THIS WARRANT HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
AND IS NOT TRANSFERABLE
EXCEPT AS PROVIDED HEREIN
Vaughan Foods, Inc.
PURCHASE WARRANT
Issued to:
PAULSON INVESTMENT COMPANY, INC.
Exercisable to Purchase
500,000 Units
of
VAUGHAN FOODS, INC.
Void after ________, 2011
This is to certify that, for value received and subject to the terms and
conditions set forth below, the Warrantholder (hereinafter defined) is entitled
to purchase, and the Company promises and agrees to sell and issue to the
Warrantholder, at any time on or after ________, 2007 and on or before ________,
2011, up to 500,000 Units (hereinafter defined) at the Exercise Price
(hereinafter defined).
This Warrant Certificate is issued subject to the following terms and
conditions:
1. DEFINITIONS OF CERTAIN TERMS. Except as may be otherwise clearly
required by the context, the following terms have the following meanings:
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Cashless Exercise" means an exercise of Warrants in which, in
lieu of payment of the Exercise Price, the Holder elects to receive a lesser
number of Securities such that the value of the Securities that such Holder
would otherwise have been entitled to receive but has agreed not to receive, as
determined by the closing price of such Securities on the date of exercise or,
if such date is not a trading day, on the next prior trading day, is equal to
the Exercise Price with respect to such exercise. A Holder may only elect a
Cashless Exercise if Securities issuable by the Company on such exercise are
publicly traded securities.
(c) "Class A Warrant" means a warrant defined as a Class A Warrant in
the Warrant Agreement.
(d) "Class B Warrant" means a warrant defined as a Class B Warrant in
the Warrant Agreement.
(e) "Closing Date" means the date on which the Offering is closed.
(f) "Commission" means the Securities and Exchange Commission.
(g) "Common Stock" means the common stock, par value $0.001, of the
Company.
(h) "Company" means Vaughan Foods, Inc., an Oklahoma corporation.
(i) "Company's Expenses" means any and all expenses payable by the
Company or the Warrantholder in connection with an offering described in Section
6 hereof, except Warrantholder's Expenses.
(j) "Corporate Financing Rule" means Rule 2710 of the rules of the
National Association of Securities Dealers, Inc.
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(k) "Effective Date" means the date on which the Registration
Statement is declared effective by the Commission.
(l) "Exercise Price" means the price at which the Warrantholder may
purchase one Unit upon exercise of Warrants as determined from time to time
pursuant to the provisions hereof. The initial Exercise Price is $_____ per
Unit.
(m) "Offering" means the public offering of Units made pursuant to the
Registration Statement.
(n) "Participating Underwriter" means any underwriter participating in
the sale of the Securities pursuant to a registration under Section 6 of this
Warrant Certificate.
(o) "Registration Statement" means the Company's registration
statement (File No. 333 -______) as amended on the Closing Date.
(p) "Rules and Regulations" means the rules and regulations of the
Commission adopted under the Act.
(q) "Securities" means the securities obtained or obtainable upon
exercise of the Warrant or securities obtained or obtainable upon exercise,
exchange, or conversion of such securities.
(r) "Unit" means one share of Common Stock, one redeemable Class A
Warrant and one redeemable Class B Warrants.
(s) "Unit Warrant" means either a Class A Warrant or a Class B
Warrant.
(t) "Warrant Agreement" means that certain Warrant Agreement, dated as
of _______, 2006, by and between the Company and ___________________ relating to
the issuance of Unit Warrants.
(u) "Warrant Certificate" means a certificate evidencing the Warrant.
(v) "Warrantholder" means a record holder of the Warrant or
Securities. The initial Warrantholder is Paulson Investment Company, Inc.
(w) "Warrantholder's Expenses" means the sum of (i) the aggregate
amount of cash payments made to an underwriter, underwriting syndicate, or agent
in connection with an offering described in Section 6 hereof multiplied by a
fraction the numerator of which is the aggregate sales price of the Securities
sold by such underwriter, underwriting syndicate, or agent in such offering and
the denominator of which is the aggregate sales price of all of the securities
sold by such underwriter, underwriting syndicate, or agent in such offering and
(ii) all out-of-pocket expenses of the Warrantholder, except for the fees and
disbursements of one firm retained as legal counsel for the Warrantholder that
will be paid by the Company.
(x) "Warrant" means the warrant evidenced by this certificate, any
similar certificate issued in connection with the Offering, or any certificate
obtained upon transfer or partial exercise of the Warrant evidenced by any such
certificate.
2. EXERCISE OF WARRANT. All or any part of the Warrant represented by this
Warrant Certificate may be exercised commencing 180 days after the Effective
Date and
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ending at 5 p.m. Pacific Time on the fifth anniversary of the Effective Date
(the "Expiration Date") by surrendering this Warrant Certificate, together with
appropriate instructions, duly executed by the Warrantholder or by its duly
authorized attorney, at the office of the Company, 216 N.E. 12th Street, Moore,
Oklahoma 73160, Attention: Chief Executive Officer; or at such other office or
agency as the Company may designate. The date on which such instructions are
received by the Company shall be the date of exercise. If the Holder has elected
a Cashless Exercise, such instructions shall so state. Subject to the provisions
below, upon receipt of notice of exercise, the Company shall immediately
instruct its transfer agent to prepare certificates for the Securities to be
received by the Warrantholder upon completion of the Warrant exercise. When such
certificates are prepared, the Company shall notify the Warrantholder and
deliver such certificates to the Warrantholder or as per the Warrantholder's
instructions immediately upon payment in full by the Warrantholder, in lawful
money of the United States, of the Exercise Price payable with respect to the
Securities being purchased, if any. If the Warrantholder shall represent and
warrant that all applicable registration and prospectus delivery requirements
for their sale have been complied with upon sale of the Securities received upon
exercise of the Warrant, such certificates shall not bear a legend with respect
to the Act.
If fewer than all the Securities purchasable under the Warrant are
purchased, the Company will, upon such partial exercise, execute and deliver to
the Warrantholder a new Warrant Certificate (dated the date hereof), in form and
tenor similar to this Warrant Certificate, evidencing that portion of the
Warrant not exercised. The Securities to be obtained on exercise of the Warrant
will be deemed to have been issued, and any person exercising the Warrant will
be deemed to have become a holder of record of those Securities, as of the date
of the payment of the Exercise Price.
Notwithstanding the foregoing, in no event shall such Securities be issued,
and the Company is authorized to refuse to honor the exercise of the Warrant, if
such exercise would result in the opinion of the Company's Board of Directors,
upon advice of counsel, in the violation of any law; and provided further that,
if the Warrant is exercisable solely for Securities listed on a securities
exchange or for which there are at least three independent market makers, the
Company may elect to redeem the Warrant submitted for exercise for a price equal
to the difference between the aggregate low asked price, or closing price, as
the case may be, of the Securities for which the Warrant is exercisable on the
date of exercise and the Exercise Price; in the event of such redemption, the
Company will pay to the holder of the Warrant the above-described redemption
price in cash within 10 business days after receipt of notice of exercise.
3. ADJUSTMENTS IN CERTAIN EVENTS. The number, class, and price of
Securities for which this Warrant Certificate may be exercised are subject to
adjustment from time to time upon the happening of certain events as follows:
(a) If the outstanding shares of the Company's Common Stock are
divided into a greater number of shares or a dividend in stock is paid on the
Common Stock, the number of shares of Common Stock for which the Warrant is then
exercisable will be proportionately increased and the Exercise Price will be
proportionately reduced; and, conversely, if the outstanding shares of Common
Stock are combined into a smaller number of shares of Common Stock, the number
of shares of Common Stock for which the Warrant is then exercisable will be
proportionately reduced and the Exercise Price will be proportionately
increased. The increases and reductions provided for in this Section 3(a) will
be made with the intent and, as nearly as
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practicable, the effect that neither the percentage of the total equity of the
Company obtainable on exercise of the Warrants nor the price payable for such
percentage upon such exercise will be affected by any event described in this
Section 3(a).
(b) In case of any change in the Common Stock through merger,
consolidation, reclassification, reorganization, partial or complete
liquidation, purchase of substantially all the assets of the Company, or other
change in the capital structure of the Company, other than changes in par value,
then, as a condition of such change, lawful and adequate provision will be made
so that the holder of this Warrant Certificate will have the right thereafter to
receive upon the exercise of the Warrant the kind and amount of shares of stock
or other securities or property to which he would have been entitled if,
immediately prior to such event, he had held the number of shares of Common
Stock obtainable upon the exercise of the Warrant. In any such case, appropriate
adjustment will be made in the application of the provisions set forth herein
with respect to the rights and interest thereafter of the Warrantholder, to the
end that the provisions set forth herein will thereafter be applicable, as
nearly as reasonably may be, in relation to any shares of stock or other
property thereafter deliverable upon the exercise of the Warrant. The Company
will not permit any change in its capital structure to occur unless the issuer
of the shares of stock or other securities to be received by the holder of this
Warrant Certificate, if not the Company, agrees to be bound by and comply with
the provisions of this Warrant Certificate.
(c) When any adjustment is required to be made in the number of shares
of Common Stock, other securities, or the property purchasable upon exercise of
the Warrant, the Company will promptly determine the new number of such shares
or other securities or property purchasable upon exercise of the Warrant and (i)
prepare and retain on file a statement describing in reasonable detail the
method used in arriving at the new number of such shares or other securities or
property purchasable upon exercise of the Warrant and (ii) cause a copy of such
statement to be mailed to the Warrantholder within thirty (30) days after the
date of the event giving rise to the adjustment.
(d) No fractional shares of Common Stock or other securities will be
issued in connection with the exercise of the Warrant, but the Company will pay,
in lieu of fractional shares, a cash payment therefor on the basis of the mean
between the bid and asked prices of the Common Stock in the over-the-counter
market or the last sale price of the Common Stock on the principal exchange or
other trading facility on which the Common Stock is traded on the day
immediately prior to exercise.
(e) If securities of the Company or securities of any subsidiary of
the Company are distributed pro rata to holders of Common Stock, such number of
securities will be distributed to the Warrantholder or its assignee upon
exercise of its rights hereunder as such Warrantholder or assignee would have
been entitled to if this Warrant Certificate had been exercised prior to the
record date for such distribution. The provisions with respect to adjustment of
the Common Stock provided in this Section 3 will also apply to the securities to
which the Warrantholder or its assignee is entitled under this Section 3(e).
(f) Notwithstanding anything herein to the contrary, there will be no
adjustment made hereunder on account of the sale by the Company of the Common
Stock or other Securities purchasable upon exercise of the Warrant.
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(g) If, immediately prior to any exercise of Warrants, there shall be
outstanding no securities of a class or series that, but for the provisions of
this Section 3, would be issuable upon such exercise (the "FORMERLY ISSUABLE
SECURITIES"), then, upon such exercise, and in lieu of the Formerly Issuable
Securities, the Company shall issue that number and kind of other securities or
property for which the Formerly Issuable Securities were most recently
exercisable or into which the Formerly Issuable Securities were most recently
convertible, as the case may be.
4. RESERVATION OF SECURITIES. The Company agrees that the number of shares
of Common Stock or other Securities sufficient to provide for the exercise of
the Warrant upon the basis set forth above will at all times during the term of
the Warrant be reserved for exercise.
5. VALIDITY OF SECURITIES. All Securities delivered upon the exercise of
the Warrant will be duly and validly issued in accordance with their terms, and
the Company will pay all documentary and transfer taxes, if any, in respect of
the original issuance thereof upon exercise of the Warrant.
6. REGISTRATION OF SECURITIES ISSUABLE ON EXERCISE OF WARRANT CERTIFICATE.
(a) The Company will register the Securities with the Commission
pursuant to the Act so as to allow the unrestricted sale of the Securities to
the public from time to time commencing on the first anniversary of the
Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of
the Effective Date (the "REGISTRATION PERIOD"). The Company will also file such
applications and other documents necessary to permit the sale of the Securities
to the public during the Registration Period in those states in which the Units
were qualified for sale in the Offering or such other states as to which the
Company and the Warrantholder agree. In order to comply with the provisions of
this Section 6(a), the Company is not required to file more than one
registration statement. No registration right of any kind, "piggyback" or
otherwise, will last longer than five years from the Effective Date.
(b) The Company will pay all of the Company's Expenses and each
Warrantholder will pay its pro rata share of the Warrantholder's Expenses
relating to the registration, offer, and sale of the Securities.
(c) Except as specifically provided herein, the manner and conduct of
the registration, including the contents of the registration statement, will be
entirely in the control and at the discretion of the Company. The Company will
file such post-effective amendments and supplements as may be necessary to
maintain the currency of the registration statement during the period of its
use. In addition, if the Warrantholder participating in the registration is
advised by counsel that the registration statement, in their opinion, is
deficient in any material respect, the Company will use its best efforts to
cause the registration statement to be amended to eliminate the concerns raised.
(d) The Company will furnish to the Warrantholder the number of copies
of a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as it may reasonably request
in order to facilitate the disposition of Securities owned by it.
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(e) The Company will, at the request of Warrantholders holding at
least 50 percent of the then outstanding Warrants, (i) furnish an opinion of the
counsel representing the Company for the purposes of the registration pursuant
to this Section 6, addressed to the Warrantholders and any Participating
Underwriter, (ii) furnish an appropriate letter from the independent public
accountants of the Company, addressed to the Warrantholders and any
Participating Underwriter, and (iii) make such representations and warranties to
the Warrantholders and any Participating Underwriter as are customarily given to
underwriters of public offerings of equity securities in connection with such
offerings. A request pursuant to this subsection (e) may be made on three
occasions. The documents required to be delivered pursuant to this subsection
(e) will be dated within ten days of the request and will be, in form and
substance, equivalent to similar documents furnished to the underwriters in
connection with the Offering, with such changes as may be appropriate in light
of changed circumstances.
7. INDEMNIFICATION IN CONNECTION WITH REGISTRATION.
(a) If any of the Securities are registered, the Company will
indemnify and hold harmless each selling Warrantholder, any person who controls
any selling Warrantholder within the meaning of the Act, and any Participating
Underwriter against any losses, claims, damages, or liabilities, joint or
several, to which any Warrantholder, controlling person, or Participating
Underwriter may be subject under the Act or otherwise; and it will reimburse
each Warrantholder, each controlling person, and each Participating Underwriter
for any legal or other expenses reasonably incurred by the Warrantholder,
controlling person, or Participating Underwriter in connection with
investigating or defending any such loss, claim, damage, liability, or action,
insofar as such losses, claims, damages, or liabilities, joint or several (or
actions in respect thereof), arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained, on the effective
date thereof, in any such registration statement or any preliminary prospectus
or final prospectus, or any amendment or supplement thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; provided, however, that the Company will not be liable in any case
to the extent that any loss, claim, damage, or liability arises out of or is
based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in any registration statement, preliminary prospectus,
final prospectus, or any amendment or supplement thereto, in reliance upon and
in conformity with written information furnished by a Warrantholder for use in
the preparation thereof. The indemnity agreement contained in this subparagraph
(a) will not apply to amounts paid to any claimant in settlement of any suit or
claim unless such payment is first approved by the Company, such approval not to
be unreasonably withheld.
(b) Each selling Warrantholder, as a condition of the Company's
registration obligation, will indemnify and hold harmless the Company, each of
its directors, each of its officers who have signed any registration statement
or other filing or any amendment or supplement thereto, and any person who
controls the Company within the meaning of the Act, against any losses, claims,
damages, or liabilities to which the Company or any such director, officer, or
controlling person may become subject under the Act or otherwise, and will
reimburse any legal or other expenses reasonably incurred by the Company or any
such director, officer, or controlling person in connection with investigating
or defending any such loss, claim, damage, liability, or action, insofar as such
losses, claims, damages, or liabilities (or actions in respect
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thereof) arise out of or are based upon any untrue or alleged untrue statement
of any material fact contained in said registration statement, any preliminary
or final prospectus, or other filing, or any amendment or supplement thereto, or
arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, but only to the extent that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in said registration statement, preliminary or final prospectus, or other
filing, or amendment or supplement, in reliance upon and in conformity with
written information furnished by such Warrantholder for use in the preparation
thereof; provided, however, that the indemnity agreement contained in this
subparagraph (b) will not apply to amounts paid to any claimant in settlement of
any suit or claim unless such payment is first approved by the Warrantholder,
such approval not to be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under subparagraphs
(a) or (b) above of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against an indemnifying
party, notify the indemnifying party of the commencement thereof; but the
omission to notify the indemnifying party will not relieve it from any liability
that it may have to any indemnified party otherwise than under subparagraphs (a)
and (b).
(d) If any such action is brought against any indemnified party and it
notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel satisfactory to such indemnified party; and after
notice from the indemnifying party to such indemnified party of its election to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
8. RESTRICTIONS ON TRANSFER. This Warrant Certificate and the Warrant may
not be sold, transferred, assigned, pledged, or hypothecated, or be the subject
of any hedging, short sale, derivative, put, or call transaction that would
result in the effective economic disposition of the securities by any person for
a period of 180 days immediately following the Effective Date, except as
permitted in subparagraph (g)(2) of the Corporate Financing Rule. The Warrant
may be divided or combined, upon request to the Company by the Warrantholder,
into a certificate or certificates evidencing the same aggregate number of
Warrants.
9. NO RIGHTS AS A SHAREHOLDER. Except as otherwise provided herein, the
Warrantholder will not, by virtue of ownership of the Warrant, be entitled to
any rights of a shareholder of the Company but will, upon written request to the
Company, be entitled to receive such quarterly or annual reports as the Company
distributes to its shareholders.
10. NOTICE. Any notices required or permitted to be given hereunder will be
in writing and may be served personally or by mail; and if served will be
addressed as follows:
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If to the Company:
Vaughan Foods, Inc.
216 N.E. 12th Street
Moore, Oklahoma 73160
Attention: Chief Executive Officer
If to the Warrantholder:
at the address furnished
by the Warrantholder to the
Company for the purpose of
notice.
Any notice so given by mail will be deemed effectively given 48 hours after
mailing when deposited in the United States mail, registered or certified mail,
return receipt requested, postage prepaid and addressed as specified above. Any
party may by written notice to the other specify a different address for notice
purposes.
11. APPLICABLE LAW. This Warrant Certificate will be governed by and
construed in accordance with the laws of the State of Oregon, without reference
to conflict of laws principles thereunder. All disputes relating to this Warrant
Certificate shall be tried before the courts of Oregon located in Multnomah
County, Oregon to the exclusion of all other courts that might have
jurisdiction.
Dated as of _______, 2006
VAUGHAN FOODS, INC.
By: ________________________________
Name: Mark E. Vaughan
Title: Chief Executive Officer
Agreed and Accepted as of _______, 2006
PAULSON INVESTMENT COMPANY, INC.
By: ________________________________
Name:
Title:
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