SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this "Agreement") is dated as of
August 25, 2004 among Sunburst Acquisitions IV, Inc. a Colorado corporation
(the "Company"), and each purchaser identified on the signature pages hereto
(each, including its successors and assigns, a "Purchaser" and collectively the
"Purchasers").
WHEREAS, subject to the terms and conditions set forth in this Agreement
and pursuant to Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act") and Rule 506 promulgated thereunder, the Company desires to
issue and sell to each Purchaser, and each Purchaser, severally and not
jointly, desires to purchase from the Company, securities of the Company as
more fully described in this Agreement.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in
this Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and each Purchaser
agrees as follows:
ARTICLE I.
DEFINITIONS
1.1Definitions. In addition to the terms defined elsewhere in this
Agreement: (a) capitalized terms that are not otherwise defined herein have the
meanings given to such terms in the Debentures (as defined herein), and (b) the
following terms have the meanings indicated in this Section 1.1:
"Action" shall have the meaning ascribed to such term in Section
3.1(j).
"Additional Investment Right" means the Additional Investment
Rights as described in Section 2.2(a)(vi).
"Additional Investment Right Shares" means the shares of Common
Stock issuable upon exercise of the Additional Investment Rights.
"Affiliate" means any Person that, directly or indirectly through
one or more intermediaries, controls or is controlled by or is under
common control with a Person, as such terms are used in and construed
under Rule 144 under the Securities Act. With respect to a Purchaser,
any investment fund or managed account that is managed on a discretionary
basis by the same investment manager as such Purchaser will be deemed to
be an Affiliate of such Purchaser.
"Closing Dates" means, collectively, the dates of the First Closing
and Second Closing.
"Closings" means collectively, the closings of the purchase and
sale of the Securities pursuant to Section 2.1, and any reference to
"Closing" or "Closings" shall be construed to include the First Closing
and the Second Closing unless only one such closing is expressly referred
to.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock of the Company, no par value,
and any securities into which such common stock shall hereinafter have
been reclassified into.
"Common Stock Equivalents" means any securities of the Company or
the Subsidiaries which would entitle the holder thereof to acquire at any
time Common Stock, including without limitation, any debt, preferred
stock, rights, options, warrants or other instrument that is at any time
convertible into or exchangeable for, or otherwise entitles the holder
thereof to receive, Common Stock.
"Company Counsel" means Frascona, Joiner, Goodman and Greenstein,
P.C.
"Conversion Price" shall have the meaning ascribed to such term in
the Debentures.
"Debentures" means, the Secured Convertible Debentures due,
subject to the terms therein, one year from their date of issuance,
issued by the Company to the Purchasers hereunder, in the form of Exhibit
A.
"Disclosure Schedules" shall have the meaning ascribed to such term
in Section 3.1 hereof.
"Effective Date" means the date that the initial Registration
Statement filed by the Company pursuant to the Registration Rights
Agreement is first declared effective by the Commission.
"Escrow Agent" shall have the meaning set forth in the Escrow
Agreement.
"Escrow Agreement" shall mean the Escrow Agreement in substantially
the form of Exhibit F hereto executed and delivered contemporaneously
with this Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exempt Issuance" means the issuance of (a) shares of Common Stock
or options to employees, officers or directors of the Company pursuant to
any stock or option plan duly adopted by a majority of the non-employee
members of the Board of Directors of the Company or a majority of the
members of a committee of non-employee directors established for such
purpose, (b) securities upon the exercise of or conversion of any
securities issued hereunder, convertible securities, options or warrants
issued and outstanding on the date of this Agreement, provided that such
securities have not been amended since the date of this Agreement to
increase the number of such securities, and (c) securities issued
pursuant to acquisitions or strategic transactions, provided any such
issuance shall only be to a Person which is, itself or through its
subsidiaries, an operating company in a business synergistic with the
business of the Company and in which the Company receives benefits in
addition to the investment of funds, but shall not include a transaction
in which the Company is issuing securities primarily for the purpose of
raising capital or to an entity whose primary business is investing in
securities.
"First Closing" shall have the meaning ascribed to such term in
Section 2.1 hereof.
"First Closing Date" means the date of the First Closing.
"FW" means Feldman Weinstein LLP with offices at 420 Lexington
Avenue, Suite 2620, New York, New York 10170-0002.
"GAAP" shall have the meaning ascribed to such term in Section
3.1(h) hereof.
"Liens" means a lien, charge, security interest, encumbrance, right
of first refusal, preemptive right or other restriction.
"Material Adverse Effect" shall have the meaning assigned to such
term in Section 3.1(b) hereof.
"Material Permits" shall have the meaning ascribed to such term in
Section 3.1(m).
"Person" means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or
subdivision thereof) or other entity of any kind.
"Principal Amount" shall mean, as to each Purchaser, the amounts
set forth below such Purchaser's signature block on the signature pages
hereto and next to the heading "Principal Amount", in United States
Dollars, which shall equal such Purchaser's aggregate Subscription Amount
multiplied by 1.35.
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated the date hereof, among the Company and the Purchasers,
in the form of Exhibit B attached hereto.
"Registration Statement" means a registration statement meeting the
requirements set forth in the Registration Rights Agreement and covering
the resale of the Underlying Shares and the Additional Investment Right
Shares by each Purchaser as provided for in the Registration Rights
Agreement.
"Required Approvals" shall have the meaning ascribed to such term
in Section 3.1(e).
"Required Minimum" means, as of any date, the maximum aggregate
number of shares of Common Stock then issued or potentially issuable in
the future pursuant to the Transaction Documents, including any
Underlying Shares issuable upon exercise or conversion in full of all
Warrants and Debentures, ignoring any conversion or exercise limits set
forth therein, and assuming that the Conversion Price is at all times on
and after the date of determination 75% of the then Conversion Price on
the Trading Day immediately prior to the date of determination.
"Rule 144" means Rule 144 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"SEC Reports" shall have the meaning ascribed to such term in
Section 3.1(h) hereof.
"Second Closing" shall have the meaning ascribed to such term in
Section 2.1 hereof.
"Second Closing Date" means the date of the Second Closing.
"Securities" means the Debentures, the Warrants, the Warrant
Shares, the Additional Investment Rights, the Additional Investment Right
Shares and the Underlying Shares.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Agreement" means the Security Agreement, dated the date
hereof, among the Company and the Purchasers, in the form of Exhibit G
attached hereto.
"Security Documents" means the Security Agreement and any other
documents and filing required thereunder in order to grant the Purchasers
a perfected security interest in all of the assets of the Company,
including all UCC-1 filing receipts.
"Subscription Amount" means, as to each Purchaser, the amounts set
forth below such Purchaser's signature block on the signature pages
hereto and next to the headings "First Closing Subscription Amount" and
"Second Closing Subscription Amount", in United States Dollars and in
immediately available funds.
"Subsequent Financing" shall have the meaning ascribed to such
term in Section 4.13.
"Subsidiary" means any subsidiary of the Company as set forth on
Schedule 3.1(a).
"Trading Day" means a day on which the Common Stock is traded on a
Trading Market.
"Trading Market" means the following markets or exchanges on which
the Common Stock is listed or quoted for trading on the date in question:
the Nasdaq SmallCap Market, the American Stock Exchange, the New York
Stock Exchange, the Nasdaq National Market or the OTC Bulletin Board.
"Transaction Documents" means this Agreement, the Debentures, the
Security Agreement, the Escrow Agreement, the Warrants, the Additional
Investment Rights, the Registration Rights Agreement and any other
documents or agreements executed in connection with the transactions
contemplated hereunder.
"Underlying Shares" means the shares of Common Stock issuable upon
conversion of the Debentures and upon exercise of the Warrants.
"VWAP" means, for any date, the price determined by the first of
the following clauses that applies: (a) if the Common Stock is then
listed or quoted on a Trading Market, the daily volume weighted average
price of the Common Stock for such date (or the nearest preceding date)
on the Trading Market on which the Common Stock is then listed or quoted
as reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30
a.m. EST to 4:02 p.m. Eastern Time) using the VAP function; (b) if the
Common Stock is not then listed or quoted on the Trading Market and if
prices for the Common Stock are then reported in the "Pink Sheets"
published by the National Quotation Bureau Incorporated (or a similar
organization or agency succeeding to its functions of reporting prices),
the most recent bid price per share of the Common Stock so reported; or
(c) in all other cases, the fair market value of a share of Common Stock
as determined by a nationally recognized-independent appraiser selected
in good faith by Purchasers holding a majority of the principal amount of
Shares then outstanding.
"Warrants" means collectively the Common Stock purchase warrants,
in the form of Exhibit C delivered to the Purchasers at the First Closing
in accordance with Section 2.2(a)(iii) hereof, which Warrants shall be
exercisable immediately and have a term of exercise equal to 5 years.
"Warrant Shares" means the shares of Common Stock issuable upon
exercise of the Warrants.
ARTICLE II.
PURCHASE AND SALE
2.1Closing. The Company agrees to sell, and each Purchaser agrees to
purchase in the aggregate, severally and not jointly, up to $1,350,000
principal amount of the Debentures. The Closings shall take place in two
stages as set forth below (respectively, the "First Closing" and the "Second
Closing"). Upon satisfaction of the conditions set forth in Section 2.3, each
Closing shall occur at the offices of Escrow Agent, or such other location as
the parties shall mutually agree.
(a)First Closing. The First Closing shall be for 50% of the
aggregate Subscription Amount, and shall occur within 5 Trading Days of the
date hereof.
(b)Second Closing. The Second Closing shall be for 50% of the
aggregate Subscription Amount, and shall occur on or before the 5th Trading Day
following the Effective Date.
2.2 Deliveries
..
a) At or prior to each Closing, unless otherwise indicated below,
the Company shall deliver or cause to be delivered to the Escrow
Agent with respect to each Purchaser the following:
(i)as to the First Closing only, this Agreement duly executed
by the Company;
(ii)a Debenture with a principal amount equal to such
Purchaser's Subscription Amount as to the applicable
Closing, shall be multiplied by 1.35, registered in the
name of such Purchaser;
(iii) as to the First Closing only, a Warrant, registered in
the name of such Purchaser, pursuant to which such
Purchaser shall have the right to acquire up to the number
of shares of Common Stock equal to 100% of such
Purchaser's aggregate Subscription Amount for both
Closings divided by the Conversion Price on the date
hereof at an exercise price of $0.12, subject to
adjustment therein;
(iv)as to the First Closing only, a copy of an Additional
Investment Right, registered in the name of such
Purchaser, pursuant to which such Purchaser shall have the
right to purchase up to 100% of such Purchaser's aggregate
Subscription Amount for both Closings divided by the
Conversion Price on the date hereof and which shall be
exercisable immediately upon issuance until the earlier of
(a) the 6 month anniversary of the Effective Date, subject
to extension therein, and (b) the 18 month anniversary of
the First Closing Date at an exercise price equal to
$0.10, subject to adjustment therein (the "Additional
Investment Right Exercise Price"), which Additional
Investment Right shall otherwise in the form of Exhibit D
attached hereto;
(v)as to the First Closing only, the Registration Rights
Agreement duly executed by the Company;
(vi)as to the First Closing only, the Security Agreement,
duly executed by the Company, along with all the Security
Documents;
(vii) as to the First Closing only, the Escrow Agreement duly
executed by the Company; and
(viii)as to the First Closing only, a legal opinion of
Company Counsel, in the form of Exhibit E attached hereto.
b) At or prior to each Closing, unless otherwise indicated below,
each Purchaser shall deliver or cause to be delivered to the
Escrow Agent the following:
(i) as to the First Closing only, this Agreement duly
executed by such Purchaser;
(ii) such Purchaser's Subscription Amount, as to the
applicable Closing, by wire transfer to the account of the Escrow Agent;
(iii) as to the First Closing only, the Security Agreement,
duly executed by the Company;
(iv) as to the First Closing only, the Escrow Agreement duly
executed by such Purchaser; and
(v) as to the First Closing only, the Registration Rights
Agreement duly executed by such Purchaser.
1.2Closing Conditions.
a) The obligations of the Company hereunder in connection with each
Closing are subject to the following conditions being met:
(i) the accuracy in all material respects when made and on
each Closing Date of the representations and warranties of the Purchasers
contained herein;
(ii) all obligations, covenants and agreements of the
Purchasers required to be performed at or prior to each Closing Date shall have
been performed; and
(iii) the delivery by the Purchasers of the items set forth
in Section 2.2(b) of this Agreement.
a) The respective obligations of the Purchasers hereunder in
connection with each Closing are subject to the following
conditions being met:
(i) the accuracy in all material respects on each Closing
Date of the representations and warranties of the Company contained herein;
(ii) all obligations, covenants and agreements of the
Company required to be performed at or prior to each Closing Date shall have
been performed;
(iii) the delivery by the Company of the items set forth in
Section 2.2(a) of this Agreement;
(iv) there shall have been no Material Adverse Effect with
respect to the Company since the applicable Closing Date; and
(v) From the date hereof to such Closing Date, trading in
the Common Stock shall not have been suspended by the Commission (except for
any suspension of trading of limited duration agreed to by the Company, which
suspension shall be terminated prior to each Closing), and, at any time prior
to each Closing Date, trading in securities generally as reported by Bloomberg
Financial Markets shall not have been suspended or limited, or minimum prices
shall not have been established on securities whose trades are reported by such
service, or on any Trading Market, nor shall a banking moratorium have been
declared either by the United States or New York State authorities nor shall
there have occurred any material outbreak or escalation of hostilities or other
national or international calamity of such magnitude in its effect on, or any
material adverse change in, any financial market which, in each case, in the
reasonable judgment of each Purchaser, makes it impracticable or inadvisable to
purchase the Debentures at each Closing.
a) As to the Second Closing only, the Company shall have filed with
the Commission the Registration Statement registering all of the
Underlying Shares and, on or before the 6-month anniversary of
the date hereof, such Registration Statement shall have been
declared effective by the Commission as to all such securities
and been maintained effective since such date.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
1.1Representations and Warranties of the Company. Except as set forth
under the corresponding section of the disclosure schedules delivered to the
Purchasers concurrently herewith (the "Disclosure Schedules") which Disclosure
Schedules shall be deemed a part hereof, the Company hereby makes the
representations and warranties set forth below to each Purchaser.
(a)Subsidiaries. All of the direct and indirect subsidiaries of
the Company are set forth on Schedule 3.1(a). The Company owns, directly or
indirectly, all of the capital stock or other equity interests of each
Subsidiary free and clear of any Liens, and all the issued and outstanding
shares of capital stock of each Subsidiary are validly issued and are fully
paid, non-assessable and free of preemptive and similar rights to subscribe for
or purchase securities. If the Company has no subsidiaries, then references in
the Transaction Documents to the Subsidiaries will be disregarded.
(b)Organization and Qualification. Each of the Company and the
Subsidiaries is an entity duly incorporated or otherwise organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization (as applicable), with the requisite power and
authority to own and use its properties and assets and to carry on its business
as currently conducted. Neither the Company nor any Subsidiary is in violation
or default of any of the provisions of its respective certificate or articles
of incorporation, bylaws or other organizational or charter documents. Each of
the Company and the Subsidiaries is duly qualified to conduct business and is
in good standing as a foreign corporation or other entity in each jurisdiction
in which the nature of the business conducted or property owned by it makes
such qualification necessary, except where the failure to be so qualified or in
good standing, as the case may be, could not have or reasonably be expected to
result in (i) a material adverse effect on the legality, validity or
enforceability of any Transaction Document, (ii) a material adverse effect on
the results of operations, assets, business, prospects or financial condition
of the Company and the Subsidiaries, taken as a whole, or (iii) a material
adverse effect on the Company's ability to perform in any material respect on a
timely basis its obligations under any Transaction Document (any of (i), (ii)
or (iii), a "Material Adverse Effect") and no Proceeding has been instituted in
any such jurisdiction revoking, limiting or curtailing or seeking to revoke,
limit or curtail such power and authority or qualification.
(c)Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents and otherwise to carry out
its obligations thereunder. The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated thereby have been duly authorized by all necessary
action on the part of the Company and no further action is required by the
Company in connection therewith other than in connection with the Required
Approvals. Each Transaction Document has been (or upon delivery will have
been) duly executed by the Company and, when delivered in accordance with the
terms hereof, will constitute the valid and binding obligation of the Company
enforceable against the Company in accordance with its terms except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors' rights
generally and (ii) as limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies.
(d)No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
other transactions contemplated thereby do not and will not: (i) conflict with
or violate any provision of the Company's or any Subsidiary's certificate or
articles of incorporation, bylaws or other organizational or charter documents,
or (ii) conflict with, or constitute a default (or an event that with notice or
lapse of time or both would become a default) under, result in the creation of
any Lien upon any of the properties or assets of the Company or any Subsidiary,
or give to others any rights of termination, amendment, acceleration or
cancellation (with or without notice, lapse of time or both) of, any agreement,
credit facility, debt or other instrument (evidencing a Company or Subsidiary
debt or otherwise) or other understanding to which the Company or any
Subsidiary is a party or by which any property or asset of the Company or any
Subsidiary is bound or affected, or (iii) subject to the Required Approvals,
conflict with or result in a violation of any law, rule, regulation, order,
judgment, injunction, decree or other restriction of any court or governmental
authority to which the Company or a Subsidiary is subject (including federal
and state securities laws and regulations), or by which any property or asset
of the Company or a Subsidiary is bound or affected, or (iv) conflict with or
violate the terms of any agreement by which the Company or any Subsidiary is
bound or to which any property or asset of the Company or any Subsidiary is
bound or affected; except in the case of each of clauses (ii) and (iii), such
as could not have or reasonably be expected to result in a Material Adverse
Effect.
(e)Filings, Consents and Approvals. The Company is not required to
obtain any consent, waiver, authorization or order of, give any notice to, or
make any filing or registration with, any court or other federal, state, local
or other governmental authority or other Person in connection with the
execution, delivery and performance by the Company of the Transaction
Documents, other than (i) filings required pursuant to Section 4.6, (ii) the
filing with the Commission of the Registration Statement, (iii) the notice
and/or application(s) to each applicable Trading Market for the issuance and
sale of the Debentures and Warrants and the listing of the Underlying Shares,
the Warrant Shares and the Additional Investment Right Shares for trading
thereon in the time and manner required thereby, and (iv) the filing of Form D
with the Commission and such filings as are required to be made under
applicable state securities laws (collectively, the "Required Approvals").
(f)Issuance of the Securities. The Securities are duly authorized
and, when issued and paid for in accordance with the applicable Transaction
Documents, will be duly and validly issued, fully paid and nonassessable, free
and clear of all Liens imposed by the Company other than restrictions on
transfer provided for in the Transaction Documents. The Underlying Shares and
Additional Investment Rights Shares, when issued in accordance with the terms
of the Transaction Documents, will be validly issued, fully paid and
nonassessable, free and clear of all Liens imposed by the Company. The Company
has reserved from its duly authorized capital stock a number of shares of
Common Stock for Underlying Shares and Additional Investment Rights Shares at
least equal to the Required Minimum on the date hereof. The Company has not,
and to the knowledge of the Company, no Affiliate of the Company has sold,
offered for sale or solicited offers to buy or otherwise negotiated in respect
of any security (as defined in Section 2 of the Securities Act) that would be
integrated with the offer or sale of the Securities in a manner that would
require the registration under the Securities Act of the sale of the Securities
to the Purchasers, or that would be integrated with the offer or sale of the
Securities for purposes of the rules and regulations of any Trading Market.
(g)Capitalization. The capitalization of the Company is as
described in the Company's most recent periodic report filed with the
Commission. The Company has not issued any capital stock since such filing
other than pursuant to the exercise of employee stock options under the
Company's stock option plans, the issuance of shares of Common Stock to
employees pursuant to the Company's employee stock purchase plan and pursuant
to the conversion or exercise of outstanding Common Stock Equivalents. No
Person has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents. Except as a result of the purchase
and sale of the Securities, there are no outstanding options, warrants, script
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities, rights or obligations convertible into or
exchangeable for, or giving any Person any right to subscribe for or acquire,
any shares of Common Stock, or contracts, commitments, understandings or
arrangements by which the Company or any Subsidiary is or may become bound to
issue additional shares of Common Stock, or securities or rights convertible or
exchangeable into shares of Common Stock. The issuance and sale of the
Securities will not obligate the Company to issue shares of Common Stock or
other securities to any Person (other than the Purchasers) and will not result
in a right of any holder of Company securities to adjust the exercise,
conversion, exchange or reset price under such securities. All of the
outstanding shares of capital stock of the Company are validly issued, fully
paid and nonassessable, have been issued in compliance with all federal and
state securities laws, and none of such outstanding shares was issued in
violation of any preemptive rights or similar rights to subscribe for or
purchase securities. No further approval or authorization of any stockholder,
the Board of Directors of the Company or others is required for the issuance
and sale of the Securities. Except as disclosed in the SEC Reports, there are
no stockholders agreements, voting agreements or other similar agreements with
respect to the Company's capital stock to which the Company is a party or, to
the knowledge of the Company, between or among any of the Company's
stockholders.
(h)SEC Reports; Financial Statements. The Company has filed all
reports required to be filed by it under the Securities Act and the Exchange
Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years
preceding the date hereof (or such shorter period as the Company was required
by law to file such material) (the foregoing materials, including the exhibits
thereto, being collectively referred to herein as the "SEC Reports") on a
timely basis or has received a valid extension of such time of filing and has
filed any such SEC Reports prior to the expiration of any such extension. As
of their respective dates, the SEC Reports complied in all material respects
with the requirements of the Securities Act and the Exchange Act and the rules
and regulations of the Commission promulgated thereunder, and none of the SEC
Reports, when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company
included in the SEC Reports comply in all material respects with applicable
accounting requirements and the rules and regulations of the Commission with
respect thereto as in effect at the time of filing. Such financial statements
have been prepared in accordance with United States generally accepted
accounting principles applied on a consistent basis during the periods involved
("GAAP"), except as may be otherwise specified in such financial statements or
the notes thereto and except that unaudited financial statements may not
contain all footnotes required by GAAP, and fairly present in all material
respects the financial position of the Company and its consolidated
subsidiaries as of and for the dates thereof and the results of operations and
cash flows for the periods then ended, subject, in the case of unaudited
statements, to normal, immaterial, year-end audit adjustments.
(i)Material Changes. Since the date of the latest audited
financial statements included within the SEC Reports, except as specifically
disclosed in the SEC Reports, (i) there has been no event, occurrence or
development that has had or that could reasonably be expected to result in a
Material Adverse Effect, (ii) the Company has not incurred any liabilities
(contingent or otherwise) other than (A) trade payables and accrued expenses
incurred in the ordinary course of business consistent with past practice and
(B) liabilities not required to be reflected in the Company's financial
statements pursuant to GAAP or required to be disclosed in filings made with
the Commission, (iii) the Company has not altered its method of accounting,
(iv) the Company has not declared or made any dividend or distribution of cash
or other property to its stockholders or purchased, redeemed or made any
agreements to purchase or redeem any shares of its capital stock and (v) the
Company has not issued any equity securities to any officer, director or
Affiliate, except pursuant to existing Company stock option plans. The Company
does not have pending before the Commission any request for confidential
treatment of information.
(j)Litigation. There is no action, suit, inquiry, notice of
violation, proceeding or investigation pending or, to the knowledge of the
Company, threatened against or affecting the Company, any Subsidiary or any of
their respective properties before or by any court, arbitrator, governmental or
administrative agency or regulatory authority (federal, state, county, local or
foreign) (collectively, an "Action") which (i) adversely affects or challenges
the legality, validity or enforceability of any of the Transaction Documents or
the Securities or (ii) could, if there were an unfavorable decision, have or
reasonably be expected to result in a Material Adverse Effect. Neither the
Company nor any Subsidiary, nor any director or officer thereof, is or has been
the subject of any Action involving a claim of violation of or liability under
federal or state securities laws or a claim of breach of fiduciary duty. There
has not been, and to the knowledge of the Company, there is not pending or
contemplated, any investigation by the Commission involving the Company or any
current or former director or officer of the Company. The Commission has not
issued any stop order or other order suspending the effectiveness of any
registration statement filed by the Company or any Subsidiary under the
Exchange Act or the Securities Act.
(k)Labor Relations. No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company which could reasonably be expected to result in a Material Adverse
Effect.
(l)Compliance. Neither the Company nor any Subsidiary (i) is in
default under or in violation of (and no event has occurred that has not been
waived that, with notice or lapse of time or both, would result in a default by
the Company or any Subsidiary under), nor has the Company or any Subsidiary
received notice of a claim that it is in default under or that it is in
violation of, any indenture, loan or credit agreement or any other agreement or
instrument to which it is a party or by which it or any of its properties is
bound (whether or not such default or violation has been waived), (ii) is in
violation of any order of any court, arbitrator or governmental body, or (iii)
is or has been in violation of any statute, rule or regulation of any
governmental authority, including without limitation all foreign, federal,
state and local laws applicable to its business except in each case as could
not have a Material Adverse Effect.
(m)Regulatory Permits. The Company and the Subsidiaries possess
all certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports, except where the failure
to possess such permits could not have or reasonably be expected to result in a
Material Adverse Effect ("Material Permits"), and neither the Company nor any
Subsidiary has received any notice of proceedings relating to the revocation or
modification of any Material Permit.
(n)Title to Assets. The Company and the Subsidiaries have good and
marketable title in fee simple to all real property owned by them that is
material to the business of the Company and the Subsidiaries and good and
marketable title in all personal property owned by them that is material to the
business of the Company and the Subsidiaries, in each case free and clear of
all Liens, except for Liens as do not materially affect the value of such
property and do not materially interfere with the use made and proposed to be
made of such property by the Company and the Subsidiaries and Liens for the
payment of federal, state or other taxes, the payment of which is neither
delinquent nor subject to penalties. Any real property and facilities held
under lease by the Company and the Subsidiaries are held by them under valid,
subsisting and enforceable leases of which the Company and the Subsidiaries are
in compliance.
(o)Patents and Trademarks. The Company and the Subsidiaries have,
or have rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, copyrights, licenses and other
similar rights necessary or material for use in connection with their
respective businesses as described in the SEC Reports and which the failure to
so have could have a Material Adverse Effect (collectively, the "Intellectual
Property Rights"). Neither the Company nor any Subsidiary has received a
written notice that the Intellectual Property Rights used by the Company or any
Subsidiary violates or infringes upon the rights of any Person. To the
knowledge of the Company, all such Intellectual Property Rights are enforceable
and there is no existing infringement by another Person of any of the
Intellectual Property Rights of others.
(p)Insurance. The Company and the Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in which the
Company and the Subsidiaries are engaged, including but not limited to, a
directors and officers insurance policy for an amount at least equal to the
gross proceeds raised pursuant to the Purchase Agreement. To the best of
Company's knowledge, such insurance contracts and policies are accurate and
complete. Neither the Company nor any Subsidiary has any reason to believe
that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as
may be necessary to continue its business without a significant increase in
cost.
(q)Transactions With Affiliates and Employees. Except as set forth
in the SEC Reports, none of the officers or directors of the Company and, to
the knowledge of the Company, none of the employees of the Company is presently
a party to any transaction with the Company or any Subsidiary (other than for
services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Company, any entity in which any officer, director, or any
such employee has a substantial interest or is an officer, director, trustee or
partner, in each case in excess of $60,000 other than (i) for payment of salary
or consulting fees for services rendered, (ii) reimbursement for expenses
incurred on behalf of the Company and (iii) for other employee benefits,
including stock option agreements under any stock option plan of the Company.
(r)Sarbanes-Oxley; Internal Accounting Controls. The Company is in
material compliance with all provisions of the Sarbanes-Oxley Act of 2002 which
are applicable to it as of each Closing Date. The Company and the Subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
GAAP and to maintain asset accountability, (iii) access to assets is permitted
only in accordance with management's general or specific authorization, and
(iv) the recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with respect to
any differences. The Company has established disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and
designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its subsidiaries, is made known
to the certifying officers by others within those entities, particularly during
the period in which the Company's most recently filed periodic report under the
Exchange Act, as the case may be, is being prepared. The Company's certifying
officers have evaluated the effectiveness of the Company's controls and
procedures as of the date prior to the filing date of the most recently filed
periodic report under the Exchange Act (such date, the "Evaluation Date"). The
Company presented in its most recently filed periodic report under the Exchange
Act the conclusions of the certifying officers about the effectiveness of the
disclosure controls and procedures based on their evaluations as of the
Evaluation Date. Since the Evaluation Date, there have been no significant
changes in the Company's internal controls (as such term is defined in Item
307(b) of Regulation S-K under the Exchange Act) or, to the Company's
knowledge, in other factors that could significantly affect the Company's
internal controls.
(s)Certain Fees. No brokerage or finder's fees or commissions are
or will be payable by the Company to any broker, financial advisor or
consultant, finder, placement agent, investment banker, bank or other Person
with respect to the transactions contemplated by this Agreement. The
Purchasers shall have no obligation with respect to any fees or with respect to
any claims made by or on behalf of other Persons for fees of a type
contemplated in this Section that may be due in connection with the
transactions contemplated by this Agreement.
(t)Private Placement. Assuming the accuracy of the Purchasers
representations and warranties set forth in Section 3.2, no registration under
the Securities Act is required for the offer and sale of the Securities by the
Company to the Purchasers as contemplated hereby. The issuance and sale of the
Securities hereunder does not contravene the rules and regulations of the
Trading Market.
(u)Investment Company. The Company is not, and is not an Affiliate
of, and immediately after receipt of payment for the Securities, will not be or
be an Affiliate of, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended. The Company shall conduct its
business in a manner so that it will not become subject to the Investment
Company Act.
(v)Registration Rights. No Person has any right to cause the
Company to effect the registration under the Securities Act of any securities
of the Company.
(w)Listing and Maintenance Requirements. The Company's Common
Stock is registered pursuant to Section 12(g) of the Exchange Act, and the
Company has taken no action designed to, or which to its knowledge is likely to
have the effect of, terminating the registration of the Common Stock under the
Exchange Act nor has the Company received any notification that the Commission
is contemplating terminating such registration. The Company has not, in the 12
months preceding the date hereof, received notice from any Trading Market on
which the Common Stock is or has been listed or quoted to the effect that the
Company is not in compliance with the listing or maintenance requirements of
such Trading Market. The Company is, and has no reason to believe that it will
not in the foreseeable future continue to be, in compliance with all such
listing and maintenance requirements.
(x)Application of Takeover Protections. The Company and its Board
of Directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar anti-
takeover provision under the Company's Certificate of Incorporation (or similar
charter documents) or the laws of its state of incorporation that is or could
become applicable to the Purchasers as a result of the Purchasers and the
Company fulfilling their obligations or exercising their rights under the
Transaction Documents, including without limitation as a result of the
Company's issuance of the Securities and the Purchasers' ownership of the
Securities.
(y)Disclosure. The Company confirms that neither it nor any other
Person acting on its behalf has provided any of the Purchasers or their agents
or counsel with any information that constitutes or might constitute material,
nonpublic information. The Company understands and confirms that the
Purchasers will rely on the foregoing representations and covenants in
effecting transactions in securities of the Company. All disclosure provided
to the Purchasers regarding the Company, its business and the transactions
contemplated hereby, including the Disclosure Schedules to this Agreement,
furnished by or on behalf of the Company with respect to the representations
and warranties made herein are true and correct with respect to such
representations and warranties and do not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading. The Company acknowledges and agrees that no Purchaser
makes or has made any representations or warranties with respect to the
transactions contemplated hereby other than those specifically set forth in
Section 3.2 hereof.
(z)No Integrated Offering. Assuming the accuracy of the Purchasers'
representations and warranties set forth in Section 3.2, neither the Company,
nor any of its affiliates, nor any Person acting on its or their behalf has,
directly or indirectly, made any offers or sales of any security or solicited
any offers to buy any security, under circumstances that would cause this
offering of the Securities to be integrated with prior offerings by the Company
for purposes of the Securities Act or any applicable shareholder approval
provisions, including, without limitation, under the rules and regulations of
any exchange or automated quotation system on which any of the securities of
the Company are listed or designated.
(aa) Solvency. Based on the financial condition of the Company as
of each Closing Date after giving effect to the receipt by the Company of the
proceeds from the sale of the Securities hereunder, (i) the Company's fair
saleable value of its assets exceeds the amount that will be required to be
paid on or in respect of the Company's existing debts and other liabilities
(including known contingent liabilities) as they mature; (ii) the Company's
assets do not constitute unreasonably small capital to carry on its business
for the current fiscal year as now conducted and as proposed to be conducted
including its capital needs taking into account the particular capital
requirements of the business conducted by the Company, and projected capital
requirements and capital availability thereof; and (iii) the current cash flow
of the Company, together with the proceeds the Company would receive, were it
to liquidate all of its assets, after taking into account all anticipated uses
of the cash, would be sufficient to pay all amounts on or in respect of its
debt when such amounts are required to be paid. The Company does not intend to
incur debts beyond its ability to pay such debts as they mature (taking into
account the timing and amounts of cash to be payable on or in respect of its
debt).
(bb) Form S-3 Eligibility.The Company is eligible to register the
resale of the Underlying Shares for resale by the Purchaser on Form S-3
promulgated under the Securities Act.
(cc) Tax Status. Except for matters that would not, individually
or in the aggregate, have or reasonably be expected to result in a Material
Adverse Effect, the Company and each Subsidiary has filed all necessary
federal, state and foreign income and franchise tax returns and has paid or
accrued all taxes shown as due thereon, and the Company has no knowledge of a
tax deficiency which has been asserted or threatened against the Company or any
Subsidiary.
(dd) No General Solicitation. Neither the Company nor any person
acting on behalf of the Company has offered or sold any of the Securities by
any form of general solicitation or general advertising. The Company has
offered the Securities for sale only to the Purchasers and certain other
"accredited investors" within the meaning of Rule 501 under the Securities Act.
(ee) Foreign Corrupt Practices. Neither the Company, nor to the
knowledge of the Company, any agent or other person acting on behalf of the
Company, has (i) directly or indirectly, used any corrupt funds for unlawful
contributions, gifts, entertainment or other unlawful expenses related to
foreign or domestic political activity, (ii) made any unlawful payment to
foreign or domestic government officials or employees or to any foreign or
domestic political parties or campaigns from corporate funds, (iii) failed to
disclose fully any contribution made by the Company (or made by any person
acting on its behalf of which the Company is aware) which is in violation of
law, or (iv) violated in any material respect any provision of the Foreign
Corrupt Practices Act of 1977, as amended
(ff)Accountants. The Company's accountants are set forth on
Schedule 3.1(ff) of the Disclosure Schedule. To the Company's knowledge, such
accountants, who the Company expects will express their opinion with respect to
the financial statements to be included in the Company's Annual Report on Form
10-KSB for the year ended February 28, 2004 are independent accountants as
required by the Securities Act.
(gg) Seniority. As of each Closing Date, no indebtedness of the
Company is senior to the Debentures in right of payment, whether upon
liquidation or dissolution, or otherwise, other than indebtedness secured by
purchase money security interests (which is senior only as to underlying assets
covered thereby) and capital lease obligations (which is senior only as to the
property covered thereby).
(hh) No Disagreements with Accountants and Lawyers. There are no
disagreements of any kind presently existing, or reasonably anticipated by the
Company to arise, between the accountants and lawyers formerly or presently
employed by the Company and the Company is current with respect to any fees
owed to its accountants and lawyers.
(ii)Acknowledgment Regarding Purchasers' Purchase of Securities.
The Company acknowledges and agrees that each of the Purchasers is acting
solely in the capacity of an arm's length purchaser with respect to the
Transaction Documents and the transactions contemplated hereby. The Company
further acknowledges that no Purchaser is acting as a financial advisor or
fiduciary of the Company (or in any similar capacity) with respect to this
Agreement and the transactions contemplated hereby and any advice given by any
Purchaser or any of their respective representatives or agents in connection
with this Agreement and the transactions contemplated hereby is merely
incidental to the Purchasers' purchase of the Securities. The Company further
represents to each Purchaser that the Company's decision to enter into this
Agreement has been based solely on the independent evaluation of the
transactions contemplated hereby by the Company and its representatives.
1.2Representations and Warranties of the Purchasers. Each Purchaser
hereby, for itself and for no other Purchaser, represents and warrants as of
the date hereof and as of each Closing Date to the Company as follows:
(a)Organization; Authority. Such Purchaser is an entity duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with full right, corporate or partnership
power and authority to enter into and to consummate the transactions
contemplated by the Transaction Documents and otherwise to carry out its
obligations thereunder. The execution, delivery and performance by such
Purchaser of the transactions contemplated by this Agreement have been duly
authorized by all necessary corporate or similar action on the part of such
Purchaser. Each Transaction Document to which it is a party has been duly
executed by such Purchaser, and when delivered by such Purchaser in accordance
with the terms hereof, will constitute the valid and legally binding obligation
of such Purchaser, enforceable against it in accordance with its terms, except
(i) as limited by general equitable principles and applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors' rights generally, (ii) as limited by laws
relating to the availability of specific performance, injunctive relief or
other equitable remedies and (iii) insofar as indemnification and contribution
provisions may be limited by applicable law.
(b)Purchaser Representation. Such Purchaser understands that the
Securities are "restricted securities" and have not been registered under the
Securities Act or any applicable state securities law and is acquiring the
Securities as principal for its own account and not with a view to or for
distributing or reselling such Securities or any part thereof, has no present
intention of distributing any of such Securities and has no arrangement or
understanding with any other persons regarding the distribution of such
Securities (this representation and warranty not limiting such Purchaser's
right to sell the Securities pursuant to the Registration Statement or
otherwise in compliance with applicable federal and state securities laws).
Such Purchaser is acquiring the Securities hereunder in the ordinary course of
its business. Such Purchaser does not have any agreement or understanding,
directly or indirectly, with any Person to distribute any of the Securities.
(c)Purchaser Status. At the time such Purchaser was offered the
Securities, it was, and at the date hereof it is, and on each date on which it
exercises any Warrants or Additional Investment Rights or converts any
Debentures it will be either: (i) an "accredited investor" as defined in Rule
501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a
"qualified institutional buyer" as defined in Rule 144A(a) under the Securities
Act. Such Purchaser is not required to be registered as a broker-dealer under
Section 15 of the Exchange Act.
(d)Experience of Such Purchaser. Such Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has
so evaluated the merits and risks of such investment. Such Purchaser is able
to bear the economic risk of an investment in the Securities and, at the
present time, is able to afford a complete loss of such investment.
(e)General Solicitation. Such Purchaser is not purchasing the
Securities as a result of any advertisement, article, notice or other
communication regarding the Securities published in any newspaper, magazine or
similar media or broadcast over television or radio or presented at any seminar
or any other general solicitation or general advertisement.
The Company acknowledges and agrees that each Purchaser does not make or
has not made any representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in this Section
3.2.
ARTICLE IV.
OTHER AGREEMENTS OF THE PARTIES
2.1Transfer Restrictions.
(a)The Securities may only be disposed of in compliance with state
and federal securities laws. In connection with any transfer of Securities
other than pursuant to an effective registration statement or Rule 144, to the
Company or to an Affiliate of a Purchaser or in connection with a pledge as
contemplated in Section 4.1(b), the Company may require the transferor thereof
to provide to the Company an opinion of counsel selected by the transferor and
reasonably acceptable to the Company, the form and substance of which opinion
and shall be reasonably satisfactory to the Company, to the effect that such
transfer does not require registration of such transferred Securities under the
Securities Act. As a condition of transfer, any such transferee shall agree in
writing to be bound by the terms of this Agreement and shall have the rights of
a Purchaser under this Agreement and the Registration Rights Agreement.
(b)The Purchasers agree to the imprinting, so long as is required
by this Section 4.1(b), of a legend on any of the Securities in the following
form:
[NEITHER] THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE [EXERCISABLE] [CONVERTIBLE]] HAVE BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF
COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE
REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE
SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH
SECURITIES.
The Company acknowledges and agrees that a Purchaser may from time
to time pledge pursuant to a bona fide margin agreement with a registered
broker-dealer or grant a security interest in some or all of the
Securities to a financial institution that is an "accredited investor" as
defined in Rule 501(a) under the Securities Act and who agrees to be
bound by the provisions of this Agreement and the Registration Rights
Agreement and, if required under the terms of such arrangement, such
Purchaser may transfer pledged or secured Securities to the pledgees or
secured parties. Such a pledge or transfer would not be subject to
approval of the Company and no legal opinion of legal counsel of the
pledgee, secured party or pledgor shall be required in connection
therewith. Further, no notice shall be required of such pledge. At the
appropriate Purchaser's expense, the Company will execute and deliver
such reasonable documentation as a pledgee or secured party of Securities
may reasonably request in connection with a pledge or transfer of the
Securities, including, if the Securities are subject to registration
pursuant to the Registration Rights Agreement, the preparation and filing
of any required prospectus supplement under Rule 424(b)(3) under the
Securities Act or other applicable provision of the Securities Act to
appropriately amend the list of Selling Stockholders thereunder.
(c)Certificates evidencing the Underlying Shares and Additional
Investment Rights Shares shall not contain any legend (including the legend set
forth in Section 4.1(b) hereof): (i) while a registration statement (including
the Registration Statement) covering the resale of such security is effective
under the Securities Act, or (ii) following any sale of such Underlying Shares
and Additional Investment Rights Shares pursuant to Rule 144, or (iii) if such
Underlying Shares and Additional Investment Rights Shares are eligible for sale
under Rule 144(k), or (iv) if such legend is not required under applicable
requirements of the Securities Act (including judicial interpretations and
pronouncements issued by the staff of the Commission); provided, however, in
connection with the issuance of the Underlying Shares, each Purchaser,
severally and not jointly with the other Purchasers, hereby agrees to adhere to
and abide by all prospectus delivery requirements under the Securities Act and
rules and regulations of the Commission. The Company shall cause its counsel to
issue a legal opinion to the Company's transfer agent promptly after the
Effective Date if required by the Company's transfer agent to effect the
removal of the legend hereunder. If all or any portion of a Debenture, Warrant
or Additional Investment Rights is converted or exercised (as applicable) at a
time when there is an effective registration statement to cover the resale of
the Underlying Shares or Additional Investment Rights Shares, or if such
Underlying Shares or Additional Investment Rights Shares may be sold under Rule
144(k) or if such legend is not otherwise required under applicable
requirements of the Securities Act (including judicial interpretations thereof)
then such Underlying Shares or Additional Investment Rights Shares shall be
issued free of all legends. The Company agrees that following the Effective
Date or at such time as such legend is no longer required under this Section
4.1(c), it will, no later than three Trading Days following the delivery by a
Purchaser to the Company or the Company's transfer agent of a certificate
representing Underlying Shares or Additional Investment Rights Shares, as
applicable, issued with a restrictive legend (such third Trading Day, the
"Legend Removal Date"), deliver or cause to be delivered to such Purchaser a
certificate representing such shares that is free from all restrictive and
other legends. The Company may not make any notation on its records or give
instructions to any transfer agent of the Company that enlarge the restrictions
on transfer set forth in this Section.
(d)In addition to such Purchaser's other available remedies, the
Company shall pay to a Purchaser, in cash, as partial liquidated damages and
not as a penalty, for each $1,000 of Underlying Shares or Additional Investment
Rights Shares (based on the VWAP of the Common Stock on the date such
Securities are submitted to the Company's transfer agent) delivered for removal
of the restrictive legend and subject to this Section 4.1(c), $10 per Trading
Day (increasing to $20 per Trading Day 5 Trading Days after such damages have
begun to accrue) for each Trading Day after the Legend Removal Date until such
certificate is delivered without a legend. Nothing herein shall limit such
Purchaser's right to pursue actual damages for the Company's failure to deliver
certificates representing any Securities as required by the Transaction
Documents, and such Purchaser shall have the right to pursue all remedies
available to it at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief.
(e)Each Purchaser, severally and not jointly with the other
Purchasers, agrees that the removal of the restrictive legend from certificates
representing Securities as set forth in this Section 4.1 is predicated upon the
Company's reliance that the Purchaser will sell any Securities pursuant to
either the registration requirements of the Securities Act, including any
applicable prospectus delivery requirements, or an exemption therefrom.
2.2Acknowledgment of Dilution. The Company acknowledges that the
issuance of the Securities may result in dilution of the outstanding shares of
Common Stock, which dilution may be substantial under certain market
conditions. The Company further acknowledges that its obligations under the
Transaction Documents, including without limitation its obligation to issue the
Underlying Shares pursuant to the Transaction Documents, are unconditional and
absolute and not subject to any right of set off, counterclaim, delay or
reduction, regardless of the effect of any such dilution or any claim the
Company may have against any Purchaser and regardless of the dilutive effect
that such issuance may have on the ownership of the other stockholders of the
Company.
2.3Furnishing of Information. As long as any Purchaser owns Securities,
the Company covenants to timely file (or obtain extensions in respect thereof
and file within the applicable grace period) all reports required to be filed
by the Company after the date hereof pursuant to the Exchange Act. As long as
any Purchaser owns Securities, if the Company is not required to file reports
pursuant to the Exchange Act, it will prepare and furnish to the Purchasers and
make publicly available in accordance with Rule 144(c) such information as is
required for the Purchasers to sell the Securities under Rule 144. The Company
further covenants that it will take such further action as any holder of
Securities may reasonably request, all to the extent required from time to time
to enable such Person to sell such Securities without registration under the
Securities Act within the limitation of the exemptions provided by Rule 144.
2.4Integration. The Company shall not sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or
sale of the Securities in a manner that would require the registration under
the Securities Act of the sale of the Securities to the Purchasers or that
would be integrated with the offer or sale of the Securities for purposes of
the rules and regulations of any Trading Market.
2.5Conversion and Exercise Procedures. The form of Notice of Exercise
included in the Warrants and the form of Notice of Conversion included in the
Debentures set forth the totality of the procedures required of the Purchasers
in order to exercise the Warrants or convert the Debentures. No additional
legal opinion or other information or instructions shall be required of the
Purchasers to exercise their Warrants or convert their Debentures. The Company
shall honor exercises of the Warrants and conversions of the Debentures and
shall deliver Underlying Shares in accordance with the terms, conditions and
time periods set forth in the Transaction Documents.
2.6Securities Laws Disclosure; Publicity. The Company shall, by 8:30
a.m. Eastern time on the Trading Day following the date hereof, issue a press
release or file a Current Report on Form 8-K, in each case reasonably
acceptable to each Purchaser disclosing the material terms of the transactions
contemplated hereby. The Company and each Purchaser shall consult with each
other in issuing any other press releases with respect to the transactions
contemplated hereby, and neither the Company nor any Purchaser shall issue any
such press release or otherwise make any such public statement without the
prior consent of the Company, with respect to any press release of any
Purchaser, or without the prior consent of each Purchaser, with respect to any
press release of the Company, which consent shall not unreasonably be withheld,
except if such disclosure is required by law, in which case the disclosing
party shall promptly provide the other party with prior notice of such public
statement or communication. Notwithstanding the foregoing, the Company shall
not publicly disclose the name of any Purchaser, or include the name of any
Purchaser in any filing with the Commission or any regulatory agency or Trading
Market, without the prior written consent of such Purchaser, except (i) as
required by federal securities law in connection with the registration
statement contemplated by the Registration Rights Agreement and (ii) to the
extent such disclosure is required by law or Trading Market regulations, in
which case the Company shall provide the Purchasers with prior notice of such
disclosure permitted under subclause (i) or (ii).
2.7Shareholders Rights Plan. No claim will be made or enforced by the
Company or, to the knowledge of the Company, any other Person that any
Purchaser is an "Acquiring Person" under any shareholders rights plan or
similar plan or arrangement in effect or hereafter adopted by the Company, or
that any Purchaser could be deemed to trigger the provisions of any such plan
or arrangement, by virtue of receiving Securities under the Transaction
Documents or under any other agreement between the Company and the Purchasers.
The Company shall conduct its business in a manner so that it will not become
subject to the Investment Company Act.
2.8Non-Public Information. The Company covenants and agrees that neither
it nor any other Person acting on its behalf will provide any Purchaser or its
agents or counsel with any information that the Company believes constitutes
material non-public information, unless prior thereto such Purchaser shall have
executed a written agreement regarding the confidentiality and use of such
information. The Company understands and confirms that each Purchaser shall be
relying on the foregoing representations in effecting transactions in
securities of the Company.
2.9Use of Proceeds. Except as set forth on Schedule 4.9 attached hereto,
the Company shall use the net proceeds from the sale of the Securities
hereunder for working capital purposes and not for the satisfaction of any
portion of the Company's debt (other than payment of trade payables in the
ordinary course of the Company's business and prior practices), to redeem any
Company equity or equity*equivalent securities or to settle any outstanding
litigation. Notwithstanding anything herein to the contrary, the Company
agrees that, except with the consent of all of the Purchasers, it will engage
and use a reasonable portion of the proceeds to pay Sichenzia Ross Friedman
Ference LLP to be the firms primary law firm in connection with the filing and
effectiveness of the Registration Statement.
2.10 Reimbursement. If any Purchaser becomes involved in any capacity
in any Proceeding by or against any Person who is a stockholder of the Company
(except as a result of sales, pledges, margin sales and similar transactions by
such Purchaser to or with any current stockholder), solely as a result of such
Purchaser's acquisition of the Securities under this Agreement, the Company
will reimburse such Purchaser for its reasonable legal and other expenses
(including the cost of any investigation preparation and travel in connection
therewith) incurred in connection therewith, as such expenses are incurred.
The reimbursement obligations of the Company under this paragraph shall be in
addition to any liability which the Company may otherwise have, shall extend
upon the same terms and conditions to any Affiliates of the Purchasers who are
actually named in such action, proceeding or investigation, and partners,
directors, agents, employees and controlling persons (if any), as the case may
be, of the Purchasers and any such Affiliate, and shall be binding upon and
inure to the benefit of any successors, assigns, heirs and personal
representatives of the Company, the Purchasers and any such Affiliate and any
such Person. The Company also agrees that neither the Purchasers nor any such
Affiliates, partners, directors, agents, employees or controlling persons shall
have any liability to the Company or any Person asserting claims on behalf of
or in right of the Company solely as a result of acquiring the Securities under
this Agreement.
2.11 Indemnification of Purchasers. Subject to the provisions of this
Section 4.11, the Company will indemnify and hold the Purchasers and their
directors, officers, shareholders, partners, employees and agents (each, a
"Purchaser Party") harmless from any and all losses, liabilities, obligations,
claims, contingencies, damages, costs and expenses, including all judgments,
amounts paid in settlements, court costs and reasonable attorneys' fees and
costs of investigation that any such Purchaser Party may suffer or incur as a
result of or relating to (a) any breach of any of the representations,
warranties, covenants or agreements made by the Company in this Agreement or in
the other Transaction Documents or (b) any action instituted against a
Purchaser, or any of them or their respective Affiliates, by any stockholder of
the Company who is not an Affiliate of such Purchaser, with respect to any of
the transactions contemplated by the Transaction Documents (unless such action
is based upon a breach of such Purchaser's representation, warranties or
covenants under the Transaction Documents or any agreements or understandings
such Purchaser may have with any such stockholder or any violations by the
Purchaser of state or federal securities laws or any conduct by such Purchaser
which constitutes fraud, gross negligence, willful misconduct or malfeasance).
If any action shall be brought against any Purchaser Party in respect of which
indemnity may be sought pursuant to this Agreement, such Purchaser Party shall
promptly notify the Company in writing, and the Company shall have the right to
assume the defense thereof with counsel of its own choosing. Any Purchaser
Party shall have the right to employ separate counsel in any such action and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Purchaser Party except to the extent that (i)
the employment thereof has been specifically authorized by the Company in
writing, (ii) the Company has failed after a reasonable period of time to
assume such defense and to employ counsel or (iii) in such action there is, in
the reasonable opinion of such separate counsel, a material conflict on any
material issue between the position of the Company and the position of such
Purchaser Party. The Company will not be liable to any Purchaser Party under
this Agreement (i) for any settlement by an Purchaser Party effected without
the Company's prior written consent, which shall not be unreasonably withheld
or delayed; or (ii) to the extent, but only to the extent that a loss, claim,
damage or liability is attributable to any Purchaser Party's breach of any of
the representations, warranties, covenants or agreements made by the Purchasers
in this Agreement or in the other Transaction Documents.
2.12 Reservation and Listing of Securities.
(a)The Company shall maintain a reserve from its duly authorized
shares of Common Stock for issuance pursuant to the Transaction Documents in
such amount as may be required to fulfill its obligations in full under the
Transaction Documents.
(b)If, on any date, the number of authorized but unissued (and
otherwise unreserved) shares of Common Stock is less than the Required Minimum
on such date, then the Board of Directors of the Company shall use commercially
reasonable efforts to amend the Company's certificate or articles of
incorporation to increase the number of authorized but unissued shares of
Common Stock to at least the Required Minimum at such time, as soon as possible
and in any event not later than the 75th day after such date.
(c)The Company shall, if applicable: (i) in the time and manner
required by the Trading Market, prepare and file with such Trading Market an
additional shares listing application covering a number of shares of Common
Stock at least equal to the Required Minimum on the date of such application,
(ii) take all steps necessary to cause such shares of Common Stock to be
approved for listing on the Trading Market as soon as possible thereafter,
(iii) provide to the Purchasers evidence of such listing, and (iv) maintain the
listing of such Common Stock on any date at least equal to the Required Minimum
on such date on such Trading Market or another Trading Market.
2.13 Participation in Future Financing. From the date hereof until the
two year anniversary of the Effective Date, upon any financing by the Company
or any of its Subsidiaries of Common Stock or Common Stock Equivalents (a
"Subsequent Financing"), each Purchaser shall have the right to participate in
up to 100% of any Subsequent Financing (the "Participation Maximum"). At least
5 Trading Days prior to the closing of the Subsequent Financing, the Company
shall deliver to each Purchaser a written notice of its intention to effect a
Subsequent Financing ("Pre-Notice"), which Pre-Notice shall ask such Purchaser
if it wants to review the details of such financing (such additional notice, a
"Subsequent Financing Notice"). Upon the request of a Purchaser, and only upon
a request by such Purchaser, for a Subsequent Financing Notice, the Company
shall promptly, but no later than 1 Trading Day after such request, deliver a
Subsequent Financing Notice to such Purchaser. The Subsequent Financing Notice
shall describe in reasonable detail the proposed terms of such Subsequent
Financing, the amount of proceeds intended to be raised thereunder, the Person
with whom such Subsequent Financing is proposed to be effected, and attached to
which shall be a term sheet or similar document relating thereto. If by 5:30
p.m. (New York City time) on the 5th Trading Day after all of the Purchasers
have received the Pre-Notice, notifications by the Purchasers of their
willingness to participate in the Subsequent Financing (or to cause their
designees to participate) is, in the aggregate, less than the total amount of
the Subsequent Financing, then the Company may effect the remaining portion of
such Subsequent Financing on the terms and to the Persons set forth in the
Subsequent Financing Notice. If the Company receives no notice from a
Purchaser as of such 5th Trading Day, such Purchaser shall be deemed to have
notified the Company that it does not elect to participate. The Company must
provide the Purchasers with a second Subsequent Financing Notice, and the
Purchasers will again have the right of participation set forth above in this
Section 4.13, if the Subsequent Financing subject to the initial Subsequent
Financing Notice is not consummated for any reason on the terms set forth in
such Subsequent Financing Notice within 60 Trading Days after the date of the
initial Subsequent Financing Notice. In the event the Company receives
responses to Subsequent Financing Notices from Purchasers seeking to purchase
more than the aggregate amount of the Subsequent Financing, each such Purchaser
shall have the right to purchase their Pro Rata Portion (as defined below) of
the Participation Maximum. "Pro Rata Portion" is the ratio of (x) the
Subscription Amount of Securities purchased by a participating Purchaser and
(y) the sum of the aggregate Subscription Amount of all participating
Purchasers. Notwithstanding the foregoing, this Section 4.13 shall not apply
in respect of an Exempt Issuance.
2.14 Subsequent Equity Sales. From the date hereof until the second
anniversary of the Effective Date, neither the Company nor any Subsidiary shall
issue shares of Common Stock or Common Stock Equivalents; provided, however,
the 2 year period set forth in this Section 4.14 shall be extended for the
number of Trading Days during such period in which (y) trading in the Common
Stock is suspended by any Trading Market, or (z) following the Effective Date,
the Registration Statement is not effective or the prospectus included in the
Registration Statement may not be used by the Purchasers for the resale of the
Underlying Shares or Additional Investment Rights Shares. Notwithstanding the
foregoing, this Section 4.14 shall not apply in respect of an Exempt Issuance
or upon the consent of holder of at least 2/3 of the then outstanding principal
amount of Debentures. In addition to the limitations set forth herein, from
the date hereof until such time as no Purchaser holds any of the Securities,
the Company shall be prohibited from effecting or enter into an agreement to
effect any Subsequent Financing involving a "Variable Rate Transaction" or an
"MFN Transaction" (each as defined below). The term "Variable Rate
Transaction" shall mean a transaction in which the Company issues or sells (i)
any debt or equity securities that are convertible into, exchangeable or
exercisable for, or include the right to receive additional shares of Common
Stock either (A) at a conversion, exercise or exchange rate or other price that
is based upon and/or varies with the trading prices of or quotations for the
shares of Common Stock at any time after the initial issuance of such debt or
equity securities, or (B) with a conversion, exercise or exchange price that is
subject to being reset at some future date after the initial issuance of such
debt or equity security or upon the occurrence of specified or contingent
events directly or indirectly related to the business of the Company or the
market for the Common Stock. The term "MFN Transaction" shall mean a
transaction in which the Company issues or sells any securities in a capital
raising transaction or series of related transactions which grants to an
investor the right to receive additional shares based upon future transactions
of the Company on terms more favorable than those granted to such investor in
such offering.
2.15 Equal Treatment of Purchasers. No consideration shall be offered
or paid to any person to amend or consent to a waiver or modification of any
provision of any of the Transaction Documents unless the same consideration is
also offered to all of the parties to the Transaction Documents. Further, the
Company shall not make any payment of principal on the Debentures in amounts
which are disproportionate to the respective principal amounts outstanding on
the Debentures at any applicable time. For clarification purposes, this
provision constitutes a separate right granted to each Purchaser by the Company
and negotiated separately by each Purchaser, and is intended to treat for the
Company the Debenture holders as a class and shall not in any way be construed
as the Purchasers acting in concert or as a group with respect to the purchase,
disposition or voting of Securities or otherwise.
ARTICLE V.
MISCELLANEOUS
3.1Fees and Expenses. At the First Closing, the Company has agreed to
reimburse T.R. Winston & Company, LLC ("T.R. Winston") up to $20,000 for its
actual, reasonable, out-of-pocket legal fees and expenses. Except as expressly
set forth in the Transaction Documents to the contrary, each party shall pay
the fees and expenses of its advisers, counsel, accountants and other experts,
if any, and all other expenses incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of this
Agreement. The Company shall pay all transfer agent fees, stamp taxes and
other taxes and duties levied in connection with the issuance of any
Securities.
3.2Entire Agreement. The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements
and understandings, oral or written, with respect to such matters, which the
parties acknowledge have been merged into such documents, exhibits and
schedules.
3.3Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
set forth on the signature pages attached hereto prior to 5:30 p.m. (New York
City time) on a Trading Day, (b) the next Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number set forth on the signature pages attached hereto on a day that
is not a Trading Day or later than 5:30 p.m. (New York City time) on any
Trading Day, (c) the second Trading Day following the date of mailing, if sent
by U.S. nationally recognized overnight courier service, or (d) upon actual
receipt by the party to whom such notice is required to be given. The address
for such notices and communications shall be as set forth on the signature
pages attached hereto.
3.4Amendments; Waivers. No provision of this Agreement may be waived or
amended except in a written instrument signed, in the case of an amendment, by
the Company and each Purchaser or, in the case of a waiver, by the party
against whom enforcement of any such waiver is sought. No waiver of any
default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver
of any subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right.
3.5Construction. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof. The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any party.
3.6Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
The Company may not assign this Agreement or any rights or obligations
hereunder without the prior written consent of each Purchaser. Any Purchaser
may assign any or all of its rights under this Agreement to any Person to whom
such Purchaser assigns or transfers any Securities, provided such transferee
agrees in writing to be bound, with respect to the transferred Securities, by
the provisions hereof that apply to the "Purchasers".
3.7No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.11.
3.8Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of the Transaction Documents shall be governed
by and construed and enforced in accordance with the internal laws of the State
of New York, without regard to the principles of conflicts of law thereof.
Each party agrees that all legal proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by this Agreement and
any other Transaction Documents (whether brought against a party hereto or its
respective affiliates, directors, officers, shareholders, employees or agents)
shall be commenced exclusively in the state and federal courts sitting in the
City of New York. Each party hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in the City of New York,
borough of Manhattan for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein (including with respect to the enforcement of any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any
suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is
improper or inconvenient venue for such proceeding. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery)
to such party at the address in effect for notices to it under this Agreement
and agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to limit
in any way any right to serve process in any manner permitted by law. The
parties hereby waive all rights to a trial by jury. If either party shall
commence an action or proceeding to enforce any provisions of the Transaction
Documents, then the prevailing party in such action or proceeding shall be
reimbursed by the other party for its attorneys' fees and other costs and
expenses incurred with the investigation, preparation and prosecution of such
action or proceeding.
3.9Survival. The representations and warranties contained herein shall
survive each Closing and the delivery, exercise and/or conversion of the
Securities, as applicable for the applicable statue of limitations.
3.10 Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.
3.11 Severability. If any provision of this Agreement is held to be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.
3.12 Rescission and Withdrawal Right. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Purchaser exercises a right, election,
demand or option under a Transaction Document and the Company does not timely
perform its related obligations within the periods therein provided, then such
Purchaser may rescind or withdraw, in its sole discretion from time to time
upon written notice to the Company, any relevant notice, demand or election in
whole or in part without prejudice to its future actions and rights; provided,
however, in the case of a rescission of a conversion of a Debenture or exercise
of a Warrant, the Purchaser shall be required to return any shares of Common
Stock subject to any such rescinded conversion or exercise notice.
3.13 Replacement of Securities. If any certificate or instrument
evidencing any Securities is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon
cancellation thereof, or in lieu of and substitution therefor, a new
certificate or instrument, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction and customary
and reasonable indemnity, if requested. The applicants for a new certificate
or instrument under such circumstances shall also pay any reasonable third-
party costs associated with the issuance of such replacement Securities.
3.14 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Purchasers and the Company will be entitled to specific performance under the
Transaction Documents. The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations described in the foregoing sentence and hereby agrees to waive in
any action for specific performance of any such obligation the defense that a
remedy at law would be adequate.
3.15 Payment Set Aside. To the extent that the Company makes a payment
or payments to any Purchaser pursuant to any Transaction Document or a
Purchaser enforces or exercises its rights thereunder, and such payment or
payments or the proceeds of such enforcement or exercise or any part thereof
are subsequently invalidated, declared to be fraudulent or preferential, set
aside, recovered from, disgorged by or are required to be refunded, repaid or
otherwise restored to the Company, a trustee, receiver or any other person
under any law (including, without limitation, any bankruptcy law, state or
federal law, common law or equitable cause of action), then to the extent of
any such restoration the obligation or part thereof originally intended to be
satisfied shall be revived and continued in full force and effect as if such
payment had not been made or such enforcement or setoff had not occurred.
3.16 Usury. To the extent it may lawfully do so, the Company hereby
agrees not to insist upon or plead or in any manner whatsoever claim, and will
resist any and all efforts to be compelled to take the benefit or advantage of,
usury laws wherever enacted, now or at any time hereafter in force, in
connection with any claim, action or proceeding that may be brought by any
Purchaser in order to enforce any right or remedy under any Transaction
Document. Notwithstanding any provision to the contrary contained in any
Transaction Document, it is expressly agreed and provided that the total
liability of the Company under the Transaction Documents for payments in the
nature of interest shall not exceed the maximum lawful rate authorized under
applicable law (the "Maximum Rate"), and, without limiting the foregoing, in no
event shall any rate of interest or default interest, or both of them, when
aggregated with any other sums in the nature of interest that the Company may
be obligated to pay under the Transaction Documents exceed such Maximum Rate.
It is agreed that if the maximum contract rate of interest allowed by law and
applicable to the Transaction Documents is increased or decreased by statute or
any official governmental action subsequent to the date hereof, the new maximum
contract rate of interest allowed by law will be the Maximum Rate applicable to
the Transaction Documents from the effective date forward, unless such
application is precluded by applicable law. If under any circumstances
whatsoever, interest in excess of the Maximum Rate is paid by the Company to
any Purchaser with respect to indebtedness evidenced by the Transaction
Documents, such excess shall be applied by such Purchaser to the unpaid
principal balance of any such indebtedness or be refunded to the Company, the
manner of handling such excess to be at such Purchaser's election.
3.17 Independent Nature of Purchasers' Obligations and Rights. The
obligations of each Purchaser under any Transaction Document are several and
not joint with the obligations of any other Purchaser, and no Purchaser shall
be responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Document. Nothing contained herein or in any
Transaction Document, and no action taken by any Purchaser pursuant thereto,
shall be deemed to constitute the Purchasers as a partnership, an association,
a joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Document. Each
Purchaser shall be entitled to independently protect and enforce its rights,
including without limitation the rights arising out of this Agreement or out of
the other Transaction Documents, and it shall not be necessary for any other
Purchaser to be joined as an additional party in any proceeding for such
purpose. Each Purchaser has been represented by its own separate legal counsel
in their review and negotiation of the Transaction Documents. For reasons of
administrative convenience only, Purchasers and their respective counsel have
chosen to communicate with the Company through FW. FW does not represent all
of the Purchasers but only T.R. Winston. The Company has elected to provide all
Purchasers with the same terms and Transaction Documents for the convenience of
the Company and not because it was required or requested to do so by the
Purchasers.
3.18 Liquidated Damages. The Company's obligations to pay any partial
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of the Company and shall not terminate until all unpaid
partial liquidated damages and other amounts have been paid notwithstanding the
fact that the instrument or security pursuant to which such partial liquidated
damages or other amounts are due and payable shall have been canceled.
(Signature Pages Follow)
IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.
SUNBURST ACQUISITIONS IV, INC. Address for Notice:
By:__________________________________________
Name:
Title:
With a copy to (which shall not constitute notice):
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOR PURCHASER FOLLOWS]
[PURCHASER SIGNATURE PAGES TO SBAQ SECURITIES PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the undersigned have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.
Name of Investing Entity: _______________________________________
Signature of Authorized Signatory of Investing Entity:
__________________________________
Name of Authorized Signatory: _____________________________________________
Title of Authorized Signatory: ____________________________________________
Email Address of Authorized Entity:________________________________________
Address for Notice of Investing Entity:
Address for Delivery of Securities for Investing Entity (if not same as above):
First Closing Subscription Amount (amount of cash delivered to the Company):
Second Closing Subscription Amount (amount of cash delivered to the Company):
Principal Amount (1.35 x Subscription Amount):
Warrant Shares:
Additional Investment Right Shares:
EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]
[SIGNATURE PAGES CONTINUE]
EXHIBIT A
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON CONVERSION OF THESE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN SECURED BY SUCH SECURITIES.
Original Issue Date: August 25, 2004
Original Conversion Price (subject to adjustment herein): $0.10
$_______________
SECURED CONVERTIBLE DEBENTURE
DUE AUGUST 25, 2005
THIS DEBENTURE is one of a series of duly authorized and issued
Convertible Debentures of Sunburst Acquisitions IV, Inc., a Colorado
corporation, having a principal place of business at 103-20120 64th Avenue,
Langley, BC, V2Y1 M8, Canada (the "Company"), designated as its Secured
Convertible Debenture, due August 25, 2005 (the "Debentures").
FOR VALUE RECEIVED, the Company promises to pay to
________________________ or its registered assigns (the "Holder"), the
principal sum of $_______________ on August 25, 2005 or such earlier date as
the Debentures are required or permitted to be repaid as provided hereunder
(the "Maturity Date"). This Debenture is subject to the following additional
provisions:
Section 1. Definitions. For the purposes hereof, in addition to the
terms defined elsewhere in this Debenture: (a) capitalized terms not otherwise
defined herein have the meanings given to such terms in the Purchase Agreement,
and (b) the following terms shall have the following meanings:
"Alternate Consideration" shall have the meaning set forth in
Section 5(e)(iii).
1
"Business Day" means any day except Saturday, Sunday and any day
which shall be a federal legal holiday in the United States or a day on
which banking institutions in the State of New York are authorized or
required by law or other government action to close.
"Change of Control Transaction" means the occurrence after the date
hereof of any of (i) an acquisition after the date hereof by an
individual or legal entity or "group" (as described in Rule 13d-5(b)(1)
promulgated under the Exchange Act) of effective control (whether through
legal or beneficial ownership of capital stock of the Company, by
contract or otherwise) of in excess of 33% of the voting securities of
the Company, or (ii) a replacement at one time or within a three year
period of more than one-half of the members of the Company's board of
directors which is not approved by a majority of those individuals who
are members of the board of directors on the date hereof (or by those
individuals who are serving as members of the board of directors on any
date whose nomination to the board of directors was approved by a
majority of the members of the board of directors who are members on the
date hereof), or (iii) the execution by the Company of an agreement to
which the Company is a party or by which it is bound, providing for any
of the events set forth above in (i) or (ii).
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock, no par value, of the Company
and stock of any other class into which such shares may hereafter have
been reclassified or changed.
"Conversion Date" shall have the meaning set forth in Section 4(a)
hereof.
"Conversion Price" shall have the meaning set forth in Section
4(b).
"Conversion Shares" means the shares of Common Stock issuable upon
conversion of Debentures in accordance with the terms hereof.
"Dilutive Issuance" shall have the meaning set forth in Section
5(b) hereof.
"Effectiveness Period" shall have the meaning given to such
term in the Registration Rights Agreement.
"Equity Conditions" shall mean, during the period in question, (i)
the Company shall have duly honored all conversions and redemptions
scheduled to occur or occurring by virtue of one or more Conversion
Notices, if any, (ii) all liquidated damages and other amounts owing in
respect of the Debentures shall have been paid; (iii) there is an
effective Registration Statement pursuant to which the Holder is
permitted to utilize the prospectus thereunder to resell all of the
shares issuable pursuant to the Transaction Documents (and the Company
believes, in good faith, that such effectiveness will continue
uninterrupted for the foreseeable future), (iv) the Common Stock is
trading on the Trading Market and all of the shares issuable pursuant to
the Transaction Documents
2
are listed for trading on a Trading Market (and the Company
believes, in good faith, that trading of the Common Stock on a Trading
Market will continue uninterrupted for the foreseeable future), (v) there
is a sufficient number of authorized but unissued and otherwise
unreserved shares of Common Stock for the issuance of all of the shares
issuable pursuant to the Transaction Documents, (vi) there is then
existing no Event of Default or event which, with the passage of time or
the giving of notice, would constitute an Event of Default and (vii) all
of the shares issued or issuable pursuant to the transaction documents in
full, ignoring for such purposes any conversion or exercise limitation
therein, would not violate the limitations set forth in Sections 4(c)(i)
and 4(c)(ii) and (ix) no public announcement of a pending or proposed
Fundamental Transaction or acquisition transaction has occurred that has
not been consummated.
"Event of Default" shall have the meaning set forth in Section
8.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Fundamental Transaction" shall have the meaning set forth in
Section 5(e)(iii) hereof.
"Intraday Trading Price" means, for any date, the actual trading
prices for such date determined by the first of the following clauses
that applies: (a) if the Common Stock is then listed or quoted on a
Trading Market, the trading prices for such date (or the nearest
preceding date) on the primary Trading Market on which the Common Stock
is then listed or quoted as reported by Bloomberg Financial L.P. (based
on a trading day from 9:30 a.m. ET to 4:02 p.m. Eastern Time); (b) if
there is no such price on such day, then the trading prices of the Common
Stock on a Trading Market on the date nearest preceding such date as
reported by Bloomberg Financial L.P. (based on a trading day from 9:30
a.m. ET to 4:02 p.m. Eastern Time); (c) if the Common Stock is not then
listed or quoted on the Trading Market and if prices for the Common Stock
are then reported in the "pink sheets" published by the National
Quotation Bureau Incorporated (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent trading
price of the Common Stock so reported; or (d) in all other cases, the
fair market value of a share of Common Stock as determined by an
independent appraiser selected in good faith by a majority in interest of
the Purchasers.
"Late Fees" shall have the meaning set forth in the second
paragraph to this Debenture.
"Mandatory Prepayment Amount" for any Debentures shall equal the
sum of (i) the greater of: (A) 130% of the principal amount of Debentures
to be prepaid or (B) the principal amount of Debentures to be prepaid,
divided by the Conversion Price on (x) the date the Mandatory Prepayment
Amount is demanded or otherwise due or (y) the date the Mandatory
Prepayment Amount is paid in full, whichever is less, multiplied by the
VWAP on (x) the date the Mandatory Prepayment Amount is demanded or
otherwise due or (y) the date the Mandatory Prepayment Amount is paid in
full, whichever is greater,
3
and (ii) all other amounts, costs, expenses and liquidated damages
due in respect of such Debentures.
"Original Issue Date" shall mean the date of the first issuance of
the Debentures regardless of the number of transfers of any Debenture and
regardless of the number of instruments which may be issued to evidence
such Debenture.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"Purchase Agreement" means the Securities Purchase Agreement, dated
as of August 25, 2004 to which the Company and the original Holder are
parties, as amended, modified or supplemented from time to time in
accordance with its terms.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the date of the Purchase Agreement, to which the
Company and the original Holder are parties, as amended, modified or
supplemented from time to time in accordance with its terms.
"Registration Statement" means a registration statement meeting the
requirements set forth in the Registration Rights Agreement, covering
among other things the resale of the Conversion Shares and naming the
Holder as a "selling stockholder" thereunder.
"Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
"Subsidiary" shall have the meaning given to such term in the
Purchase Agreement.
"Trading Day" means a day on which the Common Stock is traded on a
Trading Market.
"Trading Market" means the following markets or exchanges on which
the Common Stock is listed or quoted for trading on the date in question:
the Nasdaq SmallCap Market, the American Stock Exchange, the New York
Stock Exchange, the Nasdaq National Market or the OTC Bulletin Board.
"Transaction Documents" shall have the meaning set forth in the
Purchase Agreement.
"VWAP" means, for any date, the price determined by the first of
the following clauses that applies: (a) if the Common Stock is then
listed or quoted on a Trading Market, the daily volume weighted average
price of the Common Stock for such date (or the nearest preceding date)
on the Trading Market on which the Common Stock is then listed or quoted
as reported by Bloomberg Financial L.P. (based on a Trading Day from
4
9:30 a.m. EST to 4:02 p.m. Eastern Time) using the VAP function;
(b) if the Common Stock is not then listed or quoted on the Trading
Market and if prices for the Common Stock are then reported in the "Pink
Sheets" published by the National Quotation Bureau Incorporated (or a
similar organization or agency succeeding to its functions of reporting
prices), the most recent bid price per share of the Common Stock so
reported; or (c) in all other cases, the fair market value of a share of
Common Stock as determined by a nationally recognized-independent
appraiser selected in good faith by Purchasers holding a majority of the
principal amount of Shares then outstanding.
Section 2. Interest.
a) No Payment of Interest. The Company shall not pay interest to
the Holder on this Debenture. The Company acknowledges and
agrees that this Debenture was issued for an Original Issue
Discount in lieu of future cash interest payments.
b) Prepayment. Except as otherwise set forth in Sections 7 or 9 of
this Debenture, the Company may not prepay any portion of the
principal amount of this Debenture without the prior written
consent of the Holder.
Section 3. Registration of Transfers and Exchanges.
a) Different Denominations. This Debenture is exchangeable for an
equal aggregate principal amount of Debentures of different
authorized denominations, as requested by the Holder
surrendering the same. No service charge will be made for such
registration of transfer or exchange.
b) Investment Representations. This Debenture has been issued
subject to certain investment representations of the original
Holder set forth in the Purchase Agreement and may be
transferred or exchanged only in compliance with the Purchase
Agreement and applicable federal and state securities laws and
regulations.
c) Reliance on Debenture Register. Prior to due presentment to the
Company for transfer of this Debenture, the Company and any
agent of the Company may treat the Person in whose name this
Debenture is duly registered on the Debenture Register as the
owner hereof for the purpose of receiving payment as herein
provided and for all other purposes, whether or not this
Debenture is overdue, and neither the Company nor any such agent
shall be affected by notice to the contrary.
Section 4. Conversion.
a) Conversion at Holder's Option. At any time after the Original
Issue Date until this Debenture is no longer outstanding, this
Debenture shall be convertible into shares of Common Stock at
the option of the Holder, in whole or in part at any time and
from time to time (subject to the limitations on conversion set
forth in Section 4(c)(ii) hereof). The Holder shall effect
conversions by delivering to the Company the form of Notice of
Conversion attached hereto as Annex A (a "Notice of
Conversion"), specifying
5
therein the principal amount of Debentures to be converted and the
date on which such conversion is to be effected (a "Conversion
Date"). If no Conversion Date is specified in a Notice of
Conversion, the Conversion Date shall be the date that such
Notice of Conversion is provided hereunder. To effect
conversions hereunder, the Holder shall not be required to
physically surrender Debentures to the Company unless the entire
principal amount of this Debenture has been so converted.
Conversions hereunder shall have the effect of lowering the
outstanding principal amount of this Debenture in an amount
equal to the applicable conversion. The Holder and the Company
shall maintain records showing the principal amount converted
and the date of such conversions. The Company shall deliver any
objection to any Notice of Conversion within 1 Business Day of
receipt of such notice. In the event of any dispute or
discrepancy, the records of the Holder shall be controlling and
determinative in the absence of manifest error. The Holder and
any assignee, by acceptance of this Debenture, acknowledge and
agree that, by reason of the provisions of this paragraph,
following conversion of a portion of this Debenture, the unpaid
and unconverted principal amount of this Debenture may be less
than the amount stated on the face hereof.
b) Conversion Price. The conversion price in effect on any
Conversion Date (the "Conversion Price") shall be $0.10, subject
to adjustment herein; provided, however, if, at any time after
the Original Issue Date, 10 Intraday Trading Prices or more
(consecutive or non-consecutive) during any 20 Trading Day
period are less than $0.10, subject to adjustment for reverse
and forward stock splits, stock dividends, stock combinations
and other similar transactions of the Common Stock that occur
after the Original Issue Date, the conversion price thereafter
shall be equal to the lesser of (i) $0.10, subject to adjustment
herein and (ii) 80% of the average of the lowest 3 Intraday
Trading Prices during the 20 Trading Days prior to such
Conversion Date. Notwithstanding anything herein to the
contrary, if the Company undertakes a reverse or forward stock
split or reclassification of the Common Stock then the
Conversion Price shall thereafter be the lesser of (A) the
Conversion Price then in effect and (B) 80% of the average of
the three lowest Intraday Trading Prices during the 20 Trading
Days following the record date of such action.
c) Conversion Limitations.
i.Intentionally Omitted.
ii. Holder's Restriction on Conversion. The Company
shall not effect any conversion of this Debenture,
and the Holder shall not have the right to convert
any portion of this Debenture, pursuant to Section
4(a) or otherwise, to the extent that after giving
effect to such conversion, the Holder (together with
the Holder's affiliates), as set forth on the
applicable Notice of Conversion, would beneficially
own in excess of 4.99% of the number of shares of the
Common Stock outstanding immediately after giving
effect to such conversion. For purposes of the
foregoing sentence, the 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 conversion of this
Debenture with respect
6
to which the determination of such sentence is being
made, but shall exclude the number of shares of
Common Stock which would be issuable upon (A)
conversion of the remaining, nonconverted portion of
this Debenture beneficially owned by the Holder or
any of its affiliates and (B) exercise or conversion
of the unexercised or nonconverted portion of any
other securities of the Company (including, without
limitation, any other Debentures or the Warrants)
subject to a limitation on conversion or exercise
analogous to the limitation contained herein
beneficially owned by the Holder or any of its
affiliates. Except as set forth in the preceding
sentence, for purposes of this Section 4(c)(ii),
beneficial ownership shall be calculated in
accordance with Section 13(d) of the Exchange Act.
To the extent that the limitation contained in this
section applies, the determination of whether this
Debenture is convertible (in relation to other
securities owned by the Holder) and of which a
portion of this Debenture is convertible shall be in
the sole discretion of such Holder. To ensure
compliance with this restriction, the Holder will be
deemed to represent to the Company each time it
delivers a Notice of Conversion that such Notice of
Conversion has not violated the restrictions set
forth in this paragraph and the Company shall have no
obligation to verify or confirm the accuracy of such
determination. For purposes of this Section
4(c)(ii), in determining the number of outstanding
shares of Common Stock, the Holder may rely on the
number of outstanding shares of Common Stock as
reflected in (x) the Company's most recent Form 10-
QSB or Form 10-KSB, as the case may be, (y) a more
recent public announcement by the Company or (z) any
other notice by the Company or the Company's Transfer
Agent setting forth the number of shares of Common
Stock outstanding. Upon the written or oral request
of the Holder, the Company shall within two Trading
Days confirm orally and in writing to the Holder the
number of shares of Common Stock then outstanding.
In any case, the number of outstanding shares of
Common Stock shall be determined after giving effect
to the conversion or exercise of securities of the
Company, including this Debenture, by the Holder or
its affiliates since the date as of which such number
of outstanding shares of Common Stock was reported.
d) Mechanics of Conversion
i.Conversion Shares Issuable Upon Conversion of
Principal Amount. The number of shares of Common
Stock issuable upon a conversion hereunder shall be
determined by the quotient obtained by dividing (x)
the outstanding principal amount of this Debenture to
be converted by (y) the Conversion Price.
ii.
7
iii. Delivery of Certificate Upon Conversion. Not
later than three Trading Days after any Conversion
Date, the Company will deliver to the Holder a
certificate or certificates representing the
Conversion Shares which shall be free of restrictive
legends and trading restrictions (other than those
required by the Purchase Agreement) representing the
number of shares of Common Stock being acquired upon
the conversion of Debentures. The Company shall, if
available and if allowed under applicable securities
laws, use its best efforts to deliver any
1
certificate or certificates required to be delivered by
the Company under this Section electronically through
the Depository Trust Corporation or another
established clearing corporation performing similar
functions.
iv. Failure to Deliver Certificates. If in the case
of any Notice of Conversion such certificate or
certificates are not delivered to or as directed by
the applicable Holder by the fifth Trading Day after
a Conversion Date, the Holder shall be entitled by
written notice to the Company at any time on or
before its receipt of such certificate or
certificates thereafter, to rescind such conversion,
in which event the Company shall immediately return
the certificates representing the principal amount of
Debentures tendered for conversion.
v. Partial Liquidated Damages. If the Company fails
for any reason to deliver to the Holder such
certificate or certificates pursuant to Section
4(d)(ii) by the third Trading Day after the
Conversion Date, the Company shall pay to such
Holder, in cash, as liquidated damages and not as a
penalty, for each $1000 of principal amount being
converted, $10 per Trading Day (increasing to $20 per
Trading Day after 5 Trading Days after such damages
begin to accrue and increasing to $200 per Trading
Day 6 Trading Days after such after such damages
begin to accrue) for each Trading Day after such
third Trading Day until such certificates are
delivered. The Company's obligations to issue and
deliver the Conversion Shares upon conversion of this
Debenture in accordance with the terms hereof are
absolute and unconditional, irrespective of any
action or inaction by the Holder to enforce the same,
any waiver or consent with respect to any provision
hereof, the recovery of any judgment against any
Person or any action to enforce the same, or any
setoff, counterclaim, recoupment, limitation or
termination, or any breach or alleged breach by the
Holder or any other Person of any obligation to the
Company or any violation or alleged violation of law
by the Holder or any other person, and irrespective
of any other circumstance which might otherwise limit
such obligation of the Company to the Holder in
connection with the issuance of such Conversion
Shares; provided, however, such delivery shall not
operate as a waiver by the Company of any such action
the Company may have against the Holder. In the
event a Holder of this Debenture shall elect to
convert any or all of the outstanding principal
amount hereof, the Company may not refuse conversion
based on any claim that the Holder or any one
associated or affiliated with the Holder of has been
engaged in any violation of law, agreement or for any
other reason, unless, an injunction from a court, on
notice, restraining and or enjoining conversion of
all or part of this Debenture shall have been sought
and obtained and the Company posts a surety bond for
the benefit of the Holder in the amount of 150% of
the principal amount of this Debenture outstanding,
which is subject to the injunction, which bond shall
remain in effect until the completion of
arbitration/litigation of the dispute and the
proceeds of which shall be payable to such Holder to
the extent it obtains judgment. In the absence of an
injunction precluding the same, the Company shall
issue Conversion Shares or, if applicable, cash, upon
a properly noticed
2
conversion. Nothing herein shall limit a Holder's
right to pursue actual damages or declare an Event of
Default pursuant to Section 8 herein for the
Company's failure to deliver Conversion Shares within
the period specified herein and such Holder shall
have the right to pursue all remedies available to it
at law or in equity including, without limitation, a
decree of specific performance and/or injunctive
relief. The exercise of any such rights shall not
prohibit the Holders from seeking to enforce damages
pursuant to any other Section hereof or under
applicable law.
vi. Failure to Timely Deliver Certificates Upon
Conversion. In addition to any other rights available
to the Holder, if the Company fails for any reason to
deliver to the Holder such certificate or
certificates pursuant to Section 4(d)(ii) by the
third Trading Day after the Conversion Date, and if
after such third Trading Day the Holder is required
by its brokerage firm to purchase (in an open market
transaction or otherwise) Common Stock to deliver in
satisfaction of a sale by such Holder of the
Conversion Shares which the Holder anticipated
receiving upon such conversion (a "Buy-In"), then the
Company shall (A) pay in cash to the Holder (in
addition to any remedies available to or elected by
the Holder) the amount by which (x) the Holder's
total purchase price (including brokerage
commissions, if any) for the Common Stock so
purchased exceeds (y) the product of (1) the
aggregate number of shares of Common Stock that such
Holder anticipated receiving from the conversion at
issue multiplied by (2) the actual sale price of the
Common Stock at the time of the sale (including
brokerage commissions, if any) giving rise to such
purchase obligation and (B) at the option of the
Holder, either reissue Debentures in principal amount
equal to the principal amount of the attempted
conversion or deliver to the Holder the number of
shares of Common Stock that would have been issued
had the Company timely complied with its delivery
requirements under Section 4(d)(ii). For example, if
the Holder purchases Common Stock having a total
purchase price of $11,000 to cover a Buy-In with
respect to an attempted conversion of Debentures with
respect to which the actual sale price of the
Conversion Shares at the time of the sale (including
brokerage commissions, if any) giving rise to such
purchase obligation was a total of $10,000 under
clause (A) of the immediately preceding sentence, the
Company shall be required to pay the Holder $1,000.
The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in
respect of the Buy-In. Notwithstanding anything
contained herein to the contrary, if a Holder
requires the Company to make payment in respect of a
Buy-In for the failure to timely deliver certificates
hereunder and the Company timely pays in full such
payment, the Company shall not be required to pay
such Holder liquidated damages under Section 4(d)(iv)
in respect of the certificates resulting in such Buy-
In.
vii. Reservation of Shares Issuable Upon Conversion.
The Company covenants that it will at all times
reserve and keep available out of its authorized and
unissued shares of Common Stock solely for the
purpose of issuance upon conversion of the Debentures
free from preemptive rights or any other actual
3
contingent purchase rights of persons other than the
Holders, not less than such number of shares of the
Common Stock as shall (subject to any additional
requirements of the Company as to reservation of such
shares set forth in the Purchase Agreement) be
issuable (taking into account the adjustments and
restrictions of Section 4(d)) upon the conversion of
the outstanding principal amount of the Debentures.
The Company covenants that all shares of Common Stock
that shall be so issuable shall, upon issue, be duly
and validly authorized, issued and fully paid,
nonassessable and, if the Registration Statement is
then effective under the Securities Act, registered
for public sale in accordance with such Registration
Statement.
viii. Fractional Shares. Upon a conversion hereunder
the Company shall not be required to issue stock
certificates representing fractions of shares of the
Common Stock, but may if otherwise permitted, make a
cash payment in respect of any final fraction of a
share based on the VWAP at such time. If the Company
elects not, or is unable, to make such a cash
payment, the Holder shall be entitled to receive, in
lieu of the final fraction of a share, one whole
share of Common Stock.
ix. Transfer Taxes. The issuance of certificates for
shares of the Common Stock on conversion of the
Debentures shall be made without charge to the
Holders thereof for any documentary stamp or similar
taxes that may be payable in respect of the issue or
delivery of such certificate, provided that the
Company shall not be required to pay any tax that may
be payable in respect of any transfer involved in the
issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of
such Debentures so converted and the Company shall
not be required to issue or deliver such certificates
unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the
satisfaction of the Company that such tax has been
paid.
Section 5. Certain Adjustments.
a) Stock Dividends and Stock Splits. If the Company, at any time
while the Debentures are outstanding: (A) shall pay a stock
dividend or otherwise make a distribution or distributions on
shares of its Common Stock or any other equity or equity
equivalent securities payable in shares of Common Stock (which,
for avoidance of doubt, shall not include any shares of Common
Stock issued by the Company pursuant to this Debenture), (B)
subdivide outstanding shares of Common Stock into a larger
number of shares, (C) combine (including by way of reverse stock
split) outstanding shares of Common Stock into a smaller number
of shares, or (D) issue by reclassification of shares of the
Common Stock any shares of capital stock of the Company, then
the Conversion Price shall be multiplied by a fraction of which
the numerator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding before such
event and of which the denominator shall be the number of shares
of Common Stock
4
outstanding after such event. Any adjustment made pursuant to this
Section shall become effective immediately after the record date
for the determination of stockholders entitled to receive such
dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision,
combination or re-classification.
b) Subsequent Equity Sales. If the Company or any Subsidiary
thereof, as applicable, at any time while Debentures are
outstanding, shall offer, sell, grant any option to purchase or
offer, sell or grant any right to reprice its securities, or
otherwise dispose of or issue (or announce any offer, sale,
grant or any option to purchase or other disposition) any Common
Stock or Common Stock Equivalents entitling any Person to
acquire shares of Common Stock, at an effective price per share
less than the then Conversion Price ("Dilutive Issuance"), as
adjusted hereunder (if the holder of the Common Stock or Common
Stock Equivalents so issued shall at any time, whether by
operation of purchase price adjustments, reset provisions,
floating conversion, exercise or exchange prices or otherwise,
or due to warrants, options or rights per share which is issued
in connection with such issuance, be entitled to receive shares
of Common Stock at an effective price per share which is less
than the Conversion Price, such issuance shall be deemed to have
occurred for less than the Conversion Price), then the
Conversion Price shall be reduced to equal the effective
conversion, exchange or purchase price for such Common Stock or
Common Stock Equivalents (including any reset provisions
thereof) at issue. Such adjustment shall be made whenever such
Common Stock or Common Stock Equivalents are issued. The
Company shall notify the Holder in writing, no later than the
business day following the issuance of any Common Stock or
Common Stock Equivalents subject to this section, indicating
therein the applicable issuance price, or of applicable reset
price, exchange price, conversion price and other pricing terms.
c) Pro Rata Distributions. If the Company, at any time while
Debentures are outstanding, shall distribute to all holders of
Common Stock (and not to Holders) evidences of its indebtedness
or assets or rights or warrants to subscribe for or purchase any
security, then in each such case the Conversion Price shall be
determined by multiplying such Conversion Price in effect
immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction
of which the denominator shall be the VWAP determined as of the
record date mentioned above, and of which the numerator shall be
such VWAP on such record date less the then fair market value at
such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share
of the Common Stock as determined by the Board of Directors in
good faith. In either case the adjustments shall be described
in a statement provided to the Holders of the portion of assets
or evidences of indebtedness so distributed or such subscription
rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned
above.
d) Calculations. All calculations under this Section 5 shall be
made to the nearest cent or the nearest 1/100th of a share, as
the case may be. For purposes of this Section 5, the number of
shares of Common Stock outstanding as of a given date shall be
5
the sum of the number of shares of Common Stock (excluding treasury
shares, if any) outstanding.
e) Notice to Holders.
i.Adjustment to Conversion Price. Whenever the
Conversion Price is adjusted pursuant to any of this
Section 5, the Company shall promptly mail to each
Holder a notice setting forth the Conversion Price
after such adjustment and setting forth a brief
statement of the facts requiring such adjustment. If
the Company issues a variable rate security, despite
the prohibition thereon in the Purchase Agreement,
the Company shall be deemed to have issued Common
Stock or Common Stock Equivalents at the lowest
possible conversion or exercise price at which such
securities may be converted or exercised in the case
of a Variable Rate Transaction (as defined in the
Purchase Agreement), or the lowest possible
adjustment price in the case of an MFN Transaction
(as defined in the Purchase Agreement).
ii.Notice to Allow Conversion by Holder. If (A) the
Company shall declare a dividend (or any other
distribution) on the Common Stock; (B) the Company
shall declare a special nonrecurring cash dividend on
or a redemption of the Common Stock; (C) the Company
shall authorize the granting to all holders of the
Common Stock rights or warrants to subscribe for or
purchase any shares of capital stock of any class or
of any rights; (D) the approval of any stockholders
of the Company shall be required in connection with
any reclassification of the Common Stock, any
consolidation or merger to which the Company is a
party, any sale or transfer of all or substantially
all of the assets of the Company, of any compulsory
share exchange whereby the Common Stock is converted
into other securities, cash or property; (E) the
Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the affairs
of the Company; then, in each case, the Company shall
cause to be filed at each office or agency maintained
for the purpose of conversion of the Debentures, and
shall cause to be mailed to the Holders at their last
addresses as they shall appear upon the stock books
of the Company, at least 20 calendar days prior to
the applicable record or effective date hereinafter
specified, a notice stating (x) the date on which a
record is to be taken for the purpose of such
dividend, distribution, redemption, rights or
warrants, or if a record is not to be taken, the date
as of which the holders of the Common Stock of record
to be entitled to such dividend, distributions,
redemption, rights or warrants are to be determined
or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share
exchange is expected to become effective or close,
and the date as of which it is expected that holders
of the Common Stock of record shall be entitled to
exchange their shares of the Common Stock for
securities, cash or other property deliverable upon
such reclassification, consolidation, merger, sale,
transfer or share exchange; provided, that the
failure to mail such notice or any defect therein or
in the mailing thereof shall not affect the validity
of the corporate action required to be specified in
such
6
notice. Holders are entitled to convert Debentures
during the 20-day period commencing the date of such
notice to the effective date of the event triggering
such notice.
iii.Fundamental Transaction. If, at any time while this
Debenture is outstanding, (A) the Company effects any
merger or consolidation of the Company with or into
another Person, (B) the Company effects any sale of
all or substantially all of its assets in one or a
series of related transactions, (C) any tender offer
or exchange offer (whether by the Company or another
Person) is completed pursuant to which holders of
Common Stock are permitted to tender or exchange
their shares for other securities, cash or property,
or (D) the Company effects any reclassification of
the Common Stock or any compulsory share exchange
pursuant to which the Common Stock is effectively
converted into or exchanged for other securities,
cash or property (in any such case, a "Fundamental
Transaction"), then upon any subsequent conversion of
this Debenture, the Holder shall have the right to
receive, for each Conversion Share that would have
been issuable upon such conversion absent such
Fundamental Transaction, the same kind and amount of
securities, cash or property as it would have been
entitled to receive upon the occurrence of such
Fundamental Transaction if it had been, immediately
prior to such Fundamental Transaction, the holder of
one share of Common Stock (the "Alternate
Consideration"). For purposes of any such
conversion, the determination of the Conversion Price
shall be appropriately adjusted to apply to such
Alternate Consideration based on the amount of
Alternate Consideration issuable in respect of one
share of Common Stock in such Fundamental
Transaction, and the Company shall apportion the
Conversion Price among the Alternate Consideration in
a reasonable manner reflecting the relative value of
any different components of the Alternate
Consideration. If holders of Common Stock are given
any choice as to the securities, cash or property to
be received in a Fundamental Transaction, then the
Holder shall be given the same choice as to the
Alternate Consideration it receives upon any
conversion of this Debenture following such
Fundamental Transaction. To the extent necessary to
effectuate the foregoing provisions, any successor to
the Company or surviving entity in such Fundamental
Transaction shall issue to the Holder a new debenture
consistent with the foregoing provisions and
evidencing the Holder's right to convert such
debenture into Alternate Consideration. The terms of
any agreement pursuant to which a Fundamental
Transaction is effected shall include terms requiring
any such successor or surviving entity to comply with
the provisions of this paragraph (c) and insuring
that this Debenture (or any such replacement
security) will be similarly adjusted upon any
subsequent transaction analogous to a Fundamental
Transaction.
iv.Exempt Issuance. Notwithstanding the foregoing, no
adjustment will be made under Section 5(b) in respect
of an Exempt Issuance.
Section 6. [RESERVED]
7
Section 7. Negative Covenants. So long as any portion of this Debenture
is outstanding, the Company will not and will not permit any of its
Subsidiaries to directly or indirectly:
a) enter into, create, incur, assume or suffer to exist any
indebtedness or liens of any kind, on or with respect to any of its
property or assets now owned or hereafter acquired or any interest
therein or any income or profits therefrom that is senior to, or
pari passu with, in any respect, the Company's obligations under
the Debentures;
b) amend its certificate of incorporation, bylaws or to her charter
documents so as to adversely affect any rights of the Holder;
c) repay, repurchase or offer to repay, repurchase or otherwise
acquire more than a de minimis number of shares of its Common Stock
or other equity securities other than as to the Conversion Shares
to the extent permitted or required under the Transaction Documents
or as otherwise permitted by the Transaction Documents; or
d) enter into any agreement with respect to any of the foregoing.
Section 8. Events of Default.
a) "Event of Default", wherever used herein, means any one of the
following events (whatever the reason and whether it shall be
voluntary or involuntary or effected by operation of law or
pursuant to any judgment, decree or order of any court, or any
order, rule or regulation of any administrative or governmental
body):
i.any default in the payment of the principal of or liquidated
damages in respect of, any Debenture, in each case free of
any claim of subordination, as and when the same shall become
due and payable (whether on a Conversion Date or the Maturity
Date or by acceleration or otherwise) which default is not
cured, if possible to cure, within 3 days of notice of such
default sent by the Holder;
ii. the Company shall fail to observe or perform any other
covenant or agreement contained in this Debenture or any of
the other Transaction Documents (other than a breach by the
Company of its obligations to deliver shares of Common Stock
to the Holder upon conversion which breach is addressed in
clause (xii) below) which failure is not cured, if possible
to cure, within the earlier to occur of (A) 5 Trading Days
after notice of such default sent by the Holder or by any
other Holder and (B)10 Trading Days after the Company shall
become or should have become aware of such failure.
iii. a default or event of default (subject to any grace or
cure period provided for in the applicable agreement,
document or instrument) shall occur
8
under (A) any of the Transaction Documents other than the
Debentures, or (B) any other material agreement, lease,
document or instrument to which the Company or any Subsidiary
is bound;
iv. any representation or warranty made herein, in any
other Transaction Document, in any written statement pursuant
hereto or thereto, or in any other report, financial
statement or certificate made or delivered to the Holder or
any other holder of Debentures shall be untrue or incorrect
in any material respect as of the date when made or deemed
made;
v. (i) the Company or any of its Subsidiaries shall
commence, or there shall be commenced against the Company or
any such Subsidiary, a case under any applicable bankruptcy
or insolvency laws as now or hereafter in effect or any
successor thereto, or the Company or any Subsidiary commences
any other proceeding under any reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution,
insolvency or liquidation or similar law of any jurisdiction
whether now or hereafter in effect relating to the Company or
any Subsidiary thereof or (ii) there is commenced against the
Company or any Subsidiary thereof any such bankruptcy,
insolvency or other proceeding which remains undismissed for
a period of 60 days; or (iii) the Company or any Subsidiary
thereof is adjudicated by a court of competent jurisdiction
insolvent or bankrupt; or any order of relief or other order
approving any such case or proceeding is entered; or (iv) the
Company or any Subsidiary thereof suffers any appointment of
any custodian or the like for it or any substantial part of
its property which continues undischarged or unstayed for a
period of 60 days; or (v) the Company or any Subsidiary
thereof makes a general assignment for the benefit of
creditors; or (vi) the Company shall fail to pay, or shall
state that it is unable to pay, or shall be unable to pay,
its debts generally as they become due; or (vii) the Company
or any Subsidiary thereof shall call a meeting of its
creditors with a view to arranging a composition, adjustment
or restructuring of its debts; or (viii) the Company or any
Subsidiary thereof shall by any act or failure to act
expressly indicate its consent to, approval of or
acquiescence in any of the foregoing; or (ix) any corporate
or other action is taken by the Company or any Subsidiary
thereof for the purpose of effecting any of the foregoing;
vi. the Company or any Subsidiary shall default in any of
its obligations under any mortgage, credit agreement or other
facility, indenture agreement, factoring agreement or other
instrument under which there may be issued, or by which there
may be secured or evidenced any indebtedness for borrowed
money or money due under any long term leasing or factoring
arrangement of the Company in an amount exceeding $150,000,
whether such indebtedness now exists or shall hereafter be
created and such default shall result in such indebtedness
becoming or being declared due and payable prior to the date
on which it would otherwise become due and payable;
9
vii. the Common Stock shall not be eligible for quotation on
or quoted for trading on a Trading Market and shall not again
be eligible for and quoted or listed for trading thereon
within five Trading Days;
viii. the Company shall be a party to any Change of Control
Transaction or Fundamental Transaction, shall agree to sell
or dispose of all or in excess of 33% of its assets in one or
more transactions (whether or not such sale would constitute
a Change of Control Transaction) or shall redeem or
repurchase more than a de minimis number of its outstanding
shares of Common Stock or other equity securities of the
Company (other than redemptions of Conversion Shares and
repurchases of shares of Common Stock or other equity
securities of departing officers and directors of the
Company; provided such repurchases shall exceed $100,000, in
the aggregate, for all officers and directors during the term
of this Debenture);
ix. a Registration Statement shall not have been declared
effective by the Commission on or prior to the 180th calendar
day after the Closing Date or any other or any other Event
(as defined in the Registration Rights Agreement);
x. if, during the Effectiveness Period, the effectiveness
of the Registration Statement lapses for any reason or the
Holder shall not be permitted to resell Registrable
Securities (as defined in the Registration Rights Agreement)
under the Registration Statement, in either case, for more
than 30 consecutive Trading Days or 60 non-consecutive
Trading Days during any 12 month period; provided, however,
that in the event that the Company is negotiating a merger,
consolidation, acquisition or sale of all or substantially
all of its assets or a similar transaction and in the written
opinion of counsel to the Company, the Registration
Statement, would be required to be amended to include
information concerning such transactions or the parties
thereto that is not available or may not be publicly
disclosed at the time, the Company shall be permitted an
additional 10 consecutive Trading during any 12 month period
relating to such an event;
xi. an Event (as defined in the Registration Rights
Agreement) shall not have been cured to the satisfaction of
the Holder prior to the expiration of thirty days from the
Event Date (as defined in the Registration Rights Agreement)
relating thereto (other than an Event resulting from a
failure of an Registration Statement to be declared effective
by the Commission on or prior to the Effectiveness Date (as
defined in the Registration Rights Agreement), which shall be
covered by Section 8(a)(ix);
xii. the Company shall fail for any reason to deliver
certificates to a Holder prior to the fifth Trading Day after
a Conversion Date pursuant to and in accordance with Section
4(d) or the Company shall provide notice to the Holder,
including by way of public announcement, at any time, of its
intention not to
10
comply with requests for conversions of any Debentures in
accordance with the terms hereof; or
xiii. the Company shall fail for any reason to deliver the
payment in cash pursuant to a Buy-In (as defined herein)
within five Trading Days after notice thereof is delivered
hereunder.
11
a) Remedies Upon Event of Default. If any Event of Default occurs,
the full principal amount of this Debenture, together with any
other amounts owing in respect thereof, to the date of
acceleration shall become, at the Holder's election, immediately
due and payable in cash. The aggregate amount payable upon an
Event of Default shall be equal to the Mandatory Prepayment
Amount. Interest shall accrue on the Mandatory Prepayment
Amount hereunder from the fifth (5th) day after such amount is
due (being the date of an Event of Default) through the date of
prepayment in full thereof in an amount equal to the Late Fee,
to accrue daily from the date such payment is due hereunder
through and including the date of payment. All Debentures for
which the full Mandatory Prepayment Amount hereunder shall have
been paid in accordance herewith shall promptly be surrendered
to or as directed by the Company. The Holder need not provide
and the Company hereby waives any presentment, demand, protest
or other notice of any kind, and the Holder may immediately and
without expiration of any grace period enforce any and all of
its rights and remedies hereunder and all other remedies
available to it under applicable law. Such declaration may be
rescinded and annulled by Holder at any time prior to payment
hereunder and the Holder shall have all rights as a Debenture
holder until such time, if any, as the full payment under this
Section shall have been received by it. No such rescission or
annulment shall affect any subsequent Event of Default or impair
any right consequent thereon.
12
Section 9. Miscellaneous.
13
a) Notices. Any and all notices or other communications or
deliveries to be provided by the Holders hereunder, including,
without limitation, any Notice of Conversion, shall be in
writing and delivered personally, by facsimile, sent by a
nationally recognized overnight courier service, addressed to
the Company, at the address set forth above, facsimile number
(604) 689-7758, ATTN: TERRY FIELDS or such other address or
facsimile number as the Company may specify for such purposes by
notice to the Holders delivered in accordance with this Section.
Any and all notices or other communications or deliveries to be
provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, sent by a nationally
recognized overnight courier service addressed to each Holder at
the facsimile telephone number or address of such Holder
appearing on the books of the Company, or if no such facsimile
telephone number or address appears, at the principal place of
business of the Holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the
earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 5:30 p.m.
(New York City time), (ii) the date after the date of
transmission, if such notice or
14
communication is delivered via facsimile at the facsimile telephone
number specified in this Section later than 5:30 p.m. (New York
City time) on any date and earlier than 11:59 p.m. (New York
City time) on such date, (iii) the second Business Day following
the date of mailing, if sent by nationally recognized overnight
courier service, or (iv) upon actual receipt by the party to
whom such notice is required to be given.
b) Absolute Obligation. Except as expressly provided herein, no
provision of this Debenture shall alter or impair the obligation
of the Company, which is absolute and unconditional, to pay the
principal of and liquidated damages (if any) on, this Debenture
at the time, place, and rate, and in the coin or currency,
herein prescribed. This Debenture is a direct debt obligation
of the Company. This Debenture ranks pari passu with all other
Debentures now or hereafter issued under the terms set forth
herein.
c) Security Interest. This Debenture is a direct debt obligation
of the Company and, pursuant to the Security Agreement is
secured by a first priority perfected security interest in all
of the assets of the Company for the benefit of the Holders.
d) Lost or Mutilated Debenture. If this Debenture shall be
mutilated, lost, stolen or destroyed, the Company shall execute
and deliver, in exchange and substitution for and upon
cancellation of a mutilated Debenture, or in lieu of or in
substitution for a lost, stolen or destroyed Debenture, a new
Debenture for the principal amount of this Debenture so
mutilated, lost, stolen or destroyed but only upon receipt of
evidence of such loss, theft or destruction of such Debenture,
and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.
e) Governing Law. All questions concerning the construction,
validity, enforcement and interpretation of this Debenture shall
be governed by and construed and enforced in accordance with the
internal laws of the State of New York, without regard to the
principles of conflicts of law thereof. Each party agrees that
all legal proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by any
of the Transaction Documents (whether brought against a party
hereto or its respective affiliates, directors, officers,
shareholders, employees or agents) shall be commenced in the
state and federal courts sitting in the City of New York,
Borough of Manhattan (the "New York Courts"). Each party hereto
hereby irrevocably submits to the exclusive jurisdiction of the
New York Courts for the adjudication of any dispute hereunder or
in connection herewith or with any transaction contemplated
hereby or discussed herein (including with respect to the
enforcement of any of the Transaction Documents), and hereby
irrevocably waives, and agrees not to assert in any suit, action
or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, or such New York Courts are
improper or inconvenient venue for such proceeding. Each party
hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or
proceeding by mailing a copy thereof via registered or certified
mail or overnight delivery (with evidence of delivery) to such
party at the address in effect for notices to it under this
Debenture and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing
15
contained herein shall be deemed to limit in any way any right to
serve process in any manner permitted by law. Each party hereto
hereby irrevocably waives, to the fullest extent permitted by
applicable law, any and all right to trial by jury in any legal
proceeding arising out of or relating to this Debenture or the
transactions contemplated hereby. If either party shall commence
an action or proceeding to enforce any provisions of this
Debenture, then the prevailing party in such action or
proceeding shall be reimbursed by the other party for its
attorneys fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such action or
proceeding.
f) Waiver. Any waiver by the Company or the Holder of a breach of
any provision of this Debenture shall not operate as or be
construed to be a waiver of any other breach of such provision
or of any breach of any other provision of this Debenture. The
failure of the Company or the Holder to insist upon strict
adherence to any term of this Debenture on one or more occasions
shall not be considered a waiver or deprive that party of the
right thereafter to insist upon strict adherence to that term or
any other term of this Debenture. Any waiver must be in
writing.
g) Severability. If any provision of this Debenture is invalid,
illegal or unenforceable, the balance of this Debenture shall
remain in effect, and if any provision is inapplicable to any
person or circumstance, it shall nevertheless remain applicable
to all other persons and circumstances. If it shall be found
that any deemed interest or other amount deemed interest due
hereunder violates applicable laws governing usury, the
applicable rate of interest due hereunder shall automatically be
lowered to equal the maximum permitted rate of interest. The
Company covenants (to the extent that it may lawfully do so)
that it shall not at any time insist upon, plead, or in any
manner whatsoever claim or take the benefit or advantage of, any
stay, extension or usury law or other law which would prohibit
or forgive the Company from paying all or any portion of the
principal of or deemed interest on this Debenture as
contemplated herein, wherever enacted, now or at any time
hereafter in force, or which may affect the covenants or the
performance of this indenture, and the Company (to the extent it
may lawfully do so) hereby expressly waives all benefits or
advantage of any such law, and covenants that it will not, by
resort to any such law, hinder, delay or impeded the execution
of any power herein granted to the Holder, but will suffer and
permit the execution of every such as though no such law has
been enacted.
h) Next Business Day. Whenever any payment or other obligation
hereunder shall be due on a day other than a Business Day, such
payment shall be made on the next succeeding Business Day.
i) Headings. The headings contained herein are for convenience
only, do not constitute a part of this Debenture and shall not
be deemed to limit or affect any of the provisions hereof.
*********************
16
IN WITNESS WHEREOF, the Company has caused this Convertible Debenture to
be duly executed by a duly authorized officer as of the date first above
indicated.
SUNBURST ACQUISITIONS IV, INC.
By:__________________________________________
Name:
Title:
17
ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal under the Secured
Convertible Debenture of Sunburst Acquisitions IV, Inc., a Colorado corporation
(the "Company"), due on July __, 2005, into shares of common stock, no par
value per share (the "Common Stock"), of the Company according to the
conditions hereof, as of the date written below. If shares are to be issued in
the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto and is delivering herewith such
certificates and opinions as reasonably requested by the Company in accordance
therewith. No fee will be charged to the holder for any conversion, except for
such transfer taxes, if any.
By the delivery of this Notice of Conversion the undersigned represents
and warrants to the Company that its ownership of the Company's Common Stock
does not exceed the amounts determined in accordance with Section 13(d) of the
Exchange Act, specified under Section 4 of this Debenture.
The undersigned agrees to comply with the prospectus delivery
requirements under the applicable securities laws in connection with any
transfer of the aforesaid shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:
Principal Amount of Debentures to be Converted:
Number of shares of Common Stock to be issued:
Signature:
Name:
Address:
18
SCHEDULE 1
CONVERSION SCHEDULE
The Secured Convertible Debenture due on July ___, 2005, in the aggregate
principal amount of $____________ issued by Sunburst Acquisitions IV, Inc. a
Colorado corporation. This Conversion Schedule reflects conversions made under
Section 4 of the above referenced Debenture.
Dated:
Date of Conversion Amount of Aggregate Principal Amount Remaining Subsequent to Company Attest
(or for first entry, Original Issue Conversion Conversion
Date) (or original Principal Amount)
19
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and entered
into as of August 25, 2004 among Sunburst Acquisitions IV, Inc. a Colorado
corporation (the "Company"), and the purchasers signatory hereto (each such
purchaser is a "Purchaser" and all such purchasers are, collectively, the
"Purchasers").
This Agreement is made pursuant to the Securities Purchase
Agreement, dated as of the date hereof among the Company and the Purchasers
(the "Purchase Agreement").
The Company and the Purchasers hereby agree as follows:
1. Definitions
CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED HEREIN THAT ARE
DEFINED IN THE PURCHASE AGREEMENT SHALL HAVE THE MEANINGS GIVEN SUCH TERMS IN
THE PURCHASE AGREEMENT. As used in this Agreement, the following terms shall
have the following meanings:
"Advice" shall have the meaning set forth in Section 6(d).
"Effectiveness Date" means, with respect to the initial
Registration Statement required to be filed hereunder, the 60th calendar
day following the date hereof and, with respect to any additional
Registration Statements which may be required pursuant to Section 3(c),
the 60th calendar day following the date on which the Company first
knows, or reasonably should have known, that such additional Registration
Statement is required hereunder; provided, however, in the event the
Company is notified by the Commission that one of the above Registration
Statements will not be reviewed or is no longer subject to further review
and comments, the Effectiveness Date as to such Registration Statement
shall be the fifth Trading Day following the date on which the Company is
so notified if such date precedes the dates required above.
"Effectiveness Period" shall have the meaning set forth in
Section 2(a).
"Event" shall have the meaning set forth in Section 2(b).
"Event Date" shall have the meaning set forth in Section 2(b).
"Filing Date" means, with respect to the initial Registration
Statement required hereunder, the 30th calendar day following the date
hereof and, with respect to any additional Registration Statements which
may be required pursuant to Section 3(c), the 15th day following the date
on which the Company first knows, or reasonably should have known that
such additional Registration Statement is required hereunder.
1
"Holder" or "Holders" means the holder or holders, as the case may
be, from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in Section
5(c).
"Indemnifying Party" shall have the meaning set forth in Section
5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in a Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an
effective registration statement in reliance upon Rule 430A promulgated
under the Securities Act), as amended or supplemented by any prospectus
supplement, with respect to the terms of the offering of any portion of
the Registrable Securities covered by a Registration Statement, and all
other amendments and supplements to the Prospectus, including post-
effective amendments, and all material incorporated by reference or
deemed to be incorporated by reference in such Prospectus.
"Registrable Securities" means, as of the date in question, (i)
200% of the shares of Common Stock issuable upon conversion in full of
the Debentures, (ii) all of the Warrant Shares, (iii) any securities
issued or issuable upon any stock split, dividend or other distribution
recapitalization or similar event with respect to the foregoing and (iv)
any additional shares issuable in connection with any anti-dilution
provisions in the Debentures.
"Registration Statement" means the registration statements
required to be filed hereunder and any additional registration statements
contemplated by Section 3(c), including (in each case) the Prospectus,
amendments and supplements to such registration statement or Prospectus,
including pre- and post-effective amendments, all exhibits thereto, and
all material incorporated by reference or deemed to be incorporated by
reference in such registration statement.
"Rule 415" means Rule 415 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to
time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same purpose and effect as such Rule.
"Rule 424" means Rule 424 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to
time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same purpose and effect as such Rule.
2
2. Shelf Registration
(a) On or prior to each Filing Date, the Company shall prepare
and file with the Commission a "Shelf" Registration Statement covering the
resale of 125% of the Registrable Securities on such Filing Date for an
offering to be made on a continuous basis pursuant to Rule 415. The
Registration Statement shall be on Form S-3 (except if the Company is not then
eligible to register for resale the Registrable Securities on Form S-3, in
which case such registration shall be on another appropriate form in accordance
herewith) and shall contain (unless otherwise directed by the Holders)
substantially the "Plan of Distribution" attached hereto as Annex A. Subject
to the terms of this Agreement, the Company shall use its best efforts to cause
the Registration Statement to be declared effective under the Securities Act as
promptly as possible after the filing thereof, but in any event prior to the
applicable Effectiveness Date, and shall use its best efforts to keep such
Registration Statement continuously effective under the Securities Act until
all Registrable Securities covered by such Registration Statement have been
sold or may be sold without volume restrictions pursuant to Rule 144(k) as
determined by the counsel to the Company pursuant to a written opinion letter
to such effect, addressed and acceptable to the Company's transfer agent and
the affected Holders (the "Effectiveness Period"). The Company shall
immediately notify the Holders via facsimile of the effectiveness of the
Registration Statement on the same day that the Company receives notification
of the effectiveness from the Commission. Failure to so notify the Holder on
the same day that the Company receives such notification shall be deemed an
Event under Section 2(b).
(b) If: (i) a Registration Statement is not filed on or prior to
its Filing Date (if the Company files a Registration Statement without
affording the Holders the opportunity to review and comment on the same as
required by Section 3(a), the Company shall not be deemed to have satisfied
this clause (i)), or (ii) the Company fails to file with the Commission a
request for acceleration in accordance with Rule 461 promulgated under the
Securities Act, within five Trading Days of the date that the Company is
notified (orally or in writing, whichever is earlier) by the Commission that a
Registration Statement will not be "reviewed," or not subject to further
review, or (iii) prior to its Effectiveness Date, the Company fails to file a
pre-effective amendment and otherwise respond in writing to comments made by
the Commission in respect of such Registration Statement within 10 calendar
days after the receipt of comments by or notice from the Commission that such
amendment is required in order for a Registration Statement to be declared
effective, or (iv) a Registration Statement filed or required to be filed
hereunder is not declared effective by the Commission by its Effectiveness
Date, or (v) after the Effectiveness Date, a Registration Statement ceases for
any reason to remain continuously effective as to all Registrable Securities
for which it is required to be effective, or the Holders are not permitted to
utilize the Prospectus therein to resell such Registrable Securities for 10
consecutive calendar days but no more than an aggregate of 15 calendar days
during any 12-month period (which need not be consecutive Trading Days) (any
such failure or breach being referred to as an "Event", and for purposes of
clause (i) or (iv) the date on which such Event occurs, or for purposes of
clause (ii) the date on which such five Trading Day period is exceeded, or for
purposes of clause (iii) the date which such 10 calendar day period is
exceeded, or for purposes of clause (v) the date on which such 10 or 15
calendar day period, as applicable, is exceeded being referred to as "Event
Date"), then in addition to any other rights the Holders may
3
have hereunder or under applicable law, on each such Event Date and on each
monthly anniversary of each such Event Date (or 3 Trading Days following the
cure if the applicable Event shall have been cured prior to such date) until
the applicable Event is cured, the Company shall pay to each Holder an amount
in cash, as partial liquidated damages and not as a penalty, equal to 2.0% of
the aggregate purchase price paid by such Holder pursuant to the Purchase
Agreement for any Registrable Securities then held by such Holder. If the
Company fails to pay any partial liquidated damages pursuant to this Section in
full within seven days after the date payable, the Company will pay interest
thereon at a rate of 18% per annum (or such lesser maximum amount that is
permitted to be paid by applicable law) to the Holder, accruing daily from the
date such partial liquidated damages are due until such amounts, plus all such
interest thereon, are paid in full. The partial liquidated damages pursuant to
the terms hereof shall apply on a daily pro-rata basis for any portion of a
month prior to the cure of an Event.
3. Registration Procedures
In connection with the Company's registration obligations
hereunder, the Company shall:
(a)Not less than five Trading Days prior to the filing of each
Registration Statement or any related Prospectus or any amendment
or supplement thereto (including any document that would be
incorporated or deemed to be incorporated therein by reference),
the Company shall, (i) furnish to each Holder copies of all such
documents proposed to be filed, which documents (other than those
incorporated or deemed to be incorporated by reference) will be
subject to the review of such Holders, and (ii) cause its
officers and directors, counsel and independent certified public
accountants to respond to such inquiries as shall be necessary,
in the reasonable opinion of respective counsel to conduct a
reasonable investigation within the meaning of the Securities
Act. The Company shall not file the Registration Statement or any
such Prospectus or any amendments or supplements thereto to which
the Holders of a majority of the Registrable Securities shall
reasonably object in good faith, provided that, the Company is
notified of such objection in writing no later than 5 Trading
Days after the Holders have been so furnished copies of such
documents. Each Holder agrees to furnish to the Company a
completed Questionnaire in the form attached to this Agreement as
Annex B (a "Selling Holder Questionnaire") not less than two
Trading Days prior to the Filing Date or by the end of the fourth
Trading Day following the date on which such Holder receives
draft materials in accordance with this Section.
(b)(i) Prepare and file with the Commission such amendments,
including post-effective amendments, to a Registration Statement
and the Prospectus used in connection therewith as may be
necessary to keep a Registration Statement continuously effective
as to the applicable Registrable Securities for the Effectiveness
Period and prepare and file with the Commission such additional
Registration Statements in order to register for resale under the
Securities Act all of the Registrable Securities; (ii) cause the
related Prospectus to be amended or supplemented by any required
Prospectus supplement (subject to the terms of this Agreement),
and as so supplemented or amended to be filed pursuant to Rule
424; (iii) respond as promptly as reasonably possible to any
comments received from the Commission with respect to a
Registration Statement or any amendment thereto and as promptly
as reasonably possible provide the Holders true and complete
copies of all correspondence from and to the Commission
4
relating to a Registration Statement; and (iv) comply in all
material respects with the provisions of the Securities Act and
the Exchange Act with respect to the disposition of all
Registrable Securities covered by a Registration Statement during
the applicable period in accordance (subject to the terms of this
Agreement) with the intended methods of disposition by the
Holders thereof set forth in such Registration Statement as so
amended or in such Prospectus as so supplemented.
(c)If during the Effectiveness Period, the number of Registrable
Securities at any time exceeds 90% of the number of shares of
Common Stock then registered in a Registration Statement, then
the Company shall file as soon as reasonably practicable but in
any case prior to the applicable Filing Date, an additional
Registration Statement covering the resale by the Holders of not
less than 125% of the number of such Registrable Securities.
(d)Notify the Holders of Registrable Securities to be sold (which
notice shall, pursuant to clauses (ii) through (vi) hereof, be
accompanied by an instruction to suspend the use of the
Prospectus until the requisite changes have been made) as
promptly as reasonably possible (and, in the case of (i)(A)
below, not less than five Trading Days prior to such filing) and
(if requested by any such Person) confirm such notice in writing
no later than one Trading Day following the day (i)(A) when a
Prospectus or any Prospectus supplement or post-effective
amendment to a Registration Statement is proposed to be filed;
(B) when the Commission notifies the Company whether there will
be a "review" of such Registration Statement and whenever the
Commission comments in writing on such Registration Statement
(the Company shall provide true and complete copies thereof and
all written responses thereto to each of the Holders); and (C)
with respect to a Registration Statement or any post-effective
amendment, when the same has become effective; (ii) of any
request by the Commission or any other Federal or state
governmental authority for amendments or supplements to a
Registration Statement or Prospectus or for additional
information; (iii) of the issuance by the Commission or any other
federal or state governmental authority of any stop order
suspending the effectiveness of a Registration Statement covering
any or all of the Registrable Securities or the initiation of any
Proceedings for that purpose; (iv) of the receipt by the Company
of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the
Registrable Securities for sale in any jurisdiction, or the
initiation or threatening of any Proceeding for such purpose; (v)
of the occurrence of any event or passage of time that makes the
financial statements included in a Registration Statement
ineligible for inclusion therein or any statement made in a
Registration Statement or Prospectus or any document incorporated
or deemed to be incorporated therein by reference untrue in any
material respect or that requires any revisions to a Registration
Statement, Prospectus or other documents so that, in the case of
a Registration Statement or the Prospectus, as the case may be,
it will not contain any untrue statement of a material fact or
omit to state any 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
(vi) the occurrence or existence of any pending corporate
development with respect to the Company that the Company believes
may be material and that, in the determination of the Company,
makes it not in the best interest of the Company to allow
continued availability of the Registration Statement or
Prospectus; provided that any and all of such information shall
remain confidential to each Holder until such information
otherwise becomes public, unless disclosure by a Holder is
required by law; provided, further,
5
notwithstanding each Holder's agreement to keep such information
confidential, the Holders make no acknowledgement that any such
information is material, non-public information.
(e)Use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of (i) any order suspending the
effectiveness of a Registration Statement, or (ii) any suspension
of the qualification (or exemption from qualification) of any of
the Registrable Securities for sale in any jurisdiction, at the
earliest practicable moment.
(f)Furnish to each Holder, without charge, at least one conformed
copy of each such Registration Statement and each amendment
thereto, including financial statements and schedules, all
documents incorporated or deemed to be incorporated therein by
reference to the extent requested by such Person, and all
exhibits to the extent requested by such Person (including those
previously furnished or incorporated by reference) promptly after
the filing of such documents with the Commission.
(g)Promptly deliver to each Holder, without charge, as many copies
of the Prospectus or Prospectuses (including each form of
prospectus) and each amendment or supplement thereto as such
Persons may reasonably request in connection with resales by the
Holder of Registrable Securities. Subject to the terms of this
Agreement, the Company hereby consents to the use of such
Prospectus and each amendment or supplement thereto by each of
the selling Holders in connection with the offering and sale of
the Registrable Securities covered by such Prospectus and any
amendment or supplement thereto, except after the giving on any
notice pursuant to Section 3(d).
(h)Prior to any resale of Registrable Securities by a Holder, use
its commercially reasonable efforts to register or qualify or
cooperate with the selling Holders in connection with the
registration or qualification (or exemption from the Registration
or qualification) of such Registrable Securities for the resale
by the Holder under the securities or Blue Sky laws of such
jurisdictions within the United States as any Holder reasonably
requests in writing, to keep each registration or qualification
(or exemption therefrom) effective during the Effectiveness
Period and to do any and all other acts or things reasonably
necessary to enable the disposition in such jurisdictions of the
Registrable Securities covered by each Registration Statement;
provided, that the Company shall not be required to qualify
generally to do business in any jurisdiction where it is not then
so qualified, subject the Company to any material tax in any such
jurisdiction where it is not then so subject or file a general
consent to service of process in any such jurisdiction.
(i)If requested by the Holders, cooperate with the Holders to
facilitate the timely preparation and delivery of certificates
representing Registrable Securities to be delivered to a
transferee pursuant to a Registration Statement, which
certificates shall be free, to the extent permitted by the
Purchase Agreement, of all restrictive legends, and to enable
such Registrable Securities to be in such denominations and
registered in such names as any such Holders may request.
(j)Upon the occurrence of any event contemplated by this Section 3,
as promptly as reasonably possible under the circumstances taking
into account the Company's good faith assessment of any adverse
consequences to the Company and its stockholders of the premature
6
disclosure of such event, prepare a supplement or amendment,
including a post-effective amendment, to a Registration Statement
or a supplement to the related Prospectus or any document
incorporated or deemed to be incorporated therein by reference,
and file any other required document so that, as thereafter
delivered, neither a Registration Statement nor such Prospectus
will contain an 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
under which they were made, not misleading. If the Company
notifies the Holders in accordance with clauses (ii) through (v)
of Section 3(d) above to suspend the use of any Prospectus until
the requisite changes to such Prospectus have been made, then the
Holders shall suspend use of such Prospectus. The Company will
use its best efforts to ensure that the use of the Prospectus may
be resumed as promptly as is practicable. The Company shall be
entitled to exercise its right under this Section 3(j) to suspend
the availability of a Registration Statement and Prospectus,
subject to the payment of partial liquidated damages pursuant to
Section 2(b), for a period not to exceed 60 days (which need not
be consecutive days) in any 12 month period.
(k)Comply with all applicable rules and regulations of the
Commission.
(l)The Company may require each selling Holder to furnish to the
Company a certified statement as to the number of shares of
Common Stock beneficially owned by such Holder and, if required
by the Commission, the person thereof that has voting and
dispositive control over the Shares. During any periods that the
Company is unable to meet its obligations hereunder with respect
to the registration of the Registrable Securities solely because
any Holder fails to furnish such information within three Trading
Days of the Company's request, any liquidated damages that are
accruing at such time as to such Holder only shall be tolled and
any Event that may otherwise occur solely because of such delay
shall be suspended as to such Holder only, until such information
is delivered to the Company.
4. Registration Expenses. All fees and expenses incident to the
performance of or compliance with this Agreement by the Company shall be borne
by the Company whether or not any Registrable Securities are sold pursuant to
the Registration Statement. The fees and expenses referred to in the foregoing
sentence shall include, without limitation, (i) all registration and filing
fees (including, without limitation, fees and expenses (A) with respect to
filings required to be made with the Trading Market on which the Common Stock
is then listed for trading, and (B) in compliance with applicable state
securities or Blue Sky laws reasonably agreed to by the Company in writing
(including, without limitation, fees and disbursements of counsel for the
Company in connection with Blue Sky qualifications or exemptions of the
Registrable Securities and determination of the eligibility of the Registrable
Securities for investment under the laws of such jurisdictions as requested by
the Holders), (ii) printing expenses (including, without limitation, expenses
of printing certificates for Registrable Securities and of printing
prospectuses if the printing of prospectuses is reasonably requested by the
holders of a majority of the Registrable Securities included in a Registration
Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and
disbursements of counsel for the Company, (v) Securities Act liability
insurance, if the Company so desires such insurance, and (vi) fees and expenses
of all other Persons retained by the Company in connection with the
consummation of the transactions contemplated by this Agreement. In addition,
the Company shall be responsible for all of its
7
internal expenses incurred in connection with the consummation of the
transactions contemplated by this Agreement (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit and the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange as required hereunder. In no event shall the Company be
responsible for any broker or similar commissions or, except to the extent
provided for in the Transaction Documents, any legal fees or other costs of the
Holders.
5. Indemnification
(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents, brokers (including brokers who
offer and sell Registrable Securities as principal as a result of a pledge or
any failure to perform under a margin call of Common Stock), investment
advisors and employees of each of them, each Person who controls any such
Holder (within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act) and the officers, directors, agents and employees of each
such controlling Person, to the fullest extent permitted by applicable law,
from and against any and all losses, claims, damages, liabilities, costs
(including, without limitation, reasonable attorneys' fees) and expenses
(collectively, "Losses"), as incurred, arising out of or relating to any untrue
or alleged untrue statement of a material fact contained in a Registration
Statement, any Prospectus or any form of prospectus or in any amendment or
supplement thereto or in any preliminary prospectus, or arising out of or
relating to any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein (in the case of any
Prospectus or form of prospectus or supplement thereto, in light of the
circumstances under which they were made) not misleading, except to the extent,
but only to the extent, that (i) such untrue statements or omissions are based
solely upon information regarding such Holder furnished in writing to the
Company by such Holder expressly for use therein, or to the extent that such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in a Registration Statement, such
Prospectus or such form of Prospectus or in any amendment or supplement thereto
(it being understood that the Holder has approved Annex A hereto for this
purpose) or (ii) in the case of an occurrence of an event of the type specified
in Section 3(d)(ii)-(vi), the use by such Holder of an outdated or defective
Prospectus after the Company has notified such Holder in writing that the
Prospectus is outdated or defective and prior to the receipt by such Holder of
the Advice contemplated in Section 6(e). The Company shall notify the Holders
promptly of the institution, threat or assertion of any Proceeding arising from
or in connection with the transactions contemplated by this Agreement of which
the Company is aware.
(b) Indemnification by Holders. Each Holder shall, severally and
not jointly, indemnify and hold harmless the Company, its directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and
the directors, officers, agents or employees of such controlling Persons, to
the fullest extent permitted by applicable law, from and against all Losses, as
incurred, to the extent arising out of or based solely upon: (x) such Holder's
failure to comply with the prospectus delivery requirements of the Securities
Act or (y) any untrue or alleged untrue
8
statement of a material fact contained in any Registration Statement, any
Prospectus, or any form of prospectus, or in any amendment or supplement
thereto or in any preliminary prospectus, or arising out of or relating to any
omission or alleged omission of a material fact required to be stated therein
or necessary to make the statements therein not misleading (i) to the extent,
but only to the extent, that such untrue statement or omission is contained in
any information so furnished in writing by such Holder to the Company
specifically for inclusion in such Registration Statement or such Prospectus or
(ii) to the extent that (1) such untrue statements or omissions are based
solely upon information regarding such Holder furnished in writing to the
Company by such Holder expressly for use therein, or to the extent that such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement (it
being understood that the Holder has approved Annex A hereto for this purpose),
such Prospectus or such form of Prospectus or in any amendment or supplement
thereto or (2) in the case of an occurrence of an event of the type specified
in Section 3(d)(ii)-(vi), the use by such Holder of an outdated or defective
Prospectus after the Company has notified such Holder in writing that the
Prospectus is outdated or defective and prior to the receipt by such Holder of
the Advice contemplated in Section 6(e). In no event shall the liability of any
selling Holder hereunder be greater in amount than the dollar amount of the net
proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity hereunder
(an "Indemnified Party"), such Indemnified Party shall promptly notify the
Person from whom indemnity is sought (the "Indemnifying Party") in writing, and
the Indemnifying Party shall have the right to assume the defense thereof,
including the employment of counsel reasonably satisfactory to the Indemnified
Party and the payment of all fees and expenses incurred in connection with
defense thereof; provided, that the failure of any Indemnified Party to give
such notice shall not relieve the Indemnifying Party of its obligations or
liabilities pursuant to this Agreement, except (and only) to the extent that it
shall be finally determined by a court of competent jurisdiction (which
determination is not subject to appeal or further review) that such failure
shall have prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in
writing to pay such fees and expenses; (2) the Indemnifying Party shall have
failed promptly to assume the defense of such Proceeding and to employ counsel
reasonably satisfactory to such Indemnified Party in any such Proceeding; or
(3) the named parties to any such Proceeding (including any impleaded parties)
include both such Indemnified Party and the Indemnifying Party, and such
Indemnified Party shall reasonably believe that a material conflict of interest
is likely to exist if the same counsel were to represent such Indemnified Party
and the Indemnifying Party (in which case, if such Indemnified Party notifies
the Indemnifying Party in writing that it elects to employ separate counsel at
the expense of the Indemnifying Party, the Indemnifying Party shall not have
the right to assume the defense thereof and the reasonable fees and expenses of
one separate counsel shall be at the expense of the Indemnifying Party). The
9
Indemnifying Party shall not be liable for any settlement of any such
Proceeding effected without its written consent, which consent shall not be
unreasonably withheld. No Indemnifying Party shall, without the prior written
consent of the Indemnified Party, effect any settlement of any pending
Proceeding in respect of which any Indemnified Party is a party, unless such
settlement includes an unconditional release of such Indemnified Party from all
liability on claims that are the subject matter of such Proceeding.
Subject to the terms of this Agreement, all reasonable fees and
expenses of the Indemnified Party (including reasonable fees and expenses to
the extent incurred in connection with investigating or preparing to defend
such Proceeding in a manner not inconsistent with this Section) shall be paid
to the Indemnified Party, as incurred, within ten Trading Days of written
notice thereof to the Indemnifying Party; provided, that the Indemnified Party
shall promptly reimburse the Indemnifying Party for that portion of such fees
and expenses applicable to such actions for which such Indemnified Party is not
entitled to indemnification hereunder, determined based upon the relative
faults of the parties.
(d) Contribution. If a claim for indemnification under Section
5(a) or 5(b) is unavailable to an Indemnified Party (by reason of public policy
or otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates
to information supplied by, such Indemnifying Party or Indemnified Party, and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include,
subject to the limitations set forth in this Agreement, any reasonable
attorneys' or other reasonable fees or expenses incurred by such party in
connection with any Proceeding to the extent such party would have been
indemnified for such fees or expenses if the indemnification provided for in
this Section was available to such party in accordance with its terms.
The parties hereto agree that it would not be just and equitable
if contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 5(d), no Holder
shall be required to contribute, in the aggregate, any amount in excess of the
amount by which the proceeds actually received by such Holder from the sale of
the Registrable Securities subject to the Proceeding exceeds the amount of any
damages that such Holder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission, except in
the case of fraud by such Holder.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties may have
to the Indemnified Parties.
10
6. Miscellaneous
(a)Remedies. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, each
Holder or the Company, as the case may be, in addition to being
entitled to exercise all rights granted by law and under this
Agreement, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages would not
provide adequate compensation for any losses incurred by reason
of a breach by it of any of the provisions of this Agreement and
hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall waive
the defense that a remedy at law would be adequate.
(b)No Piggyback on Registrations. Except as set forth on Schedule
6(b) attached hereto, neither the Company nor any of its security
holders (other than the Holders in such capacity pursuant hereto)
may include securities of the Company in the Registration
Statement other than the Registrable Securities. The Company
shall not file any other registration statements until the
initial Registration Statement required hereunder is declared
effective by the Commission, provided that this Section 6(c)
shall not prohibit the Company from filing amendments to
registration statements already filed.
(c)Compliance. Each Holder covenants and agrees that it will comply
with the prospectus delivery requirements of the Securities Act
as applicable to it in connection with sales of Registrable
Securities pursuant to the Registration Statement.
(d)Discontinued Disposition. Each Holder agrees by its acquisition
of such Registrable Securities that, upon receipt of a notice
from the Company of the occurrence of any event of the kind
described in Section 3(d), such Holder will forthwith discontinue
disposition of such Registrable Securities under a Registration
Statement until such Holder's receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement, or
until it is advised in writing (the "Advice") by the Company that
the use of the applicable Prospectus may be resumed, and, in
either case, has received copies of any additional or
supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration
Statement. The Company will use its best efforts to ensure that
the use of the Prospectus may be resumed as promptly as it
practicable. The Company agrees and acknowledges that any
periods during which the Holder is required to discontinue the
disposition of the Registrable Securities hereunder shall be
subject to the provisions of Section 2(b).
(e)Piggy-Back Registrations. If at any time during the Effectiveness
Period there is not an effective Registration Statement covering
all of the Registrable Securities and the Company shall determine
to prepare and file with the Commission a registration statement
relating to an offering for its own account or the account of
others under the Securities Act of any of its equity securities,
other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity
securities to be issued solely in connection with any acquisition
of any entity or business or equity securities issuable in
connection with the stock option or other employee benefit plans,
then the Company shall send
11
to each Holder a written notice of such determination and, if within
fifteen days after the date of such notice, any such Holder shall
so request in writing, the Company shall include in such
registration statement all or any part of such Registrable
Securities such holder requests to be registered; provided, that,
the Company shall not be required to register any Registrable
Securities pursuant to this Section 6(f) that are eligible for
resale pursuant to Rule 144(k) promulgated under the Securities
Act or that are the subject of a then effective Registration
Statement.
(f)Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended,
modified or supplemented, and waivers or consents to departures
from the provisions hereof may not be given, unless the same
shall be in writing and signed by the Company and each Holder of
the then outstanding Registrable Securities. Notwithstanding the
foregoing, a waiver or consent to depart from the provisions
hereof with respect to a matter that relates exclusively to the
rights of Holders and that does not directly or indirectly affect
the rights of other Holders may be given by Holders of all of the
Registrable Securities to which such waiver or consent relates;
provided, however, that the provisions of this sentence may not
be amended, modified, or supplemented except in accordance with
the provisions of the immediately preceding sentence.
(g)Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall
be delivered as set forth in the Purchase Agreement.
(h)Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors and permitted assigns of
each of the parties and shall inure to the benefit of each
Holder. The Company may not assign its rights or obligations
hereunder without the prior written consent of all of the Holders
of the then-outstanding Registrable Securities. Each Holder may
assign their respective rights hereunder in the manner and to the
Persons as permitted under the Purchase Agreement.
(i)No Inconsistent Agreements. Neither the Company nor any of its
subsidiaries has entered, as of the date hereof, nor shall the
Company or any of its subsidiaries, on or after the date of this
Agreement, enter into any agreement with respect to its
securities, that would have the effect of impairing the rights
granted to the Holders in this Agreement or otherwise conflicts
with the provisions hereof. Except as set forth on Schedule
6(b), neither the Company nor any of its subsidiaries has
previously entered into any agreement granting any registration
rights with respect to any of its securities to any Person that
have not been satisfied in full.
(j)Execution and Counterparts. This Agreement may be executed in any
number of counterparts, each of which when so executed shall be
deemed to be an original and, all of which taken together shall
constitute one and the same Agreement. In the event that any
signature is delivered by facsimile transmission, such signature
shall create a valid binding obligation of the party executing
(or on whose behalf such signature is executed) the same with the
same force and effect as if such facsimile signature were the
original thereof.
12
(k)Governing Law. All questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall
be determined with the provisions of the Purchase Agreement.
(l)Cumulative Remedies. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law.
(m)Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions set forth herein
shall remain in full force and effect and shall in no way be
affected, impaired or invalidated, and the parties hereto shall
use their commercially reasonable efforts to find and employ an
alternative means to achieve the same or substantially the same
result as that contemplated by such term, provision, covenant or
restriction. It is hereby stipulated and declared to be the
intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without
including any of such that may be hereafter declared invalid,
illegal, void or unenforceable.
(n)Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the
meaning hereof.
(o)Independent Nature of Holders' Obligations and Rights. The
obligations of each Holder hereunder are several and not joint
with the obligations of any other Holder hereunder, and no Holder
shall be responsible in any way for the performance of the
obligations of any other Holder hereunder. Nothing contained
herein or in any other agreement or document delivered at any
closing, and no action taken by any Holder pursuant hereto or
thereto, shall be deemed to constitute the Holders as a
partnership, an association, a joint venture or any other kind of
entity, or create a presumption that the Holders are in any way
acting in concert with respect to such obligations or the
transactions contemplated by this Agreement. Each Holder shall be
entitled to protect and enforce its rights, including without
limitation the rights arising out of this Agreement, and it shall
not be necessary for any other Holder to be joined as an
additional party in any proceeding for such purpose.
********************
13
IN WITNESS WHEREOF, the parties have executed this Registration
Rights Agreement as of the date first written above.
SUNBURST ACQUISITIONS IV, INC.
By:__________________________________________
Name:
Title:
[SIGNATURE PAGE OF HOLDERS FOLLOWS]
14
[SIGNATURE PAGE OF HOLDERS TO SBAQ RRA]
Name of Investing Entity: __________________________
Signature of Authorized Signatory of Investing Entity: _________________
Name of Authorized Signatory: _________________________
Title of Authorized Signatory: __________________________
[SIGNATURE PAGES CONTINUE]
15
Plan of Distribution
Each Selling Stockholder (the "Selling Stockholders") of the common stock
("Common Stock") of Sunburst Acquisitions IV, Inc. a Colorado corporation (the
"Company") and any of their pledgees, assignees and successors-in-interest may,
from time to time, sell any or all of their shares of Common Stock on the
Trading Market or any other stock exchange, market or trading facility on which
the shares are traded or in private transactions. These sales may be at fixed
or negotiated prices. A Selling Stockholder may use any one or more of the
following methods when selling shares:
{circle}ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
{circle}block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
{circle}purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
{circle}an exchange distribution in accordance with the rules of the
applicable exchange;
{circle}privately negotiated transactions;
{circle}settlement of short sales entered into after the date of this
prospectus;
{circle}broker-dealers may agree with the Selling Stockholders to sell
a specified number of such shares at a stipulated price per share;
{circle}a combination of any such methods of sale;
{circle}through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise; or
{circle}any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"), if available, rather
than under this prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the Selling Stockholders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated. Each Selling Stockholder does not expect these
commissions and discounts relating to its sales of shares to exceed what is
customary in the types of transactions involved.
In connection with the sale of our common stock or interests therein, the
Selling Stockholders may enter into hedging transactions with broker-dealers or
other financial
16
institutions, which may in turn engage in short sales of the common stock
in the course of hedging the positions they assume. The Selling Stockholders
may also sell shares of our common stock short and deliver these securities to
close out their short positions, or loan or pledge the common stock to broker-
dealers that in turn may sell these securities. The Selling Stockholders may
also enter into option or other transactions with broker-dealers or other
financial institutions or the creation of one or more derivative securities
which require the delivery to such broker-dealer or other financial institution
of shares offered by this prospectus, which shares such broker-dealer or other
financial institution may resell pursuant to this prospectus (as supplemented
or amended to reflect such transaction).
The Selling Stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event,
any commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Each Selling Stockholder
has informed the Company that it does not have any agreement or understanding,
directly or indirectly, with any person to distribute the Common Stock.
The Company is required to pay certain fees and expenses incurred by the
Company incident to the registration of the shares. The Company has agreed to
indemnify the Selling Stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
Because Selling Stockholders may be deemed to be "underwriters" within
the meaning of the Securities Act, they will be subject to the prospectus
delivery requirements of the Securities Act. In addition, any securities
covered by this prospectus which qualify for sale pursuant to Rule 144 under
the Securities Act may be sold under Rule 144 rather than under this
prospectus. Each Selling Stockholder has advised us that they have not entered
into any agreements, understandings or arrangements with any underwriter or
broker-dealer regarding the sale of the resale shares. There is no underwriter
or coordinating broker acting in connection with the proposed sale of the
resale shares by the Selling Stockholders.
We agreed to keep this prospectus effective until the earlier of (i) the
date on which the shares may be resold by the Selling Stockholders without
registration and without regard to any volume limitations by reason of Rule
144(e) under the Securities Act or any other rule of similar effect or (ii) all
of the shares have been sold pursuant to the prospectus or Rule 144 under the
Securities Act or any other rule of similar effect. The resale shares will be
sold only through registered or licensed brokers or dealers if required under
applicable state securities laws. In addition, in certain states, the resale
shares may not be sold unless they have been registered or qualified for sale
in the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to our common stock for a period of
two business days prior to the commencement of the distribution. In addition,
the Selling Stockholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including Regulation M,
which
17
may limit the timing of purchases and sales of shares of our common stock
by the Selling Stockholders or any other person. We will make copies of this
prospectus available to the Selling Stockholders and have informed them of the
need to deliver a copy of this prospectus to each purchaser at or prior to the
time of the sale.
18
ANNEX B
SUNBURST ACQUISITIONS IV, INC.
SELLING SECURITYHOLDER NOTICE AND QUESTIONNAIRE
The undersigned beneficial owner of common stock, no par value (the
"Common Stock"), of Sunburst Acquisitions IV, Inc. a Colorado corporation (the
"Company"), (the "Registrable Securities") understands that the Company has
filed or intends to file with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (the "Registration
Statement") for the registration and resale under Rule 415 of the Securities
Act of 1933, as amended (the "Securities Act"), of the Registrable Securities,
in accordance with the terms of the Registration Rights Agreement, dated as of
August 25, 2004 (the "Registration Rights Agreement"), among the Company and
the Purchasers named therein. A copy of the Registration Rights Agreement is
available from the Company upon request at the address set forth below. All
capitalized terms not otherwise defined herein shall have the meanings ascribed
thereto in the Registration Rights Agreement.
Certain legal consequences arise from being named as a selling
securityholder in the Registration Statement and the related prospectus.
Accordingly, holders and beneficial owners of Registrable Securities are
advised to consult their own securities law counsel regarding the consequences
of being named or not being named as a selling securityholder in the
Registration Statement and the related prospectus.
NOTICE
The undersigned beneficial owner (the "Selling Securityholder") of
Registrable Securities hereby elects to include the Registrable Securities
owned by it and listed below in Item 3 (unless otherwise specified under such
Item 3) in the Registration Statement.
19
The undersigned hereby provides the following information to the Company and
represents and warrants that such information is accurate:
QUESTIONNAIRE
1. NAME.
(a) Full Legal Name of Selling Securityholder
(b) Full Legal Name of Registered Holder (if not the same as (a) above)
through which Registrable Securities Listed in Item 3 below are
held:
(c) Full Legal Name of Natural Control Person (which means a natural
person who directly you indirectly alone or with others has power
to vote or dispose of the securities covered by the questionnaire):
2. ADDRESS FOR NOTICES TO SELLING SECURITYHOLDER:
Telephone:
Fax:
Contact Person:
3. BENEFICIAL OWNERSHIP OF REGISTRABLE SECURITIES:
(a) Type and Principal Amount of Registrable Securities beneficially
owned:
20
4. BROKER-DEALER STATUS:
(a) Are you a broker-dealer?
Yes No
Note: If yes, the Commission's staff has indicated that you should be
identified as an underwriter in the Registration Statement.
(b) Are you an affiliate of a broker-dealer?
Yes No
(c) If you are an affiliate of a broker-dealer, do you certify that you
bought the Registrable Securities in the ordinary course of
business, and at the time of the purchase of the Registrable
Securities to be resold, you had no agreements or understandings,
directly or indirectly, with any person to distribute the
Registrable Securities?
Yes No
Note: If no, the Commission's staff has indicated that you should be
identified as an underwriter in the Registration Statement.
5. BENEFICIAL OWNERSHIP OF OTHER SECURITIES OF THE COMPANY OWNED BY THE
SELLING SECURITYHOLDER.
Except as set forth below in this Item 5, the undersigned is not the
beneficial or registered owner of any securities of the Company other
than the Registrable Securities listed above in Item 3.
(a) Type and Amount of Other Securities beneficially owned by the
Selling Securityholder:
21
6. RELATIONSHIPS WITH THE COMPANY:
Except as set forth below, neither the undersigned nor any of its
affiliates, officers, directors or principal equity holders (owners of 5%
of more of the equity securities of the undersigned) has held any
position or office or has had any other material relationship with the
Company (or its predecessors or affiliates) during the past three years.
State any exceptions here:
The undersigned agrees to promptly notify the Company of any inaccuracies
or changes in the information provided herein that may occur subsequent to the
date hereof at any time while the Registration Statement remains effective.
By signing below, the undersigned consents to the disclosure of the
information contained herein in its answers to Items 1 through 6 and the
inclusion of such information in the Registration Statement and the related
prospectus. The undersigned understands that such information will be relied
upon by the Company in connection with the preparation or amendment of the
Registration Statement and the related prospectus.
IN WITNESS WHEREOF the undersigned, by authority duly given, has caused
this Notice and Questionnaire to be executed and delivered either in person or
by its duly authorized agent.
Dated: Beneficial Owner:
By:
Name:
Title:
PLEASE FAX A COPY OF THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE, AND
RETURN THE ORIGINAL BY OVERNIGHT MAIL, TO:
22
EXHIBIT C
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN SECURED BY SUCH SECURITIES.
COMMON STOCK PURCHASE WARRANT
To Purchase __________ Shares of Common Stock of
SUNBURST ACQUISITIONS IV, INC.
THIS COMMON STOCK PURCHASE WARRANT (the "Warrant") certifies that,
for value received, _____________ (the "Holder"), is entitled, upon the terms
and subject to the limitations on exercise and the conditions hereinafter set
forth, at any time on or after the date hereof (the "Initial Exercise Date")
and on or prior to the close of business on the fifth anniversary of the
Initial Exercise Date (the "Termination Date") but not thereafter, to subscribe
for and purchase from Sunburst Acquisitions IV, Inc., a Colorado corporation
(the "Company"), up to ______ shares (the "Warrant Shares") of Common Stock, no
par value, of the Company (the "Common Stock"). The purchase price of one
share of Common Stock (the "Exercise Price") under this Warrant shall be $0.12,
subject to adjustment hereunder. CAPITALIZED TERMS USED AND NOT OTHERWISE
DEFINED HEREIN SHALL HAVE THE MEANINGS SET FORTH IN THAT CERTAIN SECURITIES
PURCHASE AGREEMENT (THE "PURCHASE AGREEMENT"), DATED AUGUST 25, 2004, AMONG THE
COMPANY AND THE PURCHASERS SIGNATORY THERETO.
1
1. Title to Warrant. Prior to the Termination Date and subject to
compliance with applicable laws and Section 7 of this Warrant, this Warrant and
all rights hereunder are transferable, in whole or in part, at the office or
agency of the Company by the Holder in person or by duly authorized attorney,
upon surrender of this Warrant together with the Assignment Form annexed hereto
properly endorsed. The transferee shall sign an investment letter in form and
substance reasonably satisfactory to the Company.
2. Authorization of Warrant Shares. The Company covenants that all
Warrant Shares which may be issued upon the exercise of the purchase rights
represented by this Warrant will, upon exercise of the purchase rights
represented by this Warrant, be duly authorized, validly issued, fully paid and
nonassessable and free from all taxes, liens and charges in respect of the
issue thereof (other than taxes in respect of any transfer occurring
contemporaneously with such issue).
3. Exercise of Warrant.
(a) Exercise of the purchase rights represented by this
Warrant may be made at any time or times on or after the Initial Exercise
Date and on or before the Termination Date by delivery to the Company of
a duly executed facsimile copy of the Notice of Exercise Form annexed
hereto (or such other office or agency of the Company as it may designate
by notice in writing to the registered Holder at the address of such
Holder appearing on the books of the Company); provided, however, within
5 Trading Days of the date said Notice of Exercise is delivered to the
Company, the Holder shall have surrendered this Warrant to the Company
and the Company shall have received payment of the aggregate Exercise
Price of the shares thereby purchased by wire transfer or cashier's check
drawn on a United States bank. Certificates for shares purchased
hereunder shall be delivered to the Holder within 3 Trading Days from the
delivery to the Company of the Notice of Exercise Form, surrender of this
Warrant and payment of the aggregate Exercise Price as set forth above
("Warrant Share Delivery Date"). This Warrant shall be deemed to have
been exercised on the date the Exercise Price is received by the Company.
The Warrant Shares shall be deemed to have been issued, and Holder or any
other person so designated to be named therein shall be deemed to have
become a holder of record of such shares for all purposes, as of the date
the Warrant has been exercised by payment to the Company of the Exercise
Price and all taxes required to be paid by the Holder, if any, pursuant
to Section 5 prior to the issuance of such shares, have been paid. If
the Company fails to deliver to the Holder a certificate or certificates
representing the Warrant Shares pursuant to this Section 3(a) by the
Warrant Share Delivery Date, then the Holder will have the right to
rescind such exercise. In addition to any other rights available to the
Holder, if the Company fails to deliver to the Holder a certificate or
certificates representing the Warrant Shares pursuant to an exercise on
or before the Warrant Share Delivery Date, and if after such date the
Holder is required by its broker to purchase (in an open market
transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by the Holder of the Warrant Shares which the
Holder anticipated receiving upon such exercise (a "Buy-In"), then the
Company shall (1) pay in cash to the Holder the amount by which (x) the
Holder's total purchase price (including brokerage commissions, if any)
for the shares of Common Stock so purchased exceeds (y) the amount
obtained by multiplying (A) the number of Warrant Shares that
2
the Company was required to deliver to the Holder in
connection with the exercise at issue times (B) the price at which the
sell order giving rise to such purchase obligation was executed, and (2)
at the option of the Holder, either reinstate the portion of the Warrant
and equivalent number of Warrant Shares for which such exercise was not
honored or deliver to the Holder the number of shares of Common Stock
that would have been issued had the Company timely complied with its
exercise and delivery obligations hereunder. For example, if the Holder
purchases Common Stock having a total purchase price of $11,000 to cover
a Buy-In with respect to an attempted exercise of shares of Common Stock
with an aggregate sale price giving rise to such purchase obligation of
$10,000, under clause (1) of the immediately preceding sentence the
Company shall be required to pay the Holder $1,000. The Holder shall
provide the Company written notice indicating the amounts payable to the
Holder in respect of the Buy-In, together with applicable confirmations
and other evidence reasonably requested by the Company. Nothing herein
shall limit a Holder's right to pursue any other remedies available to it
hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief with respect to the
Company's failure to timely deliver certificates representing shares of
Common Stock upon exercise of the Warrant as required pursuant to the
terms hereof.
(a)If this Warrant shall have been exercised in part, the
Company shall, at the time of delivery of the certificate or certificates
representing Warrant Shares, deliver to Holder a new Warrant evidencing the
rights of Holder to purchase the unpurchased Warrant Shares called for by this
Warrant, which new Warrant shall in all other respects be identical with this
Warrant.
(b)The Holder shall not have the right to exercise any
portion of this Warrant, pursuant to Section 3(a) or otherwise, to the extent
that after giving effect to such issuance after exercise, the Holder (together
with the Holder's affiliates), as set forth on the applicable Notice of
Exercise, would beneficially own in excess of 4.99% of the number of shares of
the Common Stock outstanding immediately after giving effect to such issuance.
For purposes of the foregoing sentence, the 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 sentence is being made, but shall exclude the
number of shares of Common Stock which would be issuable upon (A) exercise of
the remaining, nonexercised portion of this Warrant beneficially owned by the
Holder or any of its affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any other Debentures or Warrants) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its affiliates. Except as
set forth in the preceding sentence, for purposes of this Section 3(c),
beneficial ownership shall be calculated in accordance with Section 13(d) of
the Exchange Act, it being acknowledged by Holder that the Company is not
representing to Holder that such calculation is in compliance with Section
13(d) of the Exchange Act and Holder is solely responsible for any schedules
required to be filed in accordance therewith. To the extent that the
limitation contained in this Section 3(c) applies, the determination of whether
this Warrant is exercisable (in relation to other securities owned by the
Holder) and of which
3
a portion of this Warrant is exercisable shall be in the sole
discretion of such Holder, and the submission of a Notice of Exercise shall be
deemed to be such Holder's determination of whether this Warrant is exercisable
(in relation to other securities owned by such Holder) and of which portion of
this Warrant is exercisable, in each case subject to such aggregate percentage
limitation, and the Company shall have no obligation to verify or confirm the
accuracy of such determination. For purposes of this Section 3(c), in
determining the number of outstanding shares of Common Stock, the Holder may
rely on the number of outstanding shares of Common Stock as reflected in (x)
the Company's most recent Form 10-QSB or Form 10-KSB, as the case may be, (y) a
more recent public announcement by the Company or (z) any other notice by the
Company or the Company's Transfer Agent setting forth the number of shares of
Common Stock outstanding. Upon the written or oral request of the Holder, the
Company shall within two Trading Days confirm orally and in writing to the
Holder the number of shares of Common Stock then outstanding. In any case, the
number of outstanding shares of Common Stock shall be determined after giving
effect to the conversion or exercise of securities of the Company, including
this Warrant, by the Holder or its affiliates since the date as of which such
number of outstanding shares of Common Stock was reported.
(d) If at any time after one year from the date of issuance
of this Warrant there is no effective Registration Statement registering
the resale of the Warrant Shares by the Holder, then this Warrant may
also be exercised at such time by means of a "cashless exercise" in which
the Holder shall be entitled to receive a certificate for the number of
Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by
(A), where:
(A) = the VWAP on the Trading Day immediately preceding the date of
such election;
(B) = the Exercise Price of this Warrant, as adjusted; and
(X) = the number of Warrant Shares issuable upon exercise of this
Warrant in accordance with the terms of this Warrant by means
of a cash exercise rather than a cashless exercise.
4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. As to any fraction of a share which Holder would otherwise be
entitled to purchase upon such exercise, the Company shall pay a cash
adjustment in respect of such final fraction in an amount equal to such
fraction multiplied by the Exercise Price.
5. Charges, Taxes and Expenses. Issuance of certificates for
Warrant Shares shall be made without charge to the Holder for any issue or
transfer tax or other incidental expense in respect of the issuance of such
certificate, all of which taxes and expenses shall be paid by the Company, and
such certificates shall be issued in the name of the Holder or in such name or
names as may be directed by the Holder; provided, however, that in the event
certificates for Warrant Shares are to be issued in a name other than the name
of the Holder, this Warrant when surrendered for exercise shall be accompanied
by the Assignment Form attached
4
hereto duly executed by the Holder; and the Company may require, as
a condition thereto, the payment of a sum sufficient to reimburse it for any
transfer tax incidental thereto.
6. Closing of Books. The Company will not close its stockholder
books or records in any manner which prevents the timely exercise of this
Warrant, pursuant to the terms hereof.
7. Transfer, Division and Combination.
(a)Subject to compliance with any applicable securities laws
and the conditions set forth in Sections 1 and 7(e) hereof and to the
provisions of Section 4.1 of the Purchase Agreement, this Warrant and all
rights hereunder are transferable, in whole or in part, upon surrender of this
Warrant at the principal office of the Company, together with a written
assignment of this Warrant substantially in the form attached hereto duly
executed by the Holder or its agent or attorney and funds sufficient to pay any
transfer taxes payable upon the making of such transfer. Upon such surrender
and, if required, such payment, the Company shall execute and deliver a new
Warrant or Warrants in the name of the assignee or assignees and in the
denomination or denominations specified in such instrument of assignment, and
shall issue to the assignor a new Warrant evidencing the portion of this
Warrant not so assigned, and this Warrant shall promptly be cancelled. A
Warrant, if properly assigned, may be exercised by a new holder for the
purchase of Warrant Shares without having a new Warrant issued.
(b)This Warrant may be divided or combined with other
Warrants upon presentation hereof at the aforesaid office of the Company,
together with a written notice specifying the names and denominations in which
new Warrants are to be issued, signed by the Holder or its agent or attorney.
Subject to compliance with Section 7(a), as to any transfer which may be
involved in such division or combination, the Company shall execute and deliver
a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided
or combined in accordance with such notice.
(c)The Company shall prepare, issue and deliver at its own
expense (other than transfer taxes) the new Warrant or Warrants under this
Section 7.
(d)The Company agrees to maintain, at its aforesaid office,
books for the registration and the registration of transfer of the Warrants.
(e)If, at the time of the surrender of this Warrant in
connection with any transfer of this Warrant, the transfer of this Warrant
shall not be registered pursuant to an effective registration statement under
the Securities Act and under applicable state securities or blue sky laws, the
Company may require, as a condition of allowing such transfer (i) that the
Holder or transferee of this Warrant, as the case may be, furnish to the
Company a written opinion of counsel (which opinion shall be in form, substance
and scope customary for opinions of counsel in comparable transactions) to the
effect that such transfer may be made without registration under the Securities
Act and under applicable state securities or blue sky laws, (ii) that the
holder or transferee execute and deliver to the Company an investment letter in
form and substance acceptable to the
5
Company and (iii) that the transferee be an "accredited
investor" as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8)
promulgated under the Securities Act or a qualified institutional buyer as
defined in Rule 144A(a) under the Securities Act.
8. No Rights as Shareholder until Exercise. This Warrant does not
entitle the Holder to any voting rights or other rights as a shareholder of the
Company prior to the exercise hereof. Upon the surrender of this Warrant and
the payment of the aggregate Exercise Price (or by means of a cashless
exercise), the Warrant Shares so purchased shall be and be deemed to be issued
to such Holder as the record owner of such shares as of the close of business
on the later of the date of such surrender or payment.
9. Loss, Theft, Destruction or Mutilation of Warrant. The Company
covenants that upon receipt by the Company of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of this Warrant or any
stock certificate relating to the Warrant Shares, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it (which, in
the case of the Warrant, shall not include the posting of any bond), and upon
surrender and cancellation of such Warrant or stock certificate, if mutilated,
the Company will make and deliver a new Warrant or stock certificate of like
tenor and dated as of such cancellation, in lieu of such Warrant or stock
certificate.
10.Saturdays, Sundays, Holidays, etc. If the last or appointed day
for the taking of any action or the expiration of any right required or granted
herein shall be a Saturday, Sunday or a legal holiday, then such action may be
taken or such right may be exercised on the next succeeding day not a Saturday,
Sunday or legal holiday.
11.Adjustments of Exercise Price and Number of Warrant Shares.
(a)Stock Splits, etc. The number and kind of securities
purchasable upon the exercise of this Warrant and the Exercise Price shall be
subject to adjustment from time to time upon the happening of any of the
following. In case the Company shall (i) pay a dividend in shares of Common
Stock or make a distribution in shares of Common Stock to holders of its
outstanding 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 of Common Stock, or (iv) issue any shares
of its capital stock in a reclassification of the Common Stock, then the number
of Warrant Shares purchasable upon exercise of this Warrant immediately prior
thereto shall be adjusted so that the Holder shall be entitled to receive the
kind and number of Warrant Shares or other securities of the Company which it
would have owned or have been entitled to receive had such Warrant been
exercised in advance thereof. Upon each such adjustment of the kind and number
of Warrant Shares or other securities of the Company which are purchasable
hereunder, the Holder shall thereafter be entitled to purchase the number of
Warrant Shares or other securities resulting from such adjustment at an
Exercise Price per Warrant Share or other security obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares purchasable pursuant hereto immediately prior to such adjustment
and dividing by the number of Warrant Shares or other securities of the Company
that are purchasable pursuant hereto immediately after such adjustment. An
adjustment made pursuant to this paragraph shall
6
become effective immediately after the effective date of such
event retroactive to the record date, if any, for such event.
(b)Anti-Dilution Provisions. During the Exercise Period,
the Exercise Price shall be subject to adjustment from time to time as provided
in this Section 11(b). In the event that any adjustment of the Exercise Price
as required herein results in a fraction of a cent, such Exercise Price shall
be rounded up or down to the nearest cent.
(i) Adjustment of Exercise Price. If and whenever the
Company issues or sells, or in accordance with Section 11(b)(ii)
hereof is deemed to have issued or sold, any shares of Common Stock
for an effective consideration per share of less than the then
Exercise Price, or for no consideration (such lower price, the "Base
Share Price" and such issuances collectively, a "Dilutive
Issuance"), then, the Exercise Price shall be reduced to equal the
Base Share Price. Such adjustment shall be made whenever shares of
Common Stock or Common Stock Equivalents are issued.
(ii) Effect on Exercise Price of Certain Events. For
purposes of determining the adjusted Exercise Price under Section
11(b) hereof, the following will be applicable:
(A) Issuance of Rights or Options. If the
Company in any manner issues or grants any warrants, rights
or options, whether or not immediately exercisable, to
subscribe for or to purchase Common Stock or Common Stock
Equivalents (such warrants, rights and options to purchase
Common Stock or Common Stock Equivalents are hereinafter
referred to as "Options") and the effective price per share
for which Common Stock is issuable upon the exercise of such
Options is less than the Exercise Price ("Below Base Price
Options"), then the maximum total number of shares of Common
Stock issuable upon the exercise of all such Below Base Price
Options (assuming full exercise, conversion or exchange of
Common Stock Equivalents, if applicable) will, as of the date
of the issuance or grant of such Below Base Price Options, be
deemed to be outstanding and to have been issued and sold by
the Company for such price per share and the maximum
consideration payable to the Company upon such exercise
(assuming full exercise, conversion or exchange of Common
Stock Equivalents, if applicable) will be deemed to have been
received by the Company. For purposes of the preceding
sentence, the "effective price per share for which Common
Stock is issuable upon the exercise of such Below Base Price
Options" is determined by dividing (i) the total amount, if
any, received or receivable by the Company as consideration
for the issuance or granting of all such Below Base Price
Options, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the
exercise of all such Below Base Price Options, plus, in the
case of Common Stock Equivalents issuable upon the exercise
of such Below Base Price Options, the minimum aggregate
amount of additional consideration payable upon the exercise,
7
conversion or exchange thereof at the time such
Common Stock Equivalents first become exercisable,
convertible or exchangeable, by (ii) the maximum total number
of shares of Common Stock issuable upon the exercise of all
such Below Base Price Options (assuming full conversion of
Common Stock Equivalents, if applicable). No further
adjustment to the Exercise Price will be made upon the actual
issuance of such Common Stock upon the exercise of such Below
Base Price Options or upon the exercise, conversion or
exchange of Common Stock Equivalents issuable upon exercise
of such Below Base Price Options.
(B) Issuance of Common Stock Equivalents. If
the Company in any manner issues or sells any Common Stock
Equivalents, whether or not immediately convertible (other
than where the same are issuable upon the exercise of
Options) and the effective price per share for which Common
Stock is issuable upon such exercise, conversion or exchange
is less than the Exercise Price, then the maximum total
number of shares of Common Stock issuable upon the exercise,
conversion or exchange of all such Common Stock Equivalents
will, as of the date of the issuance of such Common Stock
Equivalents, be deemed to be outstanding and to have been
issued and sold by the Company for such price per share and
the maximum consideration payable to the Company upon such
exercise (assuming full exercise, conversion or exchange of
Common Stock Equivalents, if applicable) will be deemed to
have been received by the Company. For the purposes of the
preceding sentence, the "effective price per share for which
Common Stock is issuable upon such exercise, conversion or
exchange" is determined by dividing (i) the total amount, if
any, received or receivable by the Company as consideration
for the issuance or sale of all such Common Stock
Equivalents, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the
exercise, conversion or exchange thereof at the time such
Common Stock Equivalents first become exercisable,
convertible or exchangeable, by (ii) the maximum total number
of shares of Common Stock issuable upon the exercise,
conversion or exchange of all such Common Stock Equivalents.
No further adjustment to the Exercise Price will be made upon
the actual issuance of such Common Stock upon exercise,
conversion or exchange of such Common Stock Equivalents.
(C) Change in Option Price or Conversion Rate.
If there is a change at any time in (i) the amount of
additional consideration payable to the Company upon the
exercise of any Options; (ii) the amount of additional
consideration, if any, payable to the Company upon the
exercise, conversion or exchange of any Common Stock
Equivalents; or (iii) the rate at which any Common Stock
Equivalents are convertible into or exchangeable for Common
Stock (in each such case, other than under or by reason of
provisions designed to protect against dilution), the
Exercise Price in effect at the time of such change will be
readjusted to the
8
Exercise Price which would have been in effect at
such time had such Options or Common Stock Equivalents still
outstanding provided for such changed additional
consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold.
(D) Calculation of Consideration Received. If
any Common Stock, Options or Common Stock Equivalents are
issued, granted or sold for cash, the consideration received
therefor for purposes of this Warrant will be the amount
received by the Company therefor, before deduction of
reasonable commissions, underwriting discounts or allowances
or other reasonable expenses paid or incurred by the Company
in connection with such issuance, grant or sale. In case any
Common Stock, Options or Common Stock Equivalents are issued
or sold for a consideration part or all of which shall be
other than cash, the amount of the consideration other than
cash received by the Company will be the fair market 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 fair market value
(closing bid price, if traded on any market) thereof as of
the date of receipt. In case any Common Stock, Options or
Common Stock Equivalents are issued in connection with any
merger or consolidation in which the Company is the surviving
corporation, the amount of consideration therefor will be
deemed to be the fair market value of such portion of the net
assets and business of the non-surviving corporation as is
attributable to such Common Stock, Options or Common Stock
Equivalents, as the case may be. The fair market value of
any consideration other than cash or securities will be
determined in good faith by an investment banker or other
appropriate expert of national reputation selected by the
Company and reasonably acceptable to the holder hereof, with
the costs of such appraisal to be borne by the Company.
(E) Exceptions to Adjustment of Exercise Price.
Notwithstanding the foregoing, no adjustment will be made
under this Section 11(b) in respect of an Exempt Issuance.
(iii) Offerings of Other Property to Common Stock Holders.
If the Company, at any time prior to the Termination Date, shall
distribute to all holders of Common Stock (and not to Holders of
the Warrants) evidences of its indebtedness or assets or rights or
warrants to subscribe for or purchase any security other than the
Common Stock (which shall be subject to Section 11(b)(i)), then in
each such case the Exercise Price shall be adjusted by multiplying
the Exercise Price in effect immediately prior to the record date
fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the
VWAP determined as of the record date mentioned above, and of which
the numerator shall be such VWAP on such record date less the then
per share fair market value at such record date of the
9
portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of the Common Stock
as determined by the Board of Directors in good faith. In either
case the adjustments shall be described in a statement provided to
the Holders of the portion of assets or evidences of indebtedness
so distributed or such subscription rights applicable to one share
of Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after
the record date mentioned above.
(iv) Minimum Adjustment of Exercise Price. No adjustment of
the Exercise Price shall be made in an amount of less than 1% of
the Exercise Price in effect at the time such adjustment is
otherwise required to be made, but any such lesser adjustment shall
be carried forward and shall be made at the time and together with
the next subsequent adjustment which, together with any adjustments
so carried forward, shall amount to not less than 1% of such
Exercise Price.
(c) Adjustment for Events of Default. Upon the occurrence
of any Events of Default under either the Debenture or the Security
Agreement, the then Exercise Price of this Warrant shall be reduced by
50% thereafter, subject to subsequent adjustment hereunder. Such
adjustments shall be automatic and not require any further action by the
Company or Holder to be effective.
12.Reorganization, Reclassification, Merger, Consolidation or
Disposition of Assets. In case the Company shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another
corporation (where the Company is not the surviving corporation or where there
is a change in or distribution with respect to the Common Stock of the
Company), or sell, transfer or otherwise dispose of its property, assets or
business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or
any cash, shares of stock or other securities or property of any nature
whatsoever (including warrants or other subscription or purchase rights) in
addition to or in lieu of common stock of the successor or acquiring
corporation ("Other Property"), are to be received by or distributed to the
holders of Common Stock of the Company, then the Holder shall have the right
thereafter to receive, at the option of the Holder, (a) upon exercise of this
Warrant, the number of shares of Common Stock of the successor or acquiring
corporation or of the Company, if it is the surviving corporation, and Other
Property receivable upon or as a result of such reorganization,
reclassification, merger, consolidation or disposition of assets by a Holder of
the number of shares of Common Stock for which this Warrant is exercisable
immediately prior to such event or (b) cash equal to the value of this Warrant
as determined in accordance with the Black-Scholes option pricing formula. In
case of any such reorganization, reclassification, merger, consolidation or
disposition of assets, the successor or acquiring corporation (if other than
the Company) shall expressly assume the due and punctual observance and
performance of each and every covenant and condition of this Warrant to be
performed and observed by the Company and all the obligations and liabilities
hereunder, subject to such modifications as may be deemed appropriate (as
determined in good faith by resolution of the Board of Directors of the
Company) in order to provide for adjustments of Warrant Shares for which this
Warrant is exercisable
10
which shall be as nearly equivalent as practicable to the
adjustments provided for in this Section 12. For purposes of this Section 12,
"common stock of the successor or acquiring corporation" shall include stock of
such corporation of any class which is not preferred as to dividends or assets
over any other class of stock of such corporation and which is not subject to
redemption and shall also include any evidences of indebtedness, shares of
stock or other securities which are convertible into or exchangeable for any
such stock, either immediately or upon the arrival of a specified date or the
happening of a specified event and any warrants or other rights to subscribe
for or purchase any such stock. The foregoing provisions of this Section 12
shall similarly apply to successive reorganizations, reclassifications,
mergers, consolidations or disposition of assets.
13.Voluntary Adjustment by the Company. The Company may at any
time during the term of this Warrant reduce the then current Exercise Price to
any amount and for any period of time deemed appropriate by the Board of
Directors of the Company.
14.Notice of Adjustment. Whenever the number of Warrant Shares or
number or kind of securities or other property purchasable upon the exercise of
this Warrant or the Exercise Price is adjusted, as herein provided, the Company
shall give notice thereof to the Holder, which notice shall state the number of
Warrant Shares (and other securities or property) purchasable upon the exercise
of this Warrant and the Exercise Price of such Warrant Shares (and other
securities or property) after such adjustment, setting forth a brief statement
of the facts requiring such adjustment and setting forth the computation by
which such adjustment was made.
15.Notice of Corporate Action. If at any time:
(a) the Company shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive a dividend or
other distribution, or any right to subscribe for or purchase any
evidences of its indebtedness, any shares of stock of any class or any
other securities or property, or to receive any other right, or
(b) there shall be any capital reorganization of the
Company, any reclassification or recapitalization of the capital stock of
the Company or any consolidation or merger of the Company with, or any
sale, transfer or other disposition of all or substantially all the
property, assets or business of the Company to, another corporation or,
(c) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder (i) at
least 20 days' prior written notice of the date on which a record date shall be
selected for such dividend, distribution or right or for determining rights to
vote in respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, liquidation or winding up, and (ii)
in the case of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up, at least 20 days' prior written notice of the date when the same shall take
place. Such notice in accordance with the foregoing clause also shall specify
(i) the date on which any such record is to be taken for the purpose of such
11
dividend, distribution or right, the date on which the holders of Common Stock
shall be entitled to any such dividend, distribution or right, and the amount
and character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their Warrant Shares for securities or other property
deliverable upon such disposition, dissolution, liquidation or winding up.
Each such written notice shall be sufficiently given if addressed to Holder at
the last address of Holder appearing on the books of the Company and delivered
in accordance with Section 17(d).
16.Authorized Shares. The Company covenants that during the period
the Warrant is outstanding, it will reserve from its authorized and unissued
Common Stock a sufficient number of shares to provide for the issuance of the
Warrant Shares upon the exercise of any purchase rights under this Warrant.
The Company further covenants that its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates
for the Warrant Shares upon the exercise of the purchase rights under this
Warrant. The Company will take all such reasonable action as may be necessary
to assure that such Warrant Shares may be issued as provided herein without
violation of any applicable law or regulation, or of any requirements of the
Trading Market upon which the Common Stock may be listed.
Except and to the extent as waived or consented to by the
Holder, the Company shall not by any action, including, without limitation,
amending its certificate 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 of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of
all such actions as may be necessary or appropriate to protect the rights of
Holder as set forth in this Warrant against impairment. Without limiting the
generality of the foregoing, the Company will (a) not increase the par value of
any Warrant Shares above the amount payable therefor upon such exercise
immediately prior to such increase in par value, (b) take all such action as
may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and nonassessable Warrant Shares upon the exercise of
this Warrant, and (c) use commercially reasonable efforts to obtain all such
authorizations, exemptions or consents from any public regulatory body having
jurisdiction thereof as may be necessary to enable the Company to perform its
obligations under this Warrant.
Before taking any action which would result in an adjustment
in the number of Warrant Shares for which this Warrant is exercisable or in the
Exercise Price, the Company shall obtain all such authorizations or exemptions
thereof, or consents thereto, as may be necessary from any public regulatory
body or bodies having jurisdiction thereof.
17.Miscellaneous.
(a)Jurisdiction. All questions concerning the construction,
validity, enforcement and interpretation of this Warrant shall be determined in
accordance with the provisions of the Purchase Agreement.
12
(b)Restrictions. The Holder acknowledges that the Warrant
Shares acquired upon the exercise of this Warrant, if not registered, will have
restrictions upon resale imposed by state and federal securities laws.
(c)Nonwaiver and Expenses. No course of dealing or any delay
or failure to exercise any right hereunder on the part of Holder shall operate
as a waiver of such right or otherwise prejudice Holder's rights, powers or
remedies, notwithstanding all rights hereunder terminate on the Termination
Date. If the Company willfully and knowingly fails to comply with any
provision of this Warrant, which results in any material damages to the Holder,
the Company shall pay to Holder such amounts as shall be sufficient to cover
any costs and expenses including, but not limited to, reasonable attorneys'
fees, including those of appellate proceedings, incurred by Holder in
collecting any amounts due pursuant hereto or in otherwise enforcing any of its
rights, powers or remedies hereunder.
(d)Notices. Any notice, request or other document required
or permitted to be given or delivered to the Holder by the Company shall be
delivered in accordance with the notice provisions of the Purchase Agreement.
(e)Limitation of Liability. No provision hereof, in the
absence of any affirmative action by Holder to exercise this Warrant or
purchase Warrant Shares, and no enumeration herein of the rights or privileges
of Holder, shall give rise to any liability of Holder for the purchase price of
any Common Stock or as a stockholder of the Company, whether such liability is
asserted by the Company or by creditors of the Company.
(f)Remedies. Holder, in addition to being entitled to
exercise all rights granted by law, including recovery of damages, will be
entitled to specific performance of its rights under this Warrant. The Company
agrees that monetary damages would not be adequate compensation for any loss
incurred by reason of a breach by it of the provisions of this Warrant and
hereby agrees to waive the defense in any action for specific performance that
a remedy at law would be adequate.
(g)Successors and Assigns. Subject to applicable securities
laws, this Warrant and the rights and obligations evidenced hereby shall inure
to the benefit of and be binding upon the successors of the Company and the
successors and permitted assigns of Holder. The provisions of this Warrant are
intended to be for the benefit of all Holders from time to time of this Warrant
and shall be enforceable by any such Holder or holder of Warrant Shares.
(h)Amendment. This Warrant may be modified or amended or the
provisions hereof waived with the written consent of the Company and the
Holder.
(i)Severability. Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provisions or the remaining provisions of this Warrant.
13
(j)Headings. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
********************
14
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its officer thereunto duly authorized.
Dated: July __, 2004
SUNBURST ACQUISITIONS IV, INC.
By:__________________________________________
Name:
Title:
15
NOTICE OF EXERCISE
TO: SUNBURST ACQUISITIONS IV, INC.
(1)The undersigned hereby elects to purchase ________ Warrant Shares
of the Company pursuant to the terms of the attached Warrant (only if exercised
in full), and tenders herewith payment of the exercise price in full, together
with all applicable transfer taxes, if any.
(2)Payment shall take the form of (check applicable box):
[ ] in lawful money of the United States; or
[ ] the cancellation of such number of Warrant Shares as is
necessary, in accordance with the formula set forth in
subsection 3(d), to exercise this Warrant with respect to the
maximum number of Warrant Shares purchasable pursuant to the
cashless exercise procedure set forth in subsection 3(d).
(3)Please issue a certificate or certificates representing said
Warrant Shares in the name of the undersigned or in such other name as is
specified below:
_______________________________
The Warrant Shares shall be delivered to the following:
_______________________________
_______________________________
_______________________________
(4) Accredited Investor. The undersigned is an "accredited
investor" as defined in Regulation D promulgated under the Securities Act of
1933, as amended.
[PURCHASER]
By: ______________________________
Name:
Title:
Dated: ________________________
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to
_______________________________________________ whose address is
_______________________________________________________________.
_______________________________________________________________
Dated: ______________, _______
Holder's Signature:_____________________________
Holder's Address:_____________________________
_____________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as
it appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in a fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
Exhibit D
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN SECURED BY SUCH SECURITIES.
ADDITIONAL INVESTMENT RIGHT
To Purchase __________ Shares of Common Stock of
SUNBURST ACQUISITIONS IV, INC.
THIS ADDITIONAL INVESTMENT RIGHT (the "Additional Investment
Right") CERTIFIES that, for value received, _____________ (the "Holder"), is
entitled, upon the terms and subject to the limitations on exercise and the
conditions hereinafter set forth, at any time on or after the date hereof (the
"Initial Exercise Date") and on or prior to the earlier of (a) the 6 month
anniversary of the Effective Date (which period shall be extended during any
period that the registration statement registering the resale of the Additional
Investment Right is not effective as to all such shares) and (b) the 18 month
anniversary of the First Closing Date (the "Termination Date") but not
thereafter, to subscribe for and purchase from Sunburst Acquisitions IV, Inc. a
Colorado corporation (the "Company"), up to ____________ shares (the
"Additional Investment Right Shares") of Common Stock, no par value, of the
Company (the "Common Stock"). The purchase price of one share of Common Stock
(the "Exercise Price") under this Additional Investment Right shall be $0.10,
subject to adjustment hereunder. The Exercise Price and the number of
Additional Investment Right Shares for which the Additional Investment Right is
exercisable shall be subject to adjustment as provided herein. CAPITALIZED
TERMS USED AND NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS SET FORTH
IN THAT CERTAIN SECURITIES PURCHASE AGREEMENT (THE "PURCHASE AGREEMENT"), DATED
AUGUST 25, 2004 AMONG THE COMPANY AND THE PURCHASERS SIGNATORY THERETO.
1
1. Title to Additional Investment Right. Prior to the Termination
Date and subject to compliance with applicable laws and Section 7 of this
Additional Investment Right, this Additional Investment Right and all rights
hereunder are transferable, in whole or in part, at the office or agency of the
Company by the Holder in person or by duly authorized attorney, upon surrender
of this Additional Investment Right together with the Assignment Form annexed
hereto properly endorsed. The transferee shall sign an investment letter in
form and substance reasonably satisfactory to the Company.
2. Authorization of Shares. The Company covenants that all
Additional Investment Right Shares which may be issued upon the exercise of the
purchase rights represented by this Additional Investment Right will, upon
exercise of the purchase rights represented by this Additional Investment
Right, be duly authorized, validly issued, fully paid and nonassessable and
free from all taxes, liens and charges in respect of the issue thereof (other
than taxes in respect of any transfer occurring contemporaneously with such
issue).
3. Exercise of Additional Investment Right.
(a) Exercise of the purchase rights represented by this
Additional Investment Right may be made at any time or times on or after
the Initial Exercise Date and on or before the Termination Date by
delivery to the Company of a duly executed facsimile copy of the Notice
of Exercise Form annexed hereto (or such other office or agency of the
Company as it may designate by notice in writing to the registered Holder
at the address of such Holder appearing on the books of the Company);
provided, however, within 5 Trading Days of the date said Notice of
Exercise is delivered to the Company, the Holder shall have surrendered
this Additional Investment Right to the Company and the Company shall
have received payment of the aggregate Exercise Price of the shares
thereby purchased by wire transfer or cashier's check drawn on a United
States bank. Certificates for shares purchased hereunder shall be
delivered to the Holder within 3 Trading Days from the delivery to the
Company of the Notice of Exercise Form, surrender of this Additional
Investment Right and payment of the aggregate Exercise Price as set forth
above ("Additional Investment Right Share Delivery Date"). This
Additional Investment Right shall be deemed to have been exercised on the
date the Exercise Price is received by the Company. The Additional
Investment Right Shares shall be deemed to have been issued, and Holder
or any other person so designated to be named therein shall be deemed to
have become a holder of record of such shares for all purposes, as of the
date the Additional Investment Right has been exercised by payment to the
Company of the Exercise Price and all taxes required to be paid by the
Holder, if any, pursuant to Section 5 prior to the issuance of such
shares, have been paid. If the Company fails to deliver to the Holder a
certificate or certificates representing the Additional Investment Right
Shares pursuant to this Section 3(a) by the Additional Investment Right
Share Delivery Date, then the Holder will have the right to rescind such
exercise. In addition to any other rights available to the Holder, if
the Company fails to deliver to the Holder a certificate or certificates
representing the Additional Investment Right Shares pursuant to an
exercise by the Additional Investment Right Share Delivery Date, and if
after such day the Holder is required by its broker to purchase (in an
open
2
market transaction or otherwise) shares of Common Stock to
deliver in satisfaction of a sale by the Holder of the Additional
Investment Right Shares which the Holder anticipated receiving upon such
exercise (a "Buy-In"), then the Company shall (1) pay in cash to the
Holder the amount by which (x) the Holder's total purchase price
(including brokerage commissions, if any) for the shares of Common Stock
so purchased exceeds (y) the amount obtained by multiplying (A) the
number of Additional Investment Right Shares that the Company was
required to deliver to the Holder in connection with the exercise at
issue times (B) the price at which the sell order giving rise to such
purchase obligation was executed, and (2) at the option of the Holder,
either reinstate the portion of the Additional Investment Right and
equivalent number of Additional Investment Right Shares for which such
exercise was not honored or deliver to the Holder the number of shares of
Common Stock that would have been issued had the Company timely complied
with its exercise and delivery obligations hereunder. For example, if
the Holder purchases Common Stock having a total purchase price of
$11,000 to cover a Buy-In with respect to an attempted exercise of shares
of Common Stock with an aggregate sale price giving rise to such purchase
obligation of $10,000, under clause (1) of the immediately preceding
sentence the Company shall be required to pay the Holder $1,000. The
Holder shall provide the Company written notice indicating the amounts
payable to the Holder in respect of the Buy-In, together with applicable
confirmations and other evidence reasonably requested by the Company.
Nothing herein shall limit a Holder's right to pursue any other remedies
available to it hereunder, at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief
with respect to the Company's failure to timely deliver certificates
representing shares of Common Stock upon exercise of the Additional
Investment Right as required pursuant to the terms hereof.
(a)If this Additional Investment Right shall have been
exercised in part, the Company shall, at the time of delivery of the
certificate or certificates representing Additional Investment Right Shares,
deliver to Holder a new Additional Investment Right evidencing the rights of
Holder to purchase the unpurchased Additional Investment Right Shares called
for by this Additional Investment Right, which new Additional Investment Right
shall in all other respects be identical with this Additional Investment Right.
(b)The Holder shall not have the right to exercise any
portion of this Additional Investment Right, pursuant to Section 3(a) or
otherwise, to the extent that after giving effect to such issuance after
exercise, the Holder (together with the Holder's affiliates), as set forth on
the applicable Notice of Exercise, would beneficially own in excess of 4.99% of
the number of shares of the Common Stock outstanding immediately after giving
effect to such issuance. For purposes of the foregoing sentence, the 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 Additional Investment Right with respect to which the determination of
such sentence is being made, but shall exclude the number of shares of Common
Stock which would be issuable upon (A) exercise of the remaining, nonexercised
portion of this Additional Investment Right beneficially owned by the Holder or
any of its affiliates and (B) exercise or conversion of the unexercised or
nonconverted portion of any other securities of the Company (including, without
limitation, any other Additional Investment Rights) subject to a
3
limitation on conversion or exercise analogous to the
limitation contained herein beneficially owned by the Holder or any of its
affiliates. Except as set forth in the preceding sentence, for purposes of
this Section 3(c), beneficial ownership shall be calculated in accordance with
Section 13(d) of the Exchange Act, it being acknowledged by Holder that the
Company is not representing to Holder that such calculation is in compliance
with Section 13(d) of the Exchange Act and Holder is solely responsible for any
schedules required to be filed in accordance therewith. To the extent that the
limitation contained in this Section 3(c) applies, the determination of whether
this Additional Investment Right is exercisable (in relation to other
securities owned by the Holder) and of which a portion of this Additional
Investment Right is exercisable shall be in the sole discretion of such Holder,
and the submission of a Notice of Exercise shall be deemed to be such Holder's
determination of whether this Additional Investment Right is exercisable (in
relation to other securities owned by such Holder) and of which portion of this
Additional Investment Right is exercisable, in each case subject to such
aggregate percentage limitation, and the Company shall have no obligation to
verify or confirm the accuracy of such determination. For purposes of this
Section 3(c), in determining the number of outstanding shares of Common Stock,
the Holder may rely on the number of outstanding shares of Common Stock as
reflected in (x) the Company's most recent Form 10-QSB or Form 10-KSB, as the
case may be, (y) a more recent public announcement by the Company or (z) any
other notice by the Company or the Company's Transfer Agent setting forth the
number of shares of Common Stock outstanding. Upon the written or oral request
of the Holder, the Company shall within two Trading Days confirm orally and in
writing to the Holder the number of shares of Common Stock then outstanding.
In any case, the number of outstanding shares of Common Stock shall be
determined after giving effect to the conversion or exercise of securities of
the Company, including this Additional Investment Right, by the Holder or its
affiliates since the date as of which such number of outstanding shares of
Common Stock was reported.
(d) If at any time after one year from the date of issuance
of this Additional Investment Right there is no effective Registration
Statement registering the resale of the Additional Investment Right
Shares by the Holder at such time, this Additional Investment Right may
also be exercised at such time by means of a "cashless exercise" in which
the Holder shall be entitled to receive a certificate for the number of
Additional Investment Right Shares equal to the quotient obtained by
dividing [(A-B) (X)] by (A), where:
(A) = the Closing Price on the Trading Day immediately preceding
the date of such election;
(B) = the Exercise Price of this Additional Investment Right, as
adjusted; and
(X) = the number of Additional Investment Right Shares issuable
upon exercise of this Additional Investment Right in
accordance with the terms of this Additional Investment Right
by means of a cash exercise rather than a cashless exercise.
4
4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Additional Investment Right. As to any fraction of a share which Holder would
otherwise be entitled to purchase upon such exercise, the Company shall pay a
cash adjustment in respect of such final fraction in an amount equal to such
fraction multiplied by the Exercise Price.
5. Charges, Taxes and Expenses. Issuance of certificates for
Additional Investment Right Shares shall be made without charge to the Holder
for any issue or transfer tax or other incidental expense in respect of the
issuance of such certificate, all of which taxes and expenses shall be paid by
the Company, and such certificates shall be issued in the name of the Holder or
in such name or names as may be directed by the Holder; provided, however, that
in the event certificates for Additional Investment Right Shares are to be
issued in a name other than the name of the Holder, this Additional Investment
Right when surrendered for exercise shall be accompanied by the Assignment Form
attached hereto duly executed by the Holder; and the Company may require, as a
condition thereto, the payment of a sum sufficient to reimburse it for any
transfer tax incidental thereto.
6. Closing of Books. The Company will not close its stockholder
books or records in any manner which prevents the timely exercise of this
Additional Investment Right, pursuant to the terms hereof.
7. Transfer, Division and Combination.
(a)Subject to compliance with any applicable securities laws
and the conditions set forth in Sections 1 and 7(e) hereof and to the
provisions of Section 4.1 of the Purchase Agreement, this Additional Investment
Right and all rights hereunder are transferable, in whole or in part, upon
surrender of this Additional Investment Right at the principal office of the
Company, together with a written assignment of this Additional Investment Right
substantially in the form attached hereto duly executed by the Holder or its
agent or attorney and funds sufficient to pay any transfer taxes payable upon
the making of such transfer. Upon such surrender and, if required, such
payment, the Company shall execute and deliver a new Additional Investment
Right or Additional Investment Rights in the name of the assignee or assignees
and in the denomination or denominations specified in such instrument of
assignment, and shall issue to the assignor a new Additional Investment Right
evidencing the portion of this Additional Investment Right not so assigned, and
this Additional Investment Right shall promptly be cancelled. A Additional
Investment Right, if properly assigned, may be exercised by a new holder for
the purchase of Additional Investment Right Shares without having a new
Additional Investment Right issued.
(b)This Additional Investment Right may be divided or
combined with other Additional Investment Rights upon presentation hereof at
the aforesaid office of the Company, together with a written notice specifying
the names and denominations in which new Additional Investment Rights are to be
issued, signed by the Holder or its agent or attorney. Subject to compliance
with Section 7(a), as to any transfer which may be involved in such division or
combination, the Company shall execute and deliver a new Additional Investment
Right or Additional Investment Rights in exchange for the
5
Additional Investment Right or Additional Investment Rights
to be divided or combined in accordance with such notice.
(c)The Company shall prepare, issue and deliver at its own
expense (other than transfer taxes) the new Additional Investment Right or
Additional Investment Rights under this Section 7.
(d)The Company agrees to maintain, at its aforesaid office,
books for the registration and the registration of transfer of the Additional
Investment Rights.
(e)If, at the time of the surrender of this Additional
Investment Right in connection with any transfer of this Additional Investment
Right, the transfer of this Additional Investment Right shall not be registered
pursuant to an effective registration statement under the Securities Act and
under applicable state securities or blue sky laws, the Company may require, as
a condition of allowing such transfer (i) that the Holder or transferee of this
Additional Investment Right, as the case may be, furnish to the Company a
written opinion of counsel (which opinion shall be in form, substance and scope
customary for opinions of counsel in comparable transactions) to the effect
that such transfer may be made without registration under the Securities Act
and under applicable state securities or blue sky laws, (ii) that the holder or
transferee execute and deliver to the Company an investment letter in form and
substance acceptable to the Company and (iii) that the transferee be an
"accredited investor" as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or
(a)(8) promulgated under the Securities Act or a qualified institutional buyer
as defined in Rule 144A(a) under the Securities Act.
8. No Rights as Shareholder until Exercise. This Additional
Investment Right does not entitle the Holder to any voting rights or other
rights as a shareholder of the Company prior to the exercise hereof. Upon the
surrender of this Additional Investment Right and the payment of the aggregate
Exercise Price (or by means of a cashless exercise), the Additional Investment
Right Shares so purchased shall be and be deemed to be issued to such Holder as
the record owner of such shares as of the close of business on the later of the
date of such surrender or payment.
9. Loss, Theft, Destruction or Mutilation of Additional Investment
Right. The Company covenants that upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Additional Investment Right or any stock certificate relating to the
Additional Investment Right Shares, and in case of loss, theft or destruction,
of indemnity or security reasonably satisfactory to it (which, in the case of
the Additional Investment Right, shall not include the posting of any bond),
and upon surrender and cancellation of such Additional Investment Right or
stock certificate, if mutilated, the Company will make and deliver a new
Additional Investment Right or stock certificate of like tenor and dated as of
such cancellation, in lieu of such Additional Investment Right or stock
certificate.
10.Saturdays, Sundays, Holidays, etc. If the last or appointed day
for the taking of any action or the expiration of any right required or granted
herein shall be a Saturday, Sunday or a legal holiday, then such action may be
taken or such right may be exercised on the next succeeding day not a Saturday,
Sunday or legal holiday.
6
11.Adjustments of Exercise Price and Number of Additional
Investment Right Shares.
(a)Stock Splits, etc. The number and kind of securities
purchasable upon the exercise of this Additional Investment Right and the
Exercise Price shall be subject to adjustment from time to time upon the
happening of any of the following. In case the Company shall (i) pay a
dividend in shares of Common Stock or make a distribution in shares of Common
Stock to holders of its outstanding 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
of Common Stock, or (iv) issue any shares of its capital stock in a
reclassification of the Common Stock, then the number of Additional Investment
Right Shares purchasable upon exercise of this Additional Investment Right
immediately prior thereto shall be adjusted so that the Holder shall be
entitled to receive the kind and number of Additional Investment Right Shares
or other securities of the Company which it would have owned or have been
entitled to receive had such Additional Investment Right been exercised in
advance thereof. Upon each such adjustment of the kind and number of
Additional Investment Right Shares or other securities of the Company which are
purchasable hereunder, the Holder shall thereafter be entitled to purchase the
number of Additional Investment Right Shares or other securities resulting from
such adjustment at an Exercise Price per Additional Investment Right Share or
other security obtained by multiplying the Exercise Price in effect immediately
prior to such adjustment by the number of Additional Investment Right Shares
purchasable pursuant hereto immediately prior to such adjustment and dividing
by the number of Additional Investment Right Shares or other securities of the
Company that are purchasable pursuant hereto immediately after such adjustment.
An adjustment made pursuant to this paragraph shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
(b)Anti-Dilution Provisions. During the Exercise Period,
the Exercise Price shall be subject to adjustment from time to time as provided
in this Section 11(b). In the event that any adjustment of the Exercise Price
as required herein results in a fraction of a cent, such Exercise Price shall
be rounded up or down to the nearest cent.
(i) Adjustment of Exercise Price. If and whenever the
Company issues or sells, or in accordance with Section 11(b)(ii)
hereof is deemed to have issued or sold, any shares of Common Stock
for an effective consideration per share of less than the then
Exercise Price, or for no consideration (such lower price, the "Base
Share Price" and such issuances collectively, a "Dilutive
Issuance"), then, the Exercise Price shall be reduced to equal the
Base Share Price. Such adjustment shall be made whenever shares of
Common Stock or Common Stock Equivalents are issued.
(ii) Effect on Exercise Price of Certain Events. For
purposes of determining the adjusted Exercise Price under Section
11(b) hereof, the following will be applicable:
7
(A) Issuance of Rights or Options. If the
Company in any manner issues or grants any warrants, rights
or options, whether or not immediately exercisable, to
subscribe for or to purchase Common Stock or Common Stock
Equivalents (such warrants, rights and options to purchase
Common Stock or Common Stock Equivalents are hereinafter
referred to as "Options") and the effective price per share
for which Common Stock is issuable upon the exercise of such
Options is less than the Exercise Price ("Below Base Price
Options"), then the maximum total number of shares of Common
Stock issuable upon the exercise of all such Below Base Price
Options (assuming full exercise, conversion or exchange of
Common Stock Equivalents, if applicable) will, as of the date
of the issuance or grant of such Below Base Price Options, be
deemed to be outstanding and to have been issued and sold by
the Company for such price per share and the maximum
consideration payable to the Company upon such exercise
(assuming full exercise, conversion or exchange of Common
Stock Equivalents, if applicable) will be deemed to have been
received by the Company. For purposes of the preceding
sentence, the "effective price per share for which Common
Stock is issuable upon the exercise of such Below Base Price
Options" is determined by dividing (i) the total amount, if
any, received or receivable by the Company as consideration
for the issuance or granting of all such Below Base Price
Options, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the
exercise of all such Below Base Price Options, plus, in the
case of Common Stock Equivalents issuable upon the exercise
of such Below Base Price Options, the minimum aggregate
amount of additional consideration payable upon the exercise,
conversion or exchange thereof at the time such Common Stock
Equivalents first become exercisable, convertible or
exchangeable, by (ii) the maximum total number of shares of
Common Stock issuable upon the exercise of all such Below
Base Price Options (assuming full conversion of Common Stock
Equivalents, if applicable). No further adjustment to the
Exercise Price will be made upon the actual issuance of such
Common Stock upon the exercise of such Below Base Price
Options or upon the exercise, conversion or exchange of
Common Stock Equivalents issuable upon exercise of such Below
Base Price Options.
(B) Issuance of Common Stock Equivalents. If
the Company in any manner issues or sells any Common Stock
Equivalents, whether or not immediately convertible (other
than where the same are issuable upon the exercise of
Options) and the effective price per share for which Common
Stock is issuable upon such exercise, conversion or exchange
is less than the Exercise Price, then the maximum total
number of shares of Common Stock issuable upon the exercise,
conversion or exchange of all such Common Stock Equivalents
will, as of the date of the issuance of such Common Stock
Equivalents, be deemed to be outstanding and to have been
issued and sold by the Company for such price per share
8
and the maximum consideration payable to the
Company upon such exercise (assuming full exercise,
conversion or exchange of Common Stock Equivalents, if
applicable) will be deemed to have been received by the
Company. For the purposes of the preceding sentence, the
"effective price per share for which Common Stock is issuable
upon such exercise, conversion or exchange" is determined by
dividing (i) the total amount, if any, received or receivable
by the Company as consideration for the issuance or sale of
all such Common Stock Equivalents, plus the minimum aggregate
amount of additional consideration, if any, payable to the
Company upon the exercise, conversion or exchange thereof at
the time such Common Stock Equivalents first become
exercisable, convertible or exchangeable, by (ii) the maximum
total number of shares of Common Stock issuable upon the
exercise, conversion or exchange of all such Common Stock
Equivalents. No further adjustment to the Exercise Price
will be made upon the actual issuance of such Common Stock
upon exercise, conversion or exchange of such Common Stock
Equivalents.
(C) Change in Option Price or Conversion Rate.
If there is a change at any time in (i) the amount of
additional consideration payable to the Company upon the
exercise of any Options; (ii) the amount of additional
consideration, if any, payable to the Company upon the
exercise, conversion or exchange of any Common Stock
Equivalents; or (iii) the rate at which any Common Stock
Equivalents are convertible into or exchangeable for Common
Stock (in each such case, other than under or by reason of
provisions designed to protect against dilution), the
Exercise Price in effect at the time of such change will be
readjusted to the Exercise Price which would have been in
effect at such time had such Options or Common Stock
Equivalents still outstanding provided for such changed
additional consideration or changed conversion rate, as the
case may be, at the time initially granted, issued or sold.
(D) Calculation of Consideration Received. If
any Common Stock, Options or Common Stock Equivalents are
issued, granted or sold for cash, the consideration received
therefor for purposes of this Additional Investment Right
will be the amount received by the Company therefor, before
deduction of reasonable commissions, underwriting discounts
or allowances or other reasonable expenses paid or incurred
by the Company in connection with such issuance, grant or
sale. In case any Common Stock, Options or Common Stock
Equivalents are issued or sold for a consideration part or
all of which shall be other than cash, the amount of the
consideration other than cash received by the Company will be
the fair market 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
fair market value (closing bid price, if traded on any
market) thereof as of the date of receipt. In case any
Common Stock, Options or Common Stock
9
Equivalents are issued in connection with any
merger or consolidation in which the Company is the surviving
corporation, the amount of consideration therefor will be
deemed to be the fair market value of such portion of the net
assets and business of the non-surviving corporation as is
attributable to such Common Stock, Options or Common Stock
Equivalents, as the case may be. The fair market value of
any consideration other than cash or securities will be
determined in good faith by an investment banker or other
appropriate expert of national reputation selected by the
Company and reasonably acceptable to the holder hereof, with
the costs of such appraisal to be borne by the Company.
(E) Exceptions to Adjustment of Exercise Price.
Notwithstanding the foregoing, no adjustment will be made
under this Section 11(b) in respect of an Exempt Issuance.
(iii) Offerings of Other Property to Common Stock Holders.
If the Company, at any time prior to the Termination Date, shall
distribute to all holders of Common Stock (and not to Holders of
the Additional Investment Rights) evidences of its indebtedness or
assets or rights or warrants to subscribe for or purchase any
security other than the Common Stock (which shall be subject to
Section 11(b)(i)), then in each such case the Exercise Price shall
be adjusted by multiplying the Exercise Price in effect immediately
prior to the record date fixed for determination of stockholders
entitled to receive such distribution by a fraction of which the
denominator shall be the VWAP determined as of the record date
mentioned above, and of which the numerator shall be such VWAP on
such record date less the then per share fair market value at such
record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of
the Common Stock as determined by the Board of Directors in good
faith. In either case the adjustments shall be described in a
statement provided to the Holders of the portion of assets or
evidences of indebtedness so distributed or such subscription
rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.
(iv) Minimum Adjustment of Exercise Price. No adjustment of
the Exercise Price shall be made in an amount of less than 1% of
the Exercise Price in effect at the time such adjustment is
otherwise required to be made, but any such lesser adjustment shall
be carried forward and shall be made at the time and together with
the next subsequent adjustment which, together with any adjustments
so carried forward, shall amount to not less than 1% of such
Exercise Price.
12.Reorganization, Reclassification, Merger, Consolidation or
Disposition of Assets. In case the Company shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another
corporation (where the Company is not the surviving corporation or where there
is a change in or distribution with respect to the Common Stock of the
Company),
10
or sell, transfer or otherwise dispose of its property, assets or
business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or
any cash, shares of stock or other securities or property of any nature
whatsoever (including warrants or other subscription or purchase rights) in
addition to or in lieu of common stock of the successor or acquiring
corporation ("Other Property"), are to be received by or distributed to the
holders of Common Stock of the Company, then the Holder shall have the right
thereafter to receive, at the option of the Holder, (a) upon exercise of this
Additional Investment Right, the number of shares of Common Stock of the
successor or acquiring corporation or of the Company, if it is the surviving
corporation, and Other Property receivable upon or as a result of such
reorganization, reclassification, merger, consolidation or disposition of
assets by a Holder of the number of shares of Common Stock for which this
Additional Investment Right is exercisable immediately prior to such event or
(b) cash equal to the value of this Additional Investment Right as determined
in accordance with the Black Scholes option pricing formula. In case of any
such reorganization, reclassification, merger, consolidation or disposition of
assets, the successor or acquiring corporation (if other than the Company)
shall expressly assume the due and punctual observance and performance of each
and every covenant and condition of this Additional Investment Right to be
performed and observed by the Company and all the obligations and liabilities
hereunder, subject to such modifications as may be deemed appropriate (as
determined in good faith by resolution of the Board of Directors of the
Company) in order to provide for adjustments of Additional Investment Right
Shares for which this Additional Investment Right is exercisable which shall be
as nearly equivalent as practicable to the adjustments provided for in this
Section 12. For purposes of this Section 12, "common stock of the successor or
acquiring corporation" shall include stock of such corporation of any class
which is not preferred as to dividends or assets over any other class of stock
of such corporation and which is not subject to redemption and shall also
include any evidences of indebtedness, shares of stock or other securities
which are convertible into or exchangeable for any such stock, either
immediately or upon the arrival of a specified date or the happening of a
specified event and any warrants or other rights to subscribe for or purchase
any such stock. The foregoing provisions of this Section 12 shall similarly
apply to successive reorganizations, reclassifications, mergers, consolidations
or disposition of assets.
13.Voluntary Adjustment by the Company. The Company may at any
time during the term of this Additional Investment Right reduce the then
current Exercise Price to any amount and for any period of time deemed
appropriate by the Board of Directors of the Company.
14.Notice of Adjustment. Whenever the number of Additional
Investment Right Shares or number or kind of securities or other property
purchasable upon the exercise of this Additional Investment Right or the
Exercise Price is adjusted, as herein provided, the Company shall give notice
thereof to the Holder, which notice shall state the number of Additional
Investment Right Shares (and other securities or property) purchasable upon the
exercise of this Additional Investment Right and the Exercise Price of such
Additional Investment Right Shares (and other securities or property) after
such adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was made.
11
15.Notice of Corporate Action. If at any time:
(a) the Company shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive a dividend or
other distribution, or any right to subscribe for or purchase any
evidences of its indebtedness, any shares of stock of any class or any
other securities or property, or to receive any other right, or
(b) there shall be any capital reorganization of the
Company, any reclassification or recapitalization of the capital stock of
the Company or any consolidation or merger of the Company with, or any
sale, transfer or other disposition of all or substantially all the
property, assets or business of the Company to, another corporation or,
(c) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder (i) at
least 20 days' prior written notice of the date on which a record date shall be
selected for such dividend, distribution or right or for determining rights to
vote in respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, liquidation or winding up, and (ii)
in the case of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up, at least 20 days' prior written notice of the date when the same shall take
place. Such notice in accordance with the foregoing clause also shall specify
(i) the date on which any such record is to be taken for the purpose of such
dividend, distribution or right, the date on which the holders of Common Stock
shall be entitled to any such dividend, distribution or right, and the amount
and character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their Additional Investment Right Shares for securities or
other property deliverable upon such disposition, dissolution, liquidation or
winding up. Each such written notice shall be sufficiently given if addressed
to Holder at the last address of Holder appearing on the books of the Company
and delivered in accordance with Section 17(d).
16.Authorized Shares. The Company covenants that during the period
the Additional Investment Right is outstanding, it will reserve from its
authorized and unissued Common Stock a sufficient number of shares to provide
for the issuance of the Additional Investment Right Shares upon the exercise of
any purchase rights under this Additional Investment Right. The Company
further covenants that its issuance of this Additional Investment Right shall
constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates
for the Additional Investment Right Shares upon the exercise of the purchase
rights under this Additional Investment Right. The Company will take all such
reasonable action as may be necessary to assure that such Additional Investment
Right Shares may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of the Trading Market upon
which the Common Stock may be listed.
12
Except and to the extent as waived or consented to by the Holder,
the Company shall not by any action, including, without limitation, amending
its certificate 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 of this Additional Investment Right, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of
all such actions as may be necessary or appropriate to protect the rights of
Holder as set forth in this Additional Investment Right against impairment.
Without limiting the generality of the foregoing, the Company will (a) not
increase the par value of any Additional Investment Right Shares above the
amount payable therefor upon such exercise immediately prior to such increase
in par value, (b) take all such action as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable Additional Investment Right Shares upon the exercise of this
Additional Investment Right, and (c) use commercially reasonable efforts to
obtain all such authorizations, exemptions or consents from any public
regulatory body having jurisdiction thereof as may be necessary to enable the
Company to perform its obligations under this Additional Investment Right.
Before taking any action which would result in an adjustment in the
number of Additional Investment Right Shares for which this Additional
Investment Right is exercisable or in the Exercise Price, the Company shall
obtain all such authorizations or exemptions thereof, or consents thereto, as
may be necessary from any public regulatory body or bodies having jurisdiction
thereof.
17.Miscellaneous.
(a)Jurisdiction. All questions concerning the construction,
validity, enforcement and interpretation of this Additional Investment Right
shall be determined in accordance with the provisions of the Purchase
Agreement.
(b)Restrictions. The Holder acknowledges that the Additional
Investment Right Shares acquired upon the exercise of this Additional
Investment Right, if not registered, will have restrictions upon resale imposed
by state and federal securities laws.
(c)Nonwaiver and Expenses. No course of dealing or any delay
or failure to exercise any right hereunder on the part of Holder shall operate
as a waiver of such right or otherwise prejudice Holder's rights, powers or
remedies, notwithstanding all rights hereunder terminate on the Termination
Date. If the Company willfully and knowingly fails to comply with any
provision of this Additional Investment Right, which results in any material
damages to the Holder, the Company shall pay to Holder such amounts as shall be
sufficient to cover any costs and expenses including, but not limited to,
reasonable attorneys' fees, including those of appellate proceedings, incurred
by Holder in collecting any amounts due pursuant hereto or in otherwise
enforcing any of its rights, powers or remedies hereunder.
(d)Notices. Any notice, request or other document required
or permitted to be given or delivered to the Holder by the Company shall be
delivered in accordance with the notice provisions of the Purchase Agreement.
13
(e)Limitation of Liability. No provision hereof, in the
absence of any affirmative action by Holder to exercise this Additional
Investment Right or purchase Additional Investment Right Shares, and no
enumeration herein of the rights or privileges of Holder, shall give rise to
any liability of Holder for the purchase price of any Common Stock or as a
stockholder of the Company, whether such liability is asserted by the Company
or by creditors of the Company.
(f)Remedies. Holder, in addition to being entitled to
exercise all rights granted by law, including recovery of damages, will be
entitled to specific performance of its rights under this Additional Investment
Right. The Company agrees that monetary damages would not be adequate
compensation for any loss incurred by reason of a breach by it of the
provisions of this Additional Investment Right and hereby agrees to waive the
defense in any action for specific performance that a remedy at law would be
adequate.
(g)Successors and Assigns. Subject to applicable securities
laws, this Additional Investment Right and the rights and obligations evidenced
hereby shall inure to the benefit of and be binding upon the successors of the
Company and the successors and permitted assigns of Holder. The provisions of
this Additional Investment Right are intended to be for the benefit of all
Holders from time to time of this Additional Investment Right and shall be
enforceable by any such Holder or holder of Additional Investment Right Shares.
(h)Amendment. This Additional Investment Right may be
modified or amended or the provisions hereof waived with the written consent of
the Company and the Holder.
(i)Severability. Wherever possible, each provision of this
Additional Investment Right shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of this
Additional Investment Right shall be prohibited by or invalid under applicable
law, such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provisions or the
remaining provisions of this Additional Investment Right.
(j)Headings. The headings used in this Additional Investment
Right are for the convenience of reference only and shall not, for any purpose,
be deemed a part of this Additional Investment Right.
********************
14
IN WITNESS WHEREOF, the Company has caused this Additional
Investment Right to be executed by its officer thereunto duly authorized.
Dated: July ___, 2004
SUNBURST ACQUISITIONS IV, INC.
By:__________________________________________
Name:
Title:
15
NOTICE OF EXERCISE
To: Sunburst Acquisitions IV, Inc.
(1)The undersigned hereby elects to purchase ________ Additional
Investment Right Shares of the Company pursuant to the terms of the attached
Additional Investment Right (only if exercised in full), and tenders herewith
payment of the exercise price in full, together with all applicable transfer
taxes, if any.
(2)Payment shall take the form of (check applicable box):
[ ] in lawful money of the United States; or
[ ] the cancellation of such number of Additional Investment
Right Shares as is necessary, in accordance with the formula
set forth in subsection 3(d), to exercise this Additional
Investment Right with respect to the maximum number of
Additional Investment Right Shares purchasable pursuant to the
cashless exercise procedure set forth in subsection 3(d).
(3)Please issue a certificate or certificates representing said
Additional Investment Right Shares in the name of the undersigned or in such
other name as is specified below:
_______________________________
The Additional Investment Right Shares shall be delivered to the following:
_______________________________
_______________________________
_______________________________
(4) Accredited Investor. The undersigned is an "accredited
investor" as defined in Regulation D under the Securities Act of 1933, as
amended.
[PURCHASER]
By: ______________________________
Name:
Title:
Dated: ________________________
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Additional Investment Right and
all rights evidenced thereby are hereby assigned to
_______________________________________________ whose address is
_______________________________________________________________.
_______________________________________________________________
Dated: ______________, _______
Holder's Signature:_____________________________
Holder's Address:_____________________________
_____________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as
it appears on the face of the Additional Investment Right, without alteration
or enlargement or any change whatsoever, and must be guaranteed by a bank or
trust company. Officers of corporations and those acting in a fiduciary or
other representative capacity should file proper evidence of authority to
assign the foregoing Additional Investment Right.
Exhibit E
Frascona Joiner Goodman and Greenstein, P.C.
4750 Table Mesa Drive
Boulder, CO 80305
Ph: 303 494 3000
Fx: 303 494 6309
August 25, 2004
Bristol Investment Fund, Ltd.
10990 Wilshire Boulevard, Suite 1410
Los Angeles, CA 90024
Attention: Amy Wang, Esq.
Alpha Capital AG
c/o LH Financial Corp
160 Central Park South, Suite 2701
New York, NY 10019
Attn: Ari Kluger
Stonestreet LP
260 Town Centre Blvd., Suite 201
Markham, ON L3R 8H8 Canada
Re: Securities Purchase Agreement
Ladies and Gentlemen:
This opinion is furnished to you pursuant to the Securities Purchase
Agreement by and among the purchasers signatory thereto (the "Purchasers") and
Sunburst Acquisitions IV, Inc. a Colorado corporation (the "Company"), dated as
of August 24, 2004 (the "Purchase Agreement"), which provides for the issuance
and sale by the Company of up to $1,350,000 principal amount of Debentures,
Warrants and Additional Investment Rights to purchase shares of the Company's
Common Stock. All terms used herein have the meanings defined for them in the
Purchase Agreement unless otherwise defined herein.
We are counsel for the Company, but have not been engaged by the Company
in connection with the negotiation or execution of the Purchase Agreement, the
Debentures, the Escrow Agreement, the Security Agreement, the Warrants, the
Additional Investment Rights and the Registration Rights Agreement (the
Purchase Agreement, the Debentures, the Warrants, the Registration Rights
Agreement, the Escrow Agreement and the Security Agreement, collectively the
"Agreements").
We have made such legal and factual examinations and inquiries as we have
deemed advisable or necessary for the purpose of rendering this opinion. In
addition, we have examined, among other things, originals or copies of such
corporate records of the Company, certificates of public officials and such
other documents and questions of law that we consider necessary or advisable
for the purpose of rendering this opinion. In such examination we have assumed
the genuineness of all signatures on original documents, the authenticity and
completeness of all documents submitted to us as originals, the conformity to
original documents of all copies submitted to us as copies thereof, the legal
capacity of
natural persons, and the due execution and delivery of all documents
(except as to due execution and delivery by the Company) where due execution
and delivery are a prerequisite to the effectiveness thereof.
As used in this opinion, the expression "to our knowledge" refers to the
current actual knowledge of the attorneys of this firm who have worked on
matters for the Company solely in connection with the Agreements and the
Warrants and the transactions contemplated thereby, and without any independent
investigation of any underlying facts or situations.
For purposes of this opinion, we have assumed that you have all requisite
power and authority, and have taken any and all necessary corporate action, to
execute and deliver the Agreements, and we are assuming that the
representations and warranties made by each Purchaser in the Agreements and
pursuant thereto are true and correct.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Company is a corporation duly organized, validly existing and
in good standing under the laws of Colorado and has all requisite corporate
power and authority to carry on its business and to own, lease and operate its
properties and assets as described in the Company's SEC Documents. To our
knowledge, the Company does not have any subsidiaries and does not own more
than fifty percent (50%) of the outstanding capital stock of or control any
other business entity other than as disclosed in the SEC Documents.
2. The Company has the requisite corporate power and authority to
enter into and perform its obligations under the Agreements and to issue the
Debentures, Warrants, Additional Investment Rights, the Additional Investment
Rights Shares and the Underlying Shares. The execution and delivery of the
Agreements by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary corporate
action and no further consent or authorization of the Company or its Board of
Directors or stockholders is required, and the issuance of the Underlying
Shares will not violate the corporate governance rules of the Trading Market.
Each of the Agreements has been duly executed and delivered by the Company to
the Purchasers. Upon issuance in accordance with the terms of the Agreements,
the Debentures, the Warrants and the Additional Investment Rights will
constitute valid and binding obligations of the Company enforceable against the
Company in accordance with their respective terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency, or similar
laws relating to, or affecting generally the enforcement of, creditors' rights
and remedies or by other equitable principles of general application, and free
of any liens, encumbrances and preemptive or similar rights contained in the
Company's Certificate of Incorporation or Bylaws or, to our knowledge, in any
agreement to which the Company is party.
3. The execution, delivery and performance of the Agreements by the
Company and the consummation by the Company of the transactions contemplated
thereby, including, without limitation, the issuance of the Debentures, the
Warrants, the Additional Investment Rights, the Additional Investment Rights
Shares and the Underlying Shares, do not and will not (i) result in a violation
of the Company's Certificate of Incorporation or By-Laws; (ii) conflict with,
or constitute a material default (or an event that with notice or lapse of time
or both would become a default) under or give to others any rights of
termination, amendment, acceleration or cancellation of any material agreement,
indenture, instrument or any "lock-up", refusal or similar provision of any
underwriting or similar agreement to which the Company is a party; or (iii)
result in a violation of any federal or state law, rule or regulation
applicable to the Company or by which any property or asset of the Company is
bound or affected, except for such violations as would not, individually or in
the aggregate, have a Material Adverse Effect. To our knowledge, the Company
is not in violation of any terms of its Certificate of Incorporation
or Bylaws.
4. To our knowledge the Company has not and will not engage in any
general solicitation in conjunction with the offer and sale of the Debentures,
the Warrants and the Additional Investment Rights and upon issuance will take
such steps as may be necessary or appropriate to impose restrictions upon the
subsequent sale or transfer of such Securities, including, but not limited to,
causing a restrictive legend in the form described in Section 4.1(b) of the
Purchase Agreement to be imprinted on any certificates which are issued to
represent such Securities. Based upon the foregoing and upon the assumption
that all representations and warranties of the Purchasers set forth in the
Purchase Agreement are true and correct, the issuance of the Debentures, the
Warrants and the Additional Investment Rights in accordance with the Purchase
Agreement will be exempt from registration under the Securities Act of 1933, as
amended. When so issued, the Debentures, the Warrants and the Additional
Investment Rights will be duly and validly issued, fully paid and
nonassessable, and free of any liens, encumbrances and preemptive or similar
rights contained in the Company's Certificate of Incorporation or Bylaws, or,
to our knowledge, in any agreement to which the Company is a party.
5. We have not been engaged to devote substantive attention to any
claims, actions, suits, proceedings or investigations that are pending against
the Company or its properties, or against any officer or director of the
Company in his or her capacity as such. To our knowledge, the Company is not a
party to or subject to the provisions of any order, writ, injunction, judgment
or decree of any court or government agency or instrumentality.
6. The authorized capital stock of the Company consists of 200,000,000
shares of Common Stock, no par value, of which shares 88,118,692.
7. To our knowledge the Security Agreement is effective to create a
first priority security interest in all of the assets of the Company in favor
of the Purchasers in those items of the Collateral (as defined in the Security
Agreement) consisting of personal property in which a security interest can be
created under Article 9 of the UCC.
We are members of the State Bar of Colorado. We express no opinion as to
the laws of any jurisdiction other than the laws of the states of Colorado and
to the extent applicable to the foregoing opinion the federal laws of the
United States of America. This opinion is also limited to the matters
expressly stated herein and no opinions are to be inferred or may be implied
beyond the opinions expressly set forth herein.
This opinion is as of the date hereof, and we undertake no, and hereby
disclaim any, obligation to advise you of any change in any matter set forth
herein, whether based on a change in the law, a change in any fact relating to
the Company or any other person or entity, or any other circumstance. This
opinion is provided to the Purchasers for their benefit in connection with the
transactions described above and, without our prior written consent, may not be
relied upon or quoted in whole or in part or otherwise referred to or used for
any other purpose without our prior written consent, except that the Company's
transfer agent, Corporate Stock Transfer, or its successor agent, and the
Purchasers' respective brokers, or their successor agents, may rely upon this
opinion in acting as transfer agent with respect to the transactions
contemplated by the Agreements.
Sincerely yours,
Frascona, Joiner, Goodman and Greenstein,
P.C.
By: /s/ Gary S. Joiner
GSJ:gc
EXHIBIT F
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement") is made as of August 25,
2004, by and among Sunburst Acquisitions IV, Inc. a Colorado corporation (the
"Company"), the purchasers signatory hereto (each a "Purchaser" and together
the "Purchasers"), and Feldman Weinstein LLP, with an address at 420 Lexington
Avenue, New York, New York 10170-0002 (the "Escrow Agent"). CAPITALIZED TERMS
USED BUT NOT DEFINED HEREIN SHALL HAVE THE MEANINGS SET FORTH IN THE SECURITIES
PURCHASE AGREEMENT REFERRED TO IN THE FIRST RECITAL.
W I T N E S S E T H:
WHEREAS, the Purchasers will be purchasing from the Company,
severally and not jointly with the other Purchasers, in the aggregate, up to
$1,350,000 in the aggregate, of the Principal Amount of the Debentures and
Warrants as set forth in the Securities Purchase Agreement (the "Purchase
Agreement") dated the date hereof between the Purchasers and the Company, which
securities will be issued under the terms contained herein and in the Purchase
Agreement; and
WHEREAS, it is intended that the purchase of the securities be
consummated in accordance with the requirements set forth in Regulation D
promulgated under the Securities Act of 1933, as amended; and
WHEREAS, the Company and the Purchasers have requested that the
Escrow Agent hold the Subscription Amounts in escrow until the Escrow Agent has
received the Release Notice in the form attached hereto from the Company and
each Purchaser;
NOW, THEREFORE, in consideration of the covenants and mutual
promises contained herein and other good and valuable consideration, the
receipt and legal sufficiency of which are hereby acknowledged and intending to
be legally bound hereby, the parties agree as follows:
ARTICLE 1
TERMS OF THE ESCROW
1.1. The parties hereby agree to establish an escrow account with the Escrow
Agent whereby the Escrow Agent shall hold the funds for the purchase of up to
$1,350,000, in the aggregate, of Debentures and Warrants as contemplated by the
Purchase Agreement.
1.2. First Closing.
(a)Upon the Escrow Agent's receipt of the
aggregate Subscription Amounts for the First
Closing into its master escrow account, together
with executed counterparts of this Agreement, the
Purchase Agreement and the Registration Rights
Agreement, it shall telephonically advise the
Company, or the Company's
1
designated attorney or agent, of the amount of
funds it has received into its master escrow
account.
(b)Wire transfers to the Escrow Agent shall be
made as follows:
STERLING NATIONAL BANK
622 3RD AVENUE
NEW YORK, NY 10017
ACCOUNT NAME: FELDMAN WEINSTEIN LLP
ABA ROUTING NO: 026007773
ACCT NO: 0814180101
Remark: SBAQ/[FUND NAME]
(c)The Company, promptly following being advised
by the Escrow Agent that the Escrow Agent has
received the Subscription Amounts for the First
Closing along with facsimile copies of
counterpart signature pages of the Purchase
Agreement, Registration Rights Agreement, the
Security Agreement and this Agreement from each
Purchaser, shall deliver to the Escrow Agent the
certificates evidencing the Securities to be
issued to each Purchaser at the First Closing
together with:
(i)the Company's executed counterpart of
the Purchase Agreement;
(ii)the Company's executed counterpart of
the Registration Rights Agreement;
(iii) the executed opinion of Company
Counsel, in the form of Exhibit E to the
Purchase Agreement;
(iv)the Company's original executed
counterpart of this Escrow Agreement;
(v)the Company's original executed
counterpart of the Security Agreement; and
(vi)a warrant registered in the name of
T.R. Winston & Company, LLC ("T.R.
Winston"), and/or its designees, to
purchase up to a number of shares of Common
Stock equal to 10% of the number of Warrant
Shares issuable upon exercise of all of the
Warrants in full, otherwise identical to
the Warrant ("T.R. Winston Warrant").
(d)In the event that the foregoing items are not
in the Escrow Agent's possession within five (5)
Trading Days of the Escrow Agent notifying the
2
Company that the Escrow Agent has custody of the
Subscription Amount for the First Closing, then
each Purchaser shall have the right to demand the
return of their portion of the Subscription
Amount.
(e)Once the Escrow Agent receives a Release
Notice in the form attached hereto as Exhibit X
(the "Release Notice") executed by the Company
and each Purchaser it shall wire 10% of the
aggregate Subscription Amounts for the First
Closing per the written instructions of T.R.
Winston and 90% of the aggregate Subscription
Amounts for the First Closing received to the
Company's account, net of $20,000 per the
instructions of T.R. Winston.
(f)Wire transfers to the Company shall be made
pursuant to written instructions from the Company
provided to the Escrow Agent on the date of the
Purchase Agreement.
(g)Once the funds (as set forth above) have been
sent per the Company's instructions, the Escrow
Agent shall then arrange to have the certificates
representing, the Purchase Agreement, the
Registration Rights Agreement, the Security
Agreement, the Warrants, the Additional
Investment Right, the Escrow Agreement and the
opinion of counsel delivered to the appropriate
parties.
1.3. Second Closing.
a) Upon the Escrow Agent's receipt of each Purchaser's Subscription
Amounts for the Second Closing into its master escrow account,
it shall telephonically advise the Company, or the Company's
designated attorney or agent, of the amount of funds it has
received into its master escrow account.
b) The Company, upon receipt of said notice of receipt of funds,
shall deliver to the Escrow Agent the certificates evidencing
the Debentures to be issued to the Purchasers pursuant to the
Purchase Agreement.
c) In the event that the foregoing items are not in the Escrow
Agent's possession within five (5) Trading Days of the Escrow
Agent notifying the Company that the Escrow Agent has custody of
the Subscription Amount for the Second Closing, then each
Purchaser shall have the right to demand the return of their
portion of the Subscription Amount.
d) Once the Escrow Agent receives a Release executed by the Company
and each Purchaser it shall wire 10% of the aggregate
Subscription Amounts for the Second Closing per the written
instructions of T.R. Winston and the balance of the aggregate
Subscription Amounts for the Second Closing received to the
Company's account.
3
e) Once the funds (as set forth above) have been sent per the
Company's instructions, the Escrow Agent shall then arrange to
have the Debentures delivered to the appropriate parties.
ARTICLE II
MISCELLANEOUS
a.1No waiver or any breach of any covenant or provision herein contained shall
be deemed a waiver of any preceding or succeeding breach thereof, or of any
other covenant or provision herein contained. No extension of time for
performance of any obligation or act shall be deemed an extension of the
time for performance of any other obligation or act.
a.2 All notices or other communications required or permitted hereunder shall
be in writing, and shall be sent as set forth in the Purchase Agreement.
a.3 This Escrow Agreement shall be binding upon and shall inure to the benefit
of the permitted successors and permitted assigns of the parties hereto.
a.4 This Escrow Agreement is the final expression of, and contains the entire
agreement between, the parties with respect to the subject matter hereof and
supersedes all prior understandings with respect thereto. This Escrow
Agreement may not be modified, changed, supplemented or terminated, nor may
any obligations hereunder be waived, except by written instrument signed by
the parties to be charged or by its agent duly authorized in writing or as
otherwise expressly permitted herein.
a.5 Whenever required by the context of this Escrow Agreement, the singular
shall include the plural and masculine shall include the feminine. This
Escrow Agreement shall not be construed as if it had been prepared by one of
the parties, but rather as if all parties had prepared the same. Unless
otherwise indicated, all references to Articles are to this Escrow
Agreement.
a.6 The parties hereto expressly agree that this Escrow Agreement shall be
governed by, interpreted under and construed and enforced in accordance with
the laws of the State of New York. Any action to enforce, arising out of,
or relating in any way to, any provisions of this Escrow Agreement shall
only be brought in a state or Federal court sitting in New York City.
a.7 The Escrow Agent's duties hereunder may be altered, amended, modified or
revoked only by a writing signed by the Company, each Purchaser and the
Escrow Agent.
a.8 The Escrow Agent shall be obligated only for the performance of such
duties as are specifically set forth herein and may rely and shall be
protected in relying or refraining from acting on any instrument reasonably
believed by the Escrow Agent to be genuine and to have been signed or
presented by the proper party or parties. The Escrow Agent shall not be
personally liable for any act the Escrow Agent may do or omit to do
hereunder as the Escrow Agent while acting in good faith and in the absence
of gross negligence, fraud and willful misconduct, and any act done or
omitted by the Escrow Agent pursuant to the advice of the
4
Escrow Agent's attorneys-at-law shall be conclusive evidence of such good
faith, in the absence of gross negligence, fraud and willful misconduct.
a.9 The Escrow Agent is hereby expressly authorized to disregard any and all
warnings given by any of the parties hereto or by any other person or
corporation, excepting only orders or process of courts of law and is hereby
expressly authorized to comply with and obey orders, judgments or decrees of
any court. In case the Escrow Agent obeys or complies with any such order,
judgment or decree, the Escrow Agent shall not be liable to any of the
parties hereto or to any other person, firm or corporation by reason of such
decree being subsequently reversed, modified, annulled, set aside, vacated
or found to have been entered without jurisdiction.
a.10 The Escrow Agent shall not be liable in any respect on account of the
identity, authorization or rights of the parties executing or delivering or
purporting to execute or deliver the Purchase Agreement or any documents or
papers deposited or called for thereunder in the absence of gross
negligence, fraud and willful misconduct.
a.11 The Escrow Agent shall be entitled to employ such legal counsel and other
experts as the Escrow Agent may deem necessary properly to advise the Escrow
Agent in connection with the Escrow Agent's duties hereunder, may rely upon
the advice of such counsel, and may pay such counsel reasonable
compensation; provided that the costs of such compensation shall be borne by
the Escrow Agent. THE ESCROW AGENT HAS ACTED AS LEGAL COUNSEL FOR T.R.
WINSTON, AND MAY CONTINUE TO ACT AS LEGAL COUNSEL FOR T.R. WINSTON FROM TIME
TO TIME, NOTWITHSTANDING ITS DUTIES AS THE ESCROW AGENT HEREUNDER. THE
COMPANY AND THE PURCHASERS CONSENT TO THE ESCROW AGENT IN SUCH CAPACITY AS
LEGAL COUNSEL FOR T.R. WINSTON AND WAIVES ANY CLAIM THAT SUCH REPRESENTATION
REPRESENTS A CONFLICT OF INTEREST ON THE PART OF THE ESCROW AGENT. THE
COMPANY AND THE PURCHASERS UNDERSTAND THAT T.R. WINSTON AND THE ESCROW AGENT
ARE RELYING EXPLICITLY ON THE FOREGOING PROVISION IN ENTERING INTO THIS
ESCROW AGREEMENT.
a.12 The Escrow Agent's responsibilities as escrow agent hereunder shall
terminate if the Escrow Agent shall resign by giving written notice to the
Company and the Purchasers. In the event of any such resignation, the
Purchasers and the Company shall appoint a successor Escrow Agent and the
Escrow Agent shall deliver to such successor Escrow Agent any escrow funds
and other documents held by the Escrow Agent.
a.13 If the Escrow Agent reasonably requires other or further instruments in
connection with this Escrow Agreement or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
a.14 It is understood and agreed that should any dispute arise with respect to
the delivery and/or ownership or right of possession of the documents or the
escrow funds held by the Escrow Agent hereunder, the Escrow Agent is
authorized and directed in the Escrow Agent's sole discretion (1) to retain
in the Escrow Agent's possession without liability to anyone all or any part
of said documents or the escrow funds until such disputes shall have been
settled either by mutual written agreement of the parties concerned by a
final order, decree or judgment or a court of competent jurisdiction after
the time for appeal has expired and no appeal has been perfected, but the
Escrow Agent shall be under no duty whatsoever to institute or defend any
5
such proceedings or (2) to deliver the escrow funds and any other property and
documents held by the Escrow Agent hereunder to a state or Federal court
having competent subject matter jurisdiction and located in the City of New
York in accordance with the applicable procedure therefore
a.15 The Company and each Purchaser agree jointly and severally to indemnify
and hold harmless the Escrow Agent and its partners, employees, agents and
representatives from any and all claims, liabilities, costs or expenses in
any way arising from or relating to the duties or performance of the Escrow
Agent hereunder or the transactions contemplated hereby or by the Purchase
Agreement other than any such claim, liability, cost or expense to the
extent the same shall have been determined by final, unappealable judgment
of a court of competent jurisdiction to have resulted from the gross
negligence, fraud or willful misconduct of the Escrow Agent.
************************
6
IN WITNESS WHEREOF, the parties hereto have executed this Escrow
Agreement as of date first written above.
SUNBURST ACQUISITIONS IV, INC.
By:__________________________________________
Name:
Title:
With a copy to (which shall not constitute notice):
ESCROW AGENT:
FELDMAN WEINSTEIN LLP
By:__________________________________________
Name:
Title:
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES FOR PURCHASERS FOLLOW]
[SIGNATURE PAGE OF PURCHASERS TO SBAQ ESCROW]
Name of Investing Entity: __________________________
Signature of Authorized Signatory of Investing Entity: __________
Name of Authorized Signatory: _________________________
Title of Authorized Signatory: __________________________
[SIGNATURE PAGE OF PURCHASERS FOLLOWS]
Exhibit X to
Escrow Agreement
RELEASE NOTICE
The UNDERSIGNED, pursuant to the Escrow Agreement, dated as of July
__, 2004, among Sunburst Acquisitions IV, Inc. a Colorado corporation, the
Purchasers signatory thereto and Feldman Weinstein LLP, as Escrow Agent (the
"Escrow Agreement"; capitalized terms used herein and not defined shall have
the meaning ascribed to such terms in the Escrow Agreement), hereby notify the
Escrow Agent that each of the conditions precedent to the purchase and sale of
the Securities set forth in the Securities Purchase Agreement have been
satisfied. The Company and the undersigned Purchaser hereby confirm that all
of their respective representations and warranties contained in the Purchase
Agreement remain true and correct and authorize the release by the Escrow Agent
of the funds and documents to be released at the Closing as described in the
Escrow Agreement. This Release Notice shall not be effective until executed by
the Company and the Purchasers.
This Release Notice may be signed in one or more counterparts, each
of which shall be deemed an original.
IN WITNESS WHEREOF, the undersigned have caused this Release Notice
to be duly executed and delivered as of this __ day of July, 2004.
SUNBURST ACQUISITIONS IV, INC.
By:__________________________________________
Name:
Title:
[SIGNATURE PAGE OF PURCHASERS FOLLOWS]
[SIGNATURE PAGE OF PURCHASERS TO SBAQ RELEASE]
Name of Investing Entity: __________________________
Signature of Authorized Signatory of Investing Entity: ____________
Name of Authorized Signatory: _________________________
Title of Authorized Signatory: __________________________
[SIGNATURE PAGE OF PURCHASERS FOLLOWS]
EXHIBIT G
SECURITY AGREEMENT
SECURITY AGREEMENT, dated as of August 25, 2004 (this "Agreement"),
among Sunburst Acquisitions IV, Inc. a Colorado corporation (the "Debtor") and
the holder or holders of the Company's Secured Convertible Debenture due
August 25, 2005 in the original principal amount of $1,350,000 (the
"Debenture"), signatory hereto, their endorsees, transferees and assigns
(collectively referred to as, the "Secured Parties"). [IF SUBSIDIARIES EXIST,
ALSO REQUIRE A SECURITY AGREEMENT AND GUARANTEE FOR EACH SUBSIDIARY MODIFIED
ACCORDINGLY]
W I T N E S S E T H:
WHEREAS, pursuant to the Debenture, the Secured Parties have
severally agreed to extend the loans to the Debtor evidenced by the Debenture;
and
WHEREAS, in order to induce the Secured Parties to extend the loans
evidenced by the Debentures, the Debtor has agreed to execute and deliver to
the Secured Parties this Agreement and to grant the Secured Parties, pari passu
with each other Secured Party, a perfected first priority security interest in
certain property of the Debtor to secure the prompt payment, performance and
discharge in full of all of the Debtor's obligations under the Debenture.
NOW, THEREFORE, in consideration of the agreements herein contained
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto hereby agree as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement, the following
terms shall have the meanings set forth in this Section 1. Terms used but not
otherwise defined in this Agreement that are defined in Article 9 of the UCC
(such as "general intangibles" and "proceeds") shall have the respective
meanings given such terms in Article 9 of the UCC.
(a) "Collateral" means the collateral in which the Secured
Parties are granted a security interest by this Agreement and which
shall include the following, whether presently owned or existing or
hereafter acquired or coming into existence, and all additions and
accessions thereto and all substitutions and replacements thereof, and
all proceeds, products and accounts thereof, including, without
limitation, all proceeds from the sale or transfer of the Collateral and
of insurance covering the same and of any tort claims in connection
therewith:
(i) All Goods of the Debtor, including, without
limitations, all machinery, equipment, computers, motor vehicles,
trucks, tanks, boats, ships, appliances, furniture, special and
general tools, fixtures, test and quality control devices and
other equipment of every kind and nature and
1
wherever situated, together with all documents of title and
documents representing the same, all additions and accessions
thereto, replacements therefor, all parts therefor, and all
substitutes for any of the foregoing and all other items used and
useful in connection with the Debtor's businesses and all
improvements thereto (collectively, the "Equipment"); and
(ii) All Inventory of the Debtor; and
(iii)All of the Debtor's contract rights and general
intangibles, including, without limitation, all partnership
interests, stock or other securities, licenses, distribution and
other agreements, computer software (whether "off-the-shelf",
licensed from any third party or developed by Debtor) computer
software development rights, leases, franchises, customer lists,
quality control procedures, grants and rights, goodwill,
trademarks, service marks, trade styles, trade names, patents,
patent applications, copyrights, deposit accounts and income tax
refunds (collectively, the "General Intangibles"); and
(iv) All Receivables of the Debtor including all insurance
proceeds, and rights to refunds or indemnification whatsoever
owing, together with all instruments, all documents of title
representing any of the foregoing, all rights in any
merchandising, goods, equipment, motor vehicles and trucks which
any of the same may represent, and all right, title, security and
guaranties with respect to each Receivable, including any right of
stoppage in transit; and
(v) All of the Debtor's documents, instruments and
chattel paper, files, records, books of account, business papers,
computer programs and the products and proceeds of all of the
foregoing Collateral set forth in clauses (i)-(iv) above.
(b) "Obligations" means all of the Debtor's obligations under
this Agreement and the Debentures, in each case, whether now or
hereafter existing, voluntary or involuntary, direct or indirect,
absolute or contingent, liquidated or unliquidated, whether or not
jointly owed with others, and whether or not from time to time decreased
or extinguished and later increased, created or incurred, and all or any
portion of such obligations or liabilities that are paid, to the extent
all or any part of such payment is avoided or recovered directly or
indirectly from any of the Secured Parties as a preference, fraudulent
transfer or otherwise as such obligations may be amended, supplemented,
converted, extended or modified from time to time.
(c) "UCC" means the Uniform Commercial Code and or any other
applicable law of any jurisdiction (including, without limitation, the
state of California) as to any Collateral located therein.
2
2. GRANT OF PERFECTED FIRST PRIORITY SECURITY INTEREST. As an
inducement for the Secured Parties to extend the loans as evidenced by the
Debentures and to secure the complete and timely payment, performance and
discharge in full, as the case may be, of all of the Obligations, the Debtor
hereby unconditionally and irrevocably pledges, grants and hypothecates to the
Secured Parties a continuing and perfected first priority security interest in
and to, a lien upon and a right of set-off against all of their respective
right, title and interest of whatsoever kind and nature in and to, the
Collateral (the "Security Interest").
3. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS OF THE
DEBTOR. The Debtor represents and warrants to, and covenants and agrees with,
the Secured Parties as follows:
(a) The Debtor has the requisite corporate power and authority
to enter into this Agreement and otherwise to carry out its obligations
hereunder. The execution, delivery and performance by the Debtor of this
Agreement and the filings contemplated therein have been duly authorized
by all necessary action on the part of the Debtor and no further action
is required by the Debtor.
(b) The Debtor represents and warrants that they have no place
of business or offices where their respective books of account and
records are kept (other than temporarily at the offices of its attorneys
or accountants) or places where Collateral is stored or located, except
as set forth on Schedule A attached hereto.
(c) Except as set forth on Schedule B attached hereto, the
Debtor is the sole owner of the Collateral (except for non-exclusive
licenses granted by the Debtor in the ordinary course of business), free
and clear of any liens, security interests, encumbrances, rights or
claims, and are fully authorized to grant the Security Interest in and
to pledge the Collateral. There is not on file in any governmental or
regulatory authority, agency or recording office an effective financing
statement, security agreement, license or transfer or any notice of any
of the foregoing (other than those that will be filed in favor of the
Secured Parties pursuant to this Agreement) covering or affecting any of
the Collateral. So long as this Agreement shall be in effect, Debtor
shall not execute and shall not knowingly permit to be on file in any
such office or agency any such financing statement or other document or
instrument (except to the extent filed or recorded in favor of the
Secured Parties pursuant to the terms of this Agreement).
(d) No part of the Collateral has been judged invalid or
unenforceable. No written claim has been received that any Collateral or
Debtor's use of any Collateral violates the rights of any third party.
There has been no adverse decision to Debtor's claim of ownership rights
in or exclusive rights to use the Collateral in any jurisdiction or to
Debtor's right to keep and maintain such Collateral in full force and
effect, and there is no proceeding involving said rights pending or, to
the best knowledge of the Debtor, threatened before any court,
3
judicial body, administrative or regulatory agency, arbitrator or
other governmental authority.
(e) The Debtor shall at all times maintain its books of account
and records relating to the Collateral at its principal place of
business and its Collateral at the locations set forth on Schedule A
attached hereto and may not relocate such books of account and records
or tangible Collateral unless it delivers to the Secured Parties at
least 30 days prior to such relocation (i) written notice of such
relocation and the new location thereof (which must be within the United
States) and (ii) evidence that appropriate financing statements under
the UCC and other necessary documents have been filed and recorded and
other steps have been taken to perfect the Security Interest to create
in favor of the Secured Parties a valid, perfected and continuing
perfected first priority lien in the Collateral.
(f) This Agreement creates in favor of the Secured Parties a
valid security interest in the Collateral securing the payment and
performance of the Obligations and, upon making the filings described in
the immediately following sentence, a perfected first priority security
interest in such Collateral.
(g) The Debtor hereby authorizes the Secured Parties, or any of
them, to file one or more financing statements under the UCC, with
respect to the Security Interest with the proper filing and recording
agencies in any jurisdiction deemed proper by them.
(h) The execution, delivery and performance of this Agreement by
the Debtor does not conflict with, or constitute a default (or an event
that with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation (with or without notice, lapse of time or both) of, any
agreement, credit facility, debt or other instrument (evidencing
Debtor's debt or otherwise) or other understanding to which Debtor is a
party or by which any property or asset of the Debtor is bound or
affected. No consent (including, without limitation, from stockholders
or creditors of the Debtor) is required for the Debtor to enter into and
perform its obligations hereunder.
(i) The Debtor shall at all times maintain the liens and Security
Interest provided for hereunder as valid and perfected first priority
liens and security interests in the Collateral in favor of the Secured
Parties until this Agreement and the Security Interest hereunder shall
be terminated pursuant to Section 11 hereof. The Debtor hereby agrees to
defend the same against any and all persons. The Debtor shall safeguard
and protect all Collateral for the account of the Secured Parties. At
the request of the Secured Parties, the Debtor will sign and deliver to
the Secured Parties at any time or from time to time one or more
financing statements pursuant to the UCC in form reasonably satisfactory
to the Secured Parties and will pay the cost of filing the same in all
public offices wherever filing is, or is deemed by the Secured Parties
to be, necessary or desirable to effect the
4
rights and obligations provided for herein. Without limiting the
generality of the foregoing, the Debtor shall pay all fees, taxes and
other amounts necessary to maintain the Collateral and the Security
Interest hereunder, and the Debtor shall obtain and furnish to the
Secured Parties from time to time, upon demand, such releases and/or
subordinations of claims and liens which may be required to maintain the
priority of the Security Interest hereunder.
(j) The Debtor will not transfer, pledge, hypothecate, encumber,
license (except for non-exclusive licenses granted by a Debtor in its
ordinary course of business and sales of inventory), sell or otherwise
dispose of any of the Collateral without the prior written consent of a
majority in interest of the Secured Parties.
(k) The Debtor shall keep and preserve its Equipment, Inventory
and other tangible Collateral in good condition, repair and order and
shall not operate or locate any such Collateral (or cause to be operated
or located) in any area excluded from insurance coverage.
(l) The Debtor shall, within ten (10) days of obtaining knowledge
thereof, advise the Secured Parties promptly, in sufficient detail, of
any substantial change in the Collateral, and of the occurrence of any
event which would have a material adverse effect on the value of the
Collateral or on the Secured Parties' security interest therein.
(m) The Debtor shall promptly execute and deliver to the
Secured Parties such further deeds, mortgages, assignments, security
agreements, financing statements or other instruments, documents,
certificates and assurances and take such further action as the Secured
Parties may from time to time request and may in its sole discretion
deem necessary to perfect, protect or enforce its security interest in
the Collateral including, without limitation, if applicable, the
execution and delivery of a separate security agreement with respect to
each Debtor's intellectual property ("Intellectual Property Security
Agreement") in which the Secured Parties have been granted a security
interest hereunder, substantially in a form acceptable to the Secured
Parties, which Intellectual Property Security Agreement, other than as
stated therein, shall be subject to all of the terms and conditions
hereof.
(n) The Debtor shall permit the Secured Parties and their
representatives and agents to inspect the Collateral at any time, and to
make copies of records pertaining to the Collateral as may be requested
by a Secured Party from time to time.
(o) The Debtor shall take all steps reasonably necessary to
diligently pursue and seek to preserve, enforce and collect any rights,
claims, causes of action and accounts receivable in respect of the
Collateral.
5
(p) The Debtor shall promptly notify the Secured Parties in
sufficient detail upon becoming aware of any attachment, garnishment,
execution or other legal process levied against any Collateral and of
any other information received by the Debtor that may materially affect
the value of the Collateral, the Security Interest or the rights and
remedies of the Secured Parties hereunder.
(q) All information heretofore, herein or hereafter supplied to
the Secured Parties by or on behalf of the Debtor with respect to the
Collateral is accurate and complete in all material respects as of the
date furnished.
(r) The Debtor shall at all times preserve and keep in full
force and effect their respective valid existence and good standing and
any rights and franchises material to its business.
(s) The Debtor will not change its name, corporate structure, or
identity, or add any new fictitious name unless it provides at least 30
days prior written notice to the Secured Parties of such change and, at
the time of such written notification, such Debtor provides any
financing statements or fixture filings necessary to perfect and
continue perfected the perfected first priority Security Interest
granted and evidenced by this Agreement.
(t) The Debtor may not consign any of its Inventory or sell any
of its Inventory on bill and hold, sale or return, sale on approval, or
other conditional terms of sale without the consent of a majority in
interest of the Secured Parties which shall not be unreasonably
withheld..
(u) The Debtor may not relocate its chief executive office to a
new location without providing 30 days prior written notification
thereof to the Secured Parties and so long as, at the time of such
written notification, the Debtor provides any financing statements or
fixture filings necessary to perfect and continue perfected the
perfected first priority Security Interest granted and evidenced by this
Agreement.
4. DEFAULTS. The following events shall be "Events of Default":
(a) The occurrence of an Event of Default (as defined in the
Debenture) under the Debenture;
(b) Any representation or warranty of Debtor in this Agreement
shall prove to have been incorrect in any material respect when made;
(c) The failure by Debtor to observe or perform any of its
obligations hereunder for five (5) days after delivery to Debtor of
notice of such failure by or on behalf of a Secured Party;
6
(c) If any provision of this Agreement shall at any time for any
reason be declared to be null and void, or the validity or
enforceability thereof shall be contested by Debtor, or a proceeding
shall be commenced by Debtor, or by any governmental authority having
jurisdiction over Debtor, seeking to establish the invalidity or
unenforceability thereof, or Debtor shall deny that Debtor has any
liability or obligation purported to be created under this Agreement; or
5. Duty To Hold In Trust. Upon the occurrence of any Event of
Default and at any time thereafter, the Debtor shall, upon receipt of any
revenue, income or other sums subject to the Security Interest, whether payable
pursuant to the Debenture or otherwise, or of any check, draft, note, trade
acceptance or other instrument evidencing an obligation to pay any such sum,
hold the same in trust for the Secured Parties and shall forthwith endorse and
transfer any such sums or instruments, or both, to the Secured Parties, pro-
rata in proportion to their initial purchases of Debentures for application to
the satisfaction of the Obligations (and if any Debenture is not outstanding,
pro-rata in proportion to the initial purchases of the remaining Debentures).
6. Rights and Remedies Upon Default. Upon the occurrence of any
Event of Default and at any time thereafter, the Secured Parties shall have the
right to exercise all of the remedies conferred hereunder and under the
Debentures, and the Secured Parties shall have all the rights and remedies of a
secured party under the UCC. Without limitation, the Secured Parties shall
have the following rights and powers:
(a) The Secured Parties shall have the right to take possession
of the Collateral and, for that purpose, enter, with the aid and
assistance of any person, any premises where the Collateral, or any part
thereof, is or may be placed and remove the same, and the Debtor shall
assemble the Collateral and make it available to the Secured Parties at
places which the Secured Parties shall reasonably select, whether at the
Debtor's premises or elsewhere, and make available to the Secured
Parties, without rent, all of the Debtor's respective premises and
facilities for the purpose of the Secured Parties taking possession of,
removing or putting the Collateral in saleable or disposable form.
(b) The Secured Parties shall have the right to operate the
business of the Debtor using the Collateral and shall have the right to
assign, sell, lease or otherwise dispose of and deliver all or any part
of the Collateral, at public or private sale or otherwise, either with
or without special conditions or stipulations, for cash or on credit or
for future delivery, in such parcel or parcels and at such time or times
and at such place or places, and upon such terms and conditions as the
Secured Parties may deem commercially reasonable, all without (except as
shall be required by applicable statute and cannot be waived)
advertisement or demand upon or notice to the Debtor or right of
redemption of a Debtor, which are hereby expressly waived. Upon each
such sale, lease, assignment or other transfer of Collateral, the
Secured Parties may, unless prohibited by applicable law which cannot be
waived, purchase all or any part of the Collateral being sold,
7
free from and discharged of all trusts, claims, right of
redemption and equities of the Debtor, which are hereby waived and
released.
7. Applications of Proceeds. The proceeds of any such sale,
lease or other disposition of the Collateral hereunder shall be applied first,
to the expenses of retaking, holding, storing, processing and preparing for
sale, selling, and the like (including, without limitation, any taxes, fees and
other costs incurred in connection therewith) of the Collateral, to the
reasonable attorneys' fees and expenses incurred by the Secured Parties in
enforcing their rights hereunder and in connection with collecting, storing and
disposing of the Collateral, and then to satisfaction of the Obligations pro
rata among the Secured Parties, and to the payment of any other amounts
required by applicable law, after which the Secured Parties shall pay to the
applicable Debtor any surplus proceeds. If, upon the sale, license or other
disposition of the Collateral, the proceeds thereof are insufficient to pay all
amounts to which the Secured Parties are legally entitled, the Debtor will be
liable for the deficiency, together with interest thereon, at the rate of 10%
per annum or the lesser amount permitted by applicable law (the "Default
Rate"), and the reasonable fees of any attorneys employed by the Secured
Parties to collect such deficiency. To the extent permitted by applicable law,
the Debtor waives all claims, damages and demands against the Secured Parties
arising out of the repossession, removal, retention or sale of the Collateral,
unless due to the gross negligence or willful misconduct of the Secured
Parties.
8. Costs and Expenses. The Debtor agrees to pay all reasonable
out-of-pocket fees, costs and expenses incurred in connection with any filing
required hereunder, including without limitation, any financing statements
pursuant to the UCC, continuation statements, partial releases and/or
termination statements related thereto or any expenses of any searches
reasonably required by the Secured Parties. The Debtor shall also pay all
other claims and charges which in the reasonable opinion of the Secured Parties
might prejudice, imperil or otherwise affect the Collateral or the Security
Interest therein. The Debtor will also, upon demand, pay to the Secured Parties
the amount of any and all reasonable expenses, including the reasonable fees
and expenses of its counsel and of any experts and agents, which the
Secured Parties may incur in connection with (i) the enforcement of this
Agreement, (ii) the custody or preservation of, or the sale of, collection
from, or other realization upon, any of the Collateral, or (iii) the exercise
or enforcement of any of the rights of the Secured Parties under the
Debentures. Until so paid, any fees payable hereunder shall be added to the
principal amount of the Debentures and shall bear interest at the Default Rate.
9. Responsibility for Collateral. The Debtor assumes all
liabilities and responsibility in connection with all Collateral, and the
Obligations in no way be affected or diminished by reason of the loss,
destruction, damage or theft of any of the Collateral or its unavailability for
any reason.
10. Security Interest Absolute. All rights of the Secured Parties
and all Obligations of the Debtor hereunder, shall be absolute and
unconditional, irrespective of: (a) any lack of validity or enforceability of
this Agreement, the Debentures or any
8
agreement entered into in connection with the foregoing, or any portion hereof
or thereof; (b) any change in the time, manner or place of payment or
performance of, or in any other term of, all or any of the Obligations, or any
other amendment or waiver of or any consent to any departure from the
Debentures or any other agreement entered into in connection with the
foregoing; (c) any exchange, release or nonperfection of any of the Collateral,
or any release or amendment or waiver of or consent to departure from any other
collateral for, or any guaranty, or any other security, for all or any of the
Obligations; (d) any action by the Secured Parties to obtain, adjust, settle
and cancel in its sole discretion any insurance claims or matters made or
arising in connection with the Collateral; or (e) any other circumstance which
might otherwise constitute any legal or equitable defense available to a
Debtor, or a discharge of all or any part of the Security Interest granted
hereby. Until the Obligations shall have been paid and performed in full, the
rights of the Secured Parties shall continue even if the Obligations are barred
for any reason, including, without limitation, the running of the statute of
limitations or bankruptcy. The Debtor expressly waives presentment, protest,
notice of protest, demand, notice of nonpayment and demand for performance. In
the event that at any time any transfer of any Collateral or any payment
received by the Secured Parties hereunder shall be deemed by final order of a
court of competent jurisdiction to have been a voidable preference or
fraudulent conveyance under the bankruptcy or insolvency laws of the United
States, or shall be deemed to be otherwise due to any party other than the
Secured Parties, then, in any such event, the Debtor's obligations hereunder
shall survive cancellation of this Agreement, and shall not be discharged or
satisfied by any prior payment thereof and/or cancellation of this Agreement,
but shall remain a valid and binding obligation enforceable in accordance with
the terms and provisions hereof. The Debtor waives all right to require the
Secured Parties to proceed against any other person or to apply any Collateral
which the Secured Parties may hold at any time, or to marshal assets, or to
pursue any other remedy. The Debtor waives any defense arising by reason of the
application of the statute of limitations to any obligation secured hereby.
11. Term of Agreement. This Agreement and the Security Interest
shall terminate on the date on which all payments under the Debentures have
been made in full or have been satisfied and all other Obligations have been
paid or discharged. Upon such termination, the Secured Parties, at the request
and at the expense of the Debtor, will join in executing any termination
statement with respect to any financing statement executed and filed pursuant
to this Agreement.
12. Power of Attorney; Further Assurances.
(a) The Debtor authorizes the Secured Parties, and does hereby
make, constitute and appoint the Secured Parties and their respective
officers, agents, successors or assigns with full power of substitution,
as the Debtor's true and lawful attorney-in-fact, with power, in the
name of the various Secured Parties or the Debtor, to, after the
occurrence and during the continuance of an Event of Default, (i)
endorse any note, checks, drafts, money orders or other instruments of
payment (including payments payable under or in respect of any policy of
insurance) in respect of the Collateral that may come into possession of
the
9
Secured Parties; (ii) to sign and endorse any financing statement
pursuant to the UCC or any invoice, freight or express bill, bill of
lading, storage or warehouse receipts, drafts against debtors,
assignments, verifications and notices in connection with accounts, and
other documents relating to the Collateral; (iii) to pay or discharge
taxes, liens, security interests or other encumbrances at any time
levied or placed on or threatened against the Collateral; (iv) to
demand, collect, receipt for, compromise, settle and sue for monies due
in respect of the Collateral; and (v) generally, to do, at the option of
the Secured Parties, and at the expense of the Debtor, at any time, or
from time to time, all acts and things which the Secured Parties deem
necessary to protect, preserve and realize upon the Collateral and the
Security Interest granted therein in order to effect the intent of this
Agreement and the Debentures all as fully and effectually as the Debtor
might or could do; and the Debtor hereby ratifies all that said attorney
shall lawfully do or cause to be done by virtue hereof. This power of
attorney is coupled with an interest and shall be irrevocable for the
term of this Agreement and thereafter as long as any of the Obligations
shall be outstanding.
(b) On a continuing basis, the Debtor will make, execute,
acknowledge, deliver, file and record, as the case may be, with the
proper filing and recording agencies in any jurisdiction, including,
without limitation, the jurisdictions indicated on Schedule C attached
hereto, all such instruments, and take all such action as may reasonably
be deemed necessary or advisable, or as reasonably requested by the
Secured Parties, to perfect the Security Interest granted hereunder and
otherwise to carry out the intent and purposes of this Agreement, or for
assuring and confirming to the Secured Parties the grant or perfection
of a perfected first priority security interest in all the Collateral
under the UCC.
(c) The Debtor hereby irrevocably appoints the Secured Parties as
the Debtor's attorney-in-fact, with full authority in the place and
instead of the Debtor and in the name of the Debtor, from time to time
in the Secured Parties' discretion, to take any action and to execute
any instrument which the Secured Parties may deem necessary or advisable
to accomplish the purposes of this Agreement, including the filing, in
its sole discretion, of one or more financing or continuation statements
and amendments thereto, relative to any of the Collateral without the
signature of the Debtor where permitted by law.
13. Notices. All notices, requests, demands and other
communications hereunder shall be subject to the notice provision of the
Purchase Agreement.
14. Other Security. To the extent that the Obligations are now or
hereafter secured by property other than the Collateral or by the guarantee,
endorsement or property of any other person, firm, corporation or other entity,
then the Secured Parties shall have the right, in its sole discretion, to
pursue, relinquish, subordinate, modify or take any other action with respect
thereto, without in any way modifying or affecting any of the Secured Parties'
rights and remedies hereunder.
10
15. Miscellaneous.
(a) No course of dealing between the Debtor and the Secured
Parties, nor any failure to exercise, nor any delay in exercising, on
the part of the Secured Parties, any right, power or privilege hereunder
or under the Debentures shall operate as a waiver thereof; nor shall any
single or partial exercise of any right, power or privilege hereunder or
thereunder preclude any other or further exercise thereof or the
exercise of any other right, power or privilege.
(b) All of the rights and remedies of the Secured Parties with
respect to the Collateral, whether established hereby or by the
Debentures or by any other agreements, instruments or documents or by
law shall be cumulative and may be exercised singly or concurrently.
(c) This Agreement constitutes the entire agreement of the
parties with respect to the subject matter hereof and is intended to
supersede all prior negotiations, understandings and agreements with
respect thereto. Except as specifically set forth in this Agreement, no
provision of this Agreement may be modified or amended except by a
written agreement specifically referring to this Agreement and signed by
the parties hereto.
(d) In the event any provision of this Agreement is held to be
invalid, prohibited or unenforceable in any jurisdiction for any reason,
unless such provision is narrowed by judicial construction, this
Agreement shall, as to such jurisdiction, be construed as if such
invalid, prohibited or unenforceable provision had been more narrowly
drawn so as not to be invalid, prohibited or unenforceable. If,
notwithstanding the foregoing, any provision of this Agreement is held
to be invalid, prohibited or unenforceable in any jurisdiction, such
provision, as to such jurisdiction, shall be ineffective to the extent
of such invalidity, prohibition or unenforceability without invalidating
the remaining portion of such provision or the other provisions of this
Agreement and without affecting the validity or enforceability of such
provision or the other provisions of this Agreement in any other
jurisdiction.
(e) No waiver of any breach or default or any right under this
Agreement shall be considered valid unless in writing and signed by the
party giving such waiver, and no such waiver shall be deemed a waiver of
any subsequent breach or default or right, whether of the same or
similar nature or otherwise.
(f) This Agreement shall be binding upon and inure to the benefit of
each party hereto and its successors and assigns.
(g) Each party shall take such further action and execute and
deliver such further documents as may be necessary or appropriate in
order to carry out the provisions and purposes of this Agreement.
11
(h) All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by
and construed and enforced in accordance with the internal laws of the
State of New York, without regard to the principles of conflicts of law
thereof. Each party agrees that all proceedings concerning the
interpretations, enforcement and defense of the transactions
contemplated by this Agreement and the Debenture (whether brought
against a party hereto or its respective affiliates, directors,
officers, shareholders, employees or agents) shall be commenced
exclusively in the state and federal courts sitting in the City of New
York, Borough of Manhattan. Each party hereto hereby irrevocably submits
to the exclusive jurisdiction of the state and federal courts sitting in
the City of New York, Borough of Manhattan for the adjudication of any
dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives,
and agrees not to assert in any proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, that such
proceeding is improper. Each party hereto hereby irrevocably waives
personal service of process and consents to process being served in any
such proceeding by mailing a copy thereof via registered or certified
mail or overnight delivery (with evidence of delivery) to such party at
the address in effect for notices to it under this Agreement and agrees
that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to
limit in any way any right to serve process in any manner permitted by
law. Each party hereto hereby irrevocably waives, to the fullest extent
permitted by applicable law, any and all right to trial by jury in any
legal proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby. If either party shall commence a
proceeding to enforce any provisions of this Agreement, then the
prevailing party in such proceeding shall be reimbursed by the other
party for its reasonable attorneys fees and other costs and expenses
incurred with the investigation, preparation and prosecution of such
proceeding.
(i) This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the
same Agreement. In the event that any signature is delivered by
facsimile transmission, such signature shall create a valid binding
obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile
signature were the original thereof.
[SIGNATURE PAGES FOLLOW]
12
IN WITNESS WHEREOF, the parties hereto have caused this Security
Agreement to be duly executed on the day and year first above written.
SUNBURST ACQUISITIONS IV, INC.
By:__________________________________________
Name:
Title:
[SIGNATURE PAGE OF HOLDERS FOLLOWS]
13
[SIGNATURE PAGE OF HOLDERS TO SBAQ SA]
Name of Investing Entity: __________________________
Signature of Authorized Signatory of Investing entity: _________________________
Name of Authorized Signatory: _________________________
Title of Authorized Signatory: __________________________
[SIGNATURE PAGE OF HOLDERS FOLLOWS]
14
SCHEDULE A
Principal Place of Business of Debtor:
Locations Where Collateral is Located or Stored:
15
SCHEDULE B
16
SCHEDULE C
17