EXHIBIT 10.1
--------------------------------------------------------------------------------
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
BETWEEN
HEIR HOLDING CO., INC.
AND
THE PURCHASER(S) LISTED ON
SCHEDULE 1 HERETO
-------------------------------
AUGUST 7, 2002
-------------------------------
--------------------------------------------------------------------------------
84
TABLE OF CONTENTS
ARTICLE I CERTAIN DEFINITIONS...........................................
1.1 Certain Definitions.............................................
ARTICLE II PURCHASE AND SALE OF CONVERTIBLE DEBENTURES...................
2.1 Purchase and Sale; Purchase Price...............................
2.2 Execution and Delivery of Documents; the Closing................
2.3 The Post-Closing................................................
ARTICLE III REPRESENTATIONS AND WARRANTIES...............................
3.1 Representations, Warranties and Agreements of the Company.......
3.2 Representations and Warranties of the Purchaser.................
ARTICLE IV OTHER AGREEMENTS OF THE PARTIES...............................
4.1 Manner of Offering..............................................
4.2 Furnishing of Information.......................................
4.3 Notice of Certain Events........................................
4.4 Copies and Use of Disclosure Documents and Non-Public Filings...
4.5 Modification to Disclosure Documents............................
4.6 Blue Sky Laws...................................................
4.7 Integration.....................................................
4.8 Furnishing of Rule 144(c) Materials.............................
4.9 Solicitation Materials..........................................
4.10 Subsequent Financial Statements.................................
4.11 Prohibition on Certain Actions..................................
4.12 Listing of Common Stock.........................................
4.13 Escrow..........................................................
4.14 Conversion Procedures; Maintenance of Escrow Shares.............
4.15 Attorney-in-Fact................................................
4.16 Indemnification.................................................
4.17 Exclusivity.....................................................
4.18 Purchaser's Ownership of Common Stock...........................
4.19 Purchaser's Rights if Trading in Common Stock is Suspended......
4.20 No Violation of Applicable Law..................................
4.21 Redemption Restrictions.........................................
4.22 No Other Registration Rights....................................
4.23 Merger or Consolidation.........................................
4.24 Registration of Escrow Shares...................................
4.25 Liquidated Damages..............................................
4.26 Short Sales.....................................................
4.27 Fees............................................................
4.28 Additional Fees.................................................
4.29 Changes to Federal and State Securities Laws....................
4.30 Merger Agreement................................................
85
ARTICLE V TERMINATION...................................................
5.1 Termination by the Company or the Purchaser.....................
5.2. Remedies........................................................
ARTICLE VI LEGAL FEES AND DEFAULT INTEREST RATE..........................
ARTICLE VII MISCELLANEOUS.................................................
7.1 Fees and Expenses...............................................
7.2 Entire Agreement; Amendments....................................
7.3 Notices.........................................................
7.4 Amendments; Waivers.............................................
7.5 Headings........................................................
7.6 Successors and Assigns..........................................
7.7 No Third Party Beneficiaries....................................
7.8 Governing Law; Venue; Service of Process........................
7.9 Survival........................................................
7.10 Counterpart Signatures..........................................
7.11 Publicity.......................................................
7.12 Severability....................................................
7.13 Limitation of Remedies..........................................
7.14 Omnibus Provision...............................................
7.15 Successors and Assigns..........................................
LIST OF SCHEDULES:
Schedule 1 Purchaser(s)
Schedule 3.1(a) Subsidiaries
Schedule 3.1(c) Capitalization and Registration Rights
Schedule 3.1(d) Equity and Equity Equivalent Securities
Schedule 3.1(e) Conflicts
Schedule 3.1(f) Consents and Approvals
Schedule 3.1(g) Litigation
Schedule 3.1(h) Defaults and Violations
Schedule 5.1 Form 8-K Disclosure Obligations
LIST OF EXHIBITS:
Exhibit A Convertible Debenture
Exhibit B Merger Agreement
Exhibit C Conversion And Exercise Procedures
Exhibit D Escrow Agreement
Exhibit E Power of Attorney
Exhibit F Legal Opinion
86
THIS CONVERTIBLE DEBENTURE PURCHASE AGREEMENT ("Agreement") is made and
entered into as of August 7, 2002, between HEIR HOLDING CO., INC., a corporation
organized and existing under the laws of the State of Delaware (the "Company"),
and the purchaser(s) listed on SCHEDULE 1 hereto (the "Purchaser").
WHEREAS, subject to the terms and conditions set forth in this
Agreement, the Company desires to issue and sell to the Purchaser and the
Purchaser desires to acquire from the Company the Company's $1,000,000, 1%
Convertible Debenture, due August 6, 2007, at the price of One Million Dollars
($1,000,000) (the "Debenture Consideration") in the form of EXHIBIT A annexed
hereto and made a part hereof (the "Debentures").
IN CONSIDERATION of the mutual covenants contained in this Agreement,
the Company and each Purchaser agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
1.1 Certain Definitions. As used in this Agreement, and unless the
context requires a different meaning, the following terms have the meanings
indicated:
"Affiliate" means, with respect to any Person, any Person that,
directly or indirectly, controls, is controlled by or is under common control
with such Person. For the purposes of this definition, "control" (including,
with correlative meanings, the terms "controlled by" and "under common control
with") shall mean the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of such Person, whether
through the ownership of voting securities or by contract or otherwise.
"Agreement" shall have the meaning set forth in the introductory
paragraph of this Agreement.
"Attorney-in-Fact" shall have the meaning set forth in Section
2.3(b)(ii) hereof.
"Business Day" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the State of
Delaware are authorized or required by law or other government actions to close.
"Closing" shall have the meaning set forth in Section 2.2(a).
"Closing Date" shall have the meaning set forth in Section 2.2(a).
"Commission" means the Securities and Exchange Commission.
"Common Stock" means shares now or hereafter authorized of the class of
common stock, no par value, of the Company and stock of any other class into
which such shares may hereafter have been reclassified or changed.
87
"Company" shall have the meaning set forth in the introductory
paragraph.
"Control Person" shall have the meaning set forth in Section 4.16(a)
hereof.
"Conversion Date" shall have the meaning set forth in the Debentures.
"Debentures" shall have the meaning set forth in the recital.
"Default" means any event or condition which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Disclosure Documents" means (a) all documents and materials provided
to the Purchaser and/or its representatives in connection with the Company and
this offering, including, but not limited to, the Company's unaudited balance
sheet as at July 31, 2002 and profit and loss statement for the seven month
period ended July 31, 2002 and (b) the Schedules required to be to furnished to
the Purchaser by or on behalf of the Company pursuant to Section 3.1 hereof.
"Effective Date" shall mean the date on which a certificate of merger
or similar document ("Certificate of Merger") is filed with the Secretary of
State of the State of Delaware to effect the merger of the Company with Scores
Acquisition Co., Inc., a Delaware corporation ("Acquisition Co."), (the
"Merger") pursuant to the Merger Agreement annexed as EXHIBIT B hereto.
"Escrow Agent" means ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, LLP, ▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇; Tel: ▇▇▇-▇▇▇-▇▇▇▇; Fax: ▇▇▇-▇▇▇-▇▇▇▇.
"Escrow Agreement" shall have the meaning set forth in Section 4.13
hereof.
"Escrow Shares" means the certificates representing Six Million
(6,000,000) shares of duly issued Common Stock, without restriction and freely
tradable upon resale pursuant to Rule 504 of Regulation D of the Securities Act,
in the share denominations set forth in Schedule 1 hereof, registered in the
name of the Purchaser and/or its assigns to be held in escrow pursuant to this
Agreement and the Escrow Agreement. The Escrow Shares are the shares into which
the Debentures are convertible in accordance with the terms hereof and the
Debentures. For purposes of this Agreement, such conversion shares may also be
referred to as "Underlying Shares."
"Event of Default" shall have the meaning set forth in Section 5.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Execution Date" means the date of this Agreement first written above.
"Full Conversion Shares" shall have the meaning set forth in Section
4.14 hereof.
88
"Indemnified Party" shall have the meaning set forth in Section 4.16(b)
hereof.
"Indemnifying Party" shall have the meaning set forth in Section
4.16(b) hereof.
"KGL" means ▇▇▇▇▇▇ Gottbetter & ▇▇▇▇▇▇▇▇, LLP.
"Limitation on Conversion" shall have the meaning set forth in Section
4.18 hereof.
"Losses" shall have the meaning set forth in Section 4.16(a) hereof.
"Material" shall mean having a financial consequence in excess of
$100,000.
"Material Adverse Effect" shall have the meaning set forth in Section
3.1(a).
"Merger Agreement" means the Merger Agreement between SCOH, Acquisition
Co. and the Company, annexed as EXHIBIT B hereto.
"NASD" means the National Association of Securities Dealers, Inc.
"Nasdaq" shall mean the Nasdaq Stock Market, Inc.(R)
"Non-Public Filings" shall have the meaning set forth in Section 4.2
hereof.
"Notice of Conversion" shall have the meaning set forth in EXHIBIT C
annexed hereto.
"Original Issuance Date," shall have the meaning set forth in the
Debentures.
"OTCBB" shall mean the NASD over-the counter Bulletin Board(R).
"Per Debenture Consideration" shall have the meaning set forth in the
recital.
"Per Share Market Value" of the Common Stock means on any particular
date (a) the last sale price of shares of Common Stock on such date or, if no
such sale takes place on such date, the last sale price on the most recent prior
date, in each case as officially reported on the principal national securities
exchange on which the Common Stock is then listed or admitted to trading, or (b)
if the Common Stock is not then listed or admitted to trading on any national
securities exchange, the closing bid price per share as reported by Nasdaq, or
(c) if the Common Stock is not then listed or admitted to trading on the Nasdaq,
the closing bid price per share of the Common Stock on such date as reported on
the OTCBB or if there is no such price on such date, then the last bid price on
the date nearest preceding such date, or (d) if the Common Stock is not quoted
on the OTCBB, the closing bid price for a share of Common Stock on such date in
the over-the-counter market as reported by the Pinksheets LLC (or similar
organization or agency succeeding to its functions of reporting prices) or if
there is no such price on such date, then the last bid price on the date nearest
preceding such date, or (e) if the Common Stock is no longer publicly traded,
the fair market value of a share of the Common Stock as determined by an
Appraiser (as defined in Section 4(c)(iv) of the Debentures) selected in good
faith by the
89
holders of a majority of the Debentures; provided, however, that the Company,
after receipt of the determination by such Appraiser, shall have the right to
select an additional Appraiser, in which case, the fair market value shall be
equal to the average of the determinations by each such Appraiser.
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Post-Closing" shall have the meaning set forth in Section 2.3(a).
"Post-Closing Date" shall have the meaning set forth in Section 2.3(a).
"Power of Attorney" means the power of attorney in the form of EXHIBIT
E annexed hereto.
"Proceeding" means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
"Purchase Price" shall have the meaning set forth in Section 2.1.
"Purchaser" shall mean HEM Mutual Assurance LLC and all of its
officers, directors, principal shareholders and other Affiliates.
"Registrable Securities" means the securities entitled to registration
pursuant to Section 4.24.
"Reporting Issuer" means a company that is subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act.
"Required Approvals" shall have the meaning set forth in Section
3.1(f).
"SCOH" means Scores Holding Company Inc., a Utah corporation.
"Securities" means the Debentures, the Underlying Shares and the Escrow
Shares.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Short Sale" shall have the meaning set forth in Section 4.26 hereof.
"Subsidiaries" shall have the meaning set forth in Section 3.1(a).
"Trading Day" means (a) a day on which the Common Stock is quoted on
Nasdaq, the OTCBB or the principal stock exchange on which the Common Stock has
been listed, or (b) if
90
the Common Stock is not quoted on Nasdaq, the OTCBB or any stock exchange, a day
on which the Common Stock is quoted in the over-the-counter market, as reported
by the Pinksheets LLC (or any similar organization or agency succeeding its
functions of reporting prices).
"Transaction Documents" means this Agreement and all exhibits and
schedules hereto and all other documents, instruments and writings required
pursuant to this Agreement.
"Underlying Shares" means the shares of duly issued Common Stock,
without restriction and freely tradable upon resale pursuant to Rule 504 of
Regulation D of the Securities Act, into which the Debentures are convertible in
accordance with the terms hereof and the Debentures.
ARTICLE II
PURCHASE AND SALE OF CONVERTIBLE DEBENTURES
2.1 Purchase and Sale; Purchase Price. Subject to the terms and
conditions set forth herein, the Company shall issue and sell and the Purchaser
shall purchase an aggregate principal amount of One Million Dollars ($1,000,000)
(the "Purchase Price") of the Debentures. The Debentures shall have the
respective rights, preferences and privileges as set forth in the form of
Debenture annexed as EXHIBIT A hereto.
2.2 Execution and Delivery of Documents; the Closing.
(a) The Closing of the purchase and sale of the Debentures
(the "Closing") shall take place simultaneously with the execution and delivery
of this Agreement (the "Closing Date"). At the Closing,
(i) the parties shall execute and deliver the Escrow
Agreement;
(ii) the Company shall deliver to the Purchaser the
legal opinions of counsel to the Company substantially in the form of
EXHIBIT F annexed hereto, addressed to the Purchaser and dated the date
hereof;
(iii) the Company shall deliver to the Escrow Agent
(A) original and duly executed Debentures registered in the name of the
Purchaser in the amount set forth in SCHEDULE 1, (B) an original and
duly executed Power of Attorney and (C) original duly issued stock
certificates registered in the name of the Purchaser representing the
Escrow Shares;
(iv) the Company shall execute and deliver to the
Purchaser a certificate of its President certifying that attached
thereto is a copy of resolutions duly adopted by the Board of Directors
of the Company authorizing the Company to execute and deliver the
Transaction Documents and to enter into the transactions contemplated
thereby; and
91
(v) the Purchaser shall deliver to the Escrow Agent
the Purchase Price by wire transfer of One Million Dollars ($1,000,000)
pursuant to the Escrow Agent's wire transfer instructions.
(b) If this Agreement is terminated pursuant to Sections 5.1
hereof, then, within two (2) Business Days from the date of termination, either
the Company or the Purchaser shall notify the Escrow Agent of same, and
(i) the Escrow Agent shall, within two (2) Business
Days of its receipt of such notice,
(A) return the Purchase Price to the
Purchaser; and
(B) return the certificates representing
(A) the Debentures and (B) the Escrow Shares to the Company.
2.3 The Post-Closing.
(a) The post-closing of the purchase and sale of the
Debentures (the "Post-Closing") shall take place no later than five (5) Business
Days after the Effective Date (the "Post-Closing Date") at the offices of ▇▇▇▇▇▇
Gottbetter & ▇▇▇▇▇▇▇▇, LLP, ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇; provided,
however, that all of the transactions contemplated by the Merger Agreement
annexed as EXHIBIT B hereto shall have been consummated in accordance with the
terms of the Merger Agreement prior to the Post-Closing; and further, provided,
that the Post-Closing may not occur later than fifteen (15) days after the
Closing Date (except if such 15th day is not a Business Day, then the next
Business Day), unless the Purchaser agrees in writing in advance to an
extension, which writing shall set forth the new Closing Date. The Merger
Agreement shall be executed immediately after the Closing.
(b) At the Post-Closing,
(i) the Escrow Agent shall deliver to the Purchaser
original and duly executed Debentures registered in the name of the
Purchaser in the amount set forth in SCHEDULE 1 hereto;
(ii) the Company shall deliver to the Purchaser the
following:
(A) a certified copy of the Certificate of
Merger as filed with the Secretary of State of the State of
Delaware; and
(B) all other documents, instruments and
writings required to have been delivered by the Company at or
prior to the Post-Closing pursuant to this Agreement.
(c) Upon receipt by the Purchaser of those items set forth in
Sections 2.3(b)(i) and (ii) above, the Escrow Agent shall deliver the following
to the Company:
92
(i) the Purchase Price by wire transfer of
immediately available funds in the amount of One Million Dollars
($1,000,000) pursuant to written wire transfer instructions delivered
by the Company to the Escrow Agent at least three (3) Business Days
prior to the Post-Closing Date; and
(ii) all documents, instruments, and writings
required to have been delivered or necessary at or prior to the
Post-Closing by the Purchaser pursuant to this Agreement.
(d) The Escrow Agent shall retain and hold the Escrow Shares,
all of which shall be held in accordance with the terms of this Agreement and
the Escrow Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations, Warranties and Agreements of the Company. The
Company hereby makes the following representations and warranties to the
Purchaser, all of which shall survive the Post-Closing:
(a) Organization and Qualification. The Company is a
corporation, duly incorporated, validly existing and in good standing under the
laws of the State of Delaware, with the requisite corporate power and authority
to own and use its properties and assets and to carry on its business as
currently conducted. The Company has no subsidiaries other than as set forth on
SCHEDULE 3.1(a) attached hereto (collectively, the "Subsidiaries"). Each of the
Subsidiaries is a corporation, duly incorporated, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, with the full
corporate power and authority to own and use its properties and assets and to
carry on its business as currently conducted. Each of the Company and the
Subsidiaries is duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary, except
where the failure to be so qualified or in good standing, as the case may be,
would not, individually or in the aggregate, have a material adverse effect on
the results of operations, assets, prospects, or financial condition of the
Company and the Subsidiaries, taken as a whole (a "Material Adverse Effect").
(b) Authorization, Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated hereby and by each other Transaction Document and to otherwise to
carry out its obligations hereunder and thereunder. The execution and delivery
of this Agreement and each of the other Transaction Documents by the Company and
the consummation by it of the transactions contemplated hereby and thereby has
been duly authorized by all necessary action on the part of the Company. Each of
this Agreement and each of the other Transaction Documents has been or will be
duly executed by the Company and when delivered in accordance with the terms
hereof or thereof will constitute the valid and binding obligation of the
Company enforceable against the Company in accordance with its terms, except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws
93
relating to, or affecting generally the enforcement of, creditors' rights and
remedies or by other equitable principles of general application.
(c) Capitalization. The authorized, issued and outstanding
capital stock of the Company is set forth on SCHEDULE 3.1(c). No Debentures have
been issued as of the date hereof. No shares of Common Stock are entitled to
preemptive or similar rights, nor is any holder of the Common Stock entitled to
preemptive or similar rights arising out of any agreement or understanding with
the Company by virtue of this Agreement. Except as described in this Agreement,
or disclosed in SCHEDULE 3.1(c), there are no outstanding options, warrants,
script, rights to subscribe to, registration rights, calls or commitments of any
character whatsoever relating to, or, except as a result of the purchase and
sale of the Debentures hereunder, securities, rights or obligations convertible
into or exchangeable for, or giving any person any right to subscribe for or
acquire, any shares of Common Stock, or contracts, commitments, understandings,
or arrangements by which the Company or any Subsidiary is or may become bound to
issue additional shares of Common Stock, or securities or rights convertible or
exchangeable into shares of Common Stock. Neither the Company nor any Subsidiary
is in violation of any of the provisions of its respective Certificate of
Incorporation, bylaws or other charter documents.
(d) Issuance of Securities. The Debentures and the Escrow
Shares have been duly and validly authorized for issuance, offer and sale
pursuant to this Agreement and, when issued and delivered as provided hereunder
against payment in accordance with the terms hereof, shall be valid and binding
obligations of the Company enforceable in accordance with their respective
terms. The Company has and at all times while the Debentures are outstanding
will continue to maintain an adequate reserve of shares of Common Stock to
enable it to perform its obligations under this Agreement and the Debentures.
When issued in accordance with the terms hereof, the Securities will be duly
authorized, validly issued, fully paid and non-assessable. Except as set forth
in SCHEDULE 3.1(d) hereto, there is no equity or equity equivalent security
outstanding that is substantially similar to the Debentures, including any
security having a floating conversion price substantially similar to the
Debentures; provided, however, that nothing contained in this Section 3.1(d)
shall be deemed to permit any equity or equity equivalent security of the
Company to provide for a floating conversion price, other than any security
issued or that may be issued to the Purchaser or any of its respective
Affiliates or assigns.
(e) No Conflicts. The execution, delivery and performance of
this Agreement and the other Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
do not and will not (i) conflict with or violate any provision of its
Certificate of Incorporation or bylaws (each as amended through the date hereof)
or (ii) be subject to obtaining any of the consents referred to in Section
3.1(f), conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Company is a party, or (iii)
result in a violation of any law, rule, regulation, order, judgment, injunction,
decree or other restriction of any court or governmental authority to which the
Company or its Subsidiaries is subject (including, but not limited to, those of
other countries and the federal and state securities laws and regulations), or
by which any property or asset of the Company or its Subsidiaries is bound or
affected, except in the case of clause (ii), such conflicts, defaults,
94
terminations, amendments, accelerations, cancellations and violations as would
not, individually or in the aggregate, have a Material Adverse Effect. The
business of the Company and its Subsidiaries is not being conducted in violation
of any law, ordinance or regulation of any governmental authority.
(f) Consents and Approvals. Except as specifically set forth
in SCHEDULE 3.1(f), neither the Company nor any Subsidiary is required to obtain
any consent, waiver, authorization or order of, or make any filing or
registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of this Agreement and each of the other
Transaction Documents, except for the filing of the Certificate of Merger with
the Secretary of State of the State of Delaware to effect the Merger pursuant to
the Merger Agreement, which shall be filed no later than ten (10) days from the
Execution Date (together with the consents, waivers, authorizations, orders,
notices and filings referred to in SCHEDULE 3.1(f), the "Required Approvals").
(g) Litigation; Proceedings. Except as specifically disclosed
in SCHEDULE 3.1(g), there is no action, suit, notice of violation, proceeding or
investigation pending or, to the best knowledge of the Company, threatened
against or affecting the Company or any of its Subsidiaries or any of their
respective properties before or by any court, governmental or administrative
agency or regulatory authority (federal, state, county, local or foreign) which
(i) relates to or challenges the legality, validity or enforceability of any of
the Transaction Documents, the Debentures or the Underlying Shares, (ii) could,
individually or in the aggregate, have a Material Adverse Effect or (iii) could,
individually or in the aggregate, materially impair the ability of the Company
to perform fully on a timely basis its obligations under the Transaction
Documents.
(h) No Default or Violation. Except as set forth in SCHEDULE
3.1(h) hereto, neither the Company nor any Subsidiary (i) is in default under or
in violation of any indenture, loan or credit agreement or any other agreement
or instrument to which it is a party or by which it or any of its properties is
bound, except such conflicts or defaults as do not have a Material Adverse
Effect, (ii) is in violation of any order of any court, arbitrator or
governmental body, except for such violations as do not have a Material Adverse
Effect, or (iii) is in violation of any statute, rule or regulation of any
governmental authority which could (individually or in the aggregate) (x)
adversely affect the legality, validity or enforceability of this Agreement, (y)
have a Material Adverse Effect or (z) adversely impair the Company's ability or
obligation to perform fully on a timely basis its obligations under this
Agreement.
(i) Certain Fees. No fees or commission will be payable by the
Company to any investment banker, broker, placement agent or bank with respect
to the consummation of the transactions contemplated hereby except as provided
in Section 4.27 hereof.
(j) Disclosure Documents. The Disclosure Documents are
accurate in all material respects and do not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.
95
(k) Manner of Offering. The Securities are being offered and
sold to the Purchaser without registration under the Securities Act in a private
placement that is exempt from registration pursuant to Rule 504 of Regulation D
of the Securities Act and without registration under the Colorado Securities Act
of the Colorado Revised Statues (the "Colorado Act") upon the exemption provided
by Section ▇▇-▇▇-▇▇▇ of the Colorado Act and regulation 51-3.13B promulgated
thereunder. Accordingly, the Securities are being issued without restriction and
may be freely traded upon resale pursuant to Rule 504 of Regulation D of the
Securities Act.
(l) Non-Registered Offering. Neither the Company not any
Person acting on its behalf has taken or will take any action (including,
without limitation, any offering of any securities of the Company under
circumstances which would require the integration of such offering with the
offering of the Securities under the Securities Act) which might subject the
offering, issuance or sale of the Securities to the registration requirements of
Section 5 of the Securities Act.
(m) Not a Reporting Company; Eligibility to use Exemption
under 504(b). The Company is not subject to the reporting requirements of
Section 13 or Section 15(d) of the Exchange Act. The Company has not sold any
securities under Rule 504(b) in the last twelve months, except as disclosed in
Schedule 3.1(m). The Company is eligible to issue securities exempt from
registration pursuant to Rule 504 of Regulation D promulgated under the
Securities Act.
The Purchaser acknowledges and agrees that the Company makes no representation
or warranty with respect to the transactions contemplated hereby other than
those specifically set forth in Section 3.1 hereof.
3.2 Representations and Warranties of the Purchaser. The Purchaser
hereby represents and warrants to the Company as follows:
(a) Organization; Authority. The Purchaser is a limited
liability company, duly organized, validly existing and in good standing under
the laws of the jurisdiction of its formation with the requisite power and
authority to enter into and to consummate the transactions contemplated hereby
and by the other Transaction Documents and otherwise to carry out its
obligations hereunder and thereunder. The acquisition of the Debentures to be
purchased by the Purchaser hereunder has been duly authorized by all necessary
action on the part of the Purchaser. This Agreement has been duly executed and
delivered by the Purchaser and constitutes the valid and legally binding
obligation of the Purchaser, enforceable against it in accordance with its
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to, or affecting
generally the enforcement of, creditors rights and remedies or by other general
principles of equity.
(b) Investment Intent. The Purchaser is acquiring the
Debentures to be purchased by it hereunder, and will acquire the Underlying
Shares relating to such Debentures for its own account for investment purposes
only and not with a view to or for distributing or reselling such Debentures or
Underlying Shares or any part thereof or interest therein, without prejudice,
however, to such Purchaser's right, subject to the provisions of this Agreement,
at all
96
times to sell or otherwise dispose of all or any part of such Debentures or
Underlying Shares in compliance with applicable federal and state securities
laws.
(c) Purchaser Status. At the time the Purchaser was offered
the Debentures to be acquired by it hereunder, it was and at the date hereof, it
is an "accredited investor" as defined in Rule 501(a) under the Securities Act.
(d) Experience of Purchaser. The Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of an investment in the securities to be acquired by it
hereunder, and has so evaluated the merits and risks of such investment.
(e) Ability of Purchaser to Bear Risk of Investment. The
Purchaser is able to bear the economic risk of an investment in the securities
to be acquired by it hereunder and, at the present time, is able to afford a
complete loss of such investment.
(f) Prohibited Transactions. The securities to be acquired by
the Purchaser hereunder are not being acquired, directly or indirectly, with the
assets of any "employee benefit plan," within the meaning of Section 3(3) of the
Employment Retirement Income Security Act of 1974, as amended.
(g) Access to Information. The Purchaser acknowledges receipt
of the Disclosure Documents and further acknowledges that it has been afforded
(i) the opportunity to ask such questions as it has deemed necessary of, and to
receive answers from, representatives of the Company concerning the terms and
conditions of the securities offered hereunder and the merits and risks of
investing in such securities; (ii) access to information about the Company and
the Company's financial condition, results of operations, business, properties,
management and prospects sufficient to enable it to evaluate its investment in
such securities; and (iii) the opportunity to obtain such additional information
which the Company possesses or can acquire without unreasonable effort or
expense that is necessary to make an informed investment decision with respect
to the investment and to verify the accuracy and completeness of the information
contained in the Disclosure Documents.
(h) Reliance. The Purchaser understands and acknowledges that
(i) the Debentures being offered and sold to it hereunder are being offered and
sold without registration under the Securities Act in a private placement that
is exempt from the registration provisions of the Securities Act under Section
4(2) of the Securities Act and (ii) the availability of such exemption depends
in part on, and that the Company will rely upon the accuracy and truthfulness
of, the foregoing representations and such Purchaser hereby consents to such
reliance.
The Company acknowledges and agrees that the Purchaser makes no
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 3.2.
97
ARTICLE IV
OTHER AGREEMENTS OF THE PARTIES
4.1 Manner of Offering. The Securities are being issued pursuant to
Rule 504 (b) of Regulation D of the Securities Act. The Securities will be
exempt from restrictions on transfer, and will carry no restrictive legend with
respect to the exemption from registration under the Securities Act. The Company
will use its best efforts to insure that no actions are taken that would
jeopardize the availability of the exemption from registration under Rule 504(b)
for the Securities and, if for any reason such exemption becomes unavailable,
shall cause the Securities to be registered under the Securities Act as required
by Section 4.29.
4.2 Furnishing of Information. As long as the Purchaser owns any of the
Securities, the Company will promptly furnish to the Purchaser all annual and
quarterly reports comparable to those required by Section 13(a) or 15(d) of the
Exchange Act (the "Non-Public Filings").
4.3 Notice of Certain Events. The Company shall, on a continuing basis,
(i) advise the Purchaser promptly after obtaining knowledge of, and, if
requested by the Purchaser, confirm such advice in writing, of (A) the issuance
by any state securities commission of any stop order suspending the
qualification or exemption from qualification of the Debentures or the
Underlying Shares, for offering or sale in any jurisdiction, or the initiation
of any proceeding for such purpose by any state securities commission or other
regulatory authority, or (B) any event that makes any statement of a material
fact made by the Company in Section 3.1 or in the Disclosure Documents untrue or
that requires the making of any additions to or changes in Section 3.1 in or in
the Disclosure Documents in order to make the statements therein, in the light
of the circumstances under which they are made, not misleading, (ii) use its
best efforts to prevent the issuance of any stop order or order suspending the
qualification or exemption from qualification of the Securities under any state
securities or Blue Sky laws, and (iii) if at any time any state securities
commission or other regulatory authority shall issue an order suspending the
qualification or exemption from qualification of the Securities under any such
laws, and use its best efforts to obtain the withdrawal or lifting of such order
at the earliest possible time.
4.4 Copies and Use of Disclosure Documents and Non-Public Filings. The
Company shall furnish the Purchaser, without charge, as many copies of the
Disclosure Documents and the Non-Public Filings and any amendments or
supplements thereto as the Purchaser may reasonably request. The Company
consents to the use of the Disclosure Documents and the Non-Public Filings and
any amendments and supplements to any of them by the Purchaser in connection
with resales of the Securities.
4.5 Modification to Disclosure Documents. If any event shall occur as a
result of which, in the reasonable judgment of the Company or the Purchaser, it
becomes necessary or advisable to amend or supplement any of the Disclosure
Documents or the Non-Public Filings in order to make the statements therein, in
the light of the circumstances at the time such Disclosure Documents or the
Non-Public Filings were delivered to the Purchaser, not misleading, or if it
becomes necessary to amend or supplement any of the Disclosure Documents or the
Non-Public Filings to comply with applicable law, the Company shall promptly
prepare an appropriate amendment or supplement to each such document in form and
substance reasonably satisfactory
98
to both the Purchaser and Company so that (i) as so amended or supplemented,
each such document will not include an untrue statement of material fact or omit
to state a material fact necessary in order to make the statements therein, in
the light of the circumstances existing at the time it is delivered to the
Purchaser, not misleading and (ii) the Disclosure Documents and the Non-Public
Filings will comply with applicable law.
4.6 Blue Sky Laws. The Company shall cooperate with the Purchaser in
connection with the exemption from registration of the Securities under the
securities or Blue Sky laws of such jurisdictions as the Purchasers may request;
provided, however, that neither the Company nor its Subsidiaries shall be
required in connection therewith to qualify as a foreign corporation where they
are not now so qualified. The Company agrees that it will execute all necessary
documents and pay all necessary state filing or notice fees to enable the
Company to sell the Securities to the Purchasers.
4.7 Integration. The Company shall not and shall use its best efforts
to ensure that no Affiliate shall sell, offer for sale or solicit offers to buy
or otherwise negotiate in respect of any security (as defined in Section 2 of
the Securities Act) that would be integrated with the offer or sale of the
Securities in a manner that would require the registration under the Securities
Act of the sale of the Securities to the Purchaser.
4.8 Furnishing of Rule 144(c) Materials. The Company shall, for so long
as any of the Securities remain outstanding and during any period in which the
Company is not subject to Section 13 or 15(d) of the Exchange Act, make
available to any registered holder of the Securities ("Holder" or "Holders") in
connection with any sale thereof and any prospective purchaser of such
Securities from such Person, such information in accordance with Rule 144(c)
promulgated under the Securities Act as is required to sell the Securities under
Rule 144 promulgated under the Securities Act.
4.9 Solicitation Materials. The Company shall not (i) distribute any
offering materials in connection with the offering and sale of the Debentures or
the Underlying Shares other than the Disclosure Documents and any amendments and
supplements thereto prepared in compliance herewith or (ii) solicit any offer to
buy or sell the Debentures or the Underlying Shares by means of any form of
general solicitation or advertising.
4.10 Subsequent Financial Statements. If not otherwise publicly
available, the Company shall promptly furnish to the Purchaser a copy of all
financial statements for any period subsequent to the period covered by the
financial statements included in the Disclosure Documents until the full
conversion of the Debentures.
4.11 Prohibition on Certain Actions. From the date hereof through the
Post-Closing Date, the Company shall not and shall cause the Subsidiaries not
to, without the prior written consent of the Purchaser, (i) amend its
certificate of incorporation, by-laws or other charter documents so as to
adversely affect any rights of the Purchaser; (ii) split, combine or reclassify
its outstanding capital stock; (iii) declare, authorize, set aside or pay any
dividend or other distribution with respect to the Common Stock; (iv) redeem,
repurchase or offer to repurchase or otherwise acquire shares of its Common
Stock; or (v) enter into any agreement with respect to any of the foregoing.
99
4.12 Listing of Common Stock. If the Common Stock shall become listed
on the OTCBB or on another exchange, the Company shall (a) use its best efforts
to maintain the listing of its Common Stock on the OTCBB or such other exchange
on which the Common Stock is then listed until expiration of each of the periods
during which the Shares may be converted or the Warrant may be exercised and (b)
shall provide to the Purchaser evidence of such listing.
4.13 Escrow. The Company and the Purchaser agree to execute and
deliver, simultaneously with the execution and delivery of this Agreement, the
escrow agreement attached hereto and made part hereof as EXHIBIT D (the "Escrow
Agreement"), and to issue into escrow the certificates to be held by the Escrow
Agent, registered in the name of the Purchaser and without any restrictive
legend of any kind, pursuant to the terms of such escrow.
4.14 Conversion Procedures; Maintenance of Escrow Shares. EXHIBIT C
attached hereto and made a part hereof sets forth the procedures with respect to
the conversion of the Debentures, including the forms of Notice of Conversion to
be provided upon conversion, instructions as to the procedures for conversion
and such other information and instructions as may be reasonably necessary to
enable the Purchaser or its permitted transferee(s) to exercise the right of
conversion smoothly and expeditiously. The Company agrees that, at any time the
conversion price of the Debentures is such that the number of Escrow Shares with
respect to the Debentures is less than 200% of the number of shares of Common
Stock that would be needed to satisfy full conversion of all of the Debentures
given the then current conversion price (the "Full Conversion Shares"), upon
five (5) Business Days written notice of such circumstance to the Company by the
Purchaser and/or the Escrow Agent, the Company shall issue additional share
certificates in the name of the Purchaser in denominations of 10,000 shares, and
deliver same to the Escrow Agent, such that the new number of Escrow Shares with
respect to the Debentures is equal to 200% of the Full Conversion Shares.
4.15 Attorney-in-Fact. To effectuate the terms and provisions of this
Agreement and the Escrow Agreement, the Company hereby agrees to give a power of
attorney as is evidenced by EXHIBIT E annexed hereto. All acts done under such
power of attorney are hereby ratified and approved and neither the
Attorney-in-Fact nor any designee or agent thereof shall be liable for any acts
of commission or omission, for any error of judgment or for any mistake of fact
or law, as long as the Attorney-in-Fact is operating within the scope of the
power of attorney and this Agreement and its exhibits. The power of attorney,
being coupled with an interest, shall be irrevocable while any of the Debentures
remain unconverted or any portion of this Agreement or the Escrow Agreement
remains unsatisfied. In addition, the Company shall give the Attorney-in-Fact
resolutions executed by the Board of Directors of the Company which authorize
transfers of the Debentures and future issuances of the Underlying Shares for
the Debentures, and which resolutions state that they are irrevocable while any
of the Debentures remain unconverted or any portion of this Agreement or the
Escrow Agreement remains unsatisfied.
4.16 Indemnification.
(a) Indemnification
(i) The Company shall, notwithstanding termination of
this Agreement and without limitation as to time, indemnify and hold
harmless the Purchaser
100
and its officers, directors, agents, employees and affiliates, each
Person who controls the Purchaser (within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act) (each such
Person, a "Control Person") and the officers, directors, agents,
employees and affiliates of each such Control Person, to the fullest
extent permitted by applicable law, from and against any and all
losses, claims, damages, liabilities, costs (including, without
limitation, costs of preparation and attorneys' fees) and expenses
(collectively, "Losses"), as incurred, arising out of, or relating to,
a breach or breaches of any representation, warranty, covenant or
agreement by the Company under this Agreement or any other Transaction
Document.
(ii) The Purchaser shall, notwithstanding termination
of this Agreement and without limitation as to time, indemnify and hold
harmless the Company, its officers, directors, agents and employees,
each Control Person and the officers, directors, agents and employees
of each Control Person, to the fullest extent permitted by application
law, from and against any and all Losses, as incurred, arising out of,
or relating to, a breach or breaches of any representation, warranty,
covenant or agreement by the Purchaser under this Agreement or the
other Transaction Documents.
(b) Conduct of Indemnification Proceedings. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity hereunder
(an "Indemnified Party"), such Indemnified Party promptly shall notify the
Person from whom indemnity is sought (the "Indemnifying Party") in writing, and
the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all fees and expenses incurred in connection with defense thereof;
provided, that the failure of any Indemnified Party to give such notice shall
not relieve the Indemnifying Party of its obligations or liabilities pursuant to
this Agreement, except (and only) to the extent that it shall be finally
determined by a court of competent jurisdiction (which determination is not
subject to appeal or further review) that such failure shall have proximately
and materially adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed to
pay such fees and expenses; or (2) the Indemnifying Party shall have failed
promptly to assume the defense of such Proceeding and to employ counsel
reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3)
the named parties to any such Proceeding (including any impeded parties) include
both such Indemnified Party and the Indemnifying Party, and such Indemnified
Party shall have been advised by counsel that a conflict of interest is likely
to exist if the same counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense of the claim against the Indemnified Party but will
retain the right to control the overall Proceedings out of which the claim arose
and such counsel employed by the Indemnified Party shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified
101
Party, effect any settlement of any pending Proceeding in respect of which any
Indemnified Party is a party, unless such settlement includes an unconditional
release of such Indemnified Party from all liability on claims that are the
subject matter of such Proceeding.
All fees and expenses of the Indemnified Party to which the
Indemnified Party is entitled hereunder (including reasonable fees and expenses
to the extent incurred in connection with investigating or preparing to defend
such Proceeding in a manner not inconsistent with this Section) shall be paid to
the Indemnified Party, as incurred, within ten (10) Business Days of written
notice thereof to the Indemnifying Party.
No right of indemnification under this Section 4.16 shall be
available as to a particular Indemnified Party if there is a non-appealable
final judicial determination that such Losses arise solely out of the negligence
or bad faith of such Indemnified Party in performing the obligations of such
Indemnified Party under this Agreement or a breach by such Indemnified Party of
its obligations under this Agreement.
(c) Contribution. If a claim for indemnification under this
Section 4.16(a) is unavailable to an Indemnified Party or is insufficient to
hold such Indemnified Party harmless for any Losses in respect of which this
Section 4.16 would apply by its terms (other than by reason of exceptions
provided in this Section 4.16(c)), then each Indemnifying Party, in lieu of
indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such Losses in such proportion
as is appropriate to reflect the relative benefits received by the Indemnifying
Party on the one hand and the Indemnified Party on the other and the relative
fault of the Indemnifying Party and Indemnified Party in connection with the
actions or omissions that resulted in such Losses as well as any other relevant
equitable considerations. The relative fault of such Indemnifying Party and
Indemnified Party shall be determined by reference to, among other things,
whether there was a judicial determination that such Losses arise in part out of
the negligence or bad faith of the Indemnified Party in performing the
obligations of such Indemnified Party under this Agreement or the Indemnified
Party's breach of its obligations under this Agreement. The amount paid or
payable by a party as a result of any Losses shall be deemed to include any
attorneys' or other fees or expenses incurred by such party in connection with
any Proceeding to the extent such party would have been indemnified for such
fees or expenses if the indemnification provided for in this Section was
available to such party.
(d) Non-Exclusivity. The indemnity and contribution agreements
contained in this Section are in addition to any obligation or liability that
the Indemnifying Parties may have to the Indemnified Parties.
4.17 Exclusivity. During the five year period commencing on the
Original Issuance Date (as defined in the Debentures), the Company and its
Affiliates shall not offer or issue any equity, equity equivalent security,
debt, or any equity lines of credit, with a floating conversion price other than
to the Purchaser or any of its Affiliates.
4.18 Purchaser's Ownership of Common Stock. In addition to and not in
lieu of the limitations on conversion set forth in the Debentures, the
conversion rights of the Purchaser set forth in the Debentures shall be limited,
solely to the extent required, from time to time, such
102
that, unless the Purchaser gives written notice 75 days in advance to the
Company of the Purchaser's intention to exceed the Limitation on Conversion as
defined herein, with respect to all or a specified amount of the Debentures and
the corresponding number of the Underlying Shares, in no instance shall the
maximum number of shares of Common Stock which the Purchaser (singularly,
together with any Persons who in the determination of the Purchaser, together
with the Purchaser, constitute a group as defined in Rule 13d-5 of the Exchange
Act) may receive in respect of any conversion of the Debentures, exceed, at any
one time, an amount equal to the remainder of (i) 4.99% of the then issued and
outstanding shares of Common Stock of the Company following such conversion
minus (ii) the number of shares of Common Stock of the Company then owned by the
Purchaser (including any shares of Common Stock deemed beneficially owned due to
ownership of the Debentures) (the foregoing being herein referred to as the
"Limitation on Conversion"); provided, however, that the Limitation on
Conversion shall not apply to any forced or automatic conversion pursuant to
this agreement or the Debentures; and provided, further that if the Purchaser
shall have declared an Event of Default and, if a cure period is provided, the
Company shall not have properly and fully cured such Event of Default within any
such cure period, the provisions of this Section 4.18 shall be null and void
from and after such date. The Company shall, promptly upon its receipt of a
Notice of Conversion tendered by the Purchaser (or its sole designee) for the
Debentures, notify the Purchaser by telephone and by facsimile of the number of
shares of Common Stock outstanding on such date and the number of Underlying
Shares which would be issuable to the Purchaser (or its sole designee, as the
case may be) if the conversion requested in such Notice of Conversion were
effected in full, whereupon, in accordance with the Debentures notwithstanding
anything to the contrary set forth in the Debentures, the Purchaser may within
one (1) Business Day of its receipt of the Company notice required by this
Section 4.18 by facsimile revoke such conversion to the extent (in whole or in
part) that the Purchaser determines that such conversion would result in the
ownership by the Purchaser of shares of Common Stock in excess of the Limitation
on Conversion.
4.19 Purchaser's Rights if Trading in Common Stock is Suspended. If the
Common Stock is listed on any exchange, then at any time after the Post-Closing
if trading in the shares of the Common Stock is suspended (and not reinstated
within ten (10) Trading Days) on such stock exchange or market upon which the
Common Stock is then listed for trading (other than as a result of the
suspension of trading in securities on such market generally or temporary
suspensions pending the release of material information), or the Common Stock is
delisted from the OTCBB (and not reinstated within ten (10) Trading Days), then,
at the option of the Purchaser exercisable by giving written notice to the
Company, the Company shall redeem, as applicable, all of the Debentures and
Underlying Shares owned by the Purchaser at an aggregate purchase price equal to
the sum of:
(i) the product of (1) the average Per Share Market Value for
the five (5) Trading Days immediately preceding (a) the day of such notice, (b)
the date of payment in full of the repurchase price calculated under this
Section 4.19, or (c) the day when the Common Stock was suspended, delisted or
deleted from trading, whichever is greater, multiplied by (2) the aggregate
number of Underlying Shares owned by the Purchaser;
(ii) the greater of (A) the outstanding principal amount and
accrued and unpaid interest on the Debentures owned by the Purchaser and (B) the
product of (1) the average
103
Per Share Market Value for the five (5) Trading Days immediately preceding (a)
the day of such notice, (b) the date of payment in full of the repurchase price
calculated under this Section 4.19, or (c) the day when the Common Stock was
suspended, delisted or deleted from trading, whichever is greater, multiplied by
(2) the aggregate number of Underlying Shares issuable upon the conversion of
the outstanding Debentures owned by the Purchaser; and
(iii) interest on such amounts set forth in (i) - (ii) above
accruing from the seventh (7th) day after such notice until the repurchase price
under this Section 4.19 is paid in full, at the rate of fifteen percent (15%)
per annum.
4.20 No Violation of Applicable Law. Notwithstanding any provision of
this Agreement to the contrary, if the redemption of the Debentures or the
Underlying Shares otherwise required under this Agreement or the Debentures
would be prohibited by the relevant provisions of Delaware law, such redemption
shall be effected as soon as it is permitted under such law; provided, however,
that interest payable by the Company with respect to any such redemption shall
accrue in accordance with Section 4.19.
4.21 Redemption Restrictions. Notwithstanding any provision of this
Agreement to the contrary, if any redemption of the Debentures or the Underlying
Shares otherwise required under this Agreement or the Debentures would be
prohibited in the absence of consent from any lender to the Company or any of
the Subsidiaries, or by the holders of any class of securities of the Company,
the Company shall use its best efforts to obtain such consent as promptly as
practicable after any such redemption is required. Interest payable by the
Company with respect to any such redemption shall accrue in accordance with
Section 4.19 until such consent is obtained. Nothing contained in this Section
4.21 shall be construed as a waiver by the Purchaser of any rights they may have
by virtue of any breach of any representation or warranty of the Company herein
as to the absence of any requirement to obtain any such consent.
4.22 No Other Registration Rights. During the period commencing on the
date hereof and ending on the Post-Closing Date, the Company shall not file any
registration statement that provides for the registration of shares of Common
Stock to be sold by security holders of the Company, other than the Purchaser
and/or its respective Affiliates or assigns, without the prior written consent
of the Purchaser or its assigns, provided, however, that the limitation on the
right to file registration statements contained in this Section 4.22 shall not
apply to registration statements relating solely to (i) employee benefit plans,
notwithstanding the inclusion of a resale prospectus for securities received
under any such employee benefit plan, or (ii) business combinations not
otherwise prohibited by the terms of this Agreement or the other Transaction
Documents.
4.23 Merger or Consolidation. Until the earlier of (a) the full
conversion of the Debentures and (b) the Maturity Date of the Debentures (as
that term is defined in the Debentures), the Company and each Subsidiary will
not, in a single transaction or a series of related transactions, (i)
consolidate with or merge with or into any other Person, or (ii) permit any
other Person to consolidate with or merge into it, unless (w) either (A) the
Company shall be the survivor of such merger or consolidation or (B) the
surviving Person shall expressly assume by supplemental agreement all of the
obligations of the Company under the Debentures, this Agreement and the other
Transaction Documents; (x) immediately before and immediately after
104
giving effect to such transactions (including any indebtedness incurred or
anticipated to be incurred in connection with the transactions), no Event of
Default shall have occurred and be continuing; (y) if the Company is not the
surviving entity, such surviving entity's common shares will be listed on either
The New York Stock Exchange, American Stock Exchange, Nasdaq National Market or
Nasdaq SmallCap Market, or the OTCBB on or prior to the closing of such
transaction(s) and (z) the Company shall have delivered to the Purchaser an
officers' certificate and opinion of counsel, each stating that such
consolidation, merger or transfer complies with this Agreement, that the
surviving Person agrees to be bound thereby and that all conditions precedent in
this Agreement relating to such transaction(s) have been satisfied.
4.24 Registration of Escrow Shares. So long as the Purchaser and/or its
assigns owns any of the Debentures or the Underlying Shares, and the Underlying
Shares would not be freely transferable without registration, the Company agrees
not to file a registration statement with the Commission, other than on Form 10,
Form S-4 (except for a public reoffering or resale) or Form S-8 without first
having registered the Escrow Shares for resale with the SEC and for resale in
such states of the United States as the Holders thereof shall reasonably
request. If the Company shall propose to file with the SEC any registration
statement other than a Form 10, Form S-4 (except for a public reoffering or
resale) or Form S-8 which would cause, or have the effect of causing, the
Company to become a Reporting Issuer or to take any other action, other than the
sale of the Debentures to Purchaser hereunder, the effect of which would be to
cause the Underlying Shares to be restricted securities (as such term is defined
in Rule 144 promulgated under the Securities Act), the Company agrees to give
written notification of such to the Holders of the Debentures and the Underlying
Shares then outstanding at least two weeks prior to such filing or taking of the
proposed action. If any of the Debentures or the Underlying Shares are then
outstanding, the Company agrees to include in such registration statement the
Escrow Shares unless the Underlying Shares would be freely transferable upon
conversion of the Debentures without such registration, so as to permit the
public resale thereof. All costs and expenses of registration shall be borne by
the Company.
If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company will so advise
the Holders. In such event, these registration rights shall be conditioned upon
such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent provided
herein. All Holders proposing to distribute their securities through such
underwriting shall enter into an underwriting agreement in customary form with
the underwriter selected by the Company. In the event that the lead or managing
underwriter in its good faith judgment determines that material adverse market
factors require a limitation on the number of shares to be underwritten, the
underwriter may limit the number of Registrable Securities. In such event, the
Company shall so advise all holders of securities requesting registration, and
the number of shares of securities that are entitled to be included in the
registration and underwriting shall be allocated pro rata among all Holders and
other participants, including the Company, in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities and other
securities which they had requested to be included in such registration
statement at the time of filing the registration statement. If any Holder
disapproves of the terms of any such underwriting, he may elect to withdraw
therefrom by written notice to the Company and the underwriter, provided such
notice is delivered within sixty (60) days of full disclosure of such
105
terms to such Holder, without thereby affecting the right of such Holder to
participate in subsequent offerings hereunder.
Notwithstanding the foregoing, if the Company for any reason shall have
taken any action, other than the sale of the Debentures to the Purchaser
hereunder, the effect of which would be to cause the Underlying Shares to be
restricted securities (as such term is defined in Rule 144 promulgated under the
Securities Act), the Company agrees to immediately file with the SEC and cause
to become effective a registration statement which would permit the public
resale of the Escrow Shares in such states of the United States as the Holders
thereof shall reasonably request. All costs and expenses of such registration
and related Blue Sky filings shall be borne by the Company.
4.25 Liquidated Damages. The Company understands and agrees that a
breach by the Company of Section 4.1, Section 4.24, Section 4.29, Section 4.30
or an Event of Default as contained in this Agreement and/or any other
Transaction Document will result in substantial economic loss to the Purchaser,
which loss will be extremely difficult to calculate with precision. Therefore,
if, for any reason, the Company breaches Sections 4.1, Section 4.24, Section
4.29, Section 4.30 or fails to cure any Event of Default within the time, if
any, given to cure such Event of Default, as compensation and liquidated damages
for such breach or default, and not as a penalty, the Company agrees to pay the
Purchaser an amount obtained by multiplying the Purchase Price times two (2).
The Company shall, upon demand, pay the Purchaser such liquidated damages by
wire transfer of immediately available funds to an account designated by the
Purchaser. Nothing herein shall limit the right of the Purchaser to pursue
actual damages (less the amount of any liquidated damages received pursuant to
the foregoing) for the Company's breach of Section 4.1, Section 4.24, Section
4.29, Section 4.30 or failure to cure an Event of Default, consistent with the
terms of this Agreement. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN
THIS AGREEMENT, THE COMPANY'S OBLIGATIONS UNDER THIS SECTION SHALL SURVIVE ANY
TERMINATION OF THIS AGREEMENT.
4.26 Short Sales. The Purchaser agrees that it will not enter into any
Short Sales (as hereinafter defined) until the earlier to occur of the date that
the Purchaser no longer owns the Debentures and the Maturity Date. For purpose
hereof, a "Short Sale" shall mean a sale of Common Stock by the Purchaser that
is marked as a short sale and that is made at a time when there is no equivalent
offsetting long position in the Common Stock by the Purchaser. For the purposes
of determining whether there is an equivalent offsetting long position in the
Common Stock held by the Purchaser, shares of Common Stock issuable upon
conversion of the Debentures shall be deemed to be held long by the Purchaser
with respect to the Underlying Shares for which a Notice of Conversion is
delivered within two (2) Trading Days following the Trading Day that such short
sale is entered into.
4.27 Fees. The Company will pay the following fees and expenses in
connection with the transactions contemplated hereby and, except with respect to
the escrow agent fee, regardless of whether the transactions contemplated under
this Agreement are closed or otherwise completed: (a) to KGL (i) $15,000 for
document preparation fees; and (ii) all reasonable disbursements and expenses
incurred by KGL in connection therewith and (b) $5,000 to the
106
Escrow Agent for the escrow agent fee. All fees and expenses will be paid at
Post-Closing and the Escrow Agent shall deduct such fees and expenses directly
from escrow.
4.28 Additional Fees. If the Company or any of its Affiliates enters
into any future financing with any prospective purchaser introduced by the
Purchaser within a period of two (2) years from the date hereof, the Company
agrees to pay to the Purchaser simultaneously with the closing of such financing
an amount equal to four percent (4%) of the aggregate amount of the portion of
such financing purchased by or for the account of such Person.
4.29 Changes to Federal and State Securities Laws. If any of the
Underlying Shares require registration with or approval of any governmental
authority under any federal (including but not limited to the Securities Act or
similar federal statute than in force) or state law, or listing on any national
securities exchange, before the Underlying Shares may be resold or transferred
without any restrictions on their resale or transfer for reasons including, but
not limited to, a material change in Rule 504 of Regulation D promulgated under
the Securities Act or a change to the exemption for sales made to Accredited
Investors in the state in which the Purchaser resides, the Company will, at its
expense, as expeditiously as possible cause the Escrow Shares to be duly
registered or approved or listed on the relevant national securities exchange,
as the case may be. The Escrow Shares shall be registered by the Company under
the Securities Act if required by Section 4.24 and subject to the conditions
stated therein.
4.30 Merger Agreement. Immediately upon the Effective Date, all of the
transactions contemplated by the Merger Agreement annexed hereto as EXHIBIT B
shall be consummated in accordance with the terms thereof.
ARTICLE V
TERMINATION
5.1 Termination by the Company or the Purchaser. This Agreement shall
be terminated as follows upon the occurrence of any of the following events
(each an "Event of Default"):
(a) Automatically terminated prior to Post-Closing if:
(i) there shall be in effect any statute, rule, law
or regulation, including an amendment to Regulation D or an
interpretive release promulgated or issued thereunder, that prohibits
the consummation of the Post-Closing or if the consummation of the
Post-Closing would violate any non-appealable final judgment, order,
decree, ruling or injunction of any court of or governmental authority
having competent jurisdiction;
(ii) the Post-Closing shall not have occurred by the
Post-Closing Date;
(iii) the common stock of SCOH is not registered
under Section 12 of the Exchange Act;
107
(iv) SCOH is not current in its reporting obligations
under Section 13 or 15(d) of the Exchange Act;
(v) an event occurs prior to the Post-Closing
requiring SCOH to report such event to the SEC on Form 8-K and not
otherwise set forth in SCHEDULE 5.1, provided, however, such event
shall only include the following items under Form 8-K: Item 1; Item 2
to the extent that any event is reported under Item 2 that involves a
change in the nature of SCOH's business; Item 3; or Item 4 (provided
further, that as to Item 4, only if the event requires disclosure under
Item 304(a)(1)(iv) under Regulation S-B);
(vi) trading in the common stock of SCOH has been
suspended, delisted, or otherwise ceased by the Commission or the NASD
or other exchange or the Nasdaq (whether the National Market or
otherwise), except for any suspension of trading of limited duration
solely to permit dissemination of material information regarding SCOH,
and not reinstated within twenty (20) Trading Days; or
(vii) the Company fails to deliver or caused to be
delivered the Debentures as required by and by the date set forth in
Section 2.2 hereof.
(b) Prior to Post-Closing by the Purchaser, by giving written
notice of such termination to the Company, if the Company has materially
breached any representation, warranty, covenant or agreement contained in this
Agreement or the other Transaction Documents and such breach is not cured within
five (5) Business Days following receipt by the Company of notice of such
breach.
(c) Prior to Post-Closing by the Company, by giving written
notice of such termination to the Purchaser, if the Purchaser has materially
breached any representation, warranty, covenant or agreement contained in this
Agreement or the other Transaction Documents and such breach is not cured within
five (5) Business Days following receipt by the Purchaser of notice of such
breach.
5.2 Remedies. Notwithstanding anything else contained herein to the
contrary, if an Event of Default has occurred pursuant to Section 5.1, and only
with respect to Section 5.1(b) has not been cured within the cure period
provided for therein, the defaulting party shall be deemed in default hereof and
the non-defaulting party shall be entitled to pursue all available rights
without further notice. The defaulting party shall pay all attorney's fees and
costs incurred in enforcing this Agreement and the other Transaction Documents.
In addition, all unpaid amounts shall accrue interest at a rate of 15% per
annum.
ARTICLE VI
LEGAL FEES AND DEFAULT INTEREST RATE
In the event any party hereto commences legal action to enforce its
rights under this Agreement or any other Transaction Document, the
non-prevailing party shall pay all reasonable costs and expenses (including but
not limited to reasonable attorney's fees, accountant's fees, appraiser's fees
and investigative fees) incurred in enforcing such rights. In the event of an
108
uncured Event of Default by any party hereunder, interest shall accrue on all
unpaid amounts due the aggrieved party at the rate of 15% per annum, compounded
annually.
ARTICLE VII
MISCELLANEOUS
7.1 Fees and Expenses. Except as set forth in this Agreement, each
party shall pay the fees and expenses of its advisers, counsel, accountants and
other experts, if any, and all other expenses incurred by such party incident to
the negotiation, preparation, execution, delivery and performance of this
Agreement. The Company shall pay the fees of the Escrow Agent and all stamp and
other taxes and duties levied in connection with the issuance of the Debentures
(and, upon conversion, the Underlying Shares) pursuant hereto. The Purchaser
shall be responsible for any taxes payable by the Purchaser that may arise as a
result of the investment hereunder or the transactions contemplated by this
Agreement or any other Transaction Document. Whether or not the transactions
contemplated hereby and thereby are consummated or this Agreement is terminated,
the Company shall pay (i) all costs, expenses, fees and all taxes incident to
and in connection with: (A) the preparation, printing and distribution of any
registration statement required hereunder and all amendments and supplements
thereto (including, without limitation, financial statements and exhibits), and
all preliminary and final Blue Sky memoranda and all other agreements,
memoranda, correspondence and other documents prepared and delivered in
connection herewith, (B) the issuance and delivery of the Securities, (C) the
exemption from registration of the Securities for offer and sale to the
Purchaser under the securities or Blue Sky laws of the applicable jurisdiction,
(D) furnishing such copies of any registration statement required hereunder, the
preliminary and final prospectuses and all amendments and supplements thereto,
as may reasonably be requested for use in connection with resales of the
Securities, and (E) the preparation of certificates for the Securities
(including, without limitation, printing and engraving thereof), (ii) all fees
and expenses of counsel and accountants of the Company and (iii) all expenses
and fees of listing on securities exchanges, if any.
7.2 Entire Agreement; Amendments. This Agreement, together with all of
the Exhibits and Schedules annexed hereto, and any other Transaction Document
contains the entire understanding of the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, oral or
written, with respect to such matters. This Agreement shall be deemed to have
been drafted and negotiated by both parties hereto and no presumptions as to
interpretation, construction or enforceability shall be made by or against
either party in such regard.
7.3 Notices. Any notice or other communication required or permitted to
be given hereunder shall be in writing and shall be deemed to have been duly
given upon facsimile transmission (with written transmission confirmation
report) at the number designated below (if delivered on a Business Day during
normal business hours where such notice is to be received), or the first
Business Day following such delivery (if delivered other than on a Business Day
during normal business hours where such notice is to be received) whichever
shall first occur. The addresses for such communications shall be:
109
If to the Company: HEIR Holding Co., Inc.
▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
With copies to: ▇▇▇▇▇▇ Gottbetter & ▇▇▇▇▇▇▇▇, LLP
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇, Esq.
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
If to the Purchaser: See SCHEDULE 1 attached hereto
With copies to: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, LLP
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇, Esq.
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
If to Escrow Agent: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, LLP
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇, Esq.
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
or such other address as may be designated hereafter by notice given pursuant to
the terms of this Section 7.3.
7.4 Amendments; Waivers. No provision of this Agreement may be waived
or amended except in a written instrument signed, in the case of an amendment,
by both the Company and the Purchaser, or, in the case of a waiver, by the party
against whom enforcement of any such waiver is sought. No waiver of any default
with respect to any provision, condition or requirement of this Agreement shall
be deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
either party to exercise any right hereunder in any manner impair the exercise
of any such right accruing to it thereafter.
7.5 Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
7.6 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and
permitted assigns. The assignment by a
110
party of this Agreement or any rights hereunder shall not affect the obligations
of such party under this Agreement.
7.7 No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
7.8 Governing Law; Venue; Service of Process. The parties hereto
acknowledge that the transactions contemplated by this Agreement and the
exhibits hereto bear a reasonable relation to the State of New York. The parties
hereto agree that the internal laws of the State of New York shall govern this
Agreement and the exhibits hereto, including, but not limited to, all issues
related to usury. Any action to enforce the terms of this Agreement or any of
its exhibits shall be brought exclusively in the state and/or federal courts
situate in the County and State of New York. Service of process in any action by
the Purchaser to enforce the terms of this Agreement may be made by serving a
copy of the summons and complaint, in addition to any other relevant documents,
by commercial overnight courier to the Company at its principal address set
forth in this Agreement.
7.9 Survival. The representations and warranties of the Company and the
Purchaser contained in Article III and the agreements and covenants of the
parties contained in Article IV and this Article VII shall survive the
Post-Closing (or any earlier termination of this Agreement).
7.10 Counterpart Signatures. This Agreement may be executed in two or
more counterparts, all of which when taken together shall be considered one and
the same agreement and shall become effective when counterparts have been signed
by each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.
7.11 Publicity. The Company and the Purchaser shall consult with each
other in issuing any press releases or otherwise making public statements with
respect to the transactions contemplated hereby and neither party shall issue
any such press release or otherwise make any such public statement without the
prior written consent of the other, which consent shall not be unreasonably
withheld or delayed, unless counsel for the disclosing party deems such public
statement to be required by applicable federal and/or state securities laws.
Except as otherwise required by applicable law or regulation, the Company will
not disclose to any third party the names of the Purchaser.
7.12 Severability. In case any one or more of the provisions of this
Agreement shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Agreement shall not
in any way be affected or impaired thereby and the parties will attempt to agree
upon a valid and enforceable provision which shall be a reasonable substitute
therefore, and upon so agreeing, shall incorporate such substitute provision in
this Agreement.
111
7.13 Limitation of Remedies. With respect to claims by the Company or
any person acting by or through the Company for remedies at law or at equity
relating to or arising out of a breach of this Agreement, liability, if any,
shall, in no event, include loss of profits or incidental, indirect, exemplary,
punitive, special or consequential damages of any kind.
7.14 Omnibus Provision. Anything contained herein or in the other
Transaction Documents notwithstanding, in the event that the Common Stock shall
become listed on the OTCBB and subsequently ceases to be listed for trading on
the OTCBB, then any reference thereto in this Agreement or the other Transaction
Documents shall be deemed to be a reference to (a) the principal national
securities exchange on which the Common Stock is then listed or admitted to
trading, or (b) if the Common Stock is not then listed or admitted to trading on
any national securities exchange, Nasdaq, or (c) if the Common Stock is not then
listed or admitted to trading on Nasdaq, then the over-the-counter market
reported by the Pinksheets LLC (or similar organization or agency succeeding to
its functions of reporting prices).
7.15 Successors and Assigns. This Agreement shall become effective when
it is executed by the parties and shall thereafter be binding upon and enure to
the benefit of the parties hereto and their permitted successors and assigns.
This agreement and any of the rights, interests or obligations hereunder may be
assigned by the Purchaser without the consent of the Company.
[ SIGNATURE PAGE FOLLOWS ]
112
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first indicated above.
Company:
HEIR Holding Co., Inc.
By: /s/ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
---------------------------------------
Name: ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
Title: President
Purchaser:
HEM Mutual Assurance LLC
By: /s/ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
---------------------------------------
Name: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
Title: Manager
113
Schedule 1
Purchaser(s)
------------
Full Amount of
Debentures to be
Name and Address of Purchaser Purchased
----------------------------- ----------------
HEM Mutual Assurance LLC
One ▇▇▇▇▇ Center $1,000,000
▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
SHARE DENOMINATIONS
-------------------
4 x 500,000 (2,000,000)
8 x 250,000 (2,000,000)
100 x 10,000 (2,000,000)
50 x 15,000 (2,000,000)
10 x 25,000 (2,000,000)
114
Schedule 3.1(a)
Subsidiaries
None
115
Schedule 3.1(c)
Capitalization and Registration Rights
Authorized Capitalization
Common Stock, $.001 par value - 10,000,000 shares
Preferred Stock, $.001 par value - 1,000,000 shares
Outstanding Capitalization
Common Stock - 3,000,000 shares issued and outstanding
Preferred Stock - No shares issued and outstanding
116
Schedule 3.1(d)
Equity and Equity Equivalent Securities
None
117
Schedule 3.1(e)
Conflicts
None
118
Schedule 3.1(f)
Consents and Approvals
SEC Filing - Form D
Colorado Blue Sky Filing (or exemption therefrom)
119
Schedule 3.1(g)
Litigation
None
120
Schedule 3.1(h)
Defaults and Violations
None
121
Schedule 5.1
Form 8-K Disclosure Obligations
None
122
EXHIBIT A
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER RULE 504 OF REGULATION D PROMULGATED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND IN COMPLIANCE WITH
APPLICABLE STATE SECURITIES LAWS.
US $1,000,000 AUGUST 7, 2002
1% CONVERTIBLE DEBENTURE DUE AUGUST 6, 2007
THIS DEBENTURE of HEIR Holding Co., Inc., a Delaware corporation (the
"Company") in the aggregate principal amount of One Million Dollars (US
$1,000,000), is designated as its $1,000,000, 1% Convertible Debenture due
August 6, 2007 (the "Debentures").
FOR VALUE RECEIVED, the Company promises to pay to HEM Mutual Assurance
LLC or its registered assigns (the "Holder"), the principal sum of One Million
Dollars (US $1,000,000), on or prior to August 6, 2007 (the "Maturity Date") and
to pay interest to the Holder on the principal sum at the rate of one percent
(1%) per annum. Interest shall accrue daily commencing on the Original Issuance
Date (as defined in Section 1 below) in the form of cash, common stock of the
Company or additional Debentures selected by the Company subject to the
provisions of Section 2(b) hereof, until payment in full of the principal sum,
together with all accrued and unpaid interest, has been made or duly provided
for. If at any time after the Original Issuance Date an Event of Default has
occurred and is continuing, interest shall accrue at the rate of fifteen percent
(15%) per annum from the date of the Event of Default and the applicable cure
period through and including the date of payment. Interest due and payable
hereunder shall be paid to the person in whose name this Debenture (or one or
more successor Debentures) is registered on the records of the Company regarding
registration and transfers of the Debentures (the "Debenture Register");
provided, however, that the Company's obligation to a transferee of this
Debenture shall arise only if such transfer, sale or other disposition is made
in accordance with the terms and conditions hereof and of the Convertible
Debenture Purchase Agreement (the "Purchase Agreement") by and between the
Company and the Purchaser (as such term is defined in the Purchase Agreement),
dated as of August 7, 2002, as amended from time to time. A transfer of the
right to receive principal and interest under this Debenture shall be
transferable only through an appropriate entry in the Debenture Register as
provided herein.
This Debenture is subject to the following additional provisions:
123
Section 1. Definitions. Capitalized terms used and not otherwise defined
herein shall have the meanings given such terms in the Purchase Agreement. As
used in this Agreement, the following terms shall have the following meanings:
"Adjusted Conversion Price" means the lesser of the Fixed Conversion Price
or the Floating Conversion Price one day prior to the record date set for the
determination of stockholders entitled to receive dividends, distributions,
rights or warrants as provided for in Sections 4(c)(ii), (iii) and (iv).
"Conversion Date" shall have the meaning set forth in Section 4(a) hereof.
"Conversion Ratio" means, at any time, a fraction, the numerator of which
is the principal amount represented by the Debentures plus accrued but unpaid
interest thereon, and the denominator of which is the Conversion Price at such
time.
"Fixed Conversion Price" shall have the meaning set forth in Section 4(c)
hereof.
"Floating Conversion Price" shall have the meaning set forth in Section
4(c) hereof.
"Notice of Conversion" shall have the meaning set forth in Section 4(a)
hereof.
"Original Issuance Date" shall mean the date of the first issuance of this
Debenture regardless of the number of transfers hereof.
Section 2. Denominations of Debentures; Interest on Debentures. The
Debentures are exchangeable for an equal aggregate principal amount of
Debentures of different authorized denominations, as requested by the Holder
surrendering the same, but shall not be issuable in denominations of less than
integral multiplies of One Thousand Dollars (US$1,000.00). No service charge to
the Holder will be made for such registration of transfer or exchange.
Section 3. Events of Default and Remedies.
I. "Event of Default," when used herein, means any one of the following
events (whatever the reason and whether any such event shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):
(a) any default in the payment of the principal of or interest on
this Debenture as and when the same shall become due and payable either at the
Maturity Date, by acceleration, conversion, or otherwise;
(b) the Company shall fail to observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any breach of,
this Debenture, and such failure or breach shall not have been remedied within
three (3) Business Days of its receipt of notice of such failure or breach;
124
(c) the occurrence of any event or breach or default by the
Company under the Purchase Agreement or any other Transaction Document and such
failure or breach shall not have been remedied within the cure period, if any,
provided for therein;
(d) the Company or any of its Subsidiaries shall commence a
voluntary case under the United States Bankruptcy Code as now or hereafter in
effect or any successor thereto (the "Bankruptcy Code"); or an involuntary case
is commenced against the Company under the Bankruptcy Code and the petition is
not controverted within thirty (30) days, or is not dismissed within sixty (60)
days, after commencement of the case; or a "custodian" (as defined in the
Bankruptcy Code) is appointed for, or takes charge of, all or any substantial
part of the property of the Company or the Company commences any other
proceeding under any reorganization, arrangement, adjustment of debt, relief of
debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Company or there
is commenced against the Company any such proceeding which remains undismissed
for a period of sixty (60) days; or the Company is adjudicated insolvent or
bankrupt; or any order of relief or other order approving any such case or
proceeding is entered; or the Company suffers any appointment of any custodian
or the like for it or any substantial part of its property which continues
undischarged or unstayed for a period of thirty (30) days; or the Company makes
a general assignment for the benefit of creditors; or the Company shall fail to
pay, or shall state that it is unable to pay, or shall be unable to pay, its
debts generally as they become due; or the Company shall call a meeting of its
creditors with a view to arranging a composition or adjustment of its debts; or
the Company shall by any act or failure to act indicate its consent to, approval
of or acquiescence in any of the foregoing; or any corporate or other action is
taken by the Company for the purpose of effecting any of the foregoing;
(e) the Company shall default in any of its obligations under any
mortgage, indenture or instrument under which there may be issued, or by which
there may be secured or evidenced, any indebtedness of the Company in an amount
exceeding One Hundred Thousand Dollars ($100,000.00), whether such indebtedness
now exists or shall hereafter be created and such default shall result in such
indebtedness becoming or being declared due and payable prior to the date on
which it would otherwise become due and payable;
(f) the Company shall have its Common Stock deleted or delisted,
as the case may be, from the OTCBB or other national securities exchange or
market on which such Common Stock is listed for trading or suspended from
trading thereon, and shall not have its Common Stock relisted or have such
suspension lifted, as the case may be, within five (5) Trading Days of such
deletion or delisting;
(g) notwithstanding anything herein to the contrary, the Company
shall fail to deliver to the Escrow Agent share certificates representing the
shares of Common Stock to be issued upon conversion of the Debentures within
three (3) Business Days pursuant to the Company's receipt of notice from the
Escrow Agent to the Company that additional shares of Common Stock are required
to be placed in escrow pursuant to Section 4.13 of the Purchase Agreement,
Article 2 of the Escrow Agreement, and/or Section 4(b) of this Debenture;
125
(h) the Company shall issue a press release, or otherwise make
publicly known, that it is not honoring a properly executed Notice of Conversion
(as defined in Section 4(a) hereof) for any reason whatsoever;
(i) the Company issues or enters into an agreement to issue any
equity or equity equivalent security with a floating conversion price
substantially similar to the Debentures other than any securities issued at any
time or from time to time to the Purchaser or any of its Affiliates or assigns,
during the period commencing on the date hereof and ending on the third
anniversary of the date hereof.
II. (a) If any Event of Default occurs and continues, beyond a cure
period, if any, then the Holder may, by notice to the Company, accelerate all of
the payments due under this Debenture by declaring all amounts so due under this
Debenture, whereupon the same shall become immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
waived by the Company, notwithstanding anything contained herein to the
contrary, and the Holder may immediately and without expiration of any grace
period enforce any and all of its rights and remedies hereunder and all other
remedies available to it under applicable law. Such declaration may be rescinded
and annulled by the Holder at any time prior to payment hereunder. No such
rescission or annulment shall affect any subsequent Event of Default or impair
any right consequent thereon. This shall include, but not be limited to the
right to temporary, preliminary and permanent injunctive relief without the
requirement of posting any bond or undertaking.
(b) The Holder may thereupon proceed to protect and enforce its
rights either by suit in equity and/or by action at law or by other appropriate
proceedings whether for the specific performance (to the extent permitted by
law) of any covenant or agreement contained in this Debenture or in aid of the
exercise of any power granted in this Debenture, and proceed to enforce the
payment of any of the Debentures held by it, and to enforce any other legal or
equitable right of such Holder.
(c) Except as expressly provided for herein, the Company
specifically (i) waives all rights it may have (A) to notice of nonpayment,
notice of default, demand, presentment, protest and notice of protest with
respect to any of the obligations hereunder or the shares of Common Stock and
(B) notice of acceptance hereof or of any other action taken in reliance hereon,
notice and opportunity to be heard before the exercise by the Holder of the
remedies of self-help, set-off, or other summary procedures and all other
demands and notices of any type or description except for cure periods; and (ii)
releases the Holder, its officers, directors, agents, employees and attorneys
from all claims for loss or damage caused by any act or failure to act on the
part of the Holder, its officers, attorneys, agents, directors and employees
except for gross negligence or willful misconduct.
(d) As a non-exclusive remedy, upon the occurrence of an Event of
Default, the Holder may convert the remaining principal amount of the Debentures
and accrued interest thereon at the lesser of the Fixed Conversion Price or the
Floating Conversion Price upon giving a Notice of Conversion to the Company.
Except as otherwise provided herein, the Company shall not have the right to
object to the conversion or the calculation of the applicable conversion price,
and the Escrow Agent shall release the shares of Common Stock from escrow upon
notifying the Company of the conversion.
126
III. To effectuate the terms and provision of this Debenture, the Holder
may give notice of any default to the Attorney-in-Fact as set forth herein and
give a copy of such notice to the Company and its counsel, simultaneously, and
request the Attorney-in-Fact to comply with the terms of this Debenture and the
Purchase Agreement and all agreements entered into pursuant to the Purchase
Agreement on behalf of the Company.
Section 4. Conversion.
(a) The unpaid principal amount of this Debenture shall be convertible
into shares of Common Stock at the Conversion Ratio as defined below, and
subject to the Limitation on Conversion described in Section 4.18 of the
Purchase Agreement, at the option of the Holder, in whole or in part, at any
time, commencing on the Original Issuance Date. Such shares of Common Stock
shall be without any restriction and freely tradable upon resale pursuant to
Rule 504 of Regulation D of the Securities Act. Any conversion under this
Section 4(a) shall be for a minimum principal amount of $10,000.00 of the
Debentures plus the interest accrued and due thereon. The Holder shall effect
conversions by surrendering the Debenture to be converted to the Escrow Agent,
together with the form of notice attached hereto as Appendix I ("Notice of
Conversion") in the manner set forth in Section 4(j) hereof. Each Notice of
Conversion shall specify the principal amount of Debentures to be converted, and
the date on which such conversion is to be effected (the "Conversion Date")
shall be on the date the Notice of Conversion is delivered pursuant to Section
4(j). Subject to Section 4 hereof, each Notice of Conversion, once given, shall
be irrevocable. If the Holder is converting less than all of the principal
amount represented by the Debentures tendered by the Holder in the Notice of
Conversion, the Company shall deliver to the Holder a new Debenture for such
principal amount as has not been converted within two (2) Business Days of the
Conversion Date. In the event that the Escrow Agent holds the Debentures on
behalf of the Holder, the Company agrees that in lieu of surrendering the
Debentures upon every partial conversion, the Escrow Agent shall give the
Company and the Holder written notice of the amount of the Debentures left
unconverted. Upon conversion in full of the Debentures or upon the Maturity
Date, the Escrow Agent shall return the Debentures to the Company for
cancellation.
(b) Not later than two (2) Business Days after the Conversion Date, the
Escrow Agent shall deliver to the Holder (i) a certificate or certificates
representing the number of shares of Common Stock being acquired upon the
conversion of the Debentures, and once the Debentures so converted in part shall
have been surrendered to the Company, the Company shall deliver to the Holder
Debentures in the principal amount of the Debentures not yet converted;
provided, however, that the Company shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon conversion of the
Debentures, until the Debentures are either delivered for conversion to the
Escrow Agent or the Company or any transfer agent for the Debentures or Common
Stock, or the Holder notifies the Company that such Debentures have been lost,
stolen or destroyed and provides an affidavit of loss and an agreement
reasonably acceptable to the Company indemnifying the Company from any loss
incurred by it in connection with such loss, theft or destruction. In the case
of a conversion pursuant to a Notice of Conversion, if such certificate or
certificates are not delivered by the date required under this Section 4(b), the
Holder shall be entitled, upon providing written notice to the Company at any
time on or before its receipt of such certificate or certificates thereafter, to
rescind such conversion, in which event, the Company shall immediately return
the Debentures tendered for conversion.
127
The Company agrees that at any time the conversion price of the Debentures
are such that the number of Escrow Shares is less than 200% of the Full
Conversion Shares, upon three (3) Business Days of the Company's receipt of
notice of such circumstance from the Purchaser and/or the Escrow Agent, the
Company shall issue share certificates in the name of the Purchaser and deliver
the same to the Escrow Agent, in such number that the new number of Escrow
Shares is equal to 200% of the Full Conversion Shares.
(c) (i) The conversion price for the Debentures in effect on any
Conversion Date shall be the LESSER of (a) $1.15 OR sixty-five percent (65%) of
the average of the closing bid prices per share of the Common Stock during the
five (5) Trading Days immediately preceding the Closing (as defined in the
Purchase Agreement) (the "Fixed Conversion Price") OR (b) fifty percent (50%) of
the average of the three (3) lowest closing bid prices per share of the Common
Stock during the forty (40) Trading Days immediately preceding the Conversion
Date (the "Floating Conversion Price"). For purposes of determining the closing
bid price on any day, reference shall be to the closing bid price for a share of
Common Stock on such date on the NASD OTC Bulletin Board, as reported on
Bloomberg, L.P. (or similar organization or agency succeeding to its functions
of reporting prices).
(ii) If the Company, at any time while any of the Debentures are
outstanding, (a) shall pay a stock dividend or otherwise make a distribution or
distributions on shares of its Common Stock payable in shares of its capital
stock (whether payable in shares of its Common Stock or of capital stock of any
class), (b) subdivide outstanding shares of Common Stock into a larger number of
shares, (c) combine outstanding shares of Common Stock into a smaller number of
shares, or (d) issue by reclassification any shares of capital stock of the
Company, the Fixed Conversion Price as applied in Section 4(c)(i) shall be
multiplied by a fraction, the numerator of which shall be the number of shares
of Common Stock of the Company outstanding before such event and the denominator
of which shall be the number of shares of Common Stock outstanding after such
event. Any adjustment made pursuant to this Section 4(c)(ii) shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or reclassification.
(iii) If, at any time while any of the Debentures are outstanding,
the Company issues or sells shares of Common Stock, or options, warrants or
other rights to subscribe for or purchase shares of Common Stock (excluding
shares of Common Stock issuable upon exercise of options, warrants or conversion
rights granted prior to the date hereof) and at a price per share less than the
Per Share Market Value of the Common Stock at the issue date mentioned below,
the Fixed Conversion Price shall be multiplied by a fraction, the numerator of
which shall be the number of shares of Common Stock (excluding treasury shares,
if any) outstanding on the date of issuance of such shares, options, warrants or
rights plus the number of shares which the aggregate offering price of the total
number of shares so offered would purchase at such Per Share Market Value, and
the denominator of which shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding on the date of issuance of such
rights or warrants plus the number of additional shares of Common Stock offered
for subscription or purchase. Such adjustment shall be made whenever such rights
or warrants are issued, and shall become effective immediately after the record
date for the determination of stockholders entitled to receive such rights or
warrants. However, upon the expiration of any right or warrant to purchase
Common Stock, the issuance of which resulted in
128
an adjustment in the conversion price designated in Section 4(c)(i) pursuant to
this Section 4(c)(iii), if any such right or warrant shall expire and shall not
have been exercised, the Fixed Conversion Price shall immediately upon such
expiration be recomputed and effective immediately upon such expiration be
increased to the price which it would have been (but reflecting any other
adjustments in the conversion price made pursuant to the provisions of this
Section 4 after the issuance of such rights or warrants) had the adjustment of
the conversion price made upon the issuance of such rights or warrants been made
on the basis of offering for subscription or purchase only that number of shares
of Common Stock actually purchased upon the exercise of such rights or warrants
actually exercised.
(iv) If, at any time while Debentures are outstanding, the Company
distributes to all holders of Common Stock (and not to holders of Debentures)
evidences of Company indebtedness or assets, or rights or warrants to subscribe
for or purchase any security (excluding those referred to in Section 4(c)(iii)
above), then, in each such case, the conversion price at which each Debenture
shall thereafter be convertible shall be determined by multiplying (A) the Fixed
Conversion Price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such distribution by a
fraction, the numerator of which shall be the Per Share Market Value of the
Common Stock determined as of the record date mentioned above less the then fair
market value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of Common Stock
as determined by the Board of Directors in good faith and the denominator of
which shall be the Per Share Market Value of the Common Stock on such record
date; provided, however, that in the event of a distribution exceeding ten
percent (10%) of the net assets of the Company, such fair market value shall be
determined by a nationally recognized or major regional investment banking firm
or firm of independent certified public accountants of recognized standing
(which may be the firm that regularly examines the financial statements of the
Company) (an "Appraiser") selected in good faith by the holders of a majority of
the principal amount of the Debentures then outstanding; and provided, further,
that the Company, after receipt of the determination by such Appraiser, shall
have the right to select an additional Appraiser, in which case the fair market
value shall be equal to the average of the determinations by each such
Appraiser. In either case the adjustments shall be described in a statement
provided to the Holder and all other holders of Debentures of the portion of
assets or evidences of indebtedness so distributed or such subscription rights
applicable to one share of Common Stock. Such adjustment shall be made whenever
any such distribution is made and shall become effective immediately after the
record date mentioned above.
(v) All calculations under this Section 4 shall be made to the
nearest 1/1000th of a cent or the nearest 1/1000th of a share, as the case may
be. Any calculation over .005 shall be rounded up to the next cent or share and
any calculation less than .005 shall be rounded down to the previous cent or
share.
(vi) In the event the conversion price is not adjusted pursuant to
Section 4(c)(ii), (iii), (iv), or (v), within two (2) Business Days following
the occurrence of an event described therein, the Holder shall have the right to
require the Company to redeem the Debentures at 140% of the Per Debenture
Consideration and simultaneously pay such amount and all accrued interest and
dividends to the Holder pursuant to the written instructions provided by the
Holder.
129
(vii) Whenever the Fixed Conversion Price is adjusted pursuant to
Section 4(c)(ii),(iii), (iv) or (v), or this Debenture is redeemed pursuant to
Section 4(c)(vi), the Company shall within two (2) days after the determination
of the new Fixed Conversion Price mail and fax to the Holder and to each other
holder of Debentures, a notice ("Company Notice of Conversion") setting forth
the Fixed Conversion Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment.
(viii) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, the sale or
transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, then each holder of Debentures then
outstanding shall have the right thereafter to convert such Debentures only into
the shares of stock and other securities and property receivable upon or deemed
to be held by holders of Common Stock following such reclassification,
consolidation, merger, sale, transfer or share exchange (except in the event the
property is cash, then the Holder shall have the right to convert the Debentures
and receive cash in the same manner as other stockholders), and the Holder shall
be entitled upon such event to receive such amount of securities or property as
the holder of shares of the Common Stock into which such Debentures could have
been converted immediately prior to such reclassification, consolidation,
merger, sale, transfer or share exchange would have been entitled. The terms of
any such consolidation, merger, sale, transfer or share exchange shall include
such terms so as to continue to give to the Holder the right to receive the
securities or property set forth in this Section 4(c)(viii) upon any conversion
following such consolidation, merger, sale, transfer or share exchange. This
provision shall similarly apply to successive reclassifications, consolidations,
mergers, sales, transfers or share exchanges;
(ix) If:
(A) the Company shall declare a dividend (or any other
distribution) on its Common Stock; or
(B) the Company shall declare a special non-recurring cash
dividend redemption of its Common Stock; or
(C) the Company shall authorize the grant to all holders of
the Common Stock rights or warrants to subscribe for or
purchase any shares of capital stock of any class or of
any rights; or
(D) the approval of any stockholders of the Company shall be
required in connection with any reclassification of the
Common Stock of the Company (other than a subdivision or
combination of the outstanding shares of Common Stock),
any consolidation or merger to which the Company is a
party, any sale or transfer of all or substantially all
of the assets of the Company, or any compulsory share
exchange whereby the Common Stock is converted into
other securities, cash or property; or
130
(E) the Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding-up of the affairs of
the Company;
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of Debentures, and shall cause to be mailed and faxed
to the Holder and each other holder of the Debentures at their last addresses
and facsimile number set forth in the Debenture Register at least thirty (30)
calendar days prior to the applicable record or effective date hereinafter
specified, a notice stating (x) the date on which a record is to be taken for
the purpose of such dividend, distribution, redemption, rights or warrants, or
if a record is not to be taken, the date as of which the holders of Common Stock
of record to be entitled to such dividend, distributions, redemption, rights or
warrants are to be determined, or (y) the date on which such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding-up is expected to become effective, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities or other property deliverable upon
such reclassification, consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding-up; provided, however, that the failure to
mail such notice or any defect therein or in the mailing thereof shall not
affect the validity of the corporate action required to be specified in such
notice
(d) If at any time conditions shall arise by reason of action or
inaction taken by the Company, which action or inaction, in the opinion of the
Board of Directors of the Company, is not adequately covered by the other
provisions hereof and which might materially and adversely affect the rights of
the Holder and all other holders of Debentures (different or distinguishable
from the effect generally on rights of holders of any class of the Company's
capital stock), the Company shall, at least thirty (30) calendar days prior to
the effective date of such action, mail and fax a written notice to each holder
of Debentures briefly describing the action contemplated and the material
adverse effects of such action on the rights of such holders, and an Appraiser
selected by the holders of majority in principal amount of the outstanding
Debentures shall give its opinion as to the adjustment, if any (not inconsistent
with the standards established in this Section 4), of the conversion price
(including, if necessary, any adjustment as to the securities into which
Debentures may thereafter be convertible) and any distribution which is or would
be required to preserve without diluting the rights of the holders of
Debentures; provided, however, that the Company, after receipt of the
determination by such Appraiser, shall have the right to select an additional
Appraiser, in which case the adjustment shall be equal to the average of the
adjustments recommended by each such Appraiser. The Board of Directors of the
Company shall make the adjustment recommended forthwith upon the receipt of such
opinion or opinions or the taking of any such action contemplated, as the case
may be; provided, however, that no such adjustment of the conversion price shall
be made which, in the opinion of the Appraiser(s) giving the aforesaid opinion
or opinions, would result in an increase of the conversion price above the
conversion price then in effect.
(e) The Company covenants and agrees that it shall, at all times,
reserve and keep available out of its authorized and unissued Common Stock
solely for the purpose of issuance upon conversion of the Debentures as herein
provided, free from preemptive rights or any other actual contingent purchase
rights of persons other than the Holder of the Debentures, two (2) times such
number of shares of Common Stock as shall be issuable (taking into account the
adjustments and restrictions of Section 4(c) and Section 4(d) hereof) upon the
conversion of the aggregate principal
131
amount of the outstanding Debentures. The Company covenants that all shares of
Common Stock that shall be so issuable shall, upon issuance, be duly and validly
authorized and issued and fully paid and non-assessable.
(f) No fractional shares of Common Stock shall be issuable upon a
conversion hereunder and the number of shares to be issued shall be rounded up
to the nearest whole share. If a fractional share interest arises upon any
conversion hereunder, the Company shall eliminate such fractional share interest
by issuing to the Holder an additional full share of Common Stock.
(g) The issuance of a certificate or certificates for shares of Common
Stock upon conversion of the Debentures shall be made without charge to the
Holder for any documentary stamp or similar taxes that may be payable in respect
of the issuance or delivery of such certificate, provided that the Company shall
not be required to pay any tax that may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate upon conversion in
a name other than that of the Holder and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
(h) The Debentures converted into Common Stock shall be canceled upon
conversion.
(i) On the Maturity Date, the unconverted principal amount of the
Debentures and all interest due thereon shall either be paid off in full by the
Company or, if payment in full is not received within five (5) Business Days
after the Maturity Date, convert automatically into shares of Common Stock at
the lesser of the Fixed Conversion Price and the Floating Conversion Price as
set forth in Section 4(c)(i).
(j) Each Notice of Conversion shall be given by facsimile to the Escrow
Agent no later than 4:00 p.m. New York time. Upon receipt of such Notice of
Conversion, the Escrow Agent shall forward such Notice of Conversion to the
Company by facsimile by the end of the Business Day on which such notice is
received by the Escrow Agent, assuming such receipt by 6:00 p.m. New York time,
and if received by the Escrow Agent thereafter, on the next Business Day, at the
facsimile number of the Company set forth in Section 12 hereof. Any such notice
shall be deemed given and effective upon the transmission of such facsimile at
the facsimile number specified in this Section 4(j) (with printed confirmation
of transmission), and if to the Company, with a copy to the Escrow Agent. In the
event that the Escrow Agent receives the Notice of Conversion after 4:00 p.m.
New York time on any Business Day or at any time on a day that is not a Business
Day, notice will be deemed to have been given the next following Business Day.
Section 5. Redemption of Debentures. (a) At any time after the Execution
Date, so long as no Event of Default has occurred that has not been cured, the
Company shall have the option to redeem any unconverted amount of the
Debentures, either in part or whole, upon no less than thirty (30) days written
notice thereof given to the Holder with a copy to the Escrow Agent (the
"Redemption Notice"), at one hundred forty percent (140%) of the unconverted
amount of the Debentures plus accrued interest thereon (the "Redemption Price").
132
(b) Within five (5) Business Days after giving the Redemption Notice,
the Company shall deposit the Redemption Price by wire transfer to the ▇▇▇▇
account of the Escrow Agent. Upon receipt of the Redemption Price, the Escrow
Agent shall release the Redemption Price to the Holder and return the remaining
Debentures and Underlying Shares to the Company.
(c) In the event that the Company fails to deposit the Redemption Price
in the Escrow Agent's ▇▇▇▇ account number within the time allocated in section
(b) above, then the redemption shall be declared null and void.
Section 6. Shelf Registration.
If any of the Underlying Shares required to be reserved for purposes of
conversion of the Debentures require registration with or approval of any
governmental authority under any federal (including but not limited to the
Securities Act or similar federal statute then in force) or state law, or
listing on any national securities exchange, before the Underlying Shares may be
resold or transferred without any restrictions on their resale or transfer for
reasons including, but not limited to, a material change in Rule 504 of
Regulation D promulgated under the Securities Act or a change to the exemption
for sales made to Accredited Investors in the state in which the Purchaser
resides, the Company will, at its expense, as expeditiously as possible cause
the Escrow Shares to be duly registered or approved or listed on the relevant
national securities exchange, as the case may be. The Escrow Shares shall be
registered by the Company under the Securities Act if required by Section 7 and
subject to the conditions stated therein.
Section 7. Changes To Federal And State Securities Laws.
So long as the Holder and/or its assigns owns any of the Debentures or the
Underlying Shares and the Underlying Shares would not be freely transferable
without registration, the Company agrees not to file a registration statement
with the Commission, other than on Form 10, Form S-4 (except for a public
reoffering or resale) or Form S-8 without first having registered the Escrow
Shares for resale with the SEC and for resale in such states of the United
States as the Holders thereof shall reasonably request. If the Company shall
propose to file with the SEC any registration statement other than a Form 10,
Form S-4 (except for a public reoffering or resale) or Form S-8 which would
cause, or have the effect of causing, the Company to become a Reporting Issuer
or to take any other action, other than the issuance of the Debentures to
Holder, the effect of which would be to cause the Underlying Shares to be
restricted securities (as such term is defined in Rule 144 promulgated under the
Securities Act), the Company agrees to give written notification of such to the
Holders of the Debentures and the Underlying Shares then outstanding at least
two weeks prior to such filing or taking of the proposed action. If any of the
Debentures or the Underlying Shares are then outstanding, the Company agrees to
include in such registration statement the Escrow Shares unless the Underlying
Shares would be freely transferable upon exercise of the Debentures without such
registration, so as to permit the public resale thereof. All costs and expenses
of registration shall be borne by the Company.
If the registration of which the Company gives notice is for a registered
public offering involving an underwriting, the Company will so advise the
Holders. In such event, these registration rights shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of
133
such Holder's Registrable Securities in the underwriting to the extent provided
herein. All Holders proposing to distribute their securities through such
underwriting shall enter into an underwriting agreement in customary form with
the underwriter selected by the Company. In the event that the lead or managing
underwriter in its good faith judgment determines that material adverse market
factors require a limitation on the number of shares to be underwritten, the
underwriter may limit the number of Registrable Securities. In such event, the
Company shall so advise all holders of securities requesting registration, and
the number of shares of securities that are entitled to be included in the
registration and underwriting shall be allocated pro rata among all Holders and
other participants, including the Company, in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities and other
securities which they had requested to be included in such registration
statement at the time of filing the registration statement. If any Holder
disapproves of the terms of any such underwriting, he may elect to withdraw
therefrom by written notice to the Company and the underwriter, provided such
notice is delivered within sixty (60) days of full disclosure of such terms to
such Holder, without thereby affecting the right of such Holder to participate
in subsequent offerings hereunder.
Notwithstanding the foregoing, if the Company for any reason shall have
taken any action, other than the issuance of the Debentures to the Purchaser,
the effect of which would be to cause the Underlying Shares to be restricted
securities (as such term is defined in Rule 144 promulgated under the Securities
Act), the Company agrees to immediately file with the SEC and cause to become
effective a registration statement which would permit the public resale of the
Escrow Shares in such states of the United States as the Holders thereof shall
reasonably request. All costs and expenses of such registration and related Blue
Sky filings shall be borne by the Company.
Section 8. Absolute Payment Obligation; Limitation on Prepayment. Except
as expressly provided herein, no provision of this Debenture shall alter or
impair the obligation of the Company, which is absolute and unconditional, to
pay the principal of, and interest on, this Debenture at the time, place, and
rate, and in the coin or currency, herein prescribed. This Debenture is a direct
obligation of the Company. This Debenture ranks pari passu with all other
Debentures now or hereafter issued under the terms set forth herein. The Company
may not prepay any portion of the outstanding principal amount on the Debentures
except in accordance with Section 5 hereof.
Section 9. No Rights of Stockholders. Except as otherwise provided herein,
this Debenture shall not entitle the Holder to any of the rights of a
stockholder of the Company, including without limitation, the right to vote, to
receive dividends and other distributions, or to receive any notice of, or to
attend, meetings of stockholders or any other proceedings of the Company, unless
and to the extent converted into shares of Common Stock in accordance with the
terms hereof.
Section 10. Loss, Theft, Mutilation or Destruction. If this Debenture
shall be mutilated, lost, stolen or destroyed, the Company shall execute and
deliver, in exchange and substitution for and upon cancellation of a mutilated
Debenture, or in lieu of or in substitution for a lost, stolen or destroyed
Debenture, a new Debenture for the principal amount of this Debenture so
mutilated, lost, stolen or destroyed but only upon receipt of an affidavit of
such loss, theft or destruction of such Debenture, and, if requested by the
Company, an agreement to indemnity the Company in form reasonably acceptable to
the Company.
134
Section 11. Governing Law. This Debenture shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York without regard to the principles of conflicts of law thereof. Any action to
enforce the terms of this Debenture, the Purchase Agreement or any other
Transaction Document shall be exclusively brought in the state and/or federal
courts in the state and county of New York. Service of process in any action by
the Holder to enforce the terms of this Debenture may be made by serving a copy
of the summons and complaint, in addition to any other relevant documents, by
commercial overnight courier to the Company at its address set forth in the
Purchase Agreement.
Section 12. Notices. Except as otherwise provided in Section 4(j) hereof,
all notices or other communications required or permitted to be given hereunder
shall be deemed duly given and received if in writing upon facsimile
transmission (with written transmission confirmation report) at the number
designated below for the Company and at the facsimile number for the Holder set
forth in the Debenture Register (in each case, if delivered on a Business Day
during normal business hours where such notice is to be received), or the first
Business Day following such delivery (if delivered other than on a Business Day
during normal business hours where such notice is to be received) whichever
shall first occur. The addresses for such communications shall be:
If to the Company: HEIR Holding Co., Inc.
▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
With copies to: ▇▇▇▇▇▇ Gottbetter & ▇▇▇▇▇▇▇▇, LLP
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇, Esq.
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
If to the Holder: To the address or/or facsimile number set
forth in the Debenture Register
With copies to: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, LLP
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇, Esq.
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
135
If to Escrow Agent: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, LLP
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇, Esq.
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
or such other address as may be designated hereafter by notice given pursuant to
the terms of this Section 12.
Section 13. Waiver. Any waiver by the Company or the Holder of a breach of
any provision of this Debenture shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Debenture. The failure of the Company or the Holder to insist
upon strict adherence to any term of this Debenture on one or more occasions
shall not be considered a waiver or deprive that party of the right thereafter
to insist upon strict adherence to that term or any other term of this
Debenture. Any waiver must be in writing.
Section 14. Invalidity. If any provision of this Debenture is held to be
invalid, illegal or unenforceable, the balance of this Debenture shall remain in
effect, and if any provision is held to be inapplicable to any person or
circumstance, it shall nevertheless remain applicable to all other persons and
circumstances.
Section 15. Payment Dates. Whenever any payment or other obligation
hereunder shall be due on a day other than a Business Day, such payment shall be
made on the next following Business Day.
Section 16. Transfer; Assignment. This Debenture may not be transferred or
assigned, in whole or in part, at any time, except in compliance by the
transferor and the transferee with applicable federal and state securities laws.
Section 17. Fees of Enforcement. In the event any Party commences legal
action to enforce its rights under this Debenture, the non-prevailing party
shall pay all reasonable costs and expenses (including but not limited to
reasonable attorney's fees, accountant's fees, appraiser's fees and
investigative fees) incurred in enforcing such rights.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized as of the date first above
indicated.
HEIR HOLDING CO., INC.
Attest: ______________________ By:______________________________
Name: ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
Title: President
136
APPENDIX I
NOTICE OF CONVERSION
AT THE ELECTION OF THE HOLDER
(To be Executed by the Registered Holder
in order to Convert the Debentures)
Except as provided by Section 4(b) of the Debentures, the undersigned hereby
irrevocably elects to convert the attached Debenture into shares of Common
Stock, no par value (the "Common Stock"), of HEIR Holding Co., Inc. (the
"Company") according to the provisions hereof, as of the date written below. If
shares are to be issued in the name of a person other than undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith. A fee of $350 will be charged by the Escrow
Agent to the Holder for each conversion. No other fees will be charged to the
Holder, except for transfer taxes, if any.
Conversion calculations:
------------------------------------------------
------------------------------------------------
Principal Amount of Debentures to be Converted
------------------------------------------------
------------------------------------------------
Applicable Conversion Price (Pursuant to
Section 4(c)(v))
------------------------------------------------
------------------------------------------------
Signature
------------------------------------------------
Name
------------------------------------------------
Address
137
EXHIBIT B
MERGER AGREEMENT
(Filed as EXHIBIT 2.1 to this Form 8-K)
138
EXHIBIT C
CONVERSION PROCEDURE
1. At any time and from time to time during the term of the Debentures,
the Holder may deliver to the Escrow Agent written notice (a "Notice of
Conversion") that it has elected to convert the Debentures registered in the
name of such Holder in whole or in part in accordance with the terms of the
Debentures, and the Notice of Conversion shall be in the form annexed as
APPENDIX I to Debentures. A fee of $350 shall accompany every Notice of
Conversion delivered to the Escrow Agent.
2. The Holder shall send by facsimile the executed Notice of Conversion
to the Escrow Agent by 4:00 p.m. New York time on the Conversion Date. The
Escrow Agent shall send the Notice of Conversion by facsimile to the Company by
the end of the Business Day on the Conversion Date, assuming received by 6:00
p.m. New York time and if thereafter on the next Business Day, at the facsimile
telephone number of the Company. Any such notice shall be deemed given and
effective upon the transmission of such facsimile at the facsimile telephone
number specified in this paragraph 2 (with printed confirmation of
transmission). In the event that the Escrow Agent receives the Notice of
Conversion after 4:00 p.m. New York time on any Business Day or at any time on a
day that is not a Business Day, notice shall be deemed to have been given the
next following Business Day.
3. The Company shall have two (2) Business Days from transmission of
the Notice of Conversion by the Escrow Agent to object only to the calculation
of the number of Escrow Shares to be released. If the Company fails to object to
the calculation of the number of Escrow Shares to be released within said time,
then the Company shall be deemed to have waived any objections to said
calculation and to have directed Escrow Agent to release same. The Company's
only basis for any objection hereunder shall be to the calculation of the number
of Escrow Shares to be released. In the event of such an objection, the parties
shall have two (2) Business Days to agree on the number of Escrow Shares to be
released pursuant to said Conversion. In the event that the parties cannot agree
on the number of Escrow Shares to be released in said time, then the Company
shall commence a legal action in the appropriate state or federal court in the
state and county of New York, within five (5) Business Days of the transmittal
of the Notice of Conversion by the Escrow Agent to the Company. If the Company
does not commence such legal action within said five (5) Business Days, the
Escrow Agent shall release the number of shares stated in the Notice of
Conversion to the Holder and the Company's objection shall be deemed withdrawn
and waived with prejudice. If the Escrow Agent does not receive said objection
notice within the time period set forth above from the Company, the Escrow Agent
shall release from escrow and deliver to the Holder certificates or instruments
representing the number of Escrow Shares issuable to the Holder in accordance
with such conversion on the second Business Day from the transmittal to the
Company of the Notice of Conversion. In the event that the certificates
evidencing the Escrow Shares held by the Escrow Agent are not in denominations
appropriate for such delivery to the Holder, the Escrow Agent shall request the
Company to cause its transfer agent and registrar to reissue certificates in
smaller
139
denominations. The Escrow Agent shall, however, immediately release to the
requesting Holder certificates representing such lesser number of shares as the
denominations in its possession will allow that is closest to but no more than
the actual number to be released to such Holder. Upon receipt of the reissued
shares in lesser denominations from the Company's transfer agent, the Escrow
Agent shall release to such Holder the balance of the shares due to such Holder.
4. The Holder shall send the original Debentures and Notice of
Conversion to the Escrow Agent via FedEx or other commercial overnight courier,
along with a fee of $350, instructions regarding names and amount of
certificates for the issuance of the Underlying Shares and, if conversion is not
in full, instructions as to the re-issuance of the balance of the Debentures;
provided, however, that if the Escrow Agent is holding the Debentures, then the
Notice of Conversion may be faxed and the fee may be transmitted via wire
transfer to the Escrow Agent. The Escrow Agent shall deliver the foregoing to
the Company within two (2) Business Days of the Escrow Agent's receipt thereof.
In the event that the Escrow Agent has custody of the Debentures, the Escrow
Agent shall notify the Company and the Holder in writing of the balance of the
Debentures remaining and the Company and the Holder shall acknowledge such
notice in writing, in lieu of issuance of new Debentures for the balance.
5. If the Company will be issuing new Debentures, it will send such new
Debentures to the Escrow Agent within five (5) Business Days of its receipt of
the original Debentures and Notice of Conversion. The Escrow Agent shall send
the Underlying Shares to the Holder in accordance with Holder's instructions
within two (2) Business Days of receipt of the Notice of Conversion and will
send the new Debentures representing the Debentures (if any) to the Holder upon
receipt.
6. The Escrow Agent agrees to notify the Company in writing by
facsimile each time the Escrow Agent releases Escrow Shares to the Holder. Until
any such release and notification are given to the Company, the Escrow Shares
shall not be deemed to be validly issued and outstanding shares of capital stock
of the Company. Such notification shall be given when the Escrow Agent delivers
the Notice of Conversion Debentures.
7. The Company agrees that, at any time the conversion price of the
Debentures is such that the number of Escrow Shares with respect to the
Debentures is less than 200% of the number of shares of Common Stock that would
be needed to satisfy full conversion of all of the Debentures given the then
current conversion price (the "Full Conversion Shares"), upon five (5) days
written notice of such circumstance to the Company by a Holder and/or Escrow
Agent, it will issue additional share certificates, in the names of all Holders
and deliver same to the Escrow Agent, such that the new number of Escrow Shares
with respect to the Debentures is equal to 200% of the Full Conversion Shares.
140
EXHIBIT D
ESCROW AGREEMENT
ESCROW AGREEMENT (this "Agreement"), dated as of August 7, 2002, by
and among HEIR Holding Co., Inc., a Delaware corporation with its principal
place of business at ▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇ (the
"Company"); ▇▇▇▇▇▇ Gottbetter & ▇▇▇▇▇▇▇▇, LLP with its principal place of
business at ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇ (the "Escrow Agent"); and HEM
Mutual Assurance LLC, a Colorado limited liability company with offices at One
▇▇▇▇▇ Center, ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇ (the "Purchaser").
RECITALS
A. Simultaneously with the execution of this Agreement, the
Purchaser and the Company entered into a Convertible Debenture Purchase
Agreement (the "Purchase Agreement"), dated as of the date hereof and
incorporated herein by reference, pursuant to which the Company has agreed to
issue and sell and the Purchaser has agreed to purchase certain of the Company's
debentures (the "Debentures"), and the Company has granted the Escrow Agent a
power of attorney (the "Power of Attorney") with respect to the Debentures and
the Escrow Shares (collectively, the "Securities").
B. The Escrow Agent is willing to act as escrow agent pursuant to
the terms of this Agreement with respect to the purchase of the Debentures.
C. All capitalized terms used but not defined herein shall have
the meanings ascribed thereto in the Purchase Agreement.
NOW, THEREFORE, IT IS AGREED:
1. PROCEDURE FOR ESCROW. The procedures of the escrow shall be governed
by the provisions of Article 2 of the Purchase Agreement and Exhibit C thereto.
2. TERMS OF ESCROW. The terms of the escrow shall be governed by
Article 4 of the Purchase Agreement, and Articles 3 and 4 of the Debentures.
3. DUTIES AND OBLIGATIONS OF THE ESCROW AGENT.
(a) The parties hereto agree that the duties and obligations of
the Escrow Agent shall be only those obligations herein specifically provided
and no other. The Escrow Agent's duties are those of a depositary only, and the
Escrow Agent shall incur no liability whatsoever, except as a direct result of
its willful misconduct or gross negligence in the performance of its duties
hereunder;
(b) The Escrow Agent may consult with counsel of its choice, and
shall not be liable for any action taken, suffered or omitted to be taken by it
in accordance with the advice of such counsel;
141
(c) The Escrow Agent shall not be bound in any way by the terms of
any other agreement to which the Purchaser and the Company are parties, whether
or not the Escrow Agent has knowledge thereof, and the Escrow Agent shall not in
any way be required to determine whether or not any other agreement has been
complied with by the Purchaser and the Company, or any other party thereto. The
Escrow Agent shall not be bound by any modification, amendment, termination,
cancellation, rescission or supersession of this Agreement unless the same shall
be in writing and signed by the Purchaser and the Company and agreed to in
writing by the Escrow Agent;
(d) If the Escrow Agent shall be uncertain as to its duties or
rights hereunder or shall receive instructions, claims or demands which, in its
opinion, are in conflict with any of the provisions of this Agreement, the
Escrow Agent shall be entitled to refrain from taking any action other than
keeping safely the Consideration (as defined below) or taking certain action
until the Escrow Agent is directed otherwise in writing jointly by the Purchaser
and the Company or by a final judgment of a court of competent jurisdiction;
(e) The Escrow Agent shall be fully protected in relying upon any
written notice, demand, certificate or document which the Escrow Agent, in good
faith, believes to be genuine. The Escrow Agent shall not be responsible for the
sufficiency or accuracy of the form, execution, validity or genuineness of
documents or securities now or hereafter deposited hereunder or of any
endorsement thereon, or for any lack of endorsement thereon, or for any
description therein; nor shall the Escrow Agent be responsible or liable in any
respect on account of the identity, authority or rights of the persons executing
or delivering or purporting to execute or deliver any such document, security or
endorsement;
(f) The Escrow Agent shall not be required to institute legal
proceedings of any kind and shall not be required to defend any legal
proceedings which may be instituted against it or in respect of the
Consideration;
(g) If the Escrow Agent at any time, in its sole discretion, deems
it necessary or advisable to relinquish custody of any of the Securities (to the
extent delivered to the Escrow Agent pursuant hereto, the "Consideration"), it
may do so by delivering the same to another Person that agrees to act as escrow
agent hereunder and whose substitution for the Escrow Agent is agreed upon in
writing by the Purchaser and the Company. If no such escrow agent is selected
within three (3) days after the Escrow Agent gives notice to the Purchaser and
the Company of the Escrow Agent's desire to so relinquish custody of the
Consideration and resign as Escrow Agent, then the Escrow Agent may do so by
delivering the Consideration to the clerk or other proper officer of a state or
federal court of competent jurisdiction situate in the state and county of New
York. The fee of any court officer shall be borne by the Company. Upon such
delivery, the Escrow Agent shall be discharged from any and all responsibility
or liability with respect to the Consideration and this Agreement and each of
the Company and the Purchaser shall promptly pay all monies it may owe to the
Escrow Agent for its services hereunder, including, but not limited to,
reimbursement of its out-of-pocket expenses pursuant to paragraph (i) below;
142
(h) This Agreement shall not create any fiduciary duty on the
Escrow Agent's part to the Purchaser or the Company, nor disqualify the Escrow
Agent from representing either party hereto in any dispute with the other,
including any dispute with respect to the Consideration; provided, however, that
in the event of such dispute, the Escrow Agent shall have the right to commence
an interpleader action in any court of competent jurisdiction of the state of
New York or of the United States located in the county and state of New York,
deposit the Consideration with such court;
(i) The parties acknowledge and agree that the Escrow Agent is
counsel to the Purchaser. The parties agree to, and agree not to object to, the
Escrow Agent's engagement as Escrow Agent hereunder;
(j) Upon the performance of this Agreement, the Escrow Agent shall
be deemed released and discharged of any further obligations hereunder.
4. INDEMNIFICATION.
(a) The Purchaser hereby indemnifies and holds free and harmless
the Escrow Agent from any and all losses, expenses, liabilities and damages
(including but not limited to reasonable attorney's fees, and amounts paid in
settlement) resulting from claims asserted by the Company against the Escrow
Agent with respect to the performance of any of the provisions of this
Agreement;
(b) The Company hereby indemnifies and holds free and harmless the
Escrow Agent from any and all losses, expenses, liabilities and damages
(including but not limited to reasonable attorney's fees, and amount paid in
settlement) resulting from claims asserted by the Purchaser against the Escrow
Agent with respect to the performance of any of the provisions of this
Agreement;
(c) The Purchaser and the Company, jointly and severally, hereby
indemnify and hold the Escrow Agent harmless from and against any and all
losses, damages, taxes, liabilities and expenses that may be incurred by the
Escrow Agent, arising out of or in connection with its acceptance of appointment
as the Escrow Agent hereunder and/or the performance of its duties pursuant to
this Agreement, the Purchase Agreement, the Securities and the Power of
Attorney, including, but not limited to, all legal costs and expenses of the
Escrow Agent incurred defending itself against any claim or liability in
connection with its performance hereunder, provided that the Escrow Agent shall
not be entitled to any indemnity for any losses, damages, taxes, liabilities or
expenses that directly result from its willful misconduct or gross negligence in
its performance as Escrow Agent hereunder
(d) In the event of any legal action or proceeding involving any
of the parties to this Agreement which is brought to enforce or otherwise
adjudicate any of the rights or obligations of the parties hereunder, the
non-prevailing party or parties shall pay the legal fees of the prevailing party
or parties and the legal fees, if any, of the Escrow Agent.
143
5. MISCELLANEOUS.
(a) All notices, including Notices of Conversion, objections,
requests, demands and other communications sent to any party hereunder shall be
deemed duly given if (x) in writing and sent by facsimile transmission to the
Person for whom intended if addressed to such Person at its facsimile number set
forth below or such other facsimile number as such Person may designate by
notice given pursuant to the terms of this Section 5 and (y) the sender has
confirmation of transmission:
(i) If to the Company: HEIR Holding Co., Inc.
▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
With copies to: ▇▇▇▇▇▇ Gottbetter & ▇▇▇▇▇▇▇▇, LLP
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇, Esq.
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
(ii) If to the Purchaser: See Schedule 1 to the Purchase
Agreement.
With copies to ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, LLP
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇, Esq.
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
(iii) If to the Escrow Agent: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, LLP
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇, Esq.
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
(b) This Agreement has been prepared, negotiated and delivered in
the state of New York and shall be governed by and construed and enforced in
accordance with the laws of the state of New York applicable to contracts
entered into and performed entirely within New York, without giving effect to
the principles of New York law relating to the conflict of laws.
144
(c) This Agreement may be executed in two or more counterparts,
all of which when taken together shall be considered one and the same agreement
and shall become effective when counterparts have been signed by each party and
delivered to the other party, it being understood that both parties need not
sign the same counterpart. In the event that any signature is delivered by
facsimile transmission, such signature shall create a valid and binding
obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.
(d) This Agreement shall be binding upon and inure to the benefit
of the parties and their successors and permitted assigns. The assignment by a
party of this Agreement or any rights hereunder shall not affect the obligations
of such party under this Agreement.
6. TERMINATION OF ESCROW. The term of this Escrow Agreement shall begin
upon the date hereof and shall continue until terminated upon the earlier to
occur of (i) full conversion of the Debentures (ii) the Maturity Date (as
defined in the Debentures), and (iii) the written agreement of the parties to
terminate this Agreement. Upon the termination of this Escrow Agreement, the
Escrow Agent shall return any of the Consideration then held by it to the
Company pursuant to the Purchase Agreement and the other Transaction Documents.
[ SIGNATURE PAGE FOLLOWS ]
145
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed the day and year first above written.
Escrow Agent: The Company:
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, LLP HEIR HOLDING CO., INC.
By: By:
---------------------------------- ------------------------------------
Name: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇ Name: ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
Title: Managing Partner Title: President
Purchaser:
HEM MUTUAL ASSURANCE LLC
By:
------------------------------------
Name: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
Title: Manager
146
EXHIBIT E
FORM 26/33-DPOA/S-97
Power of Attorney; Statutory Short Form, Revised 1/1/97 - (with Affidavit of
Effectiveness (C)
CONSULT YOUR LAWYER BEFORE SIGNING THIS INSTRUMENT - THIS INSTRUMENT SHOULD BE
USED BY LAWYERS ONLY
DURABLE GENERAL POWER OF ATTORNEY
NEW YORK STATUTORY SHORT FORM
THE POWERS YOU GRANT BELOW CONTINUE TO BE EFFECTIVE
SHOULD YOU BECOME DISABLED OR INCOMPETENT
CAUTION: THIS IS AN IMPORTANT DOCUMENT IT GIVES THE PERSON WHOM YOU DESIGNATE
(YOUR "AGENT") BROAD POWERS TO HANDLE YOUR PROPERTY DURING YOUR LIFETIME WHICH
MAY INCLUDE POWERS TO MORTGAGE, SELL, OR OTHERWISE DISPOSE OF ANY REAL OR
PERSONAL PROPERTY WITHOUT ADVANCE NOTICE TO YOU OR APPROVAL BY YOU. THESE POWERS
WILL CONTINUE TO EXIST EVEN AFTER YOU BECOME DISABLED OR INCOMPETENT. THESE
POWERS ARE EXPLAINED MORE FULLY IN NEW YORK GENERAL OBLIGATIONS LAW, ARTICLE 5,
TITLE 15, SECTION 5-1502A THROUGH 5-1503 WHICH EXPRESSLY PERMIT THE USE OF ANY
OTHER OR DIFFERENT FORM OF POWER OF ATTORNEY.
THIS DOCUMENT DOES NOT AUTHORIZE ANYONE TO MAKE MEDICAL OR OTHER HEALTH CARE
DECISIONS. YOU MAY EXECUTE A HEALTH CARE PROXY TO DO THIS.
(IF THERE IS ANYTHING ABOUT THIS FORM THAT YOU DO NOT UNDERSTAND, YOU SHOULD ASK
A LAWYER TO EXPLAIN IT TO YOU.)
THIS is intended to constitute a DURABLE GENERAL POWER OF ATTORNEY pursuant to
Article 5, Title 15 of the New York General Obligations Law:
HEIR HOLDING CO., INC., with an address at ▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇,
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
(insert your name and address)
does hereby appoint:___________________________ ______________________________
(If 1 person is to be appointed agent, insert the name and address of your agent
above)
▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇ residing at ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ residing at ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ residing at ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
(If 2 or more persons are to be appointed agents by you insert their
names and addresses above.)
my attorney(s)-in-fact TO ACT (If more than one agent is designated, CHOOSE ONE
of the following two choices by putting your initials in ONE of the blank spaces
to the left of your choice;)
(X) Each agent may SEPARATELY act.
( ) All agents must act TOGETHER.
(If neither blank space is initialed, the agents will be required to act
TOGETHER)
IN MY NAME, PLACE AND ▇▇▇▇▇ in any way which I myself could do, if I were
personally present, with respect to the following matters as each of them is
defined in Title 15 of Article 5 of the New York General Obligations Law to the
extent that I am permitted by law to act through an agent:
(DIRECTIONS: INITIAL IN THE BLANK SPACE TO THE LEFT OF YOUR CHOICE ANY ONE OR
MORE OF THE FOLLOWING LETTERED SUBDIVISIONS AS TO WHICH YOU WANT TO GIVE YOUR
AGENT AUTHORITY. IF THE BLANK SPACE TO THE LEFT OF ANY PARTICULAR LETTERED
SUBDIVISION IS NOT INITIALED, NO AUTHORITY WILL BE GRANTED FOR MATTERS THAT ARE
INCLUDED IN THAT SUBDIVISION. ALTERNATIVELY, THE LETTER CORRESPONDING TO EACH
POWER YOU WISH TO GRANT MAY BE WRITTEN OR TYPED ON THE BLANK LINE IN SUBDIVISION
"(Q)", AND YOU MAY THEN PUT YOUR INITIALS IN THE BLANK SPACE TO THE LEFT OF
SUBDIVISION "(Q)" IN ORDER TO GRANT EACH OF THE POWERS SO INDICATED)
( ) (A) real estate transactions;
( ) (B) chattel and goods transactions;
( ) (C) bond, share and commodity transactions;
( ) (D) banking transactions;
( ) (E) business operating transactions;
( ) (F) insurance transactions;
( ) (G) estate transactions;
( ) (H) claims and litigation;
( ) (I) personal relationships and affairs;
( ) (J) benefits from military service;
( ) (K) records, reports and statements;
( ) (L) retirement benefit transactions;
( ) (M) making gifts to my spouse, children and more remote descendants,
and parents, not to exceed in the aggregate $10,000 to each of
such persons in any year;
( ) (N) tax matters;
( ) (O) all other matters;
( ) (P) full and unqualified authority to my attorney(s)-in-fact to
delegate any or all of the foregoing powers to any person or
persons whom my attorney(s)-in-fact shall select;
( X ) (Q) each of the matters identified by the following letters:
C and E
(Special provisions and limitations may be included in the statutory short form
durable power of attorney only if they conform to the requirements of Section
5-1503 of the New York General Obligations Law.)
SEE ATTACHMENT A
Special Additional Provisions: The powers granted under (A) through (C) above
shall include the sale of a cooperative housing unit and are enlarged so that
all fixtures and articles of personal property which at the time of such
transaction are or which may thereafter be attached to or used in connection
with the real or personal property may be included in the agreements or other
instruments to be executed and delivered in connection with any transactions and
which may be described in said instruments with more particularity. This Power
of Attorney is not subject to question because an instrument executed hereunder
fails to recite or recites only nominal consideration paid therefore and any
person dealing with the subject matter of such instrument may do so as if full
consideration had been expressed therein.
THIS DURABLE POWER OF ATTORNEY SHALL NOT BE AFFECTED BY MY SUBSEQUENT DISABILITY
OR INCOMPETENCE.
If every agent named above is unable or unwilling to serve, I appoint
residing at
(insert name and address of successor)
to be my agent for all purposes hereunder.
JUD 134
147
TO INDUCE ANY THIRD PARTY TO ACT HEREUNDER, I HEREBY AGREE THAT ANY THIRD PARTY
RECEIVING A DULY EXECUTED COPY OR FACSIMILE OF THIS INSTRUMENT MAY ACT
HEREUNDER, AND THAT REVOCATION OR TERMINATION HEREOF SHALL BE INEFFECTIVE AS TO
SUCH THIRD PARTY UNLESS AND UNTIL ACTUAL NOTICE OR KNOWLEDGE OF SUCH REVOCATION
OR TERMINATION SHALL HAVE BEEN RECEIVED BY SUCH THIRD PARTY, AND I FOR MYSELF
AND FOR MY HEIRS, EXECUTORS, LEGAL REPRESENTATIVES AND ASSIGNS, HEREBY AGREE TO
INDEMNIFY AND HOLD HARMLESS ANY SUCH THIRD PARTY FROM AND AGAINST ANY AND ALL
CLAIMS THAT MAY ARISE AGAINST SUCH THIRD PARTY BY REASON OF SUCH THIRD PARTY
HAVING RELIED ON THE PROVISIONS OF THIS INSTRUMENT.
THIS DURABLE GENERAL POWER OF ATTORNEY MAY BE REVOKED BY ME AT ANY TIME.
IN WITNESS WHEREOF I have hereunto signed my name this 7th day of August, 2002
HEIR HOLDING CO., INC.
(YOU SIGN HERE:) = By:_____________________________________, President
(Signature of principal)
The statute requires that this instrument be acknowledged by the principal. No
express provision is made for proof by subscribing witness.
STATE OF COUNTY OF ) SS.:
On the day of , 20 , before me personally came
to me known to be the individual described in and who executed the foregoing
instrument and acknowledged that he executed same.
STATE OF COUNTY OF ) SS.:
On the day of , 20 , before me personally came
to me known to be the individual described in and who executed the foregoing
instrument and acknowledged that he executed same.
AFFIDAVIT OF EFFECTIVENESS (C)
STATE OF COUNTY OF ) SS.:
, residing at
being duly sworn does depose and
say that I am the Attorney-in-Fact under the above Power of Attorney. That said
Power of Attorney is a valid and subsisting Power which has not been revoked by
the death of the principal(s) or otherwise; that I have no actual knowledge of a
revocation of the foregoing Power; and, I warrant and represent that I have full
and unqualified authority to execute the
[Deed, Mortgage, etc.]
knowing that , will rely upon
the representations made herein as inducement to accept such instrument(s) and
this Power of Attorney as evidence of my authority to act.
ATTORNEY IN FACT
SWORN AND SUBSCRIBED TO BEFORE ME THIS DAY OF , 2002
(NOTARY AFFIX STAMP AT RIGHT) DISTRICT
DURABLE GENERAL POWER OF ATTORNEY SECTION
REVISED STATUTORY SHORT FORM BLOCK
LOT
COUNTY OR TOWN
TITLE NO.
--------------------------------------------------------------------------------
RECORDED AT THE REQUEST OF
------------------------------------
RETURN BY MAIL TO:
------------------------------------------------------------------------------
------------------------------------------------------------------------------
RESERVED FOR RECORDING OFFICE USE
--------------------------------------------------------------------------------
148
DURABLE POWER OF ATTORNEY
NEW YORK STATUTORY SHORT FORM
DATED AUGUST 7, 2002,
BY HEIR HOLDING CO., INC.
ATTACHMENT A
The attached power of attorney is limited by and subject to the terms and
conditions of the Convertible Debenture Purchase Agreement by and between HEIR
Holding Co., Inc. (the "Company") and HEM Mutual Assurance LLC (the "Purchaser")
dated August 7, 2002 (the "Purchase Agreement"), the Escrow Agreement by and
among the Company, ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, LLP and the Purchaser dated
August 7, 2002 (the "Escrow Agreement"), and, to be issued upon the closing of,
and in accordance with, the Purchase Agreement, the Company's one percent (1%)
Convertible Debentures, due August 6, 2007, for an aggregate purchase price of
$1,000,000 (the "Debentures"), and such power of attorney can only be acted upon
to enforce the rights of the Purchaser and its successors and assigns under
Section 4.15 of the Purchase Agreement and Section 4 of the Debentures and to
grant the appointed agents the power to issue the opinions of counsel in
substantially the same form as the opinions contained in Exhibit F to the
Purchase Agreement, all including, but not limited to, the issuance and delivery
of shares of Common Stock, removing stop transfer orders and restrictions, and
replenishing the Escrow Shares (as defined in the Purchase Agreement) under the
aforementioned documents.
This power of attorney shall expire upon the full and complete
satisfaction of all of the Company's obligations under the Purchase Agreement,
the Escrow Agreement and the Debentures.
IN WITNESS WHEREOF I have hereunto signed my name this 7th day of August,
2002.
HEIR HOLDING CO., INC.
By:
-----------------------
Name: ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
Title: President
Signed and sworn to before me on
August 7, 2002
------------------------------------
Notary Public
149
EXHIBIT F
August 7, 2002
To the Purchaser Listed in Schedule 1 to the "Purchase Agreement"
RE: HEIR HOLDING CO., INC.
Ladies and Gentlemen:
We have acted as counsel to HEIR HOLDING CO., INC., a Delaware corporation
(the "Company"), in connection with the Convertible Debenture Purchase
Agreement, dated as of August 7, 2002, between you and the Company (the
"Purchase Agreement"), and the transactions contemplated thereby. Capitalized
terms used and not otherwise defined herein shall have the respective meanings
given to such terms in the Purchase Agreement.
In addition to the Transaction Documents, we have examined such other
documents, records and legal matters as in our judgment are necessary or
appropriate to enable us to render the opinions expressed below, including,
without limitation, the Company's certificate of incorporation and by-laws, each
as in effect on the date hereof (the "Certificate of Incorporation" and the
"By-Laws," respectively). We have also relied on the certificates furnished by
officers of the Company as of the date hereof. We have, without independent
verification, relied upon and assumed the accuracy of such certificates as to
factual matters and have not attempted to verify independently the statements
contained therein; however, nothing has come to our attention that would cause
us to question the accuracy of such statements.
We have also relied, without independent verification, on the
representations and warranties as to factual matters of the Company and the
Purchaser contained in the Purchase Agreement and on certificates of
governmental officials. In all such examinations, we have assumed: (i) the
genuineness of signatures of all persons other than the signatures of persons
signing on behalf of the Company; (ii) the authenticity of all documents
submitted to us as originals; (iii) the validity of all applicable laws,
statutes, ordinances, rules and regulations, and the proper indexing and
accuracy of all records and documents which are public records; and (iv) the
conformity to authentic original documents of all documents submitted to us as
certified, conformed or photostatic copies.
Based upon the foregoing and subject to the assumptions, limitations,
qualifications and exceptions stated herein, we are of the opinion that as of
the date hereof:
(a) Each of the Company and its Subsidiaries is a corporation, duly
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, with the requisite corporate power and
authority to own and use its properties and assets and to carry on its business
as currently conducted. To our knowledge, the Company has no subsidiaries other
than the Subsidiaries. Each of the Company and the Subsidiaries is duly
qualified to do business and is in good standing as a foreign corporation in
each jurisdiction in which the nature of the business
150
conducted or property owned by it makes such qualification necessary, except
where the failure to be so qualified or in good standing, as the case may be,
would not individually or in the aggregate reasonably be expected to have a
material adverse effect on its business or financial condition (a "Material
Adverse Effect").
(b) The Company has the requisite corporate power and authority to enter
into and to consummate the transactions contemplated by each of the Transaction
Documents, and to otherwise carry out its obligations thereunder. The execution
and delivery of each of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated thereby have been duly
authorized by all necessary action on the part of the Company. Each of the
Transaction Documents has been duly executed and delivered by the Company and
constitutes the valid and binding obligation of the Company enforceable against
the Company in accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally the enforcement
of, creditors' rights or by other equitable principles of general application.
(c) The Company has duly authorized and reserved for issuance such
number of shares of its common stock, no par value (the "Common Stock"), as are
issuable upon conversion of the Debentures (the "Underlying Shares"), assuming
conversion of the Debentures in full on the date hereof, and to the extent that
the number of the Underlying Shares may exceed the aggregate number of the
Escrow Shares (as defined in the Escrow Agreement) deposited in escrow pursuant
to the Escrow Agreement (such excess shares, if any, the "Excess Shares"), all
as required pursuant to the Debentures and the Purchase Agreement. The
Debentures are validly issued, fully paid and non-assessable. The Escrow Shares
are validly issued, fully paid and non-assessable. The Excess Shares, when
issued pursuant to the terms of the Debentures, and the Purchase Agreement will
be validly issued, fully paid and non-assessable.
(d) No shares of the Common Stock are entitled to statutory preemptive
or similar contractual rights known to such counsel. To our knowledge, except as
specifically disclosed in Schedule 3.1(c) to the Purchase Agreement, there are
no outstanding options, warrants, script rights to subscribe to, registration
rights, calls or commitments of any character whatsoever relating to, or, except
as a result of the purchase and sale of the Debentures, securities, rights or
obligations convertible into or exchangeable for, or giving any person any right
to subscribe for or acquire, any shares of Common Stock, or contracts,
commitments, understandings, or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of Common Stock, or
securities or rights convertible or exchangeable into shares of Common Stock,
except as otherwise provided in the Purchase Agreement.
(e) To our knowledge, other than the Required Approvals, neither the
Company nor any Subsidiary is required to obtain any consent, waiver,
authorization or order of, or make any filing or registration with, any court of
other federal, state, local or other governmental authority or other person in
connection with the execution, delivery and performance by the Company of the
Transaction Documents, the absence of which could reasonably be expected to have
a Material Adverse Effect.
151
(f) The execution and delivery of the Transaction Documents by the
Company and its performance of and compliance with the terms of the Transaction
Documents, including, without limitation, the issuance of the Debentures and the
Escrow Shares do not, and its issuance of Excess Shares, if any, will not,
violate any provision of the Certificate of Incorporation or the By-Laws or, to
our knowledge, any provision of any applicable federal or state law, rule or
regulation, which could reasonably be expected to have a Material Adverse
Effect. To our knowledge, except as disclosed in Schedule 3.1(e) to the Purchase
Agreement, the execution, delivery and performance of and compliance with the
Transaction Documents, and the issuance of the Debentures and the Escrow Shares
have not resulted, and will not result, nor will the issuance of any Excess
Shares result, in any violation of, or constitute a default under (or an event
which with the passage of time or the giving of notice or both would constitute
a default under), any contract, agreement, instrument, judgment or decree
binding upon the Company or any Subsidiary and known to us which, individually
or in the aggregate, could reasonably be expected to have a Material Adverse
Effect.
(g) Assuming the accuracy of the representations and warranties of the
Company set forth in Section 3.1 of the Purchase Agreement and of the Purchaser
set forth in Section 3.2 of the Purchase Agreement, the offer, issuance and sale
of the Debentures and the offer and issuance of the Escrow Shares pursuant to
the Purchase Agreement are and the sale of the Escrow Shares and the offer,
issuance and sale of the Excess Shares, if any, will be, exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), by reason of Rule 504 of Regulation D promulgated under
Section 4(2) of the Securities Act and Section ▇▇-▇▇-▇▇▇ of the Colorado Revised
Statutes and regulation 51-3.13B promulgated thereunder. Accordingly, the
Securities are being issued without restriction and may be freely traded upon
resale pursuant to Rule 504 of Regulation D of the Securities Act.
These opinions are limited to the matters expressly stated herein and are
rendered solely for your benefit and may not be quoted or relied upon for any
other purpose or by any other person.
The opinions expressed herein are subject to the following assumptions,
limitations, qualifications and exceptions:
(a) We have assumed that the Purchaser subscribing to the
Transaction Documents has the legal right, capacity and power to enter into and
perform all of its obligations under each of the Transaction Documents.
Furthermore, we have assumed the due authorization by the Purchaser of all
requisite action and the due execution and delivery of the Transaction
Documents, and that the Transaction Documents are the valid and binding
agreements of the Purchaser enforceable against it in accordance with their
respective terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally the enforcement of, creditors' rights or by
other equitable principles of general application.
(b) Our opinions on the binding effect and enforceability of any
obligation are subject to limitations resulting from the effects of (i)
bankruptcy, insolvency, reorganization, receivership, moratorium, fraudulent
conveyance, arrangement and assignment for the benefit of
152
creditors laws and similar laws or judicially developed doctrines, and (ii)
general principles of equity, whether applied by a court of law or equity.
(c) We disclaim any opinion as to (i) the validity or
enforceability under federal securities laws of any indemnification and
contribution provisions of the Registration Rights Agreement or any other
documents, (ii) any provisions in any documents which purport to waive any
procedural due process rights, and (iii) any provisions relating to choice of
governing law, which choice may depend upon factual circumstances and the laws
of other jurisdictions.
(d) Enforcement of your rights and remedies may be limited by laws
and judicial decisions which have imposed duties and standards of conduct
(including, without limitation, obligations of good faith, fair dealing and
reasonableness), and in this regard we have assumed that you will exercise your
rights and remedies under the Transaction Documents, to the extent required by
such laws and judicial decisions, in good faith and in circumstances and a
manner which are commercially reasonable.
(e) Requirements set forth in any of the Transaction Documents to
the effect that any provision thereof may be waived only in writing may not be
valid, binding or enforceable to the extent that an oral agreement or an implied
agreement by practice or course of conduct modifying such requirements has been
or may be created.
(f) We express no opinion as to the enforceability of any remedies
provided for under any of the Transaction Documents to the extent such remedies
would have the effect of compensating the party entitled to the benefit of such
remedies in amounts in excess of the actual loss suffered by such party.
(g) Whenever our opinion with respect to the existence or absence
of facts is indicated to be based on our knowledge, we are referring to the
actual current knowledge of partners and associates of ▇▇▇▇▇▇ Gottbetter &
▇▇▇▇▇▇▇▇, LLP who have had substantive involvement in the representation of the
Company in connection with this transaction. We have not undertaken any
independent investigation to determine the existence or absence of such facts
(and have not caused to be made any review of any court files or indices) and no
inferences as to our knowledge concerning such facts should be drawn from the
fact that such representation has been undertaken by us.
(h) Our opinions are limited to the matters expressly set forth
herein and to laws and facts existing on the date hereof an no opinion is to be
implied or inferred beyond the matters expressly so stated.
(i) Our examination of law relevant to the matters covered by this
opinion is limited to the laws of the state of New York, the General Corporation
Law of the state of Delaware and the federal law of the United States, and we
express no opinion as to the effect on the matters covered by this opinion of
the laws of any other jurisdiction. To the extent that the governing law with
respect to any matters covered by this opinion is the law of any jurisdiction
other than the states of New York or Delaware or federal law of the United
States, we have assumed that the law of such other jurisdiction is identical to
New York or Delaware law. We express no opinion as to the effect
153
on the transactions described herein, in the Transaction Documents and in the
other agreements and materials referred to herein of the laws of any
jurisdiction other than the states of New York or Delaware and the federal law
of the United States. As members of the bar of the state of New York, we do not
purport to be experts on the law of any other state of the United States or the
jurisdiction of any foreign country.
(j) In furnishing the opinion regarding the valid existence and
good standing of the Company and its Subsidiaries and the qualification of the
Company and its Subsidiaries to do business, we have relied solely upon the good
standing certificates attached to this letter.
This opinion is given as of the date hereof and we assume no obligation to
update or supplement this opinion to reflect any facts or circumstances which
may hereafter come to our attention or any changes in laws which may hereafter
occur.
Very truly yours,
▇▇▇▇▇▇ Gottbetter & ▇▇▇▇▇▇▇▇, LLP
154