-----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, Gs6j8Df5pVOF+cfZNBBhC1/iKnEmItd564IhOtq36wxE5ZG4p7U2vp8kKCUXwuua +M2QqTQowMHh/DM6qFdp4A== 0001144204-03-005757.txt : 20030923 0001144204-03-005757.hdr.sgml : 20030923 20030923165945 ACCESSION NUMBER: 0001144204-03-005757 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030923 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QT 5 INC CENTRAL INDEX KEY: 0000932127 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MEDICAL, DENTAL & HOSPITAL EQUIPMENT & SUPPLIES [5047] IRS NUMBER: 721148906 STATE OF INCORPORATION: DE FISCAL YEAR END: 0603 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-25022 FILM NUMBER: 03906461 BUSINESS ADDRESS: STREET 1: 5655 LINDERO CANYON ROAD STREET 2: SUITE 120 CITY: WESTLAKE VILLAGE STATE: CA ZIP: 91362 BUSINESS PHONE: (866) 508-8378 MAIL ADDRESS: STREET 1: 5655 LINDERO CANYON ROAD STREET 2: SUITE 120 CITY: WESTLAKE VILLAGE STATE: CA ZIP: 91362 FORMER COMPANY: FORMER CONFORMED NAME: MONEYZONE COM DATE OF NAME CHANGE: 20000120 FORMER COMPANY: FORMER CONFORMED NAME: EBONLINEINC COM DATE OF NAME CHANGE: 19990715 FORMER COMPANY: FORMER CONFORMED NAME: CERX VENTURE CORP DATE OF NAME CHANGE: 19981116 10KSB 1 v00057_10ksb.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | | ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934; OR |x| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM JANUARY 1, 2003 TO JUNE 30, 2003. Commission File No. 000-25022 QT 5, INC. ------------------------------------ (Name of small business issuer in its charter) Delaware 72-7148906 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5655 Lindero Canyon Road, Suite 120 Westlake Village, California (Address of principal executive offices) Issuer's telephone number: (818) 338-1500 MONEYZONE.COM (Former name or former address, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.15 par value Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]; No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best or registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] Issuer's revenues for its most recent fiscal year: $9,042 Aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within the past 60 days: $6,584,396 as of September 10, 2003. Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 and 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Not applicable At September 10, 2003, a total of 44,379,516 shares of registrant's common stock were outstanding. Transitional Small Business Disclosure Format (check one): Yes; [ ] No [X] TABLE OF CONTENTS PART I Page Item 1. Description of Business 1 Item 2. Description of Properties 4 Item 3. Legal Proceedings 4 Item 4. Submission of Matters to a Vote of Security Holders 4 PART II Item 5. Market Information 4 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 7. Financial Statements 16 Item 8. Changes and Disagreements with Accountants on Accounting and Financial Disclosure 17 Item 8A. Disclosure Controls and Procedures 17 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 18 Item 10. Executive Compensation 19 Item 11. Security Ownership of Certain Beneficial Owners and Management 21 Item 12. Certain Relationships and Related Transactions 22 Item 13. Exhibits, Lists and Reports on Form 8-K 23 Item 14. Principal Accountant Fees and Services 28 PART I ITEM 1. DESCRIPTION OF BUSINESS CORPORATE HISTORY QT 5, Inc. (referred to in this Annual Report as "we", "us", or "our") was formed on April 4, 1989 under the name Chelsea Atwater, Inc. On March 19, 1997 we changed our name to Cerx Entertainment Corporation, and on March 23, 1998 we changed our name to Cerx Venture Corporation. Prior to 1996 we had limited operations while we were seeking a business to acquire. On July 15, 1999, we effected a merger with EBonlineinc.com, Inc., a Delaware corporation, and changed our name to MoneyZone.com, Inc. (referred to in this discussion as "MoneyZone"). On July 18, 2002, we announced that we had entered into a Merger Agreement with QuickTest 5, Inc., a Delaware corporation. Effective January 9, 2003, pursuant to the terms of the Merger and Plan of Reorganization between MoneyZone.com, Inc. and QuickTest 5, Inc., Quicktest merged with and into MoneyZone, the separate corporate existence of Quicktest ceased, and MoneyZone continued as the surviving entity and changed its name to "QT 5, Inc." and its symbol on the over the counter bulletin board to "QTFV". Prior to the merger, our Board of Directors and the holders of a majority of the outstanding shares of Common Stock authorized and approved by written consent an amendment to our Certificate of Incorporation increasing the total number of shares of our authorized Common Stock from 25,000,000 shares to 100,000,000 shares. Prior to the merger but also effective on January 9, 2003, we effectuated a 5 for 1 forward split of our outstanding shares of Common Stock. All shares reported in this Annual Report reflect the forward stock split unless otherwise noted. On February 7, 2003 we formed Nico International, Inc., our wholly owned subsidiary. OUR BUSINESS On April 7, 2002 we entered into an Agreement for the Assignment of Patent Rights to U.S. Patent No. 6,268,386 (the "Agreement") relating to the formulation of nicotine beverages, referred to in this Annual Report as the "NICO Patent". The Agreement was effective only upon the execution and delivery of the assignment of patent. The assignment of patent was executed and delivered on June 26, 2002. Our first nicotine beverage product is NICOWater(TM) which, as the name implies, is a water based nicotine product. Currently, we are using our resources to introduce and market NICOWater(TM). NICOWater(TM) is used by individuals who are unable, temporarily, to smoke because of short-term impediments, such as being present in a non-smoking facility or in social gatherings where smoking may be discouraged, such as in the presence of children. NICOWater(TM) is a homeopathic formula that may be used by adult smokers to relieve the symptoms of tobacco cravings. NICOWater(TM) According to the United States Food and Drug Administration (referred to in this discussion as the "FDA"), homeopathy is a medical theory and practice that developed in reaction to the harsh procedures used in conventional medicine as it was practiced more than 200 years ago. Homeopathic products are normally based on natural ingredients. Because they are diluted into minuscule doses, they are generally without side effects. The FDA regulates homeopathic remedies differently from drugs, because homeopathic products contain little or no active ingredients. NICOWater(TM) is a homeopathic formula developed for adult smokers who suffer from the self-diagnosed symptoms of nicotine cravings. It is made from purified water, purchased from bottlers registered as drug manufacturers with the FDA, and nicotinum (nicotine), which is prepared by a licensed homeopathic 1 manufacturer. Both purified water and nicotinum are readily available from numerous suppliers. NICOWater(TM) is colorless, odorless and tasteless. NICOWater(TM) is available in 16.9 oz (500 ml) bottles that can be conveniently carried or packed in purses, briefcases or other small totes. NICOWater(TM) has been formulated to be used by adult smokers who find themselves in environments where smoking is prohibited or unwelcome, such as in airplanes or in the presence of children. In order to relieve the symptoms of tobacco cravings, the user sips NICOWater(TM). The directions on the bottle state that no more than one bottle of NICOWater(TM) should be consumed in an hour and no more than eight bottles of NICOWater(TM) should be consumed in a day. Although NICOWater(TM) is a highly diluted form of nicotinum (nicotine) and is marketed to adult smokers who possess a tolerance to nicotine, it is possible to overdose on nicotine and to suffer symptoms such as nausea, vomiting, dizziness, diarrhea, weakness, palpitations and rapid heartbeat. To our knowledge no one who has used NICOWater(TM) as directed has experienced nicotine overdose. Presently, NICOWater(TM) is our only product. Our Market NICOWater(TM) has been developed for adult smokers who suffer from the symptoms of tobacco cravings and find themselves in situations or environments where smoking is prohibited or discouraged. Public smoking has been increasingly restricted by government regulation due to the health risks associated with second hand smoke. In the United States alone, we believe there are over 47 million smokers, many of whom will be impacted by these regulations or will find themselves in social situations where they'd like to smoke, but can't. Although it is our belief that we are not required to do so, we have decided to limit the marketing of NICOWater(TM) solely to individuals who are 18 years or older. We require our retailers to verify proof of age. For this reason, NICOWater(TM) is not sold in vending machines or in any other location where proof of age is not required. Distribution Methods Currently we sell NICOWater(TM) to national pharmacy chains and through major distributors. We are also promoting NICOWater(TM) to retail chain pharmacies. In July 2003 we entered into an agreement with Eckerd Drug Stores to sell NICOWater(TM). Eckerd Drug Stores is a chain of approximately 2,600 stores in 21 states along the eastern seaboard and in the southern portion of the United States. We anticipate that, in the future, we will also place NICOWater(TM) in convenience stores. Sales of NICOWater(TM) have begun just recently and, as of June 30, 2003 we earned only $9,042 in revenues. Since we are in the early stages of developing our sales, we are not currently dependent on one or a few major customers. We advertise NICOWater(TM) in newspapers and on the radio. The product, upon completion of its manufacture, is shipped in cases containing six 4-pack carriers to its destination via trucks. The Effect of Government Regulation on our Business The FDA regulates homeopathic drugs, however the regulation is significantly different from non-homeopathic drugs. Because homeopathic products contain little or no active ingredients, manufacturers are deferred from submitting new drug applications and their products are exempt from good manufacturing practice requirements related to expiration dating and from finished product testing for identity and strength. However, in order to comply with FDA regulations, homeopathic drugs generally must satisfy standards of strength, quality and purity that are articulated in the Homeopathic Pharmacopoeia of the United States. They must 2 also conform with the FDA's good manufacturing practices for drug products (with the exception of expiration dating and testing for identity and strength). We believe that we are currently in compliance with applicable FDA regulations and we intend to work diligently to assure compliance with current and future regulations that impact our business. We cannot assure you, however, that future regulations relating to homeopathic products will not be enacted which might adversely impact our operations. Licenses and Other Intellectual Property On April 7, 2002 we entered into the Agreement for the Assignment of Patent Rights to U.S. Patent No. 6,268,386 relating to the formulation of nicotine beverages. The Agreement was effective only upon the execution and delivery of the assignment of patent. The assignment of patent was executed and delivered on June 26, 2002. The patent will expire in 17 years. In exchange for the patent, we issued to Marshall Anlauf Thompson, the inventor and the holder of the NICO Patent, 133,000 shares of our common stock and agreed to pay a royalty to the patent holder and related third parties in the amount of $1.20 per case for every case of NICOWater(TM) sold. We agreed to sell a minimum of 500,000 cases of NICOWater(TM) during the first year following the first distribution of the nicotine based products that utilize Mr. Thompson's patent, and a minimum of 1,000,000 cases of NICOWater(TM) during each of the following years. We also agreed to provide sufficient funds and adequate personnel to market NICOWater(TM), in order to meet the performance goals. If we fail to meet the performance goals, we could lose the patent. In June 2002, Mr. Thompson agreed to accept a prepayment of royalties in the amount of $150,000, which we paid by issuing 399,000 shares of our Common Stock. We are currently involved in a dispute with Mr. Thompson as to whether or not we are still entitled to develop and sell products based on the NICO Patent. This dispute is described in the section of this Annual Report titled "Legal Proceedings". We are in the process of reviving our application to register the mark, "NICO" with the United States Patent and Trademark Office. We believe that, as we grow, the name recognition and image that we develop in our market will significantly enhance customer response to our product. Accordingly, our trademark is important to our business. Other than the foregoing, we have no licenses, franchises or concessions and we have not entered into labor contracts. Competition To our knowledge, NICOWater(TM) is the only product that is manufactured solely for the purpose of providing nicotine to smokers who are temporarily unable to smoke. Although we believe that there are 47 million smokers in the United States, we do not know if they will find our product helpful if they are unable to smoke, if they will decline to use our product because of the price, or if our advertising and promotion will be successful in reaching our target market. Compliance with Environmental Laws Our manufacturing and distribution is outsourced to third parties. To our knowledge, federal, state or local environmental laws do not effect our operations and we have not spent any funds to comply with any such laws. Status of the Launch of NICOWater(TM) Notwithstanding positive market response to the launch of NICOWater(TM), our initial product, we have experienced some formidable challenges to our national product rollout resulting in slower than expected product placement. 3 Shortly after NICOWater(TM) was first made available in a major retail chain (Brooks Pharmacy), legislation was introduced in the State of Maine that would have immediately banned the sale of NICOWater(TM) there. The proposed legislation has been tabled until the 2004 legislative session, however the negative publicity which surrounded this event caused Brooks Pharmacy to suspend its sale of NICOWater(TM) until we make further progress in securing broad distribution. In addition, an allegation was made by the original patent inventor, Marshall Anlauf Thompson, and his associates that we are in default of our patent assignment agreement. In response we initiated an arbitration proceeding in accordance with the terms of the Agreement. We intend to aggressively defend and assert our rights under the Agreement. These issues have slowed certain aspects of the national rollout of our product. Although we have been successful in opening major regional and national accounts, we are currently assessing the impact of above mentioned events and delays in terms of the effect on our initial business plan. Employees We have 8 full-time employees. ITEM 2. DESCRIPTION OF PROPERTY Our office facilities are located at 5655 Lindero Canyon Road, Suite 120, Westlake Village, California 91362. We lease this 7,200 square foot facility at market rates. Our current rent is $7,888 per month. The lease provides for a rent increase in the amount of $0.05 per square foot for the second and third year of the term. The lease expires on April 30, 2005. We have an option to renew the lease for an additional three year term. We believe that this space is sufficient for our needs for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS On November 15, 2002, Fidelity Mortgage, Inc. filed a lawsuit against us in the Supreme Court of the State of New York alleging that we breached a sublease. Fidelity is seeking $156,400 in damages plus interest, costs and attorneys' fees. We are defending this litigation. We are currently involved in a dispute with Marshall Anlauf Thompson, the former owner of the NICO Patent, and Platinum Products, LLC regarding our rights to the NICO Patent. In May 2003 Mr. Thompson notified us of our alleged failure to meet the performance goals required by that certain Agreement for the Assignment of Patent Rights dated April 7, 2002. Platinum Products, LLC alleges that it has obtained the rights to use the NICO Patent. On June 4, 2003 we initiated an arbitration proceeding with the American Arbitration Association, as required by the Agreement for the Assignment of Patent Rights, to seek a finding that no breach has occurred and that we have retained our rights to the NICO Patent. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to our security holders for approval during the quarter starting April 1, 2003 and ending June 30, 2003. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information Our Common Stock trades on the NASD OTC Bulletin Board. Since January 9, 2003, it has traded under the symbol QTFV. Prior to that date, our Common 4 Stock traded on the NASD OTC Bulletin Board under the symbol MOZN. The table below sets forth the range of high and low bid quotes of our Common Stock for each quarter for the last two fiscal years as reported by Yahoo Finance. The bid prices represent inter-dealer quotations, without adjustments for retail mark-ups, markdowns or commissions and may not necessarily represent actual transactions. The following prices reflect the 5 for 1 stock split that was effected on January 9, 2003.
PERIOD HIGH LOW ------------------- -------- -------- Fiscal Year Ended June 30, 2003 First Quarter $1.20 $0.20 Second Quarter $1.20 $0.21 Third Quarter $2.00 $0.40 Fourth Quarter $0.50 $0.08 Fiscal Year Ended June 30, 2002 First Quarter $0.60 $0.40 Second Quarter $1.00 $0.20 Third Quarter * * Fourth Quarter * *
*No trades were made in our Common Stock during the third and fourth quarters of the June 30, 2002 fiscal year. Holders There were approximately 371 holders of our Common Stock of record as of June 30, 2003. Dividends We have never declared or paid cash dividends on our common stock, and our present policy is not to pay cash dividends on our common stock. Any payment of cash dividends in the future will be wholly dependent upon our earnings, financial condition, capital requirements and other factors deemed relevant by our board of directors. It is not likely that cash dividends will be paid in the foreseeable future. Sale of Unregistered Shares During the last fiscal year we sold securities that were not registered under the Securities Act of 1933. Of these sales, the following transactions were not reported in our previously filed quarterly reports: As part of the negotiations to purchase a non-controlling interest in a bottling facility in Mexico from OCIF-OBAC-SA de CV, we authorized and issued to escrow 2,660,000 shares of our Common Stock until a definitive agreement could be reached. At present, a definitive agreement has not been reached. The shares are still issued and held subject to a cancellation fee equal to 15% of the shares of Common Stock held in escrow unless a definitive agreement can be reached. We also entered into negotiations with the developers and patent holders of certain rapid test medical devises for an exclusive right to market these devices, at our option. At present 1,000,160 shares of our Common Stock have been authorized and issued into escrow as a partial payment for the right to market, if a definitive agreement is reached. At present, a definitive agreement has not been reached. If we do not complete these acquisitions, we will return the Common Stock to our treasury. If the Common Stock is transferred to OCIF-OBAC-SA de CV and the developers and patent holders of the rapid test medical devices, the transactions will be exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. During the month of June 2003 we sold 2,200,854 shares of our Common Stock at a price of $0.15 per share (which was the weighted average price paid by the investors for the stock issuance) in five separate sales transactions to accredited investors. The sales included, in the aggregate, warrants to purchase 1,900,000 shares of Common Stock for a weighted average exercise price of $0.58 5 per share. The warrants have a term of five years. We received aggregate net cash proceeds of $331,000 in these offerings. These transactions were exempt from registration pursuant to Regulation D promulgated under the Securities Act of 1933. In April and June 2003 we committed to issue 300,000 shares of our Common Stock to employees in connection with their initial employment. The weighted average fair market value of this Common Stock was $75,126 or $0.25 per share. These transactions were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. On June 23, 2003 we issued 1,720,000 shares of our Common Stock at a price of $0.10 per share for total proceeds of $172,000 to SBI-USA LLC pursuant to the terms of a convertible promissory note. This transaction was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. In April, May and June 2003 we issued 690,000 shares of our Common Stock to various consultants for services provided to us. The fair market value of this Common Stock was $136,128 or $0.20 per share. These transactions were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. On January 9, 2003, we consummated a reverse merger with MoneyZone.com, Inc., wherein we issued to the stockholders of Quicktest 5, Inc. 25,000,000 shares of common stock in exchange for all the issued and outstanding shares of Quicktest 5, Inc. This transaction was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. Securities Authorized for Issuance under Equity Incentive Plans Set forth in the table below is information regarding awards made through compensation plans or arrangements through June 30, 2003, the most recently completed fiscal year.
- ----------------------------- -------------------------- ------------------------- -------------------------- Number of securities remaining available for future issuance under Number of securities to Weighted average equity compensation be issued upon exercise exercise price of plans (excluding of outstanding options, outstanding options, securities reflected in Plan Category warrants and rights warrants and rights column 2) - ----------------------------- -------------------------- ------------------------- -------------------------- Equity Compensation Plans Approved by Security Holders N/A N/A N/A - ----------------------------- -------------------------- ------------------------- -------------------------- - ----------------------------- -------------------------- ------------------------- -------------------------- Equity Compensation Plans Not Approved by Security Holders 6,520,000 $0.29 7,907,997 - ----------------------------- -------------------------- ------------------------- -------------------------- - ----------------------------- -------------------------- ------------------------- --------------------------
Our 2000 Stock Option Plan (the "2000 Plan"), as amended, authorizes the issuance of options and Common Stock to officers, employees, directors and consultants. We initially reserved 2,533,330 shares of our Common Stock for awards to be made under the 2000 Plan. On February 12, 2003, we increased the number of shares of Common Stock reserved for issuance to 4,233,330 shares, pursuant to a Plan Amendment. The Common Stock reserved for issuance pursuant to the 2000 Plan has been registered on an S-8 Registration Statement. The 2000 Plan allows for the issuance of either incentive stock options (which, pursuant to Section 422 of the Internal Revenue Code, can only be granted to employees) or non-qualified stock options. The 2000 Plan is administered by a committee of two or more members of the Board of Directors or, if no committee is appointed, then by the Board of Directors. The committee, or the Board of Directors if there is no committee, determines the type of option granted, the exercise price, the option term, which may be no more than ten years, terms and conditions of exercisability and methods of exercise. Options must vest within ten years. Under the 2000 Plan, the exercise price may not be less than fair market value on the date of grant for incentive stock options, and not less than 50% of the fair market value on the date of grant for non-qualified stock options. The 2000 Plan also allows for the granting of Stock Appreciation Rights in conjunction with all or part of any stock option granted. No Stock 6 Appreciation Rights have been granted. The number of options under the Plan available for grant at June 30, 2003 was 2,655,830. On April 21, 2003 our Board of Directors adopted the 2003 Incentive Equity Stock Plan (the "2003 Plan"). The 2003 Plan authorizes the issuance of options, right to purchase Common Stock and stock bonuses to officers, employees, directors and consultants. We reserved 10,000,000 shares of our Common Stock for awards to be made under the 2003 Plan. On April 25, 2003 we filed a registration statement on Form S-8 to register 5,000,000 of these shares. The 2003 Plan is administered by a committee of two or more members of the Board of Directors or, if no committee is appointed, then by the Board of Directors. The 2003 Plan allows for the issuance of incentive stock options (which can only be granted to employees), non-qualified stock options, stock awards, or stock bonuses. The committee, or the Board of Directors if there is no committee, determines the type of award granted, the exercise price, the option term, which may be no more than ten years, terms and conditions of exercisability and methods of exercise. Options must vest within ten years. Under the 2003 Plan, the exercise price may not be less than fair market value on the date of grant for incentive stock options, and not less than 85% of the fair market value on the date of grant for non-qualified stock options. The number of options under the 2003 Plan available for grant at June 30, 2003 was 5,252,167. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS Effective January 9, 2003, we completed a merger with Quicktest 5, Inc. In conjunction with the merger, our Board of Directors changed our fiscal year from December 31st to June 30th. In May 2003 we began the distribution and sale of our first product, NICOWater(TM). NICOWater(TM) is an odorless and tasteless water based homeopathic nicotinum (nicotine) adult product designed to relieve the symptoms of self-diagnosed tobacco cravings. NICOWater(TM) is marketed and sold to adults over the age of 18. Since our acquisition of the NICO Patent, we have focused our efforts on manufacturing, marketing and selling this product. Other than NICOWater(TM), we have not developed nor do we have the right to market any other products. However, we are in negotiations to acquire licenses for certain intellectual property rights and the associated research and development efforts and FDA approvals relating to an HIV 1 and 2 professional use test kit, a retail and professional "in vitro" drug test kit and a mobile professional cardiac pulmonary test kit. Notwithstanding positive market response to the launch of NICOWater(TM), our initial product, we have experienced some formidable challenges to our national product rollout resulting in slower than expected product placement. Shortly after NICOWater(TM) was first made available in a major retail chain (Brooks Pharmacy), legislation was introduced in the State of Maine that would have immediately banned the sale of NICOWater(TM) there. The proposed legislation has been tabled until the 2004 legislative session, however the negative publicity which surrounded this event caused Brooks Pharmacy to suspend its sale of NICOWater(TM) until we make further progress in securing broad distribution. In addition, an allegation was made by the original patent inventor, Marshall Anlauf Thompson, and his associates that we are in default of our patent assignment agreement. In response we initiated an arbitration proceeding in accordance with the terms of the patent assignment agreement. We intend to aggressively defend and assert our rights under the agreement. These issues have slowed certain aspects of our product rollout. Although we have been successful in opening major regional and national accounts, we are currently assessing the impact of above mentioned events and delays in terms of the effect on our initial business plan. 7 General Overview The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited balance sheet as of June 30, 2003 and the audited statements of operations and cash flows for the fiscal years ended June 30, 2003 and 2002, and the related notes thereto. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require management to make certain estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The important facts and factors described in this discussion and elsewhere in this document sometimes have effected, and in the future could effect, our actual results, and could cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. As reported in the Independent Auditors' Report on our June 30, 2003 financial statements, we have incurred losses from operations and we have not generated significant net sales revenue. Our success is dependent upon numerous factors, including the successful outcome of the arbitration proceeding relating to our ownership of the NICO Patent, successful development of effective marketing strategies so that customers understand our product and its uses, the availability of cash when and as we need it until the revenues we earn sustain our operations, and the agreement of our executive officers to continue providing services to us. In August 2003 we obtained additional capital to launch our product by issuing $2 million in 6% convertible debentures. We received $1 million in gross proceeds from this financing in August 2003 and we will receive the additional $1 million in gross proceeds following the effective date of a registration statement to be filed with the Securities and Exchange Commission registering the Common Stock underlying the debentures. In addition, we are currently negotiating a credit facility for accounts receivable financing. However, we cannot assure you that we will obtain the credit facility or that a registration statement covering the Common Stock underlying the debentures will ever be declared effective. Furthermore, even if we received all of these proceeds, we cannot assure you that the proceeds will generate sufficient cash to satisfy our need for all the additional capital necessary for us to become profitable. If we require more financing, we cannot assure you that it will be available to us on satisfactory terms or at all. These factors, among others, raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of these uncertainties. Critical Accounting Policies In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant effect on our revenues, income or loss from operations, and net income or net loss, as well as on the value of certain assets on our balance sheet. We believe that there are several accounting policies that are critical to an understanding of our historical and future performance as these policies affect the reported amounts of revenues, expenses, and significant estimates and judgments applied by management. While there are a number of accounting policies, methods and estimates affecting our financial statements, the following policies are considered critical. In addition, you should refer to Note 1 to the accompanying consolidated financial statements for further discussion of our accounting policies. 8 STOCK-BASED COMPENSATION. We account for non-employee stock-based compensation under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting For Stock-Based Compensation." SFAS No. 123 defines a fair value based method of accounting for stock-based compensation. However, SFAS No. 123 allows an entity to continue to measure compensation cost related to stock and stock options issued to employees using the intrinsic method of accounting prescribed by Accounting Principles Board Opinion No. 25, as amended ("APB 25"), "Accounting for Stock Issued to Employees." Under APB 25, compensation cost, if any, is recognized over the respective vesting period based on the difference, on the date of grant, between the fair value of our Common Stock and the grant price. Entities electing to remain with the accounting method of APB 25 must make pro forma disclosures of net income and earnings per share, as if the fair value method of accounting defined in SFAS No. 123 had been applied. We have elected to account for its stock-based compensation to employees under APB 25. REVENUE RECOGNITION. We recognize revenue at the time of shipment of our products to customers. We were in our initial stage of selling our new product line to customers or distributors as of June 30, 2003. Pursuant to Staff Accounting Bulletin No. 101, we deferred sales and the related costs to certain distributors as the payment terms are contingent upon customer sell-through of product, and therefore collectibility is not reasonably assured. Results of Operations During the fiscal year ended June 30, 2003, we had revenues of $9,042 as compared to no revenues during the fiscal year ended June 30, 2002. Revenues were earned during the fiscal year ended June 30, 2003 due to the introduction to the market of our product, NICOWater(TM). Cost of sales for the fiscal year ended June 30, 2003 was $3,708 as compared to no cost of sales for the fiscal year ended June 30, 2002. Cost of sales included the purchase of nicotinum, four pack carriers, labels, costs related to bottling the product and costs related to repacking. General and administrative expenses for the fiscal year ended June 30, 2003 totaled $6,138,072 as compared to general and administrative expenses of $3,775,560 for the fiscal year ended June 30, 2002. The increase in general and administrative expense for the fiscal year ended June 30, 2003 was due primarily to o the increase in consulting fees totaling approximately $1,382,000, which included establishing protocols for developing and marketing our current homeopathic liquid nicotine produce and future products that may be derived therefrom; o the increase in legal and professional fees totaling approximately $417,000 which were associated with completing the merger and making the appropriate filings under the Securities Act of 1934; o an increase in salaries totaling approximately $328,000 due to the start-up of our operations; and o the increase of approximately $137,800 attributable to increases in expenses related to investor relations support, insurance and rent expenses. Other income (expense) for the fiscal year ended June 30, 2003 was made up of $106,407 in amortization of debt discount, $151,382 of interest and $19,689 of other expense representing losses on settlement of accounts payable. As a result of the above, we incurred a net loss of $6,410,216 for the fiscal year ended June 30, 2003 as compared to a net loss of $3,775,560 for the fiscal year ended June 30, 2002. Our net loss for the fiscal year ended June 30, 2002 was attributable to our development stage activities. Liquidity and Capital Resources Our capital requirements, particularly as they relate to the introduction and launch of our product and our continued testing and improvement of our product, have been and will continue to be significant. Our future cash 9 requirements and the adequacy of available funds will depend on many factors, including the pace at which we are able to launch NICOWater(TM), whether or not a market develops for NICOWater(TM) and, if a market develops, the pace at which it develops. While we have recently begun to earn revenues from the sale of NICOWater(TM), the revenues we have generated to date are not sufficient to fund our operations. In August 2003 we obtained additional capital to roll-out our product by issuing $2 million in 6% convertible debentures. We received gross proceeds of $1 million from this financing in August 2003 and we will receive the additional $1 million in gross proceeds following the effective date of a registration statement to be filed with the Securities and Exchange Commission registering the Common Stock underlying the debentures. In addition, we are currently negotiating a credit facility for accounts receivable financing. However, we cannot assure you that we will obtain the credit facility or that a registration statement covering the Common Stock underlying the debentures will ever be declared effective. Furthermore, even if we received all of these proceeds, we cannot assure you that they will provide all the additional capital necessary for us to become profitable. During the next 12 months, if we fail to earn revenues in an amount sufficient to fund our operations, we do not obtain all the proceeds from the sale of our debentures and we do not obtain the credit facility, we intend to raise capital through an offering of our securities or from additional loans. We cannot guarantee that financing will be available to us, on acceptable terms or at all. If we do not earn revenues sufficient to support our business and we fail to obtain other financing, either through an offering of our securities or by obtaining additional loans, we may be unable to maintain our operations. As of June 30, 2003 we had $67,316 in cash, $95,226 in accounts receivable (or $9,042 after considering deferred revenue), and inventory valued at $88,563 consisting primarily of finished products. During the fiscal year ended June 30, 2003 we incurred $428,957 in non-cash prepaid expense related to the issuance of shares of our Common Stock for consulting services that will be rendered in subsequent periods and $3,580,022 in non-cash expense related to the issuance of shares of our Common Stock for medical, administrative, executive, marketing and product development consulting services. During the fiscal year ended June 30, 2003, we paid our consultants with our Common Stock in order to conserve cash. Our liabilities at June 30, 2003 included accounts payable and accrued expenses of $770,333, a liability in the amount of $156,400 for unpaid lease payments on a lease we assumed from Moneyzone, and notes payable of $282,500. The amount of $67,500 in notes payable was due to parties related to us. We had an operating loss of $6,132,738 for the fiscal year ended June 30, 2003 as opposed to an operating loss of $3,775,560 for the fiscal year ended June 30, 2002. The increase in operating loss is attributable to the costs associated with the development of our business following the merger. We had a net loss of $6,410,216 for the fiscal year ended June 30, 2003. Net cash used in operating activities was $1,386,824. The primary use of cash for the fiscal year ended June 30, 2003 was to fund our net loss, offset by $106,407 for amortization of debt discount and non-cash interest expense, $572,352 representing the fair market value of options and warrants issued during the fiscal year and $3,580,022 for Common Stock and options issued to consultants and employees for services rendered. At this time, to conserve cash, we outsource the manufacture and distribution of our product and, during the last fiscal year, we paid some consultant and employee salaries with our Common Stock. During the next 12 months, if we cannot generate sufficient funds to operate our business from product sales, we may be required to sell additional debt or equity securities or borrow funds from related parties. We cannot be certain that we will be successful in obtaining financing if we need it. Cash flows from investing activities for the fiscal year ended June 30, 2003 consisted of $60,000 representing the collection of a note receivable while $8,451 was used in the purchase of property and equipment for net cash provided by investing activities of $51,549. Cash flows from investing activities for the year ended June 30, 2002 consisted of $9,427 spent on the purchase of property and equipment. Net cash provided by financing activities for the fiscal year ended June 30, 2003 included proceeds from the sale of Common Stock in the amount of $331,000, proceeds from notes payable to related parties in the amount of $100,000, proceeds from notes payable to unrelated parties in the amount of $385,000, a capital contribution in the amount of $300,000 from Moneyzone which 10 was made on the effective date of the merger, and proceeds from the exercise of options in the amount of $270,200. We also made payments on notes payable in the amount of $46,000, resulting in net cash provided by financing activities for the fiscal year ended June 30, 2003 in the amount of $1,340,200. During the fiscal year ended June 30, 2002, net cash provided by financing activities totaled $199,750 and resulted from proceeds from the sale of our Common Stock. Due to the very specific and unusual nature of NICOWater(TM), its manufacture and sale is an unproven business model that may not be successful and will ultimately depend on demand for the product. At this time it is impossible for us to predict the degree to which demand for our product will evolve or whether any potential market will be large enough to provide any meaningful revenue or profit for us. New Accounting Standards In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others," ("FIN 45"). FIN 45 requires us to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in the issuance of the guarantee. FIN 45 is effective for guarantees issued or modified after December 31, 2002. The disclosure requirements effective for the year ending December 31, 2002 expand the disclosures required by a guarantor about its obligations under a guarantee. The adoption of the disclosure requirements of this statement did not impact our financial position, results of operations or cash flows. In December 2002, Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," ("SFAS 148") was issued. SFAS 148 amends Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on the reported results. The provisions of SFAS 148 are effective for financial statements for fiscal years ending after December 15, 2002 and interim periods beginning after December 15, 2002. The adoption of the disclosure requirements of this statement did not impact our financial position, results of operations or cash flows. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of SFAS No. 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. We do not expect the adoption of SFAS No. 150 to have a material impact upon our financial position, cash flows or results of operations. FORWARD-LOOKING STATEMENTS This Form 10-KSB and other reports and statements filed by us with the Securities and Exchange Commission include "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995, and we desire to take advantage of the "safe harbor" provisions in those laws. Therefore, we are including this statement for the express purpose of availing ourselves of the protections of these safe harbor provisions with respect to all of the forward-looking statements we make. These forward-looking 11 statements reflect our current views with respect to possible future events and financial performance. They are subject to certain risks and uncertainties, including specifically the absence of significant revenues or long-term financial resources, a history of losses, the uncertainty of patent and proprietary rights, trading risks of low-priced stocks and those other risks and uncertainties discussed in this Annual Report that could cause our actual results to differ materially from our historical results or those we hope to achieve. In this report, the words "anticipates," "believes," "expects," "intends," "future" and similar expressions identify certain forward-looking statements. Except as required by law, we undertake no obligation to announce publicly revisions we make to these forward-looking statements to reflect the effect of events or circumstances that may arise after the date of this report. All written and oral forward-looking statements made subsequent to the date of this report and attributable to us or persons acting on our behalf are expressly qualified in their entirety by this section. Factors Affecting Business, Operating Results and Financial Condition An investment in our securities is very speculative and involves a high degree of risk. You should carefully consider the following risk factors, along with the other matters referred to in this Annual Report and in other documents we file with the Securities and Exchange Commission, before you decide to buy our securities. If you decide to buy our securities, you should be able to afford a complete loss of your investment. Risks Associated With Our Business We are currently in a dispute with the former owner of the NICO Patent. If we were to lose our rights to this patent, it would materially adversely effect our business, revenues and results of operations. We are currently focusing all of our efforts and capital toward the advertising, distribution and marketing of NICOWater(TM). In May 2003 we received notice from Marshall Anlauf Thompson, the inventor of the process by which we make NICOWater(TM) and the assignor of the rights to the NICO Patent, that he believed that we were in breach of the agreement by which we acquired the NICO Patent. Specifically, he alleges that we have failed to meet certain performance requirements included in that agreement and that he has a right to terminate the agreement and obtain a return of the NICO Patent. We have commenced an arbitration proceeding, as required by the agreement, to resolve this dispute. If the arbitrators were to rule against us and we lost the NICO Patent, it would have a material adverse effect on our business, revenues and results of operations. We are a recently formed business with very little operating history, therefore you have no basis on which to determine if we can be successful. In January 2003 we merged with Moneyzone.com, Inc. in a reverse acquisition. We have a very short history of operations, and we only began the marketing of our first product, NICOWater(TM), in May 2003. We are not certain that our products will generate significant revenues. During the year ended June 30, 2003, we incurred a net loss of $6,410,216 and had only $9,042 of revenues. Because we have a short operating history, you will have no basis upon which to accurately forecast our future operations, including sales, or to judge our ability to develop our business. If you purchase our securities, you may lose your entire investment. Because we have earned very little in revenues, the success of our business requires continued funding. If we cannot raise the money we need to support our operations until we earn significant revenues, we may be required to curtail or to cease our operations and you could lose your entire investment. Our ability to develop our business depends upon our receipt of money to continue our operations while we introduce our product and a market for it develops. If this funding is not received as needed, it is unlikely that we could continue our business, in which case you would lose your entire investment. In August 2003 we received gross proceeds of $1,000,000 in financing with a commitment for an additional gross proceeds of $1,000,000 in financing to be received following the effective date of a registration statement we are required to file in conjunction with 12 receipt of the financing. We believe that the proceeds from this financing, assuming a registration statement is declared effective and we receive the additional $1 million in gross proceeds, in conjunction with the financing of our accounts receivable which we are currently negotiating, will allow us to continue our operations for a period of approximately 12 months. However, we cannot assure you that the registration statement will be declared effective, nor can we assure you that we will be successful in obtaining accounts receivable financing. To the extent that we do not receive the additional gross proceeds of $1,000,000 in financing and are unsuccessful in obtaining accounts receivable financing, or to the extent that we need more money than has been committed to us, we cannot assure you that additional financing will be available to us when needed, on commercially reasonable terms, or at all. If we are unable to obtain additional financing if needed, we may be required to curtail the manufacturing and marketing of our product and possibly cease our operations. Our independent accountants have included an explanatory paragraph in their report on our financial statements set forth in this report stating that because of our significant losses and our working capital deficit there is substantial doubt that we can continue as a going concern. We are subject to the risks and uncertainties inherent in new businesses. If we fail to accurately forecast our capital needs or if our product does not earn significant revenues our business could fail and you could lose your entire investment. We are subject to the risks and uncertainties inherent in new businesses, including the following: o Our projected capital needs may be inaccurate, and we may not have enough money to develop our business and bring our products to market as we planned; o We may experience unanticipated development or marketing expenses, which may make it more difficult to develop our business and bring our products to market; o Even if we are able to develop our products and bring them to market, we may not earn enough revenues from the sales of our products to cover the costs of operating our business. If we are unsuccessful in our efforts to develop our business and if the product we provide does not produce revenues as we project, we are not likely to ever become profitable and we may be required to curtail some or all of our operations. If that happened you could lose your entire investment. We are dependent for our success on a few employees. The loss of one or more of these employees could have an adverse effect on our operations. Our future success will depend, to a significant degree, on the continued services of our Chief Executive Officer, Timothy Owens, our President, Steven Reder, and our Chief Financial Officer, Norman Kunin, and on our ability to attract, motivate and retain highly qualified and talented personnel. Loss of the services of Messrs. Owens, Reder and Kunin would have a material adverse effect on our business and operations. We cannot guarantee you that a market will develop for our product. If a market for our product does not develop, you may lose your entire investment. To our knowledge, there are no other water-based products available that are used to satisfy a self-diagnosed craving for tobacco. We must be able to successfully differentiate our product from other products that contain nicotine, so that smokers become aware of their benefits. We cannot assure you that we can develop a market for our product. Our inability to successfully develop a market for our product will have a material adverse effect on our business, operating results and financial condition and would render your investment worthless. 13 We currently have only one product and it is marketed to smokers. A number of different organizations, including government and medical organizations, are trying to curtail the use of cigarettes, particularly by children. If the number of smokers declines, the market for our product will also decline. This will have a material adverse effect on our business. Our product is marketed to smokers. In recent years campaigns to stop cigarette smoking, particularly among children, have increased. Currently, many state governments provide funds for programs designed to educate the public to the dangers of smoking. Schools and medical organizations are also active in alerting students and patients to the health risks associated with smoking. If these campaigns are successful and the number of smokers declines significantly, the need for our product will also decline. A significant decline in the number of smokers will have a material adverse effect on our business. We cannot assure you that we will be successful in developing and commercializing other products. Our ability to successfully develop any additional products is uncertain. Our research and development programs with respect to certain of our potential products are at an early stage. Potential new products may require additional research, development, testing, regulatory approval and additional investment prior to their commercialization, which may not be successful. There can be no assurance that we can develop commercially successful products. We could be subject to product liability claims. Our insurance may not be adequate to pay such claims. If we were required to pay a claim, our business and financial condition could be adversely effected and your investment may decline in value. Liability might result from claims made by consumers who purchase our product. We presently carry product liability insurance in amounts that we believe to be adequate, but we can give no assurance that such insurance will remain available at a reasonable cost or that any insurance policy would offer coverage sufficient to meet any liability arising as a result of a claim. The obligation to pay any product liability claim could have a material adverse effect on our business and financial condition. We may not be able to adequately protect our patents or other intellectual property or we could become involved in litigation with others regarding our intellectual property. Either of these events could have a material adverse effect on our business. We rely on a combination of patent laws, nondisclosure, trade secret and other contractual and technical measures to protect our proprietary rights in our product. However, we cannot assure you that these provisions will be adequate to protect our proprietary rights. In addition, the laws of certain foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Although we believe that our intellectual property does not infringe upon the proprietary rights of third parties, others may claim that we have infringed on their products. If we were to become involved in disputes regarding the use or ownership of intellectual property rights, we could incur substantial costs in defending or prosecuting any such action and the defense or prosecution of the action would likely result in a diversion of management resources. In addition, in order to settle such an action we could be required to acquire licenses from others or to give licenses to others on terms that are not beneficial to us. Any dispute relating to our intellectual property could have a material adverse effect on our business. Our products are regulated by the FDA and, in the worldwide market, government agencies like the FDA. We may be unsuccessful in obtaining regulatory approvals for our products, even though we may invest a significant amount of time and money into seeking such approvals. If our products do not receive the regulatory approvals we need to sell them, our revenues and operating results could be adversely effected and the value of your investment may decline. 14 The manufacture, sale, promotion and marketing of our current product, NICOWater(TM), and possibly our future products, are subject to regulation by the FDA and similar government regulatory bodies in other countries. As we develop or obtain new products, we will be required to determine what regulatory requirements, if any, are required to market and sell our products in the United States and worldwide. The process of obtaining regulatory approval could take years and be very costly, if approval can be obtained at all. If we failed to comply with such a requirement, we could be subjected to an FDA enforcement action. Such an action could take the form of a warning letter, an injunction to stop us from marketing the product at issue or a possible seizure of our assets. We intend to work diligently to assure compliance with all applicable regulations that impact our business. We cannot assure you, however, that we will be able to obtain regulatory approval for all of our products or that, in the future, additional regulations will not be enacted which might adversely impact our operations. In either case, our revenues and operating results could be adversely effected and the value of your investment may decline. Risks Associated With Ownership Of Our Securities We have not paid cash dividends and it is unlikely that we will pay cash dividends in the foreseeable future. We plan to use all of our earnings, to the extent we have earnings, to fund our operations. We do not plan to pay any cash dividends in the foreseeable future. We cannot guarantee that we will, at any time, generate sufficient surplus cash that would be available for distribution as a dividend to the holders of our Common Stock. You should not expect to receive cash dividends on our Common Stock. We have the ability to issue additional shares of our Common Stock without asking for shareholder approval, which could cause your investment to be diluted. Our Articles of Incorporation currently authorize the Board of Directors to issue up to 100,000,000 shares of Common Stock. The power of the Board of Directors to issue shares of Common Stock or warrants or options to purchase shares of Common Stock is generally not subject to shareholder approval. Accordingly, any additional issuance of our Common Stock may have the effect of further diluting your investment. We may raise additional capital through a securities offering that could dilute your ownership interest. We require substantial working capital to fund our business. If we raise additional funds through the issuance of equity, equity-related or convertible debt securities, those securities may have rights, preferences or privileges senior to those of the holders of our Common Stock. The issuance of additional Common Stock or securities convertible into Common Stock by our management will also have the effect of further diluting the proportionate equity interest and voting power of holders of our Common Stock. Our securities are thinly traded, so you may be unable to liquidate them if you need money. Our Common Stock trades sporadically on the Over-The-Counter Bulletin Board. It is not likely that an active market for our Common Stock will develop or be sustained in the foreseeable future. We are subject to the Penny Stock Rules and these rules may adversely effect trading in our Common Stock. Our Common Stock is considered a "low-priced" security under rules promulgated under the Securities Exchange Act of 1934. In accordance with these rules, broker-dealers participating in transactions in low-priced securities must first deliver a risk disclosure document which describes the risks associated with such stocks, the broker-dealer's duties in selling the stock, the customer's rights and remedies and certain market and other information. 15 Furthermore, the broker-dealer must make a suitability determination approving the customer for low-priced stock transactions based on the customer's financial situation, investment experience and objectives. Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written consent from the customer, and provide monthly account statements to the customer. The effect of these restrictions will likely be a decrease in the willingness of broker-dealers to make a market in our Common Stock, decreased liquidity of our Common Stock and increased transaction costs for sales and purchases of our Common Stock as compared to other securities. ITEM 7. FINANCIAL STATEMENTS 16 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders QT 5, Inc. We have audited the accompanying consolidated balance sheet of QT 5, Inc. (the "Company") as of June 30, 2003, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the years in the two-year period then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2003, and the results of its operations and its cash flows for each of the years in the two-year period then ended, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. During the year ended June 30, 2003, the Company incurred a net loss of $6,410,216, with only $9,042 of revenue. The Company also had an accumulated deficit of $10,185,776 and negative working capital of $736,273, with only $67,316 of cash at June 30, 2003. In addition, the Company is in arbitration with the patent holder of its only actively marketed product to resolve various allegations made by the patent holder against the Company. These factors, among others, as discussed in Note 1 to the consolidated financial statements, raise substantial doubt about the Company's ability to continue as a going concern. Successful completion of the Company's transition to the attainment of profitable operations is dependent upon its obtaining adequate financing to fulfill its development activities and achieving a level of sales adequate to support the Company's cost structure. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. CORBIN & COMPANY, LLP Irvine, California August 19, 2003, except for Note 11, as to which the date is September 5, 2003 QT 5, INC. CONSOLIDATED BALANCE SHEET ================================================================================
ASSETS June 30, 2003 ------------------- Current assets: Cash $ 67,316 Accounts receivable 95,226 Inventories 88,563 Deferred costs 21,551 Prepaid expenses 157,888 Notes receivable 139,500 ---------------- Total current assets 570,044 Property and equipment, net of accumulated depreciation of $5,507 29,871 Patent, net of accumulated amortization of $3,676 46,324 Other assets 8,107 ---------------- $ 654,346 LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued expenses $ 770,333 Lease liability 156,400 Notes payable 215,000 Notes payable to related parties 67,500 Deferred revenue 86,184 Deferred rent expense 10,900 ---------------- Total current liabilities 1,306,317 ---------------- Commitments and contingencies Stockholders' deficit: Common stock, $0.15 par value; 100,000,000 shares authorized; 40,821,552 shares issued and outstanding 6,123,233 Additional paid-in capital 3,839,529 Prepaid consulting expense (428,957) Accumulated deficit (10,185,776) ---------------- Total stockholders' deficit (651,971) ---------------- $ 654,346 ================
- -------------------------------------------------------------------------------- See independent auditors' report and accompanying notes to financial statements F-2 CONSOLIDATED STATEMENTS OF OPERATIONS ================================================================================
For The Year Ended For The Year Ended June 30, 2003 June 30, 2002 -------------------- --------------------- Revenue $ 9,042 $ - Costs and expenses: Cost of sales 3,708 - General and administrative 6,138,072 3,775,560 --------------- ---------------- Operating loss (6,132,738) (3,775,560) Other income (expense): Amortization of debt discount (106,407) - Interest (151,382) - Other, net (19,689) - ---------------- ---------------- Net loss $ (6,410,216) $ (3,775,560) =============== ================ Net loss available to common stockholders per common share: Basic and diluted $ (0.26) $ (0.60) ============== ============== Weighted average shares outstanding: Basic and diluted 24,828,564 6,257,985 =============== ================
- -------------------------------------------------------------------------------- See independent auditors' report and accompanying notes to financial statements F-3 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT ================================================================================
Additional Pre-paid Common Stock Paid-in Consulting Accumulated Shares Amount Capital Expense Deficit Total ------ ------ ------- ------- ------- ----- Balance, July 1, 2001 7,847,000 $1,177,050 $ (1,177,050) $ --- $ --- $ --- Issuance of common stock to founders for no Consideration 133,000 19,950 (19,950) --- --- --- Issuance of common stock for cash 531,335 79,700 120,050 --- --- 199,750 Issuance of common stock for services 9,312,660 1,396,899 2,104,101 --- --- 3,501,000 Issuance of common stock for patent 133,000 19,950 30,050 --- --- 50,000 Issuance of common stock for prepaid royalties 399,000 59,850 90,150 --- --- 150,000 Net loss --- --- --- --- (3,775,560) (3,775,560) ---------- ---------- ------------ ---------- --------------- ----------- Balance, June 30, 2002 18,355,995 2,753,399 1,147,351 --- (3,775,560) 125,190 Issuance of shares to Moneyzone in recapitalization of the Company 3,000,000 450,000 (150,000) --- --- 300,000 Issuance of common stock for services 7,201,085 1,080,163 2,853,690 (428,957) --- 3,504,896 Issuance of common stock as additional interest expense on notes payable 308,116 46,217 60,190 --- --- 106,407 Shares issued but held in escrow pending negotiations of transactions 3,660,160 549,024 (549,024) --- --- --- Issuance of common stock for exercise of options 3,394,731 509,210 (224,010) --- --- 285,200 Issuance of common stock for cash 2,200,854 330,128 872 --- --- 331,000 Shares committed to be issued to employees for services 300,000 45,000 30,126 --- --- 75,126 Issuance of common stock for conversion of convertible promissory note 1,720,000 258,000 (86,000) --- --- 172,000 Issuance of common stock for settlement of accounts Payable 680,610 102,092 34,342 --- --- 136,434 Estimated fair market value of options and warrants granted to consultants for services --- --- 572,352 --- --- 572,352 Estimated value of beneficial conversion feature on --- --- 149,640 --- --- 149,640 convertible promissory note Net loss --- --- --- --- (6,410,216) (6,410,216) ---------- ---------- ------------ ---------- --------------- ----------- Balance, June 30, 2003 40,821,551 $6,123,233 $ 3,839,529 $ (428,957) $ (10,185,776) $ (651,971) ========== ========== ============ =========== ================ ============
F-4 See independent auditors' report and accompanying notes to financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS ================================================================================
For The Year Ended For The Year Ended June 30, 2003 June 30, 2002 -------------------- --------------------- Cash flows from operating activities: Net loss $ (6,410,216) $ (3,775,560) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 7,779 1,404 Amortization of debt discount and non-cash interest expense 106,407 - Loss on issuance of shares for settlement of accounts payable 23,689 - Fair market value of options and warrants issued 572,352 - Gain on extinguishment of debt (2,000) - Stocks and options issued for services 3,580,022 3,501,000 Imputed interest expense on convertible debentures 149,640 - Changes in operating assets and liabilities: Accounts receivable (95,226) - Inventories (88,563) - Deferred costs (21,551) - Prepaid expenses (7,888) - Other assets - (8,107) Accounts payable and accrued expenses 712,848 142,130 Deferred revenue 86,184 - Deferred rent expense (301) 11,201 --------------- ---------------- Net cash used in operating activities (1,386,824) (127,932) --------------- ---------------- Cash flows from investing activities: Collection on notes receivable 60,000 - Purchases of property and equipment (8,451) (9,427) --------------- ---------------- Net cash provided by (used in) investing activities 51,549 (9,427) --------------- ---------------- Cash flows from financing activities: Proceeds from sale of stock 331,000 199,750 Proceeds from notes payable to related parties 100,000 - Proceeds from notes payable 385,000 - Payments on notes payable (46,000) - Capital contribution 300,000 - Proceeds from exercise of options 270,200 - --------------- ---------------- Net cash provided by financing activities 1,340,200 199,750 --------------- ----------------
- -------------------------------------------------------------------------------- Continued ... F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED ================================================================================
For The Year Ended For The Year Ended June 30, 2003 June 30, 2002 -------------------- --------------------- Net increase in cash 4,925 62,391 Cash, beginning of year 62,391 - --------------- ---------------- Cash, end of year $ 67,316 $ 62,391 =============== ================ Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ - $ - =============== ================ Income taxes $ - $ - =============== ================ Promissory notes receivable entered into as a consideration for the assumption of lease liability and other accounts payable $ 199,500 $ - =============== =============== Common stock issued for prepaid consulting services $ 428,957 $ - =============== =============== Furniture purchased under a note payable to related party $ 17,500 $ - =============== =============== Common stock issued to third parties for patent and prepaid royalties valued at $50,000 and $150,000, respectively $ - $ 200,000 =============== =============== Common stock issued for settlement of accounts payable $ 112,745 $ - =============== =============== Exercise of options for reduction of accounts payable $ 15,000 $ - =============== =============== Conversion of related party convertible promissory note to 1,720,000 shares of common stock $ 172,000 $ - =============== =============== Notes payable directly refinanced by related party lender $ 122,000 $ - =============== ===============
- -------------------------------------------------------------------------------- See independent auditors' report and accompanying notes to financial statements F-6 ================================================================================ NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Background and Organization On April 7, 2002, the Company entered into an Agreement for the Assignment of Patent Rights to U.S. Patent No. 6,268,386 (the "Agreement") relating to the formulation of nicotine beverages (the "Nico Patent"). The Agreement was effective only upon the execution and delivery of the assignment of patent. The assignment of patent was executed and delivered on June 26, 2002. The Company's first nicotine water-based product is NICOWater(TM). In acquiring the patent, the Company re-allocated its resources from focusing on the licensing and joint developing of medical testing devices and other pharmaceutical products to successfully launching its nicotine product line. In May 2003, the Company commenced shipping NICOWater(TM), its water-based Homeopathic Nicotinum (nicotine) product, designed to relieve the symptoms of tobacco cravings. As a result, the Company is no longer considered a development stage enterprise as defined in Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development Stage Enterprises." The Company's future plans include continuing its efforts to license small medical device(s) and pharmaceutical products together with its continued development for the professional and retail consumer markets. Other than its nicotine-based line of products, the Company has not currently developed nor does it have the definitive rights to market any other products; however, the Company is in negotiations to acquire a license for certain intellectual property rights and related associated research and development efforts and FDA approvals on an H.I.V. test kit, in-vitro drug test kit and a cardiac pulmonary test kit. Effective January 9, 2003, pursuant to the terms of the Agreement and Plan of Reorganization (the "Merger Agreement") between Moneyzone.com, Inc. ("Moneyzone"), and QuickTest 5, Inc. ("Quicktest") (the "Merger"), Quicktest merged with and into Moneyzone, the separate corporate existence of Quicktest ceased, and Moneyzone continued as the surviving entity and changed its name to "QT 5, Inc." and its symbol on the Over the Counter Bulletin Board to "QTFV." The original stockholders of Moneyzone retained 3,000,000 shares of common stock. In connection with the Merger, the Company issued an aggregate 25,000,000 shares of its common stock to Quicktest stockholders resulting in the Company having 28,000,000 shares of common stock issued and outstanding immediately following the Merger. - -------------------------------------------------------------------------------- F-7 ================================================================================ NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued As the Quicktest shareholders retained control of the combined entity after the Merger was completed, this transaction was accounted for as a "reverse acquisition." Under reverse acquisition accounting, Quicktest is considered the accounting acquirer and Moneyzone is considered the accounting acquiree; thus, the 3,000,000 shares of previously outstanding common stock of Moneyzone was accounted for as an issuance of shares in a recapitalization of the Company and valued at $300,000, representing monies advanced to Quicktest by Moneyzone prior to the Merger that were contributed to the Company upon consummation of the merger. In addition, the historical financial statements of Quicktest became those of the Company. The source of consideration used by the stockholders of Quicktest for the Merger were shares of common stock of Quicktest owned or held beneficially prior to the Merger that were acquired by the Company upon consummation of the Merger in exchange for the same number of similar securities issued by the Company. Principles of Consolidation The accompanying consolidated financial statements include the accounts of QT 5, Inc. and its wholly owned subsidiary. All significant intercompany transactions and balances have been eliminated in consolidation. Going Concern The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company incurred a net loss of $6,410,216, with only $9,042 of revenue during the year ended June 30, 2003. The Company also had an accumulated deficit of $10,185,776 and negative working capital of $736,273, with only $67,316 in cash at June 30, 2003. In addition, the Company is in arbitration with the patent holder of its only actively marketed product to resolve various allegations made by the patent holder against the Company (see Note 7). Management recognizes that the Company must obtain additional funding for the eventual achievement of sustained profitable operations. The Company's success is dependent upon numerous items, including the successful development of effective marketing strategies to customers in a competitive market coupled with faster service and a variety of options. The Company's new product line entered the market in May 2003 and management believes that this product will have a significant effect on future profitability. In August 2003, management successfully obtained additional capital through a $2 million sale and issuance of 6% convertible debentures, from which the Company received initial gross proceeds of $1 million with receipt of the second $1 million scheduled to occur following the effective date of a registration statement to be filed with the Securities and Exchange Commission - -------------------------------------------------------------------------------- F-8 ================================================================================ NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued covering the common stock underlying the debentures (see Note 11). In addition, the Company has received a proposal for a credit facility for accounts receivable financing and anticipates a definitive agreement in the near term. However, no assurance can be given that the above mentioned credit facility and additional $1 million convertible debenture funding will be consummated as contemplated or will generate sufficient cash to satisfy the Company's need for additional capital or that other debt or equity financing will be available to the Company on satisfactory terms. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of these uncertainties. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the respective reporting period. Actual results could differ from those estimates. Significant estimates made by management are, among others, the realization of prepaid royalties and long-lived assets, collectibility of receivables, and the valuation allowance on deferred tax assets. Fair Value of Financial Instruments The carrying values of the Company's financial instruments as of June 30, 2003, including cash, accounts receivable, notes receivable, accounts payable and accrued expenses, and notes payable, approximate their respective fair values due to their short maturities. The fair value of notes payable to related parties is not determinable as these transactions are with related parties. Concentration of Credit Risk The financial instrument which potentially subjects the Company to concentration of credit risk is cash. The Company maintains cash balances at certain high quality financial institutions, and at times such balances may exceed the Federal Deposit Insurance Corporation $100,000 insurance limit. As of June 30, 2003, there was approximately $1,000 of uninsured cash balances. - -------------------------------------------------------------------------------- F-9 ================================================================================ NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Accounts Receivable The Company extends credit to its customers and performs ongoing credit evaluations of such customers. The Company does not obtain collateral to secure its accounts receivable. At June 30, 2003, the Company recorded $86,184 of accounts receivable as deferred revenue, as the payment terms are contingent upon customer sell-through of product and therefore collectibility is not reasonably assured. Property and Equipment Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from three to seven years. Repairs and maintenance are charged to expense as incurred while significant improvements are capitalized. Upon retirement or other disposition of property and equipment, the accounts are relieved of the cost and the related accumulated depreciation, with any resulting gain or loss included in the consolidated statements of operations. Patent Patent is recorded at the fair value of the stock issued to acquire the patent (see Note 6) and is amortized using the straight-line method over its estimated remaining useful life of 17 years. Amortization expense for the years ended June 30, 2003 and 2002 was $2,941 and $735, respectively. Legal fees and other costs incurred in protecting patents are expensed as incurred. Impairment of Long-Lived Assets Long-lived assets and certain identifiable intangibles to be held and used by an entity are reviewed by the management of the Company for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. As of June 30, 2003, management of the Company believes that no impairment has been indicated. There can be no assurances, however, that market conditions will not change or demand for the Company's products will develop which could result in impairment of long-lived assets in the future. Conversion and Stock Split On January 9, 2003, the Company's stockholders approved an increase in the number of authorized common stock shares to 100,000,000. Also, pursuant to the terms of the Merger, the shares of Quicktest's common stock were converted into 1.33 shares of Moneyzone's common stock. - -------------------------------------------------------------------------------- F-10 ================================================================================ NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued All references in the consolidated financial statements and the accompanying notes referring to common shares, share prices, per share amounts, and stock plans have been adjusted to give retroactive effect to a conversion into 1.33 shares of Moneyzone's common stock. Revenue Recognition The Company recognizes revenue at the time of shipment of its products to customers. The Company was in its initial stage of selling the new product line to customers or distributors as of June 30, 2003. Pursuant to Staff Accounting Bulletin No. 101, the Company deferred $86,184 of its sales and the related costs of $21,551 to certain distributors as the payment terms are contingent upon customer sell-through of product and therefore collectibility is not reasonably assured. Advertising The Company expenses the cost of advertising when incurred as general and administrative expense. Advertising expense was approximately $72,000 and $70,000 for the years ended June 30, 2003 and 2002, respectively, and is included in general and administrative expenses on the accompanying consolidated statements of operations. Stock-Based Compensation The Company uses the intrinsic value method of accounting for stock-based compensation to employees in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." The Company accounts for non-employee stock-based compensation under SFAS No. 123, "Accounting for Stock-Based Compensation." At June 30, 2003, the Company has two stock-based employee compensation plans, which are described more fully in Note 6. During the year ended June 30, 2003 and 2002, $0 and $0, respectively, of compensation expense was recognized in the accompanying consolidated statements of operations for options issued to employees pursuant to APB 25, as all options granted in fiscal 2003 under those plans had exercise prices equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123, to stock-based compensation: - -------------------------------------------------------------------------------- F-11 ================================================================================ NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Year Ended June 30, ---------------------------------------- 2003 2002 ---------------- ---------------- Net loss as reported $ (6,410,216) $ (3,775,560) Deduct: Total stock-based employee compensation expense under APB 25 0 0 Add: Total stock-based employee compensation under fair value based method for all awards, net of related tax effects (268,820) 0 ---------------- ---------------- Pro forma net loss $ (6,679,036) $ (3,775,560) =============== ================ Basic and diluted loss per share - as reported $ (0.26) $ (0.60) =============== =============== Basic and diluted loss per share - pro forma $ (0.27) $ (0.60) =============== ===============
Income Taxes The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be recovered. Loss Per Share Basic loss per share is computed by dividing loss available to common stockholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. All potentially dilutive shares, 56,471 and 0 as of June 30, 2003 and 2002, respectively, have been excluded from dilutive loss per share, as their effect would be anti-dilutive for fiscal 2003 and 2002. - -------------------------------------------------------------------------------- F-12 ================================================================================ NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Comprehensive Income Comprehensive income is not presented in the Company's consolidated financial statements since the Company did not have any items of comprehensive income in any period presented. Segments of an Enterprise and Related Information As the Company operates in one segment, the Company has not made segment disclosures in the accompanying consolidated financial statements. New Accounting Pronouncements In November 2002, the Financial Accountings Standards Board ("FASB") issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company adopted FIN 45 in fiscal 2003 and there was no effect on its financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for financial statements issued for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company has applied the disclosure provisions in SFAS No. 148 in its consolidated financial statements and the accompanying notes. - -------------------------------------------------------------------------------- F-13 ================================================================================ NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of SFAS No. 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The Company does not expect the adoption of SFAS No. 150 to have a material impact upon its financial position, cash flows or results of operations. NOTE 2 - NOTES RECEIVABLE On January 1, 2003, the Company entered into promissory notes receivable in the total amount of $199,500 with two former stockholders of Moneyzone. These notes accrue interest at a rate of 4% per annum and are payable on January 1, 2004. The notes were entered into as consideration for a contingent liability and assumed defense costs relating to Moneyzone's lease liability resulting from abandoned office space (see Note 7) and other remaining accounts payable of Moneyzone assumed in the Merger (see Note 1). Pursuant to the terms of the notes, the amount of the notes shall be automatically adjusted to the amount of actual liability and defense costs incurred by the Company related to the litigation, and shall also be reduced by any amounts of Moneyzone's outstanding accounts payable which the Company does not actually pay within one year or which are forgiven or negotiated to lower amounts. These notes are secured by 399,000 shares of the Company's common stock owned by former stockholders. During the year ended June 30, 2003, the Company received $60,000 advance payment on the promissory notes receivable, resulting in the remaining notes receivable balance of $139,500 as of June 30, 2003. NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment consist of the following at June 30, 2003: Furniture and fixtures $ 19,307 Computer equipment and software 16,071 Less: accumulated depreciation (5,507) ------------ $ 29,871 ============ - -------------------------------------------------------------------------------- F-14 ================================================================================ NOTE 4 - PATENT AND ROYALTY FEE On April 7, 2002, the Company entered into the Agreement relating to the formulation of nicotine beverages (see Note 1). The Agreement was effective only upon the execution and delivery of the assignment of patent. The assignment of patent was executed and delivered on June 26, 2002. In consideration thereof, the Company issued 133,000 shares of its common stock valued at $50,000 (or $0.376 per share, which was management's estimate of the fair market value of its common stock on the date the patent was assigned). The cost of the patent is being amortized over the patent's remaining useful life of 17 years. In addition, the Company agreed to pay the original patent holder royalties of $1.20 per case, quarterly, for every case sold (consisting of 24 bottles per case) of the Company's products which utilize the patent, for the remaining life of the patent. The royalty payments will begin on the first day of the calendar quarter commencing at such time as the Company makes a first distribution. The Company has agreed to the following performance goals: (1) during the first year following the first distribution, the Company will sell a minimum of 500,000 cases of the patented product, and (2) during any year thereafter for the duration of this Agreement, the Company will sell a minimum of 1,000,000 cases of the patented product each year. In June 2002, the Company prepaid royalties through the issuance of 399,000 shares of its stock valued at $150,000 (or $0.376 per share which was management's estimate of the fair market value of its common stock on the date the shares were issued) in lieu of meeting the minimum performance requirement of the first year. This amount will be amortized to expense at the rate of $1.20 per case sold. The Company has filed for arbitration to resolve a dispute with the parties of this Agreement (see Note 7). During the year ended June 30, 2003, the Company recorded approximately $5,400 of royalty expense in the accompanying consolidated statements of operations related to this Agreement. NOTE 5 - NOTES PAYABLE In October 2002, the Company entered into a non-interest bearing convertible promissory note with a third party for $150,000. Unless earlier converted by the lender, the principal was due at the earlier of (1) four months from the effective date of the Schedule 14C of Moneyzone (but in no event later than March 31, 2003), or (2) a financing in which the Company receives net proceeds of $1 million. At the election of the holder, the outstanding principal of the note was convertible into shares of the Company's common stock at $0.75 per share (subject to standard adjustments on recapitalization, stock split, etc.). Pursuant to the terms of the promissory note, the Company issued 99,750 shares of the common stock valued at $30,000 (which was management's estimate of the fair market value of its common stock on the date the shares were issued) to the lender as additional consideration, which was recorded as a discount on the note - -------------------------------------------------------------------------------- F-15 ================================================================================ NOTE 5 - NOTES PAYABLE, continued and amortized to interest expense ratably through the earliest estimated due date of the note. In February 2003, the note was amended to extend the maturity date, unless earlier converted by the lender, to the earlier of (1) April 30, 2003, or (2) a financing in which the Company receives net proceeds of $1 million. In December 2002 and January 2003, the Company entered into three non-interest bearing convertible promissory notes with third parties totaling $235,000. Unless earlier converted by the lenders, the principal was due at the earlier of (1) April 30, 2003, or (2) a financing in which the Company receives net proceeds of either $1.5 or $2 million, as defined in the individual notes. At the election of the holder, the outstanding principal of the note was convertible into shares of the Company's common stock at $0.75 per share (subject to standard adjustments on recapitalization, stock split, etc.). Pursuant to the terms of the promissory note, the Company issued a total of 208,366 shares of the common stock valued at $76,407 (which was management's estimate of the fair market value of its common stock on the date the shares were issued) to one of its lenders as additional consideration, which was recorded as a discount on the notes and amortized to interest expense ratably through the earliest estimated due date of the note. During the year ended June 30, 2003 and 2002, the Company recorded interest expense of $106,407 and $0, respectively, from the amortization of discount on the above convertible promissory notes. During June 2003, the Company reduced the principal balance on these convertible promissory notes by a cash payment of $46,000, a direct refinancing payment from related party lender of $122,000 and by recording of a gain on extinguishment of debt of $2,000. All of these convertible promissory notes also contained certain penalty provisions under a default. In June 2003 the Company entered into a Settlement Agreement and Mutual General Releases with each of the above referenced note holders and with the related parties holding a total of $50,000 bridge loan promissory notes (see Note 8), mutually releasing all parties from any and all claims arising out of or related to the above referenced notes (the "Previous Notes"), and executed and delivered new Secured Notes and Security Agreements (the "New Notes") in the aggregate principal amount of $265,000. The New Notes supersede the Previous Notes, bearing interest at the rate of 12% per annum with the entire amount, including principal and accrued interest, due and payable on December 1, 2003. The New Notes were secured by a pledge and first and second priority security interest in all of the tangible and intangible assets of the Company, and included certain non-financial covenants and events of default, among other items, such as the Company's failure to ship in any calendar month at least 10,000 cases of NICOWater(TM) and generate gross sales of at least $280,000 from the sale of NICOWater(TM) in any month. - -------------------------------------------------------------------------------- F-16 ================================================================================ NOTE 5 - NOTES PAYABLE, continued In August 2003, the Company prepaid the entire principal and accrued interest due and payable under all the New Notes in the aggregate amount of $270,760 and has received full collateral releases from the noteholders. NOTE 6 - STOCKHOLDERS' DEFICIT Common Stock In October 2001, the Company issued 133,000 shares of common stock to various founders, which were recorded at $0 value as the Company had not commenced operations. During the fiscal year ended June 30, 2002, the Company: (i) sold 531,335 shares of common stock at $0.376 per share for $199,750 in cash; (ii) issued 9,312,660 shares of common stock valued at $3,501,000 (or $0.376 per share, which was the estimated fair market value of the common stock on the date the services were performed) as payment for consulting services to related parties and other third parties (see Note 8); and (iii) issued 133,000 and 399,000 shares of common stock to third parties for patent and prepaid royalties, respectively, valued at $50,000 and $150,000 (or $0.376 per share, which was the estimated fair market value of the common stock on the date the shares were issued), respectively (see Note 4). On January 9, 2003, the 3,000,000 shares of previously outstanding common stock of Moneyzone were accounted for as an issuance of shares in a recapitalization of the Company for $300,000 as part of the Merger (see Note 1). During the fiscal year ended June 30, 2003, the Company: (i) issued 2,751,093 shares of common stock for consulting services valued at $1,034,247 (or $0.376 per share, which was the estimated fair market value of the common stock on the date the shares were issued) and 2,200,000 restricted shares of common stock for consulting services valued at $1,571,728 (or $0.71 per share, which was the weighted average fair market value of its common stock on the dates of issuance), of which $60,959 was recorded as prepaid consulting expense to be amortized over the respective service periods and $2,545,016 was recorded as general and administrative expense in the accompanying consolidated statements of operations; (ii) issued 308,116 shares as additional interest expense pursuant to the terms of the convertible promissory notes payable valued at $106,407 as discussed in Note 5; - -------------------------------------------------------------------------------- F-17 ================================================================================ NOTE 6 - STOCKHOLDERS' DEFICIT, continued (iii) issued 3,660,160 shares valued at $0 as the shares were issued but held in escrow pending negotiation of certain transactions; (iv) issued 1,100,000 shares for consulting services under the 2000 Plan, valued at $1,118,213, (or $1.02 per share, which was the weighted average fair market value on the dates of issuance), of which $259,650 was recorded as prepaid consulting expense to be amortized over the respective service periods and $858,563 was recorded as general and administrative expense in the accompanying consolidated statements of operations; (v) issued 1,149,992 shares for consulting services under the 2003 Plan, valued at $209,665, (or $0.18 per share, which was the weighted average fair market value on the dates of issuance), of which $108,348 was recorded as prepaid consulting expense to be amortized over the respective service periods, and $214,063 was recorded as general and administrative expense in the accompanying consolidated statements of operations. In addition, the Company issued 680,610 shares under the 2003 Plan valued at $136,434 (or $0.20 per share, which was the weighted average fair market value on the dates of issuance) for the settlement of certain accounts payable totaling $112,745, recording a loss of $23,689 on the settlement of this accounts payable balance in other income (expense) in the accompanying consolidated statement of operations; (vi) issued 3,394,731 shares in connection with the exercise of options for $270,200 cash and $15,000 as a reduction of accounts payable; (vii) sold 2,200,854 shares of restricted common stock at a weighted average price of $0.15 per share and warrants to purchase 1,900,000 shares of common stock at a weighted average exercise price of $0.58 per share for which the Company received aggregate net cash proceeds of $331,000; (viii) committed to issue 300,000 shares of restricted common stock to employees in connection with their initial employment. The Company recorded salary expense of $75,126 (or $0.25 per share, which was the weighted average fair market value of its common stock on the employment agreement dates) in general and administrative expense in the accompanying consolidated statement of operations; and (ix) issued 1,720,000 shares of common stock for the conversion of a $172,000 related party note payable (see Note 8) (or $0.10 per share, which was the stated conversion price). Certain common stock purchase agreements with certain investors include a provision in which if for a period of six months from the purchase of shares the Company's common stock closing price for 5 consecutive trading days will be below $0.15 per share, the Company will issue to the investors additional shares, whereby the number of shares purchased and the additional shares, multiplied by $0.10 would be equal to the aggregate purchase price paid. For the year ended June 30, 2003, the aggregate purchase price paid by these investors totaled $310,000 and no additional shares were required to be issued. - -------------------------------------------------------------------------------- F-18 ================================================================================ NOTE 6 - STOCKHOLDERS' DEFICIT, continued Stock Options The Company has a stock option plan (the "2000 Plan"), as amended, that authorized the issuance of options and shares to acquire up to 2,533,330 registered shares of common stock to officers, employees, directors and consultants. On February 12, 2003, the Company increased the number of registered shares reserved for issuance pursuant to the Plan Amendment to 4,233,330 shares. The Plan allows for the issuance of either incentive stock options (which can only be granted to employees) and non-qualified stock options, pursuant to Section 422 of the Internal Revenue Code. Options vest at the discretion of the Board of Directors as determined at the grant date, but no longer than a ten-year term. Under the Plan, the exercise price shall not be less than fair market value on the date of grant for the incentive stock options, and not less than 50% of the fair market value on the date of grant for non-qualified stock options. The number of options under the Plan available for grant at June 30, 2003 was 2,655,830. On April 21, 2003, the Company adopted an incentive equity stock plan (the "2003 Plan") that authorized the issuance of options, right to purchase common stock and stock bonuses up to 10,000,000 shares, of which 5,000,000 shares were registered on April 25, 2003. The Plan allows for the issuance of incentive stock options (which can only be granted to employees), non-qualified stock options, stock awards, or stock bonuses pursuant to Section 422 of the Internal Revenue Code. Options vest at the discretion of the Board of Directors as determined at the grant date, but no longer than a ten-year term. Under the Plan, the exercise price shall not be less than fair market value on the date of grant for the incentive stock options, and not less than 85% of the fair market value on the date of grant for non-qualified stock options. The number of options under the 2003 Plan available for grant at June 30, 2003 was 5,252,167. Options to purchase 477,500 shares of the Company's common stock under the 2000 Plan at prices ranging from $0.13 per share to $0.30 per share (below the fair market value on the date of grant) were issued to consultants during the year ended June 30, 2003. All of these options were exercised during the year ended June 30, 2003 for cash of $90,200. Options to purchase 2,917,231 shares of the Company's common stock under the 2003 Plan at prices ranging from $0.03 per share to $0.22 per share (below the fair market value on the date of grant) were issued to consultants during the year ended June 30, 2003. All of these options were exercised during the year ended June 30, 2003 for cash of $180,000 and reduction of an accounts payable of $15,000. The Company has no options outstanding as of June 30, 2003. The general and administrative expense recognized in the accompanying consolidated statements of operations pursuant to SFAS No. 123 for the options issued to non-employees was $362,337 during the year ended June 30, 2003. No options were issued or outstanding during the year ended June 30, 2002. - -------------------------------------------------------------------------------- F-19 ================================================================================ NOTE 6 - STOCKHOLDERS' DEFICIT, continued The fair value of each option granted during the year ended June 30, 2003 was estimated using the Black-Scholes option pricing model on the date of grant using the following assumptions: (i) no dividend yield, (ii) average volatility of 167.80 percent (iii) weighted average risk free interest rate of approximately 1.23 percent, and (iv) average expected life of 1 year. The Black-Scholes option valuation method was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. Warrants From time to time, the Company issues warrants pursuant to various employment, consulting and third party agreements. During the fiscal year ended June 30, 2003, the Company: (i) issued warrants to purchase 2,560,000 shares of the Company's common stock at $0.17 per share (the fair market value on the date of grant) to two of its officers in connection with their employment agreements and recorded $0 of compensation expense as the warrants had exercise prices equal to the market value of the underlying common stock on the date of grant; (ii) issued warrants to purchase 2,060,000 shares of the Company's common stock at prices ranging from $0.01 per share to $0.17 per share (at or below the fair market value on the dates of grant) to consultants. 2,000,000 of these warrants vest immediately and 60,000 of these warrants vest upon the Company's share price reaching certain fair market values. The Company recorded general and administrative expense of $210,015 during the year ended June 30, 2003 for these warrants; and (iii) issued warrants to purchase 1,900,000 shares of the Company's common stock to certain third-party investors for $0.58 per share (see "Common Stock" section above). Certain common stock purchase warrant agreements with certain investors include a right by the Company to call any or all shares of the common stock issued under warrant agreement from the warrant holder for (i) $2.00 per share for the first 950,000 shares and (ii) $3.00 per share for the remaining 950,000 shares through June 9, 2004. This call right can by exercised by the Company only if the Company's common stock has a closing price above the call price for 7 consecutive trading days prior to execution of the call right. - -------------------------------------------------------------------------------- F-20 ================================================================================ NOTE 6 - STOCKHOLDERS' DEFICIT, continued No warrants were issued or outstanding during the year ended June 30, 2002. The following represents a summary of the warrants outstanding for the year ended June 30, 2003:
Weighted Average Exercise Price Number of Warrants Per Share -------------------- ------------------ Outstanding at July 1, 2002 - $ - Granted 6,520,000 0.29 Exercised - - Canceled - - --------------- -------------- Outstanding at June 30, 2003 6,520,000 $ 0.29 =============== =============== Exercisable at June 30, 2003 6,460,000 ===============
The following summarizes information about warrants outstanding at June 30, 2003:
Warrants Outstanding Warrants Exercisable ------------------------------------------------------ ------------------------------- Weighted Average Weighted Weighted Number of Remaining Average Number of Average Range of Shares Contractual Exercise Shares Exercise Exercise Prices Outstanding Life (Years) Price Exercisable Price ------------------- --------------- ---------------- --------------- ------------- -------------- $0.01 60,000 4.8 $ 0.01 - $ - $0.17 4,560,000 4.9 $ 0.17 4,560,000 $ 0.17 $0.40-$0.75 1,900,000 4.9 $ 0.57 1,900,000 $ 0.57 ------------ ---------- ----------- ----------- 6,520,000 $ 0.29 6,460,000 $ 0.29 ============ ========== =========== ===========
The fair value of each warrant granted during the year ended June 30, 2003 to consultants and employees is estimated using the Black-Scholes option pricing model on the date of grant using the following assumptions: (i) no dividend yield, (ii) average volatility of 173.90 percent (iii) weighted average risk free interest rate of approximately 1.23 percent, and (iv) average expected life of 1 year. - -------------------------------------------------------------------------------- F-21 ================================================================================ NOTE 7 - COMMITMENTS AND CONTINGENCIES Lease Commitment The Company leases its facility under an operating lease agreement expiring April 30, 2005. Under the lease, the Company pays $7,669 per month through March 31, 2003, $7,888 per month through March 31, 2004, and $8,107 per month thereafter. The total amount of rent paid during the year ended June 30, 2003 and 2002 was $96,161 and $28,828, respectively. The Company records rent expense on a straight-line basis, resulting in deferred rent and additional rent expense (income) of $(301) and $11,201 as of June 30, 2003 and 2002, respectively. The future minimum annual lease payments under this lease agreement at June 30, 2003 are as follows: Years Ending June 30, ----------------------------- 2004 $ 95,000 2005 73,000 --------------- $ 168,000 Employment Agreements In June 2003, the Company entered into employment agreements with two of its officers. The agreements are for a five-year term through June 2008 and provide for a combined base salary of $600,000 per annum through October 2003, $720,000 per annum through October 2004, and an annual increase of at least 10% thereafter until the termination date. The agreements also provide for a combined sign-up bonus of $200,000, annual combined net profit bonus of 4% of the Company's net income, issuance of incentive stock options, and warrants to acquire a total of 2,560,000 shares of the Company's common stock (see Note 6). Additionally, the agreements provide for a combined payment of $1,440,000 upon sale or merger of the Company, and severance payment of one year of base salary, as defined. Litigation On November 15, 2002, Fidelity Mortgage, Inc. ("Fidelity") filed a lawsuit against the Company in the Supreme Court of the State of New York alleging that the Company breached a sublease with Fidelity. Fidelity is seeking $156,400 in damages plus interest, costs and attorneys' fees. The Company is in the process defending this litigation and has recorded a liability of $156,400 in the accompanying consolidated balance sheet. - -------------------------------------------------------------------------------- F-22 ================================================================================ NOTE 7 - COMMITMENTS AND CONTINGENCIES, continued As of May 6, 2003, the Company responded to what it believes are unfounded allegations regarding the assignment of patent rights agreement between the patent inventor and the Company. The Company filed for arbitration on June 6, 2003. The Company believes that the patent inventor's claims lack any merit. The Company intends to vigorously pursue its claims in the arbitration. Nevertheless, arbitration is uncertain, and the Company may not prevail in the arbitration and can express no opinion as to its ultimate outcome. The Company is, from time to time, involved in various legal and other proceedings which arise in the ordinary course of operating its business. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not materially affect the consolidated financial position or results of operations of the Company. Indemnities and Guarantees During the normal course of business, the Company has made certain indemnities and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include certain agreements with the Company's officers, under which the Company may be required to indemnify such person for liabilities arising out of their employment relationship. The duration of these indemnities and guarantees varies and, in certain cases, is indefinite. The majority of these indemnities and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not been obligated to make significant payments for these obligations and no liabilities have been recorded for these indemnities and guarantees in the accompanying consolidated balance sheet. NOTE 8 - RELATED PARTY TRANSACTIONS During the years ended June 30, 2003 and 2002, the Company paid or accrued approximately $571,250 and $235,500, respectively, and issued shares valued at approximately $712,425 and $3,409,000, respectively, to various related parties, including officers and/or stockholders of the Company for consulting and other administrative services. During the year ended June 30, 2003, the Company issued options to a related party to purchase 3,344,731 shares. Pursuant to SFAS No. 123, the Company recorded general and administrative expense of $347,514 in the accompanying consolidated statements of operations. During the year ended June 30, 2003, all of these options were exercised for cash of $270,200. - -------------------------------------------------------------------------------- F-23 ================================================================================ NOTE 8 - RELATED PARTY TRANSACTIONS, continued Moneyzone advanced cash of $300,000 in July 2002 to the Company. Upon consummation of the Merger, the inter-company advance was eliminated in consolidation and recorded as a capital contribution (see Notes 1 and 6). In September 2002, the Company entered into bridge loan promissory notes ("Notes") with two majority stockholders of Moneyzone for a total of $50,000 with interest at 10% per annum. The principal and interest were due on the closing of collective funding by the Company of not less than $250,000. Pursuant to the terms of the Notes, the Company could not be sold or otherwise merged into any other entity except Moneyzone, unless the Notes holders were repaid. These Notes were conditionally guaranteed by the CEO of the Company if the Company would not meet its covenants. In June 2003 the Company entered into a Settlement Agreement and Mutual General Releases with each of these Notes holders, mutually releasing all parties from any and all claims arising out of or related to the above referenced notes (the "Previous Notes"), and executed and delivered new Secured Notes and Security Agreements (the "New Notes") in the aggregate principal amount of these notes of $50,000 (see Note 5). The notes were paid in full subsequent to June 30, 2003 (see Note 5). In November 2002, the Company entered into a non-interest bearing note, due on demand, for a purchase of certain office furniture from one of its officers for $17,500. This note was repaid subsequent to June 30, 2003. On June 11, 2003, the Company entered into a convertible promissory note agreement with one of its shareholders for $172,000 with 1% interest per annum, convertible at $0.10 per share to shares of the Company's common stock. On June 23, 2003, the note was converted to 1,720,000 shares of the Company's common stock. The Company recorded interest expense of $120,400 in the accompanying consolidated financial statements related to the beneficial conversion feature in the convertible promissory note. - -------------------------------------------------------------------------------- F-24 ================================================================================ NOTE 9 - INCOME TAXES No current provision for federal income taxes is required for the year ended June 30, 2003 and 2002, since the Company incurred net operating losses through June 30, 2003. The tax effect of temporary differences that give rise to significant portions of the deferred tax asset at June 30, 2003 are presented below: Deferred tax asset: Net operating loss carryforward $ 3,840,000 Stock options and warrants 230,000 Reserves and accruals 26,000 ---------------- 4,096,000 Deferred tax liability: Deferred income (34,000) ---------------- 4,062,000 Less valuation allowance (4,062,000) ---------------- Net deferred tax assets $ - ================ The valuation allowance increased by $2,552,000 and $1,510,000 during the years ended June 30, 2003 and 2002, respectively. The provision for income taxes for the years ended June 30, 2003 and 2002 differs from the amount computed by applying the U.S. Federal income tax rate of 34% to income before income taxes primarily as a result of state income taxes and changes in the valuation allowance. As of June 30, 2003, the Company had net operating loss carryforwards of approximately $9,600,000 available to offset future taxable federal and state income. The federal and state carryforward amounts expire in varying amounts through 2023 and 2010, respectively. - -------------------------------------------------------------------------------- F-25 ================================================================================ NOTE 10 - BASIC AND DILUTED LOSS PER COMMON SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted loss per common share computations for the years ended June 30, 2003 and 2002:
2003 2002 -------------------- ------------------- Numerator for basic and diluted loss per common share - net income (loss) $ (6,410,216) $ (3,775,560) ================ ================ Denominator for basic and diluted loss per common share - weighted average shares 24,828,564 6,257,985 =============== ================= Basic and diluted income (loss) per common share $ (0.26) $ (0.60) ================ ===============
NOTE 11 - SUBSEQUENT EVENTS In July 2003, the Company issued 1,000,000 shares of common stock for cash of $150,000 and a warrant to purchase 1,000,000 shares of the Company's common stock at $0.50 per share to a third party. The warrant expires in 5 years and vests immediately. The warrant agreement also includes a right by the Company to call any or all shares of the common stock issued under the warrant agreement from the warrant holder for (i) $2.00 per share for the first 500,000 shares and (ii) $3.00 per share for the remaining 500,000 shares through July 9, 2004. This call right can by exercised by the Company only if the Company's common stock has a closing price above the call price for 5 consecutive trading days prior to execution of the call right. On August 22, 2003, the Company entered into a Securities Purchase Agreement with certain investors pursuant to which the Company issued 6% convertible debentures in the total principal amount of $2,000,000. The first payment of $1,000,000 in gross proceeds was provided at the first closing, as defined, and up to $1,000,000 at the second closing, as defined. The debenture is payable on August 22, 2006. The interest of 6% per annum is payable quarterly, plus an additional interest of 15% per annum will accrue daily if all accrued interest is not paid in full when due. The debenture is convertible at the option of the holder into shares of the Company's common stock at $0.075 with a forced conversion option by the Company if certain closing prices are attained, as defined. The Company is required to register the shares that might be issued under the agreement and is subject to liquidated damages if agreed upon timetables are not met, as defined. In connection with the Securities Purchase Agreement, the Company also issued warrants to purchase 13,333,333 shares of the Company's common stock at an exercise price of $0.075 per share. In connection with the issuance of detachable warrants and the beneficial conversion feature of the debentures, the Company will record a debt discount of $1,000,000 and amortize the discount using the effective interest method through August 2006. - -------------------------------------------------------------------------------- F-26 ================================================================================ NOTE 11 - SUBSEQUENT EVENTS, continued In July 2003, the Company issued 270,430 shares of the Company's common stock, valued at $79,629 (or $0.29 per share, which is the fair market value of the stock on the date of issuance), to a consultant for services to be performed in the future. In August 2003, the Company issued 206,000 shares of the Company's common stock valued at $48,320 (or $0.23 per share, which is the fair market value of the stock on the dates of issuance), to two consultants for services to be performed in the future. In August 2003, the Company issued 283,590 shares of the Company's common stock, valued at $79,405 (or $0.28 per share, which is the fair market value of the stock on the date of issuance), for settlement of accounts payable. In September 2003, the Company issued 170,773 shares of the Company's common stock for consulting services rendered, valued at $32,447 (or $0.19 per share, which is the fair market value of the stock on the date of issuance). In August 2003, the Company prepaid notes payable and notes payable to related parties with maturity dates of December 1, 2003 in the principal amounts of $215,000 and $50,000, respectively, plus interest of $5,760 for an aggregate payment of $270,760, and has received full collateral releases from the noteholders (see Note 5). In August 2003, the Company entered into employment agreement with one of its officers. The agreement is for a five-year term through July 31, 2008 and provides for a base salary of $250,000 per annum through October 1, 2003, $300,000 per annum through October 1, 2004, and an increase of at least 10% annually until the termination date. The agreement also provides for a sign-up bonus of $75,000 payable over a seven month period, annual net profit bonus of 1.25% of the Company's net income, issuance of incentive stock options, and warrant to issue 750,000 shares of the Company's common stock at $0.24 per share (fair market value of the stock on the date of issuance). Additionally, the agreement provides for a payment of $500,000 upon sale or merger of the Company, and severance payment of one year of base salary. In August 2003, the Company issued 1,500,000 shares of its restricted common stock to one of its shareholders in full payment of a non-interest bearing demand promissory note of $112,500 dated July 25, 2003. Based on the estimated fair value of the stock issued, the Company will recognize a loss on debt settlement of $155,250 in its quarter ended September 30, 2003. - -------------------------------------------------------------------------------- F-27 ================================================================================ NOTE 11 - SUBSEQUENT EVENTS, continued In August 2003, the Company issued 127,171 shares of its restricted common stock to one of its shareholders valued at $25,452 (or $0.20 per share, which was the weighted average fair market value on the dates the services were performed) for settlement of consulting fees payable totaling $22,500. The Company will record a loss of $2,952 on the settlement of this accounts payable balance in its quarter ended September 30, 2003. - -------------------------------------------------------------------------------- F-28 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 8A. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. Regulations under the Securities Exchange Act of 1934 require public companies to maintain "disclosure controls and procedures," which are defined to mean a company's controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Our Chief Executive Officer ("CEO"), President and our Chief Financial Officer ("CFO") carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on those evaluations, as of the Evaluation Date, our CEO, President and CFO believe: (i) that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management, including the CEO, President and CFO, as appropriate to allow timely decisions regarding required disclosure; and (ii) that our disclosure controls and procedures are effective. (b) Changes in Internal Controls. There were no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect our internal controls subsequent to the evaluation date. 17 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Directors and Officers Our officers and directors are: NAME AGE TITLE Timothy J. Owens 48 Chief Executive Officer, Director Steven H. Reder 45 President, Director Norman A. Kunin 65 Chief Financial Officer There are no family relationships among any of our directors or officers. The size of our Board of Directors is currently fixed at two members. Members of the Board serve until the next annual meeting of stockholders and until their successors are elected and qualified. Officers are appointed by and serve at the discretion of the Board. None of our directors or executive officers has, during the past five years, o had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer, either at the time of the bankruptcy or within two years prior to that time, o been convicted in a criminal proceeding and none of our directors or executive officers is subject to a pending criminal proceeding, o been subject to any order, judgment, or decree not subsequently reversed, suspended or vacated of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities, or o been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated. Timothy J. Owens. Chief Executive Officer and Director. Mr. Owens is our founder and has been Chief Executive Officer since our inception. From March 1994 to January 1999, Mr. Owens served as Chief Executive Officer of Job Services, Inc., a privately held company. Mr. Owens received his Masters of Science Degree in Finance from LaSalle University in Louisiana. Mr. Owens also received letters of academic excellence in engineering from President Gerald R. Ford and President James Carter in 1976 and 1978. 18 Steven H. Reder. President and Director. Mr. Reder has been President and a member of our Board of Directors since January 2002. Mr. Reder also acted as our Chief Financial Officer from January 2002 until the appointment of Norman A. Kunin on August 8, 2003. From February 1994 to January 2002, Mr. Reder was President, CEO and majority stockholder of Friends Industry, Inc. (dba Graphix Press), a specialty printer, packaging and point of purchase display company. Prior to his employment with Graphix Press, Mr. Reder was the Chief Financial Officer for Delta Lithograph Company, a Bertelsmann company. Norman A. Kunin. Chief Financial Officer. Norman A. Kunin joined us in August 2003 as Chief Financial Officer after having been a consultant since May 2003. Mr. Kunin's professional career encompasses over thirty years of diversified financial management expertise, beginning as a certified public accountant. Approximately 30 years ago Mr. Kunin and his partners sold their accounting firm to a predecessor to Deloitte and Touche. Thereafter, Mr. Kunin continued his career as a financial executive and consultant for a variety of private and publicly held companies. From September 1998 to August 2003, Mr. Kunin was employed by Kunin Business Consulting, a division of Ace Investors, LLC located in Santa Maria, California. His consulting engagements included financial forecasting, business planning and providing temporary services as a chief financial officer and/or financial executive. Mr.Kunin earned his Bachelor of Business degree with major in Accounting at New York's City College and is a member of the American Institute of Certified Public Accountants. Compliance with Section 16(a) of the Exchange Act Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors, and persons who own more than ten percent of our Common Stock to file reports of ownership and change in ownership with the Securities and Exchange Commission and the exchange on which the Common Stock is listed for trading. Executive officers, directors and more than ten percent stockholders are required by regulations promulgated under the Exchange Act to furnish us with copies of all Section 16(a) reports filed. Based solely on our review of copies of the Section 16(a) reports filed for the fiscal year ended June 30, 2003, we believe that our executive officers, directors and ten percent stockholders complied with all reporting requirements applicable to them, with the exception of William C. Bossung, who failed to file a Form 3 reporting his ownership of shares of our Common Stock. ITEM 10. EXECUTIVE COMPENSATION The following tables and discussion set forth information with respect to all compensation, including incentive stock option plan and non-plan compensation awarded to, earned by or paid to the President and Chief Executive Officer for all services rendered in all capacities to us for each of its last three completed fiscal years. No disclosure has been made for any executive officer, other than the Chief Executive Officer and President, because, during the last three completed fiscal years, there were no other executive officers. 19
SUMMARY COMPENSATION TABLE LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS PAYOUTS -------------------------------------------------------------------------------------- Other Restricted All Other Annual Stock Securities LTIP Compen- Name and Principal Salary Bonus Compensation Awards Underlying Payout sation Position Year (Note 1) (Note 2) Note 3) ($) Options/SARs ($) ($) ($) ($) ($) Timothy J. Owens, 2003 16,750 100,000 177,500 0 1,280,000 0 0 Chief Executive 2002 0 0 113,500 0 0 0 0 Officer 2001 0 0 0 0 0 0 0 Steven Reder 2003 16,750 100,000 177,500 0 1,280,000 0 0 President 2002 0 0 105,000 0 0 0 0 2001 0 0 0 0 0 0 0
Note 1 - These salaries are accrued and unpaid for the period June 9 through June 30, 2003. Note 2 - These bonuses are accrued pursuant to employment agreements dated June 9, 2003, but have not been paid. Note 3 - Represent total amounts due to these executive officers pursuant to consulting agreements that pre-dated their employment. Cash payments made to Timothy J. Owens for the years 2003 and 2002 were $162,500 and $32,500, respectively. Cash payments made to Steven Reder for the years 2003 and 2002 were $162,500 and $35,000, respectively. Stock Options The following tables set forth certain information concerning the granting and exercise of stock options during the last completed fiscal year by each of the named executive officers and the fiscal year-end value of unexercised options on an aggregated basis: Option/SAR Grants for Last Fiscal Year-Individual Grants(1)
Number of % of Total Securities Options/SARs Granted Underlying to Employees in Options/SARs Fiscal Year Exercise Price ($/sh) Name Granted (#) Expiration Date - -------------------------- -------------------- ---------------------- ---------------------- ---------------------- Timothy J. Owens 1,280,000 50% $0.17/share June 9, 2008 Steven Reder 1,280,000 50% $0.17/share June 9, 2008 - -------------------------- -------------------- ---------------------- ---------------------- ----------------------
Aggregated Option/SAR Exercises in Last Fiscal Year And FY-End Option/SAR Values(1)
Value of Number of Unexercised Unexercised In-the-Money Options/SARs Options/SARs at FY-End (#) at FY-End ($)(2) Shares Acquired Value Realized(1) Unexercisable/ Unexercisable/ Name on Exercise (#) ($) Exercisable Exercisable - -------------------------- -------------------- ---------------------- ---------------------- ---------------------- Timothy J. Owens -0- -0- 0/1,280,000 $0/$0 Steven Reder -0- -0- 0/1,280,000 $0/$0 - -------------------------- -------------------- ---------------------- ---------------------- ----------------------
(1) Value realized is determined by calculating the difference between the aggregate exercise price of the options and the aggregate fair market value of the common stock on the date the options are exercised. (2) The value of unexercised options is determined by calculating the difference between the fair market value of the securities underlying the options at fiscal year end and the exercise price of the options. Director Compensation There is no standard or individual compensation package for any of the directors. Employment Contracts In June 2003 we entered into an employment agreement with Timothy J. Owens to employ him as Chief Executive Officer. The agreement is for a five year term, through June 8, 2008, and provides for a base salary of $300,000 per year through October 1, 2003, $360,000 per year through October 1, 2004, and an increase of at least 10% annually until the termination date. The agreement also provides for a one-time signing bonus of $100,000, payable in four equal payments of $25,000 each on July 1 and October 1, 2003 and January 1 and April 1, 2004, a bonus computed annually totaling 2.00% of net income, issuance of incentive stock options and a warrant to purchase 1,280,000 shares of our Common Stock at an exercise price of $0.17 per share, the fair market value of the Common Stock on the date of issuance. Additionally, the agreement provides for a payment of $720,000 upon certain transactions, such as a sale of substantially all of our assets or a merger, and a severance benefit of one year's base salary. As of the date of filing this Annual Report, Mr. Owens has not been paid any of the signing bonus has received partial advances against his base salary in the aggregate amount of $30,000. In June 2003 we entered into an employment agreement with Steven H. Reder to employ him as President. The agreement is for a five year term, through June 8, 2008, and provides for a base salary of $300,000 per year through October 1, 2003, $360,000 per year through October 1, 2004, and an increase of at least 10% annually until the termination date. The agreement also provides for a one-time signing bonus of $100,000, payable in four equal payments of $25,000 each on July 1 and October 1, 2003 and January 1 and April 1, 2004, a bonus computed annually totaling 2.00% of net income, issuance of incentive stock options and a warrant to purchase 1,280,000 shares of our Common Stock at an exercise price of $0.17 per share, the fair market value of the Common Stock on the date of issuance. Additionally, the agreement provides for a payment of $720,000 upon certain transactions, such as a sale of substantially all of our assets or a merger, and a severance benefit of one year's base salary. As of the date of filing this Annual Report, Mr. Reder has not been paid any of his signing bonus and has received partial advances against his base salary in the aggregate amount of $12,500. In August 2003 we entered into an employment agreement with Norman A. Kunin. The agreement is for a five year term, through July 31, 2008, and provides for a base salary of $250,000 per year through October 1, 2003, $300,000 per year through October 1, 2004, and an increase of at least 10% annually until the termination date. The agreement also provides for a one-time signing bonus of $75,000, payable in three equal payments of $25,000 each on 20 August 4 and November 1, 2003 and February 1, 2004, a bonus computed annually totaling 1.25% of net income, issuance of incentive stock options and a warrant to purchase 750,000 shares of our Common Stock at an exercise price of $0.24 per share, the fair market value of the Common Stock on the date of issuance. Additionally, the agreement provides for a payment of $500,000 upon certain transactions, such as a sale of substantially all of our assets or a merger, and a severance benefit of one year's base salary. As of the date of filing this Annual Report, Mr. Kunin has received his salary when due and a partial advance against his signing bonus in the amount of $17,500. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of September 10, 2003 as to each person who is known to us to be the beneficial owner of more than 5% of our outstanding Common Stock and as to the security and percentage ownership of each of our executive officers and directors and all of our officers and directors as a group. The term "executive officer" is defined as the Chief Executive Officer, President and the Chief Financial Officer. Except where specifically noted, each person listed in the table has sole voting and investment power with respect to the shares listed.
- ----------------------- ----------------------------------------- --------------- -------------- Number of Percentage Shares Ownership Title of Class of Beneficially Security Name and Address(1) Owned(2) - ----------------------- ----------------------------------------- --------------- -------------- Common Stock Timothy J. Owens(2)(3)(4)(5) 6,749,520(7) 15.2% Common Stock Steven H. Reder(2)(3)(4)(5) 5,096,780 11.5% Common Stock Norman Kunin(2)(3) 1,070,000 2.4% Common Stock Fred DeLuca(5) 3,399,480 7.7% Common Stock Federico Cabo(5) 3,491,250(9) 7.9% Common Stock Shelly Singhal(5)(6) 2,528,421 5.7% Common Stock Platinum Partners Global Macro Fund LP (8) 3,166,666 7.1% All Officers and Directors (3 persons) 12,916,300 29.1% - ----------------------- ----------------------------------------- --------------- --------------
(1) The address for Mr. Owens, Mr. Reder, Mr. Kunin and Mr. DeLuca is c/o QT 5, Inc., 5655 Lindero Canyon Road, Suite 120, Westlake Village, California 91362; the address for Federico Cabo is P. O. Box 10007, Newport Beach, California 92658; and the address for Shelly Singhal is c/o SBI, USA, 2361 Campus Drive, Suite 210, Irvine, California 92612. (2) Included in this calculation are 1,280,000 shares deemed beneficially owned by Timothy J. Owens, 1,280,000 shares deemed beneficially owned by Steven H. Reder and 750,000 shares deemed beneficially owned by Norman A. Kunin by virtue of their right to acquire them within 60 days of the date of this Annual Report that would be required to be reported pursuant to Rule 13d-3 of the Securities Exchange Act of 1934. These shares represent warrants granted to Messrs. Owens, Reder and Kunin in conjunction with their employment. (3) Executive Officer. (4) Director. (5) 5% Shareholder. (6) This information was acquired from a filing made with the Securities and Exchange Commission. (7) Includes 52,750 shares of Common Stock registered to Melissa Owens, 171,250 shares of Common Stock registered to Zach Owens and 2,399,320 shares of Common Stock registered to TMZ Group LLC. (8) Included in this calculation are 1,500,000 shares deemed beneficially owned by the shareholder by virtue of its right to acquire them within 60 days of the date of this Annual Report that would be required to be reported pursuant to Rule 13d-3 of the Securities Exchange Act of 1934. These shares are included in a warrant issued to the shareholder. (9) Included in this number are 2,660,000 shares of our Common Stock held in escrow, as described in Item 12 of this Annual Report. 21 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Moneyzone advanced cash of $300,000 to us in July 2002. Upon consummation of our merger with Moneyzone, the inter-company advance was eliminated in consolidation and recorded as a capital contribution. In September 2002, we entered into bridge loan promissory notes ("Notes") with two majority stockholders of Moneyzone for a total of $50,000 with interest at 10% per annum. The principal and interest were due to be paid on the closing of collective funding of not less than $250,000. These Notes were conditionally guaranteed by Timothy J. Owens, our Chief Executive Officer, in the event that we did not pay the Notes in accordance with their terms. In June 2003 we entered into a Settlement Agreement and Mutual General Releases with each of the holders of the Notes, mutually releasing all parties from any and all claims arising out of or related to the Notes, and executed and delivered new Secured Notes and Security Agreements (the "New Notes") in the aggregate principal amount of $50,000. The New Notes were paid in full subsequent to the fiscal year ended June 30, 2003. In November 2002, we executed a non-interest bearing note, due on demand, for a purchase of certain office furniture from Steven H. Reder for $17,500. This note was repaid subsequent to June 30, 2003. During the 2003 and 2002 fiscal years and prior to their employment with us, we retained the services of Timothy J. Owens and Steven H. Reder as consultants. During these periods, we paid or accrued consulting fees of $177,500 and $113,500 to Mr. Owens and consulting fees of $177,500 and $105,000 to Mr. Reder. During the 2003 and 2002 fiscal years, we retained the consulting services of Federico Cabo, a 5% shareholder, and we paid or accrued consulting fees of $122,500 and $3,000 during these periods, respectively. We also retained consulting services of other parties related to the officers and we paid or accrued consulting fees of $93,750 and $14,000 during these periods, respectively. In January and February 2003, we issued to the following parties an aggregate of 1,351,650 shares of our Common Stock in connection with consulting services having a total value of $685,425:
Name Description No. of Shares $ Value - -------------------------------------------------------------------------------------------------------- Federico Cabo 5% shareholder 399,000 $ 199,500 Timothy Owens Officer/Director/5% shareholder 186,200 $ 93,100 Zachariah Owens Related to Officer/Director 104,750 $ 56,125 Melissa Owens Related to Officer/Director 104,750 $ 56,125 Geoffrey Reder Related to Officer/Director 86,450 $ 43,225 Richard Cabo Related to 5% shareholder 99,750 $ 49,875 Gregory Cabo Related to 5% shareholder 66,500 $ 33,250 Diane Cabo Related to 5% shareholder 66,500 $ 33,250 Federico Cabo, Jr. Related to 5% shareholder 66,500 $ 33,250 Michael Reder Related to Officer/Director 86,450 $ 43,225 Anne Reder Related to Officer/Director 66,500 $ 33,250 Willie Reder Related to Officer/Director 5,000 $ 6,250
As part of the negotiations to purchase a non-controlling interest in a bottling facility in Mexico from OCIF-OBAC-SA de CV, an entity owned and controlled by Federico Cabo, a 5% shareholder, we authorized and issued to escrow 2,660,000 shares of our Common Stock until a definitive agreement could be reached. At present, a definitive agreement has not been reached. The shares are still issued and held subject to a cancellation fee equal to 15% of the shares held in escrow unless a definitive agreement can be reached. 22 In March 2003, we issued to Shelly Singhal, a 5% stockholder, 50,000 shares of our Common Stock in exchange for $14,500. In April 2003, we issued to Shelly Singhal, a 5% stockholder, 890,893 shares of our Common Stock in exchange for $118,200. In May 2003, we issued to Shelly Singhal, a 5% stockholder, 2,403,838 shares of our Common Stock in exchange for $137,500. In May 2003, before he was retained as our Chief Financial Officer, we issued to Norman A. Kunin 320,000 shares of our Common Stock as payment for consulting services provided by Kunin Business Consulting, a division of Ace Investors LLC, valued at $32,000. In June 2003 we issued to SBI USA, LLC, an affiliate of Shelly Singhal, 1,720,000 shares of our Common Stock pursuant to the terms of a convertible promissory note in the principal amount of $172,000. On August 29, 2003 we issued a total of 1,627,171 shares of our Common Stock to SBI-USA, LLC, an affiliate of Shelly Singhal. Of this amount, 1,500,000 shares were issued in settlement of a demand promissory note for a loan in the amount of $112,500 and 127,171 shares were issued in payment of amounts due in connection with the termination of a financial advisory agreement dated June 2, 2003. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 2.1 Agreement and Plan of Merger, dated as of June 28, 1999, by and among the registrant, EBonlineinc.com, Inc., and John D. Brasher, Jr., incorporated by reference to our Current Report on Form 8-K (File No. 000-25022), dated as of July 15, 1999. 2.2 Amendment No. 1 to the Agreement and Plan of Merger, dated as of June 28, 1999, by and among the registrant, EBonlineinc.com, Inc., and John D. Brasher, Jr., incorporated by reference to our Current Report on Form 8-K (File No. 000-25022), dated as of July 15, 1999. 2.3 Letter Agreement between MoneyZone.com and Global Capital Partners Inc. dated as of March 7, 2001, incorporated by reference to our Current Report on Form 8-K (File No. 000-25022), dated as of March 7, 2001. 2.4 Agreement and Plan of Merger, dated as of July 15, 2002, by and among the registrant and QuickTest 5, Inc., incorporated by reference to Exhibit 10.2 of our Schedule 14C (File No. 000-25022), filed with the Commission on December 11, 2002 (the "Schedule 14C"). 23 2.5 Certificate of Merger, dated as of January 9, 2003, between the registrant and Quicktest 5, Inc., incorporated by reference to Exhibit 10.1 of the Schedule 14C. 3.1 Certificate of Incorporation, dated as of April 4, 1989, incorporated by reference to Registration Statement on Form 10-SB (File No. 0-25022), dated as of October 27, 1994. 3.2 Certificate of Amendment to Certificate of Incorporation, dated as of November 8, 1990, incorporated by reference to Registration Statement on Form 10-SB (File No. 0-25022), dated as of October 27, 1994. 3.3 Certificate of Amendment to Certificate of Incorporation, dated as of October 26, 1994, incorporated by reference to Registration Statement on Form 10-SB (File No. 0-25022), dated as of October 27, 1994. 3.4 Certificate of Increase in Number of Authorized Shares of Common Stock, dated as of July 8, 1996, amending the Certificate of Incorporation, incorporated by reference to our Annual Report on Form 10-KSB (File No. 000-25022), dated as of March 30, 2000. 3.5 Certificate of Amendment to Certificate of Incorporation, dated as of March 12, 1997, incorporated by reference to our Annual Report on Form 10-KSB (File No. 000-25022), dated as of March 30, 2000. 3.6 Certificate of Amendment to Certificate of Incorporation, dated as of March 20, 1998, incorporated by reference to our Annual Report on Form 10-KSB (File No. 000-25022), dated as of April 14, 1998. 3.7 Certificate of Amendment to Certificate of Incorporation, dated as of March 31, 1998, incorporated by reference to our Annual Report on Form 10-KSB (File No. 000-25022), dated as of April 14, 1998. 3.8 Certificate of Amendment to Certificate of Incorporation, dated as of July 8, 1999, incorporated by reference to our Annual Report on Form 10-KSB (File No. 000-25022), dated as of March 30, 2000. 3.9 Certificate of Amendment to Certificate of Incorporation, dated as of July 22, 1999, incorporated by reference to our Annual Report on Form 10-KSB (File No. 000-25022), dated as of March 30, 2000. 3.10 Certificate of Amendment to Certificate of Incorporation, dated as of December 17, 1999, incorporated by reference to our Annual Report on Form 10-KSB (File No. 000-25022), dated as of March 30, 2000. 3.11 By-Laws of MoneyZone.com, Inc., incorporated by reference to Registration Statement on Form 10-SB (File No. 0-25022), dated as of October 27, 1994. 4.1 Form of Registration Rights Agreement, dated as of October 1, 1999, by and among EBonlineinc.com, and each of the investors listed on Exhibit A thereto, incorporated by reference to our Annual Report on Form 10-KSB (File No. 000-25022), dated as of March 30, 2000. 24 4.2 Convertible Debenture Purchase and Exchange Agreement dated as of September 15, 2000, incorporated by reference to our Current Report on Form 8-K (File No. 000-25022), dated as of September 15, 2000. 4.3 6% Convertible and Exchangeable Debenture, incorporated by reference to our Current Report on Form 8-K (File No. 000-25022), dated as of September 15, 2000. 4.4 Common Stock Purchase Warrant, incorporated by reference to our Current Report on Form 8-K (File No. 000-25022), dated as of September 15, 2000. 4.5 Registration Rights Agreement, incorporated by reference to our Current Report on Form 8-K (File No. 000-25022), dated as of September 15, 2000. 4.6 Registration Rights Agreement by and among registrant and NDMS Investments, L.P. and NDMS Investments, L.P. assignees incorporated by reference to our Annual Report on Form 10-KSB (File No. 000-25022) dated as of April 15, 2003. 4.7 $150,000 Promissory Note dated September 30, 2002, between the registrant and NDMS Investments, L.P. incorporated by reference to our Annual Report on Form 10-KSB (File No. 000-25022) dated as of April 15, 2003. 4.8 Amendment No. 1 to $150,000 Promissory Note dated February 28, 2003 incorporated by reference to our Annual Report on Form 10-KSB (File No. 000-25022) dated as of April 15, 2003. 4.9 Registration Rights Agreement dated September 30, 2002, between the registrant and NDMS Investments, L.P. incorporated by reference to our Annual Report on Form 10-KSB (File No. 000-25022) dated as of April 15, 2003. 10.1 Office Building Lease dated March 15, 2002 between the registrant and Village Green Officer Park incorporated by reference to our Annual Report on Form 10-KSB (File No. 000-25022) dated as of April 15, 2003. 10.2 Agreement for the Assignment of Patent Rights, dated April 7, 2002, by and between the registrant and Marshall Anlauf Thompson, incorporated by reference to Exhibit 99.1 of the registrant's Form 8-K as filed with the Commission on January 24, 2003. 10.3 2000 Stock Option Plan, incorporated by reference to Exhibit 10.1 of the registrant's Form S-8 (File No. 333-92236) filed with the Commission on July 11, 2002 (the "Form S-8"). 10.4 Amendment No. 1 to the 2000 Stock Option Plan, incorporated by reference to Exhibit 10.2 of the Form S-8. 10.5 Amendment No. 2 to the 2000 Stock Option Plan, incorporated by reference to Exhibit 10.3 of the registrant's Form S-8 (File No. 333-103208) filed with the Commission on February 14, 2003. 25 10.6 Issuance Agreement dated September 30, 2002, by and between the registrant and NDMS Investments, L.P. incorporated by reference to our Annual Report on Form 10-KSB (File No. 000-25022) dated as of April 15, 2003. 10.7 Issuance Agreement, dated December 31, 2002, by and between the registrant and NDMS Investments, L.P. incorporated by reference to our Annual Report on Form 10-KSB (File No. 000-25022) dated as of April 15, 2003. 10.8 2003 Incentive Equity Stock Plan, incorporated by reference to Exhibit 10.1 of the registrant's Form S-8 (File No. 333-104740) filed with the Commission on April 25, 2003. 10.9 Employment Agreement dated June 9, 2003 between the registrant and Timothy J. Owens, filed herewith. 10.10 Employment Agreement dated June 9, 2003 between the registrant and Steven H. Reder, filed herewith. 10.11 Employment Agreement dated August 4, 2003 between the registrant and Norman Kunin, filed herewith. 10.12 Common Stock Purchase Warrant dated June 9, 2003 issued to Timothy J. Owens, filed herewith. 10.13 Common Stock Purchase Warrant dated June 9, 2003 issued to Steven Reder, filed herewith. 10.14 Common Stock Purchase Warrant dated August 4, 2003 issued to Norman A. Kunin, filed herewith. 10.15 Securities Purchase Agreement dated August 19, 2003 between the registrant and various purchasers of the registrant's convertible debentures, filed herewith. 10.16 Registration Rights Agreement dated August 19, 2003 between the registrant and various purchasers of the registrant's convertible debentures, filed herewith. 10.17 Warrant dated August 19, 2003 between the registrant and various purchasers of the registrant's convertible debentures, filed herewith. 10.18 6% convertible debenture entered into by the registrant and various purchasers on September 22, 2003, filed herewith. 21 Subsidiaries of the registrant, filed herewith. 22.1 Information Statement on Schedule 14C, incorporated by reference to Schedule 14C (File No. 000-25022), dated as of March 20, 2000. 22.2 Information Statement on Schedule 14C, incorporated by reference to Schedule 14C (File No. 000-25022), dated as of December 11, 2002. 23 Consent of Corbin & Company, LLP, dated September 18, 2003, filed herewith. 26 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a), filed herewith. 31.2 Certification of President Pursuant to Rule 13a-14(a) and 15d-14(a), filed herewith. 31.3 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a), filed herewith. 32. Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. (b) Reports on 8-K On May 30, 2003 the registrant filed a Form 8-K to disclose a press release announcing the launch of its product, NICOWater(TM). On June 5, 2003 the registrant filed a Form 8-K that disclosed a transcript of a conference call during which the registrant discussed the launch of its product, NICOWater(TM), and gave revenue and earnings guidance. On June 18, 2003 the registrant filed a Form 8-K announcing the restructuring of certain promissory notes and making a statement relating to its dispute with Mr. Marshall Thompson, the assignor of the technology for the manufacture of the registrant's product, NICOWater(TM). On August 4, 2003 the registrant filed a Form 8-K to disclose a press release relating to allegations made by Platinum Products LLC. On August 27, 2003 the registrant filed a Form 8-K to disclose a press release announcing that it had obtained $2 million in financing. 27 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table sets forth fees billed to us by our auditors during the fiscal years ended June 30, 2002 and June 30, 2003 for: (i) services rendered for the audit of our annual financial statements and the review of our quarterly financial statements, (ii) services by our auditor that are reasonably related to the performance of the audit or review of our financial statements and that are not reported as Audit Fees, (iii) services rendered in connection with tax compliance, tax advice and tax planning, and (iv) all other fees for services rendered. "Audit Related Fees" consisted of consulting regarding accounting issues. "All Other Fees" consisted of fees related to the issuance of consents for our S-8 Registration Statements and this Annual Report. June 30, 2003 June 30, 2002 ------------- ------------- (i) Audit Fees $ 63,365 $ 47,892 (ii) Audit Related Fees $ 6,710 $ 0 (iii) Tax Fees $ 2,980 $ 0 (iv) All Other Fees $ 10,950 $ 0 28 SIGNATURES In accordance with Section 13 of 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. QT 5, INC. Date: September 23, 2003 By: /s/ Timothy J. Owens ----------------------------------------- Timothy J. Owens, Chief Executive Officer By: /s/ Norman A. Kunin ----------------------------------------- Norman A. Kunin, Chief Financial Officer In accordance with the requirements of the Exchange Act, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Name Title Date /s/ Timothy J. Owens Chief Executive Officer September 23, 2003 - ------------------- and director Timothy J. Owens /s/ Steven Reder President and director September 23, 2003 - --------------------------- Steven Reder /s/ Norman A. Kunin Chief Financial Officer September 23, 2003 - --------------------------- Norman A. Kunin
EX-10.9 3 ex-10_9.txt Exhibit 10.9 QT 5, INC. EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is made and entered into this ninth day of June 2003 by and between QT 5, Inc., a Delaware corporation (the "Company"), and Timothy J. Owens ("Executive"). RECITALS WHEREAS, Executive has the experience to provide services to the Company of an extraordinary character which gives such services a unique value; and WHEREAS, the Company desires to retain the services of Executive, and Executive desires to be employed by the Company for the term of this Agreement. NOW AND THEREFORE, the Company and Executive, intending to be legally bound, hereby agree as follows: 1. EMPLOYMENT. The Company hereby employs Executive as the CHIEF EXECUTIVE OFFICER of the Company. For the term of Executive's employment, and upon the other conditions set forth in this Agreement, Executive accepts such employment and agrees to perform services for the Company, subject always to such resolutions as are established from time to time by the Board of Directors of the Company. 2. TERM. The term of Executive's employment hereunder shall commence on the execution date of this Agreement and continue through June 8, 2008 subject to the termination provisions contained herein. The Agreement may be terminated by the Company only for cause as set forth below, and shall not constitute "at will" employment. 3. POSITION AND DUTIES. 3.1. SERVICES WITH THE COMPANY. During the term of this Agreement, Executive agrees to perform such duties and exercise such powers related thereto as may from time to time be assigned to him by the Company's Board of Directors (the "Board"). Executive shall duly and diligently perform all duties assigned to him while in the employ of the Company. He shall be bound by and faithfully observe and abide by all rules and regulations of the Company which are brought to his notice or of which he should be reasonably aware. Executive hereby accepts such employment, agrees to serve the Company in the capacities indicated, and agrees to use Executive's best efforts in, and shall devote Executive's full working time, attention, skill and energies to, the advancement of the interests of the Company and the performance of Executive's duties and responsibilities hereunder. 3.2. NO CONFLICTING DUTIES. Executive shall devote sufficient productive time, ability, and attention to the business of the Company during the term of this Agreement in a manner that will serve the best interests of the Company. During the term hereof, Executive shall not serve as an officer, director, employee, consultant or advisor to any other business without the 1 prior written consent of the Company's Board, which may be withheld for any reason. Executive hereby confirms he is under no contractual commitments inconsistent with his obligations set forth in this Agreement. This Agreement shall not be interpreted to prohibit Executive from making passive personal investments or conduct private business affairs if those activities do not materially interfere with the services required under this Agreement. 4. COMPENSATION. 4.1 ANNUAL SALARY. As compensation for all services to be rendered by Executive under this Agreement, the Company shall pay to Executive an annual salary of Three Hundred Thousand Dollars ($300,000), which shall increase to Three Hundred Sixty Thousand Dollars ($360,000) effective October 1, 2003 (the "Annual Salary"). Executive's Annual Salary shall be paid on a regular basis in accordance with the Company's normal payroll procedures and policies. On or before the yearly anniversary date of this Agreement, the Board of Directors shall determine the increase to the Annual Salary, but in no event shall it be less than ten (10%) . The adjusted Annual Salary shall become effective on October 1 each year. 4.2 SIGNING BONUS. Upon the execution of this Agreement, Executive shall earn a signing bonus of One Hundred Thousand Dollars ($100,000) (the "Signing Bonus") payable by the Company in four quarterly payments of Twenty Five Thousand Dollars ($25,000) each on July 1, 2003, October 1, 2003, January 1, 2004 and April 1, 2004. In addition, the Company shall issue and deliver to Executive, in the aggregate a series of five-year Warrants to purchase 1,280,000 shares (the "Warrants") of the Company's common stock (the "Shares"), which shall include provisions for cashless exercise. The purchase price for the Shares shall be $0.17 per share. The Warrants shall be issued, and shall fully vest on the date of issuance. The number and character of the Shares of common stock and the purchase price are subject to adjustment as provided therein. A form of the Warrant is attached hereto as Exhibit A. 4.3 NET PROFIT BONUS. The Company shall pay Executive an annual bonus ("Net Profit Bonus"). The Net Profit Bonus shall equal two percent (2%) of the Company's annual net income, calculated using Generally Accepted Accounting Principles. The Net Profit Bonus shall be payable annually no later than the fifteenth (15th) day of the third month following the end of the Company's fiscal year in cash and/or the equivalent cash amount in fully vested stock options at the fair market price of the Company's stock on the last day of the Company's calendar year, at the sole discretion of Executive. 4.4 INCENTIVE STOCK OPTIONS. The Company shall issue incentive stock options to Executive pursuant to the Company's qualified Incentive Stock Option Plan. At the discretion of, and in an amount to be determined by, the Board of Directors, no later than seventy five (75) days following the end of each of the Company's fiscal years, Executive will receive incentive stock options at an exercise price equal to the fair market value at the end of each fiscal year, but in no event shall the total value exceed $100,000 per year. However, if the Executive owns at least 10% of the Company's common stock, then the purchase price that will be paid to the Company when the option is exercised and the stock purchase must equal 110% of the fair market value of the common stock as of the date of grant. The Incentive Stock Options shall vest immediately and shall terminate ten years from the date of grant. Executive may exercise the incentive stock options, at his sole and absolute discretion, by providing the Company with written notice accompanied by (1) cash or a cashier's check an amount equal to the product of the incentive 2 stock option exercise price and the number of shares Executive desires to purchase pursuant to this provision; or (2) by a cashless exercise whereby Executive receives the net amount of shares after deducting the value of the exercise price. 4.5 STOCK AND OPTION REGISTRATION RIGHTS. In the event the Company with or without the assistance of an investment banking firm, conducts a registered offering of the Company's shares, the Company shall provide Executive with registration rights to all shares, warrants and/or options which Executive then holds or otherwise directly or constructively owns. 4.6 ANTI-DILUTION. The number and kind of shares or other securities that may be issued in accordance with this Agreement shall be subject to adjustment from time to time upon the happening of certain events while this Agreement remains effective, as follows: (a) Merger, Sale of Assets, etc. If the Company at any time shall consolidate with or merge into or sell or convey all or substantially all its assets to any other corporation, the Executive, shall thereafter have the right to have issued such number and kind of shares or other securities as would have been issuable or distributable on account of such consolidation, merger, sale or conveyance, upon or with respect to the number of shares of Common Stock and number of Warrants Executive could be entitled to have issued immediately prior to such consolidation, merger, sale or conveyance based on this Agreement. The foregoing provision shall similarly apply to successive transactions of a similar nature by any such successor or purchaser. Without limiting the generality of the foregoing, the provisions of this Section shall apply to such securities of such successor or purchaser after any such consolidation, merger, sale or conveyance. (b) Reclassification, etc. If the Company at any time shall, by reclassification or otherwise, change the Common Stock into the same or a different number of securities of any class or classes, the Executive shall thereafter have the right to have issued an adjusted number of such securities and kind of securities as would have been issuable as the result of such change with respect to the number of shares of Common Stock or Warrants that may be issuable to Executive immediately prior to such reclassification or other change as of the effective date for such reclassification or change. (c) Stock Splits, Combinations and Dividends. If the shares of Common Stock are subdivided or combined into a greater or smaller number of shares of Common Stock, or if a dividend is paid on the Common Stock in shares of Common Stock, any securities issuable to Executive shall be proportionately adjusted in case of subdivision of shares or stock dividend by the ratio which the total number of shares of Common Stock outstanding immediately after such event bears to the total number of shares of Common Stock outstanding immediately prior to such event. 3 (d) Share Issuance. Subject to the provisions of this Section, if the Company at any time shall issue any shares of Common Stock prior to the exercise of any warrants that have been issued to Executive in accordance with this Agreement (otherwise than as: (i) provided in Sections 4.6(a), 4.6(b) or 4.6(c) or this subparagraph; (ii) pursuant to warrants or options that may be granted in the future under any option plan of the Company, or any employment agreement, joint venture, credit, leasing or other financing agreement or any joint venture or other strategic arrangement, in each case now or hereinafter entered into by the Company; (iii) pursuant to any agreement entered into by the Company or any of its subsidiaries for the acquisition of another business (whether by stock purchase or asset purchase, merger or otherwise; or (iv) for services rendered by consultants; (i), (ii) and (iii) above, are hereinafter referred to as the "Excluded Issuances")) for a consideration less than the exercise price of Executive warrants (the "Exercise Price"), then, and thereafter successively upon each such issue, the Exercise Price shall be reduced as follows: (i) the number of shares of Common Stock outstanding immediately prior to such issue shall be multiplied by the Exercise Price and the product shall be added to the aggregate consideration, if any, received by the Company upon such issue of additional shares of Common Stock; and (ii) the sum so obtained shall be divided by the number of shares of Common Stock outstanding immediately after such issue. The resulting quotient shall be the adjusted Exercise Price. Except for the Excluded Issuances for purposes of this adjustment, the issuance of any security of the Company carrying the right to convert such security into shares of Common Stock or of any warrant, right or option to purchase Common Stock shall result in an adjustment to the Exercise Price upon the issuance of shares of Common Stock upon exercise of such warrant exercise rights. (e) During the period the warrant exercise right exists, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the full exercise of Executive's warrants. The Company represents that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. The Company agrees that its issuance of the Executive's warrants shall constitute full authority to its officers, agents, and transfer agents who are charged with the duty of executing and issuing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the exercise of Executive's warrants. 4.7 EXPENSES. The Company shall reimburse Executive for all reasonable business or travel expenses and office related expenses incurred by Executive in the performance of his duties; including but not limited to: airfare, automobile rental, lodging, meals, telephone, copy costs, and supplies. .. 4.8 BUSINESS TRAVEL. The Company and Executive recognize that it may 4 periodically be necessary for Executive to travel on behalf of the Company. The Company agrees that whenever Executive is required to travel a distance in excess of that which may be reached within three hours or more by regularly scheduled commercial air carriers, the Company will pay for Executive to travel in business class or better. 4.9 ANNUAL VACATION. Executive shall be entitled to fourteen (14) days vacation time each year without loss of compensation. In the event that Executive is unable for any reason to take the total amount of vacation time authorized herein during any year, any unused vacation time shall carry over from year to year. Any earned but unused vacation time will be paid to Executive based upon his annual rate of all compensation paid in the previous twelve months upon termination or expiration of this Agreement. 4.10 SICK LEAVE. Executive shall be entitled to seven (7) days sick leave each year without loss of compensation. In the event that Executive does not take the total amount of sick leave authorized herein during any year, any unused sick leave shall carry over from year to year. Any entitled but unused sick leave will be paid to Executive based upon his annual rate of all compensation paid in the previous twelve months upon termination or expiration of this Agreement. 4.11 HEALTH INSURANCE. The Company, at its sole cost and expense, shall provide Executive and his immediate family members with comprehensive PPO or HMO health insurance including but not limited to medical, dental, vision and disability coverage. 4.12 PAYMENT UPON SALE OR MERGER OF COMPANY. In the event the Company shall merge, sell a controlling interest, or sell a majority of its assets, the Company shall pay Executive Seven Hundred and Twenty Thousand Dollars ($720,000). Further, as to any vested but unexercised options to purchases shares in the Company which are held by Executive at the earlier of (1) the Company's execution of a Letter of Intent to (a) merge, (b) sell a controlling interest, or (c) sell a majority of its assets, or (2) the date of any such merger or sale is consummated, the Company shall pay Executive cash in the amount equal to the difference between the consideration paid to the Company on a per share basis less the exercise price of the option, the value of which is multiplied by the number of options which Executive holds. 4.13 AUTOMOBILE ALLOWANCE. The Company shall provide Executive a monthly automobile allowance in the amount of $750.00 (the "Automobile Allowance"). In the event this Agreement is terminated prior to its expiration for any reason, all payments of the Automobile Allowance shall cease immediately and Executive shall be responsible for any and all payments remaining on any lease, loan or rental agreement in connection with said Automobile Allowance. Payment of the aforesaid allowance shall be subject to any applicable withholdings tax. The Executive shall be responsible for all income taxes imposed on the Executive by reason of the automobile allowance. 5. TERMINATION AND TERMINATION BENEFITS. Notwithstanding the provisions of Section 2, Executive's employment under this Agreement shall terminate under the following circumstances set forth in this Section 5. 5 5.1 TERMINATION BY THE COMPANY FOR CAUSE. Executive's employment under this Agreement may be terminated for Cause without further liability on the part of the Company other than for accrued but unpaid Annual Salary through the date of termination effective immediately upon written notice to Executive. No termination for Cause may be invoked by the Company without first providing Executive with at least thirty (30) days written notice to correct any breach, default or causation. Such written notice shall set forth with reasonable specificity the Company's basis for such notice of termination and Executive shall have thirty (30) days to correct the condition set forth in the notice. "Cause" shall mean the following: (i) Commission of a criminal act involving fraud, embezzlement or breach of trust or other act which would prohibit Executive from holding his position under the rules of the Securities and Exchange Commission. (ii) Willful, knowing and malicious violation of written corporate policy or rules of the Company. (iii) Willful, knowing and malicious misuse, misappropriation, or disclosure of any of the Proprietary Matters. (iv) Misappropriation, concealment, or conversion of any money or property of the Company. (v) Being under the habitual influence of intoxicating liquors or controlled substances while in the course of employment. (vi) Intentional and non-trivial damage or destruction of property of the Company. For purposes of this provision, non-trivial is defined to mean damage occurring in the course of a single act or occurrence in an amount exceeding Two Thousand Dollars ($2,000). (vii) Reckless and wanton conduct which endangers the safety of other persons or property during the course of employment or while on premises leased or owned by the Company. (viii) The performance of duties in a habitually unsatisfactory manner after being repeatedly advised in writing by the Company of such unsatisfactory performance. (ix) Continued incapacity on the part of Executive to perform his duties, unless waived by the Company. 5.2 TERMINATION WITHOUT CAUSE. 5.2.1 DISABILITY. Executive's employment shall terminate upon Executive becoming totally or permanently disabled for a period of six (6) months or more. For purposes of this Agreement, the term "totally or permanently disabled" or "total or permanent disability" means Executive's inability on account of sickness or accident, whether or not job related, to engage in regularly or to perform adequately his assigned duties under this Agreement 6 as determined reasonably and in good faith by the Company. Prior to terminating the Agreement pursuant to this provision, the Company shall engage and consult one or more physicians as may be reasonable. In the event of termination pursuant to this paragraph, Executive shall be entitled to receive any accrued and unpaid base salary and any and all accrued, earned but unpaid bonuses or benefits described in Section 4 to which Executive is entitled on the date of such termination. All other rights Executive has under any benefit or stock option plans and programs shall be determined in accordance with the terms of such plans and programs. 5.2.2 DEATH. Executive's employment shall terminate immediately upon the death of Executive. Upon such termination, the obligations of Executive and Company under this Agreement shall immediately cease. If Executive's employment is terminated pursuant to this paragraph, Company shall pay Executive's beneficiary or beneficiary designated by Executive in writing to the Company, or in the absence of such beneficiary, Executive's estate, shall be entitled to receive (i) any accrued but unpaid base salary and any and all accrued, earned but unpaid bonuses or benefits described in Section 4 to which Executive is entitled on the date of such termination, and (ii) Executive's then current base salary through ninety (90) days after the date of death in accordance with Company's payroll procedures as if Executive's employment by Company had continued for such period. All other rights Executive has under any benefit or stock option plans and programs shall be determined in accordance with the terms and conditions of such plans and programs. 5.2.3 ELECTION BY EXECUTIVE. Executive's employment may be terminated at any time by Executive upon not less than ninety (90) days written notice by Executive to the Board of Directors. Upon such termination, the obligations of the Executive and Company under this Agreement shall immediately cease. In the event of termination pursuant to this paragraph, Executive shall be entitled to receive any accrued and unpaid base salary and any and all accrued, earned but unpaid bonuses or benefits described in Section 4 to which Executive is entitled on the date of such termination. All other rights Executive has under any benefit or stock option plans and programs shall be determined in accordance with the terms of such plans and programs. 5.2.4 ELECTION BY COMPANY. Executive's employment may be terminated at any time by the Company upon not less than ninety (90) days written notice by the Company to Executive. Upon such termination, the obligations of the Executive and Company under this Agreement shall immediately cease. In the event of termination pursuant to this paragraph, Executive shall be entitled to receive (i) any accrued and unpaid base salary and (ii) any and all accrued, earned but unpaid bonuses or benefits described in Section 4 to which Executive is entitled on the date of such termination. Additionally, in the event of termination of Executive's employment with the Company pursuant to this Section 5.2.4, the Company shall pay to Executive (i) In the event of Executive's termination within the first or second year of the Term, Two Hundred percent (200%) of Executive's Annual Salary for the remainder of the Term, payable on the date of termination; (ii) In the event of Executive's termination within the third or fourth year of the Term, One Hundred Fifty percent (150%) of Executive's annual salary for the remainder of the Term, payable on the date of termination; and (iii) In the event of Executive's termination within the fifth year of the Term, One Hundred Twenty Five percent (125%) of Executive's annual salary for the remainder of the Term, payable on the date of termination.. All other rights Executive has under any benefit or stock option plans and programs shall be determined in accordance with the terms of such plans and programs. 7 5.3 SURRENDER OF RECORDS AND PROPERTY. Upon termination of his employment with the Company, Executive shall deliver promptly to the Company all records, electronic media, manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, data, tables, and calculations or copies thereof, which are the property of the Company and which relate in any way to the business, products, practices or techniques of the Company, and all other property (keys, office equipment, computers, mobile phones, credit cards, etc.) of the Company and Proprietary Matter, including but not limited to, all documents which in whole or in part contain any trade secrets or confidential information of the Company, which in any of these cases are in his possession or under his control. 5.4 FULL SATISFACTION OF CLAIMS. The parties hereto agree that the benefits upon termination described in this Section 5 are to be in full satisfaction, compromise and release of any claims arising out of any termination of the Executive's employment pursuant to Section 6(c), and such amounts shall be contingent upon the Executive's delivery of a general release of such claims upon termination of employment in a form reasonably satisfactory to the Company, it being understood that none of the benefits shall be provided unless and until the Executive determines to execute and deliver such release. 5.5 SURVIVAL OF TERMS. Notwithstanding termination of this Agreement as provided in this Section 5 or any other termination of Executive's employment with the Company, Executive's obligations under Sections 6, 8, 9 and 10 hereof shall survive any termination of Executive's employment with the Company at any time and for any reason. 6. PROPRIETARY MATTER. Except as permitted or directed by the Company, Executive shall not during the term of his employment or at any time thereafter divulge, furnish, disclose, or make accessible (other than in the ordinary course of the business of the Company) to anyone for use in any way any confidential, secret, or proprietary knowledge or information of the Company ("Proprietary Matter") which Executive has acquired or become acquainted with or will acquire or become acquainted with, whether developed by himself or by others, including, but not limited to, any trade secrets, confidential or secret designs, processes, formulae, software or computer programs, plans, devices or material (whether or not patented or patentable, copyrighted or copyrightable) directly or indirectly useful in any aspect of the business of the Company, any confidential customer, distributor or supplier lists of the Company, any confidential or secret development or research work of the Company, or any other confidential, secret or non-public aspects of the business of the Company. Executive acknowledges that the Proprietary Matter constitutes a unique and valuable asset of the Company acquired at great time and expense by the Company, and that any disclosure or other use of the Proprietary Matter other than for the sole benefit of the Company would be wrongful and would cause irreparable harm to the Company. Both during and after the term of this Agreement, Executive will refrain from any acts or omissions that would reduce the value of Proprietary Matter to the Company. The foregoing obligations of confidentiality, however, shall not apply to any knowledge or information which is now published or which subsequently becomes generally publicly known, other than as a direct or indirect result of the breach of this Agreement by Executive nor shall it apply to any knowledge or information Executive had prior to the execution of this Agreement. 7. VENTURES. If, during the term of this Agreement, Executive is engaged in or 8 associated with the planning or implementing of any project, program, or venture involving the Company and a third party or parties, all rights in the project, program, or venture shall belong to the Company and shall constitute a corporate opportunity belonging exclusively to the Company. Except as expressly approved in writing by the Company, Executive shall not be entitled to any interest in such project, program, or venture or to any commission, finder's fee or other compensation in connection therewith, other than the compensation to be paid to Executive as provided in this Agreement. 8. NON-SOLICITATION OF EMPLOYEES. During Executive's employment by the Company hereunder and for the one (1) year period following the termination of such employment for any reason, Executive shall not, either directly or indirectly, on his own behalf or in the service or on behalf of others solicit, divert or hire away, or attempt to solicit, divert or hire away any person then employed full time by the Company. 9. NON-COMPETITION. Executive agrees that he shall not, during the term of this Agreement, and for a period of one (1) year thereafter: (i) directly or indirectly own, engage in, manage, operate, join, control, or participate in the ownership, management, operation, or control of, or be connected as a stockholder, partner, member, joint venturer, director, officer, employee, consultant, agent, beneficiary, or otherwise with, any corporation, limited liability company, partnership, sole proprietorship, association, business, trust, or other organization, entity or individual which develops, manufactures or markets products or performs services which are competitive with or similar to the products or services of the Company or its subsidiaries; provided, that Executive may own, directly or indirectly, securities of any entity traded on any national securities exchange or listed on the National Association of Securities Dealers Automated Quotation System if Executive does not, directly or indirectly, own 1% or more of any class of equity securities, or securities convertible into or exercisable or exchangeable for 1% or more of any class of equity securities, of such entity; (ii) call upon, solicit, direct, take away, provide products or services to, or attempt to call upon, solicit, direct, take away or provide products or services to, or accept any orders of business from any customers or clients of the Company for products or services which are competitive with or similar to the products or services of the Company or its subsidiaries. (iii) directly or indirectly request or advise any present or future supplier, service provider or financial resource of the Company to withdraw, curtail or cancel the furnishing of such service or resource to the Company. 10. CONFIDENTIALITY. 10.1 CONFIDENTIALITY. In the course of performing services hereunder on behalf of the Company and its affiliates, Executive has had and from time to time will have access to Confidential Information. Executive agrees (i) to hold the Confidential Information in strict confidence, (ii) not to disclose the Confidential Information to any person (other than in the regular 9 business of the Company or its affiliates), and (iii) not to use, directly or indirectly, any of the Confidential Information for any purpose other than on behalf of the Company and its affiliates. All documents, records, data, apparatus, equipment and other physical property, whether or not pertaining to Confidential Information, that are furnished to Executive by the Company or are produced by Executive in connection with Executive's employment will be and remain the sole property of the Company. Upon the termination of Executive's employment with the Company for any reason and as and when otherwise requested by the Company, all Confidential Information (including, without limitation, all data, memoranda, customer lists, notes, programs and other papers and items, and reproductions thereof relating to the foregoing matters) in Executive's possession or control, shall be immediately returned to the Company. 10.2 CONFIDENTIAL INFORMATION. As used in this Agreement, the term "Confidential Information" shall mean information belonging to the Company of value to the Company or with respect to which Company has right in the course of conducting its business and the disclosure of which could result in a competitive or other disadvantage to the Company. Confidential Information includes information, whether or not patentable or copyrightable, in written, oral, electronic or other tangible or intangible forms, stored in any medium, including, by way of example and without limitation, trade secrets, ideas, concepts, designs, configurations, specifications, drawings, blueprints, diagrams, models, prototypes, samples, flow charts processes, techniques, formulas, software, improvements, inventions, domain names, data, know-how, discoveries, copyrightable materials, marketing plans and strategies, sales and financial reports and forecasts, customer lists, studies, reports, records, books, contracts, instruments, surveys, computer disks, diskettes, tapes, computer programs and business plans, prospects and opportunities (such as possible acquisitions or dispositions of businesses or facilities) which have been discussed or considered by the management of the Company. Confidential Information includes information developed by Executive in the course of Executive's employment by the Company, as well as other information to which Executive may have access in connection with Executive's employment. Confidential Information also includes the confidential information of others with which the Company has a business relationship. Notwithstanding the foregoing, Confidential Information does not include information in the public domain, unless due to breach of Executive's duties under Section 10.1. 11. ASSIGNMENT. This Agreement shall not be assignable, in whole or in part, by either party without the written consent of the other party, except that the Company may, without the consent of Executive, assign its rights and obligations under this Agreement to any corporation, firm or other business entity (i) with or into which the Company may merge or consolidate, or (ii) to which the Company may sell or transfer all or substantially all of its assets or of which fifty percent (50%) or more of the equity investment and of the voting control is owned, directly or indirectly, by, or is under common ownership with, the Company. Upon such assignment by the Company, the Company shall obtain the assignees' written agreement enforceable by Executive to assume and perform, and after the date of such assignment, the terms, conditions, and provisions imposed by this Agreement upon the Company. After any such assignment by the Company and such written agreement by the assignee, the Company shall be discharged from all further liability hereunder and such assignee shall thereafter be deemed to be the Company for the purposes of all provisions of this Agreement including this section. 10 12. INDEMNIFICATION. The Company shall indemnify Executive as provided in the Delaware General Corporations Code, Company's Charter or Bylaws in effect at the commencement of this Agreement. The scope of indemnification to which Executive is entitled shall not be diminished, but may be expanded by the Company, by amendment of the Company's Bylaws, Articles of Incorporation or otherwise. Executive shall indemnify and hold the Company harmless from all liability for loss, damages or injury resulting from the negligence or misconduct of Executive. 13. LIABILITY INSURANCE. The Company shall provide, at its sole cost and expense, under which Executive shall be covered, Directors and Officers Liability Insurance and Errors and Omissions Liability Insurance in coverage amounts not less than $10 million, respectively. 14. MISCELLANEOUS. 14.1 PREPARATION OF AGREEMENT. This Agreement was prepared by the Company solely on behalf of such party. Each party acknowledges that: (i) he or it had the advice of, or sufficient opportunity to obtain the advice of, legal counsel separate and independent of legal counsel for any other party hereto; (ii) the terms of the transactions contemplated by this Agreement are fair and reasonable to such party; and (iii) such party has voluntarily entered into the transactions contemplated by this Agreement without duress or coercion. Each party further acknowledges that such party was not represented by the legal counsel of any other party hereto in connection with the transactions contemplated by this Agreement, nor was he or it under any belief or understanding that such legal counsel was representing his or its interests. Except as expressly set forth in this Agreement, each party shall pay all legal and other costs and expenses incurred or to be incurred by such party in negotiating and preparing this Agreement; in performing due diligence or retaining professional advisors; in performing any transactions contemplated by this Agreement; or in complying with such party's covenants, agreements and conditions contained herein. Each party agrees that no conflict, omission or ambiguity in this Agreement, or the interpretation thereof, shall be presumed, implied or otherwise construed against any other party to this Agreement on the basis that such party was responsible for drafting this Agreement. 14.2 COOPERATION. Each party agrees, without further consideration, to cooperate and diligently perform any further acts, deeds and things, and to execute and deliver any documents that may be reasonably necessary or otherwise reasonably required to consummate, evidence, confirm and/or carry out the intent and provisions of this Agreement, all without undue delay or expense. 14.3 GOVERNING LAW. This Agreement is made under and shall be government by and construed in accordance with the laws of the State of California. 14.4 ENTIRE AGREEMENT.This Agreement contains the entire agreement of the parties relating to the subject matter hereof and supersedes all prior agreements and understandings with respect to such subject matter, and the parties hereto have made no agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein. 14.5 LEGAL PROCEEDINGS. Should any party institute or should the parties otherwise become a party to any action or proceeding to enforce or interpret this Agreement, the prevailing party in any such action or proceeding shall be entitled to receive from the non-prevailing 11 party all costs and expenses of prosecuting or defending the action or proceeding. This Agreement and the rights of each party under this Agreement shall be governed by, interpreted under, and construed and enforced in accordance with the laws of the State of California. 14.6 WITHHOLDING TAXES. The Company shall undertake to make deductions, withholdings and tax reports with respect to payments and benefits under this Agreement to the extent that it reasonably and in good faith believes that it is required to make such deductions, withholdings and tax reports. Payments under this Agreement shall be in amounts net of any such deductions or withholdings. Nothing in this Agreement shall be construed to require the Company to make any payments to compensate the Executive for any adverse tax effect associated with any payments or benefits or for any deduction or withholding from any payment or benefit. 14.7 AMENDMENTS. No amendment or modification of this Agreement shall be deemed effective unless made in writing signed by the parties hereto. 14.8 NO WAVIER. No term or condition of this Agreement shall be deemed to have been waived nor shall there be any estoppel to enforce any provisions of this Agreement, except by a statement in writing signed by the party against whom enforcement of the waiver or estoppel is sought. Any written waiver shall not be deemed a continuing waiver unless specifically stated, shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 14.9 SEVERABILITY. To the extent any provision of this Agreement shall be invalid or unenforceable, it shall be considered deleted here from and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. 14.10 NOTICES. Any and all notices, requests or other communications required or permitted in or by any provision of this Agreement shall be in writing and may be delivered personally or by certified mail directed to the addressee at such person's or entity's last known post office address, and if given by certified mail, shall be deemed to have been delivered when deposited in such, mail postage prepaid. This Agreement is executed on the date first written above at Los Angeles, California. COMPANY: EXECUTIVE: QT 5, INC. By: _________________________ ___________________________ Title: ______________________ 12 EXHIBIT A 13 EX-10.10 4 ex-10_10.txt EXHIBIT 10.10 QT 5, INC. EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is made and entered into this ninth day of June 2003 by and between QT 5, Inc., a Delaware corporation (the "Company"), and Steven H. Reder ("Executive"). RECITALS WHEREAS, Executive has the experience to provide services to the Company of an extraordinary character which gives such services a unique value; and WHEREAS, the Company desires to retain the services of Executive, and Executive desires to be employed by the Company for the term of this Agreement. NOW AND THEREFORE, the Company and Executive, intending to be legally bound, hereby agree as follows: 1. EMPLOYMENT. The Company hereby employs Executive as the PRESIDENT of the Company. For the term of Executive's employment, and upon the other conditions set forth in this Agreement, Executive accepts such employment and agrees to perform services for the Company, subject always to such resolutions as are established from time to time by the Board of Directors of the Company. 2. TERM. The term of Executive's employment hereunder shall commence on the execution date of this Agreement and continue through June 8, 2008 subject to the termination provisions contained herein. The Agreement may be terminated by the Company only for cause as set forth below, and shall not constitute "at will" employment. 3. POSITION AND DUTIES. 3.1. SERVICES WITH THE COMPANY. During the term of this Agreement, Executive agrees to perform such duties and exercise such powers related thereto as may from time to time be assigned to him by the Company's Board of Directors (the "Board"). Executive shall duly and diligently perform all duties assigned to him while in the employ of the Company. He shall be bound by and faithfully observe and abide by all rules and regulations of the Company which are brought to his notice or of which he should be reasonably aware. Executive hereby accepts such employment, agrees to serve the Company in the capacities indicated, and agrees to use Executive's best efforts in, and shall devote Executive's full working time, attention, skill and energies to, the advancement of the interests of the Company and the performance of Executive's duties and responsibilities hereunder. 3.2. NO CONFLICTING DUTIES. Executive shall devote sufficient productive time, ability, and attention to the business of the Company during the term of this Agreement in a manner that will serve the best interests of the Company. During the term hereof, Executive shall not serve as an officer, director, employee, consultant or advisor to any other business without the 1 prior written consent of the Company's Board, which may be withheld for any reason. Executive hereby confirms he is under no contractual commitments inconsistent with his obligations set forth in this Agreement. This Agreement shall not be interpreted to prohibit Executive from making passive personal investments or conduct private business affairs if those activities do not materially interfere with the services required under this Agreement. 4. COMPENSATION. 4.1 ANNUAL SALARY. As compensation for all services to be rendered by Executive under this Agreement, the Company shall pay to Executive an annual salary of Three Hundred Thousand Dollars ($300,000), which shall increase to Three Hundred Sixty Thousand Dollars ($360,000) effective October 1, 2003 (the "Annual Salary"). Executive's Annual Salary shall be paid on a regular basis in accordance with the Company's normal payroll procedures and policies. On or before the yearly anniversary date of this Agreement, the Board of Directors shall determine the increase to the Annual Salary, but in no event shall it be less than ten (10%) . The adjusted Annual Salary shall become effective on October 1 each year. 4.2 SIGNING BONUS. Upon the execution of this Agreement, Executive shall earn a signing bonus of One Hundred Thousand Dollars ($100,000) (the "Signing Bonus") payable by the Company in four quarterly payments of Twenty Five Thousand Dollars ($25,000) each on July 1, 2003, October 1, 2003, January 1, 2004 and April 1, 2004. In addition, the Company shall issue and deliver to Executive, in the aggregate a series of five-year Warrants to purchase 1,280,000 shares (the "Warrants") of the Company's common stock (the "Shares"), which shall include provisions for cashless exercise. The purchase price for the Shares shall be $0.17 per share. The Warrants shall be issued, and shall fully vest on the date of issuance. The number and character of the Shares of common stock and the purchase price are subject to adjustment as provided therein. A form of the Warrant is attached hereto as Exhibit A. 4.3 NET PROFIT BONUS. The Company shall pay Executive an annual bonus ("Net Profit Bonus"). The Net Profit Bonus shall equal two percent (2%) of the Company's annual net income, calculated using Generally Accepted Accounting Principles. The Net Profit Bonus shall be payable annually no later than the fifteenth (15th) day of the third month following the end of the Company's fiscal year in cash and/or the equivalent cash amount in fully vested stock options at the fair market price of the Company's stock on the last day of the Company's calendar year, at the sole discretion of Executive. 4.4 INCENTIVE STOCK OPTIONS. The Company shall issue incentive stock options to Executive pursuant to the Company's qualified Incentive Stock Option Plan. At the discretion of, and in an amount to be determined by, the Board of Directors, no later than seventy five (75) days following the end of each of the Company's fiscal years, Executive will receive incentive stock options at an exercise price equal to the fair market value at the end of each fiscal year, but in no event shall the total value exceed $100,000 per year. However, if the Executive owns at least 10% of the Company's common stock, then the purchase price that will be paid to the Company when the option is exercised and the stock purchase must equal 110% of the fair market value of the common stock as of the date of grant. The Incentive Stock Options shall vest immediately and shall terminate ten years from the date of grant. Executive may exercise the incentive stock options, at his sole and absolute discretion, by providing the Company with written notice accompanied by (1) cash or a cashier's check an amount equal to the product of the incentive 2 stock option exercise price and the number of shares Executive desires to purchase pursuant to this provision; or (2) by a cashless exercise whereby Executive receives the net amount of shares after deducting the value of the exercise price. 4.5 STOCK AND OPTION REGISTRATION RIGHTS. In the event the Company with or without the assistance of an investment banking firm, conducts a registered offering of the Company's shares, the Company shall provide Executive with registration rights to all shares, warrants and/or options which Executive then holds or otherwise directly or constructively owns. 4.6 ANTI-DILUTION. The number and kind of shares or other securities that may be issued in accordance with this Agreement shall be subject to adjustment from time to time upon the happening of certain events while this Agreement remains effective, as follows: (a) Merger, Sale of Assets, etc. If the Company at any time shall consolidate with or merge into or sell or convey all or substantially all its assets to any other corporation, the Executive, shall thereafter have the right to have issued such number and kind of shares or other securities as would have been issuable or distributable on account of such consolidation, merger, sale or conveyance, upon or with respect to the number of shares of Common Stock and number of Warrants Executive could be entitled to have issued immediately prior to such consolidation, merger, sale or conveyance based on this Agreement. The foregoing provision shall similarly apply to successive transactions of a similar nature by any such successor or purchaser. Without limiting the generality of the foregoing, the provisions of this Section shall apply to such securities of such successor or purchaser after any such consolidation, merger, sale or conveyance. (b) Reclassification, etc. If the Company at any time shall, by reclassification or otherwise, change the Common Stock into the same or a different number of securities of any class or classes, the Executive shall thereafter have the right to have issued an adjusted number of such securities and kind of securities as would have been issuable as the result of such change with respect to the number of shares of Common Stock or Warrants that may be issuable to Executive immediately prior to such reclassification or other change as of the effective date for such reclassification or change. (c) Stock Splits, Combinations and Dividends. If the shares of Common Stock are subdivided or combined into a greater or smaller number of shares of Common Stock, or if a dividend is paid on the Common Stock in shares of Common Stock, any securities issuable to Executive shall be proportionately adjusted in case of subdivision of shares or stock dividend by the ratio which the total number of shares of Common Stock outstanding immediately after such event bears to the total number of shares of Common Stock outstanding immediately prior to such event. 3 (d) Share Issuance. Subject to the provisions of this Section, if the Company at any time shall issue any shares of Common Stock prior to the exercise of any warrants that have been issued to Executive in accordance with this Agreement (otherwise than as: (i) provided in Sections 4.6(a), 4.6(b) or 4.6(c) or this subparagraph; (ii) pursuant to warrants or options that may be granted in the future under any option plan of the Company, or any employment agreement, joint venture, credit, leasing or other financing agreement or any joint venture or other strategic arrangement, in each case now or hereinafter entered into by the Company; (iii) pursuant to any agreement entered into by the Company or any of its subsidiaries for the acquisition of another business (whether by stock purchase or asset purchase, merger or otherwise; or (iv) for services rendered by consultants; (i), (ii) and (iii) above, are hereinafter referred to as the "Excluded Issuances")) for a consideration less than the exercise price of Executive warrants (the "Exercise Price"), then, and thereafter successively upon each such issue, the Exercise Price shall be reduced as follows: (i) the number of shares of Common Stock outstanding immediately prior to such issue shall be multiplied by the Exercise Price and the product shall be added to the aggregate consideration, if any, received by the Company upon such issue of additional shares of Common Stock; and (ii) the sum so obtained shall be divided by the number of shares of Common Stock outstanding immediately after such issue. The resulting quotient shall be the adjusted Exercise Price. Except for the Excluded Issuances for purposes of this adjustment, the issuance of any security of the Company carrying the right to convert such security into shares of Common Stock or of any warrant, right or option to purchase Common Stock shall result in an adjustment to the Exercise Price upon the issuance of shares of Common Stock upon exercise of such warrant exercise rights. (e) During the period the warrant exercise right exists, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the full exercise of Executive's warrants. The Company represents that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. The Company agrees that its issuance of the Executive's warrants shall constitute full authority to its officers, agents, and transfer agents who are charged with the duty of executing and issuing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the exercise of Executive's warrants. 4.7 EXPENSES. The Company shall reimburse Executive for all reasonable business or travel expenses and office related expenses incurred by Executive in the performance of his duties; including but not limited to: airfare, automobile rental, lodging, meals, telephone, copy costs, and supplies. 4.8 BUSINESS TRAVEL. The Company and Executive recognize that it may 4 periodically be necessary for Executive to travel on behalf of the Company. The Company agrees that whenever Executive is required to travel a distance in excess of that which may be reached within three hours or more by regularly scheduled commercial air carriers, the Company will pay for Executive to travel in business class or better. 4.9 ANNUAL VACATION. Executive shall be entitled to fourteen (14) days vacation time each year without loss of compensation. In the event that Executive is unable for any reason to take the total amount of vacation time authorized herein during any year, any unused vacation time shall carry over from year to year. Any earned but unused vacation time will be paid to Executive based upon his annual rate of all compensation paid in the previous twelve months upon termination or expiration of this Agreement. 4.10 SICK LEAVE. Executive shall be entitled to seven (7) days sick leave each year without loss of compensation. In the event that Executive does not take the total amount of sick leave authorized herein during any year, any unused sick leave shall carry over from year to year. Any entitled but unused sick leave will be paid to Executive based upon his annual rate of all compensation paid in the previous twelve months upon termination or expiration of this Agreement. 4.11 HEALTH INSURANCE. The Company, at its sole cost and expense, shall provide Executive and his immediate family members with comprehensive PPO or HMO health insurance including but not limited to medical, dental, vision and disability coverage. 4.12 PAYMENT UPON SALE OR MERGER OF COMPANY. In the event the Company shall merge, sell a controlling interest, or sell a majority of its assets, the Company shall pay Executive Seven Hundred and Twenty Thousand Dollars ($720,000). Further, as to any vested but unexercised options to purchases shares in the Company which are held by Executive at the earlier of (1) the Company's execution of a Letter of Intent to (a) merge, (b) sell a controlling interest, or (c) sell a majority of its assets, or (2) the date of any such merger or sale is consummated, the Company shall pay Executive cash in the amount equal to the difference between the consideration paid to the Company on a per share basis less the exercise price of the option, the value of which is multiplied by the number of options which Executive holds. 4.13 AUTOMOBILE ALLOWANCE. The Company shall provide Executive a monthly automobile allowance in the amount of $750.00 (the "Automobile Allowance"). In the event this Agreement is terminated prior to its expiration for any reason, all payments of the Automobile Allowance shall cease immediately and Executive shall be responsible for any and all payments remaining on any lease, loan or rental agreement in connection with said Automobile Allowance. Payment of the aforesaid allowance shall be subject to any applicable withholdings tax. The Executive shall be responsible for all income taxes imposed on the Executive by reason of the automobile allowance. 5. TERMINATION AND TERMINATION BENEFITS. Notwithstanding the provisions of Section 2, Executive's employment under this Agreement shall terminate under the following circumstances set forth in this Section 5. 5 5.1 TERMINATION BY THE COMPANY FOR CAUSE. Executive's employment under this Agreement may be terminated for Cause without further liability on the part of the Company other than for accrued but unpaid Annual Salary through the date of termination effective immediately upon written notice to Executive. No termination for Cause may be invoked by the Company without first providing Executive with at least thirty (30) days written notice to correct any breach, default or causation. Such written notice shall set forth with reasonable specificity the Company's basis for such notice of termination and Executive shall have thirty (30) days to correct the condition set forth in the notice. "Cause" shall mean the following: (i) Commission of a criminal act involving fraud, embezzlement or breach of trust or other act which would prohibit Executive from holding his position under the rules of the Securities and Exchange Commission. (ii) Willful, knowing and malicious violation of written corporate policy or rules of the Company. (iii) Willful, knowing and malicious misuse, misappropriation, or disclosure of any of the Proprietary Matters. (iv) Misappropriation, concealment, or conversion of any money or property of the Company. (v) Being under the habitual influence of intoxicating liquors or controlled substances while in the course of employment. (vi) Intentional and non-trivial damage or destruction of property of the Company. For purposes of this provision, non-trivial is defined to mean damage occurring in the course of a single act or occurrence in an amount exceeding Two Thousand Dollars ($2,000). (vii) Reckless and wanton conduct which endangers the safety of other persons or property during the course of employment or while on premises leased or owned by the Company. (viii) The performance of duties in a habitually unsatisfactory manner after being repeatedly advised in writing by the Company of such unsatisfactory performance. (ix) Continued incapacity on the part of Executive to perform his duties, unless waived by the Company. 5.2 TERMINATION WITHOUT CAUSE. 5.2.1 DISABILITY. Executive's employment shall terminate upon Executive becoming totally or permanently disabled for a period of six (6) months or more. For purposes of this Agreement, the term "totally or permanently disabled" or "total or permanent disability" means Executive's inability on account of sickness or accident, whether or not job related, to engage in regularly or to perform adequately his assigned duties under this Agreement 6 as determined reasonably and in good faith by the Company. Prior to terminating the Agreement pursuant to this provision, the Company shall engage and consult one or more physicians as may be reasonable. In the event of termination pursuant to this paragraph, Executive shall be entitled to receive any accrued and unpaid base salary and any and all accrued, earned but unpaid bonuses or benefits described in Section 4 to which Executive is entitled on the date of such termination. All other rights Executive has under any benefit or stock option plans and programs shall be determined in accordance with the terms of such plans and programs. 5.2.2 DEATH. Executive's employment shall terminate immediately upon the death of Executive. Upon such termination, the obligations of Executive and Company under this Agreement shall immediately cease. If Executive's employment is terminated pursuant to this paragraph, Company shall pay Executive's beneficiary or beneficiary designated by Executive in writing to the Company, or in the absence of such beneficiary, Executive's estate, shall be entitled to receive (i) any accrued but unpaid base salary and any and all accrued, earned but unpaid bonuses or benefits described in Section 4 to which Executive is entitled on the date of such termination, and (ii) Executive's then current base salary through ninety (90) days after the date of death in accordance with Company's payroll procedures as if Executive's employment by Company had continued for such period. All other rights Executive has under any benefit or stock option plans and programs shall be determined in accordance with the terms and conditions of such plans and programs. 5.2.3 ELECTION BY EXECUTIVE. Executive's employment may be terminated at any time by Executive upon not less than ninety (90) days written notice by Executive to the Board of Directors. Upon such termination, the obligations of the Executive and Company under this Agreement shall immediately cease. In the event of termination pursuant to this paragraph, Executive shall be entitled to receive any accrued and unpaid base salary and any and all accrued, earned but unpaid bonuses or benefits described in Section 4 to which Executive is entitled on the date of such termination. All other rights Executive has under any benefit or stock option plans and programs shall be determined in accordance with the terms of such plans and programs. 5.2.4 ELECTION BY COMPANY. Executive's employment may be terminated at any time by the Company upon not less than ninety (90) days written notice by the Company to Executive. Upon such termination, the obligations of the Executive and Company under this Agreement shall immediately cease. In the event of termination pursuant to this paragraph, Executive shall be entitled to receive (i) any accrued and unpaid base salary and (ii) any and all accrued, earned but unpaid bonuses or benefits described in Section 4 to which Executive is entitled on the date of such termination. Additionally, in the event of termination of Executive's employment with the Company pursuant to this Section 5.2.4, the Company shall pay to Executive (i) In the event of Executive's termination within the first or second year of the Term, Two Hundred percent (200%) of Executive's Annual Salary for the remainder of the Term, payable on the date of termination; (ii) In the event of Executive's termination within the third or fourth year of the Term, One Hundred Fifty percent (150%) of Executive's annual salary for the remainder of the Term, payable on the date of termination; and (iii) In the event of Executive's termination within the fifth year of the Term, One Hundred Twenty Five percent (125%) of Executive's annual salary for the remainder of the Term, payable on the date of termination.. All other rights Executive has under any benefit or stock option plans and programs shall be determined in accordance with the terms of such plans and programs. 7 5.3 SURRENDER OF RECORDS AND PROPERTY. Upon termination of his employment with the Company, Executive shall deliver promptly to the Company all records, electronic media, manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, data, tables, and calculations or copies thereof, which are the property of the Company and which relate in any way to the business, products, practices or techniques of the Company, and all other property (keys, office equipment, computers, mobile phones, credit cards, etc.) of the Company and Proprietary Matter, including but not limited to, all documents which in whole or in part contain any trade secrets or confidential information of the Company, which in any of these cases are in his possession or under his control. 5.4 FULL SATISFACTION OF CLAIMS. The parties hereto agree that the benefits upon termination described in this Section 5 are to be in full satisfaction, compromise and release of any claims arising out of any termination of the Executive's employment pursuant to Section 6(c), and such amounts shall be contingent upon the Executive's delivery of a general release of such claims upon termination of employment in a form reasonably satisfactory to the Company, it being understood that none of the benefits shall be provided unless and until the Executive determines to execute and deliver such release. 5.5 SURVIVAL OF TERMS. Notwithstanding termination of this Agreement as provided in this Section 5 or any other termination of Executive's employment with the Company, Executive's obligations under Sections 6, 8, 9 and 10 hereof shall survive any termination of Executive's employment with the Company at any time and for any reason. 6. PROPRIETARY MATTER. Except as permitted or directed by the Company, Executive shall not during the term of his employment or at any time thereafter divulge, furnish, disclose, or make accessible (other than in the ordinary course of the business of the Company) to anyone for use in any way any confidential, secret, or proprietary knowledge or information of the Company ("Proprietary Matter") which Executive has acquired or become acquainted with or will acquire or become acquainted with, whether developed by himself or by others, including, but not limited to, any trade secrets, confidential or secret designs, processes, formulae, software or computer programs, plans, devices or material (whether or not patented or patentable, copyrighted or copyrightable) directly or indirectly useful in any aspect of the business of the Company, any confidential customer, distributor or supplier lists of the Company, any confidential or secret development or research work of the Company, or any other confidential, secret or non-public aspects of the business of the Company. Executive acknowledges that the Proprietary Matter constitutes a unique and valuable asset of the Company acquired at great time and expense by the Company, and that any disclosure or other use of the Proprietary Matter other than for the sole benefit of the Company would be wrongful and would cause irreparable harm to the Company. Both during and after the term of this Agreement, Executive will refrain from any acts or omissions that would reduce the value of Proprietary Matter to the Company. The foregoing obligations of confidentiality, however, shall not apply to any knowledge or information which is now published or which subsequently becomes generally publicly known, other than as a direct or indirect result of the breach of this Agreement by Executive nor shall it apply to any knowledge or information Executive had prior to the execution of this Agreement. 7. VENTURES. If, during the term of this Agreement, Executive is engaged in or associated with the planning or implementing of any project, program, or venture involving the Company and a third party or parties, all rights in the project, program, or venture shall belong to the 8 Company and shall constitute a corporate opportunity belonging exclusively to the Company. Except as expressly approved in writing by the Company, Executive shall not be entitled to any interest in such project, program, or venture or to any commission, finder's fee or other compensation in connection therewith, other than the compensation to be paid to Executive as provided in this Agreement. 8. NON-SOLICITATION OF EMPLOYEES. During Executive's employment by the Company hereunder and for the one (1) year period following the termination of such employment for any reason, Executive shall not, either directly or indirectly, on his own behalf or in the service or on behalf of others solicit, divert or hire away, or attempt to solicit, divert or hire away any person then employed full time by the Company. 9. NON-COMPETITION. Executive agrees that he shall not, during the term of this Agreement, and for a period of one (1) year thereafter: (i) directly or indirectly own, engage in, manage, operate, join, control, or participate in the ownership, management, operation, or control of, or be connected as a stockholder, partner, member, joint venturer, director, officer, employee, consultant, agent, beneficiary, or otherwise with, any corporation, limited liability company, partnership, sole proprietorship, association, business, trust, or other organization, entity or individual which develops, manufactures or markets products or performs services which are competitive with or similar to the products or services of the Company or its subsidiaries; provided, that Executive may own, directly or indirectly, securities of any entity traded on any national securities exchange or listed on the National Association of Securities Dealers Automated Quotation System if Executive does not, directly or indirectly, own 1% or more of any class of equity securities, or securities convertible into or exercisable or exchangeable for 1% or more of any class of equity securities, of such entity; (ii) call upon, solicit, direct, take away, provide products or services to, or attempt to call upon, solicit, direct, take away or provide products or services to, or accept any orders of business from any customers or clients of the Company for products or services which are competitive with or similar to the products or services of the Company or its subsidiaries. (iii) directly or indirectly request or advise any present or future supplier, service provider or financial resource of the Company to withdraw, curtail or cancel the furnishing of such service or resource to the Company. 10. CONFIDENTIALITY. 10.1 CONFIDENTIALITY. In the course of performing services hereunder on behalf of the Company and its affiliates, Executive has had and from time to time will have access to Confidential Information. Executive agrees (i) to hold the Confidential Information in strict confidence, (ii) not to disclose the Confidential Information to any person (other than in the regular business of the Company or its affiliates), and (iii) not to use, directly or indirectly, any of the Confidential Information for any purpose other than on behalf of the Company and its affiliates. All 9 documents, records, data, apparatus, equipment and other physical property, whether or not pertaining to Confidential Information, that are furnished to Executive by the Company or are produced by Executive in connection with Executive's employment will be and remain the sole property of the Company. Upon the termination of Executive's employment with the Company for any reason and as and when otherwise requested by the Company, all Confidential Information (including, without limitation, all data, memoranda, customer lists, notes, programs and other papers and items, and reproductions thereof relating to the foregoing matters) in Executive's possession or control, shall be immediately returned to the Company. 10.2 CONFIDENTIAL INFORMATION. As used in this Agreement, the term "Confidential Information" shall mean information belonging to the Company of value to the Company or with respect to which Company has right in the course of conducting its business and the disclosure of which could result in a competitive or other disadvantage to the Company. Confidential Information includes information, whether or not patentable or copyrightable, in written, oral, electronic or other tangible or intangible forms, stored in any medium, including, by way of example and without limitation, trade secrets, ideas, concepts, designs, configurations, specifications, drawings, blueprints, diagrams, models, prototypes, samples, flow charts processes, techniques, formulas, software, improvements, inventions, domain names, data, know-how, discoveries, copyrightable materials, marketing plans and strategies, sales and financial reports and forecasts, customer lists, studies, reports, records, books, contracts, instruments, surveys, computer disks, diskettes, tapes, computer programs and business plans, prospects and opportunities (such as possible acquisitions or dispositions of businesses or facilities) which have been discussed or considered by the management of the Company. Confidential Information includes information developed by Executive in the course of Executive's employment by the Company, as well as other information to which Executive may have access in connection with Executive's employment. Confidential Information also includes the confidential information of others with which the Company has a business relationship. Notwithstanding the foregoing, Confidential Information does not include information in the public domain, unless due to breach of Executive's duties under Section 10.1. 11. ASSIGNMENT. This Agreement shall not be assignable, in whole or in part, by either party without the written consent of the other party, except that the Company may, without the consent of Executive, assign its rights and obligations under this Agreement to any corporation, firm or other business entity (i) with or into which the Company may merge or consolidate, or (ii) to which the Company may sell or transfer all or substantially all of its assets or of which fifty percent (50%) or more of the equity investment and of the voting control is owned, directly or indirectly, by, or is under common ownership with, the Company. Upon such assignment by the Company, the Company shall obtain the assignees' written agreement enforceable by Executive to assume and perform, and after the date of such assignment, the terms, conditions, and provisions imposed by this Agreement upon the Company. After any such assignment by the Company and such written agreement by the assignee, the Company shall be discharged from all further liability hereunder and such assignee shall thereafter be deemed to be the Company for the purposes of all provisions of this Agreement including this section. 12. INDEMNIFICATION. The Company shall indemnify Executive as provided in the Delaware General Corporations Code, Company's Charter or Bylaws in effect at the commencement of 10 this Agreement. The scope of indemnification to which Executive is entitled shall not be diminished, but may be expanded by the Company, by amendment of the Company's Bylaws, Articles of Incorporation or otherwise. Executive shall indemnify and hold the Company harmless from all liability for loss, damages or injury resulting from the negligence or misconduct of Executive. 13. LIABILITY INSURANCE. The Company shall provide, at its sole cost and expense, under which Executive shall be covered, Directors and Officers Liability Insurance and Errors and Omissions Liability Insurance in coverage amounts not less than $10 million, respectively. 14. MISCELLANEOUS. 14.1 PREPARATION OF AGREEMENT. This Agreement was prepared by the Company solely on behalf of such party. Each party acknowledges that: (i) he or it had the advice of, or sufficient opportunity to obtain the advice of, legal counsel separate and independent of legal counsel for any other party hereto; (ii) the terms of the transactions contemplated by this Agreement are fair and reasonable to such party; and (iii) such party has voluntarily entered into the transactions contemplated by this Agreement without duress or coercion. Each party further acknowledges that such party was not represented by the legal counsel of any other party hereto in connection with the transactions contemplated by this Agreement, nor was he or it under any belief or understanding that such legal counsel was representing his or its interests. Except as expressly set forth in this Agreement, each party shall pay all legal and other costs and expenses incurred or to be incurred by such party in negotiating and preparing this Agreement; in performing due diligence or retaining professional advisors; in performing any transactions contemplated by this Agreement; or in complying with such party's covenants, agreements and conditions contained herein. Each party agrees that no conflict, omission or ambiguity in this Agreement, or the interpretation thereof, shall be presumed, implied or otherwise construed against any other party to this Agreement on the basis that such party was responsible for drafting this Agreement. 14.2 COOPERATION. Each party agrees, without further consideration, to cooperate and diligently perform any further acts, deeds and things, and to execute and deliver any documents that may be reasonably necessary or otherwise reasonably required to consummate, evidence, confirm and/or carry out the intent and provisions of this Agreement, all without undue delay or expense. 14.3 GOVERNING LAW. This Agreement is made under and shall be government by and construed in accordance with the laws of the State of California. 14.4 ENTIRE AGREEMENT.This Agreement contains the entire agreement of the parties relating to the subject matter hereof and supersedes all prior agreements and understandings with respect to such subject matter, and the parties hereto have made no agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein. 14.5 LEGAL PROCEEDINGS. Should any party institute or should the parties otherwise become a party to any action or proceeding to enforce or interpret this Agreement, the prevailing party in any such action or proceeding shall be entitled to receive from the non-prevailing party all costs and expenses of prosecuting or defending the action or proceeding. This Agreement and the rights of each party under this Agreement shall be governed by, interpreted under, 11 and construed and enforced in accordance with the laws of the State of California. 14.6 WITHHOLDING TAXES. The Company shall undertake to make deductions, withholdings and tax reports with respect to payments and benefits under this Agreement to the extent that it reasonably and in good faith believes that it is required to make such deductions, withholdings and tax reports. Payments under this Agreement shall be in amounts net of any such deductions or withholdings. Nothing in this Agreement shall be construed to require the Company to make any payments to compensate the Executive for any adverse tax effect associated with any payments or benefits or for any deduction or withholding from any payment or benefit. 14.7 AMENDMENTS. No amendment or modification of this Agreement shall be deemed effective unless made in writing signed by the parties hereto. 14.8 NO WAVIER. No term or condition of this Agreement shall be deemed to have been waived nor shall there be any estoppel to enforce any provisions of this Agreement, except by a statement in writing signed by the party against whom enforcement of the waiver or estoppel is sought. Any written waiver shall not be deemed a continuing waiver unless specifically stated, shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 14.9 SEVERABILITY. To the extent any provision of this Agreement shall be invalid or unenforceable, it shall be considered deleted here from and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. 14.10 NOTICES. Any and all notices, requests or other communications required or permitted in or by any provision of this Agreement shall be in writing and may be delivered personally or by certified mail directed to the addressee at such person's or entity's last known post office address, and if given by certified mail, shall be deemed to have been delivered when deposited in such, mail postage prepaid. This Agreement is executed on the date first written above at Los Angeles, California. COMPANY: EXECUTIVE: QT 5, INC. By: _________________________ ___________________________ Title: ______________________ 12 EXHIBIT A 13 EX-10.11 5 ex-10_11.txt EXHIBIT 10.11 QT 5, INC. EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is made and entered into this fourth day of August, 2003 by and between QT 5, Inc., a Delaware corporation (the "Company"), and Norman A. Kunin ("Executive"). RECITALS WHEREAS, Executive has the experience to provide services to the Company of an extraordinary character which gives such services a unique value; and WHEREAS, the Company desires to retain the services of Executive, and Executive desires to be employed by the Company for the term of this Agreement. NOW AND THEREFORE, the Company and Executive, intending to be legally bound, hereby agree as follows: 1. EMPLOYMENT. The Company hereby employs Executive as the CHIEF FINANCIAL OFFICER of the Company. For the term of Executive's employment, and upon the other conditions set forth in this Agreement, Executive accepts such employment and agrees to perform services for the Company, subject always to such resolutions as are established from time to time by the Board of Directors of the Company. 2. TERM. The term of Executive's employment hereunder shall commence on the execution date of this Agreement and continue through July 31, 2008 subject to the termination provisions contained herein. The Agreement may be terminated by the Company only for cause as set forth below, and shall not constitute "at will" employment. 3. POSITION AND DUTIES. 3.1. SERVICES WITH THE COMPANY. During the term of this Agreement, Executive agrees to perform such duties and exercise such powers related thereto as may from time to time be assigned to him by the Company's Board of Directors (the "Board"). Executive shall duly and diligently perform all duties assigned to him while in the employ of the Company. He shall be bound by and faithfully observe and abide by all rules and regulations of the Company which are brought to his notice or of which he should be reasonably aware. Executive hereby accepts such employment, agrees to serve the Company in the capacities indicated, and agrees to use Executive's best efforts in, and shall devote Executive's full working time, attention, skill and energies to, the advancement of the interests of the Company and the performance of Executive's duties and responsibilities hereunder. 3.2. NO CONFLICTING DUTIES. Executive shall devote sufficient productive time, ability, and attention to the business of the Company during the term of this Agreement in a manner that will serve the best interests of the Company. During the term hereof, Executive shall not serve as an officer, director, employee, consultant or advisor to any other business without the prior written consent of the Company's Board, which may be withheld for any reason. Executive hereby confirms he is under no contractual commitments inconsistent with his obligations set forth in this Agreement. 1 This Agreement shall not be interpreted to prohibit Executive from making passive personal investments or conduct private business affairs if those activities do not materially interfere with the services required under this Agreement. 4. COMPENSATION. 4.1. ANNUAL SALARY. As compensation for all services to be rendered by Executive under this Agreement, the Company shall pay to Executive an annual salary of Two Hundred Fifty Thousand Dollars ($250,000), which shall increase to Three Hundred Thousand Dollars ($300,000) effective October 1, 2003 (the "Annual Salary"). Executive's Annual Salary shall be paid on a regular basis in accordance with the Company's normal payroll procedures and policies. On or before the yearly anniversary date of this Agreement, the Board of Directors shall determine the increase to the Annual Salary, but in no event shall it be less than ten (10%) . The adjusted Annual Salary shall become effective on October 1 each year. 4.2. SIGNING BONUS. Upon the execution of this Agreement, Executive shall earn a signing bonus of Seventy Five Thousand Dollars ($75,000) (the "Signing Bonus") payable by the Company in three payments of Twenty Five Thousand Dollars ($25,000) each on August 4, 2003, November 1, 2003 and February 1, 2004. In addition, the Company shall issue and deliver to Executive, in the aggregate a series of five-year Warrants to purchase 750,000 shares (the "Warrants") of the Company's common stock (the "Shares"), which shall include provisions for cashless exercise. The purchase price for the Shares shall be $0.24 per share. The Warrants shall be issued, and shall fully vest on the date of issuance. The number and character of the Shares of common stock and the purchase price are subject to adjustment as provided therein. A form of the Warrant is attached hereto as Exhibit A. 4.3. NET PROFIT BONUS. The Company shall pay Executive an annual bonus ("Net Profit Bonus"). The Net Profit Bonus shall equal one and one-quarter percent (1.25%) of the Company's annual net income, calculated using Generally Accepted Accounting Principles. The Net Profit Bonus shall be payable annually no later than the fifteenth (15th) day of the third month following the end of the Company's fiscal year in cash and/or the equivalent cash amount in fully vested stock options at the fair market price of the Company's stock on the last day of the Company's fiscal year, at the sole discretion of Executive. 4.4 INCENTIVE STOCK OPTIONS. The Company shall issue incentive stock options to Executive pursuant to the Company's qualified Incentive Stock Option Plan. At the discretion of, and in an amount to be determined by, the Board of Directors, no later than seventy five (75) days following the end of each of the Company's fiscal years, Executive will receive incentive stock options at an exercise price equal to the fair market value at the end of each fiscal year, but in no event shall the total value exceed $100,000 per year. However, if the Executive owns at least 10% of the Company's common stock, then the purchase price that will be paid to the Company when the option is exercised and the stock purchase must equal 110% of the fair market value of the common stock as of the date of grant. The Incentive Stock Options shall vest immediately and shall terminate ten years from the date of grant. Executive may exercise the incentive stock options, at his sole and absolute discretion, by providing the Company with written notice accompanied by (1) cash or a cashier's check an amount equal to the product of the incentive stock option exercise price and the number of shares Executive desires to purchase pursuant to this provision; or (2) by a cashless exercise whereby Executive receives the net amount of shares after deducting the value of the 2 exercise price. 4.5 STOCK AND OPTION REGISTRATION RIGHTS. In the event the Company with or without the assistance of an investment banking firm, conducts a registered offering of the Company's shares, the Company shall provide Executive with registration rights to all shares, warrants and/or options which Executive then holds or otherwise directly or constructively owns. 4.6 ANTI-DILUTION. The number and kind of shares or other securities that may be issued in accordance with this Agreement shall be subject to adjustment from time to time upon the happening of certain events while this Agreement remains effective, as follows: (a) Merger, Sale of Assets, etc. If the Company at any time shall consolidate with or merge into or sell or convey all or substantially all its assets to any other corporation, the Executive, shall thereafter have the right to have issued such number and kind of shares or other securities as would have been issuable or distributable on account of such consolidation, merger, sale or conveyance, upon or with respect to the number of shares of Common Stock and number of Warrants Executive could be entitled to have issued immediately prior to such consolidation, merger, sale or conveyance based on this Agreement. The foregoing provision shall similarly apply to successive transactions of a similar nature by any such successor or purchaser. Without limiting the generality of the foregoing, the provisions of this Section shall apply to such securities of such successor or purchaser after any such consolidation, merger, sale or conveyance. (b) Reclassification, etc. If the Company at any time shall, by reclassification or otherwise, change the Common Stock into the same or a different number of securities of any class or classes, the Executive shall thereafter have the right to have issued an adjusted number of such securities and kind of securities as would have been issuable as the result of such change with respect to the number of shares of Common Stock or Warrants that may be issuable to Executive immediately prior to such reclassification or other change as of the effective date for such reclassification or change. (c) Stock Splits, Combinations and Dividends. If the shares of Common Stock are subdivided or combined into a greater or smaller number of shares of Common Stock, or if a dividend is paid on the Common Stock in shares of Common Stock, any securities issuable to Executive shall be proportionately adjusted in case of subdivision of shares or stock dividend by the ratio which the total number of shares of Common Stock outstanding immediately after such event bears to the total number of shares of Common Stock outstanding immediately prior to such event. 3 (d) Share Issuance. Subject to the provisions of this Section, if the Company at any time shall issue any shares of Common Stock prior to the exercise of any warrants that have been issued to Executive in accordance with this Agreement (otherwise than as: (i) provided in Sections 4.6(a), 4.6(b) or 4.6(c) or this subparagraph; (ii) pursuant to warrants or options that may be granted in the future under any option plan of the Company, or any employment agreement, joint venture, credit, leasing or other financing agreement or any joint venture or other strategic arrangement, in each case now or hereinafter entered into by the Company; (iii) pursuant to any agreement entered into by the Company or any of its subsidiaries for the acquisition of another business (whether by stock purchase or asset purchase, merger or otherwise; or (iv) for services rendered by consultants; (i), (ii) and (iii) above, are hereinafter referred to as the "Excluded Issuances")) for a consideration less than the exercise price of Executive warrants (the "Exercise Price"), then, and thereafter successively upon each such issue, the Exercise Price shall be reduced as follows: (i) the number of shares of Common Stock outstanding immediately prior to such issue shall be multiplied by the Exercise Price and the product shall be added to the aggregate consideration, if any, received by the Company upon such issue of additional shares of Common Stock; and (ii) the sum so obtained shall be divided by the number of shares of Common Stock outstanding immediately after such issue. The resulting quotient shall be the adjusted Exercise Price. Except for the Excluded Issuances for purposes of this adjustment, the issuance of any security of the Company carrying the right to convert such security into shares of Common Stock or of any warrant, right or option to purchase Common Stock shall result in an adjustment to the Exercise Price upon the issuance of shares of Common Stock upon exercise of such warrant exercise rights. (e) During the period the warrant exercise right exists, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the full exercise of Executive's warrants. The Company represents that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. The Company agrees that its issuance of the Executive's warrants shall constitute full authority to its officers, agents, and transfer agents who are charged with the duty of executing and issuing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the exercise of Executive's warrants. 4.7 EXPENSES. The Company shall reimburse Executive for all reasonable business or travel expenses and office related expenses incurred by Executive in the performance of his duties; including but not limited to: airfare, automobile rental, lodging, meals, telephone, copy costs, and supplies. . 4.8 RELOCATION COSTS. The Company recognizes that it will be necessary for Executive to relocate to the immediate area of the Company's corporate 4 headquarters, and the Company agrees to provide Executive with a relocation allowance in the amount of Twenty Thousand Dollars ($20,000), payable by the Company twenty (20) days prior to such relocation. 4.9 BUSINESS TRAVEL. The Company and Executive recognize that it may periodically be necessary for Executive to travel on behalf of the Company. The Company agrees that whenever Executive is required to travel a distance in excess of that which may be reached within three hours or more by regularly scheduled commercial air carriers, the Company will pay for Executive to travel in business class or better. 4.10 ANNUAL VACATION. Executive shall be entitled to fourteen (14) days vacation time each year without loss of compensation. In the event that Executive is unable for any reason to take the total amount of vacation time authorized herein during any year, any unused vacation time shall carry over from year to year. Any earned but unused vacation time will be paid to Executive based upon his annual rate of all compensation paid in the previous twelve months upon termination or expiration of this Agreement. 4.9 SICK LEAVE. Executive shall be entitled to seven (7) days sick leave each year without loss of compensation. In the event that Executive does not take the total amount of sick leave authorized herein during any year, any unused sick leave shall carry over from year to year. Any entitled but unused sick leave will be paid to Executive based upon his annual rate of all compensation paid in the previous twelve months upon termination or expiration of this Agreement. 4.10 HEALTH INSURANCE. The Company, at its sole cost and expense, shall provide Executive and his immediate family members with comprehensive PPO or HMO health insurance including but not limited to medical, dental, vision and disability coverage. 4.11 PAYMENT UPON SALE OR MERGER OF COMPANY. In the event the Company shall merge, sell a controlling interest, or sell a majority of its assets, the Company shall pay Executive Five Hundred Thousand Dollars ($500,000). Further, as to any vested but unexercised options to purchases shares in the Company which are held by Executive at the earlier of (1) the Company's execution of a Letter of Intent to (a) merge, (b) sell a controlling interest, or (c) sell a majority of its assets, or (2) the date of any such merger or sale is consummated, the Company shall pay Executive cash in the amount equal to the difference between the consideration paid to the Company on a per share basis less the exercise price of the option, the value of which is multiplied by the number of options which Executive holds. 4.12 AUTOMOBILE ALLOWANCE. The Company shall provide Executive a monthly automobile allowance in the amount of $750.00 (the "Automobile Allowance"). In the event this Agreement is terminated prior to its expiration for any reason, all payments of the Automobile Allowance shall cease immediately and Executive shall be responsible for any and all payments remaining on any lease, loan or rental agreement in connection with said Automobile Allowance. Payment of the aforesaid allowance shall be subject to any applicable withholdings tax. The Executive shall be responsible for all income taxes imposed on the Executive by reason of the automobile allowance. 5 5. TERMINATION AND TERMINATION BENEFITS. Notwithstanding the provisions of Section 2, Executive's employment under this Agreement shall terminate under the following circumstances set forth in this Section 5. 5.1 TERMINATION BY THE COMPANY FOR CAUSE. Executive's employment under this Agreement may be terminated for Cause without further liability on the part of the Company other than for accrued but unpaid Annual Salary through the date of termination effective immediately upon written notice to Executive. No termination for Cause may be invoked by the Company without first providing Executive with at least thirty (30) days written notice to correct any breach, default or causation. Such written notice shall set forth with reasonable specificity the Company's basis for such notice of termination and Executive shall have thirty (30) days to correct the condition set forth in the notice. "Cause" shall mean the following: (i) Commission of a criminal act involving fraud, embezzlement or breach of trust or other act which would prohibit Executive from holding his position under the rules of the Securities and Exchange Commission. (ii) Willful, knowing and malicious violation of written corporate policy or rules of the Company. (iii) Willful, knowing and malicious misuse, misappropriation, or disclosure of any of the Proprietary Matters. (iv) Misappropriation, concealment, or conversion of any money or property of the Company. (v) Being under the habitual influence of intoxicating liquors or controlled substances while in the course of employment. (vi) Intentional and non-trivial damage or destruction of property of the Company. For purposes of this provision, non-trivial is defined to mean damage occurring in the course of a single act or occurrence in an amount exceeding Two Thousand Dollars ($2,000). (vii) Reckless and wanton conduct which endangers the safety of other persons or property during the course of employment or while on premises leased or owned by the Company. (viii) The performance of duties in a habitually unsatisfactory manner after being repeatedly advised in writing by the Company of such unsatisfactory performance. (ix) Continued incapacity on the part of Executive to perform his duties, unless waived by the Company. 5.2 TERMINATION WITHOUT CAUSE. 5.2.1 DISABILITY. Executive's employment shall terminate upon Executive 6 becoming totally or permanently disabled for a period of six (6) months or more. For purposes of this Agreement, the term "totally or permanently disabled" or "total or permanent disability" means Executive's inability on account of sickness or accident, whether or not job related, to engage in regularly or to perform adequately his assigned duties under this Agreement as determined reasonably and in good faith by the Company. Prior to terminating the Agreement pursuant to this provision, the Company shall engage and consult one or more physicians as may be reasonable. In the event of termination pursuant to this paragraph, Executive shall be entitled to receive any accrued and unpaid base salary and any and all accrued, earned but unpaid bonuses or benefits described in Section 4 to which Executive is entitled on the date of such termination. All other rights Executive has under any benefit or stock option plans and programs shall be determined in accordance with the terms of such plans and programs. 5.2.2 DEATH. Executive's employment shall terminate immediately upon the death of Executive. Upon such termination, the obligations of Executive and Company under this Agreement shall immediately cease. If Executive's employment is terminated pursuant to this paragraph, Company shall pay Executive's beneficiary or beneficiary designated by Executive in writing to the Company, or in the absence of such beneficiary, Executive's estate, shall be entitled to receive (i) any accrued but unpaid base salary and any and all accrued, earned but unpaid bonuses or benefits described in Section 4 to which Executive is entitled on the date of such termination, and (ii) Executive's then current base salary through ninety (90) days after the date of death in accordance with Company's payroll procedures as if Executive's employment by Company had continued for such period. All other rights Executive has under any benefit or stock option plans and programs shall be determined in accordance with the terms and conditions of such plans and programs. 5.2.3 ELECTION BY EXECUTIVE. Executive's employment may be terminated at any time by Executive upon not less than ninety (90) days written notice by Executive to the Board of Directors. Upon such termination, the obligations of the Executive and Company under this Agreement shall immediately cease. In the event of termination pursuant to this paragraph, Executive shall be entitled to receive any accrued and unpaid base salary and any and all accrued, earned but unpaid bonuses or benefits described in Section 4 to which Executive is entitled on the date of such termination. All other rights Executive has under any benefit or stock option plans and programs shall be determined in accordance with the terms of such plans and programs. 5.2.4 ELECTION BY COMPANY. Executive's employment may be terminated at any time by the Company upon not less than ninety (90) days written notice by the Company to Executive. Upon such termination, the obligations of the Executive and Company under this Agreement shall immediately cease. In the event of termination pursuant to this paragraph, Executive shall be entitled to receive (i) any accrued and unpaid base salary and (ii) any and all accrued, earned but unpaid bonuses or benefits described in Section 4 to which Executive is entitled on the date of such termination. Additionally, in the event of termination of Executive's employment with the Company pursuant to this Section 5.2.4, the Company shall pay to Executive (i) In the event of Executive's termination within the first or second year of the Term, Two Hundred percent (200%) of Executive's Annual Salary for the remainder of the Term, payable on the date of termination; (ii) In the event of Executive's termination within the third or fourth year of the Term, One Hundred Fifty percent (150%) of Executive's annual salary for the remainder of the Term, payable on the date of termination; and (iii) In the event of Executive's termination within the fifth year of the Term, One Hundred Twenty Five percent (125%) of Executive's annual salary for the remainder of the Term, payable on the date of termination.. All other rights Executive has under any 7 benefit or stock option plans and programs shall be determined in accordance with the terms of such plans and programs. 5.3 SURRENDER OF RECORDS AND PROPERTY. Upon termination of his employment with the Company, Executive shall deliver promptly to the Company all records, electronic media, manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, data, tables, and calculations or copies thereof, which are the property of the Company and which relate in any way to the business, products, practices or techniques of the Company, and all other property (keys, office equipment, computers, mobile phones, credit cards, etc.) of the Company and Proprietary Matter, including but not limited to, all documents which in whole or in part contain any trade secrets or confidential information of the Company, which in any of these cases are in his possession or under his control. 5.4 FULL SATISFACTION OF CLAIMS. The parties hereto agree that the benefits upon termination described in this Section 5 are to be in full satisfaction, compromise and release of any claims arising out of any termination of the Executive's employment pursuant to Section 6(c), and such amounts shall be contingent upon the Executive's delivery of a general release of such claims upon termination of employment in a form reasonably satisfactory to the Company, it being understood that none of the benefits shall be provided unless and until the Executive determines to execute and deliver such release. 5.5 SURVIVAL OF TERMS. Notwithstanding termination of this Agreement as provided in this Section 5 or any other termination of Executive's employment with the Company, Executive's obligations under Sections 6, 8, 9 and 10 hereof shall survive any termination of Executive's employment with the Company at any time and for any reason. 6. PROPRIETARY MATTER. Except as permitted or directed by the Company, Executive shall not during the term of his employment or at any time thereafter divulge, furnish, disclose, or make accessible (other than in the ordinary course of the business of the Company) to anyone for use in any way any confidential, secret, or proprietary knowledge or information of the Company ("Proprietary Matter") which Executive has acquired or become acquainted with or will acquire or become acquainted with, whether developed by himself or by others, including, but not limited to, any trade secrets, confidential or secret designs, processes, formulae, software or computer programs, plans, devices or material (whether or not patented or patentable, copyrighted or copyrightable) directly or indirectly useful in any aspect of the business of the Company, any confidential customer, distributor or supplier lists of the Company, any confidential or secret development or research work of the Company, or any other confidential, secret or non-public aspects of the business of the Company. Executive acknowledges that the Proprietary Matter constitutes a unique and valuable asset of the Company acquired at great time and expense by the Company, and that any disclosure or other use of the Proprietary Matter other than for the sole benefit of the Company would be wrongful and would cause irreparable harm to the Company. Both during and after the term of this Agreement, Executive will refrain from any acts or omissions that would reduce the value of Proprietary Matter to the Company. The foregoing obligations of confidentiality, however, shall not apply to any knowledge or information which is now published or which subsequently becomes generally publicly known, other than as a direct or indirect result of the breach of this Agreement by Executive nor shall it apply to any knowledge or information Executive had prior to the execution of this Agreement. 8 7. VENTURES. If, during the term of this Agreement, Executive is engaged in or associated with the planning or implementing of any project, program, or venture involving the Company and a third party or parties, all rights in the project, program, or venture shall belong to the Company and shall constitute a corporate opportunity belonging exclusively to the Company. Except as expressly approved in writing by the Company, Executive shall not be entitled to any interest in such project, program, or venture or to any commission, finder's fee or other compensation in connection therewith, other than the compensation to be paid to Executive as provided in this Agreement. 8. NON-SOLICITATION OF EMPLOYEES. During Executive's employment by the Company hereunder and for the one (1) year period following the termination of such employment for any reason, Executive shall not, either directly or indirectly, on his own behalf or in the service or on behalf of others solicit, divert or hire away, or attempt to solicit, divert or hire away any person then employed full time by the Company. 9. NON-COMPETITION. Executive agrees that he shall not, during the term of this Agreement, and for a period of one (1) year thereafter: (i) directly or indirectly own, engage in, manage, operate, join, control, or participate in the ownership, management, operation, or control of, or be connected as a stockholder, partner, member, joint venturer, director, officer, employee, consultant, agent, beneficiary, or otherwise with, any corporation, limited liability company, partnership, sole proprietorship, association, business, trust, or other organization, entity or individual which develops, manufactures or markets products or performs services which are competitive with or similar to the products or services of the Company or its subsidiaries; provided, that Executive may own, directly or indirectly, securities of any entity traded on any national securities exchange or listed on the National Association of Securities Dealers Automated Quotation System if Executive does not, directly or indirectly, own 1% or more of any class of equity securities, or securities convertible into or exercisable or exchangeable for 1% or more of any class of equity securities, of such entity; (ii) call upon, solicit, direct, take away, provide products or services to, or attempt to call upon, solicit, direct, take away or provide products or services to, or accept any orders of business from any customers or clients of the Company for products or services which are competitive with or similar to the products or services of the Company or its subsidiaries. (iii) directly or indirectly request or advise any present or future supplier, service provider or financial resource of the Company to withdraw, curtail or cancel the furnishing of such service or resource to the Company. 10. CONFIDENTIALITY. 10.1 CONFIDENTIALITY. In the course of performing services hereunder on behalf of the Company and its affiliates, Executive has had and from time to time will have access to Confidential Information. Executive agrees (i) to hold the Confidential Information in strict confidence, (ii) not to disclose the Confidential Information to any person (other than in the regular business of the 9 Company or its affiliates), and (iii) not to use, directly or indirectly, any of the Confidential Information for any purpose other than on behalf of the Company and its affiliates. All documents, records, data, apparatus, equipment and other physical property, whether or not pertaining to Confidential Information, that are furnished to Executive by the Company or are produced by Executive in connection with Executive's employment will be and remain the sole property of the Company. Upon the termination of Executive's employment with the Company for any reason and as and when otherwise requested by the Company, all Confidential Information (including, without limitation, all data, memoranda, customer lists, notes, programs and other papers and items, and reproductions thereof relating to the foregoing matters) in Executive's possession or control, shall be immediately returned to the Company. (ix) 10.2 CONFIDENTIAL INFORMATION. As used in this Agreement, the term "Confidential Information" shall mean information belonging to the Company of value to the Company or with respect to which Company has right in the course of conducting its business and the disclosure of which could result in a competitive or other disadvantage to the Company. Confidential Information includes information, whether or not patentable or copyrightable, in written, oral, electronic or other tangible or intangible forms, stored in any medium, including, by way of example and without limitation, trade secrets, ideas, concepts, designs, configurations, specifications, drawings, blueprints, diagrams, models, prototypes, samples, flow charts processes, techniques, formulas, software, improvements, inventions, domain names, data, know-how, discoveries, copyrightable materials, marketing plans and strategies, sales and financial reports and forecasts, customer lists, studies, reports, records, books, contracts, instruments, surveys, computer disks, diskettes, tapes, computer programs and business plans, prospects and opportunities (such as possible acquisitions or dispositions of businesses or facilities) which have been discussed or considered by the management of the Company. Confidential Information includes information developed by Executive in the course of Executive's employment by the Company, as well as other information to which Executive may have access in connection with Executive's employment. Confidential Information also includes the confidential information of others with which the Company has a business relationship. Notwithstanding the foregoing, Confidential Information does not include information in the public domain, unless due to breach of Executive's duties under Section 10.1. 11. ASSIGNMENT. This Agreement shall not be assignable, in whole or in part, by either party without the written consent of the other party, except that the Company may, without the consent of Executive, assign its rights and obligations under this Agreement to any corporation, firm or other business entity (i) with or into which the Company may merge or consolidate, or (ii) to which the Company may sell or transfer all or substantially all of its assets or of which fifty percent (50%) or more of the equity investment and of the voting control is owned, directly or indirectly, by, or is under common ownership with, the Company. Upon such assignment by the Company, the Company shall obtain the assignees' written agreement enforceable by Executive to assume and perform, and after the date of such assignment, the terms, conditions, and provisions imposed 10 by this Agreement upon the Company. After any such assignment by the Company and such written agreement by the assignee, the Company shall be discharged from all further liability hereunder and such assignee shall thereafter be deemed to be the Company for the purposes of all provisions of this Agreement including this section. 12. INDEMNIFICATION. The Company shall indemnify Executive as provided in the Delaware General Corporations Code, Company's Charter or Bylaws in effect at the commencement of this Agreement. The scope of indemnification to which Executive is entitled shall not be diminished, but may be expanded by the Company, by amendment of the Company's Bylaws, Articles of Incorporation or otherwise. Executive shall indemnify and hold the Company harmless from all liability for loss, damages or injury resulting from the negligence or misconduct of Executive. 13. LIABILITY INSURANCE. The Company shall provide, at its sole cost and expense, under which Executive shall be covered, Directors and Officers Liability Insurance and Errors and Omissions Liability Insurance in coverage amounts not less than $10 million, respectively. 14. MISCELLANEOUS. 14.1 PREPARATION OF AGREEMENT. This Agreement was prepared by the Company solely on behalf of such party. Each party acknowledges that: (i) he or it had the advice of, or sufficient opportunity to obtain the advice of, legal counsel separate and independent of legal counsel for any other party hereto; (ii) the terms of the transactions contemplated by this Agreement are fair and reasonable to such party; and (iii) such party has voluntarily entered into the transactions contemplated by this Agreement without duress or coercion. Each party further acknowledges that such party was not represented by the legal counsel of any other party hereto in connection with the transactions contemplated by this Agreement, nor was he or it under any belief or understanding that such legal counsel was representing his or its interests. Except as expressly set forth in this Agreement, each party shall pay all legal and other costs and expenses incurred or to be incurred by such party in negotiating and preparing this Agreement; in performing due diligence or retaining professional advisors; in performing any transactions contemplated by this Agreement; or in complying with such party's covenants, agreements and conditions contained herein. Each party agrees that no conflict, omission or ambiguity in this Agreement, or the interpretation thereof, shall be presumed, implied or otherwise construed against any other party to this Agreement on the basis that such party was responsible for drafting this Agreement. 14.2 COOPERATION. Each party agrees, without further consideration, to cooperate and diligently perform any further acts, deeds and things, and to execute and deliver any documents that may be reasonably necessary or otherwise reasonably required to consummate, evidence, confirm and/or carry out the intent and provisions of this Agreement, all without undue delay or expense. 14.3 GOVERNING LAW. This Agreement is made under and shall be government by and construed in accordance with the laws of the State of California. 14.4 ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties relating to the subject matter hereof and supersedes all prior agreements and understandings with respect to such subject matter, and the parties hereto have made no agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein. 11 14.5 LEGAL PROCEEDINGS. Should any party institute or should the parties otherwise become a party to any action or proceeding to enforce or interpret this Agreement, the prevailing party in any such action or proceeding shall be entitled to receive from the non-prevailing party all costs and expenses of prosecuting or defending the action or proceeding. This Agreement and the rights of each party under this Agreement shall be governed by, interpreted under, and construed and enforced in accordance with the laws of the State of California. 14.6 WITHHOLDING TAXES. The Company shall undertake to make deductions, withholdings and tax reports with respect to payments and benefits under this Agreement to the extent that it reasonably and in good faith believes that it is required to make such deductions, withholdings and tax reports. Payments under this Agreement shall be in amounts net of any such deductions or withholdings. Nothing in this Agreement shall be construed to require the Company to make any payments to compensate the Executive for any adverse tax effect associated with any payments or benefits or for any deduction or withholding from any payment or benefit. 14.7 AMENDMENTS. No amendment or modification of this Agreement shall be deemed effective unless made in writing signed by the parties hereto. 14.8 NO WAVIER. No term or condition of this Agreement shall be deemed to have been waived nor shall there be any estoppel to enforce any provisions of this Agreement, except by a statement in writing signed by the party against whom enforcement of the waiver or estoppel is sought. Any written waiver shall not be deemed a continuing waiver unless specifically stated, shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 14.9 SEVERABILITY. To the extent any provision of this Agreement shall be invalid or unenforceable, it shall be considered deleted here from and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. 14.10 NOTICES. Any and all notices, requests or other communications required or permitted in or by any provision of this Agreement shall be in writing and may be delivered personally or by certified mail directed to the addressee at such person's or entity's last known post office address, and if given by certified mail, shall be deemed to have been delivered when deposited in such, mail postage prepaid. This Agreement is executed on the date first written above at Los Angeles, California. COMPANY: EXECUTIVE: QT 5, INC. By: _________________________ Title: ______________________ ___________________________ By:__________________________ Title:_______________________ 12 EXHIBIT A 13 EX-10.12 6 ex-10_12.txt Exhibit 10.12 THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO QT 5, INC. THAT SUCH REGISTRATION IS NOT REQUIRED. Right to Purchase 1,280,000 Shares of Common Stock of QT 5, Inc. (subject to adjustment as provided herein) COMMON STOCK PURCHASE WARRANT No. 002 Issue Date: June 9, 2003 QT 5, INC., a corporation organized under the laws of the State of Delaware (the "Company"), hereby certifies that, for value received, TIMOTHY J. OWENS, or assigns (the "Holder"), is entitled, subject to the terms set forth below, to purchase from the Company from and after the Issue Date of this Warrant and at any time or from time to time before 5:00 p.m., New York time, through five (5) years after such date (the "Expiration Date"), up to 1,280,000 fully paid and nonassessable shares of Common Stock (as hereinafter defined), no par value, of the Company, at the Exercise Price (as defined below). The number and character of such shares of Common Stock and the Exercise Price are subject to adjustment as provided herein. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" shall include QT 5, Inc. and any corporation which shall succeed or assume the obligations of QT 5, Inc. hereunder. (b) The term "Common Stock" includes (a) the Company's Common Stock, par value $.001 per share, and (b) any other securities into which or for which any of the securities described in (a) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (c) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4 or otherwise. (d) The term "Exercise Price" shall be $0.17 (e) per share. 1. Exercise of Warrant. 1.1. Number of Shares Issuable upon Exercise. From and after the date hereof through and including the Expiration Date, the Holder shall be 1 entitled to receive, upon exercise of this Warrant in whole or in part, by delivery of an original or fax copy of the exercise notice attached hereto as Exhibit A (the "Exercise Notice"), shares of Common Stock of the Company, subject to adjustment pursuant to Section 4. 1.2. Fair Market Value. Fair Market Value of a share of Common Stock as of a particular date (the "Determination Date") shall mean: (a) If the Company's Common Stock is traded on an exchange or is quoted on the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") National Market or the NASDAQ SmallCap Market, then the closing or last sale price, respectively, reported for the last business day immediately preceding the Determination Date. (b) If the Company's Common Stock is not traded on an exchange or on the NASDAQ National Market or the NASDAQ SmallCap Market but is traded on the NASD OTC Bulletin Board, then the mean of the average of the closing bid and asked prices reported for the last business day immediately preceding the Determination Date. (c) Except as provided in clause (d) below, if the Company's Common Stock is not publicly traded, then as the Holder and the Company agree or in the absence of agreement by arbitration in accordance with the rules then in effect of the American Arbitration Association, before a single arbitrator to be chosen from a panel of persons qualified by education and training to pass on the matter to be decided. (d) If the Determination Date is the date of a liquidation, dissolution or winding up, or any event deemed to be a liquidation, dissolution or winding up pursuant to the Company's charter, then all amounts to be payable per share to holders of the Common Stock pursuant to the charter in the event of such liquidation, dissolution or winding up, plus all other amounts to be payable per share in respect of the Common Stock in liquidation under the charter, assuming for the purposes of this clause (d) that all of the shares of Common Stock then issuable upon exercise of the Warrant are outstanding at the Determination Date. 2. Procedure for Exercise. 2.1 Delivery of Stock Certificates, etc. on Exercise. The Company agrees that the shares of Common Stock purchased upon exercise of this Warrant shall be deemed to be issued to the Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares as aforesaid. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within 3 business days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder, or as such Holder (upon payment by such holder of any applicable transfer taxes) may direct in compliance with applicable securities laws, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) to which such Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market Value of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise. 2.2. Exercise. (a) Payment may be made either in (i) cash or by certified or official bank check payable to the order of the Company equal to the applicable aggregate Exercise Price, (ii) by delivery of the Warrant, Common Stock and/or 2 Common Stock receivable upon exercise of the Warrant in accordance with Section (b) below, or (iii) by a combination of any of the foregoing methods, for the number of Common Shares specified in such form (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the holder per the terms of this Warrant) and the Holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock (or Other Securities) determined as provided herein. (b) Notwithstanding any provisions herein to the contrary, if the Fair Market Value of one share of Common Stock is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being exercised) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Exercise Notice in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula: X=Y (A-B) --- A Where X= the number of shares of Common Stock to be issued to the Holder Y= the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation) A= the Fair Market Value of one share of the Company's Common Stock (at the date of such calculation) B= Exercise Price (as adjusted to the date of such calculation) 3. Adjustment for Reorganization, Consolidation, Merger, etc. 3.1. Reorganization, Consolidation, Merger, etc. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the consummation of such a transaction, proper and adequate provision shall be made by the Company whereby the Holder of this Warrant, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such Holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4. 3.2. Dissolution. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock and other securities and property (including cash, where applicable) receivable by the Holder of the Warrant after the effective date of such dissolution pursuant to Section 3.1 to a bank or trust company having its principal office in New York, NY, as trustee for the Holder of the Warrant. 3.3. Continuation of Terms. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) 3 referred to in this Section 3, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section 4. In the event this Warrant does not continue in full force and effect after the consummation of the transactions described in this Section 3, then only in such event will the Company's securities and property (including cash, where applicable) receivable by the holders of the Warrant be delivered to the Trustee as contemplated by Section 3.2. 4. Extraordinary Events Regarding Common Stock. In the event that the Company shall (a) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (b) subdivide its outstanding shares of Common Stock, or (c) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock, then, in each such event, the Exercise Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Exercise Price then in effect. The Exercise Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 4. The number of shares of Common Stock that the holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive shall be increased to a number determined by multiplying the number of shares of Common Stock that would otherwise (but for the provisions of this Section 4) be issuable on such exercise by a fraction of which (a) the numerator is the Exercise Price that would otherwise (but for the provisions of this Section 4) be in effect, and (b) the denominator is the Exercise Price in effect on the date of such exercise. 5. Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable on the exercise of the Warrant, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Exercise Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the holder of the Warrant and any Warrant agent of the Company (appointed pursuant to Section 11 hereof). 6. Reservation of Stock, etc. Issuable on Exercise of Warrant. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrant, shares of Common Stock (or Other Securities) from time to time issuable on the exercise of the Warrant. 7. Assignment; Exchange of Warrant. Subject to compliance with applicable securities laws, this Warrant, and the rights evidenced hereby, may be transferred by any registered holder hereof (a "Transferor") with respect to any or all of the Shares. On the surrender for exchange of this Warrant, with the Transferor's endorsement in the form of Exhibit B attached hereto (the "Transferor Endorsement Form") and together with evidence reasonably satisfactory to the Company demonstrating compliance with applicable securities 4 laws, which shall include, without limitation, a legal opinion from the Transferor's counsel that such transfer is exempt from the registration requirements of applicable securities laws, the Company at its expense but with payment by the Transferor of any applicable transfer taxes) will issue and deliver to or on the order of the Transferor thereof a new Warrant of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a "Transferee"), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered by the Transferor. 8. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 9. Warrant Agent. The Company may, by written notice to the each holder of the Warrant, appoint an agent for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7, and replacing this Warrant pursuant to Section 8, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 10. Transfer on the Company's Books. Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 11. Notices, etc. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such holder or, until any such Holder furnishes to the Company an address, then to, and at the address of, the last Holder of this Warrant who has so furnished an address to the Company. 12. Voluntary Adjustment by the Company. The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 13. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be governed by and construed in accordance with the laws of State of California without regard to principles of conflicts of laws. Any action brought concerning the transactions contemplated by this Warrant shall be brought only in the state courts of California or in the federal courts located in the state of Calfiornia; provided, however, that the Holder may choose to waive this provision and bring an action outside the state of California. The individuals executing this Warrant on behalf of the Company agree to submit to the jurisdiction of such courts and waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Warrant is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of this Warrant. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect 5 the validity or enforceability of any other provision. The Company acknowledges that legal counsel participated in the preparation of this Warrant and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Warrant to favor any party against the other party. [THIS SPACE INTENTIONALLY LEFT BLANK] 6 IN WITNESS WHEREOF, the Company has executed this Warrant under seal as of the date first written above. QT 5, INC. By:_________________________________ Witness: - ------------------------------ 7 Exhibit A FORM OF SUBSCRIPTION (To be signed only on exercise of Warrant) TO: QT 5, Inc. The undersigned, pursuant to the provisions set forth in the attached Warrant (No.____), hereby irrevocably elects to purchase (check applicable box): ___ ________ shares of the Common Stock covered by such Warrant; or ___ the maximum number of shares of Common Stock covered by such Warrant pursuant to the cashless exercise procedure set forth in Section 2. The undersigned herewith makes payment of the full Exercise Price for such shares at the price per share provided for in such Warrant, which is $___________. Such payment takes the form of (check applicable box or boxes): ___ $__________ in lawful money of the United States; and/or ___ the cancellation of such portion of the attached Warrant as is exercisable for a total of _______ shares of Common Stock (using a Fair Market Value of $_______ per share for purposes of this calculation); and/or ___ the cancellation of such number of shares of Common Stock as is necessary, in accordance with the formula set forth in Section 2, to exercise this Warrant with respect to the maximum number of shares of Common Stock purchaseable pursuant to the cashless exercise procedure set forth in Section 2. The undersigned requests that the certificates for such shares be issued in the name of, and delivered to ____________________ whose address is ______________________________________ _______________________________________________________________-. The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable upon exercise of the within Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the "Securities Act") or pursuant to an exemption from registration under the Securities Act. Dated:___________________ _______________________________________ (Signature must conform to name of holder as specified on the face of the Warrant) ------------------------------------- (Address) 8 Exhibit B FORM OF TRANSFEROR ENDORSEMENT (To be signed only on transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading "Transferees" the right represented by the within Warrant to purchase the percentage and number of shares of Common Stock of QT 5, Inc. to which the within Warrant relates specified under the headings "Percentage Transferred" and "Number Transferred," respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on the books of QT 5, Inc. with full power of substitution in the premises. ================================= ======================== ===================== Transferees Percentage Number Transferred Transferred - --------------------------------- ------------------------ --------------------- - --------------------------------- ------------------------ --------------------- - --------------------------------- ------------------------ --------------------- ================================= ======================== ===================== Dated: , __ ___ _________________________________________ ----------------- ---- (Signature must conform to name of holder as specified on the face of the warrant) Signed in the presence of: - ------------------------------- ----------------------------------- (Name) (address) ----------------------------------- ACCEPTED AND AGREED: (address) [TRANSFEREE] - --------------------------------- (Name) 9 EX-10.13 7 ex-10_13.txt Exhibit 10.13 THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO QT 5, INC. THAT SUCH REGISTRATION IS NOT REQUIRED. Right to Purchase 1,280,000 Shares of Common Stock of QT 5, Inc. (subject to adjustment as provided herein) COMMON STOCK PURCHASE WARRANT No. 001 Issue Date: June 9, 2003 QT 5, INC., a corporation organized under the laws of the State of Delaware (the "Company"), hereby certifies that, for value received, STEVEN REDER, or assigns (the "Holder"), is entitled, subject to the terms set forth below, to purchase from the Company from and after the Issue Date of this Warrant and at any time or from time to time before 5:00 p.m., New York time, through five (5) years after such date (the "Expiration Date"), up to 1,280,000 fully paid and nonassessable shares of Common Stock (as hereinafter defined), no par value, of the Company, at the Exercise Price (as defined below). The number and character of such shares of Common Stock and the Exercise Price are subject to adjustment as provided herein. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" shall include QT 5, Inc. and any corporation which shall succeed or assume the obligations of QT 5, Inc. hereunder. (b) The term "Common Stock" includes (a) the Company's Common Stock, par value $.001 per share, and (b) any other securities into which or for which any of the securities described in (a) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (c) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4 or otherwise. (d) The term "Exercise Price" shall be $0.17 per share. 1 1. Exercise of Warrant. 1.1. Number of Shares Issuable upon Exercise. From and after the date hereof through and including the Expiration Date, the Holder shall be entitled to receive, upon exercise of this Warrant in whole or in part, by delivery of an original or fax copy of the exercise notice attached hereto as Exhibit A (the "Exercise Notice"), shares of Common Stock of the Company, subject to adjustment pursuant to Section 4. 1.2. Fair Market Value. Fair Market Value of a share of Common Stock as of a particular date (the "Determination Date") shall mean: (a) If the Company's Common Stock is traded on an exchange or is quoted on the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") National Market or the NASDAQ SmallCap Market, then the closing or last sale price, respectively, reported for the last business day immediately preceding the Determination Date. (b) If the Company's Common Stock is not traded on an exchange or on the NASDAQ National Market or the NASDAQ SmallCap Market but is traded on the NASD OTC Bulletin Board, then the mean of the average of the closing bid and asked prices reported for the last business day immediately preceding the Determination Date. (c) Except as provided in clause (d) below, if the Company's Common Stock is not publicly traded, then as the Holder and the Company agree or in the absence of agreement by arbitration in accordance with the rules then in effect of the American Arbitration Association, before a single arbitrator to be chosen from a panel of persons qualified by education and training to pass on the matter to be decided. (d) If the Determination Date is the date of a liquidation, dissolution or winding up, or any event deemed to be a liquidation, dissolution or winding up pursuant to the Company's charter, then all amounts to be payable per share to holders of the Common Stock pursuant to the charter in the event of such liquidation, dissolution or winding up, plus all other amounts to be payable per share in respect of the Common Stock in liquidation under the charter, assuming for the purposes of this clause (d) that all of the shares of Common Stock then issuable upon exercise of the Warrant are outstanding at the Determination Date. 2. Procedure for Exercise. 2.1 Delivery of Stock Certificates, etc. on Exercise. The Company agrees that the shares of Common Stock purchased upon exercise of this Warrant shall be deemed to be issued to the Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares as aforesaid. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within 3 business days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder, or as such Holder (upon payment by such holder of any applicable transfer taxes) may direct in compliance with applicable securities laws, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) to which such Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market Value of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise. 2 2.2. Exercise. (a) Payment may be made either in (i) cash or by certified or official bank check payable to the order of the Company equal to the applicable aggregate Exercise Price, (ii) by delivery of the Warrant, Common Stock and/or Common Stock receivable upon exercise of the Warrant in accordance with Section (b) below, or (iii) by a combination of any of the foregoing methods, for the number of Common Shares specified in such form (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the holder per the terms of this Warrant) and the Holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock (or Other Securities) determined as provided herein. (b) Notwithstanding any provisions herein to the contrary, if the Fair Market Value of one share of Common Stock is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being exercised) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Exercise Notice in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula: X=Y (A-B) --- A Where X= the number of shares of Common Stock to be issued to the Holder Y= the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation) A= the Fair Market Value of one share of the Company's Common Stock (at the date of such calculation) B= Exercise Price (as adjusted to the date of such calculation) 3. Adjustment for Reorganization, Consolidation, Merger, etc. 3.1. Reorganization, Consolidation, Merger, etc. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the consummation of such a transaction, proper and adequate provision shall be made by the Company whereby the Holder of this Warrant, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such Holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4. 3.2. Dissolution. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock and other securities and property (including cash, where applicable) receivable by the Holder of the Warrant after the 3 effective date of such dissolution pursuant to Section 3.1 to a bank or trust company having its principal office in New York, NY, as trustee for the Holder of the Warrant. 3.3. Continuation of Terms. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 3, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section 4. In the event this Warrant does not continue in full force and effect after the consummation of the transactions described in this Section 3, then only in such event will the Company's securities and property (including cash, where applicable) receivable by the holders of the Warrant be delivered to the Trustee as contemplated by Section 3.2. 4. Extraordinary Events Regarding Common Stock. In the event that the Company shall (a) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (b) subdivide its outstanding shares of Common Stock, or (c) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock, then, in each such event, the Exercise Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Exercise Price then in effect. The Exercise Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 4. The number of shares of Common Stock that the holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive shall be increased to a number determined by multiplying the number of shares of Common Stock that would otherwise (but for the provisions of this Section 4) be issuable on such exercise by a fraction of which (a) the numerator is the Exercise Price that would otherwise (but for the provisions of this Section 4) be in effect, and (b) the denominator is the Exercise Price in effect on the date of such exercise. 5. Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable on the exercise of the Warrant, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Exercise Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the holder of the Warrant and any Warrant agent of the Company (appointed pursuant to Section 11 hereof). 6. Reservation of Stock, etc. Issuable on Exercise of Warrant. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrant, shares of Common Stock (or Other Securities) from time to time issuable on the exercise of the Warrant. 7. Assignment; Exchange of Warrant. Subject to compliance with applicable securities laws, this Warrant, and the rights evidenced hereby, may be transferred by any registered holder hereof (a "Transferor") with respect to 4 any or all of the Shares. On the surrender for exchange of this Warrant, with the Transferor's endorsement in the form of Exhibit B attached hereto (the "Transferor Endorsement Form") and together with evidence reasonably satisfactory to the Company demonstrating compliance with applicable securities laws, which shall include, without limitation, a legal opinion from the Transferor's counsel that such transfer is exempt from the registration requirements of applicable securities laws, the Company at its expense but with payment by the Transferor of any applicable transfer taxes) will issue and deliver to or on the order of the Transferor thereof a new Warrant of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a "Transferee"), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered by the Transferor. 8. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 9. Warrant Agent. The Company may, by written notice to the each holder of the Warrant, appoint an agent for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7, and replacing this Warrant pursuant to Section 8, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 10. Transfer on the Company's Books. Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 11. Notices, etc. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such holder or, until any such Holder furnishes to the Company an address, then to, and at the address of, the last Holder of this Warrant who has so furnished an address to the Company. 12. Voluntary Adjustment by the Company. The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 13. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be governed by and construed in accordance with the laws of State of California without regard to principles of conflicts of laws. Any action brought concerning the transactions contemplated by this Warrant shall be brought only in the state courts of California or in the federal courts located in the state of Calfiornia; provided, however, that the Holder may choose to waive this provision and bring an action outside the state of California. The individuals executing this Warrant on behalf of the Company agree to submit to the jurisdiction of such courts and waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Warrant is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under 5 any law shall not affect the validity or enforceability of any other provision of this Warrant. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. The Company acknowledges that legal counsel participated in the preparation of this Warrant and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Warrant to favor any party against the other party. [THIS SPACE INTENTIONALLY LEFT BLANK] 6 IN WITNESS WHEREOF, the Company has executed this Warrant under seal as of the date first written above. QT 5, INC. By:_________________________________ Witness: - ------------------------------ 7 Exhibit A FORM OF SUBSCRIPTION (To be signed only on exercise of Warrant) TO: QT 5, Inc. The undersigned, pursuant to the provisions set forth in the attached Warrant (No.____), hereby irrevocably elects to purchase (check applicable box): ___ ________ shares of the Common Stock covered by such Warrant; or ___ the maximum number of shares of Common Stock covered by such Warrant pursuant to the cashless exercise procedure set forth in Section 2. The undersigned herewith makes payment of the full Exercise Price for such shares at the price per share provided for in such Warrant, which is $___________. Such payment takes the form of (check applicable box or boxes): ___ $__________ in lawful money of the United States; and/or ___ the cancellation of such portion of the attached Warrant as is exercisable for a total of _______ shares of Common Stock (using a Fair Market Value of $_______ per share for purposes of this calculation); and/or ___ the cancellation of such number of shares of Common Stock as is necessary, in accordance with the formula set forth in Section 2, to exercise this Warrant with respect to the maximum number of shares of Common Stock purchaseable pursuant to the cashless exercise procedure set forth in Section 2. The undersigned requests that the certificates for such shares be issued in the name of, and delivered to ____________________ whose address is ______________________________________ ____________________________________________________. The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable upon exercise of the within Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the "Securities Act") or pursuant to an exemption from registration under the Securities Act. Dated:___________________ _______________________________________ (Signature must conform to name of holder as specified on the face of the Warrant) ------------------------------------- (Address) 8 Exhibit B FORM OF TRANSFEROR ENDORSEMENT (To be signed only on transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading "Transferees" the right represented by the within Warrant to purchase the percentage and number of shares of Common Stock of QT 5, Inc. to which the within Warrant relates specified under the headings "Percentage Transferred" and "Number Transferred," respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on the books of QT 5, Inc. with full power of substitution in the premises. ============================ ======================= =========================== Transferees Percentage Number Transferred Transferred - ---------------------------- ----------------------- --------------------------- - ---------------------------- ----------------------- --------------------------- - ---------------------------- ----------------------- --------------------------- ============================ ======================= =========================== Dated: , __ ___ __________________________________ ----------------- ---- (Signature must conform to name of holder as specified on the face of the warrant) Signed in the presence of: - ------------------------------- ------------------------------------ (Name) (address) ------------------------------------ ACCEPTED AND AGREED: (address) [TRANSFEREE] - --------------------------------- (Name) 9 EX-10.14 8 ex-10_14.txt Exhibit 10.14 THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO QT 5, INC. THAT SUCH REGISTRATION IS NOT REQUIRED. Right to Purchase 750,000 Shares of Common Stock of QT 5, Inc. (subject to adjustment as provided herein) COMMON STOCK PURCHASE WARRANT No. 2003-7 Issue Date: August 4, 2003 QT 5, INC., a corporation organized under the laws of the State of Delaware (the "Company"), hereby certifies that, for value received, NORMAN A. KUNIN, or assigns (the "Holder"), is entitled, subject to the terms set forth below, to purchase from the Company from and after the Issue Date of this Warrant and at any time or from time to time before 5:00 p.m., New York time, through five (5) years after such date (the "Expiration Date"), up to 750,000 fully paid and nonassessable shares of Common Stock (as hereinafter defined), no par value, of the Company, at the Exercise Price (as defined below). The number and character of such shares of Common Stock and the Exercise Price are subject to adjustment as provided herein. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" shall include QT 5, Inc. and any corporation which shall succeed or assume the obligations of QT 5, Inc. hereunder. (b) The term "Common Stock" includes (a) the Company's Common Stock, par value $.001 per share, and (b) any other securities into which or for which any of the securities described in (a) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (c) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4 or otherwise. (d) The term "Exercise Price" shall be $0.24 per share. 1 1. Exercise of Warrant. 1.1. Number of Shares Issuable upon Exercise. From and after the date hereof through and including the Expiration Date, the Holder shall be entitled to receive, upon exercise of this Warrant in whole or in part, by delivery of an original or fax copy of the exercise notice attached hereto as Exhibit A (the "Exercise Notice"), shares of Common Stock of the Company, subject to adjustment pursuant to Section 4. 1.2. Fair Market Value. Fair Market Value of a share of Common Stock as of a particular date (the "Determination Date") shall mean: (a) If the Company's Common Stock is traded on an exchange or is quoted on the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") National Market or the NASDAQ SmallCap Market, then the closing or last sale price, respectively, reported for the last business day immediately preceding the Determination Date. (b) If the Company's Common Stock is not traded on an exchange or on the NASDAQ National Market or the NASDAQ SmallCap Market but is traded on the NASD OTC Bulletin Board, then the mean of the average of the closing bid and asked prices reported for the last business day immediately preceding the Determination Date. (c) Except as provided in clause (d) below, if the Company's Common Stock is not publicly traded, then as the Holder and the Company agree or in the absence of agreement by arbitration in accordance with the rules then in effect of the American Arbitration Association, before a single arbitrator to be chosen from a panel of persons qualified by education and training to pass on the matter to be decided. (d) If the Determination Date is the date of a liquidation, dissolution or winding up, or any event deemed to be a liquidation, dissolution or winding up pursuant to the Company's charter, then all amounts to be payable per share to holders of the Common Stock pursuant to the charter in the event of such liquidation, dissolution or winding up, plus all other amounts to be payable per share in respect of the Common Stock in liquidation under the charter, assuming for the purposes of this clause (d) that all of the shares of Common Stock then issuable upon exercise of the Warrant are outstanding at the Determination Date. 2. Procedure for Exercise. 2.1 Delivery of Stock Certificates, etc. on Exercise. The Company agrees that the shares of Common Stock purchased upon exercise of this Warrant shall be deemed to be issued to the Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares as aforesaid. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within 3 business days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder, or as such Holder (upon payment by such holder of any applicable transfer taxes) may direct in compliance with applicable securities laws, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) to which such Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market Value of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise. 2 2.2. Exercise. (a) Payment may be made either in (i) cash or by certified or official bank check payable to the order of the Company equal to the applicable aggregate Exercise Price, (ii) by delivery of the Warrant, Common Stock and/or Common Stock receivable upon exercise of the Warrant in accordance with Section (b) below, or (iii) by a combination of any of the foregoing methods, for the number of Common Shares specified in such form (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the holder per the terms of this Warrant) and the Holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock (or Other Securities) determined as provided herein. (b) Notwithstanding any provisions herein to the contrary, if the Fair Market Value of one share of Common Stock is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being exercised) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Exercise Notice in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula: X=Y (A-B) --- A Where X= the number of shares of Common Stock to be issued to the Holder Y= the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation) A= the Fair Market Value of one share of the Company's Common Stock (at the date of such calculation) B= Exercise Price (as adjusted to the date of such calculation) 3. Adjustment for Reorganization, Consolidation, Merger, etc. 3.1. Reorganization, Consolidation, Merger, etc. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the consummation of such a transaction, proper and adequate provision shall be made by the Company whereby the Holder of this Warrant, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such Holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4. 3.2. Dissolution. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock and other securities and property (including cash, where applicable) receivable by the Holder of the Warrant after the 3 effective date of such dissolution pursuant to Section 3.1 to a bank or trust company having its principal office in New York, NY, as trustee for the Holder of the Warrant. 3.3. Continuation of Terms. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 3, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section 4. In the event this Warrant does not continue in full force and effect after the consummation of the transactions described in this Section 3, then only in such event will the Company's securities and property (including cash, where applicable) receivable by the holders of the Warrant be delivered to the Trustee as contemplated by Section 3.2. 4. Extraordinary Events Regarding Common Stock. In the event that the Company shall (a) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (b) subdivide its outstanding shares of Common Stock, or (c) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock, then, in each such event, the Exercise Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Exercise Price then in effect. The Exercise Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 4. The number of shares of Common Stock that the holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive shall be increased to a number determined by multiplying the number of shares of Common Stock that would otherwise (but for the provisions of this Section 4) be issuable on such exercise by a fraction of which (a) the numerator is the Exercise Price that would otherwise (but for the provisions of this Section 4) be in effect, and (b) the denominator is the Exercise Price in effect on the date of such exercise. 5. Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable on the exercise of the Warrant, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Exercise Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the holder of the Warrant and any Warrant agent of the Company (appointed pursuant to Section 11 hereof). 6. Reservation of Stock, etc. Issuable on Exercise of Warrant. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrant, shares of Common Stock (or Other Securities) from time to time issuable on the exercise of the Warrant. 7. Assignment; Exchange of Warrant. Subject to compliance with applicable securities laws, this Warrant, and the rights evidenced hereby, may be transferred by any registered holder hereof (a "Transferor") with respect to 4 any or all of the Shares. On the surrender for exchange of this Warrant, with the Transferor's endorsement in the form of Exhibit B attached hereto (the "Transferor Endorsement Form") and together with evidence reasonably satisfactory to the Company demonstrating compliance with applicable securities laws, which shall include, without limitation, a legal opinion from the Transferor's counsel that such transfer is exempt from the registration requirements of applicable securities laws, the Company at its expense but with payment by the Transferor of any applicable transfer taxes) will issue and deliver to or on the order of the Transferor thereof a new Warrant of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a "Transferee"), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered by the Transferor. 8. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 9. Warrant Agent. The Company may, by written notice to the each holder of the Warrant, appoint an agent for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7, and replacing this Warrant pursuant to Section 8, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 10. Transfer on the Company's Books. Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 11. Notices, etc. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such holder or, until any such Holder furnishes to the Company an address, then to, and at the address of, the last Holder of this Warrant who has so furnished an address to the Company. 12. Voluntary Adjustment by the Company. The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 13. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be governed by and construed in accordance with the laws of State of California without regard to principles of conflicts of laws. Any action brought concerning the transactions contemplated by this Warrant shall be brought only in the state courts of California or in the federal courts located in the state of Calfiornia; provided, however, that the Holder may choose to waive this provision and bring an action outside the state of California. The individuals executing this Warrant on behalf of the Company agree to submit to the jurisdiction of such courts and waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Warrant is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under 5 any law shall not affect the validity or enforceability of any other provision of this Warrant. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. The Company acknowledges that legal counsel participated in the preparation of this Warrant and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Warrant to favor any party against the other party. [THIS SPACE INTENTIONALLY LEFT BLANK] 6 IN WITNESS WHEREOF, the Company has executed this Warrant under seal as of the date first written above. QT 5, INC. By:_________________________________ Witness: - ------------------------------ 7 Exhibit A FORM OF SUBSCRIPTION (To be signed only on exercise of Warrant) TO: QT 5, Inc. The undersigned, pursuant to the provisions set forth in the attached Warrant (No.____), hereby irrevocably elects to purchase (check applicable box): ___ ________ shares of the Common Stock covered by such Warrant; or ___ the maximum number of shares of Common Stock covered by such Warrant pursuant to the cashless exercise procedure set forth in Section 2. The undersigned herewith makes payment of the full Exercise Price for such shares at the price per share provided for in such Warrant, which is $___________. Such payment takes the form of (check applicable box or boxes): ___ $__________ in lawful money of the United States; and/or ___ the cancellation of such portion of the attached Warrant as is exercisable for a total of _______ shares of Common Stock (using a Fair Market Value of $_______ per share for purposes of this calculation); and/or ___ the cancellation of such number of shares of Common Stock as is necessary, in accordance with the formula set forth in Section 2, to exercise this Warrant with respect to the maximum number of shares of Common Stock purchaseable pursuant to the cashless exercise procedure set forth in Section 2. The undersigned requests that the certificates for such shares be issued in the name of, and delivered to ____________________ whose address is ______________________________________ ____________________________________ . The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable upon exercise of the within Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the "Securities Act") or pursuant to an exemption from registration under the Securities Act. Dated:___________________ ____________________________________ (Signature must conform to name of holder as specified on the face of the Warrant) ------------------------------------ (Address) 8 Exhibit B FORM OF TRANSFEROR ENDORSEMENT (To be signed only on transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading "Transferees" the right represented by the within Warrant to purchase the percentage and number of shares of Common Stock of QT 5, Inc. to which the within Warrant relates specified under the headings "Percentage Transferred" and "Number Transferred," respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on the books of QT 5, Inc. with full power of substitution in the premises. =========================== ======================== =========================== Transferees Percentage Number Transferred Transferred - --------------------------- ------------------------ --------------------------- - --------------------------- ------------------------ --------------------------- - --------------------------- ------------------------ --------------------------- =========================== ======================== =========================== Dated: , __ ___ ___________________________________ ----------------- ---- (Signature must conform to name of holder as specified on the face of the warrant) Signed in the presence of: - ------------------------------- ----------------------------------- (Name) (address) ----------------------------------- ACCEPTED AND AGREED: (address) [TRANSFEREE] - --------------------------------- (Name) 9 EX-10.15 9 ex-10_15.txt Exhibit 10.15 SECURITIES PURCHASE AGREEMENT This Securities Purchase Agreement (this "Agreement") is dated as of August 19, 2003, among QT 5, Inc., a Delaware corporation (the "Company"), and the purchasers identified on the signature pages hereto (each, including its successors and assigns, a "Purchaser" and collectively the "Purchasers"). WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") and Rule 506 promulgated thereunder, the Company desires to issue and sell to each Purchaser, and each Purchaser, severally and not jointly, desires to purchase from the Company, securities of the Company as more fully described in this Agreement. NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and each Purchaser agrees as follows: ARTICLE I DEFINITIONS 1.1 Definitions. In addition to the terms defined elsewhere in this Agreement: (a) capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Debentures (as defined herein), and (b) the following terms have the meanings indicated in this Section 1.1: "Affiliate" means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 144 under the Securities Act. "Capital Shares" means the Common Stock and any shares of any other class of common stock whether now or hereafter authorized, having the right to participate in the distribution of earnings and assets of the Company. "Capital Shares Equivalents" means any securities, rights or obligations that are convertible into or exchangeable for or give any right to subscribe for or purchase, directly or indirectly, any Capital Shares of the Company or any warrants, options or other rights to subscribe for or purchase, directly or indirectly, Capital Shares or any such convertible or exchangeable securities. "Closing Price" means on any particular date (a) the last reported closing bid price per share of Common Stock on such date on the Principal Market (as reported by Bloomberg L.P. at 4:15 PM (New York time), or (b) if there is no such price on such date, then the closing bid price on the Principal Market on the date nearest preceding such date (as reported by Bloomberg L.P. at 4:15 PM (New York time) for the closing bid price for regular session trading on such day), or (c) if the Common Stock is not then listed or quoted on the Principal Market and if prices for the Common Stock are then reported in the "pink sheets" published by the National Quotation Bureau Incorporated (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) if the shares of Common Stock are not then publicly traded the fair market value of a share of Common Stock as determined by a qualified independent appraiser selected in good faith by the Purchasers of a majority in interest of the principal amount of Debentures then outstanding. "Closings" means collectively, the closings of the purchase and sale of the Securities pursuant to Section 2.1, and any reference to "Closing" or "Closings" shall be construed to include the First Closing and the Second Closing unless only one such closing is expressly referred to. "Closing Dates" means, collectively, the dates of the First Closing and Second Closing. "Commission" means the Securities and Exchange Commission. "Common Stock" means the common stock of the Company, par value $0.001 per share, and any securities into which such common stock shall hereinafter have been reclassified into. "Company Counsel" means Richardson & Patel LLP. "Debentures" means, the 6% Convertible Debentures due [36] months from their date of issuance, issued by the Company to the Purchasers hereunder, in the form of Exhibit A. "Disclosure Schedules" shall have the meaning ascribed to such term in Section 3.1 hereof. "Effective Date" means the date that the initial Registration Statement filed by the Company pursuant to the Registration Rights Agreement is first declared effective by the Commission. "Escrow Agent" shall have the meaning set forth in the Escrow Agreement. "Escrow Agreement" means the Escrow Agreement in substantially the form of Exhibit F hereto executed and delivered contemporaneously with this Agreement. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "First Closing" shall have the meaning ascribed to such term in Section 2.1 hereof. -2- "First Closing Date" means the date of the First Closing. "FW" means Feldman Weinstein LLP with offices at 420 Lexington Avenue, Suite 2620, New York, New York 10170-0002. "GAAP" shall have the meaning ascribed to such term in Section 3.1(h) hereof. "Liens" shall have the meaning ascribed to such term in Section 3.1(a) hereof. "Losses" means any and all losses, claims, damages, liabilities, settlement costs and expenses, including without limitation costs of preparation and reasonable attorneys' fees. "Material Adverse Effect" shall have the meaning assigned to such term in Section 3.1(b) hereof. "Person" means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind. "Principal Market" means initially the OTC Bulletin Board and shall also include the American Stock Exchange, New York Stock Exchange, the NASDAQ Small-Cap Market or the NASDAQ National Market, whichever is at the time the principal trading exchange or market for the Common Stock, based upon share volume. "Proceeding" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "Registration Statement" means the registration statement to be filed by the Company pursuant to the Registration Rights Agreement. "Registration Rights Agreement" means the Registration Rights Agreement, dated the Closing Date, among the Company and the Purchasers, in the form of Exhibit B. "Required Approvals" shall have the meaning ascribed to such term in Section 3.1(e) hereof. "Required Minimum" means, as of any date, the maximum aggregate number of shares of Common Stock then issued or potentially issuable in the future pursuant to the Transaction Documents, including any Underlying Shares issuable upon exercise or conversion in full of all Warrants and Debentures, ignoring any conversion or exercise limits set forth therein, and assuming that the Set Price is at all times on and after the date of determination the lesser of (a) the Set Price then in effect and (b) 75% of the Closing Price on the Trading Day immediately prior to the date of determination. -3- "Rule 144" means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "SEC Reports" shall have the meaning ascribed to such term in Section 3.1(h) hereof. "Second Closing" shall have the meaning ascribed to such term in Section 2.1 hereof. "Second Closing Date" means the date of the Second Closing. "Securities" means the Debentures, the Warrants and the Underlying Shares. "Securities Act" means the Securities Act of 1933, as amended. "Set Price" shall have the meaning ascribed to such term in the Debentures. "Subscription Amount" means, as to each Purchaser, the amounts set forth below such Purchaser's signature block on the signature pages hereto and next to the headings "First Closing Subscription Amount" and "Second Closing Subscription Amount", in United States Dollars and in immediately available funds. "Subsidiary" means any subsidiary of the Company as set forth in the SEC Reports. "Trading Day" means any day during which the Principal Market shall be open for business. "Transaction Documents" means this Agreement, the Debentures, the Warrants, the Registration Rights Agreement, the Escrow Agreement and any other documents or agreements executed in connection with the transactions contemplated hereunder. "Underlying Shares" means the shares of Common Stock issuable upon conversion of the Debentures and upon exercise of the Warrants and issued and issuable in lieu of the cash payment of interest on the Debentures. "Underlying Shares Registration Statement" or "Registration Statement" means a registration statement meeting the requirements set forth in the Registration Rights Agreement and covering the resale of the Underlying Shares by each Purchaser as provided for in the Registration Rights Agreement. "Warrants" means collectively the Common Stock purchase warrants, in the form of Exhibit C delivered to the Purchasers at the Closing in accordance with Section 2.2 hereof. "Warrant Shares" means the shares of Common Stock issuable upon exercise of the Warrants. -4- ARTICLE II PURCHASE AND SALE 2.1 Closing. Each Purchaser shall purchase at each Closing, severally and not jointly with the other Purchasers, the principal amount of Debentures equal to such Purchaser's Subscription Amount applicable to such Closing and the Company shall sell such principal amount of Debentures to each such Purchaser. The principal amount of each Debenture shall be convertible in accordance with its terms at the applicable Set Price. The Closing shall take place in two stages as set forth below (respectively, the "First Closing" and the "Second Closing"). The aggregate principal amount of debentures purchased at all of the Closings shall be $2,400,000. (a) First Closing. The First Closing shall be limited to $1,200,000 in aggregate principal amount of Debentures, and shall occur within 5 Trading Days of the date hereof. (b) Second Closing. The Second Closing shall be limited to $1,200,000 in aggregate principal amount of Debentures, and shall occur on the 5th Trading Day following the Effective Date. 2.2 Closing Conditions. Each Closing shall take place at the offices of the Escrow Agent, or at such other location as the parties may agree, pursuant to the terms of the Escrow Agreement. Upon satisfaction or waiver by the party sought to be benefited thereby of the conditions set forth in this Section 2.2, as applicable, each Closing shall occur. (a) At or prior to each Closing, unless otherwise indicated below, the Company shall deliver or cause to be delivered to the Escrow Agent the following: (i) a Debenture for each Purchaser with a principal amount equal to such Purchaser's Subscription Amount as to the applicable Closing, registered in the name of such Purchaser; (ii) as to the First Closing only, a Warrant registered in the name of each Purchaser to purchase up to a number of shares of Common Stock equal to 50% of such Purchaser's aggregate Subscription Amount for both Closings divided by the Set Price, with a term of 5 years and an exercise price equal to $0.075, as adjusted therein; (iii) as to the First Closing only, the legal opinion of Company Counsel, in the form of Exhibit D attached hereto, addressed to the Purchasers; (iv) as to the First Closing only, the Escrow Agreement duly executed by the Company, in the form of Exhibit E attached hereto; -5- (v) as to the First Closing only, the Registration Rights Agreement duly executed by the Company in the form of Exhibit B attached hereto; (vi) as to the First Closing only, this Agreement, duly executed by the Company. (b) At or prior to each Closing, unless otherwise indicated below, each Purchaser shall deliver or cause to be delivered to the Escrow Agent the following: (i) such Purchaser's Subscription Amount, as to the applicable Closing, by wire transfer; (ii) as to the First Closing only, the Escrow Agreement duly executed by such Purchaser; (iii) as to the First Closing only, this Agreement, duly executed by such Purchaser; and (iv) as to the First Closing only, the Registration Rights Agreement duly executed by such Purchaser. (c) All representations and warranties of the other party contained herein shall remain true and correct as of each Closing Date and all covenants of the other party shall have been performed if due prior to such date. (d) There shall have been no Material Adverse Effect (as defined in Section 3.1(b)) with respect to the Company since the date hereof. (e) From the date hereof to each Closing Date, trading in the Common Stock shall not have been suspended by the Commission (except for any suspension of trading of limited duration agreed to by the Company, which suspension shall be terminated prior to the applicable Closing), and, at any time prior to each Closing Date, trading in securities generally as reported by Bloomberg Financial Markets shall not have been suspended or limited, or minimum prices shall not have been established on securities whose trades are reported by such service, or on the Principal Market, nor shall a banking moratorium have been declared either by the United States or New York State authorities. (f) As to the Second Closing only, the Company shall have filed with the Commission the Registration Statement registering all of the Underlying Shares and, within the time period specified in the Registration Rights Agreement, such Registration Statement shall have been declared effective by the Commission as to all such securities and been maintained effective since such date. -6- ARTICLE III REPRESENTATIONS AND WARRANTIES 3.1 Representations and Warranties of the Company. Except as set forth under the corresponding section of the disclosure schedules delivered to the Purchasers concurrently herewith (the "Disclosure Schedules") which Disclosure Schedules shall be deemed a part hereof, the Company hereby makes the representations and warranties set forth below to each Purchaser. (a) Subsidiaries. The Company owns, directly or indirectly, all of the capital stock or other equity interests of each Subsidiary free and clear of any lien, charge, security interest, encumbrance, right of first refusal or other restriction (collectively, "Liens"), and all the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights. If the Company has no Subsidiaries, then references in the Transaction Documents to the Subsidiaries will be disregarded. (b) Organization and Qualification. Each of the Company and the Subsidiaries is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. Neither the Company nor any Subsidiary is in violation of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents. Each of the Company and the Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not, individually or in the aggregate: (i) adversely affect the legality, validity or enforceability of any Transaction Document, (ii) have or result in or be reasonably likely to have or result in a material adverse effect on the results of operations, assets, prospects, business or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (iii) adversely impair the Company's ability to perform fully on a timely basis its obligations under any of the Transaction Documents (any of (i), (ii) or (iii), a "Material Adverse Effect"). (c) Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents and otherwise to carry out its obligations hereunder or thereunder. The execution and delivery of each of the Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby or thereby have been duly authorized by all necessary action on the part of the Company and no further consent or action is required by the Company other than Required Approvals. Each of the Transaction Documents has been (or upon delivery will be) duly executed by the Company and, when delivered in accordance with the terms hereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and general principles of equity. Neither the Company nor any -7- Subsidiary is in violation of any of the provisions of its respective certificate or articles of incorporation, by-laws or other organizational or charter documents except where such violation could not, individually or in the aggregate, constitute a Material Adverse Effect. (d) No Conflicts. The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated thereby do not and will not: (i) conflict with or violate any provision of the Company's or any Subsidiary's certificate or articles of incorporation, bylaws or other organizational or charter documents, or (ii) subject to obtaining the Required Approvals, conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise) or other understanding to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound or affected, or (iii) result, in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or a Subsidiary is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company or a Subsidiary is bound or affected; such as could not, individually or in the aggregate, have or result in a Material Adverse Effect. (e) Filings, Consents and Approvals. Neither the Company nor any Subsidiary is required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than (i) the filings required under Section 4.7, (ii) the filing with the Commission of the Underlying Shares Registration Statement, (iii) the notice and/or application(s) to each applicable Principal Market for the issuance and sale of the Debentures and Warrants and the listing of the Underlying Shares for trading thereon in the time and manner required thereby, and (iv) the filing of Form D with the Commission and applicable Blue Sky filings (collectively, the "Required Approvals"). (f) Issuance of the Securities. The Securities are duly authorized and, when issued and paid for in accordance with the applicable Transaction Documents, will be duly and validly issued, fully paid and non-assessable, free and clear of all Liens. The Company has reserved from its duly authorized capital stock a number of shares of Common Stock for issuance of the Underlying Shares at least equal to the Required Minimum on the date hereof. The Company has not, and to the knowledge of the Company, no Affiliate of the Company has sold, offered for sale or solicited offers to buy or otherwise negotiated in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the sale of the Securities to the Purchasers, or that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Principal Market. -8- (g) Capitalization. The number of shares and type of all authorized, issued and outstanding capital stock of the Company is set forth in the Disclosure Schedules attached hereto. No securities of the Company are entitled to preemptive or similar rights, and no Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. Except as a result of the purchase and sale of the Securities, there are no outstanding options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of Common Stock, or contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. The issuance and sale of the Securities will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than the Purchasers) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price under such securities. (h) SEC Reports; Financial Statements. The Company has filed all reports required to be filed by it under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (or such shorter period as the Company was required by law to file such material) (the foregoing materials being collectively referred to herein as the "SEC Reports") on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension. As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state 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 financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved ("GAAP"), except as may be otherwise specified in such financial statements or the notes thereto, and fairly present in all material respects the financial position of the Company and its consolidated subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments. (i) Material Changes. Since March 31, 2003, except as specifically disclosed in the SEC Reports: (i) there has been no event, occurrence or development that has had or that could result in a Material Adverse Effect, (ii) the Company has not incurred any liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company's financial statements pursuant to GAAP or required to be -9- disclosed in filings made with the Commission, (iii) the Company has not altered its method of accounting or the identity of its auditors, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock, and (v) the Company has not issued any equity securities to any officer, director or Affiliate, except pursuant to existing Company stock option or similar plans. (j) Litigation. There is no action, suit, inquiry, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company, any Subsidiary or any of their respective properties before or by any court, arbitrator, governmental or administrative agency or regulatory authority (federal, state, county, local or foreign) (collectively, an "Action") which: (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the Securities or (ii) could, if there were an unfavorable decision, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any Subsidiary, nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. The Company does not have pending before the Commission any request for confidential treatment of information. There has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the Commission involving the Company or any current or former director or officer of the Company. The Commission has not issued any stop order or other order suspending the effectiveness of any registration statement filed by the Company or any Subsidiary under the Exchange Act or the Securities Act. (k) Compliance. Neither the Company nor any Subsidiary: (i) is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company or any Subsidiary under), nor has the Company or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is in violation of any order of any court, arbitrator or governmental body, or (iii) is or has been in violation of any statute, rule or regulation of any governmental authority, except in each case as could not, individually or in the aggregate, have or result in a Material Adverse Effect. (l) Labor Relations. No material labor dispute exists or, to the knowledge of the Company, is imminent with respect to any of the employees of the Company. (m) Regulatory Permits. The Company and the Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Reports, except where the failure to possess such permits could not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect ("Material Permits"), and -10- neither the Company nor any Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit. (n) Title to Assets. The Company and the Subsidiaries have good and marketable title in fee simple to all real property owned by them that is material to the business of the Company and the Subsidiaries and good and marketable title in all personal property owned by them that is material to the business of the Company and the Subsidiaries, in each case free and clear of all Liens, except for Liens as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and the Subsidiaries. Any real property and facilities held under lease by the Company and the Subsidiaries are held under valid, subsisting and enforceable leases of which the Company and the Subsidiaries are in compliance. (o) Patents and Trademarks. The Company and the Subsidiaries have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and other similar rights necessary or material for use in connection with their respective businesses as described in the SEC Reports and which the failure to so have could have a Material Adverse Effect (collectively, the "Intellectual Property Rights"). Neither the Company nor any Subsidiary has received a written notice that the Intellectual Property Rights used by the Company or any Subsidiary violates or infringes upon the rights of any Person. To the knowledge of the Company, all such Intellectual Property Rights are enforceable and there is no existing infringement by another Person of any of the Intellectual Property Rights. (p) Insurance. The Company and the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company and the Subsidiaries are engaged. To the best of Company's knowledge, such insurance contracts and policies are accurate and complete. Neither the Company nor any Subsidiary has any reason to believe it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant increase in cost. (q) Transactions With Affiliates and Employees. Except as required to be set forth in the SEC Reports, none of the officers or directors of the Company and, to the knowledge of the Company, none of the employees of the Company is presently a party to any transaction with the Company or any Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. -11- (r) Internal Accounting Controls. The Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's 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. The Company has established disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and designed such disclosures controls and procedures to ensure that material information relating to the Company, including its subsidiaries, is made known to the certifying officers by others within those entities, particularly during the period in which the Company's Form 10-K or 10-Q, as the case may be, is being prepared. The Company's certifying officers have evaluated the effectiveness of the Company's controls and procedures as of a date within 90 days prior to the filing date of the Form 10-Q for the quarter ended March 31, 2003 (such date, the "Evaluation Date"). The Company presented in the Form 10-Q for the quarter ended March 31, 2003 the conclusions of the certifying officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date. Since the Evaluation Date, there have been no significant changes in the Company's internal controls (as such term is defined in Item 307(b) of Regulation S-K under the Exchange Act) or, the Company's knowledge, in other factors that could significantly affect the Company's internal controls. (s) Solvency/Indebtedness. Based on the financial condition of the Company as of each Closing Date: (i) the fair saleable value of the Company's assets exceeds the amount that will be required to be paid on or in respect of the Company's existing debts and other liabilities (including known contingent liabilities) as they mature; (ii) the Company's assets do not constitute unreasonably small capital to carry on its business for the current fiscal year as now conducted and as proposed to be conducted including its capital needs taking into account the particular capital requirements of the business conducted by the Company, and projected capital requirements and capital availability thereof; and (iii) the current cash flow of the Company, together with the proceeds the Company would receive, were it to liquidate all of its assets, after taking into account all anticipated uses of the cash, would be sufficient to pay all amounts on or in respect of its debt when such amounts are required to be paid. The Company does not intend to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be payable on or in respect of its debt). The Company has no knowledge of any facts or circumstances which lead it to believe that it will file for reorganization or liquidation under the bankruptcy or reorganization laws of any jurisdiction within one year from the Closing Date. The SEC Reports set forth as of the dates thereof all outstanding secured and unsecured Indebtedness of the Company or any Subsidiary, or for which the Company or any Subsidiary has commitments. For the purposes of this Agreement, "Indebtedness" shall mean (a) any liabilities for borrowed money or amounts owed in excess of $50,000 (other than trade accounts payable incurred in the ordinary course of business), (b) all guaranties, endorsements and other contingent obligations, whether or not the same are or should be reflected in the -12- Company's balance sheet or the notes thereto, except guaranties by endorsement of negotiable instruments for deposit or collection in the ordinary course of business, and (c) the present value of any lease payments in excess of $50,000 due under leases required to be capitalized in accordance with GAAP. Neither the Company nor any Subsidiary is in default with respect to any Indebtedness. (t) Certain Fees. Except as set forth in Section 5.2, no brokerage or finder's fees or commissions are or will be payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by this Agreement, and the Company has not taken any action that would cause any Purchaser to be liable for any such fees or commissions. The Company agrees that the Purchasers shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of any Person for fees of the type contemplated by this Section with the transactions contemplated by this Agreement. (u) Private Placement. Assuming the accuracy of the representations and warranties of the Purchasers set forth in Sections 3.2(b)-(f), the offer, issuance and sale of the Securities to the Purchasers as contemplated hereby are exempt from the registration requirements of the Securities Act. The issuance and sale of the Securities hereunder does not contravene the rules and regulations of the Principal Market and no shareholder approval is required for the Company to fulfill its obligations under the Transaction Documents. (v) Listing and Maintenance Requirements. The Company has not, in the 12 months preceding the date hereof, received notice from any Principal Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements of such Principal Market. The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements. (w) Registration Rights. The Company has not granted or agreed to grant to any Person any rights (including "piggy-back" registration rights) to have any securities of the Company registered with the Commission or any other governmental authority that have not been satisfied. (x) Application of Takeover Protections. The Company and its Board of Directors have taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Company's Certificate of Incorporation (or similar charter documents) or the laws of its state of incorporation that is or could become applicable to the Purchasers as a result of the Purchasers and the Company fulfilling their obligations or exercising their rights under the Transaction Documents, including without limitation as a result of the Company's issuance of the Securities and the Purchasers' ownership of the Securities. -13- (y) Seniority. As of each Closing Date, no indebtedness of the Company is senior to the Debentures in right of payment, whether with respect to interest or upon liquidation or dissolution, or otherwise, other than indebtedness secured by purchase money security interests (which is senior only as to underlying assets covered thereby) and capital lease obligations (which is senior only as to the property covered thereby). (z) Disclosure. The Company confirms that neither it nor any other Person acting on its behalf has provided any of the Purchasers or their agents or counsel with any information that constitutes or might constitute material, nonpublic information. The Company understands and confirms that the Purchasers will rely on the foregoing representations in effecting transactions in securities of the Company. All disclosure provided to the Purchasers regarding the Company, its business and the transactions contemplated hereby, including the Schedules to this Agreement, furnished by or on behalf of the Company with respect to the representations and warranties made herein are true and correct with respect to such representations and warranties and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. The Company acknowledges and agrees that no Purchaser makes or has made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in Section 3.2 hereof. (aa) Tax Status. The Company and each of its Subsidiaries has made or filed all federal, state and foreign income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company and each of its Subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. The Company has not executed a waiver with respect to the statute of limitations relating to the assessment or collection of any foreign, federal, statue or local tax. None of the Company's tax returns is presently being audited by any taxing authority. (bb) Acknowledgment Regarding Purchasers' Purchase of Securities. The Company acknowledges and agrees that the Purchasers are acting solely in the capacity of arm's length purchasers with respect to this Agreement and the transactions contemplated hereby. The Company further acknowledges that no Purchaser is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any statement made by any Purchaser or any of their respective representatives or agents in connection with this Agreement and the transactions contemplated hereby is not advice or a recommendation and is merely incidental to the Purchasers' purchase of the Securities. The Company further represents to each Purchaser that the Company's -14- decision to enter into this Agreement has been based solely on the independent evaluation of the Company and its representatives. (cc) No General Solicitation or Advertising in Regard to this Transaction. Neither the Company nor, to the knowledge of the Company, any of its directors or officers (i) has conducted or will conduct any general solicitation (as that term is used in Rule 502(c) of Regulation D) or general advertising with respect to the sale of the Debentures or the Warrants, or (ii) made any offers or sales of any security or solicited any offers to buy any security under any circumstances that would require registration of the Debentures, the Underlying Shares or the Warrants under the Securities Act or made any "directed selling efforts" as defined in Rule 902 of Regulation S. (dd) No Disagreements with Accountants and Lawyers. There are no disagreements of any kind presently existing, or reasonably anticipated by the Company to arise, between the accountants and lawyers formerly or presently employed by the Company and the Company is current with respect to any fees owed to its accountants and lawyers. 3.2 Representations and Warranties of the Purchasers. Each Purchaser hereby, for itself and for no other Purchaser, represents and warrants to the Company as follows: (a) Organization; Authority. Such Purchaser is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with the requisite corporate or partnership power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents and otherwise to carry out its obligations thereunder. The purchase by such Purchaser of the Securities hereunder has been duly authorized by all necessary action on the part of such Purchaser. Each of this Agreement, the Escrow Agreement and the Registration Rights Agreement has been duly executed by such Purchaser, and when delivered by such Purchaser in accordance with the terms hereof, will constitute the valid and legally binding obligation of such Purchaser, enforceable against it in accordance with its terms. (b) Investment Intent. Such Purchaser is acquiring the Securities as principal for its own account for investment purposes only and not with a view to or for distributing or reselling such Securities or any part thereof, without prejudice, however, to such Purchaser's right, subject to the provisions of this Agreement, at all times to sell or otherwise dispose of all or any part of such Securities pursuant to an effective registration statement under the Securities Act or under an exemption from such registration and in compliance with applicable federal and state securities laws. Nothing contained herein shall be deemed a representation or warranty by such Purchaser to hold Securities for any period of time. Such Purchaser is acquiring the Securities hereunder in the ordinary course of its business. Such Purchaser does not have any agreement or understanding, directly or indirectly, with any Person to distribute any of the Securities. -15- (c) Purchaser Status. At the time such Purchaser was offered the Securities, it was, and at the date hereof it is, and on each date on which it exercises any Warrants or converts any Debentures it will be, an "accredited investor" as defined in Rule 501(a) under the Securities Act. Such Purchaser has not been formed solely for the purpose of acquiring the Securities. Such Purchaser is not a registered broker-dealer under Section 15 of the Exchange Act. (d) Experience of such Purchaser. Such Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment. Such Purchaser is able to bear the economic risk of an investment in the Securities and, at the present time, is able to afford a complete loss of such investment. (e) General Solicitation. Such Purchaser is not purchasing the Securities as a result of any advertisement, article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement. ARTICLE IV OTHER AGREEMENTS OF THE PARTIES 4.1 Transfer Restrictions. (a) The Securities may only be disposed of in compliance with state and federal securities laws. In connection with any transfer of Securities other than pursuant to an effective registration statement, to the Company or to an Affiliate of a Purchaser, the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Securities under the Securities Act. As a condition of transfer, any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights of a Purchaser under this Agreement and the Registration Rights Agreement. (b) Each Purchaser agrees to the imprinting, so long as is required by this Section 4.1(b), of the following legend on any certificate evidencing Securities: [NEITHER] THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [EXERCISABLE] [CONVERTIBLE]] HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE -16- REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR REASONABLY ACCEPTABLE TO THE COMPANY TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES. The Company acknowledges and agrees that a Purchaser may from time to time pledge pursuant to a bona fide margin agreement or grant a security interest in some or all of the Securities and, if required under the terms of such arrangement, such Purchaser may transfer pledged or secured Securities to the pledgees or secured parties. If required by the Company's transfer agent in order to effect a pledge, the Company shall cause its counsel, at no cost to the Purchasers, to issue an opinion of counsel to the Company's transfer agent. Further, no notice shall be required of such pledge. At the appropriate Purchaser's expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Securities may reasonably request in connection with a pledge or transfer of the Securities, including the preparation and filing of any required prospectus supplement under Rule 424(b)(3) of the Securities Act or other applicable provision of the Securities Act to appropriately amend the list of Selling Stockholders thereunder. (c) Certificates evidencing Underlying Shares shall not contain any legend (including the legend set forth in Section 4.1(b) hereof): (i) while a registration statement (including the Underlying Shares Registration Statement) covering the resale of such security is effective under the Securities Act, or (ii) following any sale of such Underlying Shares pursuant to Rule 144, or (iii) if such Underlying Shares are eligible for sale under Rule 144(k), or (iv) if such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission); provided, however, in connection with the issuance of the Underlying Shares, each Purchaser, severally and not jointly with the other Purchasers, hereby agrees to adhere to and abide by all prospectus delivery requirements under the Securities Act and rules and regulations of the Commission. If all or any portion of a Debenture or Warrant is converted or exercised (as applicable) at a time when there is an effective registration statement to cover the resale of the Underlying Shares, or if such Underlying Shares may be sold under Rule 144(k) or if such legend is not otherwise required under applicable requirements of the Securities Act (including judicial interpretations thereof) then such Underlying Shares shall be issued free of all legends. The Company agrees that following the Effective Date or at such time as such legend is no longer required under this Section 4.1(c), it will, no later than three Trading Days following the delivery by a Purchaser to the Company or the Company's transfer agent of a certificate representing Underlying Shares issued with a restrictive legend (such third Trading Day, the "Legend Removal Date", -17- deliver or cause to be delivered to such Purchaser a certificate representing such shares that is free from all restrictive and other legends. The Company may not make any notation on its records or give instructions to any transfer agent of the Company that enlarge the restrictions on transfer set forth in this Section. (d) In addition to such Purchaser's other available remedies, the Company shall pay to a Purchaser, in cash, as liquidated damages and not as a penalty, for each $5,000 of Underlying Shares (based on the Closing Price of the Common Stock on the date such Securities are submitted to the Company's transfer agent) delivered for removal of the restrictive legend and subject to this Section 4.1(c), $50 per Trading Day (increasing to $100 per Trading Day 3 Trading Days after such damages have begun to accrue) for each Trading Day after the Legend Removal Date until such certificate is delivered without a legend. 4.2 Acknowledgment of Dilution. The Company acknowledges that the issuance of the Securities may result in dilution of the outstanding shares of Common Stock, which dilution may be substantial under certain market conditions. The Company further acknowledges that its obligations under the Transaction Documents, including without limitation its obligation to issue the Underlying Shares pursuant to the Transaction Documents, are unconditional and absolute and not subject to any right of set off, counterclaim, delay or reduction, regardless of the effect of any such dilution or any claim the Company may have against any Purchaser and regardless of the dilutive effect that such issuance may have on the ownership of the other stockholders of the Company. 4.3 Furnishing of Information. As long as any Purchaser owns Securities, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act. Upon the request of any Purchaser, the Company shall deliver to such Purchaser a written certification of a duly authorized officer as to whether it has complied with the preceding sentence. As long as any Purchaser owns Securities, if the Company is not required to file reports pursuant to such laws, it will prepare and furnish to the Purchasers and make publicly available in accordance with Rule 144(c) such information as is required for the Purchasers to sell the Securities under Rule 144. The Company further covenants that it will take such further action as any holder of Securities may reasonably request, all to the extent required from time to time to enable such Person to sell such Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144. 4.4 Integration. The Company shall not, and shall use its best efforts to ensure that no Affiliate of the Company shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the sale of the Securities to the Purchasers, or that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Principal Market. -18- 4.5 Reservation and Listing of Securities. (a) The Company shall maintain a reserve from its duly authorized shares of Common Stock for issuance pursuant to the Transaction Documents in such amount as may be required to fulfill its obligations in full under the Transaction Documents. So long as at least 20% of the principal amount of the Debentures, in the aggregate, issued at either the First Closing or Second Closing are then outstanding, the Company will not undertake a forward or reverse stock split or reclassification of the Common Stock without the prior written consent of each Purchaser holding Debentures at such time. (b) If, on any date, the number of authorized but unissued (and otherwise unreserved) shares of Common Stock is less than the Required Minimum on such date, then the Board of Directors of the Company shall use commercially reasonable efforts to amend the Company's certificate or articles of incorporation to increase the number of authorized but unissued shares of Common Stock to at least the Required Minimum at such time, as soon as possible and in any event not later than the 75th day after such date. (c) The Company shall, if applicable: (i) in the time and manner required by the Principal Market, prepare and file with such Principal Market an additional shares listing application covering a number of shares of Common Stock at least equal to the Required Minimum on the date of such application, (ii) take all steps necessary to cause such shares of Common Stock to be approved for listing on the Principal Market as soon as possible thereafter, (iii) provide to the Purchasers evidence of such listing, and (iv) maintain the listing of such Common Stock on any date at least equal to the Required Minimum on such date on such Principal Market or another Principal Market. 4.6 Conversion and Exercise Procedures. The form of Notice of Exercise included in the Warrants and the form of Notice of Conversion included in the Debentures set forth the totality of the procedures required of the Purchasers in order to exercise the Warrants or convert the Debentures. No additional legal opinion or other information or instructions shall be required of the Purchasers to exercise their Warrants or convert their Debentures. The Company shall honor exercises of the Warrants and conversions of the Debentures and shall deliver Underlying Shares in accordance with the terms, conditions and time periods set forth in the Transaction Documents. 4.7 Securities Laws Disclosure; Publicity. The Company shall, by 8:30 a.m. Eastern time on the Trading Day following the First Closing Date, issue a press release or file a Current Report on Form 8-K reasonably acceptable to each Purchaser disclosing all material terms of the transactions contemplated hereby. The Company and the Purchasers shall consult with each other in issuing any press releases with respect to the transactions contemplated hereby. Notwithstanding the foregoing, other than in any registration statement filed pursuant to the Registration Rights Agreement and filings related thereto, the Company shall not publicly disclose the name of any Purchaser, or include the name of any Purchaser in any filing with the Commission or any regulatory agency or Principal Market, without the prior written consent of such Purchaser, except to the extent such disclosure is required by law or Principal Market regulations, in which case the Company shall provide each Purchaser with prior notice of such disclosure. -19- 4.8 Non-Public Information. The Company covenants and agrees that neither it nor any other Person acting on its behalf will provide any Purchaser or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto such Purchaser shall have executed a written agreement regarding the confidentiality and use of such information. The Company understands and confirms that each Purchaser shall be relying on the foregoing representations in effecting transactions in securities of the Company. 4.9 Use of Proceeds. The Company shall use the net proceeds from the sale of the Securities hereunder for working capital purposes and not for the satisfaction of any portion of the Company's debt (other than payment of trade payables, capital lease obligations, and accrued expenses in the ordinary course of the Company's business and prior practices), to redeem any Company equity or equity-equivalent securities or to settle any outstanding litigation. 4.10 Reimbursement. If any Purchaser becomes involved in any capacity in any Proceeding by or against any Person who is a stockholder of the Company, solely as a result of such Purchaser's acquisition of the Securities under this Agreement and without causation by any other activity, obligation, condition or liability on the part of, or pertaining to such Purchaser and not to the purchase of Securities pursuant to this Agreement, the Company will reimburse such Purchaser, to the extent such reimbursement is not provided for in Section 4.11, for its reasonable legal and other expenses (including the cost of any investigation, preparation and travel in connection therewith) incurred in connection therewith, as such expenses are incurred. The reimbursement obligations (and limitations thereon) of the Company under this paragraph shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to any Affiliates of the Purchasers who are actually named in such action, proceeding or investigation, and partners, directors, agents, employees and controlling persons (if any), as the case may be, of the Purchasers and any such Affiliate, and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, the Purchasers and any such Affiliate and any such Person. The Company also agrees that neither the Purchasers nor any such Affiliates, partners, directors, agents, employees or controlling persons shall have any liability to the Company or any Person asserting claims on behalf of or in right of the Company solely as a result of acquiring the Securities under this Agreement except to the extent any covenant or warranty owing to the Company is breached. 4.11 Indemnification of Purchasers. Subject to the provisions of this Section 4.11, each party (the "Indemnifying Party") will indemnify and hold the other parties and their directors, officers, shareholders, partners, employees and agents (each, an "Indemnified Party") harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys' fees and costs of investigation that any such Indemnified Party may suffer or incur as a result of or relating to any breach of any of the representations, warranties, covenants or agreements made by the Indemnifying Party in this Agreement or in the other Transaction Documents. If any action shall be brought against any Indemnified Party in respect of which indemnity may be sought pursuant to this Agreement, such Indemnified Party shall promptly notify the Indemnifying Party in writing, and the Indemnifying Party shall have the right to assume the defense thereof with counsel of its own choosing. Any Indemnified Party shall have the right to employ separate counsel in any such -20- action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party except to the extent that (i) the employment thereof has been specifically authorized by the Indemnifying Party in writing, (ii) the Indemnifying Party has failed after a reasonable period of time to assume such defense and to employ counsel or (iii) in such action there is, in the reasonable opinion of such separate counsel, a material conflict on any material issue between the position of the Indemnifying Party and the position of such Indemnified Party. The Indemnifying Party will not be liable to any Indemnified Party under this Agreement (i) for any settlement by an Indemnified Party effected without the Indemnifying Party's prior written consent, which shall not be unreasonably withheld or delayed; or (ii) to the extent, but only to the extent that a loss, claim, damage or liability is attributable to any Indemnified Party's breach of any of the representations, warranties, covenants or agreements made by the Purchasers in this Agreement or in the other Transaction Documents. In no event shall the liability of any Purchaser hereunder be greater in amount than the dollar amount of the net proceeds received by such Purchaser upon the sale of the Securities. 4.12 Shareholders Rights Plan. In the event that a shareholders rights plan is adopted by the Company, no claim will be made or enforced by the Company or any other Person that any Purchaser is an "Acquiring Person" under the plan or in any way could be deemed to trigger the provisions of such plan by virtue of receiving Securities under the Transaction Documents. 4.13 Future Financings. From the date hereof until 90 days after the Effective Date, other than as contemplated by this Agreement, neither the Company nor any Subsidiary shall issue or sell any Capital Shares or Capital Shares Equivalents. Notwithstanding anything herein to the contrary, the 90 day period set forth in this Section 4.13 shall be extended for the number of Trading Days during such period in which (y) trading in the Common Stock is suspended by any Principal Market, or (z) following the Effective Date, the Registration Statement is not effective or the prospectus included in the Registration Statement may not be used by the Purchasers for the resale of the Underlying Shares. Notwithstanding anything to the contrary herein, this Section 4.13 shall not apply to the following (a) the granting or issuance of shares of Common Stock or options to employees, officers and directors of the Company pursuant to any stock option plan or employee incentive plan or agreement duly adopted or approved by a majority of the non-employee members of the Board of Directors of the Company or a majority of the members of a committee of non-employee directors established for such purpose, (b) the exercise of a Debenture or any other security issued by the Company in connection with the offer and sale of this Company's securities pursuant to this Agreement, or (c) the exercise of or conversion of any Capital Shares Equivalents issued and outstanding on the date hereof, provided that such securities have not been amended since the date hereof, or (d) the issuance of Capital Shares or Capital Shares Equivalents in connection with acquisitions, strategic investments or strategic partnering arrangements, the primary purpose of which is not to raise capital. 4.14 Participation in Future Financing. From the date hereof until 360 days after the Effective Date, the Company shall not effect a financing of its Capital Shares or Capital Shares Equivalents (a "Subsequent Financing") unless (i) the Company delivers to each Purchaser a written notice at least 5 Trading Days prior to the closing of such Subsequent Financing (the "Subsequent -21- Financing Notice") of its intention to effect such Subsequent Financing, which Subsequent Financing Notice shall describe in reasonable detail the proposed terms of such Subsequent Financing, the amount of proceeds intended to be raised thereunder, the Person with whom such Subsequent Financing is proposed to be effected, and attached to which shall be a term sheet or similar document relating thereto and (ii) such Purchaser shall not have notified the Company by 6:30 p.m. (New York City time) on the fifth (5th) Trading Day after its receipt of the Subsequent Financing Notice of its willingness to provide (or to cause its designee to provide), subject to completion of mutually acceptable documentation, all or part of such financing to the Company on the same terms set forth in the Subsequent Financing Notice. If one or more Purchasers shall fail to so notify the Company of their willingness to participate in the Subsequent Financing, the Company may effect the remaining portion of such Subsequent Financing on the terms and to the Persons set forth in the Subsequent Financing Notice; provided that the Company must provide the Purchasers with a second Subsequent Financing Notice, and the Purchasers will again have the right of first refusal set forth above in this Section 4.14, if the Subsequent Financing subject to the initial Subsequent Financing Notice is not consummated for any reason on the terms set forth in such Subsequent Financing Notice within 60 Trading Days after the date of the initial Subsequent Financing Notice with the Person identified in the Subsequent Financing Notice. In the event the Company receives responses to Subsequent Financing Notices from Purchasers seeking to purchase more than the financing sought by the Company in the Subsequent Financing such Purchasers shall have the right to purchase their Pro Rata Portion (as defined below) of the Capital Shares or Capital Shares Equivalents to be issued in such Subsequent Financing. "Pro Rata Portion" is the ratio of (x) the principal amount of Debentures purchased by a Purchaser and (y) the sum of the aggregate principal amount of Debentures issued hereunder. If any Purchaser no longer holds any Debentures, then the Pro Rata Portions shall be re-allocated among the remaining Purchasers. Notwithstanding anything to the contrary herein, this Section 4.14 shall not apply to the following (a) the granting of options to employees, officers and directors of the Company pursuant to any stock option plan duly adopted by a majority of the non-employee members of the Board of Directors of the Company or a majority of the members of a committee of non-employee directors established for such purpose, or (b) the exercise of the Debenture or any other security issued by the Company in connection with the offer and sale of this Company's securities pursuant to this Agreement, or (c) the exercise of or conversion of any Capital Shares Equivalents issued and outstanding on the Original Issue Date, provided such securities have not been amended since the date hereof, or (d) the issuance of Capital Shares or Capital Shares Equivalents in connection with acquisitions, strategic investments or strategic partnering arrangements, the primary purpose of which is not to raise capital or subsequent exercise of any such Capital Shares Equivalents. ARTICLE V MISCELLANEOUS 5.1 Termination. This Agreement may be terminated by any Purchaser, by written notice to the other parties, if the Closing has not been consummated on or before August 22, 2003; provided that no such termination will affect the right of any party to sue for any breach by the other party (or parties). -22- 5.2 Fees and Expenses. At the First Closing, the Company has agreed to reimburse Palisades Master Fund, L.P. ("Palisades") up to $15,000 for its legal fees and expenses. Except as expressly set forth in the Transaction Documents to the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. The Company shall pay all transfer agent fees, stamp taxes and other taxes and duties levied in connection with the issuance of any Securities. 5.3 Entire Agreement. The Transaction Documents, together with the exhibits and schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules. 5.4 Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified on the signature page prior to 5:30 p.m. (New York City time) on a Trading Day and an electronic confirmation of delivery is received by the sender, (b) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (c) three Trading Days following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given. The addresses for such notices and communications are those set forth on the signature pages hereof, or such other address as may be designated in writing hereafter, in the same manner, by such Person. 5.5 Amendments; Waivers. No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by the Company and each of the Purchasers or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right. 5.6 Construction. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. 5.7 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Purchasers. Any Purchaser may assign -23- its rights under this Agreement and the Registration Rights Agreement to any Person to whom such Purchaser assigns or transfers any Securities. 5.8 No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except as otherwise set forth in Sections 4.11 and 4.12. 5.9 Governing Law; Venue; Waiver of Jury Trial. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. The parties hereby waive all rights to a trial by jury. If either party shall commence an action or proceeding to enforce any provisions of this Agreement, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorneys fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding. 5.10 Survival. The representations, warranties, agreements and covenants contained herein shall survive each Closing and the delivery, exercise and/or conversion of the Securities, as applicable. 5.11 Execution. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile signature page were an original thereof. 5.12 Severability. If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid -24- and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. 5.13 Rescission and Withdrawal Right. Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) the Transaction Documents, whenever any Purchaser exercises a right, election, demand or option under a Transaction Document and the Company does not timely perform its related obligations within the periods therein provided, then such Purchaser may rescind or withdraw, in its sole discretion from time to time upon written notice to the Company, any relevant notice, demand or election in whole or in part without prejudice to its future actions and rights; provided, however, in the case of a rescission of a conversion of a Debenture or exercise of a Warrant, the Purchaser shall be required to return any shares of Common Stock subject to any such rescinded conversion or exercise notice. 5.14 Replacement of Securities. If any certificate or instrument evidencing any Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity, if requested. The applicants for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs associated with the issuance of such replacement Securities. 5.15 Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each of the Purchasers and the Company will be entitled to specific performance under the Transaction Documents. The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate. 5.16 Payment Set Aside. To the extent that the Company makes a payment or payments to any Purchaser pursuant to any Transaction Document or a Purchaser enforces or exercises its rights thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. 5.17 Usury. To the extent it may lawfully do so, the Company hereby agrees not to insist upon or plead or in any manner whatsoever claim, and will resist any and all efforts to be compelled to take the benefit or advantage of, usury laws wherever enacted, now or at any time hereafter in force, in connection with any claim, action or proceeding that may be brought by any -25- Purchaser in order to enforce any right or remedy under any Transaction Document. Notwithstanding any provision to the contrary contained in any Transaction Document, it is expressly agreed and provided that the total liability of the Company under the Transaction Documents for payments in the nature of interest shall not exceed the maximum lawful rate authorized under applicable law (the "Maximum Rate"), and, without limiting the foregoing, in no event shall any rate of interest or default interest, or both of them, when aggregated with any other sums in the nature of interest that the Company may be obligated to pay under the Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum contract rate of interest allowed by law and applicable to the Transaction Documents is increased or decreased by statute or any official governmental action subsequent to the date hereof, the new maximum contract rate of interest allowed by law will be the Maximum Rate applicable to the Transaction Documents from the effective date forward, unless such application is precluded by applicable law. If under any circumstances whatsoever, interest in excess of the Maximum Rate is paid by the Company to any Purchaser with respect to indebtedness evidenced by the Transaction Documents, such excess shall be applied by such Purchaser to the unpaid principal balance of any such indebtedness or be refunded to the Company, the manner of handling such excess to be at such Purchaser's election. 5.18 Independent Nature of Purchasers' Obligations and Rights. The obligations of each Purchaser under any Transaction Document are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance of the obligations of any other Purchaser under any Transaction Document. Nothing contained herein or in any Transaction Document, and no action taken by any Purchaser pursuant thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Document. Each Purchaser shall be entitled to independently protect and enforce its rights, including without limitation the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose. Each Purchaser has been represented by its own separate legal counsel in their review and negotiation of the Transaction Documents. For reasons of administrative convenience only, Purchasers and their respective counsel have chosen to communicate with the Company through FW. FW does not represent all of the Purchasers but only Palisades. The Company has elected to provide all Purchasers with the same terms and Transaction Documents for the convenience of the Company and not because it was required or requested to do so by the Purchasers. 5.19 Liquidated Damages. The Company's obligations to pay any liquidated damages or other amounts owing under the Transaction Documents is a continuing obligation of the Company and shall not terminate until all unpaid liquidated damages and other amounts have been paid notwithstanding the fact that the instrument or security pursuant to which such liquidated damages or other amounts are due and payable shall have been canceled. *********************** -26- IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above. QT 5, INC. By:___________________________ Name: Title: Address for Notice: ------------------ 5655 Lindero Canyon Road Suite 120 West Lake Village, CA 91362 Attn: Tel: (818) 338-1510 Fax: With a copy to: Attn: Tel: Fax: [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOR PURCHASER FOLLOWS] -27- PURCHASER'S SIGNATURE PAGE IN WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above. PALISADES MASTER FUND L.P. Address for Notice: ------------------ By: PEF ADVISORS, LLC, its authorized agent c/o PEF Advisors, LLC 200 Mansell Court East By: ____________________________________ Ste. 550 Name: Roswell Ga 30076 Title: Attn: Paul T. Mannion, Jr. First Closing Subscription Amount: $ Second Closing Subscription Amount: $ With a copy to: - -------------- (which shall not constitute notice) Feldman Weinstein LLP 420 Lexington Avenue New York, New York 10170 Attn: Robert F. Charron Tel: (212) 869-7000 Fax: (212) 401-4741 [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOR PURCHASER FOLLOWS] -28- PURCHASER'S SIGNATURE PAGE CRESCENT INTERNATIONAL LTD. Address for Notice: ------------------ c/o GreenLight (Switzerland) SA 84, Avenue Louis-Casai CH 1216 Cointrin, Geneva By: ____________________________ Switzerland Name: Attention: Mel Craw / Maxi Brezzi Title: Tel.: + 41 22 791 7170 / +41 22 791 7256 Fax : +41 22 929 5394 First Closing Subscription Amount: $ Second Closing Subscription Amount: $ [SIGNATURE PAGE CONTINUED] -29- PURCHASER'S SIGNATURE PAGE (CONT. . . ) ALPHA CAPITAL AG Address for Notice: ------------------ Lettstrasse 32 Furstentum 9490 By: __________________________ Vaduz, Liechtenstein Name: Fax: 011-423 232 3196 Title: Attn: Director First Closing Subscription Amount: $ Second Closing Subscription Amount: $ [SIGNATURE PAGE CONTINUED] -30- [PURCHASER'S SIGNATURE PAGE] BRISTOL INVESTMENT FUND, LTD. Address for Notice: ------------------ c/o Bristol DLP, LLC 6363 Sunset Boulevard, 5th Floor Hollywood, California 90028 By:_________________________ Attn: Amy Wang, Esq. Name: Fax: (323) 468-8307 Title: First Closing Subscription Amount: $ Second Closing Subscription Amount: $ [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOR PURCHASER FOLLOWS] -31- PURCHASER'S SIGNATURE PAGE (CONT. . . ) ELLIS INTERNATIONAL LTD Address for Notice: ------------------ 53rd Street, Urbanization Obarrio By: __________________________ Attn: Swiss Tower, 16th Floor, Panama Name: Republic of Panama Title: Tel: 917-748-3501 First Closing Subscription Amount: $ Second Closing Subscription Amount: $ [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOR PURCHASER FOLLOWS] -32- PURCHASER'S SIGNATURE PAGE (CONT. . . ) ZENNY TRADING LIMITED By: ____________________________ Name: Title: Address for Notice: - ------------------- Suites 7B & 8B 50 Town Range Gibralter Tel: Fax: Attn: Annette Brittendon abrittenden@mutrust.com First Closing Subscription Amount: $50,000 Second Closing Subscription Amount: $50,000 -33- EX-10.16 10 ex-10_16.txt EXHIBIT 10.16 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "AGREEMENT") is made and entered into as of August 19, 2003, among QT 5, Inc., a Delaware corporation (the "COMPANY"), and the purchasers signatory hereto (each such purchaser is a "PURCHASER" and all such purchasers are, collectively, the "PURCHASERS"). This Agreement is made pursuant to the Securities Purchase Agreement, dated as of the date hereof among the Company and the Purchasers (the "PURCHASE AGREEMENT"). The Company and the Purchasers hereby agree as follows: 1. DEFINITIONS CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED HEREIN THAT ARE DEFINED IN THE PURCHASE AGREEMENT SHALL HAVE THE MEANINGS GIVEN SUCH TERMS IN THE PURCHASE AGREEMENT. As used in this Agreement, the following terms shall have the following meanings: "EFFECTIVENESS DATE" means the 150th calendar day following the First Closing Date and, with respect to any additional Registration Statements which may be required pursuant to Section 3(c), the 90th calendar day following the date on which the Company first knows, or reasonably should have known, that such additional Registration Statement is required hereunder; PROVIDED, HOWEVER, in the event the Company is notified by the Commission that one of the above Registration Statements will not be reviewed or is no longer subject to further review and comments, the Effectiveness Date as to such Registration Statement shall be the fifth Trading Day following the date on which the Company is so notified if such date precedes the dates required above. "EFFECTIVENESS PERIOD" shall have the meaning set forth in Section 2(a). "FILING DATE" means the 30th day following the First Closing Date and, with respect to any additional Registration Statements which may be required pursuant to Section 3(c), the 15th day following the date on which the Company first knows, or reasonably should have known that such additional Registration Statement is required hereunder. "HOLDER" or "HOLDERS" means the holder or holders, as the case may be, from time to time of Registrable Securities. "INDEMNIFIED PARTY" shall have the meaning set forth in Section 5(c) hereof. "INDEMNIFYING PARTY" shall have the meaning set forth in Section 5(c) hereof. 1 "LOSSES" shall have the meaning set forth in Section 5(a). "PROCEEDING" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "PROSPECTUS" means the prospectus included in a Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by a Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. "REGISTRABLE SECURITIES" means all of the shares of Common Stock issuable upon conversion in full of the Debentures, all shares issuable as interest on the Debentures assuming all interest payments are made in shares of Common Stock and the Debentures are held for [three] years or maturity, if earlier, exercise in full of the Warrants, shares issuable in lieu of the payment of liquidated damages, together with any securities issued or issuable upon any stock split, dividend or other distribution recapitalization or similar event with respect to the foregoing or in connection with any anti-dilution provisions in the Debentures. "REGISTRATION STATEMENT" means the registration statements required to be filed hereunder and any additional registration statements contemplated by Section 3(c), including (in each case) the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. "RULE 415" means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule. "RULE 424" means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule. "SECURITIES ACT" means the Securities Act of 1933, as amended. 2 "WARRANTS" shall mean the Common Stock purchase warrants issued to the Purchasers pursuant to the Purchase Agreement. "WARRANT SHARES" shall mean the shares of Common Stock issuable upon exercise of the Warrants. 2. SHELF REGISTRATION (a) On or prior to each Filing Date, the Company shall prepare and file with the Commission a "Shelf" Registration Statement covering the resale of 130% of the Registrable Securities on such Filing Date for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form S-3 (unless the Company is not then eligible to register for resale the Registrable Securities on Form S-3, in which case such registration shall be on another appropriate form in accordance herewith) and shall contain (unless otherwise directed by the Holders) substantially the "Plan of Distribution" attached hereto as ANNEX A. Subject to the terms of this Agreement, the Company shall use its best efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event prior to the applicable Effectiveness Date, and shall use its best efforts to keep such Registration Statement continuously effective under the Securities Act until the date which is two years after the date that such Registration Statement is declared effective by the Commission or such earlier date when all Registrable Securities covered by such Registration Statement have been sold or may be sold without volume restrictions pursuant to Rule 144(k) as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company's transfer agent and the affected Holders (the "EFFECTIVENESS PERIOD"). The Company shall immediately notify the Holders via facsimile of the effectiveness of the Registration Statement on the same day that the Company receives notification of the effectiveness from the Commission. (b) If: (i) a Registration Statement is not filed on or prior to its Filing Date (if the Company files a Registration Statement without affording the Holders the opportunity to review and comment on the same as required by Section 3(a), the Company shall not be deemed to have satisfied clause (i)), or (ii) the Company fails to file with the Commission a request for acceleration in accordance with Rule 461 promulgated under the Securities Act, within five Trading Days of the date that the Company is notified (orally or in writing, whichever is earlier) by the Commission that a Registration Statement will not be "reviewed," or not subject to further review, or (iii) prior to its Effectiveness Date, the Company fails to file a pre-effective amendment and otherwise respond in writing to comments made by the Commission in respect of such Registration Statement within 10 Trading Days after the receipt of comments by or notice from the Commission that such amendment is required in order for a Registration Statement to be declared effective, or (iv) a Registration Statement filed or required to be filed hereunder is not declared effective by the Commission by its Effectiveness Date, or (v) after the Effectiveness Date, a Registration Statement ceases for any reason to remain continuously effective as to all Registrable Securities for which it is required to be effective, or the Holders are not permitted to utilize the Prospectus therein to resell such Registrable Securities for 15 consecutive Trading Days or in any individual case an aggregate of 25 Trading Days during any 12 month period (which need not be consecutive Trading Days) (any such failure or breach being referred to as an "EVENT", and for purposes of clause (i) or (iv) the date on which such Event occurs, or for purposes of clause (ii) the date on which such five Trading Day period is exceeded, or for purposes of clause (iii) the date which such 10 Trading Day period is exceeded, or for purposes of clause (v) the date on which 3 such 15 or 25 Trading Day period, as applicable, is exceeded being referred to as "EVENT DATE"), then, on each such Event Date and every monthly anniversary thereof until the applicable Event is cured, the Company shall pay to each Holder an amount in cash, as liquidated damages and not as a penalty, equal to 2.0% per month, pro rata on a daily basis, of (i) the Subscription Amount paid by such Holder pursuant to the Purchase Agreement for Debentures then held by such Holder, and (ii) if the Warrants are "in the money" and then held by the Holder, the value of any outstanding Warrants (valued at the difference between the average of the Closing Prices during the applicable month and the Exercise Price multiplied by the number of shares of Common Stock the Warrants are exercisable into). If the Company fails to pay any liquidated damages pursuant to this Section in full within seven days after the date payable, the Company will pay interest thereon at a rate of 18% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to the Holder, accruing daily from the date such liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. The liquidated damages pursuant to the terms hereof shall apply on a pro-rata basis for any portion of a month prior to the cure of an Event. 3. REGISTRATION PROCEDURES In connection with the Company's registration obligations hereunder, the Company shall: (a) Not less than five Trading Days prior to the filing of each Registration Statement or any related Prospectus or any amendment or supplement thereto (including any document that would be incorporated or deemed to be incorporated therein by reference), the Company shall, (i) furnish to each Holder copies of all such documents proposed to be filed, which documents (other than those incorporated or deemed to be incorporated by reference) will be subject to the review of such Holders, and (ii) cause its officers and directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the reasonable opinion of respective counsel to conduct a reasonable investigation within the meaning of the Securities Act. The Company shall not file the Registration Statement or any such Prospectus or any amendments or supplements thereto to which the Holders of a majority of the Registrable Securities shall reasonably and in good faith object, provided, the Company is notified of such objection in writing no later than 3 Trading Days after the Holders have been so furnished copies of such documents. 4 (b) (i) Prepare and file with the Commission such amendments, including post-effective amendments, to a Registration Statement and the Prospectus used in connection therewith as may be necessary to keep a Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement (subject to the terms of this Agreement), and as so supplemented or amended to be filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible, and in any event within 10 Trading Days, to any comments received from the Commission with respect to a Registration Statement or any amendment thereto and as promptly as reasonably possible provide the Holders true and complete copies of all correspondence from and to the Commission relating to a Registration Statement; and (iv) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by a Registration Statement during the applicable period in accordance (subject to the terms of this Agreement) with the intended methods of disposition by the Holders thereof set forth in such Registration Statement as so amended or in such Prospectus as so supplemented. (c) If during the Effectiveness Period, the number of Registrable Securities at any time exceeds 90% of the number of shares of Common Stock then registered in a Registration Statement, then the Company shall file as soon as reasonably practicable but in any case prior to the applicable Filing Date, an additional Registration Statement covering the resale by the Holders of not less than 125% of the number of such Registrable Securities. (d) Notify the Holders of Registrable Securities to be sold (which notice shall, pursuant to clauses (ii) through (vi) hereof, shall be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made) as promptly as reasonably possible (and, in the case of (i)(A) below, not less than five Trading Days prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one Trading Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to a Registration Statement is proposed to be filed; (B) when the Commission notifies the Company whether there will be a "review" of such Registration Statement and whenever the Commission comments in writing on such Registration Statement (the Company shall provide true and complete copies thereof and all written responses thereto to each of the Holders); and (C) with respect to a Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to a Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of a Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; (v) of the occurrence of any 5 event or passage of time that makes the financial statements included in a Registration Statement ineligible for inclusion therein or any statement made in a Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to a Registration Statement, Prospectus or other documents so that, in the case of a Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and (vi) the occurrence or existence of any pending corporate development with respect to the Company that the Company believes may be material and that, in the determination of the Company, makes it not in the best interests of the Company to allow continued availability or the Registration Statement or Prospectus; provided that any and all of such information shall remain confidential to each Holder until such information otherwise becomes public, unless disclosure by a Holder is required by law; PROVIDED, FURTHER, notwithstanding each Holder's agreement to keep such information confidential, the Holders make no acknowledgement that any such information is material, non-public information. (e) Promptly deliver to each Holder, without charge, as many copies of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request. Subject to the terms of this Agreement, the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto. (f) Use commercially reasonable efforts to register or qualify the resale of such Registrable Securities as required under applicable securities or Blue Sky laws of each State within the United States as any Holder requests in writing, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period; provided, that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or subject the Company to any material tax in any such jurisdiction where it is not then so subject. (g) Cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be delivered to a transferee pursuant to a Registration Statement, which certificates shall be free, to the extent permitted by the Purchase Agreement, of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any such Holders may request. (h) Upon the occurrence of any event contemplated by this Section 3, as promptly as reasonably possible, prepare a supplement or amendment, including a post-effective amendment, to a Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so 6 that, as thereafter delivered, neither a Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Company notifies the Holders in accordance with clauses (ii) through (vi) of Section 3(d) above to suspend the use of the use of any Prospectus until the requisite changes to such Prospectus have been made, or the Company otherwise notifies the Holders of its election to suspend the availability of a Registration Statement and Prospectus pursuant to clause (vi) of Section 3(d), then the Holders shall suspend use of such Prospectus. The Company will use its best efforts to ensure that the use of the Prospectus may be resumed as promptly as is practicable, except that in the case of suspension of the availability of a Registration Statement and Prospectus pursuant to clause (vi) of Section 3(d), the Company shall not be required to take such action until such time as it shall determine that the continued availability of the Registration Statement and Prospectus is no longer not in the best interests of the Company. (i) Comply with all applicable rules and regulations of the Commission. (j) Use its best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of (i) any order suspending the effectiveness of a Registration Statement, or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment. (k) The Company may require, at any time prior to the third Trading Day prior to the Filing Date, each Holder to furnish to the Company a statement as to the number of shares of Common Stock beneficially owned by such Holder and, if requested by the Commission, the controlling person thereof, within three Trading days of the Company's request. During any periods that the Company is unable to meet its obligations hereunder with respect to the registration of the Registrable Securities solely because any Holder fails to furnish such information within three Trading Days of the Company's request, any liquidated damages that are accruing at such time shall be tolled and any Event that may otherwise occur solely because of such delay shall be suspended, until such information is delivered to the Company. 4. REGISTRATION EXPENSES. All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or not any Registrable Securities are sold pursuant to the Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with the Principal Market on which the Common Stock is then listed for trading, and (B) in compliance with applicable state securities or Blue Sky laws reasonably agreed to by the Company in writing (including, without limitation, fees and disbursements of counsel for the Company in connection with Blue Sky qualifications or exemptions of the Registrable Securities and determination of the eligibility of the Registrable Securities for investment under the laws of such jurisdictions as requested by the Holders), (ii) printing expenses (including, without limitation, expenses of printing certificates for 7 Registrable Securities and of printing prospectuses requested by the Holders), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, and (v) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit and the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder. In no event shall the Company be responsible for any broker or similar commissions or, except to the extent provided for in the Transaction Documents, any legal fees or other costs of the Holders. 5. INDEMNIFICATION (a) Indemnification by the Company. The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, agents, brokers (including brokers who offer and sell Registrable Securities as principal as a result of a pledge or any failure to perform under a margin call of Common Stock), investment advisors and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, costs of preparation and reasonable attorneys' fees) and expenses (collectively, "LOSSES"), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in a Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that (1) such untrue statements or omissions or alleged untrue statements or omissions are based upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in a Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto or (2) in the case of an occurrence of an event of the type specified in Section 3(d)(ii)-(vi), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of the Advice contemplated in Section 6(e). The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding arising from or in connection with the transactions contemplated by this Agreement of which the Company is aware. 8 (b) Indemnification by Holders. Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses (as determined by a court of competent jurisdiction in a final judgment not subject to appeal or review) arising out of or based upon any untrue statement of a material fact contained in any Registration Statement, any Prospectus, or any form of prospectus, or in any amendment or supplement thereto, or arising solely out of or based solely upon: (i) such Holder's failure to comply with the prospectus delivery requirements of the Securities Act or (ii) any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading to the extent, but only to the extent, such untrue statement or omission is contained in any information so furnished in writing by such Holder to the Company specifically for inclusion in such Registration Statement or such Prospectus or to the extent that (1) such untrue statements or omissions are based upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto or (2) in the case of an occurrence of an event of the type specified in Section 3(d)(ii)-(vi), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of the Advice contemplated in Section 6(e). In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. (c) Conduct of Indemnification Proceedings. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an "INDEMNIFIED PArty"), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the "INDEMNIFYING PARTY") in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that such failure shall have prejudiced the Indemnifying Party. An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; or (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel 9 reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that a material conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and the expense of one such counsel for each Holder shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding. Subject to the terms of this Agreement, all fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten Trading Days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an Indemnified Party is not entitled to indemnification hereunder; provided, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder). (d) Contribution. If a claim for indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified Party (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 5(c), any reasonable attorneys' or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms. 10 The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 5(d), no Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by such Holder from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties. 6. MISCELLANEOUS (a) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and all of the Holders of the then outstanding Registrable Securities. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of all of the Registrable Securities to which such waiver or consent relates; PROVIDED, HOWEVER, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence. (b) No Inconsistent Agreements. Neither the Company nor any of its subsidiaries has entered, as of the date hereof, nor shall the Company or any of its subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities, that would have the effect of impairing the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Except as set forth on Schedule 6(b), neither the Company nor any of its subsidiaries has previously entered into any agreement granting any registration rights with respect to any of its securities to any Person that have not been satisfied in full. (c) No Piggyback on Registrations. Except as set forth on Schedule 6(c) attached hereto, neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in the Registration Statement other than the Registrable Securities, and the Company shall not after the date hereof enter into any agreement providing any such right to any of its security holders. 11 (d) Compliance. Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement. (e) Discontinued Disposition. Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Sections 3(d)(ii), (iii) or (vi), such Holder will forthwith discontinue disposition of such Registrable Securities under a Registration Statement until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement contemplated by Section 3(h), or until it is advised in writing (the "ADVICE") by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company may provide appropriate stop orders to enforce the provisions of this paragraph. The Company agrees and acknowledges that any periods during which the Holder is required to discontinue the disposition of the Registrable Securities hereunder shall be subject to the provisions of Section 2(b). (f) Piggy-Back Registrations. If at any time during the Effectiveness Period there is not an effective Registration Statement covering all of the Registrable Securities and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, then the Company shall send to each Holder written notice of such determination and, if within fifteen days after receipt of such notice, any such Holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such holder requests to be registered; provided, that, the Company shall not be required to register any Registrable Securities pursuant to this Section 6(f) that are eligible for resale pursuant to Rule 144(k) promulgated under the Securities Act or that are the subject of a then effective Registration Statement. (g) Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be delivered as set forth in the Purchase Agreement. (h) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of all of the Holders of the then-outstanding Registrable Securities. Each Holder may assign their respective rights hereunder in the manner and to the Persons as permitted under the Purchase Agreement. 12 (i) Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. (j) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If either party shall commence a Proceeding to enforce any provisions of this Agreement, then the prevailing party in such Proceeding shall be reimbursed by the other party for its attorneys fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding. (k) Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. (l) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (m) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 13 (n) Independent Nature of Purchasers' Obligations and Rights. The obligations of each Purchaser hereunder is several and not joint with the obligations of any other Purchaser hereunder, and no Purchaser shall be responsible in any way for the performance of the obligations of any other Purchaser hereunder. Nothing contained herein or in any other agreement or document delivered at any closing, and no action taken by any Purchaser pursuant hereto or thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert with respect to such obligations or the transactions contemplated by this Agreement. Each Purchaser shall be entitled to protect and enforce its rights, including without limitation the rights arising out of this Agreement, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose. ******************** 14 IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. QT 5, INC. By: ______________________________________ Name: Title: [SIGNATURE PAGE OF HOLDERS FOLLOWS] 15 [SIGNATURE PAGE OF HOLDERS TO RRA] PALISADES MASTER FUND, L.P. By: PEF ADVISORS, LLC, its authorized agent By: _____________________________________ Name: Title: [SIGNATURE PAGE OF HOLDERS FOLLOWS] 16 [SIGNATURE PAGE OF HOLDERS TO RRA] CRESCENT INTERNATIONAL LTD. By: ____________________________ Name: Title: [SIGNATURE PAGE OF HOLDERS FOLLOWS] 17 [SIGNATURE PAGE OF HOLDERS TO RRA] ALPHA CAPITAL AG By: _____________________________________ Name: Title: [SIGNATURE PAGE OF HOLDERS FOLLOWS] 18 [PURCHASER'S SIGNATURE PAGE TO RRA] BRISTOL INVESTMENT FUND, LTD. By: ___________________________ Name: Title: [SIGNATURE PAGE OF HOLDERS FOLLOWS] 19 [SIGNATURE PAGE OF HOLDERS TO RRA] ELLIS INTERNAIONAL LTD By: __________________________ Name: Title: ZENNY TRADING LIMITED By: ____________________________ Name: Title: 20 PLAN OF DISTRIBUTION The selling stockholders and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling stockholders may use any one or more of the following methods when selling shares: o ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; o block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; o purchases by a broker-dealer as principal and resale by the broker-dealer for its account; o an exchange distribution in accordance with the rules of the applicable exchange; o privately negotiated transactions; o broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share; o a combination of any such methods of sale; and o any other method permitted pursuant to applicable law. The selling stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus. Broker-dealers engaged by the selling stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The selling stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved. The selling stockholder may from time to time pledge or grant a security interest in some or all of the Shares or common stock or Warrant owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933 amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. 21 The selling stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus. The selling stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. The selling stockholders have informed the Company that none of them have any agreement or understanding, directly or indirectly, with any person to distribute the common stock. The Company is required to pay all fees and expenses incurred by the Company incident to the registration of the shares. The Company has agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act. 22 SCHEDULE 6(B) 23 SCHEDULE 6(C) 24 EX-10.17 11 ex-10_17.txt Exhibit 10.17 NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES COMMON STOCK PURCHASE WARRANT To Purchase __________ Shares of Common Stock of QT 5, Inc. THIS COMMON STOCK PURCHASE WARRANT CERTIFIES that, for value received, _____________ (the "Holder"), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after August 19, 2003 (the "Initial Exercise Date") and on or prior to the close of business on the fifth anniversary of the Initial Exercise Date (the "Termination Date") but not thereafter, to subscribe for and purchase from QT 5, Inc., a corporation incorporated in Delaware (the "Company"), up to ____________ shares (the "Warrant Shares") of Common Stock, par value $0.001 per share, of the Company (the "Common Stock"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be $0.075, subject to adjustment hereunder. The Exercise Price and the number of Warrant Shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain Securities Purchase Agreement (the "Purchase Agreement"), dated August 19, 2003, between the Company and the investors signatory thereto. 1 1. Title to Warrant. Prior to the Termination Date and subject to compliance with applicable laws and Section 7 of this Warrant, this Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the Holder in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. The transferee shall sign an investment letter in form and substance reasonably satisfactory to the Company. 2. Authorization of Shares. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. (a) Exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company of a duly executed facsimile copy of the Notice of Exercise Form annexed hereto (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company); provided, however, within 5 Trading Days of the date said Notice of Exercise is delivered to the Company, the Holder shall have surrendered this Warrant to the Company and the Company shall have received payment of the aggregate Exercise Price of the shares thereby purchased by wire transfer or cashier's check drawn on a United States bank. Certificates for shares purchased hereunder shall be delivered to the Holder within the earlier of (i) 5 Trading Days after the date on which the Notice of Exercise shall have been delivered by facsimile copy or (ii) 3 Trading Days from the delivery to the Company of the Notice of Exercise Form by facsimile copy, surrender of this Warrant and payment of the aggregate Exercise Price as set forth above ("Warrant Share Delivery Date"); provided, however, in the event the Warrant is not surrendered or the aggregate Exercise Price is not received by the Company within 5 Trading Days after the date on which the Notice of Exercise shall be delivered by facsimile copy, the Warrant Share Delivery Date shall be extended to the extent such 5 Trading Day period is exceeded. This Warrant shall be deemed to have been exercised on the date the Notice of Exercise is delivered to the Company by facsimile copy. The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised by payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 5 prior to the issuance of such shares, have been paid. If the Company fails to deliver to the Holder a certificate or 2 certificates representing the Warrant Shares pursuant to this Section 3(a) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise. In addition to any other rights available to the Holder, if the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to an exercise by the second Trading Day after the Warrant Share Delivery Date, and if after such third Trading Day the Holder is required by its broker to purchase (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a "Buy-In"), then the Company shall (1) pay in cash to the Holder the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (B) the price at which the sell order giving rise to such purchase obligation was executed, and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (1) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Company. Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company's failure to timely deliver certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof. (b) If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant. (c) The Company shall not effect any exercise of this Warrant, and the Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 3(a) or otherwise, to the extent that after giving effect to such issuance after exercise, the Holder (together with the Holder's affiliates), as set forth on the applicable Notice of Exercise, would beneficially own in excess of 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to such issuance. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Debentures or Warrants) subject to a limitation on conversion or 3 exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 3(c), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act. To the extent that the limitation contained in this Section 3(c) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder) and of which a portion of this Warrant is exercisable shall be in the sole discretion of such Holder, and the submission of a Notice of Exercise shall be deemed to be such Holder's determination of whether this Warrant is exercisable (in relation to other securities owned by such Holder) and of which portion of this Warrant is exercisable, in each case subject to such aggregate percentage limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. For purposes of this Section 3(c), in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company's most recent Form 10-Q or Form 10-K, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company's Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The provisions of this Section 3(c) may be waived by the Holder upon, at the election of the Holder, not less than 61 days' prior notice to the Company, and the provisions of this Section 3(c) shall continue to apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver). (d) If at any time after one year from the date of issuance of this Warrant there is no effective Registration Statement registering the resale of the Warrant Shares by the Holder, this Warrant may also be exercised at such time by means of a "cashless exercise" in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where: (A) = the Closing Price on the Trading Day preceding the date of such election; (B) = the Exercise Price of the Warrants, as adjusted; and (X) = the number of Warrant Shares issuable upon exercise of the Warrants in accordance with the terms of this Warrant. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price. 4 5. Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. 6. Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof. 7. Transfer, Division and Combination. (a) Subject to compliance with any applicable securities laws and the conditions set forth in Sections 1 and 7(e) hereof and to the provisions of Section 4.1 of the Purchase Agreement, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued. (b) This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 7(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. (c) The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 7. (d) The Company agrees to maintain, at its aforesaid office, books for the registration and the registration of transfer of the Warrants. (e) If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effective registration statement under the Securities Act and under applicable state 5 securities or blue sky laws, the Company may require, as a condition of allowing such transfer (i) that the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an "accredited investor" as defined in Rule 501(a) promulgated under the Securities Act. 8. No Rights as Shareholder until Exercise. This Warrant does not entitle the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof. Upon the surrender of this Warrant and the payment of the aggregate Exercise Price (or by means of a cashless exercise), the Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. 11. Adjustments of Exercise Price and Number of Warrant Shares. (a) Stock Splits, etc. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following. In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which it would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. Upon each such adjustment of the kind and number of Warrant Shares or other securities of the Company which are purchasable hereunder, the Holder shall thereafter be entitled to purchase the number of Warrant 6 Shares or other securities resulting from such adjustment at an Exercise Price per Warrant Share or other security obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and dividing by the number of Warrant Shares or other securities of the Company resulting from such adjustment. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) Anti-Dilution Provisions. During the Exercise Period, the Exercise Price shall be subject to adjustment from time to time as provided in this Section 11(b). In the event that any adjustment of the Exercise Price as required herein results in a fraction of a cent, such Exercise Price shall be rounded up or down to the nearest cent. (i) Adjustment of Exercise Price. If and whenever the Company issues or sells, or in accordance with Section 11(b)(ii) hereof is deemed to have issued or sold, any shares of Common Stock for a consideration per share of less than the then Exercise Price or for no consideration (such lower price, the "Base Share Price" and such issuances collectively, a "Dilutive Issuance"), then, the Exercise Price shall be reduced to equal the Base Share Price, provided, that for purposes hereof, all securities exercisable, convertible into or exchangeable for Common Stock ("Convertible Securities") shall be deemed outstanding immediately after the issuance of such Common Stock. Such adjustment shall be made whenever such shares of Common Stock or Convertible Securities are issued. (ii) Effect on Exercise Price of Certain Events. For purposes of determining the adjusted Exercise Price under Section 11(b) hereof, the following will be applicable: (A) Issuance of Rights or Options. If the Company in any manner issues or grants any warrants, rights or options, whether or not immediately exercisable, to subscribe for or to purchase Common Stock or Convertible Securities (such warrants, rights and options to purchase Common Stock or Convertible Securities are hereinafter referred to as "Options") and the effective price per share for which Common Stock is issuable upon the exercise of such Options is less than the Exercise Price ("Below Base Price Options"), then the maximum total number of shares of Common Stock issuable upon the exercise of all such Below Base Price Options (assuming full exercise, conversion or exchange of Convertible Securities, if applicable) will, as of the date of the issuance or grant of such Below Base Price Options, be deemed to be outstanding and to have been issued and sold by the Company for such price per share and the maximum consideration payable to the Company upon such exercise (assuming full exercise, conversion or exchange of Convertible Securities, if applicable) will be deemed to have been received by the Company. For purposes of the preceding sentence, the "effective price per share for which Common Stock is issuable upon the exercise of such Below Base Price Options" is determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the issuance or granting 7 of all such Below Base Price Options, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of all such Below Base Price Options, plus, in the case of Convertible Securities issuable upon the exercise of such Below Base Price Options, the minimum aggregate amount of additional consideration payable upon the exercise, conversion or exchange thereof at the time such Convertible Securities first become exercisable, convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the exercise of all such Below Base Price Options (assuming full conversion of Convertible Securities, if applicable). No further adjustment to the Exercise Price will be made upon the actual issuance of such Common Stock upon the exercise of such Below Base Price Options or upon the exercise, conversion or exchange of Convertible Securities issuable upon exercise of such Below Base Price Options. (B) Issuance of Convertible Securities. If the Company in any manner issues or sells any Convertible Securities, whether or not immediately convertible (other than where the same are issuable upon the exercise of Options) and the effective price per share for which Common Stock is issuable upon such exercise, conversion or exchange is less than the Exercise Price, then the maximum total number of shares of Common Stock issuable upon the exercise, conversion or exchange of all such Convertible Securities will, as of the date of the issuance of such Convertible Securities, be deemed to be outstanding and to have been issued and sold by the Company for such price per share and the maximum consideration payable to the Company upon such exercise (assuming full exercise, conversion or exchange of Convertible Securities, if applicable) will be deemed to have been received by the Company. For the purposes of the preceding sentence, the "effective price per share for which Common Stock is issuable upon such exercise, conversion or exchange" is determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the issuance or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise, conversion or exchange thereof at the time such Convertible Securities first become exercisable, convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the exercise, conversion or exchange of all such Convertible Securities. No further adjustment to the Exercise Price will be made upon the actual issuance of such Common Stock upon exercise, conversion or exchange of such Convertible Securities. (C) Change in Option Price or Conversion Rate. If there is a change at any time in 8 (i) the amount of additional consideration payable to the Company upon the exercise of any Options; (ii) the amount of additional consideration, if any, payable to the Company upon the exercise, conversion or exchange of any Convertible Securities; or (iii) the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock (in each such case, other than under or by reason of provisions designed to protect against dilution), the Exercise Price in effect at the time of such change will be readjusted to the Exercise Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. (D) Calculation of Consideration Received. If any Common Stock, Options or Convertible Securities are issued, granted or sold for cash, the consideration received therefor for purposes of this Warrant will be the amount received by the Company therefor, before deduction of reasonable commissions, underwriting discounts or allowances or other reasonable expenses paid or incurred by the Company in connection with such issuance, grant or sale. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration part or all of which shall be other than cash, the amount of the consideration other than cash received by the Company will be the fair market value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Company will be the fair market value (closing bid price, if traded on any market) thereof as of the date of receipt. In case any Common Stock, Options or Convertible Securities are issued in connection with any merger or consolidation in which the Company is the surviving corporation, the amount of consideration therefor will be deemed to be the fair market value of such portion of the net assets and business of the non-surviving corporation as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair market value of any consideration other than cash or securities will be determined in good faith by an investment banker or other appropriate expert of national reputation selected by the Company and reasonably acceptable to the holder hereof, with the costs of such appraisal to be borne by the Company. (E) Exceptions to Adjustment of Exercise Price. Notwithstanding the foregoing, no adjustment will be made under this Section 11(b) in respect of (1) the granting of options to employees, officers and directors of the Company pursuant to any stock option plan duly adopted by a majority of the non-employee members of the Board of Directors of the Company or a majority of the members of a committee of non-employee directors established for such purpose, (2) upon the exercise of the Debentures or any Debentures of this series or of any other series or security issued by the Company in connection with the offer and sale of this Company's securities 9 pursuant to the Purchase Agreement, or (3) upon the exercise of or conversion of any Convertible Securities or Options issued and outstanding on the Original Issue Date, provided that the securities have not been amended since the date of the Purchase Agreement except as a result of the Purchase Agreement, or (4) acquisitions or strategic investments, the primary purpose of which is not to raise capital. (iii) Minimum Adjustment of Exercise Price. No adjustment of the Exercise Price shall be made in an amount of less than 1% of the Exercise Price in effect at the time such adjustment is otherwise required to be made, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to not less than 1% of such Exercise Price. 12. Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock of the Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("Other Property"), are to be received by or distributed to the holders of Common Stock of the Company, then the Holder shall have the right thereafter to receive, at the option of the Holder, (a) upon exercise of this Warrant, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event or (b) cash equal to the value of this Warrant as determined in accordance with the Black-Scholes option pricing formula. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined in good faith by resolution of the Board of Directors of the Company) in order to provide for adjustments of Warrant Shares for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 12. For purposes of this Section 12, "common stock of the successor or acquiring corporation" shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or 10 exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 12 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets. 13. Voluntary Adjustment by the Company. The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall give notice thereof to the Holder, which notice shall state the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (and other securities or property) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. 15. Notice of Corporate Action. If at any time: (a) the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or (b) there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation or, (c) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give to Holder (i) at least 20 days' prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 20 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their Warrant Shares for securities or other property 11 deliverable upon such disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 17(d). 16. Authorized Shares. The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Principal Market upon which the Common Stock may be listed. Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. 17. Miscellaneous. (a) Jurisdiction. This Warrant shall constitute a contract under the laws of New York, without regard to its conflict of law, principles or rules. (b) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws. 12 (c) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies, notwithstanding all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. (d) Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Purchase Agreement. (e) Limitation of Liability. No provision hereof, in the absence of any affirmative action by Holder to exercise this Warrant or purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. (f) Remedies. Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (g) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares. (h) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder. (i) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant. (j) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. ******************** 13 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized. Dated: August __, 2003 QT 5, INC. By:____________________________________ Name: Title: 14 NOTICE OF EXERCISE To: Ambient Corporation (1)______The undersigned hereby elects to purchase ________ Warrant Shares of QT 5, Inc. pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any. (2)______Payment shall take the form of (check applicable box): [ ] in lawful money of the United States; or [ ] the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 3(d), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 3(d). (3)______Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below: ---------------------------------------- The Warrant Shares shall be delivered to the following: ---------------------------------------- ---------------------------------------- (4) Accredited Investor. The undersigned is an "accredited investor" as defined in Regulation D promulgated under the Securities Act of 1933, as amended. [PURCHASER] By: ______________________________ Name: Title: Dated: ________________________ ASSIGNMENT FORM (To assign the foregoing warrant, execute this form and supply required information. Do not use this form to exercise the warrant.) FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to whose address is - ----------------------------------------------- - ---------------------------------------------------------------. - --------------------------------------------------------------- _________ Dated: ______________, _______ Holder's Signature: _____________________________ Holder's Address: _____________________________ _____________________________ Signature Guaranteed: ___________________________________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant. EX-10.18 12 ex-10_18.txt Exhibit 10.18 EXHIBIT A NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON CONVERSION OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES. Date of Issuance: _________ __, 2003 $_______________ 6% CONVERTIBLE DEBENTURE DUE __________ __, 2006/1/ THIS DEBENTURE is one of a series of duly authorized and issued 6% Convertible Debentures of QT 5, Inc., a Delaware corporation, having a principal place of business at 5655 Lindero Canyon Road, Suite 120, West Lake Village, California 91362 (the "Company"), designated as its 6% Convertible Debenture, due __________ __, 2006 (the "Debentures"). FOR VALUE RECEIVED, the Company promises to pay to ________________________ or its registered assigns (the "Holder"), the principal sum of $_______________ on ___________ __, 2006 or such earlier date as the Debentures are required or permitted to be repaid as provided hereunder (the "Maturity Date"), and to pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Debenture at the rate of 6% per annum, payable quarterly on March 1, June 1, September 1 and December 1, beginning on the first such date after the Original Issue Date and on each Conversion Date (as to that principal amount then being converted) and on the Maturity Date (except that, if any such date is not a Business Day, then such - -------- /1/ 36 months from the Original Issue Date. 1 payment shall be due on the next succeeding Business Day) (each such date, an "Interest Payment Date"), in cash or shares of Common Stock at the Interest Conversion Rate, or a combination thereof; provided, however, payment in shares of Common Stock may only occur if: (i) there is an effective Underlying Shares Registration Statement pursuant to which the Holder is permitted to utilize the prospectus thereunder to resell all of the shares of Common Stock to be issued in lieu of cash (and the Company believes, in good faith, that such effectiveness will continue uninterrupted for the foreseeable future), (ii) the Common Stock is listed for trading on a Principal Market (and the Company believes, in good faith, that trading of the Common Stock on a Principal Market will continue uninterrupted for the foreseeable future), (iii) there is a sufficient number of authorized but unissued and otherwise unreserved shares of Common Stock for the issuance of all of the share issuable pursuant to the Transaction Documents, including the shares to be issued for interest in lieu of cash and (iv) such issuance would be permitted in full without violating the limitations set forth in Section 4(a)(ii). Subject to the terms and conditions herein, the decision whether to pay interest hereunder in shares of Common Stock or cash shall be at the discretion of the Company. Not less than 20 Trading Days prior to each Interest Payment Date, the Company shall provide the Holder with written notice of its election to pay interest hereunder either in cash or shares of Common Stock (the Company may indicate in such notice that the election contained in such notice shall continue for later periods until revised). Within 20 Trading Days prior to an Interest Payment Date, the Company's election (whether specific to an Interest Payment Date or continuous) shall be irrevocable as to such Interest Payment Date. Subject to the aforementioned conditions, failure to timely provide such written notice shall be deemed an election by the Company to pay the interest on such Interest Payment Date in cash. Interest shall be calculated on the basis of a 360-day year and shall accrue daily commencing on the Original Issue Date until payment in full of the principal sum, together with all accrued and unpaid interest and other amounts which may become due hereunder, has been made. Payment of interest in shares of Common Stock shall otherwise occur pursuant to Section 4(b) and only for purposes of the payment of interest in shares, the Interest Payment Date shall be deemed the Conversion Date. Interest shall cease to accrue with respect to any principal amount converted, provided that the Company in fact delivers the Underlying Shares within the time period required by Section 4(b)(i). Interest hereunder will be paid to the Person in whose name this Debenture is registered on the records of the Company regarding registration and transfers of Debentures (the "Debenture Register"). Except as otherwise provided herein, if at anytime the Company pays interest partially in cash and partially in shares of Common Stock, then such payment shall be distributed ratably among the Holders based upon the principal amount of Debentures held by each Holder. All overdue accrued and unpaid interest to be paid hereunder shall entail a late fee at the rate of 15% per annum (or such lower maximum amount of interest permitted to be charged under applicable law) ("Late Fee") which will accrue daily, from the date such interest is due hereunder through and including the date of payment. The Company may not prepay any portion of the principal amount of this Debenture without the prior written consent of the Holder. 2 This Debenture is subject to the following additional provisions: Section 1. This Debenture is exchangeable for an equal aggregate principal amount of Debentures of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be made for such registration of transfer or exchange. Section 2. This Debenture has been issued subject to certain investment representations of the original Holder set forth in the Purchase Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement and applicable federal and state securities laws and regulations. Prior to due presentment to the Company for transfer of this Debenture, the Company and any agent of the Company may treat the Person in whose name this Debenture is duly registered on the Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Debenture is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. Section 3. Events of Default. a) "Event of Default", wherever used herein, means any one of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body): i) any default in the payment of the principal of, interest on, or liquidated damages in respect of, any Debentures, free of any claim of subordination, as and when the same shall become due and payable (whether on a Conversion Date or the Maturity Date or by acceleration or otherwise) which default is not cured, if possible to cure, within 15 days of notice of such default sent by the Holder; ii) the Company shall fail to observe or perform any other covenant, agreement or warranty contained in, or otherwise commit any breach of any of the Transaction Documents (other than a breach by the Company of its obligations to deliver shares of Common Stock to the Holder upon conversion or interest payment which breach is addressed in clause (x) below) which is not cured, if possible to cure, within 10 days of notice of such default sent by the Holder; iii) the Company or any of its subsidiaries shall commence, or there shall be commenced against the Company or any such subsidiary a case under any applicable bankruptcy or insolvency laws as now or hereafter in effect or any successor thereto, or the Company commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or any subsidiary thereof or there is commenced against the Company or any subsidiary thereof any such bankruptcy, insolvency or other proceeding which remains undismissed for a period of 60 days; or the Company or any subsidiary thereof is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Company or any subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property which continues undischarged or unstayed for a period of 60 days; or the 3 Company or any subsidiary thereof makes a general assignment for the benefit of creditors; or the Company shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or the Company or any subsidiary thereof shall call a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or the Company or any subsidiary thereof shall by any act or failure to act expressly indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate or other action is taken by the Company or any subsidiary thereof for the purpose of effecting any of the foregoing; iv) the Company shall default in any of its obligations under any other Debenture or any mortgage, credit agreement or other facility, indenture agreement, factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced any indebtedness for borrowed money or money due under any long term leasing or factoring arrangement of the Company in an amount exceeding $150,000, whether such indebtedness now exists or shall hereafter be created and such default shall result in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable, which default is not cured, if possible to cure, within 15 days of notice of such default sent by the Holder; v) the Common Stock shall not be eligible for quotation on or quoted for trading on a Principal Market and shall not again be eligible for and quoted or listed for trading thereon within seven Trading Days; vi) the Company shall be a party to any Change of Control Transaction , shall agree to sell or dispose of all or in excess of 40% of its assets in one or more transactions (whether or not such sale would constitute a Change of Control Transaction) or shall redeem or repurchase more than a de minimis number of its outstanding shares of Common Stock or other equity securities of the Company (other than redemptions of Underlying Shares and repurchases of shares of Common Stock or other equity securities of departing officers and directors of the Company; provided no repurchase shall exceed $100,000 for any officer or director); vii) an Underlying Shares Registration Statement shall not have been declared effective by the Commission on or prior to the 150th calendar day after the Original Issue Date; 4 viii) if, during the Effectiveness Period (as defined in the Registration Rights Agreement), the effectiveness of the Underlying Shares Registration Statement lapses for any reason or the Holder shall not be permitted to resell Registrable Securities (as defined in the Registration Rights Agreement) under the Underlying Shares Registration Statement, in either case, for more than 15 consecutive Trading Days or 25 non-consecutive Trading Days during any 12 month period; ix) an Event (as defined in the Registration Rights Agreement) shall not have been cured to the satisfaction of the Holder prior to the expiration of thirty days from the Event Date (as defined in the Registration Rights Agreement) relating thereto (other than an Event resulting from a failure of an Underlying Shares Registration Statement to be declared effective by the Commission on or prior to the Effectiveness Date (as defined in the Registration Rights Agreement), which shall be covered by Section 3(a)(vii)); x) the Company shall fail for any reason to deliver certificates to a Holder prior to the seventh Trading Day after a Conversion Date pursuant to and in accordance with Section 4(b) or the Company shall provide notice to the Holder, including by way of public announcement, at any time, of its intention not to comply with requests for conversions of any Debentures in accordance with the terms hereof; or (xi) the Company shall fail for any reason to deliver the payment in cash pursuant to a Buy-In (as defined herein) within five days after notice thereof is delivered hereunder. b) If any Event of Default occurs and is continuing, the full principal amount of this Debenture, together with interest and other amounts owing in respect thereof, to the date of acceleration shall become at the Holder's election, immediately due and payable in cash. The aggregate amount payable upon an Event of Default shall be equal to the Mandatory Prepayment Amount. Interest shall accrue on the Mandatory Prepayment Amount hereunder from the fifth (5th) day after such amount is due (being the date of an Event of Default) through the date of prepayment in full thereof in an amount equal to the Late Fee, to accrue daily from the date such payment is due hereunder through and including the date of payment. All Debentures for which the full prepayment price hereunder shall have been paid in accordance herewith shall promptly be surrendered to or as directed by the Company. The Holder need not provide and the Company hereby waives any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such declaration may be rescinded and annulled by Holder at any time prior to payment hereunder and the Holder shall have all rights as a Debenture holder until such time, if 5 any, as the full payment under this Section shall have been received by it. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon. Section 4. Conversion. a) i) At any time after the Original Issue Date until this Debenture is no longer outstanding, this Debenture shall be convertible into shares of Common Stock at the option of the Holder, in whole or in part at any time and from time to time (subject to the limitations on conversion set forth in Section 4(a)(ii) hereof). The Holder shall effect conversions by delivering to the Company the form of Notice of Conversion attached hereto as Annex A (a "Notice of Conversion"), specifying therein the principal amount of Debentures to be converted and the date on which such conversion is to be effected (a "Conversion Date"). If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion is provided hereunder. To effect conversions hereunder, the Holder shall not be required to physically surrender Debentures to the Company unless the entire principal amount of this Debenture plus all accrued and unpaid interest thereon has been so converted. Conversions hereunder shall have the effect of lowering the outstanding principal amount of this Debenture in an amount equal to the applicable conversion. The Holder and the Company shall maintain records showing the principal amount converted and the date of such conversions. The Company shall deliver any objection to any Notice of Conversion within 1 Business Day of receipt of such notice. In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in the absence of manifest error. The Holder and any assignee, by acceptance of this Debenture, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Debenture, the unpaid and unconverted principal amount of this Debenture may be less than the amount stated on the face hereof. ii) The Holder shall not have the right to convert any portion of this Debenture, pursuant to Section 4(a)(i), Section 5b) or otherwise, to the extent that after giving effect to such conversion, the Holder (together with the Holder's affiliates), as set forth on the applicable Notice of Conversion, would beneficially own in excess of 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to such conversion. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its affiliates shall include the number of shares of Common Stock issuable upon conversion of this Debenture with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) conversion of the remaining, nonconverted portion of this Debenture beneficially owned by the Holder or any of its affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of 6 the Company (including, without limitation, any other Debentures or the Warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 4(a)(ii), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act. To the extent that the limitation contained in this section applies, the determination of whether this Debenture is convertible (in relation to other securities owned by the Holder) and of which a portion of this Debenture is convertible shall be in the sole discretion of such Holder. To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time it delivers a Notice of Conversion that such Notice of Conversion has not violated the restrictions set forth in this paragraph and the Company shall have no obligation to verify or confirm the accuracy of such determination. For purposes of this Section 4(a)(ii), in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company's most recent Form 10-Q or Form 10-K, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company's Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Debenture, by the Holder or its affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The provisions of this Section 4(a)(ii) may be waived by the Holder upon, at the election of the Holder, not less than 61 days' prior notice to the Company, and the provisions of this Section 4(a)i) shall continue to apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver). ii) Underlying Shares Issuable Upon Conversion and Pursuant to the Conversion of Principal Amount. The number of shares of Common Stock issuable upon a conversion shall be determined by the quotient obtained by dividing (x) the outstanding principal amount of this Debenture to be converted by (y) the Set Price. (b) i) Not later than five Trading Days after any Conversion Date, the Company will deliver to the Holder a certificate or certificates representing the Underlying Shares which shall be free of restrictive legends and trading restrictions (other than those required by the Purchase Agreement) representing the number of shares of Common Stock being acquired upon the conversion of Debentures (including, if so timely elected by the Company, shares of Common Stock representing the payment of accrued interest) and (B) a bank check in the amount of accrued and unpaid interest (if the Company is required to pay 7 accrued interest in cash). The Company shall, if available and if allowed under applicable securities laws, use its best efforts to deliver any certificate or certificates required to be delivered by the Company under this Section electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. If in the case of any Notice of Conversion such certificate or certificates are not delivered to or as directed by the applicable Holder by the fifth Trading Day after a Conversion Date, the Holder shall be entitled by written notice to the Company at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return the certificates representing the principal amount of Debentures tendered for conversion. ii) If the Company fails for any reason to deliver to the Holder such certificate or certificates pursuant to Section 4(b)(i) by the fifth Trading Day after the Conversion Date, the Company shall pay to such Holder, in cash, as liquidated damages and not as a penalty, for each $5,000 of principal amount being converted, $50 per Trading Day (increasing to $100 per Trading Day after 3 Trading Days after such damages begin to accrue) for each Trading Day after such third Trading Day until such certificates are delivered. In the event a Holder of this Debenture shall elect to convert any or all of the outstanding principal amount hereof, the Company may not refuse conversion based on any claim that the Holder or any one associated or affiliated with the Holder of has been engaged in any violation of law, agreement or for any other reason, unless, an injunction from a court, on notice, restraining and or enjoining conversion of all or part of this Debenture shall have been sought and obtained and the Company posts a surety bond for the benefit of the Holder in the amount of 150% of the principal amount of this Debenture outstanding, which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to such Holder to the extent it obtains judgment. In the absence of an injunction precluding the same, the Company shall issue Conversion Shares or, if applicable, cash, upon a properly noticed conversion. Nothing herein shall limit a Holder's right to pursue actual damages or declare an Event of Default pursuant to Section 3 herein for the Company's failure to deliver Conversion Shares within the period specified herein and such Holder shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holders from seeking to enforce damages pursuant to any other Section hereof or under applicable law. (iii) In addition to any other rights available to the Holder, if the Company fails for any reason to deliver to the Holder such certificate or certificates pursuant to Section 4(b)(i) by the third Trading Day after the Conversion Date, and if after such third Trading Day the Holder is required by its 8 brokerage firm to purchase (in an open market transaction or otherwise) Common Stock to deliver in satisfaction of a sale by such Holder of the Underlying Shares which the Holder anticipated receiving upon such conversion (a "Buy-In"), then the Company shall (A) pay in cash to the Holder (in addition to any remedies available to or elected by the Holder) the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that such Holder anticipated receiving from the conversion at issue multiplied by (2) the actual sale price of the Common Stock at the time of the sale (including brokerage commissions, if any) giving rise to such purchase obligation and (B) at the option of the Holder, either reissue Debentures in principal amount equal to the principal amount of the attempted conversion or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its delivery requirements under Section 4(b)(i). For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of Debentures with respect to which the actual sale price of the Underlying Shares at the time of the sale (including brokerage commissions, if any) giving rise to such purchase obligation was a total of $10,000 under clause (A) of the immediately preceding sentence, the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In. Notwithstanding anything contained herein to the contrary, if a Holder requires the Company to make payment in respect of a Buy-In for the failure to timely deliver certificates hereunder and the Company timely pays in full such payment, the Company shall not be required to pay such Holder liquidated damages under Section 4(b)(ii) in respect of the certificates resulting in such Buy-In. (iv) Notwithstanding anything herein to the contrary, if after the Effective Date each of the Closing Prices for any 20 consecutive Trading Days (such period commencing only after the Effective Price) exceeds 200% of the Set Price (subject to adjustment for reverse and forward stock splits, stock dividends, stock combinations and other similar transactions of the Common Stock that occur after the date of this Agreement), the Company may, within 2 Trading Days of the end of any such period, deliver a notice to the Holder (a "Forced Conversion Notice" and the date such notice is received by the Holder, the "Forced Conversion Notice Date") to cause the Holder to immediately convert all or part (and if part, pro-rata in proportion to each Holders initial purchase of the Debentures) of the then outstanding principal amount of Debentures pursuant to Section 4(a)(i). The Company may only effect a Forced Conversion Notice if each of the following shall be true: (i) the Company shall have duly honored all conversions occurring by virtue of one or more Conversion Notices prior to the Forced Conversion Date, (ii) there is an effective Underlying Shares Registration Statement pursuant to 9 which the Holder is permitted to utilize the prospectus thereunder to resell all of the Underlying Shares issued to the Holder and all of the Underlying Shares as are issuable to the Holder upon conversion in full of this Debenture subject to the Forced Conversion Notice (and the Company believes, in good faith, that such effectiveness will continue uninterrupted for the foreseeable future), (iii) the Common Stock is listed for trading on a Principal Market (and the Company believes, in good faith, that trading of the Common Stock on a Principal Market will continue uninterrupted for the foreseeable future), (iv) all liquidated damages and other amounts owing in respect of the Debentures and Underlying Shares shall have been paid or will, concurrently with the issuance of the Underlying Shares, be paid in cash; (v) there is a sufficient number of authorized but unissued and otherwise unreserved shares of Common Stock for the issuance of all the Underlying Shares as are issuable to the Holder upon conversion in full of the Debentures subject to the Forced Conversion Notice; (vi) no Event of Default nor any event that with the passage of time would constitute an Event of Default has occurred and is continuing; (vii) such issuance would be permitted in full without violating the limitations set forth in Section 4(a)(ii) and (viii) no public announcement of a pending or proposed Change of Control Transaction or Fundamental Transaction has occurred that has not been consummated. (c) i) The conversion price in effect on any Conversion Date shall be equal to $0.__/2/ (subject to adjustment herein)(the "Set Price"); provided, however, in the event that the Company loses its patent relating to NICO Water or otherwise is legally unable to sell NICO Water, the conversion price shall thereafter equal the lesser of (A) the Set Price and (B) 60% of the average of the 5 Closing Prices for the 5 Trading Days immediately prior to the applicable Conversion Date. ii) If the Company, at any time while the Debentures are outstanding: (A) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company pursuant to this Debenture, including interest thereon), (B) subdivide outstanding shares of Common Stock into a larger number of shares, (C) combine (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (D) issue by reclassification of shares of the Common Stock any shares of capital stock of the Company, then the Set Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstanding after such event. Any - --------------- /2/ As to the Debentures issued at the First Closing, $0.075 and as to the Debentures issued at the Second Closing, the lesser of (1) $0.075 and (2) the average of the 5 Closing Prices immediately prior to the Second Closing Date. 10 adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification. iii) If the Company, at any time while Debentures are outstanding, shall issue rights, options or warrants to all holders of Common Stock (and not to Holders) entitling them to subscribe for or purchase shares of Common Stock or other securities exercisable, convertible into or exchangeable for Common Stock (the "Common Stock Equivalents") at a price per share less than the Closing Price at the record date mentioned below, then the Set Price shall be adjusted by multiplying the Set Price in effect immediately prior to such record date by a fraction, of which the denominator shall be the number of shares of the Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the numerator shall be the number of shares of the Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at the Closing Price on the record date. Such adjustment shall be made whenever such rights, options or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights, options or warrants. iv) If the Company or any subsidiary thereof, as applicable, at any time while Debentures are outstanding, shall offer, sell, grant any option to purchase or offer, sell or grant any right to reprice its securities, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock Equivalent entitling any Person to acquire shares of Common Stock, at an effective price per share less than the then Set Price ("Dilutive Issuance"), as adjusted hereunder (if the holder of the Common Stock or Common Stock Equivalent so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which is issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share which is less than the Set Price, such issuance shall be deemed to have occurred for less than the Set Price), then the Set Price shall be reduced to equal the effective conversion, exchange or purchase price for such Common Stock or Common Stock Equivalents (including any reset provisions thereof) at issue. Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are issued. The Company shall notify the Holder in writing, no later than the 3rd business day following the issuance of any Common Stock or Common Stock Equivalent subject to this 11 section, indicating therein the applicable issuance price, or of applicable reset price, exchange price, conversion price and other pricing terms. v) If the Company, at any time while Debentures are outstanding, shall distribute to all holders of Common Stock (and not to Holders) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security, then in each such case the Set Price shall be determined by multiplying such price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Closing Price determined as of the record date mentioned above, and of which the numerator shall be such Closing Price on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors in good faith. In either case the adjustments shall be described in a statement provided to the Holders of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above. vi) All calculations under this Section 4 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 4, the number of shares of Common Stock deemed to be outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) outstanding on a fully diluted basis. vii) Whenever the Set Price is adjusted pursuant to any of Section 4(c)(ii) - (v), the Company shall promptly mail to each Holder a notice setting forth the Set Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. viii) If (A) the Company shall declare a dividend (or any other distribution) on the Common Stock; (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock; (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then, in each case, the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of the Debentures, and shall cause to be 12 mailed to the Holders at their last addresses as they shall appear upon the stock books of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. Holders are entitled to convert Debentures during the 20-day period commencing the date of such notice to the effective date of the event triggering such notice. ix) If, at any time while this Debenture is outstanding, (A) the Company effects any merger or consolidation of the Company with or into another Person, (B) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (C) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (D) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (in any such case, a "Fundamental Transaction"), then upon any subsequent conversion of this Debenture, the Holder shall have the right to receive, for each Underlying Share that would have been issuable upon such conversion absent such Fundamental Transaction, the same kind and amount of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of one share of Common Stock (the "Alternate Consideration"). For purposes of any such conversion, the determination of the Set Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Set Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of this Debenture following such Fundamental Transaction. To 13 the extent necessary to effectuate the foregoing provisions, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new Debenture consistent with the foregoing provisions and evidencing the Holder's right to convert such Debenture into Alternate Consideration. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this paragraph (c) and insuring that this Debenture (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction. (x) Notwithstanding the foregoing, no adjustment will be made under this paragraph (c) in respect of (A) the granting or issuance of shares of capital stock or of options to employees, officers, directors and consultants of the Company pursuant to any stock option plan agreement or arrangement duly adopted or approved by a majority of the non-employee members of the Board of Directors of the Company or a majority of the members of a committee of non-employee directors established for such purpose, (B) upon the exercise of this Debenture or any other Debenture of this series or of any other series or security issued by the Company in connection with the offer and sale of this Company's securities pursuant to the Purchase Agreement, or (C) upon the exercise of or conversion of any Common Stock Equivalents, rights, options or warrants issued and outstanding on the Original Issue Date, provided such securities have not been amended since the date of the Purchase Agreement except as a result of the Purchase Agreement, or (D) issuance of securities in connection with acquisitions, strategic investments, or strategic partnering arrangements, the primary purpose of which is not to raise capital. (d) The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock solely for the purpose of issuance upon conversion of the Debentures, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holders, not less than such number of shares of the Common Stock as shall (subject to any additional requirements of the Company as to reservation of such shares set forth in the Purchase Agreement) be issuable (taking into account the adjustments and restrictions of Section 4(b)) upon the conversion of the outstanding principal amount of the Debentures and payment of interest hereunder. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid, nonassessable and, if the Underlying Shares Registration Statement has been declared effective under the Securities Act, registered for public sale in accordance with such Underlying Shares Registration Statement. (e) Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of the Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the 14 Closing Price at such time. If the Company elects not, or is unable, to make such a cash payment, the Holder shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock. (f) The issuance of certificates for shares of the Common Stock on conversion of the Debentures shall be made without charge to the Holders thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of such Debentures so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. (g) Any and all notices or other communications or deliveries to be provided by the Holders hereunder, including, without limitation, any Notice of Conversion, shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service, addressed to the Company, at the address set forth above, facsimile number (____) ___-_______, Attn: _____________ or such other address or facsimile number as the Company may specify for such purposes by notice to the Holders delivered in accordance with this Section. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile telephone number or address of such Holder appearing on the books of the Company, or if no such facsimile telephone number or address appears, at the principal place of business of the Holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 5:30 p.m. (New York City time), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 5:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the second Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. Section 5. Reserved. Section 6. Definitions. For the purposes hereof, in addition to the terms defined elsewhere in this Debenture: (a) capitalized terms not otherwise defined herein have the meanings given to such terms in the Purchase Agreement, and (b) the following terms shall have the following meanings: 15 "Business Day" means any day except Saturday, Sunday and any day which shall be a federal legal holiday in the United States or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close. "Change of Control Transaction" means the occurrence after the date hereof of any of (i) an acquisition after the date hereof by an individual or legal entity or "group" (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether through legal or beneficial ownership of capital stock of the Company, by contract or otherwise) of in excess of 40% of the voting securities of the Company, or (ii) a replacement at one time or within a three year period of more than one-half of the members of the Company's board of directors which is not approved by a majority of those individuals who are members of the board of directors on the date hereof (or by those individuals who are serving as members of the board of directors on any date whose nomination to the board of directors was approved by a majority of the members of the board of directors who are members on the date hereof), or (iii) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth above in (i) or (ii). "Commission" means the Securities and Exchange Commission. "Common Stock" means the common stock, $0.001 par value per share, of the Company and stock of any other class into which such shares may hereafter have been reclassified or changed. "Conversion Date" shall have the meaning set forth in Section 4(a)(i) hereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Interest Conversion Rate" means the lesser of (i) the Set Price and (ii) 90% of the lesser of (a) the average of the 20 Closing Prices immediately prior to the applicable Interest Payment Date or (b) the average of the 20 Closing Prices immediately prior to the date the applicable interest payment shares are issued and delivered if after the Interest Payment Date. "Late Fees" shall have the meaning set forth in the second paragraph to this Debenture. "Mandatory Prepayment Amount" for any Debentures shall equal the sum of (i) the greater of: (A) 130% of the principal amount of Debentures to be prepaid, plus all accrued and unpaid interest thereon and all other accrued and unpaid amounts due hereunder, or (B) the principal amount of Debentures to be prepaid, plus all other accrued and unpaid interest hereon and other amounts due hereunder, divided by the Set Price on (x) the date the Mandatory Prepayment Amount is demanded or otherwise due or (y) the date the Mandatory Prepayment 16 Amount is paid in full, whichever is less, multiplied by the Closing Price on (x) the date the Mandatory Prepayment Amount is demanded or otherwise due or (y) the date the Mandatory Prepayment Amount is paid in full, whichever is greater, and (ii) all other amounts, costs, expenses and liquidated damages due in respect of such Debentures. "Original Issue Date" shall mean the date of the first issuance of the Debentures regardless of the number of transfers of any Debenture and regardless of the number of instruments which may be issued to evidence such Debenture. "Person" means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency. "Purchase Agreement" means the Securities Purchase Agreement, dated as of August __, 2003, to which the Company and the original Holder are parties, as amended, modified or supplemented from time to time in accordance with its terms. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of the date of the Purchase Agreement, to which the Company and the original Holder are parties, as amended, modified or supplemented from time to time in accordance with its terms. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Set Price" shall have the meaning set forth in Section 4(c)(i). "Trading Day" means (a) a day on which the shares of Common Stock are traded on a Principal Market on which the shares of Common Stock are then listed or quoted, or (b) if the shares of Common Stock are not quoted on a Principal Market, a day on which the shares of Common Stock are quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); provided, that in the event that the shares of Common Stock are not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day shall mean a Business Day. "Transaction Documents" shall have the meaning set forth in the Purchase Agreement. "Underlying Shares" means the shares of Common Stock issuable upon conversion of Debentures or as payment of interest in accordance with the terms hereof. 17 "Underlying Shares Registration Statement" means a registration statement meeting the requirements set forth in the Registration Rights Agreement, covering among other things the resale of the Underlying Shares and naming the Holder as a "selling stockholder" thereunder. Section 7. Except as expressly provided herein, no provision of this Debenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, interest and liquidated damages (if any) on, this Debenture at the time, place, and rate, and in the coin or currency, herein prescribed. This Debenture is a direct debt obligation of the Company. This Debenture ranks pari passu with all other Debentures now or hereafter issued under the terms set forth herein. As long as this Debenture is outstanding, the Company shall not and shall cause it subsidiaries not to, without the consent of the Holders, (a) amend its certificate of incorporation, bylaws or other charter documents so as to adversely affect any rights of the Holders; (b) repay, repurchase or offer to repay, repurchase or otherwise acquire shares of its Common Stock or other equity securities other than as to the Underlying Shares to the extent permitted or required under the Transaction Documents or as otherwise permitted by the Transaction Documents; or (c) enter into any agreement with respect to any of the foregoing. Section 8. If this Debenture shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for a lost, stolen or destroyed Debenture, a new Debenture for the principal amount of this Debenture so mutilated, lost, stolen or destroyed but only upon receipt of evidence of such loss, theft or destruction of such Debenture, and of the ownership hereof, and indemnity, if requested, all reasonably satisfactory to the Company. Section 9. Except as provided below in this Section 9, so long as any portion of this Debenture is outstanding, the Company will not and will not permit any of its subsidiaries to, directly or indirectly, enter into, create, incur, assume or suffer to exist any indebtedness of any kind, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom that is senior in any respect to the Company's obligations under the Debentures without the prior consent of the Holder, which consent shall not be unreasonably withheld. Notwithstanding the foregoing and anything else to the contrary in this Debenture or any other Transaction Document, the Company shall have the right in its sole and absolute discretion to enter into one or more factoring agreements and/or other type of receivables financing with any party or parties on terms acceptable to the Company so long as it shall first offer such factoring agreement and terms (the "Factoring Proposal") on a pro rata basis to the Purchasers, who shall have a right of first refusal with respect thereto. The Company shall send each Factoring Proposal, if any, to the Purchasers via facsimile and the Purchasers shall have 2 Business Days in which to deliver a binding written commitment accepting such Factoring Proposal. Failure to respond within such time shall be deemed a waiver of such right of refusal and the Company shall have the right to enter into the Factoring Proposal with a party or parties other than the Purchasers. To the extent the Purchasers exercise their right of first refusal, they may apportion the factoring amongst 18 themselves in any manner, so long as in the aggregate the amount and terms of factoring provided is equal to or more favorable to the Company than the Factoring Proposal. Section 10. All questions concerning the construction, validity, enforcement and interpretation of this Debenture shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by any of the Transaction Documents (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the City of New York, Borough of Manhattan (the "New York Courts"). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or such New York Courts are improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Debenture and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Debenture or the transactions contemplated hereby. If either party shall commence an action or proceeding to enforce any provisions of this Debenture, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its reasonable attorneys' fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding. Section 11. Any waiver by the Company or the Holder of a breach of any provision of this Debenture shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Debenture. The failure of the Company or the Holder to insist upon strict adherence to any term of this Debenture on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Debenture. Any waiver must be in writing. Section 12. If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this Debenture shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates applicable laws governing usury, the applicable rate of interest due hereunder 19 shall automatically be lowered to equal the maximum permitted rate of interest. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of or interest on the Debentures as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this indenture, and the Company (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impeded the execution of any power herein granted to the Holder, but will suffer and permit the execution of every such as though no such law has been enacted. Section 13. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day. ********************* 20 IN WITNESS WHEREOF, the Company has caused this Convertible Debenture to be duly executed by a duly authorized officer as of the date first above indicated. QT 5, INC. By:_________________________________________ Name: Title: 21 ANNEX A NOTICE OF CONVERSION The undersigned hereby elects to convert principal under the 6% Convertible Debenture of QT 5, Inc. (the "Company"), due on __________ __, 2008, into shares of common stock, $0.001 par value per share (the "Common Stock"), of the Company according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any. By the delivery of this Notice of Conversion the undersigned represents and warrants to the Company that its ownership of the Company's Common Stock does not exceed the amounts determined in accordance with Section 13(d) of the Exchange Act, specified under Section 4 of this Debenture. The undersigned agrees to comply with the prospectus delivery requirements under the applicable securities laws in connection with any transfer of the aforesaid shares of Common Stock. Conversion calculations: Date to Effect Conversion: Principal Amount of Debentures to be Converted: Payment of Interest in Common Stock __ yes __ no If yes, $_____ of Interest Accrued on Account of Conversion at Issue. Number of shares of Common Stock to be issued: Signature: Name: Address: 22 Schedule 1 CONVERSION SCHEDULE 6% Convertible Debentures due on ____________________ ___, 2008, in the aggregate principal amount of $____________ issued by QT 5, Inc. This Conversion Schedule reflects conversions made under Section 4 of the above referenced Debenture. Dated:
=============================== ------------------------- ======================= ------------------------------ Aggregate Principal Amount Remaining Date of Conversion Subsequent to (or for first entry, Original Conversion Issue Date) Amount of Conversion (or original Company Attest Principal Amount) - ------------------------------- ------------------------- ----------------------- ------------------------------ - ------------------------------- ------------------------- ----------------------- ------------------------------ - ------------------------------- ------------------------- ----------------------- ------------------------------ - ------------------------------- ------------------------- ----------------------- ------------------------------ - ------------------------------- ------------------------- ----------------------- ------------------------------ - ------------------------------- ------------------------- ----------------------- ------------------------------ - ------------------------------- ------------------------- ----------------------- ------------------------------ - ------------------------------- ------------------------- ----------------------- ------------------------------ - ------------------------------- ------------------------- ----------------------- ------------------------------ =============================== ========================= ======================= ------------------------------
23 EX-21 13 ex-21.txt QT 5, INC. ================================================================================ EXHIBIT 21 SUBSIDIARIES OF THE SMALL BUSINESS ISSUER Name of Subsidiary State of Incorporation NicoWater International, Inc. Delaware - -------------------------------------------------------------------------------- EX-23 14 ex-23.txt EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT To the Board of Directors QT 5, Inc. We hereby consent to the incorporation by reference in the previously filed Registration Statements of QT 5, Inc. on Form S-8 (File Nos. 333-92236, 333-103208, 333-104740) of our report, dated August 19, 2003, except for Note 11, as to which the date is September 5, 2003, appearing in this Annual Report on Form 10-KSB of QT 5, Inc. for the year ended June 30, 2003. CORBIN & COMPANY, LLP Irvine, California September 18, 2003 EX-31.1 15 ex31-1.txt QT5, INC. ================================================================================ EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULES 13a-14 AND 15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934 I, Timothy J. Owens, Chief Executive Officer of QT 5, Inc. (the "Company"), certify that: I have reviewed this Annual Report on Form 10-KSB of QT 5, Inc. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report. Based on my knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods, presented in the report. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which the periodic report is being prepared; (b) evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Annual Report based on such evaluation; and (c) disclosed in this Annual Report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and to the audit committee of the board of directors (or persons fulfilling the equivalent function): - -------------------------------------------------------------------------------- QT 5, INC. ================================================================================ (i) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. Dated: September 23, 2003 /s/Timothy J. Owens - -------------------------------------- Timothy J. Owens Chief Executive Officer - -------------------------------------------------------------------------------- EX-31.2 16 ex31-2.txt QT 5, INC. ================================================================================ EXHIBIT 31.2 CERTIFICATION OF PRESIDENT PURSUANT TO RULES 13a-14 AND 15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934 I, Steven Reder, President of QT 5, Inc. (the "Company"), certify that: I have reviewed this Annual Report on Form 10-KSB of QT 5, Inc. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report. Based on my knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods, presented in the report. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which the periodic report is being prepared; (b) evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Annual Report based on such evaluation; and (c) disclosed in this Annual Report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and to the audit committee of the board of directors (or persons fulfilling the equivalent function): (i) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. - -------------------------------------------------------------------------------- QT5, INC. ================================================================================ Dated: September 23, 2003 /s/Steven Reder - ---------------------------------- Steven Reder President - -------------------------------------------------------------------------------- EX-31.3 17 ex31-3.txt QT5, INC. ================================================================================ EXHIBIT 31.3 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULES 13a-14 AND 15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934 I, Norman A. Kunin, Chief Financial Officer of QT 5, Inc. (the "Company"), certify that: I have reviewed this Annual Report on Form 10-KSB of QT 5, Inc. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report. Based on my knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods, presented in the report. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which the periodic report is being prepared; (b) evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Annual Report based on such evaluation; and (c) disclosed in this Annual Report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and to the audit committee of the board of directors (or persons fulfilling the equivalent function): (i) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and - -------------------------------------------------------------------------------- QT5, INC. ================================================================================ (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. Dated: September 23, 2003 /s/Norman A. Kunin - ------------------------------ Norman A. Kunin Chief Financial Officer - -------------------------------------------------------------------------------- EX-32 18 ex32.txt QT5, INC. ================================================================================ EXHIBIT 32 CERTIFICATION OF OFFICERS OF QT 5, INC. PURSUANT TO 18 USC ss. 1350 Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsection (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) each of the undersigned officers of QT 5, Inc. (the "Company") does hereby certify, to such officer's knowledge, that: (a) The Annual Report on Form 10-KSB for the fiscal year ended June 30, 2003 of the Company fully complies with the requirements of section 13(a) or 15(b) of the Securities Exchange Act of 1934; and (b) Information contained in the Form 10-KSB fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: September 23, 2003 /s/Timothy J. Owens - -------------------------------------------------------------- Timothy J. Owens Chief Executive Officer /s/Steven Reder - -------------------------------------------------------------- Steven Reder President /s/Norman A. Kunin - -------------------------------------------------------------- Norman A. Kunin Chief Financial Officer - -------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----