UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURENT REPORT
Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
April 30, 2004
Date of Report (Date of earliest reported event)
Sentry Technology Corporation
(Exact name of registrant as specified in its chapter)
Delaware 1-12727 96-11-3349733
(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification number)
incorporation)
1881 Lakeland Avenue, Ronkonkoma, New York 11779
(Address of principal executive offices) (Zip Code)
631-739-2000
Registrant's telephone number, including area code
None
(Former name or former address, if changed since last report)
INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 2: ACQUISITION OR DISPOSITION OF ASSETS
On April 30, 2004, Sentry purchased from Saburah Investments, Inc. an Ontario
corporation, all of the outstanding common shares and Series "A" preference
shares of ID Security Systems Canada Inc., an Ontario corporation, and all of
the outstanding capital stock of ID Systems USA, Inc., a Pennsylvania
corporation (collectively, "ID Systems"). ID Systems is engaged in
anti-shoplifting technology, security labeling, radio frequency identification
(RFID), access control and library security. Mr. Peter Murdoch, President, CEO
and Director of Sentry, is the owner of Saburah. Sentry acquired ID Systems from
Saburah in exchange for 30,000,000 Sentry common shares. The price paid per
Sentry share for the securities of ID Systems was valued at approximately $0.12.
An opinion was provided to a special committee of Sentry's Board of Directors by
Corporate Valuation Services confirming that the price paid for the acquisition
of ID Systems was fair from the point of view of Sentry shareholders.
Sentry's Board of Directors and shareholders owning a majority of Sentry common
stock approved the acquisition of ID Systems.
Sentry will not obtain the interest of ID Systems in a claim against Checkpoint
Systems which currently is the subject of litigation, however, Saburah and
Sentry have agreed that Sentry may require Saburah to purchase additional Sentry
shares equal to approximately 4.5% of any amount received by Saburah from the
Checkpoint litigation, to a maximum of $1,000,000. The price per share has been
set at 80% of the previous 20 days trading average if and when the call is made.
This transaction represents the maximum future benefit that may flow to Sentry
as a result of the Checkpoint lawsuit.
After the acquisition of ID Systems, Mr. Murdoch, directly or indirectly
through his ownership of Saburah, now owns or controls 47.4% of the
outstanding common stock of Sentry.
The acquisition of ID Systems was a condition to a $2,000,000 investment in
Sentry by Brascan Technology Fund ("Brascan"), an investment fund established by
Brascan Asset Management, to invest in early stage, technology-based companies.
The investment was provided by Brascan in the form of a $2,000,000 secured
convertible debenture. The proceeds of the financing will be used primarily for
working capital.
Key terms of the transaction are as follows:
- - Four year term.
- - Interest rate of 8%.
- - Redeemable at Sentry's option after 18 months.
- - Conversion price equal to the market price, at time of conversion, less a
discount of 30% with a maximum conversion price of $0.12 per
share.
- - Conversion is at the option of Brascan when market share price is equal to
or greater than $0.17 per share or with the approval of Sentry's
Board of Directors when the market share price is less than $0.17
per share.
- - Sentry will provide most favored pricing to all Brascan affiliates and
expects to be a supplier of security and identification products to the
Brascan affiliates.
- - Brascan was issued warrants for 5,000,000 shares of Sentry common stock,
priced at $0.15 per share, exercisable anytime within the next four
years.
- - Brascan is entitled to one seat on Sentry's Board of Directors,
or will participate as an observer.
ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
Audited Combined Balance Sheet of ID Systems as of December 31, 2003 and
Combined Statements of Income and Retained Earnings and Cash Flows for the two
fiscal years ended December 31, 2003.
Unaudited Combined Balance Sheet of ID Systems as of March 31, 2004 and Combined
Statements of Income and Retained Earnings and Cash Flows for the three months
ended March 31, 2003 and 2004.
(b) Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31,
2004 and Statements of Operations for the year ended December 31, 2003 and three
months ended March 31, 2004.
(c) Exhibits
Exhibit Document
- ------- --------------------------------------
2.1 Stock Purchase Agreement, dated April 29, 2004 by and between
Sentry Technology Corporation and Saburah Investments, Inc.
4.1 Convertible Debenture, dated April 30, 2004 issued by Sentry
Technology Corporation to Brascan Technology Fund, Inc.
4.2 Warrant Certificate, dated April 30, 2004 issued by Sentry
Technology Corporation to Brascan Technology Fund, Inc.
4.3 Stakeholders Rights Agreement, dated April 30, 2004 by
and among Sentry Technology Corporation, Peter Murdoch,
Robert Furst, Saburah Investments Inc., and Brascan
Technology Fund Inc.
(a)
ID SECURITY SYSTEMS GROUP
REPORT AND COMBINED
FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2003
AUDITORS' REPORT
TO THE SHAREHOLDER,
ID SECURITY SYSTEMS GROUP
We have audited the combined balance sheets of ID Security Systems Group as at
December 31, 2002 and 2003, and the combined statements of income and retained
earnings and cash flows for the years then ended. These financial statements are
the responsibility of the group's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these combined financial statements present fairly, in all
material respects, the financial position of the group as at December 31, 2002
and 2003 and the results of its operations and its cash flows for the years then
ended, in accordance with Canadian generally accepted accounting principles.
Toronto, Ontario WALSH & COMPANY LLP
March 15, 2004. CHARTERED ACCOUNTANTS
ID SECURITY SYSTEMS GROUP
COMBINED BALANCE SHEETS
(EXPRESSED IN CANADIAN DOLLARS)
DECEMBER 31, MARCH 31,
2003 2002 2004 2003
-------------- ---------- ---------- ----------
(UNAUDITED)(UNAUDITED)
ASSETS
CURRENT
Accounts receivable . . . . . . . . . . . . . . . . . $ 2,710,602 $2,126,708 $2,638,860 $2,128,368
Inventory . . . . . . . . . . . . . . . . . . . . . . 1,689,698 1,619,458 1,835,153 1,516,489
Prepaid expenses, deposits and sundry assets (Note 2) 323,893 322,233 313,639 226,976
-------------- ---------- ---------- ----------
4,724,193 4,068,399 4,787,652 3,871,833
FUTURE INCOME TAX BENEFIT (Note 3). . . . . . . . . . . 20,300 85,000 20,300 85,000
DEFERRED LEGAL COSTS (Note 4) . . . . . . . . . . . . . 444,877 395,275 456,413 407,493
PROPERTY AND EQUIPMENT (Note 5) . . . . . . . . . . . . 674,055 658,180 649,037 633,074
-------------- ---------- ---------- ----------
$ 5,863,425 $5,206,854 $5,913,402 $4,997,400
-------------- ---------- ---------- ----------
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES
CURRENT
Bank indebtedness (Note 6). . . . . . . . . . . . . . $ 994,587 $ 631,428 $1,218,183 $ 745,780
Accounts payable and accrued liabilities. . . . . . . 1,039,199 907,850 1,025,292 943,958
Income taxes payable. . . . . . . . . . . . . . . . . 89,788 82,247 51,904 9,176
Current portion of long-term debt (Note 7). . . . . . 100,000 100,000 100,000 100,000
Notes payable (Note 8). . . . . . . . . . . . . . . . 84,032 87,191 84,032 84,032
Loan payable. . . . . . . . . . . . . . . . . . . . . - 200,000 - -
-------------- ---------- ---------- ----------
2,307,606 2,008,716 2,479,411 1,882,946
LONG-TERM DEBT (Note 7) . . . . . . . . . . . . . . . . 133,333 233,333 108,334 208,334
DUE TO AFFILIATES (Note 9). . . . . . . . . . . . . . . 253,757 361,827 89,399 279,244
MINORITY INTEREST . . . . . . . . . . . . . . . . . . . 1,169,827 1,000,474 1,176,685 1,019,398
-------------- ---------- ---------- ----------
3,864,523 3,604,350 3,853,829 3,389,922
-------------- ---------- ---------- ----------
SHAREHOLDER'S EQUITY
Stated capital (Note 10). . . . . . . . . . . . . . . 656,621 656,621 656,621 656,621
Retained earnings . . . . . . . . . . . . . . . . . . 1,342,281 945,883 1,402,952 950,857
-------------- ---------- ---------- ----------
1,998,902 1,602,504 2,059,573 1,607,478
-------------- ---------- ---------- ----------
$ 5,863,425 $5,206,854 $5,913,402 $4,997,400
-------------- ---------- ---------- ----------
ID SECURITY SYSTEMS GROUP
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
(EXPRESSED IN CANADIAN DOLLARS)
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
2003 2002 2004 2003
-------------- -------------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
SALES. . . . . . . . . . . . . . . . . . . . . . . . $ 9,213,731 $ 8,049,604 $1,593,291 $1,927,722
COST OF GOODS SOLD . . . . . . . . . . . . . . . . . 5,311,454 4,802,652 753,802 1,174,208
-------------- -------------------- ----------- -----------
GROSS PROFIT . . . . . . . . . . . . . . . . . . . . 3,902,277 3,246,952 839,489 753,514
-------------- -------------------- ----------- -----------
SELLING AND ADMINISTRATIVE EXPENSES
Advertising and promotion. . . . . . . . . . . . . 252,153 215,059 67,942 52,297
Amortization . . . . . . . . . . . . . . . . . . . 35,089 35,989 9,566 8,776
Automotive and travel. . . . . . . . . . . . . . . 290,402 299,603 86,307 58,587
Bad debts. . . . . . . . . . . . . . . . . . . . . 14,485 42,561 - 2,764
Communication. . . . . . . . . . . . . . . . . . . 81,322 79,801 19,382 13,838
Insurance. . . . . . . . . . . . . . . . . . . . . 43,342 33,196 7,018 10,075
Interest and bank charges. . . . . . . . . . . . . 114,225 85,173 37,563 22,812
Occupancy. . . . . . . . . . . . . . . . . . . . . 86,808 91,944 22,334 25,596
Office and general . . . . . . . . . . . . . . . . 219,867 150,628 60,069 43,059
Professional fees. . . . . . . . . . . . . . . . . 279,327 218,427 50,546 73,817
Repairs and maintenance. . . . . . . . . . . . . . 10,843 9,210 1,976 159
Research and development . . . . . . . . . . . . . 104,770 38,016 57,669 33,900
Salaries, benefits and commissions . . . . . . . . 1,295,626 1,267,049 319,935 316,867
Service. . . . . . . . . . . . . . . . . . . . . . 242,604 307,579 32,038 67,069
-------------- -------------------- ----------- -----------
3,070,863 2,874,235 772,345 729,616
-------------- -------------------- ----------- -----------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST . 831,414 372,717 67,144 23,898
PROVISION FOR INCOME TAXES . . . . . . . . . . . . (265,663) (56,997) 385 -
-------------- -------------------- ----------- -----------
NET INCOME BEFORE MINORITY INTEREST. . . . . . . . 565,751 315,720 67,529 23,898
MINORITY INTEREST'S SHARE IN EARNINGS. . . . . . . (169,353) (117,131) (6,858) (18,924)
-------------- -------------------- ----------- -----------
NET INCOME FOR THE YEAR. . . . . . . . . . . . . . 396,398 198,589 60,671 4,974
RETAINED EARNINGS, BEGINNING OF YEAR . . . . . . . 945,883 747,294 1,342,281 945,883
-------------- -------------------- ----------- -----------
RETAINED EARNINGS, END OF YEAR . . . . . . . . . . $ 1,342,281 $ 945,883 $1,402,952 $ 950,857
-------------- -------------------- ----------- -----------
NET INCOME PER COMMON SHARE. . . . . . . . . . . . $ 1.10 $ 0.55 $ 0.17 $ 0.01
-------------- -------------------- ----------- -----------
ID SECURITY SYSTEMS GROUP
COMBINED STATEMENT OF CASH FLOWS
(EXPRESSED IN CANADIAN DOLLARS)
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
2003 2002 2004 2003
-------------- -------------------- ------------ ----------
(UNAUDITED) (UNAUDITED)
CASH PROVIDED (USED BY):
OPERATIONS
Net income for the year . . . . . . . . . . . . $ 396,398 $ 198,589 $ 60,671 $ 4,974
Add (less) items not affecting cash:
Amortization. . . . . . . . . . . . . . . . . 138,255 126,048 31,564 27,882
Future income tax benefit . . . . . . . . . . 64,700 12,000 - -
Minority interest . . . . . . . . . . . . . . 169,353 115,104 6,858 18,924
-------------- -------------------- ------------ ----------
768,706 451,741 99,093 51,780
Changes in:
Accounts receivable . . . . . . . . . . . . . (583,894) (442,174) 71,742 (1,660)
Inventory . . . . . . . . . . . . . . . . . . (70,240) 16,187 (145,455) 102,969
Prepaid expenses, deposits and sundry assets. (1,660) (90,231) 10,254 95,257
Deferred legal costs. . . . . . . . . . . . . (49,602) (225,363) (11,536) (12,218)
Accounts payable and accrued liabilities. . . 131,349 508,524 (13,907) 36,108
Income taxes payable. . . . . . . . . . . . . 7,541 (64,264) (37,884) (73,071)
-------------- -------------------- ------------ ----------
202,200 154,420 (27,693) 199,165
-------------- -------------------- ------------ ----------
FINANCING ACTIVITIES
Repayments to related party . . . . . . . . . . - (2,932) - -
Property and equipment under capital lease. . . - (10,060) - -
Loan payable. . . . . . . . . . . . . . . . . . (200,000) 200,000 - (200,000)
Repayment of long-term debt . . . . . . . . . . (100,000) (99,999) (24,999) (24,999)
Net advances to affiliates. . . . . . . . . . . (108,070) (51,948) (164,358) (82,583)
Repayment of notes payable. . . . . . . . . . . (3,159) - - (3,159)
-------------- -------------------- ------------ ----------
(411,229) 35,061 (189,357) (310,741)
-------------- -------------------- ------------ ----------
INVESTING ACTIVITIES
Purchase of property and equipment. . . . . . . (154,130) (98,439) (6,546) (2,776)
-------------- -------------------- ------------ ----------
(DECREASE) INCREASE IN CASH . . . . . . . . . . . . (363,159) 91,042 (223,596) (114,352)
BANK INDEBTEDNESS, BEGINNING OF YEAR. . . . . . . . (631,428) (722,470) (994,587) (631,428)
-------------- -------------------- ------------ ----------
BANK INDEBTEDNESS, END OF YEAR. . . . . . . . . . . $ (994,587) $ (631,428) $(1,218,183) $(745,780)
-------------- -------------------- ------------ ----------
ID SECURITY SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements have been prepared on a combined basis and include
the financial statements of ID Security Systems Canada Inc., ID Systems USA,
Inc., Custom Securities Industries Inc., and ID Systems Do Brazil. The
financial statements are in accordance with Canadian generally accepted
accounting principles which is not materially different from United States
generally accepted accounting principles as it relates to these financial
statements.
FOREIGN CURRENCY TRANSLATION
The accounts of ID Systems USA, Inc. are translated into Canadian dollars
using the current rate method for self-sustaining foreign operations. The
accounts of ID Systems Do Brazil are translated into Canadian dollars using the
temporal method for integrated foreign operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the combined financial
statements and accompanying notes. These estimates are based on management's
best knowledge of current events and actions that the group may undertake in the
future.
INVENTORY
Inventory is stated at the lower of cost (first in - first out basis) and
net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Amortization is provided using
the following methods at the following annual rates:
Artwork, plates and negatives - 15% Declining balance
Computer equipment - 33% Declining balance
Furniture and fixtures - 20% Declining balance
Leasehold improvements - 20% Straight line
Leased computer equipment - 33% Declining balance
Manufacturing equipment - 15% Declining balance
Patents - 15% Declining balance
Test and display equipment - 33% Declining balance
Vehicle - 30% Declining balance
RESEARCH AND DEVELOPMENT
Research and development costs, net of grants received, are expensed in the
year incurred.
FINANCIAL INSTRUMENTS
The carrying amount of current assets and current liabilities approximate
their fair value because of the short-term maturities of these items. The
amount due to affiliates is shown at a cost or translated cost as appropriate.
Long-term debt is subject to floating market rates. Its carrying amount
approximates its fair value.
2. PREPAID EXPENSES, DEPOSITS AND SUNDRY ASSETS
Prepaid expenses, deposits and sundry assets includes U.S. $50,000 paid to
a supplier to fund production of certain prototype tags and secure the related
exclusive manufacturing and selling rights. Upon successful completion of the
prototype tags, a second installment of U.S. $150,000 will be required. If
unsuccessful, the supplier is to refund half the initial deposit.
3. FUTURE INCOME TAX BENEFIT
Future income tax benefit represents the estimated income taxes likely to
be recovered in future years using current tax rates applied to tax loss
carry-forwards and temporary differences between the financial statement
carrying value of certain assets and their respective income tax basis. At the
year-end, ID Security Systems Canada Inc. had temporary differences with respect
to capital and other assets of approximately $56,000 giving rise to the future
income tax benefit.
4. DEFERRED LEGAL COSTS
ID Security Systems Canada Inc. is continuing legal proceedings in the
United States federal court against another corporation for certain alleged
contractual interference and anti-trust violations. The company is seeking
compensatory damages totaling approximately U.S. $90,000,000. If liability is
found under the antitrust laws, any damages awarded would be trebled. The
company's lawyers are acting under a contingency agreement. The agreement
stipulates a payment of 33% of the first U.S. $1,000,000 and 25% of all
additional amounts awarded. To the extent the company has funded the lawsuit
with respect to disbursements incurred by the company's lawyers, the costs have
been deferred. In 2001, the company sold 75% of its interest in the lawsuit to
New Amsterdam Financial Limited for $300,000. In 2002, a jury found in favour
of the company in its action and awarded the company an aggregate of U.S.
$80,000,000 in damages. The judge subsequently reduced the damages awarded to
approximately U.S. $11,000,000 post-trial rulings. The matter is currently
under appeal.
5. PROPERTY AND EQUIPMENT
2003 2002
----------------------------------- ---------
Net Net
Accumulated Carrying Carrying
Cost Amortization Value Value
----------------------------------- --------
ARTWORK, PLATES AND NEGATIVES $ 26,114 $ 24,037 $ 2,077 $ 2,443
COMPUTER EQUIPMENT. . . . . . 82,699 64,748 17,951 21,669
FURNITURE AND FIXTURES. . . . 171,333 118,848 52,485 43,861
LEASED COMPUTER EQUIPMENT . . 32,502 28,201 4,301 6,420
LEASEHOLD IMPROVEMENTS. . . . 27,588 27,588 - -
MANUFACTURING EQUIPMENT . . . 1,458,145 892,177 565,968 515,808
PATENTS . . . . . . . . . . . 22,675 6,109 16,566 45,785
TEST AND DISPLAY EQUIPMENT. . 48,006 35,014 12,992 19,255
VEHICLE . . . . . . . . . . . 13,052 11,337 1,715 2,939
------------- ---------- -------- --------
$ 1,882,114 $1,208,059 $674,055 $658,180
------------- ---------- -------- --------
6. BANK INDEBTEDNESS
Bank indebtedness includes a bank operating line in the amount $1,250,000.
The operating line bears interest at the bank's prime rate plus 1 1/2 percent
per annum and is secured by a general security agreement, an assignment of
insurance, various corporate guarantees and certain personal guarantees.
7. LONG-TERM DEBT
2003 2000
-------- --------
Demand instalment loan to March 31, 2006, bearing interest
at prime plus 2%, with monthly principal payments of $8,333,
plus interest $233,333 $333,333
Less current portion 100,000 100,000
$133,333 $233,333
-------- --------
Security for the loan includes a general security agreement, an assignment
of insurance, guarantees from various related companies and certain personal
guarantees.
The principal repayments required in each of the forthcoming years are as
follows:
2004 $ 100,000
2005 100,000
2006 33,333
------------
$ 233,333
------------
8. NOTES PAYABLE
Notes payable bear interest at 7% per annum, are payable quarterly.
9. DUE TO AFFILIATES
Due from affiliates represents the net amount receivable from affiliated
companies. While most intercompany balances are due on demand and non-interest
bearing, certain amounts due to affiliates totaling approximately $1,252,000
are considered non-current and subject to an annual interest charge of 5.5%, or
approximately $69,000 (2002 - $69,000).
10. STATED CAPITAL
2003 2002
---- ----
AUTHORIZED : Unlimited number of common shares
: Unlimited number of 8% voting,
non-cumulative preference shares
redeemable at issue price
ISSUED : 350,000 preference shares $ 350,000 $ 350,000
: 360,326 common shares 306,621 306,621
--------- ---------
$ 656,621 $ 656,621
--------- ---------
11. LEASE COMMITMENTS
Minimum annual payments for occupancy and equipment leases are as follows:
2004 $ 110,519
2005 91,734
2006 80,762
2007 69,148
2008 15,739
------------
$ 367,902
------------
12. RELATED PARTY TRANSACTIONS PURCHASES AND ECONOMIC DEPENDENCE
Accounts receivable includes approximately $183,000 (2002 $186,000), sales
include approximately $494,000 (2002 $1,178,000) and purchases include
approximately $1,417,000 (2002 $1,550,000) relating to transactions with
affiliated companies.
13. COMPARATIVE FIGURES
The comparative combined balance sheets as at March 31, 2003 and 2004 and
the combined statements of income and retained earnings and cash flows for the
three months then ended are compiled from information provided by
management and have not been audited or reviewed.
(b)
PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial statements
give effect to the Brascan Technology Fund financing ("Brascan Financing") as
well as the acquisition (the "Acquisition") by Sentry Technology Corporation
(the "Registrant") of the shares of ID Security Systems Canada Inc. and ID
Systems USA Inc. (collectively, "ID Systems") accounted for as a purchase
transaction. The acquisition of ID Systems was a condition of the Brascan
Financing. These pro forma financial statements are presented for illustrative
purposes only, and therefore are not necessarily indicative of the operating
results and financial position that might have been achieved had the Brascan
Financing and Acquisition occurred as of an earlier date, nor are they
necessarily indicative of the operating results and financial position which may
occur in the future.
A Pro Forma Condensed Consolidated Balance Sheet is provided as of March 31,
2004, giving effect to the Brascan Financing and Acquisition as though it had
been consummated on that date. Pro Forma Condensed Consolidated Statements of
Operations are provided for the three months ended March 31, 2004 and the year
ended December 31, 2003, giving effect to the Brascan Financing and Acquisition
as though it had occurred on January 1, 2004 and 2003, respectively.
The pro forma financial statements are based on preliminary estimates of values
and transaction costs. The actual recording of the transactions will be based
on final values and transaction costs. Accordingly, the actual recording of the
transactions may differ from these pro forma financial statements.
The pro forma condensed consolidated financial statements presented as of March
31, 2004 and for the three months then ended, and for the fiscal year ended
December 31, 2003, are derived from the separate historical consolidated
financial statements of the Registrant and ID Systems and should be read in
conjunction with the audited and unaudited consolidated financial statements of
the Registrant (included in its Annual Report on Form 10-KSB for the year ended
December 31, 2003 and Quarterly Report on Form 10-QSB for the period ended March
31, 2004) and ID Systems (contained elsewhere herein.)
SENTRY TECHNOLOGY CORPORATION AND ID SYSTEMS
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004
(U. S. Dollars - In thousands)
Historical Pro Forma
------------------------ -------------------------------------
Sentry ID Systems Adjustments Consolidated
ASSETS
- -------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . $ 181 $ - $ 2,000 (1) $ 2,181
Accounts receivable . . . . . . . . . . . . . . 1,763 2,013 3,776
Inventories . . . . . . . . . . . . . . . . . . 1,976 1,400 3,376
Prepaid expenses and other current assets . . . 121 239 - 360
----------- ----------- ------------ ------------
Total current assets . . . . . . . . . . . . 4,041 3,652 2,000 9,693
PROPERTY, PLANT AND EQUIPMENT, net. . . . . . . . 176 495 671
GOODWILL. . . . . . . . . . . . . . . . . . . . . 2,120 (3) 2,120
OTHER ASSETS. . . . . . . . . . . . . . . . . . . 204 363 170 (2) 724
- - (13)(3) -
----------- ----------- ------------ ------------
$ 4,421 $ 4,510 $ 4,277 $ 13,208
=========== =========== ============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
- -----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Revolving line of credit and term loan. . . . . $ 1,934 $ 1,005 $ 2,939
Accounts payable and accrued liabilities. . . . 2,253 886 170(2) 3,387
78(3)
Obligations under capital leases -
current portion. . . . . . . . . . . . . . . 5 - - 5
Deferred income . . . . . . . . . . . . . . . . 226 - - 226
----------- ----------- ------------ ------------
Total current liabilities . . . . . . . . . . 4,418 1,891 248 6,557
LONG TERM DEBT. . . . . . . . . . . . . . . . . . 186 151 1,835 (1) 2,172
OBLIGATIONS UNDER CAPITAL LEASES -. . . . . . . . 12 - - 12
MINORITY INTEREST . . . . . . . . . . . . . . . . - 897 - 897
----------- ----------- ------------ ------------
Total liabilities. . . . . . . . . . . . . . 4,616 2,939 2,083 9,638
SHAREHOLDERSEQUITY
Common stock. . . . . . . . . . . . . . . . . . 86 - 30 (3) 116
Additional paid-in capital. . . . . . . . . . . 44,660 501 165 (1) 48,395
(501)(3)
3,570 (3)
Accumulated deficit . . . . . . . . . . . . . . (44,941) 1,070 (1,070)(3) (44,941)
Total shareholder's equity (deficit) . . . . (195) 1,571 2,194 3,570
----------- ----------- ------------ ------------
$ 4,421 $ 4,510 $ 4,277 $ 13,208
=========== =========== ============ ============
See accompanying notes to the pro forma condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION AND ID SYSTEMS
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004
1. To record the $2 million proceeds from the issuance of convertible
debentures and 5 million warrants to Brascan Technology Fund. The proceeds were
allocated between debt and equity based on their comparative fair values. The
fair value assigned to the warrants ($165,000) was based on an independent
appraisal.
2. To record the estimated transaction costs associated with the Brascan
transaction.
3. To record the acquisition of ID Systems for consideration of 30,000,000
common shares of Sentry Technology Corporation, valued at $3.6 million, plus
estimated transaction costs of $91,000 and the elimination of the historical
equity capitalization of ID Systems in accordance with the purchase method of
accounting.
Under the purchase method of accounting, the total estimated purchase price
is allocated to the net tangible and intangible assets and liabilities of ID
Systems based on their estimated fair values as of the completion of the merger.
The allocation of the purchase price reflected in the pro forma condensed
consolidated financial statements is preliminary. Management believes that
substantially all of the excess of the purchase price over the fair value of the
net assets acquired will be allocated to goodwill. The final valuation will be
based on the actual net tangible and intangible assets of ID Systems at the
completion of the merger. In the opinion of management, that allocation is not
expected to materially differ from the preliminary allocation included in the
unaudited pro forma condensed consolidated financial statements.
Goodwill is valued at $2,120,000. On an ongoing basis, Sentry will
evaluate the carrying value of goodwill versus the discounted cash benefit
expected to be realized from the performance of the underlying operations and
adjust for any impairment in value.
SENTRY TECHNOLOGY CORPORATION AND ID SYSTEMS
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004
(U. S. Dollars - In thousands, except per share data)
Historical Pro Forma
-------------------------- -----------------------------------
Sentry ID Systems Adjustments Consolidated
REVENUES. . . . . . . . . . . . . . . . . . . . . . . $ 2,946 $ 1,210 $ 30 (4) $ 4,186
COSTS AND EXPENSES:
Cost of sales . . . . . . . . . . . . . . . . . . . 941 572 (27)(4) 1,486
Customer service expenses . . . . . . . . . . . . . 1,015 24 1,039
Selling, general and administrative expenses. . . . 897 495 11 (3) 1,400
(3)(4)
Research and development. . . . . . . . . . . . . . 160 44 - 204
---------- ------------ --------- -----------
3,013 1,135 (19) 4,129
---------- ------------ --------- -----------
OPERATING PROFIT (LOSS) . . . . . . . . . . . . . . . (67) 75 49 57
INTEREST AND FINANCING EXPENSES . . . . . . . . . . . 125 29 50 (1) 110
- - (94)(2) -
---------- ------------ --------- -----------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . . . . (192) 46 93 (53)
INCOME TAXES (BENEFIT). . . . . . . . . . . . . . . . - - - -
---------- ------------ --------- -----------
NET PROFIT (LOSS) . . . . . . . . . . . . . . . . . . $ (192) $ 46 93 $ (53)
========== ============ ========= ===========
NET PROFIT (LOSS) PER SHARE . . . . . . . . . . . . . $ (0.00) $ (0.00)
========== ===========
WEIGHTED AVERAGE SHARES . . . . . . . . . . . . . . 85,756 30,000 115,756
========== ========= ===========
See accompanying notes to the pro forma condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION AND ID SYSTEMS
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004
1. To record interest expense on the $2 million $8% debenture issued to
Brascan Technology Fund and the accretion of the debenture discount
($165,000).
2. To reverse interest and financing costs associated with Sentry's purchase
order financing facility.
3. To record the amortization of Brascan transaction costs over four years.
4. To eliminate intercompany transactions between Sentry and ID Systems.
SENTRY TECHNOLOGY CORPORATION AND ID SYSTEMS
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 2003
(U. S. Dollars - In thousands, except per share data)
Historical Pro Forma
-------------------------- ----------------------------------
Sentry ID Systems Adjustments Consolidated
REVENUES. . . . . . . . . . . . . . . . . . . . .$ 13,009 $ 6,588 $ (148)(4) $ 19,449
COSTS AND EXPENSES:
Cost of sales . . . . . . . . . . . . . . . . . 5,179 3,798 (129)(4) 8,848
Customer service expenses . . . . . . . . . . . 3,977 173 4,150
Selling, general and administrative expenses. . 3,575 1,987 43 (3) 5,596
(9)(4)
Research and development. . . . . . . . . . . . 656 75 - 731
------------ ------------ ------------- -----------
13,387 6,033 (95) 19,325
------------ ------------ ------------- -----------
OPERATING PROFIT (LOSS) . . . . . . . . . . . . (378) 555 (53) 124
INTEREST AND FINANCING EXPENSES . . . . . . . . 671(5) 82 201 (1) 556
- - (398)(2) -
------------ ------------ ------------- -----------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . (1,049) 473 144 (432)
INCOME TAXES (BENEFIT). . . . . . . . . . . . . (492) 190 - (302)
------------ ------------ ------------- -----------
PROFIT (LOSS) BEFORE EXTRAORDINARY ITEM . . . . $ (557) $ 283 $ 144 $ (130)
============ ============ ============= ===========
NET PROFIT (LOSS) PER SHARE
Profit (loss) before extraordinary item . . . . $ (0.01) $ (0.00)
============ ===========
WEIGHTED AVERAGE SHARES . . . . . . . . . . . . 84,153 30,000 114,153
============ ============= ===========
See accompanying notes to the pro forma condensed consolidated financial statements.
SENTRY TECHNOLOGY CORPORATION AND ID SYSTEMS
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
1. To record interest expense on the $2 million $8% debenture issued to
Brascan Technology Fund and the accretion of the debenture
discount.
2. To reverse interest and financing costs associated with Sentry's purchase
order financing facility.
3. To record the amortization of Brascan transaction costs over four years.
4. To eliminate intercompany transactions between Sentry and ID Systems.
5. Sentry's tax benefit resulted from the utilization of net operating loss
carryforwards against an extraordinary item.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Sentry Technology Corporation
Date: 7/14/04 /s/ Peter J. Mundy,
- -------------- ---------------------------
Peter J. Mundy, VP and CFO
EXHIBIT INDEX
Exhibit Document
- ------- --------------------------------------
2.1 Stock Purchase Agreement, dated April 29, 2004 by and between
Sentry Technology Corporation and Saburah Investments, Inc.
4.1 Convertible Debenture, dated April 30, 2004 issued by Sentry
Technology Corporation to Brascan Technology Fund, Inc.
4.2 Warrant Certificate, dated April 30, 2004 issued by Sentry
Technology Corporation to Brascan Technology Fund, Inc.
4.3 Stakeholders Rights Agreement, dated April 30, 2004 by
and among Sentry Technology Corporation, Peter Murdoch,
Robert Furst, Saburah Investments Inc., and Brascan
Technology Fund Inc.
EXHIBIT 2.1
STOCK PURCHASE AGREEMENT
BETWEEN
SENTRY TECHNOLOGY CORPORATION
AND
SABURAH INVESTMENTS INC.
April 30, 2004
TABLE OF CONTENTS
PAGE
ARTICLE I THE SALE 1
1.1 The Sale 1
1.2 Purchase Price 1
1.3 Additional Actions 2
1.4 Contingent Consideration 2
ARTICLE II REPRESENTATIONS AND WARRANTIES OF SENTRY 2
2.1 Organization and Standing 2
2.2 Corporate Power and Authority 3
2.3 Capitalization of Sentry 3
2.4 Conflicts, Consents and Approval 3
ARTICLE III REPRESENTATIONS AND WARRANTIES AS TO THE COMPANY 4
3.1 Organization and Standing. 4
3.2 Subsidiaries and Investments 4
3.3 Capitalization of the Company 5
3.4 Conflicts; Consents and Approvals 6
3.5 No Material Adverse Change 6
3.6 Company Financial Statements 6
3.7 Compliance with Law 7
3.8 Litigation 7
3.9 Proprietary Rights 7
3.10 Assets of Business/Deferred Income 7
3.11 Taxes 8
3.12 Employee Matters 8
3.13 Contracts 9
3.14 Accounts Receivable 10
3.15 Undisclosed Liabilities 10
3.16 Certain Financial Matters 10
3.17 Conflicts of Interest; Affiliate Transactions 10
3.18 Customer and Supplier Relationships 11
3.19 Revenues 11
3.20 Permits; Compliance 11
3.21 Environmental Matters 12
3.22 Insurance 12
3.23 Brokerage and Finder's Fee 12
3.24 State Takeover Laws 12
3.25 Full Disclosure 12
ARTICLE IV ADDITIONAL REPRESENTATIONS AND WARRANTIES AS TO THE STOCKHOLDER 13
4.1 Ownership of Stock 13
4.2 Authorization 13
4.3 Acquisition for Investment 13
ARTICLE V COVENANTS OF THE PARTIES 14
5.1 Mutual Covenants 14
5.2 Covenants of the Company and the Stockholder 15
5.3 Additional Agreements 17
5.4 Noncompetition, Nonsolicitation, Non-Disclosure Covenants 18
ARTICLE VI CONDITIONS 20
6.1 Closing 20
6.2 Conditions to Obligations of the Stockholder 21
6.3 Conditions to Obligations of Sentry 21
ARTICLE VII TERMINATION AND AMENDMENT 23
7.1 Termination 23
7.2 Effect of Termination 23
7.3 Amendment 23
7.4 Extension; Waiver 23
ARTICLE VIII MISCELLANEOUS 24
8.1 Indemnification 24
8.2 Survival of Representations and Warranties 26
8.3 Limitations on Indemnification 26
8.4 Notices 26
8.5 Interpretation 27
8.6 Counterparts 27
8.7 Entire Agreement 27
8.8 Third Party Beneficiaries 27
8.9 Governing Law; Resolution of Disputes 27
8.10 Remedies at Law 28
8.11 Equitable Remedies 28
8.12 Assignment 28
8.13 Expenses 28
8.14 Severability 28
STOCK PURCHASE AGREEMENT
This Securities Purchase Agreement (this "AGREEMENT") is made and entered
into as of April 30, 2004, by and between SENTRY TECHNOLOGY CORPORATION, a
Delaware corporation ("SENTRY"), and SABURAH INVESTMENTS INC., an Ontario
corporation (the "STOCKHOLDER").
PRELIMINARY STATEMENTS
A. The Stockholder is the owner of record, and beneficially, of all of the
outstanding common shares and Series "A" preference shares of ID Security
Systems Canada Inc., an Ontario corporation, ("ID Canada"), all of the
outstanding capital stock of ID Systems USA, Inc., a Pennsylvania corporation,
("ID USA"), a promissory note of ID Canada in favour of the Stockholder in the
amount of CDN $73,423.24, and a promissory note of ID USA in favour of the
Stockholder in the amount of USD $376,453.30 (collectively, the "SECURITIES").
ID Canada and ID USA are collectively referred to as the "COMPANIES" and
individually referred to as a "COMPANY").
B. Sentry desires to acquire, and the Stockholder desires to sell, all of
the capital stock and promissory notes described in Recital A in exchange for
shares of Sentry Common Stock (as defined in Section 2.3) as more fully provided
herein (the "SALE").
C. ID Canada owns or possesses rights in all assets used to conduct the
business operated by ID Canada (the "ID Canada Business") as currently
conducted. ID US owns or possesses rights in all assets used to conduct the
business operated by ID Canada (the "ID USA Business") as currently conducted.
AGREEMENT
Now, therefore, in consideration of these premises and the mutual and
dependent promises hereinafter set forth, and intending to be legally bound, the
parties hereto agree as follows:
ARTICLE I
THE SALE
1.1 The Sale
.. Upon the terms and subject to the conditions hereof, Sentry shall purchase
and the Stockholder shall at the Closing sell, convey, transfer and deliver to
Sentry all of the Securities.
1.2 Purchase Price
.. The aggregate purchase price for the Securities to be paid by Sentry to the
Stockholder shall consist of 30,000,000 shares of Sentry Common Stock (the
"CONSIDERATION"). At the Closing, Sentry shall deliver to the Stockholder
certificates for such shares, and the Stockholder shall deliver to Sentry
certificates and original promissory notes representing the Securities, duly
endorsed or accompanied by stock powers executed in blank, in proper form for
transfer, with all required stock transfer tax stamps affixed thereto.
1.3 Additional Actions
If, at any time after the Sale any further deeds, assignments or assurances
in law or any other acts shall be necessary or desirable to (a) vest, perfect or
confirm, of record or otherwise, in Sentry its right, title or interest in, to
or under any of the Securities, or (b) otherwise carry out the provisions of
this Agreement, the Stockholder shall execute and deliver all such deeds,
assignments or assurances in law and to take all acts as are reasonably
necessary, proper or desirable to vest, perfect or confirm title to and
possession of the Securities in Sentry and otherwise to carry out the provisions
of this Agreement. If the Stockholder fails to do so within 14 days following
written request from Sentry, then the Stockholder shall be deemed to have
granted to Sentry an irrevocable power of attorney to execute and deliver all
such deeds, assignments or assurances in law and to take all such acts, provided
that the Stockholder shall be provided with a copy of the documents so executed
by Sentry and confirmation of the action so taken by Sentry.
1.4 Contingent Consideration
(a) Reference is made to certain litigation instituted by the Company in the
United District Court for the Eastern District of Pennsylvania and entitled
ID Security Systems Canada Inc. v. Checkpoint Systems, Inc. (the "Checkpoint
Litigation"). Upon receipt of any judgment proceeds by Stockholder or any of its
affiliates related to the Checkpoint Litigation, Stockholder will promptly
provide Sentry with written notice thereof describing the amount and date of
receipt of such judgment proceeds. Sentry may, during the ninety (90) day period
following receipt of such notice, issue a written demand to Stockholder to
purchase Sentry Common Stock for a purchase price of up to four and one-half
percent (4.5%) of the judgment proceeds received by Stockholder in the
Checkpoint Litigation, up to a maximum purchase price of $1,000,000. The number
of shares of Sentry Common Stock to be purchased by Stockholder under the terms
of this paragraph will determined in accordance with the terms set out in
Schedule 1.4.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SENTRY
In order to induce the Stockholder to enter into this Agreement, Sentry
hereby represents and warrants to the Stockholder that the statements contained
in this Article II are true, correct and complete.
2.1 Organization and Standing
.. Sentry is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware with full power and authority (corporate
and other) to own, lease, use and operate its properties and to conduct its
business as and where now owned, leased, used, operated and conducted. Sentry is
duly qualified to do business and is in good standing in each jurisdiction in
which the nature of the business conducted by it or the property it owns, leases
or operates, makes such qualification necessary, except where the failure to be
so qualified would not have a material adverse effect on the assets,
liabilities, results of operations, prospects, business or financial condition
(a "MATERIAL ADVERSE EFFECT") of Sentry. Sentry is not in default in the
performance, observance or fulfillment of any provision of its Certificate of
Incorporation or By-laws.
2.2 Corporate Power and Authority
.. Sentry has all requisite corporate power and authority to enter into this
Agreement and to consummate the transactions contemplated by this Agreement.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Sentry. This Agreement has been duly executed
and delivered by Sentry, and constitutes the legal, valid and binding
obligations of Sentry, enforceable against Sentry in accordance with its terms.
2.3 Capitalization of Sentry
.. As of the date of this Agreement, Sentry is authorized to issue One hundred
fifty million (150,000,000) shares of capital stock, of which One hundred forty
million (140,000,000) are shares of Common Stock ("SENTRY COMMON STOCK") with a
par value of $0.001 per share, and ten million (10,000,000) are shares of
Preferred Stock with a par value of $0.001 per share ("SENTRY PREFERRED STOCK"),
of which (a) approximately 85,750,363 shares of Sentry Common Stock are issued
and outstanding, (b) no shares of Sentry Preferred Stock are issued and
outstanding, (c) no shares of Sentry Common Stock or Sentry Preferred Stock are
issued and held in treasury and (d) no shares are reserved for issuance upon the
exercise or conversion of options, warrants or convertible securities granted or
issuable by Sentry except for 725,000 shares issuable upon the exercise of
warrants. In addition, Sentry has adopted the 1997 Stock Incentive Plan for
officers, employees and certain other persons (the "STOCK PLAN"), pursuant to
which options to purchase 1,581,921 shares of Sentry Common Stock have been
issued and 273,814 shares are reserved for future issuance. Each outstanding
share of Sentry capital stock is, and all shares of Sentry Common Stock to be
issued pursuant hereto will be, duly authorized and validly issued, fully paid
and nonassessable, and each outstanding share of Sentry Common Stock has not
been, and all shares of Sentry Common Stock to be issued pursuant hereto will
not be, issued in violation of any preemptive or similar rights. All shares of
Sentry Common Stock to be issued pursuant hereto will be free of liens,
encumbrances, agreements and rights of any kind.
2.4 Conflicts, Consents and Approval
.. Neither the execution and delivery of this Agreement by Sentry nor the
consummation of the transactions contemplated hereby will:
(a) conflict with, or result in a breach of any provision of the Certificate
of Incorporation or the By-laws of Sentry;
(b) violate, or conflict with, or result in a breach of any provision of, or
constitute a default (or an event which, with the giving of notice, the passage
of time or otherwise, would constitute a default) or result in any loss of any
benefit under, or entitle any party (with the giving of notice, the passage of
time or otherwise) to terminate, accelerate or call a default under, or result
in the creation of any lien, security interest, charge or encumbrance upon any
of the properties or assets of Sentry, or any of Sentry's subsidiaries under,
any of the terms, conditions or provisions of any agreement or other instrument
or obligation to which Sentry or any of its subsidiaries is a party;
(c) violate any order, writ, injunction, decree, statute, rule or
regulation, applicable to Sentry or any of Sentry's subsidiaries or their
respective properties or assets; or
(d) require any action or consent or approval of, or review by, or
registration or filing with any third party or any court, arbitral tribunal,
administrative agency or commission or other governmental or regulatory body,
agency, instrumentality or authority (a "GOVERNMENTAL AUTHORITY"), other than
the Company Required Consents (collectively, the "SENTRY REQUIRED CONSENTS"),
and other than the review by the United States Securities and Exchange
Commission of certain filings required under the Securities Exchange Act of
1934, as amended.
ARTICLE III
REPRESENTATIONS AND WARRANTIES AS TO THE COMPANY
In order to induce Sentry to enter into this Agreement, the Stockholder
hereby represents and warrants to Sentry that the statements contained in this
Article III are true, correct and complete, except as specified in the
applicable section of the Disclosure Schedule delivered herewith by the
Stockholder to Sentry (the "DISCLOSURE SCHEDULE").
3.1 Organization and Standing.
(a) Each Company and its subsidiaries, if any, is a corporation duly
organized, validly existing and in good standing, in the case of ID Canada under
the laws of Ontario and in the case of ID USA under the laws of
Pennsylvania, with full power and authority (corporate and other) to own, lease,
use and operate its properties and to conduct the Business as and where now
owned, leased, used, operated and conducted.
(b) Each Company and its subsidiaries, if any, is duly qualified to do
business or licensed and in good standing in each jurisdiction where the
Business is currently conducted, is not qualified to do business in any other
jurisdiction and neither the nature of the Business nor the property the Company
or a subsidiary owns, leases or operates requires it to qualify to do business
as a foreign corporation in any other jurisdiction, except where the failure to
be so qualified would not have a Material Adverse Effect.
(c) Neither the Companies nor their subsidiaries, if any, is in default in
the performance, observance or fulfillment of any provision of its Certificate
of Incorporation or Bylaws.
3.2 Subsidiaries and Investments
.. Except as set forth on Section 3.2 of the Disclosure Schedule, the Companies
do not own, directly or indirectly, any equity or other ownership interest in
any corporation, partnership, joint venture or other entity or enterprise or any
other securities or investments of any type. The Companies are not subject to
any obligation or requirement to provide funds to or make any investment (in the
form of a loan, capital contribution or otherwise) in any such entity referred
to in the preceding sentence or otherwise. Each Company's subsidiaries, if any,
are listed in Section 3.2 of the Disclosure Schedule. Except as set forth on
Section 3.2 of the Disclosure Schedule, each Company owns directly or indirectly
each of the outstanding shares of capital stock (or other ownership interests
having by their terms ordinary voting power to elect a majority of directors or
others performing similar functions with respect to such subsidiary) of each of
the Company's subsidiaries. Each of the outstanding shares of capital stock of
each of the Company's subsidiaries, if any, is duly authorized, validly issued,
fully paid and nonassessable, and, except as set out in the Disclosure Schedule,
is owned, directly or indirectly, by the Company free and clear of all liens,
pledges, security interests, claims or other encumbrances. There are no
outstanding subscriptions, options, warrants, puts, calls, agreements,
understandings, claims or other commitments or rights of any type relating to
the issuance, sale or transfer of any securities owned by a Company in any
subsidiary of the Company which will survive Closing (defined below), nor are
there outstanding any securities which are convertible into or exchangeable for
any shares of capital stock of any subsidiary of the Company.
3.3 Capitalization of the Company
.. ID Canada's authorized capital stock consists solely of an unlimited number
of common shares without par value, (the "ID CANADA COMMON STOCK"), an unlimited
number of preference shares issuable in series (the "ID CANADA PREFERRED STOCK")
of which a single series of Series "A" preference shares has been created with
authorization to issue up to 50,000 shares of that series, and 1,000 special
shares, designated as Class B shares (the "ID CANADA SPECIAL STOCK"). The
rights of the holders of ID Canada Special Stock shall be limited to the net
after tax proceeds received by the Companies from the Checkpoint Litigation. ID
USA's authorized capital stock consists solely of 100 shares of common stock
without par value, (the "ID USA COMMON STOCK"). All of the issued and
outstanding ID Canada Common Stock, ID Canada Preferred Stock, ID Canada Special
Stock and ID USA Common Stock (the "ISSUED STOCK") are owned as set forth in
Section 3.3 of the Disclosure Schedule. No shares of Issued Stock are issued and
held in treasury and no shares of Issued Stock are reserved for issuance upon
the exercise or conversion of options, warrants or convertible securities
granted or issued by the Company. Each outstanding share of the Issued Stock is
duly authorized and validly issued, fully paid and nonassessable, and has not
been issued in violation of any preemptive or similar rights. Except as set
forth in Section 3.3 of the Disclosure Schedule, there are no outstanding
subscriptions, options, warrants, puts, calls, agreements, understandings,
claims or other commitments or rights of any type relating to the issuance, sale
or transfer of any securities of either Company, nor are there outstanding any
securities which are convertible into or exchangeable for any shares of capital
stock of either Company; and the Companies have no obligation of any kind to
issue any additional securities or to pay for securities of the Companies or any
predecessor. The issuance and sale of all of the shares of capital stock
described in this Section 3.3 have been in compliance with federal and state
securities laws. Neither Company has agreed to register any securities under
the Securities Act of 1933, as amended (the "SECURITIES ACT"), or under the
securities laws of Canada or any state or province, or granted registration
rights to any person or entity. Neither Company has repurchased any shares of
its capital stock in the period ended two years prior to the Closing Date.
3.4 Conflicts; Consents and Approvals
.. Except as set forth in Section 3.4 of the Disclosure Schedule, neither the
execution and delivery of this Agreement by the Stockholder nor the consummation
of the transactions contemplated hereby or thereby will:
(a) conflict with, or result in a breach of any provision of the Articles of
Incorporation or By-laws of either Company;
(b) violate, or conflict with, or result in a breach of any provision of, or
constitute a default (or an event which, with the giving of notice, the passage
of time or otherwise, would constitute a default) or result in any loss of any
benefit under, or entitle any party (with the giving of notice, the passage of
time or otherwise) to terminate, accelerate or call a default under, or result
in the creation of any lien, security interest, charge or encumbrance upon any
of the properties or assets of either Company, their subsidiaries, if any, or
the Stockholder under any of the terms, conditions or provisions of any
agreement or other instrument or obligation to which the Company, their
subsidiaries, if any, or the Stockholder is a party;
(c) violate any order, writ, injunction, decree, statute, rule or regulation
applicable to a Company, its subsidiaries, if any, or the Stockholder or any of
their respective properties or assets; or
(d) require any action or consent or approval of, or review by, or
registration or filing with any third party or any Governmental Authority, or
other regulatory or self-regulatory body except for the consents, approvals,
registrations and filings set forth in the Disclosure Schedule (collectively the
"COMPANY REQUIRED CONSENTS").
3.5 No Material Adverse Change
.. Since the date of the latest balance sheet included in the Financial
Information (the "BALANCE SHEET DATE"), the Stockholder and the Companies and
their subsidiaries, if any, have conducted business in the ordinary course,
consistent with past practice, and, prior to the Closing Date, except as set
forth on Section 3.5 of the Disclosure Schedule, there has been no event,
occurrence, change or development which has had, or could reasonably be expected
to have, a Material Adverse Effect on a Company or its subsidiaries, if any, or
which has, or could reasonably be expected to have, a Material Adverse Effect on
the ability of the Stockholder to consummate the transactions contemplated
hereby.
3.6 Company Financial Statements
.. The Stockholder has heretofore delivered to Sentry the financial information
listed in Section 3.6 of the Disclosure Schedule (collectively, the "FINANCIAL
INFORMATION"). The Financial Information (a) presents fairly the financial
position and results of operations of the Companies and their subsidiaries, if
any, for the periods covered on the basis set forth therein, (b) does not
materially differ from the financial records maintained and the accounting
methods applied by the Companies, their subsidiaries, if any, the Stockholder or
the other affiliates of the Companies, as applicable, for tax purposes and (c)
discloses the extent to which any of the revenues of the Companies, their
subsidiaries, if any, the Stockholder or the other affiliates of the Companies
are subject to specific potential or actual chargebacks(s) of which the
Stockholder has knowledge after due inquiry; and (d) is in all material respects
in accordance with the books and records of the Companies. Subject to the
following sentence, to the best knowledge of the Stockholder, the documents and
other information provided to Sentry in connection with its due diligence
investigation of the Companies are true and correct in all material respects.
The financial forecasts and projections prepared by the Companies and delivered
to Sentry have a reasonable basis, were made in good faith and represent the
current best estimates and judgment of the Stockholder as to the expected future
financial performance of the Companies.
3.7 Compliance with Law
The Companies, their subsidiaries, if any, and the Stockholder are in
compliance in all material respects with, and at all times during the five-year
period ended on the Closing Date have been in compliance in all material
respects with, all applicable laws, statutes, orders, rules, regulations,
policies or guidelines promulgated, or judgments, decisions or orders entered by
any Governmental Authority material to the conduct of the business of the
Companies (collectively, the "APPLICABLE LAWS") except as set forth in Section
3.7 of the Disclosure Schedule.
3.8 Litigation
.. Except as set forth in Section 3.8 of the Disclosure Schedule, there is no
suit, claim, action, proceeding or investigation (an "ACTION") pending or, to
the knowledge of the Stockholder, threatened against the Companies, their
subsidiaries, if any, or the Stockholder relating to the Business. Except as
set forth in Section 3.8 of the Disclosure Schedule, none of the Companies,
their subsidiaries, if any, nor the Stockholder is subject to any outstanding
order, writ, injunction or decree or any other instrument limiting its or his
ability to do business. Except as otherwise disclosed in the Disclosure
Schedule, to the best of the Company's and the Stockholder' knowledge, none of
the Companies, their subsidiaries, if any, nor the Stockholder has (a) initiated
or been the target of any complaint, investigation, regulatory proceeding,
formal or informal, or disciplinary hearing or action of any kind or (b) been
the party to any legal action, regulatory proceeding, formal or informal or
arbitration, whether as petitioner, plaintiff, complainant, respondent or
defendant, regardless of whether such action was withdrawn, settled, litigated
or otherwise resolved, during the five-year period ending on the Closing Date.
3.9 Proprietary Rights
.. To the Stockholder's knowledge, none of the intellectual property of the
Stockholder, related to the conduct and operation of the Business, and the
Companies or their subsidiaries, if any, infringes upon or violates the rights
of any person, firm, corporation, or other legal entity. To the Stockholder's
knowledge, the business conducted by the Companies and their subsidiaries, if
any, has not been and is not conducted in contravention of any intellectual
property of any person, firm, corporation, or other legal entity.
3.10 Assets of Business/Deferred Income
.. At the Closing, the Companies and their subsidiaries, if any, will own or
hold under valid leases on all real and personal property and other assets used
in or necessary for the conduct of the Business as presently conducted
(including all properties reflected in the Financial Information, other than
properties disposed of in the ordinary course of business since the Balance
Sheet Date), in each case, free and clear of all security interests, claims,
liens, charges or encumbrances, except as set forth in Section 3.10 of the
Disclosure Schedule. The Companies do not own any real property. The Companies
and their subsidiaries, if any, have leasehold interests in all real estate used
in the Business under valid leases, enforceable against the lessors thereunder,
and neither of the Companies or their subsidiaries, if any, is in material
default under any thereof. The Stockholder does not hold any leasehold interest
in any real estate used in the Business.
3.11 Taxes
(a) The Companies, each of their subsidiaries, if any, and the Stockholder
have, respectively, duly filed all Tax returns, reports and forms ("TAX
RETURNS") relating to the Business required to have been filed by the Companies,
their subsidiaries, if any, or the Stockholder. All of the foregoing Tax
Returns are true and correct in all material respects. The Companies, each of
their subsidiaries, if any, and the Stockholder have duly paid all Taxes
required to be paid by it. To the best of the Stockholder's knowledge, none of
the Companies, their subsidiaries, if any, nor the Stockholder will have any
liability for any Taxes in excess of the amounts so paid. None of the
Companies, their subsidiaries, if any, nor the Stockholder is delinquent in the
payment of any Tax and none of them has requested any extension of time within
which to file any Tax Returns in respect of any taxable period which have not
since been filed. No deficiencies for any Tax relating to the Business have
been proposed, asserted or assessed (tentatively or definitely) by any taxing
authority, against a Company, its subsidiaries, if any, or the Stockholder.
There are no pending requests for waivers of the time to assess any Tax with
respect to any Company, its subsidiaries, if any, or the Stockholder relating to
the Business. The federal income Tax Returns of the Companies, their
subsidiaries, if any, and the Stockholder have been audited by the Canada
Revenue Agency or the United States Internal Revenue Service in the taxable
years set forth in Section 3.11(a) of the Disclosure Schedule.
(b) No consent or election has been made to have the provisions of Section
341(f) of the Code apply to a Company or its subsidiaries, if any.
(c) None of the Companies, their subsidiaries, if any, or the Stockholder is
party to or bound by any closing agreement, gain recognition agreement, tax
sharing, tax indemnity, tax allocation or similar agreement or arrangement.
(d) For purposes of this Agreement, "TAXES" means (i) all federal,
state, local or foreign taxes, levies, imposts, deductions, governmental charges
and duties of any kind, together with any interest, penalties, charges or fees
imposed with respect thereto, including, without limitation, taxes based upon or
measured by income, gross receipts, profits, sales, use, occupation, value
added, ad valorem, transfer, franchise, withholding, payroll and social
security, employment, excise, stamp duty or property taxes, and (ii) any
obligations under any agreements or arrangements with respect to any Taxes
described in clause (i) above.
(e) The Company has not, in the past 10 years, acquired assets
from another corporation in a transaction in which the Company's Tax basis of
the acquired assets was determined, in whole or in part, by reference to the Tax
basis of the acquired assets (or any other property) in the hands of the
transferor.
3.12 Employee Matters
(a) Except as set forth in Section 3.12(a) of the Disclosure Schedule, none
of the Companies nor their subsidiaries, if any, has any employment or
consulting Contracts for the compensation of any of its officers, directors,
employees, consultants or agents or providing for such compensation directly or
indirectly. None of the Companies and their subsidiaries, if any, has any
obligation to its officers, directors, employees, consultants or agents other
than obligations arising in the ordinary course of business on account of wages,
commissions, deferred compensation and salaries for prior services
performed. Section 3.12(a) of the Disclosure Schedule sets forth the names of
all employees of the Companies showing the rate of annual compensation
(including benefits and perquisites which would be deemed to constitute
compensation under the Rules and Regulations of the Securities and Exchange
Commission) as of the date hereof (estimated if not a fixed rate) and the amount
of any bonus paid in the Companies' last fiscal year.
(b) Except as set forth in Section 3.12(a) above, none of the Companies and
their subsidiaries, if any, sponsors, maintains, contributes to nor is obligated
to contribute to (nor has been obligated to contribute to) any employee benefit
plans, programs, policies, practices, agreements and other arrangements
providing benefits or compensation to any current or former employee, director
or consultant or any beneficiary or dependent thereof, whether or not written
and whether covering one person or more than one person or could be subject to
any liability under (i) Title IV of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), (ii) section 302 of ERISA, (iii) sections 412 or
4971 of the Internal Revenue Code of 1986, as amended (the "CODE"), (iv) the
continuation coverage requirements of section 601 et seq. of ERISA and section
4980B of the Code, or (v) corresponding or similar provisions of foreign laws or
regulations.
3.13 Contracts
.. Set forth in Section 3.13 of the Disclosure Schedule is a listing of all,
written or oral contracts, agreements, understandings, guarantees, leases and
executory commitments (each a "CONTRACT") to which any Company or its
subsidiaries, if any, is a party and which fall within any of the following
categories: (a) joint venture, partnership and similar Contracts, (b) Contracts
containing covenants purporting to limit the freedom of a Company or its
subsidiaries, if any, to compete in any line of business in any geographic area
or to hire any individual or group of individuals, (c) Contracts which after the
Closing Date would have the effect of limiting the freedom of Sentry or its
subsidiaries (other than a Company or its subsidiaries, if any,) to compete in
any line of business in any geographic area or to hire any individual or group
of individuals, (d) Contracts, indentures, mortgages, promissory notes, loan
agreements or guarantees of amounts in excess of $25,000, letters of credit or
other Contracts of a Company or its subsidiaries, if any, or commitments for the
borrowing or the lending of amounts in excess of $25,000 or providing for the
creation of any charge, security interest, encumbrance or lien upon any of the
assets of a Company or its subsidiaries, if any, (e) Contracts with or for the
benefit of any affiliate of a Company (other than subsidiaries or the Company,
if any), the Stockholder, any family member of the Stockholder or any affiliate
of the Stockholder or any family member thereof (any such Contract, an
"AFFILIATE AGREEMENT") and (f) Contracts with insurance companies not containing
terms generally customary in the industry and/or not entered into in the
ordinary course of business of the Company, its subsidiaries, if any, consistent
with past practice. Set forth in Section 3.13 of the Disclosure Schedule is a
complete and correct list of all equipment and property leases, all intellectual
property license agreements and all other contracts or agreements relating to
intellectual property to which a Company and its subsidiaries, if any, is a
party. All such Contracts are the legal, valid and binding obligations of the
Companies and, to the knowledge of the Companies and the Stockholder, the legal,
valid and binding obligation of each other party thereto. None of the
Companies, their subsidiaries, if any, nor, to the knowledge of the Stockholder,
any other party thereto is in violation of or in default in respect of, nor has
there occurred an event or condition which with or without the passage of time
or giving of notice (or both) would constitute a violation or default under, any
such Contract.
Attached to Section 3.13 of the Disclosure Schedule is a true and complete
list of all the standard forms of agreements and other documentation used in the
Business with customers or clients (the "CUSTOMER CONTRACTS"), copies of which
have previously been furnished to Sentry. There are no contracts, agreements or
other commitments, whether oral or written, between a Company and any customers
or clients, other than those in the forms of the Customer Contracts, except as
otherwise set forth on Section 3.13 of the Disclosure Schedule.
3.14 Accounts Receivable
.. To the best of the Companies' and Stockholder's knowledge, all notes
receivable and all accounts receivable of the Companies and their subsidiaries,
if any, have arisen in the ordinary course and are substantially current and
fully collectible net of any bad debt reserve (in the case of any such note
receivable, in accordance with its terms, and in the case of any such account
receivable, within 90 days after the Closing Date) at the aggregate gross
amounts thereof recorded in the Financial Information and, for receivables
arising after the date of the Financial Information, on its books, subject to
reserves shown on a Company's books and records, or the books and records of its
subsidiaries, if any.
3.15 Undisclosed Liabilities
.. Except (a) as and to the extent disclosed in the Financial Information or in
Section 3.15 of the Disclosure Schedule or (b) as incurred after the date of
this Agreement in the ordinary course of business consistent with past practice,
which in the event of such liabilities or obligations, if any, the aggregate
amount thereof is not in excess of $25,000 and not prohibited by this Agreement,
neither the Companies nor their subsidiaries, if any, has any liabilities or
obligations of any nature, whether known or unknown, absolute, accrued,
contingent or otherwise and whether due or to become due.
3.16 Certain Financial Matters
.. Schedule 3.16 of the Disclosure Schedule sets forth: (a) a list of all banks
in which any Company or its subsidiaries, if any, has accounts or maintains safe
deposit boxes and the names of all persons authorized to draw thereon or have
access thereto; (b) the names of all directors and officers of the Companies and
their subsidiaries, if any; and (c) the names of all persons holding powers of
attorney from any Company or their subsidiaries, if any, and a summary statement
of their terms.
3.17 Conflicts of Interest; Affiliate Transactions
(a) Except as disclosed in Section 3.17(a) of the Disclosure Schedule, to
the best of the Stockholder's and the Companies' knowledge, none of the
Companies, their subsidiaries, if any, the Stockholder, nor any officer or
director of a Company or its subsidiaries, if any, has any direct or indirect
interest in any firm, corporation, association or business enterprise which
competes with the Companies or their subsidiaries, if any, other than
investments of 5% or less in the stock or other equity interests of a publicly
traded firm or corporation.
(b) (i) Except as disclosed in Section 3.17(b) of the Disclosure Schedule,
none of the Stockholder or any family member of the Stockholder or any affiliate
of the Stockholder or of any family member thereof (collectively, the
"STOCKHOLDER AFFILIATES") provides or causes to be provided, on a regular basis,
to a Company or, its subsidiaries, if any, any assets, loans, advances, services
or facilities, (ii) none of the Companies nor its subsidiaries, if any, provides
or causes to be provided to any of the Stockholder or any Stockholder Affiliate
any assets, loans, advances, services or facilities and (iii) except for the
Affiliate Agreements and those matters set forth in the Disclosure Schedule
(such matters collectively, the "AFFILIATE ARRANGEMENTS"), none of the
Stockholder or any Stockholder Affiliates have any other business relationships
with the Companies or their subsidiaries, if any. The only Affiliate Agreements
and Affiliate Arrangements set forth on the Disclosure Schedule that will remain
in place from and after the Closing Date or with respect to which Sentry, the
Companies, their subsidiaries, if any, or any of their respective affiliates
will have any ongoing obligations or duties after the Closing Date, are those
items (and only with respect to such obligations or duties) which are identified
in the Disclosure Schedule as remaining in place and having ongoing obligations
or duties.
3.18 Customer and Supplier Relationships
.. The relationships of the Stockholder and the Companies and their
subsidiaries, if any, with their customers and suppliers with which it does
business are satisfactory and the execution of this Agreement and, to the best
of the Stockholder's knowledge, the consummation of the transactions
contemplated hereby will not materially adversely affect the relationships of
Stockholder, the Companies or their subsidiaries, if any, with such customers or
suppliers.
3.19 Revenues
.. The annual revenue received by the Companies and their subsidiaries, if any,
during each of the fiscal years 2001, 2002 and 2003, and the revenues received
through the most recent month end in its current fiscal year, are listed by
fiscal year or fiscal quarter, as the case may be, in the Financial Information,
and except as set forth in Section 3.19 of the Disclosure Schedule, neither the
Stockholder nor any Company is aware of any fact, circumstance or development
which, individually or together with any other facts, circumstances or
developments, may result in an adverse change in the Companies', or their
subsidiaries', if any, annual revenues.
3.20 Permits; Compliance
.. The Stockholder, the Companies and their subsidiaries, if any, are in
possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exemptions, consents, certificates, approvals and orders
necessary to own, lease and operate its or their properties and to carry on the
business as is currently conducted by each Company and its subsidiaries, if any,
(collectively, the "PERMITS"), and there is no Action pending or, to the
knowledge of the Stockholder, threatened regarding suspension or cancellation of
any of the Permits. None of the Companies or their subsidiaries, if any, nor
the Stockholder is in conflict with, or in default or violation of, any of the
Permits. The Stockholder, the Companies' and their subsidiaries', if any,
Permits utilized in the Business are listed in Section 3.20 of the Disclosure
Schedule, are all valid and are in good standing.
3.21 Environmental Matters
.. None of the Companies or its subsidiaries, if any, has any environmental
liabilities or obligations of any nature, whether known or unknown, absolute,
accrued, contingent or otherwise, and whether due or to become due except as set
forth in Section 3.21 of the Disclosure Schedule.
3.22 Insurance
.. Set forth in Section 3.22 of the Disclosure Schedule is a listing of all
insurance policies and binders and programs of self-insurance owned, held or
maintained by the Companies and their subsidiaries, if any, on the date hereof
and which afford coverage to a Company, its subsidiaries, if any, and its assets
or business. To the Stockholder' and the Companies' knowledge, all such
policies, binders and programs are in full force and effect, and, as of the
Closing Date, all such policies, binders and programs (or renewals or
replacements thereof, as applicable) will be in full force and effect. All
premiums with respect thereto covering all periods up to and including the date
hereof have been paid to the extent due, and, as of the Closing Date, all
premiums with respect thereto (or with respect to renewals or replacements
thereof, as applicable) will be paid to the extent due. No notice of
cancellation or termination has been received with respect to any such policy or
binder (or the renewals or replacements thereof, as applicable).
3.23 Brokerage and Finder's Fee
.. Except as set forth in Section 3.23 of the Disclosure Schedule, none of the
Companies, their subsidiaries, if any, the Stockholder nor any director, officer
or employee of a Company, has incurred or will incur on behalf of any Company or
its subsidiaries, if any, any brokerage, finder's or similar fee in connection
with this Agreement or the transactions contemplated hereby.
3.24 State and Province Takeover Laws
.. Prior to the date hereof, the Board of Directors of the Companies has taken
all action necessary to exempt or make inapplicable under any state or province
takeover law or state law that purports to limit or restrict business
combinations or the ability to acquire or vote shares: (a) the execution of
this Agreement, and (b) the transactions contemplated hereby.
3.25 Full Disclosure
(a) No representation or warranty of the Stockholder contained in this
Agreement (including, without limitation, those contained in Articles III and
IV) and no statement, schedule or certificate furnished or to be furnished by or
on behalf of the Companies or the Stockholder to Sentry or its agents
pursuant to this Agreement or in connection with the transactions contemplated
hereby, contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein or
therein not misleading.
(b) The Companies, their subsidiaries, if any, and the Stockholder have
clearly disclosed to Sentry, both in the course of Sentry 's due diligence
investigation and in Section 3.25 of the Disclosure Schedules attached hereto,
any information pertaining to the Companies, their subsidiaries, if any, and the
Stockholder which Sentry would reasonably deem relevant to Sentry, regardless of
its financial materiality to the transaction contemplated hereby, including such
information as (i) any litigation, complaints, regulatory matters or actions
brought by or against any Company, its subsidiaries, if any, and/or the
Stockholder as well as the current status or disposition of such matters, (ii)
any previous or contemplated relationship with a subsidiary or affiliate of
Sentry, (iii) any business dealings of the Companies, their subsidiaries, if
any, and the Stockholder outside of a Company's business, and (iv) relates to
any conflicts, disagreements or disputes with a subsidiary or affiliate of
Sentry.
ARTICLE IV
ADDITIONAL REPRESENTATIONS AND WARRANTIES
AS TO THE STOCKHOLDER
In order to induce Sentry to enter into this Agreement, the Stockholder
hereby further represents and warrants to Sentry that the statements contained
in this Article IV are true, correct and complete.
4.1 Ownership of Stock
.. Except for the ID Canada Special Stock which is owned, and will continue to
be owned, by Checklitco Inc., all issued and outstanding shares of the Companies
Common Stock are owned beneficially and of record by the Stockholder, free and
clear of all liens, claims, charges, pledges, security interests, options or
other encumbrances, or agreements or commitments of any type relating to the
issuance, sale or transfer of such shares. The Sale will not give rise to any
preemptive or similar rights on behalf of any person under any provision of any
Contract to which the Stockholder is party or by which any property of the
Stockholder is bound. All of the Securities have been acquired or obtained by
the Stockholder during the past two years. Upon consummation of the
transactions contemplated by this Agreement, Sentry will have good and valid
title to all of the issued and outstanding shares of ID Canada Common Stock, ID
Canada Preferred Shares and ID USA Common Shares, free and clear of all liens,
claims, charges, pledges, security interests, options or other encumbrances, or
agreements or commitments of any type relating to the issuance, sale or transfer
of such shares.
4.2 Authorization
.. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by the Stockholder.
This Agreement has been duly executed and delivered by the Stockholder, and
constitutes the legal, valid and binding obligation of the Stockholder,
enforceable against him in accordance with its terms.
4.3 Acquisition for Investment
(a) The Stockholder has such knowledge and experience in financial and
business matters that he is capable of evaluating the merits and risks of his
investment in Sentry Common Stock.
(b) The Stockholder is receiving the Sentry Common Stock pursuant to this
Agreement not with a view toward or for resale in connection with any
distribution thereof, or with any intention of distributing or selling Sentry
Common Stock in violation of the Securities Act. The Stockholder will not sell,
offer to sell, otherwise transfer or conduct any hedging transactions involving
Sentry Common Stock in violation of the Securities Act. The Stockholder will
provide to any person acquiring or receiving any shares of Sentry Common Stock
from it, which at the time are "restricted securities," a notice advising such
acquiror that resales of such shares are restricted as stated herein.
(c) The Stockholder acknowledges that he and his representatives have been
provided an opportunity to examine all documents and ask questions of, and has
received answers thereto from, Sentry and its representatives regarding the
business, management, and financial affairs of Sentry and its subsidiaries, and
such representatives have obtained all information reasonably requested by them
of Sentry and its representatives to verify the accuracy of all information
furnished to them regarding the Sentry Common Stock.
(d) The Stockholder understands that (i) the Sentry Common Stock to be
received pursuant to this Agreement has not been registered under the Securities
Act, by reason of its issuance in a transaction exempt from the registration
requirements of the Securities Act, (ii) the Sentry Common Stock to be received
pursuant to this Agreement must be held indefinitely unless a subsequent
disposition thereof is registered under the Securities Act or is exempt from
such registration, (iii) the certificates representing such shares of Sentry
Common Stock shall bear a legend to such effect, (iv) Sentry will make a
notation on its transfer books to such effect and (v) on any proposed sale or
other disposition of the Sentry Common Stock to be received pursuant to this
Agreement, the Stockholder will be required to furnish to Sentry such
certification, legal opinion and/or other information that Sentry may reasonably
require to confirm that the proposed sale or disposition complies with the
restrictions described in this Section 4.3.
ARTICLE V
COVENANTS OF THE PARTIES
The parties hereto agree as follows with respect to the period from and
after the execution of this Agreement.
5.1 Mutual Covenants
(a) General. Each of the parties shall use its reasonable efforts to take
all action and to do all things necessary to consummate the transactions
contemplated hereby (including, without limitation, using its reasonable efforts
to cause the conditions set forth in Article VI for which they are
responsible to be satisfied as soon as reasonably practicable and to prepare,
execute and deliver such further instruments and take or cause to be taken such
other and further action as any other party hereto shall reasonably request).
(b) Other Governmental Matters. Each of the parties shall use its
reasonable efforts to take any additional action that may be necessary, proper
or advisable in connection with any other notices to, filings with, and
authorizations, consents and approvals of any Governmental Authority that it may
be required to give, make or obtain, including, without limitation, the Sentry
Required Consents and the Company Required Consents, as applicable.
(c) Public Announcements. Unless otherwise required by Applicable Law (and
in that event only if time does not permit), at all times prior to the earlier
of the Closing Date or termination of this Agreement pursuant to Section 7.1,
Sentry, the Companies and the Stockholder shall consult with each other before
issuing any press release with respect to the transactions contemplated by this
Agreement and shall not issue any such press release prior to such
consultation.
5.2 Covenants of the Companies and the Stockholder
(a) Access. From and after the date hereof until the Closing Date (or the
earlier termination of this Agreement), the Stockholder shall permit, and shall
cause the Companies to permit, representatives of Sentry to have access at all
reasonable times to the premises, properties, books, records, contracts, tax
records, documents, customers and employees of the Companies.
(b) Conduct of Company Operations. During the period from the date hereof
until the Closing Date (or the earlier termination of this Agreement), the
Stockholder shall, and shall cause the Companies to, conduct operations in the
ordinary course except as expressly contemplated by this Agreement and the
Stockholder shall, and shall cause the Companies to, use reasonable best efforts
to maintain and preserve its business organization and to retain the services of
its officers and employees and maintain relationships with customers and other
third parties to the end that its goodwill and ongoing business shall not be
impaired. Without limiting the generality of the foregoing, during the period
from the date hereof to the Closing Date (or the earlier termination of this
Agreement), the Stockholder shall not permit the Companies to, except as
otherwise expressly contemplated by this Agreement, without the prior written
consent of Sentry:
(i) do or effect any of the following actions with respect to its
securities: (A) adjust, split, combine or reclassify its capital stock, (B)
make, declare or pay any dividend or distribution on, or directly or indirectly
redeem, purchase or otherwise acquire, any shares of its capital stock or any
securities or obligations convertible into or exchangeable for any shares of its
capital stock or any other securities, (C) grant any person any right to
acquire any shares of its capital stock or any other securities or any
registration or similar rights with respect to any of its capital stock or other
securities, (D) issue, deliver or sell or agree to issue, deliver or sell any
additional shares of its capital stock or any other securities or (E) enter into
any agreement, understanding or arrangement with respect to the sale or voting
of its capital stock or any other securities;
(ii) sell, transfer, pledge, mortgage, encumber or otherwise dispose of any
of its property or assets, except in the ordinary course of business as
previously conducted;
(iii) make or propose any changes in its Articles of Incorporation or
By-laws;
(iv) merge or consolidate with any other person or acquire a material amount
of assets or capital stock of any other person or enter into any confidentiality
agreement with any person;
(v) incur, create, assume or otherwise become liable for any indebtedness
for borrowed money or assume, guarantee, endorse or otherwise as an
accommodation become responsible or liable for the obligations of any other
individual, corporation or other entity, except for the endorsement of
negotiable instruments for collection in the ordinary course of business;
(vi) create any subsidiaries;
(vii) except in the ordinary course of business as previously conducted,
enter into, modify or amend any employment, severance, termination or similar
agreements or arrangements with, or grant any bonuses, salary increases,
severance or termination pay to or adopt, enter into or modify any employee
benefit or similar plan with respect to, any officer, director, consultant or
employee, or otherwise increase the compensation or benefits provided to any
officer, director, consultant or employee, except as may be required by
Applicable Law or a binding written contract in effect on the date hereof,
except in the ordinary course of business as previously conducted;
(viii) enter into, modify or amend any Affiliate Agreement or Affiliate
Arrangement;
(ix) except in the ordinary course of business as previously conducted,
change its method of doing business, change any method or principle of
accounting for Tax or non-Tax purposes in any manner, make any Tax election or
settle or compromise any material Tax liability or file any Tax Return;
(x) settle any Actions, whether now pending or hereafter made or brought,
involving an amount in excess of $10,000;
(xi) modify, amend or terminate, or waive, release or assign any material
rights or claims with respect to, any Contract set forth in Section 5.2 of the
Disclosure Schedule or any other material Contract to which any Company or any
of its subsidiaries is a party;
(xii) waive any rights with a value in excess of $10,000;
(xiii) except as disclosed in Section 5.2 of the Disclosure Schedule, incur
or commit to any capital expenditures, obligations or liabilities in respect
thereof which in the aggregate exceed or would exceed $10,000;
(xiv) pay any fees other than those set forth in Section 5.2 of the
Disclosure Schedule;
(xv) take any action to exempt or make inapplicable under any state or
province takeover law, or state or province law that purports to limit or
restrict business combinations or the ability to acquire or vote shares, any
person or entity (other than Sentry or its subsidiaries) or any action taken
thereby, which person, entity or action would have otherwise been subject to the
restrictive provisions thereof and not exempt therefrom;
(xvi) violate or fail to perform any material obligation or duty imposed
upon it by any Applicable Law;
(xvii) enter into or carry out any other transaction other than in the
ordinary course of business consistent with past practice;
(xviii) permit or cause any subsidiary to do any of the foregoing or agree
or commit to do any of the foregoing; or
(xix) agree in writing or otherwise to take any of the foregoing actions.
(c) No Solicitation. The Stockholder agrees that, prior to the Closing
Date, it shall not, and shall not authorize or permit any of the Companies or
their subsidiaries, if any, or any of the Companies' or such subsidiaries'
directors, officers, employees, agents or representatives, directly or
indirectly, to solicit, initiate, encourage or facilitate, or furnish or
disclose information in furtherance of, any inquiries or the making of any
proposal with respect to, any recapitalization, exchange, consolidation or other
business combination involving a Company or its subsidiaries, if any, or
acquisition of any capital stock or any material portion of the assets of a
Company or any combination of the foregoing (a "COMPETING TRANSACTION"), or
negotiate, explore or otherwise engage in discussions with any person (other
than Sentry or their respective directors, officers, employees, agents and
representatives) with respect to any Competing Transaction or enter into any
agreement, arrangement or understanding requiring it to abandon, terminate or
fail to consummate the Sale or any other transactions contemplated by this
Agreement. From and after the execution of this Agreement, the Stockholder
shall, or shall cause the Companies to, immediately advise Sentry in writing of
the receipt, directly or indirectly, of any inquiries or proposals relating to a
Competing Transaction and promptly notify Sentry in writing of any such proposal
and the name of the proposing party in addition to any information provided to
or by any third party relating thereto.
(d) Notification of Certain Matters. The Stockholder shall give prompt
notice to Sentry of (i) the occurrence or non-occurrence of any event the
occurrence or non-occurrence of which would reasonably be expected to cause any
representation or warranty contained in this Agreement to be untrue or
inaccurate at or prior to the Closing Date and (ii) any failure of the Companies
to comply with or satisfy any covenant, condition or agreement to be complied
with or satisfied by it hereunder; provided, however, that the delivery of any
-----------------
notice pursuant to this Section 6.2(d) shall not limit or otherwise affect the
remedies available hereunder to Sentry.
(e) Transfer and Voting of the Securities. The Stockholder agrees that
between the date hereof and the Closing Date, it shall not (i) sell, transfer,
pledge, encumber, assign or otherwise dispose of, or enter into any contract,
option or other arrangement or understanding with respect to the sale, transfer,
pledge, encumbrance, assignment or other disposition of, any of the Securities
owned by the Stockholder or any interest therein or (ii) grant any proxies,
deposit the shares of the Securities into a voting trust or enter into a voting
agreement with respect to the shares of the Securities or any interest therein.
5.3 Additional Agreements
(a) Certain Tax Matters. (i) Sentry, the Companies, their subsidiaries,
if any, and the Stockholder shall cooperate in all matters relating to Taxes.
The Stockholder shall deliver to Sentry such information and data concerning the
Companies and their subsidiaries, if any, as Sentry may reasonably request
in order to enable Sentry, the Companies, their subsidiaries, if any, or any of
their respective affiliates to complete and file any Tax Return which they may
be required to file, respond to audits by any taxing authorities or participate
in any other Tax proceeding and shall deliver to Sentry any Tax Returns of the
Companies or their subsidiaries, if any, or any of their affiliates as Sentry
may reasonably request. Sentry, the Companies, their subsidiaries, if any, and
the Stockholder shall cooperate in the preparation and filing of any Tax Returns
of the Companies or its subsidiaries, if any, or affiliates relating in whole or
in part to taxable periods ending on or before the Closing Date that are
required to be filed on or after such date. Such Tax Returns shall be filed
consistent with past practice.
(ii) 338(h)(10) Election. At Sentry's option, the Companies and each
Stockholder shall join with Sentry in making an election under Code 338(h)(10)
(and any corresponding election under state, local, and foreign tax law) with
respect to the purchase and sale of the Securities hereunder (collectively, a "
338(h)(10) Election"). The Stockholder shall include any income, gain, loss,
deduction, or other tax item resulting from the 338(h)(10) Election on their
Tax Returns to the extent required by applicable law. The Stockholder shall
also pay any Tax imposed on the Companies or their subsidiaries attributable to
the making of the 338(h)(10) Election, including any Tax imposed under Code
1374 any tax imposed under Reg. 1.338(h)(10)-1(e)(5), or (iii) any state, local
or foreign Tax imposed on the Companies' or their subsidiaries' gain, and the
Stockholders shall indemnify Sentry, the Companies and their subsidiaries
against any Losses arising out of any failure to pay any such Taxes.
(iii) Purchase Price Allocation. Sentry, the Companies and the Stockholders
agree that the Consideration and the liabilities of the Companies and their
qualified subchapter S subsidiaries (plus other relevant items) if any, will be
allocated to the assets of the Companies and their qualified subchapter S
subsidiaries for all purposes (including Tax and financial accounting) as agreed
to by Sentry and the Stockholder. The Companies, their subsidiaries and the
Stockholder shall file all Tax Returns (including amended returns and claims for
refund) and information reports in a manner consistent with such allocation.
(b) Release. As of the Closing, the Stockholder, on behalf of itself and any
entity controlled by it and it's respective successors, assigns, and heirs,
hereby agree to release, remise and discharge absolutely and forever, the
Companies after the Closing Date, and each of its respective direct and indirect
subsidiaries, and each of such parties' successors and assigns of and from any
and all manner of action or actions, cause or causes of action, suits, claims,
demands, damages, losses, costs or expenses of any nature whatsoever, known or
unknown, fixed or contingent that shall have accrued theretofore based on any
circumstances or state of facts existing or arising on or prior to the Closing
Date.
5.4 Noncompetition, Nonsolicitation, Non-Disclosure Covenants
(a) Non-Competition Covenant. For a time period which ends five years
following the Closing Date (the "RESTRICTIVE PERIOD"), the Stockholder shall not
engage in or become employed in any capacity by, or become an officer,
employee, director, agent, consultant, contractor, shareholder, member or
partner of or lender to, or otherwise hold an interest in, any limited liability
company, partnership, corporation or other entity that, to the best of the
Stockholders' knowledge after reasonable inquiry, competes with or engages in,
anywhere, in the business conducted by Sentry, the Companies or any subsidiary
of Sentry or a Company, whether now or hereafter conducted is engaged, except
for the ownership by the Stockholder of less than 2% of the stock or other
equity interests of a publicly traded firm or corporation. The Stockholder
agrees that this covenant is reasonable with respect to its duration, geographic
area and scope. However, if, at the time of enforcement of this Subsection
5.4(a), a court holds that the restrictions stated herein are unreasonable under
the circumstances then existing, the parties hereto agree that the maximum
period, scope or geographic area legally permissible under such circumstances
will be substituted for the period, scope or geographic area stated herein.
(b) No Hiring of Employees. The Stockholder agrees that, during the
Restrictive Period, it shall not directly or indirectly, on its own behalf or on
behalf of any other person or entity, solicit, or attempt to solicit, or hire,
any employee, agent or contractor of Sentry, the Companies or any subsidiary of
Sentry, known by the Stockholder to be such after reasonable inquiry, to leave
the employ of or cease doing business with Sentry, a Company or any subsidiary
of Sentry or a Company for any reason whatsoever. The Stockholder further
agrees that it will use its best effort to prevent any affiliate from engaging
in any activity which the Stockholder would be prohibited from engaging in
pursuant to the immediately preceding sentence. The Stockholder agrees that
this covenant is reasonable with respect to its duration and scope. However,
if, at the time of enforcement of this Section 5.4(b), a court holds that the
restrictions stated herein are unreasonable under the circumstances then
existing, the parties hereto agree that the maximum period or scope legally
permissible under such circumstances will be substituted for the period or scope
stated herein.
(c) No Solicitation of Customers. The Stockholder agrees that, during the
Restrictive Period, it shall not, directly or indirectly, on its own behalf or
on behalf of any other person or entity (i) engage in any business transaction
or relationship in any way competitive with Sentry, a Company or any subsidiary
of Sentry with a customer or client of Sentry, a Company or any subsidiary of
Sentry or perform any services for or provide any products to such a customer or
client, (ii) solicit (or accept) the business of any person or entity that is a
customer or client of Sentry, a Company or any subsidiary of Sentry, or (iii)
interfere with or induce any customer or client of Sentry, a Company or any
subsidiary of Sentry to discontinue any business relationship with Sentry, a
Company or any subsidiary of Sentry or to refrain from entering into a business
relationship or transaction with Sentry, a Company or any subsidiary of Sentry.
The Stockholder agrees that this covenant is reasonable with respect to its
duration and scope. However, if, at the time of enforcement of this Subsection
5.4 (c), a court holds that the restrictions stated herein are unreasonable
under the circumstances then existing, the parties hereto agree that the maximum
period or scope legally permissible under such circumstances will be substituted
for the period or scope stated herein.
(d) Disclosure of Confidential Information. Except to the extent (i)
authorized by the express prior consent of the Board of Directors of Sentry, or
(ii) required by law or any legal process or (iii) reasonably believed by the
Stockholder to be desirable and appropriate in performing their obligations
under this Agreement, the Stockholder will not, directly or indirectly, at any
time prior to or after the Closing, use or exploit, or disseminate, disclose, or
divulge to any person, firm, corporation, association or other business entity,
Confidential Information of a Company. All computer software, business cards,
telephone lists, client lists, prospective client lists, price lists, contract
forms, catalogs, books, records, files and know-how of the Companies are
acknowledged to be the property of the Companies and shall not be duplicated,
removed (except temporarily in the ordinary course of business of a Company)
from a Company's possession or premises or made use of other than in pursuit of
the Company's business or as may otherwise be required by law or any legal
process, or as is necessary in connection with any adversarial proceeding
against a Company and, at the Closing the Stockholder shall deliver to the
Company, without further demands, all copies thereof which are then in the
possession or under the control of the Stockholder. As used herein, the term
"CONFIDENTIAL INFORMATION" shall mean any and all information about the
Companies or relating to the trade secrets of the Companies, in each case
whether or not disclosed to the Stockholder or whether or not known by the
Stockholder as a consequence of or through their relationship with a Company, if
such information is not publicly available (other than through a breach by the
Stockholder, or any of its members or managers of this Subsection 5.4 (d)). The
Stockholder acknowledges and agrees that the term "CONFIDENTIAL INFORMATION"
includes, without limitation, all information regarding the following: products,
services, customer and lead lists (including, without limitation, names,
addresses and telephone numbers), purchasing criteria and habits of customers
and clients of the Companies, business plans, methods and procedures, accounting
data, contract forms, commission structures, business and financial models,
files and accounting and financial data of the Companies. Without limiting the
generality of the foregoing, the Stockholder acknowledges and agrees that all of
the Confidential Information is a trade secret under any and all Canadian or
United States trade secrets legislation and derives independent economic value,
actual or potential, from not being generally known to the public or other
persons or entities which can obtain economic value from its disclosure or use,
and is the subject of efforts that are reasonable under the circumstances to
maintain its secrecy, the applicable provisions of this Agreement being an
example of such efforts. The Stockholder further agrees to cause its
shareholders, members and managers to comply with the provisions of this
Subsection 5.4 (d) as if they were parties to this Agreement and expressly bound
by the provisions of this Subsection.
ARTICLE VI
CONDITIONS
6.1 Closing
.. The closing (the "CLOSING") of the Sale shall take place on April 30, 2004,
subject to the satisfaction of each of the conditions set forth in this Article
VI (the "CLOSING DATE"), at the offices of Sentry or such other place and on
such date and as may be mutually agreed upon in writing by Sentry and the
Stockholder.
6.2 Conditions to Obligations of the Stockholder
.. The obligations of the Stockholder to consummate the transactions
contemplated hereby shall be subject to the fulfillment of the following
conditions unless waived by the Stockholder:
(a) Each of the representations and warranties of each of Sentry set forth
in Article II shall be true and correct in all material respects on the date
hereof and on and as of the Closing Date as though made on and as of the Closing
Date (other than representations and warranties made as of a specified
date, which need be true and correct only as of the specified date).
(b) Sentry shall have performed in all material respects each obligation and
agreement and shall have complied in all material respects with each covenant to
be performed and complied with by it hereunder at or prior to the Closing Date.
(c) Sentry shall have furnished the Stockholder with a certificate dated the
Closing Date signed on its behalf by the Chairman, President or any Vice
President to the effect that the conditions set forth in Sections 6.2(a) and (b)
have been satisfied.
(d) There shall be no preliminary or permanent injunction, restraining order
or decree of any nature or any statute, rule or regulation that is in effect
that restrains or prohibits or imposes substantial penalties or damages on the
Stockholder with respect to (or any other materially adverse relief or remedy in
connection with) the consummation of the transactions contemplated hereby, and
there shall be no Action pending or threatened seeking such relief.
(e) All Sentry Required Consents shall have been obtained, made or filed
without any significant conditions or restrictions imposed.
(f) All corporate proceedings of Sentry that are required in connection with
the transactions contemplated by this Agreement shall be reasonably satisfactory
in form and substance to the Stockholder and his counsel, and the Stockholder
and his counsel shall have received such evidence of such corporate proceedings,
certified if requested, as may be reasonably requested and is customary in
transactions such as contemplated hereby.
(g) Sentry shall have received USD $2,000,000 from Brascan Technology Fund
under the term sheet between Brascan Technology Fund and Sentry dated February
20, 2004.
6.3 Conditions to Obligations of Sentry
.. The obligations of Sentry to consummate the transactions contemplated hereby
shall be subject to the fulfillment of the following conditions unless waived by
each of Sentry:
(a) Each of the representations and warranties of the Stockholder set forth
in Articles III and IV shall be true and correct in all material respects on the
date hereof and on and as of the Closing Date as though made on and as of
the Closing Date (other than for representations and warranties made as of a
specified date, which need be true and correct only as of the specified date).
(b) The Stockholder shall have performed in all material respects each
obligation and agreement and shall have complied in all material respects with
each covenant to be performed and complied with by him hereunder at or prior to
the Closing Date.
(c) The Stockholder shall have furnished Sentry with a certificate dated the
Closing Date to the effect that the conditions set forth in Sections 6.3(a) and
(b) have been satisfied.
(d) All Company Required Consents shall have been obtained, made or filed
without any significant conditions or restrictions imposed.
(e) There shall be no preliminary or permanent injunction, restraining order
or decree of any nature or any statute, rule or regulation that is in effect
that restrains or prohibits or imposes substantial penalties or damages on
Sentry or a Company, or their respective subsidiaries and affiliates with
respect to (or any other materially adverse relief or remedy in connection
with), the consummation of the transactions contemplated hereby or the
performance of the material obligations of Sentry or a Company under this
Agreement, and there shall be no Action pending or threatened seeking such
relief.
(f) The Stockholder shall have delivered to Sentry an affidavit in form and
substance reasonably satisfactory to Sentry duly executed and acknowledged,
certifying facts that would exempt the transactions contemplated hereby from the
provisions of the Foreign Investment in Real Property Tax Act.
(g) All proceedings of the Stockholder and the Companies that are required
in connection with the transactions contemplated by this Agreement shall be
reasonably satisfactory in form and substance to Sentry and its counsel, and
Sentry and its counsel shall have received such evidence of any such corporate
proceedings, certified if requested, as may be reasonably requested and is
customary in transactions such as this one.
(h) The Stockholder shall have delivered to Sentry an executed copy of IRS
Form W-9, Request for Taxpayer Identification Number and Certification.
(i) Sentry shall have received USD $2,000,000 from Brascan
Technology Fund under the term sheet between Brascan Technology Fund and Sentry
dated February 20, 2004.
(j) The Company shall have sufficient cash to pay its accounts
payable in the ordinary course of business. In that connection, the Stockholder
will deliver a balance sheet of the Company as of March 31, 2004 prepared in
accordance with generally accepted accounting principles consistently applied
that will reflect the accounts payable of the Business on that date.
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination
.. This Agreement may be terminated at any time prior to the Closing Date:
(a) By mutual consent of Sentry and the Stockholder;
(b) By Sentry or the Stockholder if any permanent injunction or other order
of a court or other competent Governmental Authority preventing the consummation
of the Sale or the transactions contemplated hereby shall have become final
and nonappealable;
(c) By Sentry if there has been a breach by the Stockholder of any
representation, warranty, covenant or other agreement which would prevent or
materially delay the consummation of the transaction contemplated hereby, and
such breach has not been cured, or the Stockholder has not commenced reasonable
efforts to cure such breach, within 30 days after written notice of such breach
is given by Sentry.
(d) By the Stockholder if there has been a breach by Sentry of any
representation, warranty, covenant or other agreement which would prevent or
materially delay the consummation of the transaction contemplated hereby, and
such breach has not been cured, or Sentry has not commenced reasonable efforts
to cure such breach, within 30 days after written notice of such breach is given
by Sentry.
7.2 Effect of Termination
.. In the event of the termination of this Agreement pursuant to Section 7.1,
this Agreement shall become void and have no effect, without any liability on
the part of any party or its directors, officers or stockholders.
Notwithstanding the foregoing, nothing in this Section 7.2 shall relieve any
party hereto of liability for any willful and material breach of any covenant or
agreement contained in this Agreement, and if it shall be judicially determined
that termination of this Agreement was caused by an intentional breach of any
covenant or agreement contained in this Agreement, then, in addition to other
remedies at law or equity for breach of this Agreement, the party so found to
have intentionally breached any covenant or agreement contained in this
Agreement shall indemnify and hold harmless the other party for its costs, fees
and expenses of its counsel, accountants, financial advisors, consultants and
other experts and advisors as well as fees and expense incident to negotiation,
preparation and execution of this Agreement and related documentation and
consents.
7.3 Amendment
.. This Agreement may not be amended except by an instrument in writing signed
on behalf of each of the parties hereto.
7.4 Extension; Waiver
.. At any time prior to the Closing Date, Sentry (with respect to the
Stockholder) and the Stockholder (with respect to Sentry) may, to the extent
legally allowed, (a) extend the time for the performance of any of the
obligations or other acts of such party, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party.
ARTICLE VIII
MISCELLANEOUS
8.1 Indemnification
(a) The Stockholder shall indemnify and hold harmless Sentry and its
subsidiaries and other affiliates, officers, directors, stockholders, employees
and agents (collectively, the "SENTRY INDEMNIFIED PARTIES"), from and against
all losses, costs, claims, damages, liabilities, expenses (including reasonable
attorneys' and accountant's fees, costs of suit and costs of appeal), fines and
penalties ("LOSSES") incurred by any Sentry Indemnified Party, directly or
indirectly, arising out of or relating to any of the following:
(i) the inaccuracy or falsity of any representation or warranty contained
herein made by the Stockholder or the breach by the Stockholder of any of their
covenants or agreements contained herein; and
(ii) actions or omissions of the Stockholder prior to the Closing Date.
(b) Sentry shall indemnify and hold harmless the Stockholder and other
affiliates, officers, directors, stockholders, employees and agents
(collectively, the "STOCKHOLDER INDEMNIFIED PARTIES"), from and against all
Losses incurred by any Stockholder Indemnified Party, directly or indirectly,
arising out of or relating to any of the following:
(i) the inaccuracy or falsity of any representation or warranty contained
herein made by Sentry or the breach by Sentry of any of its covenants or
agreements contained herein;
(ii) actions or omissions of Sentry after the Closing Date.
(c) In the event that any claim or demand for which an indemnifying party
("INDEMNITOR") would be liable to an indemnified party ("INDEMNITEE") hereunder
is asserted against or sought to be collected from an Indemnitee by a third
party, the Indemnitee shall promptly notify Indemnitor of such claim or demand,
specifying the nature of such claim or demand and the amount or the estimated
amount thereof to the extent then feasible (which estimate shall not be
conclusive of the final amount of such claim and demand) (the "CLAIM NOTICE").
The Indemnitor shall then have ten (10) days from the personal delivery or
mailing of the Claim Notice (the "NOTICE PERIOD") to notify the Indemnitee (i)
whether or not it disputes its liability to the Indemnitee hereunder with
respect to such claim or demand and (ii) notwithstanding any such dispute,
whether or not it desires, at its sole cost and expense, to defend the
Indemnitee against such claim or demand.
(i) If the Indemnitor disputes its liability with respect to such claim or
demand or the amount thereof (whether or not the Indemnitor desires to defend
the Indemnitee against such claim or demand as provided in paragraphs (ii) and
(iii) below), such claim or demand shall not be settled without the prior
written consent of the Indemnitee.
(ii) In the event that the Indemnitor notifies the Indemnitee within the
Notice Period that it desires to defend the Indemnitee against such claim or
demand, then, except as hereinafter provided, the Indemnitor shall have the
right to defend the Indemnitee by appropriate proceedings, which proceedings
shall be promptly settled or prosecuted by it to a final conclusion in such a
manner as to avoid any risk of the Indemnitee becoming subject to liability for
any other matter; provided, however, the Indemnitor shall not, without the prior
written consent of the Indemnitee, consent to the entry of any judgment against
the Indemnitee or enter into any settlement or compromise which does not
include, as an unconditional term thereof, the giving by the claimant or
plaintiff to the Indemnitee of a release, in form and substance reasonably
satisfactory to the Indemnitee, from all liability in respect of such claim or
litigation. If any Indemnitee desires to participate in, but not control, any
such defense or settlement, it may do so at its sole cost and expense. If, in
the reasonable opinion of the Indemnitee, any such claim or demand or the
litigation or resolution of any such claim or demand involves an issue or matter
which could have a materially adverse effect on the business, operations,
assets, properties or prospects of the Indemnitee, including without limitation
the administration of the tax returns and responsibilities under the tax laws of
any Indemnitee, then the Indemnitee shall have the right to control the defense
or settlement of any such claim or demand, and its reasonable costs and expenses
shall be included as part of the indemnification obligation of Indemnitor
hereunder; provided, however, that the Indemnitee shall not settle any such
claim or demand without the prior written consent of the Indemnitor, which
consent shall not be unreasonably withheld. If the Indemnitee should elect to
exercise such right, the Indemnitor shall have the right to participate in, but
not control, the defense or settlement of such claim or demand, at their sole
cost and expense.
(iii) If the Indemnitor elects not to defend the Indemnitee against such
claim or demand, whether by not giving the Indemnitee timely notice as provided
above or otherwise, then the amount of any such claim or demand, or if the same
by defended by the Indemnitor or by the Indemnitee (but no Indemnitee shall have
any obligation to defend any such claim or demand) then that portion thereof as
to which such defense is unsuccessful, in each case shall be conclusively deemed
to be a liability of the Indemnitor hereunder, unless the Indemnitor shall have
disputed its liability to the Indemnitee hereunder, as provided in paragraph (i)
above.
(iv) In the event an Indemnitee should have a claim against the Indemnitor
hereunder that does not involve a claim or demand being asserted against or
sought to be collected from it by a third party, the Indemnitee shall promptly
send a Claim Notice with respect to such claim to the Indemnitor. If the
Indemnitor does not notify the Indemnitee within the Notice Period that it
disputes such claim, the amount of such claim shall be conclusively deemed a
liability of the Indemnitor hereunder.
(d) Any payment made to or on behalf of a party pursuant to this Section 8.1
shall be treated by Sentry and the Stockholder for federal income tax
purposes as an adjustment to the Consideration, and Sentry and the Stockholder
agrees, not to take any position inconsistent therewith, unless a final
determination (which shall include the execution of a Form 870-AD or successor
form) with respect to the Indemnified Parties causes any such payment not to
constitute an adjustment to the Consideration for federal income tax purposes.
8.2 Survival of Representations and Warranties
.. All representations and warranties made by the parties in this Agreement, or
in connection with the negotiation, execution and performance of this Agreement
shall survive the Closing. Notwithstanding any investigation or audit conducted
before or after the Closing Date or the decision of the parties to complete the
Closing, each party shall be entitled to rely upon the representations and
warranties set forth herein, and none of such representations and warranties
shall be deemed waived or modified in any respect by reason of any such
investigation.
8.3 Limitations on Indemnification
.. Notwithstanding any other provision in this Agreement to the contrary, a
party shall not be liable to indemnify the other party until the aggregate of
all claims for which indemnity is required to be made hereunder shall exceed
$25,000.
8.4 Notices
.. All notices and other communications hereunder shall be in writing and shall
be deemed given if delivered personally, telecopied (which is confirmed) or
dispatched by a nationally recognized one night courier service to the parties
at the following addresses (or at such other address for a party as shall be
specified by like notice):
(a) if to Sentry:
Sentry Technology Corporation
1881 Lakeland Avenue
Ronkonkoma, New York 11779
Attention: Chief Operating Officer
Copy to:
Mark Haltzman, Esquire
One Belmont Plaza
Suite 300
Bala Cynwyd, Pennsylvania 19004
(b) if to the Stockholder:
Saburah Investments Inc.
37 Voyager Court North
Toronto, Ontario M9W 4Y2
Attention: President
Copy to:
Beard Winter LLP
130 Adelaide St. W.
Toronto, Ontario M5H 2K4
Attention: Erik J. Fish, Esquire
8.5 Interpretation
When a reference is made in this Agreement to an Article or Section, such
reference shall be to an Article or Section of this Agreement unless otherwise
indicated. The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
8.6 Counterparts
This Agreement may be executed in counterparts, which together shall
constitute one and the same Agreement. The parties may execute more than one
copy of the Agreement, each of which shall constitute an original each of which
alone and all of which together shall constitute one and the same instrument.
This Agreement may be transmitted by facsimile and it is the intent of the
parties for the facsimile (or a photocopy thereof) of any autograph printed by a
receiving facsimile machine to be an original signature and for the facsimile
(or a photocopy thereof) and any complete photocopy of this Agreement to be
deemed an original counterpart.
8.7 Entire Agreement
This Agreement (including the documents and the instruments referred to
herein), constitute the entire agreement among the parties and supersede all
prior agreements and understandings, agreements or representations by or among
the parties, written and oral, with respect to the subject matter hereof and
thereof.
8.8 Third Party Beneficiaries
Nothing in this Agreement, express or implied, is intended or shall be
construed to create any third party beneficiaries.
8.9 Governing Law; Resolution of Disputes
This Agreement shall be governed and construed in accordance with the laws of
the State of Delaware without regard to principles of conflicts of law. Any
dispute or controversy between the parties relating to or arising out of this
Agreement or any amendment or modification hereof shall be determined by
arbitration in New York, New York by and pursuant to the rules then prevailing
of the American Arbitration Association, other than claims for injunctive
relief. The arbitration award shall be final and binding upon the parties and
judgment may be entered thereon by any court of competent jurisdiction. The
service of any notice, process, motion or other document in connection with any
arbitration under this Agreement or the enforcement of any arbitration award
hereunder may be effectuated either by personal service upon a party or by
certified mail duly addressed to him or to his executors, administrators,
personal representatives, next of kin, successors or assigns, at the last known
address or addresses of such party or parties
8.10 Remedies at Law
The Stockholder acknowledges and agrees that (a) the acquisition by Sentry of
the goodwill of the Companies and the Confidential Information is a material
inducement to Sentry to acquire the Companies and to enter into this Agreement,
(b) the confidentiality, non-competition and non-solicitation covenants
contained herein are necessary and reasonable for the protection of such
goodwill and the Confidential Information, and (c) Sentry would not have been
willing to enter into either this Agreement if said confidentiality,
non-competition and non-solicitation covenants were not part of this Agreement.
Accordingly, the Stockholder acknowledges and agrees that the remedies available
to Sentry as described below and in Section 8.11 hereof are reasonable and
appropriate in light of the foregoing. The Stockholder agrees that in the event
of the breach of this Agreement by it, Sentry shall have all of the following
remedies at law: (i) offset any damages incurred by Sentry against any sums owed
to the Stockholder under this Agreement; (ii) bring an action for damages and/or
(iii) seek any other remedy available at law.
8.11 Equitable Remedies
The Stockholder acknowledges and agrees that the rights of Sentry under this
Agreement are of a specialized and unique character and that immediate and
irreparable damage will result to Sentry if the Stockholder fails or refuses to
perform his obligations under this Agreement or otherwise breaches this
Agreement, and notwithstanding an election by Sentry to seek a remedy at law as
provided in Section 8.10 above, Sentry may, in addition to the remedies at law
described above, seek equitable relief, including, without limitation, temporary
restraining orders and temporary and permanent injunctions, and specific
performance, and such equitable relief may be sought without the necessity of
posting a bond or other security.
8.12 Assignment
Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether by operation
of law or otherwise) without the prior written consent of the other parties.
Subject to the preceding sentence, this Agreement shall be binding upon, inure
to the benefit of and be enforceable by the parties and their respective
successors and assigns.
8.13 Expenses
Subject to the provisions of Section 7.2, Sentry shall pay and be responsible
for its own costs and expenses associated with the transactions contemplated
hereby and the Stockholder shall pay and be responsible for its costs and the
costs of the Companies associated with the transactions contemplated hereby,
including, any and all costs and expenses associated with obtaining, making or
filing the Company Required Consents.
8.14 Severability
In the event that this Agreement, or any of its provisions, or the
performance of any provision, is found to be illegal or unenforceable under
Applicable Law now or hereafter in effect, the parties shall be excused from
performance of such portions of this Agreement as shall be found to be illegal
or unenforceable under Applicable Law without affecting the validity of the
remaining provisions of this Agreement; provided, that (a) the remaining
provisions of this Agreement shall in their totality constitute a commercially
reasonable agreement, and (b) should any method of termination of this Agreement
or a portion thereof be found to be illegal or unenforceable, such method shall
be reformed to comply with the requirements of Applicable Law so as, to the
greatest extent possible, to allow termination by that method. Nothing herein
shall be construed as a waiver of any party's right to challenge the validity of
such law.
IN WITNESS WHEREOF, Sentry and the Stockholder have signed this Agreement as of
the date first written above.
SENTRY TECHNOLOGY CORPORATION
By: /s/ Peter J. Mundy
--------------------------------
SABURAH INVESTMENTS INC.
By: /s/ Peter L. Murdoch
--------------------------------
EXHIBIT 4.1
UNLESS PERMITTED UNDER SECURITIES LEGISLATION, THE HOLDER OF THIS SECURITY SHALL
NOT TRADE THIS SECURITY BEFORE THE DATE THAT IS 4 MONTHS AND A DAY AFTER THE
LATER OF (I) APRIL 30, 2004, AND (II) THE DATE THE ISSUER BECOMES A REPORTING
ISSUER IN ANY PROVINCE OR TERRITORY.
SENTRY TECHNOLOGY CORPORATION
CONVERTIBLE DEBENTURE
Sentry Technology Corporation (the "CORPORATION"), for value received,
hereby acknowledges itself indebted to and promises to pay Brascan Technology
Fund Inc. (the "HOLDER") in its capacity as general partner of, and on behalf
of, Brascan Technology Fund, a limited partnership formed under the laws of the
Province of Ontario, on April 30, 2008 or on such earlier date as the principal
hereof becomes payable in accordance with the provisions of this Debenture, on
presentation and surrender of this Debenture, the principal sum of $2,000,000 in
lawful money of the United States of America, at the registered office of the
Corporation in the City of Ronkonkoma, State of New York, United States,
subject to the right of the Holder in certain circumstances to elect to receive
Common Shares (as such term is defined in the Terms and Conditions) of the
Corporation in lieu of receiving such sum, as provided in the terms and
conditions attached hereto as Schedule "A" and forming part hereof (the "TERMS
AND CONDITIONS") and to pay interest on such principal amount as provided in the
Terms and Conditions. The Terms and Conditions are hereby incorporated by
reference herein.
The Corporation shall, prior to each Interest Payment Date (as such term is
defined in the Terms and Conditions) mail, or cause to be mailed, a cheque for
such interest to the address of the Holder. Notwithstanding the foregoing,
interest payable at maturity or on redemption may, at the option of the
Corporation, be paid on presentation and surrender of this Debenture for
payment.
This Debenture may only be transferred upon compliance with the conditions
prescribed in the Terms and Conditions on the register kept at the principal
office of the Corporation in the City of Ronkonkoma and upon compliance with
such reasonable requirements as the Corporation may prescribe (including
evidence satisfactory to the Corporation that the transfer complies with all
applicable laws).
This Debenture is convertible, at the option of the Holder into Common
Shares of the Corporation, upon and subject to the provisions and conditions
contained in the said Terms and Conditions. THE SCHEDULES AND THE EXHIBITS
ATTACHED HERETO ARE INCORPORATED IN THIS DEBENTURE BY REFERENCE AND ARE DEEMED
TO BE AN INTEGRAL PART HEREOF.
IN WITNESS WHEREOF the Corporation has caused this Debenture to be executed
under the hand of its duly authorized officer as of the 30th day of April, 2004.
SENTRY TECHNOLOGY CORPORATION
By: /s/ Peter L. Murdoch
-----------------------------------
Authorized Signing Officer
SCHEDULE "A"
TERMS AND CONDITIONS APPLICABLE TO THE
CONVERTIBLE DEBENTURE
DATED AS OF APRIL 30, 2004 ISSUED BY
SENTRY TECHNOLOGY CORPORATION
ARTICLE 1
INTERPRETATION
1.1 DEFINED TERMS
In addition to the terms parenthetically defined herein, in this Debenture
the following terms shall have the following meanings respectively:
"BUSINESS DAY" means any day, other than Saturday, Sunday or any statutory
holiday in the City of Ronkonkoma;
"CAPITAL REORGANIZATION" has the meaning attributed to such term in subsection
4.3(4);
"CHARGE" means any mortgage, charge, pledge, hypothecation, lien (statutory or
otherwise), assignment, financial lease, title retention agreement or
arrangement, security interest or other encumbrance of any nature however
arising, or any other security agreement or arrangement creating in favour of
any creditor a right in respect of a particular property that is prior to the
right of any other creditor in respect of such property;
"COLLATERAL" means the undertaking of the Corporation and all real and personal
property and assets now or hereafter acquired by the Corporation, wheresoever
located, including the property and assets of the Corporation referred to in
Section 6.1; provided always that the term "Collateral" where used herein shall
not include any consumer goods of the Corporation. Any reference to
"Collateral" herein shall be deemed to be a reference to the Collateral or any
part thereof;
"COLLATERAL OF SUBSIDIARIES" means the undertaking, property and assets of Knogo
North America Inc. and Knogo Caribe, Inc. subject to security interests under
the Security Agreements;
"COMMON SHARE REORGANIZATION" has the meaning attributed to such term in
subsection 4.3(1);
"COMMON SHARES" means the common shares in the capital of the Corporation, as
such shares exist as at the Date of Issue; provided that, in the event of a
subdivision, redivision, reduction, combination or consolidation thereof, or
successive such subdivisions, redivisions, reductions, combinations or
consolidations, then, subject to adjustments, if any, having been made in
accordance with Section 4.3, "COMMON SHARES" shall thereafter mean the shares
resulting from such subdivision, redivision, reduction, combination or
consolidation;
"CONSTATING DOCUMENTS" means the Articles of Incorporation and the By-laws of
the Corporation, and any amendments thereto or replacements thereof;
"CONVERSION PRICE" has the meaning attributed to such term in subsection 4.1(1);
"CONVERSION PRICE CEILING" means $0.12 per Common Share, subject to adjustment
in accordance with Sections 4.3 and 4.12 hereof;
"CONVERSION PRICE FLOOR" means $0.03 per Common Share, subject to adjustment in
accordance with Section 4.3 hereof;
"CONVERTIBLE SECURITIES" shall mean all securities of a corporation which,
directly or indirectly, are convertible into or are exercisable or exchangeable
for common stock of a corporation, including without limitation, stock
appreciation rights, options, warrants, convertible debt instruments,
convertible preferred stock, and other rights to directly or indirectly
purchase, subscribe for or acquire shares of common stock, whether or not such
Convertible Securities have then vested or are then exercisable or exchangeable;
"CURRENT MARKET PRICE" of the Common Shares at any date means the price per
share equal to the weighted average price at which the Common Shares have traded
on the Nasdaq Over-the-Counter Bulletin Board ("OTCBB") or, if the Common Shares
are not then listed on the Nasdaq OTCBB, on such other U.S. or Canadian stock
exchange as may be selected by the directors of the Corporation for such purpose
or, if the Common Shares are not then listed on any U.S. or Canadian stock
exchange, in such other over-the-counter market, during the period of any twenty
consecutive trading days ending immediately before such date; provided that the
weighted average price will be determined by dividing the aggregate sale price
of all Common Shares sold on the said exchange or market, as the case may be,
during the said twenty consecutive trading days by the total number of Common
Shares so sold; and provided further that if the Common Shares are not then
listed on any U.S. or Canadian stock exchange or traded in the over-the counter
market, then the Current Market Price will be determined by such firm of
independent chartered accountants as may be selected by the directors;
"DATE OF ISSUE" means the date hereof;
"DATE OF CONVERSION" has the meaning attributed to such term in subsection
4.2(2);
"DEBENTURE" means this convertible debenture of the Corporation due on April 30,
2008;
"DEFAULT INTEREST RATE" means 18% per annum;
"EVENT OF DEFAULT" has the meaning attributed to such term in Section 8.1;
"EXCLUDED ISSUANCES" means Common Shares issued pursuant to:
(i) the conversion rights of the holders of the Debenture; or
(ii) any options granted and outstanding under the Incentive Compensation
Plan at the date hereof and any options hereafter granted under the Incentive
Compensation Plan so long as the option strike price or share issuance price, as
the case may be, of options granted after the date hereof is not less than the
Conversion Price at the date of grant (whether or not the Debenture is then
convertible);
"FULLY-DILUTED BASIS" shall mean, with respect to measuring a number of shares
of capital stock of a corporation or a percentage of shares of capital stock of
a corporation, measuring based on all of the common stock then outstanding,
assuming the conversion into common stock of all Convertible Securities then
outstanding;
"GAAP" means the accounting principles which are recognized as being generally
accepted in United States from time to time as determined by the Institute of
Certified Public Accountants (as revised from time to time);
"GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" means generally accepted accounting
principles in the United States from time to time;
"INCENTIVE COMPENSATION PLAN" means a duly approved incentive compensation plan,
employee stock option plan, share purchase plan or profit sharing plan or
similar arrangement with or for directors, officers, senior management,
employees, consultants or shareholders of the Corporation or any of its
subsidiaries, as may, from time to time, be adopted by the board of directors of
the Corporation pursuant to which no more than 15% of the currently outstanding
Common Shares may be reserved for issuance;
"INCLUDING" means including without limitation;
"INTEREST PAYMENT DATE" means the day that is the last day of each month after
the Date of Issue (pro rated for such lesser period) up to April 30, 2008, being
the Maturity Date;
"INTEREST PERIOD" means the period from but excluding the Date of Issue to and
including April 30, 2004 and thereafter the period from but excluding one
Interest Payment Date to and including the next Interest Payment Date;
"INTEREST RATE" means 8.0% per annum;
"LIQUIDITY EVENT" means either of the following events:
(i) the Corporation completing a bona-fide public offering of common shares
under a prospectus filed with securities regulatory authorities in Canada, or
under a registration statement filed with securities regulatory authorities in
the United States, raising aggregate net proceeds to the Corporation of at least
$20,000,000 at a minimum share price of $0.50 per Common Share, subject to
adjustment from time to time for any subdivision, consolidation or stock
dividend which occurs after the date of this Agreement and such Common Shares
are listed on a Senior Stock Exchange and such actions received the approval of
the Holder; or
(ii) the Corporation entering into any merger, amalgamation, plan of
arrangement, business combination or any other transaction resulting in the sale
of all or substantially all of the assets of the Corporation, where the
shareholders of the Corporation prior to the transaction do not own a majority
of the outstanding voting shares of the surviving corporation;
"OBLIGATIONS" means the aggregate of all indebtedness, obligations and
liabilities, direct or indirect, absolute or contingent, matured or not, of the
Corporation to the Holder wheresoever and howsoever incurred and whether
incurred prior to, at the time of, or subsequent to the execution hereof,
whether incurred alone or with another or others, including extensions and
renewals, and including all indebtedness, obligations and liabilities of the
Corporation to the Holder hereunder or under any present or future guarantee by
the Corporation of the payment or performance or both of the debts, obligations
or liabilities of any third party to the Holder;
"OPERATING LENDER" means any institutional lender that from time to time
provides the Corporation and/or any of its subsidiaries with a secured operating
line facility;
"OPERATING LINE SECURITY" means Charges in favour of an Operating Lender which
only secure operating line indebtedness not exceeding $4,300,000 in principal
plus interest and protective disbursements, provided that the Corporation and
its subsidiaries as a group may only have Operating Line Security in favour of
up to two Operating Lenders at any particular time;
"OPTIONAL CONVERSION" has the meaning attributed to such term in subsection
4.1(2);
"PERSON" means any individual, partnership, limited partnership, joint venture,
syndicate, sole proprietorship, company or corporation with or without share
capital, unincorporated association, trust, trustee, executor, administrator or
other legal personal representative, government or governmental authority or
entity, however designated or constituted;
"PERMITTED CHARGE" means any Charges in favour of the Operating Lender, any
Operating Line Security, purchase money security interests in goods acquired for
the purpose of carrying on the Corporation's business, and Charges consented to
in writing by the Holder;
"PRIOR CLAIMS" means all claims, including wages and monies due to any
governmental authority, statutory claims or claims under Permitted Charges and
any other claims which by operation of law or statute rank in priority to this
Debenture;
"PREPAYMENT OPTION" has the meaning attributed to such term in subsection
3.2(1);
"RIGHTS OFFERING" and "RIGHTS PERIOD" have the respective meanings attributed to
such terms in subsection 4.3(2);
"SECURITY INTEREST" means, collectively, the mortgage, charge, pledge,
assignment and transfer of, and the security interest in, the Collateral granted
to the Holder by the Corporation pursuant to Section 6.1;
"SENIOR STOCK EXCHANGE" shall include the Toronto Stock Exchange, NASDAQ, New
York Stock Exchange, London Stock Exchange and such other exchange(s) as are
designated by the board of directors of the Corporation from time to time;
"SUBSCRIPTION AGREEMENT" means the subscription agreement of even date herewith
between the Corporation and the Holder providing for the purchase of the
Debenture;
"TIME OF EXPIRY" means 5:00 p.m. (Toronto time) on the Maturity Date;
"TRANSFER FORM" means the form of transfer annexed as Exhibit 1 hereto;
"UCC" means the Uniform Commercial Code as adopted in the State of New York, as
amended from time to time; and
"U.S. SECURITIES ACT" has the meaning attributed to such term in subsection
4.1(2).
1.2 STATUTORY REFERENCES; TERMS DEFINED BY THE UCC
Any reference in this Debenture to a statute shall be deemed to be a reference
to such statute as amended, re-enacted or replaced from time to time. Unless
there is something in the context or subject matter inconsistent therewith,
words and phrases not otherwise herein defined that are defined by the UCC
shall have the meanings ascribed thereto respectively by the UCC .
1.3 GENDER AND NUMBER
Unless the context otherwise requires, words importing the singular include the
plural and vice-versa and words importing gender include all genders.
1.4 MONETARY REFERENCES
Any reference in this Debenture to "Dollars", "dollars" or the symbol "$" shall
be deemed to be a reference to lawful money of the United States of America.
1.5 DAY NOT A BUSINESS DAY
In the event that any day on which any action is required to be taken hereunder
is not a Business Day, then such action shall be required to be taken on the
requisite time on the first Business Day thereafter.
1.6 INVALIDITY OF PROVISIONS
Each of the provisions contained in this Debenture is distinct and severable and
a declaration of invalidity or unenforceability of any such provision by a court
of competent jurisdiction shall not affect the validity or enforceability of any
other provision hereof or thereof.
1.7 GOVERNING LAW
This Debenture shall be governed by and construed in accordance with the UCC and
the other laws of the State of New York and the United States.
1.8 ENUREMENT
Subject to the restrictions on, and requirements for, transfer prescribed
herein, the rights and obligations of the Corporation and the Holder shall be
binding upon and shall enure to the benefit of their respective successors,
heirs, executors, administrators and permitted transferees and assigns.
ARTICLE 2
THE DEBENTURES
2.1 TERMS OF THE DEBENTURE
The Debenture shall bear interest at the Interest Rate from the Date of Issue
(or, if issued after the Date of Issue, from the actual date of issuance
thereof) to the Maturity Date and thereafter, at the Default Interest Rate.
Such interest shall be payable on each Interest Payment Date (as well after as
before default), except that interest for the first 12 months of the term will
accrue only and will not be payable monthly, and upon the expiration of such 12
month period an amount equal to the accrued interest will be payable hereunder.
All payments of principal, interest, fees and other amounts to be made pursuant
to the Debenture shall be made free and clear of and without deduction for any
and all present and future taxes, withholdings, levies, duties, any governmental
charges and all liabilities with respect thereto, and without setoff,
withholding, deduction or counterclaim of any kind whatsoever. If, with regard
to any payment to be made by the Corporation to the Holder pursuant to the
Debenture any deduction for any and all present and future taxes, withholdings,
levies, duties, governmental charges or any liability with respect thereto is
required by law ("Withholding Taxes"), the Corporation shall pay the Withholding
Taxes to the applicable Governmental Body and pay to the Holder such additional
amounts as may be necessary in order that the net amount received by the Holder
after such deduction shall equal each payment which would have been received by
the Holder in the absence of such deduction; and the Corporation shall obtain
and deliver to the Holder receipts in respect of the payment of Withholding
Taxes.
2.2 MATURITY DATE
Subject to Section 2.3, the Debenture shall mature and the principal hereof
shall become payable on April 30, 2008.
2.3 REGISTRATION OF DEBENTURE
(1) The Corporation shall cause to be kept by and at the principal office of
the Corporation in the City of Ronkonkoma a register in which shall be entered
the names and latest known addresses of the holder of this Debenture and the
other particulars, as prescribed by law, of the Debenture and of all transfers
of the Debenture. Such registration shall be noted on the Debenture by the
Corporation. No transfer of a Debenture shall be effective as against the
Corporation unless made on the register by the Holder or its executors or
administrators or other legal representatives or its or their attorney duly
appointed by an instrument in form and execution reasonably satisfactory to the
Corporation and upon compliance with such requirements as the Corporation may
reasonably prescribe, and unless such transfer shall have been duly noted on
such Debenture by the Corporation.
2.4 TRANSFER OF DEBENTURE
The rights of the Debenture shall be assignable in whole or in part, from time
to time, by the Holder to any member of the Brascan Group of Companies, but
shall not otherwise be assignable by the Holder without the Corporation's prior
consent, acting reasonably.
2.5 OWNERSHIP OF DEBENTURE
(1) The Holder of the Debenture shall be deemed to be the owner thereof for
all purposes and payment of or on account of the principal of a Debenture shall
be made only to or upon the order in writing of the Holder thereof and such
payment shall be a complete discharge to the Corporation and any paying agent
for the amounts so paid.
(2) The Holder for the time being of any Debenture shall be entitled to the
principal evidenced by such Debenture, free from all equities or rights of
set-off or counterclaim between the Corporation and the original or any
intermediate Holder thereof (except any equities of which the Corporation is
required to take notice by law) and all Persons may act accordingly and a
transferee of a Debenture shall, after the Transfer Form is lodged with the
Corporation and upon compliance with all other conditions contained in such
Debenture or by law or by any policy of any regulatory body, be entitled to be
entered on the register as the owner of such Debenture free from all equities or
rights of set-off or counterclaim between the Corporation and the transferor or
any previous Holder thereof, save in respect of equities of which the
Corporation is required to take notice by statute or by order of a court of
competent jurisdiction.
2.6 EXCHANGE OF DEBENTURE
(1) The Debenture may be exchanged for Debentures in denomination of
$100,000 and integral multiples thereof at the principal offices of the
Corporation in the City of Ronkonkoma.
(2) Except as otherwise provided herein, upon any exchange of the Debenture
for Debentures of any other authorized denominations and upon any transfer of
Debentures, the Corporation or other registrar of Debentures may make a
sufficient charge to reimburse it for any stamp tax, security transfer tax or
other governmental charge required to be paid, and payment of such charge shall
be made by the party requesting such exchange or transfer as a condition
precedent thereto.
2.7 REPLACEMENT OF DEBENTURE
If any Debenture shall become mutilated or be lost, stolen or destroyed and in
the absence of notice that such Debenture has been acquired by a good faith
purchaser within the meaning of the Business Corporations Act (Ontario), the
Corporation will issue and deliver a new Debenture upon surrender and
cancellation of the mutilated Debenture, or, in the case of a lost, stolen or
destroyed Debenture, in lieu of and in substitution for the same. In case of
loss, theft or destruction, the applicant for a new Debenture shall furnish to
the Corporation such evidence of such loss, theft or destruction as shall be
satisfactory to the Corporation in its discretion and shall also furnish an
indemnity in amount and form satisfactory to the Corporation in its sole
discretion. The applicant shall pay all reasonable expenses incidental to the
issuance of any such new Debenture.
ARTICLE 3
PREPAYMENT
3.1 MANDATORY REDEMPTION
Upon the closing of a Liquidity Event, the Holder shall, unless it has exercised
its conversion rights described below with respect to all remaining indebtedness
hereunder, be paid from the proceeds of such Liquidity Event all amounts owing
under this Debenture.
3.2 PREPAYMENT OF OUTSTANDING PRINCIPAL AMOUNT
(1) The Corporation will have a right to prepay all or any portion of the
outstanding principal amount of the Debenture at any time after the 18 month
anniversary of the date hereof (the "PREPAYMENT OPTION"), subject to the
requirement that the Corporation provide the Holder with 30 days prior written
notice of its intention to exercise the Prepayment Option, including the
prepayment amount and intended prepayment date.
(2) All prepayments pursuant to this section shall be made together with
payment of all accrued and unpaid interest on the prepayment amount calculated
to the prepayment date.
ARTICLE 4
CONVERSION
4.1 OPTIONAL CONVERSION
(1) The conversion price for each Common Share to be issued upon the
conversion of the Debenture (the "CONVERSION PRICE") shall be equal to 70% of
the Current Market Price to a maximum of the Conversion Price Ceiling and a
minimum of the Conversion Price Floor, unless such price shall have been
adjusted as provided in this Article, in which case the Conversion Price shall
mean the price as so adjusted and in effect at such time.
(2) Subject to and upon compliance with the provisions of this Article 4,
the Holder of the Debenture shall have the right to convert such Debenture or
any portion of the principal amount thereof which is $100,000 or an integral
multiple of $100,000 into freely tradeable (subject to Rule 144 under the U.S.
Securities Act of 1933 (the "U.S. SECURITIES ACT")) and fully paid and
non-assessable Common Shares at the Conversion Price (an "OPTIONAL CONVERSION")
upon the occurrence of any one of the following:
(a) at the Time of Expiry, provided that the Holder provides not less than
five (5) Business Days advance notice to the Corporation of its intention to do
so;
(b) upon an Event of Default;
(c) upon the exercise by the Corporation of the Prepayment Option, provided
that the Holder notifies the Corporation of its intent to do so within 30 days
of the exercise date of the Prepayment Option by the Corporation;
(d) if the Current Market Price is equal to or exceeds $0.17 per Common
Share;
(e) if the Current Market Price is less than $0.17 per Common Share, with
the approval of the board of directors of the Corporation, not to be
unreasonably withheld; or
(f) upon the entering into of an agreement providing for a Liquidity Event,
provided that the Optional Conversion, if exercised pursuant to this paragraph
(f), will only become effective upon completion of the Liquidity Event.
The Corporation shall take all necessary steps to provide that such Common
Shares are registered with the U.S. Securities and Exchange Commission, or any
other federal agency at the time administering the Securities Act in the United
States of America, in accordance with the terms of the Registration Rights
Agreement dated of even date herewith between the Corporation and the Holder.
4.2 MANNER OF EXERCISE OR DEEMED EXERCISE OF RIGHT TO CONVERT
(1) The Holder of a Debenture wishing to convert such Debenture in whole or
in part into Common Shares as an Optional Conversion shall surrender such
Debenture to the Corporation at its principal office in the City of Ronkonkoma,
together with written notice in form and substance satisfactory to the
Corporation substantially in the form of Exhibit "2" annexed hereto, duly
executed by the Holder, its executors, administrators, other legal
representatives or its or their attorney duly appointed by an instrument in form
and substance satisfactory to the Corporation, exercising its right to convert
such Debenture in accordance with the provisions of this Article. Thereupon
such Holder or, subject to payment of all applicable stamp taxes, security
transfer taxes or other governmental charges and compliance with all reasonable
requirements of the Corporation, its nominee or assignee, shall be entitled to
be entered in the books of the Corporation as at the Date of Conversion (or such
later date as is specified in subsection 4.2(2)) as the registered holder of the
number of Common Shares into which such Debenture is convertible in accordance
with the provisions hereof and, as soon as practicable thereafter, the
Corporation shall deliver to such Holder or, subject as aforesaid, its nominee
or assignee a certificate for such Common Shares and, if applicable, a cheque
for any amount payable under Section 4.5.
(2) For the purposes hereof, a Debenture shall be deemed to be surrendered
for an Optional Conversion on the date (the "DATE OF CONVERSION") which is the
date on which it is so surrendered in accordance with the provisions hereof and,
in the case of a Debenture so surrendered by mail or other means of delivery, on
the date on which it is received by the Corporation at its office specified in
subsection 4.2(1), provided that if a Debenture is surrendered for conversion on
a day on which the register of Common Shares is closed, the Person entitled to
receive Common Shares shall become the holder of record of such Common Shares as
at the date on which such register is next reopened; and
(3) Any part, being $100,000 or an integral multiple thereof, of a Debenture
may be converted as provided herein and all references in this Debenture to
conversion of Debentures shall be deemed to include conversion of such parts.
The Holder of any Debenture of which part only is converted shall, upon the
exercise of its right of conversion, surrender such Debenture to the
Corporation, and the Corporation shall cancel the same and shall forthwith issue
and deliver to the Holder a new Debenture in an aggregate principal amount equal
to the unconverted part of the principal amount of the Debenture so surrendered.
(4) The Common Shares issued upon conversion shall rank only in respect of
dividends declared in favour of holders of record of Common Shares on or after
the Date of Conversion or such later date as such Holder shall become the holder
of record of such Common Shares pursuant to subsection 4.2(2), from which
applicable date they will for all purposes be and be deemed to be issued and
outstanding as fully paid and non-assessable Common Shares.
4.3 ADJUSTMENT OF CONVERSION PRICE
The Conversion Price (and the Conversion Price Ceiling and Conversion Price
Floor) will be subject to adjustment from time to time in the events and in the
manner provided as follows:
(1) If and whenever at any time after the date hereof, and prior to the Time
of Expiry, the Corporation:
(i) issues Common Shares or securities exchangeable for or convertible into
Common Shares to all or substantially all the holders of Common Shares as a
stock dividend or other distribution (other than an issue of Common Shares to
holders of Common Shares pursuant to a right granted to such holders to receive
such Common Shares in lieu of dividends paid in the ordinary course);
(ii) subdivides its outstanding Common Shares into a greater number of
Common Shares; or
(iii) consolidates its outstanding Common Shares into a smaller number of
Common Shares,
other than any Excluded Issuances (any of such events in clauses (i), (ii) and
(iii) of this subsection being called a "COMMON SHARE REORGANIZATION"), then the
Conversion Price (and the Conversion Price Ceiling and Conversion Price Floor)
shall be adjusted effective immediately after the effective date or record date
for the happening of a Common Share Reorganization, as the case may be, at which
the holders of Common Shares are determined for the purpose of the Common Share
Reorganization by multiplying the Conversion Price in effect immediately prior
to such effective date or record date by a fraction, the numerator of which will
be the number of Common Shares outstanding on such effective date or record date
before giving effect to such Common Share Reorganization and the denominator of
which will be the number of Common Shares outstanding immediately after giving
effect to such Common Share Reorganization (including, in the case where
securities exchangeable for or convertible into Common Shares are distributed,
the number of Common Shares that would have been outstanding had all such
securities been exchanged for or converted into Common Shares on such effective
date or record date).
(2) If and whenever at any time after the date hereof, and prior to the Time
of Expiry, the Corporation fixes a record date for the issue of rights, options
or warrants to all or substantially all the holders of Common Shares (the
"RIGHTS") under which such holders are entitled, during a period expiring not
more than forty-five (45) days after the date of such issue (the "RIGHTS
PERIOD"), to subscribe for or purchase Common Shares at a price per share to the
holder (or at an exchange or conversion price per share during the Rights Period
to the holder in the case of securities exchangeable for or convertible into
Common Shares) of less than 95% of the price (the "CURRENT PRICE") which is
equal to the Conversion Price (or the Conversion Price Ceiling or Conversion
Price Floor, as the case may be) immediately preceding such record date (any of
such events being called a "RIGHTS OFFERING"), then the Conversion Price (or the
Conversion Price Ceiling or Conversion Price Floor, as the case may be) shall be
adjusted effective immediately after the end of the Rights Period to a price
determined by multiplying the Conversion Price (or the Conversion Price Ceiling
or Conversion Price Floor, as the case may be) in effect on such record date by
a fraction:
(i) the numerator of which will be the aggregate of:
(1) the number of Common Shares outstanding as of the record date for the
Rights Offering; plus
(2) a number determined by dividing (a) the product of the number of Common
Shares issued or subscribed for during the Rights Period upon the exercise of
the rights, warrants or options under the Rights Offering and the price at which
such Common Shares are offered by (b) the Current Price of the Common Shares as
of the record date for the Rights Offering, and
(ii) the denominator of which will be the number of Common Shares
outstanding after giving effect to the Rights Offering and including the number
of Common Shares actually issued or subscribed for during the Rights Period upon
exercise of the rights, warrants or options under the Rights Offering.
Any Holder who has exercised the right to convert Common Shares in accordance
with this Article 4 during the period beginning immediately after the record
date for a Rights Offering and ending on the last day of the Rights Period for
the Rights Offering will, in addition to the Common Shares to which that Holder
would otherwise be entitled upon such conversion, be entitled to that number of
additional Common Shares equal to the difference between the shares received on
such conversion and the shares that would have been received if the Conversion
Price as adjusted for such Rights Offering pursuant to this subsection had
applied when the Holder exercised the right to convert; provided that the
provisions of Section 4.5 will be applicable to any fractional interest in a
Common Share to which such Holder might otherwise be entitled under the
foregoing provisions of this subsection. Such additional Common Shares will be
deemed to have been issued to the Holder immediately following the end of the
Rights Period and a certificate for such additional Common Shares will be
delivered to such Holder within five Business Days following the end of the
Rights Period. To the extent that any such rights, options or warrants are not
so exercised on or before the expiry thereof, the Conversion Price will be
readjusted to the Conversion Price which would then be in effect based on the
number of Common Shares (or the securities convertible into or exchangeable for
Common Shares) actually delivered on the exercise of such rights, options or
warrants.
(3) If and whenever at any time after the date hereof and prior to the Time
of Expiry, the Corporation fixes a record date for the issue or the distribution
to all or substantially all the holders of Common Shares of (i) securities of
the Corporation, including rights, options or warrants to acquire securities of
the Corporation or any of its property or assets and including evidences of
indebtedness or (ii) any property or other assets, including evidences of
indebtedness, and if such issuance or distribution does not constitute a
dividend paid in the ordinary course, a Common Share Reorganization or a Rights
Offering (any of such non-excluded events being called a "SPECIAL
DISTRIBUTION"), the Conversion Price (or the Conversion Price Ceiling or
Conversion Price Floor, as the case may be) shall be adjusted effective
immediately after such record date to a price determined by multiplying the
Conversion Price (or the Conversion Price Ceiling or Conversion Price Floor, as
the case may be) in effect on such record date by a fraction:
(i) the numerator of which will be:
(1) the product of the number of Common Shares outstanding on such record
date and the Current Price of the Common Shares on such record date; less
(2) the excess, if any, of (a) the fair market value, as determined by
action by the Corporation's board of directors (whose determination will be
conclusive), to the holders of Common Shares of such securities or property or
other assets so issued or distributed in the Special Distribution over (b) the
fair market value of the consideration received therefor by the Corporation from
the holders of Common Shares, as determined by the Corporation's board of
directors (whose determination will be conclusive); and
(ii) the denominator of which will be the product of the number of Common
Shares outstanding on such record date and the Current Price of the Common
Shares on such record date.
To the extent that any Special Distribution is not so made, the Conversion Price
(and the Conversion Price Ceiling or Conversion Price Floor, as the case may be)
will be readjusted effective immediately to the Conversion Price (or the
Conversion Price Ceiling or Conversion Price Floor, as the case may be) which
would then be in effect based upon such securities or property or other assets
as actually distributed.
(4) If and whenever at any time after the date hereof, and prior to the Time
of Expiry, there is a reclassification of the Common Shares at any time
outstanding or change of the Common Shares into other shares or into other
securities or other capital reorganization (other than a Common Share
Reorganization), or a consolidation, amalgamation or merger of the Corporation
with or into any other corporation or other entity (other than a consolidation,
amalgamation or merger which does not result in any reclassification of the
outstanding Common Shares or a change of the Common Shares into other shares),
or a transfer of the undertaking or assets of the Corporation as an entirety or
substantially as an entirety to another corporation or other entity in which the
holders of Common Shares are entitled to receive shares, other securities or
other property (any of such events being called a "CAPITAL REORGANIZATION"), a
Holder who exercises the right to convert its Debenture into Common Shares
pursuant to the Debenture then held after the effective date of such Capital
Reorganization will be entitled to receive, and will accept for the same
aggregate consideration in lieu of the number of Common Shares to which such
Holder was previously entitled upon such conversion, the aggregate number of
shares, other securities or other property which such Holder would have been
entitled to receive as a result of such Capital Reorganization if, on the
effective date thereof, the Holder had been the registered holder of the number
of Common Shares to which such Holder was previously entitled upon conversion
subject to adjustment thereafter in accordance with provisions the same, as
nearly possible, as those contained in this Article 4. The Corporation will
take all steps necessary to ensure that, on a Capital Reorganization, the Holder
will receive the aggregate number of shares, other securities or other property
to which they are entitled as a result of the Capital Reorganization.
Appropriate adjustments will be made as a result of any such Capital
Reorganization in the application of the provisions set forth in this Article 4
with respect to the rights and interests thereafter of the Holder to the end
that the provisions set forth in this Article 4 will thereafter correspondingly
be made applicable as nearly as may reasonably be in relation to any shares,
other securities or other property thereafter deliverable upon the conversion of
any Debenture. Any such adjustment will be made by and set forth in an
instrument supplemental hereto approved by action of the board of directors of
the Corporation and will for all purposes be conclusively deemed to be an
appropriate adjustment.
(5) If the purchase price provided for in any rights, options or warrants
(the "RIGHTS OFFERING PRICE") referred to in subsections 4.3(2) or (3) is
decreased, the Conversion Price (and the Conversion Price Ceiling or Conversion
Price Floor, as the case may be) will forthwith be changed so as to decrease the
Conversion Price (or the Conversion Price Ceiling or Conversion Price Floor, as
the case may be) to the Conversion Price (or the Conversion Price Ceiling or
Conversion Price Floor, as the case may be) that would have been obtained if the
adjustment to the Conversion Price (or the Conversion Price Ceiling or
Conversion Price Floor, as the case may be) made under such subsections, as the
case may be, with respect to such rights, options or warrants had been made on
the basis of the Rights Offering Price as so decreased, provided that the terms
of this subsection will not apply to any decrease in the Rights Offering Price
resulting from terms in any such rights, options or warrants designed to prevent
dilution except to the extent that the resulting decrease in the Conversion
Price (or the Conversion Price Ceiling or Conversion Price Floor, as the case
may be) under this subsection would be greater than the decrease, if any, in the
Conversion Price (or the Conversion Price Ceiling or Conversion Price Floor, as
the case may be) to be made under the terms of this section by virtue of the
occurrence of the event giving rise to such decrease in the Rights Offering
Price.
(6) In any case in which this section requires that an adjustment become
effective immediately after a record date for an event referred to herein, the
Corporation may defer, until the occurrence of such event, issuing to the Holder
of any Debenture converted after such record date and before the occurrence of
such event the additional Common Shares issuable upon such conversion by reason
of the adjustment required by such event; provided, however, that the
Corporation shall deliver to such Holder an appropriate instrument evidencing
such Holder's right to receive such additional Common Shares upon the occurrence
of such event and the right to receive any distributions made on such additional
Common Shares declared in favour of holders of record of Common Shares on and
after the Date of Conversion or such later date on which such Holder would, but
for the provisions of this subsection, have become the holder of record of such
additional Common Shares pursuant to subsection 4.2(1).
4.4 RULES REGARDING CALCULATION OF ADJUSTMENT OF CONVERSION PRICE (OR THE
CONVERSION PRICE CEILING OR CONVERSION PRICE FLOOR)
For the purposes of Section 4.3:
(1) The adjustments provided for in Section 4.3 are cumulative and will be
computed to the nearest one-tenth of one cent and will be made successively
whenever an event referred to therein occurs, subject to the remaining
provisions of this section.
(2) No adjustment in the Conversion Price (or the Conversion Price Ceiling
or Conversion Price Floor, as the case may be) will be required unless such
adjustment would result in a change of at least 1% in the prevailing Conversion
Price (or the Conversion Price Ceiling or Conversion Price Floor, as the case
may be); provided, however, that any adjustments which, except for the
provisions of this subsection would otherwise have been required to be made,
will be carried forward and taken into account in any subsequent adjustment.
(3) No adjustment in the Conversion Price (or the Conversion Price Ceiling
or Conversion Price Floor, as the case may be) will be made in respect of any
event described in Section 4.3 if the Holder is entitled to participate in such
event on the same terms, mutatis mutandis, as if they had converted their
Debentures prior to or on the effective date or record date of such event.
(4) If at any time a dispute arises with respect to adjustments provided for
in Section 4.3, such dispute will be conclusively determined by the
Corporation's auditors, or if they are unable or unwilling to act, by such other
firm of independent chartered accountants as may be selected by action of the
Corporation's board of directors and any such determination will be binding upon
the Corporation, the Holder and shareholders of the Corporation; such auditors
or accountants will be given access to all necessary records of the Corporation.
(5) If the Corporation sets a record date to determine the holders of Common
Shares for the purpose of entitling them to receive any dividend or distribution
or sets a record date to take any other action and thereafter and before the
distribution to such shareholders of any such dividend or distribution or the
taking of any other action, legally abandons its plan to pay or deliver such
dividend or distribution or take such other action, then no adjustment in the
Conversion Price (or the Conversion Price Ceiling or Conversion Price Floor, as
the case may be) shall be made.
(6) In the absence of a resolution of the Corporation's board of directors
fixing a record date for a Special Distribution or Rights Offering, the
Corporation shall be deemed to have fixed as a record date therefor the date on
which the Special Distribution or Rights Offering is effected.
4.5 NO REQUIREMENT TO ISSUE FRACTIONAL SHARES
The Corporation shall not be required to issue fractional Common Shares upon the
conversion of Debentures. If more than one Debenture is surrendered for
conversion at one time by the same Holder, the number of whole Common Shares
issuable upon conversion thereof shall be computed on the basis of the aggregate
principal amount of the Debentures to be converted. If any fractional interest
in a Common Share would, except for the provisions of this section, be
deliverable upon the conversion of any principal amount and, if applicable,
accrued and unpaid interest, of Debentures, the Corporation shall, in lieu of
delivering any certificate of such fractional interest, satisfy such fractional
interest by paying to the Holder of such surrendered Debentures an amount in
lawful money of Canada equal to the value of such fractional interest based upon
the Current Market Price of the Common Shares on the Business Day preceding the
Date of Conversion.
4.6 CORPORATION TO RESERVE SHARES
The Corporation covenants that it will at all times reserve and keep
available out of its authorized Common Shares (if the number thereof is or
becomes limited) solely for the purpose of issue upon conversion of Debentures
as provided herein, and conditionally issue to the Holder(s) who may exercise
their conversion rights hereunder, such number of Common Shares as shall then be
issuable upon the conversion of all outstanding Debentures. All Common Shares
which shall be so issuable shall be duly and validly issued as fully paid and
non-assessable.
4.7 APPLICABLE SECURITIES LEGISLATION
The Corporation will not, directly or indirectly, do any act or thing or,
to the extent that it is able, permit any act or thing to be done, which would
remove or deny any registration or prospectus exemption available under any
applicable securities legislation with respect to the issuance of the Common
Shares upon the exercise of the conversion rights contained in this Debenture.
The Corporation undertakes to use its reasonable commercial efforts to obtain
all necessary regulatory and corporate approvals to deliver the Common Shares
within ten (10) days of receiving such conversion form set out in Exhibit "2".
4.8 CANCELLATION OF CONVERTED DEBENTURES
All Debentures converted in whole or in part shall be forthwith cancelled
by the Corporation and, subject to subsection 4.2(3), no Debentures shall be
issued in substitution therefor.
4.9 CERTIFICATE AS TO ADJUSTMENT
The Corporation shall from time to time, immediately after the occurrence
of any event which requires an adjustment or readjustment as provided in Section
4.3, deliver a certificate to the Holder specifying the nature of the event
requiring the same and the amount of the adjustment or readjustment necessitated
thereby, including the resulting Conversion Price (or the Conversion Price
Ceiling or Conversion Price Floor, as the case may be), and setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based.
4.10 NOTICE OF SPECIAL MATTERS
The Corporation covenants that, so long as any Debentures remain
outstanding, it will give notice to the Holder of its intention to fix a record
date for any event referred to in subsections 4.3(1), (2), (3) or (4) or a cash
dividend (other than a dividend paid in the ordinary course) which may give rise
to an adjustment in the Conversion Price (or the Conversion Price Ceiling or
Conversion Price Floor, as the case may be), and such notice shall specify the
particulars of such event and the record date and the effective date for such
event; provided that the Corporation shall only be required to specify in such
notice such particulars of such event as shall have been fixed and determined on
the date on which such notice is given. Such notice shall be given not less
than 14 days prior to the applicable record date.
4.11 TAXES AND CHARGES ON CONVERSION
The Corporation will from time to time promptly pay or make provision for
the payment of any and all taxes and charges that may be imposed by the laws of
Canada or any province thereof (except income tax or security transfer tax, if
any) with respect to the issuance or delivery to the Holder of Common Shares
pursuant to the terms of the Debentures.
4.12 ANTI-DILUTION PROTECTION
If at any time before this Debenture is converted into Common Shares, the
Corporation issues:
(a) any Common Shares;
(b) securities to purchase or acquire Common Shares; or
(c) securities convertible into or exchangeable for Common Shares,
other than under Excluded Issuances, at or with an issue, exercise, conversion
or exchange price (as the case may be, any such issue being a "DILUTIVE ISSUE")
which is less than the then Conversion Price (regardless of whether the
Debenture is then convertible), then at any such time, a Conversion Price Factor
shall be calculated by the following formula:
Conversion Price Numerator = PN + pn
---------
N + n
Conversion Price Factor = Conversion Price Numerator/P
where: P = the Conversion Price in effect immediately prior to the
- ------ - - ---------------------------------------------------------
Dilutive Issue
- ---------------
N = the number of Common Shares of the Corporation, calculated on a
- - ---------------------------------------------------------------
Fully Diluted Basis, immediately prior to the Dilutive Issue
- --------------------------------------------------------------------
p = the issue, exercise, conversion or exchange price (as the case
- - ---------------------------------------------------------------
may be) of the Dilutive Issue
- ----------------------------------
n = the number of additional Common Shares of the Corporation
- - ---------------------------------------------------------------
issued or issuable under the Dilutive Issue calculated on a Fully Diluted Basis
---------------------------------------------------------------------------
Each time the Holder has the right to and wishes to convert the Debenture in
whole or in part, and one or more Dilutive Issues have occurred since the Date
of Issue, both the Conversion Price and the Conversion Price Ceiling will be
adjusted lower by multiplying each of the Conversion Price and the Conversion
Price Ceiling by each consecutive Conversion Price Factor that was calculated at
each Dilutive Issue.
ARTICLE 5
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE CORPORATION
5.1 GENERAL REPRESENTATIONS
The Corporation represents and warrants to the Holder that:
(a) the execution and delivery of this Debenture by the Corporation, the
performance by the Corporation of its obligations hereunder and the consummation
by the Corporation of the transactions contemplated hereby do not require any
consent, approval or action of any federal, state, provincial, municipal,
regulatory, administrative or governmental authority or court or self-regulatory
body to whose jurisdiction the Corporation is subject or any party to any
agreement, contract, mortgage, note or any other instrument to which the
Corporation is a party or is subject or by which the Corporation may be bound,
except which has been obtained;
(b) the Corporation is a corporation duly organized and validly subsisting
in good standing under the laws of State of Delaware, has the corporate power
and authority to own its property and to carry on its business as now being
conducted by it, is duly qualified as a corporation to do business and is in
good standing in each jurisdiction in which the nature of its business makes
such qualification necessary, has the corporate power and authority to execute,
deliver and perform the terms and provisions of this Debenture, and has taken
all necessary action to authorize the execution, delivery and performance of
this Debenture, and when executed and delivered this Debenture will constitute a
legal, valid and binding obligation of the Corporation;
(c) neither the execution nor delivery of this Debenture nor the
transactions contemplated herein nor compliance with nor performance nor
observance of the terms and provisions of this Debenture will:
(i) contravene any provision of law, statute, rule or regulation to which
the Corporation is subject or any judgment, decree, order or permit applicable
to it;
(ii) contravene the Constating Documents; or
(iii) conflict with or result in a breach of or constitute a default under
any agreement or instrument, written or oral, to which the Corporation is a
party or by which it is bound; and
(d) the assets of the Corporation are located at the address of the
Corporation set forth in Section 9.1 of this Debenture.
5.2 GENERAL COVENANTS
The Corporation hereby covenants with the Holder as follows:
(a) the Corporation will duly and punctually pay or cause to be paid to the
Holder the principal thereof and interest accrued on the Debentures (and, in
case of default, interest on the amount in default) held by the Holder on the
dates, at the places, and in the manner mentioned herein;
(b) the Corporation will furnish to the Holder a copy of the following
financial statements and reports:
(i) monthly, within 45 days of the end of each month, internally-prepared
consolidated financial statements for the Corporation and shall include a
balance sheet and operating results;
(ii) annually, within 90 days of its fiscal year end, the audited financial
statements for the Corporation prepared in accordance with GAAP consistently
applied and shall include a balance sheet, operating results and cash-flow
statement;
(iii) copies of all filings made by the Corporation with any securities
commission, regulatory authority or stock exchange, at the same time as the
filing thereof;
(iv) monthly, within 45 days of the end of each month, covenant compliance
certificates signed by a senior officer of the Corporation; and
(v) such additional financial statements and information as and when
reasonably requested by the Holder;
(c) the Corporation will duly and punctually perform and carry out all of
the acts or things to be done by it, and perform all covenants required to be
performed by it, as provided in this Debenture;
(d) the Corporation shall permit a representative of the Holder to inspect
the Collateral and Collateral of Subsidiaries and the operations of the
Corporation and its subsidiaries and for that purpose to enter to the premises
of the Corporation and its subsidiaries and any other location where the
Collateral and Collateral of Subsidiaries may be situated during reasonable
business hours and upon reasonable notice;
(e) the Corporation shall and shall cause its subsidiaries to:
(i) keep proper books of accounts and records covering all of its business
and affairs on a current basis as well as accurate and complete records
concerning the Collateral and Collateral of Subsidiaries;
(ii) notify the Holder promptly of any loss or damage to or any seizure of
any significant portion of the Collateral or Collateral of Subsidiaries;
(iii) furnish the Holder with such information regarding the Collateral or
Collateral of Subsidiaries and its value and location as the Holder may from
time to time reasonably request;
(iv) permit a representative of the Holder, during reasonable business hours
and upon reasonable notice, to inspect the books of account, records and
documents of the Corporation and its subsidiaries and to make copies, extracts
and summaries therefrom;
(v) permit the Holder or its representative to make inquiries of third
parties for the purpose of verification of any of the foregoing; and
(f) the Corporation shall pay or reimburse the Holder for all costs and
expenses of the Holder, its agents, officers and employees (including legal fees
and disbursements on a solicitor and its own client basis) incurred with respect
to:
(i) the preparation, perfection, execution and filing of this Debenture and
each of the Security Agreements and Share Pledge Agreements (as each term is
defined in the Subscription Agreement) and the filing of financing statement(s)
and financing change statement(s) with respect to this Debenture and each of the
Security Agreements and Share Pledge Agreements (as each term is defined in the
Subscription Agreement);
(ii) any person engaged by the Holder to conduct an inspection under either
of paragraph (d) or (e) above; and
(iii) dealing with other creditors of the Corporation and its subsidiaries
in connection with the establishment, confirmation, amendment or preservation of
the priority of the Holder in the Collateral and Collateral of Subsidiaries,
such costs and expenses to be payable by the Corporation to the Holder on demand
and to be added to and form part of the Obligations;
(g) the Corporation shall promptly notify the Holder in writing of the
details of:
(i) any amendment to its articles, including by virtue of the filing of
articles of merger or amendment, effecting a change in the name of the
Corporation or any of its subsidiaries, provided that notice of any change in
such name shall be given within two days so as to enable the Holder to amend any
UCC filings as necessary;
(ii) any claim, litigation or proceeding before any court, administrative
board or other tribunal which either does or could have a material adverse
effect on the Collateral, Collateral of Subsidiaries or the Corporation and its
subsidiaries;
(iii) any claim, lien, attachment, execution or other process or encumbrance
made or asserted against or with respect to the Collateral or Collateral of
Subsidiaries which either does or could have material adverse effect on the
security interest of the Holder;
(iv) any transfer of the Corporation's interest in the Collateral (or a
subsidiary's interest in the Collateral of Subsidiaries), whether or not
permitted hereunder; or
(v) any material loss of or damage to the Collateral or Collateral of
Subsidiaries, whether or not such loss or damage is covered by insurance;
(h) the Corporation shall keep the Collateral and shall cause its
subsidiaries to keep the Collateral of Subsidiaries insured on a
replacement-cost basis against loss or damage by fire, theft or other usual
perils, in such amounts and with such insurers as the Holder may reasonably
require from time to time. All policies in respect of such insurance will
contain a loss payable clause naming the Holder as a named insured, and the
Corporation assigns all proceeds of insurance on the Collateral to the Holder,
subject to the rights of the Permitted Bank Financing as set forth in Article
7.3. The Corporation will, from time to time at the Holder's request, deliver
such policies (or satisfactory evidence of such policies) to the Holder. If the
Corporation does not obtain or maintain such insurance, the Holder may, but will
have no obligation to do so. The Corporation will immediately reimburse the
Holder for any amount so paid. The Corporation will promptly give the Holder
written notice of any material loss or damage to all or any part of the
Collateral or Collateral of Subsidiaries; and
(i) the Corporation shall at all times reserve and keep available out of its
authorized but unissued Common Shares, such number of its duly authorized Common
Shares as shall be sufficient to give effect to the rights of conversion set
forth in Article 4 of this Debenture. In order to ensure that the Corporation
shall be able to satisfy the foregoing covenant at all times, the Corporation
shall seek the approval of its shareholders to increase the authorized capital
of the Corporation to a number of Common Shares as shall be sufficient for such
purposes, such approval to be sought at such time as is necessary so as to
enable the Holder to be able to exercise its rights of conversion set forth in
Article 4 within the time frames set forth in Article 4, it being acknowledged
and agreed that the Holder shall also have the right, without diminishing any of
the obligations of the Corporation under this paragraph, to require the
Corporation to call a meeting of the Corporation's shareholders for the purposes
of obtaining such approval of shareholders in the event that at any time, the
Current Market Value falls below $0.07 per share, regardless of whether the
Current Market Value thereafter rises.
5.3 SPECIFIC COVENANTS
The Corporation covenants and agrees with the Holder that so long as the
Debenture is outstanding, it shall, and shall cause each of its subsidiaries to,
except as may otherwise be agreed by the Holder in writing:
(a) use all sums advanced to it hereunder from time to time for the
operations and working capital needs of the Corporation and its subsidiaries;
(b) preserve and maintain its corporate existence and will not (i) change
its name or adopt any trade or fictitious name, (ii) merge, combine or
consolidate with or into any other entity, (iii) restructure or reorganize in
another state by merger or otherwise, (iv) reorganize into another form of
business entity, or (v) make any other change which might otherwise make any
financing statement filed hereunder materially misleading or make the location
of filing of any financing statement filed hereunder inappropriate unless, in
each case, it has received the prior written consent of the Holder;
(c) pay all taxes, levies and similar assessments applicable to it when due;
(d) observe and perform all of the terms, covenants and conditions of every
other agreement between the Corporation or any of its subsidiaries and the
Holder;
(e) not change materially the nature of the business from that being
carried on at the date hereof or carry out any material transaction outside the
ordinary course of business;
(f) forthwith pay all Prior Claims when they become due, subject to the
right of the Corporation to continue to negotiate pre-January 2002 vendor
claims;
(g) give the Holder written notice of the occurrence of any Event of Default
immediately upon becoming aware of the same;
(h) not amend the terms of any class of shares of the Corporation, make any
other material change to the Constating Documents or make any material changes
to the capitalization of the Corporation;
(i) not incur or repay any indebtedness in relation to the borrowing of
money other than indebtedness specifically permitted hereunder or in favour of
the Holder, except and excluding:
(i) any indebtedness arising from or relating to the Permitted Charges not
exceeding $4,300,000 (for the Corporation and its susidiaries as a group) in
principal plus interest and protective disbursements,
(ii) any other indebtedness previously disclosed in writing to and approved
in writing by the Holder, and in such case the Corporation shall deliver written
particulars thereof to the Holder as soon as possible after the incurrence or
repayment of any such indebtedness, as aforesaid;
(j) except for Permitted Charges not exceeding $4,300,000 (for the
Corporation and its susidiaries as a group) in principal plus interest and
protective disbursements, not create, assume, incur or permit to exist any
Charge ranking in priority to or pari passu with the security interests created
by this Debenture and/or the Security Agreements and Share Pledge Agreements (as
each term is defined in the Subscription Agreement);
(k) not sell, lease, assign, release, surrender or otherwise dispose of or
part with possession of Collateral or Collateral of Subsidiaries or agree to do
so, except the Corporation may, provided there is not an existing Event of
Default nor an event which might become an Event of Default with the passage of
time or the giving of notice or both, process, sell, lease and otherwise deal
with the Collateral in the ordinary course of business;
(l) not acquire or dispose of any assets other than in the ordinary course
of business;
(m) it shall not incur capital expenditures in excess of $250,000 in the
aggregate (for the Corporation and its subsidiaries combined) for any fiscal
year, unless such capital expenditures are otherwise agreed to in writing by the
Holder;
(n) not guarantee, endorse or otherwise become liable for any obligations of
another party, except in the ordinary course of business;
(o) not make loans to or investments in any third party, except in the
ordinary course of business;
(p) invest the proceeds of the Debentures in cash or cash-equivalent
securities until such proceeds are required for operating or working capital
purposes;
(q) not be liable to any Operating Lender other than in respect of
indebtedness secured by the Operating Line Security without the prior written
approval of the Corporation, except for indebtedness which will be applied first
to repay all amounts owing hereunder in full and then for refinancing the
existing credit facilities;
(r) not enter into any non-arms-length transactions without the Holder's
prior written consent, which may be unreasonably withheld;
(s) not declare or pay any dividend, nor make any other distribution, on any
outstanding shares in its capital stock without the Holder's prior written
consent;
(t) all Common Shares which shall be issued upon an Optional Conversion
shall be issued as fully paid and non-assessable in the capital of the
Corporation;
(u) at all times maintain its corporate existence and will carry on and
conduct its business in a proper and efficient manner; provided, however, that
nothing herein contained shall prevent the Corporation from ceasing to operate
any business or property if, in the opinion of its board of directors, it shall
be advisable and in the best interests of the Corporation to do so;
(v) at all times, so long as any Debentures remain outstanding and may be
converted, keep open the register of Debentures and the transfer registers for
the Common Shares and will not take any action which would have the effect of
preventing the Holder from converting any of the Debentures or receiving any of
the Common Shares upon such conversion;
(w) make all requisite filings, including filings with appropriate
securities commissions and stock exchanges, in connection with the creation and
sale of the Debenture, the conversion thereof and the issue or transfer of the
underlying Common Shares;
(x) generally, it will well and truly perform and carry out all of the acts
or things to be done by it as provided herein;
(y) use its best efforts to comply with, satisfy and fulfil promptly all
prerequisites, conditions and requirements imposed by or arising out of legal,
regulatory and administrative requirements applicable to the Corporation with
respect to the consummation of the transactions contemplated hereby, including
filing or causing to be filed all documents, certificates, opinions, forms or
undertakings required to be filed by the Corporation in connection with the
purchase and sale of the Debenture and the issuance of the Common Shares in
accordance with the terms of the Debenture; and
(z) use its commercially reasonable best efforts to maintain trading of the
Corporation's Common Shares on the NASDAQ Over-the-Counter Bulletin Board or on
a Senior Stock Exchange.
5.4 PERFORMANCE OF COVENANTS BY THE HOLDER
The Holder may, in its sole discretion and upon 15 days prior written
notice to the Corporation, perform any covenant of the Corporation under this
Debenture that the Corporation fails to perform and that the Holder is capable
of performing, including any covenant the performance of which requires the
payment of money; provided that the Holder will not be obligated to perform any
such covenant on behalf of the Corporation. No such performance by the Holder
will require the Holder further to perform the Corporation's covenants nor
relieve the Corporation from any default or operate as a derogation of the
rights and remedies of the Holder under this Debenture. The Corporation agrees
to indemnify and to reimburse the Holder for all costs and expenses incurred by
the Holder in connection with the performance by it of any such covenant, and
all such costs and expenses shall be payable by the Corporation to the Holder on
demand and shall be added and form part of the Obligations.
ARTICLE 6
SECURITY INTEREST
6.1 GRANT OF SECURITY INTEREST, DESCRIPTION OF COLLATERAL
As continuing collateral security for the due and timely payment and
performance by the Corporation of the Obligations, the Corporation hereby
mortgages, charges, pledges, assigns, transfers and sets over to the Holder and
grants to the Holder a general and continuing security interest in the
Collateral, which shall include but not be limited to:
(a) all accounts, payment intangibles, debts, amounts, chattel paper and
electronic chattel paper, contract rights, commercial tort and other claims,
choses in actions and monies which now are, or which may at any time hereafter
become, due or owing to or owned by the Corporation, whether or not earned by
performance, including any and all accounts receivable arising or resulting from
the sale, lease, use, assignment or other disposition of any property described
in this section; all securities, letters of credit, letter of credit rights,
bank accounts, deposit accounts, mortgages, bills, notes, instruments and
documents now held or owned, or which may be hereafter taken, held or owned, by
or on behalf of the Corporation, in respect of any of the foregoing or
otherwise;
(b) all present and future agreements made between the Corporation as
secured party and others which evidence both a monetary obligation and security
interest in or a lease of specific goods;
(c) all books of accounts and other books, invoices, writings, letters,
papers and other documents whether in written, magnetic, electronic or other
form, relating to or being records of the Collateral or by which any of the
Collateral is secured, evidenced, acknowledged or made payable;
(d) all writings now or hereafter owned by the Corporation, each of which
writing purports to be issued by or addressed to a bailee and purports to cover
such goods and chattels in the bailee's possession as are identified or fungible
portions of an identified mass, whether such goods and chattels are inventory or
equipment and which writing is treated in the ordinary course of business as
establishing that the person in possession of such writing is entitled to
receive, hold and dispose of such writing and the goods and chattels it covers,
and further, whether such writing is negotiable in form or otherwise, including
bills of lading and warehouse receipts;
(e) all equipment now owned or hereafter acquired by the Corporation,
including all machinery, fixtures, plant, tools, furniture, chattels, vehicles
of any kind or description including motor vehicles, parts, accessories,
installed in or affixed or attached to any of the foregoing, all purchase
warranties and claims, drawings, specifications, plans and manuals relating
thereto, any equipment specified as equipment of the Corporation and other
tangible personal property which is not inventory;
(f) all present and future bills, notes and cheques (as such terms are
defined pursuant to the New York Uniform Commercial Code) of the Corporation,
and all of the writing and evidence a right to the payment of money and are of a
type that in the ordinary course of business are transferred by delivery and all
letters of credit and advices of credit provided that such letters of credit and
advices of credit state that they must be surrendered upon claiming payment
thereof;
(g) subject to Section 6.5, all general intangibles now owned or hereafter
acquired by the Corporation and which is not accounts, including all contractual
rights, insurance claims, goodwill, licenses, inventions, franchises, designer
rights, know-how processes and formulae, patents, patent applications,
trade-marks, trade names, copyrights and other intellectual or industrial
property of the Corporation, whether registered or not and whether under license
or otherwise, tax refunds and claims and all choses in action of the Corporation
of every kind, whether due or owing at the present time or hereinafter to become
due or owing;
(h) all goods, chattels and inventory of the Corporation including all
merchandise, raw materials, work in process, finished goods, goods held for
sale, resale or lease or that have been leased or that are to be, or have been
furnished under a contract of service, and goods used in or procured for
packing or packaging;
(i) all money now or hereafter owned by the Corporation; and
(j) all present and future securities held by the Corporation, including
investment property, stock, shares, options, rights, warrants, joint venture
interests, interests in limited partnerships, trust units, bonds, debentures and
all other documents which constitute evidence of a share, participation or other
interest of the Corporation in property or in an enterprise or which constitute
evidence of an obligation of the issuer (including an uncertificated security),
together with all accretions thereto, all substitutions therefor, all dividends
and income derived therefrom and all rights and claims in respect thereof.
6.2 PROCEEDS
The Security Interest shall extend to all proceeds (other than consumer
goods) of the Collateral.
6.3 ATTACHMENT
The Corporation hereby acknowledges that value has been given by the Holder
for the granting of the Security Interest, that the Corporation has rights in
the Collateral (other than future and hereafter acquired Collateral), and that
the parties have agreed not to postpone the time for attachment of the Security
Interest.
6.4 EXCEPTION RE CONTRACTUAL RIGHTS, LICENSES, ETC.
To the extent that the Security Interest would constitute a breach or cause
the acceleration of any agreement, lease, contractual right, license, approval,
privilege, franchise or permit to which the Corporation is a party, the Security
Interest shall not attach thereto but the Corporation shall hold its interest
therein in trust for the Holder and shall grant a security interest in such
agreement, contractual right, license or permit to the Holder forthwith upon
obtaining the appropriate consents to the creation of such security interest.
The Corporation agrees to use commercially reasonably efforts to obtain any such
consent from time to time requested by the Holder.
6.5 AMALGAMATION
In the event that the Corporation shall amalgamate or merge with any other
corporation or corporations:
(a) the term "Corporation" wherever used herein shall extend to and include
each of the amalgamating corporations and the amalgamated corporation and the
indebtedness, obligations, and liabilities of each of them shall be included in
the Obligations; and
(b) the Security Interest shall extend to and the Collateral shall include
all the property and assets of each of the amalgamating corporations and the
amalgamated corporation and to any property or assets of the amalgamated
corporation thereafter owned or acquired.
ARTICLE 7
RESTRICTIONS ON DISPOSITIONS OF COLLATERAL
7.1 GENERAL RESTRICTIONS
Except as herein expressly provided, the Corporation shall not, without the
prior written consent of the Holder:
(a) create, allow to be created, assume or suffer to exist any encumbrance
upon the Collateral ranking or purporting to rank in priority to or pari passu
with the Security Interest;
(b) sell, lease, assign or otherwise dispose of or deal with the Collateral;
or
(c) release, surrender or abandon possession of the Collateral.
Save as herein otherwise expressly provided, nothing herein shall be construed
as constituting an express or implied subordination or postponement of the
Security Interest.
7.2 PERMITTED DISPOSITIONS
This Debenture and the Security Interest shall in no way hinder or prevent
the Corporation, without the prior written consent of the Holder, at any time or
from time to time until an Event of Default shall have occurred and the Security
Interest shall become enforceable:
(a) from collecting and, where necessary, enforcing the collection of any
and all amounts due or to become due to the Corporation under any account; or
(b) from selling, leasing, licensing, consigning or otherwise disposing of
inventory or of any obsolete, worn out, damaged or otherwise unsuitable
equipment forming part of the Collateral in the ordinary course of the
Corporation's business and for the purpose of carrying on the same.
7.3 PERMITTED BANK FINANCING
Notwithstanding the provisions of Section 7.1, this Debenture and the
Security Interest shall in no way hinder or prevent the Corporation, without the
prior written consent of the Holder, provided that no Event of Default shall
have then occurred and be continuing, from assigning, pledging, selling, or
granting a security interest, in (whether by way of floating charge or
otherwise) the Collateral to any Operating Lender for the Operating Line
Security and such security interest, whether given before or after the execution
and delivery of this Debenture, shall rank in priority to the Security Interest.
ARTICLE 8
DEFAULT AND ENFORCEMENT
8.1 EVENTS OF DEFAULT
Each of the following events is hereinafter sometimes referred to as an
"EVENT OF DEFAULT":
(a) if the Corporation makes default in payment of the principal hereof when
due and payable, or to pay interest, fees or other Obligations when due and
payable which is not remedied within five Business Days after notice in writing
has been given by the Holder to the Corporation;
(b) if the Corporation or Knogo North America Inc. shall neglect to observe
or perform any other covenant or condition contained in the Debenture or the
Security Agreement executed and delivered by Knogo North America Inc. on its
part to be observed or performed (other than a covenant or condition specified
in Section 8.1(a)) and, after notice in writing has been given by the Holder to
the Corporation specifying such default and requiring the Corporation to put an
end to the same, the Corporation shall fail to make good such default within a
period of 15 Business Days, unless the Holder (having regard to the subject
matter of the default) shall have agreed in writing to a longer period, and in
such event, within the period agreed to in writing by the Holder;
(c) if the Corporation or any subsidiary shall make a general assignment for
the benefit of its creditors, or shall become insolvent or be declared or
adjudged bankrupt, or if a liquidator, trustee in bankruptcy, receiver, receiver
and manager or any other officer with similar powers shall be appointed to the
Corporation or any subsidiary or of all of its property or any material part
thereof, or if the Corporation or any subsidiary shall propose a compromise,
arrangement, or reorganization under applicable legislation of any jurisdiction
providing for the reorganization or winding-up of corporations or business
entities or providing for an agreement, composition, extension or adjustment
with its creditors; or the Corporation or any subsidiary shall admit in writing
its inability to pay its debts generally as they become due or shall take
corporate action in furtherance of any of the aforesaid purposes;
(d) if an order shall be made or effective resolution passed for the
winding-up or liquidation of the Corporation or any subsidiary, except in the
case of voluntarily winding-up or liquidating a subsidiary of the Corporation in
a voluntary transaction pursuant to which substantially all of the assets of
such subsidiary are transferred to the Corporation or another subsidiary of the
Corporation;
(e) if the Corporation or any subsidiary shall make default beyond any
period of grace provided with respect thereto in the payment of the principal
of, or part thereof, or interest or premium on, any indebtedness in excess of
$100,000 or observance of any term, agreement or condition in respect of such
indebtedness and the effect of such default is to accelerate the payment of such
indebtedness or to permit the holder or holders of such indebtedness (or trustee
on behalf of such holder or holders) to accelerate the payment of such
indebtedness, and such acceleration shall not be rescinded or annulled or such
event of default shall not be remedied or cured, whether by payment or
otherwise, by the Corporation or the subsidiary or waived by the holders of such
indebtedness, within 30 days after such acceleration shall have occurred;
(f) an encumbrancer, whether permitted or otherwise, takes possession of any
significant portion of the Collateral or Collateral of Subsidiaries;
(g) an order is made or legislation enacted for the expropriation,
confiscation, forfeiture, escheating or other taking or compulsory divestiture,
whether or not with compensation, of all or a significant portion of the
Collateral or Collateral of Subsidiaries unless the same is being actively and
diligently contested by the Corporation in good faith, the Corporation shall
have provided to the Holder such security therefor as it may reasonably require
and such order or legislation shall have been vacated, lifted, discharged,
stayed or repealed within 30 days from the date of being entered, pronounced or
enacted, as the case may be;
(h) any process of a court, execution, attachment, garnishment, distress or
analogous process is issued or levied or becomes enforceable or is enforced
against any significant portion of the Collateral or Collateral of Subsidiaries
unless the same is being actively and diligently contested by the Corporation in
good faith, the Corporation shall have provided to the Holder such security
therefor as it may reasonably require and such court process, execution,
attachment, garnishment, distress or analogous process shall have been vacated,
lifted, discharged or stayed within 30 days after being entered, commenced or
levied, as the case may be;
(i) the Corporation or Knogo North America Inc. ceases or threatens to cease
to carry on its business, commits an act of bankruptcy, becomes insolvent,
proposes a compromise or arrangement to its creditors or makes an unauthorized
sale in bulk of its assets;
(j) Peter Murdoch ("MURDOCH") ceases hold the position of President and
Chief Executive Officer of the Corporation as a result of: (i) the board of
directors of the Corporation removing Murdoch from such office other than for
cause at law, (ii) the board of directors of the Corporation not appointing
Murdoch to hold such office other than as a result of any prior act or omission
of Murdoch constituting cause at law; or (iii) Murdoch voluntarily resigning
from such positions;
(k) the Current Market Price falls below $0.03 per Common Share, subject to
adjustment in accordance with Section 4.3 hereof, regardless of whether the
Current Market Value thereafter rises;
(l) any Person or group of two or more Persons acting jointly or in concert
becoming the beneficial owner, directly or indirectly, of Common Shares
representing more than 50% of the combined voting power of the Corporation's
then outstanding voting securities calculated on a partially diluted basis
assuming the conversion or exchange of all securities exchangeable or
convertible into Common Shares (but excluding the issuance of out-of-the-money
and unvested securities under all Incentive Compensation Plans);
(m) the completion of any transaction or series of any related transactions
to which the Corporation is a party or subject involving an amalgamation,
merger, plan of arrangement, reorganization, consolidation or other business
combination (unless with a wholly-owned subsidiary), without the prior written
approval of the Holder;
(n) any representation, warranty or certification made under this Debenture
or in the Subscription Agreement proves to have been incorrect in a material
respect at the time made;
(o) if the Corporation is unable to deliver the requisite number of Common
Shares on an exercise of the Holder's right of conversion in Article 4 of this
Debenture by virtue of a limit on the authorized capital of the Corporation or
otherwise;
(p) the completion of a sale, transfer or conveyance of all of the property,
assets and undertaking of the Corporation and its subsidiaries as an entirety or
substantially as an entirety to a Person acting at arm's length to the
Corporation;
(q) the Corporation's corporate charter expires or is revoked;
(r) for so long as the unpaid amount due and owing under the Debenture is
$250,000 or more, Murdoch or Saburah Investments Inc. ("SABURAH") sells,
transfers, pledges or otherwise conveys, directly or indirectly, any Common
Shares during the first year that the Debenture is outstanding and thereafter,
in excess of 1,500,000 Common Shares (for Murdoch and Saburah together) in any
successive year that the Debenture is outstanding, save and except that if the
Holder partially converts pursuant to Article 4 hereof and sells any of the
Common Shares acquired pursuant to such conversion, Murdoch and/or Saburah shall
be entitled to sell, transfer or otherwise convey, up to that number of shares
of the Corporation equal to the number of Common Shares sold by the Holder;
(s) for so long as the unpaid amount due and owing under the Debenture is
$250,000 or more, Robert Furst ("FURST") sells, transfers, pledges or otherwise
conveys, directly or indirectly, in excess of 1,500,000 Common Shares during the
first year that the Debenture is outstanding and thereafter, in excess of
3,000,000 Common Shares in any successive year that the Debenture is
outstanding, save and except that if, at any time prior to the Maturity Date,
Furst holds less than 10% of the issued and outstanding Common Shares,
calculated on a non-diluted basis, then such restrictions on the sale of Common
Shares shall cease to apply; or
(t) if Murdoch, Saburah or Furst sells, transfers, pledges or otherwise
conveys, directly or indirectly, any Common Shares which transaction results in
Murdoch, Saburah and Furst as a group, holding less than 50.01% of the then
issued and outstanding Common Shares, unless at the time of the transaction, the
Company shall have increased its authorized capital and set aside and reserved
for issuance an aggregate 71,666,667 Common Shares to be issued on conversion of
the Debenture (regardless of whether the Debenture is then convertible) and
exercise of the Warrants.
8.2 NOTICE OF EVENTS OF DEFAULT
If an Event of Default shall occur and is continuing the Corporation shall,
within two Business Days after it becomes aware of the occurrence of such Event
of Default, give notice thereof to the Holder.
Where notice of the occurrence of an Event of Default has been given and
the Event of Default is thereafter cured, notice that the Event of Default is no
longer continuing shall be given by the Corporation to the Holder within two
Business Days after the Corporation becomes aware that the Event of Default has
been cured.
8.3 ACCELERATION ON DEFAULT
If any Event of Default has occurred and is continuing, the Holder may in
its discretion, by notice in writing to the Corporation declare the principal
amount of the Debenture held by such Holder and any other monies payable
hereunder to be due and payable and the same shall forthwith become immediately
due and payable to such Holder, anything herein contained to the contrary
notwithstanding, provided however, that if the only Event of Default is the
event set forth in Article 8.1(k), the Debenture shall not be immediately
payable but shall instead be payable in ninety (90) days from the date of the
initial Event of Default.
8.4 REMEDIES
Upon the occurrence of an Event of Default, the Security Interest shall
immediately become enforceable and the Holder may, forthwith or at any time
thereafter and without notice to the Corporation except as required by the UCC
or by this Debenture,:
(a) commence legal action to enforce payment or performance of any or all of
the Obligations;
(b) make payments to discharge any claim, lien, mortgage, security interest,
charge or other encumbrance on properties on which either the Corporation or the
Holder may hold charges or encumbrances (whether or not ranking in priority to
the Security Interest);
(c) enter upon, use and occupy any and all premises owned, leased or
occupied by the Corporation where the Collateral may be located;
(d) take immediate possession of all or any part of the Collateral and
require the Corporation to assemble or deliver possession of the Collateral at a
location or locations specified by the Holder, with power to exclude the
Corporation, its officers, directors and agents therefrom;
(e) appoint or reappoint by instrument in writing any person to be an agent
or any person to be a receiver, manager or receiver and manager (herein called a
"RECEIVER") of the Collateral and to remove any Receiver so appointed and to
appoint another if the Holder so desires;
(f) notify the account debtors or obligors under any accounts of the
assignment of such accounts to the Holder and direct such account debtors or
obligors to make payment of all amounts due or to become due to the Corporation
thereunder directly to the Holder and give valid and binding receipts and
discharges therefor and in respect thereof and, upon such notification and at
the expense of the Corporation, enforce collection of any accounts, and adjust,
settle, or compromise the account or payment thereof in the same manner and to
the same extent as the Corporation might have done and endorse the Corporation's
name on any checks or other form of payment;
(g) enjoy and exercise all of the rights and remedies of a secured party
under the UCC;
(h) file such proofs of claim or other documents as may be necessary or
desirable to have its claim lodged in any bankruptcy, winding-up, liquidation,
dissolution or other proceedings (voluntary or involuntary) relating to the
Corporation;
(i) preserve, protect and maintain the Collateral and made such replacements
thereof and additions thereto as the Holder shall deem advisable;
(j) sell, consign, lease or otherwise dispose of all or any part of the
Collateral whether by public or private sale, consignment or lease or otherwise
and on any terms so long as the disposition generally is commercially
reasonable, including terms that provide time for payment on credit; provided
that:
(i) neither the Holder nor any Receiver will be required to sell, consign,
lease or dispose of the Collateral, but may peaceably and quietly take, hold,
use, occupy, possess and enjoy the Collateral without molestation, eviction,
hindrance, or interruption by any other person or persons whomsoever for such
period of time as is commercially reasonable;
(ii) the Holder or any Receiver may dispose of all or any part of the
Collateral in the condition in which it was on the date possession of it was
taken, or after any commercially reasonable repair, processing or preparation
for disposition, it being acknowledged and agreed to by the Corporation that the
Holder may be a purchaser of all or part of the Collateral;
(iii) the Holder or any Receiver may convey, transfer or assign to a
purchaser or purchasers the title to any of the Collateral so sold; and
(iv) the Corporation will be entitled to be credited with the actual
proceeds of any such sale, consignment, lease or other disposition only when
such proceeds are received by the Holder or Receiver in cash.
8.5 POWERS AND DUTIES OF RECEIVER
Any Receiver appointed hereunder:
(a) shall, subject to the provisions of the instrument appointing it, have
all of the powers of the Holder hereunder, together with:
(i) the power to carry on the business of the Corporation or any part
thereof;
(ii) the power to borrow money in the Corporation's name or in the
Receiver's name; and
(iii) the power to grant security interests in the Collateral in priority to
the Security Interest as security for the money so borrowed; and
(b) shall be deemed to be the agent of the Corporation for the purpose of
establishing liability for the acts or omissions of the Receiver and the Holder
shall not be liable for such acts or omissions.
The Corporation hereby irrevocably authorizes the Holder from time to time
after appointment of any receiver to give instructions to the Receiver relating
to the performance relating to the Receiver's duties and to fix the remuneration
of the Receiver in connection therewith.
8.6 OTHER REMEDIES
The remedies provided in Section 8.4 are cumulative and in addition to (and
not in substitution for, exclusive of nor dependent on) any other remedies
contained herein or in any existing or future security document granted by the
Corporation to the Holder and to all other remedies existing at law or in equity
or by statute.
8.7 RESTRICTIONS ON CORPORATION
Upon the Holder taking possession of the Collateral or the appointment of a
Receiver, all the powers, functions, rights and privileges of the Corporation or
any officer, director, employee or agent of the Corporation with respect to the
Collateral shall, to the extent permitted by law, be suspended unless
specifically continued by the written consent of the Holder; however, all other
powers, functions, rights and privileges of the Corporation or any officer,
director, employee or agent of the Corporation shall be unaffected by such
events.
8.8 INDULGENCES AND RELEASES
Either the Holder or Receiver may grant extensions of time and other
indulgences, take and give up or abstain from perfecting or taking advantage of
securities, except compositions, compound, compromise, settle, grant releases
and discharges, release any part of the Collateral to third parties and
otherwise deal with the Corporation, debtors of the Corporation, surety and
others and with the Collateral and other security as the Holder or such Receiver
may see fit without prejudice to the liability of the Corporation under the
Obligations or the right of the Holder and such Receiver to hold the Collateral
and realize upon the Security Interest.
8.9 EXPENSES OF ENFORCEMENT
The Corporation agrees to indemnify the Holder for all costs and expenses
of the Holder, its agents, advisers and consultants (including legal fees and
disbursements on a solicitor and its own client basis) incurred with respect to
the exercise by the Holder of any of its rights, remedies and powers under this
Debenture (including costs and expenses relating to the custody, preservation
and realization of the Collateral, the remuneration of the Receiver and all
costs and expenses incurred by the Receiver in performing its functions under
its appointment), and such costs and expenses shall be added to and form part of
the Obligations and may be deducted from the proceeds of realization of the
Collateral as provided for in Section 8.10 below.
8.10 APPLICATION OF MONIES
Subject to the requirements of the UCC, all money or other proceeds of
realization collected or received by the Holder or any Receiver upon the
realization of the Security Interest or on exercise of any other rights or
remedies herein contained with respect to the Collateral shall be applied on
account of the Obligations in such manner as the Holder deems best or, at the
option of the Holder, may be held unapportioned in a collateral account or
released to the Corporation, all without prejudice to the liability of the
Corporation or the rights of the Holder hereunder. The balance of such
proceeds, if any, shall be paid in accordance with the UCC and any other
applicable law.
8.11 CARE AND DILIGENCE
Absent any gross negligence or intentional misconduct of the Holder, the
Holder shall not be responsible for any failure of the Holder or any other party
to exercise diligence or reasonable care in the preservation, protection,
enforcement, sale or other handling or treatment of all or any part of any
Collateral or Collateral of Subsidiaries, including, but not limited to, any
neglect, delay, omission, failure or refusal of the Holder (i) to take or
prosecute any action for the collection of any of the Obligations, or (ii) to
foreclose, or initiate any action to foreclose, or once commenced, prosecute to
completion any action to foreclose upon any security therefor, or (iii) to take
or prosecute any action in connection with any instrument or agreement
evidencing or securing all or any part of the Obligations.
8.12 LIABILITY FOR DEFICIENCY
If the proceeds of realization received by or on behalf of the Holder from
the disposition of the Collateral or Collateral of Subsidiaries are not
sufficient to satisfy the Obligations in full, the Corporation shall be liable
to pay such deficiency to the Holder forthwith on demand.
8.13 SET OFF
Without in any way limiting any other rights or remedies available to the
Holder, the Holder shall have the right (but shall not be obligated), at any
time and from time to time after the occurrence of an Event of Default and
without notice to the Corporation (such notice being expressly waived by the
Corporation), to set off against the Obligations or any of them deposits
(general or special) or monies held by the Holder or any other indebtedness
owing by the Holder to, or held by, the Holder for the credit of, the
Corporation, regardless of the currency in which such indebtedness is
denominated and notwithstanding that such indebtedness is not then due.
8.14 WAIVER
The Corporation hereby waives diligence, presentment, protest, notice of
protest, notice of dishonour and notice of non-payment of this Debenture, and
specifically consents to and waives notice of any renewal or extension of this
Debenture. No delay by the Holder in exercising any power or privilege
hereunder, nor the single or partial exercise of any power or privilege
hereunder, shall preclude any other or further exercise thereof, or the exercise
of any other power or privilege hereunder. The Corporation waives the posting
of any bond that might be required in connection with the Holder's exercise of
its rights and remedies.
8.15 IMMUNITY OF SHAREHOLDERS, DIRECTORS AND OTHERS
The Holder waives and releases any right, cause of action or remedy now or
hereafter existing in any jurisdiction against any past, present or future
incorporator, shareholder, director, officer, employee or agent of the
Corporation or of any Successor Corporation for the payment of the principal of
any of the Debentures or on any covenant, agreement, representation or warranty
by the Corporation contained herein.
ARTICLE 9
NOTICES
9.1 NOTICES
All notices and other communications required or permitted pursuant to or
in relation to this Debenture shall be in writing and shall be:
(a) personally served upon the Corporation or upon the Holder, as the case
may be, in which case such notice or other communication shall conclusively be
deemed to have been given to the addressee at the time of service; or
(b) delivered by reputable overnight courier, freight prepaid, or by
facsimile to the addressee at the following respective addresses or facsimile
numbers, as the case may be:
(i) For the Corporation
Sentry Technology Corporation
1881 Lakeland Avenue
Ronkonkoma, NY 11779 USA
Attention: Peter Murdoch
Fax No. (631) 739-2144
with a copy, which shall not constitute notice, to:
Mark S. Haltzman and Associates
One Belmont Avenue
Suite 402
Bala Cynwyd, PA 19004
Attention Mark S. Haltzman
Fax No. (610) 669-1915
(ii) For the Holder:
Brascan Technology Fund
BCE Place
181 Bay Street
Suite 300, P.O. Box 771
Toronto ON M5J 2T3
Attention: Mr. Stephen Adams
Fax No. (416) 446-0050
with a copy, which shall not constitute notice, to:
Goodman and Carr LLP
200 King Street West
Suite 2300
Toronto ON M5H 3W5
Attention: Ms. Jenny Chu Steinberg
Fax No.: (416) 595-0567
in which case such notice shall conclusively be deemed to have been given to the
addressee thereof on the next Business Day.
Each party hereby may, from time to time, by notice to the other parties, change
its address for service.
9.2 MAIL SERVICE INTERRUPTION
If, by reason of any actual or threatened interruption of mail service due
to strike, lock-out or otherwise, any notice to be given to the Holder or to the
Corporation would be unlikely to reach its destination in a timely manner, such
notice shall be valid and effective only if delivered personally in accordance
with Section 9.1.
ARTICLE 10
SUCCESSOR CORPORATIONS
10.1 CERTAIN REQUIREMENTS
The Corporation shall not enter into any transaction (whether by way of
reconstruction, reorganization, consolidation, amalgamation, merger, transfer,
sale, lease or otherwise) whereby all or substantially all of its undertaking,
property and assets would become the property of any other person or, in the
case of such amalgamation or merger, of the continuing company resulting
therefrom unless, and may do so if:
(i) such other person or continuing corporation is a corporation (herein
called the "SUCCESSOR CORPORATION") incorporated under the laws of the United
States or Canada or any state or province thereof;
(ii) the Successor Corporation shall execute, prior to, contemporaneously
with or forthwith after the consummation of such transaction an instrument
supplemental hereto and such other instruments as are necessary or advisable to
evidence the assumption by the Successor Corporation of the liability for the
due and punctual payment of all the Debentures and all other amounts payable
hereunder and the covenant of the Successor Corporation to pay the same and its
agreement to observe and perform all of the covenants and obligations of the
Corporation under this Debenture;
(iii) such transaction shall, to the satisfaction of the Holder acting
reasonably, be upon such terms as substantially to preserve and not to impair in
any material respect the rights and powers of the Holder hereunder; and
(iv) no condition or state of facts shall exist as to the Corporation or the
Successor Corporation, either at the time of or immediately before or after the
consummation of any such transaction and after giving full effect thereto or
immediately after the Successor Corporation complying with the provisions of
clause (b) above, that constitutes or would constitute after notice or lapse of
time or both, an Event of Default.
10.2 VESTING OF POWERS IN SUCCESSOR
Whenever the conditions of Section 10.1 shall have been duly observed and
performed, the Holder shall execute and deliver the supplemental instrument
provided for in Section 10.1 and thereupon the Successor Corporation shall be
bound by the covenants and obligations of the Corporation under this Debenture
and shall possess and from time to time exercise each and every power of the
Corporation under this Debenture in the name of the Corporation or otherwise,
and any act or proceeding by any provision of this Debenture required to be done
or performed by any directors or officers of the Corporation may be done and
performed with like force and effect by the directors or officers of the
Successor Corporation.
ARTICLE 11
GENERAL PROVISIONS
11.1 FURTHER ASSURANCES
The Corporation shall do, execute, acknowledge and deliver or cause to be
done, executed, acknowledged and delivered, such further acts, deeds, mortgages,
transfers, assurances or other documents as the Holder shall reasonably require
to give effect to or preserve and perfect the Security Interest in the
Collateral intended to be granted to the Holder hereunder, or any security
interest the Corporation may hereafter grant or become bound to grant to the
Holder for the purpose of accomplishing and effecting the intention of this
Debenture. The Corporation hereby irrevocably appoints the Holder to be the
attorney of the Corporation, coupled with an interest, with full power of
substitution, for and in the name of the Corporation to execute and to do any
deeds, documents, transfers, demands, assignments, assurance, consents and
things which the Corporation is obliged to sign, execute or do hereunder.
11.2 TERM
This Debenture shall become effective according to its terms immediately
upon the execution hereof by the Corporation and shall continue as security for
the Obligations until all of the Obligations are paid and performed in full and
this Debenture is terminated.
11.3 NON-SUBSTITUTION
This Debenture and the Security Interest are in addition to and not in
substitution for any other agreement made between the Holder and the Corporation
or any other security granted by the Corporation to the Holder whether before or
after the execution of this Debenture.
11.4 NO MERGER
Neither the taking of any action suit or proceeding, judicial or
extra-judicial nor the exercise of any power of seizure or disposition shall
extinguish the liability of the Corporation to pay and perform the Obligations
nor shall the acceptance of any payment or alternate security constitute or
create any novation. No covenant, representation or warranty of the Corporation
herein shall merge in any judgment.
11.5 ENTIRE AGREEMENT
There are no representations, agreements, warranties, conditions, covenants
or terms, express or implied, collateral or otherwise, affecting this Debenture
or the Security Interest or the Corporation's obligations and liabilities
hereunder other than express herein.
11.6 TIME OF ESSENCE
Time shall be of the essence in this Debenture in all respects.
11.7 DISCLOSURE OF INFORMATION RE CORPORATION
The Corporation agrees that the Holder may provide from time to time such
information concerning this Debenture, the Collateral and the Obligations to
such persons as the Holder in good faith believes are entitled to the same under
the UCC.
EXHIBIT "1"
FORM OF TRANSFER
RE: CONVERTIBLE DEBENTURE OF SENTRY TECHNOLOGY CORPORATION DUE APRIL 30, 2008
For value received, the undersigned hereby assigns and transfers unto
______________________________________ of _____________________________________
$ of the principal amount of the within Debenture registered in the name of the
undersigned on the books of SENTRY TECHNOLOGY CORPORATION (the "CORPORATION")
including the rights thereunder to the accrued and unpaid interest on such
principal amount and hereby irrevocably constitutes and appoints
____________________________ attorney to transfer the said Debenture on the
books of the Corporation with full powers of substitution in the premises.
DATED_____________ in the presence of __________________________.
Signed: ___________________________________
EXHIBIT "2"
FORM OF ELECTION OF CONVERSION PRIVILEGE
TO: SENTRY TECHNOLOGY CORPORATION
The undersigned hereby irrevocably elects to convert $100,000 or any
integral multiple thereof principal amount of the within Debenture into Common
Shares of the Corporation at the Conversion Price in accordance with the Terms
and Conditions of the Debenture. Please issue share certificates for said
Common Shares as follows:
Principal amount converted: $ _____________________________
($100,000 or integral multiple thereof only)
Name: ____________________________________
Address: ____________________________________
____________________________________
Date: ____________________________________
Signed: ____________________________________
EXHIBIT 4.2
WARRANT CERTIFICATE
WARRANT TO PURCHASE COMMON SHARES OF
SENTRY TECHNOLOGY CORPORATION
NO. W-1 5,000,000 WARRANTS
THIS CERTIFIES that, for value received, Brascan Technology Fund Inc. (the
"HOLDER") in its capacity as general partner of, and on behalf of, Brascan
Technology Fund, a limited partnership formed under the laws of the Province of
Ontario, is the registered holder of 5,000,000 warrants (each a "WARRANT" and,
collectively, the "WARRANTS") which each entitle the Holder, subject to the
terms and conditions set forth in this Certificate, to purchase from Sentry
Technology Corporation (the "CORPORATION") one common share in the capital of
the Corporation (each a "SHARE" and collectively, the "SHARES") at any time
commencing on the date hereof and continuing up to 5:00 p.m. (Toronto time) on
the Expiry Date (the "TIME OF EXPIRY") upon payment of US$0.15 per Share (the
"EXERCISE PRICE"). The number and nature of Shares which the Holder is entitled
to acquire upon exercise of the Warrants and the Exercise Price are subject to
adjustment as hereinafter provided.
SECTION 1 INTERPRETATION
1.1 DEFINITIONS. In this Warrant Certificate, unless there is something in
the subject matter or context inconsistent therewith:
(a) "DEBENTURE" means the US$2,000,000 convertible debenture dated as of the
date hereof issued by the Corporation in favour of the Holder pursuant to the
Subscription Agreement;
(b) "EXPIRY DATE" means the earlier of:
(i) the date which is the fourth year anniversary of the date hereof; and
(ii) the date which is 60 days after the date on which the Debenture has
been repaid in full;
(c) "STAKEHOLDERS' AGREEMENT" means the stakeholders agreement dated as of
the date hereof, as amended from time to time, among the Corporation, the Holder
and certain others; and
(d) "SUBSCRIPTION AGREEMENT" means the subscription agreement dated as of
the date hereof among the Corporation and the Holder pursuant to which the
Holder purchased the Debenture and the Warrants issued hereunder.
1.2 Words and phrases defined elsewhere herein shall have the particular
meanings so ascribed thereto; and
1.3 Words importing the singular number include the plural and vice versa
and words importing the masculine gender include the feminine and neuter genders
and words importing persons in this Warrant Certificate shall include
individuals, partnerships, corporations and any other entities, legal or
otherwise.
SECTION 2 EXERCISE OF WARRANTS.
2.1 ISSUE OF WARRANTS. The Holder and the Corporation entered into a
Subscription Agreement pursuant to which the Holder subscribed for and received
the Debenture and the Warrants. This Warrant Certificate evidences the Warrants
acquired by the Holder pursuant to the Subscription Agreement, subject to any
exercises of Warrants made in accordance with the terms hereof.
2.2 ELECTION TO PURCHASE. The rights evidenced by this certificate may be
exercised by the Holder in whole or in part and in accordance with the
provisions hereof by delivery of an Election to Exercise in substantially the
form attached hereto as Exhibit 1, properly completed and executed, together
with payment of the Exercise Price in cash, certified funds or wire transfer to
an account in the United States designated by Corporation for the number of
Shares specified in the Election to Exercise to the Corporation at the offices
of Sentry Technology Corporation, 1881 Lakeland Avenue, Ronkonkoma, New York
11779, Attention: President, or such other address as may be notified in writing
by the Corporation. In the event that the rights evidenced by this certificate
are exercised in part, the Corporation shall, contemporaneously with the
issuance of the Shares issuable on the exercise of the Warrants so exercised,
issue to the Holder, a Warrant Certificate on identical terms in respect of that
number of Shares in respect of which the Holder has not exercised the rights
evidenced by this Certificate.
2.3 EXERCISE. The Corporation shall, on the date (the "EXERCISE DATE") it
receives a duly executed Election to Exercise and the Exercise Price for the
number of Shares specified in the Election to Exercise, issue that number of
Shares specified in the Election to Exercise as fully paid and non-assessable
common shares of the Corporation.
2.4 CERTIFICATE. As promptly as practicable after the Exercise Date and, in
any event, within five (5) business days of receipt of the Election to Exercise,
the Corporation shall issue and deliver to the Holder, registered in such name
or names as the Holder may direct or if no such direction has been given, in the
name of the Holder, certificate(s) for the number of Shares specified in the
Election to Exercise. To the extent permitted by law, such exercise shall be
deemed to have been effected as of the close of business on the Exercise Date,
and at such time the rights of the Holder with respect to the number of Shares
in respect of which the Warrant Certificate has been exercised shall cease, and
the person or persons in whose name or names any certificate(s) for Shares shall
then be issuable upon such exercise shall be deemed to have become the holder or
holders of record of the Shares represented thereby.
2.5 FRACTIONAL SHARES. Fractional common shares shall not be issued and the
Holder shall not be entitled to any compensation or other right in lieu of any
fractional Share.
2.6 CORPORATE CHANGES. If and whenever at any time the Corporation shall be
a party to any reorganization, merger, dissolution or sale of all or
substantially all of its assets, whether or not the Corporation is the surviving
entity, the Warrants evidenced by this Certificate shall be adjusted so as to
apply to the securities to which the holder of that number of Shares subject to
the unexercised Warrants would have been entitled by reason of such
reorganization, merger, dissolution or sale of all or substantially all of its
assets (the "EVENT"), and the Exercise Price shall be adjusted to be the amount
determined by multiplying the Exercise Price in effect immediately prior to the
Event by the number of Shares subject to the unexercised Warrants immediately
prior to the Event, and dividing the product thereof by the number of securities
to which the holder of that number of Shares subject to the unexercised Warrants
would have been entitled to by reason of such Event.
2.7 CHANGE OR RECLASSIFICATION OF SHARES. In the event that at any time, and
from time to time, the Corporation shall change or reclassify its outstanding
common shares of the Corporation into a different class of securities, the
rights evidenced by each Warrant shall be adjusted as follows so as to apply to
the successor class of securities:
(a) the number of the successor class of securities which the Holder shall
be entitled to acquire for each unexercised Warrant shall be that number of the
successor class of securities which a holder of that number of Shares subject to
the unexercised Warrant immediately prior to the change or reclassification
would have been entitled to by reason of such change or reclassification; and
(b) the Exercise Price shall be determined by multiplying the Exercise Price
in effect immediately prior to the change or reclassification by the number of
Shares subject to the unexercised Warrants immediately prior to the change or
reclassification, and dividing the product thereof by the number of successor
securities determined in Section 2.7(a) hereof.
2.8 SUBDIVISION OR CONSOLIDATION OF SHARES:
(a) In the event that at any time, and from time to time, the Corporation
shall subdivide its outstanding common shares of the Corporation into a greater
number of common shares or issue any common shares of the Corporation to the
holders of all or substantially all of the outstanding common shares by way of a
stock dividend (other than any stock dividends constituting dividends paid in
the ordinary course), the Exercise Price in effect immediately prior to such
subdivision or dividend shall be proportionately reduced, and conversely, in the
event that the outstanding common shares of the Corporation shall be
consolidated into a smaller number of common shares, the Exercise Price in
effect immediately prior to such consolidation shall be proportionately
increased (any such subdivision, dividend or consolidation being hereinafter
referred to as a "CAPITAL REORGANIZATION"); and
(b) Upon each adjustment of the Exercise Price as provided in (a), the
Holder shall thereafter be entitled to acquire on exercise of each Warrant, at
the Exercise Price resulting from such adjustment, in lieu of the number of
Shares which the Holder would previously had been entitled to acquire, the
number of Shares obtained by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of Shares which may be
acquired under each Warrant immediately prior to such adjustment and dividing
the product thereof by the Exercise Price resulting from such adjustment.
2.9 OFFERING TO SHAREHOLDER. If and whenever at any time the Corporation
shall fix a record date or if a date of entitlement is otherwise established
(hereinafter referred to in this Section 2.9 as the "RECORD DATE") for the
issuance of rights, options or warrants to all or substantially all the holders
of outstanding common shares of the Corporation entitling them, for a period
expiring not more than 45 days after such record date (any such event
hereinafter being referred to as a "RIGHTS OFFERING"), to subscribe for or
purchase common shares of the Corporation or securities convertible into or
exchangeable for common shares at a price per common share or, as the case may
be, having a conversion or exchange price per common share less than 95% of the
Current Market Value (defined below) on such record date, the Exercise Price
shall be adjusted immediately after such record date so that it shall equal the
price determined by multiplying the Exercise Price in effect on such record date
by a fraction, (i) the numerator of which shall be the aggregate of (A) the
number of common shares outstanding on such record date and (B) a number equal
to the number arrived at by dividing the product of the number of common shares
which may be purchased or subscribed for (or into which they may be converted or
exchanged) multiplied by the subscription or purchase price of the common shares
offered for purchase or subscription (or the conversion or exchange price of the
convertible or exchangeable securities so offered) by such Current Market Value,
and (ii) the denominator of which shall be the aggregate of (X) the number of
common shares outstanding on such record date and (Y) the number of additional
common shares so offered (or into which the convertible or exchangeable
securities so offered are convertible or exchangeable). Common shares owned by
or held for the account of the Corporation or any subsidiary of the Corporation
shall be deemed not to be outstanding for the purpose of any such computation.
Such adjustment shall be made successively whenever such a record date is fixed.
To the extent that any rights or warrants are not so issued or any such rights
or warrants are not exercised prior to the expiration thereof, the Exercise
Price shall then be readjusted to the Exercise Price which would then be in
effect if such record date had not been fixed or to the Exercise Price which
would then be in effect based upon the number of common shares or conversion or
exchange rights contained in convertible or exchangeable securities actually
issued upon the exercise of such rights or warrants, as the case may be.
2.10 SPECIAL DISTRIBUTION. If and whenever, the Corporation shall fix a
record date (hereinafter referred to in this Section 2.10 as the "RECORD DATE")
for the distribution to all or substantially all the holders of common shares
of:
(a) shares of any class, whether of the Corporation or any other
corporation;
(b) rights, options or warrants;
(c) evidences or indebtedness; or
(d) other assets or property;
and if such distribution does not constitute a Capital Reorganization or a
Rights Offering (any such non-excluded event being hereinafter referred to as a
"SPECIAL DISTRIBUTION") the Exercise Price shall be adjusted immediately after
such record date so that it shall equal the price determined by multiplying the
Exercise Price in effect on such record date by a fraction: (A) the numerator of
which shall be the amount by which (1) the amount obtained by multiplying the
number of common shares of the Corporation outstanding on such record date by
the Current Market Value of the common shares of the Corporation on such record
date, exceeds (2) the fair market value (as reasonably determined by the
directors of the Corporation in good faith, which determination shall be
conclusive) to the holders of such common shares of such Special Distribution;
and (B) the denominator of which shall be the total number of common shares of
the Corporation outstanding on such record date multiplied by such Current
Market Value. Any common shares of the Corporation owned by or held for the
account of the Corporation or any subsidiary of the Corporation shall be deemed
not to be outstanding for the purpose of any such computation. Such adjustment
shall be made successively whenever such a record date is fixed. To the extent
that such Special Distribution is not so made or any such rights, options or
warrants are not exercised prior to the expiration thereof, the Exercise Price
shall then be readjusted to the Exercise Price which would then be in effect if
such record date had not been fixed or if such expired rights, options or
warrants had not been issued.
2.11 CARRY OVER OF ADJUSTMENTS. No adjustment of the Exercise Price shall be
made if the amount of such adjustment shall be less than 1% of the Exercise
Price in effect immediately prior to the event giving rise to the adjustment,
provided, however, that in such case any adjustment that would otherwise be
required then to be made shall be carried forward and shall be made at the time
of and together with the next subsequent adjustment which, together with any
adjustment so carried forward, shall amount to at least 1% of the Exercise
Price.
2.12 ADJUSTMENT TO NUMBER OF SHARES. If any adjustment in the Exercise Price
shall occur as a result of: (A) the fixing by the Corporation of a record date
for an event referred to in Section 2.9; or (B) the fixing by the Corporation of
a record date for an event referred to in either of Section 2.10(a) or Section
2.10(b), then the number of Shares purchasable upon any subsequent exercise of a
Warrant shall be simultaneously adjusted by multiplying the number of Shares
purchasable upon the exercise of a Warrant immediately prior to such adjustment
by a fraction which shall be the reciprocal of the fraction employed in the
adjustment of the Exercise Price. To the extent that any adjustment in
subscription rights occurs pursuant to this Section 2.12 as a result of the
fixing by the Corporation of a record date for the distribution of rights,
options or warrants referred to in Section 2.9, the number of Shares purchasable
upon exercise of a Warrant shall be readjusted immediately after the expiration
of any relevant exchange, conversion or exercise right to the number of Shares
which would be purchasable based upon the number of common shares actually
issued immediately after such expiration, and shall be further readjusted in
such manner upon expiration of any further such right. To the extent that any
adjustment in subscription rights occurs pursuant to this Section 2.12 as a
result of the fixing by the Corporation of a record date for the distribution of
exchangeable or convertible securities or rights, options or warrants referred
to in Section 2.10, the number of Shares purchasable upon exercise of the
Warrant shall be readjusted immediately after the expiration of any relevant
exchange, conversion or exercise right to the number which would be purchasable
pursuant to this Section 2.12 if the fair market value of such securities or
such rights, options or warrants had been determined for purposes of the
adjustment pursuant to this subsection on the basis of the number of common
shares issued immediately after such expiration.
2.13 NOTICE OF ADJUSTMENT. Upon any adjustment of the number of Shares and
upon any adjustment of the Exercise Price, then and in each such case the
Corporation shall give written notice thereof to the Holder, which notice shall
state the Exercise Price and the number of Shares subject to the unexercised
Warrants resulting from such adjustment, and shall set forth in reasonable
detail the method of calculation and the facts upon which such calculation is
based. Upon the request of the Holder there shall be transmitted promptly to the
Holder a statement of the firm of independent certified public accountants
retained to audit the financial statements of the Corporation to the effect that
such firm concurs in the Corporation's calculation of the change.
2.14 OTHER NOTICE. In case at any time:
(a) the Corporation shall declare any dividend upon its common shares
payable in common shares of the Corporation;
(b) the Corporation shall offer for subscription pro rata to the holders of
its common shares any additional common shares of any class or other rights;
(c) there shall be any capital reorganization or reclassification of the
capital stock of the Corporation, or consolidation, amalgamation or merger of
the Corporation with, or sale of all or substantially all of its assets to,
another corporation; or
(d) there shall be a voluntary or involuntary dissolution, liquidation or
winding-up of the Corporation;
then, in any one or more of such cases, the Corporation shall give to the Holder
(A) at least 10 days' prior written notice of the date on which a record date
shall be taken for such dividend, distribution or subscription rights or for
determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, amalgamation, sale, dissolution,
liquidation or winding-up and (B) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up, at least 10 days prior written notice of the date when the same
shall take place. Such notice in accordance with the foregoing clause (A) shall
also specify, in the case of any such dividend, distribution or subscription
rights, the date on which the holders of common shares shall be entitled
thereto, and such notice in accordance with the foregoing clause (B) shall also
specify the date on which the holders of common shares shall be entitled to
exchange their common shares for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, amalgamation,
sale, dissolution, liquidation or winding-up, as the case may be.
2.15 SHARES TO BE RESERVED. The Corporation will at all times keep available
and reserve out of its authorized common shares, solely for the purpose of issue
upon the exercise of the Warrants, such number of Shares as shall then be
issuable upon the exercise of the Warrants. The Corporation covenants and agrees
that all Shares which shall be so issuable will, upon issuance, be duly
authorized and be issued as fully paid and non-assessable common shares of the
Corporation. The Corporation will take such actions as may be reasonably
necessary and as are within its power to ensure that all such Shares may be so
issued without violation of any applicable laws or the applicable requirements
of any exchange or US over-the-counter market upon which the common shares of
the Corporation may be listed or quoted or in respect of which such common
shares are qualified for unlisted trading privileges.
2.16 CURRENT MARKET VALUE. For the purposes of any computation hereunder,
the "CURRENT MARKET VALUE" at any date shall be equal to the weighted average
closing sale price per common share of the Corporation for the 20 consecutive
trading days immediately before such date on the NASDAQ Over-the-Counter
Bulletin Board (OTCBB) or such principal stock exchange or over-the-counter
market as the shares of the Corporation may then be listed or quoted (as the
case may be), or, if the shares in respect of which a determination of Current
Market Value is being made are not listed on any stock exchange or quoted for
trading by a recognized over-the-counter market, the Current Market Value shall
be determined by the firm of independent certified public accountants retained
to audit the financial statements of the Corporation, which determination shall
be conclusive. The weighted average price shall be determined by dividing the
aggregate sale price of all such common shares sold on the said exchange during
the said 20 consecutive trading days by the total number of such common shares
so sold.
2.17 DIVIDEND IN THE ORDINARY COURSE. A "dividend paid in the ordinary
course" means any dividend paid by the Corporation on the common shares which
the directors do not by resolution determine to be extraordinary or otherwise
out of the ordinary course having regard to the Corporation's dividend policy at
such time, the value of such dividend, the effect of such dividend on the market
value of the common shares after giving effect to the payment thereof, the form
of payment of such dividend, the financial position of the Corporation and its
subsidiaries on a consolidated basis, economic conditions, business practices
and such other factors as the directors may in their discretion consider
relevant.
SECTION 3 COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE CORPORATION
The Corporation covenants, represents and warrants to the Holder as follows
and acknowledges that the Holder is relying upon such covenants, representations
and warranties:
(A) LISTING. The Corporation will, at its expense and as expeditiously as
possible, use its best efforts to cause all Shares issuable upon the exercise of
the Warrants to be duly listed on all exchanges, if any, on which the Shares are
then trading on or quoted for trading on or any over-the-counter market upon
which the Shares are qualified for unlisted trading privileges immediately prior
to the issuance of such Shares.
(B) RESERVED SHARES. The Corporation shall at all times reserve and keep
available out of its authorized by unissued Shares, such number of its duly
authorized Shares as shall be sufficient to give effect to the rights of the
Holder under this Warrant Certificate.
(C) SECURITIES QUALIFICATION REQUIREMENTS. If, in the opinion of counsel to
the Corporation, any instrument (other than a prospectus) is required to be
filed with or any permission, order or ruling is required to be obtained from
any applicable securities regulatory authority or any other step is required
under any federal or provincial law of the Province of Ontario or the state law
of New York or federal laws of the United States before any securities or
property which the Holder is entitled to receive pursuant to the exercise of the
Warrants may properly and legally be delivered upon the due exercise of the
Warrants (on a basis exempt from the prospectus and registration requirements of
the securities laws of the Province of Ontario or analogous requirements under
U.S. securities law), the Corporation covenants that it will use commercially
reasonably efforts to file such instrument, obtain such permission, order or
ruling or take all such other actions, at its expense, as is required or
appropriate in the circumstances. In the event required under applicable
securities legislation of the Province of Ontario or the United States, the
Corporation will give written notice of the issue of the Shares pursuant to the
exercise of the Warrants in such detail as may be required to the Ontario
Securities Commission or the Securities and Exchange Commission, as the case may
be, in order that the subsequent disposition of the Shares (and any securities
derived therefrom) so issued will not be subject to the prospectus requirements
of such legislation.
(D) REGISTRATION RIGHTS. The Holder shall be entitled to certain
registration rights in accordance with the terms of the Registration Rights
Agreement between the Corporation and the Holder dated the date hereof as same
may be amended, restated, replaced or otherwise modified from time to time.
SECTION 4 REPLACEMENT.
Upon receipt of evidence satisfactory to the Corporation of the loss,
theft, destruction or mutilation of this Warrant Certificate and, if requested
by the Corporation, upon delivery of a bond of indemnity satisfactory to the
Corporation (or, in the case of mutilation, upon surrender of this Warrant
Certificate), the Corporation will issue to the Holder a replacement certificate
(containing the same terms and conditions as this Warrant Certificate).
SECTION 5 NO TRANSFER OF WARRANT.
The Warrants evidenced hereby are non-assignable, non-transferable and
non-negotiable and may not be exercised by or for the benefit of any person
other than the Holder, subject to compliance with applicable securities laws,
save and except for any assignment or transfer, in whole or in part, from time
to time, by the Holder to any member of the Brascan group of companies.
SECTION 6 EXPIRY DATE.
The Warrants shall expire and all rights to purchase Shares hereunder shall
cease and become null and void at the Time of Expiry.
SECTION 7 INABILITY TO DELIVER SHARES.
If for any reason, other than the failure or default of the Holder, the
Corporation is unable to issue and deliver the Shares or other securities as
contemplated herein to the Holder upon the proper exercise by the Holder of the
right to purchase any of the Shares covered by this Warrant Certificate, the
Corporation may pay within three business days of the Exercise Date, at its
option and in complete satisfaction of its obligations hereunder, to the Holder,
in cash, an amount equal to the difference between the Exercise Price and the
Current Market Value of such Shares or other securities on the Exercise Date.
SECTION 8 GOVERNING LAW.
The laws of the State of New York and the Federal Laws of the United States
applicable therein shall govern this Warrant Certificate and the Warrants.
SECTION 9 SUCCESSOR.
This certificate shall enure to the benefit of and shall be binding upon
the Holder and the Corporation and their respective successors.
SECTION 10 GENERAL.
The holding of the Warrants evidenced by this certificate shall not
constitute the holder a shareholder of the Corporation or entitle the Holder to
any right or interest in respect thereof except as expressly provided in this
certificate.
IN WITNESS WHEREOF the Corporation has caused this Warrant Certificate to
be signed by its duly authorized officers and its corporate seal hereto affixed.
DATED as of this 30th day of April 2004.
SENTRY TECHNOLOGY CORPORATION
By: /s/ Peter L. Murdoch
------------------------------
Authorized Signing Officer
EXHIBIT 1
ELECTION TO EXERCISE
The undersigned hereby irrevocably elects to exercise the Warrant of Sentry
Technology Corporation for the number of Shares (or other property or securities
subject thereto) as set forth below:
(a) Number of Shares to be Acquired:
(b) Exercise Price per Share:
(c) Aggregate Purchase Price [(a) multiplied by(b)]:
and hereby tenders cash, a certified cheque or wire transfer for such aggregate
purchase price, and directs such Shares to be registered and a certificate
therefor to be issued as directed below.
DATED this _____ day of _______________, _____.
BRASCAN TECHNOLOGY FUND INC.
By:
Authorized Signing Officer
----------------------------
DIRECTION AS TO REGISTRATION
Name of Registered Holder:
Address of Registered Holder:
EXHIBIT 4.3
STAKEHOLDERS RIGHTS AGREEMENT
This Stakeholders Rights Agreement (the "AGREEMENT") is made as of April
---------
30, 2004 among Sentry Technology Corporation, a Delaware corporation (the
"COMPANY"), Peter Murdoch ("MURDOCH"), Robert Furst ("FURST") and Saburah
-- ------- -----
Investments Inc. ("SABURAH") (collectively referred to as the "EXISTING
------- --------
STOCKHOLDERS") and Brascan Technology Fund Inc., in its capacity as general
----
partner, and on behalf of, Brascan Technology Fund (the "INVESTOR").
--------
BACKGROUND
WHEREAS, the Company is issuing and selling to the Investor a Convertible
Debenture in the principal amount of US $2 million (the "DEBENTURE"), and
---------
warrants to purchase up to 5,000,000 Common Stock (the "WARRANTS"), pursuant to
--------
the terms of a Subscription Agreement dated even date herewith between the
Investor and the Company (the "SUBSCRIPTION AGREEMENT"); and
-----------------------
WHEREAS, the parties hereto desire to enter into this Agreement to govern
certain of their respective rights, duties and obligations after consummation of
the transactions contemplated by the Subscription Agreement.
-----------------------
NOW, THEREFORE, in consideration of the covenants and agreements set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 DEFINITIONS. As used in this Agreement, unless the context
otherwise requires, the following terms shall have the respective meanings set
forth below:
"AFFILIATE" shall mean, with respect to any Person, any other Person who
---------
directly or indirectly, through one or more intermediaries, Controls, is
Controlled by, or is under common Control with, such Person.
"BOARD" shall mean the Board of Directors of the Company.
-----
"BUSINESS DAY" shall mean any day except a Saturday, Sunday or other day on
------------
which commercial banks located in New York, New York are not open for the
general transaction of business.
"COMMON STOCK" shall mean the Common Stock, par value $.001 per share, of
-------------
the Company and any other securities into which or for which such Common Stock
may be converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, consolidation, sale of assets or other similar
transaction.
"CONTROL" shall mean the possession, directly or indirectly, of the power to
-------
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "CONTROLLED" and "CONTROLLING" have meanings correlative thereto.
---------- -----------
"CONVERTIBLE SECURITIES" shall mean all securities of a corporation which,
-----------------------
directly or indirectly, are convertible into or are exercisable or exchangeable
for common stock of a corporation, including without limitation, stock
appreciation rights, options, warrants, convertible debt instruments,
convertible preferred stock, and other rights to directly or indirectly
purchase, subscribe for or acquire shares of common stock, whether or not such
Convertible Securities have then vested or are then exercisable or exchangeable.
"FAMILY MEMBERS" shall mean, with respect to a Person, such Person's
---------------
spouse, direct descendants (including adopted children and stepchildren, if
any), siblings, parents, mother- and father- in-law, brothers- and sisters-
in-law, aunts, uncles, nieces and nephews.
"FIVE PERCENT STOCKHOLDER" shall mean, as of the time measured, any Person
-------------------------
who is the "beneficial owner" (as that term is defined in Rule 13d-3 promulgated
under the Securities Exchange Act of 1934, or any successor or replacement rule
thereof) of Common Stock which represents five percent (5%) or more of the
Common Stock then outstanding.
"FULLY-DILUTED BASIS" shall mean, with respect to measuring a number of shares
--------------------
of capital stock of a corporation or a percentage of shares of capital stock of
a corporation, measuring based on all of the common stock then outstanding,
assuming the conversion into common stock of all Convertible Securities then
outstanding.
"GAAP" shall mean United States generally accepted accounting principles as
----
in effect from time to time.
"PERSON" shall mean an individual, corporation, partnership, joint stock
------
company, limited liability company, joint venture, trust or unincorporated
organization, or a governmental authority or any agency or political subdivision
thereof, or any other business entity.
"SUBSIDIARY" or "SUBSIDIARIES" or "SUBSIDIARY" or "SUBSIDIARIES" shall mean
---------- ------------ ---------- ------------
at any date, any Person of which securities or other ownership interests
representing more than 50% of the ordinary voting power or, in the case of a
partnership, more than 50% of the general partnership interests or in the case
of a partnership or limited liability company more than 50% of the profits or
losses of which are, as of such date, owned, controlled or held by the Company
or one or more subsidiaries of the Company.
SECTION 1.2 CERTAIN OTHER DEFINITIONS. The following terms are defined in
the following sections of this Agreement:
TERM SECTION
1934 Act Section 3.1(b)
Agreement Lead-in
Existing Stockholders Lead-in
Company Lead-in
Co-Sale Securities Section 6.1
Investor Director Section 2.1
Investor Lead-in
Debenture Lead-in
Proposed Number Section 6.1
Right of First Refusal Notice Section 6.1
Sale Notice Section 6.1
SEC Section 3.1(b)
Subscription Agreement Lead-in
Tag-Along Exercise Notice Section 6.1
Transfer Section 6.1
Warrants Lead-in
ARTICLE II
CORPORATE GOVERNANCE
SECTION 2.1 BOARD OF DIRECTORS. The Investor shall have the right, but
not the obligation, to designate one (1) member for election to the Board (the
"INVESTOR DIRECTOR"). If the Board is comprised of classes of directors, when
------------------
and if designated by the Investor, the Investor Director shall become a member
of the class of directors most recently elected by the stockholders. So long as
the Investor has the right to designate an Investor Director pursuant to
this Section 2.1 and actually designates an Investor Director, the parties to
this Agreement will take such steps as are necessary to appoint such Investor
Director within 60 days of notice from the Investor to the Company designating
the Investor Director. The Investor Director shall also be entitled to, but
shall not be obligated to, serve on each committee of the Board. To the extent
not already in existence, the Existing Shareholders shall take such steps as are
necessary to cause an audit committee and compensation committee of independent
directors to be appointed. The Investor Director shall be entitled to the same
perquisites, including stock options, reimbursement of expenses and other
similar rights in connection with such person's membership on the Board, as each
other non-executive member of the Board. If after designating an Investor
Director and having the Investor Director appointed, the Investor elects not to
have an Investor Director, the Investor shall thereafter no longer be entitled
to designate an Investor Director, provided that nothing herein shall restrict
the Investor's right to designate a different individual to serve as an Investor
Director in the event of the death, resignation or removal of an Investor
Director so long as a replacement Investor Director is designated within five
Business Days of such death, resignation or removal.
SECTION 2.2 OBSERVER. If, at any time, no Investor Director is a member of
the Board, the Investor shall have the right to an observer, who shall be
entitled to attend each meeting of the Board. Such observer shall be entitled
to receive all materials that are provided to the directors of the Company and
to participate in the discussions at all meetings of the Board. Unless
prohibited by law, the observer shall be entitled to the same perquisites,
including stock options, reimbursement and expenses and other similar rights as
are available to the directors of the Company. The Investor acknowledges and
agrees that neither the Investor nor observer shall trade the securities of the
Company with knowledge of any material undisclosed information prior to its
disclosure.
SECTION 2.3 MEETINGS OF THE BOARD. The Company will cause the Board to
meet at least four times each year and at least once each quarter.
SECTION 2.4 DIRECTORS' AND OFFICERS' INSURANCE. The Company shall maintain
directors and officers liability insurance in such amounts as the Board shall
determine from time to time.
SECTION 2.5 CONFLICTING PROVISIONS IN CERTIFICATE OF INCORPORATION OR
BYLAWS. Each Existing Stockholder agrees to promptly vote its Shares or execute
proxies or written consents, as the case may be, and to take all other
actions necessary or desirable to ensure that the Company's Certificate of
Incorporation and Bylaws do not at any time conflict with any provision of this
Agreement. .
ARTICLE III
COVENANTS OF THE COMPANY
SECTION 3.1 AFFIRMATIVE COVENANTS. The Company agrees as follows:
(a) The Company will retain independent public accountants as selected
by the Board, which independent public accountants shall certify the Company's
financial statements at the end of each fiscal year.
(b) If at any time the Company shall cease to be required to make
filings of reports and other documents with the Securities Exchange Commission
(the "SEC") under the Securities Exchange Act of 1934, as amended (the "1934
--- ----
ACT"), the Company will deliver in writing the following to each Investor or
permitted transferee of such Investor:
(i) Within thirty (45) days after the end of each quarter in each fiscal
year, a consolidated balance sheet of the Company as of the end of such quarter
and a consolidated statement of operations of the Company for the period from
the beginning of the fiscal year to the end of such quarter and for the
comparable periods of the immediately preceding fiscal year, in each case
unaudited but prepared in accordance with GAAP and accompanied by a statement of
the Chief Financial Officer or other senior executive officer of the
Company to the effect that the quarterly financial statements are true, complete
and correct in all material respects and have been prepared in accordance with
GAAP, subject to normal year-end adjustments;
(ii) Within ninety (90) days after the end of each fiscal year of the
Company, a consolidated balance sheet of the Company as of the end of such
fiscal year and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the fiscal year then ended and for the
immediately preceding fiscal year, prepared in accordance with GAAP and audited
by the Company's independent public accountants, together with such firm's
report thereon;
(iii) Such other information regarding the business, prospects, financial
condition, operations and affairs of the Company and its Subsidiaries as such
Investor may reasonably request. To such end, except when necessary to preserve
the confidentiality of information or to avoid real or apparent conflicts of
interest, the Company will permit such Investor or transferee or such Person's
authorized representatives to visit and inspect the properties and records of
the Company and to discuss its business, prospects, financial condition,
operations and affairs with directors, officers and employees of the Company,
during normal business hours and upon reasonable notice, as often as may be
reasonably requested.
(c) The Company shall prepare an annual budget and deliver it to the
Board for approval no later than 30 days prior to the beginning of the fiscal
year to which the annual budget relates.
(d) The Company shall at all times reserve and keep available out of
its authorized but unissued shares of Common Stock, such number of its duly
authorized shares of Common Stock as shall be sufficient to effect the
conversion of the Debenture and the Warrants. In order to ensure that the
Company shall be able to satisfy the foregoing covenant at all times, the
Company covenants and agrees to seek the approval of its shareholders to
increase the authorized capital of the Company to a number of Common Shares as
shall be sufficient for such purposes, such approval to be sought at such time
as is necessary so as to enable the Holder to be able to exercise its rights of
conversion under the Debenture within the time frames set forth in Article 4 of
the Debenture and to exercise its rights under the Warrants, it being
acknowledged and agreed that the Holder shall also have the right, without
diminishing any of the obligations of the Company under this paragraph, to
require the Company to call a meeting of the Company's shareholders for the
purposes of obtaining such approval of shareholders in the event that at any
time, the Current Market Value (as defined in the Debenture) falls below $0.07
per share, regardless of whether the Current Market Value (as defined in the
Debenture) thereafter rises. The Company will use its best efforts to obtain
promptly any authorization, consent, approval or take any other action or make
any filing with any court or administrative body that may be required under
applicable securities laws in connection with the issuance of shares of Common
Stock upon conversion of the Debenture or exercise of the Warrants.
SECTION 3.2 NEGATIVE COVENANTS. The Company shall not, without the prior
written consent of Investor :
(a) amend the Certificate of Incorporation or Bylaws of the Company or
any of its Subsidiaries, if such amendment would change any of the rights,
preferences or privileges of the Investor under the Debenture or the Warrants;
(b) take any action which the Company is precluded from taking by this
Agreement, the Subscription Agreement or the Company's Certificate of
Incorporation, as amended or restated from time to time;
(c) invest in securities other than cash and cash equivalent
securities;
(d) declare or pay any dividends;
(e) make any loans, enter into any contracts or engage in other
transactions with any of the Company's officers, directors, or any Person who,
at the time, is a Five Percent Stockholder (or any Affiliates of any of the
foregoing) in an amount equal to or in excess of $25,000 alone or when
aggregated with other transactions with such Person in any rolling twelve (12)
month period (other than employment agreements in effect prior to the date
hereof and obligations of the Company reflected on its books and records as of
the date hereof); or
(f) agree to any of the foregoing.
ARTICLE IV
COVENANTS OF THE INVESTOR
SECTION 4.1 NO OPEN MARKET PURCHASES. During the period commencing on the
---------------------------------------------------------------
date hereof and running for one (1) year thereafter, the Investor shall not
-------------------------------------------------------------------------------
purchase any shares of the Company's Common Stock in open market transactions,
-------------------------------------------------------------------------------
unless such purchase is approved by the Board.
- ----------------------------------------------------
ARTICLE V
COVENANTS OF THE EXISTING STOCKHOLDERS
SECTION 5.1 OVER ISSUANCES. Each of the Existing Stockholders hereby agrees
to take all actions as may be necessary in order to cause the Company to
satisfy its obligations under Section 3.1(d) of this Agreement and shall vote
all of their Common Stock entitled to vote thereon to grant such approvals as
may be required by applicable law to increase the amount of the Company's
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient so as to enable the Holder to be able to exercise its rights of
conversion under the Debenture and to exercise its rights under the Warrants.
SECTION 5.2 RESTRICTIONS ON EXISTING SHAREHOLDERS. Each of Murdoch and
Saburah agrees not to sell, transfer, pledge or otherwise convey, directly or
indirectly, any Common Stock during the first year that the Debenture is
outstanding and thereafter, in excess of 1,500,000 Common Stock (for Murdoch and
Saburah together) in any successive year that the Debenture is outstanding
and Furst agrees not to sell, transfer, pledge or otherwise convey, directly or
indirectly, in excess of 1,500,000 Common Stock during the first year that the
Debenture is outstanding and thereafter, in excess of 3,000,000 Common Stock in
any successive year that the Debenture is outstanding, save and except that if,
at any time while the Debenture is outstanding, Furst holds less than 10% of the
issued and outstanding Common Stock, calculated on a non-diluted basis, then the
restrictions in this Section 5.2 on the sale of Common Stock shall cease to
apply as it relates to Furst, provided that notwithstanding any other provisions
of this Agreement, no sale, transfer, pledge or other conveyance, directly or
indirectly, of Common Stock by Murdoch, Saburah or Furst shall be permitted
while the Debenture is outstanding in the event that the transaction would
result in Murdoch, Saburah and Furst, as a group, holding less than 50.01% of
the then issued and outstanding Common Stock unless at the time of the
transaction, the Company shall have increased its authorized capital and set
aside and reserved for issuance an aggregate 71,666,667 Common Stock to be
issued on conversion of the Debenture (regardless of whether the Debenture is
then convertible) and exercise of the Warrants. Any sale of Common Stock
permitted by this Section shall be completed in accordance with Article VI.
ARTICLE VI
RIGHTS OF FIRST REFUSAL AND CO-SALE RIGHTS
SECTION 6.1 SUBJECT TRANSFERS; EXERCISE. Except for sales of Common Stock
on a recognized stock exchange on which the Common Stock is listed, if any
Existing Stockholder proposes, directly or indirectly, to transfer, sell,
assign, pledge, encumber, mortgage, hypothecate, give, or otherwise dispose of,
whether or not by operation of law and whether voluntarily or involuntarily in
one transaction or a series of related transactions (collectively, "TRANSFER"),
--------
to any Person any shares of Common Stock ("CO-SALE SECURITIES") that the
------------------
Existing Shareholder is permitted to sell under Section 5.2, such Existing
Stockholder shall give written notice to the Investor as soon as practicable but
--------
in no event later than thirty (30) days prior to the consummation of such
Transfer, which notice shall specify the name and address of the proposed
Transferee, the number of Co-Sale Securities proposed to be Transferred
("PROPOSED NUMBER"), the amount and form of consideration, and, in reasonable
----------
detail, the other terms and conditions of the proposed Transfer, and shall be
accompanied by a copy of any written agreement (whether in draft or definitive
form at such time) or offer relating to such Transfer (a "SALE NOTICE"). Each
-----------
Investor shall have the right to elect to (a) purchase the Proposed Number of
Co-Sale Securities for itself on the same terms and conditions by delivering a
written notice (a "RIGHT OF FIRST REFUSAL NOTICE") within fifteen (15) days
-------------------------------
after the Sale Notice is deemed to have been given to the Investor, (b)
participate in the proposed Transfer by delivering a written notice (a
"TAG-ALONG EXERCISE NOTICE") to the Existing Stockholder who gave the Sale
-------------------
Notice within fifteen (15) days after the Sale Notice is deemed to have been
given to the Investor, specifying the number of shares of Common Stock that the
------------------------------------------------------------------
Investor shall desire to so Transfer, or (c) decline to exercise either of the
- --------------------------------------------------------------------------------
rights in (a) or (b). Notwithstanding the foregoing, the provisions of this
- -------------------------
Section 6.1 shall not apply to any Transfer by any Existing Stockholder of any
- ---
Co-Sale Securities in any of the following circumstances, if and only if each
Transferee of such Co-Sale Securities shall, immediately prior to and as a
condition of such Transfer, become a party to this Agreement as an Existing
Stockholder: (i) by gift, (ii) as collateral security for any bone fide
indebtedness of such Existing Stockholder, (iii) to a Family Member of such
Existing Stockholder, or (iv) to a trust, the sole beneficiaries of which, or to
a corporation, partnership or limited liability company, the sole stockholders,
partners or members, as the case may be, of which, include only such Existing
Stockholder and the Family Members of such selling Existing Stockholder.
SECTION 6.2 IF RIGHT OF FIRST REFUSAL EXERCISED. In the event that the
Investor gives a Right of First Refusal Notice with respect to all of the
Co-Sale Securities, the purchase and sale of the Common Stock which are the
subject of the Right of First Refusal Notice shall be completed on that date
which is 30 days following the giving of the Right of First Refusal Notice at
the offices of the Company.
SECTION 6.3 IF TAG-ALONG EXERCISED. In the event that the Investor gives a
Tag-Along Exercise Notice instead of a Right of First Refusal Notice and
securities specified in each Tag-Along Exercise Notice delivered by the Investor
--------
in addition to the Proposed Number of shares of Common Stock, no Existing
Stockholder shall sell any Co-Sale Securities to the proposed Transferee unless
the extent to which the Investor and the Existing Stockholder participate in the
--------
proposed Transfer is proportionately reduced in the manner described in the
immediately following sentence. The Investor and Existing Stockholder shall be
--------
entitled to Transfer a number of shares (determined on a Fully-Diluted Basis)
equal to the number of shares which such Transferee has agreed to purchase from
the Investor and the Existing Stockholder multiplied by a fraction, the
--------
numerator of which is the number of shares (determined on a Fully Diluted Basis)
----
owned by the Investor or Existing Stockholder, as the case may be, on the last
--------
day of the fifteen (15) day Tag-Along Exercise Notice period, and the
denominator of which is the total number of shares (determined on a
Fully-Diluted Basis) owned by all of the selling Existing Stockholders
participating in such Transfer and the Investor on the last day of the fifteen
--------
(15) day Tag-Along Exercise Notice period. If, after any such calculation, any
Investor or any selling Existing Stockholder shall no longer desire to
participate to the full extent as calculated in the immediately preceding
sentence, then the Investor shall be entitled to proportionately increase their
--------
respective participation in such manner as shall be reasonably agreed upon by
the remaining participating Investor.
--------
SECTION 6.4 SURVIVAL. If the Investor shall not have given a Right of First
Refusal Notice with respect to all of the Co-Sale Securities and the
Existing Stockholders have not completed the sale of their Co-Sale Securities in
accordance with the terms described in the Sale Notice and this Article VI
within 120 days following the date that the Sale Notice was given to the
Investor, no sale of the Co-Sale Securities may be made without the Existing
Stockholders again complying with the terms of this Article and so on from time
to time.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1 NOTICES. All notices and other communications required or
permitted to be given pursuant to this Agreement shall be in writing signed by
the sender, and shall be deemed duly given (i) on the date delivered if
personally delivered, (ii) on the date sent by telecopier with automatic
confirmation by the transmitting machine showing the proper number of pages were
transmitted without error, or (iii) on the Business Day after being sent by
Federal Express or another recognized overnight mail service which utilizes a
written form of receipt for next day or next business day delivery, in each case
addressed to the applicable party at the address set forth below; provided that
a party hereto may change its address for receiving notice by the proper giving
of notice hereunder:
If to the Company to:
Sentry Technology Corporation
1881 Lakeland Avenue
Ronkonkoma, NY 11779
Fax:(631) 739-2144
Attn: Peter Mundy
With a copy to (which shall
not constitute notice):
Mark S. Haltzman and Associates
One Belmont Avenue, Suite 402
Bala Cynwyd, PA 19004
Fax: (610) 668-1915
Attn: Mark S. Haltzman, Esquire
If to Murdoch or Saburah:
ID Security Systems Canada Inc.
37 Voyager Court North
Toronto, Ontario M9W 4Y2
Fax: (416) 674-5075
If to Furst:
3900 Walden Road
Deephaven, MN 55391
Fax: (416) 674-5075
If to the Investor:
Brascan Technology Fund Inc.
BCE Place
181 Bay Street
Suite 300, P.O. Box 771
Toronto ON M5J 2T3
Fax: (416) 446-0050
Attn: Mr. Stephen Adams
With a copy to (which shall
not constitute notice):
Goodman and Carr LLP
200 King Street West
Suite 2300
Toronto ON M5H 3W5
Fax: (416) 595-0567
Attn: Ms. Jenny Chu Steinberg
SECTION 7.2 ENTIRE AGREEMENT. This Agreement and the other Ancillary
Agreements (as such term is defined in the Subscription Agreement) areintended
---------------------------
to be, a complete statement of all the terms of the arrangements between or
among the parties hereto with respect to the matters set forth herein, and
supersedes any previous agreements, understandings and discussions between the
parties hereto with respect to those matters. There are no promises,
representations, warranties, covenants or undertakings other than those set
forth herein and therein.
SECTION 7.3 MODIFICATIONS AND AMENDMENTS. This Agreement may be amended or
modified only by a written consent executed by the Company, Existing Shareholder
and Investor.
SECTION 7.4 BENEFIT; ASSIGNABILITY. This Agreement shall be binding on and
shall inure to the benefit of the parties hereto and their respective heirs,
successors, permitted assigns and legal representatives and is not intended, nor
shall be construed, to give any Person, other than the parties hereto and
their respective heirs, successors, assigns and legal representatives, any legal
or equitable right, remedy or claim hereunder. The Common Stock, the Debenture
and the Warrants (together with the rights of the Investor relating to the
Common Stock, the Debenture and the Warrants) shall be transferable and
assignable by each Investor to any Investor in, and officers, directors,
members, managers and partners of, an Investor, and any Affiliate (and each of
its officers, directors, members, managers and partners) or heirs, personal
representatives, or successors, of any of the foregoing.
SECTION 7.5 GOVERNING LAW; JURISDICTION. This Agreement and any and all
matters arising directly or indirectly herefrom shall be governed by and
construed and enforced in accordance with the laws of the State of New York and
the United States.
SECTION 7.6 SEVERABILITY. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the fullest extent
permitted by applicable law, the parties hereby waive any provision of law which
renders any provisions hereof prohibited or unenforceable in any respect.
If it is ever held that any restriction hereunder is too broad to permit
enforcement of such restriction to its fullest extent, such restriction shall be
enforced to the maximum extent permitted by applicable law.
SECTION 7.7 INTERPRETATION.
(a) Article, Section, and Subsection headings are not to be considered
part of this Agreement, are included solely for convenience of reference and are
not intended to be full or accurate descriptions of the contents thereof.
(b) Use of the terms "herein," "hereunder," "hereof," and like terms
shall be deemed to refer to this entire Agreement and not merely to the
particular provision in which the term is contained, unless the context clearly
indicates otherwise.
(c) Use of the word "including" or a like term shall be construed to
mean "including, but not limited to."
(d) Words importing a particular gender shall include every other
gender, and words importing the singular shall include the plural and
vice-versa, unless the context clearly indicates otherwise.
SECTION 7.8 NO WAIVER OF RIGHTS, POWERS AND REMEDIES. No failure or delay
by a party hereto in exercising any right, power or remedy under this Agreement,
and no course of dealing among the parties hereto, shall operate as a
waiver of any such right, power or remedy of the party. No single or partial
exercise of any right, power or remedy under this Agreement by a party hereto,
nor any abandonment or discontinuance of steps to enforce any such right, power
or remedy, shall preclude such party from any other or further exercise thereof
or the exercise of any other right, power or remedy hereunder. The election of
any remedy by a party hereto shall not constitute a waiver of the right of such
party to pursue other available remedies. No notice to or demand on a party not
expressly required under this Agreement shall entitle the party receiving such
notice or demand to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the rights of the party giving such
notice or demand to any other or further action in any circumstances without
such notice or demand.
SECTION 7.9 COUNTERPARTS; FACSIMILE. This Agreement may be executed in one
or more counterparts, and by different parties hereto on separate counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument and shall be effective upon delivery of
counterpart signatures by all parties hereto. Execution and delivery of this
Agreement by facsimile transmission shall constitute execution and delivery of
this Agreement for all purposes, with the same force and effect as execution and
delivery of an original manually signed copy hereof.
SECTION 7.10 TERMINATION OF THIS AGREEMENT. This Agreement and all the
rights and obligations hereunder of the Company, Existing Shareholders and the
Investor (other than the obligation of the parties to submit any dispute in
connection with Agreement as set forth in Section 7.11) shall terminate and be
of no force and effect at such time as the unpaid amount due and owing under the
Debenture is less than Two Hundred and Fifty Thousand Dollars ($250,000).
SECTION 7.11 ARBITRATION. If any dispute arising out of or related to this
Agreement, its interpretation, performance or breach hereof, and the parties are
unable to agree on a mutually satisfactory resolution within thirty (30)
days, any party may require the matter to be settled by the American Arbitration
Association in accordance with its Commercial Arbitration Rules. The parties
agree that the dispute will be resolve by a single arbitrator, selected in
accordance with the Commercial Arbitration Rules, and the decision of the
arbitrator shall be final and binding on the parties hereto and judgment upon
the award rendered by the arbitrator may be entered in any court having
jurisdiction thereof. The costs assessed by the AAA for arbitration shall be
borne equally by all the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
caused this Agreement to be executed by their duly authorized representatives,
as of the date first written above.
Sentry Technology Corporation
By: /s/ Peter J. Mundy
----------------------------
Name: Peter J. Mundy
Title: VP
Brascan Technology Fund Inc. in its capacity as general partner of, and on
behalf of, Brascan Technology Fund
By: /s/ Lenis Quan
----------------------------
Name: Lenis Quan
Title:
/s/ Peter L. Murdoch
- ------------------------------
Peter Murdoch
/s/ Robert Furst
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Robert Furst
Saburah Investments Inc.
By: Peter L. Murdoch
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Name: Peter L. Murdoch
Title: President