-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jf3VwZeXFYFvrviRfYkBwps9BtlY/Oc/RiqCBv/KqSbFQ10kunDpkszvZe0L/5x8 ipYOTnAfB92IZ9+B07VfCA== 0001015402-05-001934.txt : 20050415 0001015402-05-001934.hdr.sgml : 20050415 20050415164948 ACCESSION NUMBER: 0001015402-05-001934 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050415 DATE AS OF CHANGE: 20050415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAPIDTRON INC CENTRAL INDEX KEY: 0001125028 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 880455472 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-31713 FILM NUMBER: 05754223 BUSINESS ADDRESS: STREET 1: 3151 AIRWAY AVENUE STREET 2: BUILDING Q CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 949-798-0652 MAIL ADDRESS: STREET 1: 3151 AIRWAY AVENUE STREET 2: BUILDING Q CITY: COSTA MESA STATE: CA ZIP: 92626 FORMER COMPANY: FORMER CONFORMED NAME: FURNISHING CLUB DATE OF NAME CHANGE: 20001005 10KSB 1 body_10ksb.txt RAPIDTRON 10-KSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-KSB ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 Commission file number 000-31713 RAPIDTRON, INC (Name of small business issuer in its charter) Nevada 88-0455472 (State or other jurisdiction (IRS Employer of incorporation) Identification No.) 3151 Airway Avenue, Building Q 92626 Costa Mesa, California (Zip Code) (Address of principal executive offices) Issuers telephone number 949-798-0652 Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ ] Yes [X] No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this form 10-KSB [x] Issuer's revenues for its most recent fiscal year: $2,037,130. The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of March 28, 2005, was approximately $6,000,409 based upon the closing price of the Registrant's Common Stock on such date. There were 20,691,067 shares of Common Stock outstanding as of March 28, 2005. Documents incorporated by reference. Our definitive proxy solicitation on Schedule 14A for our annual meeting of the stockholders to be filed with the Commission on or before 120 days following the end of our fiscal year, is incorporated herein by reference in Items 5, 9, 10, 11, 12, 13 and 14. Transitional Small Business Disclosure Format (Check one): Yes ; No X --- --- TABLE OF CONTENTS ITEM 1. DESCRIPTION OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . 2 ITEM 2. DESCRIPTION OF PROPERTY. . . . . . . . . . . . . . . . . . . . . . 8 ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASER OF EQUITY SECURITIES . . . . . . . . . . . . . 8 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS . . . . . . . . . . . . . .10 ITEM 7. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . .21 ITEM 8A. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . .49 ITEM 8B. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . .49 ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . .51 ITEM 10. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . .51 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . .51 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . .51 ITEM 13. EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES . . . . . . . . . . . . .52 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53 ITEM 1. DESCRIPTION OF BUSINESS Overview We are headquartered in Costa Mesa, California, and we intend to become the leading provider of Radio Frequency ("RF") smart card access control and ticketing/membership systems by providing the premier technology for operator-free entry and exit turnstiles. We are currently the exclusive North American distributor for Axess AG, an Austrian developer and manufacturer of software and equipment for entry and exit control utilizing bar code and Smart chip technology. The equipment consists of cards, card readers, turnstiles, radio frequency emitters and other equipment which may be identified as useful in a particular market. Axess AG manufactures some of the equipment components and assembles others manufactured by various European vendors. Axess AG has installed its RF smart card technology in over 5,000 smart access gates and 2,100 point-of-sale systems to transit companies and vacation resorts in Europe. We provide marketing research, sales, installation, software integration and customer service for products purchased from Axess AG and sold under the Rapidtron brand name. We contract additional marketing research from Equus Marketing, a related party. We sell turnstiles with door, counter and handheld readers manufactured by Axess AG to the fitness, university, and winter resorts industries in North America utilizing two technologies, RF smart chip (ISO standard smart cards, key cards and ID bracelets) and bar code tickets. The RF smart cards are contactless with multilevel read/write capabilities for debit/credit, affinity/loyalty programs, access, parking, and doors. The bar code tickets are an inexpensive, read only medium for access operations. In Europe, Axess AG provides a complete software package as part of the system it sells. In North America, the resort, fitness and university markets prefer to buy their software solutions separately and do not purchase turnkey solutions because they often customize the software for their individual enterprises. We develop the interface software and own the rights to these interfaces. We are currently selling the access products to fitness clubs, winter resorts and universities. We continue to work with Axess AG to research and develop new products for these industries and other markets in North America. Corporate History Rapidtron, Inc., a Nevada corporation, was formerly known as The Furnishings Club and was formed March 22, 2000, with the intent to be an online retailer of furniture and home accessories. However, as a result of the difficulty in raising additional working capital to execute the business plan, the company abandoned its plan of operation and sought to acquire another business. On September 30, 2002, we changed our name to Rapidtron, Inc., a Nevada corporation, in anticipation of a merger with Rapidtron, Inc., a Delaware corporation ("Rapidtron Delaware"). We closed the acquisition of Rapidtron Delaware on May 8, 2003. Immediately prior to the acquisition, we had 20,000,000 shares authorized and 19,993,752 shares of common stock issued and outstanding. Pursuant to the acquisition, all of the 10,052,000 issued and outstanding shares of Rapidtron Delaware (including 128,000 shares for the settlement of accrued salaries) were exchanged for 9,600,000 shares of our company on a 0.955 to 1 basis. Concurrent with our acquisition of Rapidtron Delaware, 13,943,750 shares of our common stock were cancelled. As a result, immediately after the acquisition, we had 15,650,002 shares of common stock issued and outstanding. Immediately after the acquisition, the officers and directors of the company resigned and management of Rapidtron Delaware took control of such positions, therefore effecting a change of control. As a result, the transaction was recorded as a "reverse merger" whereby Rapidtron Delaware was considered the accounting acquirer as it retained control of the company after the merger. However, legally Rapidtron Delaware became a wholly-owned subsidiary of the company after the acquisition. Since The Furnishings Club's continuing operations and balance sheet are insignificant, all financial data and management, discussion and analysis are those of Rapidtron Delaware, before and after the acquisition. Principal products and services and their markets We distribute the access control systems manufactured by or on behalf of Axess AG. We have an exclusive distribution agreement for the North American market with Axess AG. We sell, install and service all North American installations for Axess AG. Axess AG developed and manufactured these systems based in part on our market research completed over the past six years. These systems are versatile and read either bar code or RF smart cards and other media (tags, ID bracelets, etc.). This dual capability allows a venue to issue and re-issue numerous types and durations of access privilege cards. Bar code tickets and cards are commonly found in grocery stores where they are read at check-out counters. Bar code tickets and cards are also common at fitness clubs where they are checked by operator-assisted manual scanning done at front desk entry, and athletic and amusement venues where tickets are manually checked, or manually scanned by staff members at entry to the arena or amusement park. RF smart cards, a technology that has been in existence since 1988, but primarily in Europe, incorporate an antenna and a 2K memory chip and microprocessor laminated between two plastic sheets. Our RF smart cards provide passive contact-less identification technology. These cards require no electrical contacts, or visual contact. Our RF smart cards operate in harsh environmental conditions such as skiing at winter resorts in extreme temperatures. They also provide handsfree operation at the turnstile, as the long range antennas can read the cards in the pockets of the skier without being removed and placed near the reader. Our RF smart cards have read/write memory, which means the card, when read by one of our RF ID readers, can read the data on the card, debit (points or cash) and write new data in addition to the value stored on the card. Our RF smart card is passive, which means it is powered by the reader field, unlike an active card (transponder) with a battery. Our card and reader has a reading range of 10 to 120 centimeters. This allows the card to be utilized for hands-free operation. The range of 10 to 120 centimeters is totally dependent on the size of the antenna. Our indoor system of satellite readers provides proximity reading of smart cards at a range of up to 10 centimeters, and our resort systems with long range antennas can read cards at a range of up to 120 centimeters for hands free operation. The Rapidtron smart card utilizes a 13.56 MHZ transponder for fast communication speed. We currently utilize the ISO 15693 standard chip. Our automated system allows a fitness club to use its existing bar code membership cards to start and upgrade to smart cards at any time. We can incorporate smart card debit/credit technology for retail purchases for a wallet-less workout or visit. Our system offers a variety of read/write smart media: cards, key fobs, and ID bracelets, for multifunctional capabilities including access, debit/credit and affinity/loyalty programs, parking and other uses. Our unique printers can issue both bar code tickets and smart cards. Our smart cards come with four color printing on the front with the client's design. Utilizing our Thermo printer, the reverse side can be printed on site with photos and copy that can be removed and reprinted when re-programming the smart cards on the printer. As a result, our Thermo read/write smart cards are 100% recyclable. Our proven technology has been in operation for six years with approximately 5,200 access and 2,350 point of sale systems in Europe and North America. The European installations were sold, installed and serviced by Axess AG. The products sold by Axess AG in Europe include a "turnkey" software solution that integrates the access control equipment with the home office software used by the customer to manage its consumer information. In North America, our Axess AG products include an open architecture software that allows us to customize the integration software that communicates between the access control equipment and the customer's home office. In 2004, we acquired a COM DLL integration software developed exclusively for us by a Canadian software company. This integration software makes it easy for our customers to integrate their existing operating software with the software used in the smart card turnstile system. This allows them to begin using the turnstiles to automatically communicate to their main computer program they used prior to purchasing our system. Because it is a COM DLL software, the customer can change parts of its operating software or update the software used in the smart card turnstile system without requiring a reconfiguration of either software. We have and continue to research the North American market for applications of the Axess systems and report back to Axess AG's research and development department regarding what changes in software and equipment are required to met the needs of specific industries. Please see subheading "Research and Development" below for further detail about our R&D investment. We have defined the following three industries that we are currently targeting: (1) fitness, (2) winter resorts, and (3) universities. We have established a presence in the North American marketplace by providing the smart card access control systems manufactured by Axess AG to Copper Mountain in Colorado, Park City Resort in Utah, and Tamarack Ski Resort in New York, and the bar code system to the University of California, Berkeley, and the University of California at Los Angeles and several leading fitness clubs. We anticipate having additional orders from Park City, Copper Mountain, UC Berkeley, and several other winter resorts and fitness clubs in 2005. Rapidtron works with Axess AG and develops new and enhanced products for our targeted markets. When testing these products, Rapidtron and Axess AG select Beta sites to test the new product under agreements with Rapidtron. We strive to contract with industry leaders to perform the Beta testing. Concurrently with the testing of the Beta sites, Rapidtron markets the new product to key players in the market, identified by Rapidtron during its market research phase. Rapidtron sells the products and provides customer service support for both the equipment and the software, some of which is provided through its distribution agreement with Axess AG, and some of which Rapidtron provides directly. Distribution methods of the products or services All our products and services are currently sold through commissioned sales representatives or direct selling. We currently have 9 commissioned independent sales representatives. After successfully testing in the market at the Beta sites mutually agreed upon by Rapidtron and Axess AG, we launch our marketing programs and new equipment at the next major trade show. Prior to the trade show, we provide information to the market through advertising, public relations programs and our web site. We develop and publish marketing materials such as brochures and manuals specific to each industry. We train sales representatives working directly with Rapidtron or through agreements with outside agencies. We educate the sales representatives about our product benefits and the estimated return on investment based upon our market research. We then sell the products and provide customer service support for both the equipment and the software, some of which is provided through our distribution agreement with Axess AG, and some of which Rapidtron provides directly. The majority of our equipment is supplied by Axess AG, while other peripheral items such as ADA gates and platforms are supplied by local vendors. We also plan to sell service contracts in the future to large customers with several options including full service with parts, software support and yearly visits. We issue purchase orders to Axess AG, which delivers the equipment with shipping terms of "FOB place of shipment". We generate our orders based upon the orders generated and sales forecasts that are made based on leads generated by contacts made by our sales representatives, at trade shows and mailers. Our orders are updated monthly with a rolling one year forecast. We receive shipments from Axess AG, assemble them with IP addresses and make other modifications as required by each order. We then ship the products to the customer with an accompanying packing slip and invoice to each location as specified. We coordinate and provide installation of the equipment and software for a fee, or for large clients, we provide the integration software and training so the customer can provide their own installation service. As part of our distribution process, we develop plans for software (firmware) and equipment and the manufacturing of smart cards and assembly of the access control products, primarily indoor and outdoor turnstiles and bar code and smart card readers. Competition We have focused on two main niche markets in the lifestyle and active sports industries, namely Fitness and Winter Resorts. We know of only one competitor in the winter resort market, Ski Data. As of the date of this annual report, we believe that Ski Data has not successfully interfaced with any of the ski slope software providers in North America. We have successfully interfaced with all three providers (Comptrol, Siriusware and RTP), which resulted in the sale to Copper Mountain (Siriusware), Park City (RTP), and Tamarack Resort (RTP). We believe we offer the broadest range of products with access readers and turnstiles offering both smart and Bar Code technology in the North American fitness market. We also believe that we are the only company in the fitness market that has developed a product that successfully interfaces with the seven leading software management providers in the fitness industry, Aphelion, ASF, CSI, Check Free, Twin Oaks, Computer Outfitters and CSI. The transit industry has several large access system providers, who are primarily magnetic stripe based but are now offering smart card systems as well. We have had no sales to the transit industry since 2002. We are not currently targeting this industry, but we may do so in the future. Our partner, Axess AG, has been successful in installing its access platform in most of the large winter resorts in Europe over the past six years and has approximately 5,000 access systems and 2,100 POS (point of sale) stations in operation. Axess AG manages the sales and service to the European market, while Rapidtron manages the sales and service to the North American market. Principal supplier and sources and availability of raw materials We rely upon Axess AG for our supply of inventory. Our agreement with Axess AG expires upon the last day of April following at least 12-months advance written notice. No notice to terminate has been delivered by either party to date. Axess AG has its own printing and assembly plant for four color bar code tickets and RF smart cards. Axess AG orders RF chips primarily from Texas Instruments (ISO 15963) and laminates them to a special plastic that will not delaminate at extreme temperatures for the winter resort industry. Axess AG can print four colors on both sides and have a special coating on the reverse side to accept thermo printing so that the client can erase printing while reprogramming the smart card using the Axess AG printer. Axess AG has the manufacturing capabilities to meet the growth projected in the North American market over the next five years and has not experienced problems in sourcing raw materials in five years of production. Rapidtron has identified additional manufacturing facilities within the United States that could be utilized to meet other product needs if the demand exceeds the production capacity of Axess AG. Dependence on one or a few major customers During the year ended December 31, 2004, approximately 67% of our sales were derived from sales to one major customer, Bally Total Fitness. Our strategy is to develop a mix of markets and clients that will reduce our dependence on any one major customer. Distribution Agreement Rapidtron Delaware entered into an exclusive distribution agreement dated May 6, 2000 with Axess AG. The term of the agreement is open-ended, but either party may terminate the agreement at the end of April of any year following at least 12-months advance written notice. Purchase Obligations under this agreement were waived by Axess AG. Under the terms of the distribution agreement, we have the exclusive right to market Axess AG access control systems in North America to the transportation, fitness club, amusement park and ski resort industries and to universities and colleges. Axess AG assists us with our marketing efforts, providing Rapidtron with product and marketing images, customer testimonies and other sales. In addition, Axess AG provides Rapidtron with technical assistance and product support as needed at no additional cost. Government approval of principal product Axess AG supplies Rapidtron its Radio Frequency (RF) readers and long-range antennas (AX400 series). As part of our agreement and contract with Axess AG, they are responsible for passing all standards required by the Federal Communications Commission (FCC). The FCC regulates our RF readers and long-range antennas for health and safety issues and to prevent interference with other radio frequency uses such as airports, cell phones and traditional radios. Testing laboratories (sometimes referred to as underwriting laboratories) are accredited by the FCC to conduct tests required for FCC approval, and to grant the approval subject to FCC review. Axess AG is preparing test equipment for Rapidtron to submit to a local accredited underwriter laboratory for review and documentation including pictures. The equipment is scheduled to be submitted in September of this year. Our personnel with technical support from Axess AG will be on hand through the testing process until final approval is reached (a process of one to two days). New equipment is being tested by Axess AG at this time to meet or exceed all regulations and will be submitted to the testing certification lab in September. The required equipment we will submit for testing is our long-range radio frequency antenna with accompanying reader. Austria and the European Union have similar regulations. Axess AG has passed all European standards with an accredited testing laboratory in Vienna. We expect to receive approval in the United States in the third quarter of 2005. We must also meet governmental standards applicable to general consumer and industrial products covering issues such as what temperature does a product become combustible (fire) and if the product can explode if dropped from a set minimum height. There is a common standard acceptable by all European agencies. Our complete system of turnstile, reader, power supply and antenna is also in the process of passing the underwriter laboratory's standards for fire, explosion and drop damage in Austria. This underwriter laboratory has been accredited by the U.S. government for testing, documenting and issuing approvals for regulations set by the government. When approved, our test results are forwarded to the respective governmental agency and is automatically approved unless notified of a problem. Canada and the U.S. have reciprocal agreements that will accept the results of the underwriter laboratory, and therefore, our products will meet the government requirements once we have met the standards set by the underwriter laboratory. Most of the equipment we have sold to date utilizes the bar code scanner and not the RF reader, and therefore is not subject to FCC regulations. We have very few RF antennas in operation unlike Europe that is almost completely RF. If the RF products cannot pass the tests after all changes have been tried, we will have to cease and desist from selling the RF product and remove all current products in use until we can produce a new unit that can pass. Rapidtron has sold only 23 long-range RF antennas to date and will not be selling more until August 2005, when we hope to have passed all tests. If we had to remove and change the current antennas the costs to replace and re-install would be about $23,000. Axess AG would participate in the cost, depending upon the problem. The equipment we sell has been in use for ten years in Europe without any problems arising from customers and employees passing through the entries and exits where the equipment and specifically the RF antennas are placed. As a result, we do not anticipate any problem with meeting the U.S. government standards for safety. Research and development We have spent approximately $228,000 for software development and $12,000 for product development since our inception in January 2000, none of which are directly or indirectly borne by any existing or future clients, including approximately $25,000 for the year ended December 31, 2004. We hope to be able to allocate up to 5% of our operating expenses to additional software development and interface expenses with outside software suppliers over the next 12 months. We continue product review and research through the year and report our findings to Axess AG for review and implementation on a quarterly basis. The result from this research and input is a new circuit board for quicker response times, and the development of the new AX500 indoor turnstile and reader system for application in the Fitness and University markets. Rapidtron's management makes quarterly visits to Axess AG to promote efficiency and coordinate all programs of marketing, product development, pricing and manufacturing. Axess AG's process starts with product specification, development and testing. Our product development process also includes styling and manufacturing cost analysis. We order the various components that have been successfully tested. An outside vendor under contract with Axess AG mills the turnstile and reader heads. Axess AG then assembles all components for a finished product and quality control tests every order before shipping to Rapidtron. Rapidtron quality tests all product prior to shipping. Software development is an on-going process, and Rapidtron tests software with certain equipment on a regularly scheduled basis. Our product and service development strategy is to present solutions and programs that create new functionality and revenue opportunities for us and our customers. We recently developed and installed our new automatic ADA (Americans with Disabilities Act) gate and automatic, drop arm (panic) release turnstile at the University of California, Berkeley. In July of 2005, we are scheduled to introduce and begin selling a new streamline indoor system that will be sold to Fitness and University customers. We are in the process of developing a platform that may create new revenue opportunities to fitness centers and other potential industries by using our smart card with an e-purse and debit back office system. Our secure smart card technology could be programmed to act as a debit card, which allows members to use their admittance card for purchases at health clubs. We have presented our smart card platform to four large fitness chains in the past four months, and plan to evaluate and test the concept in one or more health clubs in 2005. To be successful, we will need to demonstrate that the benefits of our smart card platform, including data management, revenue potential and member acceptance, outweigh the cost associated with switching from inexpensive bar code card legacy systems. Since September 11th, there has been renewed interest in biometric technology for admittance and other uses. We are currently testing both finger scanning and face recognition for use in tandem with smart cards. This could increase processing speed and the accuracy of the biometric technology, the primary barriers for commercializing this technology. Our system is designed and engineered to accommodate new advances and additions such as biometrics to help mitigate this problem and allow our clientele to constantly upgrade as required or desired. Employees We currently have 6 full time and 2 part time employees and 9 commissioned sales representatives. We anticipate the need to hire additional staff, continue development and refine our operations to meet customer needs. We may hire between two to three new employees, a software and hardware support technician and one to two software engineers during the next 12 months. ITEM 2. DESCRIPTION OF PROPERTY We lease our principal corporate and executive offices at 3151 Airway Avenue, Building Q, Costa Mesa, CA 92626, on a month-to-month basis from a related party. We do not currently maintain any investments in real estate, real estate mortgages or securities of persons primarily engaged in real estate activities, nor do we expect to do so in the foreseeable future. PART II ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASER OF EQUITY SECURITIES Our common stock is quoted on the OTC Bulletin Board which is sponsored by the National Association of Securities Dealers (NASD). The OTC Bulletin Board is a network of security dealers who buy and sell stock. The dealers are connected by a computer network which provides information on current "bids" and "asks" as well as volume information. Our common shares commenced trading in April 2001. The high and low bid quotations of our common stock on the OTC Bulletin Board as reported by the NASD were as follows:
PERIOD HIGH LOW 2004 FIRST QUARTER $1.90 $1.23 SECOND QUARTER 1.46 0.48 THIRD QUARTER 0.59 0.15 FOURTH QUARTER 0.88 0.22 2003 FIRST QUARTER 2.08 1.38 SECOND QUARTER 2.10 1.83 THIRD QUARTER 2.12 1.30 FOURTH QUARTER 1.62 1.21
The above quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions. As of March 28, 2005, we had 20,691,067 shares of common stock issued and outstanding, held by 137 registered shareholders. The declaration of dividends on our shares is within the discretion of our board of directors and will depend upon the assessment of, among other factors, results of operations, capital requirements and the operating and financial condition of Rapidtron. The Board has never declared a dividend. At the present time, we anticipate that all available funds will be invested to finance the growth of our business.
Equity Compensation Plan Information ------------------------------------ - ------------------------------------------------------------------------------------------------- Number of securities remaining available for future issuance under Number of securities to Weighted-average equity compensation be issued upon exercise exercise price of plans (excluding of outstanding options, outstanding options, securities reflected in category warrants and rights warrants and rights column (a)) (a) (b) (c) - --------------------- ------------------------ ---------------------- ------------------------ - --------------------- ------------------------ ---------------------- ------------------------ Equity compensation plans approved by 910,000 $ 1.00 11,090,000 security holders - --------------------- ------------------------ ---------------------- ------------------------ Equity compensation plans not approved by 5,552,505 $ 0.97 0 security holders - -------------------------------------------------------------------------------------------------
As a result of current trading prices, our common stock may be subject to the penny stock rules under the Securities Exchange Act of 1934. Unless an exemption from those rules is available, broker-dealers making a market in the common stock will be required to provide disclosure to their customers on the risks associated with the common stock, its investment suitability for the customer, information on bid and ask prices for the common stock and information about any compensation the broker-dealer will receive for a transaction in the common stock. The application of these rules will likely reduce market-making activities in the common stock by impairing its liquidity. Information regarding our existing securities authorized for issuance under equity compensation plans is incorporated by reference to our definitive proxy solicitation on Schedule 14A, to be filed with the Commission within 120 days following the end of our fiscal year. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS Cautionary Statements This year-end Report on Form 10-KSB contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend that such forward-looking statements be subject to the safe harbors created by such statutes. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. Accordingly, to the extent that this year-end Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of our company, please be advised that our actual financial condition, operating results and business performance may differ materially from that projected or estimated by us in forward-looking statements. The differences may be caused by a variety of factors, including but not limited to adverse economic conditions and intense competition, including intensification of price competition and the expansion of competition in providing end-to-end product and system solutions as more fully described in management's discussion in this report. This report on Form 10-KSB contains, in addition to historical information, forward-looking statements that involve substantial risks and uncertainties, including those set forth on pages 3-13 of our Amended Registration Statement on Form SB-2/A, filed with the Commission on June 9, 2004, incorporated by reference herein. Our actual results could differ materially from the results anticipated by us and discussed in the forward-looking statements. The following analysis of our operations refers primarily to those in the fitness, winter resort, amusement, and universities, which constitute the majority of our business activities. Critical Accounting Policies: Our significant accounting policies are outlined within Note 1 to our December 31, 2004 and 2003 financial statements contained elsewhere in this annual report. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions. Revenue Recognition Policy We recognize revenues when all of the following criteria have been met: - persuasive evidence of an arrangement exists, - delivery has occurred, - the fee is fixed or determinable, and - collectibility is reasonably assured. Generally, these criteria are met when we deliver our products to our customer. In accordance with Statement of Financial Accounting Standards ('SFAS") No. 48, "Revenue Recognition when Right of Return Exists," revenue is recorded net of an estimate of markdowns, price concessions and warranty costs. Such reserve is based on management's evaluation of historical experience and current industry trends and estimated costs. Such reserve was immaterial to the operations of the company. Management believes that the company's revenue recognition policies comply with Staff Accounting Bulletin No. 104 ("SAB 104") issued by the Securities Exchange Commission. Foreign Currency Transactions ------------------------------- We record all transactions with our foreign supplier, Axess AG, in accordance with SFAS No. 52, "Foreign Currency Translation." All invoices received from Axess AG are denominated in Euros. When an invoice is received, we translate these amounts to US Dollars at the exchange rate effective on the invoice date. If the exchange rate changes between the time of purchase and the time payment is made, a foreign currency exchange gain or loss results. Additionally, we compute a foreign currency exchange gain or loss at each balance sheet date on all recorded foreign currency denominated transactions that have not been settled. The difference between the exchange rate that could have been used to settle the transaction at the date it occurred (the invoice date), and the exchange rate at the balance sheet date, is the unrealized gain or loss recognized in current operations. Accounts Receivable -------------------- We periodically review the collectability of our accounts receivable balances. Where significant doubt exists with regard to the collection of a certain receivable balance, an allowance and a charge to the statement of operations is recorded. Allowances for doubtful accounts are based on estimates of management. At December 31, 2004, we had allowances for doubtful accounts of approximately $135,000. Product Warranties ------------------- We warrant our access systems for a period of one to two years for all hardware and 1 year for readers and scanners. Axess AG warrants our equipment for one year. We have seen no significant product warranty issues to date. As the types of services or replacements provided during the warranty period may vary, costs related to our warranties may exceed the amount of our reserve. At December 31, 2004, we had reserves for potential warranty issues of approximately $18,000 Significant Recent Accounting Pronouncements In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB 51." The primary objectives of FIN No. 46 are to provide guidance on the identification of entities for which control is achieved through means other than voting rights (variable interest entities, or "VIEs") and how to determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies to an entity for which either: (1) the equity investors do not have a controlling financial interest; or (2) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN No. 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. As amended in December 2003, the effective dates of FIN No. 46 for public entities that are small business issuers, as defined ("SBIs"), are as follows: (a) For interests in special-purpose entities ("SPEs"): periods ended after December 15, 2003; and (b) For all other VIEs: periods ended after December 15, 2004. The December 2003 amendment of FIN No. 46 also includes transition provisions that govern how an SBI which previously adopted the pronouncement (as it was originally issued) must account for consolidated VIEs. Management has concluded that the company does not have an interest in any SPEs, and is evaluating the other effects of FIN No. 46 (as amended) on its future consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity, and is effective for public companies as follows: (i) in November 2003, the FASB issued FASB Staff Position ("FSP") FAS 150-3 ("FSP 150-3"), which defers indefinitely (a) the measurement and classification guidance of SFAS No. 150 for all mandatorily redeemable non-controlling interests in (and issued by) limited-life consolidated subsidiaries, and (b) SFAS No. 150's measurement guidance for other types of mandatorily redeemable non-controlling interests, provided they were created before November 5, 2003; (ii) for financial instruments entered into or modified after May 31, 2003 that are outside the scope of FSP 150-3; and (iii) otherwise, at the beginning of the first interim period beginning after June 15, 2003. The company adopted SFAS No. 150 (as amended) on the aforementioned effective dates. The adoption of this pronouncement did not have a material impact on the company's results of operations or financial condition. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4," which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. In Chapter 4 of ARB 43, paragraph 5 previously stated that " under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and re-handling costs may be so abnormal as to require treatment as current period charges ." SFAS No. 151 requires that such items be recognized as current-period charges, regardless of whether they meet the criterion of so abnormal (an undefined term). This pronouncement also requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred in years beginning after June 15, 2005. In December 2004, the FASB issued SFAS No. 123-R, "Share-Based Payment," which requires that the compensation cost relating to share-based payment transactions (including the cost of all employee stock options) be recognized in the financial statements. That cost will be measured based on the estimated fair value of the equity or liability instruments issued. SFAS No. 123-R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS No.123-R replaces SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." As originally issued, SFAS No. 123 established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that pronouncement permitted entities to continue applying the intrinsic-value model of APB Opinion 25, provided that the financial statements disclosed the pro forma net income or loss based on the preferable fair-value method. Small Business Issuers are required to apply SFAS No. 123-R in the first interim or annual reporting period that begins after December 15, 2005. Thus, the company's consolidated financial statements will reflect an expense for (a) all share-based compensation arrangements granted after January 1, 2006 and for any such arrangements that are modified, cancelled, or repurchased after that date, and (b) the portion of previous share-based awards for which the requisite service has not been rendered as of that date, based on the grant-date estimated fair value. The FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions." The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured using the estimated fair value of the assets exchanged. SFAS No. 153 eliminates the narrow exception for nonmonetary exchanges of similar productive assets, and replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has "commercial substance" if the future cash flows of the entity are expected to change significantly as a result of the transaction. This pronouncement is effective for nonmonetary exchanges in fiscal periods beginning after June 15, 2005. Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on the company's present or future consolidated financial statements. Results of Operations The twelve months ended December 31, 2004 compared to the twelve months ended December 31, 2003. Revenue ------- During the twelve months ending December 31, 2004, we had revenues of $2,037,130, an increase of $1,091,525 (115%) from the $945,605 for the same period in fiscal year 2003. For the twelve month period ended December 31, 2004, the $1,091,525 increase in our sales revenue was due primarily to the increased sales to national fitness chains. Sales in fitness are expected to continue to expand into several major national fitness chains through 2005. We have chosen to focus our sales efforts on fitness clubs, winter resorts, and universities and colleges, niche markets where our system has penetrated key venues. During the year ended December 31, 2004, we made notable installations of our products with Bally Total Fitness, the world's largest fitness club chain, Park City Resort, Utah, Copper Mountain, Colorado, and Tamarack Ski Resort, New York, well-known four-season resorts, along with the University of California, Berkeley, and the University of California, Los Angeles leading U.S. universities. We targeted these specific customers due to their leadership position in each of their industries and the potential for sizeable revenues related to their individual contracts and future contracts. Because of the success of our equipment at these sites, we are forecasted to expand our implementation at all locations listed in 2005. We increased our focus in selling to the leading fitness chains in 2004 which resulted in two sales orders totaling 125 access control systems that shipped throughout 2004. We have had additional meetings with other leading fitness chains that have shown interest in implementing our access control systems in their clubs. We are currently in the process of evaluating the specific needs and software integration requirements for a pilot program with one of the largest national fitness chains in North America. Following our installation at UCLA John Wooden Center and UC Berkley and sales presentations to more than 250 universities, we anticipate increased sales in the next twelve months. We are currently working with several California State Universities on proposals and design layouts for potential implementations into their fitness and recreation centers. While the winter resort business is now preparing for its 2005/2006 season, we have expanded our presence with more installations at Park City, Utah, Copper Mountain and Tamarack ski resorts. We expect increased sales in each of the three targeted venues of fitness clubs, universities, and winter resorts over the next twelve months. We expect to increase our revenues in the targeted venues of fitness clubs, winter resorts, and universities in the upcoming 12 months. We continue to base these revenue growth expectations on the assumption that the successful sales, installations, and operation of our Rapidtron systems to date with industry leading customers in targeted venues will result in other customers within each venue emulating the leader in making their purchase decisions. For example, our Rapidtron system has now been operational in over 125 locations with a national fitness club, and we expect to continue to expand in the club's other locations over the next 12 months. In addition, we are forecasting 50 or more installations over the next twelve months with another leading national fitness chain. In the twelve months of 2004, we received approximately 89% of our revenue from fitness clubs, with 67% of revenues derived from Bally Total Fitness. We expect to continue our growth in sales to fitness clubs, winter resorts and universities in the upcoming twelve months. We hope to increase and diversify our revenue received through sales in the fitness industry. Our Rapidtron system has been operational at Copper Mountain since November 2001 and Park City, Utah since November 2002, with an expansion scheduled for the 2005/2006 season. We expect continued sales to Park City in 2005, and we are in discussions with Copper Mountain for additional orders in the second quarter of 2005. In the twelve months of 2004, we received less than ten percent (10%) of our revenue from sales to winter resorts. We are in discussions with several other major winter resorts that we hope will result in increased sales in the winter resort industry. Our Rapidtron system has been operational at University of California, Berkeley since May 2002 and UCLA since October 2003. In the twelve months of 2004, we received less than ten percent (10%) of our revenue from sales to these universities. Actual results may differ from our expectations as a result of delay in sales to the customers in the targeted venues. Gross Profit ------------- For the twelve months ended December 31, 2004, our gross profit for the period was $603,172, compared to gross profit of $143,944 for the same period of the preceding year. This represents an increase of $427,708 from the same period of the preceding year. The increase in gross profit is primarily due to the result of the increased sales in fitness sales to national chains, as well as negotiated discounts with our primary supplier in 2004. The improved gross margin was partially offset by the unfavorable foreign currency exchange rate of the euro to the dollar. We expect to improve our gross profit through increased sales in the targeted venues of fitness clubs, winter resorts, and universities in the coming 12 months based on the same assumptions identified in our discussion of revenues above. In the first and second quarter of 2005, we expect the majority of our sales will be generated from fitness accounts with resort sales increasing with third and fourth quarter installations at winter resorts. The unfavorable currency variance of the dollar to the euro continues to negatively impact gross profit margins in 2005 due to our purchasing from a European supplier. We expect the unfavorable currency variance of the dollar to the euro to continue in 2005, and to continue to negatively impact gross profit margins due to our plan to continue purchasing equipment, readers, and cards from our European supplier. Research and development and re-engineering of our equipment with Axess AG are currently underway to enhance our system. We expect these enhancements to reduce our costs and thereby improve margins. We expect to see the benefits of these enhancements in 2005 with new equipment introduced into the market in the third quarter of 2005. Actual results may differ from our expectations as a result of delay in sales revenues, and gross profit from those revenues to the customers in the targeted venues. Operating Expenses ------------------- For the twelve months ended December 31, 2004, our selling, general & administrative expenses totaled $3,420,633, an increase of $516,780, or 18%, from the $2,903,853 incurred during the same period of the preceding year. The increased expenses are related to increases in professional fees in 2004. The professional fees increased from approximately $1,619,000 in 2003 to $2,014,000 in 2004, an increase of $395,000. The increased professional fees are due to the following: 1) $425,000 increase in consulting services related to management consulting and financing, 2) $402,000 increase in outside marketing services, and 3) $432,000 decrease in financing fees. A majority of the increased professional fees in 2004 were related to one time expenses. We expect operating expenses in the ordinary course of business (not taking into consideration the one time expenses related to certain professional fees and financing activities) to increase modestly over the next 12 months as a result of operating, marketing, selling, service and sales commission expenses related to increased revenues in the fitness club, winter resort, and university. The commissions paid to independent sales representatives are less than 1% of selling, general and administrative expenses during the year ended December 31, 2004; however, they will increase as a percentage of sales in the coming 12 months. Actual results may differ from our expectations, and operating expenses will continue to secure and may precede sales to the customers in the targeted venues. Loss From Operations ---------------------- The loss from operations for the twelve months of fiscal 2004 was $2,817,461 compared to a loss from operations of $2,759,908 in the same period in the prior year. The loss from operations for the twelve months ended December 31, 2004, was primarily the result of the following (a) increased professional fees related to financing activities, (b) unfavorable foreign currency exchange variance, and (c) slower than anticipated sales growth in winter resort sales. Software interfaces with all major software providers in the fitness and resort industries have now been completed to capitalize on increased sales in these two targeted areas. We expect the overall loss from operations to decrease over the next 12 months as a result of increases in revenues and gross margin related to those sales. Actual results may differ from our expectations if we experience delays in sales revenues from installation as we expect to continue to incur operating expenses related to marketing to customers in the targeted venues. Interest Expense ----------------- Our interest expense for the twelve-month period was $129,562. In the same period of the preceding year, our interest expense was $80,801. The increase in interest expense in the twelve months was primarily the result of increased interest expense related to the new asset based line of credit implemented in 2004 to support sales growth plus new convertible debt. At December 31, 2004, we owed $235,657 on our accounts receivable credit facility. At December 31, 2004, we owed $250,271 on notes due to related parties, compared to $324,269 at December 31, 2003. Additionally, we owed $382,577 on convertible notes payable at December 31, 2004, compared to $0 at December 31, 2003. We expect interest expense to decrease over the twelve-months as a result of debt repayments and conversion of debt to equity. Actual results may differ from our expectations as a result of taking on additional debt necessary to finance operations, if we do not meet sales expectations. Other Expenses --------------- Pursuant to the terms of our agreement with Smart Card Integrators, we forgave an account receivable in the amount $250,000 as a result of our failure to satisfy certain conditions to close the merger contemplated by the agreement. Assets and Liabilities ------------------------ At December 31, 2004, we had total assets of $942,692 compared to total assets of $1,055,243 at December 31, 2003. Cash was $750 as of December 31, 2004, down from the $84,256 cash balance as of December 31, 2003. For the twelve-months ended December 31, 2004, cash used in operations was $1,521,400; cash used in investing activities was $1,905; and cash provided by financing activities was $1,439,799, with net decrease in cash during the current period being $83,506. Our net accounts receivable were $434,812 at December 31, 2004, an increase of $117,425 (37%) from the $317,387 at December 31, 2003. The increase in accounts receivable is primarily due to new customers and sales in the fitness club industry. Our net inventories decreased $223,460 (40%) during the twelve-months ended December 31, 2004, to $334,742, from the $558,202 at December 31, 2003. The decrease in inventory is due to the timing of purchases receipt and shipments to support fitness customers. Our net fixed assets totaled $72,074 at December 31, 2004, compared to $15,342 at December 31, 2003. The increase in fixed assets is related to the purchase of COM DLL software from Pioneer Innovations for the integration/interface of our equipment with the back office accounting systems of our fitness customers. The software was purchased for $96,271. Our purchases of fixed assets totaled $98,176 during the period, while our depreciation totaled $41,444 resulting in a net increase in fixed assets of $56,732. The majority of fixed asset purchases were related to the purchase of the COM DLL software integration tool and computer equipment purchases. Our total liabilities at December 31, 2004 were $2,661,684, an increase of $1,238,048 (87%) from the $1,423,636 at December 31, 2003. Our accounts payable and accrued liabilities totaled $1,697,647 at December 31, 2004, an increase of $693,136 (69%) from the $1,004,511 at December 31, 2003. There was an increase in accounts payable of $555,773 and an increase in accrued liabilities of $137,363. Our payables primarily increased as a result of 1) increased payables to our primary supplier of approximately $400,000 due to increased sales and extended terms (Rapidtron has reached the maximum credit line of $800,000 extended by Axess AG), and 2) increased foreign currency exchange variance of $90,000. Accrued liabilities increased as a result of an increase of $130,000 in accrued salaries to executives. Our accrued payroll totaled $226,657 at December 31, 2004, compared to $96,164 at December 31, 2003. Our accrued interest payable, which is included in accounts payable and accrued liabilities, was $17,155 at December 31, 2004, an increase of $10,481 from the $6,674 at December 31, 2003. Our notes payable and other debt totaled $872,750 at December 31, 2004, an increase of $540,970 (163%) from the $331,780 at December 31, 2003. Our total notes payable increased due to 1) $2,072,794 in borrowings, 2) less $1,421,724 in repayments, and 3) less $110,100 in debt discounts related to a convertible note payable issued with detachable stock purchase warrants. During the twelve-month period ended December 31, 2004, the company borrowed approximately $675,000 in bridge loans of which approximately $238,000 was repaid. Such notes bore interest at rates ranging from 10% to 15%, and are secured by substantially all assets of the company. The notes bare a default provision where the outstanding principal can be converted into the company's restricted common stock at approximately $0.33 per share, and all principal and interest was due within one year. Stockholder's Deficit ---------------------- Our stockholder's deficit was $1,718,992 at December 31, 2004, a decrease of $1,350,599 from the $368,393 deficit at December 31, 2003. The changes in stockholder's deficit were as follows:
Balance as of December 31, 2003 ($368,393) Net Loss (3,300,304) Common Stock issued for services 229,371 Exercise of Warrants 400,000 Receipt of Stock Subscription Receivable 535,000 Purchase of Common Shares and Warrants 200,000 Warrants granted for services 438,534 Warrants granted with convertible note payable 146,800 ------------- Balance as of December 31, 2004 ($1,718,992)
Liquidity and Capital Resources As of December 31, 2003, we had $1,055,243 in total assets, including $84,256 in cash, $317,387 in accounts receivable, $558,202 in inventories, and $67,676 in prepaid expenses and other current assets. As of December 31, 2004, we had $942,692 in total assets, including $750 in cash, $434,812 in accounts receivable, $334,742 in inventories, and $87,934 in prepaid expenses and other current assets. We consider the accounts receivable to have a high probability of collection, as a majority of the receivables are from large customers in the fitness club industry. Our inventories consist primarily of readers, turnstiles and equipment. We intend to use our inventory as current product models during 2005. We will acquire additional inventory for fitness club, university, and winter resort sales in 2005. Our fixed assets consist primarily of computers, office furniture and equipment, software, and test equipment. Due to the age and proprietary nature of most of the fixed assets, these assets probably have limited value to third parties. At December 31, 2004, our total liabilities were $2,661,684, including accounts payable and accrued liabilities of $1,697,647, and obligations to related parties of $341,558. Loans from related parties included $95,009 payable to John Creel and Steve Meineke, directors and executive officers of our company at December 31, 2004. Steve Meineke has since resigned as an executive officer. We had a working capital deficit (current assets minus current liabilities) of $1,803,446 at December 31, 2004. Our negative cash flow from operations resulted primarily from our operating losses, and increased receivables which were partially offset by a decrease in inventory, and increased payables and accrued liabilities. Our cash flow needs were met through year-end December 31, 2004 through revenues, secured borrowings from our accounts receivable credit facility, bridge loans, and private equity placements. We expect to continue operating at a negative cash flow through at least the first quarter of fiscal year 2005 as we continue our efforts to develop our business in fitness and winter resorts. Thus, our success, including our ability to fund future operations, depends largely on our ability to secure additional funding. We cannot assure you that we will be able to consummate debt or equity financings in a timely manner, on a basis favorable to the company, or at all. As of December 31, 2004, we owed $46,250 plus interest to LDM Enterprises, LLC and continue to owe this amount plus interest and expenses. This loan is in default. The loan is secured by all of our assets. We require additional investment through the sale of equity in order to pay this debt. Until we pay this debt, the lender may foreclose on our assets. Cash Flow ---------- In addition to needing cash to pay off the foregoing debt, we need cash flow of approximately $120,000 per month during the first quarter of 2005 to pay for our rent, salary, marketing, services, software interface, inventory, and receivables, excluding the anticipated increase in expenses related to sales and marketing efforts and new business development. We expect to receive cash flow from revenues averaging at least approximately $250,000 to $450,000 per month during 2005. During 2005, we expect to need additional equity or debt financing of approximately $1,500,000 for operating expenses, new business development, potential merger opportunities, marketing, services, and software development for interface with business systems in targeted industries, inventory and receivables. We anticipate that we will receive cash flow from operating revenues totaling approximately $3,000,000 to $5,500,000, in 2005. Historically, we have financed our operations through cash flow from operations, debt proceeds and the sale of equity securities. It is anticipated that we may be required to sell additional equity securities and/or incur additional debt until such time as we can generate sufficient revenues from our operations to cover operating expenses. We currently have no external sources of liquidity. The allocation of cash flow in operating the business will be dictated by where those resources can optimize results through the production of sustained revenue growth. If we do not raise the necessary capital or earn sufficient revenue to cover the foregoing expenses, we will reduce variable overhead, such as marketing expenses, travel and entertainment, software development, and reduction of personnel as feasible. In the event we are unable to generate capital from loans, the sale of stock, or revenues, we will be forced to sell our assets or curtail operations until additional capital is available. Financing Activities Subsequent to September 30, 2004 ----------------------------------------------------------- On February 11, 2005, we sold 228,009 shares of our common stock for a total purchase price of approximately $62,950. We used the proceeds of this investment for the following:
Commissions on the sale $ 6,295 Legal fees $ 3,000 Payment of debt $10,000 Working capital $43,655
We have spent all of the proceeds of this investment, and we are seeking additional investment through the private sale of equity in order to meet our monthly cash needs. We also borrowed additional funds, described in Item 8B below, incorporated by reference. We used the proceeds of these loans for the following:
Pre-paid legal expenses $25,000 Payroll 53,000 Sales Taxes $27,000
Contractual Obligations ------------------------ As of December 31, 2004, we had the following contractual obligations and commercial commitments:
- ------------------------------------------------------------------------------------------------------------ CONTRACTS WITH CONSULTANTS - ------------------------------------------------------------------------------------------------------------ Name Termination Date Payment Terms - ------------------------------------------------------------------------------------------------------------ 4,166 per month plus ten shares of common Pioneering Innovation Com Dll Dec 15, 2005 stock per satellite installed, up to 40,000 shares - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ NOTES PAYABLE - ------------------------------------------------------------------------------------------------------------ Balance as of December 31, 2004, and Payment Payee Maturity Terms - ------------------------------------------------------------------------------------------------------------ Comerica/John Creel and Ending upon payment Steve Meineke per agreement Interest only; balance due of $37,750 + interest - ------------------------------------------------------------------------------------------------------------ Equus/Vineyard Bank On demand $ 150,000 + interest - ------------------------------------------------------------------------------------------------------------ Larry Williams October 31, 2005 $ 5,262 + interest - ------------------------------------------------------------------------------------------------------------ Steve Meineke On demand $ 15,000 + interest - ------------------------------------------------------------------------------------------------------------ John Creel On demand $ 26,000 + interest - ------------------------------------------------------------------------------------------------------------ John Creel On demand $ 16,259 + interest - ------------------------------------------------------------------------------------------------------------ Oceanus Value Fund March 31,2005 400,000 + interest (1) - ------------------------------------------------------------------------------------------------------------ LDM On demand 46,250 + interest (2) - ------------------------------------------------------------------------------------------------------------ CAPITAL LEASES - ------------------------------------------------------------------------------------------------------------ Lessor Lease Term Payment Terms - ------------------------------------------------------------------------------------------------------------ Between 14 to 35 months 6 Computer Leases left on leases 436 per month for all six leases - ------------------------------------------------------------------------------------------------------------
Footnotes to Contractual Obligations: - --------------------------------------- (1) We are currently in default of this loan. At this time, we are in discussions with Oceanus pursuant to which it expected that we will be able to cure those defaults. Until we reach such an agreement or otherwise are able to cure the default, Oceanus may convert the outstanding balance into our common stock at a conversion price of the lesser of (i) $0.33 per share or (ii) eighty percent (80%) of the lowest closing bid price for the common stock (as reported by Bloomberg) in any of the five (5) trading days immediately preceding the conversion date. If the conversion date were April 14, 2005, then the conversion price would be $0.24 per share (based on the average closing bid price of $.30). In addition, the balance is secured by all of our accounts, equipment, general intangibles, inventory, and other rights to collect money. Oceanus may at any time proceed to foreclose on this collateral at any time until we cure the default and may collect from our company the cost of such proceedings. (2) We are currently in default of this loan. Until we cure the default, interest will accrue at 14%. In addition, the loan is secured by all of our assets, which security interest is subordinate to the security interest held by Silicon Valley Bank. The loan is also guaranteed by our Chief Executive Officer, John Creel. LDM may at any time proceed to foreclose on the security interest or seek recovery from Mr. Creel under the guaranty until we cure the default and may collect from our company the cost of such proceedings. We would owe Mr. Creel under the guaranty for any payments made to LDM under the guaranty. Currently, our total contractual obligations related to long-term debt, capital leases, and certain contracts is approximately $990,000 arising out of obligations related to employment and consulting agreements. In addition, we have approximately $696,000 due under notes payable on demand or in the next twelve months. We anticipate that we will have to raise capital during the next 12 months to meet our current obligations including trade accounts payable and liabilities to related parties. We intend to raise the capital required to fund our financing needs by issuance of debt and equity. We cannot assure you that financing will be available or accessible on reasonable terms. Inflation --------- We do not believe that inflation has had a significant impact on our consolidated results of operations or financial condition. ITEM 7. FINANCIAL STATEMENTS RAPIDTRON, INC. (FORMERLY THE FURNISHING CLUB) CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . F-1 Consolidated Balance Sheet as of December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Operations for the Years Ended December 31, 2004 and 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4 Consolidated Statements of Stockholders' Deficit for the Years Ended December 31, 2004 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2004 and 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders Rapidtron, Inc. (formerly The Furnishing Club) We have audited the accompanying consolidated balance sheet of Rapidtron, Inc. (the "Company") as of December 31, 2004, and the related consolidated statements of operations, stockholders' deficit, and cash flows for the years ended December 31, 2004 and 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Rapidtron, Inc. as of December 31, 2004, and the results of its operations and cash flows for the years ended December 31, 2004 and 2003 in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of December 31, 2004, the Company has a working capital deficit of approximately $1,803,000, recurring losses from operations, an accumulated deficit of approximately $7,686,000 and has generated an operating cash flow deficit of approximately $1,521,000 for the year then ended. As discussed in Note 1 to the financial statements, additional capital will be necessary to fund the Company's long-term operations. These conditions, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding these matters are also described in Note 1. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Squar, Milner, Reehl & Williamson, LLP March 25, 2005 Newport Beach, California - -------------------------------------------------------------------------------- RAPIDTRON, INC. CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2004 - --------------------------------------------------------------------------------
ASSETS CURRENT ASSETS Cash $ 750 Accounts receivable, net 434,812 Inventory, net 334,742 Prepaid expenses and other current assets 87,934 ------------ 858,238 PROPERTY AND EQUIPMENT, NET 72,074 DEPOSITS AND OTHER ASSETS 12,380 ------------ $ 942,692 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable $ 1,363,044 Accrued liabilities 334,603 Secured borrowings 235,657 Due to related party 91,287 Loans due to related parties 250,271 Notes payable, net of discount 382,577 Obligations under capital lease 4,245 ------------ 2,661,684 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT Preferred stock, par value $0.001 per share; 5,000,000 shares authorized; no shares issued or outstanding - Common stock, par value $0.001 per share; 100,000,000 shares authorized; 20,463,061 shares issued and outstanding 20,463 Additional paid-in capital 5,946,399 Stock subscription receivable (305) Accumulated deficit (7,685,549) ------------ (1,718,992) ------------ $ 942,692 ============
- ------------------------------------------------------------------------------- Page F-3 The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- RAPIDTRON, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 - --------------------------------------------------------------------------------
2004 2003 ------------ ------------ NET SALES $ 2,037,130 $ 945,605 COST OF GOODS SOLD 1,433,958 801,661 ------------ ------------ GROSS PROFIT 603,172 143,944 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,420,633 2,903,853 ------------ ------------ LOSS FROM OPERATIONS (2,817,461) (2,759,909) OTHER INCOME (EXPENSE) Interest expense (129,562) (80,801) Loss on write-off of note receivable (250,000) - Foreign currency exchange loss (99,974) (62,794) ------------ ------------ (479,536) (143,595) ------------ ------------ LOSS BEFORE PROVISION FOR INCOME TAXES (3,296,997) (2,903,504) PROVISION FOR INCOME TAXES 3,307 800 ------------ ------------ NET LOSS $(3,300,304) $(2,904,304) ============ ============ BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.16) $ (0.19) ============ ============ BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 20,345,000 15,106,000 ============ ============
- -------------------------------------------------------------------------------- Page F-4 The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- RAPIDTRON, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 - --------------------------------------------------------------------------------
ADDITIONAL COMMON STOCK TREASURY STOCK PAID- STOCK ------------------- --------------------- IN SUBSCRIPTION ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT TOTAL --------- -------- --------- ---------- ----------- ------------- ------------ ------------ --------- -------- --------- ---------- ----------- ------------- ------------ ------------ BALANCE - DECEMBER 31, 2002 9,924,000 $10,120 196,000 $(196,000) $ 74,865 $ - $(1,480,941) $(1,591,956) Shares issued to settle accrued salaries at $0.50 per share 128,000 128 - - 63,872 - - 64,000 Effects of reverse merger 5,598,002 5,598 - - (5,598) - - - Treasury shares retired in connection with reverse merger - (196) (196,000) 196,000 (195,804) - - - Debt converted to equity at approximately $1.00 per share, in connection with reverse merger 1,599,000 1,599 - - 1,646,425 - - 1,648,024 Shares issued for services at 1.00, in connection with reverse merger 400,000 400 - - 399,600 - - 400,000 Shares sold at approximately $1.00 per share 245,700 246 - - 257,568 - - 257,814 Shares issued for services at 1.19 per share 37,815 38 - - 44,962 - - 45,000 Debt converted to common shares at $1.00 per share 60,000 60 - - 59,940 - - 60,000 Shares and warrants issued at $1.25 per share in connection with Unit Purchase Agreement 1,280,000 1,280 - - 1,598,720 (535,305) - 1,064,695 Debt and payables converted to equity at $1.00 per share, in connection with Unit Purchase Agreement 348,334 348 - - 347,986 - - 348,334
(continued) - -------------------------------------------------------------------------------- Page F-5 The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- RAPIDTRON, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 - --------------------------------------------------------------------------------
COMMON STOCK TREASURY STOCK ADDITIONAL STOCK ------------------- ----------------- PAID-IN SUBSCRIPTIONS ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT TOTAL ---------- ------- -------- ------- ----------- --------------- ------------- ------------ Debt converted to stock and warrants at $1.25 per share, in connection with Unit Purchase Agreement 192,000 192 - - 239,808 - - 240,000 Net loss - - - - - - (2,904,304) (2,904,304) ---------- ------- -------- ------- ----------- --------------- ------------- ------------ BALANCE - DECEMBER 31, 2003 19,812,851 19,813 - - 4,532,344 (535,305) (4,385,245) (368,393) Shares issued for services at $1.38 per share 50,000 50 - - 68,947 - - 68,997 Shares issued for services at $1.33 per share 120,000 120 - - 159,880 - - 160,000 Shares issued for services at $1.78 per share 210 - - - 374 - - 374 Exercise of warrants at 1.25 per share 320,000 320 - - 399,680 - - 400,000 Purchase of shares and warrants at $1.25 per share 160,000 160 - - 199,840 - - 200,000 Warrants granted for services - - - - 438,534 - - 438,534 Receipt of stock subscription receivable - - - - - 535,000 - 535,000 Warrants issued with debt - - - - 146,800 - - 146,800 Net loss - - - - - - (3,300,304) (3,300,304) ---------- ------- -------- ------- ----------- --------------- ------------- ------------ BALANCE - DECEMBER 31, 2004 20,463,061 $20,463 - $ - $ 5,946,399 $ (305) $ (7,685,549) $(1,718,992) ========== ======= ======== ======= =========== =============== ============= ============
- -------------------------------------------------------------------------------- Page F-6 The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- RAPIDTRON, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 - --------------------------------------------------------------------------------
2004 2003 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(3,300,304) $(2,904,304) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 41,444 7,754 Provision for bad debts 115,044 15,000 Provision for warranty reserve 17,794 - Common shares issued for services 209,371 445,000 Warrants issued to outside consultants for services 438,534 - Unrealized foreign exchange loss 85,599 19,909 Loss on write-off of note receivable 250,000 - Amortization of note payable discount related to detachable warrants issued with debt 36,700 - Changes in operating assets and liabilities: Accounts receivable (232,469) (253,228) Inventory 223,460 (305,766) Prepaid expenses and other current assets (20,258) 6,235 Deposits and other assets - 1,521 Accounts payable 490,174 (79,046) Accrued liabilities 119,569 429,043 Due to related party 3,942 (80,830) ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (1,521,400) (2,698,712) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (1,905) (3,941) ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (1,905) (3,941) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from loans due to related parties 250,000 1,777,910 Principal payment of loans due to related parties (323,998) (322,212) Proceeds from secured borrowings 951,523 - Principal payment of secured borrowings (715,866) - Proceeds from issuance of notes payable 525,000 - Principal payment of notes payable (378,594) - Principal payment of capital lease obligations (3,266) (2,133) Proceeds from issuance of stock 200,000 257,814 Proceeds from exercise of warrants 400,000 1,064,695 Proceeds from stock subscriptions 535,000 - ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 1,439,799 2,776,074 ------------ ------------ NET INCREASE (DECREASE) IN CASH (83,506) 73,421 CASH - beginning of period 84,256 10,835 ------------ ------------ CASH - end of period $ 750 $ 84,256 ============ ============
(continued) - -------------------------------------------------------------------------------- Page F-7 The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- RAPIDTRON, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 - --------------------------------------------------------------------------------
2004 2003 -------- ---------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Income taxes $ 3,307 $ 800 ======== ========== Interest $ 67,479 $ 42,431 ======== ========== Non-cash investing and financing activities: Stock issued to settle accounts payable $ 20,000 $ - ======== ========== Acquisition of software for note payable $ 96,271 $ - ======== ========== Allocation of proceeds from convertible note payable to detachable stock purchase warrants $146,800 $ - ======== ========== Borrowings used to fund note receivable $250,000 $ - ======== ========== Cancellation of treasury stock $ - $ 196,000 ======== ========== Equipment acquired via capital lease $ - $ 6,085 ======== ========== Effects of reverse merger on common stock $ - $ 5,598 ======== ========== Common stock issued to retire debt $ - $1,712,352 ======== ========== Common stock and warrants issued to retire debt $ - $ 240,000 ======== ==========
- -------------------------------------------------------------------------------- Page F-8 The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- RAPIDTRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Rapidtron, Inc. (formerly The Furnishing Club, the "Parent") was incorporated in the State of Nevada in March 2000. The Parent's wholly owed subsidiary, also named Rapidtron, Inc. (collectively, the "Company"), was incorporated in the State of Delaware in January 2000. The Company is headquartered in Costa Mesa, California and provides Radio Frequency ("RF") smart access control and ticketing/ membership systems (the "System") to the fitness and ski industries and universities in North America. The System facilitates rapid operator-free entry and exit through automated turnstiles or portals and optional hands-free entry. The Company incorporates "smart card" debit/credit technology for retail purchases and promotional/loyalty programs. The System is versatile and utilizes either read-write RF smart cards or bar code paper tickets. This dual capability allows a venue to issue and re-issue numerous types and durations of access privilege cards. Its open architecture allows for an easy interface with existing back office software. During the year ended December 31, 2003, the Company completed a reverse merger (see Note 2). The common stock of the merged entity is quoted on the Over the Counter Bulletin Board under the symbol "RPDT.OB". GOING CONCERN AND LIQUIDITY CONSIDERATIONS The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. As of December 31, 2004, the Company has a working capital deficit of approximately $1,803,000, recurring losses from operations, an accumulated deficit of approximately $7,686,000 and has generated an operating cash flow deficit of approximately $1,521,000 for the year then ended. The Company intends to fund operations through increased sales and debt and equity financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements for the year ending December 31, 2005. Thereafter, the Company will be required to seek additional funds to finance its long-term operations. The successful outcome of future activities cannot be determined at this time, and there is no assurance that if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results, which may result in the discontinuance of operations. In response to these problems, management has planned the following actions: - Management intends to raise additional funds through future private placement offerings. - Management expects its increased marketing efforts to result in future sales increases. There can be no assurances, however, that management's expectations of future sales will be realized. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Parent and its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. - -------------------------------------------------------------------------------- Page F-9 - -------------------------------------------------------------------------------- RAPIDTRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) USE OF ESTIMATES The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting years. Significant estimates made by management include, among others, provision for losses on accounts receivable, realization of inventory and long-lived assets, warranty reserves and the valuation allowance for deferred tax assets. Actual results could differ from those estimates. CONCENTRATIONS Financial instruments that may subject the Company to credit risk include uninsured cash-in-bank balances. At times, the Company's bank balance may exceed the amount insured by the Federal Deposit Insurance Corporation. The Company grants credit to customers and requires collateral, in the form of cash deposits, on a case-by-case basis. Deposits from customers, which are included in accrued liabilities in the accompanying consolidated balance sheet, totaled $12,900 at December 31, 2004. The Company's ability to collect receivables is affected by economic fluctuations in the geographic areas served by the Company. Reserves for uncollectible amounts are provided, based on past experience and a specific analysis of the accounts, which management believes are sufficient. Receivables that have been allowed for are written-off against the allowance for doubtful accounts when management has exhausted all collection efforts and deems the receivables to have no chance of collection. Management has provided an allowance for doubtful accounts of $135,044 at December 31, 2004. Although management expects to collect amounts due, actual collections may differ from the estimated amounts. At December 31, 2004, two customers accounted for approximately 82% of net accounts receivable. One customer accounted for approximately 67% of net sales during the year ended December 31, 2004, and no other customer accounted for more than 10% of net sales for the year then ended. For the year ended December 31, 2003, two customers accounted for approximately 54% of net sales. Effective May 1, 2000, the Company entered into an exclusive distribution agreement with Axess AG ("Axess"), an Austrian company, where the Company would sell, primarily to the North American market, access control devices developed and manufactured by Axess. The Company purchases substantially all of its inventory from Axess. RISKS AND UNCERTAINTIES The Company operates in an emerging industry that is subject to market acceptance and technological change. The Company's operations are subject to significant risks and uncertainties, including financial, operational, technological and other risks associated with operating an emerging business, including the potential risk of business failure. CASH EQUIVALENTS The Company considers all highly liquid temporary cash investments with original maturities of three months or less to be cash equivalents. The Company has no cash equivalents at year-end. - -------------------------------------------------------------------------------- Page F-10 - -------------------------------------------------------------------------------- RAPIDTRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) INVENTORY Inventory is stated at the lower of cost (first-in, first-out) or estimated market and is primarily comprised of finished goods. Market is determined by comparison with recent sales or net realizable value. Such net realizable value is based on management's forecasts for sales of the Company's products or services in the ensuing years. Should the demand for the Company's products prove to be significantly less than anticipated, the ultimate realizable value of the Company's inventory could be substantially less than amounts shown in the accompanying consolidated balance sheet. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the respective assets, generally three years. Equipment under capital lease obligations are capitalized at the lesser of their estimated fair market value or the present value of the minimum lease payments, and are depreciated over the shorter of the estimated useful life or the term of the related lease. Betterments, renewals, and extraordinary repairs that extend the lives of the assets are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation applicable to assets sold or retired are removed from the accounts, and the gain or loss on disposition is recognized in current operations. IMPAIRMENT OF LONG-LIVED ASSETS Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If the cost basis of a long-lived asset is greater than the projected future undiscounted net cash flows from such asset (excluding interest), an impairment loss is recognized. Impairment losses are calculated as the difference between the cost basis of an asset and its estimated fair value. SFAS No. 144 also requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to stockholders) or is classified as held for sale. Assets to be disposed are reported at the lower of the carrying amount or fair value less costs to sell. The provisions of this statement for assets held for sale or other disposal are generally required to be applied prospectively after the adoption date to any newly initiated commitment to a plan to sell such assets by management. As a result, the Company cannot determine the potential effects that adoption of SFAS No. 144 will have on the consolidated financial statements with respect to future disposal decisions, if any. As of December 31, 2003, management has determined that no such impairment exists and therefore, no adjustments have been made to the carrying values of long-lived assets. There can be no assurance, however, that market conditions will not change or demand for the Company's products will continue which could result in impairment of long-lived assets in the future. REVENUE RECOGNITION Revenues on product sales are recognized when all of the following criteria have been met: persuasive evidence for an arrangement exists; delivery has occurred; the fee is fixed or determinable; and collectibility is reasonably assured. Installation revenues, which are billed separately from product sales, are generally recorded upon completion of services. Management believes that the Company's revenue recognition policies comply with Staff Accounting Bulletin No. 104 ("SAB 104") issued by the Securities Exchange Commission ("SEC"). - -------------------------------------------------------------------------------- Page F-11 - -------------------------------------------------------------------------------- RAPIDTRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) FOREIGN CURRENCY TRANSACTIONS The Company records all transactions with its foreign supplier, Axess (see above), in accordance with SFAS No. 52, "Foreign Currency Translation." All invoices received from Axess are denominated in Euros. When an invoice is received, the Company translates these amounts to US Dollars at the exchange rate effective on the invoice date. If the exchange rate changes between the time of purchase and the time payment is made, a foreign currency exchange gain or loss results. The Company recorded a realized foreign currency exchange gain (loss) of approximately $11,000 and $(43,000) for the years ended December 31, 2004 and 2003, respectively. Additionally, the Company computes a foreign currency exchange gain or loss at each balance sheet date on all recorded foreign currency denominated transactions that have not been settled. The difference between the exchange rate that could have been used to settle the transaction at the date it occurred (the invoice date), and the exchange rate at the balance sheet date, is the unrealized gain or loss recognized in current operations. The Company recorded an unrealized foreign currency exchange loss of approximately $87,000 and $20,000 for the years ended December 31, 2004 and 2003, respectively. The Company does not use derivative instruments to hedge against foreign currency fluctuations. ADVERTISING The Company expenses the cost of advertising when incurred. Advertising expenses are included in selling, general and administrative expenses in the accompanying consolidated statements of operations and approximated $92,000 and $156,000 for the years ended December 31, 2004 and 2003, respectively. SHIPPING AND HANDLING COSTS Shipping and handling costs are included in cost of goods sold in the accompanying consolidated statements of operations in accordance with Emerging Issues Task Force ("EITF") No. 00-10, "Accounting for Shipping and Handling Fees and Costs." Freight costs for the years ended December 31, 2004 and 2003 were approximately $89,000 and $70,000, respectively. SOFTWARE DEVELOPMENT COSTS The Company develops software to allow its products to interface with existing back office software used by its customers. Software development costs are charged to expense as incurred in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." Software development costs approximated $21,000 and $58,000 for the years ended December 31, 2004 and 2003, respectively, and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations. INCOME TAXES Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be recovered. - -------------------------------------------------------------------------------- Page F-12 - -------------------------------------------------------------------------------- RAPIDTRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) STOCK BASED COMPENSATION The Company accounts for stock-based compensation issued to employees using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). Under the intrinsic value method, compensation is the excess, if any, of the fair value of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. Compensation, if any, is recognized straight-line over the applicable service period, which is usually the vesting period. SFAS No. 123 "Accounting for Stock-Based Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123" and interpreted by Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB 25," if fully adopted, changes the method of accounting for all stock-based compensation to the fair value method. For stock options and warrants, fair value is determined using an option pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option or warrant and the annual rate of quarterly dividends. Compensation expense, if any, is recognized over the applicable service period, which is usually the vesting period. The adoption of the accounting methodology of SFAS No. 123 for employees is optional, and the Company has elected to continue accounting for stock-based compensation issued to employees using APB 25; however, pro forma disclosures, as if the Company adopted the cost recognition requirements under SFAS No. 123, are required to be presented. As of December 31, 2004, the Company has granted options to employees under one stock-based compensation plan (see Note 8). The Company accounts for such grants under the recognition and measurement principles of APB 25, and related Interpretations. No stock-based employee compensation cost is reflected in net loss, as all options granted had an exercise price equal to the estimated market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended, to stock-based employee compensation for the years ended December 31:.
2004 2003 ------------ ------------ Net loss: As reported $(3,300,304) $(2,904,304) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards (193,500) (5,400) ------------ ------------ Pro forma $(3,493,804) $(2,909,704) ============ ============ Basic and diluted net loss per share: As reported $ (0.16) $ (0.19) ============ ============ Pro forma $ (0.17) $ (0.19) ============ ============
- -------------------------------------------------------------------------------- Page F-13 - -------------------------------------------------------------------------------- RAPIDTRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income," establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. For the years ended December 31, 2004 and 2003, the Company had no items of other comprehensive income. Therefore, net loss equals comprehensive loss for the years ended December 31, 2004 and 2003. EARNINGS PER SHARE The Company computes net loss per common share using SFAS No. 128 "Earnings Per Share." Basic loss per common share is computed based on the weighted average number of shares outstanding for the period. Diluted loss per share is computed by dividing net loss by the weighted average shares outstanding assuming all dilutive potential common shares were issued. There were no dilutive potential common shares at December 31, 2004 and 2003 as all options (Note 8) and warrants (Note 9) to acquire common stock, plus convertible notes payable (Note 6), were deemed to be under water. Because the Company has incurred net losses and has no potentially dilutive common shares, basic and diluted loss per share are the same. Additionally, for purposes of calculating diluted loss per share, there were no adjustments to net loss. TREASURY STOCK The Company accounts for acquisitions of treasury stock under the cost method. Treasury stock is recorded as a separate component of stockholders' deficit at cost, and paid-in capital accounts are not adjusted until the time of sale, retirement or other disposition. SEGMENTS OF A BUSINESS SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," changed the way public companies report information about segments of their business in their quarterly reports issued to stockholders. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues and its major customers. The Company currently operates in one segment, as disclosed in the accompanying consolidated statements of operations. SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB 51." The primary objectives of FIN No. 46 are to provide guidance on the identification of entities for which control is achieved through means other than voting rights (variable interest entities, or "VIEs") and how to determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies to an entity for which either: (1) the equity investors do not have a controlling financial interest; or (2) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN No. 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. As amended in December 2003, the effective dates of FIN No. 46 for public entities that are small business issuers, as defined ("SBIs"), are as follows: (a) For interests in special-purpose entities ("SPEs"): periods ended after December 15, 2003; and (b) For all other VIEs: periods ended after December 15, 2004. The December 2003 amendment of FIN No. 46 also includes transition provisions that govern how an SBI which previously adopted the pronouncement (as it was originally issued) must account for consolidated VIEs. Management has concluded that the Company does not have an interest in any SPEs, and is evaluating the other effects of FIN No. 46 (as amended) on its future consolidated financial statements. - -------------------------------------------------------------------------------- Page F-14 - -------------------------------------------------------------------------------- RAPIDTRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS (continued) In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity, and is effective for public companies as follows: (i) in November 2003, the FASB issued FASB Staff Position ("FSP") FAS 150-3 ("FSP 150-3"), which defers indefinitely (a) the measurement and classification guidance of SFAS No. 150 for all mandatorily redeemable non-controlling interests in (and issued by) limited-life consolidated subsidiaries, and (b) SFAS No. 150's measurement guidance for other types of mandatorily redeemable non-controlling interests, provided they were created before November 5, 2003; (ii) for financial instruments entered into or modified after May 31, 2003 that are outside the scope of FSP 150-3; and (iii) otherwise, at the beginning of the first interim period beginning after June 15, 2003. The Company adopted SFAS No. 150 (as amended) on the aforementioned effective dates. The adoption of this pronouncement did not have a material impact on the Company's results of operations or financial condition. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4," which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. In Chapter 4 of ARB 43, paragraph 5 previously stated that " under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and re-handling costs may be so abnormal as to require treatment as current period charges ." SFAS No. 151 requires that such items be recognized as current-period charges, regardless of whether they meet the criterion of so abnormal (an undefined term). This pronouncement also requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred in years beginning after June 15, 2005. In December 2004, the FASB issued SFAS No. 123-R, "Share-Based Payment," which requires that the compensation cost relating to share-based payment transactions (including the cost of all employee stock options) be recognized in the financial statements. That cost will be measured based on the estimated fair value of the equity or liability instruments issued. SFAS No. 123-R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS No.123-R replaces SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." As originally issued, SFAS No. 123 established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that pronouncement permitted entities to continue applying the intrinsic-value model of APB Opinion 25, provided that the financial statements disclosed the pro forma net income or loss based on the preferable fair-value method. Small Business Issuers are required to apply SFAS No. 123-R in the first interim or annual reporting period that begins after December 15, 2005. Thus, the Company's consolidated financial statements will reflect an expense for (a) all share-based compensation arrangements granted after January 1, 2006 and for any such arrangements that are modified, cancelled, or repurchased after that date, and (b) the portion of previous share-based awards for which the requisite service has not been rendered as of that date, based on the grant-date estimated fair value. The FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions." The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured using the estimated fair value of the assets exchanged. SFAS No. 153 eliminates the narrow exception for nonmonetary exchanges of similar productive assets, and replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has "commercial substance" if the future cash flows of the entity are expected to change significantly as a result of the transaction. This pronouncement is effective for nonmonetary exchanges in fiscal periods beginning after June 15, 2005. - -------------------------------------------------------------------------------- Page F-15 - -------------------------------------------------------------------------------- RAPIDTRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS (continued) Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments include cash, accounts receivable, accounts payable, accrued liabilities, notes payable and capital lease obligations. The Company believes that the fair value of these financial instruments approximates their carrying amounts based on current market indicators, such as prevailing market rates and the short-term maturities of these financial instruments. It is not practical to estimate the fair value of amounts due to related party and loans due to related parties due to their related party nature (see Note 5 for more information on related party payables and debt). 2. REVERSE MERGER On May 8, 2003, The Furnishing Club and subsidiary ("TFC"), a publicly traded "shell" company (the previous public registrant), completed a reverse merger under an Agreement and Plan of Merger (the "Plan" or "Merger") with Rapidtron, Inc., a Delaware corporation (the "Private Company"), in a tax-free share exchange under Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended. Immediately prior to the Merger, TFC had 20,000,000 common shares authorized and 19,993,752 shares of common stock issued and outstanding. Pursuant to the Merger, all of the 10,052,000 issued and outstanding shares of common stock of the Private Company (including 128,000 shares for the settlement of accrued salaries, as discussed in Note 6) were exchanged for 9,600,000 common shares of TFC, on a 0.955 to 1 basis. Concurrent with the closing of the Merger, 13,943,750 shares of common stock of TFC were canceled, and the Private Company issued 5,598,002 shares of common stock. As a result, immediately after the Merger 15,650,002 shares of common stock were issued and outstanding. In addition, the Company issued 400,000 shares of restricted common stock to two finders associated with the merger. Immediately after the Merger, the officers and directors of TFC resigned and the management of the Private Company took control of such positions, therefore effecting a change of control. As a result, the transaction was recorded as a "reverse merger" whereby the Private Company was considered the accounting acquirer as it retained control of TFC after the merger, however, legally the Private Company became a wholly owned subsidiary of TFC after the Merger. In connection with the Merger, TFC changed its name to Rapidtron, Inc. 3. NOTE RECEIVABLE In July 19, 2004, the Company entered into a Memorandum of Understanding (MOU) with Smart Cards Integrators, Inc. (SCI), whereby the Company could purchase SCI for stock and warrants if certain conditions were met by November 30, 2004. Such conditions were not met and the acquisition was not completed. Prior to November 30, 2004, the Company loaned $250,000 to SCI. Pursuant to the terms of the MOU, the Company forgave such account receivable in the amount $250,000 as a result of its failure to satisfy certain conditions to close the merger contemplated by the MOU. - -------------------------------------------------------------------------------- Page F-16 - -------------------------------------------------------------------------------- RAPIDTRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 - -------------------------------------------------------------------------------- 4. PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31, 2004:
Furniture and fixtures $ 5,339 Computer equipment 26,144 Software 96,271 --------- 127,754 Less accumulated depreciation (55,680) --------- $ 72,074 =========
Included in property and equipment are several computers acquired under capital leases with costs totaling $10,637 and related accumulated depreciation of $6,611 at December 31, 2004. Depreciation of such leased equipment totaled $3,034 and $2,156 for the years ended December 31, 2004 and 2003, respectively. 5. RELATED PARTY TRANSACTIONS DUE TO RELATED PARTY Equus Marketing and Design, Inc. ("Equus") is a party related to the Company through commonality of ownership. The Company shares a facility and certain administrative personnel with Equus (Equus is the lessee of the property and employer of certain personnel). Additionally, Equus provides marketing services to the Company. On January 1, 2002, the Company entered into an administrative expenses agreement and a marketing services agreement with Equus on a month-to-month basis. Under the administrative expenses agreement, the Company is to reimburse Equus monthly for certain costs directly attributable to the Company plus approximately 30% to 50% of shared costs such as rent, utilities, certain employees' payroll costs, etc. Management believes that the allocated amounts are reasonable and at fair market values. For the years ended December 31, 2004 and 2003, Equus charged the Company approximately $175,000 and $277,000, respectively, for administrative expenses. The marketing services agreement requires a monthly marketing retainer of $2,500 to be paid to Equus. Additionally, the Company is billed for certain other direct advertising and marketing costs. For the years ended December 31, 2004 and 2003, marketing and advertising expenses charged by Equus approximated $110,000 and $207,000, respectively. At December 31, 2004, the Company owed Equus approximately $91,000 for unpaid administrative and marketing expenses, which is included in due to related party on the accompanying consolidated balance sheet. LOANS DUE TO RELATED PARTIES The Company had the following loans due to related parties at December 31, 2004:
Loans due to stockholders, unsecured, accrue interest at the Prime rate (5.0% at December 31, 2004), due on demand. $ 62,521 Loan payable to stockholders, unsecured, accrues interest at the Prime rate plus 2%, due on demand. 37,750 Loan payable to Equus, unsecured, accrues interest at the Prime rate plus 1%, due on demand. 150,000 -------- $250,271 ========
- -------------------------------------------------------------------------------- Page F-17 - -------------------------------------------------------------------------------- RAPIDTRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 - -------------------------------------------------------------------------------- 5. RELATED PARTY TRANSACTIONS (continued) LOANS DUE TO RELATED PARTIES (continued) During the year ended December 31, 2004, the Company borrowed approximately $250,000 from related parties, and made repayments with cash approximating $324,000. MANAGEMENT SERVICES AGREEMENT Effective January 1, 2002, the Company entered into a management services agreement with Meineke Consulting, LLC ("Meineke"). The proprietor of Meineke Consulting, LLC is a member of the Board of Directors of the Company. Under such agreement Meineke is to provide general management services to the Company until December 31, 2004, unless terminated earlier. Such agreement was terminated on March 1, 2004. Fees for each of the years ended December 31, 2004 and 2003 approximated $11,250 and $100,000, respectively. The Management Services Agreement with Meineke was terminated in February 2004. CONSULTING AGREEMENT The Company has entered into a 36-month consulting services agreement with Lee Guthrie & Associates ("LGA") to provide sales, marketing, distribution and business development strategies and assistance. Lee Guthrie, the owner of LGA, is the Company's Vice President of Fitness Sales. The agreement commenced on June 1, 2002, and may be terminated by either party with 30 days notice. Such agreement requires monthly payments of $4,000 plus annual bonuses if certain targets are met. In addition, the Company granted options to purchase 150,000 shares of the Company's common stock at an exercise price of $1.00 per share (see Note 8). The Company incurred consulting fees related to this contract totaling $48,000 during each of the years ended December 31, 2004 and 2003. The Consulting Agreement with Guthrie was terminated in November 2004. EMPLOYMENT AGREEMENTS During the year ended December 31, 2003, the Company entered into employment agreements with certain employees. Such agreements expire on December 31, 2004 and November 30, 2006 and can only be terminated prior to such dates by either party for "cause", as defined. Agreements expiring on December 31, 2004 have not been renewed, but the employees continue to work for the Company on an "at will" basis with payment terms similar to their previous employment agreements. The one agreement that has not expired has provisions that include base salary amounts, various benefits, the granting of stock options (see Note 8), and covenants not to compete. Upon a resignation with cause by the employee or termination without cause by the Company, the Company is to immediately pay all accrued compensation, and must continue paying the base salary for 6 to 12 months following termination. Total base salaries to be paid to these employees are as follows for the years ending December 31:
2005 $115,000 2006 115,000 -------- $230,000 ========
Other related party transactions are discussed elsewhere in these notes to the consolidated financial statements. - -------------------------------------------------------------------------------- Page F-18 - -------------------------------------------------------------------------------- RAPIDTRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 - -------------------------------------------------------------------------------- 6. DEBT SECURED BORROWINGS Effective June 29, 2004, the Company entered into an Accounts Receivable Purchase Agreement with Silicon Valley Bank ("SVB"). Under such agreement, the Company can request SVB to purchase, with full recourse, certain trade accounts receivable. If SVB accepts such offer, they will advance 70% to 80% of the face amount of the "purchased" receivable to the Company. The Company is required to pay $20,000 yearly as a Facility Fee, plus a monthly Finance Charge of 1.5% on the average daily Account Balance outstanding, as defined. Advances may not exceed $1,750,000 (with the underlying "purchased" receivables not exceeding $2,500,000). Advances are secured by substantially all assets of the Company. The Agreement has a one-year term, and then continues on a year-to-year basis thereafter. The Company is recording advances under the agreement as secured borrowings. The Company is obligated to repurchase transferred receivables under the agreement, and, therefore, the transaction does not qualify as a sale under the terms of SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." As of December 31, 2004, the Company has received advance totaling $235,657 against the "purchase" of trade receivables totaling $336,653. NOTES PAYABLE On October 8, 2004, the Company borrowed $350,000 under a convertible secured promissory note. Such note bears interest at 10% per annum and principal and interest is due in-full on November 8, 2004. The debt is secured by certain assets of the Company, including the note receivable (see Note 3), and is guaranteed by the president and CEO of the Company. On November 22, 2004, the note was amended to extend the maturity date to December 15, 2004 and allow the Company to borrow an additional $25,000. Such debt is subordinated to the secured borrowings with SVB, as described above. Upon an event of default, as defined, the lender may convert the note to the Company's restricted common shares at the lesser of a) $0.33 per share or b) the average lowest closing bid price during the five trading days immediately prior to the Conversion Date, as defined. No beneficial conversion feature was recorded as the fair value of the underlying stock was not deemed to be materially different from the most beneficial conversion price at the commitment date. If the note is converted, the Company shall, at its own expense, file a registration statement with the SEC within six months after the conversion date. In December 2004, the Company repaid $337,500 following the maturity date. As a result, a late fee of $18,750 became due and interest began to accrue at 14% per annum. Until the Company cures the default, interest will accrue at 14%. In addition, the loan is secured by all of the Company's assets, which security interest is subordinate to the security interest held by Silicon Valley Bank. LDM may at any time proceed to foreclose on the security interest until the Company cures the default and may collect from the Company the cost of such proceedings. On December 1, 2004, the Company borrowed $400,000 under a secured convertible promissory note with detachable stock purchase warrants (see Note 9). Such note bears interest at 15%, is due on March 31, 2005, is guaranteed by the officers of the Company, and is secured by substantially all assets of the Company. Interest totaling $15,000 was prepaid by the Company. Of this total, $5,000 has been expensed during the year ended December 31, 2004 and the remaining $10,000 is included in prepaid expenses and other current assets on the accompanying consolidated balance sheet. Thereafter, interest is due monthly. The debt is subordinated to the secured borrowings with SVB, as described above. The Company has recorded a debt discount of $146,800 to allocate the proceeds to the detachable stock purchase warrants based on their relative fair value. The lender may convert the note to the Company's common stock at the lesser of a) $0.33 per share or b) 80% of the average lowest closing bid price during the five trading days immediately prior to the conversion date. In accordance with EITF Issue No. 98-05, the Company calculated a beneficial conversion feature ("BCF") of $146,800 at the commitment date, but will not record such BCF until an event of Default has occurred. The Company was also obligated to prepare and file with the SEC no later than December 31, 2004, a registration statement covering all shares issuable under the detachable stock purchase warrants, for continuous offering pursuant to Rule 415 under the Securities Act of 1933. The Company is obligated to pay an additional $8,000 to the holder of the note for every 30 days after December 31, 2004, until the registration statement is declared effective by the Commission. - -------------------------------------------------------------------------------- Page F-19 - -------------------------------------------------------------------------------- RAPIDTRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 - -------------------------------------------------------------------------------- 6. DEBT (continued) CAPITAL LEASE OBLIGATIONS Included in property and equipment (see Note 4) are several computers acquired under capital leases. The leases accrue interest at an imputed rate of 19.99%, require principal and interest payments approximating $350 per month, and expire on various dates through October 2006. 7. EQUITY TRANSACTIONS In January 2003, the Company issued 128,000 shares of the Company's restricted common stock to an employee to settle accrued salaries payable of $64,000. Immediately after the Merger (see Note 2), the Company converted loans approximating $1,648,000 into 1,599,000 shares of the Company's restricted common stock. In connection with the Merger, the Company issued 400,000 shares of restricted common stock as finder's fees to certain individuals. Such shares were valued at $1 per share based on recent stock sales and conversions of debt to equity. The Company recorded acquisition costs totaling $400,000, which is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. In July 2003, a convertible note payable holder converted $60,000 of principal into 60,000 shares of the Company's restricted common stock. During the year ended December 31, 2003, the Company sold 245,700 shares of its restricted common stock at approximately $1.00 per share for cash approximating $258,000. On August 29, 2003, the Company filed with the SEC Form S-8 to register 37,815 shares of the Company's restricted common stock pursuant to a legal services agreement with the Company's legal counsel. Under such agreement, legal counsel may convert past due amounts due from the Company into registered common stock at $1.19 per share (estimated to be the fair market value of such shares on the date of the agreement). The Company issued all 37,815 shares registered under such Form S-8. On November 12, 2003, the Company closed the unregistered sale of common stock and warrants under a Unit Purchase Agreement, as more fully described in Unit Purchase Agreement below. Effective April 1, 2004, the Company sold in a private placement to Generation Capital Associates ("Generation Capital"), an accredited investor, 160,000 "Units" consisting of one share of restricted common stock and one warrant to purchase restricted common stock at a price of $1.46 for up to five years, for a total purchase price of $200,000. If prior to April 1, 2006, the Company files a new registration statement with the SEC, excluding any amendments to or refilings of registration statements currently on file with the SEC, then the Company is to include Generation Capital's resale of its shares in such registration statement on the same terms and conditions as provided to the other selling securities holders. In connection with the Pioneering Innovations Agreement (see Note 10), the Company issued 210 shares of restricted common stock in June 2004 for services approximating $400. On February 27, 2004, a warrant holder converted warrants to acquire 320,000 shares of the Company's common stock for cash totaling $400,000. - -------------------------------------------------------------------------------- Page F-20 - -------------------------------------------------------------------------------- RAPIDTRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 - -------------------------------------------------------------------------------- 7. EQUITY TRANSACTIONS (continued) On January 1, 2004, the Company entered into a public financial relations agreement with Liolios Group, Inc. ("Liolios"), pursuant to which the Company will pay Liolios $5,000 per month for six months, plus 50,000 shares of restricted common stock, in six equal monthly installments beginning on February 1, 2004. As of December 31, 2004, the Company has issued all 50,000 shares of common stock under this agreement and has recorded approximately $69,000 of public relations expenses during the year then ended related to such issuances. In November 2003, the Company entered into a consulting agreement with Big Sky Management Ltd ("Big Sky"). Such agreement required the Company to issue 120,000 shares of its restricted common stock plus warrants to acquire 120,000 shares of common stock (collectively, the "Units") in exchange for $160,000 of services to be performed during a 12-month period beginning on November 12, 2003. The Units were approved by the Board of Directors and issued in February 2004. The warrants are exercisable upon issuance at a price of $1.25 per share at any time up to February 12, 2005 and, thereafter, at a price of $1.50 per share at any time up to February 12, 2006, at which time such warrants shall expire. Under this agreement, the Company is required to file a registration statement on Form S-8 to register the common shares and the common shares acquirable upon exercise of the warrants under the Securities Act of 1933, as amended. During the years ended December 31, 2004 and 2003, the Company incurred consulting expense of $140,000 and $20,000, respectively, under this agreement. UNIT PURCHASE AGREEMENT On November 12, 2003, the Company closed the unregistered sale of common stock and warrants under a Unit Purchase Agreement, as more fully described below. The Company sold 1,472,000 "Units" at a cash purchase price of $1,600,000 plus satisfaction of existing debt totaling $240,000 in four separate tranches, as follows: - Tranche 1 on or about November 12, 2003, for 576,000 Units for proceeds of $720,000; - Tranche 2 on or about December 18, 2003, for 416,000 Units for proceeds of $520,000; - Tranche 3 on December 31, 2003 for 288,000 Units for proceeds of $360,000; and - Tranche 4 on December 31, 2003 for 192,000 Units in satisfaction of $240,000 of existing debt. Each "Unit" consists of one share of the Company's restricted common stock, and one warrant for the purchase of one share of common stock for a purchase price of $1.25, through the first anniversary of the date of issuance, and $1.50 up to the second anniversary of the date of issuance, upon which the warrant will expire. The Company is required to register the common stock issued as part of the Units, and if necessary, keep a shelf-registration statement effective for a period of 2 years following the issuance of the Units. The Company is required to pay all costs and expenses associated with the registration. Proceeds approximating $50,000 from the sale of the Units were set aside to cover the cost of the registration. The Company incurred costs approximating 126,000 related to this registration statement. Additional costs may be required depending upon the number of supplements or amendments that the Company may be required to file. Additional costs must be paid from operating revenue or through additional investments. The Company was required to use the proceeds from the sale to satisfy certain outstanding payables and future expenses related to registration of securities, with $385,000 set aside for paying general operating expenses. In addition, the Company cannot use any of the proceeds to pay debt to related parties. As a condition of receiving the foregoing proceeds, related parties and employees were required to accept a total of 348,334 shares of restricted common stock in exchange for $348,334 of outstanding debt. - -------------------------------------------------------------------------------- Page F-21 - -------------------------------------------------------------------------------- RAPIDTRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 - -------------------------------------------------------------------------------- 7. EQUITY TRANSACTIONS (continued) UNIT PURCHASE AGREEMENT (continued) The Company did not receive approximately $535,000 of the total proceeds under the Unit Purchase Agreement as of December 31, 2003; therefore such amount was recorded as stock subscription receivable on the accompanying consolidated statements of stockholders' deficit. The Company received $535,000 during the year ended December 31, 2004. Prior to the Merger (see Note 2), Ceres Financial Limited acquired shares of the Company's restricted common stock in another private placement. On March 31, 2003, Rapidtron Delaware borrowed $150,000 from Ceres Financial Limited, evidenced by a note with interest at 12% per annum, due September 30, 2003 and payable upon demand thereafter. On December 31, 2003, Ceres Financial Limited tendered the principal balance of $150,000 for 120,000 Units under the terms of the Unit Purchase Agreement dated November 12, 2003, as amended. On July 17, 2003, the Company borrowed $150,000 from Corvus Holding Ltd., evidenced by a promissory note with interest at 6% per annum, due October 17, 2003 and payable upon demand thereafter. The Company agreed to convert $60,000 of this debt to 60,000 shares of its restricted common stock on August 22, 2003 (as noted above). On December 31, 2003, Corvus Holding Ltd. tendered the remaining principal balance of $90,000 for 72,000 Units under the terms of the Unit Purchase Agreement dated November 12, 2003, as amended. In connection with the Unit Purchase Agreement, certain executives of the Company made certain representations and warranties to the investors related to the Company's forecasted performance and agreed that such representations were a material inducement to the investment in the Units. In connection with such forecasts, the executives, as principal shareholders, each entered into an Escrow and Contribution Agreement under which they agree to place their common shares into escrow and to contribute their pro rata share of such escrowed shares to the Company in the event of a breach of such representations and warranties or the issuance of stock or stock options in excess of certain limits. The executives placed 9,124,392 shares into escrow. Under the terms of the Escrow and Contribution Agreement, these shareholders agreed to contribute to the Company one share of common stock for (i) each $1.00 that the Company's gross revenue for the 15 month period ending December 31, 2004 falls below the gross revenue forecast of $10,880,000 for such period, (ii) each share of common stock issued and each option (or other securities exercisable to acquire a share of common stock) granted by the Company after November 12, 2003, under all compensatory or other arrangements in excess of 400,000 shares in the aggregate, and (iii) each share of common stock issued and each option (or other securities exercisable to acquire a share of common stock) granted by Rapidtron which fails to satisfy certain criteria, including a minimum share price of $1.25 per share and certain vesting requirements in connection with option grants. The Company had sales approximating 2,395,000 during the 15 month period ended December 31, 2004. As such, management estimates that approximately 8,485,000 common shares will be returned to the Company from escrow. The remaining 639,000 common shares will be returned to the shareholders. The investors shall make a claim within 15 days following the date that the December 31, 2004 annual report is filed with the SEC. Such transaction has not been recorded at December 31, 2004, but will be recorded once the investors' claim is accepted and settled. 8. STOCK OPTIONS The Company adopted the 2003 Stock Plan (the "Plan") during the year ended December 31, 2003. The Plan permits the Company to issue up to 12 million shares of common stock to employees and consultants, in the form of options or stock awards. The plan received stockholder approval in 2004. The Company's officers, directors, employees and consultants are expected to participate in the Plan. - -------------------------------------------------------------------------------- Page F-22 - -------------------------------------------------------------------------------- RAPIDTRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 - -------------------------------------------------------------------------------- 8. STOCK OPTIONS (continued) No stock options were granted during the year ended December 31, 2004. During the year ended December 31, 2003, the Company granted to certain employees, in connection with employment agreements and the Plan, options to acquire 910,000 shares of the Company's restricted common stock. Of these options, 900,000 vest half on January 1, 2004 and half on January 1, 2005, and have an exercise price of $1.00 per share. The other 10,000 options vested immediately and have an exercise price of $1.25 per share. All such options have a five year life. Additionally, options to acquire 150,000 shares granted prior to 2003 were cancelled in connection with the Merger (see Note 2). A summary of the aggregate stock option activity for the years ended December 31, 2004 and 2003 is presented below:
EXERCISE PRICE WEIGHTED AVERAGE SHARES RANGE PRICE PER SHARE --------- --------------- ----------------- Options outstanding - December 31, 2002 150,000 $ 1.00 $ 1.00 Options granted 910,000 $ 1.00 to $1.25 $ 1.00 Options exercised - - $ - Options expired or forfeited (150,000) $ 1.00 $ 1.00 --------- --------------- ----------------- Options outstanding - December 31, 2003 910,000 $ 1.00 to $1.25 $ 1.00 Options granted - - $ - Options exercised - - $ - Options expired or forfeited - - $ - Options outstanding - December 31, 2004 910,000 $ 1.00 to $1.25 $ 1.00 ========= =============== ================= Options exercisable - December 31, 2004 460,000 $ 1.00 to $1.25 $ 1.01 ========= =============== =================
The weighted average life of options outstanding at December 31, 2003 was approximately four years. The weighted average grant-date fair value per share of options granted during 2003 was $0.43. Such fair value was estimated by using the Black-Scholes stock option pricing model based on the exercise price per share, the estimated market price of the Company's common stock, and the weighted-average assumptions set forth below for issuances in the year ended December 31, 2003:
Expected life 5 Years Estimated volatility 44% Risk-free interest rate 3.4% Dividends None
9. WARRANTS In connection with the Unit Purchase Agreement (see Note 7), the Company issued warrants to acquire 1,472,000 shares of the Company's common stock. Such warrants have a purchase price of $1.25, through the first anniversary of the date of issuance, and $1.50 up to the second anniversary of the date of issuance, upon which the warrants will expire. No warrants have been exercised or forfeited as of December 31, 2003. - -------------------------------------------------------------------------------- Page F-23 - -------------------------------------------------------------------------------- RAPIDTRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 - -------------------------------------------------------------------------------- 9. WARRANTS (continued) Warrants to acquire 120,000 shares of the Company's common stock were granted in February 2004 as part of the Big Sky Management agreement (see Note 7). The Company has estimated the grant date fair value of such options to be $0.45 per share. Warrants to acquire 320,000 common shares at $1.25 per share were exercised on February 27, 2004 (see Note 7). Effective January 1, 2004, the Company entered into a consulting agreement with Mark Adair Financial Accounting Services ("Adair"), pursuant to which the Company will pay Adair $12,500 per month for 12 months, plus warrants to acquire 250,000 shares of restricted common stock in exchange for financial, accounting and strategic business planning consulting services. Such warrants have an exercise price of $1.25 per share between January 1, 2004 and December 31, 2004, and thereafter at $1.50 per share until five years following the expiration or termination of the Adair Consulting Agreement. Such warrants are exercisable on the date of grant. Total compensation of $145,000 has been estimated using the Black-Scholes option pricing model was amortized over the one-year life of the Adair Consulting Agreement. Such agreement, as amended, requires the Company to register the underlying 250,000 shares by filing a registration statement on Form S-8 by December 31, 2004. No registration statements have been filed with the SEC regarding such warrants. Warrants to acquire 160,000 shares of the Company's common stock were granted in April 2004 in connection with the Generation Capital Associates purchase of Units (see Note 7). The Company has estimated the grant date fair value of such options to be $0.65 per share. On April 1, 2004, the Company entered into a two-year management consulting agreement with Amothy Corporation ("Amothy") pursuant to which the Company will issue warrants for up to 1,000,000 shares of its restricted common stock, exercisable at the rate of $1.46 per share for five years from the date the warrants are vested. The warrants will vest as follows: 600,000 on or about April 1, 2004, 200,000 on or about July 1, 2004, and 200,000 on or about October 1, 2004. The warrants have piggyback registration rights. If the warrants are not registered at any time 12 months after the respective vesting dates of such warrants, then the warrants will have a cashless exercise provision at Amothy's option until such time as the shares underlying the warrants are registered. No registration statements have been filed with the SEC regarding such warrants. Based on the fair value of the warrants on the grant date, the Company estimates that it will record consulting fees approximating $650,000 over the life of this agreement. Expense approximating $244,000 was charged to expense during the year ended December 31, 2004. As part of the Silicon Valley Bank ("SVB") Accounts Receivable Purchase Agreement (see Note 6), the Company granted SVB warrants to acquire 150,862 shares of common stock at $0.58 per share for five years from the date of grant. Such warrants are immediately exercisable. The Company recorded expense approximating $50,000 based on the estimated fair value of the warrants. On December 1, 2004, in connection with the Oceanus Value Fund Convertible Promissory Note (see Note 6), the Company granted warrants to acquire 800,000 restricted common shares at $0.33 per share. Such warrants are immediately exercisable and have a term of five years. The Company has estimated the grant date fair value of such options to be $0.29 per share. - -------------------------------------------------------------------------------- Page F-24 - -------------------------------------------------------------------------------- RAPIDTRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 - -------------------------------------------------------------------------------- 9. WARRANTS (continued) A summary of the aggregate warrant activity for the years ended December 31, 2004 and 2003 is presented below:
EXERCISE PRICE WEIGHTED AVERAGE SHARES RANGE PRICE PER SHARE ---------- --------------- ----------------- Warrants outstanding - December 31, 2002 - - $ - Warrants granted 1,472,000 $ 1.25 $ 1.25 Warrants exercised - - $ - Warrants expired or forfeited - - $ - ---------- --------------- ----------------- Warrants outstanding - December 31, 2003 1,472,000 $ 1.25 $ 1.25 Warrants granted 2,480,862 $ 0.33 to $1.46 $ 1.01 Warrants exercised (320,000) $ 1.25 $ 1.25 Warrants expired or forfeited - - $ - ---------- --------------- ----------------- Warrants outstanding - December 31, 2004 3,632,862 $ 0.33 to $1.46 $ 0.97 ========== =============== ================= Warrants exercisable - December 31, 2004 3,632,862 $ 0.33 to $1.46 $ 0.97 ========== =============== =================
The weighted average life of warrants outstanding at December 31, 2004 was approximately three years. The weighted average grant-date fair value per share of warrants granted during 2004 and 2003 was $0.20 and $0.34, respectively. Such fair value was estimated using the Black-Scholes stock option pricing model based on the exercise price per share, the estimated market price of the Company's common stock, and the weighted-average assumptions set forth below for issuances in the years ended December 31:
2004 2003 -------- -------- Expected life 5 Years 2 Years Estimated volatility 47% 44% Risk-free interest rate 3.3% 3.4% Dividends None None
- -------------------------------------------------------------------------------- Page F-25 - -------------------------------------------------------------------------------- RAPIDTRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 - -------------------------------------------------------------------------------- 10. COMMITMENTS AND CONTINGENCIES PURCHASE COMMITMENTS At December 31, 2002, the Company was under a distribution agreement with Axess AG (its principal supplier), to purchase a minimum of $3,000,000 of access control devices through April 2003. On December 11, 2002, Axess AG agreed that if the Company made certain payments and met certain conditions, the purchase commitment would be released. As of December 31, 2004, management believes that all payments have been made and conditions have been met, as required by Axess AG. To obtain the release of inventory on orders from Axess AG, the Company filed a UCC-1 Financing Statement on September 23, 2003, securing the related payable to Axess AG of approximately $100,000. Such payable is secured by certain accounts receivable totaling $100,000. Management believes that as of December 31, 2004, the Company has met all conditions and obligations required by the security agreement. To obtain the release of additional inventory on order from Axess AG, the Company filed a UCC-1 Financing Statement on April 27, 2004, securing the related payable to Axess AG of approximately $250,000. Such payable was secured by the Company's accounts receivable. The Company met all conditions and obligations required by the security agreement, and Axess AG released this security agreement prior to December 31, 2004. CONSULTING AGREEMENT The Company entered into a software development agreement with Pioneering Innovations Inc. ("Pioneering Innovations") on January 13, 2004. Pioneering Innovations has developed a piece of software titled COM DLL, which allows the Company's products to interface with customers existing back office software. In accordance with this agreement, the Company purchased COM DLL for $100,000, to be paid in 24 equal monthly installments of $4,166.67. As no interest rate was specified in the agreement, the Company has applied a rate of 4% and recorded the related debt and asset at $96,271. Additionally, the agreement provides for support and maintenance services, related to new installations of the Company's products, by Pioneering Innovations over its three-year term. As consideration for such services, the Company will pay Pioneering Innovations 10 shares of the Company's restricted common stock per product installed that becomes fully integrated and operational with COM DLL, up to 40,000 shares. Such shares are due within 30 days of the end of each quarter. For the year ended December 31, 2004, the Company completed 26 relevant installations and has issued Pioneering Innovations 260 shares of restricted common stock (see Note 7). LEGAL The Company may be involved from time to time in various claims, lawsuits, disputes with third parties, actions involving allegations and incriminations or breach of contract actions incidental to the normal operations of the business. The Company is currently not involved in any such litigation that management believes could have a material adverse impact on its consolidated financial position or consolidated results of operations. - -------------------------------------------------------------------------------- Page F-26 - -------------------------------------------------------------------------------- RAPIDTRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 - -------------------------------------------------------------------------------- 11. INCOME TAXES There is no material income tax expense recorded for the years ended December 31, 2004 and 2003, due to the Company's net losses. Income tax expense for the years ended December 31, 2004 and 2003 differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent for the following reasons:
2004 2003 ------------ ---------- Income tax benefit at U.S. federal statutory rates $(1,122,000) $(987,000) Valuation allowance 1,122,000 987,000 State and local income taxes, net of federal income tax effect 3,307 800 ------------ ---------- $ 3,307 $ 800 ============ ==========
The Company has a deferred tax asset and like amount of valuation allowance of approximately $2,511,000 at December 31, 2004, relating primarily to tax net operating loss carryforwards ($2,239,000) and acquisition costs deferred for tax purposes but expensed for book purposes ($272,000). The valuation allowance increased by approximately $1,122,000 during the year ended December 31, 2004. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable losses and projections for future taxable income (losses) over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will not realize the benefits of these deductible differences. As of December 31, 2004, the Company had net operating loss carryforwards ("NOLs") of approximately $6,585,000 available to offset future taxable income. The federal carryforward expires in varying years through 2025. In the event the Company were to experience a greater than 50% change in ownership, as defined in Section 382 of the Internal Revenue Code, the utilization of the Company's tax net operating loss carryforwards could be severely restricted. 12. SUBSEQUENT EVENTS (Unaudited) On February 11, 2005, the Company sold 228,009 shares of our common stock for a total purchase price of approximately $62,950. The Company used the proceeds of this investment for the following:
Commissions on the sale $ 6,295 Legal fees $ 3,000 Payment of debt $10,000 Working capital $43,655
On February 8, 2005, the Company entered into a Convertible Note and Warrant Purchase Agreement with Ceres Financial, Limited, a British Virgin Islands company ("Ceres"), the lead investor under the Unit Purchase Agreement, dated November 12, 2003. The Company issued to Ceres a convertible promissory note in the face amount of $30,000, plus interest at 8% per annum, and received net proceeds in the amount of $30,000. The principal amount shall be converted into shares of the Company's common stock at the close of its next equity - -------------------------------------------------------------------------------- Page F-27 - -------------------------------------------------------------------------------- RAPIDTRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 - -------------------------------------------------------------------------------- financing in a single transaction or series of transactions yielding gross proceeds of $200,000 or more, at a conversion rate of price per share in such equity financing. In addition, at the option of the holder, the balance of the note may be converted into common stock at the rate of the lesser of (a) $0.33 per share, or (b) 80% of the lowest closing bid price during the immediately preceding five-day trading period. The Company also issued a warrant to purchase 60,000 shares of its common stock at any time through February 7, 2010, at $0.33 per share. The conversion price may be adjusted one time during the five-year period to the closing price on the date immediately preceding notice from the holder. On March 7, 2005, the Company entered into another Convertible Note and Warrant Purchase Agreement with Ceres, for a loan of $75,000, upon the same terms and conditions as described above. The Company issued to Ceres a convertible promissory note in the face amount of $75,000, plus interest at 8% per annum, and received net proceeds in the amount of $75,000. The principal amount shall be converted into shares of the Company's common stock on the same terms as described above. The Company also issued a warrant to purchase 150,000 shares of its common stock at any time through March 6, 2010, on the same terms as described above. - -------------------------------------------------------------------------------- Page F-28 ITEM 8A. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the periodic reports filed by us with the Commission is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management. Based on their most recent evaluation, which was completed during the period covered by this report, our Chief Executive Officer and Chief Financial Officer believe that our disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) were effective as of December 31, 2004. There were no significant changes in our internal controls or in other factors that could significantly affect these internal controls subsequent to the date of the most recent evaluation. ITEM 8B. OTHER INFORMATION ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT. In November 2004, we terminated our consulting agreement with Lee Guthrie & Associates, eliminating the $4,000 monthly payment. We are currently negotiating a new agreement for services for 2005. On November 22, 2004, we amended the note and loan agreement with LDM Enterprises, LLC, as described under the heading "Item 2.04 Triggering Events That Accelerate or Increase a Direct Financial Obligation," incorporated by reference. On February 8, 2005, we entered into a Convertible Note and Warrant Purchase Agreement with Ceres Financial, Limited, a British Virgin Islands company ("Ceres"), the lead investor under the Unit Purchase Agreement, dated November 12, 2003. We issued to Ceres a convertible promissory note in the face amount of $30,000, plus interest at 8% per annum, and we received net proceeds in the amount of $30,000. The principal amount shall be converted into shares of our common stock at the close of our next equity financing in a single transaction pr series of transactions yielding gross proceeds of $200,000 or more, at a conversion rate of price per share in such equity financing. In addition, at the option of the holder, the balance of the note may be converted into common stock at the rate of the lesser of (a) $0.33 per share, or (b) 80% of the lowest closing bid price during the immediately preceding five-day trading period. We also issued a warrant to purchase 60,000 shares of our common stock at any time through February 7, 2010, at $0.33 per share. The conversion price may be adjusted one time during the five-year period to the closing price on the date immediately preceding notice from the holder. Until June 5, 2005, or until the note is converted or paid in full, we may not, without the prior written consent of Ceres Financial Limited, do any one of the following: 1. enter into any material contract or commitment, or violating, amending or otherwise modifying or waiving any of the terms of any of our material contracts in any case, other than in the ordinary course of business. 2. issue, deliver or sell or authorize or propose the issuance, delivery or sale of, or purchase or propose the purchase of, any shares of our capital stock or securities convertible into, or subscriptions, rights, or options to acquire, or other agreements or commitments of any character obligating us to issue, any such shares or other convertible securities, other than the issuance of shares of our common stock pursuant to the exercise of stock options or other rights therefor outstanding as of February 8, 20005; 3. Convey, license, assign or otherwise transfer to any person or entity any rights to our intellectual property rights or assets other than in the ordinary course of business; 4. 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 our products or technology; 5. Sell, lease, license or otherwise dispose of or encumber any of our properties or assets which are material individually or in the aggregate, to us and our business, taken as a whole, except in the ordinary course of business; 6. 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; 7. Enter into any operating lease in excess of $20,000; 8. Pay, discharge or satisfy in an amount in excess of $10,000 in any one case or $50,000 in the aggregate, any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise) arising other 49 than in the ordinary course of business, other than the payment, discharge or satisfaction of liabilities reflected or reserved against in our financial statements for the quarter ended September 30, 2004 or incurred in the ordinary course of business; 9. Make any capital expenditures, capital additions or capital improvements in excess of $25,000, except in the ordinary course of business; 10. Materially reduce the amount of any material insurance coverage provided by existing insurance policies; 11. Terminate or waive any right of substantial value, other than in the ordinary course of business; 12. Adopt or amend any employee benefit or stock purchase or option plan obligating us to issue more than 100,000 shares of common stock in aggregate, pay any special bonus or special remuneration exceeding $5,000 individually or $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 our employees except in the ordinary course of business; 13. 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 our standard past practice; 14. Commence a lawsuit other than (i) for the routine collection of bills or (ii) in such cases where we, in good faith, determine that failure to commence suit would result in the material impairment of a valuable aspect of our business; 15. 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 our business, taken as a whole; 16. 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 18. Revalue any of our 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. On March 7, 2005, we entered into another Convertible Note and Warrant Purchase Agreement with Ceres, for a loan of $75,000, upon the same terms and conditions as described above. We issued to Ceres a convertible promissory note in the face amount of $75,000, plus interest at 8% per annum, and we received net proceeds in the amount of $75,000. The principal amount shall be converted into shares of our common stock on the same terms as described above. We also issued a warrant to purchase 150,000 shares of our common stock at any time through March 6, 2010, on the same terms as described above. On or about April 14, 2005, we terminated the Memorandum of Understanding with Smart Card Integrators ("SCI"). The terms of the Memorandum of Understanding are described in our Form 8-K filed with the Commission on August 3, 2004, incorporated herein by reference. Pursuant to our termination agreement with SCI, we have forgiven the outstanding balance of the $250,000 loan made pursuant to the memorandum, and both parties have otherwise fully waived and released the other party from any and all claims arising under the memorandum. ITEM 2.04 TRIGGERING EVENTS THAT ACCELERATE OR INCREASE A DIRECT FINANCIAL OBLIGATION. On October 8, 2004, we borrowed $350,000 under a convertible secured promissory note, as more fully described in our Form 8-K filed with the Commission on October 15, 2004, incorporated herein by reference. On November 22, 2004, we amended the note to extend the maturity date to December 15, 2004 and to borrow an additional $25,000. We did not make the required payment on December 15, 2004, and we are now in default under the loan agreement, the note and the security agreement. As a result, a late fee of $18,750 became due and interest began to accrue at 50 14% per annum. We repaid $347,500 following the maturity date. Until we cure the default, interest will accrue at 14%. In addition, the loan is secured by all of our assets, which security interest is subordinate to the security interest held by Silicon Valley Bank. The lender may at any time proceed to foreclose on the security interest until the we cure the default and may collect from the company the cost of such proceedings. On December 1, 2004, we borrowed $400,000 under a secured convertible promissory note with detachable stock purchase warrants, as more fully described in our Form 8-K filed with the Commission on January 11, 2005, incorporated herein by reference. The full balance was due on March 31, 2005, and we have not made any payments to the lender. We are currently in default under the note and will remain in default until the full balance is paid in full. We were also obligated to prepare and file with the SEC no later than December 31, 2004, a registration statement covering all shares issuable under the detachable stock purchase warrants. We have not filed the registration statement to date. As a result, we are obligated to pay an additional $8,000 to the holder of the note for every 30 days after December 31, 2004, until the registration statement is declared effective by the Commission. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the name, age and position of each person who currently serves as a director and/or executive officer of our company as of December 31, 2004, is incorporated by reference to our definitive proxy solicitation on Schedule 14A, to be filed with the Commission within 120 days of the end of our fiscal year. ITEM 10. EXECUTIVE COMPENSATION Information regarding the executive compensation of our named executive officers is incorporated by reference to our definitive proxy solicitation on Schedule 14A, to be filed with the Commission within 120 days of the end of our fiscal year. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information regarding the security ownership of certain beneficial owners and management and related stockholder matters is incorporated by reference to our definitive proxy solicitation on Schedule 14A, to be filed with the Commission within 120 days of the end of our fiscal year. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is incorporated by reference to our definitive proxy solicitation on Schedule 14A, to be filed with the Commission within 120 days of the end of our fiscal year. ITEM 13. EXHIBITS
Exhibit Number Description - ---------------------------------------------------------------------------------------------- 2.1 Agreement and Plan of Merger (1) 2.2 Amendment to Agreement and Plan of Merger (2) 3.1 Articles of Incorporation (3) 3.2 Amended Articles of Incorporation(3) 3.3 Amended Articles of Incorporation(4) 3.4 Amended Articles of Incorporation(5) 3.5 Bylaws(3) 10.1 Registration Rights Agreement 10.2 Security Agreement 10.3 Warrant To Purchase Common Stock 10.4 15% Secured Convertible Promissory Note 10.5 Securities Purchase Agreement 51 Exhibit Number Description - --------------------------------------------------------------------------------------------------- 10.6 Convertible promissory Note 10.7 Loan Agreement 10.8 Security Agreement 10.9 Amendment No. 1 to Loan Agreement 10.10 Allonge to Convertible Promissory Note 10.11 Unit Purchase Agreement dated November 12, 2003(6) 10.12 Amended and Restated Amendment No. 1 to Unit Purchase Agreement dated November 12, 2003(6) 10.13 Registration Rights Agreement dated November 12, 2003(6) 10.14 Escrow and Contribution Agreement dated November 12, 2003(6) 10.15 Consulting Agreement with Big Sky Management Ltd dated November 12, 2003(6) 10.16 Agreement between Rapidtron, Inc. and Market Street Publishing Ltd., dated November, 2003(6) 10.17 Release of Security Agreement with Axess AG dated November 24, 2003(6) 10.18 Stock Plan(6) 10.19 Agreement between Rapidtron and Pioneering Innovation Inc., dated January 13, 2004. (6) 10.20 Purchase Order from National Fitness Club Chain (7) 10.21 Letter Agreement with John Creel Regarding Repayment of Debt, dated December 29, 2003 (6) 10.22 Letter Agreement with Equus Marketing Regarding Repayment of Debt, dated December 31, 2003 (6) 10.23 Letter Agreement with Peter Dermutz Regarding Repayment of Debt, dated December 31, 2003 (6) 10.24 Letter Agreement with Steve Meineke Regarding Repayment of Debt, dated December 31, 2003 (6) 10.25 Employment Agreement with Chris Perkins, dated December 1, 2003, as amended (6) 10.26 Memorandum of Understanding (8) 10.27 Termination Agreement (9) 10.28 Director Service and Indemnification Agreement 10.29 Repacement Promissory Note 10.30 Accounts Receivable Purchase Agreement (10) 10.31 Intellectual Property Security Agreement with Rapidtron, Inc., a Nevada Corporation 10.32 Intellectual Property Security Agreement with Rapidtron, Inc., a Delaware Corporation (10) 10.33 Warrant to Purchase Stock (10) 10.34 Registration Rights Agreement (10) 10.35 Amendment to Consulting Agreement (10) 10.36 Financial Public Relations Agreement, Dated January 1, 2004 (11) 10.37 Employment Termination Agreement, Dated March 1, 2004 (11) 10.38 Director Service and Indemnification Agreement, Dated March 1, 2004 (11) 10.39 Unit Purchase Agreement, Dated April 1, 2004 (11) 10.40 Letter Agreement with Amothy Corporation, Dated March 17, 2004 (11) 21.1 Subsidiaries (6) 31.1 Certification Of Chief Executive Officer Pursuant To 15d-14. 31.2 Certification Of Chief Financial Officer Pursuant To 15d-14. 32.1 Certification Of Chief Executive Officer Pursuant To 18 U.S.C. Sec.1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002. 32.2 Certification Of Chief Financial Officer Pursuant To 18 U.S.C. Sec.1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002. (1) Incorporated by reference to our Form 8-K filed with the Commission on January 23, 2003. (2) Incorporated by reference to our Form 8-K filed with the Commission on April 2, 2003. (3) Incorporated by reference to our Form 10-SB filed with the Commission on October 6, 2000. (4) Incorporated by reference to our Form 8-K filed with the Commission on November 15, 2002. (5) Incorporated by reference to our Form 10-QSB filed with the Commission on May 19, 2003. (6) Incorporated by reference to our Registration Statement on Form SB-2, filed with the Securities and Exchange Commission on February 5, 2004. (7) Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on January 14, 2004. (8) Incorporated by reference to our Form 8-K filed with the Commission on August 3, 2004. (9) Incorporated by reference to our Form 8-K filed with the Commission on March 1, 2004. (10) Incorporated by reference to our Form 10-QSB filed with the Commission on August 16, 2004. (11) Incorporated by reference to our Form 10-QSB filed with the Commission on May 17, 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding our principal accountant fees and services is set forth in our definitive proxy solicitation on Schedule 14A, to be filed with the Commission within 120 days of the end of our fiscal year 52 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RAPDITRON, INC. Date: April 15, 2005 By: /s/ John Creel - ----------------------------------------------------------- John Creel, Chairman, President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: April 15, 2005 By: /s/ John Creel - ----------------------------------------------------------- John Creel, Chairman, President and Chief Executive Officer By: /s/ Peter Dermutz - ----------------------------------------------------------- Peter Dermutz, Chief Financial Officer (Principal Financial Officer), Corporate Secretary, Executive Vice President and Treasurer 53 EX-10.1 2 ex10_1.txt EXHIBIT 10.1 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") is made and entered into on December 1, 2004, by and between Rapidtron, Inc., a corporation organized under the laws of the State of Nevada, with its principal place of business located at 3151 Airway Avenue, Building Q, Costa Mesa, California (the "Company"), and Oceanus Value Fund, L.P. (the "Buyer"). NOW, THEREFORE, in consideration of their respective promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Buyer hereby agree as follows: 1. Definitions. Capitalized terms used and not otherwise defined ----------- herein shall have the meanings given such terms in the Securities Purchase Agreement entered into between the Company and the Buyer dated concurrently herewith (the "Securities Purchase Agreement"). As used in this Agreement, the following terms shall have the specified meanings: "Affiliate" means, with respect to any Person, any other Person that directly or indirectly controls or is controlled by or under common control with such Person. For the purposes of this definition, "control," when used with respect to any Person, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise, and the terms "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. "Blackout Period" shall have the meaning set forth in Section 2(c). "Board" shall have the meaning set forth in Section 2(c). "Business Day" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the City of New York or the State of New York are authorized or required by law or other government actions to close. "Commission" means the Securities and Exchange Commission. "Common Stock" means the Company's $0.001 par value common stock. "Effectiveness Date" means the date which is ninety (90) days after the Filing Date. "Effectiveness Period" shall have the meaning set forth in Section 2(a). "Event" shall have the meaning set forth in Section 8(c). "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Filing Date" means the date which is thirty (30) days after the date of this Agreement. "Holder" or "Holders" means the holder or holders, as the case may be, from time-to-time of Registrable Securities. "Indemnified Party" shall have the meaning set forth in Section 6(c). "Indemnifying Party" shall have the meaning set forth in Section 6(c). "Losses" shall have the meaning set forth in Section 6(a). "OTC Bulletin Board" shall mean the over-the-counter electronic bulletin board market. "Person" means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Proceeding" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "Prospectus" means the prospectus included in a Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective Registration Statement in reliance upon Rule 430A under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference in such Prospectus. "Registrable Securities" means (i) the Warrant Shares, (ii) any shares issuable upon any stock split, stock dividend, recapitalization or similar event with respect to the Warrant Shares and (iii) any other dividend or other distribution with respect to, conversion or exchange of, or in replacement of, the Warrant Shares. "Registration Statement" means each registration statement provided for in Section 2 hereof, including (in each case) the Prospectus, any amendments and supplements to such registration statement or Prospectus (including pre- and post-effective amendments), all exhibits thereto, and all material incorporated by reference in such registration statement. "Rule 144" means Rule 144 under the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Rule 158" means Rule 158 under the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Rule 415" means Rule 415 under the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Securities Act" means the Securities Act of 1933, as amended. 2. Registration. ------------ (a) Required Registration. As promptly as possible, but in any event no --------------------- later than the Filing Date, the Company shall prepare and file with the Commission a Registration Statement covering all Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. The Company shall use its commercially reasonable efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event prior to the Effectiveness Date (except where the Company's audited financial statements are stale, in which case by the earlier of 90 days after the Effectiveness Date or the date that current audited financial statements have been filed by the Company as part of a Form 10-KSB), and, subject to Section 2(c) below, to keep such Registration Statement continuously effective under the Securities Act until such date as is the earlier of (i) the date when all Registrable Securities covered by such Registration Statement have been sold or (ii) two (2) years after the date of the issuance of the Warrant under the Securities Purchase Agreement (the "Effectiveness Period"). If at any time during the Effectiveness Period (i) the maximum number of Warrant Shares exceeds (A) the number of shares of Common Stock initially registered in respect of the Warrant Shares minus (B) the number of Warrant Shares, if any, already sold pursuant to the Registration Statement and (ii) such excess exists for a period of more than ten (10) Business Days in any thirty (30) day period, the Company shall be required to file an amendment to the Registration Statement or an additional Registration Statement with respect to such excess shares within ten (10) Business Days after such conditions have been met (except where the Company's audited financial statements are stale, in which case within 100 calendar days after such conditions have been met), and the Company shall thereafter use its commercially reasonable efforts to cause such amendment or additional Registration Statement to be declared effective by the Commission as soon as possible, but in no event later than ninety (90) days after filing. (b) Shelf Registration. No later than thirty (30) days after becoming ------------------ eligible to file a registration statement for a secondary or resale offering of the Registrable Securities on Form S-3, the Company shall prepare and file with the Commission such documentation as is necessary to allow all remaining Registrable Securities to thereafter be sold on a continuous basis under Rule 415 pursuant to a "shelf" Registration Statement on Form S-3. Notwithstanding anything to the contrary contained herein, at no time during the Effectiveness Period shall any of the Registrable Securities cease being registered. (c) Delay in Filing, Effectiveness or Use. Anything in this Agreement ------------------------------------- to the contrary notwithstanding, if (i) there is material non-public information regarding the Company which the Company's Board of Directors (the "Board") reasonably determines not to be in the Company's best interest to disclose and which the Company is not otherwise required to disclose or (ii) there is a significant business opportunity (including, but not limited to, the acquisition or disposition of assets (other than in the ordinary course of business) or any merger, consolidation, tender offer or other similar transaction, available to the Company which the Board reasonably determines not to be in the Company's best interest to disclose and which the Company would be required to disclose in the Registration Statement, then, upon written notice to each Holder, the Company may postpone or suspend the filing, effectiveness or use of a Registration Statement for a period not to exceed 10 consecutive days; provided, however, that the Company may not postpone or suspend its obligations under Section 2(a) for more than 30 days in the aggregate during any 12 month period (each, a "Blackout Period"). (d) Piggy-Back Registrations. ------------------------ (i) If at any time when there is not an effective Registration Statement covering the Registrable Securities, the Company shall decide to prepare and file with the Commission a Registration Statement relating to an offering for its own account of any of its equity securities or the account of other holders of any of its equity securities, other than on Form S-4 or Form S-8 (or their then equivalents relating to equity securities to be issued solely in connection with the acquisition of an entity or business, or equity securities issuable in connection with stock option or other employee benefit plans), the Company shall send to each Holder written notice of such decision. If, within thirty (30) days after receipt of such notice, a Holder does not request in writing to the Company that some or all of such Holder's Registrable Securities be removed from such Registration Statement, then the Company shall cause the registration under the Securities Act of all Registrable Securities which are held by each Holder subject to the Company's right to exclude a Holder as set forth below; provided, however, that if at any time after giving written notice of its intention to register any securities and prior to the effective date of the Registration Statement filed in connection with such registration, the Company shall determine for any reason not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to each Holder and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay expenses in accordance with Section 5 hereof) and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities being registered pursuant to this Section 2(d) for the same period as the delay in registering such other securities. The foregoing notwithstanding, the Company shall not be required to register any Registrable Securities pursuant to this Section 2(d) that are eligible for sale pursuant to Rule 144(k). (ii) In the case of an underwritten public offering, if the managing underwriter(s) should reasonably object to the inclusion of the Registrable Securities in such Registration Statement, then if the Company, after consultation with the managing underwriter(s), should reasonably determine that the inclusion of the Registrable Securities would materially adversely affect the offering contemplated in such Registration Statement, and based on such determination recommends inclusion in such Registration Statement of fewer or none of the Registrable Securities of a Holder, then (A) if the Company after consultation with the underwriter(s) recommends the inclusion of fewer Registrable Securities, the number of Registrable Securities of the Holders included in such Registration Statement shall be reduced pro-rata among such Holders (based upon the number of Registrable Securities requested to be included in the registration), or (B) none of the Registrable Securities of the Holders shall be included in such Registration Statement, if the Company after consultation with the underwriter(s) recommends the inclusion of none of such Registrable Securities; provided, however, that if securities are being offered for the account of other Persons as well as the Company, such reduction shall not represent a greater fraction of the number of Registrable Securities intended to be offered by the Holders than the fraction of similar reductions imposed on such other Persons (other than the Company). 3. Registration Procedures. In connection with the Company's ------------------------ registration obligations under Section 2 above, the Company shall: (a) Initial Filing. With respect to its obligations under Section -------------- 2(a), prepare and file with the Commission on or prior to the Filing Date, a Registration Statement on Form SB-2 (or, if the Company is not then eligible to register for resale the Registrable Securities on that Form, such registration shall be on another appropriate form in accordance herewith) in accordance with the method or methods of distribution thereof specified by the Holders in writing (unless otherwise directed by the Holders in writing), and use its commercially reasonable efforts to cause the Registration Statement to become effective and remain effective as provided herein; provided, however, that not less than five (5) Business Days prior to the filing of the Registration Statement or any related Prospectus or any amendment or supplement thereto (including any document that would be incorporated therein by reference), the Company shall (i) furnish to each Holder copies of all such documents proposed to be filed, which documents (other than those incorporated by reference) will be subject to the review of each Holder and (ii) at the request of a Holder, cause the Company's officers, directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the reasonable opinion of counsel to such Holder, to conduct a reasonable investigation within the meaning of the Securities Act. The Company shall not file a Registration Statement or any such Prospectus or any amendments or supplements thereto to which a Holder or any counsel therefor shall reasonably object in writing within three (3) Business Days of their receipt thereof. (b) Amendments. With respect to its obligations under Section 2(a), ---------- use its commercially reasonable efforts to (i) prepare and file with the Commission such amendments, including post-effective amendments, as may be necessary to keep the Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period, and prepare and file with the Commission such amendments to the Registration Statement and/or additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities, (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended, to be filed pursuant to Rule 424 (or any similar provisions then in force) under the Securities Act, (iii) respond as promptly as possible to any comments received from the Commission with respect to a Registration Statement or any amendment thereto and as promptly as possible provide to each Holder true and complete copies of all correspondence from and to the Commission relating to the Registration Statement or amendment and (iv) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by the Registration Statement during the applicable period in accordance with the intended methods of disposition by each Holder thereof set forth in such Registration Statement as so amended or in such Prospectus as so supplemented. (c) Related Matters. Notify each Holder of Registrable Securities to --------------- be sold and any counsel therefor as promptly as possible (and, in the case of clause (i)(A) below, not less than five (5) Business Days prior to such filing) (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to a Registration Statement is proposed to be filed, (B) when the Commission notifies the Company whether there will be a "review" of such Registration Statement and whenever the Commission comments in writing on such Registration Statement and (C) with respect to a Registration Statement or any post-effective amendment, when the same has become effective, (ii) of any request by the Commission or any other federal or state governmental authority for amendments or supplements to a Registration Statement or Prospectus or for additional information, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of a Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose, (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose and (v) of the occurrence of any event that makes any statement made in a Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to a Registration Statement, Prospectus or other documents so that, in the case of such Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (d) Withdrawal and Suspension. With respect to its obligations under ------------------------- Section 2(a), use its commercially reasonable efforts to avoid the issuance of, or, if issued, at the earliest practicable time obtain the withdrawal of, (i) any order suspending the effectiveness of the Registration Statement or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction. (e) Incorporation of Certain Matters. If requested by the Holders of a -------------------------------- majority in interest of the Registrable Securities, (i) promptly incorporate in a Prospectus supplement or post-effective amendment to a Registration Statement such information as the Company reasonably agrees should be included therein and (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated therein. (f) Copies. To the extent requested by any Holder, provide to each ------ Holder and any counsel therefor, without charge, at least one conformed copy of each Registration Statement and each amendment thereto (including financial statements and schedules, documents incorporated or deemed to be incorporated therein by reference, and all exhibits), such documents to be provided promptly after their filing with the Commission. (g) Delivery. Promptly deliver to each Holder and any counsel -------- therefor, without charge, as many copies of the Prospectus or Prospectuses and each amendment or supplement thereto as they may reasonably request; and the Company hereby consents to the use of each such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offer and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto. (h) Blue Sky Matters. (A) Prior to any public offering of Registrable ---------------- Securities, use its commercially reasonable efforts to register or qualify or cooperate with the selling Holders and any counsel therefor in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder reasonably requests in writing and (B) keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period (if applicable) and perform or do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of those Registrable Securities covered by a Registration Statement; provided, however, that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or subject the Company to any material tax in any such jurisdiction where it is not then so subject. (i) Preparation of Certificates. Cooperate with each Holder to --------------------------- facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold pursuant to a Registration Statement, which certificates shall be free of all restrictive legends, and cause such certificates to be in such denominations and registered in such names as each Holder may request at least two (2) Business Days prior to any sale of Registrable Securities. (j) Misrepresentation. Subject to Section 2(c) above, upon the ----------------- occurrence of any event contemplated by Section 3(c)(v), as promptly as possible, prepare a supplement or amendment, including a post-effective amendment, to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither such Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (k) Listing and Quotation. Use its commercially reasonable efforts to --------------------- cause all Registrable Securities relating to a Registration Statement to be quoted on the OTC Bulletin Board and any securities exchange, quotation system or other market on which similar securities issued by the Company are then listed or quoted as and when required pursuant to the Securities Purchase Agreement. (l) Rule 158. Comply in all material respects with all applicable -------- rules and regulations of the Commission and make generally available to its security holders an earnings statement satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 not later than 45 days after the end of any 12-month period (or 90 days after the end of any 12-month period if such period is a fiscal year) commencing on the first day of the first fiscal quarter of the Company after the effective date of the Registration Statement. 4. Additional Matters. ------------------- (a) Holder Information. In connection with a Registration Statement, ------------------- each selling Holder shall be required to furnish to the Company information regarding such Holder and the distribution of such Registrable Securities as is required by law to be disclosed in the Registration Statement, and the Company may exclude from such registration the Registrable Securities of any such Holder who fails to furnish such information within a reasonable time prior to the filing of such Registration Statement or any supplemented Prospectus and/or amended Registration Statement. (b) Reference to Holder. If a Registration Statement refers to any --------------------- Holder by name as the holder of any securities of the Company, then such Holder shall have the right to require the deletion of the reference to such Holder in any amendment or supplement to the Registration Statement that is filed subsequent to the time that such reference ceases to be required by the Securities Act or any similar federal statute then in force. (c) Holder Covenants. Each Holder covenants and agrees that (i) it ----------------- will not sell any Registrable Securities under a Registration Statement until it has received copies of the Prospectus as then amended or supplemented as contemplated in Section 3(g) and notice from the Company that such Registration Statement and any post-effective amendments thereto have become effective as contemplated by Section 3(c) and (ii) it and its officers, directors and Affiliates, if any, will comply with the prospectus delivery requirements of the Securities Act as applicable to them in connection with the sale of Registrable Securities pursuant to such Registration Statement. (d) Discontinuance. Each Holder agrees by its acquisition of -------------- Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in clauses (ii) through (v) of Section 3(c) or suspension of the use of the Registration Statement pursuant to Section 2(c) hereof, such Holder will immediately discontinue disposition of such Registrable Securities under the Registration Statement until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement contemplated by Section 3(j), or until it is advised in writing by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. 5. Registration Expenses All fees and expenses incident to the ---------------------- performance of or compliance with this Agreement by the Company shall be borne by the Company, whether or not a Registration Statement is filed or becomes effective and whether or not any Registrable Securities are sold pursuant to a Registration Statement. Such fees and expenses shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made by or with the OTC Bulletin Board and each securities exchange, quotation system or other market on which Registrable Securities are required hereby to be listed or quoted, (B) with respect to filings required to be made with the Commission and (C) in compliance with state securities or Blue Sky laws (including, without limitation, reasonable fees and disbursements of counsel for each Holder in connection with Blue Sky qualifications of the Registrable Securities and any determination of the eligibility of the Registrable Securities for investment under the laws of such jurisdictions as the Holders of a majority of Registrable Securities may designate)), (ii) printing expenses (including, without limitation, expenses of printing certificates for the Registrable Securities and of printing Prospectuses, if the printing of Prospectuses is requested by the Holders of a majority of the Registrable Securities included in the Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company and a single counsel for the Holders, (v) Securities Act liability insurance, if the Company so desires such insurance and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement, including, without limitation, the Company's independent public accountants (including any costs associated with the delivery by independent public accountants of a comfort letter or comfort letters). In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, and the fees and expenses incurred in connection with the listing or quoting of the Registrable Securities on the OTC Bulletin Board or any securities exchange, quotation system or other market on which Registrable Securities are required to be listed or quoted. 6. Indemnification. --------------- (a) Indemnification by the Company. The Company shall, notwithstanding ------------------------------ any termination of this Agreement, defend, indemnify and hold harmless each Holder, each officer, director, manager, owner, agent and employee of each Holder, each Person who controls any Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and each officer, director, manager, owner, agent and employee of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, reasonable costs (including, without limitation, costs of investigation, preparation and attorneys' fees actually incurred) and expenses (collectively, "Losses"), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in a Registration Statement or any Prospectus or any amendment or supplement thereto, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or supplement thereto, in the light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that (i) such untrue statements or omissions are based solely upon information regarding such Holder which was furnished in writing to the Company by such Holder expressly for use therein, (ii) such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder for use in the Registration Statement or such Prospectus or in any amendment or supplement thereto or (iii) the use by such Holder of an outdated or defective prospectus (without any Company provided supplement correcting such outdated or defective prospectus) after the Company has notified such Holder in writing that such prospectus is suspended from use, outdated or defective. The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of an Indemnified Party and shall survive the transfer of Registrable Securities by a Holder. (b) Indemnification by Holders. Each Holder shall, severally and not ---------------------------- jointly, defend, indemnify and hold harmless the Company, the Company's directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses, as incurred, arising solely out of or based solely upon any untrue statement of a material fact contained in a Registration Statement, any Prospectus or any amendment or supplement thereto, or arising solely out of or based solely upon any omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or supplement thereto, in the light of the circumstances under which they were made) not misleading, to the extent, but only to the extent, that (i) such untrue statement or omission is contained in or omitted from any information so furnished in writing by such Holder to the Company specifically for inclusion in such Registration Statement or such Prospectus or an amendment or supplement thereto, (ii) such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in such Registration Statement or such Prospectus or any amendment or supplement thereto or (iii) the use by such Holder of an outdated or defective prospectus (without any Company provided supplement correcting such outdated or defective prospectus) after the Company has notified such Holder in writing that such prospectus is suspended from use, outdated or defective. Notwithstanding anything to the contrary contained herein, a Holder shall be liable under this Section 6(b) for only that amount which does not exceed the net proceeds to such Holder as a result of the sale of Registrable Securities pursuant to such Registration Statement. (c) Conduct of Indemnification Proceedings. If any Proceeding shall be -------------------------------------- brought or asserted against any Person entitled to indemnity hereunder (an "Indemnified Party"), such Indemnified Party promptly shall notify the Person from whom indemnity is sought (the "Indemnifying Party") in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party. An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (i) the Indemnifying Party has agreed in writing to pay such fees and expenses, (ii) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding following receipt of notice and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding or (iii) the named parties to any such Proceeding (including any impleaded parties) include both the Indemnified Party and the Indemnifying Party, and the Indemnified Party shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent both the Indemnified Party and the Indemnifying Party (in which case, if the Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding. All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within thirty (30) Business Days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that the Indemnified Party is not entitled to indemnification hereunder; provided, that the Indemnifying Party may require the Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that the Indemnified Party is not entitled to indemnification hereunder). (d) Contribution. If a claim for indemnification under Section 6(a) or ------------ 6(b) is unavailable to an Indemnified Party because of a failure or refusal of a governmental authority to enforce such indemnification in accordance with its terms (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses, as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying, Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 6(c), any reasonable attorneys' or other reasonable fees or expenses incurred in connection with any Proceeding to the extent there would have been indemnification for such fees or expenses if the indemnification provided in this Section was available in accordance with its terms. Notwithstanding anything to the contrary contained herein, a Holder shall be liable or required to contribute under this Section 6(d) for only such amount as does not exceed the net proceeds to such Holder as a result of the sale of Registrable Securities pursuant to the Registration Statement. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 6(d) were determined by pro rata allocation or by any other method of allocation that does not take into misrepresentation (within the meaning provided in the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The indemnity and contribution agreements contained in this Section are in addition to any liability that an Indemnifying Party may have to an Indemnified Party. 7. Rule 144. As long as any Holder owns the Warrant or any Warrant --------- Shares, the Company agrees to timely file (or obtain extensions in respect thereof and file within the applicable extension period) all reports required to be filed by the Company pursuant to Section 13 or 15(d) of the Exchange Act. In addition, as long as any Holder owns any Warrant Shares, if the Company is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act, it will prepare and furnish to each Holder and make publicly available in a timely fashion the information specified in Rule 144(c)(2). The Company further agrees that it will take such further action as any Holder may reasonably request to the extent required from time to time to enable each Holder to sell Warrant Shares without registration under the Securities Act within the limitation of the exemption provided by Rule 144, including providing any legal opinions of counsel to the Company referred to in the Securities Purchase Agreement. Upon the request of any Holder, the Company shall deliver to such Holder a written certification of a duly authorized officer as to whether it has complied with the foregoing requirements. 8. Miscellaneous. ------------- (a) Remedies. In the event of a breach by the Company or any Holder of -------- any of their obligations under this Agreement, each non-breaching party, in addition to being entitled to exercise all rights granted by law or under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agree that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. The Company and the Buyer also acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement or the Securities Purchase Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement or the Securities Purchase Agreement and to enforce specifically the terms and provisions hereof or thereof, this being in addition to any other remedy to which any of them may be entitled by law or equity. (b) No Inconsistent Agreements. Neither the Company nor any of its ---------------------------- Affiliates has, as of the date hereof, entered into and currently in effect, nor shall the Company or any of its Affiliates on or after the date of this Agreement enter into, any agreement with respect to its securities that is inconsistent with the rights granted to each Holder in this Agreement or otherwise conflicts with the provisions hereof, except for registration rights provisions disclosed in a Schedule to the Securities Purchase Agreement or in the SEC Documents (as defined in the Securities Purchase Agreement). Except for registration rights provisions disclosed in a Schedule to the Securities Purchase Agreement or in the SEC Documents, neither the Company nor any of its Affiliates has previously entered into any agreement currently in effect granting any registration rights with respect to any of its securities to any Person. Without limiting the generality of the foregoing, without the written consent of the Buyer and the Holders of a majority of the then outstanding Registrable Securities, the Company shall not grant to any Person the right to request the Company to register any securities of the Company under the Securities Act unless the rights so granted are subject in all respects to the prior rights in full of each Holder and are not otherwise in conflict with the provisions of this Agreement. The foregoing notwithstanding, this Section 8(b) shall not prohibit the Company from entering into any agreements concerning the registration of securities on Form S-8 or Form S-4. (c) Failure to File Registration Statement and Other Events. The -------------------------------------------------------------- Company and the Buyer agree that the Holders will suffer damages if the Registration Statement required by Section 2(a) above is not filed on or prior to the Filing Date and not declared effective by the Commission on or prior to the Effectiveness Date and maintained in the manner contemplated herein during the Effectiveness Period, or if certain other events occur. The Company and the Buyer further agree that it would not be feasible to ascertain the extent of such damages with precision. Accordingly, subject to the Company's suspension rights as set forth in Section 2(c) hereof, if (i) a required Registration Statement is not filed on or prior to the Filing Date, or is not declared effective by the Commission on or prior to the Effectiveness Date (or in the event an additional Registration Statement is filed because the actual number of Warrant Shares exceeds the number of shares of Common Stock initially registered is not filed and declared effective within the time periods set forth in Section 2(a)), (ii) a required Registration Statement is filed with and declared effective by the Commission but thereafter ceases to be effective as to all Registrable Securities at any time prior to the expiration of the Effectiveness Period, without being succeeded immediately by a subsequent Registration Statement filed with and declared effective by the Commission, (iii) trading in the Common Stock shall be suspended or if the Common Stock ceases to be quoted on the OTC Bulletin Board for any reason for more than sixty (60) days in the aggregate or (iv) the exercise rights of a Holder with respect to the Warrant are suspended by the Company (any such circumstance, failure or breach being referred to as an "Event"), the Company shall pay to the Holders in cash as liquidated damages for such failure, and not as a penalty, an aggregate amount equal to 2% of the original principal amount of the Note issued to the Buyer for each thirty (30) day period until the applicable Event has been cured, which shall be pro rated for periods of less than thirty (30) days (the "Periodic Amount"). Subject to the Buyer's right to add such Periodic Amount on to the principal amount of the Note (as provided in the Note), payments to be made pursuant to this Section 8(c) shall be due and payable three (3) Business Days after the end of each month in which a Periodic Amount accrues, such payments to be made in immediately available funds and allocated among the Holders according to their interests in the Warrant and Warrant Shares. The parties agree that the Periodic Amount represents a reasonable estimate on the part of the parties, as of the date of this Agreement, of the amount of damages that may be incurred by a Holder if a Registration Statement is not filed on or prior to the Filing Date or has not been declared effective by the Commission on or prior to the Effectiveness Date and maintained in the manner contemplated herein during the Effectiveness Period or if any other Event as described herein has occurred. (d) Amendments and Waivers. The provisions of this Agreement, ------------------------ including the provisions of this sentence, shall not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof shall not be given, unless the same shall be in writing and signed by the Company and the applicable Holder. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates generally to the rights of the Holders may be given by Holders of at least a majority of the Registrable Securities to which such waiver or consent relates; provided, however, that the provisions of this sentence may not be amended, waived, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence. (e) Notices. Any and all communications required or permitted to be ------- provided hereunder shall be in writing and shall be deemed given and effective as provided in Section 8(f) of the Securities Purchase Agreement. The addresses for such communications shall be as provided in Section 8(f) of the Securities Purchase Agreement or such other address or addresses as any party may most recently have designated in writing to the other parties hereto. (f) Successors and Assigns. This Agreement shall be binding upon and ------------------------ inure to the benefit of the parties and their respective successors and permitted assigns. The Company may not assign this Agreement or any of its rights or obligations hereunder without the prior written consent of the Holders. The Buyer may assign its rights hereunder in the manner and to the Persons as permitted herein or in the Securities Purchase Agreement. (g) Assignment of Registration Rights. The rights of each Holder ------------------------------------ hereunder, including the right to have the Company register for resale Registrable Securities in accordance with the terms of this Agreement, shall be automatically assignable by each Holder to any transferee of such Holder of all or a portion of the Warrant and/or the Registrable Securities if: (i) the Holder agrees in writing with the transferee or assignee to assign such rights and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (A) the name and address of such transferee or assignee and (B) the securities with respect to which such registration rights are being transferred or assigned, (iii) following such transfer or assignment the further disposition of such securities by the transferee or assignees is restricted under the Securities Act and applicable state securities laws, (iv) at or before the time the Company receives the written notice contemplated by clause (ii) of this Section, the transferee or assignee agrees in writing with the Company to be bound by all of the provisions of this Agreement and (v) such transfer shall have been made in accordance with the applicable requirements of the Securities Purchase Agreement. In addition, each Holder shall have the right to assign its rights hereunder to any other Person with the prior written consent of the Company, which consent shall not be unreasonably withheld. The rights to assignment shall apply to the Holders and to their subsequent successors and assigns. (h) Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) such document with the same force and effect as if such facsimile signature were the original thereof. (i) Governing Law. This Agreement shall be governed by and interpreted ------------- in accordance with the laws of the State of California without regard to the principles of conflict of laws. The parties hereto agree that a final, non-appealable judgment in any suit or proceeding with respect to this Agreement shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. (j) Cumulative Remedies. No provision of this Agreement providing for -------------------- any specific remedy to a party shall be construed to limit such party to the specific remedy described, and that any other remedy that would otherwise be available to such party at law or in equity shall also be available. The parties also intend that the rights and remedies hereunder be cumulative, so that exercise of any one or more of such rights or remedies shall not preclude the later or concurrent exercise of any other rights or remedies. (k) Severability. If any provision of this Agreement shall be invalid ------------ or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. (l) Headings; Interpretation. The headings of this Agreement are for ------------------------- convenience of reference and shall not form a part of, or affect the interpretation of, this Agreement. As used herein, (i) the neuter gender includes the masculine or feminine and the singular number includes the plural, and vice versa, as the context may require and (ii) unless the context clearly requires otherwise, the words "herein," "hereunder" and "hereby," shall refer to this entire Agreement and not only to the Section or paragraph in which such word appears. If any date specified herein falls upon a Saturday, Sunday or public or legal holidays, the date shall be construed to mean the next Business Day following such Saturday, Sunday or public or legal holiday. Each party intends that this Agreement be deemed and construed to have been jointly prepared by the parties. As a result, the parties agree that any uncertainty or ambiguity existing herein shall not be interpreted against either of them. (m) Attorney's Fees. If any party to this Agreement shall bring any ---------------- action for relief against the other arising out of or in connection with this Agreement, in addition to all other remedies to which the prevailing party may be entitled, the losing party shall be required to pay to the prevailing party a reasonable sum for attorney's fees and costs incurred in bringing such action and/or enforcing any judgment granted therein, all of which shall be deemed to have accrued upon the commencement of such action and shall be paid whether or not such action is prosecuted to judgment. Any judgment or order entered in such action shall contain a specific provision providing for the recovery of attorney's fees and costs incurred in enforcing such judgment. For the purposes of this Section, attorney's fees shall include, without limitation, fees incurred with respect to the following: (i) post-judgment motions, (ii) contempt proceedings, (iii) garnishment, levy and debtor and third party debtor and third party examinations, (iv) discovery and (v) bankruptcy litigation. (n) No Third Party Beneficiaries. This Agreement is intended for the ------------------------------ benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized persons on the date first written above. RAPIDTRON, INC. By: -------------------- President By: -------------------- Secretary OCEANUS VALUE FUND, L.P. By: Oceanus Asset Management, L.L.C., General Partner By: -------------------- Name: John C. Tausche Title: Member EX-10.2 3 ex10_2.txt EXHIBIT 10.2 SECURITY AGREEMENT This Security Agreement (the "Agreement") is made and entered into on December 1, 2004, by and between Rapidtron, Inc., a Nevada corporation (the "Debtor"), and Oceanus Value Fund, L.P.(the "Secured Party"). A. Debtor and Secured Party have entered into a Securities Purchase Agreement dated concurrently herewith (the "Securities Purchase Agreement"). B. Pursuant to the Securities Purchase Agreement, Debtor has, among other things, delivered to Secured Party a $400,000 15% Secured Convertible Promissory Note (the "Note"). C. The parties now enter into this Agreement as security for Debtor's obligations under the Note. NOW, THEREFORE, in consideration of their respective promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties, the parties hereto agree as follows: 1. Definitions. Capitalized terms used in this Agreement and not ----------- defined elsewhere herein or in the Securities Purchase Agreement shall have the meanings set forth below: "Accounts" means and includes all of Debtor's presently existing and hereafter arising accounts receivable, contract rights, rights of payment, instruments, notes, drafts, documents, chattel paper, and all other forms of obligations owing to Debtor arising out of the sale or lease of goods or the rendition of services by Debtor, whether or not earned by performance, and any and all letters of credit, credit insurance, guaranties, and other security therefor, and all merchandise returned to or reclaimed by Debtor, and all proceeds and products of any of the foregoing, and all of Debtor's Books (as defined below) relating to any of the foregoing. "Collateral" means and includes all of the following: (i) the Accounts, Equipment, General Intangibles, Inventory, Negotiable Collateral, and such other assets of Debtor as to which Secured Party may from time-to-time be granted a security interest and (ii) the proceeds of any of the foregoing, including, but not limited to, proceeds of insurance covering the foregoing or any portion thereof, and any and all money, deposit accounts or other tangible and intangible property of Debtor resulting from a sale or other disposition of the foregoing or any portion thereof; provided, however, that notwithstanding anything to the contrary contained in this Agreement, the Collateral does not include any "infectious waste," "restricted hazardous waste," or "hazardous waste" as those terms are defined under 42 U.S.C. Section 6903(5), as such section may be from time to time amended, or under any regulations thereunder. "Debtor's Books" means and includes all of Debtor's books and records, including, but not limited to, all records, ledgers and computer programs, disk or tape files, printouts and other computer-prepared information indicating, summarizing or evidencing the Collateral. "Equipment" means and includes all of Debtor's present and hereafter acquired equipment wherever located, including but not limited to, machinery and machine tools with motors, controls, attachments, parts, tools and accessories incidental thereto, all present and future furniture, furnishings, fixtures, motor vehicles, tools, drawings, blueprints, catalogs and computer programs; and all attachments, accessories, accessions, replacements, substitutions, additions and improvements thereto, wherever located, as well as Debtor's Books relating to any of the foregoing. "Event of Default" means the occurrence of any one of the events set forth in Section 7 of this Agreement. "General Intangibles" means and includes all of Debtor's presently existing and hereafter acquired or arising general intangibles and other personal property (including, without limitation, any and all choses in action, licenses, leasehold interests, equity interests (including equity interests in subsidiaries, partnerships and joint ventures), goodwill, intellectual property of any kind (including patents, copyrights, trademarks, trade names and service marks), blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, monies due or recoverable from factors, route lists, infringement claims, software source codes, computer programs and disks, literature, reports, catalogs, deposit accounts, tax refunds and tax refund claims, together with the proceeds and products of any of the foregoing, as well as Debtor's Books relating to any of the foregoing. "Inventory" means and includes all of Debtor's present and hereafter acquired inventory in which Debtor has any interest, including goods held for sale or lease or to be furnished under a service contract, and all of Debtor's present and future goods, parts, raw materials, work in process, finished goods and supplies that are or might be used in connection with the manufacture, packing, shipping advertising, selling or finishing of such goods, as well as Debtor's Books relating to any of the foregoing. "Negotiable Collateral" means and includes all of Debtor's presently existing and hereafter acquired or arising letters of credit, advices of credit, promissory notes, drafts, instruments, documents, leases of personal property and chattel paper, as well as Debtor's Books relating to any of the foregoing "Obligations" means and includes any and all liabilities and indebtedness owing by Debtor to Secured Party pursuant to the Note, including, without limitation, all interest and other payments required thereunder that are not paid when due, and all of the Secured Party Expenses which Debtor is required to pay or reimburse by this Agreement, by law, or otherwise. "Secured Party Expenses" means and includes (i) all costs or expenses required to be paid by Debtor under this Agreement that are instead paid or advanced by Secured Party; (ii) all costs and expenses incurred to correct any default or enforce any provision of this Agreement, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale and/or advertising to sell the Collateral, irrespective of whether a sale is consummated; and (iii) all costs and expenses (including reasonable attorney's fees) incurred by Secured Party in enforcing or defending this Agreement, irrespective of whether suit is brought. "Senior Lender" means Silicon Valley Bank, in connection with that certain Accounts Receivable Purchase Agreement dated as of June 29, 2004, as amended from time to time, and its successors and assigns or any other person or entity who provides funds to Debtor to refinance, refund or replace such Accounts Receivable Purchase Agreement. "Senior Liens" means the liens, security interests and other encumbrances in favor of Senior Lender. 2. Construction. Unless the context of this Agreement clearly requires ------------ otherwise, references to the plural include the singular and vice versa, to the part include the whole, "including" is not limiting, and "or" has the inclusive meaning represented by the phrase "and/or." References in this Agreement to a "determination" by Secured Party include reasonable, good faith estimates by Secured Party (in the case of quantitative determinations) and reasonable, good faith beliefs by Secured Party (in the case "of qualitative determinations). The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Section references are to this Agreement, unless otherwise specified. 3. Creation of Security Interest. ----------------------------- 3.1 Grant of Security Interest. In order to secure Debtor's timely -------------------------- payment of the Obligations and timely performance of each and all of its covenants and obligations under this Agreement and any other document, instrument or agreement executed by Debtor and/or delivered by Debtor to Secured Party in connection with the Obligations (other than in connection with a conversion of the Note), Debtor hereby grants to Secured Party a continuing security interest in all presently existing and hereafter acquired or arising Collateral. Such security interest in the Collateral shall (i) be a first-priority security interest except as to the Senior Liens] and (ii) attach to all Collateral without further act on the part of Secured Party or Debtor. 3.2 Rights as to Inventory and Accounts. Unless an Event of Default ----------------------------------- under this Agreement has occurred and is continuing, Debtor may, subject to the provisions hereof and consistent herewith, (i) sell the Inventory and enter into licenses with respect to its property, but in each case only in the ordinary course of Debtor's business, and (ii) sell the Accounts to Senior Lender. A sale of Inventory in Debtor's ordinary course of business does not include an exchange or a transfer in partial or total satisfaction of a debt owing by Debtor, nor does it include an exchange for less than the lower of cost or fair market value. 4. Insurance. Debtor, at its expense, shall keep and maintain the --------- Inventory and Equipment insured against loss or damage by fire, theft, explosion, sprinklers and all other hazards and risks and in such amounts as are ordinarily insured against by other owners of such properties in similar businesses. Debtor shall also keep and maintain public liability and property damage insurance relating to Debtor's ownership and use of the Inventory and Equipment and its other assets. At the request of Secured Party, all such policies of insurance (except those of public liability and property damage) shall contain an endorsement, in a form satisfactory to Secured Party, showing Secured Party as loss payee thereof (except to the extent necessary to reflect the Senior Liens), and all proceeds payable thereunder shall be payable to 3 Secured Party (subject to the Senior Liens). At the request of Secured Party, each such insurer shall agree (by endorsement upon the policy or policies of insurance issued by it to Debtor or by independent instruments) that it will give Secured Party at least thirty (30) days written notice before any such policy or policies of insurance will be altered or cancelled, and that no act or default of Debtor, or any other person, shall affect the right of Secured Party to recover under such policy or policies of insurance or to pay any premium in whole or in part relating thereto. 5. Further Assurances. ------------------ 5.1 General. Following the Closing, Secured Party is authorized to ------- file a UCC-1 Financing Statement with the Secretary of State of the State of Nevada evidencing Secured Party' security interest in the Collateral. Debtor also authorizes the filing by Secured Party of such other UCC financing statements, continuation financing statements, fixture filings, security agreements, chattel mortgages, assignments and other documents as Secured Party may reasonably require in order to perfect and maintain Secured Party's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under this Agreement; provided, however, unless specifically required by this Agreement or the Note, (i) Debtor shall not be required to execute or deliver (A) possession of any of the Collateral, (B) any agreements providing for control with respect to any of the Collateral or (C) any agreements providing for acknowledgment by any third party, such as a bailee, of Secured Party's security interests in the Collateral (other than the SVB Subordination Agreement and the Designa Subordination Agreement) and (ii) Secured Party will make no filing or recordation with respect to the Collateral with the United States Patent and Trademark Office or the United States Copyright Office. Subject to the foregoing, if so requested by Secured Party at any time hereafter, Debtor shall promptly execute and deliver such fixture filings, security agreements, chattel mortgages, assignments and other documents that Secured Party may reasonably require from Debtor. Debtor hereby irrevocably makes, constitutes and appoints Secured Party (and any of Secured Party's employees or agents designated by Secured Party ) as Debtor's true and lawful attorney with power, upon Debtor's failure or refusal to promptly comply with its obligations in this Section 5.1, to sign the name of Debtor on any of the above-described documents or on any other similar documents which need to be executed, recorded and/or filed in order to perfect or maintain Secured Party's security interests in the Collateral. 5.2 Additional Matters. Without limiting the generality of Section ------------------ 5.1, Debtor will (i) at the reasonable request of Secured Party, appear in and defend any action or proceeding which may affect Debtor's title to, or the security interests of Secured Party in, the Collateral (other than action brought by Senior Lender) and (ii) promptly furnish to Secured Party, from time to time, such reports in connection with the Collateral as Secured Party may reasonably request, all in reasonable detail, including reports describing the Equipment and Inventory, specifying the locations at which the Equipment and Inventory are based and setting forth the then current location of Debtor's Books pertaining to the Collateral. 5.3 Accounts and Negotiable Collateral. In the event that any portion ---------------------------------- of the Collateral, including proceeds, is evidenced by or consists of Accounts and/or Negotiable Collateral as to which no Senior Lien exists, Debtor shall, immediately upon request therefore 4 from Secured Party, endorse (where appropriate) and assign such Accounts and/or Negotiable Collateral over to Secured Party, and deliver actual physical possession of the Accounts and/or Negotiable Collateral to Secured Party in order to perfect fully the security interest therein (subject to the Senior Liens). 6. Warranties, Representations and Covenants. Debtor warrants, ----------------------------------------- represents, covenants and agrees as follows: 6.1 No Other Encumbrances. Debtor has good and marketable title to the --------------------- Collateral, free and clear of any liens, claims, encumbrances and rights of any kind except the Senior Liens. 6.2 Merchantable Inventory. Except for defects arising in the ordinary ---------------------- and usual course of business, all Inventory is now and at all times hereafter shall be of good and merchantable quality. 6.3 Storage of Inventory. The Inventory is not now and shall not at -------------------- any time hereafter be stored with a bailee, warehouseman or similar party, unless Debtor has given fifteen (15) days prior written notice to Secured Party specifying the name and address of such entity and, in such event, Debtor shall, unless a Permitted Interest therein then exists, concurrently therewith, cause any such bailee, warehouseman or similar party to issue and deliver to Secured Party (in a form acceptable to Secured Party) warehouse receipts in Secured Party's name evidencing the storage of the Inventory. 6.4 Inventory Records. Debtor now keeps, and at all times hereafter ----------------- shall keep, correct and accurate records itemizing and describing the kind, type, quality and quantity of the Inventory and Debtor's cost therefor. All of such records shall be available upon demand to any of Secured Party's agents and employees for inspection and copying during normal business hours and upon reasonable advance notice. 6.5 Right to Inspect Inventory and Equipment. Secured Party shall have ---------------------------------------- the right, during Debtor's usual business hours and upon reasonable advance notice, to inspect and examine the Inventory and the Equipment and to check and test the same as to quality, quantity value and condition. Debtor agrees that any reasonable expenses incurred by Secured Party in connection with this Section 6.5 shall constitute Secured Party Expenses. 6.6 Title to Equipment. Upon Secured Party's request, Debtor shall ------------------ immediately deliver to Secured Party, properly endorsed, any and all evidences of ownership of or title to any items of Debtor's Equipment (provided no Senior Liens shall then exist ). 6.7 Maintenance of Equipment. Debtor shall keep and maintain the ------------------------ Equipment in good operating condition and repair, and shall make all necessary replacements thereto, so that the value and operating efficiency thereof shall at all times be maintained and preserved consistent with reasonable business practices. 5 6.8 Negative Covenants. Debtor shall not (i) sell, lease, or otherwise ------------------ dispose of, relocate or transfer, whether by sale or otherwise, any of Debtor's assets other than transfers of Accounts to the Senior Lender and/or sales of Inventory and licenses of property in the ordinary course of Debtor's business, (ii) allow any liens on the Collateral except the Senior Liens and liens created by this Agreement or (iii) change Debtor's name or add any new fictitious name without providing Secured Party with forty-five (45) days prior written notice. 6.9 Relocation of Principal Place of Business. The principal place of ----------------------------------------- business of Debtor is at the address indicated in Section 10, and Debtor shall not, during the term of this Agreement, without prior written notification to Secured Party, relocate such principal place of business. 6.10 Further Information. Debtor shall promptly supply Secured Party ------------------- with such information concerning Debtor's business as Secured Party may reasonably request from time to time hereafter, and shall promptly notify Secured Party of any material adverse change in Debtor's financial condition or any event which constitutes an Event of Default. 6.11 Solvency. Debtor is now and shall be at all times hereafter able -------- to pay its debts (including trade debts) as they mature. 6.12 Secured Party Expenses. Debtor shall within ten (10) days of ---------------------- written demand, reimburse Secured Party for all sums expended by Secured Party which constitute Secured Party Expenses and, in the event that Debtor does not pay Secured Party Expenses payable to a third party within ten (10) days after notice thereof, then Secured Party may immediately and without further notice pay such Secured Party Expenses on Debtor's behalf, and Debtor hereby authorizes and approves all advances and payments by Secured Party for items constituting such Secured Party Expenses. 6.13 Reliance by Secured Party; Representations Cumulative. Each ----------------------------------------------------- warranty, representation and agreement contained in this Agreement shall be conclusively presumed to have been relied on by Secured Party regardless of any investigation made or information possessed by Secured Party. The warranties, representations and agreements set forth herein shall be cumulative and in addition to any and all other warranties, representations and agreements which Debtor shall now or hereafter give, or cause to be given, to Secured Party. 7. Events of Default. The occurrence of any Event of Default under the ----------------- Note, after the expiration of any applicable cure period, shall constitute an "Event of Default" by Debtor under this Agreement. 8. Rights and Remedies. ------------------- 8.1 Secured Party' Rights and Remedies. ---------------------------------- (a) Upon the occurrence and during the continuance of an Event of Default, without notice of election and without demand (but subject to the rights of the holders of Senior Liens), 6 Secured Party, upon the written consent and direction of Secured Party, may cause any one or more of the following to occur, all of which are authorized by Debtor: (i) Secured Party may make such payments and do such acts as it considers necessary or reasonable to protect its security interests in the Collateral. Debtor agrees to assemble and make available the Collateral if Secured Party so requires. Subject to the Senior Liens, Debtor authorizes Secured Party to enter the premises where the Collateral is located, take and maintain possession of the Collateral, or any part thereof, and pay, purchase, contest or compromise any encumbrance, claim, right or lien (other than the Senior Liens) which, in the opinion of Secured Party or its assignee, appears to be prior or superior to Secured Party's security interests, and to pay all expenses incurred in connection therewith; (ii) Secured Party shall be automatically deemed to be granted a license or other right to use, without charge, Debtor's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks and advertising matter, and any other property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale and selling any Collateral; (iii) Secured Party may ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale and sell (in the manner provided for herein) the Collateral; (iv) Secured Party may sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Debtor's premises) as is commercially reasonable (it not being necessary that the Collateral be present at any such sale); (v) Secured Party shall be entitled to give notice of the disposition of the Collateral as follows: (A) Secured Party shall give Debtor a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Collateral, the time on or after which the private sale or other disposition is to be made, (B) the notice shall be personally delivered or mailed, postage prepaid, to Debtor at least ten (10) calendar days before the date fixed for the sale, or at least five (5) calendar days before the date on or after which the private sale or other disposition is to be made, unless the Collateral is perishable or threatens to decline speedily in value and (C) if the sale is to be a public sale, Secured Party shall also give notice of the time and place by publishing a notice one time at least five (5) calendar days before the date of the sale in a newspaper of general circulation, if one exists, in the county in which the sale is to be held; and (vi) Secured Party may credit bid and purchase all or any portion of the Collateral at any public sale. (b) Upon demand, Debtor shall pay all the Secured Party Expenses incurred in connection with the enforcement and exercise of any of the rights and remedies of Secured Party provided for herein, irrespective of whether suit is commenced. Any deficiency which exists after disposition of the Collateral as provided herein will be paid immediately by Debtor, and any 7 excess that exists will be returned, without interest and subject to the rights of third parties, to Debtor by Secured Party. 8.2 Rights and Remedies Cumulative. The rights and remedies of Secured ------------------------------ Party under this Agreement and any other agreements and documents delivered and/or executed in connection with the Obligations shall be cumulative. Secured Party shall also have all other rights and remedies not inconsistent herewith as are provided under applicable law, or in equity. No exercise by Secured Party of one right or remedy shall be deemed an election, and no waiver by Secured Party of any default on Debtor's part shall be deemed a continuing waiver. No delay by Secured Party shall constitute a waiver, election or acquiescence. 9. Additional Waivers. Secured Party shall not in any way or manner be ------------------ liable or responsible for (i) the safekeeping of the Collateral, (ii) any loss or damage thereto occurring or arising in any manner or fashion from any cause, (iii) any diminution in the value thereof or (iv) any act or default of any carrier, warehouseman, bailee, forwarding agency or other person whomsoever. 10. Notices. All notices or demands by any party relating to this ------- Agreement shall be made in writing as provided in Section 8(f) of the Securities Purchase Agreement. 11. Choice of Law. The validity of this Agreement, its construction, ------------- interpretation and enforcement, and the rights of the parties hereunder and concerning the Collateral, shall be determined under, governed by, and construed in accordance with the laws of the State of California. 12. Waiver of Jury Trial. Debtor and Secured Party each waive any -------------------- right to trial by jury in any action or proceeding relating to this Agreement. 13. General Provisions. ------------------ 13.1 Effectiveness. This Agreement shall be binding and deemed ------------- effective when executed by Debtor and Secured Party. 13.2 Successors and Assigns. This Agreement shall bind and inure to ---------------------- the benefit of the respective successors and permitted assigns of Secured Party. Debtor shall not assign this Agreement or any rights hereunder, and any such assignment shall be absolutely void. 13.3 Section Headings. Section headings are for convenience only. ---------------- 13.4 Interpretation. Neither this Agreement nor any uncertainty or -------------- ambiguity herein shall be construed or resolved against Secured Party or Debtor, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of the parties. 8 13.5 Severability of Provisions. Each provision of this Agreement -------------------------- shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 13.6 Entire Agreement; Amendments. This Agreement and the documents ---------------------------- referenced herein contain the entire understanding of the parties with respect to the matters covered herein and supercede all prior agreements, negotiations and understandings, written or oral, with respect to such subject matter. No provision of this Agreement shall be waived or amended other than by an instrument in writing signed by Debtor and Secured Party. 13.7 Good Faith. The parties intend and agree that their respective ---------- rights, duties, powers, liabilities and obligations shall be performed, carried out, discharged and exercised reasonably and in good faith. 13.8 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same agreement. 13.9 Senior Liens. Notwithstanding anything in this Agreement to the ------------ contrary, the rights and remedies of Secured Party hereunder with respect to the Collateral are subject to the prior rights and remedies of the holder of the Senior Liens, and Debtor shall not be in violation of this Agreement for taking actions or failing to take actions with respect to the Collateral if such actions are expressly required or prohibited, as applicable, by the documents evidencing the Senior Liens. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized persons on the date first written above. RAPIDTRON, INC. By: President By: Secretary OCEANUS VALUE FUND, L.P. By: Oceanus Asset Management, L.L.C., General Partner By: ---------------------------- John C. Tausche, Member 9 EX-10.3 4 ex10_3.txt EXHIBIT 10.3 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE (COLLECTIVELY, THE "LAWS"). THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF EITHER (I) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE APPLICABLE LAWS OR (II) AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER, TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED DUE TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE APPLICABLE LAWS. RAPIDTRON, INC. WARRANT TO PURCHASE COMMON STOCK Warrant No. 1 Number of Shares: 800,000 Date of Issuance: December 1, 2004 Rapidtron, Inc., a Nevada corporation (the "Company"), hereby certifies that, for value received, Oceanus Value Fund, L.P., and permitted assigns, the registered holder hereof ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company upon surrender of this Warrant to Purchase Common Stock (the "Warrant"), at any time after the date hereof, but not after 5:00 P.M. California time on the Expiration Date (as defined herein) 800,000 fully paid and nonassessable shares of Common Stock (as defined herein) of the Company (each a "Warrant Share" and collectively the "Warrant Shares") at a purchase price (the "Warrant Exercise Price") equal to $0.33 per share; provided, however, that one (1) time prior to the Expiration Date, the Holder shall have the right, upon written notice to the Company (the "Notice"), to reset the Warrant Exercise Price to an amount equal to the closing price of the Common Stock on the trading day immediately preceding the date of the Notice (as specified in the Notice) as quoted on the OTC Bulletin Board or such national securities exchange or other market on which the Common Stock is then listed or quoted. The Warrant Exercise Price shall be paid in lawful money of the United States. Both the number of Warrant Shares purchasable hereunder and the Warrant Exercise Price are subject to adjustment as provided in Section 9 below. Section 1. Definitions. ----------- (a) The following words and terms used in this Warrant shall have the following meanings: "Common Stock" means (i) the Company's $0.001 par value common stock and (ii) any capital stock into which such Common Stock shall have been changed or any capital stock resulting from a reclassification of such Common Stock. 1 "Expiration Date" means the date which is five (5) years from the date of this Warrant or, if such date falls on a Saturday, Sunday or other day on which banks are required or authorized to be closed in the State of California (a "Holiday"), the next preceding date that is not a Holiday. "Market Price" means the average of the closing stock prices for the Common Stock for the ten (10) trading days immediately prior to the date on which a Notice of Exercise is delivered to the Company, as quoted on the OTC Bulletin Board or such national securities exchange or other market on which the Common Stock may then be listed or quoted. "Securities Act" means the Securities Act of 1933, as amended. "Securities Purchase Agreement" shall mean the Securities Purchase Agreement between the Holder (or its predecessor in interest) and the Company for the purchase of this Warrant and the other Securities (as defined in the Securities Purchase Agreement). (b) Other definitional provisions: (i) Except as otherwise specified herein, all references herein (A) to the Company shall be deemed to include the Company's successors and (B) to any applicable law shall be deemed references to such applicable law as the same may be amended or supplemented from time to time. (ii) When used in this Warrant, unless otherwise specified in a particular instance, the words "herein," "hereof," and "hereunder," and words of similar import, shall refer to this Warrant as a whole and not to any provision of this Warrant, and the words "Section" and "Exhibit" shall refer to Sections of, and Exhibits to, this Warrant unless otherwise specified. (iii) Whenever the context so requires, the neuter gender includes the masculine or feminine, and the singular number includes the plural, and vice versa. (iv) When used in this Warrant, "transfer" shall include any disposition of this Warrant or any Warrant Shares, or of any interest in either thereof, which would constitute a sale thereof within the meaning of the Securities Act or applicable state securities laws. Section 2. Exercise of Warrant. ---------------------- (a) Subject to the terms and conditions hereof, this Warrant may be exercised by the Holder, as a whole or in part (except that this Warrant shall not be exercisable as to a fractional share), at any time prior to 5:00 p.m. California time on the Expiration Date. The rights represented by this Warrant shall be exercised by the Holder by (i) delivery of a written notice in the form attached as Exhibit I hereto (a "Notice of Exercise") of the Holder's election to exercise this Warrant, which notice shall specify the number of Warrant Shares to be purchased, (ii) payment to the Company of an amount equal to the Warrant Exercise Price multiplied by the number of Warrant Shares as to which the Warrant is being exercised, plus any applicable issuance or transfer taxes, in immediately available funds (either by wire transfer or a certified or cashier's check drawn on a United States bank) and (iii) the surrender of this Warrant, properly 2 endorsed, at the principal office of the Company (or at such other agency or office of the Company as the Company may designate by notice to the Holder). (b) In addition, and notwithstanding anything to the contrary contained in this Warrant, at such time as the Market Price per share of the Common Stock exceeds the Warrant Exercise Price, this Warrant may be exercised by presentation and surrender of this Warrant to the Company in a cashless exercise, including a written calculation of the number of Warrant Shares to be issued upon such exercise in accordance with the terms hereof (a "Cashless Exercise"). In the event of a Cashless Exercise, in lieu of paying the Warrant Exercise Price, the Holder shall surrender this Warrant for, and the Company shall issue in respect thereof, the number of Warrant Shares determined by multiplying the number of Warrant Shares to which the Holder would otherwise be entitled by a fraction, the numerator of which shall be determined by subtracting the Warrant Exercise Price from the then current Market Price per share of Common Stock, and the denominator of which shall be the then current Market Price per share of Common Stock. (c) Any Warrant Shares shall be deemed to be issued to the Holder or Holder's designee, as the record owner of such Warrant Shares, as of the date on which this Warrant shall have been surrendered, the completed Notice of Exercise shall have been delivered, and payment (or notice of an election to effect a Cashless Exercise) shall have been made for such Warrant Shares as set forth above, irrespective of the date of delivery of such share certificate, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are properly closed, such person shall be deemed to have become the holder of such Warrant Shares at the opening of business on the next succeeding date on which the stock transfer books are open. For each exercise of the rights represented by this Warrant in compliance with this Section 2, a certificate or certificates for the Warrant Shares so purchased, registered in the name of, or as directed by, the Holder, shall be delivered to, or as directed by, the Holder within three (3) business days after such rights shall have been so exercised. (d) Unless this Warrant shall have expired or shall have been fully exercised, the Company shall issue a new Warrant identical in all respects to the Warrant exercised except that it shall represent rights to purchase the number of Warrant Shares purchasable immediately prior to such exercise under the Warrant exercised, less the number of Warrant Shares with respect to which such Warrant is exercised (or, in the case of a Cashless Exercise, the number of shares to which the Holder would otherwise have been entitled). (e) In the case of any dispute with respect to an exercise, the Company shall promptly issue such number of Warrant Shares as are not disputed in accordance with this Section. If such dispute only involves the number of Warrant Shares receivable by the Holder under a Cashless Exercise, the Company shall submit the disputed calculations to an independent accounting firm of national standing via facsimile within two (2) business days of receipt of the Notice of Exercise. The accountant shall review the calculations and notify the Company and the Holder of the results no later than two (2) business days from the date it receives the disputed calculations. The accountant's calculation shall be deemed conclusive absent manifest error. The Company shall then issue the appropriate number of shares of Common Stock in accordance with this Section. 3 Section 3. Covenants as to Common Stock. The Company covenants and ------------------------------ agrees that all Warrant Shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued, fully paid and nonassessable. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved a sufficient number of shares of Common Stock to provide for the exercise of the rights then represented by this Warrant and that the par value of said shares will at all times be less than or equal to the applicable Warrant Exercise Price. Section 4. Taxes. The Company shall not be required to pay any tax or ----- taxes attributable to the initial issuance of the Warrant Shares or any transfer involved in the issuance or delivery of any certificates for Warrant Shares in a name other than that of the Holder or any permitted transferee of this Warrant. Section 5. Warrant Holder Not Deemed a Stockholder. No Holder of this --------------------------------------- Warrant, as such, shall be entitled to vote or receive dividends or be deemed the holder of shares of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the Holder, as such, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issuance of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the Holder of the Warrant Shares which the Holder is then entitled to receive upon the due exercise of this Warrant. Notwithstanding the foregoing, the Company will provide the Holder with copies of the same notices and other information given to the stockholders of the Company generally, contemporaneously with the delivery thereof to the stockholders. Section 6. No Limitation on Corporate Action. No provisions of this ---------------------------------- Warrant and no right or option granted or conferred hereunder shall in any way limit, affect or abridge the exercise by the Company of any of its corporate rights or powers to recapitalize, amend its Articles of Incorporation, reorganize, consolidate or merge with or into another corporation, or to transfer all or any part of its property or assets, or the exercise of any other of its corporate rights and powers. Section 7. Representations of Holder. By the acceptance hereof, the --------------------------- Holder represents that the Holder is acquiring this Warrant and the Warrant Shares for the Holder's own account for investment and not with a view to, or for sale in connection with, any distribution hereof or of any of the shares of Common Stock or other securities issuable upon the exercise hereof, and not with any present intention of distributing any of the same. The Holder further represents, by acceptance hereof, that, as of this date, the Holder is an "accredited investor" as such term is defined in Rule 501(a) of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act. Upon exercise of this Warrant, the Holder shall, if requested by the Company, confirm the foregoing representations in writing, in a form satisfactory to the Company. If the Holder cannot make such representations because they would be factually incorrect, it shall be a condition to the Holder's exercise of the Warrant that the Company receive such other representations as the Company considers reasonably necessary 4 to assure the Company that the issuance of its securities upon exercise of the Warrant shall not violate any federal or state securities laws. Section 8. Restrictions on Transfer. The Holder understands that (i) -------------------------- this Warrant and the Warrant Shares have not been and are not being registered under the Securities Act or any state securities laws (other than as described in the Securities Purchase Agreement and the Registration Rights Agreement entered into concurrently therewith (the "Registration Rights Agreement")), and may not be offered for sale, sold, assigned or transferred unless (A) subsequently registered thereunder or (B) pursuant to an exemption from such registration, and (ii) neither the Company nor any other person is under any obligation to register such securities (other than as described in the Securities Purchase Agreement and the Registration Rights Agreement) under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. Section 9. Adjustments. ----------- (a) Reclassification and Reorganization. In case of any ------------------------------------- reclassification, capital reorganization or other change of outstanding shares - of the Common Stock, or in case of any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock), the Company shall cause effective provision to be made so that the Holder shall have the right thereafter, by exercising this Warrant, to purchase the kind and number of shares of stock or other securities or property (including cash) receivable upon such reclassification, capital reorganization or other change, consolidation or merger by a holder of the number of shares of Common Stock that could have been purchased upon exercise of the Warrant immediately prior to such reclassification, capital reorganization or other change, consolidation or merger. Any such provision shall include provision for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 9. The foregoing provisions shall similarly apply to successive reclassifications, capital reorganizations and other changes of outstanding shares of Common Stock and to successive consolidations or mergers. If the consideration received by the holders of Common Stock is other than cash, the value shall be as determined by the Board of Directors of the Company acting in good faith. (b) Dividends and Stock Splits. If and whenever the Company shall ----------------------------- effect a stock dividend, a stock split, a stock combination, or a reverse stock split of the Common Stock, the number of Warrant Shares purchasable hereunder and the Warrant Exercise Price shall be proportionately adjusted in the manner determined by the Company's Board of Directors acting in good faith. The number of shares, as so adjusted, shall be rounded down to the nearest whole number and the Warrant Exercise Price shall be rounded to the nearest cent. (c) Default Adjustment. Any other provision of this Warrant ------------------- notwithstanding, in the event of a default under the Note (as defined in the Securities Purchase Agreement), until the Expiration Date the Warrant Exercise Price shall automatically be reduced to the par value of the Common Stock. 5 Section 10. Lost, Stolen, Mutilated or Destroyed Warrant. If this ----------------------------------------------- Warrant is lost, stolen or destroyed, the Company shall, on receipt of an indemnification undertaking reasonably satisfactory to the Company, issue a new Warrant of like denomination and tenor as the Warrant so lost, stolen or destroyed. In the event the Holder asserts such loss, theft or destruction of this Warrant, the Company may require the Holder to post a bond issued by a surety reasonably satisfactory to the Company with respect to the issuance of such new Warrant. Section 11. Notice. Any notices required or permitted to be given ------- under the terms of this Warrant shall be sent by mail or delivered personally or by courier or facsimile, and shall be effective five days after being placed in the mail, if mailed, certified or registered, return receipt requested, or upon receipt, if delivered personally or by courier or by facsimile, in each case properly addressed to the party to receive the same. The addresses for such communications shall be as provided in Section 8(f) of the Securities Purchase Agreement (with Holder being defined therein as the "Buyer"). Each party shall provide notice to the other party of any change in address. Section 12. Miscellaneous. This Warrant and any term hereof may be -------------- changed, waived, discharged, or terminated only by an instrument in writing signed by the party or Holder against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be governed by and interpreted under the laws of the State of Kansas, without regard to the principles of conflict of laws. Headings are for convenience only and shall not affect the meaning or construction of any of the provisions hereof. This Warrant shall be binding upon the Company and its successors and assigns and shall inure to the benefit of the Holder and its permitted successors and assigns. The Holder may not assign this Warrant except in accordance with applicable federal and state securities laws. Section 13. Attorney's Fees. If Holder or the Company shall bring any ---------------- action for relief against the other arising out of or in connection with this Warrant, in addition to all other remedies to which the prevailing party may be entitled, the losing party shall be required to pay to the prevailing party a reasonable sum for attorney's fees and costs incurred in bringing such action and/or enforcing any judgment granted therein, all of which shall be deemed to have accrued upon the commencement of such action and shall be paid whether or not such action is prosecuted to judgment. Any judgment or order entered in such action shall contain a specific provision providing for the recovery of attorney's fees and costs incurred in enforcing such judgment. For the purposes of this Section, attorney's fees shall include, without limitation, fees incurred with respect to the following: (i) post-judgment motions, (ii) contempt proceedings, (iii) garnishment, levy and debtor and third party debtor and third party examinations, (iv) discovery and (v) bankruptcy litigation. Section 14. Effect of Expiration. This Warrant, in all events, shall --------------------- be wholly void and of no effect after the close of business on the Expiration Date, except that notwithstanding any other provisions hereof, the provisions of Sections 8 and 12 shall continue in full force and effect after such date as to any Warrant Shares or other securities issued upon the exercise of this Warrant. 6 RAPIDTRON, INC. By:_____________________ President By: Secretary EXHIBIT I NOTICE OF EXERCISE FORM ----------------------- RAPIDTRON, INC. The undersigned hereby exercises the right to purchase the number of Warrant Shares covered by the Warrant attached hereto as specified below according to the conditions thereof and herewith makes payment of U.S. $__________ (unless effected by a Cashless Exercise in accordance with the terms of the Warrant), which constitutes the aggregate Warrant Exercise Price of such Warrant Shares pursuant to the terms and conditions of the Warrant. (i) The undersigned agrees not to offer, sell, transfer or otherwise dispose of any Common Stock obtained upon exercise of the Warrant except under circumstances that will not result in a violation of the 1933 Act or applicable state securities laws. (ii) The undersigned requests that the stock certificates for the Warrant Shares be issued, and a Warrant representing any unexercised portion hereof be issued, pursuant to the terms of the Warrant in the name of the Holder (or such other person(s) indicated below) and delivered to the undersigned (or designee(s)) at the address or addresses set forth below. Dated: __________, _____. HOLDER: By: ---------------------------- Title: ------------------------- Address: ----------------------------------- ----------------------------------- ----------------------------------- Number of Warrant Shares being purchased: -------------------------- 7 EX-10.4 5 ex10_4.txt EXHIBIT 10.4 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE (COLLECTIVELY, THE "LAWS"). THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF EITHER (I) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE APPLICABLE LAWS OR (II) AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER, TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED DUE TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE APPLICABLE LAWS. THIS NOTE IS SUBJECT TO THE TERMS OF THE SUBORDINATION AGREEMENT DATED DECEMBER 1, 2004 (THE "SUBORDINATION AGREEMENT") IN FAVOR OF SILICON VALLEY BANK (THE "SENIOR LENDER"), AND THE RIGHTS AND REMEDIES HEREUNDER AND UNDER THE SECURITY AGREEMENT, AS DEFINED BELOW, ARE SUBORDINATE TO THOSE OF THE SENIOR LENDER. DATE: DECEMBER 1, 2004 $400,000.00 RAPIDTRON, INC. 15% SECURED CONVERTIBLE PROMISSORY NOTE DUE MARCH 31, 2005 This 15% Secured Convertible Promissory Note (the "Note") is issued by Rapidtron, Inc., a corporation duly organized and validly existing under the laws of the State of Nevada (the "Company"), pursuant to that certain Securities Purchase Agreement (the "Agreement") entered into concurrently herewith by and between the Company and Oceanus Value Fund, L.P. 1. Payment Obligation. For value received, the Company promises to ------------------- pay to Oceanus Value Fund, L.P. or its permitted successors and assigns (collectively, the "Holder"), (i) the principal amount of Four Hundred Thousand Dollars ($400,000) (to which may be added any liquidated damages that accrue pursuant to the terms of the Agreement or the Registration Rights Agreement referenced below) and (ii) interest on the principal amount outstanding at the rate of fifteen percent (15%) per annum, compounded annually. The principal amount of this Note, together with all accrued and unpaid interest, shall be due and payable in full on March 31, 2005 (the "Maturity Date"). Interest on this Note in the amount of Fifteen Thousand Dollars ($15,000) shall be pre-paid by the Company upon execution hereof (which pre-payment shall be non-refundable); thereafter, interest in the amount of Five Thousand Dollars ($5,000) shall be paid at the end of each thirty (30) day period (the "Interest Payment Date") that this Note remains outstanding after February 28, 2005 (prorated for a partial period and any reductions in principal amount). Accrual of interest on the outstanding principal amount shall commence on the date hereof and shall continue until full payment of the outstanding principal amount has been made or duly provided for. Payments on this Note are payable to the Holder in whose name this Note (or one or more successor Notes) is registered on the records of the Company regarding registration and transfer of this Note (the "Note Register"); provided, however, that the Company's obligation to a transferee of this Note arises only if such transfer, sale or other disposition is made in accordance with the terms and conditions of the Agreement. The Company has the right at any time, upon at least three (3) business days prior written notice to the Holder, to redeem or prepay all or any portion of this Note for an amount equal to one hundred five percent (105%) of the principal amount being redeemed or prepaid, plus all accrued and unpaid interest on the portion being redeemed or prepaid; the Company shall have no right to redeem or prepay any portion of this Note except pursuant to the foregoing. 2. Provisions as to Payment. Payments on this Note are payable in ------------------------ immediately available funds in currency of the United States of America at the address last appearing on the Note Register of the Company as designated in writing by the Holder hereof from time to time. The Company shall pay the amount required by this Note on the Maturity Date or applicable Interest Payment Date (as the case may be), less any amounts required by law to be deducted or withheld, to the Holder of this Note appearing of record as of the fifth business day (as defined in the Agreement) prior to the Maturity Date or applicable Interest Payment Date, as the case may be, in each case addressed to such Holder at the last address appearing on the Note Register. The forwarding of such funds shall constitute full payment of the amount then required to be paid under this Note and shall satisfy and discharge the liability for such amount to the extent of the sum represented by such payment plus any amounts so deducted or withheld. All payments under this Note shall be credited first to reimburse the Holder for any cost or expense reimbursable hereunder, then to the payment of accrued interest, and third to the payment of principal. 3. Withholding. The Company shall be entitled to withhold from all ----------- payments of principal or interest pursuant to this Note any amounts required to be withheld under applicable provisions of the United States income tax or other applicable laws at the time of such payments. 4. Transfer of Note; Opinion of Counsel; Legend. -------------------------------------------- (a) This Note has been issued subject to investment representations of the original Holder and may be transferred or exchanged only in compliance with the Securities Act of 1933, as amended (the "1933 Act") and applicable state securities laws. Prior to presentment of this Note for transfer, the Company and any agent of the Company may treat the person in whose name this Note is duly registered on the Note Register as the Holder hereof for the purpose of receiving payments as herein provided and for all other purposes, whether or not this Note be overdue, and neither the Company nor any such agent shall be affected or bound by notice to the contrary. (b) The Holder understands and acknowledges by its acceptance hereof that (i) this Note has not been, and is not being, registered under the 1933 Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (A) subsequently registered thereunder or (B) the Holder shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, substance and scope to the Company, to the effect that this Note may be sold, assigned or transferred pursuant to an exemption from such registration and (ii) neither the Company nor any other person is under any obligation to register this Note under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. 5. Conversion Upon Default. ----------------------- (a) If (and only if) this Note is not paid in full by the Maturity Date (a "Payment Default"), the Holder of this Note shall be entitled, at its option at any time prior to such Payment Default being cured, to convert all or a portion of the outstanding principal amount of this Note and any accrued and unpaid interest and/or liquidated damages accrued under this Note, the Agreement and/or the Registration Rights Agreement as of the Conversion Date (as defined below), into shares of the Company's $0.001 par value common stock (the "Common Stock") at a conversion price (the "Conversion Price") for each share of Common Stock equal to the lesser of (i) $0.33 per share or (ii) eighty percent (80%) of the lowest closing bid price for the Common Stock (as reported by Bloomberg) in any of the five (5) trading days immediately preceding the Conversion Date. (b) After a Payment Default, any conversion of this Note shall be achieved by submitting to the Company the fully completed form of conversion notice attached hereto as Exhibit I (a "Notice of Conversion"), executed by the Holder of this Note evidencing such Holder's intention to convert this Note or a specified portion hereof (including any designated accrued and unpaid interest and/or liquidated damages). A Notice of Conversion may be submitted via facsimile to the Company at the telecopy number for the Company provided in the Agreement (or at such other number as specified in advance of such conversion in writing by the Company). A Notice of Conversion may also be submitted by mail. The Company and the Holder shall each keep records with respect to the portion of this Note then being converted and all portions previously converted. Upon receipt by the Holder of the requisite Conversion Shares, the outstanding principal amount of this Note shall then (and only then) be reduced by the amount specified in the Notice of Conversion resulting in such Conversion Shares. The Company may, from time-to-time, but is not required to, (i) instruct the Holder to surrender this Note along with the Notice of Conversion for the purposes of making a notation thereon as to the amount of principal being converted or (ii) cancel this Note and issue a new Note in the same form with the principal amount of such Note reduced by the amount converted. Such new or annotated Note shall be delivered to the Holder within three (3) business days after such Holder's surrender to the Company. No fractional shares or scrip representing fractions of shares will be issued on conversion, but the number of shares issuable shall be rounded up to the nearest whole share. The date on which a Notice of Conversion is given (the "Conversion Date") shall be deemed to be either the date on which the Company receives from the Holder an original 3 Notice of Conversion duly executed, or, if earlier, the date set forth in a Notice of Conversion that is sent via facsimile. (c) In all cases, the Company shall deliver the Conversion Shares to the Holder within three (3) business days after the Conversion Date at the address specified in the Notice of Conversion. The Company acknowledges that the Agreement requires that the Company pay liquidated damages for late or non-delivery of Conversion Shares. 6. Obligations of the Company Herein Are Unconditional. The Company's --------------------------------------------------- obligations to repay this Note at the time, place, interest rate and in the currency hereinabove stated are absolute and unconditional. This Note and all other Notes now or hereafter issued in replacement of this Note on the same or similar terms are direct obligations of the Company. This Note ranks at least equally with all other Notes now or hereafter issued under the terms set forth herein. 7. Waiver of Demand, Presentment, Etc. The Company hereby expressly ----------------------------------- waives demand and presentment for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, notice of acceleration or intent to accelerate, bringing of suit and diligence in taking any action to collect amounts called for hereunder and shall be directly and primarily liable for the payment of all sums owing and to be owing hereunder, regardless of and without any notice, diligence, act or omission as or with respect to the collection of any amount called for herein. No delay or omission of any Holder hereof in exercising any right or remedy hereunder shall constitute a waiver of any such right or remedy. A waiver on one occasion shall not operate as a bar to, or waiver of, any such right or remedy on any future occasions. 8. Attorney's Fees; Reimbursable Expenses. The Company agrees to pay -------------------------------------- all costs and expenses, including, without limitation, attorney's fees, which may be incurred by the Holder in collecting any amount due under this Note or in enforcing any of the Holder's rights as described herein or under the Security Agreement (as defined below). 9. Default. If one or more of the following described "Events of ------- Default" shall occur: (a) The Company shall fail to make timely payment of any amount then due and owing under this Note; (b) Any of the representations or warranties made by the Company herein, in the Agreement, the Security Agreement, or in any certificate or other written statement heretofore or hereafter furnished by or on behalf of the Company in connection with the execution and delivery of this Note, the Agreement or the Security Agreement shall be false or misleading in any material respect at the time made and the Holder shall have provided written notice to the Company of the alleged misrepresentation or breach of warranty and the same shall continue uncured for a period of 4 seven (7) days after such written notice from the Holder; (c) If (i) the Company shall fail to perform or observe, in any material respect, any covenant, term, provision, condition, agreement or obligation of the Company under this Note not covered by clause (a) or (b) above or (ii) a default occurs under the Security Agreement or the Agreement, or any addenda thereto, and such failure or default shall continue uncured for a period of seven (7) days after written notice from the Holder; (d) The Company shall either: (i) become insolvent; (ii) admit in writing its inability to pay its debts generally or as they become due, (iii) make an assignment for the benefit of creditors or commence proceedings for its dissolution or (iv) apply for, or consent to the appointment of, a trustee, liquidator, or receiver for all or a substantial part of its property or business; (e) A trustee, liquidator or receiver shall be appointed for the Company or for a substantial part of its property or business without the Company's consent and such appointment is not discharged within sixty (60) days after such appointment; (f) Any governmental agency, or any court of competent jurisdiction at the instance of any governmental agency, shall assume custody or control of the whole or any substantial portion of the properties or assets of the Company and such custody or control shall not be released within sixty (60) days thereafter; (g) Any money judgment, writ or note of attachment, or similar process in excess of $25,000 in the aggregate shall be entered or filed against the Company or any of its properties or assets and shall remain unpaid, unvacated, unbonded or unstayed for a period of fifteen (15) days, or in any event later than five (5) days prior to the date of any proposed sale thereunder; (h) Bankruptcy, reorganization, insolvency or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Company and, if instituted against the Company, shall not be dismissed within sixty (60) days after such institution, or the Company shall by any action or answer approve of, consent to, or acquiesce in any such proceedings or admit the material allegations of, or default in answering a petition filed in, any such proceeding; (i) The Company shall have received a notice of default on the payment of any debt(s) aggregating in excess of $25,000 beyond any applicable grace period; (j) The Holder shall reasonably believe that there has been a change in control of the Company; (k) The Company shall be in default as to any obligation to Silicon Valley Bank beyond any applicable grace period; 5 (l) The Company's common stock shall have been voluntarily or involuntarily removed from future quotation on the OTC Bulletin Board; (m) John Creel and/or Peter Dermutz shall be in default as to any obligation under their Guaranty, Pledge and Security Agreements dated December 1, 2004, beyond any applicable grace period; or (n) The Holder shall reasonably believe that there has been a material adverse change in the operations, properties, management or financial condition of the Company; then, or at any time thereafter, and in any and every such case, unless such Event of Default shall have been waived in writing by the Holder (which waiver in one instance shall not be deemed to be a waiver in another instance or for any other prior or subsequent Event of Default), at the option of the Holder and in the Holder's sole discretion, the Holder may immediately accelerate the maturity hereof, whereupon all principal and accrued interest and liquidated damages (if any) hereunder shall be immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Company, anything herein or in any other instrument to the contrary notwithstanding, and the Holder may immediately, and upon the expiration of any period of grace, enforce any and all of the Holder's rights and remedies provided herein or any other rights or remedies afforded by law or equity. 10. Security. Pursuant to a Security Agreement attached to the -------- Agreement as Exhibit "C" (the "Security Agreement"), this Note is secured by a security interest in substantially all of the Company's tangible and intangible assets (including intellectual property) (collectively, the "Collateral"). A default under the terms of this Note shall also constitute a default under the Security Agreement. 11. Due on Sale Clause. If the Company shall sell, convey, transfer, ------------------ assign or further encumber the Collateral or any part thereof or any interest therein, whether legal or equitable, in any manner (whether voluntarily or involuntarily) not permitted under the Security Agreement, without the prior written consent of the Holder, which consent the Holder shall have no obligation to give, the Holder shall have the right, at its option, to declare this Note immediately due and payable irrespective of the Maturity Date specified herein. Any consent by the Holder to such a transfer may be predicated upon such terms, conditions and covenants as may be deemed advisable or necessary in the sole discretion of the Holder, including, but not limited to, the right to (i) require the transferee's assumption of personal liability on the debt hereunder, (ii) approve the form and substance of all transfer and assumption documents, (iii) change the interest rate, date of maturity and amount and/or schedule of payments hereunder and (iv) charge a fee based on a percentage of the original principal amount of this Note. The granting of permission for a transferee of the Collateral to assume this Note shall not in any manner be deemed a consent to any subsequent transfer, and the Holder shall retain the right to consent to 6 such subsequent transfer or transfers on the terms and conditions stated above. Consent to one such transfer shall not be deemed to be a waiver of the right of such consent to further or successive transfers. No assumption or consent to any subsequent transfer shall be deemed to constitute a release of the Company's obligations hereunder. 12. Enforceability; Maximum Interest Rate. ------------------------------------- (a) In case any provision of this Note is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Note shall not in any way be affected or impaired thereby. (b) Notwithstanding anything to the contrary contained in this Note, the Company shall not be obligated to pay, and the Holder shall not be entitled to charge, collect, receive, reserve or take interest ("interest" being defined, for purposes of this paragraph, as the aggregate of all charges which constitute interest under applicable law that are contracted for, charged, reserved, received or paid under this Note) in excess of the maximum rate allowed by applicable law. During any period of time in which the interest rate specified herein exceeds such maximum rate, interest shall accrue and be payable at such maximum rate. For purposes of this Note, the term "applicable law" shall mean that law in effect from time-to-time and applicable to the transaction between the Company and the Holder which lawfully permits the charging and collection of the highest permissible rate of interest on such transaction and this Note, including the laws of the State of Kansas and, to the extent controlling, laws of the United States of America. 13. Entire Agreement. This Note, together with the Agreement and the ---------------- Security Agreement and any exhibits or schedules attached thereto, and any addenda to any of the foregoing, constitute the full and entire understanding between the Company and the Holder with respect to the subject matter hereof and thereof and supersede all prior negotiations, agreements and understandings, written or oral, with respect to such subject matter. No provision of this Note shall be amended, waived, discharged or terminated other than by a written instrument signed by the Company and the Holder. 14. Governing Law. This Note shall be governed by and construed in ------------- accordance with the laws of the State of Kansas without giving effect to applicable principles of conflict of law. The Company hereby agrees that the exclusive venue for resolution of any case or controversy arising out of or in connection with this Note shall be the State of Kansas. 15. Headings. The headings in this Note are for convenience only, and -------- shall not be used in the construction of this Note. IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by its duly authorized officers on the date first written above. 7 RADIPTRON, INC. By: President By: Secretary EXHIBIT I NOTICE OF CONVERSION ---------------------- (To Be Executed by the Registered Holder in Order to Convert the Note) The undersigned hereby irrevocably elects to convert $___________ in principal amount of the 15% Secured Convertible Promissory Note Due March 31, 2005, into shares of Common Stock of Rapidtron, Inc. ( the "Company"), according to the terms and conditions set forth in the Note, as of the date specified below. In addition, the undersigned hereby irrevocably elects to convert $___________ in accrued interest and $___________ in accrued liquidated damages into an additional ___________ shares of Common Stock of the Company according to the terms and conditions set forth in the Note. If securities are to be issued to a person other than the undersigned, the undersigned agrees to pay all applicable transfer taxes with respect thereto. The undersigned represents that he, she or it, as of this date, is an "accredited investor" as such term is defined in Rule 501(a) of Regulation D under the 1933 Act. The undersigned also represents that the Conversion Shares are being acquired for the undersigned's own account and not as a nominee for any other person. The undersigned represents and warrants that all offers and sales by the undersigned of the Conversion Shares shall be made pursuant to registration of the same under the 1933 Act, or pursuant to an exemption from registration under the 1933 Act. The undersigned acknowledges that the Conversion Shares shall, if (and only if) required by law, contain the legend contained on page 1 of the Note. Conversion Date: --------------------- Applicable Conversion Price: ------------------------------ Total Conversion Shares: Holder: -------------------------------------- (Print Legal Name and Title) --------------------------------------------------------- (Signature of Duly Authorized Representative of Holder) Address of Holder: 8 EX-10.5 6 ex10_5.txt EXHIBIT 10.5 SECURITIES PURCHASE AGREEMENT This Securities Purchase Agreement (the "Agreement") is made and entered into on December 1, 2004, by and between Rapidtron, Inc., a corporation organized under the laws of the State of Nevada, with its principal place of business located at 3151 Airway Avenue, Building Q, Costa Mesa, California (the "Company"), and Oceanus Value Fund, L.P. (the "Buyer"). RECITALS -------- A. The Company and the Buyer are executing and delivering this Agreement in reliance upon the exemptions from securities registration afforded by (i) the provisions of Regulation D ("Regulation D") as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933 Act"), and (ii) Section 4(2) under the 1933 Act. B. The Buyer desires to purchase from the Company, and the Company desires to sell to the Buyer, for the amount and upon the terms and conditions stated in this Agreement, in a closing (the "Closing") as herein described, the following securities of the Company: (i) The Company's 15% Secured Convertible Promissory Note, the form of which is attached as Exhibit A (the "Note"), which may be converted into the Company's $0.001 par value common stock (the "Common Stock") on the terms and conditions set forth in the Note. The principal amount of the Note shall be Four Hundred Thousand Dollars ($400,000). (ii) As additional consideration for the Buyer's purchase of the Note, the Company shall also issue to the Buyer a warrant (the "Warrant") to purchase 800,000 shares of Common Stock with an exercise price as specified in the Warrant, which Warrant must be exercised (if at all) within five (5) years after the date of issuance. The Warrant shall be in the form attached as Exhibit B. Any Common Stock issuable pursuant to conversion of the Note shall be referred to herein as the "Conversion Shares." The Common Stock receivable upon exercise of the Warrant shall be referred to herein as the "Warrant Shares." The Note, the Conversion Shares, the Warrant and the Warrant Shares may be collectively referred to herein as the "Securities." C. Contemporaneously with the execution and delivery of this Agreement, the Company is executing and delivering a Security Agreement (the "Security Agreement") in the form of the attached Exhibit C, pursuant to which the Company has agreed to secure its obligations under the Note with a security interest in substantially all tangible and intangible assets (including intellectual property) owned by the Company (the "Collateral"). Pursuant to a Subordination Agreement between the Buyer and Silicon Valley Bank ("SVB") in the form attached as Exhibit D (the "SVB Subordination Agreement"), the Buyer's security interest in the Collateral will be subordinated to the interest of SVB. D. As additional security for the Company's obligations under the Note, contemporaneously with the execution and delivery of this Agreement, John Creel (the Company's President and Chief Executive Officer) and Peter Dermutz (the Company's Executive Vice President, acting Secretary, Treasurer and Principal Financial Officer) (collectively, the "Pledgors"), are each executing and delivering a Guaranty, Pledge and Security Agreement (the "Pledge Agreements") in the form attached as Exhibit E pursuant to which, effective January 1, 2005, each Pledgor agrees to guaranty payment of the Note and to secure that guaranty with a first-priority security interest in all shares of the Company which he owns. E. Contemporaneously with the execution and delivery of this Agreement, the parties hereto are also executing and delivering a Registration Rights Agreement (the "Registration Rights Agreement") in the form of the attached Exhibit F, pursuant to which the Company has, among other things, agreed to provide certain registration rights for the Warrant Shares under the 1933 Act and applicable state securities laws. AGREEMENTS ---------- NOW, THEREFORE, in consideration of their respective promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Buyer hereby agree as follows: 1. PURCHASE AND SALE OF THE SECURITIES. ---------------------------------------- (a) Purchase. At the Closing, the Buyer agrees to purchase the Note -------- from the Company and the Company agrees to sell the Note to the Buyer. The purchase price for the Note shall be $400,000 (the "Purchase Price"), out of which shall be paid (i) $15,000 in pre-paid interest (as provided in the Note), (ii) an origination fee of $12,000 to the Buyer, (iii) a finder's fee of $20,000 to Bridgewater Capital Corporation and (iv) such other amounts as may be included in the Disbursement Instructions attached as Exhibit G (the "Disbursement Instructions"). The disbursements specified in the Disbursement Instructions (including disbursement to the Company of the remainder of the Purchase Price) shall be made on the Closing Date (as defined below). (b) The Closing. The date of the Closing (the "Closing Date") shall ------------ be December 1, 2004, or such other date as the parties may agree in writing. On or before the Closing Date, (i) the Purchase Price shall be delivered to the Escrow Agent (as defined in the Escrow Agreement in the form of the attached Exhibit H (the "Escrow Agreement")) and (ii) the Company shall deliver to the Escrow Agent on behalf of the Company the originals of this Agreement, the Note, the Warrant, the Security Agreement, the SVB Subordination Agreement, the Pledge Agreements, the Registration Rights Agreement, the Disbursement Instructions and the Escrow Agreement, each duly authorized and executed by the Company and/or any other parties thereto (other than the Buyer), together with such other items as may be required by this Agreement (collectively, the "Closing Documents"). (c) Payment. The Buyer shall pay the Purchase Price by wire transfer ------- of immediately available funds in United States Dollars, to be deposited into the Escrow Account (as defined in the Escrow Agreement), against delivery to the Escrow Agent of the Closing Documents by the Company. At the Closing, the Escrow Agent shall be responsible for disbursement of the Purchase Price according to the Disbursement Instructions and delivery of the Closing Documents to the Buyer (with copies to the Company duly executed by the Buyer, where required), in each case in accordance with the terms of the Escrow Agreement. 2. THE BUYER'S REPRESENTATIONS AND WARRANTIES. With respect to its -------------------------------------------- purchase hereunder, the Buyer represents and warrants to the Company, and agrees, as follows: (a) Investment Purposes; Compliance With 1933 Act. The Buyer is -------------------------------------------------- purchasing the Securities for its own account for investment only and not with a view towards, or in connection with, the public sale or distribution thereof, except pursuant to sales registered, or exempt from registration, under the 1933 Act and applicable state securities laws. The Buyer is not purchasing the Securities for the purpose of covering short sale positions in the Common Stock established on or prior to the Closing Date. The Buyer agrees to offer, sell or otherwise transfer the Securities only (i) in accordance with the terms of this Agreement, the Note and the Warrant, as applicable, and (ii) pursuant to registration under the 1933 Act or an exemption from registration under the 1933 Act and any other applicable securities laws. The Buyer does not by its representations in this Section 2(a) agree to hold the Securities for any minimum or other specific term, and reserves the right to dispose of the Securities at any time pursuant to a registration statement or in accordance with an exemption from registration under the 1933 Act, in all cases in accordance with applicable state and federal securities laws. The Buyer understands that it shall be a condition to the issuance of the Conversion Shares and the Warrant Shares that such shares be and are subject to the representations set forth in this Section 2(a). (b) Accredited Investor Status. The Buyer is an "accredited investor," --------------------------- as that term is defined in Rule 501(a) of Regulation D. The Buyer has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment made pursuant to this Agreement. The Buyer is aware that it may be required to bear the economic risk of the investment made pursuant to this Agreement for an indefinite period of time, and is able to bear such risk. (c) Reliance on Exemptions. The Buyer understands that the Securities ----------------------- are being offered and sold to it in reliance on specific exemptions from the registration requirements of applicable federal and state securities laws, and that the Company is relying upon the truth and accuracy of, and the Buyer's compliance with, the representations, warranties, agreements and covenants of the Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of the Buyer to acquire the Securities. (d) Information. The Buyer and its advisors, if any, have been ----------- furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities that have been requested by the Buyer. The Buyer and its advisors, if any, have been afforded the opportunity to ask all questions of the Company as they have in their discretion deemed advisable. The Buyer understands that its investment in the Securities involves a high degree of risk. The Buyer has sought such accounting, legal and tax advice as it has considered necessary to an informed investment decision with respect to the investment made pursuant to this Agreement. (e) No Government Review. The Buyer understands that no United States --------------------- federal or state agency or any other government or governmental agency has approved or made any recommendation or endorsement of the Securities or the fairness or suitability of the investment in the Securities, nor have such authorities passed upon or endorsed the merits of the offering of the Securities. (f) Transfer or Resale. The Buyer understands that: (i) except as -------------------- provided in the Registration Rights Agreement, the Securities have not been and are not being registered under the 1933 Act or any state securities laws, and may not be offered for sale, sold or otherwise transferred unless either (A) subsequently registered thereunder or (B) the Buyer shall have delivered to the Company an opinion by counsel reasonably satisfactory to the Company, in form, scope and substance reasonably satisfactory to the Company, to the effect that the securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration and (ii) neither the Company nor any other person is under any obligation to register the Securities under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder (in each case, except as required by this Agreement or the Registration Rights Agreement). (g) Legend. Subject to Section 5(b) below, the Buyer understands that ------ the Note, the Warrant and the stock certificates representing the Conversion Shares and the Warrant Shares (until such time as the Conversion Shares and the Warrant Shares have been registered under the 1933 Act pursuant to the Registration Rights Agreement or otherwise may be sold by the Buyer pursuant to Rule 144 (or any applicable rule which operates to replace said Rule) promulgated under the 1933 Act ("Rule 144")), will bear a restrictive legend (the "Legend") in substantially the following form: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE (COLLECTIVELY, THE "LAWS"). THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF EITHER (I) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE APPLICABLE LAWS OR (II) AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER, TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED DUE TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE APPLICABLE LAWS. (h) Authorization; Enforcement. This Agreement, the Registration --------------------------- Rights Agreement, the Disbursement Instructions, the Security Agreement and the Escrow Agreement (collectively, the "Agreements") have been duly and validly authorized, executed and delivered by the Buyer and are each valid and binding agreements of the Buyer enforceable in accordance with their terms, subject as to enforceability to general principles of equity and to bankruptcy, insolvency, moratorium and other similar laws affecting the enforcement of creditors' rights generally. 3. THE COMPANY'S REPRESENTATIONS AND WARRANTIES. The Company ------------------------------------------------ represents and warrants to the Buyer, and agrees, as follows: (a) Organization and Qualification. The Company is a corporation duly ------------------------------- organized and existing in good standing under the laws of the State of Nevada, and has the requisite corporate power to own its properties and to carry on its business as now being conducted. The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary and where the failure so to qualify would have a Material Adverse Effect. As used herein, "Material Adverse Effect" means any material adverse effect on the operations, properties or financial condition of the Company taken as a whole. The Common Stock is quoted on the OTC Bulletin Board. The Company has received no notice, either written or oral, with respect to the continued eligibility of the Common Stock for such quotation, the Company has maintained all requirements for the continuation of such quotation, and the Company does not reasonably anticipate that the Common Stock will be removed from the OTC Bulletin Board in the foreseeable future. The Company has complied, and will timely comply, with all requirements of the SEC, the National Association of Securities Dealers and the OTC Bulletin Board with respect to the issuance of the Securities. (b) Authorization; Enforcement. The Company has the requisite --------------------------- corporate power and authority to enter into and perform the Agreements, to issue and sell the Securities in accordance with the terms thereof, and to perform its obligations under the Note and the Warrant in accordance with their terms. The Company's execution, delivery and performance of the Agreements, the Note and the Warrant, and its consummation of the transactions contemplated thereby, have been duly authorized by the Company's Board of Directors and no further consent or authorization of the Company, its Board of Directors, its stockholders, or any other person or entity is required. The Agreements and, on the Closing Date, the Note and the Warrant, have been duly and validly authorized, executed and delivered by the Company, and the Note (when issued), the Warrant (when issued), and the Agreements constitute the valid and binding obligations of the Company enforceable in accordance with their terms, subject as to enforceability to general principles of equity and to bankruptcy, insolvency, moratorium and other similar laws affecting the enforcement of creditors' rights generally. (c) Capitalization. As of September 30, 2004, the authorized capital -------------- stock of the Company consisted of 100,000,000 shares of Common Stock, of which 20,463,058 shares were issued and outstanding. All of such outstanding shares have been validly issued and are fully paid and non-assessable. No shares of Common Stock are subject to preemptive rights or any other similar rights or any liens or encumbrances. As of the Closing Date, except as set forth in the attached Schedule 3(c) or in the SEC Documents (as defined in paragraph (h) below) filed prior to or for the quarter ended September 30, 2004, (i) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever issued or agreed to by the Company relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries, (ii) there are no outstanding debt securities of the Company or any of its subsidiaries except those issued to the Buyer and (iii) there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of its or their securities under the 1933 Act (except as provided herein and in the Registration Rights Agreement). If requested by the Buyer, the Company has furnished to the Buyer true and correct copies of the Company's Articles of Incorporation as in effect on the date hereof (the "Articles of Incorporation"), and the Company's Bylaws as in effect on the date hereof. (d) Issuance of Warrant and Conversion Shares. The Warrant Shares are ------------------------------------------ all duly authorized and reserved for issuance, and in all cases upon issuance shall be validly issued, fully paid and non-assessable, free from all taxes, liens and charges with respect to the issuance thereof, and will not be subject to preemptive rights or other similar rights of stockholders of the Company. Upon issuance, the Conversion Shares shall be validly issued, fully paid and non-assessable, free from all taxes, liens and charges with respect to the issuance thereof, and will not be subject to preemptive rights or other similar rights of stockholders of the Company. (e) Acknowledgment Regarding Buyer's Purchase of the Securities. (i) ------------------------------------------------------------- The Buyer is not acting as a financial advisor to or fiduciary of the Company (or in any similar capacity) with respect to this Agreement or the transactions contemplated hereby, (ii) this Agreement and the transactions contemplated hereby, and the relationship between the Buyer and the Company, are and will be considered "arms-length" notwithstanding any other or prior agreements or nexus between the Buyer and the Company, whether or not disclosed, and (iii) any statements made by the Buyer, or any of its representatives or agents, in connection with this Agreement and the transactions contemplated hereby are not to be construed as advice or a recommendation, are merely incidental to the Buyer's purchase of the Securities and have not been relied upon in any way by the Company, its officers or directors. The Company's decision to enter into this Agreement and the transactions contemplated hereby have been based solely upon an independent evaluation by the Company, its officers and directors. (f) No Integrated Offering. Neither the Company nor any of its ------------------------ affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances which would prevent the parties hereto from consummating the transactions contemplated hereby pursuant to an exemption from registration under the 1933 Act and, specifically, in accordance with the provisions of Regulation D. The transactions contemplated hereby are exempt from the registration requirements of the 1933 Act, assuming the accuracy of the representations and warranties of the Buyer contained herein. (g) No Conflicts. Except as set forth in the attached Schedule 3(g), ------------- neither the Company nor any of its subsidiaries is in violation of its Articles of Incorporation or other organizational documents, and neither the Company nor any of its subsidiaries is in default (and no event has occurred which, with notice or lapse of time or both, would put the Company or any of its subsidiaries in default) under, nor has there occurred any event giving others (with notice or lapse of time or both) any rights of termination, amendment, acceleration or cancellation, of any agreement, indenture or other instrument to which the Company or any of its subsidiaries is a party, except for possible defaults or rights as would not, in the aggregate or individually, have a Material Adverse Effect. The business of the Company and its subsidiaries is not being conducted and, so long as the Buyer owns any of the Securities, shall not be conducted, in violation of any law, ordinance or regulation of any governmental entity, except for possible violations which neither singly or in the aggregate would have a Material Adverse Effect. Except as specifically contemplated by this Agreement or as required under the 1933 Act and any applicable state securities laws, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court, governmental agency, individual or entity in order for it to execute, deliver and perform any of its obligations under the Agreements, the Note or the Warrant in accordance with the terms thereof. (h) SEC Documents; Financial Statements. Except as disclosed on -------------------------------------- Schedule 3(h) hereof, since at least September 30, 2004, the Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "1934 Act"), with all of the foregoing that were filed prior to the date hereof and all exhibits included therein and all financial statements and schedules thereto and all documents (other than exhibits) incorporated by reference therein being hereinafter referred to as the "SEC Documents." The Company has delivered to the Buyer (to the extent requested by the Buyer) true and complete copies of the SEC Documents. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the applicable rules and regulations of the SEC promulgated thereunder, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements (i) have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved except (A) as may be otherwise indicated in such financial statements or the notes thereto or (B) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements and (ii) fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No information provided by or on behalf of the Company to the Buyer contains any untrue statement of a material fact or omits to state any material fact required to be stated therein in order to make the statements therein, in the light of the circumstances under which they are or were made, not misleading. Except as set forth in the financial statements of the Company included in the SEC Documents, the Company has no liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to the date of such financial statements and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in such financial statements, in each case of clauses (i) and (ii) above, which, individually or in the aggregate, are not material to the financial condition, business, operations, properties, operating results or prospects of the Company. The SEC Documents contain a complete and accurate description of all written and oral contracts, agreements, leases or other instruments to which the Company or any subsidiary is a party or by which the Company or any subsidiary is bound which are required by the rules and regulations promulgated by the SEC to be disclosed (each a "Contract"). None of the Company, its subsidiaries or, to the best of the Company's knowledge, any of the other parties thereto, is in breach or violation of any Contract, which breach or violation would, or with the lapse of time, the giving of notice, or both, have a Material Adverse Effect. (i) Absence of Certain Changes; Bankruptcy. Except as disclosed in the -------------------------------------- SEC Documents, since at least November 23, 2004, there has been no material adverse change or development in the business, properties, operation, financial condition, results of operations or prospects of the Company. The Company has not taken any steps, and does not currently have any reasonable expectation of taking any steps, to seek protection pursuant to any bankruptcy law, nor does the Company have any knowledge that its creditors intend to initiate involuntary bankruptcy proceedings. (j) Absence of Litigation. Except as set forth in the attached ----------------------- Schedule 3(j) or in the SEC Documents filed prior to or for the quarter ended September 30, 2004, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board or governmental body pending or, to the knowledge of the Company, threatened against or affecting the Company, wherein an unfavorable decision, ruling or finding would have a Material Adverse Effect or which would adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement or any of the documents contemplated herein. (k) Foreign Corrupt Practices. Neither the Company nor any of its --------------------------- subsidiaries, nor any officer, director or other person acting on behalf of the Company or any subsidiary has, in the course of his, her or its actions for or on behalf of the Company, (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity, (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds, (iii) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended, or (iv) made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee. (l) Brokers; No General Solicitation. The Company has taken no action --------------------------------- that would give rise to any claim by any person for brokerage commissions, finder's fees or similar payments relating to this Agreement and the transactions contemplated hereby, other than as set forth in the attached Schedule 3(l) or the Disbursement Instructions. The Company acknowledges that no broker or finder was involved with respect to the transactions contemplated hereby, other than as set forth in the attached Schedule 3(l) or the Disbursement Instructions. Neither the Company nor any other person or entity participating on the Company's behalf in the transactions contemplated hereby, nor any person or entity acting for the Company or any such other person or entity, has conducted any "general solicitation," as described in Rule 502(c) under Regulation D, with respect to the Securities. (m) Status of Assets. Except as described on Schedule 3(m) or in the ------------------ SEC Documents filed prior to or for the quarter ended September 30, 2004, the Company has good and marketable title to each of the assets that is material to its business, free and clear of all liens, claims, restrictions and other encumbrances. (n) Eligibility to File Registration Statement. The Company is --------------------------------------------- currently eligible to file registration statements with the SEC on Form SB-2 under the 1933 Act. (o) No Encumbrances on Shares. To the Company's best knowledge after --------------------------- inquiry of both John Creel and Peter Dermutz, except as described on Schedule 3(o), neither Mr. Creel nor Mr. Dermutz has pledged, hypothecated or otherwise encumbered any shares in the Company that he may own. (p) Validity of Pledge Agreements. To the Company's best knowledge, -------------------------------- the Pledge Agreements constitute valid and binding obligations of John Creel and Peter Dermutz, enforceable in accordance with their terms, subject to bankruptcy, insolvency, moratorium and other similar laws affecting the enforcement of creditors' rights generally. 4. COVENANTS OF THE PARTIES. --------------------------- (a) Best Efforts. Each party shall use its best efforts to timely ------------- satisfy each of the conditions to be satisfied by it as provided in Sections 6 and 7 of this Agreement. (b) Securities Laws. The Company shall timely file a Form D (and any ---------------- other equivalent form or notice required by applicable state law) with respect to the Securities if and as required under Regulation D and applicable state securities laws and provide copies thereof to the Buyer upon the Buyer's request. The Company shall, on or before the Closing Date, take all action necessary in order to sell the Securities to the Buyer in compliance with federal and applicable state securities laws, and shall provide written evidence of such action to the Buyer upon the Buyer's request. (c) Reporting Status. So long as the Buyer beneficially owns any of ----------------- the Securities, the Company shall (i) file all reports required to be filed with the SEC pursuant to the 1934 Act and (ii) maintain its status as an issuer required to file reports under the 1934 Act, even if the 1934 Act or the rules and regulations thereunder would permit termination of such status. (d) Reservation of Shares. ----------------------- (i) The Company shall at all times have authorized and reserved for the purpose of issuance that number of shares of Common Stock which is sufficient to provide for the issuance of all of the Conversion Shares and the Warrant Shares. Prior to full payment of the Note and complete exercise of the Warrant, the Company shall not reduce the number of shares of Common Stock reserved for issuance hereunder without the written consent of the Buyer, except for a reduction proportionate to a reverse stock split which affects all shares of Common Stock equally. (ii) If at any date the Company shall not have authorized and reserved for the purpose of issuance that number of shares of Common Stock which is sufficient to provide for the issuance of all of the Conversion Shares and the Warrant Shares which could then be issued, within thirty (30) days of such date the Company shall call and hold a special meeting of its shareholders for the sole purpose of increasing the Company's authorized and unissued shares to an amount sufficient to correct such deficiency. In connection with such meeting, (i) the Company's officers and directors shall (A) recommend to shareholders that they vote in favor of such increase in the number of authorized and unissued shares and (B) vote all of their shares in favor of such increase and (ii) the Company shall cause its officers and directors to act in a manner consistent with the forgoing clause (i). (e) Listing or Quotation. The Company shall promptly secure the ---------------------- listing of the Warrant Shares and the Conversion Shares upon each national securities exchange or automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance), and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of the Warrant Shares and the Conversion Shares as may exist from time to time under the terms of this Agreement and/or the Registration Rights Agreement. The Company shall at all times comply in all respects with the Company's reporting, filing and other obligations under the by-laws or rules of the National Association of Securities Dealers and the OTC Bulletin Board or such national securities exchange or other market on which the Common Stock may then be quoted or listed, as applicable. (f) Prospectus Delivery Requirement. The Buyer understands that the --------------------------------- 1933 Act requires delivery of a prospectus relating to the Conversion Shares and the Warrant Shares in connection with any sale thereof pursuant to a registration statement under the 1933 Act, and the Buyer shall comply with any applicable prospectus delivery requirements of the 1933 Act in connection with any such sale. The Company shall have the right to rely upon the Buyer's agreement contained in this Section 4(g); therefore, with respect to any resale of the Conversion Shares and the Warrant Shares by the Buyer pursuant to a registration statement, any certificate evidencing such Conversion Shares and Warrant Shares shall not contain a restrictive legend of any kind. (g) Intentional Acts or Omissions. Neither party shall intentionally ------------------------------- perform or fail to perform any act that, if performed or omitted to be performed, would prevent or excuse the performance of this Agreement or any of the transactions contemplated hereby. (h) Expenses. At the Closing, the Company agrees to pay to, or at the -------- direction of, the Buyer an amount equal to the attorney's fees and other expenses incurred by Buyer in connection with the Buyer's due diligence investigation, document preparation and escrow for the transactions contemplated by this Agreement. (i) Corporate Status; Taxes. The Company shall, at least until the ------------------------- Buyer no longer holds any of the Securities, maintain its corporate existence in good standing and shall pay all taxes when due except for taxes it reasonably disputes. 5. LEGEND; TRANSFER INSTRUCTIONS; RELATED MATTERS. --------------------------------------------------- (a) Transfer Agent Instructions. Promptly after receiving notice of ----------------------------- conversion of the Note or exercise of the Warrant (as applicable), and in any event no more than three (3) business days after the Company's receipt of such notice of conversion or exercise, the Company shall instruct its transfer agent to issue certificates, registered in the name of the Buyer or its permitted nominee, for the Conversion Shares and/or Warrant Shares in such amounts as are specified in such notice. All such certificates shall bear the restrictive legend specified in Section 2(g) of this Agreement only to the extent required by applicable law and as specified in this Agreement or any documents referenced herein. The Company represents and warrants that (i) no instructions will be given by it to its transfer agent other than (A) the instructions referred to in this Section 5 and (B) any stop transfer instructions required to give effect to Section 2(f) hereof in the case of the Conversion Shares and Warrant Shares prior to their registration under the 1933 Act and (ii) the Conversion Shares and Warrant Shares shall otherwise be freely transferable on the books and records of the Company as and to the extent permitted by applicable law and provided by this Agreement, the Warrant and the Registration Rights Agreement. Nothing in this Section shall affect in any way the Buyer's obligations and agreement to comply with all applicable securities laws upon resale of the Conversion Shares and Warrant Shares. If the Buyer (i) provides the Company with an opinion of counsel reasonably satisfactory to Company that registration by the Buyer of the Note, the Warrant, the Warrant Shares and/or the Conversion Shares is not required under the 1933 Act or (ii) transfers any of the Securities to an affiliate which is an accredited investor (in accordance with the provisions of this Agreement) or in compliance with Rule 144, then, in either instance, the Company shall permit such transfer and, if applicable, promptly (and in all events within three (3) trading days) instruct its transfer agent to issue one or more certificates in such name and in such denominations as specified by the Buyer. (b) Removal of Legend. The Legend shall be removed from any ------------------- certificate for a Security, and a certificate for a Security shall be originally issued without the Legend, if, unless otherwise required by state securities laws, (i) the sale of such Security is registered under the 1933 Act, (ii) the holder of such Security provides the Company with an opinion by counsel reasonably satisfactory to the Company, that is in form, substance and scope reasonably satisfactory to the Company, to the effect that a public sale or transfer of such Security may be made without registration under the 1933 Act or (iii) such holder provides the Company with assurances reasonably satisfactory to the Company and its counsel that such Security can be sold pursuant to Rule 144. The Buyer agrees that its sale of all Securities, including those represented by a certificate from which the Legend has been removed, or which were originally issued without the Legend, shall be made only pursuant to an effective registration statement (with delivery of a prospectus in connection with such sale) or in compliance with an exemption from the registration requirements of the 1933 Act. In the event the Legend is removed from the certificate for any Security or any certificate for a Security is issued without the Legend and thereafter the effectiveness of a registration statement covering the sale of such Security is suspended or the Company determines that a supplement or amendment thereto is required by applicable securities laws, then upon reasonable advance notice to the holder of such Security, the Company shall be entitled to require that the Legend be placed upon such Security, which Legend shall be removed when such Security may again be sold pursuant to an effective registration statement or Rule 144 or such holder provides the opinion with respect thereto described in clause (ii) above. (c) Conversion of Note. Subject to the terms of the Note, the Buyer -------------------- shall have the right to convert the Note by delivering via facsimile an executed and completed Notice of Conversion (as defined in the Note) to the Company and delivering within three (3) business days thereafter the original Notice of Conversion and, if required by the Company, the original Note being converted by overnight courier to the Company. Each date on which a Notice of Conversion is faxed to the Company in accordance with the provisions hereof shall be deemed a "Conversion Date." The Company will then deliver the certificates representing the shares of Common Stock issuable upon conversion of the Note (along with a replacement Note representing the principal amount of the original Note not so converted, if applicable) to the Buyer or its designee via overnight courier within three (3) business days after the relevant Conversion Date (with respect to each conversion, the "Deadline"). Time is of the essence with respect to the requirements of the immediately preceding sentence. (d) Exercise of Warrant. The Buyer shall have the right to exercise the ------------------- Warrant by delivering via facsimile an executed and completed Notice of Exercise (as attached to the Warrant) to the Company and delivering within three (3) business days thereafter the original Notice of Exercise and the original Warrant being exercised (if required by the Company) by overnight courier to the Company. Each date on which a Notice of Exercise is faxed to the Company in accordance with the provisions hereof shall be deemed an "Exercise Date." The Company will transmit the certificates representing the shares of Common Stock issuable upon exercise of the Warrant (along with a replacement Warrant representing the amount of said Warrant not so exercised, if applicable) to the Buyer or its designee via overnight courier within three (3) business days after the relevant Exercise Date (with respect to each exercise, the "Deadline"). Time is of the essence with respect to the requirements of the immediately preceding sentence. (e) Injunctive Relief for Breach. The Company acknowledges that a ------------------------------- breach of its obligations under Sections 5(a), 5(b), 5(c) and/or 5(d) above will cause irreparable harm to the Buyer by vitiating the intent and purpose of the transactions contemplated hereby. Accordingly, the Company agrees that the remedy at law for a breach of its obligations under such Sections would be inadequate and agrees that, in the event of a breach or threatened breach by the Company, the Buyer shall be entitled, in addition to all other remedies at law or in equity, to an injunction restraining any breach and requiring immediate issuance and/or transfer, without the necessity of showing economic loss and without any bond or other security being required. (f) Liquidated Damages for Non-Delivery of Certificates. In addition to --------------------------------------------------- the provisions of Section 5(e) above, the Company understands and agrees that any delay in the issuance of the certificates beyond the Deadline will result in substantial economic loss and other damages to the Buyer. As partial compensation to the Buyer for such loss, the Company agrees to pay liquidated damages (which the Company acknowledges is not a penalty) to the Buyer for issuance and delivery of the certificates after the Deadline, in accordance with the following schedule (where "No. of Business Days Late" is defined as the number of business days beyond five (5) business days from the date of delivery by the Buyer to the Company of a facsimile Notice of Conversion or Notice of Exercise or, if later, from the date on which all other necessary documentation duly executed and in proper form required for conversion of the Note or exercise of the Warrant has been delivered to the Company, but only if such necessary documentation has not been delivered to the Company within the three (3) business day period after the facsimile delivery to the Company of the Notice of Conversion or Notice of Exercise required in this Agreement): No. of Business Days Late Liquidated Damages (in US$) ------------------------- --------------------------- 1 $300 2 $400 3 $500 4 $600 5 $700 6 $800 7 $900 8 $1,000 9 $1,250 10 $1,500 11+ $1,750 + $1,000 for each Business Day Late beyond 11 days Subject to the Buyer's right, in its sole discretion, to add accrued liquidated damages on to the principal amount of the Note (as provided in the Note), the Company shall pay the Buyer any liquidated damages incurred under this Section 5(f) by certified or cashier's check upon the earlier of (i) the issuance to the Buyer of the certificates with respect to which the damages accrued or (ii) each monthly anniversary of the receipt by the Company of the Buyer's Notice of Conversion or Notice of Exercise, as the case may be. Nothing herein shall limit the Buyer's right to pursue actual damages for the Company's failure to issue and deliver certificates to the Buyer in accordance with the terms of this Agreement or for breach by the Company of this Agreement. 6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligation of ------------------------------------------------ the Company hereunder to sell the Note and the Warrant at the Closing is subject to the satisfaction, on or before the Closing Date, of each of the following conditions; provided, however, that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion: (a) The Buyer shall have (i) executed the Agreements (to the extent required thereby) and (ii) delivered such documents or signature pages thereof (via facsimile or as otherwise provided in the Escrow Agreement), together with such other items as may be required by this Agreement, to the Escrow Agent. (b) The Buyer shall have delivered to the Escrow Agent on behalf of the Company the Purchase Price by wire transfer of immediately available funds pursuant to the wiring instructions provided by the Escrow Agent. (c) The representations and warranties of the Buyer in this Agreement shall be true and correct in all material respects as of the date made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date), and the Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Buyer at or prior to the Closing Date. (d) No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered or issued by any court or governmental authority of competent jurisdiction or any self- regulatory organization having authority over the matters contemplated hereby which restricts or prohibits the consummation of any of the transactions contemplated herein. 7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE. The obligation of ------------------------------------------------ the Buyer to purchase the Note and Warrant is subject to the satisfaction, on or before the Closing Date, of each of the following conditions; provided, however, that these conditions are for the sole benefit of the Buyer and may be waived by the Buyer at any time in its sole discretion: (a) The Company shall have (i) executed the Agreements and (ii) delivered such documents and the executed Pledge Agreements and the SVB Subordination Agreement, or signature pages thereof (via overnight delivery or as otherwise provided in the Escrow Agreement), together with such other items as may be required by this Agreement, to the Escrow Agent. (b) The Company shall have issued and have duly executed by the authorized officers of the Company, and delivered to the Escrow Agent on behalf of the Buyer, the original Note and Warrant (via overnight delivery or as otherwise provided by the Escrow Agreement). (c) The representations and warranties of the Company in this Agreement shall be true and correct in all material respects as of the date made and as of Closing Date as though made at that time (except for representations and warranties that speak as of a specific date), and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing Date. The Buyer may require a certificate, executed by the Chief Executive Officer of the Company and dated as of the Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by the Buyer. (d) The Common Stock shall be authorized for quotation on the OTC Bulletin Board (or listing on a national securities exchange or other market) and trading in the Common Stock on such market shall not have been suspended by the SEC or other relevant regulatory agency. (e) No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered or issued by any court or governmental authority of competent jurisdiction or any self- regulatory organization having authority over the matters contemplated hereby which restricts or prohibits the consummation of any of the transactions contemplated herein. 8. GOVERNING LAW; MISCELLANEOUS. ------------------------------ (a) Governing Law. This Agreement shall be governed by and interpreted -------------- in accordance with the laws of the State of Kansas without regard to the principles of conflict of laws. Service of process in any civil action relating to or arising out of this Agreement (including all Exhibits or Schedules or any addenda hereto) or the transactions contemplated herein may be accomplished in any manner provided by law. The parties hereto agree that a final, non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. (b) Counterparts. This Agreement may be executed in two or more ------------ identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and signature pages from such counterparts have been delivered to the Escrow Agent. (c) Headings; Interpretation. The headings of this Agreement are for ------------------------- convenience of reference and shall not form a part of, or affect the interpretation of this Agreement. As used herein, the masculine shall refer to the feminine and neuter, and vice versa, as the context may require. As used herein, unless the context clearly requires otherwise, the words "herein," "hereunder" and "hereby," shall refer to this entire Agreement and not only to the Section or paragraph in which such word appears. If any date specified herein falls on a Saturday, Sunday or public or legal holiday, the date shall be construed to mean the next business day following such Saturday, Sunday or public or legal holiday. For purposes of this Agreement, a "business day" is any day other than a Saturday, Sunday or public or legal holiday. Each party intends that this Agreement be deemed and construed to have been jointly prepared by the parties. As a result, the parties agree that any uncertainty or ambiguity existing herein shall not be interpreted against either of them. (d) Severability. If any provision of this Agreement shall be invalid ------------ or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. (e) Entire Agreement; Amendments. This Agreement and the documents ------------------------------ referenced herein (which are incorporated herein by reference) contain the entire understanding of the parties with respect to the matters covered herein and supercede all prior agreements, negotiations and understandings, written or oral, with respect to such subject matter. Except as specifically set forth herein, neither the Company nor the Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement shall be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement. No delay or omission of either party hereto in exercising any right or remedy hereunder shall constitute a waiver of such right or remedy, and no waiver as to any obligation shall operate as a continuing waiver or as a waiver of any subsequent breach. (f) Notices. Any notices required or permitted to be given under the ------- terms of this Agreement shall be in writing and sent by U. S. Mail or delivered personally or by overnight courier or via facsimile (if via facsimile, to be followed within one (1) business day by an original of the notice document via overnight courier) and shall be effective (i) five (5) days after being placed in the mail, if mailed, certified or registered, return receipt requested, (ii) upon receipt, if delivered personally or (iii) one (1) day after facsimile transmission or delivery to a courier service for overnight delivery, in each case properly addressed to the party to receive the same. The addresses for such communications shall be as follows: If to the Company: Rapidtron, Inc. 3151 Airway Avenue, Building Q Costa Mesa, California 92626 Telephone: (949) 798-0652 Facsimile: (949) 474-4550 Attention: John Creel If to the Buyer: Oceanus Value Fund, L.P. 225 North Market Street, Suite 220 Wichita, Kansas 67202 Telephone: (316) 262-8874 Facsimile: (316) 267-0204 Attention: John C. Tausche Each party shall provide written notice to the other party of any change in address. (g) Successors and Assigns. This Agreement shall be binding upon and ------------------------ inure to the benefit of the parties and their respective successors and permitted assigns. Neither the Company nor the Buyer shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other (which consent shall not be unreasonably withheld) and, in any event, any assignee of the Buyer shall be an accredited investor (as defined in Regulation D), in the written opinion of counsel who is reasonably satisfactory to the Company and in form, substance and scope reasonably satisfactory to the Company. Notwithstanding the foregoing, if applicable, the Buyer may assign its rights hereunder to any of its "affiliates," as that term is defined in Rule 405 of the 1933 Act, without the consent of the Company; provided, however, that (i) any such assignment shall not release the Buyer from its obligations hereunder unless such obligations are assumed by such affiliate and (ii) no such assignment shall be made unless it is made in accordance with any applicable securities laws. Any request for consent to an assignment made hereunder by the Buyer shall be accompanied by a legal opinion in form, substance and scope reasonably satisfactory to the Company that such assignment is proper under applicable law. Notwithstanding anything herein to the contrary, the Buyer may pledge all or any part of the Securities as collateral for a bona fide loan pursuant to a security agreement with a third party lender, and such pledge shall not be considered an assignment in violation of this Agreement so long as it is made in compliance with all applicable laws. (h) No Third Party Beneficiaries. This Agreement is intended for the ------------------------------ benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person. (i) Survival. Unless this Agreement is terminated under Section 8(l) -------- below, the representations and warranties of the Company and the Buyer contained herein, and the agreements and covenants set forth herein, shall survive the Closing. (j) Publicity. The Company and the Buyer shall have the right to --------- review, before issuance by the other, any press releases or other public statements with respect to the transactions contemplated hereby; provided, however, that (i) the Company shall be entitled, without prior consultation with or approval of the Buyer, to make any press release or other public disclosure with respect to such transactions that is required by applicable law or regulations and (ii) the Buyer and it affiliates shall be entitled, without prior consultation with or approval of the Company, to publish a "tombstone" describing the financing provided pursuant to this Agreement. (k) Further Assurance. Each party shall do and perform, or cause to be ----------------- done and performed, at its expense, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. (l) Termination. In the event that the Closing shall not have occurred ----------- on or before December 15, 2004, this Agreement may be terminated at any time thereafter by written notice from one party to the other. Such termination shall not be the sole remedy for a breach of this Agreement by the non-breaching party, and each party shall retain all of its rights hereunder at law or in equity. Notwithstanding anything herein to the contrary, a party whose breach of a covenant or representation and warranty or failure to satisfy a condition prevented the Closing shall not be entitled to terminate this Agreement. (m) Remedies. No provision of this Agreement providing for any -------- specific remedy to a party shall be construed to limit such party to the specific remedy described, and that any other remedy that would otherwise be available to such party at law or in equity shall also be available. The parties also intend that the rights and remedies hereunder be cumulative, so that exercise of any one or more of such rights or remedies shall not preclude the later or concurrent exercise of any other rights or remedies. (n) Attorney's Fees. If any party to this Agreement shall bring any ---------------- action for relief against the other arising out of or in connection with this Agreement, in addition to all other remedies to which the prevailing party may be entitled, the losing party shall be required to pay to the prevailing party a reasonable sum for attorney's fees and costs incurred in bringing such action and/or enforcing any judgment granted therein, all of which shall be deemed to have accrued upon the commencement of such action and shall be paid whether or not such action is prosecuted to judgment. Any judgment or order entered in such action shall contain a specific provision providing for the recovery of attorney's fees and costs incurred in enforcing such judgment. For the purposes of this Section, attorney's fees shall include, without limitation, fees incurred with respect to the following: (i) post-judgment motions, (ii) contempt proceedings, (iii) garnishment, levy and debtor and third party examinations, (iv) discovery and (v) bankruptcy litigation. IN WITNESS WHEREOF, the Buyer and the Company have caused this Agreement to be duly executed by their respective authorized persons on the date first written above. RAPIDTRON, INC. By: ---------------------------- President By: Secretary OCEANUS VALUE FUND, L.P. By: Oceanus Asset Management, L. L. C., General Partner By: ------------------------------ John C. Tausche, Member For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned hereby agree to be bound by the terms of Section 4(d)(ii) above as it relates to them personally. ---------------------------- John Creel, individually Peter Dermutz, individually LIST OF EXHIBITS AND SCHEDULES --------------------------------- Exhibit A 15% Secured Convertible Promissory Note Exhibit B Warrant to Purchase Common Stock Exhibit C Security Agreement Exhibit D Subordination Agreement with Silicon Valley Bank Exhibit E Form of Guaranty, Pledge and Security Agreement Exhibit F Registration Rights Agreement Exhibit G Disbursement Instructions Exhibit H Escrow Agreement Schedule 3(c) Schedule 3(g) Schedule 3(h) Schedule 3(j) Schedule 3(l) Schedule 3(m) Schedule 3(o) SCHEDULE 3(C) CAPITALIZATION -------------- None other than what has been reflected in the SEC Documents. SCHEDULE 3(G) NO CONFLICTS ------------ None SCHEDULE 3(H) SEC DOCUMENTS; FINANCIAL STATEMENTS ----------------------------------- None SCHEDULE 3(J) ABSENCE OF LITIGATION --------------------- None SCHEDULE 3(L) BROKERS; NO GENERAL SOLICITATION -------------------------------- Scott Liolios - Bathgate Capital - 2% commission based on agreement signed on October 22, 2003. SCHEDULE 3(M) STATUS OF ASSETS ---------------- None other than those disclosed in the SEC Documents filed prior to or for the quarter ended September 30, 2004. The LDM Enterprises agreement will be terminated at the Closing. SCHEDULE 3(O) NO ENCUMBRANCES ON SHARES ------------------------- None other than those disclosed in the SEC Documents. EX-10.6 7 ex10_6.txt EXHIBIT 10.6 CONVERTIBLE SECURED PROMISSORY NOTE ----------------------------------- $350,000 OCTOBER 8, 2004 --------------- COSTA MESA, CALIFORNIA ---------------------- FOR VALUE RECEIVED, RAPIDTRON, INC., a Nevada corporation ("MAKER"), hereby promise to pay to the order of LDM Enterprises, LLC, a California limited liability company ("HOLDER"), at Holder's address for notice as set forth in Section 12 hereof or at such other address as Holder may designate by written notice delivered to Maker at any time and from time to time, the principal sum credited or disbursed to Maker from time to time, not to exceed Three Hundred Fifty Thousand and 00/100 Dollars ($350,000.00), plus interest on the principal amount disbursed and other fees and costs due hereunder, as set forth below. 1. Interest Rate. Interest upon the principal amount disbursed under -------------- this Note plus any other fees and costs due hereunder shall accrue at the rate of ten percent (10%) per annum. NOTICE: Under no circumstances will the interest rate of this Note be more than the maximum rate allowed by applicable law. 2. Payments/Maturity. The entire indebtedness evidenced by this Note, ----------------- including the entire principal balance outstanding hereunder, any and all unpaid interest accrued thereon, and any and all other amounts due and owing hereunder, shall be due and payable in full on November 8, 2004 (the "MATURITY DATE"). Maker may prepay the principal and interest due hereunder at any time without additional fee or penalty. 3. No Setoff. All payments made hereunder shall be made in lawful money ---------- of the United States of America without setoff, deduction or counterclaim of any kind whatsoever. 4. Default and Acceleration. For purposes of this Note, Maker shall be -------------------------- in "DEFAULT" under this Note if any one of the following events occurs: (a) Maker fails to make any payment of interest, principal or other amount hereunder on or before the Maturity Date; (b) Maker admits in writing Maker's inability to pay Maker's debts as such debts become due, makes a general assignment for the benefit of creditors, or files any petition or action for relief under any bankruptcy, reorganization, insolvency or moratorium law or under any other law for the relief of, or relating to, debtors; (c) Maker commits any breach of or default under this Note or any instrument securing or otherwise assuring payment of or performance under this Note; (d) any involuntary petition is filed against Maker under any bankruptcy, reorganization, insolvency or moratorium law or under any other law for the relief of, or relating to, debtors; (e) a levy or writ of attachment or garnishment or other like judicial process is filed or issued against or upon the Maker or any of the "Collateral" (defined in Section 13 below); or (f) Holder deems itself insecure, believing that the prospect of payment under this Note is impaired or fears the Collateral is at risk of being compromised. Notwithstanding any other provision of this Note to the contrary, upon the occurrence of a Default, Holder may, at Holder's option but with written notice to Maker, the entire indebtedness evidenced by this Note, including the entire principal balance outstanding hereunder, any and all unpaid interest accrued thereon and any and all other amounts due and owing under this Note, shall immediately be due and payable. 5. Late Charge. If Maker fails to pay any amount due hereunder ------------ (including, without limitation, any monthly installment or the final installment of principal and interest due on the Maturity Date) on or before the due date, Maker shall pay a late charge of five percent (5%) of the amount past due (the "LATE FEE"). Maker acknowledges and agrees that it would be extremely difficult or impracticable to fix the actual damages resulting from Maker's failure to pay amounts when due, and therefore, Maker shall pay such late charges not as a penalty, but for the purpose of defraying the administrative expenses incident to handling amounts past due. Such late charges represent the reasonable estimate of such expenses. The late charges shall be payable by Maker without prejudice to the rights of Holder to collect any other amounts to be paid under this Note or any Security Document (including, without limitation, interest at the Default Rate pursuant to Section 6, below and other collection fees) or to accelerate all sums due hereunder pursuant to Section 4, above. 1 6. Default Rate. Notwithstanding anything in this Note to the contrary, ------------- upon and after a Default, interest shall accrue on the unpaid principal at the interest rate of the greater of (a) fourteen percent (14%) per annum, or (b) the Prime Rate as published by U.S. Bank for its U.S. customers, plus eight points (the "DEFAULT RATE"'). The unpaid principal shall accrue interest at the Default Rate only until the Default is cured. Maker acknowledges and agrees that it would be extremely difficult or impractical to fix the actual damages resulting from Maker's failure to pay the principal, accrued interest and other sums due on the Maturity Date, and therefore Maker shall pay interest at the Default Rate not as a penalty, but for purposes of defraying the expenses and losses incident to the loss of the past due principal, accrued interest and other sums due under this Note. Interest at the Default Rate represents the reasonable estimate of such expenses and losses. Interest at the Default Rate shall be payable by Maker without prejudice to the rights of Holder to collect any other amounts to be paid under this Note or any Security Document (including, without limitation, the Late Fee pursuant to Section 5, above), or to accelerate all sums due hereunder pursuant to Section 4, above. 7. Conversion. If Maker is in Default of this Note, then Holder may, at ---------- any time prior to the cure of such Default in its sole and absolute discretion, convert the entire outstanding principal balance of this Note into that number of shares of common stock of the Corporation as determined by dividing (i) the outstanding principal amount under this Note, by (ii) the "Conversion Price" (as defined below). In connection with such conversion, no fraction of a share of common stock shall be issued. Such right to conversion shall terminate immediately following the Maturity Date. The term "COMMON STOCK" means the common stock of Rapidtron, Inc., a Nevada corporation (the "CORPORATION") issued upon conversion of this Note. The term "CONVERSION PRICE" means the lesser of (a) $0.33 per share, or (b) the average lowest closing bid price during the five (5) trading days immediately prior to the "Conversion Date" (defined below), each as reported by Bloomberg, or if no report is provided by Bloomberg, as reported by Nasdaq's OTC Bulletin Board or other U.S. national trading market upon which the Corporation's common stock is traded. Holder shall have no obligation to convert the Note pursuant to this Section 7, and any such conversion shall not be deemed a waiver of any of Holder's remedies for any Default, including the collection of the Late Fee or Default Interest. 7.1 Effect of Conversion. Immediately following tender of the ---------------------- original Note and other items required by Section 7 and its related subsections, this Note shall be deemed no longer outstanding and all rights with respect to this Note shall immediately cease and terminate, except only the right of the Holder to receive shares of Common Stock in exchange therefor. Upon conversion but subject to the terms and conditions of the Corporation's Shareholders Agreement, Certificate of Incorporation and related documents, the Holder shall be admitted as a constituent shareholder of the Corporation holding the Common Stock. 7.2 Securities Representations. Upon conversion of this Note, the --------------------------- registered Holder shall execute and deliver to the Corporation an instrument, in form and substance satisfactory to the Corporation, representing that either (a) Holder is an "Accredited Investor" within the meaning of the rules and regulations promulgated under the Securities Act of 1933, as amended (the "SECURITIES ACT"); and that the shares of Common Stock issued to Holder are being acquired for such Holder's own account, for investment and not with a view to sale, transfer, assignment or distribution within the meaning of the Securities Act, or (b) Holder is not a "U.S. Person" within the meaning of Regulation S promulgated under the Securities Act, the sale of the Common Stock to Holder qualifies for an exemption from registration in accordance with Regulation S, and such other representations and warranties as may then be appropriate under Regulation S. 7.3 Delivery of Documents. To convert this Note, the Holder must ----------------------- surrender the original of this Note to the Corporation at its offices, accompanied by a Conversion Notice in the form attached hereto as Exhibit A and --------- such other documents as may be reasonably required by the Corporation in connection with the issuance of shares of Common Stock to Holder, including, without limitation, an investor questionnaire related to Holder's qualification as an Accredited Investor. "CONVERSION DATE" shall mean the date Holder delivers all of the foregoing documents. 7.4 Failure to Issue Common Stock. Failure to issue unrestricted, -------------------------------- freely tradable Common Stock to the purchasers following Conversion and pursuant to the effective Registration filed pursuant to this Note 2 shall be considered a Default, which if not cured within 10 days, shall entitle the Holder to accelerate full repayment of the Note then outstanding. The Corporation acknowledges that the failure to honor a Conversion Notice shall cause definable financial hardship on Holder. 7.5 Reservation of Common Stock. At all times until the total ------------------------------ outstanding balance of this Note is paid in full, the Corporation shall keep available Common Stock duly authorized for issuance against this Note. If at any time, the Corporation does not have available an amount of authorized and non-issued Common Stock necessary to satisfy full Conversion of the then outstanding amount of the Convertible, the Corporation shall call and hold a special meeting within 30 days of such occurrence, or as soon thereafter as permitted by the Securities and Exchange Act of 1934, for the sole purpose of increasing the number of shares of Common Stock authorized. The Board of Directors of the Corporation shall recommend to shareholders to vote in favor of increasing the number of Common Stock authorized. The Management shall also vote all of its shares in favor of increasing the number of Common Stock authorized. 8. Registration and Securities Act Compliance. 8.1 No Registration on Closing Date. Holder acknowledges that the ---------------------------------- sale of this Note and the Common Stock have not been registered under the Securities Act or any applicable state laws. 8.2 Securities Act Compliance. This Note, any share of Common Stock, ------------------------- and any equity securities in any successor entity for which such Common Stock may be exchanged in a merger, shall not be sold or transferred unless either (i) such sale or transfer shall first have been registered under the Securities Act and any applicable state law, or (ii) such sale or transfer is exempt from such registration and Holder furnishes to the Corporation an opinion of legal counsel, reasonably satisfactory to the Corporation, to the effect that such sale or transfer is exempt from the registration requirements of the Securities Act. 8.3 Registration Following Default. If Holder exercises the right to ------------------------------ convert this Note pursuant to Section 7 above, then the Corporation shall, at its sole cost and expense, file a registration statement (the "REGISTRATION") with the Securities and Exchange Commission (the "SEC") within six (6) months after the Conversion Date for the public resale of the Common Stock by Holder and all other holders of the Notes, as follows: (a) The Corporation shall file the Registration on such forms as may be available to the Corporation, in the Corporation's sole discretion, for the resale of its common stock, including a Form S-3, Form SB-2, or similar forms. (b) The Holder will cooperate with the Corporation in all respects in connection with the Registration, at Holder's sole cost and expense, including timely supplying all information reasonably requested by the Corporation (which shall include all information regarding the Holder and proposed manner of sale of the Common Stock required to be disclosed in any registration statement) and executing and returning all documents reasonably requested in connection with the registration and sale of the Common Stock and entering into and performing their obligations under any underwriting agreement, if the offering is an underwritten offering, in usual and customary form, with the managing underwriter or underwriters of such underwritten offering. Nothing in this Note shall obligate any Holder to consent to be named as an underwriter in any registration statement. Any delay or delays caused by the Holder by failure to cooperate as required hereunder shall extend the deadline for filing the Registration. (c) The Corporation shall keep such Registration effective until the Common Stock is no longer "restricted" under Rule 144 and may be freely tradable without registration. (d) If at any time or from time to time after the effective date of the Registration, the Corporation notifies the Holder in writing of the existence of a "Potential Material Event" (as defined below), the Holder shall not offer or sell any Common Stock or engage in any other transaction involving or relating to Common Stock, from the time of the giving of notice with respect to a Potential Material Event until the Holder receives written notice from the Corporation that such Potential Material Event either has been disclosed to the public or no longer 3 constitutes a Potential Material Event; provided, however, that the Corporation may not so suspend the right to Holder for more than twenty (20) days in the aggregate during the period the Registration is required to be in effect. If a Potential Material Event shall occur prior to the date the Registration is required to be filed, then the Corporation's obligation to file such Registration shall be delayed without penalty for not more than twenty (20) days. The Corporation must, if lawful, give the Holder notice in writing at least two (2) trading days prior to the first day of the blackout period. (e) If, at the time the Holder wishes to resell the Common Stock, the Corporation's legal counsel determines that the Common Stock may be resold by Holder without registration, then notwithstanding anything to the contrary in this Section 8, the Corporation shall not be required to register such resale; provided the Corporation permits such resale in accordance with any such exemption. 9. No Assignment. Maker shall not assign any right, title, -------------- interest, power or privilege (or any part thereof) in, to or under this Note or to delegate any debt, duty, liability or obligation (or any part thereof) under this Note without the prior written consent of Holder. 10. Severability. The provisions of this Note are intended by Maker to be ------------ severable and divisible and the invalidity or unenforceability of a provision or term herein shall not invalidate or render unenforceable the remainder of this Note or any part thereof. 11. No Waiver. The acceptance by Holder of any amount in payment less ---------- than the full amount due and payable shall not constitute a waiver of Holder's right to accelerate the indebtedness at that time or any subsequent time or nullify any prior acceleration unless Holder has expressly waived such right by written notice to Maker or such waiver is implied or otherwise effected by operation of law. 12. Notices. All notices required or permitted by this Guaranty shall be ------- in writing or by telex or facsimile transmission and shall be deemed to have been duly given (i) on the date of service if delivered in person or by telex or facsimile transmission (with the telex or facsimile confirmation of transmission receipt acting as confirmation of service when sent and provided telexed or telecopied notices are also mailed by first class, certified or registered mail, postage prepaid); or (ii) seventy-two (72) hours after mailing by first class, registered or certified mail, postage prepaid, and properly addressed to the addresses specified below or at such other address as the party affected may designate in a written notice to such other party in compliance with this Section 12. 13. Security. As a condition to and in consideration of the amounts -------- loaned to Maker pursuant to this Note, the payment, performance and satisfaction of Maker's debts, duties, liabilities and obligations under this Note are and shall be fully secured by a security interest in all of the assets of Maker (the "COLLATERAL") in accordance with a separate Assignment and Security Agreement, of even date herewith (the "SECURITY AGREEMENT"), duly executed and delivered by Maker, and a personal guaranty of payment and performance executed and delivered by John Creel, an individual. 14. Waivers By Maker. Maker (a) waives diligence, presentment, protest ------------------ and demand, and (b) consents to the acceptance of security, or the release of security, for this Note, all without in any way affecting the liability of Maker. The right to plead any and all statutes of limitations as a defense to any duty, obligation, or liability under this Note, or any instrument securing or otherwise assuring payment of this Note, is expressly waived by Maker to the fullest extent permitted by law. 15. Governing Law. This Note shall be governed by and construed and -------------- interpreted in accordance with the internal laws of the State of California, as applied to contracts between California residents entered into and to be performed wholly within the State of California. 16. Compliance with Laws. Notwithstanding any provision of this Note to ---------------------- the contrary, the total liability for payments in the nature of interest shall not exceed the limits imposed by the applicable usury laws of the 4 State of California. If, from any circumstances whatsoever, fulfillment of any provision hereof or of any other agreement evidencing, securing or otherwise assuring payment of the debt, at the time performance of such provision shall be due, shall involve the payment of interest in excess of that authorized by law, and if from any circumstances, Holder shall ever receive as interest an amount which would exceed the highest lawful rate applicable to Maker, such amount which would be excessive interest shall be applied to the reduction of the principal balance outstanding under this Note and not to the payment of interest. 17. Attorneys Fees. If Holder institutes any collection effort, of any --------------- nature whatsoever (expressly including any collection efforts in any bankruptcy case), for any amount due and payable hereunder following a Default, then Maker shall pay to Holder forthwith any and all reasonable costs and expenses of collection actually incurred by Holder, including, without limitation, reasonable attorneys fees, accounting fees, expert witness fees and related costs, including time for personnel of Holder, plus interest for such costs or expenses as incurred, at the Default Rate, whether or not suit or other action or proceeding is instituted. The payment of any and all such costs and expenses shall be fully secured by any and all instruments securing this Note and fully assured by any and all instruments assuring payment of this Note, including without limitation, the Security Documents. If either party to this Note commences any mediation, arbitration, administrative proceeding or judicial proceeding (each, a "PROCEEDING") to enforce or interpret any term, condition or other provision of this Note, the prevailing party in such Proceeding shall be entitled to recover reasonable attorneys fees, accounting fees, expert witness fees and related costs incurred by such prevailing party in such Proceeding from the non-prevailing party, in addition to any other relief to which such prevailing party may be entitled. "MAKER" RAPIDTRON, INC., a Nevada corporation By:________________________________________________________ John Creel, President & Chief Executive Officer Maker's Address for Notice: - ------------------------------ Rapidtron, Inc. 3151 Airway Avenue, Suite Q Costa Mesa, CA 92626-4627 Facsimile: (949) 474-4550 Holder's Address for Notice: - ------------------------------ LDM Enterprises, LLC Attention: Raymond Lee 2515 Sierra Vista Newport Beach, California 92660 Facsimile: (949) 722-7526 5 Exhibit "A" to Convertible Secured Promissory Note EXHIBIT A CONVERSION NOTICE To: RAPIDTRON, INC. The undersigned holder of the within Notice hereby irrevocably exercises the option to convert all of the principal amount outstanding of the within Debenture into that number of shares of Common Stock determined by dividing the outstanding principal amount by the Conversion Price (as defined in the Debenture) in accordance with the terms of the within Debenture, and directs that the shares issuable and deliverable upon the conversion be issued in the name of and delivered to the undersigned payee. Date: ____________________ [for individual] _____________________________________________________ (signature) Printed Name and Capacity:________________________ [for entity] _____________________________________________________ By:__________________________________________________ (signature) Name:________________________________________________ Title:_______________________________________________ EX-10.7 8 ex10_7.txt EXHIBIT 10.7 LOAN AGREEMENT This LOAN AGREEMENT (this "Agreement") is entered into effective as of October 9, 2004 (the "EFFECTIVE DATE") by and between LDM ENTERPRISES, LLC, a California limited liability company ("LENDER"); Rapidtron, Inc., a Nevada corporation ("BORROWER"); and John Creel, an individual ("GUARANTOR"), with reference to the following recitals: A. Borrower is currently a party to a Memorandum of Understanding ("MOU") with Smart Card Integrators, Inc. ("SCI"), pursuant to which Borrower is obligated to provide $350,000 of financing to SCI in accordance with the terms of the MOU (the "SCI LOAN"). B. The following parties have made financing available to Borrower (each such loan, a "BRIDGE LOAN"): (i) Bathgate Capital Partners LLC in the amount of $600,000 pursuant to a Sale Of Secured Convertible Bridge Notes Summary of Terms, dated September 28, 2004; (ii) Oceanus Value Fund, LP in the amount of $400,000 pursuant to a Draft Term Sheet dated September 22, 2004; and (iii) affiliates of John Steinacker in the amount of $1,000,000. Borrower intends to accept one or more of the Bridge Loans as soon as possible and use the proceeds thereof to finance the SCI Loan, but pursuant to the MOU, Borrower must finance the SCI Loan prior to the expected closing of any one of the Bridge Loans. C. Borrower has requested, and Lender has agreed to provide, a short-term loan to Borrower to fund a portion of the SCI Loan intended to be repaid from the proceeds of the first Bridge Loan. D. As of the Effective Date hereof, Borrower is a client of Greenberg Traurig LLP ("GT") and Raymond A. Lee ("RAL"), a shareholder of GT and former partner of Lee & Rasor LLP ("LR"). RAL is an affiliate of Lender. E. Lender has agreed to loan to Borrower up to $350,000, to be used solely for the purpose of funding of $250,000 of the SCI Loan, provided SCI agrees to amend the MOU to permit Borrower to fund a portion of the SCI Loan pending the closing of the Bathgate Bridge Loan, and payment of $100,000 towards outstanding invoices owed to GT and LR. F. Borrower shall secure the loan by granting Lender an assignment of the SCI Loan and a security interest in all of the assets of Borrower. G. Guarantor is an owner, officer and director of Borrower. Guarantor shall guaranty Borrower's repayment of the loan and shall secure such guaranty by granting a deed of trust upon his personal residence (the "RESIDENCE") for the benefit of Lender. H. Borrower and Guarantor understand that because RAL is an affiliate of Lender and GT, GT is unable to represent Borrower or Guarantor with respect to this Agreement and the related transactions, and Borrower and Guarantor have agreed to obtain separate legal counsel to represent them with respect to this Agreement and the related transactions. Further, GT shall represent Lender in connection with the Loan and related transactions, and each of 1 Borrower and Lender has agreed to waive any actual or potential conflict of interest that may exists with respect to GT's representation of Lender in this matter and GT's ongoing and future representation of Borrower with respect to other matters. NOW, THEREFORE, for and in consideration of the foregoing recitals and the mutual covenants, promises and agreements set forth herein, the parties hereto agree as follows: 1. The Loan. Borrower agrees to accept and Lender agrees to make, upon --------- the terms and conditions contained in this Agreement, a loan in the principal sum of up to Three Hundred Fifty Thousand Dollars ($350,000.00) (the "LOAN"), at an interest rate of the lesser of ten percent (10%) per annum or the highest rate permitted by law, and due and payable on or before the earlier of (a) October 29, 2004, or (b) closing of the first Bridge Loan. If the total outstanding balance of the Loan is not repaid on or before November 14, 2004, then Lender shall have the option, but not the obligation, to covert the total balance of the Loan or any portion thereof into common stock of Borrower at any time until such balance is paid in full, at a conversion rate of the lesser of $0.33 per share or the average closing bid price during the five trading days prior to and including November 14, 2004. Lender's election to so convert the outstanding balance of the Note shall not be deemed a waiver of any right or remedy Lender may have for breach of this Agreement or any Loan Document. 2. Security for the Loan. As collateral for repayment of the Loan and ------------------------ Borrower's performance of the other "Loan Documents" (defined below), Borrower shall execute and deliver to Lender a Security Agreement in the form attached hereto as Exhibit "A" (the "SECURITY AGREEMENT"), assigning to Lender all right, ----------- title and interest in and to the SCI Loan and the Bathgate Bridge Loan, and granting a security interest in all other existing or hereinafter acquired assets of Borrower, to be perfected by the filing of a UCC-1 financing statement. 3. Personal Guaranty. As a condition to the Loan, Guarantor shall ------------------ execute and deliver the Guaranty in the form attached hereto as Exhibit "B" (the ----------- "GUARANTY") and the Deed of Trust attached hereto as Exhibit "C" (the "DEED OF ----------- TRUST"). If Borrower fails to repay the Loan on or before October 29, 2004, then Guarantor shall obtain a new loan secured by the Residence and use the proceeds thereof to satisfy the Loan and Guaranty. If Borrower has failed to repay the entire balance of the Loan on or before October 22, 2004, then Guarantor shall promptly make a good faith application for such new loan with an available bank or other mortgage lender on or before October 25, 2004. Failure by Guarantor to satisfy the obligation to apply for such new loan shall be deemed a material default of this Agreement and the Guaranty, and Lender shall have all rights and remedies for default under the Guaranty. 4. Loan Documents. In order to consummate the Loan, Borrower shall --------------- execute and/or deliver to Lender the following documents (collectively, together with this Agreement, the "LOAN DOCUMENTS"): (a) Convertible Secured Promissory Note (the "NOTE") in the principal amount of up to $350,000.00, with a maturity date of November 8, 2004, and in the form attached hereto as Exhibit "D"; ------------ 2 (b) the Security Agreement; (c) the Guaranty, duly executed and delivered by Guarantor; and (d) the Deed of Trust. 5. Closing. Closing of the Loan shall occur within one business day ------- following Borrower's delivery of the original Loan Documents to Lender. At closing, Lender shall disburse the proceeds of the Loan on behalf of Borrower as provided in Section 6 below. 6. Use of Loan Proceeds. Borrower hereby covenants to Lender that ----------------------- Borrower shall use the proceeds of the Loan only in accordance with Schedule 1, ---------- attached hereto. Borrower hereby authorizes and directs Lender to disburse the proceeds of the Loan directly to the third-party payees identified on Schedule ---------- 1, in the amounts shown thereon, for and on behalf of Borrower. - -- 7. Covenant to Accept Bridge Loans. Rapidtron shall in good faith ----------------------------------- proceed to apply for the Bridge Loans as soon as possible and diligently pursue the closing of such Bridge Loans, and Rapidtron shall apply any such funds to the repayment of the Loan. 8. Lender's Costs and Expenses. At closing, Borrower shall reimburse ------------------------------ Lender for its legal fees and other out-of-pocket expenses in connection with the preparation of the Loan Documents and other matters related to the transactions contemplated herein, not to exceed $3,500, from funds separate and apart from the proceeds of the Loan. 9. Default. The occurrence of any of the following events shall ------- constitute an "EVENT OF DEFAULT" under this Agreement: 9.1 Nonpayment. Borrower fails to pay, within five (5) calendar days ---------- after demand or after the date when due, any payment obligation in accordance with the terms of the Note. 9.2 Other Provisions of Loan Documents. Except for payment -------------------------------------- obligations under the Note or Guaranty, either Borrower or Guarantor fails to comply with or perform any agreement, covenant, condition or provision of this Agreement or any other Loan Document and such failure shall remain uncured for a period of thirty (30) days following delivery of written notice of default by Lender to Borrower or Guarantor, as the case may be. 10. Further Assurances. Each party hereto also agrees to provide further ------------------- assurances; to take further actions; and to make, execute, acknowledge, certify, verify, enter into, deliver, record and/ or file any and all documents as are necessary and appropriate to the Loan or to the closing, consummation, confirmation and perfection of any and all transactions contemplated by this Agreement. 3 11. General Provisions. ------------------- 11.1 No Modifications. No supplement, modification or amendment of ----------------- this Agreement shall be binding unless executed in writing by all parties. 11.2 Binding Agreement. Neither party shall assign any right, power, ----------------- privilege or authority or delegate any duty, liability or obligation under this Agreement to any person or entity without the prior written consent of the other party, such consent not to be unreasonably withheld or delayed. No such assignment or delegation shall release the assigning party from any duty, liability or obligation under this Agreement unless expressly provided to the contrary in a written instrument signed by all parties. Subject to the foregoing restrictions and limitations, this Agreement shall be binding on, and shall inure to the benefit of, the parties and their respective heirs, representatives, successors and assigns. 11.3 Attorneys Fees. If either party commences any mediation, --------------- arbitration, administrative proceeding or judicial proceeding (each, a "PROCEEDING") to enforce or interpret any term, condition or other provision of this Agreement, then the prevailing party in such Proceeding shall be entitled to recover reasonable attorneys fees, expert witness fees, accounting fees and related costs incurred by such prevailing party in such Proceeding from the non-prevailing party, in addition to any other relief to which such prevailing party may be entitled. 11.4 Enforceability. In the event that the application of any of the -------------- provisions of this Agreement is held to be unenforceable or invalid by a court of competent jurisdiction, the validity and enforceability of other applications of that provision and of the remaining provisions shall not be affected. 11.5 Counterparts and Execution. This Agreement may be executed in ---------------------------- any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. Each signatory may affix its respective signatures to this Agreement in any manner so long as such signatory acknowledges such signature as its own. Executed signature pages from separate counterpart originals may be attached to a single counterpart copy. The parties hereby agree that facsimile signatures may be used in order to close the transactions contemplated hereby (other than with respect to the Purchase Note); provided, however, that original signatures shall promptly follow (by Federal Express, other overnight messenger or courier service) the delivery of such facsimile signatures. 11.6 Construction. As used in this Agreement, masculine, feminine or ------------ neuter gender and the singular or plural number shall each be deemed to include the others where and when the context so dictates. 11.7 Governing Law. This Agreement shall be governed by and construed ------------- and interpreted in accordance with the internal laws of the State of California, as applied to contracts between California residents entered into and to be performed wholly within the State of California. 4 11.8 Legal Representation and Acknowledgement and Waiver of Conflict. --------------------------------------------------------------- Lender and Borrower hereby acknowledge that RAL is the principal of Lender, is an attorney licensed to practice law in the State of California and a shareholder with GT and former partner of LR, which has been dissolved. Lender and Borrower further acknowledge that Dennis J. Rasor ("DJR") is an associate attorney with GT and a former partner of LR. LR has in the past represented Borrower, and GT has in the past and continues to represent Borrower in connection with general business and securities matters. Borrower acknowledges that neither RAL, DJR nor GT is representing Borrower, its representatives or advisors with respect to this Agreement or any transaction related thereto. Borrower acknowledges that RAL has disclosed to Borrower a conflict of interest between RAL, DJR and GT on the one hand, and Borrower on the other, with respect to the terms of this Agreement. Borrower further acknowledges that RAL, DJR and GT have advised Borrower to obtain independent legal counsel to represent Borrower in connection with this Agreement and to advise Borrower with respect to any conflict this Agreement may present with respect to RAL's, DJR's and GT's current and future representation of Borrower. Further, Borrower and Lender acknowledge that DJR and GT are representing Lender with respect to this transaction and that each of Lender and Borrower has reviewed and executed a separate waiver of conflict of interest with respect to such representation. IN WITNESS WHEREOF, Borrower and Lender have executed, delivered and entered into this Agreement as of the Effective Date hereof. "BORROWER" RAPIDTRON, INC., a Nevada corporation By:______________________________________ John Creel President & Chief Executive Officer "LENDER" LDM ENTERPRISES, LLC, a California limited liability company By:_______________________________________ Raymond A. Lee, Manager By:_______________________________________ Barbara Lee, Manager 5 Schedule 1 ---------- Use of Proceeds ---------------
SCI $250,000.00 GT $ 80,000.00 LR $ 20,000.00
_________________________________ (1) Discounted from $32,528.56. Schedule 1 to Loan Agreement Exhibit "A" to Loan Agreement ----------------------------- Form of Security Agreement -------------------------- SEE ATTACHED Exhibit "A" to Loan Agreement Exhibit "B" to Loan Agreement ----------------------------- Form of Guaranty ---------------- SEE ATTACHED Exhibit "B" to Loan Agreement Exhibit "C" to Loan Agreement ----------------------------- Form of Deed of Trust --------------------- SEE ATTACHED Exhibit "C" to Loan Agreement Exhibit "D" to Loan Agreement ----------------------------- Form of Convertible Secured Promissory Note ------------------------------------------- SEE ATTACHED Exhibit "D" to Loan Agreement EX-10.8 9 ex10_8.txt EXHIBIT 10.8 SECURITY AGREEMENT This SECURITY AGREEMENT, is made effective as of October 8, 2004 (the "EFFECTIVE DATE"), by and between RAPIDTRON, INC., a Nevada corporation (the "DEBTOR"), and LDM Enterprises, LLC, a California limited liability company (the "SECURED PARTY"), with reference to the following recitals: WHEREAS, the Debtor and Secured Party are parties to that certain Loan Agreement, dated as of the Effective Date (the "LOAN AGREEMENT"), pursuant to which Debtor has delivered that certain Secured Promissory Note made by Debtor payable to Secured Party in the amount of up to Three Hundred Fifty Thousand Dollars ($350,000) (the "NOTE"); and WHEREAS, it is a condition precedent to the Secured Party's making any loans (or otherwise extending credit) to the Debtor under the Loan Agreement that the Debtor execute and deliver to the Secured Party this Agreement; and WHEREAS, the Debtor wishes to grant a security interest in favor of the Secured Party as herein provided. NOW, THEREFORE, in consideration of the promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. All capitalized terms used herein without definitions shall ----------- have the respective meanings provided therefor in the Loan Agreement. The term "STATE," as used herein, means the State of California. All terms defined in the Uniform Commercial Code of the State and not otherwise defined herein shall have the same definitions herein as specified therein. The term "OBLIGATIONS," as used herein, means all of the indebtedness, obligations and liabilities of the Debtor to the Secured Party, individually or collectively, whether direct or indirect, joint or several, absolute or contingent, due or to become due, now existing or hereafter arising under or in respect of the Loan Agreement, the Note or this Agreement, and the term "EVENT OF DEFAULT," as used herein, means the failure of the Debtor to pay or perform any of the Obligations as and when due to be paid or performed under the terms of the Loan Agreement or the Note. 2. Grant of Security Interest. The Debtor hereby grants to the Secured Party, -------------------------- to secure the payment and performance in full of all of the Obligations, a security interest in and so pledges and assigns to the Secured Party all the properties, assets and rights of the Debtor, tangible and intangible, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof (all of the same being hereinafter called the "COLLATERAL"), including, without limitation, the following: all contract, all personal and fixture property of every kind and nature including without limitation all goods (including inventory, equipment and any accessions thereto), instruments (including promissory notes), contracts, documents, accounts (including health-care-insurance or life insurance receivables), chattel paper (whether tangible or electronic), deposit accounts, letter-of-credit rights (whether or not the letter of credit is evidenced by a writing), commercial tort claims, securities and all other investment property, supporting obligations, any other contract rights or rights to the payment of money, insurance claims and proceeds, and all general intangibles (including all payment intangibles). 3. Authorization to File Financing Statements. The Debtor hereby irrevocably ------------------------------------------- authorizes the Secured Party at any time and from time to time to file in any filing office in any Uniform Commercial Code jurisdiction any initial financing statements and amendments thereto that (a) indicate the Collateral (i) as all assets of the Debtor or words of similar effect, regardless of whether any particular asset comprised in the Collateral falls within the scope of Article 9 of the Uniform Commercial Code of the State, or (ii) as being of an equal or lesser scope or with greater detail, and (b) provide any other information required by part 5 of Article 9 of the Uniform Commercial Code of the State, or such other jurisdiction, for the sufficiency or filing office acceptance of any financing statement or amendment, including (i) whether the Debtor is an organization, the type of organization and any organizational identification number issued to the Debtor and, (ii) in the case of a financing statement filed as a fixture filing or indicating Collateral as as-extracted collateral or timber to be cut, a sufficient description of real property to which the Collateral relates. The Debtor agrees to furnish any such information to the Secured Party promptly upon the Secured Party's request. The Debtor also ratifies its authorization for the Secured Party to have filed in any Uniform Commercial Code jurisdiction any like initial financing statements or amendments thereto if filed prior to the date hereof. 4. Other Actions. To further the attachment, perfection and priority of, and -------------- the ability of the Secured Party to enforce, the Secured Party's security interest in the Collateral, and without limitation on the Debtor's other obligations in this Agreement, the Debtor agrees, in each case at the Debtor's expense, to take the following actions with respect to the following Collateral: 4.1 Promissory Notes and Tangible Chattel Paper. If the Debtor shall at --------------------------------------------- any time hold or acquire any promissory notes or tangible chattel paper, the Debtor shall forthwith endorse, assign and deliver the same to the Secured Party, accompanied by such instruments of transfer or assignment duly executed in blank as the Secured Party may from time to time specify. 4.2 Deposit Accounts. For each deposit account that the Debtor at any ----------------- time opens or maintains, the Debtor shall, at the Secured Party's request and option, pursuant to an agreement in form and substance satisfactory to the Secured Party, either (a) cause the depositary bank to comply at any time with instructions from the Secured Party to such depositary bank directing the disposition of funds from time to time credited to such deposit account, without further consent of the Debtor, or (b) arrange for the Secured Party to become the customer of the depositary bank with respect to the deposit account, with the Debtor being permitted, only with the consent of the Secured Party, to exercise rights to withdraw funds from such deposit account. The provisions of this paragraph shall not apply to (i) any deposit account for which the Debtor, the depositary bank and the Secured Party have entered into a cash collateral agreement specially negotiated among the Debtor, the depositary bank and the Secured Party for the specific purpose set forth therein, (ii) a deposit account for which the Secured Party is the depositary bank and is in automatic control, and (iii) deposit accounts specially and exclusively used for payroll, payroll taxes and other employee wage and benefit payments to or for the benefit of the Debtor's salaried employees. 4.3 Investment Property. If the Debtor shall at any time hold or acquire -------------------- any certificated securities, the Debtor shall forthwith endorse, assign and deliver the same to the Secured Party, accompanied by such instruments of transfer or assignment duly executed in blank as the Secured Party may from time to time specify. If any securities now or hereafter acquired by the Debtor are uncertificated and are issued to the Debtor or its nominee directly by the issuer thereof, the Debtor shall immediately notify the Secured Party thereof and, at the Secured Party's request and option, pursuant to an agreement in form and substance satisfactory to the Secured Party, either (a) cause the issuer to agree to comply with instructions from the Secured Party as to such securities, without further consent of the Debtor or such nominee, or (b) arrange for the Secured Party to become the registered owner of the securities. If any securities, whether certificated or uncertificated, or other investment property now or hereafter acquired by the Debtor are held by the Debtor or its nominee through a securities intermediary or commodity intermediary, the Debtor shall immediately notify the Secured Party thereof and, at the Secured Party's request and option, pursuant to an agreement in form and substance satisfactory to the Secured Party, either (i) cause such securities intermediary or (as the case may be) commodity intermediary to agree to comply with entitlement orders or other instructions from the Secured Party to such securities intermediary as to such securities or other investment property, or (as the case may be) to apply any value distributed on account of any commodity contract as directed by the Secured Party to such commodity intermediary, in each case without further consent of the Debtor or such nominee, or (ii) in the case of financial assets or other investment property held through a securities intermediary, arrange for the Secured Party to become the entitlement holder with respect to such investment property, with the Debtor being permitted, only with the consent of the Secured Party, to exercise rights to withdraw or otherwise deal with such investment property. The provisions of this paragraph shall not apply to any financial assets credited to a securities account for which the Secured Party is the securities intermediary. 4.4 Collateral in the Possession of a Bailee. If any Collateral is at any ---------------------------------------- time in the possession of a bailee, the Debtor shall promptly notify the Secured Party thereof and, at the Secured Party's request and option, shall promptly obtain an acknowledgement from the bailee, in form and substance satisfactory to the Secured Party, that the bailee holds such Collateral for the benefit of the Secured Party, and that such bailee agrees to comply, without further consent of the Debtor, with instructions from the Secured Party as to such Collateral. 4.5 Electronic Chattel Paper and Transferable Records. If the Debtor at --------------------------------------------------- any time holds or acquires an interest in any electronic chattel paper or any "transferable record," as that term is defined in Section 201 of the federal Electronic Signatures in Global and National Commerce Act, or in Section 16 of the Uniform Electronic Transactions Act as in effect in any relevant jurisdiction, the Debtor shall promptly notify the Secured Party thereof and, at the request and option of the Secured Party, shall take such action as the Secured Party may reasonably request to vest in the Secured Party control, under Section 9-105 of the Uniform Commercial Code, of such electronic chattel paper or control under Section 201 of the federal Electronic Signatures in Global and National Commerce Act or, as the case may be, Section 16 of the Uniform Electronic Transactions Act, as so in effect in such jurisdiction, of such transferable record. 4.6 Letter-of-Credit Rights. If the Debtor is at any time a beneficiary ------------------------ under a letter of credit, the Debtor shall promptly notify the Secured Party thereof and, at the request and option of the Secured Party, the Debtor shall, pursuant to an agreement in form and substance satisfactory to the Secured Party, either (i) arrange for the issuer and any confirmer or other nominated person of such letter of credit to consent to an assignment to the Secured Party of the proceeds of the letter of credit, or (ii) arrange for the Secured Party to become the transferee beneficiary of the letter of credit, with the Secured Party agreeing, in each case, that the proceeds of the letter to credit are to be applied as provided in the Note. 4.7 Commercial Tort Claims. If the Debtor shall at any time hold or ------------------------ acquire a commercial tort claim, the Debtor shall immediately notify the Secured Party in a writing signed by the Debtor of the particulars thereof and grant to the Secured Party in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance satisfactory to the Secured Party. 4.8 Other Actions as to Any and All Collateral. The Debtor further ------------------------------------------------- agrees, at the request and option of the Secured Party, to take any and all other actions the Secured Party may determine to be necessary or useful for the attachment, perfection and first priority of, and the ability of the Secured Party to enforce, the Secured Party's security interest in any and all of the Collateral, including, without limitation, (a) executing, delivering and, where appropriate, filing financing statements and amendments relating thereto under the Uniform Commercial Code, to the extent, if any, that the Debtor's signature thereon is required therefor, (b) causing the Secured Party's name to be noted as secured party on any certificate of title for a titled good if such notation is a condition to attachment, perfection or priority of, or ability of the Secured Party to enforce, the Secured Party's security interest in such Collateral, (c) complying with any provision of any statute, regulation or treaty of the United States as to any Collateral if compliance with such provision is a condition to attachment, perfection or priority of, or ability of the Secured Party to enforce, the Secured Party's security interest in such Collateral, (d) obtaining governmental and other third party waivers, consents and approvals in form and substance satisfactory to Secured Party, including, without limitation, any consent of any licensor, lessor or other person obligated on Collateral, (e) obtaining waivers from mortgagees and landlords in form and substance satisfactory to the Secured Party and (f) taking all actions under any earlier versions of the Uniform Commercial Code or under any other law, as reasonably determined by the Secured Party to be applicable in any relevant Uniform Commercial Code or other jurisdiction, including any foreign jurisdiction. 5. Insurance Policies. In furtherance of the continuing security interests ------------------- granted herein, the Debtor hereby grants to Secured Party the right to: (a) collect from Transamerica Life Companies ("TRANSAMERICA") the net proceeds of any of the Insurance Policies; (b) surrender any of the Insurance Policies and receive the surrender value thereof at any time provided by the terms of such Insurance Policy and at such other times as Transamerica may allow; (c) obtain one or more loans or advances on any of the Insurance Policies at any time, either from Transamerica or from other persons, and to pledge or assign any of the Insurance Policies as security for such loans or advances; (d) collect and receive all distributions or shares of surplus, dividend deposits or additions to any of the Insurance Policies now or hereinafter made or apportioned thereto, and exercise any and all options contained in any of the Insurance Policies with respect hereto; provided that, unless and until the Secured Party shall notify Transamerica in writing to the contrary, the distributions or shares of surplus, divided deposits and additions shall continue on the plan in force as of the date hereof; (e) exercise all nonforfeiture rights permitted by the terms of any of the Insurance Policies or allowed by Transamerica and receive all benefits and advantages derived therefrom; (f) amend any of the Insurance Policies; and (g) exercise any and all voting rights or privileges to the extent created or endowed by and of the Insurance Policies. 6. Relation to Other Security Documents. The provisions of this Agreement ---------------------------------------- supplement the provisions of any real estate mortgage or deed of trust now or hereinafter granted by the Debtor or any guarantor to the Secured Party which secures the payment or performance of any of the Obligations. Nothing contained in any such real estate mortgage or deed of trust shall derogate from any of the rights or remedies of the Secured Party hereunder. 7. Covenants Concerning Debtor's Legal Status. The Debtor covenants with the ------------------------------------------- Secured Party as follows: (a) without providing at least 30 days prior written notice to the Secured Party, the Debtor will not change its name, its place of business or, if more than one, chief executive office, or its mailing address or organizational identification number if it has one, (b) if the Debtor does not have an organizational identification number and later obtains one, the Debtor shall forthwith notify the Secured Party of such organizational identification number, and (c) the Debtor will not change its type of organization, jurisdiction of organization or other legal structure. 8. Representations and Warranties Concerning Collateral, etc. The Debtor -------------------------------------------------------------- further represents and warrants to the Secured Party as follows: (a) the Debtor is the owner of or has other rights in or power to transfer the Collateral, free from any right or claim or any person or any adverse lien, security interest or other encumbrance, except for the security interest created by this Agreement or as otherwise disclosed to Secured Party, (b) none of the Collateral constitutes, or is the proceeds of, "farm products" as defined in Section 9-102(a)(34) of the Uniform Commercial Code of the State, (c) none of the account debtors or other persons obligated on any of the Collateral is a governmental authority covered by the Federal Assignment of Claims Act or like federal, state or local statute or rule in respect of such Collateral, and (d) the Debtor has at all times operated its business in compliance with all applicable provisions of the federal Fair Labor Standards Act, as amended, and with all applicable provisions of federal, state and local statutes and ordinances dealing with the control, shipment, storage or disposal of hazardous materials or substances. 9. Covenants Concerning Collateral, etc. The Debtor further covenants with --------------------------------------- the Secured Party as follows: (a) the Collateral, to the extent not delivered to the Secured Party pursuant to Section 4, will be kept at the Debtor's principal place of business and the Debtor will not remove the Collateral from such locations, without providing at least thirty days prior written notice to the Secured Party, (b) except for the security interest herein granted and liens permitted by the Note, the Debtor shall be the owner of or have other rights in the Collateral free from any right or claim of any other person, lien, security interest or other encumbrance, and the Debtor shall defend the same against all claims and demands of all persons at any time claiming the same or any interests therein adverse to the Secured Party, (c) the Debtor shall not pledge, mortgage or create, or suffer to exist any right of any person in or claim by any person to the Collateral, or any security interest, lien or encumbrance in the Collateral in favor of any person, other than the Secured Party, (d) the Debtor will keep the Collateral in good order and repair and will not use the same in violation of law or any policy of insurance thereon, (e) the Debtor will permit the Secured Party, or its designee, to inspect the Collateral at any reasonable time, wherever located, (f) the Debtor will pay promptly when due all taxes, assessments, governmental charges and levies upon the Collateral or incurred in connection with the use or operation of such Collateral or incurred in connection with this Agreement, (g) the Debtor will continue to operate, its business in compliance with all applicable provisions of the federal Fair Labor Standards Act, as amended, and with all applicable provisions of federal, state and local statutes and ordinances dealing with the control, shipment, storage or disposal of hazardous materials or substances, and (h) the Debtor will not sell or otherwise dispose, or offer to sell or otherwise dispose, of the Collateral or any interest therein, without the prior written consent of the Secured Party. 10. Insurance. --------- 10.1 Maintenance of Insurance. The Debtor will maintain with financially ------------------------- sound and reputable insurers insurance with respect to its properties and business against such casualties and contingencies as shall be in accordance with general practices of businesses engaged in similar activities in similar geographic areas. Such insurance shall be in such minimum amounts that the Debtor will not be deemed a co-insurer under applicable insurance laws, regulations and policies and otherwise shall be in such amounts, contain such terms, be in such forms and be for such periods as may be reasonably satisfactory to the Secured Party. In addition, all such insurance shall be payable to the Secured Party as loss payee under a "standard" loss payee clause. Without limiting the foregoing, the Debtor will (i) keep all of its physical property insured with casualty or physical hazard insurance on an "all risks" basis, with broad form flood and earthquake coverages and electronic data processing coverage, with a full replacement cost endorsement and an "agreed amount" clause in an amount equal to 100% of the full replacement cost of such property, (ii) maintain all such workers' compensation or similar insurance as may be required by law, and (iii) maintain, in amounts and with deductibles equal to those generally maintained by businesses engaged in similar activities in similar geographic areas, general public liability insurance against claims of bodily injury, death or property damage occurring, on, in or about the properties of the Debtor; business interruption insurance; and product liability insurance. 10.2 Insurance Proceeds. The proceeds of any casualty insurance in respect ------------------ of any casualty loss of any of the Collateral shall, subject to the rights, if any, of other parties with an interest having priority in the property covered thereby, (i) so long as no Default or Event of Default has occurred and is continuing and to the extent that the amount of such proceeds is less than $10,000, be disbursed to the Debtor for direct application by the Debtor solely to the repair or replacement of the Debtor's property so damaged or destroyed, and (ii) in all other circumstances, be held by the Secured Party as cash collateral for the Obligations. The Secured Party may, at its sole option, disburse from time to time all or any part of such proceeds so held as cash collateral, upon such terms and conditions as the Secured Party may reasonably prescribe, for direct application by the Debtor solely to the repair or replacement of the Debtor's property so damaged or destroyed, or the Secured Party may apply all or any part of such proceeds to the Obligations. 10.3 Continuation of Insurance. All policies of insurance shall provide --------------------------- for at least 10 days prior written cancellation notice to the Secured Party. In the event of failure by the Debtor to provide and maintain insurance as herein provided, the Secured Party may, at its option, provide such insurance and charge the amount thereof to the Debtor. The Debtor shall furnish the Secured Party with certificates of insurance and policies evidencing compliance with the foregoing insurance provision. 11. Collateral Protection Expenses; Preservation of Collateral. ---------------------------------------------------------------- 11.1 Expenses Incurred by Secured Party. In the Secured Party's -------------------------------------- discretion, if the Debtor fails to do so, the Secured Party may discharge taxes and other encumbrances at any time levied or placed on any of the Collateral, maintain any of the Collateral, make repairs thereto and pay any necessary filing fees or insurance premiums. The Debtor agrees to reimburse the Secured Party on demand for all expenditures so made. The Secured Party shall have no obligation to the Debtor to make any such expenditures, nor shall the making thereof be construed as the waiver or cure of any Default or Event of Default. 11.2 Secured Party's Obligations and Duties. Anything herein to the ------------------------------------------ contrary notwithstanding, the Debtor shall remain obligated and liable under each contract or agreement comprised in the Collateral to be observed or performed by the Debtor thereunder. The Secured Party shall not have any obligation or liability under any such contract or agreement by reason of or arising out of this Agreement or the receipt by the Secured Party of any payment relating to any of the Collateral, nor shall the Secured Party be obligated in any manner to perform any of the obligations of the Debtor under or pursuant to any such contract or agreement, to make inquiry as to the nature or sufficiency of any payment received by the Secured Party in respect of the Collateral or as to the sufficiency of any performance by any party under any such contract or agreement, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to the Secured Party or to which the Secured Party may be entitled at any time or times. The Secured Party's sole duty with respect to the custody, safe keeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Uniform Commercial Code of the State or otherwise, shall be to deal with such Collateral in the same manner as the Secured Party deals with similar property for its own account. 11.3 Securities and Deposits. The Secured Party may at any time, at its ------------------------- option, transfer to itself or any nominee any securities constituting Collateral, receive any income thereon and hold such income as additional Collateral or apply it to the Obligations. Whether or not any Obligations are due, the Secured Party may demand, sue for, collect, or make any settlement or compromise which it deems desirable with respect to the Collateral. Regardless of the adequacy of Collateral or any other security for the Obligations, any deposits or other sums at any time credited by or due from the Secured Party to the Debtor may at any time be applied to or set off against any of the Obligations. 12. Notification to Account Debtors and Other Persons Obligated on Collateral. -------------------------------------------------------------------------- The Debtor shall, at the request and option of the Secured Party, notify account debtors and other persons obligated on any of the Collateral of the security interest of the Secured Party in any account, chattel paper, general intangible, instrument or other Collateral and that payment thereof is to be made directly to the Secured Party or to any financial institution designated by the Secured Party as the Secured Party's agent therefor, and the Secured Party may itself, without notice to or demand upon the Debtor, so notify account debtors and other persons obligated on Collateral. After the making of such a request or the giving of any such notification, the Debtor shall hold any proceeds of collection of accounts, chattel paper, general intangibles, instruments and other Collateral received by the Debtor as trustee for the Secured Party without commingling the same with other funds of the Debtor and shall turn the same over to the Secured Party in the identical form received, together with any necessary endorsements or assignments. The Secured Party shall apply the proceeds of collection of accounts, chattel paper, general intangibles, instruments and other Collateral received by the Secured Party to the Obligations, such proceeds to be immediately credited after final payment in cash or other immediately available funds of the items giving rise to them. 13. Power of Attorney. ------------------- 13.1 Appointment and Powers of Secured Party. The Debtor hereby -------------------------------------------- irrevocably constitutes and appoints the Secured Party and any officer or agent thereof, with full power of substitution, as its true and lawful attorneys-in-fact with full irrevocable power and authority in the place and stead of the Debtor or in the Secured Party's own name, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments that may be necessary or useful to accomplish the purposes of this Agreement and, without limiting the generality of the foregoing, hereby gives said attorneys the power and right, on behalf of the Debtor, without notice to or assent by the Debtor, to do the following: (a) upon the occurrence and during the continuance of an Event of Default, generally to sell, transfer, pledge, make any agreement with respect to or otherwise dispose of or deal with any of the Collateral in such manner as is consistent with the Uniform Commercial Code of the State and as fully and completely as though the Secured Party were the absolute owner thereof for all purposes, and to do, at the Debtor's expense, at any time, or from time to time, all acts and things which the Secured Party deems necessary or useful to protect, preserve or realize upon the Collateral and the Secured Party's security interest therein, in order to effect the intent of this Agreement, all at least as fully and effectively as the Debtor might do, including, without limitation, (i) the filing and prosecuting of registration and transfer applications with the appropriate federal, state, local or other agencies or authorities with respect to trademarks, copyrights and patentable inventions and processes, (ii) upon written notice to the Debtor, the exercise of voting rights with respect to voting securities, which rights may be exercised, if the Secured Party so elects, with a view to causing the liquidation of assets of the issuer of any such securities, and (iii) the execution, delivery and recording, in connection with any sale or other disposition of any Collateral, of the endorsements, assignments or other instruments of conveyance or transfer with respect to such Collateral; and (b) to the extent that the Debtor's authorization given in Section 3 is not sufficient, to file such financing statements with respect hereto, with or without the Debtor's signature, or a photocopy of this Agreement in substitution for a financing statement, as the Secured Party may deem appropriate and to execute in the Debtor's name such financing statements and amendments thereto and continuation statements which may require the Debtor's signature. 13.2 Ratification by Debtor. To the extent permitted by law, the Debtor ------------------------ hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and is irrevocable. 13.3 No Duty on Secured Party. The powers conferred on the Secured Party ------------------------- hereunder are solely to protect its interests in the Collateral and shall not impose any duty upon it to exercise any such powers. The Secured Party shall be accountable only for the amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to the Debtor for any act or failure to act, except for the Secured Party's own gross negligence or willful misconduct. 14. Rights and Remedies. If an Event of Default shall have occurred and be --------------------- continuing, the Secured Party, without any other notice to or demand upon the Debtor have in any jurisdiction in which enforcement hereof is sought, in addition to all other rights and remedies, the rights and remedies of a secured party under the Uniform Commercial Code of the State and any additional rights and remedies which may be provided to a secured party in any jurisdiction in which Collateral is located, including, without limitation, the right to take possession of the Collateral, and for that purpose the Secured Party may, so far as the Debtor can give authority therefor, enter upon any premises on which the Collateral may be situated and remove the same therefrom. The Secured Party may in its discretion require the Debtor to assemble all or any part of the Collateral at such location or locations within the jurisdiction(s) of the Debtor's principal office(s) or at such other locations as the Secured Party may reasonably designate. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, the Secured Party shall give to the Debtor at least five Business Days prior written notice of the time and place of any public sale of Collateral or of the time after which any private sale or any other intended disposition is to be made. The Debtor hereby acknowledges that five Business Days prior written notice of such sale or sales shall be reasonable notice. In addition, the Debtor waives any and all rights that it may have to a judicial hearing in advance of the enforcement of any of the Secured Party's rights and remedies hereunder, including, without limitation, its right following an Event of Default to take immediate possession of the Collateral and to exercise its rights and remedies with respect thereto. 15. Standards for Exercising Rights and Remedies. To the extent that ------------------------------------------------- applicable law imposes duties on the Secured Party to exercise remedies in a commercially reasonable manner, the Debtor acknowledges and agrees that it is not commercially unreasonable for the Secured Party (a) to fail to incur expenses reasonably deemed significant by the Secured Party to prepare Collateral for disposition or otherwise to fail to complete raw material or work in process into finished goods or other finished products for disposition, (b) to fail to obtain third party consents for access to Collateral to be disposed of, or to obtain or, if not required by other law, to fail to obtain governmental or third party consents for the collection or disposition of Collateral to be collected or disposed of, (c) to fail to exercise collection remedies against account debtors or other persons obligated on Collateral or to fail to remove liens or encumbrances on or any adverse claims against Collateral, (d) to exercise collection remedies against account debtors and other persons obligated on Collateral directly or through the use of collection agencies and other collection specialists, (e) to advertise dispositions of Collateral through publications or media of general circulation, whether or not the Collateral is of a specialized nature, (f) to contact other persons, whether or not in the same business as the Debtor, for expressions of interest in acquiring all or any portion of the Collateral, (g) to hire one or more professional auctioneers to assist in the disposition of Collateral, whether or not the collateral is of a specialized nature, (h) to dispose of Collateral by utilizing Internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capability of doing so, or that match buyers and sellers of assets, (i) to dispose of assets in wholesale rather than retail markets, (j) to disclaim disposition warranties, (k) to purchase insurance or credit enhancements to insure the Secured Party against risks of loss, collection or disposition of Collateral or to provide to the Secured Party a guaranteed return from the collection or disposition of Collateral, or (l) to the extent deemed appropriate by the Secured Party, to obtain the services of other brokers, investment bankers, consultants and other professionals to assist the Secured Party in the collection or disposition of any of the Collateral. The Debtor acknowledges that the purpose of this Section 15 is to provide non-exhaustive indications of what actions or omissions by the Secured Party would fulfill the Secured Party's duties under the Uniform Commercial Code or other law of the State or any other relevant jurisdiction in the Secured Party's exercise of remedies against the Collateral and that other actions or omissions by the Secured Party shall not be deemed to fail to fulfill such duties solely on account of not being indicated in this Section 15. Without limitation upon the foregoing, nothing contained in this Section 15 shall be construed to grant any rights to the Debtor or to impose any duties on the Secured Party that would not have been granted or imposed by this Agreement or by applicable law in the absence of this Section 15. 16. Notices. All notices required or permitted by this Agreement shall be in ------- writing or by telex or facsimile transmission and shall be deemed to have been duly given (i) on the date of service if delivered in person or by telex or facsimile transmission (with the telex or facsimile confirmation of transmission receipt acting as confirmation of service when sent and provided telexed or telecopied notices are also mailed by first class, certified or registered mail, postage prepaid); or (ii) seventy-two (72) hours after mailing by first class, registered or certified mail, postage prepaid, and properly addressed to the addresses specified below or at such other address as the party affected may designate in a written notice to such other party in compliance with this Section 16. Debtor: Rapidtron, Inc. 3151 Airway Avenue, Suite Q Costa Mesa, CA 92626-4627 Facsimile: (949) 474-4550 Secured Party: LDM Enterprises, LLC Attention: Raymond Lee 2515 Sierra Vista Newport Beach, California 92660 Facsimile: (949) 722-7526 17. No Waiver by Secured Party, etc. The Secured Party shall not be deemed to ------------------------------- have waived any of its rights or remedies in respect of the Obligations or the Collateral unless such waiver shall be in writing and signed by the Secured Party. No delay or omission on the part of the Secured Party in exercising any right or remedy shall operate as a waiver of such right or remedy or any other right or remedy. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. All rights and remedies of the Secured Party with respect to the Obligations or the Collateral, whether evidenced hereby or by any other instrument or papers, shall be cumulative and may be exercised singularly, alternatively, successively or concurrently at such time or at such times as the Secured Party deems expedient. 18. Suretyship Waivers by Debtor. The Debtor waives demand, notice, protest, ----------------------------- notice of acceptance of this Agreement, notice of loans made, credit extended, Collateral received or delivered or other action taken in reliance hereon and all other demands and notices of any description. With respect to both the Obligations and the Collateral, the Debtor assents to any extension or postponement of the time of payment or any other indulgence, to any substitution, exchange or release of or failure to perfect any security interest in any Collateral, to the addition or release of any party or person primarily or secondarily liable, to the acceptance of partial payment thereon and the settlement, compromising or adjusting of any thereof, all in such manner and at such time or times as the Secured Party may deem advisable. The Secured Party shall have no duty as to the collection or protection of the Collateral or any income therefrom, the preservation of rights against prior parties, or the preservation of any rights pertaining thereto beyond the safe custody thereof as set forth in Section 11.2. The Debtor further waives any and all other suretyship defenses. 19. Marshalling. The Secured Party shall not be required to marshal any ----------- present or future collateral security (including but not limited to the Collateral) for, or other assurances of payment of, the Obligations or any of them or to resort to such collateral security or other assurances of payment in any particular order, and all of its rights and remedies hereunder and in respect of such collateral security and other assurances of payment shall be cumulative and in addition to all other rights and remedies, however existing or arising. To the extent that it lawfully may, the Debtor hereby agrees that it will not invoke any law relating to the marshalling of collateral which might cause delay in or impede the enforcement of the Secured Party's rights and remedies under this Agreement or under any other instrument creating or evidencing any of the Obligations or under which any of the Obligations is outstanding or by which any of the Obligations is secured or payment thereof is otherwise assured, and, to the extent that it lawfully may, the Debtor hereby irrevocably waives the benefits of all such laws. 20. Proceeds of Dispositions; Expenses. The Debtor shall pay to the Secured ------------------------------------ Party on demand any and all expenses, including reasonable attorneys' fees and disbursements, incurred or paid by the Secured Party in protecting, preserving or enforcing the Secured Party's rights and remedies under or in respect of any of the Obligations or any of the Collateral. After deducting all of said expenses, the residue of any proceeds of collection or sale or other disposition of the Collateral shall, to the extent actually received in cash, be applied to the payment of the Obligations in such order or preference as the Secured Party may determine, proper allowance and provision being made for any Obligations not then due. Upon the final payment and satisfaction in full of all of the Obligations and after making any payments required by Sections 9-608(a)(1)(C) or 9-615(a)(3) of the Uniform Commercial Code of the State, any excess shall be returned to the Debtor. In the absence of final payment and satisfaction in full of all of the Obligations, the Debtor shall remain liable for any deficiency. 21. Overdue Amounts. Until paid, all amounts due and payable by the Debtor ---------------- hereunder shall be a debt secured by the Collateral and shall bear, whether before or after judgment, interest at the rate of interest. 22. Governing Law; Consent to Jurisdiction. THIS AGREEMENT IS INTENDED TO ------------------------------------------ TAKE EFFECT AS A SEALED INSTRUMENT AND SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA. The Debtor agrees that any action or claim arising out of, or any dispute in connection with, this Agreement, any rights, remedies, obligations, or duties hereunder, or the performance or enforcement hereof or thereof, may be brought in the courts of the State or any federal court sitting therein and consents to the non-exclusive jurisdiction of such court and to service of process in any such suit being made upon the Debtor by mail at the address specified in the Note. The Debtor hereby waives any objection that it may now or hereafter have to the venue of any such suit or any such court or that such suit is brought in an inconvenient court. 23. Waiver of Jury Trial. THE DEBTOR WAIVES ITS RIGHT TO A JURY TRIAL WITH ----------------------- RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, ANY RIGHTS, REMEDIES, OBLIGATIONS, OR DUTIES HEREUNDER, OR THE PERFORMANCE OR ENFORCEMENT HEREOF OR THEREOF. Except as prohibited by law, the Debtor waives any right which it may have to claim or recover in any litigation referred to in the preceding sentence any special, exemplary, punitive or consequential damages or any damages other than, or in addition to, actual damages. The Debtor (i) certifies that neither the Secured Party nor any representative, agent or attorney of the Secured Party has represented, expressly or otherwise, that the Secured Party would not, in the event of litigation, seek to enforce the foregoing waivers or other waivers contained in this Agreement, and (ii) acknowledges that, in loan the funds pursuant to the Note, the Secured Party is relying upon, among other things, the waivers and certifications contained in this Section 23. 24. Miscellaneous. The headings of each section of this Agreement are for ------------- convenience only and shall not define or limit the provisions thereof. This Agreement and all rights and obligations hereunder shall be binding upon the Debtor and its respective successors and assigns, and shall inure to the benefit of the Secured Party and its successors and assigns. If any term of this Agreement shall be held to be invalid, illegal or unenforceable, the validity of all other terms hereof shall in no way be affected thereby, and this Agreement shall be construed and be enforceable as if such invalid, illegal or unenforceable term had not been included herein. The Debtor acknowledges receipt of a copy of this Agreement. IN WITNESS WHEREOF, intending to be legally bound, the Debtor has caused this Agreement to be duly executed as of the date first above written. RAPIDTRON, INC., a Nevada corporation By:_____________________________________________________ John Creel, President & Chief Executive Officer EX-10.9 10 ex10_9.txt EXHIBIT 10.9 AMENDMENT NO. 1 TO LOAN AGREEMENT This Amendment No. 1 to Loan Agreement (this "AMENDMENT"), is made effective as of November 22, 2004, by and between Rapidtron, Inc., a Nevada corporation (the "COMPANY"), and LDM Enterprises, LLC, a California limited liability company ("Lender"), in connection with that certain Loan Agreement, dated effective as of October 8, 2004 (the "MASTER AGREEMENT"): FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Amount of Loan. The amount of the Loan is hereby increased to $375,000. --------------- 2. Maturity Date. The Maturity Date is extended to December 15, 2004. -------------- 3. Schedule 1. Schedule 1 is hereby amended and restated as follows: ----------- Use of Proceeds ---------------
- ---------------------------- SCI $250,000.00 - ------------- ------------- GT $ 80,000.00 - ------------- ------------- LR $ 20,000.00 - ------------- ------------- Squar Milner $ 25,000.00 - ----------------------------
4. Acknowledgment and Consent of Guarantors. By signing below, the -------------------------------------------- undersigned Guarantors of the Master Agreement hereby acknowledge and consent to this Amendment and agree that the "Obligations" as defined in the Guaranty, dated October 8, 2004, shall include for all purposes this Amendment. Guarantors acknowledge that Lender is relying upon this acknowledgment and consent in order to advance additional principal to Borrower and to enter into this Amendment, and hereby consents to the recording of the original Deed of Trust previously executed and delivered as security for the Guaranty. 5. Non-Impairment. Except as expressly modified herein, the Master -------------- Agreement shall continue in full force and effect, and the parties hereby ratify and reaffirm the Master Agreement as modified herein. 6. Defined Terms. All capitalized terms used in this Amendment and not -------------- otherwise defined herein shall have the meaning given to such terms in the Master Agreement. 7. Inconsistencies. In the event of any inconsistency, ambiguity or --------------- conflict between the terms and provisions of this Amendment and the terms and provisions of the Master Agreement, the terms and provisions of this Amendment shall control. 8. Counterparts. This Amendment may be executed in any number of ------------ counterparts, each of which when executed will be deemed an original and all of which, taken together, will be deemed to be one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first written above. RAPIDTRON, INC., LDM ENTERPRISES, LLC, a Nevada corporation a California limited liability company By:_________________________ By:_______________________ John Creel, President Raymond A. Lee, Manager EX-10.10 11 ex10_10.txt EXHIBIT 10.10 ALLONGE TO PROMISSORY NOTE For valuable consideration, the receipt of which is hereby acknowledged, this Allonge to Promissory Note is made and executed effective as of November 22, 2004, with reference to that certain Convertible Secured Promissory Note, dated October 8, 2004 (the "Note"), in the original principal amount of Three Hundred Fifty Thousand Dollars (US$350,000.00), made by RAPIDTRON, INC., a Delaware corporation ("Maker"), payable to the order of LDM ENTERPRISES, LLC, a California limited liability company ("Holder"). This Allonge to Promissory Note shall be affixed to the original of the Note and is hereby incorporated into and made a part of the Note, for all purposes. The principal amount of the Note is increased from $350,000 to $375,000. The term of the Note is hereby extended from November 8, 2004, until December 15, 2004. IN WITNESS WHEREOF, the maker and the Holder have executed this Allonge effective as of the date set forth above. "MAKER" RAPIDTRON, INC, a Delaware corporation By:_________________________________________________ John Creel, Chief Executive Officer and President "HOLDER" LDM ENTERPRISES, LLC, a California limited liability company By:_______________________ Raymond A. Lee, Manager ACKNOWLEDGEMENT AND CONSENT OF GUARANTOR The undersigned Guarantors of the foregoing Note hereby acknowledge and consent to this Allonge to Promissory Note and agree that the "Obligations" as defined in the Guaranty, dated October 8, 2004, shall include for all purposes the increased principal amount added to the Note pursuant to this Allonge to Promissory Note. Guarantors acknowledge that Holder is relying upon this acknowledgment and consent in order to advance additional principal to Maker and to enter into this Allonge, and hereby consents to the recording of the original Deed of Trust previously executed and delivered as security for the Guaranty. _________________________________________ JOHN A. CREEL, an individual _________________________________________ JUDITH CREEL, an individual EX-31.1 12 ex31_1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 13a-14(a) ---------------------------- I, John Creel, certify that: 1. I have reviewed this annual report on Form 10-KSB of Rapidtron, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation on such evaluation Date; d) disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonable likely to affect, the registrant's internal control over financial reporting; 5. I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonable likely to adversely affect the registrant's ability to record, process, summarize and report information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: April 15, 2005 By: /s/ John Creel ---------------- John Creel Chief Financial Officer EX-31.2 13 ex31_2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 13a-14(a) ---------------------------- I, Peter Dermutz, certify that: 1. I have reviewed this annual report on Form 10-KSB of Rapidtron, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation on such evaluation Date; d. Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonable likely to affect, the registrant's internal control over financial reporting; 5. I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonable likely to adversely affect the registrant's ability to record, process, summarize and report information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: April 15, 2005 By: /s/ Peter Dermutz ------------------- Peter Dermutz Chief Financial Officer EX-32.1 14 ex32_1.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, John Creel, certify, PURSUANT TO 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the annual report of Rapidtron, Inc. on form 10-KSB for the year ended December 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such annual report on Form 10-KSB fairly presents in all material respects the financial condition and results of operations of Rapidtron, Inc. April 15, 2005 By: /s/ John Creel ---------------------------- John Creel Chief Executive Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears typed from within the electronic version of this written statement required by Section 906, has been provided to Rapidtron, Inc. and will be retained by Rapidtron, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 15 ex32_2.txt EXHIBIT 32.2 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Peter Dermutz, certify, PURSUANT TO 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the annual report of Rapidtron, Inc. on form 10-KSB for the year ended December 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such annual report on Form 10-KSB fairly presents in all material respects the financial condition and results of operations of Rapidtron, Inc. Date: April 15, 2005 By: /s/ Peter Dermutz -------------------------------- Peter Dermutz Chief Financial Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears typed from within the electronic version of this written statement required by Section 906, has been provided to Rapidtron, Inc. and will be retained by Rapidtron, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----