number of shares of Common Stock outstanding as of a date within five (5) days
of the Additional Closing Date.

 

(vi)          The Common Stock (A) shall
be designated for quotation or listed on the applicable Eligible Market and (B) shall
not have been suspended, as of the Additional Closing Date, by the SEC or such
Eligible Market from trading on such Eligible Market nor shall suspension by
the SEC or the Eligible Market have been threatened, as of the Additional
Closing Date, either (I) in writing by the SEC or the Eligible Market or (II) by
falling below the minimum maintenance requirements of the Eligible Market.

 

(vii)         The Company shall have
obtained all governmental, regulatory or third party consents and approvals, if
any, necessary for the sale of the Securities.

 

29

 

8.             TERMINATION.

 

In the event that the Initial Closing shall
not have occurred with respect to a Buyer on or before five (5) Business
Days from the date hereof due to the Company’s or such Buyer’s failure to
satisfy the conditions set forth in Sections 6 and 7 above (and a nonbreaching
party’s failure to waive such unsatisfied condition(s)), any such nonbreaching
party shall have the option to terminate this Agreement with respect to such
breaching party at the close of business on such date without liability of any
party to any other party, except as set forth below; provided, however, that if
this Agreement is terminated pursuant to this Section 8, the Company shall
remain obligated to reimburse the non-breaching Buyers for the expenses
described in Section 4(g) above.

 

9.             MISCELLANEOUS.

 

(a)           Governing Law; Jurisdiction; Jury
Trial.  All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by the internal laws of the State of Delaware, without giving
effect to any choice of law or conflict of law provision or rule (whether
of the State of Delaware or any other jurisdictions) that would cause the
application of the laws of any jurisdictions other than the State of
Delaware.  Each party hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting
in the City of New York, Borough of Manhattan, for the adjudication of any
dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is
not personally subject to the jurisdiction of any such court, that such suit,
action or proceeding is brought in an inconvenient forum or that the venue of
such suit, action or proceeding is improper. 
Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by mailing
a copy thereof to such party at the address for such notices to it under this
Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. 
Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.  Nothing contained herein shall be deemed to
limit in any way any right to serve process in any manner permitted by law.  EACH PARTY
HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED HEREBY.

 

(b)           Counterparts.  This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original,
not a facsimile signature.

 

(c)           Headings.  The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the interpretation
of, this Agreement.

 

30

 

(d)                                 Severability.  If any provision of this Agreement is
prohibited by law or otherwise determined to be invalid or unenforceable by a
court of competent jurisdiction, the provision that would otherwise be
prohibited, invalid or unenforceable shall be deemed amended to apply to the
broadest extent that it would be valid and enforceable, and the invalidity or
unenforceability of such provision shall not affect the validity of the
remaining provisions of this Agreement so long as this Agreement as so modified
continues to express, without material change, the original intentions of the
parties as to the subject matter hereof and the prohibited nature, invalidity
or unenforceability of the provision(s) in question does not substantially
impair the respective expectations or reciprocal obligations of the parties or
the practical realization of the benefits that would otherwise be conferred
upon the parties.  The parties will
endeavor in good faith negotiations to replace the prohibited, invalid or
unenforceable provision(s) with a valid provision(s), the effect of which
comes as close as possible to that of the prohibited, invalid or unenforceable
provision(s).

 

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

 

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

 

31

 

If to the Company:

	
   

  
	
  American Defense
  Systems, Inc.

  
	
  230
  Duffy Avenue, Unit C

  
	
  Hicksville,
  NY 11801

  
	
  Telephone:

  	
  (516)
  390-5300

  
	
  Facsimile:

  	
  (516)
  390-5308

  
	
  Attention:

  	
  Chief Financial Officer

  
	
   

  
	
  With a copy (for
  informational purposes only) to:

  
	
   

  
	
  Greenberg Traurig, LLP

  
	
  1750 Tysons Boulevard

  
	
  Suite 1200

  
	
  McLean, Virginia 22102

  
	
  Telephone:

  	
  (703)
  749-1336

  
	
  Facsimile:

  	
  (703)
  749-1301

  
	
  Attention:

  	
  Jeffrey R. Houle

  

 

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

 

with a copy (for
informational purposes only) to:

	
   

  
	
  Schulte Roth &
  Zabel LLP

  
	
  919 Third Avenue

  
	
  New York, New York 10022

  
	
  Telephone:

  	
  (212) 756-2000

  
	
  Facsimile:

  	
  (212) 593-5955

  
	
  Attention:

  	
  Eleazer N.
  Klein, Esq.

  

 

or to such other address
and/or facsimile number and/or to the attention of such other Person as the
recipient party has specified by written notice given to each other party five (5) days
prior to the effectiveness of such change. 
Written confirmation of receipt (A) given by the recipient of such
notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender’s facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by an overnight courier service shall be
rebuttable evidence of personal service, receipt by facsimile or receipt from
an overnight courier service in accordance with clause (i), (ii) or (iii) above,
respectively.

 

(g)                                 Successors and
Assigns.  This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and assigns, including any purchasers of the Preferred Shares or the
Warrants.  The Company shall not assign
this Agreement or any rights or obligations hereunder without the prior written
consent of the holders of at least a majority of the aggregate number of
Registrable Securities issued and issuable hereunder and under the Certificate
of Designations and the Warrants, including by way of a Fundamental Transaction
(unless the Company is in compliance with the applicable provisions governing 

 

32

 

Fundamental Transactions set
forth in the Certificate of Designations and the Warrants).  A Buyer may assign some or all of its rights
hereunder without the consent of the Company, in which event such assignee
shall be deemed to be a Buyer hereunder with respect to such assigned rights.

 

(h)                                 No Third Party
Beneficiaries.  This
Agreement is intended for the benefit of the parties hereto and their
respective permitted successors and assigns, and is not for the benefit of, nor
may any provision hereof be enforced by, any other Person.

 

(i)                                     Survival.  Unless this Agreement is terminated under Section 8,
the representations and warranties of the Company and the Buyers contained in
Sections 2 and 3 and the agreements and covenants set forth in Sections 4, 5
and 9 shall survive each Closing and the delivery and exercise and/or
conversion of the Securities, as applicable. 
Each Buyer shall be responsible only for its own representations,
warranties, agreements and covenants hereunder.

 

(j)                                     Further
Assurances.  Each party
shall do and perform, or cause to be done and performed, all such further acts
and things, and shall execute and deliver all such other agreements,
certificates, instruments and documents, as any other party may reasonably
request in order to carry out the intent and accomplish the purposes of this
Agreement and the consummation of the transactions contemplated hereby.

 

(k)                                  Indemnification.

 

(i)                                     In
consideration of each Buyer’s execution and delivery of the Transaction
Documents and acquiring the Securities thereunder and in addition to all of the
Company’s other obligations under the Transaction Documents, the Company shall
defend, protect, indemnify and hold harmless each Buyer and each other holder
of the Securities and all of their stockholders, partners, members, officers,
directors, employees and direct or indirect investors and any of the foregoing
Persons’ agents or other representatives (including, without limitation, those
retained in connection with the transactions contemplated by this Agreement)
(collectively, the “Indemnitees”)
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorneys’ fees and disbursements (the “Indemnified
Liabilities”), incurred by any Indemnitee as a result of, or arising
out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in the Transaction Documents, (b) any
breach of any material covenant, agreement or obligation of the Company
contained in the Transaction Documents or (c) any cause of action, suit or
claim brought or made against such Indemnitee by a third party (including for
these purposes a derivative action brought on behalf of the Company) and
arising out of or resulting from (i) the execution, delivery, performance
or enforcement of the Transaction Documents or any other certificate,
instrument or document contemplated hereby or thereby, (ii) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, (iii) any
disclosure made by such Buyer pursuant to Section 4(i), or (iv) the
status of such Buyer or holder of the Securities as an investor in the Company
pursuant to the transactions contemplated by the Transaction Documents.  To the extent that the foregoing undertaking
by the Company may be unenforceable for any reason, the Company shall 

 

33

 

make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities that is permissible under applicable law.

 

(ii)                                  Promptly after
receipt by an Indemnitee under this Section 9(k) of notice of the
commencement of any action or proceeding (including any governmental action or
proceeding) involving an Indemnified Liability, such Indemnitee shall, if a
claim for indemnification in respect thereof is to be made against any
indemnifying party under this Section 9(k), deliver to the indemnifying
party a written notice of the commencement thereof, and the indemnifying party
shall have the right to participate in, and, to the extent the indemnifying
party so desires, jointly with any other indemnifying party similarly noticed,
to assume control of the defense thereof with counsel mutually satisfactory to
the indemnifying party and the Indemnitee; provided, however,
that an Indemnitee shall have the right to retain its own counsel with the fees
and expenses of not more than one counsel for such Indemnitee to be paid by the
indemnifying party, if, in the reasonable opinion of the Indemnitee, the
representation by such counsel of the Indemnitee and the indemnifying party
would be inappropriate due to actual or potential differing interests between
such Indemnitee and any other party represented by such counsel in such
proceeding.  Legal counsel referred to in
the immediately preceding sentence shall be selected by the Buyers holding at least
a majority of the Securities issued and issuable hereunder.  The Indemnitee shall cooperate fully with the
indemnifying party in connection with any negotiation or defense of any such
action or Indemnified Liabilities by the indemnifying party and shall furnish
to the indemnifying party all information reasonably available to the
Indemnitee that relates to such action or Indemnified Liabilities.  The indemnifying party shall keep the
Indemnitee fully apprised at all times as to the status of the defense or any
settlement negotiations with respect thereto. 
No indemnifying party shall be liable for any settlement of any action,
claim or proceeding effected without its prior written consent, provided,
however, that the indemnifying party shall not unreasonably withhold,
delay or condition its consent.  No
indemnifying party shall, without the prior written consent of the Indemnitee,
which consent shall not be unreasonably withheld conditioned or delayed,
consent to entry of any judgment or enter into any settlement or other
compromise which (i) does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnitee of a release from all
liability in respect to such Indemnified Liabilities or litigation, (ii) requires
any admission of wrongdoing by such Indemnitee, or (iii) obligates or
requires an Indemnitee to take, or refrain from taking, any action.  Following indemnification as provided for
hereunder, the indemnifying party shall be subrogated to all rights of the
Indemnitee with respect to all third parties, firms or corporations relating to
the matter for which indemnification has been made.  The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnitee under this Section 9(k), except to the extent that the
indemnifying party is prejudiced in its ability to defend such action.

 

(iii)                               The
indemnification required by this Section 9(k) shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnified Liabilities are
incurred.

 

(iv)                              The indemnity
agreements contained herein shall be in addition to  (x) any cause of action or similar right
of the Indemnitee against the indemnifying party or others, and (y) any
liabilities the indemnifying party may be subject to pursuant to the law.

 

34

 

(l)                                     No Strict
Construction.  The
language used in this Agreement will be deemed to be the language chosen by the
parties to express their mutual intent, and no rules of strict
construction will be applied against any party.

 

(m)                               Remedies.  Each Buyer and each holder of the Securities
shall have all rights and remedies set forth in the Transaction Documents and
all rights and remedies which such holders have been granted at any time under
any other agreement or contract and all of the rights which such holders have
under any law.  Any Person having any
rights under any provision of this Agreement shall be entitled to enforce such
rights specifically (without posting a bond or other security), to recover
damages by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. 
Furthermore, the Company recognizes that in the event that it fails to
perform, observe, or discharge any or all of its obligations under the
Transaction Documents, any remedy at law may prove to be inadequate relief to
the Buyers.  The Company therefore agrees
that the Buyers shall be entitled to seek temporary and permanent injunctive
relief in any such case without the necessity of proving actual damages and
without posting a bond or other security.

 

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

 

(o)                                 Payment Set
Aside.  To the extent that the Company
makes a payment or payments to the Buyers hereunder or pursuant to any of the
other Transaction Documents or the Buyers enforce or exercise their rights
hereunder or thereunder, and such payment or payments or the proceeds of such
enforcement or exercise or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside, recovered from, disgorged
by or are required to be refunded, repaid or otherwise restored to the Company,
a trustee, receiver or any other Person under any law (including, without
limitation, any bankruptcy law, foreign, 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.

 

(p)                                 Independent
Nature of Buyers’ Obligations and Rights.  The obligations of each Buyer under any
Transaction Document are several and not joint with the obligations of any
other Buyer, and no Buyer shall be responsible in any way for the performance
of the obligations of any other Buyer under any Transaction Document.  Nothing contained herein or in any other
Transaction Document, and no action taken by any Buyer pursuant hereto or
thereto, shall be deemed to constitute the Buyers as, and the Company acknowledges
that the Buyers do not so constitute, a partnership, an association, a joint
venture or any other kind of entity, or create a presumption that the Buyers
are in any way acting in concert or as a group, and the Company will not assert
any such claim with respect to such obligations or the transactions
contemplated by the Transaction Documents and the Company acknowledges that the
Buyers are not acting in 

 

35

 

concert or as a group with
respect to such obligations or the transactions contemplated by the Transaction
Documents.  The Company acknowledges and
each Buyer confirms that it has independently participated in the negotiation
of the transaction contemplated hereby with the advice of its own counsel and
advisors.  Each Buyer shall be entitled
to independently protect and enforce its rights, including, without limitation,
the rights arising out of this Agreement or out of any other Transaction
Documents, and it shall not be necessary for any other Buyer to be joined as an
additional party in any proceeding for such purpose.

 

[Signature Page Follows]

 

36

 

IN WITNESS WHEREOF, each Buyer and the Company
have caused their respective signature page to this Securities Purchase
Agreement to be duly executed as of the date first written above.

 

 

	
   

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  AMERICAN DEFENSE SYSTEMS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

37

 

IN WITNESS WHEREOF, each Buyer and the Company
have caused their respective signature page to this Securities Purchase
Agreement to be duly executed as of the date first written above.

 

 

	
   

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  WEST COAST OPPORTUNITY FUND, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

38

 

IN WITNESS WHEREOF, each Buyer and the Company
have caused their respective signature page to this Securities Purchase
Agreement to be duly executed as of the date first written above.

 

 

	
   

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  CENTAUR VALUE FUND, LP

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

39

 

IN WITNESS WHEREOF, each Buyer and the Company
have caused their respective signature page to this Securities Purchase
Agreement to be duly executed as of the date first written above.

 

 

	
   

  	
  BUYERS:

  
	
   

  	
   

  
	
   

  	
  UNITED CENTAUR MASTER FUND

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

40EXHIBIT 10.19

 

Form of
Lock-Up Agreement

 

 

March 7, 2008

 

American Defense Systems, Inc.

230 Duffy Avenue, Unit C

Hicksville, NY 11801

 

                                                Re:  American Defense Systems, Inc.— Lock-Up Agreement

 

Dear Sirs:

 

                This Lock-Up Agreement is
being delivered to you in connection with the Securities Purchase Agreement
(the “Purchase Agreement”), dated as of March 7,
2008 by and among American Defense Systems, Inc., a Delaware corporation,
(the “Company”) and the investors party
thereto (the “Buyers”), with respect to the
issuance of (i) convertible preferred stock of the Company designated as Series A
Convertible Preferred Sock (the “Series A Preferred
Stock”), which are convertible into shares of common stock of the
Company, par value $0.001 per share (the “Common
Stock”), (ii) shares (the “Common Shares”)
of Common Stock of the Company and (iii) warrants (the “Warrants”) which are exercisable to purchase shares of
Common Stock.  Capitalized terms used
herein and not otherwise defined herein shall have the respective meanings set
forth in the Purchase Agreement.

 

                In order to induce the Buyers to
enter into the Purchase Agreement, the undersigned agrees that, commencing on the date hereof and ending
on the twelve (12) month anniversary of the Initial Closing Date  (the “Lock-Up Period”), the undersigned will not (i) sell, offer to sell,
contract or agree to sell, hypothecate, pledge, grant any option
to purchase, make any short sale or otherwise dispose of or
agree to dispose of, directly or indirectly, any shares of Common Stock, or
establish or increase a put equivalent position or liquidate or decrease a call
equivalent position within the meaning of Section 16 of the Securities
Exchange Act of 1934, as amended and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder with respect to more
than ten percent (10%) of the total number of shares of Common Stock owned
directly by the undersigned (including holding as a custodian) or with respect
to which the undersigned has beneficial ownership within the rules and
regulations of the Securities and Exchange Commission as of the
Initial Closing Date (collectively, the “Undersigned’s Shares”)
or (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
more than ten percent (10%) of the Undersigned’s Shares, whether any
such transaction is to be settled by delivery of such securities, in cash or
otherwise.  The foregoing sentence shall
not apply to the exercise of options or warrants or the conversion of a
security outstanding on the Initial Closing Date; provided, however, that the
undersigned agrees that the foregoing sentence shall apply to any securities
issued by the Company to the undersigned upon such an exercise or conversion.

 

 

 

 

                The foregoing restriction is
expressly agreed to preclude the undersigned or any affiliate of the
undersigned from engaging in any hedging or other transaction which is designed
to or which reasonably could be expected to lead to or result in a sale or
disposition of the Undersigned’s Shares even if the Undersigned’s Shares would
be disposed of by someone other than the undersigned.  Such prohibited hedging or other transactions
would include, without limitation, any short sale or any purchase, sale or
grant of any right (including, without limitation, any put or call option) with
respect to any of the Undersigned’s Shares or with respect to any security that
includes, relates to, or derives any significant part of its value from the
Undersigned’s Shares.

 

                Notwithstanding the foregoing,
the undersigned may transfer the Undersigned’s Shares (i) as a bona fide gift or gifts, provided that the donee or donees
thereof agree to be bound in writing by the restrictions set forth herein, (ii) to
any trust for the direct or indirect benefit of the undersigned or the
immediate family of the undersigned, provided that the trustee of the trust
agrees to be bound in writing by the restrictions set forth herein, and
provided further that any such transfer shall not involve a disposition for
value or (iii) in transactions relating to shares of Common Stock acquired
by the undersigned in open market transactions after the Listing Date.  For purposes of this Lock-Up Agreement, “immediate
family” shall mean any relationship by blood, marriage or adoption, not more
remote than first cousin.  The
undersigned now has, and, except as contemplated by clauses (i) and (ii) above,
for the duration of this Lock-Up Agreement will have, good and marketable title
to the Undersigned’s Shares, free and clear of all liens, encumbrances and
claims whatsoever.  In addition,
notwithstanding the foregoing, the undersigned may, during the Lock-Up Period,
establish a trading plan pursuant to Rule 10b5-1 under the Securities
Exchange Act of 1934, as amended (and/or modify an existing trading plan),
provided that no sales or other transfers in excess of that otherwise permitted
hereunder occur under such plan during the Lock-Up Period.  The undersigned also agrees and consents to
the entry of stop transfer instructions with the Company’s transfer agent and
registrar against the transfer of the Undersigned’s Shares except in compliance
with the foregoing restrictions.

 

                The undersigned understands and
agrees that this Lock-Up Agreement is irrevocable and shall be binding upon the
undersigned’s heirs, legal representatives, successors, and assigns.

 

                This Lock-Up Agreement may be
executed in two counterparts, each of which shall be deemed an original but
both of which shall be considered one and the same instrument.

 

                This Lock-Up Agreement will be
governed by and construed in accordance with the laws of the State of New York,
without giving effect to any choice of law or conflicting provision or rule (whether
of the State of New York, or any other jurisdiction) that would cause the laws
of any jurisdiction other than the State of New York to be applied.  In furtherance of the foregoing, the internal
laws of the State of New York will control the interpretation and construction of
this Lock-Up Agreement, even if under such jurisdiction’s choice of law or
conflict of law analysis, the substantive law of some other jurisdiction would ordinarily apply.

 

 

 

	
   

  	
   

  	
  Very
  truly yours,

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Exact
  Name of Stockholder

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Authorized
  Signature

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Agreed
  to and Acknowledged:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  AMERICA DEFENSE SYSTEMS, INC.

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
   

  
	
   

  	
  Title:

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00139-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00139-of-00352.parquet"}]]