-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PQAKhtAY2BVSjA89P0Dv/G/TfaD8pdcmYabZJxqpVLpwthi0ThzF2g1W7tEGvQOM vPlunzDCcExtetInf+rDtg== 0000949091-97-000021.txt : 19971010 0000949091-97-000021.hdr.sgml : 19971010 ACCESSION NUMBER: 0000949091-97-000021 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19970924 ITEM INFORMATION: FILED AS OF DATE: 19971009 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMART CHOICE AUTOMOTIVE GROUP INC CENTRAL INDEX KEY: 0000949091 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 591469577 STATE OF INCORPORATION: FL FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-14082 FILM NUMBER: 97693016 BUSINESS ADDRESS: STREET 1: 5200 S WASHINGTON AVE CITY: TITUSVILLE STATE: FL ZIP: 32780 BUSINESS PHONE: 4072699680 MAIL ADDRESS: STREET 1: PO BOX 5637 CITY: TITUSVILLE STATE: FL ZIP: 32783 FORMER COMPANY: FORMER CONFORMED NAME: ECKLER INDUSTRIES INC DATE OF NAME CHANGE: 19950912 8-K 1 FORM 8-K FOR SMART CHOICE AUTOMOTIVE GROUP, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K ------------------------- CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities and Exchange act of 1934 Date of Report: September 24, 1997 (Date of earliest event reported) ----------------------------------------------- SMART CHOICE AUTOMOTIVE GROUP, INC. (Exact name of registrant as specified in its charter) ------------------------------------------------ Florida 1-14082 59-1469577 (State or other (Commission File Number) (IRS Employer jurisdiction of Identification No.) incorporation or organization) 5200 South Washington Avenue, Titusville, Florida 32780 (Address of principal executive offices) (Zip Code) (407) 269-9680 Registrant's telephone number, including area code: ----------------------- Item 5. Other Events. Issuance of $1,050,000 Convertible Notes and Warrants to High Capital Funding, LLC, among Other Purchasers. On September 24, 1997, Smart Choice Automotive Group, Inc.(the "Registrant") completed funding from certain accredited investor purchasers, including, among others, High Capital Funding, LLC, a Delaware limited liability company("HCF") in the aggregate amount of $1,050,000 and, in exchange, issued or will issue $1,050,000 in Convertible Notes and a total of 52,500 common stock purchase warrants (the "Warrants"). The following summary of the transaction is qualified in its entirety by the more detailed information contained in the copies of the form of Convertible Note and the form of Warrant attached as Exhibits 10.l and 10.2, respectively, to this Current Report. The Convertible Notes mature on April 15, 1998 and bear interest at a rate of 8% per annum; however, if the Registrant's common stock underlying such Convertible Notes and Warrants (the "HCF Conversion Shares") are not registered by June 1, 1998, the interest rate will increase to 12% per annum retroactive to August 29, 1997. The principal amount of the Convertible Notes may be converted into common stock of the Company (the "Common Stock") at any time after December 14, 1997, at a conversion price of 66 2/3% of the average closing bid price of the Common Stock for the 5 trading days immediately preceding the effective date of a conversion notice, which percentage shall be decreased to 62% and 60% if the HCF Conversion Shares have not been registered by April 15, 1998 and May 15, 1998, respectively, and which conversion price is subject to certain anti-dilution protections for the purchasers set forth therein. The Registrant also issued a Warrant which entitles the holder thereof to purchase from the Registrant, at any time from August 29, 1997 to August 29, 2002, up to 35,000 shares of Common Stock and is obligated to issue a second Warrant for 17,500 shares of Common Stock each at a purchase price of $7.00 per share, subject to certain anti-dilution protections for the holder set forth therein. The HCF Conversion Shares are subject to certain registration rights, including (i) demand registration rights which obligate the Registrant to use its best efforts to have a registration statement covering such shares declared effective no later than December 30, 1997, and in any event, which provide that such registration statement shall be declared effective by April 15, 1998 or constitute a default under the terms thereof, and (ii) piggyback rights with respect to the shares of Common Stock underlying the warrants, as set forth therein. The Registrant has deposited into escrow agent under the terms of an escrow agreement such shares as are to be delivered to purchasers upon conversion of the HCF Conversion Shares. Guaranty Agreement and Pledge and Security Agreement in connection with $1,500,000 Loan from Stephens Inc. Effective September 30, 1997, the Registrant secured on behalf of Eckler Industries, Inc., its wholly-owned subsidiary ("Eckler's"), a $1,500,000 term loan from Stephens Inc. ("Stephens"), which matures on October 15, 1998 (the "Stephens Loan"), and in connection therewith entered into a Guaranty Agreement with Stephens, pursuant to which the Registrant unconditionally guarantees the loan from Stephens to Eckler, and a Pledge and Security Agreement, pursuant to which the Registrant pledged to Stephens a first lien and security interest in and to all of the issued and outstanding capital stock of Eckler. In addition, the loan was secured by all of the personal property assets of Eckler pursuant to a separate security agreement between Stephens and Eckler. The loan bears interest at a rate of 10% per annum. Such summary of the transaction is qualified in its entirety by the more detailed information contained in the copies of the Promissory Note, Guaranty Agreement, and Pledge and Security Agreement attached as Exhibits 10.3, 10.4 and 10.5, respectively, to this Current Report. Issuance of Series A Redeemable Convertible Preferred Stock to Promethean Investment Group, LLC, among other purchasers. Effective September 30, 1997, the Registrant secured $3,000,000 in equity funding from certain accredited investor buyers represented by, among others, Promethean Investment Group, LLC, in a private placement with such buyers of (i) a total of 400 shares of its newly designated Series A Redeemable Convertible Preferred Stock at $10,000 per share pursuant to that certain Securities Purchase Agreement between the Registrant and the buyers and (ii) a total of 90,000 common stock purchase warrants. The buyers are committed to purchase an additional $1,000,000 in such preferred stock on the occurrence of certain events. The Preferred Stock is convertible into shares of Common Stock at a conversion price which, at the option of the buyers, is either fixed at a rate of 135% of the market price of such Common Stock on the date of issuance of the Preferred Stock, or floating at a rate of 100% of the market price of such Common Stock if converted during the period 90 days after the issuance date of the Preferred Stock and 90% of the market price if converted at any time after 90 days for a period of 5 years; such conversion rate is also subject to anti-dilution protections in favor of the buyers. The shares of Common Stock issuable upon exercise of the warrants may be purchased by the holders for a purchase price of $8.10 per share, subject to adjustment pursuant to certain anti-dilution protections stated therein. The Preferred Stock has no voting rights. Pursuant to a Registration Rights Agreement, all of the common stock underlying the shares of Preferred Stock and the Warrants are subject to both (i) demand registration rights which require the Registrant to have a registration statement covering such shares effective within 90 days of the issuance of the Preferred Stock, and (ii) piggyback registration rights, as set forth therein. Such summary of the transaction is qualified in its entirety by the more detailed information contained in the copies of the Second Articles of Amendment to the Articles of Incorporation, the Securities Purchase Agreement, the form of Warrant and the Registration Rights Agreement attached as Exhibit 3.1, 10.6, 10.7 and 10.8, respectively, to this Current Report. Item 7. Financial Information, Pro Forma Financial Information and Exhibits. (a) Financial Statements of Business Acquired. Not Applicable. (b) Pro Forma Financial Information. Not Applicable (c) Exhibits. EXHIBIT DESCRIPTION ------- ----------- 3.1 Second Articles of Amendment to Articles of Incorporation 10.1 Form of Convertible Note issued by Registrant to High Capital Funding, LLC, among other purchasers 10.2 Form of Warrant issued by Registrant to High Capital Funding, LLC, among other purchasers 10.3 Promissory Note by Eckler Industries, Inc. in favor of Stephens Inc. 10.4 Guaranty by Registrant to Stephens Inc. 10.5 Pledge and Security Agreement between Registrant and Stephens Inc. 10.6 Securities Purchase Agreement between the Registrant and certain buyers represented by Promethean Investment Group, L.L.C., among others 10.7 Form of Warrant from Registrant to certain buyers represented by Promethean Investment Group, L.L.C., among others 10.8 Registration Rights Agreement between Registrant and certain buyers represented by Promethean Investment Group, L.L.C., among others. SIGNATURES Pursuant to the requirement of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: October 9, 1997 SMART CHOICE AUTOMOTIVE GROUP, INC. (Registrant) By: __________________________________ James Neal Hutchinson, Jr. Assistant Vice President EX-3.1 2 SECOND ARTICLES OF AMENDMENT TO ARTICLES OF INCOR. SECOND ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF SMART CHOICE AUTOMOTIVE GROUP, INC. Pursuant to the provisions of Sections 607.1006 and 607.0602 of the Florida Business Corporation Act, the corporation adopts the following articles of amendment to its articles of incorporation: FIRST: ARTICLE V Article V of the Articles of Incorporation of the Corporation is hereby amended by inserting the following words at the end of such article: Series A Redeemable Convertible Preferred Stock Four hundred (400) shares of the authorized and unissued shares of $.01 par value Preferred Stock of the Corporation are hereby designated "Series A Redeemable Convertible Preferred Stock" (the "Series A Preferred Shares") with the following powers, preferences and rights, and the qualifications, limitations and restrictions thereon: (1) Dividends. The Series A Preferred Shares shall not bear any dividends. (2) Holder's Conversion of Series A Preferred Shares. A holder of Series A Preferred Shares shall have the right, at such holder's option, to convert the Series A Preferred Shares into shares of the Corporation's common stock, $.01 par value per share (the "Common Stock"), on the following terms and conditions: (a) Conversion Right. At any time or times on or after the Issuance Date (as defined below), any holder of Series A Preferred Shares shall be entitled to convert any whole number of Series A Preferred Shares into fully paid and nonassessable shares (rounded to the nearest whole share in accordance with Section 2(h) below) of Common Stock, at the Conversion Rate (as defined below); provided, however, that in no event shall any holder be entitled to convert Series A Preferred Shares in excess of that number of Series A Preferred Shares which, upon giving effect to such conversion, would cause the aggregate number of shares of Common Stock beneficially owned by the holder and its affiliates to exceed 4.9% of the outstanding shares of the Common Stock following such conversion. For purposes of the foregoing proviso, the aggregate number of shares of Common Stock beneficially owned by the holder and its affiliates shall -1- include the number of shares of Common Stock issuable upon conversion of the Series A Preferred Shares with respect to which the determination of such proviso is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) conversion of the remaining, nonconverted Series A Preferred Shares beneficially owned by the holder and its affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Corporation (including, without limitation, any warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the holder and its affiliates. Except as set forth in the preceding sentence, for purposes of this paragraph, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. The holder may waive the foregoing limitations by written notice to the Corporation upon not less than 61 days prior notice (with such waiver taking effect only upon the expiration of such 61 day notice period). The Corporation shall have the right to elect to pay the Additional Amount (as defined below) in cash, in lieu of conversion to Common Stock in accordance with this Section 2. If the Corporation elects to pay the Additional Amount in cash, such cash shall be paid simultaneously with the delivery to the holder of the certificates representing the Common Stock issuable upon conversion in accordance with Section 2(f) below. At the written request of any holder of the Series A Preferred Shares, the Corporation shall advise such holder in writing, within three business days of such request, whether conversion of the Additional Amount will be paid in Common Stock or in cash, and such election shall be binding on the Corporation for 30 days following the date of the Corporation's response. Failure of the Corporation to respond to the holder within three business days shall be deemed to be an election to convert the Additional Amount into Common Stock for any conversions pursuant to Conversion Notices (as defined in Section 2(f) below) submitted within 30 days plus three business days of the Holder's request. (b) Conversion Rate. The number of shares of Common Stock issuable upon conversion of each of the Series A Preferred Shares shall be determined according to the following formula (the "Conversion Rate"): Conversion Amount Conversion Price For purposes of this Article V, the following terms shall have the following meanings: (i) "Conversion Price" means, as of any Conversion Date (as defined below) or other date of determination, the lower of the Fixed Conversion Price and the Floating Conversion Price, each in effect as of such date and subject to adjustment as provided herein. (ii) "Fixed Conversion Price" means 135% of the Market Price on the date of issuance of the applicable Series A Preferred Shares, subject to adjustment as provided herein. -2- (iii) "Floating Conversion Price" means, as of any date of determination, the amount obtained by multiplying the Conversion Percentage in effect as of such date by the Market Price as of such date. (iv) "Conversion Percentage" means (A) 100% for the period beginning on the Issuance Date and ending on and including the date which is 90 days after the Issuance Date and (B) 90% for the period beginning on and including the date which is 91 days after the Issuance Date and ending on and including the date which is five years after the Issuance Date, subject in each case to adjustment as provided herein. (v) "Market Price" means, with respect to any security for any date, the lowest Closing Bid Price (as defined below) for such security during the seven consecutive trading days immediately preceding such date. (vi) "Closing Bid Price" means, for any security as of any date, the last closing bid price for such security on The Nasdaq SmallCap Market as reported by Bloomberg Financial Markets ("Bloomberg"), or, if The Nasdaq SmallCap Market is not the principal trading market for such security, the last closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last closing bid price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price is reported for such security by Bloomberg, the last closing trade price of such security as reported by Bloomberg, or, if no last closing trade price is reported for such security by Bloomberg, the average of the bid prices of any market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on such date on any of the foregoing bases, the Closing Bid Price of such security on such date shall be the fair market value as mutually determined by the Corporation and the holders of Series A Preferred Shares. If the Corporation and the holders of Series A Preferred Shares are unable to agree upon the fair market value of the Common Stock, then such dispute shall be resolved pursuant to Section 2(f)(iii) below with the term "Closing Bid Price" being substituted for the term "Market Price." (All such determinations to be appropriately adjusted for any stock dividend, stock, split or other similar transaction during such period). (vii) "Conversion Amount" means the sum of (A) the Additional Amount, provided that the Corporation has not elected to pay the Additional Amount in cash as described in Section 2(a) above, and (B) 10,000. (viii) "Additional Amount" means the result of the following formula: (.07)(N/365)(10,000). (ix) "N" means the number of days from, but excluding, the Issuance Date through and including the Conversion Date for the Series A Preferred Shares for which conversion is being elected. -3- (x) "Issuance Date" means, with respect to each Series A Preferred Share, the date of the original issuance of the applicable Series A Preferred Share. (c) Effect of Failure to Obtain and Maintain Effectiveness of Registration Statement. If the registration statement (the "Registration Statement") covering the resale of the shares of Common Stock issuable upon conversion or exercise of the Series A Preferred Shares and the Warrants (as defined in the Securities Purchase Agreement between the Corporation and the initial holders of the Series A Preferred Shares (the "Securities Purchase Agreement")), respectively, and required to be filed by the Corporation pursuant to the Registration Rights Agreement between the Corporation and the Buyers referred to therein (the "Registration Rights Agreement") is not (i) filed within 60 days of the first Issuance Date of any Series A Preferred Shares (the "Scheduled Filing Date"), (ii) declared effective by the United States Securities and Exchange Commission (the "SEC") on or before 90 days after the first Issuance Date for any Series A Preferred Shares (the "Scheduled Effective Date"), or (iii) if after the Registration Statement has been declared effective by the SEC, sales cannot be made pursuant to the Registration Statement (whether because of a failure to keep the Registration Statement effective, to disclose such information as is necessary for sales to be made pursuant to the Registration Statement, to register sufficient shares of Common Stock or otherwise), then, as partial relief for the damages to any holder by reason of any such delay in or reduction of its ability to sell the underlying shares of Common Stock (which remedy shall not be exclusive of any other remedies available at law or in equity), the Conversion Percentage and the Fixed Conversion Price shall be adjusted as follows: (A) Conversion Percentage. The Conversion Percentage in effect at such time shall be reduced by a number of percentage points equal to the sum of (x) 2 and (y) the product of (I) .06 and (II) the sum of (i) the number of days after the Scheduled Filing Date that the relevant Registration Statement is filed with the SEC, (ii) the number of days after the Scheduled Effective Date and prior to the date that the relevant Registration Statement is declared effective by the SEC and (iii) the number of days that sales cannot be made pursuant to the Registration Statement in accordance with the Registration Rights Agreement after the Registration Statement has been declared effective (such number of days in clauses (i), (ii) and (iii) above being collectively referred to herein as the "Registration Statement Default Days"); and (B) Fixed Conversion Price. The Fixed Conversion Price in effect at such time shall be reduced by an amount equal to the sum of (x) the product of .02 and the Fixed Conversion Price in effect as of the Issuance Date and (y) product of (I) the Fixed Conversion Price in effect as of the Issuance Date and (II) .0006 multiplied by (III) the number of Registration Statement Default Days. Notwithstanding the foregoing, in no event shall the Conversion Percentage be reduced pursuant to Section 2(c)(A) above and Section 3(g) by a number of percentage points which in the aggregate exceeds 15 nor shall the Fixed Conversion Price be reduced pursuant to Section 2(c)(B) above by an amount which in the aggregate exceeds the product of .15 and the Fixed Conversion Price in effect as of the Issuance Date. The Registration Statement Default Days shall not include, with respect to a specific holder of Preferred Shares, (a) the number of days -4- during which a holder of the Preferred Shares has agreed not to sell shares of Common Stock pursuant to a "lock-up" agreement with the underwriters of a public offering of the Common Stock as provided in Section 4(l) of the Securities Purchase Agreement and (b) the number of days during which the registration statement was not filed or declared effective or, after being declared effective, did not remain effective if such delay(s) are due solely to the failure of such holder to comply with its obligations under Sections 4(a), (b) and (c) of the Registration Rights Agreement. (d) Adjustment to Conversion Price -- Dilution and Other Events. In order to prevent dilution of the rights granted under this Article V, the Conversion Price will be subject to adjustment from time to time as provided in this Section 2(d). (i) Adjustment of Fixed Conversion Price upon Issuance of Convertible Securities. If, during the period beginning on the Issuance Date and ending on and including the date which is 180 days after the date that the Registration Statement is declared effective by the SEC, the Corporation in any manner issues or sells Convertible Securities (as defined below) that are convertible into Common Stock at a price which has as a component which is a fixed price (the "Fixed Price Component") and such Fixed Price Component is less than the Fixed Conversion Price then in effect (the "Applicable Price"), the Corporation shall provide written notice thereof via facsimile and overnight courier to each holder of the Series A Preferred Shares ("Fixed Price Component Notice") on the date of issuance of such Convertible Securities. Within three (3) business days of the issuance of such Convertible Securities, the Corporation shall prepare and deliver to each holder of the Series A Preferred Shares via facsimile and overnight courier a copy of an amendment to this Article V (the "Fixed Price Component Amendment") that substitutes the Fixed Price Component for the Fixed Conversion Price (together with such modifications to this Article V as may be required to give full effect to the substitution of the Fixed Price Component for the Fixed Conversion Price). The Corporation shall file such Fixed Price Component Amendment with the Secretary of State of the State of Florida within three (3) business days after delivery of the Fixed Price Component Amendment to the holders of the Series A Preferred Shares; provided that in the event that the Corporation receives a notice prior to the filing of the Fixed Price Component Amendment from any holder that such holder objects to the form of the Fixed Price Component Amendment, the Corporation shall not file such Fixed Price Component Amendment until such time as the Fixed Price Component Amendment has been revised to the reasonable satisfaction of the holders of Series A Preferred Shares representing at least two-thirds (2/3) of the Series A Preferred Shares then outstanding. Except as provided in the preceding proviso, a holder's failure to object to the form of the Fixed Price Component Amendment shall serve as the consent required to amend this Article V pursuant to Section 14 below. For purposes of determining the adjusted Fixed Conversion Price under this Section 2(d)(i), the following shall be applicable: (A) Issuance of Options. If the Corporation in any manner grants any rights or options to subscribe for or to purchase Common Stock (other than pursuant to an Approved Stock Plan or upon conversion of the Series A Preferred -5- Shares) or any stock or other securities convertible into or exchangeable for Common Stock (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities") and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities is less than the Applicable Price, then for purposes of this Section 2(d)(i)(A), the "price per share for which Common Stock is issuable upon exercise of such Options or upon conversion or exchange of such Convertible Securities" is determined by dividing (I) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon the exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the issuance or sale of such Convertible Securities and the conversion or exchange thereof, by (II) the total maximum number of shares of Common Stock issuable upon exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No adjustment of the Fixed Conversion Price shall be made upon the actual issuance of such Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities. (B) Issuance of Convertible Securities. If the Corporation in any manner issues or sells any Convertible Securities and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Applicable Price, then for the purposes of this Section 2(d)(i)(B), the "price per share for which Common Stock is issuable upon such conversion or exchange" is determined by dividing (I) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (II) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No adjustment of the Fixed Conversion Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Fixed Conversion Price had been or are to be made pursuant to other provisions of this Section 2(d)(i), no further adjustment of the Fixed Conversion Price shall be made by reason of such issue or sale. (C) Change in Option Price or Rate of Conversion. If the purchase price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock change at any time, the Fixed Conversion Price in effect at the time of such change shall be readjusted to the Fixed Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or changed conversion rate, as the case -6- may be, at the time initially granted, issued or sold; provided that no adjustment shall be made if such adjustment would result in an increase of the Fixed Conversion Price then in effect. (D) Certain Definitions. For purposes of determining the adjusted Fixed Conversion Price under this Section 2(d)(i), "Approved Stock Plan" shall mean any contract, plan or agreement which has been approved by the Board of Directors of the Corporation, pursuant to which the Corporation's securities may be issued to any employee, officer, director, consultant or other service provider. (E) Effect on Fixed Conversion Price of Certain Events. For purposes of determining the adjusted Fixed Conversion Price under this Section 2(d)(i), the following shall be applicable: (I) Calculation of Consideration Received. If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the net amount received by the Corporation therefor. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Corporation will be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Corporation will be the Market Price of such securities for the twenty (20) consecutive trading days immediately preceding the date of receipt. In case any Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving entity in connection with any merger in which the Corporation is the surviving entity the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash or securities will be determined in good faith by the Board of Directors of the Corporation. If the Board of Directors is unable to determine the fair value of any consideration as required by the immediately preceding sentence within ten (10) days after the occurrence of an event requiring valuation (the "Valuation Event"), the fair value of such consideration will be determined within forty-eight (48) hours of the tenth (10th) day following the Valuation Event by an independent, reputable appraiser selected by the Corporation. The determination of such appraiser shall be deemed binding upon all parties absent manifest error. (II) Integrated Transactions. In case any Option is issued in connection with the issue or sale of other securities of the Corporation, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, the Options will be deemed to have been issued for a consideration of $.01. (III) Treasury Shares. The number of shares of Common Stock outstanding at any given time does not include shares owned or held by or for the account of the Corporation, and the -7- disposition of any shares so owned or held will be considered an issue or sale of Common Stock. (IV) Record Date. If the Corporation takes a record of the holders of Common Stock for the purpose of entitling them (1) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (2) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (ii) Adjustment of Fixed Conversion Price upon Subdivision or Combination of Common Stock. If the Corporation at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Fixed Conversion Price in effect immediately prior to such subdivision will be proportionately reduced. If the Corporation at any time combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Fixed Conversion Price in effect immediately prior to such combination will be proportionately increased. (iii) Adjustment of Floating Conversion Price upon Issuance of Convertible Securities. If, during the period beginning on the Issuance Date and ending on and including the date which is 180 days after the date that the Registration Statement is declared effective by the SEC, the Corporation in any manner issues or sells Convertible Securities that are convertible into Common Stock at a price which varies with the market price of the Common Stock (the formulation for such variable price being herein referred to as, the "Variable Price") and such Variable Price is not calculated using the same formula used to calculate the Floating Conversion Price in effect immediately prior to the time of such issue or sale, the Corporation shall provide written notice thereof via facsimile and overnight courier to each holder of the Series A Preferred Shares ("Variable Notice") on the date of issuance of such Convertible Securities. If the holders of Series A Preferred Shares representing at least two-thirds (2/3) of the Series A Preferred Shares then outstanding provide written notice via facsimile and overnight courier (the "Variable Price Election Notice") to the Corporation within five (5) business days of receiving a Variable Notice that such holders desire to replace the Floating Conversion Price then in effect with the Variable Price described in such Variable Notice, the Corporation shall prepare and deliver to each holder of the Series A Preferred Shares via facsimile and overnight courier a copy of an amendment to this Article V (the "Variable Price Amendment") that substitutes the Variable Price for the Floating Conversion Price (together with such modifications to this Article V as may be required to give full effect to the substitution of the Variable Price for the Floating Conversion Price) within five (5) business days after receipt of the requisite number of Variable Price Election Notices set forth above. The Corporation shall file such Variable Price Amendment with the Secretary of State of the State of -8- Florida within five (5) business days after delivery of the Variable Price Amendment to the holders of the Series A Preferred Shares; provided that in the event that the Corporation receives a notice prior to the filing of the Variable Price Amendment from any holder who has delivered a Variable Price Election Notice in connection with such Variable Price Amendment that such holder objects to the form of the Variable Price Amendment, the Corporation shall not file such Variable Price Amendment until such time as the Variable Price Amendment has been revised to the reasonable satisfaction of such holder and approved in writing by the holders of the Series A Preferred Shares representing at least two-thirds (2/3) of the Series A Preferred Shares then outstanding. Except as provided in the preceding proviso, a holder's delivery of a Variable Price Election Notice shall serve as the consent required to amend this Article V pursuant to Section 14 below. (iv) Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger (where the Corporation is not the surviving entity), sale of all or substantially all of the Corporation's assets to another Person (as defined below) or other transaction which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as "Organic Change." Prior to the consummation of any Organic Change, the Corporation will make appropriate provision (in form and substance satisfactory to the holders of a majority of the Series A Preferred Shares then outstanding) to insure that each of the holders of the Series A Preferred Shares will thereafter have the right to acquire and receive in lieu of or addition to (as the case may be) the shares of Common Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Series A Preferred Shares, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Series A Preferred Shares had such Organic Change not taken place (without taking into account any limitations or restrictions on the timing or amount of conversions). In any such case, the Corporation will make appropriate provision (in form and substance satisfactory to the holders of a majority of the Series A Preferred Shares then outstanding) with respect to such holders' rights and interests to insure that the provisions of this Section 2(d) and Section 2(e) below will thereafter be applicable to the Series A Preferred Shares (including, in the case of any such consolidation, merger or sale in which the successor entity or purchasing entity is other than the Corporation, an immediate adjustment of the Fixed Conversion Price to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, if the value so reflected is less than the Fixed Conversion Price in effect immediately prior to such consolidation, merger or sale). The Corporation will not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor entity (if other than the Corporation) resulting from consolidation or merger or the entity purchasing such assets assumes, by written instrument, the obligation to deliver to each holder of Series A Preferred Shares such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. "Person" shall mean an individual, a limited liability -9- company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. (v) Certain Events. If any event occurs of the type contemplated by the provisions of this Section 2(d) but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Corporation's Board of Directors will make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of the Series A Preferred Shares; provided that no such adjustment will increase the Conversion Price as otherwise determined pursuant to this Section 2(d). (vi) Notices. (A) Immediately upon any adjustment of the Conversion Price, the Corporation will give written notice thereof to each holder of Series A Preferred Shares, setting forth in reasonable detail and certifying the calculation of such adjustment. (B) The Corporation will give written notice to each holder of Series A Preferred Shares at least twenty (20) days prior to the date on which the Corporation closes its books or takes a record (I) with respect to any dividend or distribution upon the Common Stock, (II) with respect to any pro rata subscription offer to holders of Common Stock or (III) for determining rights to vote with respect to any Organic Change, dissolution or liquidation; provided that in no event shall such notice be provided to such holder prior to such information being made known to the public. (C) The Corporation will also give written notice to each holder of Series A Preferred Shares at least twenty (20) days prior to the date on which any Organic Change, dissolution or liquidation will take place; provided that in no event shall such notice be provided to such holder prior to such information being made known to the public. (e) Purchase Rights. In addition to any adjustments of the Conversion Price pursuant to Section 2(d) above, if at any time the Corporation grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then the holders of Series A Preferred Shares will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock acquirable upon complete conversion of the Series A Preferred Shares (without taking into account any limitations or restrictions on the timing or amount of conversions) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. -10- (f) Mechanics of Conversion. Subject to the Corporation's inability to fully satisfy its obligations under a Conversion Notice (as defined below) as provided for in Section 6 below: (i) Holder's Delivery Requirements. To convert Series A Preferred Shares into full shares of Common Stock on any date (the "Conversion Date"), the holder thereof shall (A) transmit by facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m., Central Time on such date, a copy of a fully executed notice of conversion in the form set forth in Section 16 (the "Conversion Notice"), to the Corporation or its designated transfer agent (the "Transfer Agent"), and (B) surrender to a common carrier for delivery to the Corporation or the Transfer Agent as soon as practicable following such date, the original certificates representing the Series A Preferred Shares being converted (or an indemnification undertaking with respect to such shares in the case of their loss, theft or destruction) (the "Preferred Stock Certificates") and the originally executed Conversion Notice. (ii) Corporation's Response. Upon receipt by the Corporation of a facsimile copy of a Conversion Notice, the Corporation shall immediately send, via facsimile, a confirmation of receipt of such Conversion Notice to such holder. Upon receipt by the Corporation or the Transfer Agent of the Preferred Stock Certificates to be converted pursuant to a Conversion Notice, together with the originally executed Conversion Notice, the Corporation or the Transfer Agent (as applicable) shall, on the next business day following the date of receipt (or the second business day following the date of receipt if received after 11:00 a.m. local time of the Corporation or Transfer Agent, as applicable), (I) issue and surrender to a common carrier for overnight delivery to the address as specified in the Conversion Notice, a certificate, registered in the name of the holder or its designee, for the number of shares of Common Stock to which the holder shall be entitled, or (II) credit such aggregate number of shares of Common Stock to which the holder shall be entitled to the holder's or its designee's balance account with The Depository Trust Corporation. If the number of Series A Preferred Shares represented by the Preferred Stock Certificate(s) submitted for conversion is greater than the number of Series A Preferred Shares being converted, then the Corporation or Transfer Agent, as the case may be, shall, as soon as practicable and in no event later than two business days after receipt of the Preferred Stock Certificate(s) and at its own expense, issue and deliver to the holder a new Preferred Stock Certificate representing the number of Series A Preferred Shares not converted. (iii) Dispute Resolution. In the case of a dispute as to the determination of the Market Price or the arithmetic calculation of the Conversion Rate, the Corporation shall promptly issue to the holder the number of shares of Common Stock that is not disputed and shall submit the disputed determinations or arithmetic calculations to the holder via facsimile as soon as possible, but in no event later than two (2) business days after receipt of such holder's Conversion Notice. If such holder and the Corporation are unable to agree upon the determination of the Market Price or arithmetic calculation of the Conversion Rate within one (1) business day of such disputed determination or arithmetic calculation being submitted to the holder, then the -11- Corporation shall within one (1) business day submit via facsimile (A) the disputed determination of the Market Price to an independent, reputable investment bank or (B) the disputed arithmetic calculation of the Conversion Rate to its independent, outside accountant. The Corporation shall cause the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Corporation and the holder of the results no later than forty-eight (48) hours from the time it receives the disputed determinations or calculations. Such investment bank's or accountant's determination or calculation, as the case may be, shall be binding upon all parties absent manifest error. (iv) Record Holder. The person or persons entitled to receive the shares of Common Stock issuable upon a conversion of Series A Preferred Shares shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Conversion Date. (v) Corporation's Failure to Timely Convert. If within five (5) business days of the Corporation's or the Transfer Agent's receipt of the Preferred Stock Certificates to be converted and the originally executed Conversion Notice the Corporation shall fail to issue a certificate to a holder or credit the holder's balance account with The Depository Trust Corporation for the number of shares of Common Stock to which such holder is entitled upon such holder's conversion of Series A Preferred Shares or to issue a new Preferred Stock Certificate representing the number of Series A Preferred Shares to which such holder is entitled pursuant to Section 2(f)(ii), in addition to all other available remedies which such holder may pursue hereunder and under the Securities Purchase Agreement (including indemnification pursuant to Section 8 thereof), the Corporation shall pay additional damages to such holder on each date after such fifth (5th) business day that such conversion is not timely effected in an amount equal to 0.5% of the product of (A) the sum of the number of shares of Common Stock not issued to the holder on a timely basis pursuant to Section 2(f)(ii) and to which such holder is entitled and, in the event the Corporation has failed to deliver a Preferred Stock Certificate to the holder on a timely basis pursuant to Section 2(f)(ii), the number of shares of Common Stock issuable upon conversion of the Series A Preferred Shares represented by such Preferred Stock Certificate, as of the last possible date which the Corporation could have issued such Preferred Stock Certificate to such holder without violating Section 2(f) (ii) and (B) the Closing Bid Price of the Common Stock on the last possible date which the Corporation could have issued such Common Stock and such Preferred Stock Certificate, as the case may be, to such holder without violating Section 2(f)(ii). (g) Mandatory Conversion. If any Series A Preferred Shares remain outstanding on the Mandatory Conversion Date (as defined below), then all such Series A Preferred Shares shall be converted as of such date in accordance with this Section 2 as if the holders of such Series A Preferred Shares had given the Conversion Notice on the Mandatory Conversion Date. All holders of Series A Preferred Shares shall thereupon surrender all Preferred Stock Certificates, duly endorsed for cancellation, to the Corporation or the Transfer Agent and on the Mandatory Conversion Date all Series -12- A Preferred Shares. "Mandatory Conversion Date" means the date which is five years after the applicable Issuance Date. (h) Fractional Shares. The Corporation shall not issue any fraction of a share of Common Stock upon any conversion. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one Series A Preferred Share by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of a fraction of a share of Common Stock. If, after the aforementioned aggregation, the issuance would result in the issuance of a fraction of a share of Common Stock, the Corporation shall round such fraction of a share of Common Stock up or down to the nearest whole share. (i) Taxes. The Corporation shall pay any and all taxes which may be imposed upon it with respect to the issuance and delivery of Common Stock upon the conversion of the Series A Preferred Shares. (3) Redemption at Option of Holders. (a) Redemption Option Upon Major Transaction. In addition to all other rights of the holders of Series A Preferred Shares contained herein, simultaneous with or after the occurrence of a Major Transaction (as defined below), each holder of Series A Preferred Shares shall have the right, at such holder's option, to require the Corporation to redeem all or a portion of such holder's Series A Preferred Shares at a price per Series A Preferred Share equal to the greater of (i) Liquidation Value (as defined in Section 10 below) and (ii) the product of (A) the Conversion Rate at such time and (B) the Closing Bid Price on the date of the public announcement of such Major Transaction or the next date on which the exchange or market on which the Common Stock is traded is open if such public announcement is made (X) after 12:00 p.m., Central Time, time on such date or (Y) on a date on which the exchange or market on which the Common Stock is traded is closed ("Major Transaction Redemption Price"). (b) Redemption Option Upon Triggering Event. In addition to all other rights of the holders of Series A Preferred Shares contained herein, after a Triggering Event (as defined below), each holder of Series A Preferred Shares shall have the right, at such holder's option, to require the Corporation to redeem all or a portion of such holder's Series A Preferred Shares at a price per Series A Preferred Share equal to the greater of (i) $12,000 and (ii) the product of (A) the Conversion Rate at such time and (B) the Closing Bid Price calculated as of the date immediately preceding such Triggering Event on which the exchange or market on which the Common Stock is traded is open ("Triggering Event Redemption Price" and, collectively with "Major Transaction Redemption Price," the "Redemption Price"). -13- (c) "Major Transaction". A "Major Transaction" shall be deemed to have occurred at such time as any of the following events: (i) the consolidation, merger or other business combination of the Corporation with or into another Person (other than pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of the Corporation). (ii) the sale or transfer of all or substantially all of the Corporation's assets other than a sale or transfer to a wholly-owned subsidiary of the Corporation; or (iii) a purchase, tender or exchange offer made to and accepted by the holders of more than 30% of the outstanding shares of Common Stock which requires or receives the consent of the Corporation's Board of Directors. (d) "Triggering Event". A "Triggering Event" shall be deemed to have occurred at such time as any of the following events: (i) the failure of the Registration Statement to be declared effective by the SEC on or prior to the date that is 150 days after the Initial Issuance Date; (ii) while the Registration Statement is required to be maintained effective pursuant to the terms of the Registration Rights Agreement, the effectiveness of the Registration Statement lapses for any reason (including, without limitation, the issuance of a stop order) or is unavailable to the holder of the Series A Preferred Shares for sale of the Registrable Securities (as defined in the Registration Rights Agreement) in accordance with the terms of the Registration Rights Agreement (other than unavailability to such holder during the time period during which a holder of the Preferred Shares has agreed not to sell shares of Common Stock pursuant to a "lock-up" agreement with the underwriters of a public offering of the Common Stock as provided in Section 4(l) of the Securities Purchase Agreement), and such lapse or unavailability continues for a period of ten consecutive trading days, provided that the cause of such lapse or unavailability is not due to factors solely within the control of such holder of Series A Preferred Shares; (iii) the failure of the Common Stock to be listed on the Nasdaq National Market, The Nasdaq SmallCap Market, The New York Stock Exchange, Inc. or The American Stock Exchange, Inc. for a period of seven consecutive days (provided that such failure shall not constitute a Triggering Event if the Corporation delists the Common Stock at the election of the holders of Series A Preferred Shares pursuant to Section 3(g) below); or (iv) the Corporation's notice to any holder of Series A Preferred Shares, including by way of public announcement, at any time, of its intention not to -14- comply with proper requests for conversion of any Series A Preferred Shares into shares of Common Stock, including due to any of the reasons set forth in Section 6(a) below. (e) Mechanics of Redemption at Option of Buyer Upon Major Transaction. No sooner than 15 days nor later than 10 days prior to the consummation of a Major Transaction, but not prior to the public announcement of such Major Transaction, the Corporation shall deliver written notice thereof via facsimile and overnight courier ("Notice of Major Transaction") to each holder of Series A Preferred Shares. At any time after receipt of a Notice of Major Transaction, the holders of at least, and not less than, two-thirds (2/3) of the Series A Preferred Shares then outstanding may require the Corporation to redeem all of the holder's Series A Preferred Shares then outstanding by delivering written notice thereof via facsimile and overnight courier ("Notice of Redemption at Option of Buyer Upon Major Transaction") to the Corporation, which Notice of Redemption at Option of Buyer Upon Major Transaction shall indicate (i) the number of Series A Preferred Shares that such holders are voting in favor of redemption and (ii) the applicable Major Transaction Redemption Price, as calculated pursuant to Section 3(a) above. (f) Mechanics of Redemption at Option of Buyer Upon Triggering Event. Within one (1) business day after the occurrence of a Triggering Event, the Corporation shall deliver written notice thereof via facsimile and overnight courier ("Notice of Triggering Event") to each holder of Series A Preferred Shares. At any time after receipt of a Notice of Triggering Event, the holders of at least, and not less than, two-thirds (2/3) of the Series A Preferred Shares then outstanding may require the Corporation to redeem all of the Series A Preferred Shares by delivering written notice thereof via facsimile and overnight courier ("Notice of Redemption at Option of Buyer Upon Triggering Event") to the Corporation, which Notice of Redemption at Option of Buyer Upon Triggering Event shall indicate (i) the number of Series A Preferred Shares that such holders are voting in favor of redemption and (ii) the applicable Triggering Event Redemption Price, as calculated pursuant to Section 3(b) above. (g) Payment of Redemption Price. Upon the Corporation's receipt of a Notice(s) of Redemption at Option of Buyer Upon Major Transaction or a Notice(s) of Redemption at Option of Buyer Upon Triggering Event, as the case may be, from the holders of at least two-thirds (2/3) of the Series A Preferred Shares then outstanding, the Corporation shall immediately notify each holder by facsimile of the Corporation's receipt of such requisite notices necessary to affect a redemption and each holder of Series A Preferred Shares shall thereafter promptly send such holder's Preferred Stock Certificates to be redeemed to the Corporation or its Transfer Agent. The Corporation shall deliver the applicable Redemption Price to such holder within ten days after the Corporation's receipt of the requisite notices required to affect a redemption; provided, however, that a holder's Preferred Stock Certificates shall have been so delivered to the Corporation or its Transfer Agent; provided further that if the Corporation is unable to redeem all of the Series A Preferred Shares, the Corporation shall redeem an amount from each holder of Series A Preferred Shares equal to such holder's pro-rata amount (based on the number of Series A Preferred Shares held by such holder relative to the -15- number of Series A Preferred Shares outstanding) of all Series A Preferred Shares being redeemed. If the Corporation shall fail to redeem all of the Series A Preferred Shares submitted for redemption (other than pursuant to a dispute as to the arithmetic calculation of the applicable Redemption Price), in addition to any remedy such holder of Series A Preferred Shares may have under this Article V and the Securities Purchase Agreement, the Redemption Price payable in respect of such unredeemed Series A Preferred Shares shall bear interest at the rate of 2.0% per month (prorated for partial months) until paid in full. Until the Corporation pays any unpaid applicable Redemption Price in full to each holder, holders of at least two-thirds (2/3) of the Series A Preferred Shares then outstanding, including shares of Series A Preferred Shares submitted for redemption pursuant to this Section 3 and for which the applicable Redemption Price has not been paid, shall have the option (the "Void Optional Redemption Option") to, in lieu of redemption, require the Corporation to promptly return to each holder all of the Series A Preferred Shares that were submitted for redemption by such holder under this Section 3 and for which the applicable Redemption Price has not been paid, by sending written notice thereof to the Corporation via facsimile (the "Void Optional Redemption Notice"). Upon the Corporation's receipt of such Void Optional Redemption Notice(s) and prior to payment of the full applicable Redemption Price to each holder, (i) the Notice(s) of Redemption at Option of Buyer Upon Triggering Event or the Notice(s) of Redemption at Option of Buyer Upon Major Transaction, as the case may be, shall be null and void with respect to those Series A Preferred Shares submitted for redemption and for which the applicable Redemption Price has not been paid, (ii) the Corporation shall immediately return any Series A Preferred Shares submitted to the Corporation by each holder for redemption under this Section 3(i) and for which the applicable Redemption Price has not been paid, (iii) the Fixed Conversion Price of such returned Series A Preferred Shares shall be adjusted to the lesser of (A) the Fixed Conversion Price as in effect on the date on which the Void Optional Redemption Notice(s) is delivered to the Corporation and (B) the lowest Closing Bid Price during the period beginning on the date on which the Notice(s) of Redemption of Option of Buyer Upon Major Transaction or the Notice(s) of Redemption at Option of Buyer Upon Triggering event, as the case may be, is delivered to the Corporation and ending on the date on which the Void Optional Redemption Notice(s) is delivered to the Corporation; provided that no adjustment shall be made if such adjustment would result in an increase of the Fixed Conversion Price then in effect, and (iv) the Conversion Percentage in effect at such time shall be reduced by a number of percentage points equal to the product of (A) .25 and (B) the number of days in the period beginning on the date on which the Notice(s) of Redemption at Option of Buyer Upon Major Transaction or the Notice(s) of Redemption at Option of Buyer Upon Triggering Event, as the case may be, is delivered to the Corporation and ending on the date on which the Void Optional Redemption Notice(s) is delivered to the Corporation. Notwithstanding the foregoing, in no event shall the Conversion Percentage be reduced pursuant to this Section 3(g) and Section 2(c)(A) by a number of percentage points which in the aggregate exceeds 15. In addition, in the event of a dispute as to the determination of the Closing Bid Price or the arithmetic calculation of the Redemption Price, such dispute shall be resolved pursuant to Section 2(f)(iii) above with the term "Closing Bid Price" being substituted for the term "Market Price" and the term "Redemption Price" being substituted for the term -16- "Conversion Rate". Payments provided for in this Section 3 shall have priority to payments to other shareholders in connection with a Major Transaction. (4) Corporation's Right to Redeem at Its Election. (a) Notwithstanding Section 2(g) or anything herein to the contrary but subject to Sections 4(e) and 4(f) below, the Corporation (i) at any time on or after the date which is two years after the date that the Registration Statement is declared effective by the SEC, the Corporation shall have the right, in its sole discretion, to redeem from time to time, any or all of the Series A Preferred Shares at the applicable Redemption Price at the Corporation's Election set forth in Section 4(b) below, (ii) at any time during the period beginning on the date as of which the holders of the Series A Preferred Shares representing at least one-third (1/3) of the Series A Preferred Shares then outstanding have refused to consent to the Corporation's written request to be permitted to issue equity securities during the LockUp Period (as defined in the Securities Purchase Agreement) and ending on the date that is 180 days after the Issuance Date, the Corporation shall have the right, in its sole discretion to redeem all, but not less than all, of the Series A Preferred Shares then outstanding held by the holders which have refused to consent to such issuance of equity securities at the applicable Redemption Price at the Corporation's Election set forth in Section 4(b) below and (iii) at any time during the period beginning on the date as of which a particular holder of Series A Preferred Shares has refused to agree not to sell shares of Common Stock pursuant to a "lock-up" agreement with the underwriters of a public offering of the Common Stock as provided in Section 4(l) of the Securities Purchase Agreement and ending on the date that is 365 days after the Issuance Date, the Corporation shall have the right, in its sole discretion to redeem all, but not less than all, of the Series A Preferred Shares then outstanding held by such holder which has refused to sign a "lock-up" agreement at the applicable Redemption Price at the Corporation's Election set forth in Section 4(b) below (such rights to redeem being collectively referred to herein as "Redemption at the Corporation's Election"). If the Corporation elects to redeem some, but not all, of the Series A Preferred Shares, the Corporation shall redeem an amount from each holder of Series A Preferred Shares equal to such holder's pro-rata amount (based on the number of Series A Preferred Shares held by such holder relative to the number of Series A Preferred Shares outstanding) of all Series A Preferred Shares being redeemed. (b) Redemption Price at the Corporation's Election. The "Redemption Price at the Corporation's Election" shall be an amount per Series A Preferred Share equal to: (i) in the case of a Redemption at the Corporation's Election referred to in clause (i) of Section 4(a), the product of (A) 1.15 multiplied by (B) the sum of (I) (.07)(P/365)(10,000) plus (II) 10,000; (ii) in the case of a Redemption at the Corporation's Election referred to in clause (ii) of Section 4(a), the greater of (A) the product of (I) 1.20 multiplied by (II) the sum of (y) (.07)(P/365)(10,000) plus (z) 10,000, and (B) the product of (I) the Conversion Rate on the Date of Redemption at the Corporation's -17- Election (as defined in Section 4(c)) multiplied by (II) the Closing Bid Price on the Date of Redemption at the Corporation's Election; and (iii) in the case of a Redemption at the Corporation's Election referred to in clause (iii) of Section 4(a), the greater of (A) the product of (I) 1.20, if the Date of Redemption at the Corporation's Election is prior to the date which is 180 days after the Issuance Date, or 1.35 if the Date of Redemption at the Corporation's Election is after the date which is 180 days after the Issuance Date, multiplied by (II) the sum of (y) (.07)(P/365)(10,000) plus (z) 10,000, and (B) the product of (I) the Conversion Rate on the Date of Redemption at the Corporation's Election (as defined in Section 4(c)) multiplied by (II) the Closing Bid Price on the Date of Redemption at the Corporation's Election. For purposes of this Section 4(b), "P" shall mean the number of days from, but excluding, the Issuance Date through and including the Date of Redemption at the Corporation's Election. (c) Mechanics of Redemption at the Corporation's Election. The Corporation shall effect each such redemption no sooner than 30 trading days nor later than 40 trading days after delivering written notice of its Redemption at the Corporation's Election via facsimile and overnight courier ("Notice of Redemption at the Corporation's Election") to (i) each holder of the Series A Preferred Shares and (ii) the Transfer Agent. Such Notice of Redemption at the Corporation's Election shall indicate (A) the number of shares of Series A Preferred Shares that have been selected for redemption, (B) the date that such redemption is to become effective (the "Date of Redemption at the Corporation's Election") and (C) the applicable Redemption Price at the Corporation's Election; provided, however, that the Date of Redemption at the Corporation's Election must be within the period during which the Corporation has the right to a Redemption at the Corporation's Election. Notwithstanding the above, any holder may convert into Common Stock pursuant to Section (2)(a) above, on or prior to the date immediately preceding the Date of Redemption at the Corporation's Election, any Series A Preferred Shares that such holder is otherwise entitled to convert, including Series A Preferred Shares that have been selected for Redemption at the Corporation's Election pursuant to this Section 4. (d) Payment of Redemption Price. Each holder submitting Series A Preferred Shares being redeemed under this Section 4 shall send such holder's Preferred Stock Certificates so redeemed to the Corporation or its Transfer Agent within five (5) business days after the Date of Redemption at the Corporation's Election, and the Corporation shall pay the applicable Redemption Price at the Corporation's Election to that holder in cash within three business days after such holder's Preferred Stock Certificates are so delivered to the Corporation or its Transfer Agent. If the Corporation shall fail to pay the applicable Redemption Price at the Corporation's Election to such holder on a timely basis as described in this Section 4(d), in addition to any remedy such holder of Series A Preferred Shares may have under this Article V and the Securities Purchase Agreement, such unpaid amount shall bear interest at the rate of 2.0% per -18- month until paid in full. Notwithstanding the foregoing, if the Corporation fails to pay the applicable Redemption Price at the Corporation's Election to a holder within the time period described in this Section 4 due to a dispute as to the arithmetic calculation of the Redemption Price at the Corporation's Election, such dispute shall be resolved pursuant to Section 2(f)(iii) above with the term "Redemption Price at the Corporation's Election" being substituted for the term "Conversion Rate." (e) Corporation Must Have Immediately Available Funds or Credit Facilities. The Corporation shall not be entitled to send any Notice of Redemption at the Corporation's Election pursuant to Section 4(c) above and begin the redemption procedure under this Section 4, unless it has: (i) the full amount of the Redemption Price at the Corporation's Election in cash, available in a demand or other immediately available account in a bank or similar financial institution; (ii) credit facilities, with a bank or similar financial institutions that are immediately available and unrestricted for use in redeeming the Series A Preferred Shares, in the full amount of the Redemption Price at the Corporation's Election; (iii) a written agreement with a standby underwriter or qualified buyer ready, willing and able to purchase from the Corporation a sufficient number of shares of stock to provide proceeds necessary to redeem any stock that is not converted prior to a Redemption at the Corporation's Election; or (iv) a combination of the items set forth in the preceding clauses (i), (ii) and (iii), aggregating the full amount of the Redemption Price at the Corporation's Election. (f) Certain Conditions During Notice Period. The Corporation shall not be entitled to redeem the Series A Preferred Shares on a Date of Redemption at the Election of the Corporation, unless each of the following conditions are satisfied as of the date of the Notice of Redemption at the Corporation's Election and on each day from such date until and including the later of the Date of Redemption at the Corporation's Election and the date on which the Corporation pays the applicable Redemption Price: (i) If shareholder approval of the issuance of the Securities (as defined in the Securities Purchase Agreement) would be required (absent Section 13 of this Article V) by the rules and regulations of The Nasdaq Stock Market, Inc. in order for the Corporation to issue all of the Securities, then the Corporation's shareholders shall have approved the issuance of the Securities on or prior to the Date of Redemption at the Corporation's Election; (ii) The Registration Statement shall be effective and available for the sale of no less than 125% of the sum of (A) the number of Conversion Shares -19- then issuable upon the conversion of all outstanding Series A Preferred Shares, including the Conversion Shares to be issued pursuant to this Conversion at the Corporation's Election, (B) the number of Warrant Shares then issuable upon exercise of all outstanding Warrants and (C) the number of Conversion Shares and Warrant Shares that are then held by the holders of the Series A Preferred Shares; (iii) The Common Stock is designated for quotation on The Nasdaq SmallCap Market, the Nasdaq National Market or a national securities exchange and is not suspended from trading; (iv) The Corporation shall have delivered Conversion Shares upon conversion of the Series A Preferred Shares and Warrant Shares upon exercise of the Warrants to the Buyers on a timely basis as set forth in Section 2(f)(ii) of this Article V and Sections 2(a) and 2(b) of the Warrants, respectively; and (v) the Corporation otherwise has satisfied its obligations and is not in default under this Article V, the Securities Purchase Agreement and the Registration Rights Agreement. (5) Corporation's Right to Redeem in Lieu of Conversion. (a) Notwithstanding Section 2 or anything herein to the contrary but subject to Section 5(e) below, at any time after the Issuance Date, the Corporation may elect to redeem Series A Preferred Shares submitted for conversion in lieu of converting such Series A Preferred Shares, provided that the Conversion Rate for such Series A Preferred Shares on the date submitted for conversion is less than $2.25 per share (a "Corporation Redemption in Lieu of Conversion"). If the Corporation elects to redeem some, but not all, of the Series A Preferred Shares submitted for conversion, the Corporation shall redeem an amount from each holder of Series A Preferred Shares submitted for conversion on the applicable date a number of Series A Preferred Shares equal to such holder's pro-rata amount (based on the number of Series A Preferred Shares held by such holder relative to the number of Series A Preferred Shares outstanding) of all Series A Preferred Shares submitted for conversion which the Corporation elects to redeem. (b) Redemption Price of Corporation Redemption in Lieu of Conversion. The "Redemption Price of Corporation Redemption in Lieu of Conversion" shall be an amount per Series A Preferred Share equal to the product of (i) the Conversion Rate of the Series A Preferred Shares on the date such Series A Preferred Shares are submitted for conversion and (ii) the last reported sale price of the Common Stock (as reported by Bloomberg) on the date the applicable Series A Preferred Shares are submitted for conversion. (c) Mechanics of Corporation Redemption in Lieu of Conversion. The Corporation shall exercise its right to redeem by delivering written notice by facsimile and overnight courier ("Notice of Corporation Redemption in Lieu of Conversion") to (i) each holder of the Series A Preferred Shares and (ii) the Transfer Agent. Such Notice of Corporation Redemption in Lieu of Conversion at the Corporation's Election -20- shall indicate (A) the maximum, if any, aggregate Redemption Price of Corporation Redemption in Lieu of Conversion which the Corporation is willing to expend for Corporation Redemption in Lieu of Conversion, (B) confirm the time period during which the Corporation may effect Corporation Redemption in Lieu of conversion, which period shall begin on and include the date which is five business days after the date of receipt by all of the holders' of the Notice of Redemption in Lieu of Conversion and shall end on and include the date which is 30 calendar days after the fifth business day following the date of receipt by all of the holders of the Notice of Redemption in Lieu of Conversion (the "Redemption in Lieu of Conversion Period"). The Corporation may terminate a Redemption in Lieu of Conversion Period at any time with respect to Series A Preferred Shares which have not been submitted for conversion by delivering written notice of such termination to each holder of Series A Preferred Shares by facsimile and overnight courier. Any Series A Preferred Shares submitted for conversion after the termination of the Redemption in Lieu of Conversion Period or the redemption price of which is in excess of the maximum aggregate Redemption Price of Corporation Redemption in Lieu of Conversion shall be converted in accordance with Section 2. (d) Payment of Redemption Price. The Corporation shall pay the applicable Redemption Price of Corporation Redemption in Lieu of Conversion to the holder of the Series A Preferred Shares being redeemed in cash within a number of days after the termination or expiration of the Redemption in Lieu of Conversion Period equal to (i) five days if the number of Series A Preferred Shares presented for conversion and subject to redemption is less than or equal to 100 Series A Preferred Shares, (ii) 10 days if the number of Series A Preferred Shares presented for conversion and subject to redemption is greater than 100 but less than or equal to 200 Series A Preferred Shares, (iii) 15 days if the number of Series A Preferred Shares presented for conversion and subject to redemption is greater than 200 but less than or equal to 300 Series A Preferred Shares, and (iv) 25 days if the number of Series A Preferred Shares presented for conversion and subject to redemption is greater than 300. If the Corporation shall fail to pay the applicable Redemption Price of Corporation Redemption in Lieu of Conversion to such holder on a timely basis as described in this Section 5(d), in addition to any remedy such holder of Series A Preferred Shares may have under this Article V and the Securities Purchase Agreement, such unpaid amount shall bear interest at the rate of 2.0% per month until paid in full. Until the Corporation pays such unpaid applicable Redemption Price of Corporation Redemption in Lieu of Conversion full to each holder, each holder of Series A Preferred Shares submitted for redemption pursuant to this Section 5 and for which the applicable Redemption Price of Corporation Redemption in Lieu of Conversion has not been paid, shall have the option (the "Void Corporation Redemption Option") to, in lieu of redemption, require the Corporation to promptly return to each holder all of the Series A Preferred Shares that were submitted for redemption by such holder under this Section 5 and for which the applicable Redemption Price of Corporation Redemption in Lieu of Conversion has not been paid, by sending written notice thereof to the Corporation via facsimile (the "Void Corporation Redemption Notice"). Upon the Corporation's receipt of such Void Corporation Redemption Notice(s) and prior to payment of the full applicable redemption price to each holder, (i) the Corporation's Redemption in Lieu of Conversion shall be null and -21- void with respect to those Series A Preferred Shares submitted for redemption and for which the applicable redemption price has not been paid, (ii) the Corporation shall immediately return any Series A Preferred Shares submitted to the Corporation by each holder for redemption under this Section 5 and for which the applicable Redemption Price of Corporation Redemption in Lieu of Conversion has not been paid and (iii) the Fixed Conversion Price of such returned Series A Preferred Shares shall be adjusted to the lesser of (A) the Conversion Rate applicable to such conversion on the date on which such Series A Preferred Shares were originally presented for conversion and (B) the Conversion Rate which would have been effect if such Series A Preferred Shares were presented for conversion on the business day immediately following the last day on which the Corporation could have effected a timely Corporation Redemption in Lieu of Conversion. Notwithstanding the foregoing, if the Corporation fails to pay the applicable Redemption Price of Corporation Redemption in Lieu of Conversion to a holder within the time period described in this Section 5(d) due to a dispute as to the arithmetic calculation of the Redemption Price of Corporation Redemption in Lieu of Conversion, such dispute shall be resolved pursuant to Section 2(f)(iii) above with the term "Redemption Price of Corporation Redemption in Lieu of Conversion" being substituted for the term "Conversion Rate." If the Corporation fails to timely effect a Corporation Redemption in Lieu of Conversion in accordance with this Section 5, the Corporation shall not be allowed to submit another Notice of Corporation Redemption in Lieu of Conversion without the prior written consent of the holders of at least two-thirds (2/3) of the Series A Preferred Shares then outstanding. (e) Corporation Must Have Immediately Available Funds or Credit Facilities. The Corporation shall not be entitled to send any Notice of Corporation Redemption in Lieu of Conversion pursuant to Section 5(b) above and begin the redemption procedure under this Section 5, unless it has: (i) the full amount of the Redemption Price of Corporation Redemption in Lieu of Conversion in cash, available in a demand or other immediately available account in a bank or similar financial institution; (ii) credit facilities, with a bank or similar financial institutions that are immediately available and unrestricted for use in redeeming the Series A Preferred Shares, in the full amount of the Redemption Price of Corporation Redemption in Lieu of Conversion; (iii) a written agreement with a standby underwriter or qualified buyer ready, willing and able to purchase from the Corporation a sufficient number of shares of stock to provide proceeds necessary to redeem any stock that is not converted prior to a Corporation Redemption in Lieu of Conversion; or (iv) a combination of the items set forth in the preceding clauses (i), (ii) and (iii), aggregating the full amount of the Redemption Price of Corporation Redemption in Lieu of Conversion. -22- (6) Inability to Fully Convert. (a) Holder's Option if Corporation Cannot Fully Convert. If, upon the Corporation's receipt of a Conversion Notice, the Corporation can not issue shares of Common Stock registered for resale under the Registration Statement for any reason, including, without limitation, because the Corporation (x) does not have a sufficient number of shares of Common Stock authorized and available, (y) is otherwise prohibited by applicable law or by the rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Corporation or its Securities, including without limitation the Exchange Cap, from issuing all of the Common Stock which is to be issued to a holder of Series A Preferred Shares pursuant to a Conversion Notice or (z) fails to have a sufficient number of shares of Common Stock registered for resale under the Registration Statement, then the Corporation shall issue as many shares of Common Stock as it is able to issue in accordance with such holder's Conversion Notice and pursuant to Section 2(f) above and, with respect to the unconverted Series A Preferred Shares, the holder, solely at such holder's option, can elect to: (i) require the Corporation to redeem from such holder those Series A Preferred Shares for which the Corporation is unable to issue Common Stock in accordance with such holder's Conversion Notice ("Mandatory Redemption") at a price per Series A Preferred Share (the "Mandatory Redemption Price") equal to the Redemption Price as of such Conversion Date; (ii) if the Corporation's inability to fully convert Series A Preferred Shares is pursuant to Section 6(a)(z) above, require the Corporation to issue restricted shares of Common Stock in accordance with such holder's Conversion Notice and pursuant to Section 2(f)above; (iii) void its Conversion Notice and retain or have returned, as the case may be, the nonconverted Series A Preferred Shares that were to be converted pursuant to such holder's Conversion Notice; or (iv) if the Corporation's inability to fully convert Series A Preferred Shares is pursuant to the Exchange Cap described in Section 6(a)(y) above, require the Corporation to issue shares of Common Stock in accordance with such holder's Conversion Notice and pursuant to Section 2(f) above at a Conversion Price equal to the Market Price of the Common Stock for the seven consecutive trading days preceding such holder's Notice in Response to Inability to Convert (as defined below). (b) Mechanics of Fulfilling Holder's Election. The Corporation shall immediately send via facsimile to a holder of Series A Preferred Shares, upon receipt of a facsimile copy of a Conversion Notice from such holder which cannot be fully satisfied as described in Section 6(a) above, a notice of the Corporation's inability to fully satisfy such holder's Conversion Notice (the "Inability to Fully Convert Notice"). Such Inability to Fully Convert Notice shall indicate (i) the reason why the Corporation is -23- unable to fully satisfy such holder's Conversion Notice, (ii) the number of Series A Preferred Shares which cannot be converted and (iii) the applicable Mandatory Redemption Price. Such holder must within five (5) business days of receipt of such Inability to Fully Convert Notice deliver written notice via facsimile to the Corporation ("Notice in Response to Inability to Convert") of its election pursuant to Section 6(a) above. (c) Payment of Redemption Price. If such holder shall elect to have its shares redeemed pursuant to Section 6(a)(i) above, the Corporation shall pay the Mandatory Redemption Price in cash to such holder within thirty (30) days of the Corporation's receipt of the holder's Notice in Response to Inability to Convert. If the Corporation shall fail to pay the applicable Mandatory Redemption Price to such holder on a timely basis as described in this Section 6(c) (other than pursuant to a dispute as to the determination of the arithmetic calculation of the Redemption Price), in addition to any remedy such holder of Series A Preferred Shares may have under this Article V and the Securities Purchase Agreement, such unpaid amount shall bear interest at the rate of 2.0% per month (prorated for partial months) until paid in full. Until the full Mandatory Redemption Price is paid in full to such holder, such holder may void the Mandatory Redemption with respect to those Series A Preferred Shares for which the full Mandatory Redemption Price has not been paid and receive back such Series A Preferred Shares. Notwithstanding the foregoing, if the Corporation fails to pay the applicable Mandatory Redemption Price within such thirty (30) days time period due to a dispute as to the determination of the arithmetic calculation of the Redemption Rate, such dispute shall be resolved pursuant to Section 2(f)(iii) above with the term "Redemption Price" being substituted for the term "Conversion Rate". (d) Pro-rata Conversion and Redemption. In the event the Corporation receives a Conversion Notice from more than one holder of Series A Preferred Shares on the same day and the Corporation can convert and redeem some, but not all, of the Series A Preferred Shares pursuant to this Section 6, the Corporation shall convert and redeem from each holder of Series A Preferred Shares electing to have Series A Preferred Shares converted and redeemed at such time an amount equal to such holder's pro-rata amount (based on the number of Series A Preferred Shares held by such holder relative to the number of Series A Preferred Shares outstanding) of all Series A Preferred Shares being converted and redeemed at such time. (7) Reissuance of Certificates. In the event of a conversion or redemption pursuant to this Article V of less than all of the Series A Preferred Shares represented by a particular Preferred Stock Certificate, the Corporation shall promptly cause to be issued and delivered to the holder of such Series A Preferred Shares a preferred stock certificate representing the remaining Series A Preferred Shares which have not been so converted or redeemed. (8) Reservation of Shares. The Corporation shall, so long as any of the Series A Preferred Shares are outstanding, reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Series -24- A Preferred Shares, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all of the Series A Preferred Shares then outstanding; provided that the number of shares of Common Stock so reserved shall at no time be less than 150% of the number of shares of Common Stock for which the Series A Preferred Shares are at any time convertible; provided further that such shares of Common Stock so reserved shall be allocated for issuance upon conversion of Series A Preferred Shares pro rata among the holders of Series A Preferred Shares based on the number of Series A Preferred Shares held by such holder relative to the total number of authorized Series A Preferred Shares. (9) Voting Rights. Holders of Series A Preferred Shares shall have no voting rights, except as required by law, including but not limited to the Business Corporation Act of the State of Florida, and as expressly provided in this Article V. (10) Liquidation, Dissolution, Winding-Up. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of the Series A Preferred Shares shall be entitled to receive in cash out of the assets of the Corporation, whether from capital or from earnings available for distribution to its shareholders (the "Preferred Funds"), before any amount shall be paid to the holders of any of the capital stock of the Corporation of any class junior in rank to the Series A Preferred Shares in respect of the preferences as to the distributions and payments on the liquidation, dissolution and winding up of the Corporation, an amount per Series A Preferred Share equal to the sum of (i) $10,000 and (ii) an amount equal to the product of (.07) (N/365) ($10,000) (such sum being referred to as the "Liquidation Value"); provided that, if the Preferred Funds are insufficient to pay the full amount due to the holders of Series A Preferred Shares and holders of shares of other classes or series of preferred stock of the Corporation that are of equal rank with the Series A Preferred Shares as to payments of Preferred Funds (the "Pari Passu Shares"), then each holder of Series A Preferred Shares and Pari Passu Shares shall receive a percentage of the Preferred Funds equal to the full amount of Preferred Funds payable to such holder as a liquidation preference, in accordance with their respective powers, preference and rights as set forth in this Article V, as a percentage of the full amount of Preferred Funds payable to all holders of Series A Preferred Shares and Pari Passu Shares. The purchase or redemption by the Corporation of stock of any class, in any manner permitted by law, shall not, for the purposes hereof, be regarded as a liquidation, dissolution or winding up of the Corporation. Neither the consolidation or merger of the Corporation with or into any other Person, nor the sale or transfer by the Corporation of less than substantially all of its assets, shall, for the purposes hereof, be deemed to be a liquidation, dissolution or winding up of the Corporation. No holder of Series A Preferred Shares shall be entitled to receive any amounts with respect thereto upon any liquidation, dissolution or winding up of the Corporation other than the amounts provided for herein. (11) Preferred Rank. All shares of Common Stock shall be of junior rank to all Series A Preferred Shares in respect to the preferences as to distributions and payments upon the liquidation, dissolution and winding up of the Corporation. The -25- rights of the shares of Common Stock shall be subject to the preferences and relative rights of the Series A Preferred Shares. Without the prior express written consent of the holders of not less than two-thirds (2/3) of the then outstanding Series A Preferred Shares, the Corporation shall not hereafter authorize or issue additional or other capital stock that is of senior or equal rank to the Series A Preferred Shares in respect of the preferences as to distributions and payments upon the liquidation, dissolution and winding up of the Corporation. Without the prior express written consent of the holders of not less than two-thirds (2/3) of the then outstanding Series A Preferred Shares, the Corporation shall not hereafter authorize or make any amendment to the Corporation's Articles of Incorporation or bylaws, or file any resolution of the board of directors of the Corporation with the Florida Secretary of State containing any provisions, which would adversely affect or otherwise impair the rights or relative priority of the holders of the Series A Preferred Shares relative to the holders of the Common Stock or the holders of any other class of capital stock. In the event of the merger or consolidation of the Corporation with or into another corporation, the Series A Preferred Shares shall maintain their relative powers, designations and preferences provided for herein and no merger shall result inconsistent therewith. (12) Restriction on Redemption and Cash Dividends with respect to Other Capital Stock. Until all of the Series A Preferred Shares have been converted or redeemed as provided herein, the Corporation shall not, directly or indirectly, redeem, or declare or pay any cash dividend or distribution on, its Common Stock without the prior express written consent of the holders of not less than two-thirds (2/3) of the then outstanding Series A Preferred Shares. (13) Limitation on Number of Conversion Shares. The Corporation shall not be obligated to issue, in the aggregate, more than 1,854,740 shares of Common Stock (such amount to be proportionately and equitably adjusted from time to time in the event of stock splits, stock dividends, combinations, reverse stock splits, reclassification, capital reorganizations and similar events relating to the Common Stock) (the "Exchange Cap") upon conversion of the Series A Preferred Shares, if issuance of a larger number of shares of Common Stock would constitute a breach of the Corporation's obligations under the rules or regulations of The Nasdaq Stock Market, Inc. or any other principal securities exchange or market upon which the Common Stock is or becomes traded. The Exchange Cap shall be allocated among the Series A Preferred Shares pro rata based on the total number of authorized Series A Preferred Shares. (14) Vote to Change the Terms of Series A Preferred Shares; Required Approvals of Holders of Series A Preferred Shares. The affirmative vote at a meeting duly called for such purpose or the written consent without a meeting, of the holders of not less than two-thirds (2/3) of the then outstanding Series A Preferred Shares, shall be required for any change to this Article or the Corporation's Articles of Incorporation which would amend, alter, change or repeal any of the powers, designations, preferences and rights of the Series A Preferred Shares. For purposes of determining whether any requisite approval of the holders of the Series A Preferred Shares has been obtained as -26- required by this Article V, Series A Preferred Shares which are held by affiliates of the Corporation shall be excluded. (15) Lost or Stolen Certificates. Upon receipt by the Corporation of evidence satisfactory to the Corporation of the loss, theft, destruction or mutilation of any Preferred Stock Certificates representing the Series A Preferred Shares, and, in the case of loss, theft or destruction, of any reasonably appropriate indemnification undertaking by the holder to the Corporation and, in the case of mutilation, upon surrender and cancellation of the Preferred Stock Certificate(s), the Corporation shall execute and deliver new preferred stock certificate(s) of like tenor and date; provided, however, the Corporation shall not be obligated to re-issue preferred stock certificates if the holder contemporaneously requests the Corporation to convert such Series A Preferred Shares into Common Stock. (16) Form of Conversion Notice. Each Conversion Notice required to be delivered by a holder of Preferred Shares shall be in the following form: SMART CHOICE AUTOMOTIVE GROUP, INC. CONVERSION NOTICE Reference is made to the Second Articles of Amendment of Articles of Incorporation of Smart Choice Automotive Group, Inc., a Florida corporation (the "Corporation"), setting forth the designations, preferences and rights of the Corporation's Series A Redeemable Convertible Preferred Stock (the "Articles of Amendment"). In accordance with and pursuant to the Articles of Amendment, the undersigned hereby elects to convert the number of shares of Series A Redeemable Convertible Preferred Stock, par value $.01 per share (the "Series A Preferred Shares"), of the Corporation, indicated below into shares of Common Stock, par value $.01 per share (the "Common Stock"), of the Corporation, by tendering the stock certificate(s) representing the share(s) of Series A Preferred Shares specified below as of the date specified below. Date of Conversion: Number of Series A Preferred Shares to be converted: Stock certificate no(s). of Series A Preferred Shares to be converted: Please confirm the following information: Conversion Price: Number of shares of Common Stock to be issued: -27- Please issue the Common Stock into which the Series A Preferred Shares are being converted and, if applicable, any check drawn on an account of the Corporation in the following name and to the following address: Issue to: Facsimile Number: Authorization: By: Title: Dated: Account Number: (if electronic book entry transfer): Transaction Code Number (if electronic book entry transfer): ------------------------- SECOND: Pursuant to Section 607.0602 of the Florida Business Act, the Board of Directors adopted this Amendment to Article V of the Articles of Incorporation on September 29, 1997 without shareholder action. -28- The above Amendment to Article V of the Articles of Incorporation is hereby approved by the undersigned this 30th day of September, 1997. SMART CHOICE AUTOMOTIVE GROUP, INC. By: /s/ Gary R. Smith Name: Gary R. Smith Its: President and a Director EX-10.1 3 FORM OF CONVERTIBLE NOTE THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY APPLICABLE STATE SECURITIES LAW AND MAY NOT BE TRANSFERRED UNLESS (I) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR SUCH APPLICABLE SECURITIES LAWS, OR (II) IN THE OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY REGISTRATION UNDER THE SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH TRANSFER. SMART CHOICE AUTOMOTIVE GROUP, INC. CONVERTIBLE NOTE __________ Titusville, FL August 29, 1997 FOR VALUE RECEIVED, the undersigned, Smart Choice Automotive Group, Inc., a Florida corporation (the "Company"), hereby promises to pay to the order of ___________, a__________ corporation, or its lawful assigns (the "Purchaser"), in lawful money of the United States of America, and in immediately available funds, the principal sum of __________ (_________). The principal hereof and any unpaid accrued interest hereon shall be due and payable at 5:00 p.m., New York time, on April 15, 1998 (unless (i) this Note is converted as set forth in Section 1 hereof, (ii) the payment date is extended as provided in Section 2 hereof, or (iii) the payment date is accelerated as provided in Section 5 hereof). Payment of all amounts due hereunder shall be made at the address of the Purchaser provided for in Section 7 hereof. The Company further promises to pay interest at the rate of 8% percent per annum on the outstanding principal balance hereof, such interest to be payable monthly in arrears on the 1st day of each month ("Interest Payment Date"), commencing October 1, 1997; provided the interest rate shall be increased to 12% per annum, retroactive to August 29, 1997, if the Company's common stock ("Common Stock") has not been registered by June 1, 1998 as herein provided. Interest is payable in cash or Common Stock at the option of the Company. If the interest is paid in Common Stock the stock shall be valued at 66 2/3 % of the average of the Closing Bid Price (as defined herein) for the five trading days immediately preceding the (i) Effective Date, for interest payable as a result of a conversion of the Note, and (ii) the Interest Payment Date, for interest otherwise payable. In connection with any conversion of the Note into any Conversion Shares (as defined herein), the Company shall place into escrow with David A. Rapaport, Esq., as escrow agent (the "Escrow Agent") under, and in accordance with the terms of, that certain Escrow Agreement with the Company and Purchaser dated the date hereof (the "Escrow Agreement") an aggregate of 275,000 shares of Common Stock pursuant to the terms of such Escrow Agreement. THE PROVISIONS OF THE ESCROW AGREEMENT ARE INCORPORATED HEREIN BY REFERENCE. In the event that the Conversion Shares have not been registered by December 30, 1997 the Company shall use its best efforts deliver to the Escrow Agent no later than January 10, 1997, as collateral for the performance of the Company's obligations hereunder, 275,000 shares of Common Stock not owned by the Company which may be transferred to the Purchaser and sold pursuant to Rule 144d or Rule 144k commencing on or before April 16, 1998 (the "Collateral Shares"). In the event the Company is in breach of its obligation to register the Conversion Shares by April 15, 1998 and has not registered the Conversion Shares under an S-3 Registration (as herein defined) within 45 days of the Purchaser's request, the Escrow Agent shall deliver Collateral Shares to the Purchaser upon receipt of a Conversion Notice on the same basis as it would have delivered Conversion Shares, had such Conversion Shares been registered. 1. CONVERSION. The Purchaser of this Note is entitled, at its option, from December 14, 1997 and in whole or in part, until maturity hereof (as extended by Purchaser) to convert the principal amount of this Note or any portion of the principal amount hereof into shares of Common Stock at a conversion price for each share of Common Stock equal to 66 2/3% of the average Closing Bid Price (as herein defined) of the Common Stock (subject to adjustment as provided for herein) for the five trading days immediately preceding the Effective Date (defined herein) ("Conversion Percentage"). For purposes of this Section 1, the Closing Bid Price shall be the closing bid price of the Common Stock as reported by the National Association of Securities Dealers Automated Quotation System ("Nasdaq"), or the closing bid price in the over-the-counter market or, in the event the Common Stock is listed on a stock exchange, the closing bid price value per share shall be the closing price on the exchange, as reported in the Wall Street Journal. The shares of Common Stock issued upon conversion of the principal of the Note are herein referred to as "Principal Conversion Shares" or sometimes the "Conversion Shares"). (a) In the event the Conversion Shares have not been registered for resale without restriction by April 15, 1998 and May 15, 1998, respectively, the Conversion Percentage shall be decreased to 62% and 60%, respectively. (b) Such conversion shall be effectuated by delivering to the Escrow Agent the form of conversion notice attached hereto as Exhibit A (the "Conversion Notice"), executed by the Purchaser of this Note evidencing such Purchaser's intention to convert this Note or a specified portion hereof in accordance with the terms hereof and the Conversion Notice. The effective date of the Conversion Notice shall be deemed to be the earlier of (i) the date on which the Conversion Notice is received by the Escrow Agent, or, (ii) the date set forth in such Conversion Notice only if the Conversion Notice is received by the Escrow Agent within five business days' after the date set forth in such Conversion Notice. (c) Such Conversion Notice shall include, among other things, an amount of principal that upon conversion shall result in such number of Conversion Shares which is an even multiple of 1,000; provided that, any Conversion Notice which, when fulfilled by Escrow Agent, would result in the conversion of the entire remaining principal balance of this Note, may be in an amount that is not a multiple of 1,000; provided further, that Escrow Agent shall send to Purchaser such number of shares of Common Stock converted from accrued but unpaid interest (herein referred to as the Interest Conversion Shares and sometimes as the "Conversion Shares") equal to the nearest multiple of 1,000 rounding up, and promptly thereafter Purchaser shall send to the Company such number of excess Interest Conversion Shares as is provided for in the Conversion Notice. (d) Upon recording the amount converted and amount of indebtedness remaining under the Note, set forth in the Conversion Notice on the grid comprising the last page of the Note ("Principal Reduction Grid"), the Escrow Agent will send a copy of the revised Principal Reduction Grid to the Company and will send a copy of the revised Principal Reduction Grid to the Purchaser together with the certificate or certificates representing the Conversion Shares. (e) If at any time prior to conversion in full of this Note the Company's Closing Bid Price is less than or equal to $3.00 per share for five consecutive trading days, the Company hereby agrees to immediately issue and deliver to the Escrow Agent such number of additional shares equal to the new number of shares required upon the exercise of any conversion rights hereunder, plus an additional 25%, rounded to the nearest 1,000. (For example, if the Closing Bid Price for the Company's common stock were $2.00 per share, and none of the Note had been repaid or converted, the Company would issue and deliver to the Escrow Agent a total of 246,000 additional shares calculated as: $500,000 (amount of note) / $1.20 (60% of $2.00 ) = 416,667 x 1.25 (additional 25%) = 521,000 (520,834 rounded to the nearest 1,000) (275,000) (previously issued and delivered shares) 246,000 (additional escrow shares) (f) The Company has authorized and has reserved and covenants to continue to reserve, free of preemptive rights and other similar contractual rights of stockholders, a sufficient number of its authorized but unissued shares of its Common Stock to satisfy the rights of conversion of the holder of this Note. (g) Any certificates representing Conversion Shares transferred to Purchaser which are not registered for resale without restriction under the Securities Act or applicable state securities laws shall be endorsed with the following legend: THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY APPLICABLE STATE SECURITIES LAW AND MAY NOT BE TRANSFERRED UNLESS (1) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR SUCH APPLICABLE SECURITIES LAWS, OR (II) IN THE OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY REGISTRATION UNDER THE SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH TRANSFER. 2. EXTENSION OF MATURITY DATE. The maturity of this Note shall automatically be extended to the 15th day of the next succeeding month for twelve one-month periods unless the Purchaser, in its sole discretion, gives written notice to the Company and the Escrow Agent 5 business days prior to any maturity date that the Note is due on such maturity date. 3. PREPAYMENT. This Note shall not be prepaid, in whole or in part, without the prior written consent of the Purchaser. 4. TRANSFERABILITY. The Note and Conversion Shares may be transferred or assigned by Purchaser subject to compliance with applicable federal and state securities laws; provided that any transferee or assignee of the Note shall be an "accredited investor" as defined in Regulation D and such transfer or assignment is made expressly subject to the terms and provisions of this Note Purchaser or any transferee from Purchaser shall be liable for payment of any and all documentary stamp taxes, if any, payable in respect, and as a result, of the transfer of such Note. The Company will pay any and all documentary stamp taxes or similar issue or transfer taxes, if any, otherwise payable in respect of the issue or delivery of the Conversion Shares upon conversion of this Note pursuant to the terms hereof; provided that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of Conversion Shares in a name other that that of Purchaser or any affiliate of Purchaser, and no such issue or delivery shall be made unless and until the transferee Purchaser requesting such issue or delivery or the person in whose name such Conversion Shares shall be issued has paid to the Escrow Agent the amount of any such tax or has established, to the satisfaction of the Escrow Agent, that such tax has been paid. 5. DEFAULT. The occurrence of any one of the following events shall constitute an Event of Default: (a) The non-payment, when due, of any principal or interest pursuant to this Note; (b) The material breach of any representation or warranty in this Note or in the Escrow Agreement. In the event the Purchaser becomes aware of a breach of this Section 5(b), the Purchaser shall notify the Company in writing of such breach and the Company shall have five business days after notice to cure such breach; (c) The breach of any covenant or undertaking in this Note or in the Escrow Agreement, not otherwise provided for in this Section 5; (d) A default shall occurs in the payment when due (subject to any applicable grace period), whether by acceleration or otherwise, of any indebtedness of the Company in excess of an aggregate of $200,000 or an event of default or similar event shall occur with respect to any indebtedness of $200,000 or more, if the effect of such default or event (subject to any required notice and any applicable grace period) would be to accelerate the maturity of any such indebtedness or to permit the holder or holders of such indebtedness to cause such indebtedness to become due and payable prior to its express maturity; (e) The commencement by the Company of any voluntary proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, receivership, dissolution, or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or the adjudication of the Company as insolvent or bankrupt by a decree of a court of competent jurisdiction; or the petition or application by the Company for , acquiescence in, or consent by the Company to, the appointment of any receiver or trustee for the Company or for all or a substantial part of the property of the Company; or the assignment by the Company for the benefit of creditors; or the written admission of the Company of its inability to pay its debts as they mature; or (f) The commencement against the Company of any proceeding relating to the Company under any bankruptcy, reorganization, arrangement, insolvency, adjustment of debt, receivership, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, provided, however, that the commencement of such a proceeding shall not constitute an Event of Default unless the Company consents to the same or admits in writing the material allegations of same, or said proceeding shall remain undismissed for 20 days; or the issuance of any order, judgment or decree for the appointment of a receiver or trustee for the Company or for all or a substantial part of the property of the Company, which order, judgment or decree remains undismissed for 20 days; or a warrant of attachment, execution, or similar process shall be issued against any substantial part of the property of the Company. (g) The failure of the Company to have a registration statement covering the Conversion Shares effective by April 15, 1998. (h) Notwithstanding anything contained in this Note, in any other documentation issued or executed in conjunction herewith and all applicable laws, the capital stock held by any party, all assets and right in assets of Florida Finance Group, Inc. and First Choice Auto Finance, Inc. ("Excluded Assets") shall not be available to Purchaser to satisfy any obligation under this Note. By Purchaser's receipt and acceptance of this Note, Purchaser hereby waives and relinquishes all rights and remedies with respect to the Excluded Assets. Upon the occurrence of any Default or Event of Default, the Purchaser, may, by written notice to the Company, (i) declare all or any portion of the unpaid principal amount due to Purchaser, together with all accrued interest thereon, immediately due and payable, in which event it shall immediately be and become due and payable; (ii) on or after April 16, 1998 require the Company to file an S-3 registration statement ("S-3 Registration") for all Conversion Shares within 30 days and use its best efforts to have such S-3 Registration be declared effective within 45 days of the filing date; or (iii) in the event the S-3 Registration Statement is not declared effective within 75 days of Purchaser's written request to the Company; and the Collateral Shares have not been delivered to Escrow Agent as herein provided, the Company shall be required on 3 business days after receipt of written notice to pay to Purchaser an amount equal to the market value of the number of such Conversion Shares to which Purchaser is entitled on the date of such notice, as determined by the Conversion Percentage in effect on the date of such notice ("Conversion Share Payment"). The Company acknowledges that this Section 5 (iii) is a method of providing to Purchaser the same economic benefit to which it is entitled by the timely performance of the Company's obligation to register the Conversion Shares under the Securities Act. After receipt of the Conversion Share Payment, Purchaser shall instruct Escrow Agent and Escrow Agent shall promptly deliver to the Company, and in any event no later than 3 days after receipt of the Conversion Shares Payment, the certificate(s) representing all Conversion Shares which have been sold to the Company under the terms hereof and for which the Conversion Shares Payment has been received. 6. REGISTRATION OF CONVERSION SHARES. a) The Company agrees and, the Board of Directors of the Company shall authorize, the filing of a registration statement (the "Registration Statement") under the Securities Act of 1933, as amended (the "Act") covering the Conversion Shares and shall use its best efforts to enable such Registration Statement to be declared effective by the Securities and Exchange Commission ("SEC") no later than December 30, 1997; and shall maintain the effectiveness of such Registration Statement until the earlier of (i) the date upon which the Purchaser has advised the Company in writing that all of the Conversion Shares have been sold; or (ii) 120 trading days; provided that the failure of the Conversion Shares to be so registered by December 30, 1997 for any reason shall not constitute a default under Section 5 hereof. b) The Company shall (i) furnish the Purchaser and each and every underwriter, if any, of Conversion Shares with such copies of the prospectus, including the preliminary prospectus, conforming to the Act, (and such other documents as each such Purchaser or each such underwriter may reasonably request) in order to facilitate the sale or distribution of the Conversion Shares, (ii) use its best efforts to register or qualify such Conversion Shares under the blue sky laws (to the extent applicable) of such jurisdiction or jurisdictions as the Purchaser of any such Conversion Shares and each - -underwriter of Conversion Shares being sold by such Purchaser shall reasonably request and (iii) take such other actions as may be reasonably necessary or advisable to enable such Purchaser and such underwriters to consummate the sale or distribution in such jurisdiction or jurisdictions in which such Purchaser shall have reasonably requested that the Conversion Shares be sold. c) The Company shall pay all expenses incurred in connection with any registration or other action pursuant to the provisions of this Section 6, other than underwriting discounts and applicable transfer taxes relating to the Conversion Shares. d) The Company will indemnify the holders of Conversion Shares which are included in the Registration Statement substantially to the same extent as the Company has indemnified the underwriters (the "Underwriters") of its public offering of Common Stock pursuant to the Underwriting Agreement and such holders will indemnify the Company (and the underwriters, if applicable) with respect to information furnished by them in writing to the Company for inclusion therein substantially to the same extent as the Underwriters have indemnified the Company. (e) The Company shall not be obligated to effect, or to take any action to effect, any such registration pursuant to this Section 6 in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act. (f) The registration statement filed to cover the Conversion Shares, with respect to which registration rights have been granted, may include securities of the Company being sold for the account of the Company, except any S-3 Registration file pursuant to Section 5 (ii). (g) Purchaser shall furnish to the Company in writing and in a timely manner such information regarding the Purchaser and the distribution proposed by such person as the Company or the underwriters may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Note. 6. NOTICES. Notices to be given hereunder shall be in writing and shall be deemed to have been sufficiently given if delivered personally or sent by overnight courier or messenger or sent by registered or certified mail (air mail if overseas), return receipt requested, or by telex, facsimile transmission, telegram or similar means of communication. Notice shall be deemed to have been received on the date and time of personal delivery, telex, facsimile transmission, telegram or similar means of communication, or if sent by overnight courier or messenger, shall be deemed to have been received on the next delivery day after deposit with the courier or messenger, or if sent by certified or registered mail, return receipt requested, shall be deemed to have been received on the third business day after the date of mailing; provided that, no such notice shall be deemed received by Escrow Agent until in fact received. Notices shall be given to the following addresses: If to the Company: 5200 S. Washington Ave. Titusville, FL 32780 Attn: Fred E. Whaley, Exec. Vice President & Chief Financial Officer Facsimile No.: (407) 264-0376 With a copy to: Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A. 111 N. Orange Ave., 20th Floor Orlando, FL 32801 Attn: Randolph Fields, Esq. Facsimile No.: (407) 420-5909 If to the Purchaser: High Capital Funding, LLC 70 East Sunrise Highway Box 547, Suite 400 Valley Stream, NY 11582-0547 Facsimile No.: (516) 872-2357 With a copy to: David A. Rapaport 333 Sandy Springs Circle, Suite 230 Atlanta, GA 30328 Facsimile No.: (404) 255-2218 8. LIMITATION. Notwithstanding any other provision of this Note (including, without limitation, all Exhibits hereto) to the contrary, no individual Purchaser or holder of this Note or any portion of this Note shall be required or permitted to exercise any of the conversion rights to receive securities of the Company, if such action by Purchaser or such holder would result in the Purchaser or such holder converting into and/or otherwise becoming at any particular time, the beneficial owner of an aggregate of more than 5% of the then outstanding Common Stock of the Company, as calculated pursuant to Section 13 of the Exchange Act and Regulation 13D-G promulgated thereunder. In the event a conversion and transfer of Conversion Shares is made in violation of this provision, such conversion and transfer shall be void and rescinded to the extent such conversion results in an excess of 5% and Purchaser or holder, as the case may be, shall promptly return such certificates representing the excess Conversion Shares so transferred in violation back to the Escrow Agent; Escrow Agent, in turn, shall make adjustments to the outstanding indebtedness reflected on the grid of the Note in an amount equal to the excess amount purportedly converted pursuant to the voided Conversion Notice; provided further, that Escrow Agent shall have no responsibility or liability for determining whether such Purchaser or holder beneficially owns 5% of the common stock of the Company. The foregoing shall not prohibit the Purchaser or such holder from receiving any remaining amounts owed under this Note to such Purchaser or such holder from the Company, or to receive in the aggregate securities which would exceed 5% so long as Purchaser or such holder does not have beneficial ownership of an aggregate of more than 5% of the outstanding Common Stock at any given time. 9. REPRESENTATIONS AND WARRANTIES. The Company hereby makes the following representations and warranties to the Purchaser: . The Company is a corporation duly incorporated, validly exiting and in good standing under the laws of the State of Florida and has the requisite corporate power to own, lease and operate its properties and assets and to conduct its business as it is now being conducted. . The Company has the requisite corporate power and authority to enter into and perform this Note and the Escrow Agreement and to issue and sell this Note and the Conversion Shares in accordance with the terms hereof. The execution, delivery and performance of this Note and the Escrow Agreement by the Company and the consummation by it of the Transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action, and no further consent or authorization of the Company or its Board of Directors or shareholders is required. This Note and the Escrow Agreement have been duly executed and delivered by the Company. This Note and the Escrow Agreement constitutes, or shall constitute when executed and delivered, a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation, conservatorship, receivership or similar laws relating to, or affecting generally the enforcement of, creditor's rights and remedies or by other equitable principles of general application. . The authorized capital stock of the Company consists of 100,000,000 shares of Common Stock, of which 9,277,385 shares are issued and outstanding as of the date hereof, and 5,000,000 shares of preferred stock, of which no shares are issued and outstanding. All of the outstanding shares of the Company's securities have been duly and validly authorized and issued and are fully paid and nonassessable. d. Issuance of this Note and the Conversion Shares. The Note and the Conversion Shares to be issued upon conversion of the Note have been duly authorized by all necessary corporate action and, when paid for or issued in accordance with the terms hereof, will be validly issued and outstanding, fully paid and non-assessable and entitled to the rights and preferences set forth herein. . Neither this Note, the Escrow Agreement nor any other document, certificate or instrument furnished to the Purchaser by or on behalf of the Company in connection with the transactions contemplated by this Note or the Escrow Agreement contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made herein or therein, in the light of the circumstances under which they were made herein or therein, not misleading. f. Validity of Prior Representations. Except as disclosed in its reports, registrations, proxy or information statements and the other documents, together with any amendments made thereof , filed with the SEC under the Securities Act and the Securities Exchange Act of 1934, as amended (collectively, the "SEC Reports"), the representations and warranties of the Company set forth in Section 2 of that certain Loan Agreement between the Company and Sirrom Capital Corporation (Tandem Capital, Inc.) dated May 13, 1997 are true as of the date hereof, except for the passage of time, as if made on the date hereof and such representations and warranties are herein made to Purchaser and are incorporated in this agreement as if fully stated herein. Purchaser hereby makes the following representations and warranties to the Company: . The Purchaser is a limited liability company duly organized, validly exiting and in good standing under the laws of the State of Delaware and has the requisite power to own, lease and operate its properties and assets and to conduct its business as it is now being conducted. . The Purchaser has the requisite power and authority to enter into and perform the terms of the Note and the Escrow Agreement in accordance with the terms hereof. The execution, delivery and performance of the Note and the Escrow Agreement by the Purchaser and the consummation by it of the Transactions contemplated hereby and thereby have been duly and validly authorized by all necessary action, and no further consent or authorization of the Purchaser is required. This Note and the Escrow Agreement have been duly executed by the Purchaser. This Note and the Escrow Agreement constitutes, or shall constitute when executed and delivered, a valid and binding obligation of the Purchaser enforceable against the Purchaser in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation, conservatorship, receivership or similar laws relating to, or affecting generally the enforcement of, creditor's rights and remedies or by other equitable principles of general application. . Purchaser is purchasing the Note solely for its own account for the purpose of investment and not with a view to or for sale in connection with a distribution. Purchaser does not have a present intention to sell the Note or the Conversion Shares nor a present arrangement (whether or not legally binding) or intention to effect any distribution of the Note or the Conversion Shares to or through any person or entity; provided however, that by making the representations herein, such Purchaser does not agree to hold the Note or the Conversion Shares for any minimum or other specific term and reserves the right to dispose of the Note or the Conversion Shares at any time in accordance with Federal securities laws applicable to such disposition. Such Purchaser acknowledges that it is able to bear the financial risks associated with an investment in the Note and the Conversion Shares and that it has been given full access to such records of the Company and the subsidiaries and to the officers of the Company and the subsidiaries as it has deemed necessary and appropriate to conduct its due diligence investigation. Such Purchaser is an "accredited investor" as defined in Regulation D promulgated under the Securities Act of 1933, as amended. 10. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. The Company and Purchaser consent to the jurisdiction of the Federal District Court for the Middle District of Florida. The Company waives personal service of any summons, complaint or other process in connection with any such action or proceeding and agrees that service thereof may be made, as the Purchaser may elect, by certified mail directed to the Company at the location provided for in Section 8 hereof, or, in the alternative, in any other form or manner permitted by law. 11. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF FLORIDA APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY THEREIN, WITHOUT GIVING EFFECT TO THE RULES OR PRINCIPLES OF CONFLICTS OF LAW. 12. ATTORNEYS FEES. In the event the Purchaser or any holder hereof shall refer this Note to an attorney for collection, the Company agrees to pay all the costs and expenses incurred in attempting or effecting collection hereunder or enforcement of the terms of this Note, including attorney's fees, including but not limited to contingency fees, whether or not suit is instituted. 13. CONFORMITY WITH LAW. It is the intention of the Company and of the Purchaser to conform strictly to applicable usury and similar laws. Accordingly, notwithstanding anything to the contrary in this Note, it is agreed that the aggregate of all charges which constitute interest under applicable usury and similar laws that are contracted for, chargeable or receivable under or in respect of this Note, shall under no circumstances exceed the maximum amount of interest permitted by such laws, and any excess, whether occasioned by acceleration or maturity of this Note or otherwise, shall be canceled automatically, and if theretofore paid, shall be either refunded to the Company or credited on the principal amount of this Note. IN WITNESS WHEREOF, the Company has signed and sealed this Note as of August 29, 1997. SMART CHOICE AUTOMOTIVE GROUP, INC. By: James Neal Hutchinson Assistant Vice President ATTEST Assistant Secretary _____________________ [Purchaser] By:__________________ PRINCIPAL REDUCTION GRID Principal Adjusted Conversion Date Principal Converted Principal Shares Issued - ----- ---------- --------- --------- ----------------- August 29, 1997 $500,000 - 0 - $500,000 - 0 - $500,000 EX-10.2 4 FORM OF WARRANT FORM OF WARRANT THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT. ANY SUCH OFFER, SALE, ASSIGNMENT OR TRANSFER MUST ALSO COMPLY WITH THE APPLICABLE STATE SECURITIES LAWS. SMART CHOICE AUTOMOTIVE GROUP, INC. WARRANT TO PURCHASE COMMON STOCK Warrant No.: Number of Shares: ------------------------------- Date of Issuance: ____________ __, 199_ Smart Choice Automotive Group, Inc., a Florida corporation (the "Company"), hereby certifies that, for Ten United States Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, ____________________, the registered holder hereof or its permitted assigns, is entitled, subject to the terms set forth below, to purchase from the Company upon surrender of this Warrant, at any time or times on or after the date hereof, but not after 11:59 P.M. Eastern Time on the Expiration Date (as defined herein) ( ) [300 for each Preferred Share] fully paid nonassessable shares of Common Stock (as defined herein) of the Company (the "Warrant Shares") at the purchase price per share provided in Section 1(b) below (the "Warrant Exercise Price"); provided, however, that in no event shall the holder be entitled to exercise this Warrant for a number of Warrant Shares in excess of that number of Warrant Shares which, upon giving effect to such exercise, would cause the aggregate number of shares of Common Stock beneficially owned by the holder and its affiliates to exceed 4.9% of the outstanding shares of the Common Stock following such exercise. For purposes of the foregoing proviso, the aggregate number of shares of Common Stock beneficially owned by the holder and its affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination of such proviso is being made, but shall exclude shares of Common Stock which would be issuable upon (i) exercise of the remaining, unexercised Warrants beneficially owned by the holder and its affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company beneficially owned by the holder and its affiliates (including, without limitation, any convertible notes or preferred stock) subject to a limitation on conversion or exercise analogous to the limitation contained herein. Except as set forth in the preceding sentence, for purposes of this paragraph, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. The holder may waive the foregoing limitations by written notice to the Company upon not less than 61 days prior notice (with such waiver taking effect only upon the expiration of such 61 day notice period). Section 1. (a) Securities Purchase Agreement. This Warrant is one of the Warrants (the "Preferred Share Warrants") issued pursuant to Section 1 of that certain Securities Purchase Agreement dated as of September 30, 1997, among the Company and the Buyers referred to therein (the "Purchase Agreement"). (b) Definitions. The following words and terms as used in this Warrant shall have the following meanings: "Market Price" means, with respect to any security for any date, the lowest Closing Bid Price (as defined below) for such security during the seven consecutive trading days immediately preceding such date. "Closing Bid Price" means, for any security as of any date, the last closing bid price for such security on The Nasdaq SmallCap Market as reported by Bloomberg Financial Markets ("Bloomberg"), or, if The Nasdaq SmallCap Market is not the principal trading market for such security, the last closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last closing bid price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price is reported for such security by Bloomberg, the last closing trade price for such security as reported by Bloomberg, or, if no last closing trade price is reported for such security by Bloomberg, the average of the bid prices of any market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on such date on any of the foregoing bases, the Closing Bid Price of such security on such date shall be the fair market value as mutually determined by the Company and the holders of the Preferred Shares. If the Company and the holders of the Preferred Shares are unable to agree upon the fair market value of the Common Stock, then such dispute shall be resolved pursuant to Section 2(a) of this Warrant with the term "Closing Bid Price" being substituted for the term "Market Price." (All such determinations to be appropriately adjusted for any stock dividend, stock split or other similar transaction during such period.) "Approved Stock Plan" shall mean any contract, plan or agreement which has been approved by the Board of Directors of the Company, pursuant to which the Company's securities may be issued to any employee, officer, director, consultant or other service provider for services provided to the Company. "Articles of Amendment" means the Company's Second Articles of Amendment to Articles of Incorporation setting forth the designations, preferences and rights of the Series A Redeemable Convertible Preferred Stock. "Common Stock" means (i) the Company's common stock, par value $.01 per share, and (ii) any capital stock into which such Common Stock shall have been changed or any capital stock resulting from a reclassification of such Common Stock. "Common Stock Deemed Outstanding" means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Sections 8(b)(i) and 8(b)(ii) hereof regardless of whether the Options (as defined below) or Convertible Securities (as defined below) are actually exercisable or convertible at such time, but excluding any shares of Common Stock issuable upon exercise of the Preferred Share Warrants. "Expiration Date" means the date five years from the date of this Warrant or, if such date falls on a Saturday, Sunday or other day on which banks are required or authorized to be closed in the City of New York or the State of New York (a "Holiday"), the next preceding date that is not a Holiday. "Other Securities" means (i) those warrants of the Company issued prior to, and outstanding on, the date of issuance of this Warrant, (ii) the Preferred Shares (as defined below), (iii) the shares of Common Stock issued upon conversion of the Preferred Shares and (iv) shares of Common Stock issued upon conversion of up to $7,500,000 of convertible notes of the Company which currently are held by Sirrom Capital Corporation. "Person" means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. "Preferred Shares" means the shares of the Company's Series A Redeemable Convertible Preferred Stock issued pursuant to the Purchase Agreement. "Securities Act" means the Securities Act of 1933, as amended. "Warrant" means this Warrant and all Warrants issued in exchange, transfer or replacement of any thereof. "Warrant Exercise Price" shall be [INSERT 135% of the Market Price on the date of issuance of the related Preferred Shares], subject to adjustment as hereinafter provided. (c) Other Definitional Provisions. (i) Except as otherwise specified herein, all references herein (A) to the Company shall be deemed to include the Company's successors and (B) to any applicable law defined or referred to herein, shall be deemed references to such applicable law as the same may have been or may be amended or supplemented from time to time. (ii) When used in this Warrant, the words "herein," "hereof," and "hereunder," and words of similar import, shall refer to this Warrant as a whole and not to any provision of this Warrant, and the words "Section," "Schedule," and "Exhibit" shall refer to Sections of, and Schedules and Exhibits to, this Warrant unless otherwise specified. (iii) Whenever the context so requires, the neuter gender includes the masculine or feminine, and the singular number includes the plural, and vice versa. Section 2. Exercise of Warrant. (a) Subject to the terms and conditions hereof, this Warrant may be exercised by the holder hereof then registered on the books of the Company, in whole or in part, at any time on any business day on or after the opening of business on the date hereof and prior to 11:59 P.M. Eastern Time on the Expiration Date by (i) delivery of a written notice, in the form of the subscription notice attached as Exhibit A hereto, of such holder's election to exercise this Warrant, which notice shall specify the number of Warrant Shares to be purchased, (ii) payment to the Company of an amount equal to the Warrant Exercise Price multiplied by the number of Warrant Shares as to which the Warrant is being exercised (plus any applicable issue or transfer taxes) (the "Aggregate Exercise Price") in cash or by check or wire transfer, and (iii) the surrender of this Warrant, at the principal office of the Company; provided, that if such Warrant Shares are to be issued in any name other than that of the registered holder of this Warrant, such issuance shall be deemed a transfer and the provisions of Section 7 shall be applicable. In the event of any exercise of the rights represented by this Warrant in compliance with this Section 2(a), a certificate or certificates for the Warrant Shares so purchased, in such denominations as may be requested by the holder hereof and registered in the name of, or as directed by, the holder, shall be delivered at the Company's expense to, or as directed by, such holder as soon as practicable after such rights shall have been so exercised, and in any event no later than two business days after such exercise. In the case of a dispute as to the determination of the Warrant Exercise Price or the last reported sale price (as reported by Bloomberg) of a security or the arithmetic calculation of the Warrant Shares, the Company shall promptly issue to the holder the number of shares of Common Stock that is not disputed and shall submit the disputed determinations or arithmetic calculations to the holder via facsimile within one business day of receipt of the holder's subscription notice. If the holder and the Company are unable to agree upon the determination of the Warrant Exercise Price or the last reported sale price (as reported by Bloomberg) or arithmetic calculation of the Warrant Shares within one day of such disputed determination or arithmetic calculation being submitted to the holder, then the Company shall immediately submit via facsimile (i) the disputed determination of the Warrant Exercise Price or the last reported sale price (as reported by Bloomberg) to an independent, reputable investment banking firm or (ii) the disputed arithmetic calculation of the Warrant Shares to its independent, outside accountant. The Company shall cause the investment banking firm or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the holder of the results no later than forty-eight (48) hours from the time it receives the disputed determinations or calculations. Such investment banking firm's or accountant's determination or calculation, as the case may be, shall be deemed conclusive absent manifest error. (b) Unless the rights represented by this Warrant shall have expired or shall have been fully exercised, the Company shall, as soon as practicable and in no event later than ten business days after any exercise and at its own expense, issue a new Warrant identical in all respects to the Warrant exercised except (i) it shall represent rights to purchase the number of Warrant Shares purchasable immediately prior to such exercise under the Warrant exercised, less the number of Warrant Shares with respect to which such Warrant is exercised, and (ii) the holder thereof shall be deemed for all corporate purposes to have become the holder of record of such Warrant Shares immediately prior to the close of business on the date on which the Warrant is surrendered and payment of the amount due in respect of such exercise and any applicable taxes is made, irrespective of the date of delivery of certificates evidencing such Warrant Shares, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are properly closed, such person shall be deemed to have become the holder of such Warrant Shares at the opening of business on the next succeeding date on which the stock transfer books are open. (c) No fractional shares of Common Stock are to be issued upon the exercise of this Warrant, but rather the number of shares of Common Stock issued upon exercise of this Warrant shall be rounded up or down to the nearest whole number. (d) If the Company shall fail for any reason or for no reason to issue to the holder on a timely basis as described in this Section 2, a certificate for the number of shares of Common Stock to which the holder is entitled upon the holder's exercise of this Warrant or a new Warrant for the number of shares of Common Stock to which such holder is entitled pursuant to Section 2(b) hereof, within five business days of the date that the Warrant is exercised pursuant to Section 2(a) hereof, the Company shall, in addition to any other remedies under this Warrant or the Securities Purchase Agreement or otherwise available to such holder, including any indemnification under Section 8 of the Securities Purchase Agreement, pay as additional damages in cash to such holder on each date after the fifth business day following receipt by the Company of the exercise notice that such exercise is not timely effected in an amount equal to 0.5% of the product of (A) the sum of the number of shares of Common Stock not issued to the holder on a timely basis and to which the holder is entitled and, in the event the Company has failed to timely deliver a new Warrant, the number of shares represented by the portion of this Warrant which is not being converted, as the case may be, and (B) the average of the Closing Bid Prices for the three consecutive trading days immediately preceding the last possible date which the Company could have issued such Common Stock to the holder without violating this Section 2. (e) If, despite the Company's obligations provided in the Purchase Agreement and the Registration Rights Agreement (as defined in the Purchase Agreement), the Company shall not have registered pursuant to a Registration Statement under the Securities Act of 1933, as amended, and/or available for issuance upon exercise of this Warrant sufficient shares of Common Stock for such issuance as such registered shares then, notwithstanding anything contained herein to the contrary and in addition to and not in lieu of any of the other rights and remedies to which the holder may be entitled by reason of the Company's failure fully to meet its obligations under the Purchase Agreement or the Registration Rights Agreement, the holder of the Warrant may, at its election exercised in its sole discretion, exercise this Warrant in whole or in part and, in lieu of making the cash payment otherwise contemplated to be made to the Company upon such exercise in payment of the Aggregate Exercise Price, elect instead to receive upon such exercise the Net Number of shares of Common Stock determined according to the following formula: Net Number = (A x B) - (A x C) B For purposes of the foregoing formula: A= the total number shares with respect to which this Warrant is then being exercised. B= the Market Price of a share of Common Stock at the time of such calculation. C= the Exercise Price then in effect at the time of such exercise. Section 3. Covenants as to Common Stock. The Company hereby covenants and agrees as follows: (a) This Warrant is, and any Preferred Share Warrants issued in substitution for or replacement of this Warrant will upon issuance be, duly authorized and validly issued. (b) All Warrant Shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof (other than any taxes in respect of any transfer of the Warrant Shares by the holder contemporaneously with the issue of the Warrant Shares). (c) During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved at least 100% of the number of shares of Common Stock needed to provide for the exercise of the rights then represented by this Warrant and the par value of said shares will at all times be less than or equal to the applicable Warrant Exercise Price. (d) The Company shall promptly secure the listing of the shares of Common Stock issuable upon exercise of this Warrant upon each national securities exchange or automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance upon exercise of this Warrant) and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all shares of Common Stock from time to time issuable upon the exercise of this Warrant; and the Company shall so list on each national securities exchange or automated quotation system, as the case may be, and shall maintain such listing of, any other shares of capital stock of the Company issuable upon the exercise of this Warrant if and so long as any shares of the same class shall be listed on such national securities exchange or automated quotation system. (e) The Company will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may reasonably be requested by the holder of this Warrant in order to protect the exercise privilege of the holder of this Warrant against dilution or other impairment, consistent with the tenor and purpose of this Warrant. No impairment of the designations, preferences and rights of the Preferred Shares contained in the Company's Articles of Amendment or any waiver thereof which has an adverse effect on the rights granted hereunder shall be given effect until the Company has taken appropriate action (satisfactory to the holders of Preferred Share Warrants representing a majority of the shares of Common Stock issuable upon the exercise of such Preferred Share Warrants then outstanding) to avoid such adverse effect with respect to this Warrant. Without limiting the generality of the foregoing, the Company (i) will not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the Warrant Exercise Price then in effect, and (ii) will take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant. (f) This Warrant will be binding upon any entity succeeding to the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets. Section 4. Taxes. The Company shall pay any and all taxes which may be payable with respect to the issuance and delivery of Warrant Shares upon exercise of this Warrant (other than any taxes in respect of any transfer of the Warrant Shares by the holder contemporaneously with the issue of the Warrant Shares). Section 5. Warrant Holder Not Deemed a Stockholder. Except as otherwise specifically provided herein, no holder, as such, of this Warrant shall be entitled to vote or receive dividends or be deemed the holder of shares of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the holder of this Warrant of the Warrant Shares which he or she is then entitled to receive upon the due exercise of this Warrant. In addition, nothing contained in this Warrant shall be construed as imposing any liabilities on such holder to purchase any securities or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company. Notwithstanding this Section 5, the Company will provide the holder of this Warrant with copies of the same notices and other information given to the stockholders of the Company generally, contemporaneously with the giving thereof to the stockholders. Section 6. Representations of Holder. The holder of this Warrant, by the acceptance hereof, represents that it is acquiring this Warrant and the Warrant Shares for its own account for investment and not with a view to, or for sale in connection with, any distribution hereof or of any of the shares of Common Stock or other securities issuable upon the exercise thereof, and not with any present intention of distributing any of the same. The holder of this Warrant further represents, by acceptance hereof, that, as of this date, such holder is an "accredited investor" as such term is defined in Rule 501(a)(1) of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act (an "Accredited Investor"). Upon exercise of this Warrant, the holder shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the Warrant Shares so purchased are being acquired solely for the holder's own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale and that such holder is an Accredited Investor. Notwithstanding the foregoing, by making the representations herein, the holder does not agree to hold the Warrant or the Warrant Shares for any minimum or other specified term and reserves the right to dispose of the Warrant and the Warrant Shares at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act. If such holder cannot make such representations because they would be factually incorrect, it shall be a condition to such holder's exercise of the Warrant that the Company receive such other representations as the Company considers reasonably necessary to assure the Company that the issuance of its securities upon exercise of the Warrant shall not violate any United States or state securities laws. Section 7. Ownership and Transfer. (a) The Company shall maintain at its principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), a register for this Warrant, in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee. The Company may treat the person in whose name any Warrant is registered on the register as the owner and holder thereof for all purposes, notwithstanding any notice to the contrary, but in all events recognizing any transfers made in accordance with the terms of this Warrant. (b) This Warrant and the rights granted to the holder hereof are transferable to affiliates or associates of the holder hereof, without the written consent of the Company, and to other Persons, with the consent of the Company, which consent shall not be unreasonably withheld, in whole or in part, upon surrender of this Warrant, together with a properly executed warrant power in the form of Exhibit B attached hereto; provided, however, that any transfer or assignment shall be subject to the conditions set forth in Section 7(c) below. (c) The holder of this Warrant understands that this Warrant has not been and is not expected to be, registered under the Securities Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (a) subsequently registered thereunder, or (b) such holder shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company, to the effect that the securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration; provided that (i) any sale of such securities made in reliance on Rule 144 promulgated under the Securities Act may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any resale of such securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the Securities Act) may require compliance with some other exemption under the Securities Act or the rules and regulations of the Securities and Exchange Commission thereunder; and (ii) neither the Company nor any other person is under any obligation to register the Preferred Share Warrants under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. (d) The Company is obligated to register the Warrant Shares for resale under the Securities Act pursuant to the Registration Rights Agreement dated September 30, 1997 by and between the Company and the Buyers listed on the signature page thereto (the "Registration Rights Agreement") and the initial holder of this Warrant (and certain assignees thereof) is entitled to the registration rights in respect of the Warrant Shares as set forth in the Registration Rights Agreement. Section 8. Adjustment of Warrant Exercise Price and Number of Shares. In order to prevent dilution of the rights granted under this Warrant, the Warrant Exercise Price and the number of shares of Common Stock issuable upon exercise of this Warrant shall be adjusted from time to time as follows: (a) Adjustment of Warrant Exercise Price and Number of Shares upon Issuance of Common Stock. If and whenever on or after the date of issuance of this Warrant, the Company issues or sells, or is deemed to have issued or sold, any shares of Common Stock (other than shares of Common Stock deemed to have been issued by the Company in connection with an Approved Stock Plan or upon exercise or conversion of the Other Securities) for a consideration per share less than the Warrant Exercise Price in effect immediately prior to such time (the "Applicable Price"), then immediately after such issue or sale the Warrant Exercise Price shall be reduced to an amount equal to the product of (x) the Warrant Exercise Price in effect immediately prior to such issue or sale and (y) the quotient determined by dividing (1) the sum of (I) the product derived by multiplying the Applicable Price by the number of shares of Common Stock Deemed Outstanding immediately prior to such issue or sale, plus (II) the consideration, if any, received by the Company upon such issue or sale, by (2) the product derived by multiplying the (I) Applicable Price by (II) the number of shares of Common Stock Deemed Outstanding immediately after such issue or sale. Upon each such adjustment of the Warrant Exercise Price hereunder, the number of shares of Common Stock acquirable upon exercise of this Warrant shall be adjusted to the number of shares determined by multiplying the Warrant Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock acquirable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Warrant Exercise Price resulting from such adjustment. (b) Effect on Warrant Exercise Price of Certain Events. For purposes of determining the adjusted Warrant Exercise Price under Section 8(a) above, the following shall be applicable: (i) Issuance of Options. If the Company in any manner grants any rights or options to subscribe for or to purchase Common Stock (other than pursuant to an Approved Stock Plan or Other Securities) or any stock or other securities convertible into or exchangeable for, directly or indirectly, Common Stock (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities") and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities is less than the Applicable Price, then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to be outstanding and to have been issued and sold by the Company for such price per share. For purposes of this Section 8(b)(i), the "price per share for which Common Stock is issuable upon exercise of such Options or upon conversion or exchange of such Convertible Securities" is determined by dividing (A) the total amount, if any, received or receivable by the Company as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Company upon the issuance or sale of such Convertible Securities and the conversion or exchange thereof, by (B) the total maximum number of shares of Common Stock issuable upon exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No adjustment of the Warrant Exercise Price shall be made upon the actual issuance of such Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities. (ii) Issuance of Convertible Securities. If the Company in any manner issues or sells any Convertible Securities and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Applicable Price, then the maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible Securities shall be deemed to be outstanding and to have been issued and sold by the Company for such price per share. For the purposes of this Section 8(b)(ii), the "price per share for which Common Stock is issuable upon such conversion or exchange" is determined by dividing (A) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (B) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No adjustment of the Warrant Exercise Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Warrant Exercise Price had been or are to be made pursuant to other provisions of this Section 8(b), no further adjustment of the Warrant Exercise Price shall be made by reason of such issue or sale. (iii) Change in Option Price or Rate of Conversion. If the purchase price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock change at any time, the Warrant Exercise Price in effect at the time of such change shall be readjusted to the Warrant Exercise Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold and the number of shares of Common Stock acquirable hereunder shall be correspondingly readjusted; provided that no adjustment shall be made if such adjustment would result in an increase of the Warrant Exercise Price then in effect. (c) Effect on Warrant Exercise Price of Certain Events. For purposes of determining the adjusted Warrant Exercise Price under Sections 8(a) and 8(b), the following shall be applicable: (i) Calculation of Consideration Received. If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the net amount received by the Company therefor. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company will be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Company will be the last reported sale price (as reported by Bloomberg) of such securities for the twenty (20) consecutive trading days immediately preceding the date of receipt. In case any Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving entity the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash or securities will be determined jointly by the Company and the holders of Warrants representing a majority of the shares of Common Stock issuable upon exercise of such Warrants then outstanding. If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the "Valuation Event"), the fair value of such consideration will be determined within forty-eight (48) hours of the tenth (10th) day following the Valuation Event by an independent, reputable appraiser selected by the Company. The determination of such appraiser shall be final and binding upon all parties. (ii) Integrated Transactions. In case any Option is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, the Options will be deemed to have been issued for a consideration of $.01. (iii) Treasury Shares. The number of shares of Common Stock outstanding at any given time does not include shares owned or held by or for the account of the Company, and the disposition of any shares so owned or held will be considered an issue or sale of Common Stock. (iv) Record Date. If the Company takes a record of the holders of Common Stock for the purpose of entitling them (1) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (2) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (d) Adjustment of Warrant Exercise Price upon Subdivision or Combination of Common Stock. If the Company at any time after the date of issuance of this Warrant subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Warrant Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of shares of Common Stock obtainable upon exercise of this Warrant will be proportionately increased. If the Company at any time after the date of issuance of this Warrant combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Warrant Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of shares of Common Stock obtainable upon exercise of this Warrant will be proportionately decreased. (e) Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets to another Person (as defined below) or other transaction which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as "Organic Change." Prior to the consummation of any Organic Change, the Company will make appropriate provision (in form and substance satisfactory to the holders of the Preferred Share Warrants representing a majority of the shares of Common Stock issuable upon exercise of such Preferred Share Warrants then outstanding) to insure that each of the holders of the Preferred Share Warrants will thereafter have the right to acquire and receive in lieu of or addition to (as the case may be) the shares of Common Stock immediately theretofore acquirable and receivable upon the exercise of such holder's Preferred Share Warrants, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore acquirable and receivable upon the exercise of such holder's Preferred Share Warrants had such Organic Change not taken place. In any such case, the Company will make appropriate provision (in form and substance satisfactory to the holders of the Preferred Share Warrants representing a majority of the shares of Common Stock issuable upon exercise of such Preferred Share Warrants then outstanding) with respect to such holders' rights and interests to insure that the provisions of this Section 8 and Section 9 below will thereafter be applicable to the Preferred Share Warrants (including, in the case of any such consolidation, merger or sale in which the successor entity or purchasing entity is other than the Company, an immediate adjustment of the Warrant Exercise Price to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and a corresponding immediate adjustment in the number of shares of shares of Common Stock acquirable and receivable upon exercise of the Preferred Share Warrants, if the value so reflected is less than the Warrant Exercise Price in effect immediately prior to such consolidation, merger or sale). The Company will not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor entity (if other than the Company) resulting from consolidation or merger or the entity purchasing such assets assumes, by written instrument, the obligation to deliver to each holder of Preferred Share Warrants such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. (f) Certain Events. If any event occurs of the type contemplated by the provisions of this Section 8 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company's Board of Directors will make an appropriate adjustment in the Warrant Exercise Price and the number of shares of Common Stock obtainable upon exercise of this Warrant so as to protect the rights of the holders of the Preferred Share Warrants; provided that no such adjustment will increase the Warrant Exercise Price or decrease the number of shares of Common Stock obtainable as otherwise determined pursuant to this Section 8. (g) Notices. (i) Immediately upon any adjustment of the Warrant Exercise Price, the Company will give written notice thereof to the holder of this Warrant, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Company will give written notice to the holder of this Warrant at least twenty (20) days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Organic Change, dissolution or liquidation, except that in no event shall such notice be provided to such holder prior to such information being made known to the public. (iii) The Company will also give written notice to the holder of this Warrant at least twenty (20) days prior to the date on which any Organic Change, dissolution or liquidation will take place. (h) De Minimis Adjustments. Notwithstanding anything to the contrary in this Section 8, no adjustment in the number of Warrant Shares or the Warrant Exercise Price shall be required unless such adjustment would result in an increase or decrease of at least one percent (1%) of the Warrant Exercise Price; provided that any adjustments which by reason of this Subsection 8(h) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations shall be made to the nearest cent or to the nearest one-thousandth of a share, as the case may be. Section 9. Purchase Rights. In addition to any adjustments pursuant to Section 8 above, if at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then the holder of this Warrant will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. Section 10. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost, stolen, mutilated or destroyed, the Company shall, on receipt of an indemnification undertaking, issue a new Warrant of like denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed. Section 11. Notice. Any notices consents, waivers or other communications required or permitted to be given under the terms of this Warrant must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile, provided a copy is mailed by U.S. certified mail, return receipt requested; (iii) three days after being sent by U.S. certified mail, return receipt requested, or (iv) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: Smart Choice Automotive Group, Inc. 5200 S. Washington Avenue Titusville, Florida Telephone: 407-269-9680 Facsimile: 407-264-0376 Attention: President, Gary R. Smith With copy to: Greenberg Traurig Hoffman Lipoff Rosen & Quentel 111 N. Orange Avenue, 20th Floor Orlando, Florida 32801 Telephone: 407-420-1000 Facsimile: 407-420-5909 Attention: Randolph H. Fields, Esq. If to a holder of this Warrant, to it at the address set forth below such holder's signature on the signature page hereof. Each party shall provide five (5) days' prior written notice to the other party of any change in address or facsimile number. Section 12. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged, or terminated only by an instrument in writing signed by the party or holder hereof against which enforcement of such change, waiver, discharge or termination is sought. The headings in this Warrant are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. This Warrant shall be governed by and interpreted under the laws of the State of New York. Section 13. Date. The date of this Warrant is __________, 199__. This Warrant, in all events, shall be wholly void and of no effect after the close of business on the Expiration Date, except that notwithstanding any other provisions hereof, the provisions of Section 7 shall continue in full force and effect after such date as to any Warrant Shares or other securities issued upon the exercise of this Warrant. SMART CHOICE AUTOMOTIVE GROUP, INC. By: Name: Title: EXHIBIT A TO WARRANT SUBSCRIPTION FORM TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT SMART CHOICE AUTOMOTIVE GROUP, INC. The undersigned hereby irrevocably exercises the right to purchase the number of Warrant Shares covered by this Warrant specified below according to the conditions thereof and herewith makes payment therefor in the amount of $__________, the Aggregate Exercise Price of such Warrant Shares in full, and requests that such Warrant Shares be issued in the name of: [HOLDER] Dated: , 199_. By: Name: Title: Address: Number of Warrant Shares Being Purchased: EXHIBIT B TO WARRANT FORM OF WARRANT POWER FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to ________________, Federal Identification No. __________, a warrant to purchase ____________ shares of the capital stock of Smart Choice Automotive Group, Inc., a Florida corporation, represented by warrant certificate no. _____, standing in the name of the undersigned on the books of said corporation. The undersigned does hereby irrevocably constitute and appoint ______________, attorney to transfer the warrants of said corporation, with full power of substitution in the premises. Dated: _________, 199_ By: _____________________________ Its: _____________________________ EX-10.3 5 PROMISSORY NOTE BY ECKLER INDUSTRIES, INC. PROMISSORY NOTE 1. DATE AND PARTIES. This Promissory Note ("Note") is dated as of September 30, 1997, and the parties and their mailing addresses and Borrower's tax identification number are as follows: BORROWER: Eckler Industries, Inc. 5200 S. Washington Avenue Titusville, FL 32780 Tax ID Number: applied for HOLDER: Stephens Inc. 950 East Paces Ferry Road, Suite 310 Atlanta, GA 30326 ATTN: David Linch 2. PROMISE TO PAY. For value received, Borrower promises to pay to the order of Holder, in accordance with the provisions of this Note, at Holder's office at the address above, or at such other place as Holder may designate, the principal sum of One Million Five Hundred Thousand and No/100 Dollars ($1,500,000.00) plus interest from the date of disbursement on the unpaid principal balance at the rate of ten percent (10%) per annum. After the Maturity Date (defined herein), whether by acceleration or otherwise, the Note shall bear interest at the maximum rate allowed by law until paid in full. The interest permitted by this Note is limited to the maximum lawful amount of interest (Maximum Lawful Interest) permitted under applicable federal and state laws, whichever is greater. If the interest accrued and collected exceeds the Maximum Lawful Interest as of the time of collection, such excess shall be applied to reduce the principal amount outstanding. If or when no principal amount is outstanding, any excess interest shall be refunded to Borrower. All fees and charges accrued, assessed, or collected which constitute interest shall be amortized and pro-rated over the full term of the Note for purposes of determining the Maximum Lawful Interest. 3. ADVANCE AND FUNDING PROVISIONS. This Note is a Term Note. No advances will be made after the initial advance. 4. TERMS OF PAYMENT: All principal advanced under this Note and all interest accrued under this Note are due and payable to Holder and shall be paid to Holder as follows: all unpaid interest then accrued is due and payable in monthly payments on the first day of each month, beginning on the first day of November, 1997, with one final payment on the fifteenth (15th) day of October, 1998 (the "Maturity Date") in an amount equal to the entire principal balance then outstanding under this Note, plus all unpaid interest then accrued under the terms of this Note. Additionally, if Smart Choice Automotive Group, Inc. ("Smart Choice") or any of its affiliates shall, prior to the repayment in full of the entire indebtedness evidenced by this Note, either (i) issue any debt or equity securities in a public offering; or (ii) issue, in the aggregate, more than seven and one-half (7.5) million dollars of debt or equity securities in one or more private placements, including any securitization or other sale or financing of chattel paper or receivables, but excluding floor plan financing; then (in either of such events) this Note shall mature and all outstanding principal and all accrued and unpaid interest on the Note shall be paid in full on the date of closing of such issuance. This Note may be prepaid in whole or in part at any time without premium or penalty. COLLATERAL: The collateral (the "Collateral") securing this note includes but is not limited to: All accounts receivable now owing or in the future accruing to Borrower, all inventory, equipment, instruments, documents, chattel paper and general intangibles now owned by or hereafter acquired by Borrower as more particularly described in that certain Security Agreement between Holder and Borrower of even date herewith; and All of the issued and outstanding capital stock of Eckler Industries, Inc. on terms and conditions more particularly described in that certain Security Agreement between Holder and Smart Choice of even date herewith. This Note is also guaranteed under Guaranty Agreement of even date herewith by Smart Choice in favor of Holder. 5. RECEIPT OF COPY. By signing this Note, Borrower acknowledges that he has read this entire Note and Exhibits, if any, prior to execution and that it received a copy (copies) of this Note. Borrower agrees to all provisions of this Note and undertakes to perform all obligations of Borrower hereunder. 6. EVENTS OF DEFAULT. Borrower shall be in default upon the occurrence of any of the following events, circumstances, or conditions ("Events of Default"): (a) Failure by Borrower to make any payment to Holder when due; (b) A default or breach under any of the terms of the Note, or any other Loan Document (as hereinafter defined); (c) A default or breach under any of the terms of any note, loan agreement, security agreement, subordination agreement, mortgage, deed of trust, deed to secure debt, assignment of beneficial interest, guaranty agreement, trust deed or any other document or instrument evidencing, guaranteeing, or securing any other obligations of Borrower; (d) The making or furnishing of any verbal or written representation, statement, or warranty to Holder which is false or incorrect in any material respect or the failure to furnish facts necessary to prevent any statement made by, or on behalf of Borrower or any guarantor of the Note or other obligations of Borrower to Holder from being materially misleading; (e) The death, dissolution, liquidation or insolvency of Borrower, the appointment of a receiver by or on the behalf of Borrower, the assignment for the benefit of creditors by or on behalf of Borrower, the voluntary or involuntary termination of existence by Borrower or any guarantor or the commencement under any present or future federal or state insolvency, bankruptcy, reorganization, composition or debtor relief law by or against Borrower or any guarantor of the Note or other obligation of Borrower to Holder; (f) Entry of a judgment against Borrower or any guarantor; (g) A material adverse change in the financial condition of Borrower or any guarantor; or a good faith belief by Holder at any time that Holder is insecure, that the prospect of any payment is impaired, or that any collateral securing the Note is impaired; (h) Failure of Borrower or of any guarantor to pay and provide proof of payment of any tax, assessment, rent, insurance premium, or escrow payment on or before its due date; (i) Without the prior written consent of Holder: (i) creation of any lien or encumbrance on, or any sale, lease or transfer of, or any contract to transfer, sell or lease, any collateral securing the Note or other obligation of Borrower to Holder; (ii) transfer of ownership or control of the business of Borrower or Smart Choice or more than fifty percent (50%) of the ownership of Borrower or Smart Choice, whether by transfer of shares, partnership interest, joint venture, pledge or otherwise; or (iii) any action by Borrower or any guarantor to become a party to any merger or consolidation; (j) Without first having given Holder thirty (30) days' prior written notice: (i) any action by Borrower or Smart Choice to guarantee or otherwise in any way become liable or be responsible for the indebtedness or obligation of any other person or entity; (ii) any action by Borrower or Smart Choice to acquire by purchase, lease or otherwise all or substantially all of the assets or capital stock of any entity; (iii) any expansion, acquisition or entry into any additional businesses or lines of business or establishment of business locations other than their present businesses; or (iv) the establishment of any subsidiary, partnership or joint venture for such purpose; any material change in the management or business of the Borrower or Smart Choice or entry into any management contract delegating effective management or control to third parties; (k) The termination of any guaranty of the Note by any guarantor, or a default on any debt owed by Borrower or any guarantor to any other creditor; (l) Use of any portion of the loan proceeds in any transaction which may cause Holder to directly or indirectly incur any securities or environmental liability; or (m) Any charge or indictment against Borrower or any guarantor under a federal or state law for which forfeiture of any portion of the Collateral is a potential penalty. 7. REMEDIES ON DEFAULT. If an Event of Default occurs, then Holder may exercise any one or more of the following rights and remedies, and any other rights and remedies provided in any of the Loan Documents as Holder, in its sole discretion, may deem necessary or appropriate: (a) declare the unpaid principal of, and all interest then accrued, on the Loan and the Note, to be forthwith due and payable, whereupon the same shall forthwith become due and payable without presentment, demand, protest, notice of default, notice of acceleration or of intention to accelerate or other notice of any kind, all of which Borrower hereby expressly waives, anything contained herein or in the Note to the contrary notwithstanding, (b) reduce any claim to judgment, and/or (c) without notice of default or demand, pursue and enforce any of Holder's rights and remedies under any of the Loan Documents, or otherwise provided under or pursuant to any applicable law or agreement; provided, however, that if any Event of Default specified in Subsection (e) above shall occur, the principal of, and all interest then accrued on, the Note and other liabilities hereunder shall thereupon become due and payable automatically and concurrently therewith, without any further action by Holder and without presentment, demand, protest, notice of default, notice of acceleration or intention to accelerate or other notice of any kind, all of which Borrower hereby expressly waives. 8. SET-OFF. Borrower acknowledges and agrees that upon the occurrence of an Event of Default, Holder may exercise its right of set-off, without demand or notice to Borrower or any other person or entity, to pay all or any part of the outstanding principal and accrued interest owed on this Note against any obligation Holder or any participant in the Note may have, now or hereafter, to pay money to Borrower, including but not limited to any balances in any account of Borrower. Where Borrower may obtain payment only with the endorsement or consent of someone who has not agreed to pay this Note, Holder's right of set-off will extend to Borrower's interest in the obligation. Holder's right of set-off will not apply to accounts or obligations in which Borrower's rights are solely as a fiduciary for another or to accounts exempt by law from the claims of creditors. Holder's right of set-off may be exercised without regard to the existence or value of any Collateral securing this Note, and without regard to the number or creditworthiness of any other persons or entities who have agreed to pay this Note. Borrower agrees to indemnify and hold Holder harmless from any person's or entity's claims arising as a result of Holder's exercise of Holder's right of set-off and the costs and expenses arising from any such claim, including without limitation, attorney's fees. In addition to the right of set-off, to further secure payment of the Note, Borrower hereby grants, conveys and transfers to Holder a continuing security interest in all of Borrower's accounts with Holder or with any participant in the Note. 9. COLLECTION EXPENSES. Upon a default on this Note, Holder may recover from Borrower and all guarantors or any of them, all costs and expenses incurred by Holder in collecting and enforcing this Note and reasonable costs and expenses in preserving, selling or disposing of collateral and realizing on any security. Such costs and expenses shall include, but are not limited to, reasonable filing fees, costs of publication, deposition fees, stenographer fees, witness fees, attorneys fees, paralegal fees, and any other court costs, plus costs of collecting and enforcing the Note. Any such reasonable collection costs and expenses shall be added to the principal amount of the Note and shall accrue interest at the same rate as the Note. 10. ATTORNEYS' FEES. Borrower indemnifies Holder and holds Holder harmless for all reasonable attorneys fees incurred by Holder, without limitation, for the enforcement and collection of the obligations under this Note, if it is placed in the hands of an attorney for collection, or for the protection of any collateral or lien which secures this Note. 11. WAIVER AND CONSENT BY BORROWER AND OTHER SIGNERS. In regard to this Note, Borrower and each guarantor: (a) Waive protest, presentment for payment, notice of dishonor, notice of intent to accelerate, and notice of acceleration; (b) Consent to any one or multiple renewals or extensions of time for payment on this Note; (c) Consent to Holder's release of any guarantor, surety, endorser or co-signer; (d) Consent to the release or substitution of any collateral or any failure by Holder to perfect or continue a security interest in any collateral or any impairment of any collateral; (e) Consent to any modification of the terms of this Note or any instrument securing, guaranteeing, or relating to this Note; (f) Consent to any and all sales, repurchases, and participations of this Note to any person or entity in any amounts and waive notice of such sales, repurchases, or participations of this Note; and (g) Consent to Holder's right of set-off as well as any participating Holder's right to set-off. 12. ADDITIONAL COLLATERAL. If Holder at any time deems any portion of the collateral securing this Note to be unsatisfactory because of a decrease or potential decrease in its value, upon demand, Borrower shall furnish such additional collateral or make such payment upon the accrued interest and principal balance of the Note as Holder may request. 13. NO DUTY BY Holder. Holder is under no duty to preserve or protect any collateral until Holder is in actual possession of the collateral. Holder shall only be deemed to be in "actual" possession of the collateral when Holder has physical, immediate, and exclusive control over the collateral and has affirmatively accepted such control. 14. APPLICATION OF PAYMENTS. All payments on this Note, including, but not limited to, regular payments or prepayments, received by Holder shall be applied first to costs and expenses, then to accrued interest, and the balance, if any, to principal. No prepayment shall excuse or defer Borrower's subsequent payment obligations. 15. JOINT AND SEVERAL. Borrower and any other signers shall be jointly and severally liable under this Note. 16. FINANCIAL STATEMENTS. Until this Note is paid in full, Borrower shall furnish Holder upon any material change in financial or business condition, upon Holder's written request, and in the event of no request, at least annually, current financial statements of the Borrower, which is certified by Borrower and Borrower's accountant to be true and accurate. The requirements of this paragraph shall be in addition to any imposed by any security agreement or other loan documents executed in connection with the Note. 17. NO OBLIGATION TO RENEW. Borrower must repay the entire principal balance of the Note and unpaid interest when due. The Holder is under no obligation to renew or extend the Note or to refinance the Loan at any time. 18. NO DEFENSES. Borrower represents and warrants to Holder that as of the date of this Note Borrower has no claims or causes of action against the Holder, nor any defenses, set-offs, or counterclaims to this Note or the repayment in full according to the terms hereof, and in consideration of the making hereof or the renewal or extension hereof, Borrower releases all rights or claims whatsoever of Borrower against Holder. 19. RELEASE OF INFORMATION. Borrower authorizes Holder to disclose, without any additional consent, information concerning this Note for any one or more of the following purposes: to complete the transaction contemplated hereby, to verify and disclose the existence and condition of the account for credit reporting purposes, to perfect any security interest, or to collect any money the Holder in good faith believes Borrower owes, to disclose to Holder's attorneys or collection agents, to disclose to Holder's accountants or auditors as part of the review of the Holder's business affairs, to verify the accuracy of any statement made to Holder, as part of the Holder's report to officials of any governmental authority or self-regulatory organization that regulates the business of Holder or its affiliates, for the sale or transfer of the Note or an interest therein, or for any other legitimate business purpose of Holder. 20. GENERAL PROVISIONS. (a) TIME OF THE ESSENCE. Time is of the essence in Borrower's performance of all duties and obligations imposed by this Note. (b) NO WAIVER BY HOLDER. Holder's course of dealing or Holder's forbearance from, or delay in, the exercise of any of Holder's rights, remedies, privileges, or right to insist upon Borrower's strict performance of any provisions contained in this Note or other Loan Documents shall not be construed as a waiver by Holder, unless any such waiver is in writing and signed by Holder. (c) AMENDMENT. The provisions contained in this Note may not be amended except through a written amendment signed by Borrower and Holder. (d) GOVERNING LAW. This Note shall be governed by the laws of the State of Arkansas, to the extent that such laws are not preempted by federal laws and regulations. (e) FORUM AND VENUE. In the event of litigation pertaining to this Note, the exclusive forum, venue, and place of jurisdiction shall be in the State of Arkansas, unless otherwise designated in writing by Holder. (f) SUCCESSORS. This Note shall inure to the benefit of and bind the heirs, personal representatives, successors, and assigns of the parties. (g) NUMBER AND GENDER. Whenever used, the singular shall include the plural, the plural the singular, and the use of any gender shall be applicable to all genders. (h) PARAGRAPH HEADINGS. The headings at the beginning of each paragraph and each sub-paragraph in this Note are for convenience only and shall not be dispositive in the interpreting or construing this Note or any part thereof. (i) SEVERABILITY. If any provision of this Note shall be unenforceable or void, then such provision shall be deemed severable from the remaining provisions and shall in no way affect the enforceability of the remaining provisions nor the validity of this Note. (j) BORROWER DEFINED. The term "Borrower" includes each and every person and entity signing this Note as a Borrower, and any co-signers. (k) HOLDER. The term "Holder" shall include any transferee or assignee of Holder or any other holder of this Note. (l) ENTIRE AGREEMENT. This Note, any guaranty agreement, any security agreement, any pledge agreement, any financing statements and any other documents or instruments executed in connection with this Note by Borrower and Smart Choice, or either of them (collectively, the "Loan Documents"), contain all the terms of the agreement among the parties, and no earlier oral statement or agreement has any force or effect. If any of the terms or provisions relating to the indebtedness or the repayment of the indebtedness contained in a security agreement, mortgage or any of the Loan Documents are inconsistent with the terms of the Note, the terms of the Note shall be controlling. If any terms or provisions relating to the collateral contained in any security agreement, mortgage, or other collateral agreement are inconsistent with the terms of the Note, the terms of the security agreement, mortgage or other collateral agreement, shall be controlling. Borrower agrees that Borrower is not relying on any representation or agreement except those contained in the Loan Documents. BORROWER: ECKLER INDUSTRIES, INC. BY: /s/ James Neal Hutchinson, Jr. Title: Vice President EX-10.4 6 GUARANTY AGREEMENT GUARANTY AGREEMENT 1. DATE AND PARTIES. This Guaranty Agreement ("Agreement") is dated as of September 30, 1997, and the parties and their mailing addresses and Borrower's and Guarantor's tax identification numbers are as follows: Borrower: Eckler Industries, Inc., a Florida corporation 5200 S. Washington Avenue Titusville, FL 32780 Tax I.D. No.: applied for Holder: Stephens Inc. 950 East Paces Ferry Road Suite 310 Atlanta, GA 30326 ATTN: David Linch Guarantor: Smart Choice Automotive Group, Inc., a Florida corporation 5200 S. Washington Avenue Titusville, FL 32780 Tax I.D. No. 59-1469577 2. PROMISE OF GUARANTY. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and to induce Holder to make the Loan, as defined in Paragraph 2(a) hereof, Guarantor hereby jointly and severally absolutely and unconditionally guarantees, without limitation, the full and prompt performance of the Obligations, as defined herein, to Holder. This Guaranty is an absolute, unconditional, and continuing guaranty of the full and punctual payment and performance of the Obligations, and not of their collectability only, and is in no way conditioned upon Holder first attempting to collect any of the Obligations from Borrower or resorting to any collateral security or other means of obtaining payment of any of the Obligations which Holder may now or hereafter acquire or upon any contingency whatsoever. The terms "Obligations" and "Obligation" are used interchangeably and include the following: (a) PROMISSORY NOTE. All obligations, agreements, promises and covenants of Borrower under that certain Promissory Note of even date herewith ("Note"), executed by Borrower, payable to the order of Holder, evidencing a loan to Borrower in the initial principal amount of $1,500,000.00, and all extensions, renewals, modifications, or substitutions thereof (the "Loan"). The terms of the Note are incorporated herein by reference as if set forth herein word for word; (b) BORROWER'S PERFORMANCE. All obligations of Borrower or any other person to perform under the terms of the Note, any loan agreement related to the Loan, and any deed of trust, trust deed, mortgage, deed to secure debt, assignment of beneficial interest, security agreement, guaranty agreement, or any other agreement which secures, guaranties, or otherwise relates to the Note or Loan, the terms of which are incorporated herein by reference as if set forth herein word for word; (c) FUTURE ADVANCES. All obligations arising from all future advances by Holder to Borrower, or to Borrower and others, plus all additional obligations of Borrower to Holder (1) regardless of whether or not this Agreement is specifically referred to in the evidence of indebtedness with regard to such future and additional indebtedness; (2) regardless of whether such indebtedness is incurred for any business or agricultural purpose that was related or wholly unrelated to the purpose of the Loan and (3) regardless of whether such indebtedness was incurred for some personal purpose, non-business purpose, or any other purpose related, unrelated, similar or dissimilar to the purpose of the Loan; (d) ADVANCES AND EXPENSES. All obligations arising from sums advanced and expenses incurred by Holder for the purpose of insuring, preserving or otherwise protecting any collateral for either the Loan, its value or any of the Obligations defined in this Paragraph 2, and any other sums advanced and expenses incurred by Holder under this Agreement, the Note, any loan agreement related to the Loan, and any deed of trust, trust deed, mortgage, deed to secure debt, assignment of beneficial interest, security agreement, guaranty agreement, or any other agreement which secures, guarantees, or otherwise relates to the Note, the Loan, or any of the Obligations defined in this Paragraph 2, including but not limited to expenses of disposing of any collateral securing the Loan or the other Obligations, collection expenses and attorneys' fees, plus interest at the highest lawful rate which may be charged by Holder on the Obligations. In addition to any other expenses, Guarantor agrees to pay all reasonable expenses relating to default and collection of those Obligations described in this Paragraphs 2, as follows: Expenses for taking, holding, preparing for sale, selling or similar expenses, advances made for the above purposes and advances relating to the collateral for Obligations made on Borrower's behalf as permitted by any agreements securing such Obligations; and reasonable attorneys' fees, paralegal fees and other legal expenses to the extent not prohibited by law, including, but not limited to, any such fees, costs and expenses incurred in or related to collecting, protecting and enforcing liabilities, any negotiations or legal proceedings, including, but not limited to, any bankruptcy proceedings, or any actions in or relating to any bankruptcy proceedings; (e) OTHER OBLIGATIONS. All other obligations of Borrower to Holder, including but not limited to any and all advances made by Holder on Borrower's behalf and liabilities as guarantor, endorser or surety to Holder, all whether now existing or hereafter arising, due or to become due, direct or indirect, absolute or contingent, primary or secondary, liquidated or unliquidated, or joint, several or joint and several; and (f) MODIFICATIONS. All obligations arising out of any and all extensions, renewals, modifications and substitutions of any of the obligations set out in this Paragraph 2. 3. GUARANTOR'S WARRANTIES AND REPRESENTATIONS: (a) INVESTIGATION. Guarantor has conducted such due diligence as Guarantor deems appropriate with respect to Borrower's financial condition and existing indebtedness, authority to borrow, and the use and intended use of all Loan proceeds or other funds advanced or to be advanced by Holder to Borrower or on Borrower's behalf that create the Obligations; and Guarantor has not relied on any representations of Holder or any information provided by Holder about Borrower, Borrower's financial condition and the existing indebtedness, Borrower's authority, or Borrower's use and intended use of all Loan proceeds or other funds giving rise to the Obligation whether now or hereafter advanced to Borrower or for Borrower's benefit; (b) RELIANCE. Guarantor acknowledges that Holder is relying on this Agreement in making the Loan to Borrower and to otherwise extend financial accommodation to the Borrower or for Borrower's benefit from time to time and Guarantor acknowledges and agrees that the requirement for Guarantor's signature is necessary in order for Holder to make the Loan; (c) BENEFIT TO GUARANTOR. Guarantor represents and warrants that Guarantor is the sole owner of all of the issued and outstanding capital stock of Borrower, subject to no liens or incumbrances except for a security interest in favor of Holder in connection with the Loan and that the Loan will be of substantial benefit to Guarantor; (d) NO DEFENSES. Guarantor represents that as of the date of this Agreement, Guarantor has no claims or causes of action against Holder, nor any defenses, set-offs, or counterclaims to this Agreement, and in consideration of the making of the Loan or the renewal or extension thereof, Guarantor releases all rights or claims whatsoever of Guarantor against Holder which exist as of the date hereof; (e) AGREEMENTS. The execution and delivery of this Agreement will not violate any agreement governing Guarantor or to which Guarantor is a party, except for violations, if any, that have been disclosed in writing to Holder and that would not result in any material adverse consequences for the business, operations or financial condition of Guarantor or for the ability of Guarantor to perform its obligations in connection with the Loan, including but not limited to its obligations hereunder; (f) HOLDER'S CONDUCT. If at any time Guarantor believes that any employee of Holder has engaged in conduct which is unfair or improper or Holder exercises any undue control over the business, management, property or decisions of Borrower or Guarantor, Guarantor will notify Holder in writing immediately of the following: (1) Conduct of Holder which forms the basis of Guarantor's concern; (2) Name of Holder employee(s) involved; (3) Harm which Guarantor believes will result if Holder does not alleviate the problem; (g) COMPLIANCE WITH LAW. Guarantor is in compliance with all laws, regulations, ordinances, and orders of public authorities applicable to Guarantor, except for violations, if any, that have been disclosed in writing to Holder and that would not result in any material adverse consequences for the business, operations or financial condition of Guarantor or for the ability of Guarantor to perform its obligations in connection with the Loan, including but not limited to its obligations hereunder; (h) ACCURACY OF INFORMATION. All other information, reports, papers, and data given to Holder with respect to Guarantor or to others obligated under the terms of this Agreement are accurate and correct in all material respects and complete insofar as completeness may be necessary to give Holder a true and accurate knowledge of the subject matter of the aforesaid information; the net worth of Guarantor as of the date hereof, determined on the basis of generally accepted accounting principles, consistently applied, is in excess of $9 million; and Guarantor has the capacity to pay its creditors and debts as they come due, notwithstanding the guaranty made herein; (i) CORPORATE WARRANTIES AND REPRESENTATIONS. Guarantor makes to Holder the following warranties, representations, and covenants, which shall be continuing so long as the obligations of Guarantor under this Agreement remain outstanding: (1) Guarantor is a corporation which is duly organized and is validly existing as a corporation in good standing under the laws of the state of its organization as identified in paragraph 1 of this Agreement; (2) Guarantor has the corporate power and authority to carry on its business as now being conducted; (3) Guarantor is qualified to do business and is in good standing in Florida and every other jurisdiction in which the nature of its business or its property makes such qualification necessary; (4) The execution, delivery, and performance of this Agreement and any documents securing this Agreement by Guarantor are within the corporate powers of Guarantor; have been duly authorized by all requisite action; have received all necessary governmental approval; will not violate any provision of law, any order of any court or other agency of government, or Guarantor's articles of incorporation, by-laws, partnership agreement or other organizational document; will not violate any provision of any indenture, agreement or other instrument to which Guarantor is a party or to which Guarantor or any of Guarantor's property is subject, including, but not limited to, securing the obligations of Guarantor under this Agreement, any provision prohibiting the creation or imposition of any lien, charge, or encumbrance of any nature whatsoever upon any of Guarantor's property or assets; and (5) Upon request by Holder, Guarantor shall deliver to Holder copies of its articles of incorporation and bylaws certified by Guarantor's secretary as being true and correct copies of same. 4. INVALIDITY OF SECURITY AND COLLATERAL IMPAIRMENT. The obligations of Guarantor under this Agreement shall not be released, discharged, or in any way affected or become unenforceable, nor shall Guarantor have any rights against Holder by reason of any of the following: (i) that the condition of any collateral securing the Obligations or Guarantor's obligations under this Agreement may be in default at the time of acceptance thereof by Holder; (ii) that a valid lien in any collateral securing the Obligations or Guarantor's obligation under this Agreement may not be conveyed to, created or perfected in favor of Holder; (iii) that the value of, or the lien or security interest of Holder in, any of collateral securing the Obligations or Guarantor's obligations under this Agreement may be or become impaired; (iv) that the collateral may be subject to equities, defenses or claims in favor of others or may be invalid or defective in any way; or (v) Holder's act, or failure to act, as the case may be, with respect to any collateral securing the Obligations or Guarantor's obligations under this Agreement authorized to be taken or excused from being taken under the security agreement, mortgage, assignment or other documents creating or perfecting Holder's security interest in such collateral; or (vi) the existence or priority of any liens or security interests in favor of third parties affecting or encumbering all or any portion of the collateral securing or intended to secure the Loan. 5. EVENTS OF DEFAULT. Guarantor shall be in default upon the occurrence of any of the following events, circumstances, or conditions ("Events of Default"): (a) Failure by any person obligated on the Obligations to make payment or performance to Holder when due; or (b) A default or breach under any of the terms of this Agreement, the Note, any construction loan agreement or other loan agreement, any security agreement, mortgage, deed to secure debt, deed of trust, trust deed, or any other document or instrument evidencing, guaranteeing, securing or otherwise relating to the Obligations, this Agreement, or any other obligations of Borrower or Guarantor; or (c) The making or furnishing of any verbal, or written, representation, statement, or warranty to Holder which is false or incorrect in any material respect or the failure to furnish facts necessary to prevent any statement made from being materially misleading, by, or on behalf of, Guarantor or Borrower; or (d) The death, dissolution, liquidation, or insolvency of Borrower or Guarantor, the appointment of a receiver by or on the behalf of Borrower or Guarantor, the assignment for the benefit of creditors by or on the behalf of Borrower or Guarantor, the voluntary or involuntary termination of existence by Borrower or Guarantor, or the commencement of an action or proceeding under any present or future federal or state insolvency, bankruptcy, reorganization, composition, or debtor relief law by or against Guarantor or Borrower; or (e) A good faith belief by Holder at any time that Holder is insecure, that the prospect of any payment of an Obligation is impaired, or that the collateral for the Obligations or this Agreement is impaired; or (f) Failure of Borrower or Guarantor to pay and provide proof of payment of any tax, assessment, rent, insurance premium, or escrow on or before its due date; or (g) A transfer of a substantial part of Guarantor's money or property to any one or more person(s) other than a wholly-owned subsidiary of Guarantor; or (h) Use of any portion of the Loan proceeds or other funds giving rise to an Obligation, whether now or hereafter advanced to Borrower or for Borrower's benefit, in any transaction which may cause Holder to directly or indirectly incur any securities or environmental liability; or (i) Any charge or indictment against Guarantor or Borrower under a federal or state law for which forfeiture is a potential penalty. 6. REMEDIES UPON DEFAULT. At the option of Holder, all or any part of the Obligations and the obligations of Guarantor under this Agreement shall become immediately due and payable without notice or demand, upon the occurrence of an Event of Default or at any time thereafter. In addition, upon the occurrence of any Event of Default, Holder, at its option, may immediately invoke any or all other remedies provided for in this Agreement, the Note, or any other instrument evidencing the Obligations, and any documents securing or otherwise relating to this Agreement or the Obligations. All rights and remedies are cumulative and not exclusive, and Holder is entitled to all remedies provided by law or equity, whether or not expressly set forth. 7. EFFECT OF BORROWER'S BANKRUPTCY. Guarantor understands and agrees that, if bankruptcy, reorganization or receivership proceedings should at any time be filed by or against Borrower, or upon the insolvency (however defined) of Borrower, this Agreement shall remain in full force and effect, and the maturity of the Loan and any other Obligations and Guarantor's liability hereunder may be accelerated, and all the aforesaid obligations of Borrower and Guarantor may become immediately payable by Guarantor. No invalidity, irregularity, or unenforceability by reason of the Federal Bankruptcy Code, 11 U.S.C. ss.ss.101 et seq., as amended from time to time, or any insolvency or other similar law, or any law or order of any government or agency thereof purporting to reduce, amend or otherwise affect, the Obligations, shall impair, affect, be a defense to or claim against the obligations of Guarantor under this Agreement. Any determination by final order of a court of competent jurisdiction that any payment of principal or interest to Holder by any other guarantor, surety, endorser or co-maker was a voidable preference or a fraudulent conveyance under the bankruptcy or insolvency laws of the United States or otherwise shall not extinguish Guarantor's liability to Holder under this Agreement, and Guarantor shall be liable to pay to Holder any amounts which Holder may be required to disgorge because of the insolvency or bankruptcy of Borrower or any other guarantors, surety, endorser, or co-maker of the Obligations. 8. CONSENTS BY GUARANTOR. Guarantor consents and agrees that: (a) To enforce the liability of Guarantor hereunder Holder shall NOT be required to first: (1) give Guarantor any notice of Borrower's default; (2) foreclose upon or resort to any mortgage, pledge or other collateral held as security for the Loan or any other Obligation; (3) attempt to enforce the liability of the Borrower or of any other maker, surety, guarantor, endorser, or other third party who may be primarily or secondarily liable for the Loan or any other Obligation; or (4) exhaust any other remedies it may have. (b) Holder may, without notice to Guarantor and without defeating or diminishing the liability of Guarantor hereunder, and on any terms satisfactory to Holder, from time to time on one or more occasions, without limitation: (1) release in whole or in part any mortgage, pledge or other collateral held as security for the Loan or other Obligations, or accept substitutions of collateral therefor; or (2) extend the maturity or modify the terms of the Loan or other Obligations, or permit the substitution or the renewal or renewals thereof, without limitation as to the number of renewals, extensions, modifications or substitutions; or (3) release, agree not to sue, suspend the right to enforce its rights as to Borrower or any third party who may at any time be liable as a co-obligor, endorser, surety, accommodation maker, guarantor or otherwise for the Loan or other Obligations, including the release of any co-signer of this Agreement, without the permission of the other signer(s); or (4) enter into agreements for sale, repurchase and participations of the Note and Loan or other Obligations to any person in any amounts; or (5) assign all or any part of the Note or other Obligations or this Agreement, in which event this Agreement shall inure to the benefit of any such assignee with the same force and effect as though the assignee was specifically named herein; or (6) make any future advances to Borrower without limit as to the amounts, numbers or terms of payment or interest rates of such advances; or (7) agree to any valuation of any collateral securing the Obligations or this Agreement made in connection with any proceedings under the U.S. Bankruptcy Code concerning Borrower or Guarantor, without regard to the amount of such valuation or any actual monies received by Holder from the sale of such collateral; or (8) take or fail to take any action authorized or permitted to be taken or that Holder is excused from taking by the Note, or any other instrument evidencing, guaranteeing, securing or otherwise relating to the Obligations, this Agreement, or any other obligations of Borrower or Guarantor to Holder. 9. WAIVERS. The Guarantor waives presentment for payment, demand, protest, notice of dishonor, notice of intent to accelerate, notice of acceleration, notice of acceptance of this Agreement, notice of the assignment of this Agreement or the Note or other Obligations, and notice of action by Holder upon default in regard to the Obligations, and any right of set-off Guarantor may have against Holder or any participating Holder. Guarantor further waives the following rights: (i) all rights to indemnification, reimbursement, contribution, or other rights at law or equity to recover or seek recovery from Borrower or any insider, as that is defined in 11 U.S.C. ss.101(30) as amended, of the Borrower for any sums paid by Guarantor to Holder in full or partial satisfaction of Borrower's Obligations or Guarantor's obligations to Holder under this Agreement; (ii) all rights to be subrogated to the rights of Holder against the Borrower or any insider, as defined above, for any sums paid by Guarantor to Holder in full or partial satisfaction of Borrower's Obligations or Guarantor's obligations to Holder under this Agreement; (iii) all other claims, cause of action, liens, rights of payment, rights of equitable remedy for breach of performance if such breach gives rise to a right of payment against Borrower or any insider as defined hereinabove, whether or not any of foregoing is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured. 10. GUARANTY IRREVOCABLE. This Agreement constitutes a continuing guaranty of the Obligations, cannot be revoked by Guarantor, and will remain in full force and effect until the Obligations are paid in full. 11. JOINT AND SEVERAL LIABILITY. Each Guarantor shall be jointly and severally liable for the payment of the entire amount of the unpaid balance owing under the Obligations, and Holder shall not, as a condition precedent to enforcing any Guarantor's liability hereunder, be obligated to enforce payment from any other guarantor. The failure by any person to sign this Agreement shall not affect the enforceability against each person who signs this Agreement. 12. CHANGES IN ORGANIZATION. No change in the corporate organization or structure of Borrower shall discharge or otherwise affect Guarantor's liabilities hereunder. 13. NO CONDITIONS. The liability of Guarantor hereunder is not conditioned upon the signing of this Agreement by any other person and is not subject to any other condition not herein expressly set out. 14. ATTORNEYS' FEES AND COSTS. Guarantor agrees to pay the reasonable costs incurred by Holder to enforce and collect this Agreement, including, but not limited to, reasonable paralegal fees, attorneys' fees, court costs and other legal expenses. 15. LIENS AND RIGHTS OF SET-OFF. In addition to all liens upon, and rights of set-off against the moneys, securities, and other property of Guarantor given to Holder by law, Holder shall have a lien upon and a right of set-off against all moneys, securities, and other property of Guarantor now or hereafter in the possession of Holder, whether held in a general or special account, or for safekeeping or otherwise; and every such lien or right of set-off may be exercised without demand upon or notice to Guarantor, without regard to the existence or value of any collateral securing the Obligations or this Agreement, and without regard to the number or creditworthiness of any other persons who have agreed to pay the Obligations. If any such money is also owned by some other person who has not guaranteed or agreed to pay the Obligations, Holder's right of set-off will extend to the amount which could be withdrawn or paid directly to Guarantor on Guarantor's request, endorsement or instruction alone. Where Guarantor may obtain payment from Holder only with the endorsement or consent of someone who has not guaranteed or agreed to pay the Obligations, Holder's right of set-off will extend to Guarantor's interest in the obligation. Holder's right of set-off will not apply to an account or other obligation if it clearly appears that Guarantor's rights in the obligation are solely as a fiduciary for another or to an account which, by its nature and applicable law, must be exempt from the claims of creditors. Holder will not be liable for failure to honor any instruction or request of Guarantor when there are insufficient funds in the account or other obligation to pay for such instruction or request because of Holder's exercise of its right of set-off. Guarantor agrees to indemnify and hold Holder harmless from any person's claim arising as a result of Holder's exercise of Holder's right of set-off and the cost and expenses related thereto, including without limitation, attorneys' fees and paralegal fees. 16. SUBORDINATION OF INDEBTEDNESS OF GUARANTOR TO BORROWER. Any indebtedness of Guarantor now or hereafter held by Borrower is hereby subordinated to the guaranty obligations of Guarantor to Holder under this Guaranty Agreement; and such indebtedness of Guarantor to Borrower shall not be paid by Guarantor until all of the Obligations shall have been paid and satisfied in full. 17. FINANCIAL STATEMENTS. Until the Obligations are satisfied in full, Guarantor shall furnish Holder upon any material change in financial or business condition, upon Holder's request, and in the event of no request, at least annually, a current financial statement of Guarantor, which is certified by Guarantor and Guarantor's accountant to be true and accurate, and Guarantor shall also provide to Holder a copy of its audited financial statements, certified by its independent auditors, promptly upon the issuance of such auditors report. 18. TERMINATION OF GUARANTY. The obligations of Guarantor under this Agreement shall continue in full force and effect until 120 days after the Obligations have been paid or satisfied in full, provided however, that this Agreement shall continue to be effective or shall be reinstated, as the case may be, if at any time payment or other satisfaction of any of the Obligations is rescinded or must otherwise be restored or refunded upon the insolvency or reorganization of Borrower, or otherwise, as though such payment had not been made or such other satisfaction had not occurred. 19. GENERAL PROVISIONS. (a) TIME OF THE ESSENCE. Time is of the essence in Guarantor's performance of all duties and obligations imposed by this Agreement. (b) NO WAIVER BY HOLDER. Holder's course of dealing, forbearance, or delay in, the exercise of any Holder's rights, remedies, privileges, or right to insist upon Guarantor's strict performance of any provisions contained in this Agreement or Borrower's strict performance of Borrower's obligations, shall not be construed as a waiver by Holder, unless any such waiver is in writing and signed by Holder. (c) AMENDMENT. The terms and provisions of this Agreement may not be waived, altered, modified or amended, except by a writing duly signed by an authorized agent of Holder and by Guarantor. (d) GOVERNING LAW. This Agreement shall be governed by the laws of the State of Arkansas, to the extent that such laws are not preempted by federal laws and regulations. (e) FORUM AND VENUE. In the event of litigation pertaining to this Agreement, the exclusive forum, venue, and place of jurisdiction shall be in the State of Arkansas, unless otherwise designated in writing by Holder. (f) SUCCESSORS. This Agreement shall inure to the benefit of and bind the heirs, personal representatives, successors, and assigns of the parties. The term "Holder" shall specifically include any transferee or assignee of Holder or any other holder of the Obligations. The term "Guarantor" shall specifically include any successors of Guarantor. (g) NUMBER AND GENDER. Whenever used, the singular shall include the plural, the plural the singular, and the use of any gender shall be applicable to all genders. (h) PARAGRAPH HEADINGS. The headings at the beginning of each paragraph and each subparagraph in this Agreement are for convenience only and shall not be dispositive in interpreting or construing this Agreement or any part thereof. (i) SEVERABILITY. If any provision of this Agreement shall be ruled unenforceable or void by a court of law having jurisdiction over the parties and subject matter, then such provision shall be deemed severable from the remaining provisions and shall in no way affect the enforceability of the remaining provisions nor the validity of this Agreement. (j) ENTIRE AGREEMENT. This Agreement and the Loan Documents as defined in the Note contain all the terms of the agreement between Holder and Guarantor, and no earlier statement has any force or effect. 20. RECEIPT OF COPY. By signing this Agreement, Guarantor acknowledges that Guarantor has read the Agreement prior to execution and that a copy (copies) of this Agreement was delivered and received by Guarantor. GUARANTOR: Smart Choice Automotive Group, Inc. By: /s/ James Neal Hutchinson, Jr. Name: James Neal Hutchinson, Jr. Title: Assistant Vice President Attest: By: /s/ Ernest Restina Name: Ernest Restina Secretary (Corporate Seal) BORROWER: ECKLER INDUSTRIES, INC. BY: /s/ James Neal Hutchinson, Jr. Title: Vice President EX-10.5 7 PLEDGE AND SECURITY AGREEMENT PLEDGE AND SECURITY AGREEMENT THIS PLEDGE AND SECURITY AGREEMENT (this "Agreement") is entered into as of September 30, 1997, by and between Smart Choice Automotive Group, Inc., a Florida Corporation ("Pledgor"), and Stephens Inc., an Arkansas Corporation ("Creditor"). 1. DEFINITIONS. 1.1 "Collateral" - all of the capital stock and other securities issued by Eckler Industries, Inc. (herein sometimes called "Eckler" and sometimes called "Borrower") now owned or hereafter acquired by Pledgor and all books and records relating to any of the above and all products and proceeds of the foregoing in whatever form and wherever located, including, without limitation, all insurance proceeds, all claims against third parties for loss or destruction of or damage to any of the foregoing, and all income from interest or dividends thereon and all proceeds of proceeds; 1.2 "Creditor" - See preamble; 1.3 "Pledgor" - See preamble; 1.4 "Obligations" - all present and future indebtedness and other obligations owing to Creditor, pursuant to (a) that certain Promissory Note (the "Note") of even date herewith by Eckler to the order of Creditor in the face principal amount of One Million Five Hundred Thousand Dollars ($1,500,000), (b) this Agreement, (c) that certain Guaranty Agreement of even date herewith from Pledgor to Creditor (the "Guaranty"), (d) that certain Security Agreement of even date herewith from Eckler to Creditor (the "Eckler Security Agreement"), or (e) any of them, and all present and future indebtedness and other obligations owing by Pledgor to Creditor or guaranteed to Creditor by Pledgor in connection with the Note, whether or not for the payment of money, whether or not evidenced by any note or other instrument, whether direct or indirect, absolute or contingent, due or to become due, joint or several, primary or secondary, liquidated or unliquidated, secured or unsecured, whether arising before, during, or after the commencement of any case with respect to Borrower or Pledgor under the United States Bankruptcy Code or any similar statute, including interest, fees, charges, expenses, and attorneys' fees chargeable to Pledgor or incurred by Creditor in connection with this Agreement and/or the transaction(s) related thereto. 2. GRANT OF SECURITY INTEREST. 2.1 To secure the payment and performance in full of all of the Obligations, Pledgor hereby grants to Creditor a continuing security interest in and lien upon, and a right of set off against, and Pledgor hereby assigns and pledges to Creditor, all of the Collateral. Pledgor hereby agrees to give possession of the Collateral to Creditor at the time of execution of this Agreement; and, with respect to any portion of the Collateral that subsequently comes into Pledgor's possession, immediately upon Pledgor's obtaining possession thereof, Pledgor shall deliver possession thereof to Creditor. 2.2 Following a written notice from Creditor to Pledgor, Creditor may, in its discretion and without liability, take any one or more of the following actions: (a) Transfer to or register in its name or the name of its nominee any of the Collateral, with or without indication of its security interest, and whether or not so transferred or registered, receive the profits, income, dividends, and other distributions thereon and hold them or apply them to the Obligations in any order of priority; (b) Exercise or cause to be exercised all voting and corporate or partnership powers with respect to any of the Collateral, including all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to the Collateral, as if the absolute owner thereof; (c) Insure any of the Collateral (but Holder shall have no duty to insure the Collateral); (d) Exchange any of the Collateral for other property upon a reorganization, recapitalization or other readjustment, and in connection therewith, deposit any of the Collateral with any committee or depository upon such terms as Holder may determine. Pledgor hereby constitutes and appoints Creditor its attorney-in-fact, at Pledgor's cost and expense to take any actions and to execute and deliver any instruments or documents on behalf of Pledgor to effect any of the foregoing actions, and such appointment as attorney-in-fact, being coupled with an interest shall be irrevocable and shall continue until all of the Obligations shall have been paid and satisfied in full. 3. REPRESENTATIONS AND WARRANTIES. Pledgor represents and warrants that it is the sole owner of the Collateral, free and clear of all liens and encumbrances, except for the lien and security interest created by this Agreement. Pledgor represents and warrants that the Collateral comprises all of the issued and outstanding capital stock and other securities of Eckler and that there exist no warrants, rights, convertible securities or other obligations of Eckler or Pledgor that could, now or in the future, give the holder thereof the right to receive any capital stock or other securities of Eckler. 4. COVENANTS. Pledgor covenants that: 4.1 Pledgor shall give Creditor written notice immediately upon forming an intention to change its name or form of business organization or place of business. 4.2 Pledgor shall not directly or indirectly: (a) sell, lease, transfer, assign, further encumber, abandon, or otherwise dispose of any part of the Collateral or any material portion of its other assets without the prior written consent of Creditor; (b) consolidate with or merge with or into any other entity, or permit any other entity to consolidate with or merge with or into Pledgor, without giving at least thirty (30) days prior written notice to Creditor; (c) form or acquire any interest in any firm, corporation, or other entity, without giving at least thirty (30) days prior written notice to Creditor; or (d) incur any debt except in the normal and ordinary course of business consistent with past practices without the prior written consent of Creditor. 4.3 Pledgor shall pay, on Creditor's demand, whether incurred before or after the commencement of any case with respect to Borrower or Pledgor under the United States Bankruptcy Code or any similar statute, all costs and expenses of filing or recording any instruments, documents or pleadings relating to the Obligations or any of them or to the Collateral (including but not limited to Uniform Commercial Code financing statement filing taxes and fees, documentary taxes, intangibles taxes, and mortgage recording taxes and fees, if applicable, and reasonable attorneys' fees). 4.4 Pledgor hereby authorizes Creditor as attorney-in-fact for Pledgor and on Pledgor's behalf to sign and to file any financing statements or amendments with respect to the Collateral, and to file as financing statements any carbon, photographic, or other reproductions of this Agreement or any financing statements signed by Pledgor. 4.5 Pledgor shall fully and promptly comply with any and all requests made by Creditor for information relating to the business, operations, finances, results of operation, marketing, contracts, products, prospects, assets, liabilities, contingencies, income, expenses, taxes and any and all matters relating to the business or prospects of Eckler, Pledgor or any of their affiliate companies. 5. EVENTS OF DEFAULT. Creditor shall be in default under this Agreement upon the occurrence of any of the events, circumstances or conditions ("Events of Default") set forth in Section 6 of the Note. 6. REMEDIES ON DEFAULT. Creditor shall have all of the rights and remedies upon the occurrence of any of the Events of Default as set forth in Section 7 of the Note, and all of the rights and remedies provided by law for secured parties and all of the rights and remedies set forth in this Section 6. Creditor shall also have the right, following occurrence of an Event of Default, to receive and collect any and all dividends, proceeds and other distributions made in respect of the Collateral or any portion thereof and to hold such dividends, proceeds and other distributions as additional Collateral hereunder or apply any or all of them toward satisfaction of the Obligations and to exercise any and all voting rights with respect to the Collateral and any and all rights to give or withhold consents, waivers or ratifications with respect to the Collateral. The Borrower and Pledgor shall be liable for the entire amount of all Obligations, regardless of whether Creditor exercises or declines to exercise any rights or remedies of Creditor against the Collateral (or any portion thereof), and if Creditor elects to exercise any of its rights or remedies against the Collateral, Borrower shall be and remain liable for the entire amount and complete satisfaction of all Obligations of Borrower to the full extent that proceeds realized by Creditor upon disposition of such Collateral are insufficient to satisfy all of the Obligations in full. (a) ASSEMBLY OF COLLATERAL. Creditor may require Pledgor to assemble all or any part of the Collateral and make it available to Creditor at a place to be designated by Creditor which is reasonably convenient to both parties. (b) NOTICE OF SALE. Any notice of sale, disposition or other intended action by Creditor, given or sent at least ten (10) days prior to such action to the last known address of Pledgor as shown on Creditor's records, shall constitute reasonable notice. Creditor shall have no obligation to give notice of any sale, disposition or other intended action, except as required by applicable law. Following occurrence of any Event of Default and reasonable notice to Pledgor, if required by applicable law, Creditor shall have the right to sell or otherwise dispose of the Collateral by public or private sale and in any manner that Creditor reasonably deems commercially reasonable (c) APPLICATION OF PROCEEDS. Any cash held by Creditor as Collateral and all cash proceeds received by Creditor from any sale of, collection from, receipt of dividends, proceeds or distributions upon, or other realization upon all or any part of the Collateral under the provisions of the Uniform Commercial Code or this Agreement shall be applied to the following in such order as Creditor may elect: (1) To the repayment of the reasonable costs and expenses (including reasonable attorneys fees, paralegal fees, and other legal expenses) incurred by Creditor in connection with the administration of the Note or this Agreement, the custody, preservation, use, operation of, sale or collection from, or other realization upon, any collateral securing the Obligations or any of them, the exercise or enforcement of any of the rights of Creditor hereunder or under any of the other Loan Documents (as defined in the Note), or the failure of Pledgor to perform or observe any of the provisions of this Agreement or the Note; (2) To the payment or other satisfaction of any liens and other encumbrances upon any of the collateral securing the Obligations or any of them, at the sole option of Creditor; (3) To the reimbursement of Creditor for the amount of any obligations of Borrower or Pledgor paid or discharged by Creditor pursuant to the provisions of this Agreement or any of the other Loan Documents and of any expenses of Creditor payable by Pledgor hereunder; (4) To the satisfaction of the Obligations in such order as Creditor shall elect; (5) To the payment of any other amounts required or permitted by applicable law, including, without limitation, ss.4-9-504(1)(c) of the Arkansas Uniform Commercial Code or any similar successor statutory provision. In the event that the proceeds of any such sale, collection, or disposition, are insufficient to pay all of the amounts to which Creditor is legally entitled, Borrower and Pledgor shall be liable for the deficiency, together with interest thereon at such rates as shall be fixed by the instruments evidencing the Obligations, together with the costs of collection and the reasonable fees of any attorneys employed by Creditor to collect such deficiency. If surplus proceeds are realized upon Creditor's disposition of the Collateral, they shall be paid to Borrower or Pledgor or to whomsoever shall be lawfully entitled to receive the same, or as a court of competent jurisdiction shall direct. 7. WAIVERS BY PLEDGOR. Pledgor hereby irrevocably waives: 7.1 any bond and any surety or security relating thereto by any statute, court rule, or otherwise as an incident to Creditor's possession of the Collateral; and 7.2 any requirement that Creditor retain possession of and not dispose of any such Collateral until after trial or final judgment. 8. MISCELLANEOUS. 8.1 Notices. Any notice given, or required to be given, by any party under this Agreement shall be deemed to be validly given if in writing and delivered personally or by a nationally recognized overnight courier service, or upon receipt if by facsimile transmission, or if sent by mail, on the first to occur of the date actually received or three (3) days after deposit in the certified U.S. mail, postage prepaid and return receipt requested, addressed to the other party at the following addresses: Pledgor: Smart Choice Automotive Group, Inc. 5200 S. Washington Ave. Titusville, FL 37780 Telephone No. (407) 269-0834 Facsimile No. (407) 264-0376 Attention: Mr. Gary Smith with copy to: Greenburg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. 111 N. Orange Avenue, 20th Floor Orlando, FL 32801 Attention: Randolph Fields, Esq. Telephone: (407) 420-1000 Facsimile No: (407) 420-5909 Creditor: Stephens Inc. Corporate Finance Department 950 E. Paces Ferry Road Atlanta, GA 30326 Attention: David Linch with a copy to: Stephens Inc. 111 Center Street Little Rock, Arkansas 72201 Attention: William B. Keisler, Associate General Counsel Telephone No. 501-377-8045 Facsimile No. 501-377-2677 8.2 Costs and Expenses - General. Pledgor agrees to reimburse Creditor for all reasonable costs and expenses, including attorneys' fees, which Creditor has incurred or may incur in (a) negotiating, preparing, administering, or enforcing this Agreement and any documents prepared in connection herewith; (b) protecting, preserving, or enforcing any lien, security interest, or other right granted by Pledgor to Creditor, or arising under applicable law, whether or not suit is brought; and (c) connection with any federal or state insolvency proceeding commenced by or against Borrower or Pledgor, including those (i) arising out of the automatic stay, (ii) seeking dismissal or conversion of the bankruptcy proceeding or (iii) opposing confirmation of Borrower's or Pledgor's plan thereunder. All such costs and expenses which have been incurred on or prior to the execution hereof shall be paid contemporaneously with the execution hereof. Any such costs and expenses incurred subsequent to the execution hereof shall become part of the Obligations when incurred and may be added to the outstanding principal amount due hereunder. 8.3 Costs and Expenses - Enforcement of Judgments. Pledgor agrees to reimburse Creditor for all costs and expenses, including reasonable attorneys' fees, which Creditor incurs in enforcing any judgment rendered in connection with this Agreement. This provision is severable from all other provisions hereof and shall survive, and not be deemed merged into, any such judgment. 8.4 Severability of Provisions. In the event that any one or more of the provisions contained in this Agreement is held to be invalid, illegal, or unenforceable in any respect, then such provisions shall be ineffective only to the extent of such prohibition or invalidity, and the validity, legality, and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 8.5 Amendment and Waiver. Neither this Agreement nor any provisions hereof may be changed, waived, discharged, or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge, or termination is sought. 8.6 No Waiver. No failure to exercise and no delay in exercising any right, power, or remedy hereunder shall impair any right, power, or remedy which Creditor may have, nor shall any such delay be construed to be a waiver of any of such rights, powers, or remedies, or any acquiescence in any breach or default hereunder; nor shall any waiver of any breach or default of Pledgor hereunder be deemed a waiver of any default or breach subsequently occurring. All rights and remedies granted to Creditor hereunder shall remain in full force and effect notwithstanding any single or partial exercise of, or any discontinuance of action begun to enforce any such right or remedy. The rights and remedies specified herein are cumulative and not exclusive of each other or of any rights or remedies which Creditor would otherwise have. Any waiver, permit, consent, or approval by Creditor of any breach or default hereunder must be in writing and shall be effective only to the extent set forth in such writing and only as to that specific instance. 8.7 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of Pledgor, Creditor, and their respective successors and assigns. 8.8 Waiver of Statute of Limitations. Pledgor waives the pleading of any statute of limitations with respect to any and all actions in connection herewith. 8.9 Waiver Of Trial By Jury. In recognition of the higher costs and delay which may result from a jury trial, the parties hereto waive any right to trial by jury of any claim, demand, action, or cause of action (1) arising hereunder, or (2) in any way connected with or related or incidental to the dealings of the parties hereto or any of them with respect hereto, in each case whether now existing or hereafter arising, and whether sounding in contract or tort or otherwise; and each party hereby agrees and consents that any such claim, demand, action, or cause of action shall be decided by court trial without a jury, and that any party hereto may file an original counterpart or a copy of this section with any court as written evidence of the consent of the parties hereto to the waiver of their right to trial by jury. 8.10 Voting and Cash Dividends Prior to Default. Prior to Creditor giving notice under paragraph 2.2 of this Agreement, Pledgor shall be entitled to (a) exercise any voting rights with respect to the Collateral and to give consents, waivers and ratifications in respect thereof, provided that no vote shall be cast or consent, waiver or ratification given which would constitute or create a material violation of any of the terms of the Note or the Security Agreement, and (b) receive or retain for its own use cash dividends on the Collateral paid out. 8.11 Release of Pledged Collateral. Upon payment or other satisfaction in full of the Obligations as provided for herein and in the Note, the Guaranty and the Security Agreement, this Agreement shall terminate and Creditor shall promptly deliver to Pledgor, at Pledgor's expense, such of the Collateral as shall not have been sold or otherwise applied pursuant to this Agreement. 8.12 This Agreement may be executed in any number of counterparts, and this Agreement shall be a valid and binding agreement of the parties, if it has been executed by all parties in one or more counterparts which are identical except for the signatures affixed thereto. A facsimile transmission to any party to this Agreement of the signature to this Agreement by or on behalf of any party hereto shall be as effective to bind such signatory party as the delivery of an original of this Agreement manually signed by or on behalf of the such signatory party. 8.13 Governing Law. The validity, construction, and performance of this Agreement shall be governed by the laws, without regard to the laws as to choice or conflict of laws, of the State of Arkansas. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. PLEDGOR: Smart Choice Automotive Group, Inc. By: /s/ James Neal Hutchinson Title: Assistant Vice President BORROWER: ECKLER INDUSTRIES, INC. By: /s/ James Neal Hutchinson, Jr. Title: Vice President CREDITOR: Stephens Inc. By: /s/ Warren A. Stephens Title: President EX-10.6 8 SECURITIES AND PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT (the "Agreement"), dated as of September 30, 1997, by and among Smart Choice Automotive Group, Inc., a Florida corporation, with headquarters located at 5200 S. Washington Avenue, Titusville, Florida 32780 (the "Company"), and the investors listed on the Schedule of Buyers attached hereto (individually, a "Buyer" and collectively, the "Buyers"). WHEREAS: A. The Company and the Buyers are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Rule 506 of Regulation D ("Regulation D") as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933 Act"); B. The Company has authorized the following new series of its Preferred Stock, par value $.01 per share (the "Preferred Stock"): the Company's Series A Redeemable Convertible Preferred Stock (the "Preferred Shares"), which shall be convertible into shares of the Company's Common Stock, par value $.01 per share (the "Common Stock") (as converted, the "Conversion Shares"), in accordance with the terms of the Company's Second Articles of Amendment to Articles of Incorporation setting forth the designations, preferences and rights of the Preferred Shares, substantially in the form attached hereto as Exhibit A (the "Articles of Amendment"); C. The Buyers wish to purchase, upon the terms and conditions stated in this Agreement, initially an aggregate of 300 of the Preferred Shares (the "Initial Preferred Shares") in the respective amounts set forth opposite each Buyer's name on the Schedule of Buyers and one warrant, in substantially the form attached hereto as Exhibit E (the "Warrants"), to acquire 300 shares of Common Stock for each Preferred Share purchased, which Warrants shall expire five years after the date of issuance; D. Subject to the terms and conditions set forth in this Agreement, each Buyer shall purchase a number of additional Preferred Shares, along with the related Warrant, equal to up to an aggregate of 100 Preferred Shares (the "Additional Preferred Shares"), pro rata based on the number of Initial Preferred Shares each Buyer purchased in relation to the total number of Initial Preferred Shares; and E. Contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement substantially in the form attached hereto as Exhibit B (the "Registration Rights Agreement") pursuant to which the Company has agreed to provide certain registration rights under the 1933 Act and the rules and regulations promulgated thereunder, and applicable state securities laws. NOW THEREFORE, the Company and the Buyers hereby agree as follows: 1. PURCHASE AND SALE OF PREFERRED SHARES. a. Purchase of Preferred Shares. Subject to the satisfaction (or waiver) of the conditions set forth in Sections 6(a) and 7(a) below, the Company shall issue and sell to the Buyers and the Buyers shall purchase from the Company an aggregate of 300 Initial Preferred Shares, in the respective amounts set forth opposite each Buyer's name on the Schedule of Buyers along with one Warrant for each Preferred Share purchased (the "Initial Closing"). Subject to the satisfaction (or waiver) of the conditions set forth in Sections 1(c), 6(b) and 7(b) below, at the option of each Buyer, the Company shall issue and sell to each such Buyer and each such Buyer shall purchase from the Company, an aggregate of up to 100 Additional Preferred Shares, along with the related Warrants, pro rata based on the number of Initial Preferred Shares each Buyer purchased in relation to the total number of Initial Preferred Shares (the "Additional Closing"). The Initial Closing and the Additional Closing collectively are referred to in this Agreement as the "Closings." The purchase price (the "Purchase Price") of each Preferred Share and the related Warrant at each of the Closings shall be $10,000. b. The Initial Closing Date. The date and time of the Initial Closing (the "Initial Closing Date") shall be 10:00 a.m. Central Time, within three (3) business days following the date hereof, subject to notification of satisfaction (or waiver) of the conditions to the Closing set forth in Sections 6(a) and 7(a) below (or such later date as is mutually agreed to by the Company and the Buyers). The Initial Closing shall occur on the Initial Closing Date at the offices of Katten Muchin & Zavis, 525 West Monroe Street, Suite 1600, Chicago, Illinois 60661-3693. c. The Additional Closing Date. The date and time of the Additional Closing (the "Additional Closing Date") shall be 10:00 a.m. Central Time, on the date specified in the Company's Additional Share Notice (as defined below), subject to satisfaction (or waiver) of the conditions to the Additional Closing set forth in Sections 6(b) and 7(b) and the conditions set forth in this paragraph (or such later date as is mutually agreed to by the Company and the Buyers). Within one business day of the date that the Registration Statement is declared effective by the SEC, the Company shall deliver written notice to each of the Buyers (a "Additional Share Notice") setting forth (i) each Buyer's pro rata portion (based on the number of Initial Preferred Shares each Buyer purchased in relation to the total number of Initial Preferred Shares purchased by the Buyers) of the aggregate number of Additional Preferred Shares, which aggregate number shall equal 100 Preferred Shares, along with the related Warrants, which each Buyer is required, subject to the satisfaction of the conditions set forth in Sections 1(d), 6(b) and 7(b), to purchase at the Additional Closing, (ii) the aggregate Purchase Price for each such Buyer's Additional Preferred Shares and the related Warrants and (iii) the date selected by the Company for the Additional Closing Date, which Additional Closing Date shall be not less than 20 nor more than 30 days after the Buyer's receipt of the Company's Additional Share Notice. The Initial Closing Date and the Additional Closing Date collectively are referred to in this Agreement as the "Closings Dates." d. The Additional Notice Conditions. Notwithstanding anything in this agreement to the contrary, the Company shall not be entitled to deliver an Additional Share Notice and the Buyers shall not be required to purchase the Additional Preferred Shares along with the related Warrants unless, in addition to the satisfaction of the requirements of Sections 6(b) and 7(b), all of the following conditions are satisfied: (i) if stockholder approval of the issuance of the Securities (as defined below) would be required (absent Section 13 of the Articles of Amendment) by the rules and regulations of The Nasdaq Stock Market, Inc. in order for the Company to issue all of the Securities, then the Company's stockholders shall have approved the issuance of the Securities on or prior to the date the Company delivers its Additional Share Notice (the "Additional Share Notice Date"); (ii) as of the Additional Share Notice Date and the Additional Closing Date, the Company's $35,000,000 revolving credit facility with FINOVA has not (A) been reduced to less than $31,500,000 and (B) been terminated unless it also has been replaced with a credit facility of at least $35,000,000, an interest rate not higher than under the current FINOVA credit facility and with a financial institution with at least $1,000,000,000 in assets; (iii) during the period beginning on the Additional Share Notice Date and ending on and including the Additional Closing Date, the Registration Statement shall be effective and available for the sale of no less than 125% of the sum of (A) the number of Conversion Shares then issuable upon the conversion of all outstanding Preferred Shares and the Additional Preferred Shares to be issued by the Company, (B) the number of Warrant Shares (as defined in Section 2(a) below) then issuable upon exercise of all outstanding Warrants and the Warrants to be issued in connection with the Additional Preferred Shares and (C) the number of Conversion Shares and Warrant Shares that are then held by the Buyers, (iv) during the period beginning on the Additional Share Notice Date and ending on and including the Additional Closing Date, the Common Stock is designated for quotation on The Nasdaq SmallCap Market or a national securities exchange and is not suspended from trading; (v) no event constituting a Major Business Event (as defined below), including an agreement to consummate a Major Business Event, or a Triggering Event set forth in Section 3(d)(iv) of the Articles of Amendment shall have occurred from the period beginning on the Initial Closing Date and ending on and including the Additional Closing Date; (vi) during the period beginning on the Initial Closing Date and ending on and including the Additional Closing Date, the Company shall have delivered Conversion Shares upon conversion of the Preferred Shares and Warrant Shares upon exercise of the Warrants to the Buyers on a timely basis as set forth in Section 2(f)(ii) of the Articles of Amendment and Sections 2(a) and 2(b) of the Warrants, respectively; and (vii) the Company otherwise has satisfied its obligations under, is in compliance with and is not in default under or breach of this Agreement, the Registration Rights Agreement, the Articles of Amendment and the Warrants. For purposes of this Section 1(d) "Major Business Event" means (x) consolidation, merger or other business combination of the Company with another entity (other than pursuant to a migratory merger effected solely for the purpose of changing the Company's jurisdiction of incorporation), (y) the sale or transfer of all or substantially all of the Company's assets or (z) a purchase, tender or exchange offer made to and accepted by the holders of more than 25% of the outstanding shares of Common Stock. e. Form of Payment. On each of the Closing Dates, (i) each Buyer shall pay the Purchase Price to the Company for the Preferred Shares and the Warrants to be issued and sold to such Buyer at the respective Closing, by wire transfer of immediately available funds in accordance with the Company's written wire instructions, and (ii) the Company shall deliver to each Buyer, stock certificates (in the denominations as such Buyer shall request) (the "Stock Certificates") representing such number of the Preferred Shares which such Buyer is then purchasing (as indicated opposite such Buyer's name on the Schedule of Buyers) along with a Warrant exercisable for 300 shares of Common Stock for each Preferred Share purchased, duly executed on behalf of the Company and registered in the name of such Buyer or its designee. 2. BUYER'S REPRESENTATIONS AND WARRANTIES. Each Buyer represents and warrants with respect to only itself that: a. Investment Purpose. Such Buyer (i) is acquiring the Preferred Shares and the Warrants, (ii) upon conversion of the Preferred Shares, will acquire the Conversion Shares then issuable and (iii) upon exercise of the Warrants, will acquire the shares of Common Stock issuable upon exercise thereof (the "Warrant Shares") (the Preferred Shares, the Conversion Shares, the Warrants and the Warrant Shares collectively are referred to herein as the "Securities"), for its own account for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof, except pursuant to sales registered or exempted under the 1933 Act; provided, however, that by making the representations herein, such Buyer does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of Preferred Shares at any time in accordance with or pursuant to a registration statement or an exemption under the 1933 Act. b. Accredited Investor Status. Such Buyer is an "accredited investor" as that term is defined in Rule 501(a)(3) of Regulation D. c. Reliance on Exemptions. Such Buyer understands that the Securities are being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying in part upon the truth and accuracy of, and such Buyer's compliance with, the representations, warranties, agreements, acknowledgments and understandings of such Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of such Buyer to acquire such securities. d. Information. Such Buyer and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities which have been requested by such Buyer. Such Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company. Neither such inquiries nor any other due diligence investigations conducted by such Buyer or its advisors, if any, or its representatives shall modify, amend or affect such Buyer's right to rely on the Company's representations and warranties contained in Section 3 below. Such Buyer understands that its investment in the Securities involves a high degree of risk. Such Buyer has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Securities. e. No Governmental Review. Such Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities or the fairness or suitability of the investment in the Securities nor have such authorities passed upon or endorsed the merits of the offering of the Securities. f. Transfer or Resale. Such Buyer understands that except as provided in the Registration Rights Agreement: (i) the Securities have not been and are not being registered under the 1933 Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (A) subsequently registered thereunder, (B) such Buyer shall have delivered to the Company an opinion of counsel, in a form reasonably acceptable to the Company, to the effect that such Securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration, or (C) such Buyer provides the Company with reasonable assurance that such Securities can be sold, assigned or transferred pursuant to Rule 144 promulgated under the 1933 Act (or a successor rule thereto)("Rule 144"); (ii) any sale of the Securities made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of the Securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (iii) neither the Company nor any other person is under any obligation to register such Securities under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. g. Legends. Such Buyer understands that the certificates or other instruments representing the Preferred Shares and the Warrants and, until such time as the sale of the Conversion Shares and the Warrant Shares have been registered under the 1933 Act as contemplated by the Registration Rights Agreement, the stock certificates representing the Conversion Shares and the Warrant Shares, except as set forth below, shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of such stock certificates): THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT. The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of the Securities upon which it is stamped, if, unless otherwise required by state securities laws, (i) such Securities are registered for sale under the 1933 Act, (ii) in connection with a sale transaction, such holder provides the Company with an opinion of counsel, in a form reasonably acceptable to the Company, to the effect that a public sale, assignment or transfer of such Securities may be made without registration under the 1933 Act, or (iii) such holder provides the Company with reasonable assurances that such Securities can be sold pursuant to Rule 144 without any restriction as to the number of securities acquired as of a particular date that can then be immediately sold. Each Buyer acknowledges, covenants and agrees to sell the Securities represented by a certificate(s) from which the legend has been removed, only pursuant to (i) a registration statement effective under the 1933 Act, or (ii) advice of counsel that such sale is exempt from registration required by Section 5 of the 1933 Act. h. Authorization; Enforcement. This Agreement has been duly and validly authorized, executed and delivered on behalf of such Buyer and is a valid and binding agreement of such Buyer enforceable in accordance with its terms, subject as to enforceability to general principles of equity and to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors' rights and remedies. i. Residency. Such Buyer is a resident of that country specified in its address on the Schedule of Buyers. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each of the Buyers that: a. Organization and Qualification. The Company and its subsidiaries (a complete list of which is set forth in Schedule 3(a)) are corporations duly organized and validly existing in good standing under the laws of the jurisdiction in which they are incorporated, and have the requisite corporate power to own their properties and to carry on their business as now being conducted. Each of the Company and its subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect. As used in this Agreement, "Material Adverse Effect" means any material adverse effect on the business, properties, assets, operations, results of operations, financial condition or prospects of the Company and its subsidiaries, if any, taken as a whole, or on the transactions contemplated hereby or by the agreements and instruments to be entered into in connection herewith. b. Authorization; Enforcement; Compliance with Other Instruments. (i) The Company has the requisite corporate power and authority to enter into and perform this Agreement, the Registration Rights Agreement and each of the other agreements entered into by the parties hereto in connection with the transactions contemplated by this Agreement (collectively, the "Transaction Documents"), and to issue the Securities in accordance with the terms hereof and thereof, (ii) the execution and delivery of the Transaction Documents, the Articles of Amendment and the Warrants by the Company and the consummation by it of the transactions contemplated hereby and thereby, including without limitation the issuance of the Preferred Shares and the Warrants and the reservation for issuance and the issuance of the Conversion Shares and the Warrant Shares issuable upon conversion or exercise thereof, have been duly authorized by the Company's Board of Directors and no further consent or authorization is required by the Company, its Board of Directors or its stockholders, (iii) the Transaction Documents and the Warrants have been duly executed and delivered by the Company, (iv) the Transaction Documents and the Warrants constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors' rights and remedies, and (v) prior to the Closing Date, the Articles of Amendment has been filed with the Secretary of State of the State of Florida and will be in full force and effect, enforceable against the Company in accordance with its terms. c. Capitalization. As of the date hereof, the authorized capital stock of the Company consists of (i) 100,000,000 shares of Common Stock, of which as of September 29, 1997, 9,278,385 shares were issued and outstanding, 175,000 shares are reserved for issuance pursuant to the Company's stock option and purchase plans and 5,595,639 shares are reserved for issuance pursuant to securities (other than the Preferred Shares and the Warrants) exercisable or exchangeable for, or convertible into, shares of Common Stock and (ii) 5,000,000 shares of preferred stock, none of which as of the date were issued and outstanding. All of such outstanding shares have been, or upon issuance will be, validly issued and are fully paid and nonassessable. Except as disclosed in Schedule 3(c), no shares of Common Stock or Preferred Stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company. Except as disclosed in Schedule 3(c), as of the effective date of this Agreement, (i) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, (ii) there are no outstanding debt securities and (iii) there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of their securities under the 1933 Act (except the Registration Rights Agreement). Except as disclosed in Schedule 3(c), there are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Securities as described in this Agreement. The Company has furnished to the Buyers true and correct copies of the Company's Articles of Incorporation, as amended and as in effect on the date hereof (the "Articles of Incorporation"), and the Company's By-laws, as in effect on the date hereof (the "By-laws"), and the terms of all securities convertible into or exercisable for Common Stock and the material rights of the holders thereof in respect thereto. d. Issuance of Securities. The Preferred Shares and the Warrants are duly authorized and, upon issuance in accordance with the terms hereof, shall be (i) validly issued, fully paid and non-assessable, (ii) free from all taxes, liens and charges with respect to the issue thereof and (iii) entitled to the rights and preferences set forth in the Articles of Amendment. 1,300,000 shares of Common Stock (subject to adjustment pursuant to the Company's covenant set forth in Section 4(f) below) initially have been duly authorized and reserved for issuance upon conversion of the Preferred Shares and upon exercise of the Warrants. Upon conversion or exercise in accordance with the Articles of Amendment or the Warrants, as the case may be, the Conversion Shares and the Warrant Shares will be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof, with the holders being entitled to all rights accorded to a holder of Common Stock. The issuance by the Company of the Securities is exempt from registration under the 1933 Act. e. No Conflicts. Except as disclosed in Schedule 3(e), the execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby will not (i) result in a violation of the Articles of Incorporation, any Articles of Amendment, Preferences and Rights of any outstanding series of Preferred Stock of the Company or the By-laws or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and the rules and regulations of the principal market or exchange on which the Common Stock is traded or listed) applicable to the Company or any of its subsidiaries or by which any property or asset of the Company or any of its subsidiaries is bound or affected. Except as disclosed in Schedule 3(e), neither the Company nor its subsidiaries is in violation of any term of or in default under the Articles of Incorporation, any Articles of Amendment, Preferences and Rights of any outstanding series of Preferred Stock or the By-laws or their organizational charter or by-laws, respectively, or (except for possible defaults which would not individually or in the aggregate have a Material Adverse Effect) any contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company or its subsidiaries. The business of the Company and its subsidiaries is not being conducted, and shall not be conducted, in violation of any law, ordinance, regulation of any governmental entity, except for involuntary violations which would not individually or in the aggregate have a Material Adverse Effect. Except as specifically contemplated by this Agreement and as required under the 1933 Act, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under or contemplated by this Agreement or the Registration Rights Agreement in accordance with the terms hereof or thereof. Except as disclosed in Schedule 3(e), all consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company and its subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. f. SEC Documents; Financial Statements. Since September 30, 1995, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "1934 Act") (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein being hereinafter referred to as the "SEC Documents"). The Company has delivered to the Buyers or their respective representatives true and complete copies of the SEC Documents. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other information provided by or on behalf of the Company to the Buyers which is not included in the SEC Documents, including, without limitation, information referred to in Section 2(d) of this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstance under which they are or were made, not misleading. Neither the Company nor any of its subsidiaries or any of their officers, directors, employees or agents have provided the Buyers with any material, nonpublic information. g. Absence of Certain Changes. Except as disclosed in Schedule 3(g), since September 30, 1996, there has been no material adverse change and no material adverse development in the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries. The Company has not taken any steps, and does not currently expect to take any steps, to seek protection pursuant to any bankruptcy law nor does the Company or its subsidiaries have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings. h. Absence of Litigation. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company or any of its subsidiaries, threatened against or affecting the Company, the Common Stock or any of the Company's subsidiaries, wherein an unfavorable decision, ruling or finding would (i) adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement or any of the documents contemplated herein or (ii), except as expressly set forth in the SEC Documents or in Schedule 3(h), have a Material Adverse Effect. i. Acknowledgment Regarding Buyers' Purchase of Preferred Shares. The Company acknowledges and agrees that each of the Buyers is acting solely in the capacity of arm's length purchaser with respect to the Transaction Documents and the transactions contemplated thereby. The Company further acknowledges that each Buyer is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated thereby and any advice given by any of the Buyers or any of their respective representatives or agents in connection with the Transaction Documents and the transactions contemplated thereby is merely incidental to such Buyer's purchase of the Securities. The Company further represents to each Buyer that the Company's decision to enter into the Transaction Documents has been based solely on the independent evaluation by the Company and its representatives. j. No Undisclosed Events, Liabilities, Developments or Circumstances. No event, liability, development or circumstance has occurred or exists, or is contemplated to occur, with respect to the Company or its subsidiaries or their respective business, properties, prospects, operations or financial condition, which has not been publicly announced or disclosed in writing to the Buyers. k. No General Solicitation. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the 1933 Act) in connection with the offer or sale of the Securities. l. No Integrated Offering. 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 require registration of any of the Securities under the 1933 Act or cause this offering of Securities to be integrated with prior offerings by the Company for purposes of the 1933 Act or any applicable stockholder approval provisions, including, without limitation, under the rules and regulations of The Nasdaq Stock Market, Inc., nor will the Company or any of its subsidiaries take any action or steps that would require registration of the Securities under the 1933 Act or cause the offering of the Securities to be integrated with other offerings. m. Employee Relations. Neither the Company nor any of its subsidiaries is involved in any union labor dispute nor, to the knowledge of the Company or any of its subsidiaries, is any such dispute threatened. Neither the Company nor any of its subsidiaries is a party to a collective bargaining agreement, and the Company and its subsidiaries believe that relations with their employees are good. n. Intellectual Property Rights. The Company and its subsidiaries own or possess adequate rights or licenses to use all trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now conducted. Except as set forth on Schedule 3(n), none of the Company's trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, government authorizations, trade secrets or other intellectual property rights have expired or terminated, or are expected to expire or terminate within two years from the date of this Agreement. The Company and its subsidiaries do not have any knowledge of any infringement by the Company or its subsidiaries of trademark, trade name rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, or of any such development of similar or identical trade secrets or technical information by others and, except as set forth on Schedule 3(n), there is no claim, action or proceeding being made or brought against, or to the Company's knowledge, being threatened against, the Company or its subsidiaries regarding trademark, trade name, patents, patent rights, invention, copyright, license, service names, service marks, service mark registrations, trade secret or other infringement; and the Company and its subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. The Company and its subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of all of their intellectual properties. o. Environmental Laws. The Company and its subsidiaries (i) are in compliance with any and all applicable material foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have received all material permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval where the failure to so comply would have, individually or in the aggregate, a Material Adverse Effect. p. Title. The Company and its subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as are described in Schedule 3(p) or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its subsidiaries. Any real property and facilities held under lease by the Company or any of its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries. q. Insurance. The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its subsidiaries are engaged. Neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company and its subsidiaries, taken as a whole. r. Regulatory Permits. The Company and its subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit. s. Internal Accounting Controls. The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles 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. t. No Materially Adverse Contracts, Etc. Neither the Company nor any of its subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company's officers has or is expected in the future to have a Material Adverse Effect. Neither the Company nor any of its subsidiaries is a party to any contract or agreement which in the judgment of the Company's officers has or is expected to have a Material Adverse Effect. u. Tax Status. Except as set forth on Schedule 3(u), the Company and each of its subsidiaries has made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company and each of its subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. v. Certain Transactions. Except as set forth on Schedule 3(v) and in the SEC Documents and except for arm's length transactions pursuant to which the Company makes payments in the ordinary course of business upon terms no less favorable than the Company could obtain from third parties and other than the grant of stock options disclosed on Schedule 3(c), none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company or any of its subsidiaries (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 corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. w. Dilutive Effect. The Company understands and acknowledges that the number of Conversion Shares issuable upon conversion of the Preferred Shares and the Warrant Shares issuable upon exercise of the Warrants will increase in certain circumstances. The Company further acknowledges that its obligation to issue Conversion Shares upon conversion of the Preferred Shares in accordance with this Agreement and the Articles of Amendment and its obligation to issue the Warrant Shares upon exercise of the Warrants in accordance with this Agreement and the Warrants, is, in each case, absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Company. 4. COVENANTS. a. Best Efforts. Each party shall use its best efforts timely to satisfy each of the conditions to be satisfied by it as provided in Sections 6 and 7 of this Agreement. b. Form D. The Company agrees to file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof to each Buyer promptly after such filing. The Company shall, on or before each of the Closing Dates, take such action as the Company shall reasonably determine is necessary to qualify the Securities for, or obtain exemption for the Securities for, sale to the Buyers at each of the Closings pursuant to this Agreement under applicable securities or "Blue Sky" laws of the states of the United States, and shall provide evidence of any such action so taken to the Buyers on or prior to the Closing Date. c. Reporting Status. Until the earlier of (i) the date as of which the Investors (as that term is defined in the Registration Rights Agreement) may sell all of the Conversion Shares and the Warrant Shares without restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor thereto), or (ii) the date on which (A) the Investors shall have sold all the Conversion Shares and the Warrant Shares and (B) none of the Preferred Shares or Warrants is outstanding (the "Registration Period"), the Company shall file all reports required to be filed with the SEC pursuant to the 1934 Act, and the Company shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would otherwise permit such termination. d. Use of Proceeds. The Company will use the proceeds from the sale of the Preferred Shares for substantially the same purposes and in substantially the same amounts as indicated in Schedule 4(d). e. Financial Information. The Company agrees to send the following to each Investor (as that term is defined in the Registration Rights Agreement) during the Registration Period: (i) within two (2) days after the filing thereof with the SEC, a copy of its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q, any Current Reports on Form 8-K and any registration statements or amendments filed pursuant to the 1933 Act; (ii) on the same day as the release thereof, facsimile copies of all press releases issued by the Company or any of its subsidiaries and (iii) copies of any notices and other information made available or given to the stockholders of the Company generally, contemporaneously with the making available or giving thereof to the stockholders. f. Reservation of Shares. The Company shall take all action necessary to at all times have authorized, and reserved for the purpose of issuance, no less than 125% of the number of shares of Common Stock needed to provide for the issuance of the Conversion Shares and the Warrant Shares. g. Additional Issuances; Right of First Refusal. Subject to the exceptions described below, the Company agrees that during the period beginning on the date hereof and ending 180 days following the Initial Closing Date (the "Lock-Up Period"), neither the Company nor its subsidiaries will, without the prior written consent of the holders of the Preferred Shares representing at least two-thirds (2/3) of the Preferred Shares then outstanding, negotiate or contract with any party for any equity financing (including any debt financing with a significant equity component) or issue any equity securities of the Company or any subsidiary or securities convertible or exchangeable into or for equity securities of the Company or any subsidiary (including debt securities with a significant equity component) in any form. In addition, subject to the exceptions described below, the Company and its subsidiaries shall not negotiate or contract with any party for any equity financing (including any debt financing with a significant equity component) or issue any equity securities of the Company or any subsidiary or securities convertible or exchangeable into or for equity securities of the Company or any subsidiary (including debt securities with a significant equity component) in any form ("Future Offerings") during the period beginning on the last day of the Lock-Up Period and ending on the last day that any Preferred Shares are outstanding, unless it shall have first delivered to each Buyer or a designee appointed by such Buyer written notice (the "Future Offering Notice") describing the proposed Future Offering, including the terms and conditions thereof, and providing each Buyer an option to purchase up to its Aggregate Percentage (as defined below), as of the date of delivery of the Future Offering Notice, in the Future Offering (the limitations referred to in this and the preceding sentence are collectively referred to as the "Capital Raising Limitation"). For purposes of this Section 4(g), "Aggregate Percentage" at any time with respect to any Buyer shall mean the percentage obtained by dividing (i) the aggregate number of Conversion Shares issued or issuable, as if a conversion occurred on such date, upon conversion of the Initial Preferred Shares held by such Buyer by (ii) the aggregate number of Conversion Shares issued or issuable, as if a conversion occurred on such date, upon conversion of the Initial Preferred Shares held by the Buyers. A Buyer can exercise its option to participate in a Future Offering by delivering written notice thereof to participate to the Company within ten (10) business days of receipt of a Future Offering Notice, which notice shall state the quantity of securities being offered in the Future Offering that such Buyer will purchase, up to its Aggregate Percentage, and that number of securities it is willing to purchase in excess of its Aggregate Percentage. In the event the Buyers fail to elect to fully participate in the Future Offering within the periods described in this Section 4(g), the Company shall have 30 days thereafter to sell the securities of the Future Offering respecting which such Buyer's rights were not exercised, upon terms and conditions, no more favorable to the purchasers thereof than specified in the Future Offering Notice. In the event the Company has not sold such securities of the Future Offering within such 30 day period, the Company shall not thereafter issue or sell such securities without first offering such securities to the Buyers in the manner provided in this Section 4(g). The Capital Raising Limitation shall not apply to (i) a loan from a commercial bank, (ii) any transaction involving the Company's issuances of securities in connection with (A) a merger or consolidation, (B) any strategic partnership or joint venture (the primary purpose of which is not to raise equity capital), or (C) the disposition or acquisition of a business, product or license by the Company, (iii) the issuance of Common Stock in a firm commitment, underwritten public offering, (iv) the issuance of securities upon exercise or conversion of the Company's options, warrants or other convertible securities outstanding as of the date hereof, or (v) the grant of additional options or warrants, or the issuance of additional securities, under any Company stock option or restricted stock plan for the benefit of the Company's employees, directors or consultants. The Buyers shall not be required to participate or exercise their right of first refusal with respect to a particular Future Offering in order to exercise their right of first refusal with respect to later Future Offerings. Notwithstanding the foregoing, if during the Lock-Up Period the Company requests the consent of the holders of Preferred Shares to issue equity securities (including any debt financing with a significant equity component) and the Company does not receive the necessary consents from the holders to conduct the equity offering, then the Company shall be entitled, at its option, to redeem all, but not less than all, of the outstanding Preferred Shares in the manner and at the redemption price set forth in Section 4 of the Articles of Amendment. If a holder of Preferred Shares fails to respond in writing to the Company within 10 days of such holders receipt of the Company's written request for consent to issue equity securities during the Lock-Up Period, then such holder shall be deemed to have refused to consent to such issuance. h. Listing. The Company shall promptly secure the listing of all of the Registrable Securities (as defined in the Registration Rights Agreement) upon each national securities exchange and automated quotation system (including The Nasdaq SmallCap Market and the Nasdaq National Market), if any, upon which shares of Common Stock are then listed (subject to official notice of issuance) and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Registrable Securities from time to time issuable under the terms of the Transaction Documents. The Company shall maintain the Common Stock's authorization for quotation on The Nasdaq SmallCap Market, the Nasdaq National Market, The New York Stock Exchange, Inc. ("NYSE") or The American Stock Exchange, Inc. ("AMEX"). Neither the Company nor any of its subsidiaries shall take any action which may result in the delisting or suspension of the Common Stock on The Nasdaq SmallCap Market, the Nasdaq National Market, NYSE or AMEX. The Company shall promptly provide to each Buyer copies of any notices it receives from The Nasdaq SmallCap Market, the Nasdaq National Market, NYSE or AMEX regarding the continued eligibility of the Common Stock for listing on such automated quotation system or securities exchange. The Company shall pay all fees and expenses in connection with satisfying its obligations under this Section 4(h). i. Expenses. Subject to Section 9(l) below, following the Initial Closing, the Company shall reimburse the Buyers for the Buyers' expenses (including attorneys fees and expenses) in connection with negotiating and preparing the Transaction Documents and consummating the transactions contemplated thereby up to an aggregate of $25,000. j. Proxy Statement. If stockholder approval of the issuance of the Securities would be required (absent Section 13 of the Articles of Amendment) by the rules and regulations of The Nasdaq Stock Market, Inc. in order for the Company to issue all of the Securities, then as soon as practicable, and in no event later then the next annual meeting of the Company's stockholders, the Company shall hold a meeting of stockholders. The Company shall provide each stockholder entitled to vote at such meeting of stockholders of the Company, a proxy statement, which has been previously reviewed by the Buyers and a counsel of their choice, soliciting each such stockholder's affirmative vote at such annual stockholder meeting for approval of the Company's issuance of the Securities as described in this Agreement and the Company shall use its best efforts to solicit its stockholders' approval of such issuance of the Securities and cause the Board of Directors of the Company to recommend to the stockholders that they approve such proposal. k. Filing of Form 8-K. On or before the tenth (10th) day following each of the Closing Dates, the Company shall file a Form 8-K with the SEC describing the terms of the transaction contemplated by the Transaction Documents and consummated at such Closing, in each case in the form required by the 1934 Act. l. Underwriting Lock-Up Agreements. At any time during the period beginning on the Initial Closing Date and ending on the date that is 365 days after the Initial Closing Date the Company may request that all, but not less than all, of the holders of the Preferred Shares agree to sign a "lock-up" agreement with the underwriters of a public offering of the Common Stock. The Company shall make such request by delivering written notice (the "Lock-Up Request Notice") of such request to all of the holders of the Preferred Shares then outstanding at least 30 days prior to the date on which the "lock-up" agreement would take effect, but in no event prior to the filing of the registration statement for such proposed offering. The Lock-up Request Notice shall state (i) that the underwriters of such offering have requested that the holders of the Preferred Shares enter into "lock-up" agreements, (ii) the date on which the holders' agreement to not sell shares of Common Stock pursuant to the Registration Statement would begin and (iii) the name of the managing underwriters of the proposed offering. The holders of the Preferred Shares shall have 10 days from the date of receipt of the Lock-Up Request Notice to respond in writing to the Company. If any holder fails to respond within such period to the Lock-Up Request Notice, then such holder shall be deemed to have rejected such request. The Company shall have the right to redeem the Preferred Shares held by any holder which rejects or is deemed to have rejected the Company's request to enter into a "lock-up" agreement in accordance with the terms of Section 4 of the Articles of Amendment provided that the request is made in accordance with this Section 4(l). Notwithstanding the foregoing, this Section 4(l) shall not apply to any request by the Company for the holders of the Preferred Shares to enter into a "lock-up" agreement unless (x) the lock-up period being requested is not more than 90 days, (y) the lock-up agreement would not begin until the date of the final prospectus for such proposed offering and (z) the managing underwriters for such proposed offering are included on the Schedule of Underwriters attached to this Agreement. 5. TRANSFER AGENT INSTRUCTIONS. The Company shall issue irrevocable instructions to its transfer agent, and any subsequent transfer agent, to issue certificates, registered in the name of each Buyer or its respective nominee(s), for the Conversion Shares and the Warrant Shares in such amounts as specified from time to time by each Buyer to the Company upon conversion of the Preferred Shares or exercise of the Warrants (the "Irrevocable Transfer Agent Instructions"). Prior to registration of the Conversion Shares and the Warrant Shares under the 1933 Act, all such certificates shall bear the restrictive legend specified in Section 2(g) of this Agreement. The Company warrants that no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section 5, and stop transfer instructions to give effect to Section 2(f) hereof (in the case of the Conversion Shares and the Warrant Shares, prior to registration of the Conversion Shares and the Warrant Shares under the 1933 Act) will be given by the Company to its transfer agent and that the Securities shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and the Registration Rights Agreement. Nothing in this Section 5 shall affect in any way each Buyer's obligations and agreements set forth in Section 2(g) to comply with all applicable prospectus delivery requirements, if any, upon resale of the Securities. If a Buyer provides the Company with an opinion of counsel, reasonably satisfactory in form, and substance to the Company, that registration of a resale by such Buyer of any of such Securities is not required under the 1933 Act, the Company shall permit the transfer, and, in the case of the Conversion Shares and the Warrant Shares, promptly instruct its transfer agent to issue one or more certificates in such name and in such denominations as specified by such Buyer and without any restrictive legends. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Buyers by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Section 5 will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Section 5, that the Buyers shall be entitled, in addition to all other available remedies, to an injunction restraining any breach and requiring immediate issuance and transfer, without the necessity of showing economic loss and without any bond or other security being required. 6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. a. Initial Closing Date. The obligation of the Company hereunder to issue and sell the Initial Preferred Shares and the related Warrants to each Buyer at the Initial Closing is subject to the satisfaction, at or before the Initial Closing Date, of each of the following conditions, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion by providing each Buyer with prior written notice thereof: (i) Such Buyer shall have executed each of the Transaction Documents and delivered the same to the Company. (ii) The Articles of Amendment shall have been filed with the Secretary of State of the State of Florida. (iii) Such Buyer shall have delivered to the Company the Purchase Price for the Preferred Shares and the related Warrants being purchased by such Buyer at the Initial Closing by wire transfer of immediately available funds pursuant to the wire instructions provided by the Company. (iv) The representations and warranties of such Buyer shall be true and correct in all material respects as of the date when made and as of the Initial Closing Date as though made at that time (except for representations and warranties that speak as of a specific date), and such Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by such Buyer at or prior to the Initial Closing Date. b. Additional Closing Date. The obligation of the Company hereunder to issue and sell the Additional Preferred Shares and the related Warrants to each Buyer at the Additional Closing is subject to the satisfaction, at or before the Additional Closing Date, of each of the following conditions, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion by providing each Buyer with prior written notice thereof: (i) Such Buyer shall have complied with the requirements of Section 1(c). (ii) Such Buyer shall have delivered to the Company the Purchase Price for the Additional Preferred Shares and the related Warrants being purchased by such Buyer at the Additional Closing by wire transfer of immediately available funds pursuant to the wire instructions provided by the Company. (iii) The representations and warranties of such Buyer shall be true and correct in all material respects as of the date when made and as of the Additional Closing Date as though made at that time (except for representations and warranties that speak as of a specific date), and such Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by such Buyer at or prior to the Additional Closing Date. 7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE. a. Initial Closing Date. The obligation of each Buyer hereunder to purchase the Initial Preferred Shares at the Initial Closing is subject to the satisfaction, at or before the Initial Closing Date, of each of the following conditions, provided that these conditions are for each Buyer's sole benefit and may be waived by such Buyer at any time in its sole discretion: (i) The Company shall have executed each of the Transaction Documents, and delivered the same to such Buyer. (ii) The Articles of Amendment shall have been filed with the Secretary of State of the State of Florida, and a copy thereof certified by such Secretary of State shall have been delivered to such Buyer. (iii) The Common Stock shall be authorized for quotation on The Nasdaq SmallCap Market, the Nasdaq National Market, NYSE or AMEX, trading in the Common Stock issuable upon conversion of the Initial Preferred Shares and the exercise of the related Warrants to be traded on The Nasdaq SmallCap Market, the Nasdaq National Market, NYSE or AMEX shall not have been suspended by the SEC, The Nasdaq Stock Market, Inc., NYSE or AMEX and all of the Conversion Shares and Warrant Shares issuable upon conversion of the Initial Preferred Shares and exercise of the related Warrants to be sold at the Initial Closing shall be listed upon The Nasdaq SmallCap Market, the Nasdaq National Market, NYSE or AMEX. (iv) The representations and warranties of the Company shall be true and correct in all material respects (except to the extent that any of such representations and warranties is already qualified as to materiality in Section 3 above, in which case, such representations and warranties shall be true and correct without further qualification) as of the date when made and as of the Initial Closing Date as though made at that time (except for representations and warranties that speak as of a specific date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the Initial Closing Date. Such Buyer shall have received a certificate, executed by the Chief Executive Officer of the Company, dated as of the Initial Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by such Buyer including, without limitation, an update as of the Initial Closing Date regarding the representation contained in Section 3(c) above. (v) Such Buyer shall have received the opinion of the Company's counsel dated as of the Initial Closing Date, in form, scope and substance reasonably satisfactory to such Buyer and in substantially the form of Exhibit C attached hereto. (vi) The Company shall have executed and delivered to such Buyer the Warrants and the Stock Certificates (in such denominations as such Buyer shall request) for the Initial Preferred Shares being purchased by such Buyer at the Initial Closing. (vii) The Board of Directors of the Company shall have adopted resolutions consistent with Section 3(b)(ii) above and in a form reasonably acceptable to such Buyer (the "Resolutions"). (viii) As of the Initial Closing Date, the Company shall have reserved out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Preferred Shares and the exercise of the Warrants, at least 1,300,000 shares of Common Stock. (ix) The Irrevocable Transfer Agent Instructions, in the form of Exhibit D attached hereto, shall have been delivered to and acknowledged in writing by the Company's transfer agent. (x) The Company shall have delivered to such Buyer a certificate evidencing the incorporation and good standing of the Company and each subsidiary in such corporation's state of incorporation issued by the Secretary of State of such state of incorporation as of a date within 10 days of the Initial Closing. (xi) The Company shall have delivered to such Buyer certified copies of its Articles of Incorporation and Bylaws, each as in effect at the Initial Closing. (xii) The Company shall have delivered to such Buyer such other documents relating to the transactions contemplated by this Agreement as such Buyer or its counsel may reasonably request. b. Additional Closing Date. The obligation of each Buyer hereunder to purchase the Additional Preferred Shares and the related Warrants at the Additional Closing is subject to the satisfaction, at or before the Additional Closing Date, of each of the following conditions, provided that these conditions are for each Buyer's sole benefit and may be waived by such Buyer at any time in its sole discretion: (i) The Articles of Amendment shall be in full force and effect and shall not have been amended since the Initial Closing Date, and a copy thereof certified by the Secretary of State of the State of Florida shall have been delivered to such Buyer. (ii) The Common Stock shall be authorized for quotation on The Nasdaq SmallCap Market, the Nasdaq National Market, NYSE or AMEX, trading in the Common Stock issuable upon conversion of the Additional Preferred Shares and the exercise of the related Warrants to be traded on The Nasdaq SmallCap Market, the Nasdaq National Market, NYSE or AMEX shall not have been suspended by the SEC, The Nasdaq Stock Market, Inc., NYSE or AMEX and all of the Conversion Shares and Warrant Shares issuable upon conversion of the Additional Preferred Shares and the related Warrants to be sold at such Additional Closing shall be listed upon The Nasdaq SmallCap Market, the Nasdaq National Market, NYSE or AMEX. (iii) The representations and warranties of the Company shall be true and correct in all material respects (except to the extent that any of such representations and warranties is already qualified as to materiality in Section 3 above, in which case, such representations and warranties shall be true and correct without further qualification) as of the date when made and as of the respective Additional Closing Date as though made at that time (except for representations and warranties that speak as of a specific date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the respective Additional Closing Date. Such Buyer shall have received a certificate, executed by the Chief Executive Officer of the Company, dated as of such Additional Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by such Buyer including, without limitation, an update as of such Additional Closing Date regarding the representation contained in Section 3(c) above. (iv) Such Buyer shall have received the opinion of the Company's counsel dated as of such Additional Closing Date, in form, scope and substance reasonably satisfactory to such Buyer and in substantially the form of Exhibit C attached hereto. (v) The Company shall have executed and delivered to such Buyer the Warrants and the Stock Certificates (in such denominations as such Buyer shall request) for the Additional Preferred Shares being purchased by such Buyer at such Additional Closing. (vi) The Board of Directors of the Company shall have adopted, and shall not have amended, the Resolutions in a form reasonably acceptable to such Buyer. (vii) As of such Additional Closing Date, the Company shall have reserved out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Preferred Shares and the exercise of the Warrants, a number of shares of Common Stock equal to at least 150% of the number of shares of Common Stock which would be issuable upon conversion and exercise in full, as the case may be, of the then outstanding Preferred Shares and Warrants, including for such purposes any Preferred Shares and Warrants to be issued at such Additional Closing. (viii) The Irrevocable Transfer Agent Instructions, in the form of Exhibit D attached hereto, shall have been delivered to and acknowledged in writing by the Company's transfer agent. (ix) The Company shall have delivered to such Buyer a certificate evidencing the incorporation and good standing of the Company and each subsidiary in such corporation's state of incorporation issued by the Secretary of State of such state of incorporation as of a date within 10 days of such Additional Closing. (x) The Company shall have delivered to such Buyer certified copies of its Articles of Incorporation and Bylaws, each as in effect at such Additional Closing. (xi) During the period beginning on the Additional Share Notice Date and ending on and including the Additional Closing Date, the Company shall have delivered Conversion Shares upon conversion of the Preferred Shares and Warrant Shares upon exercise of the Warrants to the Buyers on a timely basis as set forth in Section 2(f)(ii) of the Articles of Amendment and Sections 2(a) and 2(b) of the Warrants, respectively. (xii) The Company shall have delivered to such Buyer such other documents relating to the transactions contemplated by this Agreement as such Buyer or its counsel may reasonably request. 8. INDEMNIFICATION. In consideration of each Buyer's execution and delivery of the Transaction Documents and acquiring the Securities thereunder and in addition to all of the Company's other obligations under the Transaction Documents, the Company shall defend, protect, indemnify and hold harmless each Buyer and each other holder of the Securities and all of their officers, directors, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Indemnitees") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys' fees and disbursements (the "Indemnified Liabilities"), incurred by any Indemnitee as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in the Transaction Documents, the Articles of Amendment or the Warrants or any other certificate, instrument or document contemplated hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in the Transaction Documents, the Articles of Amendment or the Warrants or any other certificate, instrument or document contemplated hereby or thereby, or (c) any cause of action, suit or claim brought or made against such Indemnitee and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement or any other instrument, document or agreement executed pursuant hereto by any of the Indemnitees, any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuance of the Securities or the status of such Buyer or holder of the Securities as an investor in the Company. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. 9. GOVERNING LAW; MISCELLANEOUS. a. Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York without regard to the principles of conflict of laws. Each party hereby irrevocably submits to the non-exclusive jurisdiction of the state and federal courts sitting the City of New York, borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. b. Counterparts. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. In the event any signature page is delivered by facsimile transmission, the party using such means of delivery shall cause four (4) additional original executed signature pages to be physically delivered to the other party within five (5) days of the execution and delivery hereof. c. Headings. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. d. Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. e. Entire Agreement; Amendments. This Agreement supersedes all other prior oral or written agreements between the Buyers, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor any Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be amended other than by an instrument in writing signed by the Company and the holders of at least two-thirds (2/3) of the Preferred Shares then outstanding, and no provision hereof may be waived other than by an instrument in writing signed by the party against whom enforcement is sought. No such amendment shall be effective to the extent that it applies to less than all of the holders of the Preferred Shares then outstanding. f. Notices. Any notices consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically generated and kept on file by the sending party); (iii) three (3) days after being sent by U.S. certified mail, return receipt requested, or (iv) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: Smart Choice Automotive Group, Inc. 5200 S. Washington Avenue Titusville, Florida 32780 Telephone: 47-269-9680 Facsimile: 407-264-0376 Attention: President, Gary R. Smith With a copy to: Greenberg Traurig Hoffman Lipoff Rosen & Quentel 111 N. Orange, Avenue, 20th Floor Orlando, Florida 32801 Telephone: 407-420-1000 Facsimile: 407-420-5909 Attention: Randolph H. Fields, Esq. If to the Transfer Agent: American Stock Transfer & Trust Company 6201 15th Avenue, 3rd Floor Telephone: 718-921-8261 Facsimile: 718-921-8337 Attention: Ms. Donna Ansbro If to a Buyer, to its address and facsimile number on the Schedule of Buyers, with copies to such Buyer's representatives as set forth on the Schedule of Buyers. Each party shall provide five (5) days' prior written notice to the other party of any change in address or facsimile number. g. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, including any purchasers of the Preferred Shares. Except as in compliance with Section 3 of the Articles of Amendment, the Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the holders of two-thirds (2/3) of the Preferred Shares then outstanding including by merger or consolidation. A Buyer may assign some or all of its rights hereunder to affiliates or associates of such Buyer, without the consent of the Company, and to others, with the consent of the Company; provided, however, that any such assignment shall not release such Buyer from its obligations hereunder unless such obligations are assumed by such assignee and the Company has consented to such assignment and assumption. h. No Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person. i. Survival. Unless this Agreement is terminated under Section 9(l), the representations and warranties of the Company and the Buyers contained in Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and 9, and the indemnification provisions set forth in Section 8, shall survive each of the Closings. Each Buyer shall be responsible only for its own representations, warranties, agreements and covenants hereunder. j. Publicity. The Company and each Buyer shall have the right to approve before issuance any press releases or any other public statements with respect to the transactions contemplated hereby; provided, however, that the Company shall be entitled, without the prior approval of any Buyer, to make any press release or other public disclosure with respect to such transactions as is required by applicable law and regulations (although each Buyer shall be consulted by the Company in connection with any such press release or other public disclosure prior to its release and shall be provided with a copy thereof). k. Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. l. Termination. In the event that the Initial Closing shall not have occurred with respect to a Buyer on or before three (3) business days from the date hereof due to the Company's or such Buyer's failure to satisfy the conditions set forth in Sections 6 and 7 above (and the nonbreaching party's failure to waive such unsatisfied condition(s)), the nonbreaching party shall have the option to terminate this Agreement with respect to such breaching party at the close of business on such date without liability of any party to any other party; provided, however, that if this Agreement is terminated pursuant to this Section 9(l), the Company shall remain obligated to reimburse the non-breaching Buyers for the expenses described in Section 4(i) above. m. Placement Agent. Each of the Company and the Buyers, on their own behalf, acknowledges that it has not engaged a placement agent in connection with the sale of the Preferred Shares. n. No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. IN WITNESS WHEREOF, the Buyers and the Company have caused this Securities Purchase Agreement to be duly executed as of the date first written above. COMPANY: BUYERS: SMART CHOICE AUTOMOTIVE GROUP, INC. THEMIS PARTNERS L.P. By: Promethean Investment Group L.L.C. By: /s/ James Neal Hutchinson, Jr. Its: General Partner Name: James Neal Hutchinson, Jr. Its: Assistant Vice President By: /s/ E. Kurt Kim Name: E. Kurt Kim Its: Duly Authorized Signatory HERACLES FUND By: Promethean Investment Group L.L.C. Its: Investment Advisor By: /s/E. Kurt Kim Name: E. Kurt Kim Its: Duly Authorized Signatory LEONARDO, L.P. By: Angelo, Gordon & Co., L.P. Its: General Partner By: /s/ Michael L. Gordon Name: Michael L. Gordon Its: Chief Operating Officer GAM ARBITRAGE INVESTMENTS, INC. By: Angelo, Gordon & Co., L.P. Its: Investment Advisor By: /s/ Michael L. Gordon Name: Michael L. Gordon Its: Chief Operating Officer AG SUPER FUND INTERNATIONAL PARTNERS, L.P. By: Angelo, Gordon & Co., L.P. Its: General Partner By: /s/ Michael L. Gordon Name: Michael L. Gordon Its: Chief Operating Officer RAPHAEL, L.P. By: /s/ Michael L. Gordon Name: Michael L. Gordon Its: Chief Operating Officer RAMIUS FUND, LTD. By: AG Ramius Partners, L.L.C. Its: Investment Advisor By: /s/ Michael L. Gordon Name: Michael L. Gordon Its: Managing Officer HICK INVESTMENTS, LTD. By: AG Ramius Partners, L.L.C. Its: Investment Advisor By: /s/ Michael L. Gordon Name: Michael L. Gordon Its: Managing Officer HALIFAX FUND, L.P. By: The Palladin Group Its: Investment Manager By: Palladin Capital Management LLC Its: General Partner By: /s/ Andrew Kaplan Name: Andrew Kaplan Its: Authorized Representative SCHEDULE OF BUYERS Investor Name Investor Address Number of Investor's Representatives' Address and Facsimile Number Initial/Additional and Facsimile Number Preferred Shares - ---------------------- ------------------------------------- ---------------- ------------------------------------- Themis Partners L.P. Promethean Investment Group, L.L.C. 56.25 / 18.75 Promethean Investment Group, L.L.C. 40 West 57th Street, Suite 1520 40 West 57th Street, Suite 1520 New York, New York 10019 New York, New York 10019 Attn: James F. O'Brien, Jr. Attn: James F. O'Brien, Jr. Facsimile: 212-698-0505 E. Kurt Kim Facsimile: 212-698-0505 Katten Muchin & Zavis 525 West Monroe, Suite 1600 Chicago, Illinois 60661-3693 Attn: Robert J. Brantman, Esq. Facsimile: 312-902-1061 Heracles Fund Bank of Bermuda (Cayman) Limited 37.5 / 12.5 Promethean Investment Group, L.L.C. P.O. Box 513 40 West 57th Street, Suite 1520 3rd Floor British American Center New York, New York 10019 Dr. Roy's Drive Attn: James F. O'Brien, Jr. Georgetown, Grand Cayman E. Kurt Kim Cayman Island, BWI Facsimile: 212-698-0505 Attn: Allen J. Bernardo Facsimile: 809-949-7802 Katten Muchin & Zavis 525 West Monroe, Suite 1600 Chicago, Illinois 60661-3693 Attn: Robert J. Brantman, Esq. Facsimile: 312-902-1061 Leonardo, L.P. Trident Trust Company 71.25 / 23.75 Angelo, Gordon & Co., L.P. Shedden Road 245 Park Avenue - 26th Floor Elizabeth Square New York, New York 10167 P.O. Box 847 Attn: Gary Wolf Georgetown, Grand Cayman Islands Facsimile: 212-867-6449 GAM Arbitrage Craigmuir Chambers 5.625 / 1.875 Angelo, Gordon & Co., L.P. Investments, P.O. Box 71 245 Park Avenue - 26th Floor Inc. Road Town, Tortola, British Virgin New York, New York 10167 Islands Attn: Gary Wolf Facsimile: 212-867-6449 AG Super Fund c/o Angelo, Gordon & Co., L.P. 5.625 / 1.875 International 245 Park Avenue - 26th Floor Partners, L.P. New York, New York 10167 Attn: Gary Wolf Facsimile: 212-867-6449 Raphael, L.P. c/o Rafael Capital Management, Ltd. 22.5 / 7.5 Angelo, Gordon & Co., L.P. Abbott Building 245 Park Avenue - 26th Floor P.O. Box 3186c New York, New York 10167 Road Town, Tortola, British Virgin Attn: Gary Wolf Islands Facsimile: 212-867-6449 Ramius Fund, Ltd. c/o Bank of Bermuda Building 30 / 10 Angelo, Gordon & Co., L.P. 6 Front Street 245 Park Avenue - 26th Floor P.O. Box HM1026 New York, New York 10167 Hamilton, Bermuda HMDX Attn: Gary Wolf Facsimile: 212-867-6449 Hick Investments, c/o I.T.I.B.V. Galleria Building 15 / 5 Angelo, Gordon & Co., L.P. Ltd. Via Cantonale 2 245 Park Avenue - 26th Floor 6828 Manno, Switzerland New York, New York 10167 Attn: Gary Wolf Facsimile: 212-867-6449 Halifax Fund, L.P. c/o CITCO Fund Services, Ltd. 56.25 / 18.75 The Palladin Group Corporate Center, West Bay Road 40 West 57th Street P.O. Box 31106 Suite 1500 SMB New York, New York 10019 Grand Cayman, Cayman Islands Attn: Andrew Kaplan Facsimile: 212-698-0599
SCHEDULE OF UNDERWRITERS Goldman Sachs & Co. Merrill Lynch & Co. Morgan Stanley & Co. Incorporated Lehman Brothers Inc. Smith Barney Inc. Salomon Brothers Inc. J.P. Morgan & Co. PaineWebber Incorporated Donaldson, Lufkin & Jenrette Bear Stearns & Co., Inc. First Boston Lazard Freres Robertson Stephens & Company Stephens, Inc. Friedman Billings, Ramsey & Co. Inc. ABN Amro Chicago Corp. Alex Brown & Sons, Incorporated J.C. Bradford Raymond James Montgomery Securities Crutten Den Roth, Inc. Equitable Securities or any successor to or affiliate of any of the above SCHEDULE 3(a) Subsidiaries SCHEDULE 3(c) Capitalization SCHEDULE 3(e) Conflicts SCHEDULE 3(g) Material Changes SCHEDULE 3(h) Litigation SCHEDULE 3(n) Intellectual Property SCHEDULE 3(p) Liens SCHEDULE 3(u) Tax Status SCHEDULE 3(v) Certain Transactions SCHEDULE 4(d) Use of Proceeds EXHIBIT A Form of Second Articles of Amendment to Articles of Incorporation Attached hereto. EXHIBIT B Form of Registration Rights Agreement Attached hereto. EXHIBIT C Form of Company Counsel Opinion Attached hereto. EXHIBIT D Form of Irrevocable Transfer Agent Instructions Attached hereto. EXHIBIT E Form of Warrant Attached hereto. EX-10.7 9 FORM WARRANT TO PROMETHEAN THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY APPLICABLE STATE SECURITIES LAW AND MAY NOT BE TRANSFERRED UNLESS (1) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR SUCH APPLICABLE SECURITIES LAWS, OR (II) IN THE OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY REGISTRATION UNDER THE SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH TRANSFER. SMART CHOICE AUTOMOTIVE GROUP, INC. Common Stock Purchase Warrant ------------ FOR VALUE RECEIVED, Smart Choice Automotive Group, Inc., a Florida corporation (the "Company"), hereby certifies that ___________________, a ________ corporation or a permitted assign thereof, is entitled to purchase from the Company, at any time or from time to time commencing August 29, 1997 and prior to 5:00 P.M., New York City time, on August 29, 2002, up to __________ (_____) fully paid and nonassessable shares of the common stock, of the Company for an aggregate purchase price of _________ (computed on the basis of $7.00 per share). (Hereinafter, (i) said common stock, together with any other equity securities which may be issued by the Company with respect thereto or in substitution therefor, is referred to as the "Common Stock," (ii) the shares of the Common Stock purchasable hereunder or under any other Warrant (as hereinafter defined) are referred to as the "Warrant Shares," the aggregate purchase price payable hereunder for the Warrant Shares is referred to as the "Aggregate Warrant Price," (iv) the price payable hereunder for each of the Warrant Shares is referred to as the "Per Share Warrant Price," (v) this Warrant, all identical warrants issued on the date hereof and all warrants hereafter issued in exchange or substitution for this Warrant or such other warrants are referred to as the "Warrants" and (vi) the holder of this Warrant is referred to as the "Holder" and the holder of this Warrant and all other Warrants are referred to as the "Holders"). The Aggregate Warrant Price is not subject to adjustment. The Per Share Warrant Price is subject to adjustment as hereinafter provided; in the event of any such adjustment, the number of Warrant Shares shall be adjusted by dividing the Aggregate Warrant Price by the Per Share Warrant Price in effect immediately after such adjustment. 1. Exercise of Warrant. a) Exercise for Cash This Warrant may be exercised, in whole at any time or in part from time to time, commencing August 29, 1997 and prior to 5:00 P.M., New York City time, on August 29, 2002 (the "Exercise Period"), by the Holder by the surrender of this Warrant (with the subscription form at the end hereof duly executed) at the address set forth in Subsection 9(a) hereof, together with proper payment of the Aggregate Warrant Price, or the proportionate part thereof if this Warrant is exercised in part (the "Warrant Exercise Price") and any applicable stock transfer taxes, if any. After expiration of the Exercise Period, the Holder shall have no right to purchase any shares of common stock underlying this Warrant. Payment for Warrant Shares shall be made by certified or official bank check payable to the order of the Company. If this Warrant is exercised in part, this Warrant must be exercised for a number of whole shares of the Common Stock, and the Holder is entitled to receive a new Warrant Covering the Warrant Shares which have not been exercised and setting forth the proportionate part of the Aggregate Warrant Price applicable to such Warrant Shares. Upon such surrender of this Warrant the Company will (a) issue a certificate or certificates in the name of the Holder for the largest number of whole shares of the Common Stock to which the Holder shall be entitled and, if this Warrant is exercised in whole, in lieu of any fractional share of the Common Stock to which the Holder shall be entitled, pay to the Holder cash in an amount equal to the fair value of such fractional share (determined in such reasonable manner as the Board of Directors of the Company or a committee thereof shall determine), and (b) deliver the other securities and properties receivable upon the exercise of this Warrant, or the proportionate part thereof if this Warrant is exercised in part, pursuant to the provisions of this Warrant. This Warrant accordingly shall be deemed to have been exercised in whole or in part to the extent specified, immediately prior to the close of business on the date this Warrant is surrendered and payment is made in accordance with the foregoing provisions of this paragraph, and the Holder shall become the holder of record of such shares of Common Stock at that time and date. b) Cashless Exercise In lieu of exercising this Warrant in the manner set forth in paragraph l(a) above, the Warrant may be exercised by surrender of the Warrant without payment of any other consideration, commission or remuneration, by execution of the cashless exercise subscription form (at the end hereof, duly executed). The number of shares to be issued in exchange for the Warrant will be computed by subtracting the Warrant Exercise Price from the average closing bid price of the common stock for the five trading days immediately preceding on the date of receipt of the cashless exercise subscription form, multiplying that amount by the number of shares represented by the Warrant, and dividing by the closing bid price as of the same date. 2. Reservation of Warrant Shares, Listing. The Company agrees that, prior to the expiration of this Warrant, the Company will at all times have authorized and in reserve, and will keep available, solely for issuance or delivery upon the exercise of this Warrant, the shares of the Common Stock and other securities and properties as from time to time shall be receivable upon the exercise of this Warrant, free and clear of all restrictions on sale or transfer (except for applicable state or federal securities law restrictions) and free and clear of all pre-emptive rights. 3. Protection Against Dilution. a) If, at any time or from time to time after the date of this Warrant, the Company shall issue or distribute (for no consideration) to the holders of shares of Common Stock evidences of its indebtedness, any other securities of the Company or any cash, property or other assets (excluding a subdivision, combination or reclassification, or dividend or distribution payable in shares of Common Stock, referred to in Subsection 3(b), and also excluding cash dividends or cash distributions paid out of net profits legally available therefor if the full amount thereof, together with the value of other dividends and distributions made substantially concurrently therewith or pursuant to a plan which includes payment thereof, is equivalent to not more than 5% of the Company's net worth) (any such nonexcluded event being herein called a "Special Dividend"), the Per Share Warrant Price shall be adjusted by multiplying the Per Share Warrant Price then in effect by a fraction, the numerator of which shall be the then current market price of the Common Stock (defined as the average for the thirty consecutive business days immediately prior to the record date of the daily closing price of the Common Stock as reported by the NASDAQ system) less the fair market value (as determined by the Company's Board of Directors) of the evidences of indebtedness, securities or property, or other assets issued or distributed in such Special Dividend applicable to one share of Common Stock and the denominator of which shall be such then current market price per share of Common Stock. An adjustment made pursuant to this Subsection 3(a) shall become effective immediately after the record date of any such Special Dividend. b) In case the Company shall hereafter (i) pay a dividend or make a distribution on its capital stock in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares or (iv) issue by reclassification of its Common Stock any shares of capital stock of the Company, the Per Share Warrant Price shall be adjusted so that the Holder of any Warrant upon the exercise hereof shall be entitled to receive the number of shares of Common Stock or other capital stock of the Company which he would have owned immediately prior thereto. An adjustment made pursuant to this Subsection 3(b) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this Subsection 3(b), the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Board of Directors (whose determination shall be conclusive and shall be described in a written notice to the Holder of any Warrant promptly after such adjustment) shall determine the allocation of the adjusted Per Share Warrant Price between or among shares of such classes or capital stock or shares of Common Stock and other capital stock. c) Except as provided in Subsection 3(e), in case the Company shall hereafter issue or sell any shares of Common Stock for a consideration per share less than the Per Share Warrant Price on the date of such issuance or sale, the Per Share Warrant Price shall be adjusted as of the date of such issuance or sale so that the same shall equal the consideration per share received by the Company upon such issuance or sale; provided, however, that no adjustment of the Per Share Warrant Price shall be required in connection with the issuance of shares upon the exercise of: (i) the conversion rights under the Convertible Notes in an aggregate principal amount not to exceed $2,000,000 issued to HCF, Mary L. Hart and certain other purchasers pursuant to a term sheet dated August 29, 1997 ("Term Sheet"); (ii) any warrants issued to HCF or its designees or assigns pursuant to the Term Sheet; and (iii) any other presently outstanding warrants or options. d) In case of any capital reorganization or reclassification, or any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another entity of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), the Holder of this Warrant shall have the right thereafter to convert such Warrant into the kind and amount of securities, cash or other property which he would have owned or have been entitled to receive immediately after such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance had this Warrant been converted immediately prior to the effective date of such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section 3 with respect to the rights and interests thereafter of the Holder of this Warrant to the end that the provisions set forth in this Section 3 shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock or other securities or be, in relation to any shares of stock or other securities or property thereafter deliverable on the conversion of this Warrant. The above provisions of this Subsection 3(e) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, statutory exchanges, sales or conveyances. The issuer of any shares of stock or other securities or property thereafter deliverable on the conversion of this Warrant shall be responsible for all of the agreements and obligations of the Company hereunder. Notice of any such reorganization, reclassification, consolidation, merger, statutory exchange, sale or conveyance and of said provisions so proposed to be made, shall be mailed to the Holders of the Warrants not less than 10 days prior to such event. A sale of all or substantially all of the assets of the Company for a consideration consisting primarily of securities shall be deemed a consolidation or merger for the foregoing purposes. e) No adjustment in the Per Share Warrant Price shall be required unless such adjustment would require an increase or decrease of at least $0.10 per share of Common Stock; provided, however, that any adjustments which by reason of this Subsection 3(f) are not required to be made shall be carried forward and taken into account in any subsequent adjustment; provided further, however, that adjustments shall be required and made in accordance with the provisions of this Section 3 (other than this Subsection 3(f)) not later than such time as may be required in order to preserve the tax-free nature of a distribution to the Holder of this Warrant or Common Stock issuable upon exercise hereof. All calculations under this Section 3 shall be made to the nearest cent. Anything in this Section 3 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Per Share Warrant Price, in addition to those required by this Section 3, as it in its discretion shall deem to be advisable in order that any stock dividend, subdivision of shares or distribution of rights to purchase stock or securities convertible or exchangeable for stock hereafter made by the Company to its shareholders shall not be taxable. f) Whenever the Per Share Warrant Price is adjusted as provided in this Section 3 and upon any modification of the rights of a Holder of Warrants in accordance with this Section 3, the Company shall promptly obtain, certificate of the Company's Chief Financial Officer setting forth the Per Share Warrant Price and the number of Warrant Shares after such adjustment or the effect of such modification, a brief statement of the facts requiring such adjustment or modification and the manner of computing the same and cause copies of such certificate to be mailed to the Holders of the Warrants. g) If the Board of Directors of the Company shall declare any dividend or other distribution with respect to the Common Stock, other than a cash distribution out of earned surplus, the Company shall mail notice thereof to the Holders of the Warrants not less than 10 days prior to the record date fixed for determining shareholders entitled to participate in such dividend or other distribution. 4. Fully Paid Stock, Taxes. The Company agrees that the shares of the Common Stock represented by each and every certificate for Warrant Shares delivered on the exercise of this Warrant shall, at the time of such delivery, be validly issued and outstanding, fully paid and nonassessable, and not subject to pre-emptive rights, and the Company will take all such actions as may be necessary to assure that the par value or stated value, if any, per share of the Common Stock is at all times equal to or less than the then Per Share Warrant Price. The Company further covenants and agrees that it will pay, when due and payable, any and all Federal and state stamp, original issue or similar taxes which may be payable in respect of the issue of any Warrant Share or certificate therefor, except transfer taxes, if any, which shall be payable by Holder or its transferee. 5. Registration Under Securities Act of 1933. a) The Company agrees to include the shares of Common Stock underlying the Warrant in any registration statement required to be filed under that certain Convertible Note issued to HCF by the Company on the date hereof. b) The Company agrees that if, at any time and from time to time during the period commencing on September 1, 1997 and ending on January 31, 2002, the Board of Directors of the Company shall authorize the filing of a registration statement or a post-effective amendment to a registration statement (any such registration statement being hereinafter called a "Subsequent Registration Statement") under the Act other than a registration statement on Form S-4, Form S-8 or other form which does not include substantially the same information as would be required in a form for the general registration of securities) in connection with the proposed offer of any of its securities by it or any of its shareholders, subject to the holder providing such information and customary indemnitees as reasonably requested by the Company or its underwriters, the Company will (i) promptly notify the Holder and each of the Holders, if any, of other Warrants and/or Warrant Shares that such Subsequent Registration Statement will be filed and that the Company will use its best efforts to cause the Warrant Shares which are then held, and/or which may be acquired upon the exercise of the Warrants, by the Holder and such Holders, at the Holder's and such Holders' request, to be included in such Subsequent Registration Statement, (ii) use its best efforts to cause to be included in the securities covered by such Subsequent Registration Statement all Warrant Shares which it has been so requested to include, (iii) use its best efforts to cause such Subsequent Registration Statement to become effective as soon as practicable and (iv) take all other action necessary under any Federal or state law or regulation of any governmental authority to permit all Warrant Shares which it has been so requested to include in such Subsequent Registration Statement or to be sold or otherwise disposed of, and will maintain such compliance with each such Federal and state law and regulation of any governmental authority for the period necessary for the Holder and such Holders to effect the proposed sale or other disposition; provided however, that (i) the Holders shall be entitled to only two registrations under this section 5(b); and (ii) the Holder agrees to sell Warrant Shares in the same manner and on the same terms and conditions as the other Common Stock which the Company proposes to register, including any "lock-up" agreements required of other selling shareholders of the Company, and (iii) if the registration is to include Common Stock to be sold for the account of the Company, the proposed managing underwriter does not advise the Company that in its opinion the inclusion of a portion or all of the Holder's Warrant Shares is likely to affect adversely the success of the offering by the Company or the price it would receive; if, however, such underwriter does so opine then the distribution of all or a specified portion of the Warrant Shares shall be excluded from such registration; in such event, the Company shall give the Holder prompt notice of the number of shares of Warrant Shares excluded from such registration at the request of the managing underwriter and no such exclusion shall reduce the securities being offered by the Company for its own account in such registration statement. c) Whenever the Company is required pursuant to the provisions of this Section 5 to include Warrant Shares in a registration statement or a post-effective amendment to a registration statement, the Company shall (i) furnish each Holder of any such Warrant Shares and each underwriter of such Warrant Shares with such copies of the prospectus, including the preliminary prospectus, conforming to the Act, (and such other documents as each such Holder or each such underwriter may reasonably request) in order to facilitate the sale or distribution of the Warrant Shares, (ii) use its best efforts to register or qualify such Warrant Shares under the blue sky laws (to the extent applicable)of such jurisdiction or jurisdictions as the Holders of any such Warrant Shares and each underwriter of Warrant Shares being sold by such Holders shall reasonably request and (iii) take such other actions as may be reasonably necessary or advisable to enable such Holders and such underwriters to consummate the sale or distribution in such jurisdiction or jurisdictions in which such Holders shall have reasonably requested that the Warrant Shares be sold. d) The Company shall pay all expenses incurred in connection with any registration or other action pursuant to the provisions of this Section 5; provided that, the Company shall not be liable for underwriting discounts or commissions, applicable transfer taxes relating to the Warrant Shares, or the fees and expenses of counsel for any holder, provided that the Company will pay costs of Company counsel when Company counsel is representing any or all of the selling shareholders. e) The Company will indemnify the Holders of Warrant Shares which are included in each Subsequent Registration Statement substantially to the same extent as the Company has indemnified the underwriters (the "Underwriters") of its public offering of Common Stock pursuant to the Underwriting Agreement and such Holders will indemnify the Company (and the underwriters, if applicable) with respect to information furnished by them in writing to the Company for inclusion therein substantially to the same extent as the Underwriters have indemnified the Company. 6. Transferability. The Company may treat the registered Holder of this Warrant as he or it appears on the Company's books at any time as the Holder for all purposes. The Company shall permit any Holder of a Warrant or his duly authorized attorney, upon written request during ordinary business hours, to inspect and copy or make extracts from its books showing the registered holders of Warrants. All warrants issued upon the transfer or assignment of this Warrant will be dated the same date as this Warrant, and all rights of the Holder thereof shall be identical to those of the Holder. The Warrant may be transferred or assigned by Purchaser, in whole in part, subject to compliance with applicable federal and state securities laws; provided that any transferee or assignee of the Warrant shall be an "accredited investor" as defined in Regulation D and such transfer or assignment is made expressly subject to the terms and provisions of this Warrant. 7. Loss, etc., of Warrant. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver to the Holder a new Warrant of like date, tenor and denomination. 8. Warrant Holder Not Shareholders. Except as otherwise provided herein, this Warrant does not confer upon the Holder any right to vote or to consent to or receive notice as a shareholder of the Company, as such, in respect of any matters whatsoever, or any other rights or liabilities as a shareholder, prior to the exercise hereof 9. Communication. No notice or other communication under this Warrant shall be effective unless, but any notice or other communication shall be effective and shall be deemed to have been given if, the same is in writing and is mailed by first-class mail, postage prepaid, addressed to: If to the Company: 5200 S. Washington Ave. Titusville, FL 32780 Attn: Fred E. Whaley,Executive Vice President & Chief Financial Officer Facsimile No.: (407) 264-0376 With a copy to: Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A. 111 N. Orange Ave., 20th Floor Orlando, FL 32801 Attn: Randolph Fields, Esq. Facsimile No.: (407) 420-5909 If to HCF: High Capital Funding, LLC 70 East Sunrise Highway Box 547, Suite 400 Valley Stream, NY 11582-0547 Facsimile No.: (516) 872-2357 With a copy to: David A. Rapaport 333 Sandy Springs Circle, Suite 230 Atlanta, GA 30328 Facsimile No.: (404) 255-2218 10. Accredited Investor Status. The Holder represents and warrants to the Company that he is an "accredited investor", as that term is defined in Rule 501 of the Securities Act of 1933, as amended. 11. Headings. The headings of this Warrant have been inserted as a matter of convenience and shall not affect the construction hereof. 12. Applicable Law. This Warrant shall be governed by and construed in accordance with the law of the State of Florida without giving effect to the principles of conflicts of law thereof. IN WITNESS WHEREOF, Smart Choice Automotive Group, Inc. has caused this Warrant to be signed this day of 29th day of August, 1997. SMART CHOICE AUTOMOTIVE GROUP, INC. /s/ Gary R. Smith By: Gary R. Smith, President Attest: Secretary SUBSCRIPTION The undersigned, _____________________, pursuant to the provisions of the foregoing Warrant, hereby agrees to subscribe for and purchase shares of the Common Stock of Smart Choice Automotive Group, Inc. covered by said Warrant, and makes payment therefor in full at the price per share provided by said Warrant. Dated:______________________ Signature: ____________________________ Address: ___________________ ASSIGNMENT FOR VALUE RECEIVED___________________ hereby sells, assigns and transfers unto ____________ the foregoing Warrant and all rights evidenced thereby, and does irrevocably constitute and appoint _______________________, attorney, to transfer said Warrant on the books of Smart Choice Automotive Group, Inc. Dated:______________________ Signature: ____________________________ Address: ___________________ PARTIAL ASSIGNMENT FOR VALUE RECEIVED ____________________hereby assigns and transfers unto ____________________ the right to purchase ______________ shares of the Common Stock of ________________ by the foregoing Warrant, and a proportionate part of said Warrant and the rights evidenced hereby, and does irrevocably constitute and appoint ____________________, attorney, to transfer that part of said Warrant on the books of Smart Choice Automotive Group, Inc. Dated:______________________ Signature: ____________________________ Address: ___________________ CASHLESS EXERCISE SUBSCRIPTION The undersigned _______________________ pursuant to the provisions of the foregoing Warrant, hereby agrees to subscribe to that number of shares of stock of Smart Choice Automotive Group, Inc. as are issuable in accordance with the formula set forth in paragraph l(b) of the Warrant, and makes payment therefore in full by surrender and delivery of this Warrant. Dated:______________________ Signature: ____________________________ Address: ___________________ EX-10.8 10 REGISTRATION RIGHTS REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of September 30, 1997, by and among Smart Choice Automotive Group, Inc., a Florida corporation, with headquarters located at 5200 S. Washington Avenue, Titusville, Florida 32780 (the "Company"), and the undersigned buyers (each, a "Buyer" and collectively, the "Buyers"). WHEREAS: A. In connection with the Securities Purchase Agreement by and among the parties of even date herewith (the "Securities Purchase Agreement"), the Company has agreed, upon the terms and subject to the conditions of the Securities Purchase Agreement, to (i) issue and sell to the Buyers shares of the Company's Series A Redeemable Convertible Preferred Stock (the "Preferred Shares"), which will be convertible into shares of the Company's common stock, par value $.01 per share (the "Common Stock") (as converted, the "Conversion Shares"), in accordance with the terms of the Company's Second Articles of Amendment to Articles of Incorporation setting forth the designations, preferences and rights of the Series A Redeemable Convertible Preferred Stock (the "Articles of Amendment"), and (ii) issue Warrants (the "Warrants") which will be exercisable to purchase shares of Common Stock (the "Warrant Shares"); and B. To induce the Buyers to execute and deliver the Securities Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "1933 Act"), and applicable state securities laws: NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Buyers hereby agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: a. "Investor" means a Buyer and any transferee or assignee thereof to whom a Buyer assigns its rights under this Agreement and who agrees to become bound by the provisions of this Agreement in accordance with Section 9. b. "Person" means a corporation, a limited liability company, an association, a partnership, an organization, a business, an individual, a governmental or political subdivision thereof or a governmental agency. c. "Register," "registered," and "registration" refer to a registration effected by preparing and filing one or more Registration Statements in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous basis ("Rule 415"), and the declaration or ordering of effectiveness of such Registration Statement(s) by the United States Securities and Exchange Commission (the "SEC"). d. "Registrable Securities" means the Conversion Shares and the Warrant Shares issued or issuable upon conversion of the Preferred Shares and exercise of the Warrants, respectively, and any shares of capital stock issued or issuable with respect to the Conversion Shares, the Warrant Shares, the Warrants or the Preferred Shares as a result of any stock split, stock dividend, recapitalization, exchange or similar event or otherwise. e. "Registration Statement" means a registration statement of the Company filed under the 1933 Act. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Securities Purchase Agreement. 2. REGISTRATION. a. Mandatory Registration. The Company shall prepare, and, on or prior to 60 days after the date of issuance of the relevant Preferred Shares, file with the SEC a Registration Statement or Registration Statements (as is necessary) on Form S-3 (or, if such form is unavailable for such a registration, on such other form as is available for such a registration, subject to the consent of the Investors holding a majority of the Registrable Securities and the provisions of Section 2(c), which consent will not be unreasonably withheld), covering the resale of all of the Registrable Securities, which Registration Statement(s) shall state that, in accordance with Rule 416 promulgated under the 1933 Act, such Registration Statement(s) also covers such indeterminate number of additional shares of Common Stock as may become issuable upon conversion of the Preferred Shares or exercise of the Warrants (i) to prevent dilution resulting from stock splits, stock dividends or similar transactions and (ii) by reason of changes in the Conversion Price or Conversion Rate of the Preferred Shares in accordance with the terms thereof. Such Registration Statement shall initially register for resale at least 1,300,000 shares of Common Stock, subject to adjustment as provided in Section 3(b). Such registered shares of Common Stock shall be allocated among the Investors pro rata based on the total number of Registrable Securities issued or issuable as of each date that a Registration Statement, as amended, relating to the resale of the Registrable Securities is declared effective by the SEC. The Company shall use its best efforts to have the Registration Statement(s) declared effective by the SEC as soon as practicable, but in no event later than 90 days after the issuance of the relevant Preferred Shares. b. Counsel and Investment Bankers. Subject to Section 5 hereof, in connection with any offering pursuant to Section 2, the Buyers holding a majority of the Registrable Securities shall have the right to select one legal counsel. The Company shall reasonably cooperate with any such counsel. c. Piggy-Back Registrations. If at any time prior to the expiration of the Registration Period (as hereinafter defined) the Company proposes to file with the SEC a Registration Statement relating to an offering for its own account or the account of others under the 1933 Act of any of its securities (other than on Form S-4 or Form S-8 or their then equivalents relating to securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans) the Company shall promptly send to each Investor who is entitled to registration rights under this Section 2(c) written notice of the Company's intention to file a Registration Statement and of such Investor's rights under this Section 2(c) and, if within ten (10) days after receipt of such notice, such Investor shall so request in writing, the Company shall include in such Registration Statement all or any part of the Registrable Securities such Investor requests to be registered, subject to the priorities set forth in Section 2(d) below. No right to registration of Registrable Securities under this Section 2(c) shall be construed to limit any registration required under Section 2(a). The obligations of the Company under this Section 2(c) may be waived by Investors holding a majority of the Registrable Securities. If an offering in connection with which an Investor is entitled to registration under this Section 2(c) is an underwritten offering, then each Investor whose Registrable Securities are included in such Registration Statement shall, unless otherwise agreed by the Company, offer and sell such Registrable Securities in an underwritten offering using the same underwriter or underwriters and, subject to the provisions of this Agreement, on the same terms and conditions as other shares of Common Stock included in such underwritten offering. d. Priority in Piggy-Back Registration Rights in connection with Registrations for Company Account. If the registration referred to in Section 2(c) is to be an underwritten public offering and the managing underwriter(s) advise the Company in writing, that in their judgment, marketing or other factors dictate that a limitation on the number of shares of Common Stock which may be included in the Registration Statement is necessary to facilitate the public distribution, then the Company shall include in such registration: (1) first, all securities the Company proposes to sell for its own account, (2) second, up to the full number of securities proposed to be registered for the account of the holders of securities entitled to inclusion of their securities in the Registration Statement by reason of demand registration rights, and (3) third, the securities requested to be registered by the Investors and other holders of securities entitled to participate in the registration, as of the date hereof, drawn from them pro rata based on the number each has requested to be included in such registration as the underwriters shall permit. e. Eligibility for Form S-3. The Company represents, warrants and covenants that on and after the date hereof it meets and will meet the requirements for the use of Form S-3 for registration of the sale by the Investors of the Registrable Securities and the Company has filed and shall file all reports required to be filed by the Company with the SEC in a timely manner so as to obtain and maintain such eligibility for the use of Form S-3. In the event that Form S-3 is not available for sale by the Investors of the Registrable Securities, then the Company (i) with the consent of the Investors holding a majority of the Registrable Securities pursuant to Section 2(a), shall register the sale of the Registrable Securities on another appropriate form and (ii) the Company shall undertake to register the Registrable Securities on Form S-3 as soon as such form is available, provided that the Company shall maintain the effectiveness of the Registration Statement then in effect during the Registration Period until such time as a Registration Statement on Form S-3 covering the Registrable Securities has been declared effective by the SEC. 3. RELATED OBLIGATIONS. Whenever an Investor has requested that any Registrable Securities be registered pursuant to Section 2(c) or at such time as the Company is obligated to file a Registration Statement with the SEC pursuant to Section 2(a), the Company will use its best efforts to effect the registration of the Registrable Securities in accordance with the intended method of disposition thereof and, pursuant thereto, the Company shall have the following obligations: a. The Company shall promptly prepare and file with the SEC a Registration Statement with respect to the Registrable Securities (on or prior to the sixtieth (60th) day after the date of issuance of any Preferred Shares for the registration of Registrable Securities pursuant to Section 2(a)) and use its best efforts to cause such Registration Statement relating to the Registrable Securities to become effective as soon as possible after such filing (but in no event later than 90 days after the issuance of any Preferred Shares for the registration of Registrable Securities pursuant to Section 2(a)), and keep such Registration Statement effective pursuant to Rule 415 at all times until the earlier of (i) the date as of which the Investors may sell all of the Registrable Securities without restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor thereto) or (ii) the date on which (A) the Investors shall have sold all the Registrable Securities and (B) none of the Preferred Shares or Warrants is outstanding (the "Registration Period"), which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. b. The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and the prospectus used in connection with such Registration Statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be necessary to keep such Registration Statement effective at all times during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by such Registration Statement until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in such Registration Statement. In the event the number of shares available under a Registration Statement filed pursuant to this Agreement is insufficient to cover all of the Registrable Securities, the Company shall amend such Registration Statement, or file a new Registration Statement (on the short form available therefor, if applicable), or both, so as to cover all of the Registrable Securities, in each case, as soon as practicable, but in any event within fifteen (15) days after the necessity therefor arises (based on the market price of the Common Stock and other relevant factors on which the Company reasonably elects to rely). The Company shall use it best efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof. For purposes of the foregoing provision, the number of shares available under a Registration Statement shall be deemed "insufficient to cover all of the Registrable Securities" if at any time the number of Registrable Securities issued or issuable upon conversion of the Preferred Shares and exercise of the Warrants is greater than the quotient determined by dividing (i) the number of shares of Common Stock available for resale under such Registration Statement by (ii) 1.5. For purposes of the calculation set forth in the foregoing sentence, any restrictions on the convertibility of the Preferred Shares or exerciseability of the Warrants shall be disregarded and such calculation shall assume that the Preferred Shares and the Warrants are then convertible and exercisable, respectively, into shares of Common Stock at the then prevailing Conversion Rate (as defined in the Company's Articles of Amendment) and Warrant Exercise Price (as defined in the Warrant), respectively, if applicable. c. The Company shall furnish to each Investor whose Registrable Securities are included in any Registration Statement and its legal counsel without charge (i) promptly after the same is prepared and filed with the SEC at least one copy of such Registration Statement and any amendment(s) thereto, including financial statements and schedules, the prospectus included in such Registration Statement (including each preliminary prospectus) and, with regards to such Registration Statement(s), any correspondence by or on behalf of the Company to the SEC or the staff of the SEC and any correspondence from the SEC or the staff of the SEC to the Company or its representatives, (ii) upon the effectiveness of any Registration Statement, ten (10) copies of the prospectus included in such Registration Statement and all amendments and supplements thereto (or such other number of copies as such Investor may reasonably request) and (iii) such other documents, including any preliminary prospectus, as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor. d. The Company shall use reasonable efforts to (i) register and qualify the Registrable Securities covered by a Registration Statement under such other securities or "blue sky" laws of such jurisdictions in the United States as the Investors holding a majority of the Registrable Securities reasonably request, (ii) prepare and file in those jurisdictions, such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other reasonable actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (w) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (x) subject itself to general taxation in any such jurisdiction, (y) file a general consent to service of process in any such jurisdiction or (z) make any changes in its charter or bylaws, which in each case the Board of Directors of the Company determines to be contrary to the best interests of the Company and its shareholders. The Company shall promptly notify each Investor who holds Registrable Securities of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities for sale under the securities or "blue sky" laws of any jurisdiction in the United States or its receipt of actual notice of the initiation or threatening of any proceeding for such purpose. e. In the event Investors who hold a majority of the Registrable Securities being offered in the offering select underwriters for the offering, the Company shall enter into and perform its obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the underwriters of such offering. f. As promptly as practicable after becoming aware of such event, the Company shall notify each Investor in writing of the happening of any event as a result of which the prospectus included in a Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and promptly prepare a supplement or amendment to such Registration Statement to correct such untrue statement or omission, and deliver ten (10) copies of such supplement or amendment to each Investor (or such other number of copies as such Investor may reasonably request). The Company shall also promptly notify each Investor in writing (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and when a Registration Statement or any post-effective amendment has become effective (notification of such effectiveness shall be delivered to each Investor by facsimile on the same day of such effectiveness and by overnight mail), (ii) of any request by the SEC for amendments or supplements to a Registration Statement or related prospectus or related information, and (iii) of the Company's reasonable determination that a post-effective amendment to a Registration Statement would be appropriate. g. The Company shall use its best efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify each Investor who holds Registrable Securities being sold (and, in the event of an underwritten offering, the managing underwriters) of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding for such purpose. h. The Company shall permit each Investor and a single firm of counsel, initially Katten Muchin & Zavis or such other counsel as thereafter designated as selling stockholders' counsel by the Investors who hold a majority of the Registrable Securities being sold, to review and comment upon a Registration Statement and all amendments and supplements thereto at least four (4) business days prior to their filing with the SEC, and not file any document in a form to which such counsel reasonably objects. The Company shall not submit a request for acceleration of the effectiveness of a Registration Statement or any amendment or supplement thereto without the prior approval of such counsel, which consent shall not be unreasonably withheld. i. At the request of the Investors who hold a majority of the Registrable Securities being sold, the Company shall furnish, on the date that Registrable Securities are delivered to an underwriter, if any, for sale in connection with the Registration Statement (i) if required by an underwriter, a letter, dated such date, from the Company's independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, and (ii) an opinion, dated as of such date, of counsel representing the Company for purposes of such Registration Statement, in form, scope and substance as is customarily given in an underwritten public offering, addressed to the underwriters and the Investors. j. The Company shall make available for inspection by (i) any Investor, (ii) any underwriter participating in any disposition pursuant to a Registration Statement, (iii) one firm of attorneys and one firm of accountants or other agents retained by the Investors, and (iv) one firm of attorneys retained by all such underwriters (collectively, the "Inspectors") all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably deemed necessary by each Inspector to enable each Inspector to exercise its due diligence responsibility, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request for purposes of such due diligence; provided, however, that each Inspector shall hold in strict confidence and shall not make any disclosure (except to an Investor) or use of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement or is otherwise required under the 1933 Act, (b) the release of such Records is ordered pursuant to a final, non-appealable subpoena or order from a court or government body of competent jurisdiction, or (c) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement of which the Inspector has knowledge. The Company shall not be required to disclose any confidential information in such Records to an Inspector until and unless such Inspector shall have entered into a confidentiality agreement with the Company with respect thereto, substantially in the form of this Section 3(j). Each Investor agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. k. The Company shall hold in confidence and not make any disclosure of information concerning an Investor provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this Agreement or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning an Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to such Investor and allow such Investor, at the Investor's expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information. l. The Company shall use its best efforts either to (i) cause all the Registrable Securities covered by a Registration Statement to be listed on each securities exchange on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange, or (ii) secure designation and quotation of all the Registrable Securities covered by the Registration Statement on The Nasdaq SmallCap Market or, if, despite the Company's best efforts to satisfy the preceding clause (i) or (ii), the Company is unsuccessful in satisfying the preceding clause (i) or (ii), to take such actions as is necessary to have the Registrable Securities traded on the electronic bulletin board or the "pink sheets", without limiting the generality of the foregoing, to arrange for at least two market makers to register with the National Association of Securities Dealers, Inc. ("NASD") as such with respect to such Registrable Securities. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section 3(l). m. The Company shall cooperate with the Investors who hold Registrable Securities being offered and, to the extent applicable, any managing underwriter or underwriters, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities to be offered pursuant to a Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the managing underwriter or underwriters, if any, or, if there is no managing underwriter or underwriters, the Investors may reasonably request and registered in such names as the managing underwriter or underwriters, if any, or the Investors may request. n. The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Investors of Registrable Securities pursuant to a Registration Statement. o. The Company shall provide a transfer agent and registrar, which may be a single entity, for all such Registrable Securities not later than the effective date of such Registration Statement. p. If properly and reasonably requested by the managing underwriters or an Investor, the Company shall (i) immediately incorporate in a prospectus supplement or post-effective amendment such information as the managing underwriters and the Investors agree should be included therein relating to the sale and distribution of Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and any other terms of the underwritten (or best efforts underwritten) offering of the Registrable Securities to be sold in such offering; (ii) make all required filings of such prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; and (iii) supplement or make amendments to any Registration Statement if requested by a shareholder or any underwriter of such Registrable Securities. q. The Company shall use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities in the United States of America as may be necessary to consummate the disposition of such Registrable Securities. r. The Company shall make generally available to its security holders as soon as practical, but not later than 90 days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the 1933 Act) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of the Registration Statement. s. The Company shall otherwise use its best efforts to comply with all applicable rules and regulations of the SEC in connection with any registration hereunder. t. Within two (2) business days after the Registration Statement which includes the Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel for the Company to deliver, to the transfer agent for such Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) confirmation that the Registration Statement has been declared effective by the SEC in the form attached hereto as Exhibit A. 4. OBLIGATIONS OF THE INVESTORS. a. At least seven (7) days prior to the first anticipated filing date of a Registration Statement, the Company shall notify each Investor in writing of the information the Company requires from each such Investor if such Investor elects to have any of such Investor's Registrable Securities included in such Registration Statement. It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. Each Investor shall use its best efforts to respond to the Company's written request for information within five days of such Investor's receipt of such request. If any delay in the filing of the Registration Statement results from an Investor's failure to respond within such five-day period, then such delay shall not constitute an default under or breach of this Agreement by the Company and no penalties shall accrue under this Agreement, the Securities Purchase Agreement of the Articles of Amendment during such delay. b. Each Investor, by such Investor's acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of any Registration Statement hereunder, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from such Registration Statement. c. In the event any Investor elects to participate in an underwritten public offering pursuant to Section 2, each such Investor agrees to enter into and perform such Investor's obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the managing underwriter of such offering and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities, unless such Investor notifies the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from such Registration Statement. d. Each Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(g) or the first sentence of 3(f), such Investor will immediately discontinue disposition of Registrable Securities pursuant to any Registration Statement(s) covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(g) or the first sentence of 3(f) and, if requested in writing by the Company, such Investor shall deliver to the Company (at the Company's expense) or destroy (and deliver to the Company a certificate of destruction) all copies in such Investor's possession of the prospectus covering the Registrable Securities at the time of receipt of such request. e. No Investor may participate in any underwritten registration hereunder unless such Investor (i) agrees to sell such Investor's Registrable Securities on the basis provided in any underwriting arrangements in usual and customary form entered into by the Company, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements, and (iii) agrees to pay its pro rata share of all underwriting discounts and commissions or any expenses in excess of those payable by the Company pursuant to Section 5 below. 5. EXPENSES OF REGISTRATION. All reasonable expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printers and accounting fees, and fees and disbursements of counsel for the Company and fees and disbursements of one counsel for the Investors, shall be paid by the Company; provided, however, that the Company shall not be obligated to pay more than $2,500 of the fees and disbursements of one counsel for the Investors for each Registration Statement that is filed. 6. INDEMNIFICATION. In the event any Registrable Securities are included in a Registration Statement under this Agreement: a. To the fullest extent permitted by law, the Company will, and hereby does, indemnify, hold harmless and defend each Investor who holds such Registrable Securities, the directors, officers, partners, employees, agents of, and each Person, if any, who controls, any Investor within the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), and any underwriter (as defined in the 1933 Act) for the Investors, and the directors and officers of, and each Person, if any, who controls, any such underwriter within the meaning of the 1933 Act or the 1934 Act (each, an "Indemnified Person"), against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, reasonable attorneys' fees, amounts paid in settlement or expenses, joint or several, (collectively, "Claims") incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto ("Indemnified Damages"), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or any post-effective amendment thereto or in any filing made by or on behalf of the Company in connection with the qualification of the offering under the securities or other "blue sky" laws of any jurisdiction in which Registrable Securities are offered ("Blue Sky Filing"), or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which the statements therein were made, not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading, or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities pursuant to a Registration Statement (the matters in the foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject to the restrictions set forth in Section 6(d) with respect to the number of legal counsel, the Company shall reimburse the Investors and each such underwriter or controlling person, promptly as such expenses are incurred and are due and payable, for any reasonable legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (i) shall not apply to a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by any Indemnified Person or underwriter for such Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto, if such prospectus was timely made available by the Company pursuant to Section 3(c); (ii) with respect to any preliminary prospectus, shall not inure to the benefit of any such person from whom the person asserting any such Claim purchased the Registrable Securities that are the subject thereof (or to the benefit of any person controlling such person) if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected in the prospectus, as then amended or supplemented, if such prospectus was timely made available by the Company pursuant to Section 3(c), and the Indemnified Person was promptly advised in writing not to use the incorrect prospectus prior to the use giving rise to a violation and such Indemnified Person, notwithstanding such advice, used it; (iii) shall not be available to the extent such Claim is based on a failure of the Investor to deliver or to cause to be delivered the prospectus made available by the Company; and (iv) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. b. In connection with any Registration Statement in which an Investor is participating, each such Investor agrees to severally and not jointly indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement, each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act, any underwriter and any other stockholder selling Registrable Securities pursuant to the Registration Statement or any of their officers or any Person, if any, which controls such underwriter or stockholder within the meaning of the 1933 Act or the 1934 Act (collectively and together with an Indemnified Person, an "Indemnified Party"), against any Claim or Indemnified Damages to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or are based upon any Violation, in each case to the extent, and only to the extent, that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Investor expressly for use in connection with such Registration Statement; and, subject to Section 6(d), such Investor will reimburse any legal or other expenses (promptly as such expenses are incurred and are due an payable) reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Investor, which consent shall not be unreasonably withheld; provided, further, however, that the Investor shall be liable under this Section 6(b) for only that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to such Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected on a timely basis in the prospectus, as then amended or supplemented. c. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in any distribution, to the same extent as provided above, with respect to information such persons so furnished in writing expressly for inclusion in the Registration Statement. d. Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The Company shall pay reasonable fees for only one separate legal counsel for the Investors, and such legal counsel shall be selected by the Investors holding a majority in interest of the Registrable Securities included in the Registration Statement to which the Claim relates. The Indemnified Party or Indemnified Person shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person which relates to such action or claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding effected without its written consent, provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without the consent of the Indemnified Party or Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such claim or litigation. Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. e. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnified Damages are incurred. f. The indemnity agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law. 7. CONTRIBUTION. To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that: (i) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6; (ii) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of fraudulent misrepresentation; and (iii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. 8. REPORTS UNDER THE 1934 ACT. With a view to making available to the Investors the benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or regulation of the SEC that may at any time permit the Investors to sell securities of the Company to the public without registration ("Rule 144"), the Company agrees to: a. make and keep public information available, as those terms are understood and defined in Rule 144; b. file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements (it being understood that nothing herein shall limit the Company's obligations under Section 4(c) of the Securities Purchase Agreement) and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and c. furnish to each Investor so long as such Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the investors to sell such securities pursuant to Rule 144 without registration. 9. ASSIGNMENT OF REGISTRATION RIGHTS. The rights under this Agreement shall be automatically assignable by the Investors to any transferee of all or any portion of Registrable Securities if: (i) the Investor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment; (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (a) the name and address of such transferee or assignee, and (b) the securities with respect to which such registration rights are being transferred or assigned; (iii) immediately following such transfer or assignment the further disposition of such securities by the transferee or assignee is restricted under the 1933 Act and applicable state securities laws; (iv) at or before the time the Company receives the written notice contemplated by clause (ii) of this sentence the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein; (v) such transfer shall have been made in accordance with the applicable requirements of the Securities Purchase Agreement; and (vi) such transferee shall be an "accredited investor" as that term is defined in Rule 501 of Regulation D promulgated under the 1933 Act. 10. AMENDMENT OF REGISTRATION RIGHTS. Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investors who hold two-thirds (_) of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Investor and the Company. 11. MISCELLANEOUS. a. A person or entity is deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. b. Any notices consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided a confirmation of transmission is mechanically generated and kept on file by the sending party); (iii) three (3) days after being sent by U.S. certified mail, return receipt requested; or (iv) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: Smart Choice Automotive Group, Inc. 5200 S. Washington Avenue Titusville, Florida 32780 Telephone: 407-269-9680 Facsimile: 407-264-0376 Attention: President, Gary R. Smith With a copy to: Greenberg Traurig Hoffman Lipoff Rosen & Quentel 111 N. Orange Avenue, 20th Floor Orlando, Florida 32801 Telephone: 407-420-1000 Facsimile: 407-420-5909 Attention: Randolph H. Fields, Esq. If to a Buyer, to its address and facsimile number on the Schedule of Buyers attached hereto, with copies to such Buyer's counsel as set forth on the Schedule of Buyers. Each party shall provide five (5) days prior notice to the other party of any change in address, phone number or facsimile number. c. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. d. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York without regard to the principles of conflict of laws. Each party hereby irrevocably submits to the non-exclusive jurisdiction of the state and federal courts sitting the City of New York, borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. e. This Agreement and the Securities Purchase Agreement constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement and the Securities Purchase Agreement supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof. f. Subject to the requirements of Section 9, this Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of each of the parties hereto. g. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. h. This Agreement may be executed in two or more identical counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. i. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. j. All consents and other determinations to be made by the Investors pursuant to this Agreement shall be made, unless otherwise specified in this Agreement, by Investors holding a majority of the Registrable Securities, determined as if all of the Preferred Shares and the Warrants then outstanding have been converted into or exercised for Registrable Securities. k. 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. IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement to be duly executed as of day and year first above written. COMPANY: BUYERS: SMART CHOICE AUTOMOTIVE THEMIS PARTNERS L.P. GROUP, INC. By: Promethean Investment Group L.L.C. Its: General Partner By: /s/ James Neal Hutchinson, Jr. By: /s/ Kurt Kim Name: James Neal Hutchinson, Jr. Name: E. Kurt Kim Its: Assistant Vice President Its: Duly Authorized Signatory HERACLES FUND By: Promethean Investment Group L.L.C. Its: Investment Advisor By: /s/ Kurt Kim Name: E. Kurt Kim Its: Duly Authorized Signatory LEONARDO, L.P. By: Angelo, Gordon & Co., L.P. Its: General Partner By: /s/ Michael L. Gordon Name: Michael L. Gordon Its: Chief Operating Officer GAM ARBITRAGE INVESTMENTS, INC. By: Angelo, Gordon & Co., L.P. Its: Investment Advisor By: /s/ Michael L. Gordon Name: Michael L. Gordon Its: Chief Operating Officer AG SUPER FUND INTERNATIONAL PARTNERS, L.P. By: Angelo, Gordon & Co., L.P. Its: General Partner By: /s/ Michael L. Gordon Name: Michael L. Gordon Its: Chief Operating Officer RAPHAEL, L.P. By: /s/ Michael L. Gordon Name: Michael L. Gordon Its: Chief Operating Officer RAMIUS FUND, LTD. By: AG Ramius Partners, L.L.C. Its: Investment Advisor By: /s/ Michael L. Gordon Name: Michael L. Gordon Its: Managing Officer HICK INVESTMENTS, LTD. By: AG Ramius Partners, L.L.C. Its: Investment Advisor By: /s/ Michael L. Gordon Name: Michael L. Gordon Its: Managing Officer HALIFAX FUND, L.P. By: The Palladin Group Its: Investment Manager By: The Palladin Capital Management LLC Its: General Partner By: /s/ Andrew Kaplan Name: Andrew Kaplan Its: Authorized Representative SCHEDULE OF BUYERS Investor Name Investor Address Investor's Representatives' Address and Facsimile Number and Facsimile Number - ---------------------- ---------------------------------------- ------------------------------------- Themis Partners L.P. Promethean Investment Group, L.L.C. Promethean Investment Group, L.L.C. 40 West 57th Street, Suite 1520 40 West 57th Street, Suite 1520 New York, New York 10019 New York, New York 10019 Attn: James F. O'Brien, Jr. Attn: James F. O'Brien, Jr. Facsimile: 212-698-0505 E. Kurt Kim Facsimile: 212-698-0505 Katten Muchin & Zavis 525 West Monroe, Suite 1600 Chicago, Illinois 60661-3693 Attn: Robert J. Brantman, Esq. Facsimile: 312-902-1061 Heracles Fund Bank of Bermuda (Cayman) Limited Promethean Investment Group, L.L.C. P.O. Box 513 40 West 57th Street, Suite 1520 3rd Floor British American Center New York, New York 10019 Dr. Roy's Drive Attn: James F. O'Brien, Jr. Georgetown, Grand Cayman E. Kurt Kim Cayman Island, BWI Facsimile: 212-698-0505 Attn: Allen J. Bernardo Facsimile: 809-949-7802 Katten Muchin & Zavis 525 West Monroe, Suite 1600 Chicago, Illinois 60661-3693 Attn: Robert J. Brantman, Esq. Facsimile: 312-902-1061 Leonardo, L.P. Trident Trust Company Angelo, Gordon & Co., L.P. Shedden Road 245 Park Avenue - 26th Floor Elizabeth Square New York, New York 10167 P.O. Box 847 Attn: Gary Wolf Georgetown, Grand Cayman Islands Facsimile: 212-867-6449 GAM Arbitrage Craigmuir Chambers Angelo, Gordon & Co., L.P. Investments, Inc. P.O. Box 3186c 245 Park Avenue - 26th Floor Road Town, Tortola, British Virgin New York, New York 10167 Islands Attn: Gary Wolf Facsimile: 212-867-6449 AG Super Fund c/o Angelo, Gordon & Co., L.P. International 245 Park Avenue - 26th Floor Partners, L.P. New York, New York 10167 Attn: Gary Wolf Facsimile: 212-867-6449 Raphael, L.P. c/o Rafael Capital Management, Ltd. Angelo, Gordon & Co., L.P. Abbott Building 245 Park Avenue - 26th Floor P.O. Box 3186c New York, New York 10167 Road Town, Tortola, British Virgin Attn: Gary Wolf Islands Facsimile: 212-867-6449 Ramius Fund, Ltd. c/o Bank of Bermuda Building Angelo, Gordon & Co., L.P. 6 Front Street 245 Park Avenue - 26th Floor P.O. Box HM1026 New York, New York 10167 Hamilton, Bermuda HMDX Attn: Gary Wolf Facsimile: 212-867-6449 Hick Investments, c/o I.T.I.B.V. Galleria Building Angelo, Gordon & Co., L.P. Ltd. Via Cantonale 2 245 Park Avenue - 26th Floor 6828 Manno, Switzerland New York, New York 10167 Attn: Gary Wolf Facsimile: 212-867-6449 Halifax Fund, L.P. c/o CITCO Fund Services, Ltd. _The Palladin Group Corporate Center, West Bay Road 40 West 57th Street P.O. Box 31106 Suite 1500 SMB New York, New York 10019 Grand Cayman, Cayman Islands Attn: Andrew Kaplan Facsimile: 212-698-0599
EXHIBIT A FORM OF NOTICE OF EFFECTIVENESS OF REGISTRATION STATEMENT [TRANSFER AGENT] Attn: _______________ Re: Smart Choice Automotive Group, Inc. Ladies and Gentlemen: We are counsel to Smart Choice Automotive Group, Inc., a Florida corporation (the "Company"), and have represented the Company in connection with that certain Securities Purchase Agreement (the "Purchase Agreement") entered into by and among the Company and the buyers named therein (collectively, the "Holders") pursuant to which the Company issued to the Holders shares of its Series A Redeemable Convertible Preferred Stock, par value $.01 per share, (the "Preferred Shares") and warrants to purchase 300 shares of the Company's common stock, par value $.01 per share (the "Common Stock"), for each Preferred Share, subject to adjustment (the "Warrants"). Pursuant to the Purchase Agreement, the Company also has entered into a Registration Rights Agreement with the Holders (the "Registration Rights Agreement") pursuant to which the Company agreed, among other things, to register the Registrable Securities (as defined in the Registration Rights Agreement), including the shares of Common Stock issuable upon conversion of the Preferred Shares and exercise of the Warrants, under the Securities Act of 1933, as amended (the "1933 Act"). In connection with the Company's obligations under the Registration Rights Agreement, on ____________ ___, 1997, the Company filed a Registration Statement on Form S-3 (File No. 333-_____________) (the "Registration Statement") with the Securities and Exchange Commission (the "SEC") relating to the Registrable Securities which names each of the Holders as a selling stockholder thereunder. In connection with the foregoing, we advise you that a member of the SEC's staff has advised us by telephone that the SEC has entered an order declaring the Registration Statement effective under the 1933 Act at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after telephonic inquiry of a member of the SEC's staff, that any stop order suspending its effectiveness has been issued or that any proceedings for that purpose are pending before, or threatened by, the SEC and the Registrable Securities are available for resale under the 1933 Act pursuant to the Registration Statement. Very truly yours, GREENBERG TRAURIG HOFFMAN LIPOFF ROSEN & QUENTEL By: ________________________ cc: [LIST NAMES OF HOLDERS] -----END PRIVACY-ENHANCED MESSAGE-----