CONVERTIBLE NOTE AND WARRANT
PURCHASE AGREEMENT
RAPIDTRON, INC.
This Convertible Note and Warrant Purchase Agreement (the "AGREEMENT") is made
effective as of the 21st day of June, 2005 (the "EFFECTIVE DATE") by and among:
RAPIDTRON, INC., a Nevada corporation, of 0000 Xxxxxx Xxx., Xxxx. X, Xxxxx
Xxxx, XX 00000 (the "COMPANY"); and
CERES FINANCIAL LIMITED, a BVI company, of Walkers Xxxxxxxx, P.O. Box 92,
Mill Mall, Road Town, Tortola, British Virgin Islands (the "INVESTOR").
The Company and the Investor are collectively referred to in this Agreement as
the "PARTIES."
WHEREAS:
A. The Company currently does not have sufficient current assets to meet
its working capital requirements and has on-going commitments and
obligations to its employees, suppliers, security holders, debt
holders and other third parties; and the Company is currently in the
process of evaluating a restructuring of its business and finances in
order to continue as a going concern, including a possible merger or
acquisition transaction (the "RESTRUCTURING");
B. The Investor is a shareholder of the Company and the Company has
certain obligations to the Investor under the terms of that certain
Unit Purchase Agreement dated November 12, 2003, as amended; a Bridge
Loan Agreement dated on or about January 6, 2005; certain Convertible
Note and Warrant Purchase Agreements dated on or about February 8,
2005, March 1, 2005, April 12, 2005 and May 18, 2005; a Registration
Rights Agreement; various Security Agreements granting the Investor a
security interest in accounts receivable, inventory and proceeds from
any financing transactions to secure payment of various notes and
obligations of the Company and other documents entered into in
connection with the Investor's investments in the Company (the
"INVESTOR'S RIGHTS");
C. The Company is indebted to the Investor under the terms of the
following debt instruments (collectively, the "DEBT SECURITIES");
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DESCRIPTION PRINCIPAL DATE OF ISSUANCE INTEREST DUE DATE ACCRUED
AMOUNT RATE INTEREST
--------------- ---------- ---------------- --------- ------------ ---------
Promissory Note $ 12,500 January 6, 2005 8% July 6, 2005 $ 454.29
--------------- ---------- ---------------- --------- ------------ ---------
Promissory Note $ 12,500 January 31, 2005 8% July 6, 2005 $ 386.30
--------------- ---------- ---------------- --------- ------------ ---------
Promissory Note $ 12,500 January 31, 2005 8% July 6, 2005 $ 386.30
--------------- ---------- ---------------- --------- ------------ ---------
Convertible $ 30,000 February 8, 2005 8% July 6, 2005 $ 874.22
Promissory Note
--------------- ---------- ---------------- --------- ------------ ---------
Convertible $ 75,000 March 2, 2005 8% July 6, 2005 $1,824.66
Promissory Note
--------------- ---------- ---------------- --------- ------------ ---------
Convertible $ 50,000 April 12, 2005 8% July 6, 2005 $ 767.12
Promissory Note
--------------- ---------- ---------------- --------- ------------ ---------
Convertible $ 50,000 May 18, 2005 8% July 6, 2005 $ 372.60
Promissory Note
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D. The Company holds the following warrants exercisable to acquire shares
of common stock of the Company (collectively, the "WARRANTS")"
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DATE OF ISSUANCE CERTIFICATE NUMBER OF CURRENT EXPIRY DATE
NUMBER SHARES EXERCISE
PRICE
---------------- ----------- --------- --------- -----------------
March 1, 2004 n/a 95,000 $ 1.50 December 31, 2005
---------------- ----------- --------- --------- -----------------
January 6, 2005 A-001 75,000 $ 0.33* January 6, 2010
---------------- ----------- --------- --------- -----------------
February 8, 2005 A-002 60,000 $ 0.33* February 8, 2010
---------------- ----------- --------- --------- -----------------
March 2, 2005 A-003 150,000 $ 0.33* March 2, 2010
---------------- ----------- --------- --------- -----------------
April 12, 2005 A-004 100,000 $ 0.175* April 12, 2010
---------------- ----------- --------- --------- -----------------
May 18, 2005 A-005 100,000 $ 0.175* May 18, 2010
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* Contains a one time reset right based on the trading price of the
common stock.
E. The Company desires to borrow an additional $150,000 to fund working
capital requirements and on-going commitments, and to extend the due
dates of the Debt Securities;
F. The Investor has agreed to loan the Company $150,000 (the "CURRENT
LOAN") and to extend the due date of the Debt Securities only on the
condition that the Debt Securities and Warrant are restructured with
the same terms and conditions of the current Loan, all of which shall
be evidenced by (i) a convertible promissory note in substantially the
form attached to this Agreement as Exhibit A (the "CONVERTIBLE NOTE"),
---------
which shall be convertible on the terms stated therein into equity
securities of the Company, and (ii) warrants to purchase equity
securities of the Company on the terms stated therein in substantially
the form attached to this Agreement as Exhibit B (the "WARRANTS"). The
---------
Note, the Warrant and the equity securities issuable upon conversion
or exercise thereof are collectively referred to herein as the
"SECURITIES";
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G. The Company will grant registration rights to the Investor; and
H. The Investor (i) satisfies the criteria for "ACCREDITED INVESTORS" as
defined under Rule 501(a) of Regulation D of the Securities Act of
1933, as amended (the "SECURITIES ACT"), (ii) is not a "U.S. Person"
as such term is defined by Rule 902 of Regulation S under the
Securities Act and (iii) is outside the United States at the time of
execution and delivery of this Agreement.
NOW THEREFORE THIS AGREEMENT WITNESSES that, in consideration of the mutual
covenants and agreements herein contained, the receipt of which is acknowledged,
the Parties covenant and agree with each other as follows:
1. PURCHASE AND SALE OF NOTE AND WARRANT; AND GRANT OF SECURITY INTEREST
1.1 SALE AND ISSUANCE OF NOTE AND WARRANT.
-------------------------------------
(a) Subject to the terms and conditions of this Agreement, the Investor
agrees to purchase at the Closing (as defined below) and the Company
agrees to sell and issue to the Investor a Convertible Note in the
principal amount of Three Hundred Ninety-Seven Thousand Five Hundred
Sixty-Six and 29/100 Dollars (US$397,566.29), and a Warrant to
purchase 1,437,143 shares of common stock of the Company at an
aggregate exercise price as set forth in the Warrant.
(b) The total purchase price of the Note and the Warrant together shall be
(i) a cash payment of One Hundred Fifty Thousand Dollars (US$150,000);
(ii) the tender of the Debt Securities in the aggregate principal
amount of $242,500 together with accrued interest in the amount of
$5,066.29; and (iii) the tender of the Warrants exercisable to acquire
580,000 shares of common stock of the Company (the "PURCHASE
CONSIDERATION").
1.2 GRANT OF SECURITY INTEREST. The Company will execute and deliver to
--------------------------
Investor a security agreement, in the form attached hereto as Exhibit C,
---------
securing payment of its indebtedness, liabilities and obligations under the
Convertible Note, and granting to Investor a security interest in all of
the Company's accounts receivable, inventory and proceeds from any
financing transactions (the "SECURITY AGREEMENT").
1.3 GRANT OF REGISTRATION RIGHTS. The Company will execute and deliver an
----------------------------
investors rights agreement, in the form attached hereto as Exhibit D,
---------
granting the Investor registration rights in connection with the shares of
common stock of the Company issuable upon exercise or conversion of the
Securities (the "REGISTRATION RIGHTS AGREEMENT").
2. CLOSING, CLOSING CONDITIONS AND DELIVERIES
2.1 CLOSING. There shall be no physical closings of the transactions
-------
contemplated by this Agreement. The purchase and sale of the Note and
Warrant shall take place at the offices of Xxxxxx & Xxxxxxx LLP, legal
counsel to the Investor, at 0000 Xxxxx Xxxxxx, Xxxxx 0000, Xxxxxxx,
Xxxxxxxxxx 00000 at 10:00 a.m. on the effective date, or at such other time
and place as the Company and the Investor mutually agree upon, orally or in
writing (which time and place are designated as the "CLOSING"). At the
Closing, the Company shall deliver to the Investor the
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Convertible Note and Warrants against payment of the Purchase Consideration
(the cash consideration to be paid by check or by wire transfer to the
Company's bank account and the Debt Securities and Warrants to be delivered
to the Company's office). The Parties may arrange for executed copies to be
held in escrow prior to such exchange, so as to facilitate the exchange
without the need for the presence of one or more of the Parties.
2.2 The Closing of the transaction contemplated by this Agreement is subject to
the fulfillment of the following conditions (the "CLOSING CONDITIONS")
which are for the benefit of the Investor:
(a) all relevant documentation and approvals as may be required by
applicable securities statutes, regulations, policy statements and
interpretation notes, by applicable securities regulatory authorities
and by applicable rules and guidelines of any stock exchange on which
the Company's common shares are listed, shall have been obtained and,
where applicable, executed by or on behalf of the Investor;
(b) the Company's board of directors shall have authorized and approved
the execution and delivery of this Agreement, the issuance and
delivery of the Convertible Note, the reservation and issuance of
securities acquirable upon exercise or conversion of the Convertible
Note (the "NOTE SECURITIES"), the allotment and issuance of the
Warrant, and the reservation and issuance of the Company's common
shares acquirable upon exercise of the Warrant (the "WARRANT SHARES");
(c) the representations and warranties of the Company set forth in this
Agreement shall be true and correct as of the Closing;
(d) no action or proceeding at law or in equity shall be pending or
threatened by any person, including any government, governmental
authority, regulatory body or agency to enjoin, restrict or prohibit
the purchase and issuance of the Securities or the transactions
contemplated hereby; and
(e) the Company shall have delivered a copy of resolutions of the Board of
Directors of the Company certified by the secretary of the Company
authorizing and approving the execution, delivery and performance of
this Agreement and the transactions contemplated herein.
2.3 The Closing Conditions may be waived in writing in whole or in part by the
Investor before the Closing upon such terms as it may consider appropriate
in its sole discretion.
3. INVESTOR'S REPRESENTATIONS AND WARRANTIES
3.1 The Investor makes the following representations and warranties to the
Company:
(a) The Investor represents that it is an "ACCREDITED INVESTOR" as such
term is defined under Rule 501(a) of Regulation D of the Securities
Act;
(b) The Investor represents it is not a "U.S. person" as defined in
Regulation S under the Securities Act; and
(c) The Investor represents that it was not offered the Convertible Note
or the Warrant in the United States, did not receive any materials
relating to this Agreement or the transactions
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contemplated herein in the United States, and did not execute this
Agreement or any other materials relating to this Agreement in the
United States.
3.2 The Investor has the power and authority to sign and comply with the terms
of this Agreement and the person signing this Agreement on its behalf has
the necessary power to do so; the Investor's principal place of business
and principal office are located within the jurisdiction set forth in the
address provided by the Investor below.
4. COMPANY'S REPRESENTATIONS, WARRANTIES, AND COVENANTS
4.1 In order to induce the Investor to purchase the Convertible Note and
Warrant, the Company hereby represents and warrants to the Investor, except
as disclosed in the attached Company Disclosure Schedule, that:
(a) Organization, Standing, etc. The Company is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of the
state of Nevada, and has the requisite corporate power and authority
to own its properties and to carry on its business in all material
respects as it is now being conducted. The Company has the requisite
corporate power and authority to issue the Convertible Note and
Warrant and to otherwise perform its obligations under this Agreement.
(b) Governing Instruments. The Company has filed in its reports filed
---------------------
with the United States Securities and Exchange Commission (the "SEC
REPORTS") true, accurate and correct copies of the articles of
incorporation and bylaws of the Company and such articles of
incorporation and bylaws are the duly and legally adopted articles of
incorporation and bylaws of the Company in effect as of the date of
this Agreement.
(c) Subsidiaries, etc. Except as otherwise described in its SEC Reports,
-----------------
the Company does not have any direct or indirect ownership interest in
any corporation, partnership, joint venture, association or other
business enterprise. If any entity is described in the Company's SEC
Reports and the Company owns a controlling interest in such entity,
each of the representations and warranties set forth in this article
4.1 are being hereby restated with respect to such entity (modified as
appropriate to the nature of such entity).
(d) Qualification. The Company is duly qualified, licensed or
-------------
domesticated as a foreign corporation in good standing in each
jurisdiction wherein the nature of its activities or the properties
owned or leased by it makes such qualification, licensing or
domestication necessary and in which failure to so qualify or be
licensed or domesticated would have a material adverse impact upon its
business.
(e) Financial Statements. The Company's most recent financial statements
--------------------
contained in the Company's SEC Reports (i) are in accordance with the
books and records of the Company, (ii) present fairly the financial
condition of the Company at the balance sheets dates and the results
of its operations for the periods therein specified, and (iii) have,
in all material respects, been prepared in accordance with generally
accepted accounting principles applied on a basis consistent with
prior accounting periods. Without limiting the generality of the
foregoing, the balance sheets or notes thereto disclose all of the
debts, liabilities and obligations of any nature (whether absolute,
accrued or contingent and whether due or to become due) as of the date
of the Company's most recent financial
-5-
statements contained in the Company's SEC Reports, which, individually
or in the aggregate, are material and which in accordance with
generally accepted accounting principles would be required to be
disclosed in such balance sheets, and includes appropriate reserves
for all taxes and other liabilities accrued as of such dates but not
yet payable.
(f) Tax Returns and Audits. All required federal, state and local tax
----------------------
returns or appropriate extension requests of the Company have been
filed, and all federal, state and local taxes required to be paid with
respect to such returns have been paid or provision for the payment
thereof has been made. The Company is not delinquent in the payment of
any such tax or in the payment of any assessment or governmental
charge. The Company has not received notice of any tax deficiency
proposed or assessed against it, and it has not executed any waiver of
any statute of limitations on the assessment or collection of any tax.
None of the Company's tax returns have been audited by governmental
authorities in a manner to bring such audits to the Company's
attention. The Company does not have any tax liabilities except those
incurred in the ordinary course of business since January 1, 2003.
(g) Changes, Dividends, etc. Except for the transactions contemplated by
-----------------------
this Agreement, since the date of the Company's most recent financial
statements contained in the Company's SEC Reports, the Company has
not: (i) incurred any debts, obligations or liabilities, absolute,
accrued or contingent and whether due or to become due, except current
liabilities incurred in the ordinary course of business which will not
materially and adversely affect the business, properties or prospects
of the Company; (ii) paid any obligation or liability other than, or
discharged or satisfied any liens or encumbrances other than those
securing, current liabilities, in each case in the ordinary course of
business; (iii) declared or made any payment to or distribution to its
shareholders as such, or purchased or redeemed any of its shares of
capital stock, or obligated itself to do so; (iv) mortgaged, pledged
or subjected to lien, charge, security interest or other encumbrance
any of its assets, tangible or intangible, except in the ordinary
course of business; (v) sold, transferred or leased any of its assets
except in the ordinary course of business; (vi) suffered any physical
damage, destruction or loss (whether or not covered by insurance)
materially and adversely affecting the properties, business or
prospects of the Company; (vii) entered into any transaction other
than in the ordinary course of business; (viii) encountered any labor
difficulties or labor union organizing activities; (ix) issued or sold
any shares of capital stock or other securities or granted any
options, warrants, or other purchase rights with respect thereto other
than pursuant to this Agreement; (x) made any acquisition or
disposition of any material assets or become involved in any other
material transaction, other than for fair value in the ordinary course
of business; (xi) increased the compensation payable, or to become
payable, to any of its directors or employees, or made any bonus
payment or similar arrangement with any of its directors or employees
or increased the scope or nature of any fringe benefits provided for
its directors or employees; or (xii) agreed to do any of the foregoing
other than pursuant hereto. There has been no material adverse change
in the financial condition, operations, results of operations or
business of the Company since the date of the Company's most recent
financial statements contained in the Company's SEC Reports or most
recent draft delivered to the Investor.
-6-
(h) Title to Properties and Encumbrances. The Company has good and
------------------------------------
marketable title to all of its properties and assets, including
without limitation the properties and assets reflected on Company's
most recent financial statements contained in the Company's SEC
Reports and the properties and assets used in the conduct of its
business, except for property disposed of in the ordinary course of
business since the date of the Company's most recent financial
statements contained in the Company's SEC Reports, which properties
and assets are not subject to any mortgage, pledge, lease, lien,
charge, security interest, encumbrance or restriction, except (a)
those which are shown and described on the Company Disclosure Schedule
or the notes to the financial statements attached to the Company's
latest SEC Reports, (b) liens for taxes and assessments or
governmental charges or levies not at the time due or in respect of
which the validity thereof shall currently be contested in good faith
by appropriate proceedings, or (c) those which do not materially
affect the value of or interfere with the use made of such properties
and assets.
(i) Conditions of Properties. The plant, offices and equipment of the
------------------------
Company have been kept in good condition and repair in the ordinary
course of business.
(j) Litigation; Governmental Proceedings. There are no legal actions,
------------------------------------
suits, arbitrations or other legal, administrative or governmental
proceedings existing or, to the knowledge of the Company, threatened,
against the Company, or its properties or business, and the Company is
not aware of any pending investigations or facts which are likely to
result in or form the basis for any such action, suit or other
proceeding. The Company is not in default with respect to any
judgment, order or decree of any court or any governmental agency or
instrumentality. The Company has not been threatened with any action
or proceeding under any business or zoning ordinance, law or
regulation.
(k) Compliance With Applicable Laws and Other Instruments. To the best of
-----------------------------------------------------
the Company's knowledge, the business and operations of the Company
have been and are being conducted in all material respects in
accordance with all applicable laws, rules and regulations of all
governmental authorities. Neither the execution nor delivery of, nor
the performance of or compliance with, this Agreement nor the
consummation of the transactions contemplated hereby will, with or
without the giving of notice or passage of time, result in any breach
of, or constitute a default under, or result in the imposition of any
lien or encumbrance upon any asset or property of the Company pursuant
to, any agreement or other instrument to which the Company is a party
or by which it or any of its properties, assets or rights is bound or
affected, and will not violate the articles of incorporation or bylaws
of the Company. The Company is not in violation of its articles of
incorporation or bylaws nor in material violation of, or in material
default under, any lien, indenture, mortgage, lease, agreement,
instrument, commitment or arrangement in any material respect. The
Company is not subject to any restriction which would prohibit it from
entering into or performing its obligations under this Agreement.
(l) Convertible Note and Warrant. The Convertible Note is a legal, valid
----------------------------
and binding obligation of Company, enforceable in accordance with its
terms. The Warrant, when issued pursuant to the terms of this
Agreement, will be a binding obligation of the Company in accordance
with its terms. The Note Securities and the Warrant Shares have been
reserved for issuance and when issued upon exercise or conversion of
the Convertible Note or exercise of the Warrant will be duly
authorized, validly issued and
-7-
outstanding, fully paid, nonassessable and free and clear of all
pledges, liens, encumbrances and restrictions.
(m) Securities Laws. Based in part upon the representations of the
---------------
Investor in Section 3, no consent, authorization, approval, permit or
order of or filing with any governmental or regulatory authority is
required under current laws and regulations in connection with the
execution and delivery of this Agreement or the offer, issuance, sale
or delivery of the Convertible Note or Warrant, other than the
qualification thereof, if required, under applicable state securities
laws, which qualification has been or will be effected as a condition
of these sales, except applicable notices of exemption, such as a Form
D.
(n) Patents and Other Intangible Rights. To the best of the Company's
-----------------------------------
knowledge, the Company (a) owns or has the exclusive right to use,
free and clear of all material liens, claims and restrictions, all
patents, trademarks, service marks, trade names, copyrights, licenses
and rights with respect to the foregoing, used in the conduct of its
business as now conducted without infringing upon or otherwise acting
adversely to the right or claimed right of any person under or with
respect to any of the foregoing, (b) is not obligated or under any
liability whatsoever to make any payments of a material nature by way
of royalties, fees or otherwise to any owner of, licensor of, or other
claimant to, any patent, trademark, trade name, copyright or other
intangible asset, with respect to the use thereof or in connection
with the conduct of its business or otherwise, (c) owns or has the
unrestricted right to use all trade secrets, including know-how,
customer lists, inventions, designs, processes, computer programs and
technical data necessary to develop operation and sale of all products
and services sold or proposed to be sold by it, free and clear of any
rights, liens, or claims of others, and (d) is not using any
confidential information or trade secrets of others.
(o) Capital Stock. The authorized capital stock of the Company consists
-------------
of 100,000,000 common shares, US$0.001 par value, and 5,000,0000
shares of preferred stock, US$0.001 par value, of which no shares are
issued and outstanding. All of the outstanding shares of the Company
were duly authorized and validly issued and are fully paid and
nonassessable. There are no outstanding subscriptions, options,
warrants, calls, contracts, demands, commitments, convertible
securities or other agreements or arrangements of any character or
nature whatever, other than this Agreement, under which the Company is
obligated to issue any securities of any kind representing an
ownership interest in the Company. Neither the offer nor the issuance
of the Convertible Note or the Warrant constitutes an event, under any
anti-dilution provisions of any securities issued or issuable by the
Company or any agreements with respect to the issuance of securities
by the Company, which will either increase the number of shares
issuable pursuant to such provisions or decrease the consideration per
share to be received by the Company pursuant to such provisions. No
holder of any security of the Company is entitled to any pre-emptive
or similar rights to purchase any securities of the Company from the
Company; provided, however, that nothing in this section 4.1(o) shall
affect, alter or diminish any right granted to the Investor in this
Agreement or any previous right granted to the Investor by the
Company.
(p) Securities Act Compliance. All securities issued by the Company after
-------------------------
May 8, 2003, have been issued in full compliance with an exemption or
exemptions from the
-8-
registration and prospectus delivery requirements of the Securities
Act and from the registration and qualification requirements of all
applicable state securities laws.
(q) Outstanding Debt. The Company does not have any material indebtedness
----------------
incurred as the result of a direct borrowing of money, including, but
not limited to, indebtedness with respect to trade accounts, except as
set forth in the Company's most recent financial statements contained
in the Company's SEC Reports or the notes thereto. The Company is not
in default in the payment of the principal of or interest or premium
on any such indebtedness, and no event has occurred or is continuing
under the provisions of any instrument, document or agreement
evidencing or relating to any such indebtedness which with the lapse
of time or the giving of notice, or both, would constitute an event of
default thereunder.
(r) Assets and Contracts. The Company has filed all material agreements
--------------------
required to be filed or submitted with its SEC Reports under the rules
and regulations of the SEC. The Company has in all material respects
substantially performed all obligations required to be performed by it
to date and is not in default in any material respect under any of the
contracts, agreements, leases, documents, commitments or other
arrangements to which it is a party or by which it is otherwise bound.
All instruments material to the Company's business or otherwise
described in this section are in effect and enforceable according to
their respective terms, and there is not under any of such instruments
any existing material default or event of default or event which, with
notice or lapse of time or both, would constitute an event of default
thereunder. All parties having material contractual arrangements with
the Company are in substantial compliance therewith and none are in
material default in any respect thereunder.
(s) Corporate Acts and Proceedings. This Agreement has been duly
------------------------------
authorized by all necessary corporate action on behalf of the Company,
has been duly executed and delivered by authorized officers of the
Company, and is a valid and binding agreement on the part of the
Company that is enforceable against the Company in accordance with its
terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency, moratorium, reorganization or other similar
laws affecting the enforcement of creditors' rights generally and to
judicial limitations on the enforcement of the remedy of specific
performance and other equitable remedies. All corporate action
necessary to the authorization, creation, reservation, issuance and
delivery of the Convertible Note and Warrant and the common shares
acquirable upon exercise of the Warrant or conversion of the
Convertible Note has been taken by the Company, or will be taken by
the Company on or prior to the Closing.
(t) Accounts Receivable. To the extent that they exceed the reserves for
-------------------
doubtful accounts set forth in the most recent financial statements
contained in the Company's SEC Reports, the accounts receivable which
are reflected in such financial statements and all accounts receivable
of the Company which have arisen since the latest date of the balance
sheet contained in such financial statements (except such accounts
receivable as have been collected) are valid and enforceable claims,
and the goods and services sold and delivered which gave rise to such
accounts were sold and delivered in conformity with the applicable
purchase orders, agreements and specifications. To the best of the
Company's knowledge, such accounts receivable are subject to no valid
defense or offsets except routine customer complaints or warranty
demands of an immaterial nature.
-9-
The reserve for doubtful accounts that is included in the most recent
financial statements contained in the Company's SEC Reports is
adequate.
(u) Inventories. The inventories of the Company which are reflected in
-----------
the most recent financial statements contained in the Company's SEC
Reports and all inventory items which have been acquired since the
latest date of the balance sheet contained in such financial
statements consist of raw materials, supplies, work-in-process and
finished goods of such quality and quantities as are currently usable
or salable in the ordinary course of its business.
(v) Purchase Commitments and Outstanding Bids. No material purchase
-----------------------------------------
commitment of the Company is in excess of normal, ordinary and usual
requirements of its business, or was made at any price in excess of
the then current market price, or contains terms and conditions more
onerous than those usual and customary in the industry. There is no
outstanding material bid, sales proposal, contract or unfilled order
of the Company which (a) will, or could if accepted, require the
Company to supply goods or services at a cost to the Company in excess
of the revenues to be received therefrom, or (b) quotes prices which
do not include a xxxx-up over reasonably estimated costs consistent
with past xxxx-ups on similar business or market conditions current at
the time.
(w) Insurance Coverage. There are in full force policies of insurance
------------------
issued by insurers of recognized responsibility insuring the Company
and its properties and business against such losses and risks, and in
such amounts, as in the Company's best judgment, after advice from its
insurance broker, are acceptable for the nature and extent of such
business and its resources.
(x) No Brokers or Finders. No person, firm or corporation has or will
---------------------
have, as a result of any act or omission of the Company, any right,
interest or valid claim against the Company or the Investor for any
commission, fee or other compensation as a finder or broker in
connection with the transactions contemplated by this Agreement. The
Company will indemnify and hold the Investor harmless against any and
all liability with respect to any such commission, fee or other
compensation which may be payable or determined to be payable in
connection with the transactions contemplated by this Agreement.
(y) Conflicts of Interest. No officer, director or shareholder of the
---------------------
Company or any affiliate (as such term is defined in Rule 405 under
the Securities Act) of any such person has any direct or indirect
interest (a) in any entity which does business in excess of US$10,000
with the Company, (b) in any property, asset or right with a value in
excess of US$10,000 which is used by the Company in the conduct of its
business, or (c) in any contractual relationship with the Company
other than as an employee, the proceeds of which will exceed
US$10,000. For the purpose of this section 4.1(y), there shall be
disregarded any interest which arises solely from the ownership of
less than a 5% equity interest in a corporation whose stock is
regularly traded on any national securities exchange or in the
over-the-counter market.
(z) Licenses. The Company possesses from the appropriate agency,
--------
commission, board and government body and authority, whether state,
local or federal, all licenses, permits, authorizations, approvals,
franchises and rights which are (a) necessary for it to engage in the
business currently conducted by it, and (b) if not possessed by the
Company would
-10-
have an adverse impact on the Company's business. The Company has no
knowledge that would lead it to believe that it will not be able to
obtain all licenses, permits, authorizations, approvals, franchises
and rights that may be required for any business the Company proposes
to conduct.
(aa) Disclosure. The Company has not knowingly withheld from the Investor
----------
any material facts known to the Company and relating to the assets,
business, operations, financial condition or prospects of the Company.
No representation or warranty in this Agreement or in any certificate,
schedule, statement or other document furnished or to be furnished to
the Investor pursuant hereto or in connection with the transactions
contemplated hereby contains or will contain any untrue statement of a
material fact or omits or will omit to state any material fact
required to be stated herein or therein or necessary to make the
statements herein or therein not misleading.
(bb) Retirement Plans. The Company does not have any retirement plan in
----------------
which any employee of the Company participates that is subject to any
provisions of the Employee Retirement Income Security Act of 1974 and
of the regulations adopted pursuant thereto ("ERISA").
(cc) Environmental and Safety Laws. The Company has not received any
-----------------------------
notice that it is in violation of any applicable statute, law or
regulation relating to the environment or occupational health and
safety, and to the best of the Company's knowledge no material
expenditures are or will be required in order to comply with any such
existing statute, law or regulation.
(dd) Employees. To the best of the Company's knowledge, no officer of the
---------
Company or employee of the Company (whose annual compensation is in
excess of US$20,000) has any plans to terminate his or her employment
with the Company. Except for the accrual of salaries disclosed in the
Company Disclosure Schedule, the Company has complied in all material
respects with all laws relating to the employment of labor, including
provisions relating to wages, hours, equal opportunity, collective
bargaining and payment of Social Security and other taxes, and the
Company has not encountered any material labor difficulties. The
Company does not have any worker's compensation liabilities.
(ee) Absence of Restrictive Agreements. To the best of the Company's
---------------------------------
knowledge, no employee of the Company is subject to any secrecy or
non-competition agreement or any agreement or restriction of any kind
that would impede in any way the ability of such employee to carry out
fully all activities of such employee in furtherance of the business
of the Company. To the best of the Company's knowledge, no employer or
former employer of any employee of the Company has any claim of any
kind whatsoever in respect of any of such rights.
4.2 CONDUCT OF BUSINESS. In order to induce the Investor to enter into this
-------------------
Agreement and to purchase the Convertible Note and Warrant, the Company
hereby covenants and agrees that during the period from the execution and
delivery of this Agreement and continuing until the later of September 30,
2005 or until the Convertible Note has been exercised, converted or paid in
full, except as expressly agreed to in writing, the Company shall not do,
cause or permit any of the following, without the prior written consent of
Investor, which consent shall not be unreasonably withheld, conditioned or
delayed:
-11-
(a) Material Contracts. Enter into any material contract or commitment,
------------------
or violate, amend or otherwise modify or waive any of the terms of any
of its material contracts in any case, other than in the ordinary
course of business;
(b) Issuance of Securities. Except as contemplated in this Agreement or
----------------------
as set forth on the Company Disclosure Schedule, issue, deliver or
sell or authorize or propose the issuance, delivery or sale of, or
purchase or propose the purchase of, any shares of its capital stock
or securities convertible into, or subscriptions, rights, or options
to acquire, or other agreements or commitments of any character
obligating it to issue, any such shares or other convertible
securities, other than the issuance of shares of its common stock
pursuant to the exercise of stock options or other rights therefor
outstanding as of the date of this Agreement;
(c) Intellectual Property. Convey, license, assign or otherwise transfer
---------------------
to any person or entity any rights to its intellectual property rights
or assets other than in the ordinary course of business;
(d) Exclusive Rights. Enter into or amend any agreements pursuant to
----------------
which any other party is granted exclusive marketing or other
exclusive rights of any type or scope with respect to any of its
products or technology;
(e) Dispositions. Sell, lease, license or otherwise dispose of or
------------
encumber any of its properties or assets which are material
individually or in the aggregate, to it and its business, taken as a
whole, except in the ordinary course of business;
(f) Indebtedness. Incur any indebtedness for borrowed money or guarantee
------------
any such indebtedness or issue or sell any debt securities or
guarantee any debt securities of others;
(g) Leases. Enter into any operating lease in excess of US$20,000;
------
(h) Payment of Obligations. Pay, discharge or satisfy in an amount in
----------------------
excess of US$10,000 in any one case or US$50,000 in the aggregate, any
claim, liability or obligation (absolute, accrued, asserted or
unasserted, contingent or otherwise) arising other than in the
ordinary course of business, other than the payment, discharge or
satisfaction of liabilities reflected or reserved against in the
Company's financial statements for the quarter ended March 31, 2005 or
incurred in the ordinary course of business;
(i) Capital Expenditures. Make any capital expenditures, capital
--------------------
additions or capital improvements in excess of US$25,000, except in
the ordinary course of business;
(j) Insurance. Materially reduce the amount of any material insurance
---------
coverage provided by existing insurance policies;
(k) Termination or Waiver. Terminate or waive any right of substantial
---------------------
value, other than in the ordinary course of business;
(l) Employee Benefit Plans; New Hires; Pay Increases. Adopt or amend any
------------------------------------------------
employee benefit or stock purchase or option plan obligating the
Company to issue more than 100,000 shares of common stock in
aggregate, pay any special bonus or special
-12-
remuneration exceeding US$5,000 individually or US$20,000 in the
aggregate to any employee or director (except payments made pursuant
to written agreements outstanding on the date of this Agreement), or
increase the salaries or wage rates of its employees except in the
ordinary course of business;
(m) Severance Arrangements. Grant any severance or termination pay (i) to
----------------------
any director or officer or (ii) to any other employee except (A)
payments made pursuant to written agreements outstanding on the date
hereof or (B) grants which are made in the ordinary course of business
in accordance with its standard past practice;
(n) Lawsuits. Commence a lawsuit other than (i) for the routine
--------
collection of bills or (ii) in such cases where it, in good faith,
determines that failure to commence suit would result in the material
impairment of a valuable aspect of its business;
(o) Acquisitions. Acquire or agree to acquire by merging or consolidating
------------
with, or by purchasing a substantial portion of the assets of, or by
any other manner, any business or any corporation, partnership,
association or other business organization or division thereof or
otherwise acquire or agree to acquire any assets which are material
individually or in the aggregate, to its business, taken as a whole;
(p) Taxes. Other than in the ordinary course of business, make or change
-----
any material election in respect of taxes, adopt or change any
accounting method in respect of taxes, settle any material claim or
assessment in respect of taxes; or
(q) Revaluation. Revalue any of its assets, including without limitation
-----------
writing down the value of inventory or writing off notes or accounts
receivable other than in the ordinary course of business or as
required by US GAAP.
5. GENERAL
5.1 Should the Company desire to sell any newly issued securities, the Company
shall provide written notice to the Investor in the following manner (the
"OFFER NOTICE"). The Offer Notice must specify all of the terms and
conditions of the proposed sale, but may omit the identity of the proposed
purchaser(s) (collectively, the "PROPOSED PURCHASER"). The Investor shall
have the option, but not the obligation, within five (5) business days
after receipt of the Offer Notice to purchase all of the securities
specified in the Offer Notice ("OFFERED SECURITIES") at the price and on
all the terms stated in the Offer Notice, including, without limitation,
the closing date and manner of delivery of funds. If the Investor does not
elect to purchase the Offered Securities within said five (5) business day
period, then the Company shall be under no obligation to sell any of the
Offered Stock to the Investor but may instead sell any portion of the
Offered Stock to the Proposed Purchaser at the price and on the terms and
conditions specified in Offer Notice, within ninety (90) days of delivery
to the Investor of the Offer Notice. The Company may not, however, without
giving a new notice of its intention to so do pursuant to this Section 5.1,
sell any or all of the Offered Securities beyond said ninety (90) day
period or at any other price or on any terms and conditions other than
those specified in the Offer Notice.
5.2 The Company agrees to pay to, or at the direction of, the Investor an
amount equal to the attorney's fees and other expenses incurred by Investor
in connection with the Investor's due
-13-
diligence investigation, document preparation and other expenses for the
transactions contemplated by this Agreement.
5.3 For the purposes of this Agreement, time is of the essence.
5.4 The parties will sign and deliver all further documents and instruments and
do all things that may, either before or after the signing of this
Agreement, be reasonably required to carry out the full intent and meaning
of this Agreement.
5.5 This Agreement may not be assigned by either party hereto.
5.6 All notices, requests, consents and other communications required or
permitted hereunder shall be in writing and shall be delivered, or mailed
first-class postage prepaid, registered or certified mail, if to the
Investor at its address as shown below, or at such other address as such
holder may specify by written notice to the Company, or if to the Company
at the address set forth above, Attention: President; or at such other
address as the Company may specify by written notice to the Investor; and
such notices and other communications shall for all purposes of this
Agreement be treated as being effective or having been given if delivered
personally, or, if sent by mail, when received.
5.7 All representations and warranties contained herein shall survive the
execution and delivery of this Agreement. All statements contained in any
certificate, instrument or other writing delivered by or on behalf of the
Company pursuant to this Agreement or in connection with or in
contemplation of the transactions herein contemplated shall constitute
representations and warranties by the Company hereunder.
5.8 This Agreement and the agreements contemplated herein contain the entire
understanding of the parties with respect to the transactions contemplated
in this Agreement and the terms of this Agreement expressly replace and
supersede any prior oral or written communication, understanding or
agreement among the parties and this Agreement may be amended only by
agreement in writing executed by the parties.
5.9 Each Party acknowledges that it has been advised by the other to seek
independent legal and financial (including tax) advice with respect to this
Agreement and that it has not relied on the other party for any advice,
whether legal or otherwise, with respect to this Agreement.
5.10 This Agreement shall be interpreted neutrally and no construction against
the drafter shall be permitted.
5.11 It is the intention of the parties hereto that this Agreement and the
performance hereunder shall be interpreted and construed in accordance with
and pursuant to the laws of the State of California.
5.12 This Agreement may be signed by the parties in as many counterparts as may
be deemed necessary, each of which so signed will be deemed to be an
original, and all counterparts together will constitute one and the same
instrument. A signed copy of this Agreement transmitted by facsimile will
be treated and relied on for all purposes by any person as an originally
signed copy.
5.13 In the event any legal action is instituted by any party to this Agreement
for the purpose of enforcing or interpreting any provision of this
Agreement or any other agreement arising under or
-14-
relating to this Agreement, the prevailing party in such action shall be
entitled to recover its reasonable attorneys' and expert witness fees and
costs.
[Signature Pages Follow]
-15-
TO BE COMPLETED BY THE INVESTOR
-------------------------------
A. REGISTRATION INSTRUCTIONS The name and address of the person in whose
name the Convertible Note and Warrant are to be registered is as follows:
------------------------------------------------------------
Name
------------------------------------------------------------
Address
------------------------------------------------------------
City, State Zip Code
B. DELIVERY INSTRUCTIONS. The name and address of the person to whom the
Convertible Note and Warrant certificate referred to in paragraph A above
are to be delivered is as follows (if the name and address is the same as
was inserted in paragraph A above, then insert "N/A"):
------------------------------------------------------------
Name
------------------------------------------------------------
Address
------------------------------------------------------------
City, State Zip Code
Attn:
------------------------------------------------------------
The Investor has signed this Agreement as of the ____ day of June, 2005.
---------------------------------------------
Signature of Investor
---------------------------------------------
Title (if applicable)
-16-
ACCEPTANCE
Signed and Accepted this ____ day of June, 2005.
RAPIDTRON, INC.
By:
---------------------------------------------
Authorized Signatory
-17-
COMPANY DISCLOSURE SCHEDULE
-18-
EXHIBIT A
FORM OF CONVERTIBLE NOTE
-19-
EXHIBIT B
FORM OF WARRANT TO PURCHASE COMMON STOCK
-20-
EXHIBIT C
FORM OF SECURITY AGREEMENT
-21-
EXHIBIT D
FORM OF REGISTRATION RIGHTS AGREEMENT
-22-
