1
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
among
BIOMETRIC IDENTIFICATION, INC.,
a California corporation,
ARETE ASSOCIATES, INC.,
a California corporation
AND
SONOMA RESOURCE CORP.,
a corporation organized under the laws of
British Columbia, Canada
$5,000,000 Convertible Debentures Due 2003
June 11, 1998
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TABLE OF CONTENTS
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PAGE
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1 Definitions
2 Sale of Purchase and of Debentures
2.1 Authorization and Issuance of Debentures
2.2 Purchase and Sale of Debentures
2.3 Closing
2.4 Transfer Restrictions
3 Payment of Debentures
3.1 Payment Terms
3.2 Allocation of Payments
3.3 Taxes
4A. Representations and Warranties of Obligor
4A.1 Corporate Existence and Power
4A.2 Corporate Authority
4A.3 Binding Effect
4A.4 Capital Stock
4A.5 No Conflict
4A.6 Consents
4A.7 Assets and Properties
4A.8 Taxes
4A.9 Broker's or Finder's Commissions
4A.10 Labor Matters
4A.11 Environmental Matters
4A.12 Compliance with Applicable Law; Permits, Licenses and Authorizations
4A.13 Employee Matters; Compliance with ERISA
4A.14 Material Contracts
4A.15 Insurance
4A.16 Intellectual Property
4A.17 Customers and Suppliers
4A.18 Certain Transactions
4A.19 Business Operations and Other Information; Financial Condition
4A.20 Disclosure
4A.21 Offering of Securities
4A.22 Financial Projections
4A.23 Manpower and Tax Sharing Agreement
4A.24 Sole Business
4A.25 Transaction Documents
4A.26 No Litigation
4B. Representations and Warranties of Arete
4B.1 Corporate Existence and Power
4B.2 Corporate Authority
4B.3 Binding Effect
4B.4 No Conflict
4B.5 Consents
4B.6 Assets and Properties
4B.7 Taxes
4B.8 Labor Matters
4B.9 Environmental Matters
4B.10 Compliance with Applicable Law; Permits, Licenses and Authorizations
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4B.11 Employee Matters; Compliance with ERISA
4B.12 Intellectual Property
4B.13 Customers and Suppliers
4B.14 Business Operations and Other Information; Financial Condition
4B.15 Disclosure
4B.16 Offering of Securities
4B.17 Manpower and Tax Sharing Agreement
4B.18 Sole Business
4B.19 Transaction Documents
4B.20 No Litigation
5 Representations and Warranties of Purchaser
5.1 Investment Intent
5.2 Corporate Existence and Power
5.3 Corporate Authority
5.4 Binding Effect
5.5 Financing
5.6 No Conflict
5.7 Consents
5.8 No Litigation
5.9 Transaction Documents
5.10 Broker's or Finder's Commissions
5.11 Access
6A Conditions to Purchaser's Obligation to Close
6A.1 Proceedings Satisfactory
6A.2 Opinions of Counsel for Obligor and Arete
6A.3 Representations and Warranties True
6A.4 Absence of Material Adverse Change, Etc.
6A.5 Consents and Approvals
6A.6 Absence of Litigation, Orders, Etc.
6A.7 Recapitalization
6A.8 License
6A.9 Manpower and Tax Sharing Agreement
6A.10 Agreements of Certain Persons
6A.11 Export Permits
6B. Conditions of Obligor's Obligation to Close
6B.1 Representations and Warranties True
6B.2 Absence of Litigation, Orders, Etc.
7 Affirmative Covenants
7.1 Use of Proceeds
7.2 Payment of Obligations
7.3 Payment of Taxes and Claims
7.4 Maintenance of Properties and Books
7.5 Inspection of Properties and Books
7.6 Initial Public Offering; Additional Financing
7.7 Registration Rights
7.8 Events of Default
7.9 Non-Competition
7.10 Further Assurances
8 Negative and Maintenance Covenants
8.1 Restrictions on Liens
8.2 Limitation on Sale and Leasebacks
8.3 Mergers, Consolidations and Sales of Assets; Acquisitions;
Subsidiaries
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8.4 Conduct of Business
8.5 Transactions with Affiliates
8.6 Amendments of Charter, By-Laws and Certain Documents
9 Financial Statements and Information
10 Events of Default
10.1 Events of Default; Remedies
10.2 Suits for Enforcement; Remedies
10.3 Remedies Cumulative
10.4 Remedies Not Waived
11 Conversion of Debentures
11.1 Conversion of Debentures
11.2 Conversion Price
11.3 Exercise of Conversion Privilege
11.4 No Dilution or Impairment
11.5 Issuance of Additional Shares
11.6 Fractional Shares
11.7 Notices of Certain Events
12 Deliveries
13 Termination
14 Registration, Exchange, and Transfer of Debentures
15 Lost, Stolen, Damaged and Destroyed Debentures
16 Board Constitution; Representation and Action
17 Prior Advance
18 Miscellaneous
18.1 Amendment and Waiver
18.2 Expenses
18.3 Survival of Representations and Warranties
18.4 Successors and Assigns
18.5 Administrative Agent
18.6 Notices
18.7 Certain Acknowledgments
18.8 Public Announcements
18.9 No Fiduciary Relationship
18.10 Integration and Severability
18.11 Counterparts
18.12 Governing Law
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INDEX OF SCHEDULE REFERENCES
Schedule 1.72
Schedule 2.2
Schedule 4A.4
Schedule 4A.4(b)
Schedule 4A.7
Schedule 4A.13
Schedule 4A.14
Schedule 4A.16(a)
Schedule 4A.16(b)
Schedule 4A.16(e)
Schedule 4A.16(f)
Schedule 4A.16(h)
Schedule 4A.18
Schedule 4A.26
Schedule 4B.6
Schedule 4B.9
Schedule 5.7
Schedule 11.2
LIST OF EXHIBITS
EXHIBIT A
EXHIBIT B
EXHIBIT C
EXHIBIT E
EXHIBIT F
EXHIBIT G
EXHIBIT H
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CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
This CONVERTIBLE DEBENTURE PURCHASE AGREEMENT (this "Agreement") is
made and entered into as of June 11, 1998, by and among BIOMETRIC
IDENTIFICATION, INC., a California corporation ("Obligor"), ARETE ASSOCIATES, a
California corporation ("Arete"), and SONOMA RESOURCE CORP., a corporation
organized under the laws of British Columbia, Canada ("Purchaser").
NOW, THEREFORE, the parties agree as follows:
SECTION 1 DEFINITIONS. Unless the context otherwise requires, the terms defined
in this Section I shall have the meanings specified below.
1.1 "Additional Capital Stock" has the meaning set forth in Section
11.5.
1.2 "Administaff" means Administaff Companies, Inc., a Delaware
corporation, and any successor or assignee thereof.
1.3 "Affiliate" means any Person which directly or indirectly
controls, is controlled by, or is under common control with, the indicated
Person.
1.4 "Agreement" means this Convertible Debenture Purchase Agreement,
as such agreement may be amended from time to time, together with all Exhibits
and Schedules hereto.
1.5 "Amended and Restated Articles" means the Amended and Restated
Articles of Obligor to be filed with the California Secretary of State pursuant
to Section 6A. 7a, in the form of Exhibit A.
1.6 "Amended and Restated Memorandum of Agreement " means that
certain Amended and Restated Memorandum of Agreement dated May 20, 1998, among
Obligor, Arete and RECC.
1.7 "Arete Financial Statements" means the audited Balance Sheet and
Income Statement for Arete for each of the years ended December 31, 1997, 1996
and 1995 as of such date and Arete's Unaudited Balance Sheet and Income
Statement for the three month period ended March 31, 1998, copies of which are
attached hereto as Exhibit B.
1.8 "Arete's Knowledge " means the actual knowledge, after reasonable
investigation, of Xxxxx Xxxxxx.
1.9 "Balance Sheet Date" means the date of Obligor's most recently
audited Balance Sheet.
1.10 "Bankruptcy Code" means 11 U.S.C. Sec. 101 et seq., as from time
to time hereafter amended, and any successor or similar statute.
1.11 "Business" means the development, manufacture, marketing,
distribution and sale of technology and devices that recognize fingerprints, and
the licensing of computer software and technology related thereto.
1.12 "Capital Stock" means and includes any and all shares, interests,
participations or other equivalents of or interests in (however designated)
corporate stock, including, without limitation, shares of preferred stock and
any warrant, option or other right to acquire the same.
1.13 "Change of Control" means any of the following: (i) completion of
a tender offer or exchange offer for 50% or more of the outstanding shares of
any Capital Stock of Obligor or securities of Obligor issued in substitution
therefor after the date hereof (other than a tender offer or exchange offer made
by Obligor); (ii) merger, consolidation or other transaction as a result of
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which less than 50% of the outstanding Voting Stock (or securities issued in
substitution therefor) of the surviving or resulting entity shall be owned in
the aggregate, directly or indirectly, by the stockholders of Obligor as the
same shall have existed immediately prior to such transaction; (iii) liquidation
or dissolution of Obligor; or (iv) sale or exchange or other disposition of all
or any material part of the Technology or the Intellectual Property or all or
substantially all of the assets of Obligor.
1.14 "Closing Date" has the meaning set forth in Section 2.2.
1.15 "Code" means the Internal Revenue Code of 1986, as amended, or
any similar federal statute then in effect, together with the rules and
regulations promulgated thereunder.
1.16 "Commission" means the United States Securities and Exchange
Commission or any successor agency.
1.17 "Common Stock" means the common stock, without par value, of
Obligor.
1.18 "Conversion Stock" means stock into which the Debentures are
converted, directly or indirectly, including Series A Preferred Stock and Common
Stock.
1.19 "Copyright Rights" means all rights in and to all copyrights
associated with the Technology, together with all registrations (if any) and all
goodwill associated therewith.
1.20 "Xxxxxxx Matter" has the meaning set forth in Section 4A.10.
1.21 "Debenture" and "Debentures" mean the debentures that are issued
pursuant to this Agreement, as well as any debenture issued in exchange therefor
or in substitution or replacement thereof, convertible into shares of Series A
Preferred Stock, such Debenture evidenced by one or more certificates
substantially in the form of Exhibit C.
1.22 "Debenture Purchase Request" has the meaning set forth in Section
2.2.
1.23 "Default" means any event or condition which, with due notice or
lapse of time or both, would become an Event of Default.
1.24 "Default Rate" means (i) 5% over the Imputed Rate or (ii) the
highest rate permitted by law, whichever is less.
1.25 "Dollars" shall mean United States dollars, unless otherwise
specifically delineated as Canadian dollars.
1.26 "Effective Date" means the date the last of all of the following
have occurred: (a) the execution of the Amended and Restated Memorandum of
Agreement, (b) the delivery by Obligor to Purchaser of an unaudited balance
sheet with full notes as of April 30, 1998, and an audited income statement for
the year ended December 31, 1997, and an unaudited internal BII income statement
for the four month period ended January 1, 1998 to April 30, 1998, (c) the
delivery by Obligor to Purchaser of a pro forma balance sheet reflecting the
recapitalization of Obligor, (d) the completion of a manpower plan between
Obligor and Arete, (e) the execution of a technology license agreement between
Obligor and Arete, (f) the finalization of Obligor's Stock Incentive Plan, (g)
the filing of BII's Amended and Restated Articles with the California Secretary
of State and (h) the execution and delivery of such other documents as may
reasonably be requested by the parties.
1.27 "Environmental Laws" means any and all statutes, Orders, permits,
concessions, grants, franchises, licenses, agreements or governmental
restrictions relating to pollution, the protection of the environment or the
generation, treatment, storage, use, maintenance, recycling, transportation,
release or disposal of Hazardous Materials.
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1.28 "Environmental Matter" means any claim, investigation,
information request, litigation, administrative proceeding or Order, relating to
any Environmental Law or Hazardous Materials, in each case, against Arete or
Obligor or affecting any operations or any properties owned, licensed, leased,
occupied or operated by either of them.
1.29 "ERISA" means the Employee Retirement Income Security Act of
1974, as from time to time amended.
1.30 "ERISA Affiliate" means any Person which is a member of the same
controlled group (within the meaning of Section 414(b) of the Code) as Obligor,
Arete or Administaff or which is under common control (within the meaning of
Section 414(c) of the Code) with Obligor, Arete or Administaff or any Person
which is a member of an affiliated service group (within the meaning of Section
414(m) of the Code) with Obligor, Arete or Administaff or any corporation or
other Person which is required to be aggregated with Obligor, Arete or
Administaff pursuant to Section 414(o) of the Code or the regulations
promulgated thereunder.
1.31 "Essential Material Contract" means a Material Contract the
termination of which, prior to its scheduled expiration date, would have a
Material Adverse Effect.
1.32 "Exchange Act" means the Securities Exchange Act of 1934, as
amended or any similar federal statute then in effect, together with the rules
and regulations promulgated thereunder.
1.33 "GAAP" means generally accepted accounting principles as in
effect from time to time in the United States of America, consistently applied,
1.34 "Guarantee" means any guarantee, suretyship or other contingent
liability, whether direct or indirect, with respect to any obligations of
another Person.
1.35 "Hazardous Material" means any substance, or form of energy or
pathogenic agent that is subject to any past or present requirement of any
Governmental Body imposing obligations, liability, or standards of conduct
concerning the protection of human health, plant life, animal life, natural
resources, property or the reasonable enjoyment of life or property from the
presence in the environment of any solid, liquid, gas, odor, pathogen or form of
energy, from whatever source.
1.36 "Holder" of any security means the registered holder of such
security. A Holder of any Debentures or Conversion Stock shall be treated as the
Holder of the stock underlying such Debentures or Conversion Stock except,
however, such Holder shall not have voting rights until such Holder actually
acquires Conversion Stock.
1.37 "Imputed Rate" means the rate per annum equal to the lowest
interest rate imputed under the Code, determined as of the last day of each
month for the month then ending and adjusted monthly.
1.38 Intentionally deleted.
1.39 "Indebtedness" with respect to any Person means, without
duplication, (i) all indebtedness of such Person for borrowed money, (ii) any
obligation incurred for all or any part of the purchase price of property or
services, other than accounts payable and accrued expenses included in current
liabilities in accordance with GAAP and incurred in respect of property or
services purchased in the ordinary course of business, (iii) indebtedness or
obligations evidenced by bonds, notes or similar written instruments, (iv) all
reimbursement obligations of such Person (whether contingent or otherwise) in
respect of letters of credit, bankers' acceptances, surety or other bonds and
similar instruments, (v) any obligation (whether or not such Person has assumed
or become liable for the payment of such obligation) secured by a Lien on any
property of such Person,(vi) capitalized lease obligations of such Person, (vii)
all obligations, contingent or otherwise, of such Person with respect to any
interest rate protection agreement (e.g., swap, cap or collar agreement), (viii)
all obligations, contingent or otherwise, of such Person under any foreign
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exchange contract, currency swap agreement or other similar agreement or
arrangement designed to protect such Person against fluctuations in currency
values, and (ix) all Guarantees.
1.40 "Initial Advance" has the meaning set forth in Section 17.
1.41 "Initial Public Offering " shall mean the closing of underwritten
public offering of the Series A Preferred Stock or Common Stock of Obligor
pursuant to an effective registration statement under the Securities Act
pursuant to which Obligor receives net proceeds of not less than five million
dollars ($5,000,000.00).
1.42 "Intellectual Property" shall mean the Patent Rights, the
Trademark Rights, the Copyright Rights, the Technology, all mask works, all
trade secrets and confidential information, and all other intellectual property
and proprietary rights whatsoever pertaining to any of the foregoing in any way
related to the Business now or in the future.
1.43 "Internal Revenue Service" means the United States Internal
Revenue Service and any successor agency.
1.44 "License Agreement" means the Technology License Agreement to be
entered into by Arete and Obligor in the form attached hereto as Exhibit D.
1.45 "Lien" means any security interest, mortgage, pledge, lien,
claim, charge, encumbrance, conditional sale or title retention agreement,
reservation of rights, lessor's interest under a capitalized lease or analogous
instrument.
1.46 "Majority Holders" means the Person or Persons other than Obligor
or Arete who are the Holders of more than 50% of the then outstanding principal
amount of the Debentures, and, for all purposes hereunder, if all or any part of
the Debentures have been converted at the applicable time, the Holders of the
Series A Preferred Stock issued on the conversion of such Debentures (or Common
Stock issued upon conversion of such Series A Preferred Stock) will be deemed to
be holding Debentures in the principal amounts so converted, in addition to any
unconverted Debentures still held by them.
1.47 "Mandatory Conversion" has the meaning set forth in Section
11.1.
1.48 "Manpower and Tax Sharing Agreement" means the Manpower and Tax
Sharing Agreement to be entered into by Arete and Obligor in the form of Exhibit
E.
1.49 "Material Adverse Effect" means any change or effect that
individually or in the aggregate is reasonably likely to be materially adverse
to (i) the assets, business, operations, income, prospects or condition
(financial or otherwise) of Obligor, as applicable, (ii) the legality, validity
or enforceability of any Transaction Document, (iii) the ability of Arete or
Obligor, as applicable, to fulfill their obligations under any Transaction
Document or (iv) the Business.
1.50 "Material Contracts" means all supply agreements, license
agreements, contracts commitments, documents, instruments and understandings, in
each case whether written or oral, material to the Business, financial
condition, results of operation or prospects of Obligor which shall be deemed to
include without limitation: all contracts, or commitments, documents and
instruments: (a) having a value or cost in the aggregate of $50,000 or more or
having a term longer than one year; (b) relating directly or indirectly to the
Intellectual Property, or the manufacture or supply of any products or
components used in the Business; (c) relating directly or indirectly to the
chain of title of the Intellectual Property; (d) with employees or contractors
who have participated in the development of the Technology or any other
Intellectual Property or the products of the Business; (e) containing
confidentiality agreements with any Person to whom any Intellectual Property or
confidential information relating to the Business has been disclosed; (f)
continuing Guarantees to which Obligor is a party, or by which the assets of
either are bound; (g) between Obligor and Arete or between Obligor and any other
shareholder, Affiliate, officer or director or employee of Obligor or Arete; (h)
evidencing Indebtedness of Obligor greater than $50,000; (i)
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containing leases of real property at which any aspect of the Business is
conducted; o) containing leases of equipment used in or related to the Business;
and (k) containing security agreements to which Obligor is a party or by which
they or any of their assets are bound (or to which Arete is a party and by which
any of the Intellectual Property is bound).
1.51 "Maturity Date" of a Debenture means the date that is the fifth
anniversary of the date of issuance of such Debenture.
1.52 "Multiemployer Plan " means a multiemployer plan as defined in
Section 3(37) or Section 4001(a)(3) of ERISA or Section 414(f) of the Code
contributed to by Arete, Obligor, Administaff or ERISA Affiliates of any of
them.
1.53 "Number of Fully Diluted Shares Outstanding" shall mean the
number of shares of Common Stock outstanding on the relevant date, including,
without limitation, any shares of Common Stock then issued and any shares of
Common Stock which are then or might, with the passage of time or on the
occurrence of any event, become issuable (x) on the exercise of any outstanding
option or warrant, (y) on the exercise of any option or warrant which Obligor
has agreed to issue, or (z) pursuant to any other agreement, right of conversion
or exchange or other obligation, and: (a) for the purpose of Section 1.72
includes any shares which are issued or issuable pursuant to the Stock Incentive
Plan or any security issued thereunder exercisable for or convertible into
shares of Common Stock and any shares issued as part of the additional debt or
equity financing to be raised by Obligor prior to or following the purchase of
all Debentures by Purchaser hereunder or any security issued therein exercisable
for or convertible into shares of Common Stock; (b) for the purpose of Section
11.2 will exclude any shares which are issued or issuable pursuant to the Stock
Incentive Plan or any security issued thereunder exercisable for or convertible
into shares of Common Stock and will exclude any shares issued as part of any
equity or convertible debt financing raised by the Obligor after the timely
completion of the $5,000,000 financing as more particularly described in Section
7.6. All Capital Stock shall be deemed Common Stock for the purpose of this
definition. For the purpose of calculating the number of shares which may be
issued pursuant to the Stock Incentive Plan, and for the purpose of calculating
the Number of Fully Diluted Shares Outstanding, the share issuances described on
Schedule 1.72 will be deemed to be shares issued under the Stock Incentive Plan.
1.54 "Obligor Financial Statements" means the audited Balance Sheet
and Income Statement for Obligor for the year ended December 31, 1997 as of such
date and Obligor's unaudited Balance Sheet (with full notes) as of April 30,
1998 and unaudited internal B11 Income Statement for the four month period of
January 1, 1998 to April 30, 1998, copies of which are attached hereto as
Exhibit B.
1.55 "Obligor's Knowledge" means the actual knowledge, after
reasonable investigation, of Xxxxx Xxxxxx, Xxxxxx Xxxx or, as to Section 4A. 16
only, Xxxxx Xxxxxxx.
1.56 "Order" means any order, writ, injunction, decree, judgment,
award, determination or written direction or demand of any court, arbitrator or
governmental body.
1.57 "Other Taxes" has the meaning set forth in Section 3.3.
1.58 "Outside Purchase Date" has the meaning set forth in Section 2.2.
1.59 "Patent Rights" means all rights in and to those patents and
patent applications described in Schedule 4A. 16(a), as such applications may be
amended, and all patents issued pursuant to such applications as they might be
amended, together with all rights in and to the underlying inventions.
1.60 "PBGC" means the Pension Benefit Guaranty Corporation.
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1.61 "Pension Plan" means an employee pension benefit plan, as defined
in Section 3(2) of ERISA, excluding any Multiemployer Plans, maintained by or
contributed to by Obligor, Arete, Administaff or any ERISA Affiliate of any of
them.
1.62 "Person" means and includes any actual person, partnership, joint
venture, association, limited liability company, corporation, trust,
unincorporated organization and other entity and any government department,
agency or instrumentality or political subdivision thereof.
1.63 "Plan" and "Plans" means any employee benefit plan as defined in
Section 3(3) of ERISA, excluding a Multiemployer Plan, established or maintained
for the benefit of employees of Obligor, Arete, Administaff or any ERISA
Affiliate of any of them.
1.64 "RECC" means Xxxx Xxxxx Capital Corp. and its permitted
successors and assigns.
1.65 "Recapitalization" means the recapitalization of BII in
accordance with the Recapitalization Plan in the form of Exhibit G.
1.66 "Registrable Securities" means the common stock issued or
issuable upon conversion of the Debentures and Series A Preferred Stock sold
pursuant to the Convertible Debenture Purchase Agreement, whether owned by
Purchaser or not, and any securities issued or issuable with respect to the
common stock referred to above by way of a stock dividend or stock split or in
connection with a combination of shares, reclassification, recapitalization,
merger or consolidation or reorganization; provided, however, that such shares
of common stock shall only be treated as Registrable Securities if and so long
as they have not been (i) sold to or through a broker or dealer or underwriter
in a public distribution or a public securities transaction, or (ii) sold in a
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act under Section 4(l) thereof so that all transfer restrictions
and restrictive legends with respect to such common stock are removed upon the
consummation of such sale and the seller and purchaser of such common stock
receive an opinion of counsel for Seller which shall be in form and content
reasonably satisfactory to Obligor, to the effect that such common stock in the
hands of the purchaser is freely transferable without restriction or
registration under the Securities Act in any public or private transaction.
1.67 "Remaining Advance" has the meaning set forth in Section 17.
1.68 "Reportable Event" has the meaning set forth in Section 4A.13(c).
1.69 "Securities Act" means as of any date the Securities Act of 1933,
as amended, and or any similar federal statute then in effect, together with the
rules and regulations promulgated thereunder.
1.70 "Series A Preferred Stock" means Obligor's Series A Preferred
Stock.
1.71 "Sonoma" means Sonoma Resource Corp. and its permitted successors
and assigns.
1.72 "Stock Incentive Plan" means the equity incentive plan in the
form of Exhibit F hereto, pursuant to which Obligor may issue to directors,
officers, employees and consultants of Obligor or Arete an aggregate of up to 15
% of the Number of Fully Diluted Shares Outstanding as of the date hereof and
after giving effect to the Recapitalization and the issuance and conversion of
all Debentures issuable hereunder and the issuance and conversion of all Series
A Preferred Stock into which such Debentures may be converted, including without
limitation the options to purchase Capital Stock of Obligor listed on Schedule
4A.4. For the purpose of calculating the number of shares which may be issued
pursuant to the Stock Incentive Plan, and for the purpose of calculating the
Number of Fully Diluted Shares Outstanding, the share issuances described on
Schedule 1.72 will be deemed to be shares issued under the Stock Incentive Plan.
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1.73 "Taxes" has the meaning set forth in Section 3.3.
1.74 "Technology" shall mean all technology, inventions, information,
developments or any method or process relating directly to, or necessary or
commercially desirable for, Obligor to conduct and engage in the Business
including, without limitation, all software code, algorithms, documentation,
trade secrets, engineering, scientific and practical information and formulas,
research data, design and manufacturing procedures, know-how, raw material data,
specifications.
1.75 "Termination Event" has the meaning set forth in Section 2.2.
1.76 "Trademark Rights" means all rights in and to the names
"Biometric Identification," "BII" and "Veriprint," including all trademark
registrations and applications therefor and all renewal rights, and all goodwill
in each of the foregoing.
1.77 "Tranche C Effective Date" means the date on which the Tranche C
Debenture (as so designated on Schedule 2.2 hereto) is purchased pursuant
hereto, which date shall be the later of (a) June 11, 1998 , or (b) the date on
which the last of all of the following have occurred (unless waived by Purchaser
in writing): (i) this Agreement and all Transaction Documents shall have been
executed by all par-ties thereto and become effective; (ii) the Obligor
Financial Statements shall have been delivered to Purchaser, including a pro
forma balance sheet reflecting the Recapitalization; (iii) the finalization of
Obligor's Stock Incentive Plan in the form of Exhibit F hereto; and (iv) the
filing of Obligor's Amended and Restated Articles of Incorporation.
1.78 "Transaction Documents" means, collectively, the Amended and
Restated Memorandum of Agreement, the Agreement, the Debenture, the
Recapitalization Plan, the Manpower and Tax Sharing Agreement, the License
Agreement, the Amended and Restated Articles and such other agreements and
instruments as the parties may deem necessary or appropriate to effectuate the
Transactions.
1.79 "Transactions" means, collectively, (i) the Recapitalization in
accordance with the Recapitalization Plan, (ii) the licensing by Arete to
Obligor of all the Technology on an exclusive basis and otherwise in accordance
with the License Agreement, (iii) the provision of the services of certain Arete
employees and independent contractors and contribution to Obligor by Arete of
certain tax benefits, all in accordance with the Manpower and Tax Sharing
Agreement, (iv) the issuance, sale and conversion of the Debentures and the
issuance and conversion of the Series A Preferred Stock into which the
Debentures may be converted, in each case pursuant to the Transaction Documents,
and (v) the other transactions contemplated by the Transaction Documents.
1.80 "Voting Stock Capital Stock of any class or classes, the holders
of which are ordinarily, in the absence of contingencies, entitled to vote for
the election of members of the Board of Directors (or Persons performing similar
functions).
SECTION 2 SALE AND PURCHASE OF DEBENTURES.
2.1 Authorization and Issuance of Debentures. Obligor has duly
authorized the issuance, sale and delivery of Debentures in the aggregate
principal amount of $5,000,000 having the terms set forth herein and in the
certificate evidencing the Debentures. The Debentures shall bear simple interest
(computed on the basis of a 360-day year and actual days elapsed) from the date
of issuance thereof at the Imputed Rate, payable annually in arrears, and, so
long as any Default or Event of Default has occurred and is continuing, shall
bear interest (so computed) at the Default Rate (compounded annually), on the
unpaid balance thereof, including any overdue principal or interest, if any,
and, to the extent permitted by applicable law, on any overdue interest, until
the same shall be paid, to mature on June 11, 2003 (the "Maturity Date").
2.2 Purchase and Sale of Debentures. Upon the terms and conditions of
this Agreement, Obligor will issue and sell to Purchaser and Purchaser will
purchase from Obligor, one or more Debentures in the aggregate principal amount
set forth in each "Debenture Purchase Request" (as hereinafter defined),
registered in the name of Purchaser or Purchaser's designee.
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Each issuance and sale of Debentures hereunder shall be made upon written notice
by Purchaser to Obligor (each such notice a "Debenture Purchase Request")
delivered no later than 11:00 A.M. (Los Angeles time) on the fifth business day
prior to the date such sale is to be effected. Such notice shall specify (a) the
requested date of sale which date shall not be later than the "Outside Purchase
Date' set forth on Schedule 2.2 (each a "Closing Date ") and (b) the aggregate
principal dollar amount of Debentures to be sold and purchased on such Closing
Date. Notwithstanding anything in any Transaction Document suggesting otherwise,
(i) at no time shall Purchaser be obligated to deliver a Debenture Purchase
Request to Obligor (or purchase any Debenture other than pursuant to a Debenture
Purchase Request), and (ii) if, as of the close of business on any Outside
Purchase Date on Schedule 2.2, Purchaser or its designee shall not have
purchased the indicated aggregate principal amount of Debentures corresponding
to such date other than as a result of the failure of the conditions set forth
in Section 6A hereof to be satisfied as of such date (the failure of such
conditions on such date, a "Termination Event") or an event of force majeure,
then Obligor shall be under no further obligation to issue and sell to Purchaser
or Purchaser's designee any Debenture not yet issued and outstanding as of the
close of business on such date.
2.3 Closing. The closing of each sale of Debentures shall take place
at 10:00 A.M. (Los Angeles time) at the office of Citron & Deutsch, A Law
Corporation, located at 00000 Xxxxxxxx Xxxxxxxxx, Xxxxx 000, Xxx Xxxxxxx,
Xxxxxxxxxx 00000, or at such other date, time and place as Obligor and Purchaser
may agree. The representations and warranties set forth in Sections 4A, 4B and 5
shall be deemed made on and as of the date hereof, the Tranche C Effective Date
and each Effective Date and, except for those representations and warranties
that specifically refer only to the Tranche C Effective Date or Effective Date
on each Closing Date. On the Closing Date, Purchaser or Purchaser's designee
shall pay to Obligor in immediately available funds by wire transfer or business
check, the principal amount of the Debentures then being purchased.
2.4 Transfer Restrictions. The Debentures and the Conversion Stock
shall not be transferable except in compliance with the Securities Act. The
Holder of any Debentures and Conversion Stock, by acceptance thereof, agrees,
prior to any transfer of the Debentures or any Conversion Stock, to give written
notice to Obligor of such Holder's intention to transfer such securities. Each
such notice shall describe the manner and circumstances of the proposed transfer
and shall be accompanied by the written opinion of counsel of such Holder,
stating that in the opinion of such counsel such proposed transfer does not
involve a transaction requiring registration or qualification of the securities
under the Securities Act or any applicable "blue sky" laws of any state of the
United States or any applicable Canadian law. The provisions imposed by this
Section 2.4 upon the transferability of the Debentures and the Conversion Stock
shall cease and terminate when (i) such securities are sold or otherwise
disposed of pursuant to an effective registration statement under the Securities
Act, or (ii) the Holder of the securities has met the requirements for transfer
pursuant to subparagraph (k) of Rule 144 (or any successor statute) and all
applicable Canadian statutes. Each Debenture and each certificate for any
Conversion Shares shall (unless otherwise permitted by Section 2.4) be stamped
with a legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED. IN ADDITION, THESE SECURITIES ARE SUBJECT TO THE
TERMS AND CONDITIONS, INCLUDING RESTRICTIONS ON TRANSFER, SET FORTH IN
THE CONVERTIBLE DEBENTURE PURCHASE AGREEMENT DATED AS OF JUNE 11, 1998,
AMONG THE COMPANY, ARETe ASSOCIATES AND SONOMA RESOURCE CORP. THESE
SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT."
SECTION 3 PAYMENT OF DEBENTURES.
3.1 Payment Terms. Obligor shall repay all principal and accrued
interest and other fees, costs and expenses on the Debentures as and when due in
accordance with this Agreement
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and the Debentures. Each payment shall be made in United States Dollars by wire
transfer or other immediately available funds, without deduction, set-off or
counterclaim, to each Holder entitled to receive such payment at such address or
bank account as shall be specified by such Holder from time to time by written
notice to Obligor, not later than 9:00 A.M. (Los Angeles time) on the date on
which such payment shall become due (each such payment made after such time on
such due date to be deemed to have been made on the next succeeding business
day). If the Holder does not provide Obligor with an address or bank account to
make payment, Obligor shall deposit the payment into an interest-bearing escrow
account established by Obligor for such purpose. Whenever any payment hereunder
or under the Debentures shall be stated to be due on a day other than a United
States business day, that payment shall be made on the next succeeding United
States business day. Obligor may not prepay all or any part of the principal
amount of the Debentures without the Holders' prior written consent. Obligor may
prepay accrued interest on the Debentures without penalty or premium.
3.2 Allocation of Payments. If any payment of less than the entire
outstanding principal balance of the Debentures is made in accordance with the
terms hereof, without limiting any other rights or remedies available to them
such payments shall be allocated among the Holders on a pro rata basis in
respect of the unpaid principal amounts of the Debentures held by the Holders.
All payments shall be applied first, to the payment of all obligations other
than unpaid principal and interest; second, to the payment of accrued unpaid
interest; third, to the repayment of principal.
3.3 Taxes. All payments by Obligor to any Holder shall be made free
and clear of and without deduction for any taxes, levies, imposts, deductions,
charges or withholdings other than, net income or franchise taxes properly
imposed on such Holder's net income and taxes required to be withheld under
applicable United States law (less such non-excluded items "Taxes"). Obligor
shall pay any stamp or documentary taxes or any other excise or property taxes,
charges or similar levies that arise from any payment made under any Transaction
Document or from the execution, delivery, enforcement or registration of, or
otherwise with respect to any Transaction Document, other than any transfer
taxes payable in connection with a change in the registered Holder of any
Debentures ("Other Taxes").
SECTION 4A. REPRESENTATIONS AND WARRANTIES OF OBLIGOR. Obligor represents and
warrants to, and covenants with, Purchaser and all Holders that:
4A.1 Corporate Existence and Power. Obligor is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. Obligor is duly qualified to do business in each jurisdiction where
the failure to so qualify could have a Material Adverse Effect. Obligor has all
requisite corporate power to own its properties and to carry on the Business and
all other business as now being conducted and as proposed to be conducted by it
according to the Biometric Identification, Inc. Business Plan distributed to
Purchaser on or about March 23, 1998, and to execute, deliver and perform its
obligations under each Transaction Document to which it is a party.
4A.2 Corporate Authority. The execution, delivery and performance by
Obligor of each Transaction Document to which it is a party are within its
corporate powers and have been duly authorized by all necessary corporate action
on the part of its Board of Directors and stockholders.
4A.3 Binding Effect. Each of the Transaction Documents which
contemplates that Obligor is to be a party has been duly executed and delivered
by Obligor, and constitutes legal, valid and binding obligations of Obligor,
enforceable against Obligor in accordance with its terms, except the
enforceability of Transaction Documents may be subject to or limited by
bankruptcy, insolvency, reorganization, arrangement, moratorium or similar laws
relating to or affecting the rights of creditors generally, (b) general
principles of equity, regardless of whether such enforceability is considered in
a proceeding in law or in equity and (c) the effect of those provisions and
principles of California law which provide that a Court may refuse to enforce or
may limit the application of a contract or any clause thereof which the court
finds as a matter of law to have been unconscionable at the time it was made.
15
4A.4 Capital Stock. (a) Schedule 4A.4 sets forth the authorized and
issued shares of Capital Stock of Obligor at each of the following points in
time (i) as of date of this Agreement prior to giving effect to the
Transactions, (ii) after giving effect to the Recapitalization but before giving
effect to the other Transactions, (iii) after giving effect to all of the
Transactions assuming that all Debentures are purchased and converted into
Series A Preferred Stock. All of the issued and outstanding shares of Capital
Stock of Obligor are validly issued, fully paid and non-assessable. Except as
set forth on Schedule 4A.4, except for the Debentures being purchased pursuant
hereto, and except for the stock portion of the finders fee described in Section
4A.9, there are no securities outstanding that directly or indirectly are
convertible into or exchangeable for any shares of Capital Stock of Obligor, nor
are there outstanding any rights to subscribe for or purchase, or any options or
warrants for the purchase of, or any agreements (contingent or otherwise)
providing for the issuance of, or any calls, commitments or claims of any
character relating to, any shares of Capital Stock of Obligor or any securities
directly or indirectly convertible into or exchangeable for any such shares.
(b) Except set forth in Schedule 4A.4(b), Obligor is not
subject to any obligation (contingent or otherwise) to repurchase, retain,
acquire or retire (i) any of its Capital Stock, (ii) any securities directly or
indirectly convertible into or exchangeable for any of its Capital Stock (except
for the Debentures), or (iii) any options, warrants or other rights to subscribe
for, purchase or acquire any of its Capital Stock (except for the Debentures).
(c) The Conversion Stock is duly authorized and has been
reserved for issuance upon conversion of the Debentures and upon conversion of
the Series A Preferred Stock and, when issued upon conversion will be duly
authorized, validly issued, fully paid and non-assessable, free and clear of all
Liens and. restrictions, other than Liens that might have been created by
Holders (other than Obligor or Arete) or arise under the Transaction Documents
and restrictions imposed by the Securities Act.
4A.5 No Conflict. Neither the execution and delivery by Obligor of any
Transaction Document to which it is a party, nor the offering, issuance or sale
of the Debentures or the Conversion Stock by Obligor, nor the fulfillment by
Obligor of, or compliance by Obligor with, the terms and provisions of the
Transaction Documents, will conflict with, or result in a breach or violation of
the terms of or constitute a default under, or result in the creation of any
Lien on any properties of Obligor, the Articles of Incorporation, Amended and
Restated Articles of Incorporation, or by-laws of Obligor or, any contract,
agreement, mortgage, indenture, lease or instrument to which Obligor is a party
or by which Obligor or its assets are bound or, to Obligor's Knowledge, violate
any treaty, law, regulation or Order to which Obligor or any of its assets are
subject.
4A.6 Consents. No consent, approval or authorization of or
declaration, registration or filing with any governmental authority of the
United States or any subdivision thereof is required in connection with the
execution or delivery by Obligor of the Transaction Documents, or the
performance by Obligor of its obligations thereunder, or as a condition to the
legality, validity or enforceability of any of the Transaction Documents.
4A.7 Assets and Properties. Obligor does not own any real property.
True and complete copies of all leases of real property to which Obligor is a
party, together with all amendments, modifications and supplements thereto to
the date of this Agreement, have been delivered to Purchaser or its
representatives. No assets or other properties, including any of the Technology
and including any other Intellectual Property used in the Business is subject to
any Lien of any kind except Permitted Liens. The assets owned by, leased to,
licensed to, or used by Obligor are in good operating condition and repair,
ordinary wear and tear excepted, and serve the function for which they are
intended. No Transaction Document nor any of the Transactions will materially
adversely affect any right, title or interest of Obligor in and to any of the
assets or properties owned, leased or used by Obligor. Except as disclosed in
Schedule 4A.7, Obligor owns or leases all equipment (technical, computer, office
or other), furniture and other goods and chattels used by Obligor, Arete or any
other Person in the Business.
16
4A.8 Taxes. Obligor has filed all tax returns and informational
returns which are required to have been filed, and has paid all taxes shown to
be due and payable on such returns and all other taxes and assessments payable
by it, except to the extent that any such tax liability is being diligently
contested in good faith and Obligor has adequately reserved against such tax
liability on its books and financial statements in accordance with GAAP. No
material tax liens have been filed and no material claims are being asserted
with respect to any such taxes as of the date hereof. To Obligor's Knowledge, no
material tax assessment against Obligor has been proposed, and all of its tax
liabilities are adequately provided for on its respective books and financial
statements in accordance with GAAP.
4A.9 Broker's or Finder's Commissions. Except for a finders fee
payable to Xxxxx Xxxxx and Xxxxxxx Xxxxxx in the aggregate amount of 2% of the
principal amount of Debentures purchased by Purchaser hereunder and an aggregate
of 816,000 shares of Series B Common stock to be issued to Xxxxx Xxxxx and
Xxxxxxx Xxxxxx, no broker's or finder's fee or commission will be payable by any
Person with respect to the issuance and sale of the Debentures or any of the
Transactions.
4A.10 Labor Matters. There has been no strike, work stoppage, slowdown
or other labor dispute or grievance involving Obligor or Persons employed by, or
providing services for the benefit of, Obligor, nor to Obligor's Knowledge is
any such action, dispute or grievance pending or threatened. Obligor is not a
party to any collective bargaining agreement, and, to Obligor's Knowledge, there
is no pending or threatened organizational effort. There are no pending
retaliatory or wrongful discharge claims or employment discrimination charges or
complaints or administrative or judicial complaints pending against Obligor, or
against any Person employed by, or providing services for the benefit of,
Obligor before any governmental body, nor, to Obligor's Knowledge, are there any
threats of such charges or complaints, except for the matter described in that
confidential memorandum from Xxxxxxxxx X. Sheamill to Xxxxxxx Xxxxxx dated June
7, 1997 (the "Xxxxxxx Matter") and except for the claim of Xxxx Xxxxxxx
previously disclosed to Purchaser. Such memorandum accurately and completely
describes the circumstances and facts surrounding the Xxxxxxx Matter.
4A.11 Environmental Matters. (i) There is no pending Environmental
Matter, nor, to Obligor's Knowledge, are there any facts that could reasonably
be expected to result in any Environmental Matter, and Obligor has not assumed
any liability of any other Person for cleanup, compliance, or required capital
expenditures in connection with any Environmental Matter; (ii) to Obligor's
Knowledge, all properties used, owned, leased, operated, managed or controlled
by Obligor are free of contamination from Hazardous Materials and are free of
any other potentially harmful chemical or physical conditions that could have a
Material Adverse Effect; (iii) to Obligor's Knowledge, Obligor is in compliance
with all applicable Environmental Laws and has not received any notice of
violation of any Environmental Law or of any potential liability for cleanup of
Hazardous Materials, and Obligor has not generated, manufactured, refined,
recycled, discharged, emitted, released, buried, processed, produced, reclaimed,
stored, treated, transported, or disposed of any Hazardous Materials in
violation of any treaty, law, regulation or Order; (iv) no real property used,
leased or controlled by Obligor is listed or proposed for listing on the
National Priorities List under CERCLA or listed in the Comprehensive
Environmental Response, Compensation, Liability Information System List
promulgated pursuant to CERCLA, or on any comparable list maintained by any
governmental body; and (v) to Obligor's Knowledge, Obligor has no liabilities,
absolute or contingent on the date hereof with respect to Hazardous Materials.
4A.12 Compliance with Applicable Law. Permits, Licenses and
Authorizations. To Obligor's Knowledge, Obligor is not violating nor has Obligor
violated any treaty, law, regulation or Order. Obligor holds, and is in material
compliance with, all governmental permits, licenses, and authorizations
necessary to operate the Business. To the best of Obligor's knowledge, (a)
export permits are required under the laws of the United States for the
Veriprint 1000 product, but the Obligor understands that such export permits
will be routinely granted (except for exports to approximately seven countries,
including Libya and Iran); (b) export permits are required under the laws of the
United States for the other products of the Obligor.
17
4A.13 Employee Matters, Compliance with ERISA. (a) Obligor has
furnished Purchaser with a true and complete list of all Persons rendering
services to or on behalf of Obligor on a full-time or part-time basis and has
separately identified to Purchaser, in the case of items (i), (ii) and as to
oral agreements (iii), with respect to each such person, that person's (i) age,
(ii) date his or her services commenced, (iii) status (e.g., employee of
Administaff or Obligor, independent contractor, etc.), (iv) salary, (v) benefits
and (vi) other oral or written agreements to which they are a party relating to
the provision of such services in each case both in respect to before and after
the implementation of the Manpower and Tax Sharing Agreement. Schedule 4A. 13
sets forth a true and complete list of all persons who are key personnel in the
Business.
(b) To Obligor's Knowledge, no Pension Plan which is subject to
Part 3 of Subtitle B of Title I of ERISA or Section 412 of the Code has or had
an accumulated funding deficiency (as such term is defined in Section 302 of
ERISA or Section 412 of the Code), whether or not waived, as of the last day of
the most recent fiscal year of such Pension Plan heretofore ended;
(c) To Obligor's Knowledge, no liability to PBGC (other than
required insurance premiums, of which all that are required to have been paid on
or before the date hereof have been paid) has been incurred and is outstanding
with respect to any Pension Plan, and there has not been any "Reportable Event"
(within the meaning of Section 4043(b) of ERISA or the regulations promulgated
thereunder), or any other event or condition, which presents a risk of
involuntary termination of any Pension Plan by the PBGC.
(d) To Obligor's Knowledge, neither Obligor, Administaff, any
Multiemployer Plan or Plan nor any trust created thereunder, nor any trustee or
administrator thereof, has engaged in a prohibited transaction (as such term is
defined in Section 4975 of the Code or described in Section 406 of ERISA) that
could subject Obligor or the assets of Obligor or used by Obligor in the
Business to any tax or penalty on prohibited transactions imposed under said
Section 4975 or Section 502(i) of ERISA.
(e) To Obligor's Knowledge no liability has been incurred and is
outstanding with respect to any Multiemployer Plan as a result of the complete
or partial withdrawal by Obligor, Administaff or any ERISA Affiliate from such
Multiemployer Plan under Title IV of ERISA, nor has any of Obligor, Administaff
or any ERISA Affiliate been notified by any Multiemployer Plan that such
Multiemployer Plan is currently in reorganization or insolvency under and within
the meaning of Section 4241 or 4245 of ERISA or that such Multiemployer Plan
intends to terminate or has been terminated under Section 4041A of ERISA.
(f) To Obligor's Knowledge, Obligor Administaff the ERISA
Affiliates, and all Plans and Multiemployer Plans are in compliance with all
applicable provisions of ERISA and the Code and with the applicable law and
administrative requirements of any relevant jurisdiction and the regulations and
published interpretations thereunder.
(g) To Obligor's Knowledge, the actuarial present value of all
benefit liabilities (as defined in Section 4001(a)(16) of ERISA) under each
Pension Plan that is subject to Title IV of ERISA does not exceed the fair
market value of the assets allocable to such liabilities, determined as if such
Plan were terminated as of the date hereof, and by using such Plan's actuarial
assumptions as set forth in the most recent actuarial report pertaining to such
Plan.
(h) To Obligor's Knowledge, no Multiemployer Plan has any
unfunded vested benefits within the meaning of Section 4213(c) of ERISA.
(i) To Obligor's Knowledge, no event has occurred with respect to
any Plan or with respect to any other employee benefit pension plan (as defined
in Section 3(2) of ERISA) established or maintained at any time during the
five-year period immediately preceding the date hereof for the benefit of
employees of, or rendering services for the benefit of, Obligor, or any ERISA
Affiliate, which presents a risk of liability of any of such Persons under
Section 4069 of ERISA.
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(j) To Obligor's Knowledge, there are no liabilities under the
Plans that are employee welfare benefit plans (as defined in Section 3(l) of
ERISA) providing for medical, health, life or other welfare benefits that are
not insured by fully paid non-assessable insurance policies, and no such Plan
provides for continued medical, health, life or other welfare benefits for
employees after they leave the employment of Obligor, Administaff or any ERISA
Affiliate (other than any such welfare benefits required to be provided under
the Consolidated Omnibus Budget Reconciliation Act of 1985 or other similar
law).
(k) To Obligor's Knowledge, neither Obligor, nor any ERISA
Affiliate of Obligor is a party in interest (as defined in Section 3(14) of
ERISA) with respect to any employee benefit plan (as defined in Section 3(3) of
ERISA), other than the Plans.
(1) To Obligor's Knowledge, neither Obligor nor Administaff nor
any ERISA Affiliate of Obligor has breached or violated any of the
responsibilities, obligations or duties imposed upon any of such Persons by the
Code or ERISA or any other statute, regulation, or governmental order which
breach or violation has given rise, or could give rise in the future to, any
material liability of, or obligation to pay money by, Arete or Obligor.
(m) To Obligor's Knowledge, there are no actions, suits or
claims, pending, asserted or, threatened against any Plan, Obligor, Administaff,
any ERISA Affiliate, or any Person for which Arete or Obligor may be directly or
indirectly liable through indemnification arrangement or otherwise, other than
routine claims for benefits.
(n) To Obligor's Knowledge, all required reports and descriptions
of the Plans of Obligor Administaff or ERISA Affiliates (including but not
limited to Form 5500 Annual Reports, Summary Annual Reports and Summary Plan
Descriptions) have been timely filed and distributed, and any notices required
by ERISA or the Code or any other applicable law, ruling or regulation.
(o) No proceeding has been instituted or, to Obligor's Knowledge,
is reasonably expected to be instituted under Section 515 of ERISA to collect
delinquent contributions to a Plan.
4A.14 Material Contracts. Schedule 4A.14 sets for a true and correct
list of all Material Contracts other than those having a value of less than
$50,000. Obligor has furnished or made available to Purchaser or its
representatives true and complete copies of each of the Material Contracts, with
all amendments, modifications and supplements thereto to the date hereof. To
Obligor's Knowledge, each Material Contract is valid, subsisting and in full
force and effect and enforceable by Obligor in accordance with its terms. No
Material Contract has been assigned, pledged, hypothecated or otherwise
transferred to any Person other than Obligor. Except as set forth on Schedule
4A. 14, Obligor is not in breach or violation of any Material Contract; nor to
Obligor's Knowledge, has there been any breach of a Material Contract by a third
party.
4A.15 Insurance. Obligor has delivered to Purchaser or its
representative true and complete copies of all insurance policies of Obligor.
Each of these policies is in full force and effect, and Obligor has not received
notice of cancellation with respect to any such policy. All premiums payable
with respect to such policies have been or will, by the date due, have been
paid.
4A.16 Intellectual Property. (a) Schedule 4A. 16(a) sets a true and
complete list of all (i) Intellectual Property owned by Obligor specifying with
respect to each patent, patent application, registered trademark and registered
copyright, the registration or application number thereof, the jurisdiction by
or in which such item has been issued or registered or in which an application
therefor has been filed, if any, the date of such issuance, registration or
application, (ii) Intellectual Property licensed to Obligor other than "off the
shelf' software obtained for less than $5,000 individually which is subject to
shrink wrap licenses, specifying with respect to each such item, the owner
thereof, and expiration date, and (iii) Intellectual Property licensed by
Obligor to third parties, specifying with respect to each item, whether the
license is exclusive or non-exclusive and the subject matter, territory and term
thereof To Obligor's Knowledge, except as set forth in Schedule 4A.16(a), there
is no reason to believe that any patent applications set forth on Schedule
19
4A.16(a) will not be granted, including without limitation any patent
application, whether pending on the date hereof or not.
(b) Except as set forth on Schedule 4A.16(b), Obligor owns and
has good title to, or is party to enforceable and non-revocable license
agreements permitting Obligor to use of, all items of Intellectual Property,
free from Liens and restrictions, which are currently used or necessary or
desirable for the present and, to Obligor's Knowledge, the planned future
conduct of the Business.
(c) To Obligor's Knowledge, except as set forth in Schedules 4A.
16(a) or (b), (i) none of the present or contemplated products or operations of
Obligor, or the Intellectual Property or Obligor's use thereof, infringes or
otherwise violates any intellectual property owned by any other Person, and (ii)
there is no pending or threatened claim, demand, litigation, investigation,
arbitration or other proceeding contesting Obligor's right to manufacture,
distribute or sell any such product or to engage in any such operation, or to
use or otherwise exploit any Intellectual Property.
(d) Except as set forth on Schedules 4A.16(a) or (b), all
registrations for Intellectual Property identified thereon and all applications
to register Intellectual Property have been filed with the appropriate
government authority. To Obligor's Knowledge, the Intellectual Property owned by
obligor is valid and enforceable in all material respects. Correct and complete
copies of registrations for all registered Intellectual Property identified on
Schedule 4A. 16(a) (together with any subsequent correspondence with the United
States Copyright Office, the United States Patent and Trademark Office or the
foreign equivalents thereof in each jurisdiction in which Obligor does or in
which it is reasonably foreseeable will do, business, in each case as
applicable, or filings relating to the foregoing) have been made available by
Obligor to Purchaser or its counsel.
(e) All algorithms, designs, drawings, specifications, source
code, object code, documentation, flow charts, diagrams and other Technology
material to the Business were to Obligor's Knowledge, written, developed and
created primarily by the Persons identified in Schedule 4A.16(e). Each of the
Persons listed in Schedule 4A.16(e) whose contribution to the Technology was or
is material to the Business is and, at all relevant times will be, either (i) an
employee of Obligor or Arete whose work on the Technology constitutes a work
made for hire for such party, or (ii) a third party who assigns his ownership of
his/her or its rights to Obligor pursuant to a valid and enforceable agreement.
Obligor has at all times used and will, at all relevant times, use its best
efforts to protect the confidentiality of all of their other confidential and
proprietary information and that of third parties that has been in, or comes
into, its possession.
(f) Except as set forth in Schedule 4A.16(f), each Person who in
the past rendered, is rendering, or in the future renders, significant or
substantial services to or on behalf of Obligor with access to the Technology or
other Confidential or proprietary information of Obligor has executed and
delivered, or will execute and deliver, to Obligor a Confidentiality and
Assignment Agreement substantially in the form of Exhibit H. To Obligor's
Knowledge, such confidentiality and nondisclosure agreements constitute or will
constitute valid and binding obligations of such Persons, enforceable in
accordance with their respective terms.
(g) No product liability or warranty claim (other than warranty
claims that would not be expected to have a Material Adverse Effect), has been
asserted or overtly threatened against Obligor nor, to Obligor's Knowledge, is
there a valid basis for any such claim.
(h) Except for the fees payable by Obligor pursuant to the
License Agreement and the fees payable under the Mitsubishi Patent License, no
royalty or other fees are required to be paid by Obligor to any Person in
respect of the use of any of the Intellectual Property. Except as set forth in
Schedule 4A.16(h), Obligor has the exclusive night to use all of the
Intellectual Property and Obligor has not granted any license or other right to
any other Person, directly or indirectly, in respect of any Intellectual
Property. There are no restrictions on the ability of Obligor which do or could
adversely affect the rights of Obligor to use and exploit the Intellectual
Property.
20
None of the rights of Obligor in the Intellectual Property will be impaired or
affected in any way by the Transactions (except as to Arete pursuant to the
License Agreement). The conduct of Obligor, and Arete so far as it relates to
the Business of Obligor, does not include any activity which might constitute
passing off.
(i) No Person has any option or similar right to acquire or use
any right, title or interest in or to any Intellectual Property, except as set
forth in Schedule 4A.16(b), (i) other than Obligor or Arete as of the Closing
Date and (ii) other than third parties unrelated to Obligor or Arete to whom
Obligor may sub-license parts of the Technology provided that any such
sublicensor shall not compete with or permit competition with the Business.
4A.17 Customers and Suppliers. To Obligor's Knowledge, there is no
reason to believe that any significant customer (other than the government of
Venezuela) or supplier of Obligor will cease to do business with Obligor in the
same manner and at the same levels as previously conducted with or anticipated
by Obligor. No such supplier has notified Obligor of any expected or projected
increase in the cost of goods or services provided by such supplier, to Obligor.
4A.18 Certain Transactions. Except as described on Schedule 4A.18
hereto Obligor is not indebted, directly or indirectly, to. any of its officers,
directors or shareholders or to any of the respective spouses or children of any
of such persons in any amount in excess of $25,000 individually or $100,000 in
the aggregate. Except as set forth on Schedule 0X.00, xxxx of such officers,
directors or shareholders, or any member of their immediate families, is (i)
indebted to Obligor in any amount in excess of $500 individually or $1,000 in
the aggregate, or (ii) has a financial interest in any contract or arrangement
with Obligor.
4A.19 Business Operations and Other Information; Financial Condition.
(a) As of the date of each of the balance sheets included in the Obligor
Financial Statements, Obligor had no Indebtedness or liability, absolute or
contingent, liquidated or unliquidated, except Indebtedness and liabilities
reflected or reserved against on such balance sheets or described in the notes
thereto. Since the Balance Sheet Date, no Material Adverse Effect has occurred.
(b) The Obligor Financial Statements have been prepared in
accordance with GAAP and fairly, completely and accurately present the financial
position of Obligor and the financial information presented therein for the
periods and as at the dates thereof. The notes to such Obligor Financial
Statements do not contain any misstatement of a material fact, nor do they omit
to state a material fact required to make any statement contained therein true.
(c) There are no material liabilities of Obligor, contingent or
otherwise, existing on the date hereof or which will exist on the Tranche C
Effective Date in respect of which Obligor may be liable other than (i)
liabilities disclosed in, reflected in, or provided for in the Financial
Statements;
and (ii) liabilities incurred in the ordinary course of business and
attributable to the period since the Balance Sheet Date, none of which could
have a Material Adverse Effect.
(d) The books of account and financial records of Obligor have
been prepared in accordance with GAAP and fairly and correctly set out and
disclose all material respects of the financial position of Obligor.
4A.20 Disclosure. To Obligor's Knowledge, no Transaction Document or
any other document furnished to Purchaser or any Holder by or on behalf of
Obligor in connection with the Transactions, including without limitation the
Obligor Financial Statements, contained, as of its respective date, the date
hereof, the Tranche C Effective Date or any Closing Date, any untrue statement
of a material fact, or as of any such date omitted to state a material fact
necessary in order to make the statements contained herein and therein, in light
of the circumstances under which they were made, not misleading. To Obligor's
Knowledge, there are no facts that individually or in the aggregate have had a
Material Adverse Effect or, could have a Material Adverse Effect in the future.
The minute books for Obligor provided to Purchaser and its counsel for review
are
21
complete and contain true and complete copies of the charter documents, by-laws
and all resolutions of directors and shareholders of Obligor and all documents
required by law to be included in such minute books.
4A.21 Offering of Securities. Assuming the truth and accuracy of
Purchaser's representations and warranties in Section 5.1, the offer, issuance
and sale of the Debentures and issuance of Series A Preferred Stock upon
conversion of the Debentures and the issuance of Common Stock upon conversion of
the Series A Preferred Stock are exempt from the registration requirements of
Section 5 of the Securities Act, and Obligor has not taken nor will it take any
action which would subject the issuance or sale of any of the Debentures or
issuance of Series A Preferred Stock upon conversion of the Debentures, or
issuance of Common Stock upon conversion of the Series A Preferred Stock to the
provisions of Section 5 of the Securities Act or violate the provisions of any
securities or Blue Sky laws of any applicable United States jurisdiction.
4A.22 Financial Projections. The financial projections contained in the
Biometric Identification, Inc. Business Plan (the "Projections") distributed to
Purchaser on or about March 23, 1998, were prepared reasonably and in good faith
on the basis of the assumptions stated therein, which assumptions (a) were to
Obligor's Knowledge reasonable in light of conditions existing at the time of
delivery of such financial projections and, (b) in all material respects,
represented Obligor's best estimate of the future financial performance (after
giving effect to the Transactions) of Obligor. To Obligor's Knowledge, there are
no facts or circumstances that are reasonably likely to result in any material
deviation from such projections.
4A.23 Manpower and Tax Sharing Agreement. The Manpower and Tax Sharing
Agreement will be prepared reasonably and in good faith. To Obligor's Knowledge,
there are no facts or circumstances that are reasonably likely to result in any
material deviation from any provisions in the Manpower and Tax Sharing
Agreement.
4A.24 Sole Business. Obligor is not engaged in any business other than
the Business.
4A.25 Transaction Documents. The representations and warranties of
Obligor contained in each Transaction Document are true and correct in all
material respects on the date hereof and will be true and correct in all
material respects on the Tranche C Effective Date, except to the extent that
such representations and warranties expressly relate to an earlier date (in
which case such representations and warranties shall be true and correct on and
as of such earlier date), and the Holders shall be entitled to rely upon such
representations and warranties with the same force and effect as if they were
made to the Holders directly.
4A.26 No Litigation. Except as set forth in Schedule 4A.26, there are
no actions, suits or proceedings pending, taken or, to Obligor's Knowledge,
threatened by any Person before any governmental body or by an elected or
appointed public official or private person in the United States or elsewhere,
whether or not having the force of law, which might otherwise relate to or
affect the Intellectual Property or which seeks to vary, terminate or otherwise
affect any of the Transaction Documents or Transactions.
SECTION 4B. REPRESENTATIONS AND WARRANTIES OF ARETE. Arete represents and
warrants to, and covenants with, Purchaser and all Holders that:
4B.1 Corporate Existence and Power. Arete is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. Arete is duly qualified to do business in each jurisdiction where
the failure to so qualify could have a Material Adverse Effect. Arete has all
requisite corporate power to own its properties and to carry on all other
business as now being conducted and as proposed to be conducted by Arete, and to
execute, deliver and perform its obligations under each Transaction Document to
which it is a party.
4B.2 Corporate Authority. The execution, delivery and performance by
Arete of each Transaction Document to which it is a party are within its
corporate powers and have been duly
22
authorized by all necessary corporate action on the part of its Board of
Directors. No stockholder approval is required by Arete for the Transactions.
4B.3 Binding Effect. Each of the Transaction Documents which
contemplates that Arete is to be a party has been duly executed and delivered by
Arete and constitutes legal, valid and binding obligations of Arete, enforceable
against Arete in accordance with its terms, except the enforceability of
Transaction Documents may be subject to or limited by (a) bankruptcy,
insolvency, reorganization, arrangement, moratorium or similar laws relating to
or affecting the rights of creditors generally, (b) general principles of
equity, regardless of whether such enforceability is considered in a proceeding
in law or in equity and (c) the effect of those provisions and principles of
California law which provide that a Court may refuse to enforce or may limit the
application of a contract or any clause thereof which the court finds as a
matter of law have been unconscionable at the time it was made.
4B.4 No Conflict. To Arete's Knowledge, the execution and delivery by
Arete of any Transaction Document to which it is a party will not conflict with,
or result in a breach or violation of the terms of or constitute a default
under, or result in the creation of any Lien on any properties of Arete, the
articles of incorporation or by-laws of Arete or any contract, agreement,
mortgage, indenture, lease or instrument to which Arete is a party or by which
Arete's assets are bound or, to Arete's Knowledge, violate any treaty, law,
regulation or Order to which Arete or its assets are subject.
4B.5 Consents. No consent, approval or authorization of or declaration,
registration or filing with any governmental authority of the United States or
any subdivision thereof is required in connection with the execution or delivery
by Arete of the Transaction Documents, or the performance by Arete of its
obligations thereunder, or as a condition to the legality, validity or
enforceability of any of the Transaction Documents.
4B.6 Assets and Properties. Arete owns no real property. True and
complete copies of all leases of real property to which Arete is a party with
respect to property used in the conduct of the Business, together with all
amendments, modifications and supplements thereto to the date of this Agreement,
have been delivered to Purchaser or its representatives. Arete has good and
marketable title to all properties (other than properties leased from others),
used in the Business subject to no Lien of any kind. The properties owned by,
leased to, licensed to, or used in the conduct of the Business are in good
operating condition and repair, ordinary wear and tear excepted, and serve the
function for which they are intended. No Transaction Document nor any of the
Transactions will materially adversely affect any right, title or interest of
Arete in and to any of the assets or properties owned, leased or used in the
conduct of the Business. Except as disclosed in Schedule 4B.6, neither Arete nor
any other shareholders, director, officer of affiliate of Arete owns any
equipment (technical, computer, office or other), furniture and other goods and
chattels used in connection with the Business or otherwise material to the
Business.
4B.7 Taxes. Arete has filed all tax returns and informational returns
which are required to have been filed, and has paid all taxes shown to be due
and payable on such returns and all other taxes and assessments payable by it,
except to the extent that any such tax liability is being diligently contested
in good faith and Arete has adequately reserved against such tax liability on
its books and financial statements in accordance with GAAP. No material tax
liens have been filed and no material claims are being asserted with respect to
any such taxes as of the date hereof. No material tax assessment against Arete
has been proposed, and all of their respective tax liabilities are adequately
provided for on its books and financial statements in accordance with GAAP.
4B.8 Labor Matters. There has been no strike, work stoppage, slowdown
or other labor dispute or grievance involving Persons employed by, or providing
services for the benefit of, Obligor nor to Arete's Knowledge, is any such
action, dispute or grievance pending or threatened. Arete is not a party to any
collective bargaining agreement, and to Arete's Knowledge, there is no pending
or threatened organizational effort. There are no pending retaliatory or
wrongful discharge claims or employment discrimination charges or complaints or
administrative or judicial complaints pending against any Person employed by, or
providing services for the benefit of, Obligor before
23
any governmental body, nor, to Arete's Knowledge, are there any threats of such
charges or complaints, except for the Xxxxxxx Matter and for the claim by Xxxx
Xxxxxxx, previously disclosed to Purchaser. That confidential memorandum from
Xxxxxxxxx X. Xxxxxxxxx to Xxxxxxx Xxxxxx dated June 7, 1997 accurately and
completely describes the circumstances and facts surrounding the Xxxxxxx Matter.
4B.9 Environmental Matters. Except as set forth in Schedule 4B.9: (i)
there is no pending Environmental Matter, nor to are there any facts that could
reasonably be expected to result in any Environmental Matter, and to Arete's
Knowledge, are there any facts that could reasonably be expected to result in
any Environmental Matter, and Arete has not assumed any liability of any other
Person for cleanup, compliance, or required capital expenditures in connection
with any Environmental Matter; (ii) to Arete's Knowledge, all properties used,
owned, leased, operated, managed or controlled by Arete or Obligor are free of
contamination from Hazardous Materials and are free of any other potentially
harmful chemical or physical conditions that could have a Material Adverse
Effect; (iii) to Arete's Knowledge each of Arete and Obligor is in compliance
with all applicable Environmental Laws and has not received any notice of
violation of any Environmental Law or of any potential liability for cleanup of
Hazardous Materials, and, to Arete's Knowledge, Arete nor Obligor has generated,
manufactured, refined, recycled, discharged, emitted, released, buried,
processed, produced, reclaimed, stored, treated, transported, or disposed of any
Hazardous Materials in violation of any treaty, law, regulation or Order; (iv)
to Arete's Knowledge no real property used, leased or controlled by Arete or
Obligor is listed or proposed for listing on the National Priorities List under
CERCLA or listed in the Comprehensive Environmental Response, Compensation,
Liability Information System List promulgated pursuant to CERCLA, or on any
comparable list maintained by any governmental body; and (v) to Arete's
Knowledge neither Arete's nor Obligor has any liabilities, absolute or
contingent on the date hereof with respect to Hazardous Materials.
4B.10 Compliance with Applicable Law Permits, Licenses and
Authorizations. To Arete's Knowledge, Arete is not violating and has not
violated any treaty, law, regulation or Order in the conduct of the Business. To
Arete's Knowledge Arete holds, and is in material compliance with, all
governmental permits, licenses, and authorizations necessary for Arete in
connection with the Business.
4B.11 Employee Matters, Compliance with ERISA. (a) To Arete's
Knowledge, Obligor has furnished Purchaser with a true and complete list of all
Persons rendering services to, or on behalf of, Obligor on a full-time or
part-time basis. Schedule 4A.13 sets forth a true and complete list of all
Persons who are key personnel in the Business.
(b) To Arete's Knowledge, no Pension Plan which is subject to
Part 3 of Subtitle B of Title I of ERISA or Section 412 of the Code has or had
an accumulated funding deficiency (as such term is defined in Section 302 of
ERISA or Section 412 of the Code), whether or not waived, as of the last day of
the most recent fiscal year of such Pension Plan heretofore ended;
(c) To Arete's Knowledge, no liability to the PBGC (other than
required insurance premiums, of which all that are required to have been paid on
or before the date hereof have been paid) has been incurred and is outstanding
with respect to any Pension Plan, and there has not been any "Reportable Event"
(within the meaning of Section 4043(b) of ERISA or the regulations promulgated
thereunder), or any other event or condition, which presents a risk of
involuntary termination of any Pension Plan by the PBGC.
(d) To Arete's Knowledge, neither Arete, Obligor, Administaff,
any Multiemployer Plan or Plan nor any trust created thereunder, nor any trustee
or administrator thereof, has engaged in a prohibited transaction (as such term
is defined in Section 4975 of the Code or described in Section 406 of ERISA)
that could subject Arete or Obligor or the assets of either to any tax or
penalty on prohibited transactions imposed under said Section 4975 or Section
502(i) of ERISA.
(e) To Arete's Knowledge, no liability has been incurred and is
outstanding with respect to any Multiemployer Plan as a result of the complete
or partial withdrawal by Arete, Obligor, Administaff or any ERISA Affiliate from
such Multiemployer Plan under Title IV of ERISA, nor has any of Arete,
24
Obligor, Administaff or any ERISA Affiliate been notified by any Multiemployer
Plan that such Multiemployer Plan is currently in reorganization or insolvency
under and within the meaning of Section 4241 or 4245 of ERISA or that such
Multiemployer Plan intends to terminate or has been terminated under Section
4041 A of ERISA.
(f) To Arete's Knowledge, Arete, Obligor, Administaff the ERISA
Affiliates, and all Plans and Multiemployer Plans are in compliance with all
applicable provisions of ERISA and the Code and with the applicable law and
administrative requirements of any relevant jurisdiction and the regulations and
published interpretations thereunder.
(g) To Arete's Knowledge, the actuarial present value of all
benefit liabilities (as defined in Section 4001(a)(16) of ERISA) under each
Pension Plan that is subject to Title IV of ERISA does not exceed the fair
market value of the assets allocable to such liabilities, determined as if such
Plan were terminated as of the date hereof, and by using such Plan's actuarial
assumptions as set forth in the most recent actuarial report pertaining to such
Plan.
(h) To Arete's Knowledge, no Multiemployer Plan has any unfunded
vested benefits within the meaning of Section 4213(c) of ERISA.
(i) To Arete's Knowledge, no event has occurred with respect to
any Plan or with respect to any other employee benefit pension plan (as defined
in Section 3(2) of ERISA) established or maintained at any time during the
five-year period immediately preceding the date hereof for the benefit of
employees of Arete or Obligor, or any ERISA Affiliate, which presents a risk of
liability of any of such Persons under Section 4069 of ERISA.
(j) To Arete's Knowledge, there are no liabilities under the
Plans that are employee welfare benefit plans (as defined in Section 3(l) of
ERISA) providing for medical, health, life or other welfare benefits that are
not insured by fully paid non-assessable insurance policies, and no such Plan
provides for continued medical, health, life or other welfare benefits for
employees after they leave the employment of Arete, Obligor, Administaff or any
ERISA Affiliate (other than any such welfare benefits required to be provided
under the Consolidated Omnibus Budget Reconciliation Act of 1985 or other
similar law).
(k) To Arete's Knowledge, neither Arete or Obligor, nor any ERISA
Affiliate or Arete or Obligor is a party in interest (as defined in Section
3(14) of ERISA) with respect to any employee benefit plan (as defined in Section
3(3) of ERISA), other than the Plans.
(1) To Arete's Knowledge, neither Arete or Obligor nor
Administaff nor any ERISA Affiliate of Arete or Obligor has breached or violated
any of the responsibilities, obligations or duties imposed upon any of such
Persons by the Code or ERISA or any other statute, regulation, or governmental
order which breach or violation has given rise, or could give rise in the future
to, any material liability of, or obligation to pay money by, Arete or Arete.
(m) To Arete's Knowledge, there are no actions, suits or claims,
pending, asserted or, threatened against any Plan, Arete, Obligor, Administaff,
any ERISA Affiliate, or any Person for which Arete or Obligor may be directly or
indirectly liable through indemnification arrangement or otherwise, other than
routine claims for benefits.
(n) To Arete's Knowledge, all required reports and descriptions
of the Plans of Arete, Obligor, Administaff or ERISA Affiliates (including but
not limited to Form 5500 Annual Reports, Summary Annual Reports and Summary Plan
Descriptions) have been timely filed and distributed, and any notices required
by ERISA or the Code or any other applicable law, ruling or regulation.
(o) No proceeding is reasonably expected to be instituted or to
Arete's Knowledge no proceeding has been instituted under Section 515 of ERISA
to collect delinquent contributions to a Plan.
25
4B.12 Intellectual Property. (a) Schedule 4A.16(a) sets a true and
complete list of all Intellectual Property owned by, licensed to, and licensed
by Obligor as more specifically described in Section 4A.16. To Arete's
Knowledge, except as to the matters set forth on Schedule 4A.16(b), there is no
reason to believe that any patent applications set forth on Schedule 4A.16(a)
will not be granted, including without limitation any patent application,
whether pending on the date hereof or not.
(b) Except as set forth on Schedule 4A.16(b), Obligor owns and
has good title to, or is party to enforceable and non-revocable license
agreements permitting Obligor to use all items of Intellectual Property, free
from Liens and restrictions, which are currently used or necessary or desirable
for the present and, to the best of Arete's Knowledge planned future conduct of
the Business.
(c) Except as set forth in Schedule 4A.16(a) or 4A.16(b), (i)
to Arete's Knowledge, none of the present or contemplated products or operations
of Obligor, or the Intellectual Property or Obligor's use thereof, infringes or
otherwise violates any intellectual property owned by any other Person, and (ii)
there is no pending or, to Arete's Knowledge, threatened claim, demand,
litigation, investigation, arbitration or other proceeding contesting Arete's or
Obligor's right to manufacture, distribute or sell any such product or to engage
in any such operation, or to use or otherwise exploit any Intellectual Property.
(d) Except as set forth on Schedules 4A.16(a) or (b), all
registrations for Intellectual Property identified thereon and all applications
to register Intellectual Property have been filed with the appropriate
government authorities. To the best of Arete's Knowledge, the Intellectual
Property owned by Obligor or Arete is valid and enforceable in all material
respects. Obligor or Arete has the right to bring actions for infringement or
unauthorized use of the Intellectual Property described on Schedule 4A.16(a),
and there is no valid basis for any such action.
(e) All algorithms, designs, drawings, specifications, source
code, object code, documentation, flow charts, diagrams and other Technology
were to Arete's Knowledge developed and created primarily by the Persons
identified in Schedule 4A.16(e), or otherwise disclosed to Purchaser in writing.
Each of the Persons listed in Schedule 4A.16(e) is either (i) an employee of
Obligor or Arete whose work on the Technology constitutes a work made for hire
for such party (ii) a third party who assigns his ownership of his/her or its
rights to Obligor pursuant to a valid and enforceable agreement. Arete has at
all times used, and will at all times use, its best efforts to protect the
confidentiality of all of their other confidential and proprietary information
and that of third parties that is in, or comes into, its possession.
(f) Except as set forth in Schedule 4A.16(f), each Person who is
rendering, or in the past, to Arete's Knowledge, rendered or in future renders,
significant or substantial services to Arete in respect of the Business with
access to the Technology has executed and delivered, or will execute and
deliver, to Obligor a Confidentiality and Assignment Agreement substantially in
the form of Exhibit G. To Arete's Knowledge, such confidentiality and
non-disclosure agreements constitute valid and binding obligations of such
Persons, enforceable in accordance with their respective terms.
(g) To Arete's Knowledge, no product liability or warranty claim
has been asserted or overtly threatened against Arete nor, to Arete's Knowledge,
is there a valid basis for any such claim.
(h) Except for the fees payable by Obligor pursuant to the
License Agreement, and the fees payable pursuant to the Mitsubishi Patent
License, no royalty or other fees are required to be paid by Obligor to any
Person in respect of the use of any of the Intellectual Property. Except as set
forth in Schedule 4A.16(h), Obligor has the exclusive right to use all of the
Intellectual Property and neither Arete nor Obligor has granted any license or
other right to any other Person, directly or indirectly, in respect of any
Intellectual Property. There are no restrictions which do or
26
could adversely affect the rights of Obligor to use and exploit the Intellectual
Property. None of the rights of Obligor or Arete in the Intellectual Property
will be impaired or affected in any way by the Transactions (except as to Arete
pursuant to the License Agreement). The conduct of Obligor, and Arete so for as
it relates to the Business of Obligor, does not include any activity which might
constitute passing off.
(i) No Person has any option or similar right to acquire or use
any right, title or interest in or to any Intellectual Property other than Arete
or Obligor.
4B.13 Customers and Suppliers. To Arete's Knowledge, there is no reason
to believe that any significant customer (other than the government of
Venezuela) or supplier of Obligor or of Arete in connection with the Business
will cease to do business with Obligor (or Arete, as the case may be) in the
same manner and at the same levels as previously conducted with or anticipated
by Arete. No such supplier has notified Arete of any expected or projected
increase in the cost of goods or services provided by such supplier, to Obligor
or Arete, as the case may be.
4B.14 Business Operations and Other Information, Financial Condition.
(a) As of the date of each of the balance sheets included in the Arete Financial
Statements, Arete had no Indebtedness or liability, absolute or contingent,
liquidated or unliquidated, except Indebtedness and liabilities reflected or
reserved against on such balance sheets or described in the notes thereto. Since
the Balance Sheet Date, no Material Adverse Effect has occurred.
(b) The Arete Financial Statements have been prepared in
accordance with GAAP and fairly, completely and accurately present the financial
position of Arete and the financial information presented therein for the
periods and as at the date thereof The notes to such Arete Financial Statements
do not contain any misstatement of a material fact, nor do they omit to state a
material fact required to make any statement contained therein true.
(c) There are no material liabilities of Arete, contingent or
otherwise, existing on the date hereof or which will exist on the Tranche C
Effective Date in respect of which Arete may be liable other than (i)
liabilities disclosed in, reflected in, or provided for in the Arete Financial
Statements; and (ii) liabilities incurred in the ordinary course of business and
attributable to the period since the Balance Sheet Date, none of which could
have a Material Adverse Effect.
(d) The books of account and financial records of Arete have been
prepared in accordance with GAAP and fairly and correctly set out and disclose
all material respects of the financial position of Arete.
4B.15 Disclosure. No Transaction Document or any other document
furnished to Purchaser or any Holder by or on behalf of Arete in connection with
the Transactions, including without limitation the Arete Financial Statements,
contained, as of its respective date, the date hereof, the Tranche C Effective
Date or any Closing Date, any untrue statement of a material fact, or as of any
such date omitted to state a material fact necessary in order to make the
statements contained herein and therein, in light of the circumstances under
which they were made, not misleading. To Arete's Knowledge, there are no facts
that individually or in the aggregate have had a Material Adverse Effect or,
could have a Material Adverse Effect in the future.
4B.16 Offering of Securities. Assuming the truth and accuracy of
Purchaser's representations and warranties in Section 5.1, the offer, issuance
and sale of the Debentures and issuance of Series A Preferred Stock upon
conversion of the Debentures and the issuance of Common Stock upon conversion of
the Series A Preferred Stock are exempt from the registration requirements of
Section 5 of the Securities Act, and Obligor has not taken nor will it take any
action which would subject the issuance or sale of any of the Debentures or
issuance of Series A Preferred Stock upon conversion of the Debentures, or
issuance of Common Stock upon conversion of the Series A Preferred Stock to the
provisions of Section 5 of the Securities Act or violate the provisions of any
securities or Blue Sky laws of any applicable jurisdiction.
27
4B.17 Manpower and Tax Sharing Agreement. The Manpower and Tax Sharing
Agreement will be prepared reasonably and in good faith. To Arete's Knowledge,
there are no facts or circumstances that are reasonably likely to result in any
material deviation from any provisions the Manpower and Tax Sharing Agreement.
4B.18 Sole Business. Obligor is not engaged in any business other than
the Business.
4B.19 Transaction Documents. (1) The representations and warranties of
Arete contained in each Transaction Document are true and correct in all
material respects on the date hereof and will be true and correct in all
material respects on the Tranche C Effective Date, except to the extent that
such representations and warranties expressly relate to an earlier date (in
which case such representations and warranties shall be true and correct on and
as of such earlier date), and the Holders shall be entitled to rely upon such
representations and warranties with the same force and effect as if they were
made to the Holders directly.
4B.20 No Litigation. There are no actions, suits or proceedings
pending, taken or, to Arete's Knowledge, threatened before or Person by any
governmental body or by an elected or appointed public official or private
person in the United States or elsewhere, whether or not having the force of
law, which might otherwise relate to or affect the Intellectual Property or
which seeks to vary, terminate or otherwise affect any of the Transaction
Documents or Transactions.
SECTION 5 REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents. and
warrants to Arete and Obligor as follows:
5.1 Investment Intent. Purchaser is acquiring the Debentures for its
own account, for investment, and not with a view to or for sale in connection
with any distribution thereof in violation of the registration provisions of the
Securities Act or the rules and regulations promulgated thereunder or in
violation of any Canadian statutes, laws, rules or regulations.
5.2 Corporate Existence and Power. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of British
Columbia, Canada. Purchaser is duly qualified to do business in each
jurisdiction where the failure to so qualify could have a material adverse
effect on Purchaser's business. Purchaser has all requisite corporate power to
own its properties and to carry on its business and to execute, deliver and
perform its obligations under each Transaction Document to which it is a party.
5.3 Corporate Authority. The execution, delivery and performance by
Purchaser of each Transaction Document to which it is a party are within its
corporate powers and have been duly authorized by all necessary corporate action
on the part of its Board of Directors and stockholders.
5.4 Binding Effect. Each of the Transaction Documents which
contemplates that Purchaser is to be a party has been duly executed and
delivered by Purchaser and constitutes legal, valid and binding obligations of
Purchaser, enforceable against Purchaser in accordance with its terms, except
the enforceability of Transaction Documents may be subject to or limited by (a)
bankruptcy, insolvency, reorganization, arrangement, moratorium or similar laws
relating to or affecting the rights of creditors generally, (b) general
principles of equity, regardless of whether such enforceability is considered in
a proceeding in law or in equity and (c) the effect of those provisions and
principles of California law which provide that a Court may refuse to enforce or
may limit the application of a contract or any clause thereof which the court
finds as a matter of law have been unconscionable at the time it was made.
5.5 Financing. Purchaser has at least 3,000,000 Canadian Dollars in
cash or cash equivalents on the date hereof and the Closing Date.
5.6 No Conflict. Neither the execution and delivery by Purchaser of
any Transaction Document to which it is a party, nor fulfillment of or
compliance by Purchaser with the terms and provisions of its obligations under
the Transaction Documents, will conflict with, or result in a breach or
violation of the terms of or constitute a default under, or result in the
creation of any Lien
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on any properties of Purchaser, the charter or by-laws of Purchaser or any
contract, agreement, mortgage, indenture, lease or instrument to which Purchaser
is a party or by which its assets are bound or violate or, to the best knowledge
of Purchaser, any treaty, law, regulation or Order to which Purchaser or any of
its assets are subject.
5.7 Consents. Except as set forth in Schedule 5.7, no consent,
approval or authorization of or declaration, registration or filing with any
governmental authority of the United States or any subdivision thereof is
required in connection with the execution or delivery by Purchaser of the
Transaction Documents, or the performance by Purchaser of its obligations
thereunder, or as a condition to the legality, validity or enforceability of any
of the Transaction Documents, all of which shall have been obtained prior to the
date hereof and will remain in full force and effect.
5.8 No Litigation. To the best knowledge of Purchaser, there are no
actions, suits or proceedings pending, taken or threatened by any Person before
any governmental body or by an elected or appointed public official or private
person in the United States or elsewhere, whether or not having the force of
law, which might otherwise relate to or affect the Intellectual Property or
which seeks to vary, terminate or otherwise affect any of the Transaction
Documents or Transactions or which may affect the ability of Purchaser to
purchase the Debentures at the time and in the manner set forth in this
Agreement.
5.9 Transaction Documents. The representations and warranties of
Purchaser contained in each Transaction Document are true and correct in all
material respects on the date hereof and will be true and correct in all
material respects on the Tranche C Effective Date and each Closing Date, except
to the extent that such representations and warranties expressly relate to an
earlier date (in which case such representations and warranties shall be true
and correct on and as of such earlier date). This Agreement and the other
Transaction Documents constitute the only material agreements relating to the
Transactions to which Purchaser is a party.
5.10 Broker's or Finder's Commissions. Except as disclosed in Section
4A.9 above, Purchaser is not aware of any broker's or finder's fee or commission
that will be payable by any Person with respect to the issuance and sale of the
Debentures or any of the Transactions.
5.11 Access. By reason of its business and financial experience,
Purchaser has the capacity to protect its own interests in connection with the
Transactions and has been given full and adequate access to certain officers and
employees of Obligor for the purpose of conducting due diligence.
SECTION 6A CONDITIONS TO PURCHASER'S OBLIGATION TO CLOSE. Purchaser's obligation
to purchase the Debentures hereunder on the Tranche C Effective Date and any
Closing Date shall be subject to the satisfaction (or written waiver by
Purchaser), on or before such Tranche C Effective Date or Closing Date, of the
following conditions:
6A.I Proceedings Satisfactory. All corporate and other proceedings
taken or to be taken in connection with the transactions contemplated to occur
on or before such Tranche C Effective Date or such Closing Date and all related
documents shall be reasonably satisfactory in form and substance to Purchaser,
and Purchaser shall have received all such documents as they may reasonably
request, including, without limitation: (i) good standing and tax clearance
certificates for Arete and Obligor in jurisdictions where they are organized;
(ii) certified copies of Obligor's charter documents (iii) certified copies of
resolutions of the Board of Directors of Arete and Obligor authorizing the
execution and delivery of the Transaction Documents to which it is a party and
the transactions contemplated thereby, including without limitation the
reservation of the Series A Preferred Stock for issuance upon conversion of the
Debentures and reservation of Common Stock upon conversion of the Series A
Preferred Stock; (iv) certified copies of resolutions of the shareholders of
Obligor adopting, and authorizing the filing of the Amended and Restated
Articles of Obligor and Stock Option Plan; and (v) certificates as to the
incumbency and signatures of each of the officers of Arete and Obligor who shall
execute any Transaction Document or other document executed and delivered
pursuant to or in connection with this Agreement.
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6A.2 Opinions of Counsel for Obligor and Arete. Purchaser shall have
received from counsel to Arete and counsel to Obligor in connection with the
Transactions prior to the Tranche C Effective Date, a favorable legal opinion,
dated the Closing Date and addressed to Purchaser, covering such matters
relating to the Transactions as Purchaser may reasonably request.
6A.3 Representations and Warranties True. The representations and
warranties contained in Sections 4A, 4B and elsewhere in the Transaction
Documents and in any certificate delivered by or on behalf of Arete or Obligor
shall be true and correct on and as of the Tranche C Effective Date and such
Closing Date with the same effect as if such representations and warranties had
been made on and as of the Tranche C Effective Date and such Closing Date after
giving effect to the Transactions to be consummated on or prior to the Tranche C
Effective Date and such Closing Date, except to the extent that such
representations and warranties expressly relate to an earlier date (in which
case such representations and warranties shall be true and correct on and as of
such earlier date). Each of Arete and Obligor shall have performed all
agreements on its part required to be performed under this Agreement and under
any other Transaction Document on or prior to the Tranche C Effective Date and
such Closing Date, and there shall exist no Default or Event of Default on the
Effective Date and such Closing Date after giving effect to the Transactions
contemplated by this Agreement. Each of Arete and Obligor shall have delivered
to Purchaser an Officer's Certificate, dated as of the Tranche C Effective Date
and such Closing Date, to the effect of the matters stated in the foregoing
sentences of this Section 6A.3 and in Sections 6A.4, 6A.5, 6A.6, 6A.7, 6A.8,
6A.10 and 6A.11.
6A.4 Absence of Material Adverse Change, Etc. Since December 31,
1997, no Material Adverse Effect (regardless of whether it relates to Obligor or
Arete) shall have occurred, other than the losses projected in the business plan
of Obligor previously delivered to the Purchaser.
6A.5 Consents and Approvals. All necessary consents, waivers,
approvals and authorizations of, and declarations, registrations and filings
with, governmental bodies and other Persons required in order to issue and sell
the Debentures as contemplated hereby and to consummate the other Transactions
shall have been obtained or made and shall be in full force and effect.
6A.6 Absence of Litigation, Orders. Etc. Save and except for the
potential litigation involving Xxxx Xxxxxxx as previously disclosed to the
Purchasers, there shall not be pending or, to the knowledge of any party,
threatened, any action, suit, proceeding, governmental investigation or
arbitration against or affecting Purchaser, Arete or Obligor or the Intellectual
Property, Technology or other assets or property of either of them which seeks
to enjoin or restrain any of the Transactions or which could have a Material
Adverse Effect. No Order shall be in effect which purports to enjoin or restrain
any of the transactions contemplated herein or which has had or is reasonably
likely to have a Material Adverse Effect.
6A.7 Recapitalization. The Recapitalization shall have been
consummated in accordance with the terms the Recapitalization Plan prior to the
Tranche C Effective Date.
6A.7a Filing of Amended and Restated Articles of Obligor. Obligor shall
cause to be filed with the California Secretary of State, the Amended and
Restated Articles of Obligor, in the form of Exhibit A hereto as part of the
Recapitalization.
6A.8 License. The License Agreement shall have been duly executed and
delivered by the parties thereto, prior to the Tranche C Effective Date, and
shall be in full force and effect.
6A.9 Manpower and Tax Sharing Agreement. Arete and Obligor shall have
executed and delivered to Purchaser prior to the Tranche C Effective Date the
Manpower and Tax Sharing Agreement and such Agreement shall be in full force and
effect.
6A.10 Agreements of Certain Persons. Arete and Obligor shall have
delivered to Purchaser prior to the Tranche C Effective Date, in form and
substance satisfactory to Purchaser in its
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reasonable discretion, Confidentiality and Assignment Agreements between Obligor
or Arete and all Persons set forth on Schedule 4A.16(e), fully executed and in
full force and effect.
6A.11 Export Permits. Arete and Obligor shall have obtained and
delivered to Purchaser copies of such export pen-nits and other licenses and
documents as may be required under the laws of the United States to permit the
export of the products of Obligor and the licensing of the Technology and
Intellectual Property to persons outside of the United States.
SECTION 6B. CONDITIONS TO OBLIGOR'S OBLIGATION TO CLOSE. Obligor's obligation to
sell the Debentures hereunder on the Tranche C Effective Date and any Closing
Date shall be subject to the satisfaction (or written waiver by Obligor), on or
before such Tranche C Effective Date or Closing Date, of the following
conditions:
6B.1 Representations and Warranties True. The representations and
warranties contained in Section 5 and in any certificate delivered by or on
behalf of Purchaser shall be true correct on and as of the Tranche C Effective
Date and such Closing Date with the same effect as if such representations and
warranties had been made on and as of the Tranche C Effective Date or the
Closing Date after giving effect to the Transactions to be consummated on or
prior to such Tranche C Effective Date or Closing Date, except to the extent
that such representations and warranties expressly relate to an earlier date (in
which case such representations and warranties shall be true and correct on and
as of such earlier date). Obligor shall have delivered to Purchaser an Officer's
Certificate, dated as of the Tranche C Effective Date and such Closing Date, to
the effect of the matters stated in the foregoing sentences of this Section 6B.1
and 6B.2.
6B.2 Absence of Litigation. Orders, Etc. There shall not be pending
or, to the knowledge of any party, threatened, any action, suit, proceeding,
governmental investigation or arbitration against or affecting Purchaser, Arete
or Obligor or the Intellectual Property, Technology or other assets or property
of either of them which seeks to enjoin or restrain any of the Transactions or
which could have a Material Adverse Effect, other than the claim of Xxxx
Xxxxxxx, previously disclosed. No Order shall be in effect which purports to
enjoin or restrain any of the transactions contemplated herein or which has had
or is reasonably likely to have a Material Adverse Effect.
SECTION 7 AFFIRMATIVE COVENANTS. Obligor hereby covenants and agrees that, so
long as any of the Debentures or Conversion Stock shall be and remain
outstanding:
7.1 Use of Proceeds. The use of proceeds of the issuance and sale of
the Debentures shall be used solely for working capital of Obligor for the
development of its fingerprint technology and the manufacture and sale of
related products.
7.2 Payment of Obligations. Obligor will duly and punctually pay the
principal of and interest on the Debentures in accordance with the terms of such
Debentures and this Agreement, and each of Obligor and Arete will duly and
punctually pay and perform all of their respective Obligations, covenants,
agreements and conditions contained in the other Transaction Documents.
7.3 Payment of Taxes and Claims. Obligor will pay before they become
delinquent: (i) all taxes, assessments and governmental charges or levies
imposed upon Obligor, its income or profits or upon its property, real, personal
or mixed, or upon any part thereof, (ii) all claims of landlords, warehousemen
or materialmen, for labor, materials and supplies or of any other nature which,
if unpaid, would result in the creation of a Lien upon property of Obligor, and
(iii) all claims, assessments, or levies required to be paid by Obligor, or any
ERISA Affiliate pursuant to any Pension Plan or Multiemployer Plan or any
agreement, contract, statute or Order governing or relating to any such plan;
provided, that the taxes, assessments, claims, charges and levies described
herein need not be paid while being diligently contested in good faith and by
appropriate proceedings so long as (i) adequate book reserves have been
established with respect thereto in accordance with GAAP and (ii) Obligor's
title to and right to use its property and the Intellectual Property is not
materially adversely affected by such non-payment. Obligor will timely file all
tax returns required to be filed in connection with the payment of taxes
required by this Section 7.3.
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7.4 Maintenance of Properties, Records and Corporate Existence.
Obligor will, in its reasonable business judgment: (i) diligently prosecute all
patent applications and defend all intellectual property rights relating to the
Business, (ii) maintain its properties in good condition, reasonable wear and
tear excepted, and make all necessary renewals, repairs, replacements,
additions, betterments, and improvements thereto; (iii) keep books of records
and accounts in which full and correct entries will be made of all its business
transactions and will reflect in its financial statements adequate accruals and
appropriations to reserves, all in accordance with GAAP; (iv) maintain the same
fiscal year during and after the current fiscal year ending December 31, 1998;
(v) do or cause to be done all things necessary to preserve and keep in full
force and effect its corporate existence, and its material contract rights,
powers and franchises; and (vi) comply with all material applicable laws,
regulations, Orders, franchises, authorizations, licenses and pen-nits of, any
governmental body.
7.5 Inspection of Properties and Books. Purchaser and the Holders
shall have the right during normal business hours and upon three business days'
prior notice (a) to visit and inspect any of the properties of Obligor, (b) to
examine Obligor's books of account and records and to make copies and extracts
therefrom at Holder's expense, and (c) to discuss Obligor's affairs, finances
and accounts with, and to be advised as to the same by, Obligor's officers and
employees and Obligor's independent public accountants. Purchaser and the
Holders shall be entitled to meet with the senior management of Obligor at least
once during each fiscal quarter of Obligor to discuss Obligor's financial
statements, business, assets, operations and prospects.
7.6 Initial Public Offering, Additional Financing. Arete and
Purchaser shall use their reasonable best efforts to cause the business of
Obligor to become publicly traded by way of an Initial Public Offering, ("IPO")
undertaken by Obligor, or by otherwise causing the business of Obligor to be
wholly-owned by a publicly traded company. In respect of this matter, the
parties acknowledge and agree that it is their intention, subject to there being
no adverse securities, legal or tax issues, that the business of Obligor will
become public by way of Obligor being acquired by, or merged with, the
Purchaser, rather than by undertaking an IPO on behalf of the Obligor. The
parties further acknowledge and agree that this may be effected by the Purchaser
acquiring all of the issued and outstanding shares of Obligor, and any
securities or agreements pursuant to which shares might be issued in the future,
such that Obligor becomes a wholly-owned subsidiary of the Purchaser, or by
Obligor being merged with the Purchaser, by merger, amalgamation, arrangement or
otherwise, in order to create a new corporate entity that wholly-owns the
business of Obligor. As part of that process, the parties shall use their best
efforts to cause the Series A Preferred Stock or Common Stock to become publicly
tradable within two years of the Tranche C Effective Date. If prior to the
purchase by Purchaser of all Debentures to which it is entitled hereunder (i.e.,
$5,000,000), Obligor wishes to raise additional debt or equity financing, and
provided that Purchaser has purchased all available Debentures in accordance
with the funding schedule herein (or is not in compliance for a reason other
than Obligor's or Arete's breach of any Transaction Document), Obligor shall
notify Purchaser of the type and amount of financing required, and the valuation
of Obligor for such financing, and Purchaser (or its designee) shall then have
fifteen (15) days from the date of the notice to notify Obligor if it desires to
provide the financing required on the terms of the notice, which such financing
shall be consummated within ninety (90) days of such election. If Purchaser (or
its designee) elects not to provide the financing, Obligor shall have the right
to obtain the financing on substantially the same terms set forth in the notice
from any source for a period of one hundred eighty (180) days, as long as such
financing does not dilute the shareholding interest of Purchaser. In the event
Obligor desires to raise additional debt or equity financing after full and
timely completion of the $5,000,000 financing, Purchaser (or its designee) shall
have the right of first offer set forth above, but any equity or convertible
debt financing shall dilute the shareholding interest of all shareholders,
(including Purchaser) pro rata except the shares issued under the Stock Option
Plan. The right of first offer described above shall not be applicable to any
financing by a strategic partner of Obligor, as determined by the Board of
Directors of Obligor. Obligor hereby agrees that Arete is not a strategic
partner of Obligor. The Purchaser is not permitted to designate as the
Purchaser's designee a Person which is a direct or indirect competitor of BII or
Arete in the biometric field.
7.7 Registration Rights.
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(a) Each time Obligor shall determine to file a registration
statement under the Securities Act (other than pursuant to Section 2 hereof and
other than on Form X-0, X-0 or a registration statement on Form S- I covering
solely an employee benefit plan) in connection with the proposed offer and sale
for money of any of its securities either for its own account or on behalf of
any other security holder, Obligor agrees to give prompt written notice of its
determination to all Holders of Registrable Securities. Upon the written request
of the Majority Holder given within thirty (30) days after the receipt of such
written notice from Obligor, Obligor agrees to cause all such Registrable
Securities, the Holders of which have so requested registration thereof, to be
included in such registration statement and registered under the Securities Act,
all to the extent requisite to permit the sale or other disposition by the
prospective seller or sellers of the Registrable Securities to be so registered.
(b) If the registration of which Obligor gives written notice
pursuant to Section 7.7(a) is for a public offering involving an underwriting,
Obligor agrees to so advise the Holders as a part of its written notice. In such
event the right of any Holder to registration pursuant to this Section 7.7(b)
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 Registrable
Securities through such underwriting agree to enter into (together with Obligor
and the other holders distributing their securities through such underwriting)
an underwriting agreement with the underwriter or underwriters selected for such
underwriting by Obligor, provided that such underwriting agreement is in
customary form and is reasonably acceptable to the Holders of a majority of the
shares of Registrable Securities requested to be included in such registration.
(c) Notwithstanding any other provision of this Section 7.7, if
the managing under-writer of an underwritten distribution advises Obligor and
the Holders of the Registrable Securities participating in such registration in
writing that in its good faith judgment the inclusion of all Registrable
Securities proposed to be included in such registration would interfere with
successful marketing (including pricing) of Obligor's Securities, the number of
Registrable Securities shall be reduced or eliminated in the sole discretion of
the underwriter, and such reduced number of shares shall be allocated among all
participating Holders of Registrable Securities and the holders of other
securities in proportion, as nearly as practicable, to the respective number of
shares of Registrable Securities and other securities held by such Holders and
other holders at the time of filing the registration statement. All Registrable
Securities and other securities which are excluded from the underwriting by
reason of the underwriter's marketing limitation and all other Registrable
Securities not originally requested to be so included shall not be included in
such registration and shall be withheld from the market by the Holders thereof
for such period of time as the managing underwriter reasonably determines is
necessary to effect the underwritten public offering.
(d) If and whenever Obligor is required by the provisions of this
Section 7.7 to effect the registration of Registrable Securities under the
Securities Act, Obligor, at its expense and as expeditiously as possible, shall:
(i) In accordance with the Securities Act and all
applicable rules and regulations, prepare and file with the Commission a
registration statement with respect to such securities and use its best efforts
to cause such registration statement to become and remain effective until the
securities covered by such registration statement-have been sold, and prepare
and file with the Commission such amendments and supplements to such
registration statement and the prospectus contained therein as may be necessary
to keep such registration statement effective and such registration statement
and prospectus accurate and complete until the securities covered by such
registration statement have been sold;
(ii) Furnish to the Holders of securities participating
in such registration and to the underwriters of the securities being registered
such number of copies of the registration statement and each amendment and
supplement thereto, preliminary prospectus, final prospectus
33
and such other documents as such underwriters and Holders may reasonably request
in order to facilitate the public offering of such securities;
(iii) Use its best efforts to register or qualify the
securities covered by such registration statement under such state securities or
blue sky laws of such jurisdictions as such participating Holders and
underwriters may reasonably request within ten (10) days prior to the original
filing of such registration statement, except that Obligor shall not for any
purpose be required to execute a general consent to service of process or to
qualify to do business as a foreign corporation in any jurisdiction where it is
not so qualified or which will subject it to general taxation;
(iv) Notify the Holders participating in such
registration, promptly after it shall receive notice thereof, of the date and
time when such registration statement and each posteffective amendment thereto
has become effective or a supplement to any prospectus forming a part of such
registration statement has been filed;
(v) Notify such Holders promptly of any request by the
Commission for the amending or supplementing of such registration statement or
prospectus or for additional information;
(vi) Prepare and file with the Commission, promptly
upon the request of any such Holders, any amendments or supplements to such
registration statement or prospectus which, in the opinion of counsel for such
Holders, is required under the Securities Act or the rules and regulations
thereunder in connection with the distribution of the Registrable Securities by
such Holders;
(vii) Prepare and file promptly with the Commission,
and promptly notify such Holders of the filing of, such amendments or
supplements to such registration statement or prospectus as may be necessary to
correct any statements or omissions if, at the time when a prospectus relating
to such securities is required to be delivered under the Securities Act, any
event has occurred as the result of which any such prospectus or any other
prospectus as then in effect would include an untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading;
(viii) In case any of such Holders or any underwriter
for any such Holders is required to deliver a prospectus at a time when the
prospectus then in circulation is not in compliance with the Securities Act or
the rules and regulations of the Commission, prepare promptly upon request such
amendments or supplements to such registration statement and such prospectus as
may be necessary in order for such prospectus to comply with the requirements of
the Securities Act and such rules and regulations;
(ix) Advise such Holders, promptly after it shall
receive notice or obtain knowledge thereof, of the issuance of any stop order by
the Commission suspending the effectiveness of such registration statement or
the initiation or threatening of any proceeding for that purpose and promptly
use its best efforts to prevent the issuance of any stop order or to obtain its
withdrawal such stop order should be issued;
(x) Not file any registration statement or prospectus
or any amendment or supplement to such registration statement or prospectus to
which the Holders of a majority of the Registrable Securities included or to be
included in a registration have reasonably objected on the grounds that such
registration statement or prospectus or amendment or supplement thereto does not
comply in all material respects with the requirements of the Securities Act or
the rules and regulations thereunder, after having been furnished with a copy
thereof at least five (5) business days prior to the filing thereof-, provided,
however, that the failure of such Holders or their counsel to review or object
to any registration statement or prospectus or any amendment or supplement to
such registration statement or prospectus shall not affect the rights of such
Holders or their respective officers, directors, partners, legal counsel,
accountants or controlling Persons or any underwriter or any controlling Person
of such underwriter under this Section 7.7 hereof,
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(xi) Make available for inspection upon request by any
Holder of Registrable Securities covered by such registration statement, by any
managing underwriter of any distribution to be effected pursuant to such
registration statement and by any attorney, accountant or other agent retained
by any such Holder or any such underwriter, all financial and other records,
pertinent corporate documents and properties of Obligor, and cause all of
Obligor's officers, directors and employees to supply all information reasonably
requested by any such Holder, underwriter, attorney, accountant or agent in
connection with such registration statement; and
(xii) At the request of any Holder of Registrable
Securities covered by such registration statement, furnish to such Holder on the
effective date of the registration statement or, if such registration includes
an underwritten public offering, at the closing provided for in the underwriting
agreement, (i) an opinion dated such date of the counsel representing Obligor
for the purposes of such registration, addressed to the underwriters, if any,
and to the Holder or Holders making such request, covering such matters with
respect to the registration statement, the prospectus and each amendment or
supplement thereto, proceedings under state and federal securities laws, other
matters relating to Obligor, the securities being registered and the offer and
sale of such securities as are customarily the subject of opinions of issuer's
counsel provided to underwriters in underwritten public offerings, and such
opinion of counsel shall additionally cover such legal and factual matters with
respect to the registration as such requesting Holder or Holders may reasonably
request, and (ii) letters dated each of such effective date and such closing
date, from the independent certified public accountants of Obligor, addressed to
the underwriters, if any, and to the Holder or Holders making such request,
stating that they are independent certified public accountants within the
meaning of the Securities Act and dealing with such matters as the underwriters
may request, or if the offering is not underwritten that in the opinion of such
accountants the financial statements and other financial data of Obligor
included in the registration statement or the prospectus or any amendment or
supplement thereto comply in all material respects with the applicable
accounting requirements of the Securities Act, and additionally covering such
other accounting and financial matters, including information as to the period
ending not more than five (5) business days prior to the date of such letter
with respect to the registration statement and prospectus, as such requesting
Holder or Holders may reasonably request as shall be reasonably necessary to
enable them to exercise their due diligence responsibility.
Any such information which Obligor provides shall not be disclosed unless such
information is necessary to avoid or correct a misstatement or omission in the
registration statement or such information has been generally available to the
public.
(e) With respect to each registration effected pursuant to this
Section 7.7 and with respect to each inclusion of shares of Registrable
Securities in a registration statement pursuant to this Section 7.7, Obligor
agrees to bear all fees, costs and expenses of and incidental to such
registration and the public offering in connection therewith; provided, however,
that security holders participating in any such registration agree to bear their
pro rata share of the underwriting discount and commissions.
(f) In connection with any registration or Registrable Securities
under this Agreement, (i) Obligor hereby agrees to indemnify and hold harmless
each Holder of Registrable Securities which are included in a registration
statement pursuant to the provisions of this Agreement and each of such Holder's
officers, directors, partners, legal counsel and accountants, and each Person
who controls such Holder within the meaning of the Securities Act and any
underwriter (as defined in the Securities Act) for such Holder, and any Person
who controls such underwriter within the meaning of the Securities Act, from and
against, and agrees to reimburse such Holder, its officers, directors, partners,
legal counsel, accountants and controlling Persons and each such underwriter and
controlling Person of such underwriter with respect to, any and all claims,
actions (actual or threatened), demands, losses, damages, liabilities, costs and
expenses to which such Holder, its officers, directors, partners, legal counsel,
accountants or controlling Persons, or any such underwriter or controlling
Person of such underwriter may become subject under the Securities Act or
otherwise, insofar as such claims, actions, demands, losses, damages,
liabilities, costs or expenses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in such
registration statement, any prospectus contained
35
therein, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however that Obligor will not be liable in any such case to the extent
that any such claim, action, demand, loss, liability, cost or expense is caused
by an untrue statement or omission so made in strict conformity with written
information furnished by such Holder, such underwriter or such controlling
Person specifically for use in the preparation thereof.
(g) Each Holder hereby agrees to indemnify and hold harmless
Obligor, Arete and each of Obligor's and Arete's officers, directors, partners,
legal counsel and accountants, and each Person who controls Obligor within the
meaning of the Securities Act and any underwriter (as defined in the Securities
Act) for Obligor, and any Person who controls such underwriter within the
meaning of the Securities Act, from and against, and agrees to reimburse
Obligor, Arete, their respective officers, directors, partners, legal counsel,
accountants and controlling Persons and each such underwriter and controlling
Person of such underwriter with respect to, any and all claims, actions (actual
or threatened), demands, losses, damages, liabilities, costs and expenses to
which Obligor, Arete, their respective officers, directors, partners, legal
counsel, accountants or controlling Persons, or any such underwriter or
controlling Person of such underwriter may become subject under the Securities
Act or otherwise, insofar as such claims, actions, demands, losses, damages,
liabilities, costs or expenses arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in such
registration statement, any prospectus contained therein, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
Holder will not be liable unless such claim, action, demand, loss, liability,
cost or expense is caused by an untrue statement or omission so made in strict
conformity with written information furnished by such Holder to Obligor, such
underwriter or such controlling Person specifically for use in the preparation
thereof.
(h) Except as expressly permitted by this Agreement and except
for an underwriting agreement between Obligor and one or more professional
underwriters of securities, Obligor shall not agree to register any equity
securities under the Securities Act unless such agreement specifically provides
that (i) the holder of such equity securities may not participate in any
registration requested pursuant hereto without the written consent of the
Holders of a majority of the shares of Registrable Securities included in such
registration unless ([x]) the sale of the Registrable Securities is to be
underwritten on a firm commitment basis and the managing underwriter in its good
faith judgment concludes that the public offering or sale of such equity
securities would not cause the number of shares of Registrable Securities and
such Equity Securities to exceed the number which can be sold in such offering,
and ([y]) the Holders of Registrable Securities shall have the right to
participate, to the extent that they may request, in any registration statement
initiated under a demand registration right exercised by the holder of such
equity securities, except that if the managing underwriter of a public offering
made pursuant to such a demand registration limits the number of shares of
common stock to be sold, the participation of the Holders of Registrable
Securities and the holders of all other common stock (other than the equity
securities held by such holder of equity securities) shall be pro rata based
upon the number of shares of Registrable Securities and Common Stock held at the
time of filing the registration statement, (ii) the holder of such equity
securities may not participate in any registration requested pursuant hereto if
the sale of Registrable Securities is to be underwritten unless, if the managing
underwriter limits the total number of securities to be sold, the holders of
such equity securities and the Holders of Registrable Securities are entitled to
participate in such underwritten distribution pro rata based upon the number of
shares of common stock and Registrable Securities held at the time of filing the
registration statement, and ([z]) all equity securities excluded from any
registration as a result of the foregoing limitations shall not be included in
such registration and may not be publicly offered or sold for such period as the
managing underwriter of such registered distribution may request.
7.8 Events of Default. Obligor covenants and agrees to deliver to the
Holders promptly (and in any event within 5 days) after becoming aware of the
existence of any Default or Event of
36
Default, an Officer's Certificate specifying the nature and period of existence
thereof and what actions they are taking or propose to take with respect
thereto.
7.9 Non-Competition. Arete shall not knowingly, directly or
indirectly, or by action in concert with others, engage in any activity, or
invest in, or loan funds to, any Person, that is in direct or indirect
competition with Obligor and where such conduct is engaged in unknowingly, Arete
shall immediately cease such action when brought to its attention; provided,
however that Arete shall have the right to indirectly compete with Obligor by
the development, sale or license of technology, inventions, information,
developments or any method or process relating to biometric identification
systems other than fingerprint identification.
7.10 Further Assurances. Each of the parties shall use all reasonable
efforts to take all action reasonably necessary or advisable to consummate the
transactions contemplated by the Transaction Documents, including but not
limited to doing all acts, matters or things stated to be done by that party
under the Transaction Documents, to satisfy all conditions to performance set
forth in any of them and using all reasonable efforts to obtain all necessary
waivers, consents and approvals, and to effect all necessary registrations and
filings with third parties or governmental or public bodies.
SECTION 8 NEGATIVE AND MAINTENANCE COVENANTS. Obligor covenants and agrees that
so long as any Debentures shall be outstanding, unless approved by the Majority
Holders:
8.1 Restrictions on Liens. Neither Obligor nor Arete will, directly
or indirectly, create, assume or suffer to exist any Lien on any Intellectual
Property.
8.2 Limitation on Sale and Leasebacks. Neither Obligor nor Arete will
enter into any arrangement whereby Obligor nor Arete shall sell or transfer any
property owned by it and material to the Business to any Person and thereupon
Obligor or Arete shall lease or intend to lease, as lessee, the same property.
8.3 Mergers, Consolidations and Sales of Assets; Acquisitions;
Subsidiaries. Obligor will not enter into any transaction of merger,
amalgamation or consolidation, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or convey, sell, lease, license,
transfer or otherwise dispose of, in one transaction or a series of
transactions, all or substantially all of the assets of Obligor, or acquire by
purchase or otherwise all or substantially all of the business or property of
any Person or otherwise have any subsidiaries or acquire by purchase or
otherwise any subsidiary, or enter into any agreement, contract or understanding
providing for any of the foregoing.
8.4 Conduct of Business. Obligor will not engage in any business
other than the Business. Obligor will pursue and develop the Business in good
faith in the ordinary course thereof.
8.5 Transactions with Affiliates. Obligor will not directly or
indirectly, enter into or permit to exist any transaction (including, without
limitation, the purchase, sale, lease or exchange of any property or the
rendering of any service) with any stockholder, director, officer or Affiliate
of Obligor or Arete, or any stockholder, director, officer or Affiliate of any
such Person, unless such transaction is not otherwise prohibited under any
Transaction Document, is in the ordinary course of Obligor's business and is on
fair and reasonable terms that are not less favorable, taken as a whole, to
Obligor, than those that would be obtainable at the time in an arms' length
transaction with a Person who does not stand in such relationship.
8.6 Amendments of Charter, By-Laws and Certain Documents. Obligor
will not effect any amendment to or modification of its charter documents or
by-laws or any Transaction Document, including without limitation any amendment
or modification that imposes any voting requirements with respect to any action
of Obligor's Board of Directors, except as provided in Section 16.
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SECTION 9 FINANCIAL STATEMENTS AND INFORMATION. Each of Obligor and Arete will
furnish to the Holders in the case of items (a), (b), (c) and (d) to each member
of the Board of Directors in the case of (e) and (f), so long as any Debentures
or Conversion Stock is outstanding:
(a) Financial Statements. (i) within thirty 30 days of the end of
each calendar month as to Obligor and each fiscal quarter as to Arete, copies of
the balance sheets of Obligor and Arete as of the end of such month and quarter,
and the related consolidated and consolidating statements of operations and cash
flows for such month and such quarter and for the portion of the fiscal year
ended with the last day of such month and such quarter; (ii) as soon as
available and in any event within ninety (90) days after the end of each fiscal
year of Obligor or Arete, as the case may be, copies of the audited consolidated
and unaudited balance sheets of Obligor and Arete, in each case as of the end of
such fiscal year, together with, in each case, the related audited and unaudited
statements of operations, stockholders' equity and cash flows for such fiscal
year, and the notes thereto, all in reasonable detail. All financial statements
furnished pursuant to the foregoing shall be prepared in accordance with GAAP.
(b) Officer's Compliance Certificates. Concurrently with the
reports or financial statements furnished pursuant to subsection (a) of this
Section, an Officer's Certificate of the Chief Financial Officer of Arete or
Obligor, as the case may be, stating that, based upon such examination or
investigation and review of this Agreement as in the opinion of the signer is
necessary to enable the signer to express an informed opinion with respect
thereto to Arete's Knowledge and Obligor's Knowledge, respectively, no Default
or Event of Default exists or has existed during such period or, if such a
Default or Event of Default shall exist or have existed, the nature and period
of existence thereof and what action Obligor or Arete, as the case may be, has
taken, is taking or proposes to take with respect thereto.
(c) Material Adverse Effect. Promptly after becoming aware of any
Material Adverse Effect with respect to which notice is not otherwise required
to be given pursuant to this Section 9, an Officer's Certificate of Obligor or
Arete, as the case may be, setting forth the details of such Material Adverse
Effect and stating what action Obligor or Arete, as the case may be, have taken
or proposes to take with respect thereto.
(d) Litigation and Proceedings. Promptly (and in any event within
15 days) after Arete or Obligor receives notice of the institution of, or threat
of, any action, suit, proceeding, governmental investigation or arbitration
against or affecting Obligor, the Intellectual Property, Technology or any other
property of Obligor, or any material development in any such action, suit,
proceeding, governmental investigation or arbitration, which, in either case, if
adversely determined, might have a Material Adverse Effect, an Officer's
Certificate of Obligor describing the nature and status of such matter in
reasonable detail. Purchaser shall notify Obligor and Arete of any litigation or
threatened litigation involving Purchaser.
(e) Annual Budget, Business Plan and Projections. Not later than
sixty (60) days prior to the commencement of each fiscal year of Obligor, a copy
of (i) a budget of Obligor for such fiscal year, which shall include at minimum
a projected balance sheet and a projected statement of operations and cash flows
for each month in such fiscal year, together with projections for the financial
performance of Obligor for such fiscal year and the basis therefor, and (ii) a
business plan for such fiscal year, provided, however, Obligor may redact those
portions (and only those portions) which contain confidential and proprietary
information.
(f) Other Information. Any other information, including financial
statements and computations, relating to the performance of obligations arising
under any Transaction Document and/or the affairs of Obligor or, in connection
with the Business, Arete that Purchaser or any Holder may from time to time
reasonably request and which is capable of being obtained, produced or generated
by Obligor or Arete without undue expense or hardship, and provided that such
Holder executes and delivers a non-disclosure agreement acceptable to Obligor
with respect to such information.
SECTION 10 EVENTS OF DEFAULT.
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10. 1 Events of Default; Remedies. If any of the following events
(herein called "EVENTS OF DEFAULT") shall have occurred and not cured within the
time allocated (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or by operation of law or otherwise and such
Event of Default shall be deemed to be continuing until waived by the Majority
Holders in accordance with the terms hereof):
(a) Obligor shall default in the due and punctual payment or
permitted prepayment of all or any part of the principal of or interest accrued
on any Debenture when and as the same shall become due and payable, whether at
stated maturity, by acceleration, by permitted notice of prepayment or otherwise
and such default shall continue for a period of fifteen (15) days after notice
in writing from Purchaser or the Majority Holders; or
(b) Obligor or Arete shall default in the performance or
observance of any of its covenants, agreements or conditions contained in
Section 8 of this Agreement and such default shall continue for a period of
fifteen (15) days after notice in writing from Purchaser or the Majority
Holders; or
(c) Obligor or Arete shall default in the performance or
observance of any of its covenants, agreements or conditions contained in this
Agreement (other than those referred to in any subsection of this Section 10.1
other than this subsection (c)), or Obligor or Arete shall default in the
performance or observance of any of its covenants, agreements or conditions
contained in any of the other Transaction Documents, and such default shall
continue for a period of fifteen (15) days after notice in writing from
Purchaser or the Majority Holders; or
(d) Arete or Obligor shall fail to pay any principal of, premium
or interest when the same becomes due and payable (whether at scheduled
maturity, or by acceleration, demand or otherwise); or any other event shall
occur or condition shall exist under any agreement or instrument relating to any
such Indebtedness if the effect of such event or condition is to permit the
acceleration of the maturity of such Indebtedness and such default shall
continue for a period of fifteen (15) days after notice in writing from
Purchaser or the Majority Holders; or
(e) Obligor shall apply for or consent to the appointment of, or
the taking of possession by, a receiver, custodian, trustee or liquidator of
itself or of all or a substantial part of its property, became insolvent, make a
general assignment for the benefit of its creditors, commence a voluntary case
under the Bankruptcy Code or the foreign equivalent thereof, file a petition
seeking to take advantage of any other debtor relief Statute, fail to controvert
in a timely or appropriate manner, or acquiesce in writing to, any petition
filed against it in an involuntary case under the Bankruptcy Code or the foreign
equivalent thereof, admit in writing its inability to pay its debts generally as
such debts become due or become insolvent or take any action under the laws of
its jurisdiction of organization analogous to any of the foregoing; or
(f) an inventory proceeding or case shall be commenced, in any
court of competent jurisdiction, seeking the liquidation or reorganization of
Obligor or readjustment of the Indebtedness of either, the appointment of a
trustee, receiver, custodian, liquidator or the like of Obligor, or of all or
any substantial part of the assets of either of them, or similar relief in
respect of Obligor, as the case may be, under any statute providing for the
relief of debtors, and such proceeding or case shall continue undismissed, or
unstayed. and in effect, for a period of 90 days; or an order for relief shall
be entered in an involuntary case under the Bankruptcy Code, against Obligor; or
action under the laws of the jurisdiction of organization of Obligor analogous
to the foregoing shall be taken with respect to any of Obligor and shall
continue undismissed, or unstayed and in effect, for a period of sixty (60)
days; or
(g) any material representation or warranty made by or on behalf
of Arete or Obligor in any Transaction Document or Officer's Certificate or
other instrument shall be incorrect or breached in any material respect on the
date as of which made (or deemed made); or
39
(h) any provision of any Transaction Document shall not be or
shall cease to be in full force and effect, due to the actions of Arete or
Obligor, or not be, or be asserted in writing by Arete or Obligor not to be
valid, binding and enforceable against any Person purported to be bound by it,
then each of Purchaser and the Majority Holders may (but shall not be
obligated to), by written notice to Obligor, declare the unpaid principal amount
of Debentures held by such Person to be, and the same shall forthwith become,
immediately due and payable, together with the interest accrued thereon.
10.2 Suits for Enforcement, Remedies. If any Event of Default shall
have occurred and be continuing, the Majority Holders may proceed to protect and
enforce the rights of Purchaser and the Holders, either by suit in equity or by
action at law, or both, whether for the specific performance of any covenant or
agreement contained in any other Transaction Document or in aid of the exercise
of any power granted in this Agreement or any other Transaction Document, and
may proceed to enforce the payment of all sums due upon the Debentures and any
other obligations, and such further amounts as shall be sufficient to cover the
costs and expenses of collection (including, without limitation, reasonable
counsel fees and disbursements), or to enforce any other legal or equitable
right of Purchaser and the Holders.
10.3 Remedies Cumulative. No remedy conferred herein or in any
Transaction Document upon Purchaser or the Holders is intended to be exclusive
of any other remedy and each and every such remedy shall be cumulative available
at law or in equity or otherwise.
10.4 Remedies Not Waived. No course of dealing between Arete or
Obligor, on the one hand, and Purchaser or any Holder, on the other hand, and no
delay or failure in exercising any rights hereunder or under any Transaction
Document shall operate as a waiver of any of the rights of Purchaser or any
Holder.
SECTION 11 CONVERSION OF DEBENTURES.
11.1 Conversion of Debentures. Any Holder of any Debenture may, at
such Holder's option, at any time and from time to time, convert such Debenture,
or any portion of the principal amount thereof, at the rate and upon the terms
hereinafter set forth. Provided that no Default or Event of Default shall have
occurred and be continuing, all outstanding Debentures shall be converted (a
"Mandatory Conversion") upon the Initial Public Offering.
11.2 Conversion Price. The Debentures shall be convertible pursuant to
Section 11. 1 into shares of Series A Preferred Stock in accordance with the
percentages set forth on Schedule 11.2 hereto. The actual number of shares into
which Debentures (or parts thereof) shall be converted will be:
(a) if Debentures representing
(i) all of Tranche A;
(ii) all of Tranches B and C;
(iii) all of Tranches D and E; or
(iv) all of Tranches F and G are
converted, the number of shares of Series A Preferred Stock into which the
Debentures shall be converted will be such number of shares of Series A
Preferred Stock so that, if such shares of Series A Preferred Stock were
converted into Common Stock, the number of such shares of Common Stock would be
equal to the percentage specified in Schedule 11.2 of the Number of Fully
Diluted Shares Outstanding as of the date of conversion (including, for clarity
and without duplication, the shares to be issued upon such conversion) and (b)
if less than all of the
40
Debentures described in one of clauses (a)(i) to (iv) are so converted, the
number of shares of Series A Preferred Stock into which the Debenture (or part
thereof) shall be converted will be equal to the number which would be
determined under subsection (a) if all of the Debentures in the Tranches
described in the applicable subclause (a)(i) to (iv) were so converted,
multiplied by a fraction the numerator of which is the amount of the Debenture
(or part thereof) being converted and the denominator of which is the total
amount of all of the Debentures described in the applicable subclause.
For clarity, the position of the Holder may be diluted by shares of stock issued
under the Stock Incentive Plan, both before and after the date of conversion of
the Debentures. [Rider A]
[Rider A -- For additional purposes of clarity, and without limiting the
generality of the foregoing or any provision of this Agreement, the position of
the Holder may also be diluted by shares of stock issued in connection with any
additional financing of the Obligor (whether debt or equity) if the Purchaser
has failed to purchase debentures by the Outside Purchase Date shown on Schedule
2.2 (unless excused by virtue of Obligor's breach of this Agreement or any
Transaction Document), as provided for in this Agreement.]
11.3 Exercise of Conversion Privilege. (a)(i) To exercise the
conversion privilege set forth in Section 11.1, the Holder of any Debenture
shall surrender such Debenture, appropriately endorsed, to Obligor at its
principal office, accompanied by written notice to Obligor, (X) stating that the
Holder elects to convert such Debenture or a portion thereof, and if a portion
the amount of such portion, and (Y) setting forth the name or names (with
address) in which the certificate or certificates for shares of Conversion Stock
issuable upon such conversion shall be issued. A Debenture shall be deemed to
have been converted immediately prior to the close of business on the date of
receipt by Obligor of such Debenture and notice, even if Obligor's stock
transfer books are at that time closed, and the converting Holder shall be
treated for all purposes as the record holder of the shares of Conversion Stock
deliverable upon such conversion as of the close of business on such date.
(b) Obligor shall provide notice to each Holder of any event
pursuant to which there is a Mandatory Conversion under Section 11. 1 hereof (X)
certifying that a Mandatory Conversion has occurred and the underlying events
resulting in such conversion (Y) providing detailed instructions regarding the
procedure to be followed by the Holders to receive Conversion Stock in respect
of the amount of Debentures being converted. A Debenture shall be deemed to have
been converted in accordance with Section 11.1 hereof as set forth in the
notice required hereunder immediately prior to the close of business on the date
of issuance of such notice in accordance herewith by Obligor to the Holders,
even if Obligor's stock transfer books are at that time closed, and the
converting Holders shall be treated for all purposes as the record holder of the
shares of Conversion Stock deliverable upon such conversion as of the close of
business on such date. Prior to actual receipt of the notice required under this
Section 11.3(b), no Holder shall be charged with or deemed to possess any
knowledge of the occurrence of a Mandatory Conversion or the underlying facts
causing such conversion to occur.
(c) Promptly after the date of conversion, Obligor shall issue
and deliver to each converting Holder a certificate or certificates for the
number of shares of its Series A Preferred Stock due on such conversion upon
submission of the Debentures to be converted for cancellation or replacement (if
conversion is as to less than the full amount thereof). Interest shall accrue on
the unpaid principal amount of the Debentures converted to the date of
conversion, and Obligor shall promptly pay such interest. Upon conversion of any
Debenture which is converted in part, Obligor shall execute and deliver to the
Holder thereof, at the expense of Obligor, a new Debenture in the aggregate
principal amount equal to the unconverted portion (including accrued interest)
of such Debenture. Such new Debenture shall have the same terms and provisions,
other than the principal amount, as the Debenture or Debentures surrendered for
conversion.
(d) The issue of Conversion Stock certificates on conversion
shall be made without charge to the Holder for any tax in respect of the issue
thereof, except taxes, if any, on income of the Holder.
41
11.4 No Dilution or Impairment. Obligor will not, by amendment of its
articles of incorporation or through reorganization, consolidation, merger,
dissolution, issue or sale of securities, sale of assets or any other voluntary
action or otherwise, avoid or seek to avoid the observance or performance of any
of the terms of this Section 11, but will at all times in good faith assist in
the carrying out of all such terms and of the taking of all such action as may
be necessary or appropriate in order to protect the rights of Purchaser and the
Holders of the Debentures against dilution or other impairment.
11.5 Issuance of Additional Shares. If at any time Obligor issues or
sells any Capital Stock ("Additional Capital Stock") after Purchaser has
converted some or all of the Debentures in Conversion Stock other than (i) as a
dividend or other distribution on the Series A Preferred Stock, in accordance
with the Transaction Documents; (ii) pursuant to the Stock Incentive Plan (the
shares of which shall dilute the shareholding interest of all holders of
Obligor's Securities on a pro rata basis), (iii) in connection with any
additional financing of Obligor (whether debt or equity) after completion of the
purchase of all Debentures hereunder (unless excused by virtue of Obligor's
breach of this Agreement or any Transition Document) which financing shall
dilute the shareholding interest of all Holders other than with respect to
shares issued under the Stock Incentive Plan (iv) in connection with any
additional financing of Obligor (whether debt or equity) if Purchaser has failed
to purchase Debentures by the Outside Purchase Date shown on Schedule 2.2
(unless excused by virtue of Obligor's breach of this Agreement or any
Transaction Document) which financing shall dilute the shareholding interest of
all Holders other than with respect to shares issued under the Stock Incentive
Plan, then Obligor shall issue promptly to each Holder of Conversion Stock the
number of shares of such Conversion Stock which, together with the number of
shares of such Conversion Stock theretofore held by such holder, equals the
number shares of Conversion Stock such Holder would have been entitled to
receive upon Conversion pursuant to Section 11.2 had the Additional Capital
Stock been issued immediately prior to such conversion. For the purposes of the
foregoing calculation, [x] the issuance by Obligor of Common Stock shall be
deemed the issuance of the same number of shares of Series A Preferred Stock;
[y] the issuance by Obligor of any warrant, option or other right to acquire
Capital Stock shall be deemed the issuance of the number of shares issuable
pursuant thereto; and [z] each adjustment increasing the number of shares
issuable pursuant to any warrant, option or other right to acquire Capital Stock
shall be deemed an issuance of the additional number of shares thereby
receivable upon exercise or exchange thereof.
11.6 Fractional Shares. No fractional shares of Common Stock will be
issued in connection with any conversion hereunder but in lieu of such
fractional shares, Obligor shall make a cash payment therefor equal in amount to
the product of the applicable fraction multiplied by the fair market value of
one full share at the time of such conversion as determined in good faith by the
Board of Directors of Obligor.
11.7 Notices of Certain Events. In case (i) Obligor shall determine to
pay any dividend or make any distribution to its shareholders, or offer to its
shareholders any right to purchase any securities, or to receive any other
right; or (ii) of any capital reorganization of Obligor, any reclassification of
the capital stock of Obligor (including a subdivision or combination thereof),
any consolidation or merger of Obligor with or into another Person, or any
conveyance of all or substantially all of the assets of Obligor to another
Person or entity; or (iii) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of Obligor, then, and in each such case,
Obligor shall promptly give written notice to the Purchaser and the Holders of
the Debentures of the date on which (x) the books of Obligor shall close or a
record date shall be fixed for determination of the shareholders entitled to
receive such dividend, distribution or right, and stating the amount and
character of such dividend, distribution or right, or (y) such reorganization,
reclassification, consolidation, merger, conveyance, dissolution, liquidation or
winding up is to take place, and the time, if any, is to be fixed, as of which
the holders of record of Series A Preferred Stock or Common Stock (or such stock
or securities at the time receivable upon the exercise of the conversion
privilege) shall be entitled to exchange their shares for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, conveyance, dissolution, liquidation or winding up, as the case may be.
Such written notice shall
42
be given at least 30 days prior to the action in question and not less than 30
days prior to the record date or the date on which Obligor's transfer books are
closed.
SECTION 12 DELIVERIES. At each Closing, Obligor shall deliver to Purchaser or
its designee (i) duly endorsed Debentures in the aggregate principal amount
being purchased thereat in the names of such Persons as Purchaser shall
theretofore designate in writing to Purchaser(or its designee); (ii) the
certificates referenced in Section 6A.1 and 6A.3 hereof, and (iii) such other
documents, instruments or certificates which Purchaser (or its designee) may
reasonably request. At each Closing, Purchaser (or its designee) shall deliver
to Obligor, by wire in available funds or cashiers or bank check, the amount
equal to the aggregate principal amount of Debentures being purchased at such
Closing.
SECTION 13 TERMINATION. This Agreement may be terminated; provided, however,
such termination shall not affect those provisions which, by their terms, remain
operative until a later date or indefinitely only by mutual written consent of
Obligor, Purchaser and each Holder; or by Obligor or Purchaser if the Tranche C
Effective Date shall not have occurred on or prior to June 11, 1998.
SECTION 14 REGISTRATION, EXCHANGE, AND TRANSFER OF DEBENTURES. Obligor will keep
at its principal executive office a register, in which, subject to such
reasonable regulations as it may prescribe, but at its expense (other than
transfer taxes, if any), Obligor will provide for the registration and transfer
of the Debentures. Whenever (in accordance with Section 15 below) any Debenture
is surrendered, for transfer or exchange, accompanied (if so required by
Obligor) by a written instrument of transfer in form reasonably satisfactory to
Obligor duly executed by the Holder thereof, Obligor will execute and deliver a
new Debenture in such denominations as may be requested by such Holder, of like
tenor and in the same aggregate unpaid principal amount as the aggregate unpaid
principal amount of the Debenture so surrendered. Any Debenture so issued shall
carry the rights to unpaid interest and interest to accrue which were carried by
the surrendered Debenture, and neither gain nor loss of interest shall result
from any such transfer or exchange of the surrendered Debenture. Any transfer
tax or governmental charge relating to such transaction shall be paid by the
Holder requesting transfer or exchange. Obligor and any of its agents may treat
the Person in whose name any Debenture registered as the sole and exclusive
record and beneficial holder and owner of such Debenture all other purposes.
SECTION 15 LOST, STOLEN, DAMAGED AND DESTROYED DEBENTURES. At the request of any
Holder, Obligor will issue and deliver at the Holder's expense, in replacement
of any lost, stolen, damaged or destroyed Debenture, a new Debenture in the same
aggregate unpaid principal amount, and otherwise of the same tenor, as the
replaced Debenture. Obligor may require Holder of the replacement Debenture to
provide an indemnity and/or security reasonably satisfactory to Obligor;
however, if such Holder is Purchaser, Purchaser's unsecured agreement of
indemnity shall be deemed sufficient.
SECTION 16 BOARD CONSTITUTION, REPRESENTATION AND ACTION. Obligor and Arete
shall (1) cause the Board of Directors of Obligor (the "Obligor Board") to
consist of seven members, of which, following the purchase by Purchaser or its
nominee of Debentures in an aggregate principal amount not less than $1,250,000,
and so long as such Debentures or underlying Conversion Stock is held by
Purchaser or its nominee and an Initial Public Offering has not taken place, one
(1) Board member shall be designated by Purchaser, and Purchaser shall also be
entitled to have one (1) nonvoting representative at such meeting. Obligor and
Arete shall further require, following the purchase by Purchaser or its nominee
of Debentures in an aggregate principal amount not less than $5,000,000, the
affirmative vote or not less than a majority of the members of Obligor Board,
which majority shall, following the purchase of Debentures by Purchaser or its
nominee in an aggregate principal amount of not less than $1,250,000, and so
long as such Debentures or underlying Conversion Stock is held by Purchaser or
its nominee, include Purchaser's Board designee in order for Obligor to: (i)
declare or pay, or agree to declare or pay any dividend to any stockholders of
Obligor or any Affiliate thereof; (ii) sell, lease, transfer, mortgage, pledge
or otherwise dispose of or encumber all or substantially all of Obligor's assets
or any material portions of Intellectual Property or Technology; (iii) amend the
articles of incorporation or bylaws;
43
(iv) consolidate, merge or amalgamate with any other Person; or (v) enter into
any other transaction that could have a material adverse on the value of the
investment of Purchaser or its designee; provided however, that the right of
Purchaser's designee on the Board of Directors to approve the foregoing matters
shall terminate upon the earlier of an IPO or at such time as Obligor is merged
with Purchaser (as provided in Section 7.6 hereof).
SECTION 17 PRIOR ADVANCE. Obligor hereby acknowledges that Purchaser has paid to
Obligor, and Obligor has received, as an advance against the purchase of
Debentures the sum of $350,000 consisting of payments of $100,000 (the "Initial
Advance") and $250,000 (the "Remaining Advance"). If on or prior to June 11, 199
8 Purchaser has not purchased the Debentures under Tranche C pursuant to Section
2 hereof, then Purchaser may elect by written notice to Obligor, and Obligor
covenants and agrees to perform all acts required of it to accomplish the ends
of such election, either (i) to have the Initial Advance repaid in full to
Purchaser within sixty (60) days of such notice, together with interest thereon
accruing from the date of the Initial Advance to the date paid at the Imputed
Rate, or (ii) to convert the Initial Advance into the number of shares of Series
A Preferred Stock equal to 1.6% of the Number of Fully-Diluted Shares
Outstanding (after giving effect to conversion of the Advance), such percentage
to be calculated on the date of the giving of such notice by Obligor, which
shares Obligor hereby agrees to issue in such name or names as Purchaser shall
designate and which shares shall constitute "Conversion Stock" for purposes of
the Transaction Documents, and in either circumstance to have the Remaining
Advance repaid in full to the Purchaser within one hundred and eighty (180) days
of such notice, together with interest thereon accruing from the date of the
Remaining Advance to the date paid at the Imputed Rate. The provisions of this
Section 17 shall survive termination of this Agreement.
SECTION 18 MISCELLANEOUS.
18.1 Amendment and Waiver. No amendment or waiver of any Transaction
Document shall be effective unless in writing and signed by Purchaser and the
Majority Holders, and except that without the specific prior written consent of
the Holder directly affected thereby, no such amendment or waiver shall reduce
the principal of, or the rate of interest on, any of the Debentures of any
Holder, or extend the time of payment of the principal of or interest on any
Debenture of such Holder. Any such waiver or consent shall be effective only in
the specific instance and for the purpose for which given. Neither any failure
nor any delay on the part of Purchaser or any Holder in exercising any right,
power or privilege under any Transaction Document shall operate as a waiver.
Except as otherwise provided in any Transaction Document, no notice to or demand
on any Person shall entitle such Person to any other or further notice or
demand. Notwithstanding any other provision contained in this Agreement to the
contrary, Debentures which at any time are held by Obligor, Arete or any
Affiliate of Obligor or Arete (other than Purchaser if at any time it shall
become an Affiliate of Obligor or Arete) shall be deemed not to be outstanding
for purposes of any vote, consent, approval, waiver or other action required or
permitted to be taken by Holders under the provisions of this Agreement, and
neither Obligor, Arete nor an Affiliate of either of them shall be entitled to
exercise any right as a Holder with respect to any such vote, consent, approval
or waiver or to take or participate in taking any such action at any time.
18.2 Expenses. Each of the parties shall pay their own expenses
incurred by them of performance and administration connection with the
preparation, negotiation, execution, delivery the Transaction Documents, except
as otherwise agreed.
18.3 Survival of Representations and Warranties. All representations
and warranties contained herein or made in writing by or on behalf of any party
to any Transaction Document shall survive the execution and delivery of such
Transaction Document and shall continue in effect as long as any Holder may
purchase any Debentures hereunder or any Debenture or Conversion Stock is
outstanding, and be deemed to be material and to have been relied upon by Arete,
Obligor and each Holder, regardless of any investigation made by Purchaser or
such Holder or on its behalf.
18.4 Successors and Assigns. The Transaction Documents shall be
binding upon and inure to the benefit of Obligor, Purchaser and the Holders, and
their respective permitted successors and
44
permitted assigns; provided, however, that (i) neither Arete nor Obligor shall
have the right to assign its rights hereunder or any interest herein or to
delegate any of its duties hereunder without the prior written consent of
Purchaser and the Majority Holders and (ii) Purchaser may not assign its rights
to any Person which is a direct or indirect competitor of Obligor without
Obligor's prior written consent. No assignment hereunder shall in any respect
relieve or release any obligation of Arete or Obligor or Purchaser hereunder.
Each Holder (the "Assignor") may at any time sell, assign, mortgage or encumber
(each an "Assignee") all or any part of its interests in any Debentures or any
Transaction Document, and each such Assignee shall assume the obligations of the
Assignor hereunder and thereunder, to the extent provided in such assignment,
and to the extent of such assumption the Assignor shall be released from its
obligations hereunder and thereunder. Upon execution and delivery of such an
instrument, such Assignee shall be a party to this Agreement and shall have the
rights and obligations of a Holder to the extent of such assignment.
18.5 Administrative Agent. Whenever outstanding Debentures and
Conversion Stock shall be held by more than one Holder, the Majority Holders may
at their option and upon written notice to Obligor designate a particular Person
to act as administrative agent on their behalf and direct that any or all
notices, and other documents or information to be sent or given to or by the
Holders under any Transaction Document be given to or by such administrative
agent on their behalf, and may further direct that, upon the written direction
of the Majority Holders, such administrative agent may take any action on behalf
of the Holders which the Majority Holders would be entitled to take under the
provisions of the Transaction Documents and Obligor shall be conclusively
entitled to rely for all purposes on the instructions of such administrative
agent.
18.6 Notices. All notices hereunder shall be in writing and shall be
conclusively deemed to have been received and shall be effective (i) on the next
business day after delivery if delivered personally or transmitted by telecopier
and confirmed by mail, or (ii) one (1) business day after the date on which the
same is delivered to an internationally recognized overnight courier service,
and shall be addressed:
(iii) in the case of Obligor, to:
Biometric Identification, Inc.
0000 Xxx Xxxx Xxxxxxxxx, Xxxxx 000
Xxxxxxx Xxxx, Xxxxxxxxxx 00000
Attention: President
Telecopy: 818/501-7163;
Telephone: 818/000-0000
(iv) in the case of Arete, to:
Arete Associates
0000 Xxx Xxxx Xxxxxxxxx, Xxxxx 000
Xxxxxxx Xxxx, Xxxxxxxxxx 00000
Attention: President
Telecopy: 818/501-2905
Telephone: 818/000-0000
with, in the case of each of (iii) and (iv), a copy to:
Citron & Deutsch
00000 Xxxxxxxx Xxxxxxxxx, Xxxxx 000
Xxx Xxxxxxx, Xxxxxxxxxx 00000
Attention: Xxxxx X. Deutsch; Esq.
Telecopy: 310/475-1368
Telephone: 310/000-0000
(v) in the case of Purchaser, to:
45
Sonoma Resource Corp.
# 1940, 000 Xxxxxxx Xxxxxx
X.X. Xxx 00
Xxxxxxxxx, Xxxxxxx Xxxxxxxx X0X 0X0
XXXXXX
Attention: Chairman of the Board
Telecopy: 604/687-4144 or 800/763-3255
Telephone: 604/000-0000
With a copy to:
Paul, Hastings, Xxxxxxxx & Xxxxxx LLP
Twenty-Third Floor
000 Xxxxx Xxxxxx Xxxxxx
Xxx Xxxxxxx, Xxxxxxxxxx 00000-0000
Attention: Xxxxxxx X. Xxxxxx, Esq.
Telecopy: 213/627-0705
Telephone: 213/000-0000
and
Xxxxxxx & Xxxxxx
21100 - 0000 Xxxx Xxxxxxx Xxxxxx
Xxxxxxxxx, Xxxxxxx Xxxxxxxx X0X 0X0
XXXXXX
Attention: Xxxxx X. Xxxxx, Esq.
Telecopier: 604/688-0829
Telephone: 604/000-0000
(vi) in the case of any other Holder, to such Holder at such
address and telecopy number and to the attention of such Person as such Holder
shall specify in writing to the parties; or in any of the foregoing cases, at
such other address and/or telecopy number and/or to the attention of such other
Person as any of such Persons shall have advised the others by notice in the
manner herein specified.
18.7 Certain Acknowledgments. Arete and Purchaser acknowledge and
agree that the issuance of any Capital Stock pursuant to the Stock Incentive
Plan will and shall dilute Arete's and Purchaser's equity interest in Obligor on
a pro rata basis with all other Holders.
18.8 Public Announcements. Arete, Obligor and Purchaser agree that
neither will issue any press release or make any other public announcement, with
regard to the Transactions without the prior approval of Obligor, Arete and
Purchaser and the Majority Holders unless otherwise required by law and except
by Purchaser in connection with the offering of securities of Purchaser in
connection with which Purchaser shall afford Obligor (and Arete, if mentioned in
the press release) twenty-four (24) hours to comment on its press release and
consider Obligor's (and Arete's, as the case may be) comments in good faith.
18.9 No Fiduciary Relationship. Purchaser shall not, and no Holder
shall, by reason of its purchase or holding of Debentures pursuant to this
Agreement, be deemed to have any fiduciary or other special relationship with
Obligor or Arete. No provision of any Transaction Document or any of the other
document executed and delivered in connection herewith shall be construed to
create a fiduciary duty on the part of Purchaser or any Holder or any trustee or
agent therefor in favor of Obligor, Arete or their respective Affiliates, or any
of their respective directors, officers, employees, agents, stockholders or
creditors.
18.10 Integration and Severability. This Agreement (including the
schedules and exhibits thereto), together with the other Transaction Documents
embodies the entire agreement and
46
understanding between Purchaser, the Holders, Arete and Obligor, and supersedes
all prior agreements and understandings, relating to the subject matter hereof.
In case any one or more of the provisions contained in any Transaction Document
or other agreement, instrument or document executed in connection therewith,
shall be invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions shall not be affected or
impaired and the invalid, illegal or unenforceable provisions shall be enforced
to the greatest extent legally permissible.
18.11 Counterparts. Each Transaction Document may be executed in two
or more counterparts, each of which shall be deemed an original but all of which
shall together constitute one and the same instrument.
18.12 GOVERNING LAW. EACH TRANSACTION DOCUMENT SHALL BE GOVERNED BY
AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE
STATE OF CALIFORNIA WITHOUT REGARD TO THE CONFLICTS OF LAWS RULES OF CALIFORNIA.
IN WITNESS WHEREOF, Obligor, Arete and Purchaser have caused this
Agreement to be executed by their duly authorized officers as of the date first
written above.
OBLIGOR:
BIOMETRIC IDENTIFICATION, INC.,
a California Corporation
By: /s/ Xxxxxx X. Xxxx
------------------------------------
Xxxxxx X. Xxxx, President
ARETE:
ARETE ASSOCIATES
a California corporation
By: /s/ Xxxxxxx X. Xxxxxx
------------------------------------
Xxxxxxx X. Xxxxxx, President
PURCHASER:
SONOMA RESOURCE CORP.
a British Columbia corporation
By: /s/ Xxxxxxx X. XxXxxxxx
------------------------------------
Xxxxxxx X. XxXxxxxx, Director
