Document:

Exhibit 10.23

 

AAR CORP.

 

NON-EMPLOYEE DIRECTOR
NON-QUALIFIED STOCK OPTION AGREEMENT

(“Agreement”)

 

1.  Subject to the provisions set
forth herein and the terms and conditions of the AAR CORP. Stock Benefit Plan (“Plan”),
the terms of which are hereby incorporated by reference, and in consideration
of the agreements of «Name» (“Grantee”)
herein provided, AAR CORP., a Delaware corporation (“Company”), hereby grants
to the Grantee an option entitling the Grantee to purchase from the Company
common stock of the Company, par value $1.00 per share (“Common Stock”), in the
number of shares at the purchase price per share, and on the schedule, set
forth below (“Option”).

 

	
  Number of
  Shares

  	
   

  	
   

  	
   

  
	
  Subject
  to Option:

  (subject to adjustment pursuant to the terms of this Agreement.)

  	
   

  	
  3,500

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Option
  Price Per Share:

  (subject to adjustment pursuant to the terms of this Agreement.)

  	
   

  	
  $

  	
  «Price»

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Date
  of Grant:

  	
   

  	
  «Date»

  	
   

  
					

 

Option Vesting Schedule:

 

	
  Number of Shares Becoming

  	
   

  	
  Date First

  	
   

  
	
  Subject to Exercise

  	
   

  	
  Exercisable

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  First 875 shares of Grant

  	
   

  	
  «IncrDate1»

  	
   

  
	
  Second 875 shares of Grant

  	
   

  	
  «IncrDate2»

  	
   

  
	
  Third 875 shares of Grant

  	
   

  	
  «IncrDate3»

  	
   

  
	
  Fourth 875 shares of Grant

  	
   

  	
  «IncrDate4»

  	
   

  

 

Each
of the above option increments shall expire on «Expiry»
(“Expiration Date” of the Option) or upon the earlier expiration of the Option
as provided in this Agreement.

 

 

In the event the Grantee’s membership on
the Board terminates within one year following a Change in Control whether or
not such Change in Control has the prior written approval of a majority of the
Continuing Directors, and notwithstanding any conditions or restrictions
contained in this Agreement, the Option shall become immediately exercisable on
the date of such termination with respect to all shares of Common Stock covered
thereby, whether vested or not, and not previously purchased upon exercise of
the Option and shall remain so exercisable until the Option expires as provided
in paragraph 1 or 3 herein.

 

For purposes of this Agreement, the following terms have the meaning
set forth below:

 

(a)           “Permitted
Assignment” means an assignment in writing approved by the Company, and
otherwise meeting the requirements of the Plan document, of all or any portion
of this award to (i) Grantee’s spouse or lineal descendent(s), (ii) the trustee
of a trust for the primary benefit of Grantee’s spouse or lineal descendent(s),
(iii) a partnership of which the Grantee’s spouse or lineal descendent(s) are
the only partners, or (iv) a tax exempt organization as defined in Section
501(c)(3) of the Internal Revenue Code, for which the Grantee does not receive
any consideration.

 

(b)           “Retirement”
means the voluntary termination of membership on the Board at or after age 65
with not less than five (5) consecutive years of service as a non-employee
director of the Company.

 

2

 

2.             The exercise of the Option is conditioned upon
the acceptance by the Grantee of the terms hereof as evidenced by the Grantee’s
execution of this Agreement and return of an executed copy to the Secretary of
the Company within thirty (30) days from the date of the cover letter from the
Secretary transmitting original copies to the Grantee for execution.

 

3.             (a)           If the Grantee’s service on the Board is
terminated for any reason, other than for Retirement, death or Disability, the
Option of Grantee shall terminate on the earlier to occur of (i) three months
after termination of service on the Board or (ii) the date that the Option
expires in accordance with its terms.

 

(b)           If the Grantee’s service on the Board is
terminated by reason of Retirement, the Option shall remain exercisable by the
retired Grantee until the Option expires by its terms and may be exercised by
the retired Grantee in the same manner and to the same extent as if he had
continued service on the Board during that period; provided, however, that if
the Grantee dies before the Option expires, the Option shall be exercisable
only by the Successor of the deceased Grantee (as defined in the Plan) to the
extent that the deceased Grantee was entitled at the date of the Grantee’s
death.

 

(c)           If (i) the Grantee’s service on the Board is
terminated by reason of death or (ii) the Grantee dies within three months
after the termination of his service on the Board, the Option shall expire on
the earlier to occur of one year after Grantee’s death or the Expiration Date
of the Option; provided, however, that during such period, the Option shall be
exercisable only by the Successor of the deceased Grantee to

 

3

 

the
extent, if any, that the deceased Grantee was entitled at the date of the
Grantee’s death.

 

(d)           If the Grantee’s service on the Board is
terminated by reason of Disability, the Option shall expire on the earlier to
occur of one year after termination of service on the Board or the date the
Option expires in accordance with its terms, and during said period the Option
may be exercised by the disabled Grantee with respect to the same number of
shares, in the same manner and to the same extent as if the Grantee had
continued service on the Board during such period.

 

(e)           If at any time prior to expiration of this
Option, the Grantee, without the Company’s express written consent, directly or
indirectly, alone or as a member of a partnership, group or joint stock venture
or as an employee, officer, director, or stockholder of any corporation, or in
any capacity engages in any activity which is competitive with any of the
businesses conducted by the Company or its Affiliated Companies from time to
time or at any time during the Grantee’s term of employment, the Grantee shall
forfeit and return all Award Shares not previously released from the
restrictions of Section 1 hereof.

 

4.             Written notice of an election to exercise any
portion of the Option, specifying the portion thereof being exercised and the
exercise date, shall be given by the Grantee, or the Grantee’s personal
representative in the event of the Grantee’s death or disability necessitating
a Court approved personal representative, by delivering such notice to the
Secretary of the Company, accompanying such notice with (i) payment in full of
the purchase price of any shares to be purchased, which may be made in cash, or
in

 

4

 

the
form of a certified check or a cashier’s check issued by a federally insured
bank or federally insured savings and loan association, in all cases made
payable to AAR CORP., and as set forth in the Plan, or by surrendering a number
of shares of Common Stock of the Company with a Fair Market Value (as defined
in the Plan) on the date of exercise equal to the purchase price, or by
directing the Company to withhold such number of shares otherwise issuable upon
exercise of such Option having an aggregate Fair Market Value on the date of
exercise equal to the purchase price, or by any combination of the above, and
(ii) payment of an amount sufficient to satisfy any applicable withholding
requirements as provided for in Section 13 below.  Any exercise of the Option shall be effective
as of the later of the dates specified in such notice and the date the notice
and accompanying payment are actually received by the Secretary of the Company.

 

5.             Any exercise of an Option shall be subject to
action by the Board taken at any time in its sole discretion (i) to effect,
amend or maintain any necessary registration of the Plan or the shares of
Common Stock issuable upon exercise of the Option under the Securities Act of
1933, as amended, or the securities laws of any applicable jurisdiction, (ii)
to permit any action to be taken in order to (A) list such shares on a stock
exchange if the shares are then listed on such exchange or (B) comply with
restrictions or regulations incident to the maintenance of a public market for
its shares of Common Stock, including any rules or regulations of any stock
exchange on which such shares are listed, or (iii) to determine that such
shares and the Plan are exempt from such registration or that no action of the
kind referred to in (ii)(B) above needs to be taken; and the Company shall not
be obligated by virtue of any terms and conditions of the Option, or

 

5

 

any
provision of this Agreement or the Plan, to recognize an exercise of the Option
or to sell or issue shares of Common Stock in violation of the Securities Act
of 1933 or the law of any government having jurisdiction thereof.  Any such postponement shall not extend the
Expiration Date of the Option, and neither the Company nor its directors or
officers shall have any obligation or liability to the Grantee or to any other
person with respect to any shares as to which the Option shall lapse because of
such postponement.  If deemed necessary
by the Committee, the Grantee may be required to represent at the time of each
exercise of the Option that the shares purchased are being acquired for
investment and not with a view to distribution; and the Company may place a
legend on the related stock certificate to indicate that the stock may not be
sold or otherwise disposed of except in accordance with the Securities Act of
1933, as amended, and the rules and regulations promulgated thereunder,
including, but not limited to Rule 144.

 

6.             Notwithstanding any provision of this Agreement
to the contrary, the Company shall not be obliged to issue or transfer any of
its Common Stock to Grantee upon exercise of the Option, if the Committee or
the Board of Directors of the Company determines that the issuance or transfer
of such Common Stock, or payment of such amount of cash, would be in violation
of any covenant in any of the Company’s loan agreements or other contracts.

 

7.             Any increase or decrease in the number of
outstanding shares of Common Stock of the Company occurring through stock splits,
stock dividends, stock consolidations, spin offs, other distributions of assets
to shareholders or assumption or conversion of outstanding Options due to an
acquisition after the Date of Grant of the

 

6

 

Option
shall be reflected proportionately in the number of shares of Common Stock
subject to the Option; and a proportionate reduction or increase, as
applicable, shall be made in the Option Price Per Share hereunder.  Any fractional shares resulting from such
adjustment shall be eliminated.  If
changes in capitalization other than those considered above shall occur, the
Board of Directors of the Company shall make such adjustment in the number or
class of shares purchasable upon exercise of the Option and in the Option Price
Per Share as the Board in its discretion may consider appropriate, and all such
adjustments shall be conclusive upon all persons.

 

8.             The Option may be exercised only by the Grantee
during the Grantee’s lifetime and may not be transferred other than by a
Permitted Assignment, will or the applicable laws of descent or
distribution.  The Option shall not
otherwise be transferred, assigned, pledged or hypothecated for any purpose
whatsoever and is not subject, in whole or in part, to execution, attachment,
or similar process.  Any attempted
assignment, transfer, pledge or hypothecation or other disposition of the
Option, other than in accordance with the terms set forth herein, shall be void
and of no effect.

 

9.             Neither the Grantee nor any other person entitled
to exercise the Option under the terms hereof shall be, or have any of the
rights or privileges of, a stockholder of the Company in respect of any of the
shares of Common Stock issuable on exercise of the Option, unless and until such
shares shall have been actually issued.

 

10.           In the event the Option shall be exercised in
part, the Company may require that this Agreement be delivered by the Grantee
to the Company for the purpose of making appropriate notation thereon, or of
otherwise reflecting, in such manner as the

 

7

 

Company
shall determine, such partial exercise. 
In the event the Option shall be exercised in whole, this Agreement
shall be surrendered to the Company for cancellation. In the event that a
change in the number or designation of the Common Stock shall be made, the
Company may require the Grantee to surrender this Agreement to the Company for
the purpose of making appropriate notation thereon, or of otherwise reflecting,
such change in the number or designation of the Common Stock.

 

11.           When the Option expires as herein provided, such
expiration shall occur at the Company’s close of business on the date of
expiration.

 

12.           Nothing in the Option shall constitute or be evidence
of any agreement or understanding, express or implied, that the Company shall
retain a director for any period of time, or at any particular rate of
compensation.  The execution of this
agreement by the Grantee conclusively evidences the Grantee’s intent to
continue to serve as a director of the Company for the remainder of the Grantee’s
term during which the Option was granted.

 

13.           Upon any exercise of the Option, the Grantee
shall remit to the Company an amount necessary to satisfy applicable withholding
requirements including those arising under state and federal income tax
laws.  If the Grantee does not remit such
amount, the Company may withhold all or a portion of any compensation then or
in the future owed to the Grantee as necessary to satisfy such requirements.

 

The
Grantee may satisfy the income tax withholding obligation in connection with
such Option in whole or in part by (i) directing the Company to withhold a
portion of the shares otherwise distributable to the Grantee or (ii) transferring
to the Company shares of

 

8

 

Common Stock of the Company
previously acquired by the Grantee having a Fair Market Value (as defined in
the Plan) on the date such shares are transferred to the Company equal to the
amount of such withholding or lesser portion thereof as may be desired by the
Grantee.  A Grantee’s election pursuant
to the preceding sentence must be made on or prior to the date as of which
income is realized by the Grantee in connection with such Option and must be
irrevocable.  In lieu of a separate
election on each Taxable Date (as defined in the Plan), the Grantee may file a
blanket election with the Committee which shall govern all future Taxable Dates
until revoked by the Grantee.

 

14.           The Option shall be exercised in accordance with
such administrative regulations as the Committee shall from time to time adopt.

 

15.           The Option, and this Agreement, shall be
construed, administered and governed in all respects under and by the laws of
the State of Illinois.

 

16.           This Agreement has been examined by the parties
hereto, and accordingly the rule of construction that ambiguities be construed
against a party which causes a document to be drafted shall have no application
in the construction or interpretation hereof. 
If any part of this Agreement is held invalid for any reason, the
remainder hereof shall nevertheless remain in full force and effect.

 

17.           This Agreement constitutes the entire agreement
between the parties concerning the subject matter hereof and any prior
understanding or representation of any kind antedating this Agreement
concerning such subject matter shall not be binding upon either party except to
the extent incorporated herein.  No
consent, waiver, modification or amendment hereof, or additional obligation
assumed by

 

9

 

either
party in connection herewith, shall be binding unless evidenced by a writing
signed by both parties and referring specifically hereto.  No consent, waiver, modification or amendment
with respect hereto shall be construed as applicable to any past or future
events other than the one in respect of which it was specifically made.

 

18.           This Agreement shall be construed consistent with
the provisions of the Plan and in the event of any conflict between the terms
of this Agreement and the terms of the Plan, the terms of the Plan shall
control.

 

19.           Capitalized terms used herein and not defined
herein will have the meaning set forth in the Plan.

 

IN WITNESS WHEREOF, this Agreement has been executed for the Company by
its duly authorized officer on the 23rd day of August, 2004.

 

	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  AAR
  CORP.

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:

  	
  Howard
  A. Pulsifer

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:

  	
  Vice President and Secretary

  
										

 

The
undersigned hereby accepts the foregoing Option and the terms and conditions
thereof on this             
day of                               ,
2004.

 

 

	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Director

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:

  	
  «Name»

  	
   

  	
   

  
										

 

10Exhibit 10.1

 

SECURITIES PURCHASE AGREEMENT

 

This
Securities Purchase Agreement (this “Agreement”) is dated as of December
30, 2005 among Crdentia Corp., a Delaware corporation (the “Company”),
and each purchaser identified on the signature pages hereto (each, including
its successors and assigns, a “Purchaser” and collectively the “Purchasers”).  Notwithstanding any references herein or in
any other Transaction Document to more than one Purchaser, MedCap Partners, L.P. (“MedCap”) is the only
Purchaser hereunder.

 

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

 

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

 

ARTICLE I.

DEFINITIONS

 

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

 

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

 

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

 

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

 

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

 

 “Commission” means the
Securities and Exchange Commission.

 

 

“Common Stock” means the common stock of the Company, par value
$.0001 per share, and any other class of securities into which such securities
may hereafter have been reclassified or changed into.

 

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

 

“Company Counsel” means Morrison & Foerster LLP.

 

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

 

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

 

“Evaluation Date” shall have the meaning ascribed to such term
in Section 3.1(r).

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

2

 

“Per Share Purchase Price” equals $0.60, subject to adjustment
for reverse and forward stock splits, stock dividends, stock combinations and
other similar transactions of the Common Stock that occur after the date of
this Agreement.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

“Short Sales” shall
include all “short sales” as defined in Rule 200 of Regulation SHO under the
Exchange Act (but shall not be deemed to include the location and/or
reservation of borrowable shares of Common Stock) and all types of direct and
indirect stock pledges, forward sale contracts, options, puts, calls, swaps and
similar arrangements (including on a total return basis), and sales and other
transactions through non-US broker dealers or foreign regulated brokers. 

 

 “Subscription Amount”
means, as to each Purchaser, the aggregate amount to be paid for Shares
purchased hereunder as specified below such Purchaser’s name on the signature
page of this Agreement and next to the heading “Subscription Amount”, in 

 

3

 

United States
Dollars and through the cancellation of indebtedness of the Company owed to
such Purchaser.

 

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

 

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

 

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

 

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

 

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

 

ARTICLE II.

PURCHASE AND SALE

 

2.1                                 Closing.  On the Closing Date, upon the terms and
subject to the conditions set forth herein, concurrent with the execution and
delivery of this Agreement by the parties hereto, the Company agrees to sell,
and each Purchaser agrees to purchase in the aggregate, severally and not
jointly, up to $2,000,000 of the Shares. 
Each Purchaser shall deliver to the Company via the surrender of evidence
of indebtedness of the Company for cancellation equal to their Subscription
Amount and the Company shall deliver to each Purchaser their respective Shares as
determined pursuant to Section 2.2(a) and the other items set forth in Section
2.2 issuable at the Closing.  Upon
satisfaction of the conditions set forth in Sections 2.2 and 2.3, the Closing
shall

 

4

 

occur at the
offices of FW, or such other location as the parties shall mutually agree.

 

2.2                                 Deliveries.

 

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

 

(i)                                     this
Agreement duly executed by the Company;

 

(ii)                                  a
copy of the irrevocable instructions to the Company’s transfer agent
instructing the transfer agent to deliver, on an expedited basis, a certificate
evidencing a number of Shares equal to such Purchaser’s Subscription Amount
divided by the Per Share Purchase Price, registered in the name of such
Purchaser; and

 

(iii)                               the
Registration Rights Agreement duly executed by the Company.

 

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

 

(i)                                     this
Agreement duly executed by such Purchaser;

 

(ii)                                  the surrender for cancellation of those certain
promissory notes of the Company issued to MedCap on November 18, 2005 in the
aggregate principal amount of $2,000,000 as payment for MedCap’s Subscription
Amount hereunder; and

 

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

 

2.3                                 Closing Conditions.

 

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

 

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

 

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

 

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

 

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

 

5

 

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

 

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

 

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

 

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

 

(v)                                 the sale of up to $6,000,000 of debentures and
warrants of the Company shall have been consummated contemporaneous with the
Closing hereunder on terms and conditions reasonably satisfactory to the
Purchasers; and

 

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

 

ARTICLE III.

REPRESENTATIONS AND WARRANTIES

 

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

 

(a)                                  Subsidiaries.  All of the direct and indirect subsidiaries
of the Company are set forth on Schedule 3.1(a).  The Company owns, directly or indirectly, all
of the capital stock or other equity interests of each Subsidiary free and
clear of any Liens, and all the issued and outstanding shares of capital stock
of each Subsidiary are validly issued and are fully paid, non-assessable and
free of preemptive and similar rights to subscribe 

 

6

 

for or purchase securities.  If the Company has no subsidiaries, then
references in the Transaction Documents to the Subsidiaries will be
disregarded.

 

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

 

(c)                                  Authorization;
Enforcement.  The Company has the
requisite corporate power and authority to enter into and to consummate the
transactions contemplated by each of the Transaction Documents and otherwise to
carry out its obligations hereunder and thereunder.  The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated thereby have been duly authorized by all necessary
action on the part of the Company and no further action is required by the
Company, its board of directors or its stockholders in connection therewith
other than in connection with the Required Approvals.  Each Transaction Document has been (or upon
delivery will have been) duly executed by the Company and, when delivered in
accordance with the terms hereof and thereof, will constitute the valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors’ rights generally and (ii) as limited by laws relating
to the availability of specific performance, injunctive relief or other
equitable remedies.

 

(d)                                 No
Conflicts.  The execution, delivery
and performance of the Transaction Documents by the Company and the
consummation by the Company of the other transactions contemplated hereby and thereby
do not and will not: (i) conflict with or violate any provision of the Company’s
or any Subsidiary’s certificate or articles of incorporation, bylaws or other
organizational or charter documents, or (ii) conflict with, or constitute a
default (or an event that with notice or lapse of time or both would become 

 

7

 

a default)
under, result in the creation of any Lien upon any of the properties or assets
of the Company or any Subsidiary, or give to others any rights of termination,
amendment, acceleration or cancellation (with or without notice, lapse of time
or both) of, any agreement, credit facility, debt or other instrument
(evidencing a Company or Subsidiary debt or otherwise) or other understanding
to which the Company or any Subsidiary is a party or by which any property or
asset of the Company or any Subsidiary is bound or affected, or (iii) subject
to the Required Approvals, conflict with or result in a violation of any law,
rule, regulation, order, judgment, injunction, decree or other restriction of
any court or governmental authority to which the Company or a Subsidiary is
subject (including federal and state securities laws and regulations), or by
which any property or asset of the Company or a Subsidiary is bound or
affected; except in the case of each of clauses (ii) and (iii), such as could
not have or reasonably be expected to result in a Material Adverse Effect.

 

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

 

(f)                                    Issuance
of the Shares.  The Shares are duly
authorized and, when issued and paid for in accordance with the applicable
Transaction Documents, will be duly and validly issued, fully paid and
nonassessable, free and clear of all Liens imposed by the Company other than
restrictions on transfer provided for in the Transaction Documents.

 

(g)                                 Capitalization.  The capitalization of the Company is as set
forth on Schedule 3.1(g).  The
Company has not issued any capital stock since its most recently filed periodic report under the Exchange Act, other
than pursuant to the exercise of employee stock options under the Company’s
stock option plans, the issuance of shares of Common Stock to employees
pursuant to the Company’s employee stock purchase plan and pursuant to the
conversion or exercise of outstanding Common Stock Equivalents.  No Person has any right of first refusal,
preemptive right, right of participation, or any similar right to participate
in the transactions contemplated by the Transaction Documents.  Except as a result of the purchase and sale
of the Securities, there are no outstanding options, warrants, script rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities, rights or obligations convertible into or exercisable or exchangeable
for, or giving any Person any right to subscribe for or acquire, any shares of
Common Stock, or contracts, commitments, understandings or arrangements by
which the Company or any Subsidiary is or may become bound to issue additional
shares of Common Stock or Common Stock 

 

8

 

Equivalents.
The issuance and sale of the Shares will not obligate the Company to issue
shares of Common Stock or other securities to any Person (other than the
Purchasers) and will not result in a right of any holder of Company securities
to adjust the exercise, conversion, exchange or reset price under such
securities. All of the outstanding shares of capital stock of the Company are
validly issued, fully paid and nonassessable, have been issued in compliance
with all federal and state securities laws, and none of such outstanding shares
was issued in violation of any preemptive rights or similar rights to subscribe
for or purchase securities.  No further approval
or authorization of any stockholder, the Board of Directors of the Company or
others is required for the issuance and sale of the Shares.  There are no stockholders agreements, voting
agreements or other similar agreements with respect to the Company’s capital
stock to which the Company is a party or, to the knowledge of the Company,
between or among any of the Company’s stockholders.

 

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

 

(i)                                     Material
Changes.  Since the date of the
latest audited financial statements included within the SEC Reports, except as
specifically disclosed in the SEC Reports, (i) there has been no event,
occurrence or development that has had or that could reasonably be expected to
result in a Material Adverse Effect, (ii) the Company has not incurred any
liabilities (contingent or otherwise) other than (A) trade payables and accrued
expenses incurred in the ordinary course of business consistent with past
practice and (B) liabilities 

 

9

 

not required
to be reflected in the Company’s financial statements pursuant to GAAP or
required to be disclosed in filings made with the Commission, (iii) the Company
has not altered its method of accounting, (iv) the Company has not declared or
made any dividend or distribution of cash or other property to its stockholders
or purchased, redeemed or made any agreements to purchase or redeem any shares
of its capital stock and (v) the Company has not issued any equity securities
to any officer, director or Affiliate, except pursuant to existing Company
stock option plans. The Company does not have pending before the Commission any
request for confidential treatment of information.  Except for the issuance of the Shares contemplated
by this Agreement or as set forth on Schedule 3.1(i), no event,
liability or development has occurred or exists with respect to the Company or
its Subsidiaries or their respective business, properties, operations or
financial condition, that would be required to be disclosed by the Company
under applicable securities laws at the time this representation is made that
has not been publicly disclosed 1 Trading Day prior to the date that this
representation is made.

 

(j)                                     Litigation.  There is no action, suit, inquiry, notice of
violation, proceeding or investigation pending or, to the knowledge of the
Company, threatened against or affecting the Company, any Subsidiary or any of
their respective properties before or by any court, arbitrator, governmental or
administrative agency or regulatory authority (federal, state, county, local or
foreign) (collectively, an “Action”) which (i) adversely affects or
challenges the legality, validity or enforceability of any of the Transaction
Documents or (ii) could, if there were an unfavorable decision, have or
reasonably be expected to result in a Material Adverse Effect.  Neither the Company nor any Subsidiary, nor
any director or officer thereof, is or has been the subject of any Action
involving a claim of violation of or liability under federal or state
securities laws or a claim of breach of fiduciary duty.  There has not been, and to the knowledge of
the Company, there is not pending or contemplated, any investigation by the
Commission involving the Company or any current or former director or officer
of the Company.  The Commission has not
issued any stop order or other order suspending the effectiveness of any
registration statement filed by the Company or any Subsidiary under the
Exchange Act or the Securities Act.  None
of the Company’s or its Subsidiaries’ employees is a member of a union that
relates to such employee’s relationship with the Company, and neither the
Company or any of its Subsidiaries is a party to a collective bargaining
agreement, and the Company and its Subsidiaries believe that their
relationships with their employees are good. 
No executive officer, to the knowledge of the Company, is, or is now
expected to be, in violation of any material term of any employment contract,
confidentiality, disclosure or proprietary information agreement or
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.  The Company and its Subsidiaries are in
compliance with all U.S. federal, state, local and foreign laws and regulations
relating to employment and employment practices, terms and conditions of
employment and wages and hours, except where the failure to be in compliance
could not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.

 

10

 

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

 

(l)                                     Compliance.  Neither the Company nor any Subsidiary (i) is
in default under or in violation of (and no event has occurred that has not
been waived that, with notice or lapse of time or both, would result in a
default by the Company or any Subsidiary under), nor has the Company or any
Subsidiary received notice of a claim that it is in default under or that it is
in violation of, any indenture, loan or credit agreement or any other agreement
or instrument to which it is a party or by which it or any of its properties is
bound (whether or not such default or violation has been waived), (ii) is in
violation of any order of any court, arbitrator or governmental body, or (iii)
is or has been in violation of any statute, rule or regulation of any
governmental authority, including without limitation all foreign, federal, state
and local laws applicable to its business and all such laws that affect the
environment, except in each case as could not have a Material Adverse Effect.

 

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

 

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

 

(o)                                 Patents
and Trademarks.  The Company and the
Subsidiaries have, or have rights to use, all patents, patent applications,
trademarks, trademark applications, service marks, trade names, trade secrets,
inventions, copyrights, licenses and other intellectual property rights similar
rights necessary or material for use in connection with their respective
businesses as described in the SEC Reports and which the failure to so have
could have a Material Adverse Effect (collectively, the “Intellectual
Property Rights”).  Neither the
Company nor any Subsidiary has received a notice (written or otherwise) that
the Intellectual Property Rights used by the Company or any Subsidiary violates
or infringes upon the rights of any Person. To the knowledge of the Company,
all such 

 

11

 

Intellectual
Property Rights are enforceable and there is no existing infringement by
another Person of any of the Intellectual Property Rights of others.  The Company and its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of all of their intellectual properties, except where failure to do so could
not, individually or in the aggregate, reasonably be expect to have a Material
Adverse Effect.

 

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

 

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

 

(r)                                    Sarbanes-Oxley;
Internal Accounting Controls.  The
Company is in material compliance with all provisions of the Sarbanes-Oxley Act
of 2002 which are applicable to it as of the Closing Date.  The Company
and the Subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed
in accordance with management’s general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management’s general or
specific authorization, and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences. The Company has established
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) for the Company and designed such disclosure controls and
procedures to ensure that material information relating to the Company,
including its Subsidiaries, is made known to the certifying officers by others 

 

12

 

within those entities, particularly during the period in which the
Company’s most recently filed periodic report under the Exchange Act, as the
case may be, is being prepared.  The
Company’s certifying officers have evaluated the effectiveness of the Company’s
controls and procedures as of the date prior to the filing date of the most recently
filed periodic report under the Exchange Act (such date, the “Evaluation
Date”).  The Company presented in its
most recently filed periodic report under the Exchange Act the conclusions of
the certifying officers about the effectiveness of the disclosure controls and
procedures based on their evaluations as of the Evaluation Date.  Since the Evaluation Date, there have been no
significant changes in the Company’s internal controls (as such term is defined
in Item 307(b) of Regulation S-K under the Exchange Act) or, to the knowledge
of the Company, in other factors that could significantly affect the Company’s
internal controls.

 

(s)                                  Certain
Fees.  Other than fees or commissions
payable to Dawson James Securities, no brokerage or finder’s fees or commissions
are or will be payable by the Company to any broker, financial advisor or
consultant, finder, placement agent, investment banker, bank or other Person
with respect to the transactions contemplated by the Transaction Documents.  The Purchasers shall have no obligation with
respect to any fees or with respect to any claims made by or on behalf of other
Persons for fees of a type contemplated in this Section that may be due in
connection with the transactions contemplated by the Transaction Documents.

 

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

 

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

 

(v)                                 Registration
Rights.  Except as set forth on
Schedule 3.1(v), other than each of the Purchasers, no Person has any right to
cause the Company to effect the registration under the Securities Act of any
securities of the Company.

 

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

 

13

 

maintenance
requirements of such Trading Market. The Company is, and has no reason to
believe that it will not in the foreseeable future continue to be, in
compliance with all such listing and maintenance requirements.

 

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

 

(y)                                 Disclosure.  The Company confirms that neither it nor any
other Person acting on its behalf has provided any of the Purchasers or their
agents or counsel with any information that constitutes or might constitute
material, nonpublic information.  The
Company understands and confirms that the Purchasers will rely on the foregoing
representations and covenants in effecting transactions in securities of the
Company.  All disclosure provided to the
Purchasers regarding the Company, its business and the transactions
contemplated hereby, including the Disclosure Schedules to this Agreement,
furnished by or on behalf of the Company with respect to the representations
and warranties made herein are true and correct with respect to such
representations and warranties and do not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading. The Company acknowledges and agrees that no Purchaser
makes or has made any representations or warranties with respect to the
transactions contemplated hereby other than those specifically set forth in
Section 3.2 hereof.

 

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

 

(aa)                            Solvency.  Based on the financial condition of the
Company as of the Closing Date after giving effect to the receipt by the
Company of the proceeds from the sale of the Shares hereunder, (i) the Company’s
fair saleable value of its assets exceeds the amount that will be required to
be paid on or in respect of the Company’s existing debts and other liabilities
(including known contingent liabilities) as they mature; (ii) the Company’s
assets do not constitute unreasonably small capital to carry on its business for

 

14

 

the current fiscal year as now conducted and
as proposed to be conducted including its capital needs taking into account the
particular capital requirements of the business conducted by the Company, and
projected capital requirements and capital availability thereof; and (iii) the
current cash flow of the Company, together with the proceeds the Company would
receive, were it to liquidate all of its assets, after taking into account all
anticipated uses of the cash, would be sufficient to pay all amounts on or in
respect of its debt when such amounts are required to be paid.  The Company does not intend to incur debts
beyond its ability to pay such debts as they mature (taking into account the
timing and amounts of cash to be payable on or in respect of its debt).  The Company has no knowledge of any facts or
circumstances which lead it to believe that it will file for reorganization or
liquidation under the bankruptcy or reorganization laws of any jurisdiction
within one year from the Closing Date. 
The SEC Reports set forth as of the dates thereof all outstanding
secured and unsecured Indebtedness of the Company or any Subsidiary, or for
which the Company or any Subsidiary has commitments.  For the purposes of this Agreement, “Indebtedness”
shall mean (a) any liabilities for borrowed money or amounts owed in excess of
$50,000 (other than trade accounts payable incurred in the ordinary course of
business), (b) all guaranties, endorsements and other contingent obligations in
respect of Indebtedness of others, whether or not the same are or should be
reflected in the Company’s balance sheet (or the notes thereto), except
guaranties by endorsement of negotiable instruments for deposit or collection
or similar transactions in the ordinary course of business; and (c) the present
value of any lease payments in excess of $50,000 due under leases required to
be capitalized in accordance with GAAP. 
Neither the Company nor any Subsidiary is in default with respect to any
Indebtedness.

 

(bb)                          Form
SB-2 Eligibility.                                 The
Company is eligible to register the resale of the Shares for resale by the
Purchaser on Form SB-2 promulgated under the Securities Act.

 

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

 

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

 

(ee)                            Foreign
Corrupt Practices.  Neither the
Company, nor to the knowledge of the Company, any agent or other person acting
on behalf of the Company, has (i) directly or indirectly, used any funds for
unlawful contributions, gifts, entertainment or other unlawful expenses related
to foreign or domestic political activity, (ii) made any unlawful payment to
foreign or domestic government officials or employees or to any foreign or 

 

15

 

domestic
political parties or campaigns from corporate funds, (iii) failed to disclose
fully any contribution made by the Company (or made by any person acting on its
behalf of which the Company is aware) which is in violation of law, or (iv)
violated in any material respect any provision of the Foreign Corrupt Practices
Act of 1977, as amended.

 

(ff)                                Accountants.  The Company’s accountants are set forth on Schedule
3.1(ff) of the Disclosure Schedule. 
To the knowledge of the Company, such accountants, who the Company
expects will express their opinion with respect to the financial statements to
be included in the Company’s Annual Report on Form 10-KSB for the year ending
December 31, 2005 are a registered public accounting firm as required by the
Securities Act.

 

(gg)                          [RESERVED].

 

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

 

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

 

(jj)                                  Acknowledgement
Regarding Purchasers’ Trading Activity. 
Anything in this Agreement or elsewhere herein to the contrary
notwithstanding (except for Section 4.14 and Section 3.2(f) hereof), it is
understood and agreed by the Company (i) that none of the Purchasers have been
asked to agree, nor has any Purchaser agreed, to desist from purchasing or
selling, long and/or short, securities of the Company, or “derivative”
securities based on securities issued by the Company or to hold the Shares for
any specified term; (ii) that past or future open market or other transactions
by any Purchaser, including Short Sales, and specifically including, without
limitation, Short Sales or “derivative” transactions, before or after the
closing of this or future private placement transactions, may negatively impact
the market price of the Company’s publicly-traded securities; (iii) that any
Purchaser, and counter parties in “derivative” transactions to which any such
Purchaser is a party, directly or indirectly, presently may have a “short”
position in the Common Stock, and (iv) that each Purchaser shall not be deemed
to have 

 

16

 

any
affiliation with or control over any arm’s length counter-party in any
“derivative” transaction.  The Company
further understands and acknowledges that (a) one or more Purchasers may engage
in hedging activities at various times during the period that the Shares are
outstanding and (b) such hedging activities (if any) could reduce the value of
the existing stockholders’ equity interests in the Company at and after the
time that the hedging activities are being conducted.  The Company acknowledges that such
aforementioned hedging activities do not constitute a breach of any of the
Transaction Documents.

 

(kk)                            Manipulation
of Price.  The Company has not, and to its knowledge no one acting on
its behalf has, (i) taken, directly or indirectly, any action designed to cause
or to result in the stabilization or manipulation of the price of any security
of the Company to facilitate the sale or resale of any of the Securities, (ii)
sold, bid for, purchased, or, paid any compensation for soliciting purchases
of, any of the Shares (other than for the placement agent’s placement of the
Securities), or (iii) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company.

 

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

 

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

 

(b)                                 Own Account.  Such Purchaser understands that the Shares are
“restricted securities” and have not been registered under the Securities Act
or any applicable state securities law and is acquiring the Shares as principal
for its own account and not with a view to or for distributing or reselling
such Shares or any part thereof in violation of the Securities Act or any applicable state securities law,
has no present intention of distributing any of such Shares in violation of the
Securities Act or any applicable state
securities law and has no arrangement or understanding with any other
persons regarding 

 

17

 

the distribution of such Shares (this
representation and warranty not limiting such Purchaser’s right to sell the
Shares pursuant to the Registration Statement or otherwise in compliance with
applicable federal and state securities laws) in violation of the Securities
Act or any applicable state securities law.  Such Purchaser is acquiring the Shares hereunder
in the ordinary course of its business. Such Purchaser does not have any
agreement or understanding, directly or indirectly, with any Person to
distribute any of the Shares.

 

(c)                                  Purchaser
Status.  At the time such Purchaser
was offered the Shares, it was, and at the date hereof it is, either: (i) an “accredited
investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under
the Securities Act or (ii) a “qualified institutional buyer” as defined in Rule
144A(a) under the Securities Act.  Such
Purchaser is not required to be registered as a broker-dealer under Section 15
of the Exchange Act.

 

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

 

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

 

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

 

18

 

The Company
acknowledges and agrees that each Purchaser does not make or has not made any
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 3.2.

 

ARTICLE IV.

OTHER AGREEMENTS OF THE PARTIES

 

4.1                                 Transfer
Restrictions.

 

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

 

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

 

[NEITHER] THESE SECURITIES
[NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [EXERCISABLE]
[CONVERTIBLE]] HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY.  THESE SECURITIES AND THE
SECURITIES ISSUABLE UPON [EXERCISE] [CONVERSION] OF THESE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY
SUCH SECURITIES.

 

The Company acknowledges and
agrees that a Purchaser may from time to time pledge pursuant to a bona fide
margin agreement with a registered broker-dealer or grant a security interest
in some or all of the Shares to a financial institution that is an “accredited
investor” as defined in Rule 501(a) under the Securities Act and who agrees 

 

19

 

to
be bound by the provisions of this Agreement and the Registration Rights
Agreement and, if required under the terms of such arrangement, such Purchaser
may transfer pledged or secured Shares to the pledgees or secured parties.  Such a pledge or transfer would not be
subject to approval of the Company and no legal opinion of legal counsel of the
pledgee, secured party or pledgor shall be required in connection
therewith.  Further, no notice shall be
required of such pledge.  At the
appropriate Purchaser’s expense, the Company will execute and deliver such
reasonable documentation as a pledgee or secured party of Shares may reasonably
request in connection with a pledge or transfer of the Securities, including,
if the Shares are subject to registration pursuant to the Registration Rights
Agreement, the preparation and filing of any required prospectus supplement
under Rule 424(b)(3) under the Securities Act or other applicable provision of
the Securities Act to appropriately amend the list of Selling Stockholders
thereunder.

 

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

 

(d)                                 In
addition to such Purchaser’s other available remedies, the Company shall pay to
a Purchaser, in cash, as partial liquidated damages and not as a penalty, for
each $1,000 of Shares (based on the VWAP of the Common Stock on the date such
Shares are submitted to the Company’s transfer agent) delivered for removal of
the restrictive legend and subject to Section 4.1(c), $10 per Trading Day
(increasing to $20 per Trading Day 5 Trading Days after such damages have begun
to accrue) for each Trading Day after the Legend Removal Date until such
certificate is delivered without a legend. 
Nothing herein shall limit such Purchaser’s right to pursue actual
damages for the Company’s failure to deliver certificates representing any
Shares as required by the Transaction Documents, and such Purchaser shall have
the right to pursue all remedies 

 

20

 

available to
it at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief.

 

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

 

(f)                                    Until
the one year anniversary of the Effective Date, the Company shall not undertake
a reverse or forward stock split or reclassification of the Common Stock
without the prior written consent of the Purchasers holding a majority of the
Shares then outstanding, unless the Board of Directors determines that a
particular reverse split is necessary in order to secure the inclusion or
listing of the Common Stock on the Nasdaq Stock Market or a national securities
exchange.

 

4.2                                 Acknowledgment of
Dilution.  The Company acknowledges
that the issuance of the Shares may result in dilution of the outstanding
shares of Common Stock, which dilution may be substantial under certain market
conditions.

 

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

 

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

 

4.5                                 [RESERVED].

 

4.6                                 Securities
Laws Disclosure; Publicity.  The
Company shall, by 8:30 a.m. Eastern time on the Trading Day following the date
hereof, issue a Current Report on Form 8-K, reasonably acceptable to each
Purchaser disclosing the material terms of the transactions contemplated
hereby, and shall attach the Transaction Documents thereto.  The Company and each Purchaser shall consult
with each other in issuing any other press releases with respect to the
transactions contemplated hereby, and neither the Company nor any Purchaser
shall issue any 

 

21

 

such press release or otherwise make any such public statement without
the prior consent of the Company, with respect to any press release of any
Purchaser, or without the prior consent of each Purchaser, with respect to any
press release of the Company, which consent shall not unreasonably be withheld,
except if such disclosure is required by law, in which case the disclosing
party shall promptly provide the other party with prior notice of such public
statement or communication. 
Notwithstanding the foregoing, the Company shall not publicly disclose
the name of any Purchaser, or include the name of any Purchaser in any filing
with the Commission or any regulatory agency or Trading Market, without the
prior written consent of such Purchaser, except (i) as required by federal
securities law in connection with the registration statement contemplated by
the Registration Rights Agreement and (ii) to the extent such disclosure is
required by law or Trading Market regulations, in which case the Company shall provide
the Purchasers with prior notice of such disclosure permitted under subclause
(i) or (ii).

 

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

 

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

 

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

 

4.10                           Reimbursement.  If any Purchaser becomes involved in any
capacity in any Proceeding by or against any Person who is a stockholder of the
Company (except as a result of sales, pledges, margin sales and similar
transactions by such Purchaser to or with any current stockholder), solely as a
result of such Purchaser’s acquisition of the Shares under this Agreement, the
Company will reimburse such Purchaser for its reasonable legal and other
expenses (including the cost of any investigation preparation and travel in
connection therewith) incurred in connection therewith, as such expenses are
incurred.  The reimbursement obligations
of the Company under this paragraph shall be in addition to any liability which
the Company may otherwise have, shall extend upon the same terms and conditions
to any Affiliates of the Purchasers who are actually named in such action,
proceeding or investigation, and partners, directors, agents, employees and
controlling persons (if any), as the case may be, of the Purchasers and any
such Affiliate, and shall be binding upon and inure to the benefit of any 

 

22

 

successors, assigns, heirs and personal representatives of the Company,
the Purchasers and any such Affiliate and any such Person.  The Company also agrees that neither the
Purchasers nor any such Affiliates, partners, directors, agents, employees or
controlling persons shall have any liability to the Company or any Person
asserting claims on behalf of or in right of the Company solely as a result of
acquiring the Shares under this Agreement.

 

4.11                           Indemnification
of Purchasers.   Subject to the
provisions of this Section 4.11, the Company will indemnify and hold each
Purchaser and its directors, officers, shareholders, members, partners,
employees and agents (and any other Persons with a functionally equivalent role
of a Person holding such titles notwithstanding a lack of such title or any
other title), each Person who controls such Purchaser (within the meaning of
Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents, members, partners or employees (and any other
Persons with a functionally equivalent role of a Person holding such titles
notwithstanding a lack of such title or any other title) of such controlling person
(each, a “Purchaser Party”) harmless from any and all losses,
liabilities, obligations, claims, contingencies, damages, costs and expenses,
including all judgments, amounts paid in settlements, court costs and
reasonable attorneys’ fees and costs of investigation that any such Purchaser
Party may suffer or incur as a result of or relating to (a) any breach of any
of the representations, warranties, covenants or agreements made by the Company
in this Agreement or in the other Transaction Documents or (b) any action
instituted against a Purchaser, or any of them or their respective Affiliates,
by any stockholder of the Company who is not an Affiliate of such Purchaser,
with respect to any of the transactions contemplated by the Transaction
Documents (unless such action is based upon a breach of such Purchaser’s
representations, warranties or covenants under the Transaction Documents or any
agreements or understandings such Purchaser may have with any such stockholder
or any violations by the Purchaser of state or federal securities laws or any
conduct by such Purchaser which constitutes fraud, gross negligence, willful
misconduct or malfeasance).  If any
action shall be brought against any Purchaser Party in respect of which
indemnity may be sought pursuant to this Agreement, such Purchaser Party shall
promptly notify the Company in writing, and the Company shall have the right to
assume the defense thereof with counsel of its own choosing.  Any Purchaser Party shall have the right to
employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Purchaser Party except to the extent that (i) the employment thereof has
been specifically authorized by the Company in writing, (ii) the Company has
failed after a reasonable period of time to assume such defense and to employ
counsel or (iii) in such action there is, in the reasonable opinion of such
separate counsel, a material conflict on any material issue between the position
of the Company and the position of such Purchaser Party.  The Company will not be liable to any
Purchaser Party under this Agreement (i) for any settlement by a Purchaser
Party effected without the Company’s prior written consent, which shall not be
unreasonably withheld or delayed; or (ii) to the extent, but only to the extent
that a loss, claim, damage or liability is attributable to any Purchaser Party’s
breach of any of the representations, warranties, covenants or agreements made
by the Purchasers in this Agreement or in the other Transaction Documents.

 

4.12                           Reservation and Listing
of Shares.

 

(a)                                  The
Company hereby agrees to use best efforts to maintain the listing of 

 

23

 

the Common Stock on a Trading Market, and as soon as reasonably
practicable following the Closing (but not later than the earlier of the
Effective Date and the first anniversary of the Closing Date) to list all of
the Shares on such Trading Market. The Company further agrees, if the Company
applies to have the Common Stock traded on any other Trading Market, it will
include in such application all of the Shares, and will take such other action
as is necessary to cause all of the Shares to be listed on such other Trading
Market as promptly as possible.  The
Company will take all action reasonably necessary to continue the listing and
trading of its Common Stock on a Trading Market and will comply in all respects
with the Company’s reporting, filing and other obligations under the bylaws or
rules of the Trading Market.

 

4.13                           Equal Treatment of
Purchasers.  No consideration shall
be offered or paid to any person to amend or consent to a waiver or
modification of any provision of any of the Transaction Documents unless the
same consideration is also offered to all of the parties to the Transaction
Documents. Further, the Company shall not make any payment of principal or
interest on the Debentures in amounts which are disproportionate to the
respective principal amounts outstanding on the Debentures at any applicable
time.  For clarification purposes, this
provision constitutes a separate right granted to each Purchaser by the Company
and negotiated separately by each Purchaser, and is intended for the Company to
treat the Purchasers as a class and shall not in any way be construed as the
Purchasers acting in concert or as a group with respect to the purchase,
disposition or voting of Shares or otherwise.

 

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

 

24

 

4.15                           Delivery of Securities
after Closing.  The Company shall
deliver, or cause to be delivered, the respective Shares purchased by each
Purchaser to such Purchaser within 3 Trading Days of the Closing Date.

 

4.16                           Form D; Blue Sky Filings.        
The Company agrees to timely file a Form D with respect to the Securities as
required under Regulation D and to provide a copy thereof, promptly upon
request of any Purchaser. The Company shall, on or before or after the 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 Purchasers at the Closing under applicable securities or “Blue Sky” laws of
the states of the United States, and shall provide evidence of such actions
promptly upon request of any Purchaser.

 

ARTICLE V.

MISCELLANEOUS

 

5.1                                 Termination. 
This Agreement may be terminated by any Purchaser, as to such Purchaser’s
obligations hereunder only and without any effect whatsoever on the obligations
between the Company and the other Purchasers, by written notice to the other
parties, if the Closing has not been consummated on or before December 31,
2005; provided, however, that no such termination will affect the
right of any party to sue for any breach by the other party (or parties).

 

5.2                                 Fees and Expenses.  Except as expressly set forth in the
Transaction Documents to the contrary, each party shall pay the fees and
expenses of its advisers, counsel, accountants and other experts, if any, and
all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement.  The Company shall pay all transfer agent
fees, stamp taxes and other taxes and duties levied in connection with the delivery
of any Shares.

 

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

 

5.4                                 Notices.  Any and all notices or other communications
or deliveries required or permitted to be provided hereunder shall be in
writing and shall be deemed given and effective on the earliest of (a) the date
of transmission, if such notice or communication is delivered via facsimile at
the facsimile number set forth on the signature pages attached hereto prior to
5:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile number set forth on the signature pages attached
hereto on a day that is not a Trading Day or later than 5:30 p.m. (New York
City time) on any Trading Day, (c) the 2nd Trading Day following the
date of mailing, if sent by U.S. nationally recognized overnight courier
service, or (d) upon actual 

 

25

 

receipt by the party to whom such notice is required to be given.  The address for such notices and
communications shall be as set forth on the signature pages attached hereto.

 

5.5                                 Amendments; Waivers.  No provision of this Agreement may be waived,
modified, supplemented or amended except in a written instrument signed, in the
case of an amendment, by the Company and each Purchaser or, in the case of a
waiver, by the party against whom enforcement of any such waiver is
sought.  No waiver of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any subsequent
default or a waiver of any other provision, condition or requirement hereof,
nor shall any delay or omission of either party to exercise any right hereunder
in any manner impair the exercise of any such right.

 

5.6                                 Headings.  The headings herein are for convenience only,
do not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.  The
language used in this Agreement will be deemed to be the language chosen by the
parties to express their mutual intent, and no rules of strict construction
will be applied against any party.

 

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

 

5.8                                 No Third-Party
Beneficiaries.  This Agreement is
intended for the benefit of the parties hereto and their respective successors
and permitted assigns and is not for the benefit of, nor may any provision
hereof be enforced by, any other Person, except as otherwise set forth in
Section 4.11.

 

5.9                                 Governing Law.  All questions concerning the construction,
validity, enforcement and interpretation of the Transaction Documents shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York, without regard to the principles of conflicts of law
thereof.  Each party agrees that all
legal proceedings concerning the interpretations, enforcement and defense of
the transactions contemplated by this Agreement and any other Transaction Documents
(whether brought against a party hereto or its respective affiliates,
directors, officers, shareholders, employees or agents) shall be commenced
exclusively in the state and federal courts sitting in the City of New York.  Each party hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in the City of
New York, borough of Manhattan for the adjudication of any dispute hereunder or
in connection herewith or with any transaction contemplated hereby or discussed
herein (including with respect to the enforcement of any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any
suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is
improper or inconvenient venue for such proceeding.  Each party hereby irrevocably waives personal
service of process and consents to process being served in any such suit,
action or proceeding by mailing 

 

26

 

a copy thereof
via registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it under this
Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. 
Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.  The parties hereby waive all rights to a
trial by jury.  If either party shall
commence an action or proceeding to enforce any provisions of the Transaction
Documents, then the prevailing party in such action or proceeding shall be
reimbursed by the other party for its attorneys’ fees and other costs and
expenses incurred with the investigation, preparation and prosecution of such
action or proceeding.

 

5.10                           Survival.  The covenants and other agreements contained
herein shall survive the Closing and the delivery, exercise and/or conversion
of the Securities, as applicable. The representations and warranties contained
herein shall survive the Closing and the delivery, exercise and/or conversion
of the Securities, as applicable until the third anniversary of the Closing.

 

5.11                           Execution.  This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both parties
need not sign the same counterpart.  In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid and binding obligation of the party executing
(or on whose behalf such signature is executed) with the same force and effect
as if such facsimile signature page were an original thereof.

 

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

 

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

 

5.14                           Replacement of Shares.  If any certificate or instrument evidencing
any Shares is mutilated, lost, stolen or destroyed, the Company shall issue or
cause to be issued in exchange and substitution for and upon cancellation
thereof, or in lieu of and substitution therefor, a new certificate or
instrument, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction and customary and reasonable
indemnity, if requested.  The applicants
for a new certificate or instrument under such circumstances shall also pay any
reasonable third-party costs associated with the issuance of such replacement
Shares.

 

27

 

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

 

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

 

5.17                           Independent Nature of
Purchasers’ Obligations and Rights. 
The obligations of each Purchaser under any Transaction Document are
several and not joint with the obligations of any other Purchaser, and no
Purchaser shall be responsible in any way for the performance of the
obligations of any other Purchaser under any Transaction Document.  Nothing contained herein or in any
Transaction Document, and no action taken by any Purchaser pursuant thereto,
shall be deemed to constitute the Purchasers as a partnership, an association,
a joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Documents.  Each Purchaser shall be entitled to
independently protect and enforce its rights, including without limitation the
rights arising out of this Agreement or out of the other Transaction Documents,
and it shall not be necessary for any other Purchaser to be joined as an additional
party in any proceeding for such purpose. 
Each Purchaser has been represented by its own separate legal counsel in
their review and negotiation of the Transaction Documents.  For reasons of administrative convenience
only, Purchasers and their respective counsel have chosen to communicate with
the Company through FW.  FW does not
represent all of the Purchasers but only Dawson James Securities, the placement
agent for the transaction.  The Company
has elected to provide all Purchasers with the same terms and Transaction
Documents for the convenience of the Company and not because it was required or
requested to do so by the Purchasers.

 

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

 

28

 

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

 

(Signature
Pages Follow)

 

29

 

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

 

	
  CRDENTIA CORP.

  	
  Address for Notice:

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ James D. Durham

  	
   

  	
  14114
  Dallas Pkwy, Suite 600

  
	
   

  	
  Name: James D. Durham

  	
  Dallas,
  TX 75254

  
	
   

  	
  Title: Chairman and Chief Executive Officer

  	
   

  
	
   

  	
   

  	
   

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

  	
   

  
	
   

  	
   

  
	
  Morrison & Foerster LLP

  	
   

  
	
  12531 High Bluff Drive

  	
   

  
	
  San Diego, CA 92130

  	
   

  
	
  Fax: (858) 720-5125

  	
   

  
	
  Attn: Steven G. Rowles, Esq.

  	
   

  
				

 

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOR PURCHASER FOLLOWS]

 

30

 

[PURCHASER SIGNATURE PAGES TO CRDE SECURITIES PURCHASE AGREEMENT]

 

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

 

 

	
  Name of
  Purchaser: MedCap Partners LP

  
	
  Signature
  of Authorized Signatory of Purchaser:

  	
  /s/ C. Fred
  Toney

  	
   

  
	
  Name of
  Authorized Signatory: C. Fred Toney

  
	
  Title of Authorized Signatory: Managing Member of MedCap Management
  & Research LLC, the general partner of MedCap Partners LP

  

 

Email Address of Purchaser:

 

Address for Notice of Purchaser:

 

 

 

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

 

 

 

Subscription Amount:

EIN Number:  [PROVIDE THIS UNDER
SEPARATE COVER]

 

[SIGNATURE PAGES CONTINUE]

 

31

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