-----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, GH17Ne4cLH20k+3WTv3G9IndnpoOLbI2k40E2cw2ZX7xlYHm8qOgxi23DvX3CWF7 n2zM6mb/sEaowsoYmOy+Wg== 0000926236-01-500090.txt : 20010618 0000926236-01-500090.hdr.sgml : 20010618 ACCESSION NUMBER: 0000926236-01-500090 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010430 FILED AS OF DATE: 20010615 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIAL THRU INTERNATIONAL CORP CENTRAL INDEX KEY: 0000913659 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 752801677 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22636 FILM NUMBER: 1662086 BUSINESS ADDRESS: STREET 1: 700 S. FLOWER STREET 2: SUITE 2950 CITY: LOS ANGELES STATE: CA ZIP: 90017 BUSINESS PHONE: 2136277599 MAIL ADDRESS: STREET 1: 700 S. FLOWER STREET 2: SUITE 2950 CITY: LOS ANGELES STATE: CA ZIP: 90017 FORMER COMPANY: FORMER CONFORMED NAME: ARDIS TELECOM & TECHNOLOGIES INC DATE OF NAME CHANGE: 19990301 FORMER COMPANY: FORMER CONFORMED NAME: CANMAX INC /WY/ DATE OF NAME CHANGE: 19941215 FORMER COMPANY: FORMER CONFORMED NAME: INTERNATIONAL RETAIL SYSTEMS INC/BD DATE OF NAME CHANGE: 19941215 10-Q 1 dti01q2f.txt 10Q FOR QUARTER ENDED APRIL 30, 2001 United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Period Ended April 30, 2001 ----------- or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From ______ to _____ Commission file number 0-22636 ------- DIAL-THRU INTERNATIONAL CORPORATION ---------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 75-2461665 ------------------------------------- --------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700 South Flower, Suite 2950 Los Angeles, California 90017 ---------------------------------------- --------------------------------- (Address of principal executive offices) (Zip Code) (213) 627-7599 ---------------------------------------------------------------------------- (Registrant's telephone number, including area code) ---------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods 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 [ ] As of June 12, 2001, 11,416,590 shares of common stock, $.001 par value per share, were outstanding. PART I. FINANCIAL INFORMATION Item 1. Financial Statements DIAL-THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS ------ April 30, October 31, 2001 2000 ----------- ---------- (unaudited) CURRENT ASSETS Cash and cash equivalents $ 565,103 $ 73,867 Trade accounts receivable, net of allowance for doubtful accounts of $930,766 at April 30, 2001 and October 31, 2000 467,768 455,819 Prepaid expenses and other 97,243 116,785 Investment in available for sale marketable securities 11,000 - ----------- ---------- Total current assets 1,141,114 646,471 ----------- ---------- PROPERTY AND EQUIPMENT, net 1,319,633 1,539,544 PROPERTY AND EQUIPMENT HELD FOR SALE 320,307 320,307 ADVERTISING CREDITS 2,453,027 2,453,027 OTHER ASSETS 193,493 205,473 EXCESS OF COST OVER FAIR VALUE OF NET ASSETS OF COMPANY ACQUIRED, net of accumulated amortization of $165,859 at April 30, 2001 and $104,148 at October 31, 2000 1,906,816 937,327 ----------- ---------- TOTAL ASSETS $ 7,334,390 $ 6,102,149 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES Current portion of long-term debt, net of debt discount of none and $315,988 at April 30, 2001 and October 31, 2000, respectively $ - $ 684,012 Note payable to shareholder 755,958 346,000 Current portion of capital lease obligation 79,293 102,472 Trade accounts payable 2,980,687 3,930,315 Accrued liabilities 149,257 365,765 Deferred revenue 77,005 47,190 ----------- ---------- Total current liabilities 4,042,200 5,475,754 ----------- ---------- LONG-TERM DEBT, net of debt discount of $83,255 916,745 - at April 30, 2001 CAPITAL LEASE OBLIGATION, net of current portion 118,616 118,615 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock, 44,169,100 shares authorized; $.001 par value; 11,416,590 shares issued and 11,404,568 shares outstanding at April 30, 2001 and 9,895,090 shares issued and 9,883,068 outstanding at October 31, 2000 11,416 9,895 Additional paid-in capital 33,476,329 31,325,432 Accumulated deficit (30,717,730) (30,750,181) Accumulated other comprehensive income (loss) (441,236) (5,416) Treasury stock, 12,022 common shares at cost (54,870) (54,870) Note receivable - common stock (17,080) (17,080) ----------- ---------- Total shareholders' equity 2,256,829 507,780 ----------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,334,390 $ 6,102,149 =========== ========== The accompanying notes are an integral part of these consolidated financial statements.
DIAL-THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, ------------------------ ----------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- REVENUES Revenues $ 903,639 $ 2,823,704 $ 1,794,258 $ 6,630,471 ---------- ---------- ---------- ---------- Total revenues 903,639 2,823,704 1,794,258 6,630,471 COSTS AND EXPENSES Cost of revenue 609,367 3,109,052 1,276,373 7,472,725 Sales & marketing 223,001 278,569 425,575 786,783 General & administrative 598,259 1,741,938 1,211,609 2,682,034 Depreciation and amortization 155,612 159,342 302,502 274,447 ---------- ---------- ---------- ---------- Total costs and expenses 1,586,239 5,288,901 3,216,059 11,215,989 ---------- ---------- ---------- ---------- Operating income (loss) (682,600) (2,465,197) (1,421,801) (4,585,518) OTHER INCOME (EXPENSES) Financing fees (3,620) (240,260) (319,608) (240,260) Interest income (expense), net (12,730) (16,899) (15,514) 20,052 Other income related to settlement of disputes 97,186 - 1,009,373 - ---------- ---------- ---------- ---------- Total other income (expense) 80,836 (257,159) 674,251 (220,208) ---------- ---------- ---------- ---------- NET LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM (601,764) (2,722,356) (747,550) (4,805,726) PROVISION FOR INCOME TAXES - - - - ---------- ---------- ---------- ---------- NET LOSS BEFORE EXTRAORDINARY ITEM (601,764) (2,722,356) (747,550) (4,805,726) ---------- ---------- ---------- ---------- EXTRAORDINARY ITEM-forgiveness of debt - - 780,000 - ---------- ---------- ---------- ---------- NET INCOME (LOSS) $ (601,764) $(2,722,356) $ 32,450 $(4,805,726) ========== ========== ========== ========== BASIC AND DILUTED EARNINGS (LOSS) PER SHARE: Income (loss) before extraordinary item $ (0.06) $ (0.33) $ (0.07) $ (0.59) Extraordinary item - - 0.07 - ---------- ---------- ---------- ---------- Basic earnings (loss) per share (0.06) (0.33) 0.00 (0.59) Dilutive impact of stock options, warrants and convertible debentures - - - - ---------- ---------- ---------- ---------- Diluted earnings (loss) per share $ (0.06) $ (0.33) $ 0.00 $ (0.59) ========== ========== ========== ========== SHARES USED IN THE CALCULATION OF PER SHARE AMOUNTS: Basic common shares 10,481,756 8,353,496 10,162,400 8,120,228 Dilutive impact of stock options, warrants and convertible debentures - - 431,832 - ---------- ---------- ---------- ---------- Dilutive common shares 10,481,756 8,353,496 10,594,232 8,120,228 ========== ========== ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
DIAL-THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED APRIL 30, ------------------------ 2001 2000 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 32,450 $(4,805,726) Adjustments to reconcile net income (loss) to net cash used in operating activities: Financing fees and amortization of debt discount 319,608 240,260 Other income related to settlement of disputes (1,009,373) - Forgiveness of debt (780,000) - Depreciation and amortization 302,502 274,447 (Increase) decrease in: Trade accounts receivable (11,949) 11,147 Accounts receivable - other - (19,393) Inventory - 82,539 Prepaid expenses and other 28,341 89,630 Other assets 10,000 (84,344) Increase (decrease) in: Trade accounts payable 386,441 2,851,966 Accrued liabilities (216,508) 29,764 Deferred revenue 29,815 (173,834) Other payable - (80,000) ---------- ---------- Net cash provided by (used in) operating activities (908,673) (1,583,544) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (21,215) (198,630) Payments on note receivable - 300,000 Cash in DTI at acquisition date - 69,137 ---------- ---------- Net cash provided by (used in) investing activities (21,215) 170,507 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on note payable - (724,000) Payments on shareholder note payable (189,619) (54,000) Proceeds from notes payable 1,000,000 1,000,000 Proceeds from shareholder note payable 599,577 - Payments on capital leases (23,178) (47,991) Change in restricted cash - 937,733 Issuance of common shares for cash - 490,970 Proceeds from exercise of stock options 34,344 - ---------- ---------- Net cash provided by (used in) financing activities 1,421,124 1,602,712 ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 491,236 189,675 Cash and cash equivalents at beginning of period 73,867 846,141 ---------- ---------- Cash and cash equivalents at end of period $ 565,103 $ 1,035,816 ========== ========== SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES Cash paid for interest $ - $ 20,894 Conversion of debt to equity 1,000,000 - Additional shares issued as purchase consideration 1,031,200 - The accompanying notes are an integral part of these consolidated financial statements.
DIAL-THRU INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE A - BASIS OF PRESENTATION The condensed consolidated financial statements of Dial-Thru International Corporation and its subsidiaries included in this Form 10-Q are unaudited. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position and operating results for the three and six month periods ended April 30, 2001 and 2000 have been included. Operating results for the six month period ended April 30, 2001 are not necessarily indicative of the results that may be expected for the year ending October 31, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended October 31, 2000. On November 2, 1999, the Company acquired substantially all of the business and assets of Dial-Thru International Corporation, a California corporation, now known as DTI-LIQCO, Inc., along with the rights to the name "Dial-Thru International Corporation." On January 19, 2000, the Company changed its name from ARDIS Telecom & Technologies, Inc. to Dial-Thru International Corporation("DTI"). During fiscal 1998 and 1999, the Company's operations included mainly sales and distribution of prepaid domestic and international calling cards to wholesale and retail customers. Starting January 2000 following the acquistion of Dial Thru, the Company changed its focus from prepaid calling cards to becoming a full service, facility-based provider of communication products to small and medium size businesses, both domestically and internationally. The Company now provides a variety of international and domestic communication services including international dial-thru, Internet voice and fax services, e-Commerce solutions and other value-added communication services, using its "VoIP" Network to effectively deliver the products to the end user. In addition to helping companies achieve significant savings on long- distance voice and fax calls by routing calls over the Internet, or the Company's private network, the Company also offers new opportunities for existing Internet Service Providers who want to expand into voice services, private corporate networks seeking to lower long-distance costs, and Web- enabled corporate call centers engaged in electronic commerce. DTI is also introducing "VoIP" to a new segment of customers by delivering a high quality, reliable and scaleable solution that uniquely addresses the needs of the rapidly growing "VoIP" industry. NOTE B - EARNINGS (LOSS) PER SHARE The shares issuable upon the exercise of stock options and warrants, and convertible debentures are included in earnings (loss) per share to the extent that they are dilutive. NOTE C - REVENUE RECOGNITION AND COSTS OF REVENUES Revenues from prepaid services sold where the Company operates its own switch are recognized from customer usage. The Company sells products to retailers and distributors at a fixed price. When the retailer or distributor is invoiced, referred revenue is recognized. The Company recognizes revenue, and reduces the deferred revenue account as the customer utilizes calling time or upon expiration of cards containing unused calling time. Revenues generated by international re-origination and dial-thru services are based on minutes of customer usage. The Company records payments received in advance as deferred revenue until such services are provided. NOTE D - CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS The Company has an outstanding receivable from a customer of approximately $435,000, all of which has been reserved. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Accounts are guaranteed by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At April 30, 2001 the Company had approximately $350,000 in excess of FDIC insured limits. NOTE E - ACQUISITION On November 2, 1999, the Company consummated the acquisition of substantially all of the assets and business of Dial-Thru International Corporation (the "Seller"), a California corporation. The acquisition was effected pursuant to the terms of an Asset Purchase Agreement between the Company, a wholly owned subsidiary of the Company, the Seller and John Jenkins, the sole shareholder of the Seller. The Company issued to the Seller an aggregate of 1,000,000 shares of common stock, recorded a total purchase price of $937,500 using the Company's common stock price at the time the acquisition was announced, and agreed to issue an additional 1,000,000 shares of its common stock upon the acquired business achieving specified goals. In March 2001, the additional 1,000,000 shares of common stock were issued to the Seller in accordance with the terms of the Asset Purchase Agreement, and recorded an addition to the purchase price of $1,031,200 using the Company's common stock price at the time of approval of the issuance. The acquisition was accounted for as a purchase. Goodwill initially recorded in the acquisition will be amortized over a period of 10 years beginning November 1999. Incremental goodwill is being amortized over its remaining life, approximately 8.5 years. The results of operations of the acquired entity are included in the consolidated operations of the Company from November 1, 1999. NOTE F - CONVERTIBLE DEBENTURES In February 2000, the Company executed non-interest bearing convertible note agreements (the "Agreements") with nine accredited investors, which provided financing of $1,000,000. The notes were payable on the earlier of one year from the date of issuance or the Company's consummation of a debt or equity financing in excess of $5,000,000. If the notes were not repaid within 90 days of issuance, they were convertible into shares of common stock at $4.00 per share while remaining outstanding. The Company recorded financing fees of approximately $117,000 in February 2000 related to these notes for the difference in the conversion price of $4.00 and the market price of $4.47 on the date the notes were approved by the Board of Directors. The Company also issued to the holders of the notes warrants to acquire an aggregate of 125,000 shares of common stock at an exercise price of $3.00 per share, which expire five years from the date of issuance. In February 2000, the Company recorded deferred financing fees of approximately $492,000. This amount represents the Company's estimate of the fair value of these warrants at the date of grant using the Black- Scholes pricing model with the following assumptions: applicable risk-free interest rate based on the current treasury-bill interest rate at the grant date of 6%; dividend yields of 0%; volatility factors of the expected market price of the Company's common stock of 1.62; and an expected life of the warrants of three years. The Company is amortizing these fees over the initial maturity of these notes of one year. The amount is fully amortized as of April 30, 2001. Under the terms of the agreement, additional warrants to acquire up to an aggregate of 125,000 shares of common stock at an exercise price of $2.75 per share were issued to the holders of the notes upon conversion of the debt to equity as discussed below. During March 2001, terms of the convertible notes were modified and the debt was converted into 400,000 common shares. Additionally, in connection with the conversion, the warrants to purchase 250,000 shares of common stock were modified to allow for an exercise price of $0.01 per share and 150,000 additional warrants with as exercise price of $3.00 per share were issued to the note holders. On April 11, 2001, the Company executed a 6% convertible note agreement (the "Agreement") with Global Capital Funding Group L.P, which provided financing of $1,000,000. Note maturity date is April 11, 2003. The conversion price equals to the lesser of (i) 100% of the volume weighted average of sales price as reported by the Bloomberg L.P. of the common stock on the last trading day immediately preceding the Closing Date ("Fixed Conversion Price") and (ii) 80% of the average of the five(5) lowest volume weighted average sales price as reported by Bloomberg L.P. during the twenty (20) Trading Days immediately preceding but not including the date of the related Notice on Conversion ("the "Formula Conversion Price"). In an event of default the amount declared due and payable on the Conversion Debentures shall be at the Formula Price. The Company also issued to the holders of the notes warrants to acquire aggregate of 100,000 shares of common stock at an exercise price of $0.89 per share, which expire on April 11, 2006. In April 2001, the Company recorded deferred financing fees of approximately $86,875. This amount represents the Company's estimate of the fair value of these warrants at the date of grant using the Black-Scholes pricing model with the following assumptions: applicable risk-free interest rate based on the current treasury-bill interest rate at the grant date of 6%; dividend yields of 0%; volatility factors of the expected market price of the Company's common stock of 1.53; and an expected life of the warrants of five years. The Company is amortizing these fees over the initial maturity of these notes of two years. The amount charged to expense and accumulated amortization for the three months ended April 30, 2001 totaled approximately $3,600. NOTE G - RELATED PARTY PAYABLE In connection with the acquisition of Dial-Thru International Corporation on November 2, 1999, the Company assumed a related party note payable to the sole owner of the acquired entity of approximately $400,000. The note bears interest at 6% per annum, is payable in quarterly installments of $50,000 plus interest beginning November 1, 1999, and matures on August 1, 2001. The Company is currently in arrears of quarterly payments to the noteholder and during the three month period ended April 30, 2001 an additional net loan in the amount of $109,958 was provided by the note holder. The outstanding balance at April 30, 2001 was $755,958, and is classified as a current liability. NOTE H - SHAREHOLDERS' EQUITY COMMON STOCK ISSUANCES For the six months ended April 30, 2001, the Company issued an additional 121,500 shares in connection with the exercise of options for $34,344. Note I - MARKETABLE SECURITIES Marketable securities include one investment in a common stock and are classified as available-for-sale and carried at market value. Unrealized holding gains and losses are reported as a separate component of Stockholders' equity until realized. Realized gains and losses on the sale of investments are based upon specific identification method and are included in the statement of operations. During the six months ended April 30, 2001, a reduction in market value resulted in an unrealized loss of $435,820. NOTE J - SETTLEMENT OF LEGAL/CARRIER DISPUTES AND FORGIVENESS OF DEBT During the quarter ended January 31, 2001 the Company settled a pending lawsuit with Star Telecommunications, Inc. In conjunction with the settlement the Company received a carrier usage credit in the amount of $780,000 for previous services and future services comprised of one year of no charge domestic carrier services for transporting traffic between Los Angeles, New York and Miami. The $780,000 credit for past services is recorded as forgiveness of debt in the accompanying statement of operations. The Company also received 1,100,000 shares of common stock of Star Telecommunications which were recorded at fair value totaling $446,820. The credit for future services is contingent on the Company using these services and at the time of settlement there is no basis for valuing these services. Fair value of these services will be credited to other income and charged to operations as utilized. The Company also recorded income of $465,000 in connection with the settlement of disputes with RSL Communications, Inc. ("RSL") during the six months ended April 30, 2001. This amount was originally credited to the Company by RSL during the year ended October 31, 2000. Subsequently, the credit was rescinded and as the outcome was unclear no benefit was recorded during fiscal 2000. During the first quarter 2001 the credit was acknowledged by RSL management. The vendor is in the process of liquidating its United States operations. Accordingly, the Company has applied the credit to amounts owed to the vendor and recorded the effect as income in other income and expense in the three months ended January 31, 2001. During the quarter ended April 30, 2001, the Company settled other disputes in connection with carrier services resulting in other income of $97,186. NOTE K - SEGMENT INFORMATION The Company is organized by line of business. Historically, the two major lines of business operating segments are prepaid phone cards and call back/dial thru services. The accounting policies of the line of business operating segments are the same as those described in the summary of significant accounting policies. Revenue represents revenue from external customers. During the six months ended April 30, 2001 substantially all revenue and expenses related to call back and dial thru services. At April 30, 2001, substantially all assets other than property and equipment held for sale are now used in the call back and dial thru business operations. Revenue and net loss for the prepaid card business and dial thru business for the six months ended April 30, 2000 were $2,713,933, $3,884,812 and $3,916,538 and $920,914, respectively. Total assets of the prepaid business and dial thru business at April 30, 2000 were $2,805,474 and $2,476,010, respectively. ITEM 2. MANAGEMENT'S DISCUSSION AND ANAYLYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS With the exception of historical information, the matters discussed in this quarterly Report on Form 10-Q include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are statements other than historical information or statements of current condition. Some forward-looking statements may be identified by the use of such terms as "expects", "should", "will", "anticipates", "estimates", "believes," "plans" and words of similar meaning. These forward-looking statements relate to business plans, programs, trends, results of future operations, satisfaction of future cash requirements, funding of future growth, acquisition plans and other matters. In light of the risks and uncertainties inherent in all such projected matters, the inclusion of forward-looking statements in this Form 10-Q should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved or that operating expectations will be realized. Revenues and results of operations are difficult to forecast and could differ materially from those projects in forward-looking statements contained herein, including without limitation statements regarding the Company's belief of the sufficiency of capital resources and its ability to compete in the telecommunications industry. Actual results could differ from those projected in any forward-looking statements for, among others, the following reasons: (a) increased competition from existing and new competitors using Voice over Internet Protocol ("VoIP") to provide telecommunications services, (b) the relatively low barriers to entry for start-up companies using VoIP to provide telecommunications services, (c) the price-sensitive nature of consumer demand, (d) the Company's dependence upon favorable pricing from its suppliers to compete in the telecommunications industry, (e) increased consolidation in the telecommunication industry, which may result in larger competitors being able to compete more effectively, (f) the failure to attract or retain key employees, (g) continuing changes in governmental regulations affecting the telecommunications industry and the Internet, (h) changing consumer demand, technological development and industry standards that characterize the industry, and (i) the "Certain Business Factors" identified in the Company's Annual Report on Form 10-K for the year ended October 31, 2000. In light of the significant uncertainties inherent in the forward-looking statements included in this Form 10-Q, you should not consider the inclusion of such information as a representation by the Company or anyone else that we will achieve our objectives and plans. The Company does not undertake to update any forward-looking statements contained herein. Readers are cautioned not to place undue reliance on the forward-looking statements made in, or incorporated by reference into, this Quarterly Report on Form 10-Q or in any document or statement referring to this Quarterly Report on Form 10-Q. GENERAL Dial-Thru International Corporation is a facilities-based, global Internet Protocol (IP) communications company providing connectivity to international markets experiencing significant demand for IP enabled services. The Company provides a variety of international telecommunications services targeted to small and medium sized enterprises (SME's) that include the transmission of voice and data traffic and the provision of Web-based and other communications products and services. The Company utilizes Voice over Internet Protocol (VoIP) packetized voice technology (and other compression techniques) to improve both cost and efficiencies of telecommunication transmission mechanisms, and is developing a private IP Telephony network. IP Telephony, or Voice over Internet Protocol (VoIP), is voice communication that has been converted into digital packets and is then addressed, prioritized, and transmitted over any form of broadband network, utilizing the same technology that makes the Internet possible. These technologies allow the Company to transport voice communications with the same high- density compression as networks initially designed for data transmission, and at the same time utilize a common network for providing customers with enhanced Web-based products and services. The Company's primary focus is in niche markets where competition is not as keen, thereby giving it opportunities for greater profit margin and market share. These markets include regions of the world where deregulation of telecommunications services has begun, or is in early development. The Company also targets smaller markets that have not attracted large multi- national providers. Africa, Asia, and parts of South America offer the greatest abundance of these target markets. Cooperating with overseas carriers and the incumbent operator, usually government owned telephone companies, gives the Company a high degree of leverage to engage in co-branding of jointly marketed products, including IP based enhancements that it has developed, rather than simply basing a strategy on pricing arbitrage. As a result, the Company is proactively invited to participate rather than reactively prevented from entering these new markets. Unlike many other wholesale VoIP carriers in the market, the Company is focused on retail telecommunications sales to business customers which allows the Company to provide a complete package of communication services, not just wholesale voice traffic. A portfolio of enhanced offerings provides the Company with the opportunity for higher profit margins and better customer loyalty, thus making the Company less susceptible to competitive forces and market churn. In tandem with overseas partners, the Company is deploying a "book-end" strategy targeting markets at both ends of international circuits. As an example, while cooperating with partners to target the SME market in a selected foreign region, the Company also targets corresponding expatriates and foreign owned businesses back in the U.S. By providing these services in cooperation with the carrier that will ultimately terminate the calls in the caller's "home" country, the Company enjoys reduced facilities costs, increased economies of scale, lower customer acquisition costs, and higher customer retention. Focusing on cooperation in emerging markets also gives the Company added benefit of being able to develop and exploit labor cost advantages not found in industrial markets. For example, the Company plans to develop new and extremely low-cost call center applications that will tie into and enhance its new Web and VoIP applications. By relying on VoIP and IP, rather than traditional voice technology, the Company ensures that its network infrastructure is extremely cost-effective and state-of-the-art. These are assets that not only help to build the Company's business, but also make the Company more attractive as a potential partner to overseas carriers and incumbent telephone companies. The following discussion should be read in conjunction with the Company's Form 10-K and the consolidated financial statements for the years ended October 31, 2000, 1999, and 1998; the Company's Form 10-Q for the quarter ending April 30, 2000; and the consolidated financial statements and related notes for the quarter ended April 30, 2001 found elsewhere in this report. RESULTS OF OPERATIONS THREE MONTH COMPARISON REVENUES Revenues were $904,000 for the quarter ended April 30, 2001, compared to $2,824,000 for the quarter ended April 30, 2000, representing a decrease of 68% from the prior period. The decrease in revenues for this quarter compared to the prior year resulted primarily from the Company's change in business focus away from the prepaid long distance market and toward providing international communication services for small to medium-size businesses. Costs associated with the discontinuation of certain distribution channels have prevented the Company from fully marketing according to its plans for the redirected business. Now that these costs have been eliminated and new markets have been opened, the Company anticipates experiencing substantial revenue growth in future periods. EXPENSES Costs of revenues were $609,000, or 67% of revenues, for the quarter ended April 30, 2001, compared to $3,109,000, or 110% of revenues, for the quarter ended April 30, 2000. By focusing its business on providing international communication services the Company has been able to demonstrate the ability to produce positive margins on sales across its product line. Settlement of a dispute with a carrier over charges in prior periods resulted in income of $97,000 to the Company. This is reflected as a credit to Other Income on the Consolidated Statements of Operations for the period. Sales and marketing costs were $223,000, or 25% of revenues for the quarter ended April 30, 2001, compared to $279,000, or 10% of revenues, for the quarter ended April 30, 2000. This represents a 20% decrease in such costs from the prior period. Sales and marketing costs incurred during the prior period were primarily associated with the operation of the distribution channel for the prepaid products. The change in the focus of the Company's operations has reduced its sales and marketing costs in absolute terms, as the prepaid calling card business required a large sales and marketing staff. In the short term, while the Company is opening a number of new international markets just beginning to produce revenues, sales and marketing costs as a percentage of revenues have increased. In the long term, however, when these markets are fully developed, the Company expects that sales and marketing costs will decline as a percentage of revenue. General and administrative costs were $598,000, or 66% of revenue, for the quarter ended April 30, 2001, compared to $1,742,000, or 62% of revenue, for the quarter ended April 30, 2000. This represents in dollar terms a 65% decrease from the prior period. The change in the focus of the Company's business has resulted in an overall drop of its general and administrative expenses, and the Company anticipates a reduction of these costs as a percentage of revenue in future periods. During the quarter ended April 30, 2001, the Company incurred net interest expense of $13,000 and financing fees of $4,000 compared with net interest expense of $17,000 and financing fees of $240,000 for the quarter ended April 30, 2000. As a result of the foregoing, the Company incurred a net loss of $602,000, or $0.06 per share, for the quarter ended April 30, 2001, as compared to a net loss of $2,722,000, or $0.33 per share, for the quarter ended April 30, 2000. SIX MONTH COMPARISON REVENUES Revenues were $1,794,000 for the six months ended April 30,2001, compared to $6,630,000 for the six months ended April 30, 2000, representing a decrease of 73% from the prior period. The decrease in revenues for this period compared to the prior year resulted primarily from the Company's change in business focus away from the prepaid long distance market and toward providing international communication services for small- to medium-size businesses. Costs associated with the discontinuation of certain distribution channels have prevented the Company from fully marketing according to its plans for the redirected business. Now that these costs have been eliminated and new markets have been opened, the Company anticipates experiencing substantial revenue growth in future periods. EXPENSES Costs of revenues were $1,276,000, or 71% of revenues, for the six months ended April 30, 2001, compared to $7,473,000, or 113% of revenues, for the six months ended April 30, 2000. By focusing its business on providing international communication services the Company has been able to demonstrate the ability to produce positive margins on sales across its product line. Sales and marketing costs were $426,000, or 24% of revenues for the six months ended April 30, 2001, compared to $787,000, or 12% of revenues, for the six months ended April 30, 2000. This represents a 46% decrease in such costs from the prior period. Sales and marketing costs incurred during the prior period were primarily associated with the operation of the distribution channel for the prepaid products. The change in the focus of the Company's operations has reduced its sales and marketing costs in absolute terms, as the prepaid calling card business required a large sales and marketing staff. In the short term, while the Company is opening a number of new international markets just beginning to produce revenues, sales and marketing costs as a percentage of revenues have increased. In the long term, however, when these markets are fully developed, the Company expects that sales and marketing costs will decline as a percentage of revenue. General and administrative costs were $1,212,000, or 68% of revenue, for the six months ended April 30, 2001, compared to $2,682,000, or 40% of revenue, for the six months ended April 30, 2000. However this represents in dollar terms a 55% decrease from the prior period. The change in the focus of the Company's business has resulted in an overall drop of its general and administrative expenses, and the Company anticipates a reduction of these costs as a percentage of revenue in future periods. During the six months ended April 30, 2001, the Company incurred net interest expense of $16,000 and financing fees of $320,000 compared with net interest income of $20,000 and financing fees of $240,000 for the six months ended April 30, 2000. SETTLEMENT OF LEGAL/CARRIER DISPUTES AND FORGIVENESS OF DEBT During the quarter ended January 31, 2001 the Company settled a pending lawsuit with Star Telecommunications, Inc. In conjunction with the settlement the Company received a carrier usage credit in the amount of $780,000 for previous services and future services comprised of one year of no charge domestic carrier services for transporting traffic between Los Angeles, New York and Miami. The $780,000 credit for past services is recorded as forgiveness of debt in the accompanying statement of operations. The Company also received 1,100,000 shares of common stock of Star Telecommunications which were recorded at fair value totaling $446,820. The credit for future services is contingent on the Company using these services and at the time of settlement there is no basis for valuing these services. Fair value of these services will be credited to other income and charged to operations as utilized. The Company also recorded income of $465,000 in connection with the settlement of disputes with RSL Communications, Inc. ("RSL") during the six months ended April 30, 2001. This amount was originally credited to the Company by RSL during the year ended October 31, 2000. Subsequently, the credit was rescinded and as the outcome was unclear no benefit was recorded during fiscal 2000. During the first quarter 2001 the credit was acknowledged by RSL management. The vendor is in the process of liquidating its United States operations. Accordingly, the Company has applied the credit to amounts owed to the vendor and recorded the effect as income in other income and expense in the three months ended January 31, 2001. During the quarter ended April 30, 2001, the Company settled other disputes in connection with carrier services resulting in other income of $97,186. During the six months ended April 30, 2001 the Company recorded other income relating to settlement of disputes totaling $1,009,373 and recorded forgiveness of debt income totaling $780,000. As a result of the foregoing, the Company generated net income of $32,000 or $0.00 per share, for the six months ended April 30, 2001, as compared to a net loss of $4,806,000, or $0.59 per share, for the six months ended April 30, 2000. LIQUIDITY AND CAPITAL RESOURCES At April 30, 2001, the Company had cash and cash equivalents of $565,000, an increase of $491,000 from the balance at October 31, 2000. As of April 30, 2001, the Company had a working capital deficit of $2,901,000, compared to a working capital deficit of $2,869,000 at April 30, 2000. As of April 30, 2001, the Company's current assets of $1,141,000 included cash and cash equivalents of $565,000 and net accounts receivable of $468,000. During the six months ended April 30, 2001, net cash used in operating activities was $909,000, compared to net cash used in operating activities of $1,584,000 for the six months ended April 30, 2000. The decrease in net cash used in operating activities for the six months ended April 30, 2001 was primarily due to the net income of $32,000 versus a net loss of $4,806,000 from the comparable period in the prior year offset partially by other changes in current assets and liabilities. Deferred revenue increased to $77,000 for the period ending April 30, 2001 from $47,000 in the prior period due to an increase in prepaid customer amounts. Cash used in investing activities was $21,000 for the six months ended April 30, 2001, compared to cash provided by investing activities of $171,000 for the six months ended April 30, 2000. The net change was primarily attributable to capital equipment purchases of $199,000 offset by receipts of $300,000 in notes receivable, during the six months ended April 30, 2000. Cash provided by financing activities for the six months ended April 30, 2001 totaled $1,421,000, compared to cash provided by financing activities of $1,603,000 for the six months ended April 30, 2000. During the six months ended April 30, 2001, significant components of cash provided by financing activities includes $1,000,000 in proceeds from notes payable and net proceeds from shareholder of $410,000. During the six months ended April 30, 2000, significant components of cash provided by financing activities includes net proceeds from notes payable of $276,000, cash released from restricted cash of $938,000 and proceeds from the exercise of stock options of $491,000. Because the Company is in a growth mode and at the same time refocused its operations during fiscal 2000, cash flow was constrained and resulted in slow payment to vendors and growth in payables. The Company's cash flow commitments entering fiscal 2001 included operating overhead, outstanding debt of $1 million, and settling a significant portion of its trade payables of $3.9 million (as of Oct. 31, 2000). The Company has made a significant reduction in monthly overhead expenses, the debt has been converted to equity, and the Company has made significant reductions of payables through settlements with carriers and expects to make additional reductions through use of trade credits. There are no other commitments or uncertainties that management is currently aware of. The Company believes that it will be able to significantly improve its cash flows in the coming year for the following reasons: 1. The Company has lowered operating expenses by reorganization of operating staff and changing channels of distribution. This has resulted in reduced expenses in excess of $250,000 per month. 2. The Company reached a favorable settlement with Star Telecommunications that reduced payables and future cash requirements. The Company eliminated a payable of $780,000, received approximately one million shares of common stock in Star, and received carrier usage credits for one year for domestic services which value will be determined as use occurs. 3. The Company converted $1 million of debt into equity. (See additional discussion further). 4. The Company expects to be able to bring in additional financing of 1 to 3 million dollars during fiscal year 2001, with $1 million of debt financing having already been completed in the second quarter. (See additional discussion further). 5. The Company expects to be able to convert at least $1.5 million of its prepaid media credits into cash or services. 6. The Company expects an increase in recurring revenues and improvements in profit margin due to changes in product focus sufficient to produce positive monthly operating cash flow by fiscal year end. To address its cash flow needs, the Company consummated a private placement of $1,000,000 in principal amount of convertible notes in February 2000. The notes were payable on the earlier of one year from the date of issuance or the closing of equity financing in excess of $5 million. During the second quarter, the notes were converted into 400,000 shares of the Company's common stock at a conversion price of $2.50 per share. The holders of the notes were also issued warrants to acquire an aggregate of 250,000 shares of the Company's common stock at an exercise price of one half at $3.00 per share and one half at $2.75 per share. As a condition of the conversion of the notes into common stock, the exercise price of these warrants were repriced to $0.01, and an additional 125,000 warrants were issued with an exercise price of $3.00. On April 11, 2001, the Company executed a 6% convertible note agreement (the "Agreement") with Global Capital Funding Group L.P, which provided financing of $1,000,000. Note maturity date is April 11, 2003. Conversion price equals to the lesser of (i) 100% of the volume weighted average of sales price as reported by the Bloomberg L.P. of the common stock on the last trading day immediately preceding the Closing Date ("Fixed Conversion Price") and (ii) 80% of the average of the five (5) lowest volume weighted average sales price as reported by Bloomberg L.P. during the twenty (20) Trading Days immediately preceding but not including the date of the related Notice on Conversion ("the "Formula Conversion Price"). In an event of default the amount declared due and payable on the Conversion Debentures shall be at the Formula Price. The Company also issued to the holders of the notes warrants to acquire aggregate of 100,000 shares of common stock at an exercise price of $0.89 per share, which expire on April 11, 2006. In April 2001, the Company recorded deferred financing fees of approximately $86,875. This amount represents the Company's estimate of the fair value of these warrants at the date of grant using the Black-Scholes pricing model with the following assumptions: applicable risk-free interest rate based on the current treasury-bill interest rate at the grant date of 6%; dividend yields of 0%; volatility factors of the expected market price of the Company's common stock of 1.53; and an expected life of the warrants of five years. The Company is amortizing these fees over the initial maturity of these notes of two years. The amount charged to expense and accumulated amortization for the three months ended April 30, 2001 totaled approximately $3,600. The Company's growth models for its business are scaleable, but the rate of growth is dependent on the availability of future financing for capital resources. The Company plans to commit at least $2.0 million for capital investment for fiscal 2001, and plans to finance additional infrastructure development externally through debt and/or equity offerings and internally through the operations of its Telecommunications Business. The Company plans to obtain vendor financing for a major portion of its equipment needs associated with expansion. The Company also plans to exchange a portion of its prepaid media credits to reduce accounts payable, and to liquidate an additional portion of its prepaid media credits for cash. The Company believes that, with sufficient capital, it can significantly accelerate its growth plan. The Company's failure to obtain additional financing or to exchange or liquidate media credits, could significantly delay the Company's implementation of its business plan and have a material adverse effect on its business, financial condition and operating results. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following Exhibits are required to be filed with this quarterly report on Form 10-Q: 4.1 Securities Purchase Agreement (filed herewith) (b) Reports on Form 8-Ks None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dial-Thru International Corporation (Registrant) DATE: June 15, 2001 /s/ John Jenkins -------------------------- ---------------------------------- John Jenkins President, Chief Financial Officer (Principal Financial Officer) EX-4.1 2 ex04-1.txt SECURITIES PURCHASE AGREEMENT EXHIBIT 4.1 SECURITIES PURCHASE AGREEMENT dated as of April 11, 2001 by and between Dial-Thru International Corporation as the Issuer, and Global Capital Funding Group, L.P. Securities Purchase Agreement TABLE OF CONTENTS ARTICLE I. DEFINITIONS.........................................1 Section 1.1 Definitions...................................1 Section 1.2 Accounting Terms and Determinations...........9 ARTICLE II. PURCHASE AND SALE OF SECURITIES...................10 Section 2.1 Purchase and Sale of Convertible Debentures..10 Section 2.2 Purchase Price...............................10 Section 2.3 Closing and Mechanics of Payment.............10 ARTICLE III. PAYMENT TERMS OF CONVERTIBLE DEBENTURES..........10 Section 3.1 Payment of Principal and Interest; Payment Mechanics....................................10 Section 3.2 Payment of Interest..........................11 Section 3.3 Voluntary Prepayment.........................11 Section 3.4 Mandatory Prepayments........................11 Section 3.5 Prepayment Procedures........................12 Section 3.6 Payment of Additional Amounts................13 ARTICLE IV. REPRESENTATIONS AND WARRANTIES....................14 Section 4.1 Organization and Qualification...............14 Section 4.2 Authorization and Execution..................15 Section 4.3 Capitalization ..............................15 Section 4.4 Governmental Authorization...................16 Section 4.5 Issuance of Shares...........................16 Section 4.6 No Conflicts.................................16 Section 4.7 Financial Information........................17 Section 4.8 Litigation...................................17 Section 4.9 Compliance with ERISA and other Benefit Plans.......................................17 Section 4.10 Environmental Matters.......................18 Section 4.11 Taxes.......................................18 Section 4.12 Investments, Joint Ventures.................18 Section 4.13 Not an Investment Company...................18 Section 4.14 Full Disclosure.............................18 Section 4.15 No Solicitation; No Integration with Other Offerings...................................19 Section 4.16 Permits.....................................19 Section 4.17 Leases......................................19 Section 4.18 Absence of Any Undisclosed Liabilities or Capital Calls...............................19 Section 4.19 Public Utility Holding Company..............19 Section 4.20 Intellectual Property Rights................20 Section 4.21 Insurance...................................20 Section 4.22 Title to Properties.........................20 Section 4.23 Internal Accounting Controls................20 Section 4.24 Foreign Practices...........................20 Section 4.25 Title to Certain Assets.....................20 ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PURCHASER........21 Section 5.1 Purchaser....................................21 ARTICLE VI. CONDITIONS PRECEDENT TO PURCHASE OF SECURITIES....22 Section 6.1 Conditions Precedent to Purchaser's Obligations to Purchase......................22 Section 6.2 Conditions to the Company's Obligations......24 ARTICLE VII. AFFIRMATIVE COVENANTS............................24 Section 7.1 Information..................................25 Section 7.2 Payment of Obligations.......................25 Section 7.3 Maintenance of Property; Insurance...........26 Section 7.4 Maintenance of Existence.....................26 Section 7.5 Compliance with Laws.........................26 Section 7.6 Inspection of Property, Books and Records....26 Section 7.7 Investment Company Act.......................26 Section 7.8 Use of Proceeds..............................27 Section 7.9 Compliance with Terms and Conditions of Material Contracts...........................27 Section 7.10 Reserved Shares and Listings................27 Section 7.11 Transfer Agent Instructions.................28 Section 7.12 Maintenance of Reporting Status; Supplemental Information....................28 Section 7.13 Form D; Blue Sky Laws.......................28 ARTICLE VIII. NEGATIVE COVENANTS..............................29 Section 8.1 Limitations on Debt or Other Liabilities.....29 Section 8.2 Transactions with Affiliates.................29 Section 8.3 Merger or Consolidation......................29 Section 8.4 Limitation on Asset Sales....................29 Section 8.5 Restrictions on Certain Amendments...........30 Section 8.6 Restrictions on Issuances of Securities......30 Section 8.7 Limitation on Stock Repurchases..............31 ARTICLE IX. RESTRICTIVE LEGENDS...............................31 Section 9.1 Restrictions on Transfer.....................31 Section 9.2 Legends......................................32 Section 9.3 Notice of Proposed Transfers.................32 ARTICLE X. ADDITIONAL AGREEMENTS AMONG THE PARTIES............32 Section 10.1 Liquidated Damages..........................32 Section 10.2 Conversion Notice...........................33 Section 10.3 Conversion Limit............................33 Section 10.4 Registration Rights.........................34 ARTICLE XI. ADJUSTMENT OF FIXED PRICE.........................35 Section 11.1 Reorganization..............................35 Section 11.2 Share Reorganization........................36 Section 11.3 Rights Offering.............................36 Section 11.4 Special Distribution........................37 Section 11.5 Capital Reorganization......................38 Section 11.6 Purchase Price Adjustments..................39 Section 11.7 Adjustment Rules............................39 Section 11.8 Certificate as to Adjustment................39 Section 11.9 Notice to Holders...........................40 ARTICLE XII. EVENTS OF DEFAULT................................40 Section 12.1 Events of Default...........................40 Section 12.2 Powers and Remedies Cumulative..............42 ARTICLE XIII. MISCELLANEOUS...................................43 Section 13.1 Notices.....................................43 Section 13.2 No Waivers; Amendments......................43 Section 13.3 Indemnification.............................44 Section 13.4 Expenses: Documentary Taxes................46 Section 13.5 Payment.....................................46 Section 13.6 Successors and Assigns......................46 Section 13.7 Brokers.....................................46 Section 13.8 Delaware Law; Submission to Jurisdiction; Waiver of Jury Trial; Appointment of Agent..46 Section 13.9 Entire Agreement............................47 Section 13.10 Survival; Severability......................47 Section 13.11 Title and Subtitles.........................47 Section 13.12 Reporting Entity for the Common Stock.......47 Section 13.13 Publicity...................................47 LIST OF SCHEDULES Schedule 2.2 Allocation of Purchase Price Schedule 4.3 Capitalization Schedule 4.7 Financial Information Schedule 4.8 Litigation Schedule 4.12 Investments, Joint Ventures Schedule 4.15 No Solicitation; No Integration with Other Offerings Schedule 7.8 Use of Proceeds Schedule 8.2 Transactions with Affiliates LIST OF EXHIBITS Exhibit A Form of Convertible Debentures Exhibit B Form of Registration Rights Agreement Exhibit C Form of Solvency Certificate Exhibit D Form of Officer's Certificate Exhibit E Form of Common Stock Purchase Warrant Exhibit F Security Agreement SECURITIES PURCHASE AGREEMENT AGREEMENT, dated as of April 11, 2001, between Dial-Thru International Corporation (the "Company") and Global Capital Funding Group, L.P. ("Purchaser"). R E C I T A L S: WHEREAS, the Company desires to sell and issue to Purchaser, and Purchaser desires to purchase from the Company $1,000,000 principal amount of the Company's 6% Convertible Debentures due April 6, 2003 (the "Convertible Debentures") in accordance with the terms and conditions as set forth in the form of Convertible Debenture attached hereto as Exhibit A; WHEREAS, the Convertible Debentures will be convertible into shares of the Company's common stock, $.001 par value per share (the "Common Stock") and secured by certain assets of the Company as set forth in the Security Agreement attached hereto as Exhibit F ("Security Agreement"); WHEREAS, in order to induce the Purchaser to enter into the transactions described in this Agreement, the Company desires to issue to the Purchaser up to an aggregate of 100,000 warrants to purchase shares of Common Stock upon the Closing (as defined herein) on the terms and conditions described in the form of the common stock purchase warrant attached hereto as Exhibit E (the "Warrants"); and WHEREAS, Purchaser will have certain registration rights with respect to such shares of Common Stock issuable as interest under, and upon conversion of, the Convertible Debentures (the "Debenture Shares") and upon exercise of the Warrants (the "Warrant Shares," the Debenture Shares and the Warrant Shares being collectively referred to herein as the "Conversion Shares") as set forth in the Registration Rights Agreement in the form attached hereto as Exhibit B; NOW, THEREFORE, in consideration of the foregoing premises and the covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1. DEFINITIONS ARTICLE 1.1 Definitions. The following terms, as used herein, have the following meanings: "Additional Shares of Common Stock" has the meaning set forth in Section 11.6. "Affiliate" means, with respect to any Person (the "Subject Person"), (i) any other Person (a "Controlling Person") that directly, or indirectly through one or more intermediaries, Controls the Subject Person or (ii) any other Person (other than the Subject Person or a Consolidated Subsidiary of the Subject Person) which is Controlled by or is under common Control with a Controlling Person. "Agreement" means this Securities Purchase Agreement, as amended, supplemented or otherwise modified from time to time in accordance with its terms. "Asset Sale" has the meaning set forth in Section 8.4. "Balance Sheet Date" has the meaning set forth in Section 4.7. "Benefit Arrangement" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by the Company. "Benefit Plans" has the meaning set forth in Section 4.9(b). "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law to close. "Capital Reorganization" has the meaning set forth in Section 11.5. "Change in Control" means (i) after the date of this Agreement, any person or group of persons (within the meaning of Sections 13 and 14 of the Exchange Act and the rules and regulations of the Commission relating to such sections) other than Purchaser shall have acquired beneficial ownership (within the meaning of Rules 13d-3 and 13d-5 promulgated by the Commission pursuant to the Exchange Act) of 33a% or more of the outstanding shares of Common Stock of the Company without the prior written consent of Purchaser; (ii) any sale or other disposition (other than by reason of death or disability) to any Person of more than 75,000 shares of Common Stock of the Company by any executive officers and/or employee directors of the Company without the prior written consent of Purchaser, except any disposition made by Roger Bryant in accordance with Rule 144 promulgated under the Securities Act; (iii) individuals constituting the Board of Directors of the Company on the date hereof (together with any new Directors whose election by such Board of Directors or whose nomination for election by the stockholders of the Company was approved by a vote of at least 50.1% of the Directors still in office who are either Directors as of the date hereof or whose election or nomination for election was previously so approved), cease for any reason to constitute at least two-thirds of the Board of Directors of the Company then in office, scheduled to be held in May, 2001, except changes in the Board of Directors made at the Company's Annual Meeting of Shareholders for 2001. "Closing Bid Price" shall mean for any security as of any date, the lowest closing bid price as reported by Bloomberg, L.P. ("Bloomberg") on the principal securities exchange or trading market where such security is listed or traded or, if the foregoing does not apply, the lowest closing bid price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no lowest trading price is reported for such security by Bloomberg, then the average of the bid prices of any market makers for such securities as reported in the "Pink Sheets" by the National Quotation Bureau, Inc. If the lowest closing bid price cannot be calculated for such security on such date on any of the foregoing bases, the lowest closing bid price of such security on such date shall be the fair market value as mutually determined by Purchaser and the Company for which the calculation of the closing bid price requires, and in the absence of such mutual determination, as determined by the Board of Directors of the Company in good faith. "Closing Date" means the date on which all of the conditions set forth in Sections 6.1 and 6.2 shall have been satisfied and Convertible Debentures in the aggregate principal amount of $1,000,000 are issued by the Company to Purchaser. "Code" means the Internal Revenue Code of 1986, as amended. "Commission" means the Securities and Exchange Commission or any entity succeeding to all of its material functions. "Common Stock" means common stock, $.001 par value per share, of the Company. "Company" means Dial-Thru International Corporation, a Delaware corporation, and its successors. "Company Corporate Documents" means the certificate of incorporation and bylaws of the Company. "Consolidated Net Worth" means at any date the total shareholder's equity which would appear on a consolidated balance sheet of the Company prepared as of such date. "Consolidated Subsidiary" means at any date with respect to any Person or Subsidiary or other entity, the accounts of which would be consolidated with those of such Person in its consolidated financial statements if such statements were prepared as of such date. "Control" (including, with correlative meanings, the terms "Controlling," "Controlled by" and under "common Control with"), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities, by contract or otherwise. "Conversion Date" shall mean the date of delivery (including delivery via telecopy) of a Notice of Conversion for all or a portion of a Convertible Debenture by the holder thereof to the Company as specified in each Convertible Debenture. "Conversion Price" has the meaning set forth in the Convertible Debentures. "Conversion Shares" has the meaning set forth in the Recitals. "Convertible Debentures" means the Company's 6% Convertible Debentures substantially in the form set forth as Exhibit A hereto. "Deadline" has the meaning set forth in Section 10.1. "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes, or other similar instruments issued by such Person, (iii) all obligations of such Person as lessee which (y) are capitalized in accordance with GAAP or (z) arise pursuant to sale- leaseback transactions, (iv) all reimbursement obligations of such Person in respect of letters of credit or other similar instruments, (v) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person and (vi) all Debt of others Guaranteed by such Person. "Default" means any event or condition which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Derivative Securities" has the meaning set forth in Section 8.6. "Discounted Equity Offerings" has the meaning set forth in Section 8.6. "Directors" means the individuals then serving on the Board of Directors or similar such management council of the Company. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environment or to emissions, discharges or releases of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes into the environment, including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes or the cleanup or other remediation thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means the Company and each Subsidiary and all members of a controlled group of corporation and all trades or businesses (whether or not incorporated) under common control which, together with the Company or any Subsidiary, are treated as a single employer under the Code. "Event of Default" has the meaning set forth in Article XII hereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Financing" means a public or private financing consummated (meaning closing and funding) through the issuance of debt or equity securities (or securities convertible into or exchangeable for debt or equity securities) of the Company, other than Permitted Financings. "Fixed Price(s)" has the meaning set forth in Section 11.1. "GAAP" has the meaning set forth in Section 1.2. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing (whether by virtue of partnership arrangements, by agreement to keep well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain a minimum net worth, financial ratio or similar requirements, or otherwise) any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or (ii) entered into for the purpose of assuring in any other manner the holder of such Debt of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part); provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term Guarantee used as a verb has a corresponding meaning. "Hazardous Materials" means any hazardous materials, hazardous wastes, hazardous constituents, hazardous or toxic substances or petroleum products (including crude oil or any derivative or fraction thereof), defined or regulated as such in or under any Environmental Laws. "Intellectual Property" has the meaning set forth in Section 4.20. "Investment" means any investment in any Person, whether by means of share purchase, partnership interest, capital contribution, loan, time deposit or otherwise. "Lien" means any lien, mechanic's lien, materialmen's lien, lease, easement, charge, encumbrance, mortgage, conditional sale agreement, title retention agreement, agreement to sell or convey, option, claim, title imperfection, encroachment or other survey defect, pledge, restriction, security interest or other adverse claim, whether arising by contract or under law or otherwise (including, without limitation, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction in respect of any of the foregoing). "Listing Applications" has the meaning set forth in Section 4.4. "Majority Holders" means (i) as of the Closing Date, Purchaser and (ii) at any time thereafter, the holders of more than 50% in aggregate principal amount of the 6% Convertible Debentures dated April 11, 2001 outstanding at such time. "Market Price" shall mean the Closing Bid Price of the Common Stock on the date immediately preceding the date on which a determination of Market Price is required to be made in accordance with any section of this Agreement or any other Transaction Agreement. "Material Plan" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $500,000. "Maturity Date" shall mean the date of maturity of the Convertible Debentures. "Maximum Number of Shares" shall mean that percentage that the Company may issue without shareholder approval under the applicable rules of the National Market or the applicable OTC Bulletin Board or equivalent entity, of the then issued and outstanding shares of Common Stock of the Company as of the applicable date of determination, or such greater number of shares as the stockholders of the Company may have previously approved. "NASD" has the meaning set forth in Section 7.10. "Nasdaq Market" means the Nasdaq Stock Market's National Market System. "National Market" means the Nasdaq Market, the Nasdaq Small Cap Market, the New York Stock Exchange, Inc. or the American Stock Exchange, Inc. "Net Cash Proceeds" means, with respect to any transaction, the total amount of cash proceeds received by the Company or any Subsidiary less (i) reasonable underwriters' fees, brokerage commissions, reasonable professional fees and other customary out-of-pocket expenses payable in connection with such transaction, and (ii) in the case of dispositions of assets, (A) actual transfer taxes (but not income taxes) payable with respect to such dispositions, and (B) the amount of Debt, if any, secured by a Lien on the asset or assets disposed of and required to be, and actually repaid by the Company or any Subsidiary in connection therewith, and any trade payables specifically relating to such asset or assets sold by the Company or any Subsidiary that are not assumed by the purchaser of such asset or assets. "Notice of Conversion" means the form to be delivered by a holder of a Convertible Debenture upon conversion of all or a portion thereof to the Company substantially in the form of Exhibit A to the form of Convertible Debenture. "Notice of Exercise" means the form to be delivered by a holder of a Warrant upon exercise of all or a portion thereof to the Company substantially in the form of Exhibit A to the Warrant. "Officer's Certificate" shall mean a certificate executed by the president, chief executive officer or chief financial officer of the Company in the form of Exhibit D attached hereto. "OTC Bulletin Board" means the over-the-counter bulletin board operated by the NASD. "Other Taxes" has the meaning set forth in Section 3.6(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permits" means all domestic and foreign licenses, franchises, grants, authorizations, permits, easements, variances, exemptions, consents, certificates, orders and approvals necessary to own, lease and operate the properties of, and to carry on the business of the Company and the Subsidiaries. "Permitted Financings" has the meaning set forth in Section 10.5. "Person" means an individual, corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock Company, government (or any agency or political subdivision thereof) or other entity of any kind. "Plan" means at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under the Code and either (i) is maintained, or contributed to, by any member of the ERISA group for employees of any member of the ERISA group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA group for employees of the Person which was at such time a member of the ERISA Group. "Purchase Price" means the purchase price for the Securities set forth in Section 2.2 hereof. "Purchaser" means the entity listed on the signature page hereto and its successors and assigns, including holders from time to time of the Convertible Debentures. "Recourse Financing" means Debt of the Company or any Subsidiary which, by its terms, does not bar the lender thereof from action against the Company or any Subsidiary, as borrower or guarantor, if the security value of the project or asset pledged in respect thereof falls below the amount required to repay such Debt. "Redemption Event" has the meaning set forth in Section 3.4. "Registrable Securities" has the meaning set forth in Section 10.4(a). "Registration Default" has the meaning set forth in Section 10.4(e). "Registration Maintenance Period" has the meaning set forth in Section 10.4(c). "Registration Statement" has the meaning set forth in Section 10.4(b). "Registration Rights Agreement" means the agreement between the Company and Purchaser dated the date hereof substantially in the form set forth in Exhibit B attached hereto. "Required Effectiveness Date" has the meaning set forth in Section 10.4(b). "Reserved Amount" has the meaning set forth in Section 7.10(a). "Restricted Payment" means, with respect to any Person, (i) any dividend or other distribution on any shares of capital stock of such Person (except dividends payable solely in shares of capital stock of the same or junior class of such Person and dividends from a wholly-owned direct or indirect Subsidiary of the Company to its parent corporation), (ii) any payment on account of the purchase, redemption, retirement or acquisition of (a) any shares of such Person's capital stock or (b) any option, warrant or other right to acquire shares of such Person's capital stock or (iii) any loan, or advance or capital contribution to any Person (a "Stockholder") owning any capital stock of such Person other than relocation, travel or like advances to officers and employees in the ordinary course of business, and other than reasonable compensation as determined by the Board of Directors. "Rights Offering" has the meaning set forth in Section 11.3. "Sale Event" has the meaning set forth in Section 3.4. "SEC Reports" has the meaning set forth in Section 7.1(a). "Securities" means the Convertible Debentures, the Warrants and, as applicable, the Conversion Shares. "Securities Act" means the Securities Act of 1933, as amended. "Security Agreement" has the meaning set forth in the recitals. "Share Reorganization" has the meaning set forth in Section 11.2. "Solvency Certificate" shall mean a certificate executed by the chief financial officer or treasurer of the Company as to the solvency of the Company, the adequacy of its capital and its ability to pay its debts, all after giving effect to the issuance and sale of the Convertible Debentures and the completion of the offering (including without limitation the payment of any fees or expenses in connection therewith), which such Solvency Certificate shall be in the form of Exhibit C attached hereto. "Special Distribution" has the meaning set forth in Section 11.4. "Subsidiary" means, with respect to any Person, any corporation or other entity of which (x) a majority of the capital stock or other ownership interests having ordinary voting power to elect a majority of the Board of Directors or other persons performing similar functions are at the time directly or indirectly owned by such Person or (y) the results of operations, the assets and the liabilities of which are consolidated with such Person under GAAP. "Subsidiary Corporate Documents" means the certificates of incorporation and bylaws of each Subsidiary. "Taxes" has the meaning set forth in Section 3.6. "Trading Day" shall mean any Business Day in which the OTC Bulletin Board, National Market or other automated quotation system or exchange on which the Common Stock is then traded is open for trading for at least four (4) hours. "Transaction Agreements" means this Agreement, the Convertible Debenture, the Warrants, the Registration Rights Agreement, the Security Agreement, and the other agreements contemplated by this Agreement. "Transaction Fee" has the meaning set forth in Section 13.4. "Transfer" means any disposition of Securities that would constitute a sale thereof under the Securities Act. "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all benefits under Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "Warrant" means the Common Stock Purchase Warrant substantially in the form set forth in Exhibit E hereto. ARTICLE 1.2 Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared, in accordance with generally accepted accounting principles as in effect from time to time, applied on a consistent basis (except for changes concurred in by the Company's independent public accountants) ("GAAP") and Regulation S-X promulgated under the Securities Act ("Regulation S-X"). All references to "dollars," "Dollars" or "$" are to United States dollars unless otherwise indicated. ARTICLE 2. PURCHASE AND SALE OF SECURITIES ARTICLE 2.1 Purchase and Sale of Convertible Debentures. (a) Subject to the terms and conditions set forth herein, the Company agrees to issue and sell to Purchaser, and Purchaser agrees to purchase from the Company, the Convertible Debenture. (b) Purchaser shall acquire the Convertible Debenture on the Closing Date in an aggregate principal amount of One Million Dollars ($1,000,000.00). (c) In connection with the Purchaser's agreement to purchase the Convertible Debentures specified in this Article II, the Company shall issue and deliver to the Purchaser on the Closing Date Warrants to purchase an aggregate of 100,000 shares of Common Stock. ARTICLE 2.2 Purchase Price. The purchase price (the "Purchase Price") for the Convertible Debenture and the Warrants on the Closing Date shall be $1,000,000.00 and shall be allocated as set forth in Schedule 2.2. ARTICLE 2.3 Closing and Mechanics of Payment. (a) The Purchase Price shall be paid on the Closing Date by wire transfer of immediately available funds. (b) The Convertible Debentures and Warrants issued on the Closing Date shall be dated the date thereof. ARTICLE 3. PAYMENT TERMS OF CONVERTIBLE DEBENTURES ARTICLE 3.1 Payment of Principal and Interest; Payment Mechanics. The Company will pay all amounts due on each Convertible Debenture by the method and at the address specified for such purpose by Purchaser in writing, without the presentation or surrender of any Convertible Debenture or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of this Convertible Debenture, the holder shall surrender the Convertible Debenture for cancellation, reasonably promptly after any such request, to the Company at its principal executive office. Prior to any sale or other disposition of any Convertible Debenture, the holder thereof will, at its election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender the Convertible Debenture to the Company in exchange for a new Convertible Debenture or Convertible Debentures. The Company will afford the benefits of this Section 3.1 to any direct or indirect transferee of the Convertible Debenture purchased under this Agreement and that has made the same agreement relating to this Convertible Debenture as Purchaser has in this Section 3.1; provided that such transferee is an "accredited investor" under Rule 501 of the Securities Act and that such transfer has been made in compliance with applicable securities laws. ARTICLE 3.2 Payment of Interest. Interest shall accrue on the outstanding principal amount of each Convertible Debenture as of the date of issuance and shall be payable as specified therein. ARTICLE 3.3 Voluntary Prepayment. For so long as no Event of Default shall have occurred or is continuing, the Company may, at its option, repay, in whole or in part, the Convertible Debentures, per the formula set forth in Section 3 of Exhibit A hereto, thereof following at least five (5) Business Days prior written notice to Purchaser (the expiration of such five (5) Business Day period being referred to as the "prepayment date"); provided, however, that if such date is not a Business Day, the prepayment date shall be the next Business Day thereafter. ARTICLE 3.4 Mandatory Prepayments. (a) Upon (i) the occurrence of a Change in Control of the Company, (ii) a transfer of all or substantially all of the assets of the Company to any Person in a single transaction or series of related transactions, or (iii) a consolidation, merger or amalgamation of the Company with or into another Person in which the Company is not the surviving entity (other than a merger which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of Common Stock) (each of items (i), (ii) and (iii) being referred to as a "Sale Event"), then, in each case, the Company shall, upon request of the Majority Holders, redeem the Convertible Debentures and Warrants, subject to the provisions of Section 5 of the Convertible Debentures and Section 13 of the Warrants, respectively. The redemption price payable upon any such redemption shall be the Redemption Price in Section 5 of the Convertible Debentures and Section 13 of the Warrants, respectively (referred to herein as the "Formula Price"). (b) At the option of Purchaser, upon the consummation of one or more Financings following the first anniversary of the Closing Date, the Company shall use 25% of the Net Cash Proceeds therefrom (unless such Net Cash Proceeds from each such Financing is less than $250,000) to redeem the Convertible Debentures. (c) Upon the issuance of the Maximum Number of Shares and the failure within 90 days of such issuance to obtain shareholder approval to issue additional shares of Common Stock (the "Redemption Event"), the Company shall redeem the outstanding balance of each Convertible Debenture and Warrant for the applicable Prepayment Price and the Warrant Formula Price, respectively. ARTICLE 3.5 Prepayment Procedures. (a) Any permitted prepayment or redemption of the Convertible Debentures and Warrants, as applicable pursuant to Sections 3.3 or 3.4 above shall be deemed to be effective and consummated (for purposes of determining the Prepayment Price, the Formula Price and the time at which Purchaser shall thereafter not be entitled to deliver a Notice of Conversion for the Convertible Debentures) as follows: (i) A prepayment pursuant to Section 3.3, the "prepayment date" specified therein; (ii) A redemption pursuant to Section 3.4(a), the date of consummation of the applicable Sale Event or the Registration Default; (iii) A redemption pursuant to Section 3.4(b), three (3) Business Days following the date of consummation of the applicable Financing (meaning closing and funding); and (iv) A redemption pursuant to Section 3.4(c), the date specified in each Convertible Debenture. (b) On the Maturity Date and on the effective date of a prepayment or redemption of the Convertible Debentures and Warrants as specified in Section 3.5(a) above, the Company shall deliver by wire transfer of funds the prepayment/redemption price to Purchaser of the Convertible Debentures and Warrants subject to redemption. Should Purchaser not receive payment of any amounts due on redemption of its Convertible Debentures and Warrants by reason of the Company's failure to make payment at the times prescribed above for any reason, the Company shall pay to the applicable holder on demand (x) interest on the sums not paid when due at an annual rate equal to 14%, until the applicable holder is paid in full and (y) all costs of collection, including, but not limited to, reasonable attorneys' fees and costs, whether or not suit or other formal proceedings are instituted. (c) The Company shall select the Convertible Debentures and Warrants to be redeemed in any redemption in which not all of the Convertible Debentures and Warrants are to be redeemed so that the ratio of the Convertible Debentures and Warrants of each holder selected for redemption to the total Convertible Debentures and Warrants owned by that holder shall be the same as the ratio of all such Convertible Debentures and Warrants selected for redemption bears to the total of all then outstanding Convertible Debentures and Warrants. Should any Convertible Debentures and Warrants required to be redeemed under the terms hereof not be redeemed solely by reason of limitations imposed by law, the applicable Convertible Debentures and Warrants shall be redeemed on the earliest possible dates thereafter to the maximum extent permitted by law. (d) Any Notice of Conversion delivered by Purchaser (including delivery via telecopy) to the Company prior to the (x) Maturity Date or (y) effective date of a voluntary prepayment pursuant to Section 3.3 or a mandatory repayment pursuant to Section 3.4 as specified in Section 3.5(a) above), shall be honored by the Company and the conversion of the Convertible Debentures shall be deemed effected on the Conversion Date. In addition, between the effective date of a voluntary prepayment pursuant to Section 3.3 or a mandatory repayment pursuant to Section 3.4 as specified in Section 3.5(a) above and the date the Company is required to deliver the redemption proceeds in full to Purchaser, Purchaser may deliver a Notice of Conversion to the Company. Such notice will be (x) of no force or effect if the Company timely pays the redemption proceeds to Purchaser when due or (y) honored on or as of the date of the Notice of Conversion if the Company fails to timely pay the redemption proceeds to Purchaser when due. ARTICLE 3.6 Payment of Additional Amounts. (a) Any and all payments by the Company hereunder or under the Convertible Debentures to Purchaser and each "qualified assignee" thereof shall be made free and clear of and without deduction or withholding for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto (all such taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes") unless such Taxes are required by law or the administration thereof to be deducted or withheld. If the Company shall be required by law or the administration thereof to deduct or withhold any Taxes from or in respect of any sum payable under the Convertible Debentures (i) the holders of the Convertible Debentures subject to such Taxes shall have the right, but not the obligation, for a period of thirty (30) days commencing upon the day it shall have received written notice from the Company that it is required to withhold Taxes to transfer all or any portion of the Convertible Debentures to a qualified assignee to the extent such transfer can be effected in accordance with the other provisions of this Agreement and applicable law; (ii) the Company shall make such deductions or withholdings; (iii) the sum payable shall be increased as may be necessary so that after making all required deductions or withholdings (including deductions or withholdings applicable to additional amounts paid under this Section 3.6) Purchaser receives an amount equal to the sum it would have received if no such deduction or withholding had been made; and (iv) the Company shall forthwith pay the full amount deducted or withheld to the relevant taxation or other authority in accordance with applicable law; provided, however the Company shall not be required to pay any taxes owed by Purchaser or any qualified assignee resulting from (x) the payment of interest on the Convertible Debentures by the Company or (y) any gain recognized from the transfer of the Convertible Debentures by the Purchaser or any qualified assignee. A "qualified assignee" of a Purchaser is a Person that is organized under the laws of (i) the United States or (ii) any jurisdiction other than the United States or any political subdivision thereof and that (y) represents and warrants to the Company that payments of the Company to such assignee under the laws in existence on the date of this Agreement would not be subject to any Taxes and (z) from time to time, as and when requested by the Company, executes and delivers to the Company and the Internal Revenue Service forms, and provides the Company with any information necessary to establish such assignee's continued exemption from Taxes under applicable law. (b) The Company shall forthwith pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies (all such taxes, charges and levies hereinafter referred to as "Other Taxes") which arise from any payment made under any of the Transaction Agreements or from the execution, delivery or registration of, or otherwise with respect to, this Agreement other than Taxes payable solely as a result of the transfer from Purchaser to a Person of any Security. (c) The Company shall indemnify Purchaser, or qualified assignee, for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 3.6) paid by Purchaser, or qualified assignee, and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Payment under this indemnification shall be made within 30 days from the date Purchaser or assignee makes written demand therefor. A certificate as to the amount of such Taxes or Other Taxes submitted to the Company by Purchaser or assignee shall be conclusive evidence of the amount due from the Company to such party. (d) Within 30 days after the date of any payment of Taxes, the Company will furnish to Purchaser the original or a certified copy of a receipt evidencing payment thereof. ARTICLE 4. REPRESENTATIONS AND WARRANTIES The Company represents and warrants to Purchaser, as of the Closing Date, the following: ARTICLE 4.1 Organization and Qualification. The Company and each Subsidiary is a corporation (or other legal entity) duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, with full power and authority to own, lease, use and operate its properties and to carry on its business as and where now owned, leased, used, operated and conducted. The Company is qualified to conduct business as a foreign corporation and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary, except where such failure would not have a Material Adverse Effect. A "Material Adverse Effect" means any material adverse effect on the operations, results of operations, properties, assets or condition (financial or otherwise) of the Company or the Company and its Subsidiaries, taken as a whole, or on the transactions contemplated hereby or by the agreements or instruments to be entered into in connection herewith. ARTICLE 4.2 Authorization and Execution. (a) The Company has all requisite corporate power and authority to enter into and perform each Transaction Agreement and to consummate the transactions contemplated hereby and thereby and to issue the Securities in accordance with the terms hereof and thereof. (b) The execution, delivery and performance by the Company of each Transaction Agreement and the issuance by the Company of the Securities have been duly and validly authorized and no further consent or authorization of the Company, its Board of Directors or its shareholders is required. (c) This Agreement has been duly executed and delivered by the Company. (d) This Agreement constitutes, and upon execution and delivery thereof by the Company, each of the Transaction Agreements will constitute, a valid and binding agreement of the Company, in each case enforceable against the Company in accordance with its respective terms subject to (i) applicable bankruptcy, insolvency or similar laws affecting the enforceability of creditor's rights generally and (ii) equitable principles of general applicability. ARTICLE 4.3 Capitalization . As of the date hereof, the authorized, issued and outstanding capital stock of the Company is as set forth on Schedule 4.3 hereto and except as set forth on Schedule 4.3 no other shares of capital stock of the Company will be outstanding as of the Closing Date. All of such outstanding shares of capital stock are, or upon issuance will be, duly authorized, validly issued, fully paid and nonassessable. No shares of capital stock of the Company are subject to preemptive rights or similar rights of the stockholders of the Company or any liens or encumbrances imposed through the actions or failure to act of the Company. Other than as set forth on Schedule 4.3 hereto, as of the date hereof, (i) there are no outstanding options, warrants, scrip, rights to subscribe for, puts, calls, rights of first refusal, agreements, understandings, claims or other commitments or rights of any character whatsoever relating to, or securities or rights convertible into or exchangeable for 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, and (ii) there are no agreements or arrangements under which the Company or any of its Subsidiaries are obligated to register the sale of any of its or their securities under the Securities Act (except pursuant to the Registration Rights Agreement) and (iii) there are no anti-dilution or price adjustment provisions contained in any security issued by the Company (or in any agreement providing rights to security holders) that will be triggered by the issuance of the Convertible Debentures or Conversion Shares. The Company has furnished to Purchaser true and correct copies of the Company's Corporate Documents, and the terms of all securities convertible into or exercisable for Common Stock and the material rights of the holders thereof in respect thereto. ARTICLE 4.4 Governmental Authorization. The execution and delivery by the Company of the Transaction Agreements does not and will not, the issuance and sale by the Company of the Securities does not and will not, and the consummation of the transactions contemplated hereby and by the other Transaction Agreements will not, require any action by or in respect of, or filing with, any governmental body, agency or governmental official except (a) such actions or filings that have been undertaken or made prior to the date hereof and that will be in full force and effect (or as to which all applicable waiting periods have expired) on and as of the date hereof or which are not required to be filed on or prior to the Closing Date, (b) such actions or filings that, if not obtained, would not result in a Material Adverse Effect, (c) listing applications ("Listing Applications") to be filed with the OTC Bulletin Board or the National Market relating to the Conversion Shares of Common Stock issuable upon conversion of the Convertible Debentures, (d) the filing of a "Form D" as described in Section 7.13 below, (e) the filing of one or more registration statements covering the Securities and such registration statement being declared effective and (f) compliance with applicable state securities laws provisions. ARTICLE 4.5 Issuance of Shares. Upon conversion in accordance with the terms of the Convertible Debentures and exercise of the Warrants, the Conversion Shares shall be duly and validly issued and outstanding, fully paid and nonassessable, free and clear of any Taxes, Liens and charges with respect to issuance and shall not be subject to preemptive rights or similar rights of any other stockholders of the Company. Assuming the representations and warranties of Purchaser herein are true and correct in all material respects, each of the Securities will have been issued in material compliance with all applicable U.S. federal and state securities laws. The Company understands and acknowledges that, in certain circumstances, the issuance of Conversion Shares could dilute the ownership interests of other stockholders of the Company. Subject to the provisions of this Agreement and the Transaction Agreements, the Company further acknowledges that its obligation to issue Conversion Shares upon conversion of the Convertible Debentures and exercise of the Warrants is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Company. ARTICLE 4.6 No Conflicts. The execution and delivery by the Company of the Transaction Agreements to which it is a party did not and will not, the issuance and sale by the Company of the Securities did not and will not and the consummation of the transactions contemplated hereby and by the other Transaction Agreements will not, contravene or constitute a default under or violation of (i) any provision of applicable law or regulation, (ii) the Company Corporate Documents, (iii) any agreement, judgment, injunction, order, decree or other instrument binding upon the Company or any Subsidiary or any of their respective assets, or result in the creation or imposition of any Lien on any asset of the Company or any Subsidiary. The Company and each Subsidiary is in compliance with and conforms to all statutes, laws, ordinances, rules, regulations, orders, restrictions and all other legal requirements of any domestic or foreign government or any instrumentality thereof having jurisdiction over the conduct of its businesses or the ownership of its properties, except where such failure would not have a Material Adverse Effect. ARTICLE 4.7 Financial Information. Since October 31, 2000 (the "Balance Sheet Date"), except as disclosed in Schedule 4.7, there has been (x) no material adverse change in the assets or liabilities, or in the business or condition, financial or otherwise, or in the results of operations or prospects, of the Company and its Subsidiaries, whether as a result of any legislative or regulatory change, revocation of any license or rights to do business, fire, explosion, accident, casualty, labor trouble, flood, drought, riot, storm, condemnation, act of God, public force or otherwise and (y) no material adverse change in the assets or liabilities, or in the business or condition, financial or otherwise, or in the results of operations or prospects, of the Company and its subsidiaries except in the ordinary course of business; and no fact or condition exists or is contemplated or threatened which might cause such a change in the future. The audited and unaudited consolidated balance sheets of the Company and its Subsidiaries for the periods ending October 31, 2000 and January 31, 2001, respectively, and the related consolidated statements of income, changes in stockholders' equity and changes in cash flows for the periods then ended, including the footnotes thereto, except as indicated therein, (i) complied in all material respects with applicable accounting requirements and (ii) have been prepared in accordance with GAAP consistently applied throughout the periods indicated, except that the unaudited financial statements do not contain notes and may be subject to normal audit adjustments and normal annual adjustments. Such financial statements fairly present the financial condition of the Company and its Subsidiaries at the dates indicated and the consolidated results of their operations and cash flows for the periods then ended and, except as indicated therein, reflect all claims against and all Debts and liabilities of the Company and its Subsidiaries, fixed or contingent. ARTICLE 4.8 Litigation. Except as set forth on Schedule 4.8, there is no action, suit or proceeding pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary, before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, condition (financial or otherwise), operations, performance, properties or prospects of the Company or which challenges the validity of any Transaction Agreements. ARTICLE 4.9 Compliance with ERISA and other Benefit Plans. (a) Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Code in respect of any Plan, (ii) failed to make any required contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which as resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. (b) The benefit plans not covered under clause (a) above (including profit sharing, deferred compensation, stock option, employee stock purchase, bonus, retirement, health or insurance plans, collectively the "Benefit Plans") relating to the employees of the Company are duly registered where required by, and are in good standing in all material respects under, all applicable laws. All required employer and employee contributions and premiums under the Benefit Plans to the date hereof have been made, the respective fund or funds established under the Benefit Plans are funded in accordance with applicable laws, and no past service funding liabilities exist thereunder. (c) No Benefit Plans have any unfunded liabilities, either on a "going concern" or "winding up" basis and determined in accordance with all applicable laws and actuarial practices and using actuarial assumptions and methods that are reasonable in the circumstances. No event has occurred and no condition exists with respect to any Benefit Plans that has resulted or could reasonably be expected to result in any pension plan having its registration revoked or wound up (in whole or in part) or refused for the purposes of any applicable laws or being placed under the administration of any relevant pension benefits regulatory authority or being required to pay any taxes or penalties (in any material amounts) under any applicable laws. ARTICLE 4.10 Environmental Matters. The costs and liabilities associated with Environmental Laws (including the cost of compliance therewith) are unlikely to have a material adverse effect on the business, condition (financial or otherwise), operations, performance, properties or prospects of the Company or any Subsidiary. Each of the Company and the Subsidiaries conducts its businesses in compliance in all material respects with all applicable Environmental Laws. ARTICLE 4.11 Taxes. All United States federal, state, county, municipality, local or foreign income tax returns and all other material tax returns (including foreign tax returns) which are required to be filed by or on behalf of the Company and each Subsidiary have been filed and all material taxes due pursuant to such returns or pursuant to any assessment received by the Company and each Subsidiary have been paid except those being disputed in good faith and for which adequate reserves have been established. The charges, accruals and reserves on the books of the Company and each Subsidiary in respect of taxes and other governmental charges have been established in accordance with GAAP and Regulation S-X. ARTICLE 4.12 Investments, Joint Ventures. Other than as set forth in Schedule 4.12, the Company has no Subsidiaries or other direct or indirect Investment in any Person, and the Company is not a party to any partnership, management, shareholders' or joint venture or similar agreement. ARTICLE 4.13 Not an Investment Company. Neither the Company nor any Subsidiary is an "Investment Company" within the meaning of Investment Company Act of 1940, as amended. ARTICLE 4.14 Full Disclosure. The information heretofore furnished by the Company to Purchaser for purposes of or in connection with this Agreement or any transaction contemplated hereby does not, and all such information hereafter furnished by the Company or any Subsidiary to Purchaser will not (in each case taken together and on the date as of which such information is furnished), contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein, in the light of the circumstances under which they are made, not misleading. ARTICLE 4.15 No Solicitation; No Integration with Other Offerings. No form of general solicitation or general advertising was used by the Company or, to the best of its actual knowledge, any other Person acting on behalf of the Company, in connection with the offer and sale of the Securities. Except as set forth on Schedule 4.15, neither the Company, nor, to its knowledge, any Person acting on behalf of the Company, has, either directly or indirectly, sold or offered for sale to any Person (other than Purchaser) any of the Securities or, within the six months prior to the date hereof, any other similar security of the Company except as contemplated by this Agreement, and the Company represents that neither itself nor any Person authorized to act on its behalf (except that the Company makes no representation as to Purchaser and their Affiliates) will sell or offer for sale any such security to, or solicit any offers to buy any such security from, or otherwise approach or negotiate in respect thereof with, any Person or Persons so as thereby to cause the issuance or sale of any of the Securities to be in violation of any of the provisions of Section 5 of the Securities Act. The issuance of the Securities to Purchaser will not be integrated with any other issuance of the Company's securities (past, current or future) which requires stockholder approval under the rules of the OTC Bulletin Board. ARTICLE 4.16 Permits. (a) Each of the Company and its Subsidiaries has all material Permits; (b) all such Permits are in full force and effect, and each of the Company and its Subsidiaries has fulfilled and performed all material obligations with respect to such Permits; (c) no event has occurred which allows, or after notice of lapse of time would allow, revocation or termination by the issuer thereof or which results in any other material impairment of the rights of the holder of any such Permit; and (d) the Company has no reason to believe that any governmental body or agency is considering limiting, suspending or revoking any such Permit. ARTICLE 4.17 Leases. Neither the Company nor any Subsidiary is a party to any capital lease obligation with a value greater than $250,000 or to any operating lease with an aggregate annual rental greater than $250,000 during the life of such lease. ARTICLE 4.18 Absence of Any Undisclosed Liabilities or Capital Calls. There are no liabilities of the Company or any Subsidiary of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, and there is no existing condition, situation or set of circumstances which would reasonably be expected to result in such a liability, other than (i) those liabilities provided for in the financial statements delivered pursuant to Section 4.7 and (ii) other undisclosed liabilities which, individually or in the aggregate, would not have a Material Adverse Effect. Public Utility Holding Company. Neither the Company nor any Subsidiary is, or will be upon issuance and sale of the Securities and the use of the proceeds described herein, subject to regulation under the Public Utility Holding Company Act of 1935, as amended, the Federal Power Act, the Interstate Commerce Act or to any federal or state statute or regulation limiting its ability to issue and perform its obligations under any Transaction Agreement. ARTICLE 4.20 Intellectual Property Rights. Each of the Company and its Subsidiaries owns, or is licensed under, and has the rights to use, all material patents, trademarks, trade names, copyrights, technology, know-how and processes (collectively, "Intellectual Property") used in, or necessary for the conduct of its business; no claims have been asserted by any Person to the use of any such Intellectual Property or challenging or questioning the validity or effectiveness of any license or agreement related thereto. To the best of Company's and its Subsidiaries' knowledge, there is no valid basis for any such claim and the use of such Intellectual Property by the Company and its Subsidiaries will not infringe upon the rights of any Person. ARTICLE 4.21 Insurance. The Company and its Subsidiaries maintain, with financially sound and reputable insurance companies, insurance in at least such amounts and against such risks such that any uninsured loss would not have a Material Adverse Effect. All insurance coverages of the Company and its Subsidiaries are in full force and effect and there are no past due premiums in respect of any such insurance. ARTICLE 4.22 Title to Properties. The Company and its Subsidiaries have good and marketable title to all their respective properties free and clear of all Liens. ARTICLE 4.23 Internal Accounting Controls. The Company and each of its Subsidiaries maintain a system of internal accounting controls sufficient, in the judgment of the Company's Board of Directors, to provide reasonable assurance that (i) transactions are executed in accordance with managements' general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. ARTICLE 4.24 Foreign Practices. Neither the Company nor any of its Subsidiaries nor, to the Company's knowledge, any employee or agent of the Company or any Subsidiary has made any payments of funds of the Company or Subsidiary, or received or retained any funds, in each case in violation of any law, rule or regulation. ARTICLE 4.25 Title to Certain Assets. The Company owns the assets designated as collateral and described on Exhibit A to the Security Agreement, free and clear of any lien or encumbrance. ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF PURCHASER ARTICLE 5.1 Purchaser. Purchaser hereby represents and warrants to the Company that: (a) Purchaser is an "accredited investor" within the meaning of Rule 501(a) under the Securities Act and the Securities to be acquired by it pursuant to this Agreement are being acquired for its own account and, as of the date hereof, not with a view toward, or for sale in connection with, any distribution thereof except in compliance with applicable United States federal and state securities law; (b) the execution, delivery and performance of this Agreement and the purchase of the Securities pursuant thereto are within Purchaser's corporate or partnership powers, as applicable, and have been duly and validly authorized by all requisite corporate or partnership action; and no further consent or authorization by the Purchaser, or its partners is required; (c) this Agreement has been duly executed and delivered by Purchaser; (d) the execution and delivery by Purchaser of the Transaction Agreements to which it is a party does not, and the consummation of the transactions contemplated hereby and thereby will not, contravene or constitute a default under or violation of (i) any provision of applicable law or regulation, or (ii) any agreement, judgment, injunction, order, decree or other instrument binding upon Purchaser; (e) Purchaser understands that the Securities have not been registered under the Securities Act and may not be transferred or sold except as specified in this Agreement or the remaining Transaction Agreements; (f) this Agreement constitutes a valid and binding agreement of Purchaser enforceable in accordance with its terms, subject to (i) applicable bankruptcy, insolvency or similar laws affecting the enforceability of creditors rights generally and (ii) equitable principles of general applicability; (g) Purchaser has such knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of its investment in the Securities and Purchaser is capable of bearing the economic risks of such investment; (h) Purchaser is knowledgeable, sophisticated and experienced in business and financial matters; Purchaser fully understands the limitations on transfer described herein; Purchaser has been afforded access to information about the Company and the financial condition, results of operations, property, management and prospects of the Company sufficient to enable it to evaluate its investment in the Securities; Purchaser has been afforded the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities and the merits and the risks of investing in the Securities; and Purchaser has been afforded the opportunity to obtain such additional information which the Company possesses or can acquire that is necessary to verify the accuracy and completeness of the information given to Purchaser concerning the Company. The foregoing does not in any way relieve the Company of its representations and other undertakings hereunder, and shall not limit Purchaser's ability to rely thereon; and (i) no part of the source of funds used by Purchaser to acquire the Securities constitutes assets allocated to any separate account maintained by Purchaser in which any employee benefit plan (or its related trust) has any interest. ARTICLE 6. CONDITIONS PRECEDENT TO PURCHASE OF SECURITIES ARTICLE 6.1 Conditions Precedent to Purchaser's Obligations to Purchase. The obligation of Purchaser hereunder to purchase the Convertible Debenture at the Closing is subject to the satisfaction, on or before the Closing Date, of each of the following conditions, provided that these conditions are for Purchaser's sole benefit and may be waived by Purchaser at any time in its sole discretion: (a) The Company shall have duly executed this Agreement, the Convertible Debenture, the Warrant, the Registration Rights Agreement, the Security Agreement and all appropriate financing statements, and the Escrow Agreement and delivered the same to Purchaser; (b) The Company shall have delivered to Purchaser duly executed certificates representing the Convertible Debentures and Warrants in accordance with Section 2.3 hereof; (c) The Company shall have delivered the Solvency Certificate; (d) The representations and warranties of the Company contained in each Transaction Agreement shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at such time (except for representations and warranties that speak as of a specified date) and the Company shall have performed, satisfied and complied with all covenants, agreements and conditions required by such Transaction Agreements to be performed, satisfied or complied with by it at or prior to the Closing Date. Purchaser shall have received an Officer's Certificate executed by the chief executive officer of the Company, dated as of the Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by Purchaser, including but not limited to certificates with respect to the Company Corporate Documents, resolutions relating to the transactions contemplated hereby and the incumbencies of certain officers and directors of the Company. The form of such certificate is attached hereto as Exhibit D; (e) Except as set forth in Section 4.4 of this Agreement, the Company shall have received all governmental, Board of Directors, shareholders and third party consents and approvals necessary or desirable in connection with the issuance and sale of the Securities and the consummation of the transactions contemplated by the Transaction Agreements; (f) All applicable waiting periods in respect to the issuance and sale of the Securities shall have expired without any action having been taken by any competent authority that could restrain, prevent or impose any materially adverse conditions thereon or that could seek or threaten any of the foregoing; (g) No law or regulation shall have been imposed or enacted that, in the judgment of Purchaser, could adversely affect the transactions set forth herein or in the other Transaction Agreements, and no law or regulation shall have been proposed that in the reasonable judgment of Purchaser could reasonably have any such effect; (h) Purchaser shall have received an opinion, dated the Closing Date, of counsel to the Company, in form and substance satisfactory to Purchaser; (i) All fees and expenses due and payable by the Company prior to the Closing Date shall have been paid; provided that, all fees and expenses due and payable on the Closing Date shall be subtracted from the payment of the Purchase Price; (j) The Company Corporate Documents and the Subsidiary Corporate Documents, if any, shall be in full force and effect and no term or condition thereof shall have been amended, waived or otherwise modified without the prior written consent of Purchaser; (k) There shall have occurred no material adverse change in the business, condition (financial or otherwise), operations, performance, properties or prospects of the Company or any Subsidiary since January 31, 2001; (l) There shall exist no action, suit, investigation, litigation or proceeding pending or threatened in any court or before any arbitrator or governmental instrumentality that challenges the validity of or purports to affect this Agreement or any other Transaction Agreement, or other transaction contemplated hereby or thereby or that could reasonably be expected to have a Material Adverse Effect, or any material adverse effect on the enforceability of the Transaction Agreements or the Securities or the rights of the holders of the Securities or Purchaser hereunder; (m) Purchaser shall have confirmed the receipt of the Convertible Debenture and the Warrants to be issued, duly executed by the Company and registered in the name of Purchaser; (n) There shall not have occurred any disruption or adverse change in the financial or capital markets generally, or in the market for the Common Stock (including but not limited to any suspension or delisting), which Purchaser reasonably deems material in connection with the purchase of the Securities; (o) Immediately before and on the Closing Date, no Default or Event of Default shall have occurred and be continuing; (p) Purchaser shall have received all other opinions, resolutions, certificates, instruments, agreements or other documents as they shall reasonably request; (q) Company shall have delivered to Purchaser the Use of Proceeds Schedule 7.8. ARTICLE 6.2 Conditions to the Company's Obligations. The obligations of the Company to issue and sell the Securities to Purchaser pursuant to this Agreement are subject to the satisfaction, at or prior to the Closing Date, of the following conditions: (a) The representations and warranties of Purchaser contained herein shall be true and correct in all material respects on the Closing Date and Purchaser shall have performed and complied in all material respects with all agreements required by this Agreement to be performed or complied with by Purchaser at or prior to the Closing Date; (b) The issue and sale of the Securities by the Company shall not be prohibited by any applicable law, court order or governmental regulation; (c) Receipt by the Company of duly executed counterparts of this Agreement, the Security Agreement, the Escrow Agreement, and the Registration Rights Agreement signed by Purchaser; (d) The Company shall have received payment of Purchase Price, less the Transaction Fee. ARTICLE 7. AFFIRMATIVE COVENANTS The Company hereby agrees that, from and after the date hereof for so long as any Convertible Debentures remain outstanding and for the benefit of Purchaser: ARTICLE 7.1 Information. The Company will deliver to each holder of the Convertible Debentures: (a) promptly upon the filing thereof, copies of (i) all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent), and (ii) all reports of Forms 10-K, 10-Q and 8-K (or other equivalents) which the Company or any Subsidiary has filed with the Commission (collectively, "SEC Reports"); (b) simultaneously with the delivery of each item referred to in clause (a) above, a certificate from the chief financial officer of the Company certifying the accuracy of the financial statements contained in the Company's reports on Forms 10-K and 10-Q (or other equivalents) and stating that no Default or Event of Default has occurred and is continuing, or, if as of the date of such delivery a Default shall have occurred and be continuing, a certificate from the Company setting forth the details of such Default or Event of Default and the action which the Company is taking or proposes to take with respect thereto; (c) within two (2) days after any officer of the Company obtains knowledge of a Default or Event of Default, or that any Person has given any notice or taken any action with respect to a claimed Default hereunder, a certificate of the chief financial officer of the Company setting forth the details thereof and the action which the Company is taking or proposed to take with respect thereto; (d) promptly upon the mailing thereof to the shareholders of the Company generally, copies of all financial statements, reports and proxy statements so mailed and any other document generally distributed to shareholders; (e) at least two (2) Business Days prior to the consummation of any Financing or other event requiring a repayment of the Convertible Debentures under Section 3.4, notice thereof together with a summary of all material terms thereof and copies of all documents and instruments associated therewith; (f) notice promptly upon the occurrence of any event by which the Reserved Amount becomes less than the sum of (i) 1.5 times the maximum number of Conversion Shares issuable pursuant to the Transaction Agreements; and (g) promptly following the commencement thereof, notice and a description in reasonable detail of any litigation or proceeding to which the Company or any Subsidiary is a party in which the amount involved is $250,000 or more and not covered by insurance or in which injunctive or similar relief is sought. ARTICLE 7.2 Payment of Obligations. The Company will, and will cause each Subsidiary to, pay and discharge, at or before maturity, all their respective material obligations, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings and will maintain, in accordance with GAAP, appropriate reserves for the accrual of any of the same. ARTICLE 7.3 Maintenance of Property; Insurance. The Company will, and will cause each Subsidiary to, keep all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. In addition, the Company and each Subsidiary will maintain insurance in at least such amounts and against such risks as it has insured against as of the Closing Date. ARTICLE 7.4 Maintenance of Existence. The Company will, and will cause each Subsidiary to, continue to engage in business of the same general type as now conducted by the Company and such Subsidiaries, and will preserve, renew and keep in full force and effect its respective corporate existence and their respective material rights, privileges and franchises necessary or desirable in the normal conduct of business. ARTICLE 7.5 Compliance with Laws. The Company will, and will cause each Subsidiary to, comply, in all material respects, with all federal, state, municipal, local or foreign applicable laws, ordinances, rules, regulations, municipal by-laws, codes and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder) except (i) where compliance therewith is contested in good faith by appropriate proceedings or (ii) where non- compliance therewith could not reasonably be expected, in the aggregate, to have a material adverse effect on the business, condition (financial or otherwise), operations, performance, properties or prospects of the Company or such Subsidiary. ARTICLE 7.6 Inspection of Property, Books and Records. The Company will, and will cause each Subsidiary to, keep proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to their respective businesses and activities; and will permit, during normal business hours, Purchaser' Representative or an affiliate thereof, as representatives of Purchaser, and representatives of the Small Business Administration to visit and inspect any of their respective properties, upon reasonable prior notice, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective executive officers and independent public accountants (and by this provision the Company authorizes its independent public accountants to disclose and discuss with Purchaser the affairs, finances and accounts of the Company and its Subsidiaries in the presence of a representative of the Company; provided, however, that such discussions will not result in any unreasonable expense to the Company, without Company consent), all at such reasonable times. ARTICLE 7.7 Investment Company Act. The Company will not be or become an open-end investment trust, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act of 1940, as amended. ARTICLE 7.8 Use of Proceeds. The proceeds from the issuance and sale of the Convertible Debentures by the Company shall be used in accordance with Schedule 7.8 attached hereto. None of the proceeds from the issuance and sale of the Convertible Debentures by the Company pursuant to this Agreement will be used directly or indirectly for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any "margin stock" within the meaning of Regulation G of the Board of Governors of the Federal Reserve System. ARTICLE 7.9 Compliance with Terms and Conditions of Material Contracts. The Company will, and will cause each Subsidiary to, comply, in all respects, with all terms and conditions of all material contracts to which it is subject. ARTICLE 7.10 Reserved Shares and Listings. (a) The Company shall at all times have authorized, and reserved for the purpose of issuance, a sufficient number of shares of Common Stock to provide for the full conversion of the outstanding Convertible Debentures and exercise of the Warrants and issuance of the Conversion Shares (based on the conversion price of the Convertible Debentures in effect from time to time and the exercise price of the Warrants, respectively) (the "Reserved Amount"). The Company shall not reduce the Reserved Amount without the prior written consent of Purchaser. With respect to all Securities which contain an indeterminate number of shares of Common Stock issuable in connection therewith (such as the Convertible Debentures), the Company shall include in the Reserve Amount, no less than two (2) times the number of shares that is then actually issuable upon conversion or exercise of such Securities. If at any time the number of shares of Common Stock authorized and reserved for issuance is below the number of Conversion Shares issued or issuable upon conversion of the Convertible Debentures and exercise of the Warrants, the Company will promptly take all corporate action necessary to authorize and reserve a sufficient number of shares, including, without limitation, either (x) calling a special meeting of shareholders to authorize additional shares, in the case of an insufficient number of authorized shares or (y) in lieu thereof, consummating the immediate repurchase of the Convertible Debentures and the Warrants contemplated in Section 3.4(c) hereof. (b) The Company shall promptly file the Listing Applications and secure the listing of 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 all Conversion Shares from time to time issuable upon conversion or exercise of the Convertible Debentures and Warrants, respectively. The Company will maintain the listing and trading of its Common Stock on the OTC Bulletin Board. The Company will use its commercially reasonable best efforts to obtain as soon as practicable and maintain the listing and trading of its Common Stock on a National Market. The Company will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the National Association of Securities Dealers, Inc. (the "NASD") and such exchanges, as applicable. The Company shall promptly provide to Purchaser copies of any notices it receives regarding the continued eligibility of the Common Stock for listing on the OTC Bulletin Board or any National Market. ARTICLE 7.11 Transfer Agent Instructions. Upon receipt of a Notice of Conversion or Notice of Exercise, as applicable, the Company shall immediately direct the Company's transfer agent to issue certificates, registered in the name of Purchaser or its nominee, for the Conversion Shares, in such amounts as specified from time to time by Purchaser to the Company upon proper conversion of the Convertible Debentures or exercise of the Warrants. Upon conversion of any Convertible Debentures in accordance with their terms and/or exercise of any Warrants in accordance with their terms, the Company will, and will use its best lawful efforts to cause its transfer agent to, issue one or more certificates representing shares of Common Stock in such name or names and in such denominations specified by a Purchaser in a Notice of Conversion or Notice of Exercise, as the case may be. As long as the Registration Statement contemplated by the Registration Rights Agreement shall remain effective, the shares of Common Stock issuable upon conversion of any Convertible Debentures or exercise of the Warrants shall be issued to any transferee of such shares from Purchaser without any restrictive legend upon appropriate evidence of transfer in compliance with the Securities Act and the rules and regulations of the Commission; provided that for so long as the Registration Statement is effective, no opinion of counsel will be required to effect any such transfer. The Company further warrants and agrees that no instructions other than these instructions have been or will be given to its transfer agent. Nothing in this Section 7.11 shall affect in any way a Purchaser's obligation to comply with all securities laws applicable to Purchaser upon resale of such shares of Common Stock, including any prospectus delivery requirements. ARTICLE 7.12 Maintenance of Reporting Status; Supplemental Information. So long as any of the Securities are outstanding, the Company shall timely file all reports required to be filed with the Commission pursuant to the Exchange Act. The Company shall not terminate its status as an issuer required to file reports under the Exchange Act, even if the Exchange Act or the rules and regulations thereunder would permit such termination. If at anytime the Company is not subject to the requirements of Section 13 or 15(d) of the Exchange Act, the Company will promptly furnish at its expense, upon request, for the benefit of the holders from time to time of Securities, and prospective purchasers of Securities, information satisfying the information requirements of Rule 144 under the Securities Act. ARTICLE 7.13 Form D; Blue Sky Laws. The Company agrees to file a "Form D" with respect to the Securities as required under Regulation D of the Securities Act and to provide a copy thereof to Purchaser promptly after such filing. The Company shall, on or before the Closing Date, take such action as the Company shall reasonably determine is necessary to qualify the Securities for sale to Purchaser at the Closing pursuant to this Agreement under applicable securities or "blue sky" laws of the states of the United States (or to obtain an exemption from such qualification), and shall provide evidence of any such action so taken to Purchaser on or prior to the Closing Date. ARTICLE 8. NEGATIVE COVENANTS The Company hereby agrees that after the date hereof for so long as any Convertible Debentures remain outstanding and for the benefit of Purchaser: ARTICLE 8.1 Limitations on Debt or Other Liabilities. Neither the Company nor any Subsidiary will create, incur, assume or suffer to exist (at any time after the Closing Date, after giving effect to the application of the proceeds of the issuance of the Securities), without the prior written consent of Purchaser, any Debt except (x) Debt incurred in a Permitted Financing, (y) Debt incurred in connection with equipment leases to which the Company or its Subsidiaries are a party incurred in the ordinary course of business; and (z) Debt incurred in connection with trade accounts payable, imbalances and refunds arising in the ordinary course of business. ARTICLE 8.2 Transactions with Affiliates. The Company and each Subsidiary will not, directly or indirectly, pay any funds to or for the account of, make any investment (whether by acquisition or stock or indebtedness, by loan, advance, transfer of property, guarantee or other agreement to pay, purchase or service, directly or indirectly, and Debt, or otherwise) in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, to, or participate in, or effect any transaction in connection with any joint enterprise or other joint arrangement with, any Affiliate, except, (1) pursuant to those agreements specifically identified on Schedule 8.2 attached hereto (with a copy of such agreements annexed to such Schedule 8.2) and (2) on terms to the Company or such Subsidiary no less favorable than terms that could be obtained by the Company or such Subsidiary from a Person that is not an Affiliate of the Company upon negotiation at arms' length, as determined in good faith by the Board of Directors of the Company; provided that no determination of the Board of Directors shall be required with respect to any such transactions entered into in the ordinary course of business. ARTICLE 8.3 Merger or Consolidation. The Company will not, in a single transaction or a series of related transactions (i) consolidate with or merge with or into any other Person, or (ii) permit any other Person to consolidate with or merge into it, unless the Company shall be the survivor of such merger or consolidation and (x) immediately before and immediately after given effect to such transaction (including any indebtedness incurred or anticipated to be incurred in connection with the transaction), no Default or Event of Default shall have occurred and be continuing; and (y) the Company has delivered to Purchaser an Officer's Certificate stating that such consolidation, merger or transfer complies with this Agreement, and that all conditions precedent in this Agreement relating to such transaction have been satisfied. ARTICLE 8.4 Limitation on Asset Sales. Neither the Company nor any Subsidiary will consummate an Asset Sale of material assets of the Company or any Subsidiary without the prior written consent of Purchaser, which consent shall not be unreasonably withheld. As used herein, "Asset Sale" means any sale, lease, transfer or other disposition (or series of related sales, leases, transfers or dispositions) or sales of capital stock of a Subsidiary (other than directors' qualifying shares), property or other assets (each referred to for the purpose of this definition as a "disposition"), including any disposition by means of a merger, consolidation or similar transaction other than a disposition of property or assets at fair market value in the ordinary course of business. ARTICLE 8.5 Restrictions on Certain Amendments. Neither the Company nor any Subsidiary will waive any provision of, amend, or suffer to be amended, any provision of such entity's existing Debt, any material contract or agreement previously or hereafter filed by the Company with the Commission as part of its SEC Reports, any Company Corporate Document or Subsidiary Corporate Document if such amendment, in the Company's reasonable judgment, would materially adversely affect Purchaser or the holders of the Securities without the prior written consent of Purchaser. ARTICLE 8.6 Restrictions on Issuances of Securities. (a) From the Closing Date and continuing until 120 days following the date on which the Registration Statement becomes effective, the Company agrees that it will not, without the prior written consent of Purchaser, issue any of its equity securities (or securities convertible into or exchangeable or exercisable for equity securities (the "Derivative Securities")) on terms that allow a holder thereof to acquire such equity securities (or Derivative Securities) at a discount to the Market Price of the Common Stock at the time of issuance or, in the case of Derivative Securities, at a conversion price based on any formula (other than standard anti-dilution provisions) based on the Market Price on a date later than the date of issuance which is below the Market Price on the date of issuance (each such event, a "Discounted Equity Offering") other than (i) borrowings under conventional credit facilities existing as of the date hereof, (ii) stock issued or credit facilities to be established in connection with acquisitions, (iii) equity securities or Derivative Securities in connection with employee and director stock option and stock purchase plans and (iv) securities issued under the Convertible Debenture or Warrants. In addition, the Company shall not issue any equity securities in connection with a strategic alliance entered into by the Company unless such securities are the subject of a one year statutory or contractual hold period or, if not subject to such a hold period, unless the Purchaser has fully converted all outstanding Convertible Debentures and exercised all Warrants. As used herein, "discount" shall include, but not be limited to, (i) any warrant, right or other security granted or offered in connection with such issuance which, on the applicable date of grant, is offered with an exercise or conversion price, as the case may be, at less than the then current Market Price of the Common Stock or, if such security has an exercise or conversion price based on any formula (other than standard anti-dilution provisions) based on the Market Price on a date later than the date of issuance, then at a price below the Market Price on such date of exercise or conversion, as the case may be, or (ii) any commissions, fees or other allowances paid in connection with such issuances (other than customary underwriter or placement agent commissions, fees or allowances). For the purposes of determining the Market Price at which Common Stock is acquired under this Section, normal underwriting commissions and placement fees (including underwriters' warrants) shall be excluded. Notwithstanding the foregoing, the Company may enter into the following types of transactions (collectively referred to as "Permitted Financings"): (1) "permanent financing" transactions, which would include any form of debt or equity financing (other than an underwritten offering), which is followed by a reduction of the said financing commitment to zero and payment of all related fees and expenses; (2) "project financing" which provide for the issuance of recourse debt instruments in connection with the operation of the Company's business as presently conducted or as proposed to be conducted; (3) an underwritten offering of Common Stock, provided that such offering provides for the registration of the Conversion Shares if the Registration Statement has not been declared effective; and (4) other financing transactions specifically consented to in writing by the Purchaser. The 120-day restrictive period set forth in this paragraph (a) of this Section 8.6 shall be increased by one day for each day a Registration Default has occurred and not been cured by the Company. (b) Until such time as all of the Convertible Debentures have been either redeemed or converted into Conversion Shares in full, the Company agrees it will not issue any of its equity securities (or Derivative Securities), unless any shares of Common Stock issued or issuable in connection therewith are "restricted securities." As used herein "restricted securities" shall mean securities which may not be sold prior to twelve (12) months following the date of issuance of such securities by virtue of contractual restrictions imposed by the Company or otherwise. (c) Notwithstanding the foregoing, the restrictions contained in this Section 8.6 shall not apply to the issuance by the Company of (or the agreement to issue) Common Stock or securities convertible into Common Stock in connection with (i) the acquisition (including by merger) of a business or of assets otherwise permitted under this Agreement, or (ii) Company or Subsidiary stock option or other compensatory or employee benefit plans. ARTICLE 8.7 Limitation on Stock Repurchases. Except as otherwise set forth in the Convertible Debentures and the Warrants, the Company shall not, without the written consent of the Majority Holders, redeem, repurchase or otherwise acquire (whether for cash or in exchange for property or other securities or otherwise) any shares of capital stock of the Company or any warrants, rights or options to purchase or acquire any such shares. ARTICLE 9. RESTRICTIVE LEGENDS ARTICLE 9.1 Restrictions on Transfer. From and after their respective dates of issuance, none of the Securities shall be transferable except upon the conditions specified in this Article IX, which conditions are intended to ensure compliance with the provisions of the Securities Act in respect of the Transfer of any of such Securities or any interest therein. Purchaser will use its best efforts to cause any proposed transferee of any Securities held by it to agree to take and hold such Securities subject to the provisions and upon the conditions specified in this Article IX. ARTICLE 9.2 Legends. The Convertible Debentures and Warrants shall bear restrictive legends in accordance with applicable securities laws. The Conversion Shares, upon resale by the Purchaser pursuant to the Registration Statement, shall be freely tradeable and unrestricted. ARTICLE 9.3 Notice of Proposed Transfers. Prior to any proposed Transfer of the Securities (other than a Transfer (i) registered or exempt from registration under the Securities Act, (ii) to an affiliate of a Purchaser which is an "accredited investor" within the meaning of Rule 501(a) under the Securities Act, provided that any such transferee shall agree to be bound by the terms of this Agreement and the Registration Rights Agreement, or (iii) to be made in reliance on Rule 144 under the Securities Act), the holder thereof shall give written notice to the Company of such holder's intention to effect such Transfer, setting forth the manner and circumstances of the proposed Transfer, which shall be accompanied by (a) an opinion of counsel reasonably acceptable to the Company, confirming that such transfer does not give rise to a violation of the Securities Act, (B) representation letters in form and substance reasonably satisfactory to the Company to ensure compliance with the provisions of the Securities Act and (C) letters in form and substance reasonably satisfactory to the Company from each such transferee stating such transferee's agreement to be bound by the terms of this Agreement and the Registration Rights Agreement. Such proposed Transfer may be effected only if the Company shall have received such notice of transfer, opinion of counsel, representation letters and other letters referred to in the immediately preceding sentence, whereupon the holder of such Securities shall be entitled to Transfer such Securities in accordance with the terms of the notice delivered by the holder to the Company. ARTICLE 10. ADDITIONAL AGREEMENTS AMONG THE PARTIES ARTICLE 10.1 Liquidated Damages. (a) The Company shall cause its transfer agent to, issue and deliver shares of Common Stock consistent with Section 7.11 hereof within three (3) New York Stock Exchange Trading Days of delivery of a Notice of Conversion or Notice of Exercise, as applicable (the "Deadline") to Purchaser (or any party receiving Securities by transfer from Purchaser) at the address of Purchaser set forth in the Notice of Conversion or Notice of Exercise, as the case may be. The Company understands that a delay in the issuance of such certificates after the Deadline could result in economic loss to Purchaser. (b) Without in any way limiting Purchaser's right to pursue other remedies, including actual damages and/or equitable relief, the Company agrees that if delivery of the Conversion Shares is more than one (1) Business Day after the Deadline (other than a failure due to the circumstances described in Section 4.3 of the Convertible Debentures, which failure shall be governed by such Section) the Company shall pay to Purchaser, as liquidated damages and not as a penalty, $500 for each $100,000 of Convertible Debentures then outstanding per day in cash, for each of the first ten (10) days beyond the Deadline, and $1,000 for each $100,000 of Convertible Debentures then outstanding per day in cash for each day thereafter that the Company fails to deliver such Common Stock. Such cash amount shall be paid to Purchaser upon demand, or at the option of Purchaser (by written notice to the Company by the first day of the week following the week in which it has accrued), shall be added to the principal amount of the Convertible Debenture (if then outstanding) payable to Purchaser, in which event interest shall accrue thereon in accordance with the terms of the Convertible Debentures and such additional principal amount shall be convertible into Common Stock in accordance with the terms of the Convertible Debentures. ARTICLE 10.2 Conversion Notice. The Company agrees that, in addition to any other remedies which may be available to Purchaser, including, but not limited to, the remedies available under Section 10.1, in the event the Company fails for any reason (other than as a result of actions taken by a Purchaser in breach of this Agreement) to effect delivery to a Purchaser of certificates with or without restrictive legends as contemplated by Article IX representing the shares of Common Stock on or prior to the Deadline after conversion of any Convertible Debentures or exercise of the Warrants, Purchaser will be entitled, if prior to the delivery of such certificates, to revoke the Notice of Conversion or Notice of Exercise, as applicable, by delivering a notice to such effect to the Company whereupon the Company and Purchaser shall each be restored to their respective positions immediately prior to delivery of such Notice of Conversion or Notice of Exercise, as the case may be. ARTICLE 10.3 Conversion Limit. Notwithstanding the conversion rights under the Convertible Debentures, unless Purchaser delivers a waiver in accordance with the immediately following sentence, in no event shall Purchaser be entitled to convert any portion of the Convertible Debentures, in excess of that portion of the Convertible Debentures, as applicable, of which the sum of (i) the number of shares of Common Stock beneficially owned by Purchaser and its Affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Convertible Debenture or other Derivative Securities convertible into or exchangeable for shares of Common Stock which contain a limitation similar to that set forth in this Section 10.3), and (ii) the number of shares of Common Stock issuable upon the conversion of the portion of the Convertible Debenture with respect to which this determination is being made, would result in beneficial ownership by Purchaser and its Affiliates of more than 4.99% of the outstanding shares of Common Stock. For purposes of Section 10.3(i) beneficial ownership shall be determined in accordance with Rule 13d-3 of the Exchange Act and Regulations 13 D-G thereunder, except as otherwise provided in this Section 10.3. The foregoing limitation shall not apply and shall be of no further force or effect (i) immediately preceding and upon the occurrence of any voluntary or mandatory redemption or repayment transaction described herein or in the Convertible Debentures, (ii) immediately preceding and upon any Sale Event, (iii) on the Maturity Date or (iv) following the occurrence of any Event of Default which is not cured for a period of ten (10) calendar days. ARTICLE 10.4 Registration Rights. (a) The Company shall grant Purchaser registration rights covering the Conversion Shares (the "Registrable Securities") on the terms set forth in the Registration Rights Agreement and herein. (b) The Company shall prepare and file within sixty (60) days following the Closing Date (the "Filing Date") a registration statement or amendment thereto (the "Registration Statement") covering the resale of the Registrable Securities. The Company shall use its best efforts to cause the Registration Statement to be declared effective by the Commission and the necessary Listing Applications to be filed on the earlier of (i) 180 days of the Closing Date, (ii) ten days following the receipt of a "No Review" Letter from the Commission or (iii) the first day following the day the Commission determines the Registration Statement eligible to be declared effective (the "Required Effectiveness Date"). The Company shall pay all expenses of registration (other than underwriting fees and discounts, if any, in respect of Registrable Securities offered and sold under each registration statement by Purchaser). (c) If the Registration Statement is not filed by the Filing Date, the Company shall pay to Purchaser, as liquidated damages and not as a penalty, an amount equal to two percent (2%) of the principal amount of Convertible Debentures outstanding for each 30-day period (prorated) until the Registration Statement is filed with the Commission. If the Registration Statement is not declared effective by the Commission by the Required Effectiveness Date, the Formula Conversion Price (as defined in the Convertible Debenture) shall be amended so that the percentage used in the denominator of the Formula Conversion Price shall be reduced by ten percent (10%) for each 30-day period the Registration Statement is not declared effective by the Commission through the 360th day following the Closing Date. (By way of example, if the Registration Statement is not declared effective by the Commission on the 240th day following the Closing Date, the Formula Conversion Price for the Convertible Debenture would be the formula F/P, where: F = Principal amount of the Convertible Debenture being converted, together with the accrued and unpaid interest through the date of conversion, and P = 60% of the average of the 5 lowest volume weighted average sales prices, as reported by Bloomberg LP, during the 20 Trading Days immediately preceding the date of the related notice of conversion.) In the event the Company fails to obtain a valid registration statement by the 360th day following the Closing Date, the Purchaser may require the Company to redeem the Convertible Debentures and the Warrants as set forth in Section 5 of the Convertible Debentures and Section 13 of the Warrants, respectively. Additionally, the Company will grant to Purchaser first priority piggyback registration rights in the event the Company proposes to effect a registered offering of Common Stock or warrants or both prior to the filing of the Registration Statement referenced above. (d) Any such liquidated damages shall be paid in cash by the Company to Purchaser by wire transfer in immediately available funds on the last day of each calendar week following the event requiring its payment. (e) If, following the declaration of effectiveness of the Registration Statement the Registration Statement (or any prospectus or supplemental prospectus contained therein) shall cease to be effective for any reason (including but not limited to the occurrence of any event that results in any prospectus or supplemental prospectus containing an untrue statement of a material fact or omitting a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading), the Company fails to file required amendments to the Registration Statement in order to allow the Purchaser to exercise its rights to receive unrestricted, unlegended, freely tradeable shares of Common Stock, or if for any reason there are insufficient shares of such shares of Common Stock registered under the then current Registration Statement to effect full conversion of the Convertible Debentures or exercise of the Warrants (each a "Registration Default"), the Company shall immediately take all necessary steps to cause the Registration Statement to be amended or supplemented so as to cure the Registration Default. Failure to cure a Registration Default within ten (10) Business Days shall result in the Company paying to Purchaser liquidated damages at the rate of one percent (1%) of the outstanding principal amount of Convertible Debentures for each 30-day period (prorated) the Registration Default remains uncured. (f) In the event that there is an insufficient number of authorized, issuable, unlegended and freely tradeable shares of Common Stock registered under the Registration Statement filed by the Company to fully convert the Convertible Debentures and exercise all Warrants held by Purchaser and sell such shares issued thereon, then the Company shall immediately file an amendment to the then current registration statement to register a sufficient number of such shares to convert said Convertible Debentures and Warrants. The failure of the Company to register a sufficient number of such shares to fully convert said Convertible Debentures and exercise such Warrants shall be a Registration Default under Section 10.4(e) above from the date of the Notice of Conversion to the date of the earlier of (i) the redemption of the outstanding balance of the Convertible Debentures and exercise of all such Warrants or (ii) full conversion of the Convertible Debentures and exercise of all such Warrants ARTICLE 11. ADJUSTMENT OF FIXED PRICE ARTICLE 11.1 Reorganization. The Conversion Price and the exercise price of the Warrants (collectively, the "Fixed Prices") shall be adjusted, as applicable, as hereafter provided. ARTICLE 11.2 Share Reorganization. If and whenever the Company shall: (i) subdivide the outstanding shares of Common Stock into a greater number of shares; (ii) consolidate the outstanding shares of Common Stock into a smaller number of shares; (iii) issue Common Stock or securities convertible into or exchangeable for shares of Common Stock as a stock dividend to all or substantially all the holders of Common Stock; or (iv) make a distribution on the outstanding Common Stock to all or substantially all the holders of Common Stock payable in Common Stock or securities convertible into or exchangeable for Common Stock; any of such events being herein called a "Share Reorganization," then in each such case the applicable Fixed Price shall be adjusted, effective immediately after the record date at which the holders of Common Stock are determined for the purposes of the Share Reorganization or, if no record date is fixed, the effective date of the Share Reorganization, by multiplying the applicable Fixed Price in effect on such record or effective date, as the case may be, by a fraction of which: (i) the numerator shall be the number of shares of Common Stock outstanding on such record or effective date (without giving effect to the transaction); and (II) the denominator shall be the number of shares of Common Stock outstanding after giving effect to such Share Reorganization, including, in the case of a distribution of securities convertible into or exchangeable for shares of Common Stock, the number of shares of Common Stock that would have been outstanding if such securities had been converted into or exchanged for Common Stock on such record or effective date. ARTICLE 11.3 Rights Offering. If and whenever the Company shall issue to all or substantially all the holders of Common Stock, rights, options or warrants under which such holders are entitled, during a period expiring not more than 45 days after the record date of such issue, to subscribe for or purchase Common Stock (or Derivative Securities), at a price per share (or, in the case of securities convertible into or exchangeable for Common Stock, at an exchange or conversion price per share at the date of issue of such securities) of less than 95% of the Market Price of the Common Stock as of the record date (any such event being herein called a "Rights Offering"), then in each such case the applicable Fixed Price shall be adjusted, effective immediately after the record date at which holders of Common Stock are determined for the purposes of the Rights Offering, by multiplying the applicable Fixed Price in effect on such record date by a fraction of which: (i) the numerator shall be the sum of: (I) the number of shares of Common Stock outstanding on such record date; and (II) a number obtained by dividing: (A) either, (x) the product of the total number of shares of Common Stock so offered for subscription or purchase and the price at which such shares are so offered, or (y) the product of the maximum number of shares of Common Stock into or for which the convertible or exchangeable securities so offered for subscription or purchase may be converted or exchanged and the conversion or exchange price of such securities, or, as the case may be, by (B) the Market Price of the Common Stock as of the record date; and (ii) the denominator shall be the sum of: (I) the number of shares of Common Stock outstanding on such record date; and (II) the number of shares of Common Stock so offered for subscription or purchase (or, in the case of Derivative Securities, the maximum number of shares of Common Stock for or into which the securities so offered for subscription or purchase may be converted or exchanged). To the extent that such rights, options or warrants are not exercised prior to the expiry time thereof, the applicable Fixed Price shall be readjusted effective immediately after such expiry time to the applicable Fixed Price which would then have been in effect upon the number of shares of Common Stock (or Derivative Securities) actually delivered upon the exercise of such rights, options or warrants. ARTICLE 11.4 Special Distribution. If and whenever the Company shall issue or distribute to all or substantially all the holders of Common Stock: (i) shares of the Company of any class, other than Common Stock; (ii) rights, options or warrants; or (iii) any other assets (excluding cash dividends and equivalent dividends in shares paid in lieu of cash dividends in the ordinary course); and if such issuance or distribution does not constitute a Share Reorganization or a Rights Offering (any such event being herein called a "Special Distribution"), then in each such case the applicable Fixed Price shall be adjusted, effective immediately after the record date at which the holders of Common Stock are determined for purposes of the Special Distribution, by multiplying the applicable Fixed Price in effect on such record date by a fraction of which: (I) the numerator shall be the difference between: (A) the product of the number of shares of Common Stock outstanding on such record date and the Market Price of the Common Stock as of such date; and (B) the fair market value, as determined by the Directors (whose determination shall be conclusive), to the holders of Common Stock of the shares, rights, options, warrants, evidences of indebtedness or other assets issued or distributed in the Special Distribution (net of any consideration paid therefor by the holders of Common Stock), and (II) the denominator shall be the product of the number of shares of Common Stock outstanding on such record date and the Market Price of the Common Stock as of such date. ARTICLE 11.5 Capital Reorganization. If and whenever there shall occur: (i) a reclassification or redesignation of the shares of Common Stock or any change of the shares of Common Stock into other shares, other than in a Share Reorganization; (ii) a consolidation, merger or amalgamation of the Company with, or into another body corporate; or (iii) the transfer of all or substantially all of the assets of the Company to another body corporate; (any such event being herein called a "Capital Reorganization"), then in each such case the holder who exercises the right to convert Convertible Debentures after the effective date of such Capital Reorganization shall be entitled to receive and shall accept, upon the exercise of such right, in lieu of the number of shares of Common Stock to which such holder was theretofore entitled upon the exercise of the conversion privilege, the aggregate number of shares or other securities or property of the Company or of the body corporate resulting from such Capital Reorganization that such holder would have been entitled to receive as a result of such Capital Reorganization if, on the effective date thereof, such holders had been the holder of the number of shares of Common Stock to which such holder was theretofore entitled upon conversion; provided, however, that no such Capital Reorganization shall be consummated in effect unless all necessary steps shall have been taken so that such holders shall thereafter be entitled to receive such number of shares or other securities of the Company or of the body corporate resulting from such Capital Reorganization, subject to adjustment thereafter in accordance with provisions the same, as nearly as may be possible, as those contained above. ARTICLE 11.6 Purchase Price Adjustments. In case at any time and from time to time the Company shall issue any shares of Common Stock or Derivative Securities convertible or exercisable for shares of Common Stock (the number of shares so issued, or issuable upon conversion or exercise of such Derivative Securities, as applicable, being referred to as "Additional Shares of Common Stock") for consideration less than the then Market Price as of the date of issuance of such shares of Common Stock or such Derivative Securities, in each such case the Conversion Price shall, concurrently with such issuance, be adjusted by multiplying the Conversion Price immediately prior to such event by a fraction: (i) the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such Additional Shares of Common Stock plus the number of shares of Common Stock that the aggregate consideration received by the Company for the total number of such Additional Shares of Common Stock so issued would purchase at the Market Price and (ii) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of Additional Shares of Common Stock plus the number of such Additional Shares of Common Stock so issued or sold. ARTICLE 11.7 Adjustment Rules. The following rules and procedures shall be applicable to adjustments made in this Article XI: (a) no adjustment in the applicable Fixed Price shall be required unless such adjustment would result in a change of at least 1% in the applicable Fixed Price then in effect, provided, however, that any adjustments which, but for the provisions of this clause would otherwise have been required to be made, shall be carried forward and taken into account in any subsequent adjustment; (b) if any event occurs of the type contemplated by the adjustment provisions of this Article XI but not expressly provided for by such provisions, the Company will give notice of such event as provided herein, and the Company's board of directors will make an appropriate adjustment in the Fixed Price so that the rights of the holders of the applicable Security shall not be diminished by such event; and (c) if a dispute shall at any time arise with respect to any adjustment of the applicable Fixed Price, such dispute shall be conclusively determined by the auditors of the Company or, if they are unable or unwilling to act, by a firm of independent chartered accountants selected by the Directors and any such determination shall be binding upon the Company and Purchaser. ARTICLE 11.8 Certificate as to Adjustment. The Company shall from time to time promptly after the occurrence of any event which requires an adjustment in the applicable Fixed Price deliver to Purchaser a certificate specifying the nature of the event requiring the adjustment, the amount of the adjustment necessitated thereby, the applicable Fixed Price after giving effect to such adjustment and setting forth, in reasonable detail, the method of calculation and the facts upon which such calculation is based. ARTICLE 11.9 Notice to Holders. If the Company shall fix a record date for: (a) any Share Reorganization (other than the subdivision of outstanding Common Stock into a greater number of shares or the consolidation of outstanding Common Stock into a smaller number of shares), (b) any Rights Offering, (c) any Special Distribution, (d) any Capital Reorganization (other than a reclassification or redesignation of the Common Stock into other shares), (e) Sale Event; or (f) any cash dividend, the Company shall, not less than 10 days prior to such record date or, if no record date is fixed, prior to the effective date of such event, give to Purchaser notice of the particulars of the proposed event or the extent that such particulars have been determined at the time of giving the notice. ARTICLE 12. EVENTS OF DEFAULT ARTICLE 12.1 Events of Default. If one or more of the following events (each an "Event of Default") shall have occurred and be continuing: (a) failure by the Company to pay or repay when due, all or any part of the principal on any of the Convertible Debentures (whether by virtue of the agreements specified in this Agreement or the Convertible Debentures); (b) failure by the Company to pay (i) within five (5) Business Days of the due date thereof any interest on any Convertible Debentures or (ii) within five (5) Business Days following the delivery of notice to the Company of any fees or any other amount payable (not otherwise referred to in (a) above or this clause (b)) by the Company under this Agreement or any other Transaction Agreement; (c) reserved; (d) failure on the part of the Company to observe or perform any covenant contained in Article VIII of this Agreement; (e) failure on the part of the Company to observe or perform any covenant or agreement contained in any Transaction Agreement (other than those covered by clauses (a), (b), (c), or (d) above) for 30 days from the date of such occurrence; (f) the trading in the Common Stock shall have been suspended by the Commission, OTC Bulletin Board or any National Market (except for any suspension of trading of limited duration solely to permit dissemination of material information regarding the Company and except if, at the time there is any suspension on any National Market, the Common Stock is then listed and approved for trading on another National Market within ten (10) Trading Days thereof); (g) reserved; (h) the Company shall have its Common Stock delisted from the OTC Bulletin Board or a National Market for at least ten (10) consecutive Trading Days and is unable to obtain a listing on a National Market within such ten (10) Trading Days; (i) the effectiveness of the Registration Statement shall not be maintained for the Registration Maintenance Period, which results in the Company incurring the liquidated damages or a default fee for a period in excess of 30 days; (j) the Company or any Subsidiary has commenced a voluntary case or other proceeding seeking liquidation, winding-up, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency, moratorium or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or has consented to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or has made a general assignment for the benefit of creditors, or has failed generally to pay its debts as they become due, or has taken any corporate action to authorize any of the foregoing; (k) an involuntary case or other proceeding has been commenced against the Company or any Subsidiary seeking liquidation, winding-up, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency, moratorium or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days, or an order for relief has been entered against the Company or any Subsidiary under the federal bankruptcy laws as now or hereafter in effect; (l) default in any provision (including payment) or any agreement governing the terms of any Debt of the Company or any Subsidiary in excess of $500,000, which has not been cured within any applicable period of grace associated therewith; (m) judgments or orders for the payment of money which in the aggregate at any one time exceed $1,000,000 and are not covered by insurance have been rendered against the Company or any Subsidiary by a court of competent jurisdiction and such judgments or orders shall continue unsatisfied and unstayed for a period of 60 days; or (n) any representation, warranty, certification or statement made by the Company in any Transaction Agreement or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with any Transaction Agreement shall prove to have been untrue in any material respect when made. then, and in every such occurrence, Purchaser may, with respect to an Event of Default specified in paragraphs (a) or (b), and the Majority Holders may, with respect to any other Event of Default, by notice to the Company, declare the Convertible Debentures to be, and the Convertible Debentures shall thereon become immediately due and payable; provided that in the case of any of the Events of Default specified in paragraph (j) or (k) above with respect to the Company or any Subsidiary, then, without any notice to the Company or any other act by Purchaser, the entire amount of the Convertible Debentures shall become immediately due and payable, provided, further, if any Event of Default has occurred and is continuing, and irrespective of whether any Convertible Debenture has been declared immediately due and payable hereunder, any Purchaser of Convertible Debentures may proceed to protect and enforce the rights of Purchaser by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Convertible Debenture, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise, and provided further, in the case of any Event of Default, the amount declared due and payable on the Convertible Debentures shall be the Formula Price. ARTICLE 12.2 Powers and Remedies Cumulative. No right or remedy herein conferred upon or reserved to Purchaser is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Every power and remedy given by the Convertible Debentures or by law may be exercised from time to time, and as often as shall be deemed expedient, by Purchaser. ARTICLE 13. MISCELLANEOUS ARTICLE 13.1 Notices. All notices, demands and other communications to any party hereunder shall be in writing (including telecopier or similar writing) and shall be given to such party at its address set forth on the signature pages hereof, or such other address as such party may hereafter specify for the purpose to the other parties. Each such notice, demand or other communication shall be effective (i) if given by telecopy, when such telecopy is transmitted to the telecopy number specified on the signature page hereof, (ii) if given by mail, four days after such communication is deposited in the mail with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when delivered at the address specified in or pursuant to this Section. ARTICLE 13.2 No Waivers; Amendments. (a) No failure or delay on the part of any party in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. (b) Any provision of this Agreement may be amended, supplemented or waived if, but only if, such amendment, supplement or waiver is in writing and is signed by the Company and the Majority Holders; provided, that without the consent of each holder of any Convertible Debenture affected thereby, an amendment or waiver may not (a) reduce the aggregate principal amount of Convertible Debentures whose holders must consent to an amendment or waiver, (b) reduce the rate or extend the time for payment of interest on any Convertible Debenture, (c) reduce the principal amount of or extend the stated maturity of any Convertible Debenture or (d) make any Convertible Debenture payable in money or property other than as stated in such Convertible Debenture. In determining whether the holders of the requisite principal amount of Convertible Debentures have concurred in any direction, consent, or waiver as provided in any Transaction Agreement, Convertible Debentures which are owned by the Company or any other obligor on or guarantor of the convertible Debentures, or by any Person Controlling, Controlled by, or under common Control with any of the foregoing, shall be disregarded and deemed not to be outstanding for the purpose of any such determination; and provided further that no such amendment, supplement or waiver which affects the rights of Purchaser and their affiliates otherwise than solely in their capacities as holders of Convertible Debentures shall be effective with respect to them without their prior written consent. ARTICLE 13.3 Indemnification. (a) The Company agrees to indemnify and hold harmless Purchaser, its Affiliates, and each Person, if any, who controls Purchaser, or any of its Affiliates, within the meaning of the Securities Act or the Exchange Act (each, a "Controlling Person"), and the respective partners, agents, employees, officers and Directors of Purchaser, their Affiliates and any such Controlling Person (each an "Indemnified Party") and collectively, the "Indemnified Parties"), from and against any and all losses, claims, damages, liabilities and expenses (including, without limitation and as incurred, reasonable costs of investigating, preparing or defending any such claim or action, whether or not such Indemnified Party is a party thereto, provided that the Company shall not be obligated to advance such costs to any Indemnified Party other than Purchaser unless it has received from such Indemnified Party an undertaking to repay to the Company the costs so advanced if it should be determined by final judgment of a court of competent jurisdiction that such Indemnified Party was not entitled to indemnification hereunder with respect to such costs) which may be incurred by such Indemnified Party in connection with any investigative, administrative or judicial proceeding brought or threatened that relates to or arises out of, or is in connection with any activities contemplated by any Transaction Agreement or any other services rendered in connection herewith; provided that the Company will not be responsible for any claims, liabilities, losses, damages or expenses that are determined by final judgment of a court of competent jurisdiction to result from such Indemnified Party's gross negligence, willful misconduct or bad faith. (b) If any action shall be brought against an Indemnified Party with respect to which indemnity may be sought against the Company under this Agreement, such Indemnified Party shall promptly notify the Company in writing and the Company, at its option, may, assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Party and payment of all reasonable fees and expenses. The failure to so notify the Company shall not affect any obligations the Company may have to such Indemnified Party under this Agreement or otherwise unless the Company is materially adversely affected by such failure. Such Indemnified Party shall have the right to employ separate counsel in such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party, unless (i) the Company has failed to assume the defense and employ counsel or (ii) the named parties to any such action (including any impleaded parties) include such Indemnified Party and the Company, and such Indemnified Party shall have been advised by counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the Company, in which case, if such Indemnified Party notifies the Company in writing that it elects to employ separate counsel at the expense of the Company, the Company shall not have the right to assume the defense of such action or proceeding on behalf of such Indemnified Party, provided, however, that the Company shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be responsible hereunder for the reasonable fees and expenses of more than one such firm of separate counsel, in addition to any local counsel, which counsel shall be designated by Purchaser. The Company shall not be liable for any settlement of any such action effected without the written consent of the Company (which shall not be unreasonably withheld) and the Company agrees to indemnify and hold harmless each Indemnified Party from and against any loss or liability by reason of settlement of any action effected with the consent of the Company. In addition, the Company will not, without the prior written consent of Purchaser, settle or compromise or consent to the entry of any judgment in or otherwise seek to terminate any pending or threatened action, claim, suit or proceeding in respect to which indemnification or contribution may be sought hereunder (whether or not any Indemnified Party is a party thereto) unless such settlement, compromise, consent or termination includes an express unconditional release of Purchaser and the other Indemnified Parties, satisfactory in form and substance to Purchaser, from all liability arising out of such action, claim, suit or proceeding. (c) If for any reason the foregoing indemnity is unavailable (otherwise than pursuant to the express terms of such indemnity) to an Indemnified Party or insufficient to hold an Indemnified Party harmless, then in lieu of indemnifying such Indemnified Party, the Company shall contribute to the amount paid or payable by such Indemnified Party as a result of such claims, liabilities, losses, damages, or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and by Purchaser on the other from the transactions contemplated by this Agreement or (ii) if the allocation provided by clause (i) is not permitted under applicable law, in such proportion as is appropriate to reflect not only the relative benefits received by the Company on the one hand and Purchaser on the other, but also the relative fault of the Company and Purchaser as well as any other relevant equitable considerations. Notwithstanding the provisions of this Section 13.3, the aggregate contribution of all Indemnified Parties shall not exceed the amount of interest and fees actually received by Purchaser pursuant to this Agreement. It is hereby further agreed that the relative benefits to the Company on the one hand and Purchaser on the other with respect to the transactions contemplated hereby shall be determined by reference to, among other things, whether any untrue or alleged untrue statement of material fact or the omission or alleged omission to state a material fact related to information supplied by the Company or by Purchaser and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. (d) The indemnification, contribution and expense reimbursement obligations set forth in this Section 13.3 (i) shall be in addition to any liability the Company may have to any Indemnified Party at common law or otherwise; (ii) shall survive the termination of this Agreement and the other Transaction Agreements and the payment in full of the Convertible Debentures and (iii) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of Purchaser or any other Indemnified Party. ARTICLE 13.4 Expenses: Documentary Taxes. The Company agrees to pay to Global Capital Advisors, Ltd., on the Closing Date, a fee of $40,000.00 (the "Transaction Fee") in full satisfaction of all obligations of the Company to Purchaser and its agents in connection with the negotiation and preparation of the Transaction Agreements, relevant due diligence, and fees and disbursements of legal counsel. In addition, the Company agrees to pay any and all stamp, transfer and other similar taxes, assessments or charges payable in connection with the execution and delivery of any Transaction Agreement or the issuance of the Securities to Purchaser, excluding their assigns. ARTICLE 13.5 Payment. The Company agrees that, so long as Purchaser shall own any Convertible Debentures purchased by it from the Company hereunder, the Company will make payments to Purchaser of all amounts due thereon by wire transfer by 4:00 P.M. (E.S.T.). ARTICLE 13.6 Successors and Assigns. This Agreement shall be binding upon the Company and upon Purchaser and its respective successors and assigns; provided that the Company shall not assign or otherwise transfer its rights or obligations under this Agreement to any other Person without the prior written consent of the Majority Holders. All provisions hereunder purporting to give rights to Purchaser and its affiliates or to holders of Securities are for the express benefit of such Persons and their successors and assigns. ARTICLE 13.7 Brokers. The Closing, the Company represents and warrants that it has not employed any broker, finder, financial advisor or investment banker who would be entitled to any brokerage, finder's or other fee or commission payable by the Company or Purchaser in connection with the sale of the Securities. ARTICLE 13.8 Delaware Law; Submission to Jurisdiction; Waiver of Jury Trial; Appointment of Agent. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE. EACH PARTY HERETO HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR DELAWARE AND OF ANY FEDERAL DISTRICT COURT SITTING IN DELAWARE FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY HERETO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY TO THIS AGREEMENT IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS IN ANY SUCH PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH PARTY AT ITS ADDRESS SET FORTH HEREIN. NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY PARTY TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. EACH PARTY WAIVES ITS RIGHT TO A TRIAL BY JURY. ARTICLE 13.9 Entire Agreement. This Agreement, the Exhibits or Schedules hereto, which include, but are not limited to the Convertible Debenture, the Warrant, the Registration Rights Agreement and the Security Agreement, set forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior and contemporaneous agreements, negotiations and understandings between the parties, both oral and written relating to the subject matter hereof. The terms and conditions of all Exhibits and Schedules to this Agreement are incorporated herein by this reference and shall constitute part of this Agreement as is fully set forth herein. ARTICLE 13.10 Survival; Severability. The representations, warranties, covenants and agreements of the parties hereto shall survive the Closing hereunder. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that such severability shall be ineffective if it materially changes the economic benefit of this Agreement to any party. ARTICLE 13.11 Title and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. ARTICLE 13.12 Reporting Entity for the Common Stock. The reporting entity relied upon for the determination of the trading price or trading volume of the Common Stock on any given Trading Day for the purposes of this Agreement and all Exhibits shall be Bloomberg, L.P. or any successor thereto. The written mutual consent of the Purchaser and the Company shall be required to employ any other reporting entity. ARTICLE 13.13 Publicity. The Company and the Purchaser shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and no party shall issue any such press release or otherwise make any such public statement without the prior written consent of the other parties, which consent shall not be unreasonably withheld or delayed, except that no prior consent shall be required if such disclosure is required by law, in which such case the disclosing party shall provide the other parties with prior notice of such public statement. Notwithstanding the foregoing, the Company shall not publicly disclose the name of Purchaser without the prior written consent of Purchaser, except to the extent required by law, in which case the Company shall provide Purchaser with prior written notice of such public disclosure. [signature page follows] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers, as of the date first above written. DIAL-THRU INTERNATIONAL CORPORATION By: John A. Jenkins /S/ ------------------- Name: John A. Jenkins Title: President Address: Dial-Thru International Corporation 700 South Flower Suite 2950 Los Angeles, CA 90017 Fax: (323) 210-2091 Telephone: (213) 627-7599 GLOBAL CAPITAL FUNDING GROUP, L.P. By its General Partner, Global Capital Management Services, Inc. By: Lewis N Lester /S/ ------------------ Name: Lewis N. Lester Title: President Address: 106 Colony Park Drive Suite 900 Cumming, Georgia 30040 Fax: 678-947-6499 Tel.: 678-947-0028 Schedule 2.2 Allocation of Purchase Price 1. $1,000,000 Principal Amount 6% Convertible Debentures for a purchase price equal to $990,000.00 2. Warrant to purchase 100,000 shares of Common Stock of the Company for a purchase price equal to $10,000.00 Schedule 7.8 Use of Proceeds VolP Equipment - 5 Cities 25% Build out Facilities - 5 Cities 35% Switch Upgrade 10% SS-7 Signal Upgrade 10% Software Upgrade 7.5% Hardware Upgrade 7.5% Marketing of Dial Around Svc. 5% ________________________________________________________ 100% -----END PRIVACY-ENHANCED MESSAGE-----