-----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, M/FrL0qCbnmJMW5TW3Q5j3pczbzko/TcZtODPe6esc30sTWlc9VO/h+wgJXXQtF7 aJFEGSmO9ZwdHs6VMZhC+w== 0001091818-01-500346.txt : 20020412 0001091818-01-500346.hdr.sgml : 20020412 ACCESSION NUMBER: 0001091818-01-500346 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 20011206 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPOSITE INDUSTRIES OF AMERICA INC CENTRAL INDEX KEY: 0000894501 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 870434297 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-74648 FILM NUMBER: 1807759 BUSINESS ADDRESS: STREET 1: 4505 W HACIENDA AVE STREET 2: UNIT I 1 CITY: LAS VEGAS STATE: NV ZIP: 89118 BUSINESS PHONE: 7025794888 MAIL ADDRESS: STREET 1: 3098 S HIGHLAND DR STE 460 CITY: SALT LAKE CITY STATE: UT ZIP: 84106 FORMER COMPANY: FORMER CONFORMED NAME: AFFORDABLE HOMES OF AMERICA INC DATE OF NAME CHANGE: 19990518 FORMER COMPANY: FORMER CONFORMED NAME: WORLD HOMES INC DATE OF NAME CHANGE: 20001109 SB-2 1 ciai_sb2-120501.txt REGISTRATION STATEMENT As filed with the Securities and Exchange Commission on December 6, 2001. Registration No. 333-_____ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------------- COMPOSITE INDUSTRIES OF AMERICA, INC. (Name of Small Business Issuer in its Charter) Nevada 1531 (State or other jurisdiction of (Primary Standard Industrial incorporation or organization) Classification Code Number) 87-0434297 (I.R.S. Employer Identification No.) Merle Ferguson Chief Executive Officer and President 4505 West Hacienda Avenue, Unit I-1 Las Vegas, Nevada 89118 (702) 579-4888 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Copies of communications to: Christopher Auguste, Esq. Jenkens & Gilchrist Parker Chapin LLP The Chrysler Building 405 Lexington Ave. New York, New York 10174 Telephone No.: (212) 704-6000 Facsimile No.: (212) 704-6288 (Name, address, including zip code, and telephone number, including area code, of agent for service) Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. _X_ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ___ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ___ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ___ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. ___ CALCULATION OF REGISTRATION FEE
- ------------------------------------------- -------------- ------------------ ------------------ ---------------- Proposed Maximum Proposed Maximum Title of Each Class of Amount to be Offering Price Per Aggregate Offering Amount of Securities to be Registered Registered (1) Share (2) Price (2) Registration Fee - ------------------------------------------- -------------- ------------------ ------------------ ---------------- Common Stock, par value $.001 per share (3) 11,777,777(2) $0.405 $ 4,770,000 $ 1,192.50 Common Stock, par value $.001 per share (4) 213,675 $1.5375 $ 328,525 $ 82.00 Common Stock, par value $.001 per share (5) 200,267 $0.575 $ 115,154 $ 29.00 Common Stock, par value $.001 per share (6) 2,173,913 $0.01 $ 21,739 $ 5.50 Common Stock, par value $.001 per share (6) 521,739 $0.575 $ 300,000 $ 75.00 Common Stock, par value $.001 per share (7) 100,000 $1.44 $ 144,000 $ 36.00 Common Stock, par value $.001 per share (8) 57,180,851 $0.405 $ 23,158,245 $ 5,790.00 Common Stock, par value $.001 per share (5) 37,500 $0.475 $ 17,813 $ 4.50 - ------------------------------------------- -------------- ------------------ ------------------ ---------------- Total 72,205,722(2) $ 28,855,476 $ 7,214.00 - ------------------------------------------- -------------- ------------------ ------------------ ----------------
(1) Because the number of shares of common stock issuable upon the conversion of the Debentures issued depends on the market price of our common stock, the actual number of shares to be sold under this registration statement cannot be determined at this time. Under the terms of the purchase agreement entered into between Composite Industries of America and the investor referred to therein we are required to file a registration statement registering for resale not less than 200% of the number of shares of our common stock into which the Debentures issued may be converted as of the date hereof pursuant to the purchase agreement. Further, under the terms of the equity line purchase agreement entered into between CIAI and Burlington Street LLC, we are required to register not less than 215% of the number of shares of our common stock issuable pursuant to the equity line purchase agreement. The number of shares registered for resale is not intended to be a prediction as to the future market price of our common stock upon conversion of the Debentures. (2) Estimated pursuant to Rule 457(c) under the Securities Act of 1933 solely for the purpose of computing the amount of the registration fee. The fee was based on (i) the average of the high and low price of the common stock quoted in the OTC Bulletin Board on November 27, 2001 for: (i) the shares issuable upon conversion of the Debenture; (ii) the price at which the warrant may be exercised; and (iii) the shares issuable pursuant to the Equity Line Purchase Agreement between CIAI and Burlington Street LLC. (3) Represents shares of common stock issuable upon conversion of the Debentures issued to Lenore Avenue LLC. (4) Represents shares of common stock issuable upon exercise of a warrant issued to Lenore Avenue LLC in April 2001. (5) Represents shares of common stock issuable upon exercise of a warrant issued to Lenore Avenue LLC in October 2001. (6) Represents shares of common stock issuable upon exercise of warrants issued to Burlington Street LLC in December 2001. (7) Represents shares of common stock issuable upon exercise of warrants issued to consultants. (8) Represents shares of common stock issuable pursuant to an equity line purchase agreement between CIAI and Burlington Street LLC. (9) Represents shares of common stock issuable pursuant upon exercise of a warrant issued to Lenore Avenue LLC on December 4, 2001. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. The information in this prospectus is not complete and may be changed. The selling stockholder may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Preliminary Prospectus Subject to Completion dated December __, 2001 Composite Industries of America, Inc. 72,205,722 shares of common stock - -------------------------------------------------------------------- - - Of the 72,205,722 shares of our common stock are being offered by the selling stockholders listed on page 35 of this prospectus: - - 11,777,777 are issuable upon conversion of debentures issued to the selling stockholders; - - 3,247,094 shares are issuable upon the exercise of warrants issued to the selling stockholders; and - - 57,180,851 shares are issuable pursuant to an equity line purchase agreement by and among CIAI and Burlington Street LLC. We will not receive any proceeds from the sale of these shares. We could receive up to $905,492 in proceeds from the exercise of warrants, the underlying shares of which we are registering in this prospectus, by the selling stockholders, which proceeds would be used for general corporate purposes. As of the date of this prospectus, the warrants have not been exercised. OTC Bulletin Board:common stock "CIAI" - - On December 3, 2001 the closing sale price of our common stock on the OTC Bulletin Board was $0.40. The securities offered in this prospectus involve a high degree of risk. You should carefully consider the factors described under the heading "Risk Factors" beginning on page 5. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this prospectus is ________________, 2001 - ----------------------------------------------------------------------------- TABLE OF CONTENTS SUMMARY .................................................................. 1 RISK FACTORS ............................................................. 3 SPECIAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS ................. 10 USE OF PROCEEDS .......................................................... 10 MARKET PRICE OF OUR COMMON STOCK ......................................... 10 DIVIDENDS ................................................................ 11 BUSINESS - OUR COMPANY ................................................... 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ................ 13 MANAGEMENT ............................................................... 23 PRINCIPAL STOCKHOLDERS ................................................... 26 SELLING STOCKHOLDERS ..................................................... 27 PLAN OF DISTRIBUTION ..................................................... 28 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........................... 30 DESCRIPTION OF SECURITIES ................................................ 30 NEVADA BUSINESS COMBINATION PROVISIONS ................................... 31 INDEMNIFICATION OF DIRECTORS AND OFFICERS ................................ 32 WHERE YOU CAN FIND MORE INFORMATION ...................................... 32 TRANSFER AGENT ........................................................... 33 LEGAL MATTERS ............................................................ 33 EXPERTS .................................................................. 33 INDEX TO FINANCIAL STATEMENTS ........................................... F-1 SUMMARY The information below is only a summary of more detailed information included in other sections of this prospectus. The other information is important, so please read the entire prospectus carefully. ABOUT OUR COMPANY We are a development stage company, founded in 1997, in the business of building homes for low income and first time home buyers. Our focus is to develop and build homes for sale, both in the United States and internationally, with little or no timber products. Our methods of construction are patented and we plan to begin building homes this year. On April 28, 1999, we acquired Composite Industries, Inc., owner of a patent for a cementacious building material that can be used instead of concrete, dry wall or lumber, at a reduced cost. HOW OUR COMPANY IS ORGANIZED We were incorporated in Nevada under the name Affordable Homes of America in February, 1997. In March, 1999 we merged into Kowtow, Inc. and changed our name to Affordable Homes of America, Inc. On October 12, 2000 we changed our name to World Homes, Inc. and on August 23, 2001 we changed our name to Composite Industries of America, Inc. WHERE YOU CAN FIND US We are located at 4505 West Hacienda Avenue, Unit I-1, Las Vegas, Nevada 89118. Our telephone number is (702) 579-4888, our facsimile number is (702) 579-4833, our e-mail address is info@theworldhome.com, and our homepage on the world-wide web is at http//www.compositeindustries.com. THE OFFERING Common stock offered by Composite Industries Of America, Inc. No shares Common stock offered by the selling stockholder pursuant to previously purchased securities 72,205,722 shares Common stock to be outstanding after this offering 111,749,636 shares (1) Use of proceeds We will not receive any part of the proceeds from the sales of the shares of our common stock. If the selling stockholders exercise all of their warrants, we will receive gross proceeds of approximately $905,492. When and if we receive these funds, the funds will be used for general corporate purposes. OTC Bulletin Board Trading Symbol CIAI (1) This information is based on 40,065,281 shares outstanding at September 30, 2001. On April 5, 2001, we sold a $1,000,000 face value 6% convertible debenture and warrants to purchase 213,675 shares of our common stock at an exercise price of $1.5375 per share, under a purchase agreement between us and Lenore Avenue LLC. We also issued warrants to purchase an aggregate of 100,000 shares of common stock at an exercise price of $1.44 per share to Hyperion Holdings, LLC and vFinance.com, Inc., for consulting services. On October 22, 2001 we sold a $750,000 face value 6% convertible debenture and two warrants to purchase, respectively, up to 200,267 shares of our common stock at an exercise price of $0.575 per share and up to 37,500 shares of our common stock at an exercise price of $0.475 per share under a purchase agreement between us and Lenore Avenue LLC. On December 3, 2001 we entered into an Equity Line Purchase Agreement between us and Burlington Street LLC. Pursuant to this agreement, we have the right, subject to certain conditions, to sell up to $10,000,000 of our shares of common stock over the next two years to Burlington. Additionally, we issued two warrants to Burlington to purchase, respectively, up to 521,739 shares of our common stock at an exercise price of $0.575 and up to 2,173,913 shares of our common stock at an exercise price of $0.01 per share. SELECTED FINANCIAL DATA The following summary of our financial information has been derived from our financial statements that are included in this prospectus. The information for the three months ended September 30, 2001 and 2000 and the years ended June 30, 2001 and 2000 is derived from our financial statements. See "Financial Statements" and "Management's Discussion and Analysis or Plan of Operation".
For the Three Months Ended For the Fiscal Years ended September 30, June 30, -------------------------------------------------------------------- 2001 2000 2001 2000 ------------- ------------- ------------- ------------ Revenues $ - $ - $ - $ - Operating expenses $ 1,310,153 $ 518,075 $ 2,803,866 $ 3,447,186 Net (loss) $ (894,696) $ (479,903) $ (2,740,898) $ (3,105,360) Net (loss) per share $ (0.03) $ (0.02) $ (0.13) $ (0.16) Working Capital (deficit) $ (1,467,273) $ (736,586) $ (1,115,383) $ (1,115,575) Total assets $ 17,915,547 $ 18,881,173 $ 18,227,287 $ 19,387,523 Current liabilities $ $ 183,016 $ $ 250,384 Stockholders' Equity $ 11,728,091 $ 13,122,648 $ 11,827,781 $ 13,222,826 Convertible Debentures (net of conversion benefit) $ 954,750 $ - $ 931,750 $ - --------------------------------------------------------------------
RISK FACTORS An investment in our common stock is highly speculative and involves a high degree of risk. Therefore, you should consider all of the risk factors discussed below, as well as the other information contained in this document. You should not invest in our common stock unless you can afford to lose your entire investment and you are not dependent on the funds you are investing. RISKS RELATED TO THIS OFFERING WE HAVE 72,205,722 SHARES OF COMMON STOCK RESERVED FOR FURTHER ISSUANCES WHICH CAN SUBSTANTIALLY DILUTE THE VALUE OF YOUR COMPOSITE INDUSTRIES OF AMERICA COMMON STOCK The issuance of reserved shares would dilute the equity interest of existing stockholders and could have a significant adverse effect on the market price of our common stock. As of November 21, 2001, we had 72,205,722 shares of common stock reserved for possible future issuances pursuant to an equity line purchase agreement and upon conversion of preferred stock, warrants and Debentures. RESTRICTIONS IN OUR CURRENT FINANCING ARRANGEMENTS NEGATIVELY AFFECT RAISING ADDITIONAL FUNDS The purchase agreements signed in connection with the April 2001 and October 2001 offerings contain restrictions on future financing, which could have a materially adverse effect on our ability to raise the needed additional funds. For 90 days following the effective date of this registration statement, without the consent of the investor, we are restricted from issuing any equity, convertible debt or other securities which are or could be, by conversion or registration, free-trading securities. For 270 days after the effective date of this registration statement, if we intend to sell shares in a financing, we are generally required to give certain investors a right of first refusal to purchase a number of shares, on the same terms, and in the same proportion as the investor purchased our Debentures. THE DILUTIVE EFFECT OF THE SHARES ISSUABLE PURSUANT TO THE APRIL 2001, OCTOBER 2001 AND DECEMBER 2001 OFFERINGS (SEE "DILUTION") As of November 27, 2001, assuming full conversion of the Debenture and exercise of the warrants issued in connection with the April 2001 and October 2001 offerings and the issuance of all of the shares of common stock issuable in connection with the December 2001 offering, 72,168,222 shares of our common stock would be issuable, representing approximately 180% of our currently outstanding common stock. These issuances, if made in their entirety, would result in your common stock being diluted by approximately 65%. The conversion rates of the April 2001 and October 2001 Debentures are based on a floating rate at a discount to the market price of our common stock at the time that such Debentures are converted. Accordingly, we cannot determine the ultimate number of shares of common stock that we will issue upon conversion of the Debentures issued in connection with the April 2001 and October 2001 offerings. CONVERSION AND SALES OF SHARES COULD DEPRESS THE PRICE OR OUR COMMON STOCK Because of the conversion features in the debentures issued in relation to the April 2001 and October 2001 offerings, the debenture holders will receive a greater number of shares of common stock upon conversion if our common stock price decreases. If the debenture holder converts its debentures or exercises its warrants and then sells our common stock, the common stock price may decrease due to the additional shares in the market. This could allow the debenture holder to convert any unconverted portion of its debentures into greater amounts of common stock, the sales of which would further depress the stock price. The significant downward pressure on the price of the common stock could encourage short sales, if short sales of our stock were permitted, and consequently place further downward pressure on the price of our common stock. THE LOWER THE PRICE OF OUR COMMON STOCK, THE MORE SHARES OF COMMON STOCK WILL BE ISSUABLE IN THE FORM OF INTEREST PAYMENTS The debentures issued in connection with the April 2001 and October 2001 offerings each bear interest at an annual rate of 6% and the interest is payable in cash or in shares of our common stock. Consequently, the lower the price of our common stock, the more shares will be issuable in the form of interest payments. As of December 4, 2001, the debenture issued in the amount of $1,000,000 in connection with the April 2001 financing has accrued approximately $35,000 in interest and the debenture issued in the amount of $750,000 in the October 2001 offering has accrued approximately $3,750 in interest. OUR DEFAULT ON THE PAYMENT OF DEBENTURES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, OPERATING RESULTS, OR FINANCIAL CONDITION On April 5, 2001, we issued a $1,000,000 convertible debenture to Lenore Avenue, LLC and on October 22, 2001 we issued a $750,000 convertible debenture to Lenore Avenue LLC. All principal and interest due on each outstanding debenture becomes immediately due and payable one year from the date of issuance, or earlier in the event of a default. Events of default under the April 2001 and October 2001 offerings include: - - a breach by us of any material covenant or term or condition of the debentures issued in connection with the offerings; - - a breach by us of any material representation or warranty made in the purchase agreements signed in the offerings, or in any agreements made in connection therewith; - - we make an assignment for the benefit of our creditors, or a receiver or trustee is appointed for us; - - any form of bankruptcy or insolvency proceeding is instituted by or against us; - - we do not comply with the conditions for listing on a principal market; and - - our common stock is delisted from a principal market. If we default on a debenture issued in connection with the April 2001 or October 2001 offering, we will be required to pay the principal of the debenture and any interest accrued. The cash required to pay such amounts will most likely come out of our working capital. Since we rely on our working capital for our day to day operations, such a default on the debenture could have a material adverse effect on our business, operating results, or financial condition to such extent that we are forced to restructure, file for bankruptcy, sell assets or cease operations, any of which could put your investment dollars at significant risk. See "Management's Discussion and Analysis or Plan of Operations". IF WE DO NOT ISSUE TO THE INVESTOR THE SHARES OF COMMON STOCK UPON CONVERSION OF THE DEBENTURES WITHIN A LIMITED AMOUNT OF TIME, WE WILL BE REQUIRED TO PAY LIQUIDATED DAMAGES. In the event that we are unable to issue the shares of common stock within three trading days of when a debenture, issued pursuant to the April 2001 or October 2001 offerings, is convertible, then at the debenture holder's election, we must pay to the debenture holder a sum of money equal to $5,000 for every trading day after the third day following conversion of the debenture during which the shares underlying the debenture remain undelivered. IF WE DO NOT PAY THE PRINCIPAL OR INTEREST DUE ON THE DEBENTURES, THE INTEREST RATE WILL INCREASE FROM 6% TO 18% PER ANNUM. In the event that we do not pay the principal or interest on the debenture issued in connection with the April 2001 or October 2001 offering within 10 days of such amount becoming due, the interest rate will increase from 6% to 18%; for example, principal and interest due and not paid on a $1,000,000 debenture will result in a payment of $180,000 per year instead of $60,000 per year. OUR CURRENT FINANCING ARRANGEMENT COULD PREVENT OUR COMMON STOCK FROM BEING LISTED ON NASDAQ OR OTHER PRINCIPAL MARKETS. Nasdaq and other principal markets require that, to be eligible for inclusion in the stock market, a company's common stock have a minimum bid price per share of common stock. The characteristic of our financing is to exert downward pressure on the bid price of our common stock which may prevent our common stock from being listed on Nasdaq or other principal markets; for example: - - the conversion feature of the debentures issued in our current financing arrangements will result in the debenture holder receiving a greater number of shares of common stock upon conversion if our common stock price decreases; - - if the investor converts its debentures or exercises its warrants and then sells our common stock, the common stock price may decrease due to the additional shares in the market. This could allow the investor to convert any remaining unconverted portion of its debentures into greater amounts of common stock, the sale of which would further depress the stock price. RISKS RELATED TO OUR INDUSTRY THE HOMEBUILDING INDUSTRY IS CYCLICAL AND A DOWNWARD CYCLE MAY NEGATIVELY IMPACT OUR REVENUES. The homebuilding industry is cyclical and is affected by many factors relating to local, national and international economic conditions, such as employment levels, the availability of reasonable financing for buyers, general consumer confidence, the level of demand for housing as opposed to the level of supply, the cost of construction supplies and the availability of alternatives to new homes such as rental properties or used homes. A downward cycle in the homebuilding industry would adversely affect our revenues and operating results. INTEREST RATE INCREASES AND THE CONDITIONS FOR MORTGAGE FINANCING COULD DECREASE DEMAND FOR THE HOMES WE BUILD. In general, demand for housing is adversely affected by an increase in mortgage interest rates and the limited availability of mortgage financing by lenders because a smaller percentage of the population can afford to purchase homes. Our target consumers, being low income and first time homeowners, are more likely to be affected by interest rate increases and the availability of mortgage financing than the general population. Therefore, if interest rates were to increase or if the availability of mortgage financing were to decrease, we would most likely sell fewer homes than if conditions were more favorable, decreasing our revenue and adversely affecting our operating results. CHANGES IN INCOME TAX HOMEOWNER BENEFITS COULD DECREASE DEMAND FOR THE HOMES WE BUILD. Currently, mortgage interest paid to lenders and real estate taxes paid to state governments can be deducted on federal income tax returns. These deductions are a factor in why many people choose to purchase homes, and in some cases make it financially possible for people to purchase a home when they otherwise would not be able to do so. These deductions are especially important to the buyers of our homes because we intend to target low income and first time homeowners. Therefore, any decrease or elimination of these deductions might cause fewer people who are our target consumers to be able to afford homes, which would adversely affect our sales, revenues and operating results. THE VALUE OF REAL ESTATE MIGHT FLUCTUATE SIGNIFICANTLY, ADVERSELY AFFECTING OUR OPERATING RESULTS. In order to build homes, we must first purchase the real estate on which to build them. Real estate values are, however, subject to significant fluctuation. Therefore, real estate that we purchased to build homes upon could significantly decrease in value, making it impossible for us to make a profit on the sale of a home built on that property, decreasing our revenues. Additionally, if the value of real estate were to increase in the areas we build homes, the cost of the real estate might put the homes out of the price range of the low income and first time homeowner market, decreasing our sales. Therefore, any significant fluctuation in the price of real estate would adversely affect our sales, revenues and operating results. THE WEATHER AND OTHER FORCES OF NATURE MAY INFLUENCE OUR HOMEBUILDING OPERATIONS. The homebuilding industry is subject to weather conditions and other forces of nature which could alter the way our operations are conducted. Hurricanes, tornadoes, mudslides, earthquakes, fires and floods, among other things, all may have negative impacts on our ability to successfully build and sell homes. For example, naturally occurring events could delay construction, increasing our costs. Additionally, customers might be less willing to buy homes in areas prone to natural disasters or areas that just suffered from a natural disaster, or they might only be willing to buy homes for less than it cost us to build them. Therefore, any change in operations due to naturally occurring events similar to the ones described could negatively impact our revenues and operating results. OUR EXECUTIVE OFFICERS AND CERTAIN HIGHLY SKILLED PERSONNEL MAY LEAVE. Our success depends largely on the skills, experience and performance of some key members of our management, including our Chairman of the Board, Chief Executive Officer and President and our Executive Vice President of Finance and Chief Financial Officer. If we lose one or more of these key employees, our ability to implement our business strategy and maintain or provide effective leadership might be hampered, adversely affecting our business, revenues and operating results. Our future success also depends on our ability to continue attracting and retaining highly skilled personnel generally. We face intense competition for qualified personnel. Many of our competitors have greater resources than we have, and are therefore able to spend more money to obtain the services of highly skilled personnel. Therefore, we cannot be certain that we will be successful in attracting new personnel or adequately compensating our current personnel in the future. If we are unable to retain or attract highly skilled personnel in the future, the quality of our product or the sale of our homes might decline, resulting in decreased revenue. GOVERNMENTAL REGULATIONS COULD LIMIT OUR ABILITY TO BUILD HOMES ON REAL ESTATE WE PURCHASED CAUSING OUR REVENUES TO DECREASE. The homebuilding industry is subject to extensive government regulation relating to construction, including zoning laws and building codes. The agencies administering these laws often have broad discretion regarding the interpretation of these laws. The decisions of an agency regarding any of these regulations could increase the costs of completing a project or prevent us from completing a project, leading to a decrease in revenues and adversely affecting our operating results. Additionally, the purchasers of real estate are generally subject to a variety of environmental regulations which could result in delays in the construction of our homes, increasing our costs and decreasing our revenues. RISKS RELATED TO OUR BUSINESS WE CURRENTLY DO NOT HAVE ANY OPERATIONS, AND WITHOUT ADDITIONAL FUNDS WE MAY NOT ACHIEVE OUR CURRENT BUSINESS STRATEGY, WHICH COULD FORCE US TO RESTRUCTURE OR COULD RESULT IN OUR CEASING OPERATIONS. We currently do not have any operations. We need to raise a minimum of $20 million through public or private debt or sale of equity to begin constructing homes. Such financing may not be available when needed. Even if such financing is available, it may be on terms that are materially adverse to your interests with respect to dilution of book value, dividend preferences, liquidation preferences, or other terms. If we are unable to obtain financing on reasonable terms, we could be forced to delay, scale back or eliminate certain product development programs. In addition, such inability to obtain financing on reasonable terms could have a material adverse effect on our business, operating results, or financial condition to such extent that we are forced to restructure, file for bankruptcy, sell assets or cease operations, any of which could put your investment dollars at significant risk. See "Management's Discussion and Analysis or Plan of Operations." WE HAVE LOST, AND MAY CONTINUE TO LOSE, MONEY AND IF WE DO NOT ACHIEVE PROFITABILITY WE MAY NOT BE ABLE TO CONTINUE OUR BUSINESS. Through September 30, 2001, we have generated no revenues from operations, have incurred substantial expenses and have sustained losses. We have incurred net losses of $894,696 for the three months ended September 30, 2001 and $2,740,898 for the year ended June 30, 2001. Losses have resulted principally from costs incurred in connection with developing our business activities and from costs associated with our administrative activities. We cannot be certain if or when we will become profitable. We expect to continue incurring significant operating expenses. As a result, we will need to generate significant revenues to achieve profitability, which may not occur. We expect our operating expenses to increase as a result of our planned expansion. Since we have not yet begun building homes, and have no operating history of marketing our homes to the public, we cannot assure you that our business will be profitable or that we will ever generate sufficient revenues to meet our expenses and support our anticipated activities. Even if we do achieve profitability, we may be unable to sustain or increase profitability on a quarterly or annual basis in the future. WE ARE A DEVELOPMENT STAGE COMPANY IN A NEW AND EVOLVING MARKET AND WE CANNOT BE CERTAIN THAT OUR BUSINESS STRATEGY WILL BE SUCCESSFUL. We are a development stage company and we will not begin building or selling homes until the first quarter of 2001. Our limited operating history makes an evaluation of our business and prospects very difficult. You must consider our business prospects in light of the risks and difficulties we encounter as a development stage company in the competitive construction market. These risks and difficulties include, but are not limited to: - - An evolving business and marketing model; - - High capital expenditures associated with home construction; - - Lack of sufficient customers, contracted locations, net sales, or cash flow; - - Lack of widespread acceptance of our construction methods due to unfamiliarity; - - Difficulties in managing rapid growth in personnel and operations. We cannot be certain that our business strategy will be successful or that we will successfully address these risks. Our failure to address any of the risks described above could have a material adverse effect on our business. MANY COMPANIES COULD COMPETE WITH US AND NEGATIVELY AFFECT OUR BUSINESS. Once we introduce our construction methods into the market place, we anticipate experiencing significant competition from other construction companies offering homes built utilizing widely know and accepted building materials. Our potential customers, namely low income families and first time home buyers, may prefer to buy homes built in a traditional manner. Although we believe that our home construction methods will be competitive with traditional construction companies, we cannot assure you that other companies with greater resources than ours would not be able to successfully compete against us and negatively affect our business prospects in the market. OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY. Our success depends, to a significant degree, upon the protection of our patented construction materials. Although we have patents covering our proprietary technology, there can be no assurance that others will not develop technologies that are similar or superior to our technology. The steps we intend taking to protect our other proprietary rights may not be adequate and third parties may infringe or misappropriate our patents and similar proprietary rights. Additionally, effective patent and trade secret protection may not be available in every country in which we may operate in the future. Litigation may be necessary in the future to enforce our proprietary rights, or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could have a material negative effect on our business, operating results or financial condition. RISKS RELATED TO OUR COMMON STOCK OUR STOCK IS THINLY TRADED AND MAY EXPERIENCE PRICE VOLATILITY. Our common stock currently is quoted on the OTC Bulletin Board. The trading volume of our common stock historically has been limited, and there can be no assurance that an active public market for our common stock will be developed or sustained. As a result, once you purchase our common stock it may be difficult to sell the stock. The trading price of our common stock in the past has been, and in the future could be, subject to wide fluctuations. These fluctuations may be caused by a variety of factors, including the following: - - Quarterly variations in our operating results - - Actual or anticipated announcements of new products or services by us or our competitors - - Changes in analysts' estimates of our financial performance. The stock market in general also has experienced extreme price and volume fluctuations that have particularly affected the market prices for many rapidly expanding companies and often have been unrelated to the operating performance of such companies. These broad market fluctuations and other factors may adversely affect the market price of our common stock. QUARTERLY OPERATING RESULTS MAY CAUSE SIGNIFICANT PRICE FLUCTUATIONS IN OUR COMMON STOCK. Our quarterly revenues and operating results are difficult to predict and may fluctuate significantly from quarter to quarter. At our current level of operations, most of our expenses are relatively fixed. As a result, any shortfall in revenues relative to our expectations could cause a significant decline in our quarterly operating results. If we do not meet the expectations of investors and analysts in a given quarter, our common stock price could decline. Fluctuations in our common stock price may be exaggerated if the trading volume of our common stock is low. FUTURE SALES OF SHARES BY MERLE FERGUSON, OUR CHIEF EXECUTIVE OFFICER AND PRESIDENT, COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. There are 40,065,281 shares of our common stock outstanding, of which approximately 14,000,000 shares are held beneficially by Mr. Ferguson. Mr. Ferguson will be able to sell these shares in the public markets from time to time, subject to certain limitations on the timing, amount and method of such sales imposed by Securities and Exchange Commission regulations. If Mr. Ferguson were to sell a large number of shares, the market price of our common stock could decline significantly. Moreover, the perception in the public markets that such sales by Mr. Ferguson might occur could also adversely affect the market price of our common stock. CONTROL BY MERLE FERGUSON COULD PREVENT A CHANGE OF CONTROL OF OUR COMPANY AND MAY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. Merle Ferguson owns approximately 34.9% of our common stock. Accordingly, for as long as Mr. Ferguson continues to beneficially own a controlling interest in our common stock, he will be able to exercise a significant amount of influence over our management and operations. This concentration of ownership could have the effect of preventing us from undergoing a change of control in the future and might affect the market price of our common stock. WE DO NOT EXPECT TO PAY DIVIDENDS AND INVESTORS SHOULD NOT BUY OUR COMMON STOCK EXPECTING TO RECEIVE DIVIDENDS. We have not paid any dividends on our common stock in the past, and do not anticipate that we will declare or pay any dividends in the foreseeable future. Consequently, you will only realize an economic gain on your investment in our common stock if the price appreciates. You should not purchase our common stock expecting to receive cash dividends. SPECIAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS Some of the statements in this prospectus are "forward-looking statements". These forward-looking statements involve certain known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward- looking statements. These factors include, among others, the factors set forth above under "Risk Factors." The words "believe," "expect," "anticipate," "intend" and "plan" and similar expressions identify forward- looking statements. We caution you not to place undue reliance on these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements or to publicly announce the result of any revisions to any of the forward-looking statements in this document to reflect future events or developments. USE OF PROCEEDS The selling stockholders are selling all of the shares of common stock covered by this prospectus for its own account. Accordingly, we will not receive any of the proceeds from the resale of these shares. We may receive proceeds from the exercise of the warrants. Assuming that the warrants are fully exercised, we will receive $905,492 in proceeds. We expect to use such net proceeds, if any, for general corporate purposes. We paid finder's fees in the amount of $90,000 in connection with the issuance of a debenture in the amount of $1,000,000 and $60,000 in connection with the issuance of a debenture in the amount of $750,000. We have agreed to bear the expenses relating to the registration of the shares, other than brokerage commissions and expenses, if any, which will be paid by the selling stockholders. MARKET PRICE OF OUR COMMON STOCK Our common stock is quoted on the OTC Bulletin Board under the symbol "CIAI". As of September 30, 2001, we had 40,065,281 shares of common stock outstanding held by 850 stockholders of record. The following table sets forth the range of high and low bid prices of our common stock for the fiscal quarter ended December 31, 1999, the fiscal quarters for 2000 and 2001 and for the fiscal quarter ended September 30, 2001. The quotations represent prices between dealers in securities, do not include retail mark-ups, mark-downs or commissions and do not necessarily represent actual transactions. Year Quarter High Low 2002 1 1.32 0.39 2001 4 1.46 0.42 3 1.85 0.19 2 0.43 0.14 1 0.85 0.39 2000 4 1.156 0.36 3 1.35 0.312 2 0.75 0.28 1 2.00 0.31 1999 4 5.00 1.50 3 2 1 DIVIDENDS We have never paid a cash dividend on our common stock. It is our present policy to retain earnings, if any, to finance the development and growth of our business. Accordingly, we do not anticipate that cash dividends will be paid until our earnings and financial condition justify such dividends, and there can be no assurance that we can achieve such earnings. OUR BUSINESS ORGANIZATION WITHIN THE LAST FIVE YEARS On March 17, 1999, Kowtow, Inc. received 100% of the common stock of Affordable Homes of America, Inc. in a merger. Additionally, Kowtow, Inc. issued 4,000,000 shares of common stock to SCS Enterprises, Inc. Trust, the sole shareholder of Affordable Homes of America, Inc. On the same date we accepted the resignation of Krista Nielson and Sasha Belliston as Officers and Directors of Kowtow, Inc. and elected Merle Ferguson as President, CEO and Chairman of the Board of Directors. We also elected Susan Donohue as Secretary/Treasurer and as a member of the Board of Directors. We changed our name to Affordable Homes of America, Inc. on March 19, 1999 and obtained a new trading symbol -AHOA. We restructured our common stock with a two for one forward split effective March 31, 1999. We changed our name to World Homes, Inc. on October 12, 2000 and obtained a new trading symbol - WHME. On August 23, 2001 we changed our name to Composite Industries of America, Inc. On the same date, the trading symbol for our common stock on the Over- the-Counter Bulletin Board changed from WHME to CIAI, the symbol under which our common stock currently trades. We maintain our principal offices at 4505 W. Hacienda Ave., Unit I-1, Las Vegas, Nevada 89118. ACQUISITIONS AND OUR TECHNOLOGY On April 28, 1999, we acquired Composite Industries of America, Inc., the owner of a patent covering a construction material known as "Z MIX". The acquisition of Composite Industries of America, Inc. was accomplished by exchanging one share of our common stock for two shares of Composite's common stock. All stock issued by us pursuant to this acquisition is restricted. As the surviving entity, we own the patents formerly owned by Composite. Z MIX is a cementacious building material and can be used in a two step construction method instead of concrete, dry wall or lumber. We believe Z MIX will enable us to build better quality homes at a lower price than if other products were used. We also acquired a plan for a "World Home" and a "US Home" made from this material. OVERVIEW We are in the business of building homes for low income and first time home buyers. Founded in 1997, the focus of Composite Industries of America is to develop and build homes for sale in both international locations and in the United States with little or no timber products. Our three cost-saving construction methods are patented and are being implemented this year. All three methods reduce the time and cost needed to construct the average home and reduce the amount of wood used in building the average home. They are: - -Z MIX - A cementacious product that combines diatomaceous earth and used tires to create a lightweight building material that reduces the time and the cost for constructing a house. We currently hold the patent on Z MIX. - -IN-LINE FRAMING - A new method of construction that reduces the amount of wood used by one third. This reduces the cost of lumber used in construction, and thereby reduces the overall cost of the home. - -FOAM-PANELIZED CONSTRUCTION - This method of construction uses foam slabs covered with panels and strengthened with internal trusses. This allows for increased insulation and quick construction. CERTIFICATION OF Z MIX We are finishing the certification procedures necessary to sell our Z MIX products in the United States. Once completed, we will begin sales and distribution of our products in the United States. We have been approached by several international entities to establish factories to supply Z MIX for construction, however, we have not established any such factories and we may never enter into agreement to do so. Z MIX is a lightweight cementacious insulating mixture with a high compression strength and thermal resistance values up to 30 to 40 times that of standard concrete. It is fire proof, insect proof, has excellent acoustical properties and is easy to clean up. Z MIX can be used for wall and roof panels and can easily be pumped for walls and floors. Z MIX makes a well-insulated cost effective floor that has a slight give to it. Z MIX is excellent for gymnasium floors. This material is used for residential, light commercial and agricultural building. The composition also has the property of being able to absorb contaminated or hazardous materials, especially petroleum based contaminants and is, therefore, useful in cleaning up and controlling contaminants in underground storage tanks, especially in abandoned or closed service stations. CERTIFICATION OF THE WORLD HOME PLAN When we acquired Composite, we acquired the rights to a design plan for a World Home and a US Home made from Z MIX. The World Home design plan has been certified by Larson Engineering, Inc. as earthquake resistant in all four seismic regions in the world. Larson Engineering, Inc. also certified that houses built from these materials are able to withstand hurricane winds up to 150 mph. We believe that use of Z MIX will permit us to construct lower cost housing at substantial less that the present cost for such housing. Z MIX can also be used in the manufacturing of utility poles, railroad ties and pallets with substantial savings in the manufacturing cost of these items. We believe that the use of Z MIX will broaden our market and increase our profitability. OUR STRATEGY We have signed joint venture agreements or strategic alliance agreements with three companies. Tristar USA of LA, Inc. and Composite Industries of America signed a five- year Joint Venture Agreement on June 22, 2000 pursuant to which Tristar will act as the construction company and we will supply our proprietary Z MIX material for building affordable housing in Developing Nations, particularly in Nigeria. AL NASR Trading & Industrial Corporation L.L.C. and Composite Industries of America signed a three-year Joint Venture Agreement with a 25-year optional extension, on August 17, 2000 under which AL NASR is to provide a proposal for the establishment of a manufacturing plant for Z MIX in a Middle Eastern country and a working plan for at least four other countries in the Middle Eastern / Northern Africa area. We will provide our patented Z MIX material and our technical expertise in building affordable housing. We have entered into a consulting agreement with CS & S Enterprise Inc. to provide general and technical building-related services, in the amount of $100,000 per year. Merle Ferguson, our chairman and a shareholder of Composite Industries of America, also owns 100% of the stock of CS & S Enterprises, Inc. Mr. Ferguson has from time to time advanced funds to or to one of our subsidiaries to assist with working capital requirements. As of September 30, 2001 and 2000, Mr. Ferguson had advanced to us, $[455,899] and $[373,854], respectively. No officer, director, nominee for election as a director, or associates of such officer, director or nominee is currently in debt to us. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION We are a homebuilding and development company in the development stage focusing on building for low-income and first-time home buyers. We have and will continue to develop new building techniques and patented products that significantly reduce the overall cost and time, while maintaining or increasing the quality and integrity of new home construction. Our plan is to develop and build our "World Home" for sale outside the United States and in developing nations where there is an immediate need for permanent affordable shelter. The patented Z MIX material used in the World Home provides protection from natural elements ( hurricanes and earthquakes) and is fireproof. Our immediate focus is to enter into licensing and/or joint venture affiliations in which we will supply our proprietary, patent- protected Z MIX material to established companies for use outside the United States in home construction and other applications such as railroad ties, utility poles and environmental remediation. We believe this approach to be the fastest route for the penetration into the global marketplace. We project that the revenues received from licensing Z MIX technology will be recognized by us without incurring the usual development and labor expenses associated construction projects. RESULTS OF OPERATIONS QUARTER ENDED SEPTEMBER 30, 2001 VS. SEPTEMBER 30, 2000 Revenues. We are presently a development stage company. Accordingly, we have no revenues for the Quarter ended September 30, 2001. We have signed several joint ventures and agreements and project revenues for the beginning of next fiscal year. Operating Expenses. Operating expenses are comprised of General and Administrative Expenses which consists primarily of amortization of patent expense, professional fees, product development expense and office expense. Amortization expense relating to the patent amounted to $260,625 during the three month periods ended September 30, 2001 and September 30, 2000. The patent is being amortized on a straight-line basis over the remaining life of the patent (195 months as of the acquisition date, April 28, 1999). Operating expenses, other than amortization of the patent, increased from $257,450 for the three months ended September 30, 2000 to $1,049,528 for the three months ended September 30, 2001. Net Loss. Our net loss after taxes increased from $479,903 for the three months ended September 30, 2000 to $894,696 for the three months ended September 30, 2001. YEAR ENDED JUNE 30, 2001 VS. JUNE 30, 2000 Revenues. We are presently a development stage company. Accordingly, we have no revenues for the year ended June 30, 2001. We have signed several joint ventures and agreements and project revenues for the next fiscal year. Operating Expenses. Operating expenses are comprised of General and Administrative Expenses which consists primarily of amortization of patent expense, professional fees, product development expense and office expense. Amortization expense related to amortization of the patent was $1,042,500 each for the fiscal years ended June 30, 2000 and June 30, 2001, respectively. The patent is being amortized on a straight line basis over the remaining life of the patent (195 months as of the acquisition date, April 28, 1999). Other depreciation and amortization amounted to $53,645 and $50,091 for the fiscal years ended June 30, 2000 and June 30, 2001 respectively. Operating expenses decreased from $3,447,186 for the twelve months ended June 30, 2000 to $2,803,726 for the twelve months ended June 30, 2001. The decrease in operating expenses was primarily due to a reduction of professional fees which decreased from $1,798,321 for the twelve months ended June 30, 2000 to $1,238,660 for the twelve months ended June 30, 2001. Net Loss. As a result, our net loss decreased from $3,105,360 for the twelve months ended June 30, 2000 to $2,740,898 for the twelve months ended June 30, 2001. We are currently a development stage company, however management projects that during the next twelve months revenue derived from one or more of the signed joint ventures, and the proceeds from the April, October and November financing should be sufficient to finance our working capital and capital expenditures for the next twelve months. CAPITAL REQUIREMENTS, CASH FLOW AND OPERATING CONSIDERATIONS Composite Industries is currently a development stage company, however, management projects that during the next twelve months revenue derived from one or more of the signed joint ventures and the proceeds from the private placements described herein should be sufficient to finance our working capital requirements and capital expenditures. Although we believe that the revenues projected over the next twelve months will be significant, we entered into the private placements described elsewhere in this prospectus for immediate funds. In the event that we are unable to take advantage of the Equity Line of Credit described elsewhere in this prospectus, we have made alternative provisions to meet our working capital requirements. THE APRIL 2001 OFFERING The agreements and instruments relating to the rights and obligations of the securities issued in the April 2001 offering are filed as exhibits to the registration statement, of which this prospectus forms a part. We urge you to read them in their entirety. On April 5, 2001, under the terms of the purchase agreement between us and the investor we sold a 6% convertible debenture with a face value of $1,000,000. THE TERMS OF THE DEBENTURE INCLUDE: - - maturity date of one year from the date of issuance; - - conversion price of the debenture in the principal amount of $1,000,000 is the lower of: - - $1.5375, or - - 77.5% of the average of the three lowest closing bid prices for our common stock for the 20 trading days preceding the conversion date; - - as of November 27, 2001, the conversion price for the debenture was $0.315, which is below the market price of our common stock; - - interest is payable on the debenture at an annual rate of 6%; however, if we do not pay the principal or interest on the debenture when due, the interest rate will increase from 6% to 18%; - - the debenture holder has the right to convert the interest due under the debenture into shares of our common stock; - - if we are unable to issue the shares of common stock within three trading days of when the debenture is convertible, then we must pay a late fee of $5,000 per trading day after the date when the converted debenture shares were required to have been issued; - - if we do not deliver the shares of common stock to the holder upon the debenture holder's conversion of the debenture, the debenture holder may purchase such number of shares in the open market in order to satisfy a sale by the debenture holder; we will then be required to pay to the debenture holder the amount in cash by which the debenture holder's total purchase price of the shares exceeds the aggregate principal amount of the debenture, plus interest; for example, if the debenture holder purchases shares having a purchase price of $11,000 to cover shares to be sold with respect to an attempted conversion of $10,000 of principal and/or interest, we will be required to pay the debenture holder $1,000 plus interest; - - we may not pay off the debenture prior to the maturity date without the consent of the debenture holder; - - the debenture has adjustment provisions for standard dilution events including stock splits, stock dividends and similar transactions; - - all principal and interest due on the outstanding debenture become immediately due and payable on April 5, 2002, or earlier in the event of a default. EVENTS OF DEFAULT INCLUDE: - - the registration statement, of which this prospectus is a part, is not declared effective within the 120 days following April 5, 2001; - - a breach by us of any material covenant or term or condition of the debenture; - - a breach by us of any material representation or warranty made in the purchase agreement, or in any agreement made in connection therewith; - - we make an assignment for the benefit of our creditors, or a receiver or trustee is appointed for us; - - any form of bankruptcy or insolvency proceeding is instituted by or against us; and - - our common stock is delisted from, or we do not comply with the conditions for listing on, a principal market. THE WARRANT - - We issued a warrant to purchase up to 213,675 shares of our common stock. - - The warrant is exercisable at an exercise price equal to $1.5375 per share of our common stock. - - The warrant has a term of five years, expiring April 5, 2006. - - The warrant has adjustment provisions for standard dilution events including stock splits, stock dividends and similar transactions. REGISTRATION RIGHTS Under the terms of the purchase agreement, we are required to file a registration statement registering for resale at least 200% of the shares of our common stock which would be issuable upon conversion of the debenture, and such shares must be reserved and set aside solely for the benefit of the debenture holder. RESTRICTION ON FUTURE FINANCING Until the passage of 90 days after the effectiveness of the registration statement of which this prospectus is a part, we are restricted from issuing any equity, convertible debt or other securities which are or could be, by conversion or registration, free-trading securities, except for the following issuances, among others: - - equity or debt issued in connection with us acquiring a business or assets; - - stock issued in connection with us establishing a joint venture, a partnership or creating a licensing arrangement; or - - stock or stock options granted to our employees or directors pursuant to a plan which has been approved by our shareholders. LIMITATION ON THE INVESTORS' OWNERSHIP OF OUR SHARES We cannot require the selling stockholder to convert the debenture, in full or in part, into shares of our common stock, or exercise its warrant, in full or in part, if it would result in it owning more than 9.99% of all of our common stock, as would be outstanding on that purchase date, conversion date or exercise date, when aggregated with all other shares of common stock then owned by the selling stockholder beneficially or deemed beneficially owned by such selling stockholder, including shares of common stock into which such debenture is convertible or into which such warrant is exercisable, as determined in accordance with Section 16 of the Exchange Act. FINDER'S FEES On April 5, 2001, at the closing of this offering, we paid the following finder's fees: $90,000, which is 9% of the aggregate purchase amount of the debenture. This finder's fee was paid to Hyperion Partners Corp. In addition, we agreed to pay finder's fee of 5% of actual cash proceeds from the exercise of the warrant. Failure to pay the finder's fee constitutes an event of default under the debenture. This default would result in all principal and interest due on the outstanding debenture becoming immediately due and payable. REASONS FOR OUR ACCEPTING THE FINANCING At the time our board of directors approved the April 5, 2001 financing, there were no other viable funding solutions readily available to us. The stock market had within previous months experienced significant volatility, and this kept many other investors from committing funds. In light of the market conditions, and lacking any other credible sources, our board accepted the financing in spite of the potentially adverse effects of the financing. THE OCTOBER 2001 OFFERING The agreements and instruments relating to the rights and obligations of the securities issued in the October 2001 offering are filed as exhibits to the registration statement, of which this prospectus forms a part. We urge you to read them in their entirety. On October 22, 2001, under the terms of the purchase agreement, amended and restated as of December 3, 2001, between us and the investor, we sold a 6% convertible debenture with a face value of $750,000. THE TERMS OF THE DEBENTURE INCLUDE: - - maturity date of one year from the date of issuance; - - conversion price of the debenture in the principal amount of $750,000 is the lower of: - - $1.5375, or - - 77.5% of the average of the three lowest closing bid prices for our common stock for the 20 trading days preceding the conversion date; - - as of November 27, 2001, the conversion price for the debenture was $0.315, which is below the market price of our common stock; - - interest is payable on the debenture at an annual rate of 6%; however, if we do not pay the principal or interest on the debenture when due, the interest rate will increase from 6% to 18%; - - the decision whether to pay interest accrued on the October 2001 debenture in shares of common stock is at our discretion, however, not less than ten (10) days prior to each conversion date or maturity date, we must provide written notice to Lenore of our election to pay interest in cash or in shares of our common stock; - - if we are unable to issue the shares of common stock within three trading days of when the debenture is convertible, then we must pay a late fee of $5,000 per trading day after the date when the converted debenture shares were required to have been issued; - - if we do not deliver the shares of common stock to the holder upon the debenture holder's conversion of the debenture, the debenture holder may purchase such number of shares in the open market in order to satisfy a sale by the debenture holder; we will then be required to pay to the debenture holder the amount in cash by which the debenture holder's total purchase price of the shares exceeds the aggregate principal amount of the debenture, plus interest; for example, if the debenture holder purchases shares having a purchase price of $11,000 to cover shares to be sold with respect to an attempted conversion of $10,000 of principal and/or interest, we will be required to pay the debenture holder $1,000 plus interest; - - we have the right, exercisable at any time and from time to time after the Original Issue Date of the debenture, and upon seven (7) days written notice to the affected holders, to repay all or any portion of the outstanding principal balance of the debenture for which conversion notices have not previously been delivered or for which an event of default shall not have been declared; - - the debenture has adjustment provisions for standard dilution events including stock splits, stock dividends and similar transactions; - - all principal and interest due on the outstanding debenture become immediately due and payable on November 13, 2002, or earlier in the event of a default. EVENTS OF DEFAULT INCLUDE: - - the registration statement, of which this prospectus is a part, is not declared effective within the 120 days following October 22, 2001; - - a breach by us of any material covenant or term or condition of the debenture; - - a breach by us of any material representation or warranty made in the purchase agreement, or in any agreement made in connection therewith; - - we make an assignment for the benefit of our creditors, or a receiver or trustee is appointed for us; - - any form of bankruptcy or insolvency proceeding is instituted by or against us; and - - our common stock is delisted from, or we do not comply with the conditions for listing on, a principal market. THE WARRANT - - We issued two warrants to purchase, respectively, up to 200,267 and up to 37,500 shares of our common stock. - - The warrants are exercisable at exercise prices equal to $0.575 per share and $0.475 per share of our common stock, respectively. - - The warrants have a term of five years, expiring November 13, 2006 and December 4, 2006, respectively. - - The warrants have adjustment provisions for standard dilution events including stock splits, stock dividends and similar transactions. REGISTRATION RIGHTS Under the terms of the purchase agreement, we are required to file a registration statement registering for resale at least 200% of the shares of our common stock which would be issuable upon conversion of the debenture, and such shares must be reserved and set aside solely for the benefit of the debenture holder. RESTRICTION ON FUTURE FINANCING Until the passage of 90 days after the effectiveness of the registration statement of which this prospectus is a part, we are restricted from issuing any equity, convertible debt or other securities which are or could be, by conversion or registration, free-trading securities, except for the following issuances, among others: - - equity or debt issued in connection with us acquiring a business or assets; - - stock issued in connection with us establishing a joint venture, a partnership or creating a licensing arrangement; or - - stock or stock options granted to our employees or directors pursuant to a plan which has been approved by our shareholders. LIMITATION ON THE INVESTORS' OWNERSHIP OF OUR SHARES We cannot require the selling stockholder to convert the debenture, in full or in part, into shares of our common stock, or exercise its warrant, in full or in part, if it would result in it owning more than 9.99% of all of our common stock, as would be outstanding on that purchase date, conversion date or exercise date, when aggregated with all other shares of common stock then owned by the selling stockholder beneficially or deemed beneficially owned by such selling stockholder, including shares of common stock into which such debenture is convertible or into which such warrant is exercisable, as determined in accordance with Section 16 of the Exchange Act. FINDER'S FEES In connection with this offering, we paid the following finder's fees: $60,000, which is 8% of the aggregate purchase amount of the debenture. This finder's fee was paid to Hyperion Partners Corp. In addition, we agreed to pay finder's fee of 5% of actual cash proceeds from the exercise of the warrant. Failure to pay the finder's fee constitutes an event of default under the debenture. This default would result in all principal and interest due on the outstanding debenture becoming immediately due and payable. Reasons for our accepting the financing At the time our board of directors approved the October 22, 2001 financing, there were no other viable funding solutions readily available to us. The stock market had within previous months experienced significant volatility, and this kept many other investors from committing funds. In light of the market conditions, and lacking any other credible sources, our board accepted the financing in spite of the potentially adverse effects of the financing. THE EQUITY LINE FINANCING On December 3, 2001 we entered into an Equity Line Purchase Agreement with Burlington Street LLC. Pursuant to this agreement, we have the right, subject to certain conditions, to sell up to $10,000,000 of our shares of common stock over the next two years to Burlington, which Burlington may resell to the public through this prospectus. Additionally, we issued two warrants to Burlington to purchase, respectively, up to 521,739 shares of our common stock at an exercise price of $0.575 and up to 2,173,913 shares of our common stock at an exercise price equal to $.01 per share, each with an expiration date of December 3, 2006. Shares issuable upon exercise of Burlington's warrant may also be resold to the public through this prospectus. Beginning on the date the registration statement, of which this prospectus forms a part, is declared effective by the SEC, and continuing for two years thereafter, we may in our sole discretion sell, or put, shares of our common stock to Burlington. From time to time during the two-year term, we may make 24 monthly draw downs, by giving notice and requiring Burlington to purchase shares of our common stock, for the draw down amount. Burlington's purchase price will be based upon the average of the three lowest closing bid prices of the common stock over the period of ten (10) trading days during which the purchase price of the common stock is determined with respect to the put date, which period shall begin on the put date and end nine (9) trading days following the put date. Our ability to cause Burlington to purchase shares of our common stock under the Equity Line Purchase Agreement is subject to certain conditions, including, but not limited to: - - The number of shares we may sell to Burlington on any put date, when aggregated with all other shares then owned by Burlington, cannot exceed 4.999% of the total common stock we then have outstanding. - - The registration statement, of which this prospectus forms a part, must remain effective so that Burlington may publicly resell the shares that it acquires from us under the agreement. - - There has not been an effect on the business, operations, properties, prospects or financial condition of our company that is material and adverse to our company and such other entities controlling or controlled by our company, taken as a whole, and/or any condition, circumstance or situation that would prohibit or otherwise interfere with the ability of our company to enter into and perform its obligations under the agreement. We may not be able to satisfy all conditions required to put shares to Burlington at any given time. If this occurs, we would likely need to raise money from other sources in order to continue to fund our operations. Such alternative funding may not be available. Also, we cannot put shares to Burlington at a time when we have not publicly disclosed material information about our company. In connection with the Equity Line Purchase Agreement, we issued a warrant on December 3, 2001 to Burlington to purchase up to 2,173,913 shares of our common stock at an exercise price equal to $.01 per share. Burlington may exercise the warrant through December 3, 2004. Burlington is an "underwriter" within the meaning of the Securities Act in connection with its resale of shares of our common stock under this prospectus. DILUTION As of December 3, 2001, we had issued and outstanding 40,065,281 shares of common stock. At that date, there were an additional 72,205,722 shares of common stock subject to possible future issuances. EFFECTS ON MARKET PRICE AND DILUTION TO COMMON STOCKHOLDERS RESULTING FROM CONVERSION OF THE DEBENTURES Since the outstanding principal amount of the debentures converts at a floating rate based on a discount to the market price of the common stock, the lower the stock price when the holder converts, the more shares of common stock the holder gets. When the selling stockholder converts and then sells the common stock, the common stock price may decrease due to the additional shares in the market. This could allow the selling stockholders to convert the debentures into greater amounts of common stock, the sales of which would further depress the stock price. The significant downward pressure on the price of the common stock as the selling stockholder converts and sells material amounts of common stock could encourage short sales by the selling stockholder or others. This could place further downward pressure on the price of the common stock. The conversion of the debentures may result in substantial dilution to the interests of other holders of common stock since each holder of the debentures may ultimately convert and sell the full amount issuable on conversion. DESCRIPTION OF FLOATING CONVERSION FEATURE AND EXAMPLES OF HOW THIS CONVERSION FEATURE WORKS Each debenture is convertible into such number of shares of our common stock as is determined by dividing (a) that portion of the outstanding principal balance of the debenture by (b) the conversion price. The conversion price equals the lesser of (x) $1.5375 and (y) 77.5% of the average of the 3 lowest closing bid prices during the 20 trading days prior to the conversion date. For example, if all of the debenture holders convert the full $1,750,000 and the average closing bid price for the 3 trading days having the lowest closing bid prices during the 20 trading days prior to the conversion date is $.20, the debenture holders will own an aggregate of 11,290,322 shares of our common stock (77.5% of $.20 equals $.155 and 1,750,000 divided by .155 equals 11,290,322). If all of the debenture holders convert the full $1,750,000 and the average closing bid price for the 3 trading days having the lowest closing bid prices during the 20 trading days prior to the conversion date is $.30, the debenture holders will own an aggregate of 7,526,882 shares of our common stock (77.5% of $.30 equals $.2325 and 1,750,000 divided by .2325 equals 7,526,882). If all of the debenture holders convert the full $1,750,000 and the average closing bid price for the 3 trading days having the lowest closing bid prices during the 20 trading days prior to the conversion date is $.40, the debenture holders will own an aggregate of 5,645,161 shares of our common stock (77.5% of $.40 equals $.31 and 1,750,000 divided by .31 equals 5,645,161). The following table represents the number of shares of our common stock issuable upon conversion of debentures issued and the percentage of our outstanding shares such number of shares would represent, assuming $1,750,000 in debentures are fully converted, and assuming the purchase price is 0%, 25%, 50% and 75%, respectively, discounted from the current trading price of our common stock. For purposes of this table, we are assuming that the average conversion rate of the debentures is $.346 (as of November 14, 2001). The conversion of debentures and/or exercise of warrants may result in a change of control of Composite Industries of America.
TABLE 1a - ----------------------------------------------------------------------------------------- % of our % of our Purchase price of outstanding Purchase price of outstanding $.0338 (discount common $.0254 (discount common Name of Investor value of 0%) stock value of 25%) stock - ---------------- ----------------- ----------- ----------------- ----------- Lenore Avenue 5,177,515 11.4% 6,889,764 14.7% - ----------------------------------------------------------------------------------------- TABLE 1b - ----------------------------------------------------------------------------------------- % of our % of our Purchase price of outstanding Purchase price outstanding $.0169 (discount common of $.0085 (discount common Name of Investor value of 50%) stock value of 75%) stock - ---------------- ----------------- ----------- ------------------- ----------- Lenore Avenue 10,355,029 20.5% 20,588,235 33.9% - -----------------------------------------------------------------------------------------
Effects on Market Price and Dilution Common Stockholders Resulting from Exercise of Puts under the Equity Line The purchase price for each put under the equity line purchase agreement is also based on a floating discount to the market price of our common stock. Therefore, the lower the stock price when we put shares to the purchaser, the more shares of common stock the purchaser gets. When we put shares to the purchaser for resale to the public, the common stock price may decrease due to the additional shares in the market. This could mean that the next put is at a lower price, allowing the selling stockholders to receive greater amounts of common stock for the same investment, the sales of which would further depress the stock price. The significant downward pressure on the price of the common stock as the selling stockholder sells material amounts of common stock could encourage short sales by the selling stockholder or others. This could place further downward pressure on the price of the common stock. The put of shares may result in substantial dilution to the interests of other holders of common stock since the purchaser of the put shares may ultimately sell the full amount issuable under the equity line purchase agreement. The following table illustrates how the number of shares of common stock required to be sold to draw down the full $10,000,000 under the Equity Line Purchase Agreement would increase or decrease if the market price (as defined in the purchase agreement) of our common stock were to increase or decrease. For illustrative purposes, the market prices shown below are based on the trading price of our common stock as of November 21, 2001, the 52-week high of our common stock and the 52-week low of our common stock. Also included are market prices representing an increase of 50% from the current trading price and a decrease of 50% from the current trading price.
- -------------------- --------- ---------- ---------- ---------- ---------- Market Price $1.94 $0.72 $0.48 $0.24 $0.14 - -------------------- --------- ---------- ---------- ---------- ---------- Purchase Price $1.7945 $0.666 $0.444 $0.222 $0.1295 - -------------------- --------- ---------- ---------- ---------- ---------- Number of Shares required to draw down $10,000,000 5,572,583 15,015,015 22,522,522 45,045,045 77,220,077 - -------------------- --------- ---------- ---------- ---------- ---------- Percentage of shares of common stock outstanding as of September 30, 2001 12.21% 27.26% 35.99% 52.93% 65.84% - -------------------- --------- ---------- ---------- ---------- ----------
Market price is based on the average of the three (3) lowest bid prices for the 10 days commencing on the date of the draw down request. The purchase price reflects an amount equal to 92.5% of the market price pursuant to the purchase agreement. This chart is for illustrative purposes only. The amount we will be actually be able to draw down is subject to certain minimums, maximums and other conditions and limitations. We are under no obligation to draw down any amount under the purchase agreement. LEGAL PROCEEDINGS We are not a party to any legal proceedings at this time. MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth information about our executive officers and directors. NAME AGE POSITION - -------------- --- --------- Merle Ferguson 54 Chief Executive Officer, President and Chairman William Morris 63 Executive Vice President of Finance, Chief Financial Officer and Director Susan Donohoe 48 Secretary and Director Merle Ferguson has served as our president, chief executive officer and chairman of the board of directors since he founded Composite Industries of America in February 1997 . Prior to founding Composite Industries of America, Inc., Mr. Ferguson spent 22 years in the construction industry as a developer and builder focusing on commercial and residential buildings in California, Oregon and Washington. Mr. Ferguson attended Yakima Valley College in Washington State with a focus in forestry. He honorably served his country with the United States Marine Corps from 1966 to 1970. This included two tours in Vietnam. For the past 7 years, Mr. Ferguson has been researching new construction products to reduce deforestation. The Z-Mix construction methods under development by Composite Industries of America use no timber products. William Morris joined Composite Industries of America as executive vice president of finance, chief financial officer and director on May 22, 2001. He is the president and founder of William Morris Inc., a management consulting company, specializing in financial matters. He has 35 years experience as an accountant. Mr. Morris served as a Chief Financial Officer of Trans World Network, Marantz Company, Inc., The Hollywood Reported, Motown Industries, (Sony)/Superscope, Inc. (later renamed Marantz Company Inc.), Menasco Manufacturing Company and Newhall Land and Farming. Mr. Morris received a degree in Accounting from San Fernando State College (renamed California State University-Northridge). Susan Donohoe is the Secretary and a Director of the Company. She was one of the two founders of Zawada Technologies, Inc. At Zawada Technologies she worked directly with Joseph Zawada on the research of the Z Mix product. Zawada Technologies merged with Composite Industries, Inc. Ms. Donohoe joined Composite Industries of America when Composite merged with Affordable Homes of America, Inc. Ms. Donohoe attended the University of Wisconsin at Stevens Point with a focus in sociology and psychology. Ms. Donohoe also attended Cardinal Stritch College of Madison, where she majored in Business Administration. BOARD OF DIRECTORS Our board currently consists of three directors. BOARD COMMITTEES The board of directors has established no committees. EXECUTIVE COMPENSATION None of our executive officers received salaries from us during the 1999, 2000 and 2001 fiscal years. However, Messrs. Ferguson and Morris and Ms. Donohue were paid through business management services contracts for their respective services as officers and directors of Composite Industries, specific senior roles, consulting services and the day-to-day duties of running the coporate office. According to the terms of the management services agreements that Merle Ferguson, our President, and Susan Donohue, our Secretary, signed with us on March 19, 1999, Merle Ferguson is paid $150,000 per year and Susan Donohue is to be paid $60,000 per year. Mr. Morris receives $120,000 per year. See "Certain Relationships and Related Transactions". The following table sets forth information concerning annual and long-term compensation, on an annualized basis for the 2000 and 2001 fiscal years, for our Chief Executive Officer and for each of our other executive officers whose compensation on an annualized basis exceeded $100,000 during fiscal 2000 and 2001.
SUMMARY COMPENSATION TABLE - ------------------------------------------------------------------------------------------------------------------------ | ANNUAL COMPENSATION | LONG-TERM COMPENSATION | | | | Restricted Securities | Fiscal Other Annual | Stock Awards Underlying All Other Name and Principal Position | Year Salary Bonus Compensation(1) | (2) Options Compensation | | | 1999 0 0 $150,000 | 0 0 $0 Merle Ferguson | 2000 0 0 $150,000 | 0 0 0 Chief Executive Officer | 2001 0 0 $150,000 | 0 0 0 - ------------------------------------------------------------------------------------------------------------------------
(1) See "Certain Relationships and Related Transactions" relating to Mr. Ferguson's consulting arrangement with us. STOCK OPTIONS OPTIONS GRANTED IN FISCAL 2001 The following table sets forth the details of options to purchase common stock the Company granted to its executive officers during fiscal year ended June 30, 2001, including the potential realized value over the 5 year term of the option based on assumed rates of stock appreciation of 5% and 10%, compounded annually. These assumed rates of appreciation comply with the rules of the Securities and Exchange Commission and do not represent the Company's estimate of future stock price. Actual gains, if any, on stock option exercises will be dependent on the future performance of our common stock. Each option is immediately exercisable.
Potential Realizable Number of Per Value at Assumed Annual Securities Percent of Total Share Rate of Stock Price Underlying To Employees Exercise Appreciation For Name Options in Fiscal Year Price Expiration Date Option Term - -------------- ---------- ---------------- -------- --------------- ----------------------- 5% 10% ------- -------- Merle Ferguson 10,000,000 100% $0.66 July 24, 2003 $55,168 $115,850 - -------------- ---------- ---------------- -------- --------------- -----------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES During the fiscal year ended June 30, 2000, no executive officer of the Company exercised options. The following table sets forth the number of shares of our common stock underlying unexercised stock options granted by us to our executive officers and the value of those options at June 30, 2001. The value of each option is based on the positive difference, if any, of the closing bid price for our common stock on the OTC Bulletin Board on July 18, 2001, or $.46, under the exercise price of the option.
Number of Securities Underlying Unexercised Value of Unexercised In Options at Fiscal Year-End the Money Options at Fiscal Year-End ----------------------------------------------------------------------- Name of Executive Officer Exercisable Unexercisable Exercisable Unexercisable Merle Ferguson 10,187,500 $0 $7,131,250 $0 -----------------------------------------------------------------------
EMPLOYMENT AGREEMENT As of the date of this prospectus, we have not entered into written employment agreements with any of our employees. PRINCIPAL STOCKHOLDERS The following table sets forth, as of December 3, 2001, certain information with respect to the beneficial ownership of the common stock by (1) each person known by us to beneficially own more than 5% of our outstanding shares, (2) each of our directors, (3) each named executive officer and (4) all of our executive officers and directors as a group. Except as otherwise indicated, each person listed below has sole voting and investment power with respect to the shares of common stock set forth opposite such person's name. NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (2) OUTSTANDING SHARES 5% STOCKHOLDERS - ------------------------------- ------------------------ ------------------ Lenore Avenue LLC(3) 4,002,523(4) 9.99% c/o Citco Trustees (Cayman) Limited Commercial Centre P.O. Box 31106 SMB Grand Cayman, Cayman Islands Randy Vozka 2,205,645 5.5% DIRECTORS AND NAMED EXECUTIVE OFFICERS Merle Ferguson 14,000,000 34.9% Susan Donohue 5,867,000 14.6% William Morris 2,000,000 4.9% All the Officers and Directors 24,072,645 60.1% As a Group - ------------------------------- ------------------------ ------------------ * Less than 1% (1) Unless otherwise indicated, the address of each beneficial owner is c/o Composite Industries of America, Inc., 4505 West Hacienda Avenue, Unit I-1, Las Vegas, NV 89118. (2) Under the rules of the SEC, a person is deemed to be the beneficial owner of a security if such person has or shares the power to vote or direct the voting of such security or the power to dispose or direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities if that person has the right to acquire beneficial ownership within 60 days of the date hereof. Unless otherwise indicated by footnote, the named entities or individuals have sole voting and investment power with respect to the shares of common stock beneficially owned. (3) David Simms is the Director of Navigator Management, Ltd., the director and control person of Lenore Avenue LLC and Burlington Street LLC, and, through Navigator, has investment control of Lenore's shares and Burlington's shares. (4) Represents 4,002,522 shares of our common stock issuable upon conversion of debentures in the aggregate amount of $1,750,000 and 451,442 shares of our common stock issuable upon the exercise of warrants, subject to a provision in the Convertible Debenture Purchase Agreements limiting the total amount of shares of our common stock that Lenore can hold at any time to 9.999% of our outstanding common stock. SELLING STOCKHOLDERS The shares being offered for resale by the selling stockholders consist of the shares of common stock underlying the debentures issued pursuant to the terms of the purchase agreement signed in the April 2001 and October 2001 offerings, and the shares of common stock issuable under the terms of the Equity Line Purchase Agreement signed in the December 2001 offering. The selling stockholders do not have and, within the past three years have not had, any position, office or other material relationship with us or any of our predecessors or affiliates. The following table sets forth the names of the selling stockholders who are offering shares of common stock under this prospectus, the number of shares of common stock beneficially owned by each selling stockholder, the number of shares of common stock that may be sold in this offering and the number of shares of common stock that the selling stockholder will own after the offering, assuming it sells all of its shares offered. Beneficial ownership is determined in accordance with SEC rules and generally includes voting or investment power with respect to securities. Common shares that are issuable upon the exercise of outstanding options, warrants, convertible preferred stock or other purchase rights, to the extent exercisable within 60 days of the date of this prospectus, are treated as outstanding for purposes of computing each selling stockholder's ownership of outstanding common shares.
Name of selling stockholder Shares of common Shares of Shares of common stock stock owned prior common stock to owned after offering to offering be sold(1) Number Percent - --------------------------- ----------------- ---------------- ---------------------- Lenore Avenue LLC (2) 4,002,521(3) 12,229,219(4)(5) 0 0 Burlington Street LLC (2) 2,002,863(6) 59,876,503(7)(8) 0 0 Hyperion Holdings LLC (9) 65,000(10) 65,000(10) 0 0 Vfinance.com, Inc. (11) 35,000(12) 35,000(12) 0 0 Total 6,105,384 72,205,722 0 0 - --------------------------- ----------------- ---------------- ----------------------
(1) Assumes that all of the shares of common stock offered in this prospectus are sold and no other shares of common stock are sold during the offering period. (2) David Simms is the Director of Navigator Management, Ltd., the director and control person of Lenore Avenue LLC and Burlington Street LLC, and, through Navigator, has investment control of Lenore's shares and Burlington's shares. (3) Pursuant to the terms of the debenture purchase agreements, the selling stockholder cannot convert its debentures or exercise its warrants to the extent that such conversion or exercise would, singly or in the aggregate, result in the selling stockholder beneficially owning more than 9.99% of our outstanding common stock. (4) Pursuant to the Registration Rights Agreements between us and Lenore, the initial registration statement filed thereunder shall include (but not be limited to) a number of shares of common stock equal to no less than the sum of (a) 200% of the number of shares of common stock issuable upon conversion in full of the principal amount of the debentures assuming one full year of interest has accrued and all such interest is being paid in shares of common stock and (b) the number of shares of common stock issuable upon exercise in full of the warrants issued to the selling stockholder. (5) Represents 11,777,777 shares of our common stock issuable upon conversion of debentures in the aggregate amount of $1,750,000, and 451,442 shares of our common stock issuable upon the exercise of warrants. (6) Pursuant to the terms of the Equity Line Purchase Agreement, the selling stockholder cannot purchase shares of our common stock or exercise its warrants to the extent that such purchase or exercise would, singly or in the aggregate, result in the selling stockholder beneficially owning more than 4.99% of our outstanding common stock. (7) Pursuant to the Registration Rights Agreements between us and Burlington, the initial registration statement filed thereunder shall include (but not be limited to) a number of shares of common stock equal to no less than the sum of (a) 215% of the number of shares of common stock issuable under the Equity Line Purchase Agreement and (b) the number of shares of common stock issuable upon exercise in full of the warrants issued to the selling stockholder. (8) Represents 57,180,851 shares of our common stock issuable under a $10,000,000 Equity Line Purchase Agreement and 2,695,652 shares of our common stock issuable upon the exercise of warrants. (9) Paul Manion is the Managing Director of Hyperion Partners Corp., the director and control person of Hyperion Holdings LLC, and through Hyperion Partners, has investment control of Hyperion Holdings's shares. (10) Represents 65,000 shares of our common stock issuable upon the exercise of a warrant. (11) Leonard J. Soklow is the president and control person of vFinance.com, Inc. (12) Represents 35,000 shares of our common stock issuable upon the exercise of a warrant. PLAN OF DISTRIBUTION The selling stockholders and any of their respective 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: - - ordinary brokerage transactions and transactions in which the broker- dealer solicits purchasers; - - 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; - - purchases by a broker-dealer as principal and resale by the broker- dealer for its account; - - an exchange distribution in accordance with the rules of the applicable exchange; - - privately negotiated transactions; - - short sales; - - broker-dealers may agree with the selling stockholder to sell a specified number of such shares at a stipulated price per share; - - a combination of any such methods of sale; and - - 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. The selling stockholders may also engage in short sales against the box, puts and calls and other transactions in our securities or derivatives of our securities and may sell or deliver shares in connection with these trades. The selling stockholders may pledge their shares to their brokers under the margin provisions of customer agreements. If a selling stockholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares. The selling stockholders, other than Burlington Street LLC, have advised us that they have not entered into any agreements, understandings or arrangements with any underwriters or broker-dealers regarding the sale of their shares other than ordinary course brokerage arrangements, nor is there an underwriter or coordinating broker acting in connection with the proposed sale of shares by the selling stockholders. The selling stockholders, other than Burlington Street LLC, 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 shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Burlington Street LLC is an "underwriter" within the meaning of the Securities Act in connection with the sale of the common stock offered hereby. Broker- dealers who act in connection with the sale of the common stock may also be deemed to be underwriters. Profits on any resale of the common stock as a principal by such broker-dealers and any commissions received by such broker- dealers may be deemed to be underwriting discounts and commissions under the Securities Act. Any broker-dealer participating in such transactions as agent may receive commissions from Burlington (and, if they act as agent for the purchaser of our common stock, from such purchaser). Broker-dealers may agree with Burlington to sell a specified number of shares of our common stock at a stipulated price per share, and, to the extent such a broker-dealer is unable to do so acting as agent for Burlington, to purchase as principal any unsold common stock at the price required to fulfill the broker-dealer commitment to Burlington. Broker-dealers who acquire common stock as principal may thereafter resell the common stock from time to time in transactions (which may involve crosses and block transactions and which may involve sales to and through other broker-dealers, including transactions of the nature described above) in the over-the-counter market, in negotiated transactions or otherwise, at market prices prevailing at the time of the sale or at negotiated prices, and in connection with such resales may pay to or receive from the purchasers of such common stock commissions computed as described above. We will not receive any proceeds from the sale of the common shares pursuant to this prospectus. We have agreed to bear the expenses of the registration of the shares, including legal and accounting fees, and have additionally agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities including liabilities under the Securities Act. We have informed the selling stockholders that certain anti-manipulative rules contained in Regulation M under the Securities Exchange Act of 1934, as amended, may apply to their sales of the common stock. In addition, we have informed the selling stockholders of the need for delivery of copies of this prospectus. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We have entered into a consulting agreement with CS & S Enterprise, Inc. to provide general and technical building-related services, in the amount of $100,000 per year. Merle Ferguson, a director and shareholder of Composite Industries of America, owns 100% of the stock of CS & S Enterprises, Inc. Mr. Ferguson, our president and chief executive officer, has from time to time advanced funds to us or to one of our subsidiaries to assist with working capital requirements. As of June 30, 1999 and 2000, such funds advanced to us amounted to $235,287 and $281,434 respectively. No officer, director, nominee for election as a director, or associates of such officer, director or nominee is or has been in debt to us during the past fiscal year. DESCRIPTION OF SECURITIES The following is a summary description of our capital stock. Our authorized capital stock consists of 200,000,000 shares of common stock, par value $.001 per share, of which 40,065,281 shares are currently issued and outstanding and 100,000,000 shares of preferred stock, par value $.001 per share, of which 428,572 shares are currently issued and outstanding. We have also reserved 92,461,243 shares of common stock for issuance: - - upon conversion of convertible debentures and upon exercise of related warrants; - - pursuant to an equity line purchase agreement and related warrants; and - - upon exercise of options issued and issuable under our stock option plan, contingent upon approval of the plan by our stockholders. COMMON STOCK The holders of the common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Our certificate of incorporation and by-laws do not provide for cumulative voting rights in the election of directors. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of common stock are entitled to receive ratably such dividends as may be declared by the Board out of funds legally available therefor. In the event of our liquidation or dissolution, holders of common stock are entitled to share ratably in the assets remaining after payment of liabilities. Holders of common stock have no preemptive, conversion or redemption rights. NEVADA BUSINESS COMBINATION PROVISIONS ANTI-TAKEOVER LAW We may be or in the future we may become subject to Nevada's control share law. A corporation is subject to Nevada's control share law if it has more than 200 stockholders, at least 100 of whom are stockholders of record and residents of Nevada, and it does business in Nevada or through an affiliated corporation. The law focuses on the acquisition of a "controlling interest" which means the ownership of outstanding voting shares sufficient, but for the control share law, to enable the acquiring person to exercise the following proportions of the voting power of the corporation in the election of directors: (i) one- fifth or more but less than one-third, (ii) one-third or more but less than a majority, or (iii) a majority or more. The ability to exercise such voting power may be direct or indirect, as well as individual or in association with others. The effect of the control share law is that the acquiring person, and those acting in association with it, obtains only such voting rights in the control shares as are conferred by a resolution of the stockholders of the corporation, approved at a special or annual meeting of stockholders. The control share law contemplates that voting rights will be considered only once by the other stockholders. Thus, there is no authority to strip voting rights from the control shares of an acquiring person once those rights have been approved. If the stockholders do not grant voting rights to the control shares acquired by an acquiring person, those shares do not become permanent non- voting shares. The acquiring person is free to sell its shares to others. If the buyers of those shares themselves do not acquire a controlling interest, their shares do not become governed by the control share law. If control shares are accorded full voting rights and the acquiring person has acquired control shares with a majority or more of the voting power, any stockholder of record, other than an acquiring person, who has not voted in favor of approval of voting rights is entitled to demand fair value for such stockholder's shares. Nevada's control share law may have the effect of discouraging takeovers of the corporation. BUSINESS COMBINATION LAW In addition to the control share law, Nevada has a business combination law which prohibits certain business combinations between Nevada corporations and "interested stockholders" for three years after the "interested stockholder" first becomes an "interested stockholder" unless the corporation's board of directors approves the combination in advance. For purposes of Nevada law, an "interested stockholder" is any person who is (i) the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares of the corporation, or (ii) an affiliate or associate of the corporation and at any time within the three previous years was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then outstanding shares of the corporation. The definition of the term "business combination" is sufficiently broad to cover virtually any kind of transaction that would allow a potential acquirer to use the corporation's assets to finance the acquisition or otherwise to benefit its own interests rather than the interests of the corporation and its other stockholders. The effect of Nevada's business combination law is to potentially discourage parties interested in taking control of the company from doing so if it cannot obtain the approval of our board of directors. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under Nevada Revised Statutes Section 78.7502 and 78.751, our articles of incorporation and bylaws provide us with the power to indemnify any of our directors, officers, employees or agents. The director, officer, employ or agent must have conducted himself in good faith and reasonably believe that his conduct was in, or not opposed to our best interests. In a criminal action the director, officer, employee or agent must not have had a reasonable cause to believe his conduct was unlawful. Advances for expenses may be made if the director affirms in writing that he believes he has met the standards and that he will personally repay the expense if it is determined he did not meet the standards. We will not indemnify a director or officer adjudged liable due to his negligence or willful misconduct toward us, adjudged liable to us, or if he improperly received personal benefit. Indemnification in a derivative action is limited to reasonable expenses incurred in connection with the proceeding. We have agreed to indemnify each of our directors and certain officers against certain liabilities, including liabilities under the Securities Act of 1933. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons pursuant to the provisions described above, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than our payment of expenses incurred or paid by our director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered for resale, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. WHERE YOU CAN FIND MORE INFORMATION Upon effectiveness of this registration statement we will commence filing reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any report, proxy statement or other information we file with the Commission at the Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800- SEC-0330. In addition, we will file electronic versions of these documents on the Commission's Electronic Data Gathering Analysis and Retrieval, or EDGAR, System. The Commission maintains a website at ht.//www.sec.gov that contains reports, proxy statements and other information filed with the Commission. We have filed a registration statement on Form SB-2 with the Commission to register resale shares of our common stock issuable upon exercise of warrants and upon conversion of Debentures issued and issuable to be sold by the selling stockholders. This prospectus is part of that registration statement and, as permitted by the Commission's rules, does not contain all of the information set forth in the registration statement. For further information with respect to us or our common stock, you may refer to the registration statement and to the exhibits and schedules filed as part of the registration statement. You can review a copy of the registration statement and its exhibits and schedules at the public reference room maintained by the Commission, and on the Commission's web site, as described above. You should Debenture that statements contained in this prospectus that refer to the contents of any contract or other document are not necessarily complete. Such statements are qualified by reference to the copy of such contract or other document filed as an exhibit to the registration statement. TRANSFER AGENT The transfer agent and registrar for our common stock is National Stock Transfer. Its telephone number is (801) 485-7978. LEGAL MATTERS The validity of the shares of common stock offered in this prospectus has been passed upon for us by Jenkens & Gilchrist Parker Chapin LLP, The Chrysler Building, 405 Lexington Avenue, New York, New York 10174. Its telephone number is (212) 704-6000. EXPERTS Our financial statements at June 30, 2000 and 1999, appearing in this prospectus and registration statement have been audited by Pascale, Razzino, Alexanderson & Co., PLLC, independent auditors, as set forth in their reports thereon (which contain an explanatory paragraph describing conditions that raise substantial doubt about our ability to continue as a going concern as described in Debenture 1 to the financial statements) appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (F/K/A World Homes, Inc./Affordable Homes of America, Inc.) (a development stage company) INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 and 2000 PAGE Report of Independent Auditors ................................ F-1 Consolidated Balance Sheets as of June 30, 2001 and 2000 ...... F-2 Consolidated Statements of Operations During the Development Stage for the Years Ended June 30, 2001 and 2000 and Cumulative from February 10, 1997 (Inception) ......... F-4 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended June 30, 2001 and 2000 and Cumulative from February 10, 1997 (Inception) to June 30, 1999 ......... F-6 Consolidated Statements of Cash Flows During the Development Stage for the Years Ended June 30, 2001 and 2000 and Cumulative from February 10, 1997 (Inception) ......... F-12 Notes to the Consolidated Financial Statements ................ F-14 F-1 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (F/K/A World Homes, Inc./Affordable Homes of America, Inc.) (a development stage company) CONSOLIDATED FINANCIAL STATEMENTS and REPORT OF INDEPENDENT AUDITORS FROM FEBRUARY 10, 1997 (DATE OF INCEPTION) TO JUNE 30, 2001 and 2000 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Composite Industries of America, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Composite Industries of America, Inc. and Subsidiaries (F/K/A World Homes, Inc./Affordable Homes of America, Inc.) (a development stage company) as of June 30, 2001 and 2000 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended June 30, 2001 and 2000 and for the period from February 10, 1997 (inception) to June 30, 2001. These 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Composite Industries of America, Inc. and Subsidiaries as of June 30, 2001 and 2000 and the results of their operations and their cash flows for the years then ended, and from February 10, 1997 to June 30, 2001, in conformity with accounting principles generally accepted in the United States of America. North Bellmore, New York September 14, 2001 (except as to Note 20 which is as of October 3, 2001) F-2 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (F/K/A World Homes, Inc./Affordable Homes of America, Inc.) (a development stage company) CONSOLIDATED BALANCE SHEETS JUNE 30, 2001 and 2000
ASSETS 2001 2000 - -------------------------------------------------------------------------------------- Cash $ 667,142 $ 18,516 Employee advances - 67,423 Land and land development costs 65,991 449,206 Capitalized interest - 44,059 Deferred tax asset 2,390,000 2,262,655 Machinery & equipment - net of accumulated depreciation of $40,232 and $73,226 as of June 30, 2001 and 2000, respectively 164,805 176,028 Patent - net of accumulated amortization of $2,258,750 and $1,216,250 as of June 30, 2001 and 2000, respectively 14,939,349 15,981,849 Goodwill - net of accumulated amortization of $20,410 as of June 30, 2000 - 387,787 ---------- ---------- TOTAL ASSETS $ 18,227,287 $ 19,387,523 ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-3 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (F/K/A World Homes, Inc./Affordable Homes of America, Inc.) (a development stage company) CONSOLIDATED BALANCE SHEETS (continued) JUNE 30, 2001 and 2000
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000 - ----------------------------------------------------------------------------------------------------- LIABILITIES Accounts payable $ 3,530 $ 55,024 Accrued expenses 20,000 195,360 Accrued interest 22,313 - Loans and notes payable 133,429 323,494 Loans and advances from related parties 325,301 281,434 Convertible debenture (net of unamortized discount of $68,250 at June 30, 2001) 931,750 - Deferred tax liability 4,963,183 5,309,385 --------- --------- TOTAL LIABILITIES 6,399,506 6,164,697 --------- --------- COMMITMENTS AND CONTINGENCIES (Notes 15 and 20) STOCKHOLDERS' EQUITY Convertible preferred stock class A, (5,000,000 shares authorized; 428,572 shares issued and outstanding at June 30, 2001 and 2000) 1,511,086 1,511,086 Convertible preferred stock class B (5,000,000 shares authorized: 0 shares issued and outstanding at June 30, 2001 and 2000) - - Common stock ($.001 par value, 100,000,000 shares authorized, 22,761,396 shares issued and outstanding as of June 30, 2001; 20,417,379 shares issued and outstanding as of June 30, 2000) 22,761 20,417 Additional paid-in capital 17,347,521 16,195,761 Officer loans - ( 191,749) Deficit accumulated during the development stage ( 7,053,587) ( 4,312,689) ---------- ---------- Total Stockholders' Equity 11,827,781 13,222,826 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,227,287 $19,387,523 ========== ========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
F-4 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (F/K/A World Homes, Inc./Affordable Homes of America, Inc.) (a development stage company) CONSOLIDATED STATEMENTS OF OPERATIONS DURING THE DEVELOPMENT STAGE
FOR THE YEARS ENDED JUNE 30, 2001 and 2000 AND CUMULATIVE FROM FEBRUARY 10, 1997 (INCEPTION) Cumulative from Inception to 2001 2000 June 30, 2001 Operating expenses: ---------- ---------- ------------ General and administrative expenses $ 472,015 $ 552,720 $ 2,638,666 Depreciation and amortization 1,092,591 1,096,145 2,338,372 Officer and consultants' compensation 1,238,660 1,798,321 3,036,981 Total operating expenses 2,803,266 3,447,186 ( 8,014,019) (Loss) from operations (2,803,266} (3,447,186} ( 8,014,019) Other income and (expense): Interest and other income 4,865 4,453 14,068 Bad debt expense - ( 136,814) ( 136,814) Gain on sale of automobile 2,093 - 2,093 Interest expense ( 31,429) ( 33,866) ( 65,295) Net (loss) on disposition of subsidiaries ( 386,708) (1,604,166) ( 1,993,724) Total other (expense) - net ( 411,179) (1,770,393} ( 2,179,672) Net (loss) before income taxes (3,214,445) (5,217,579) (10,193,691) Benefit for income taxes 473,547 2,112,219 3,140,104 Net (loss) $( 2,740,898) $( 3,105,360) $( 7,053,587) Net (loss) per common share $( .13} $( .16} $( .49} Weighted average number of common shares outstanding 21,482,312 18,825,400 14,365,533 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
F-5 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (F/K/A World Homes, Inc./Affordable Homes of America, Inc.) (a development stage company) CONSOLIDATED STATEMENTS OF OPERATIONS DURING THE DEVELOPMENT STAGE
Deficit Convertible Common Accumulated Preferred Stock Additional During the Total Stock A .001 Par Value Paid-in Officer Development Stockholders' Shares Amount Shares Amount Capital Loans Stage Equity -------- --------- ---------- --------- ----------- -------- ------------- ------------ Opening balance - July 1, 2000 428,572 $1,511,086 20,417,379 $ 20,417 $16,195,761 $(191,749) $( 4,312,689) $ 13,222,826 Issuance of common stock for officer's compensation 1,975,000 1,975 787,350 789,325 Issuance of common stock for legal and for consulting services rendered 90,000 90 44,910 45,000 Issuance of Common Stock through exercise of stock options 500,000 500 199,500 200,000 Issuance of stock option to consultant 120,000 120,000 Cancellation of restricted stock issued in the acquisition of Big Mountain Construction Company, Inc. ( 215,983) ( 216) ( 216) Adjustment ( 5,000) ( 5) ( 5) Officer loans converted to compensation 191,749 191,749 Net (loss) for the year ended June 30, 2001 ( 2,740,898) ( 2,740,898) -------- --------- ---------- --------- ----------- -------- ------------- ------------ Closing balance - June 30, 2001 428,572 $1,511,086 22,761,396 $ 22,761 $ 17,347,521 $ - $ ( 7,053,587) $ 11,827,781 ======== ========= ========== ========= =========== ======== ============= ============ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-6 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (F/K/A World Homes, Inc./Affordable Homes of America, Inc.) (a development stage company) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED JUNE 30, 2000
Convertible Common Convertible Preferred Stock Preferred Stock A .001 Par Value Stock B Shares Amount Shares Amount Shares Amount -------- ---------- ---------- --------- -------- --------- Opening balance - July 1, 1999 657,144 $ 2,311,086 17,549,402 $ 17,549 100,000 $550,000 Rescission of Preferred A convertible stock to reverse the acquisition of 100% of the common stock of Realty Center, Inc. and a 25% interest in the Heartland Homes Joint Venture ( 228,572) ( 800,000) Rescission of Preferred B convertible stock to reverse the acquisition of 100% of the common stock of M.P. Hall Enterprises, Inc. (100,000) (550,000) Issuance of common stock for legal and consulting services rendered 2,105,458 2,106 1,959,199 Common stock issued for equipment on May 25, 2000 135,008 135 79,925 Common stock issued in connection with investment banking services 300,000 300 317,700 Officer loans 327,511 327 191,422 Net (loss) for the year ended June 30, 2000 -------- ---------- ---------- --------- -------- --------- Closing balance - June 30, 2000 428,572 $1,511,086 20,417,379 $ 20,417 $ - $ - ======== ========== ========== ========= ======== ========= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-7 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (F/K/A World Homes, Inc./Affordable Homes of America, Inc.) (a development stage company) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED JUNE 30, 2000 (continued)
Deficit Accumulated Additional During the Total Paid-in Officer Development Stockholders' Capital Loans Stage Equity ----------- -------- ------------- ------------ Opening balance - July 1, 1999 $13,647,515 $ - $( 1,207,329) $ 15,318,821 Rescission of Preferred A convertible stock to reverse the acquisition of 100% of the common stock of Realty Center, Inc. and a 25% interest in the Heartland Homes Joint Venture (800,000) Rescission of Preferred B convertible stock to reverse the acquisition of 100% of the common stock of M.P. Hall Enterprises, Inc. (550,000) Issuance of common stock for legal and consulting services rendered 1,961,305 Common stock issued for equipment on May 25, 2000 80,060 Common stock issued in connection with investment banking services 318,000 Officer loans (191,749) - Net (loss) for the year ended June 30, 2000 ( 3,105,360) ( 3,105,360) ----------- -------- ------------- ------------ Closing balance - June 30, 2000 $ 16,195,761 $(191,749) $( 4,312,689) $ 13,222,826 =========== ======== ============= ============ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-8 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (F/K/A World Homes, Inc./Affordable Homes of America, Inc.) (a development stage company) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1999 AND CUMULATIVE FROM FEBRUARY 10, 1997 (INCEPTION)
Convertible Convertible Common Preferred Preferred Stock Stock A Stock B .001 Par Value Shares Amount Shares Amount Shares Amount -------- ---------- -------- --------- ---------- --------- Initial issuance of common stock as restated to account for the 2 for 1 stock split dated March 19, 1999 $ $ 2,000,000 $ 2,000 Net (loss) during the development stage through June 30, 1998 Issuance of common stock in exchange for 100% of the common stock of Affordable- Nevada on March 17, 1999 4,000,000 4,000 Issuance of common stock to founders on March 18, 1999 250,000 250 Common stock split on a 2 for 1 basis on March 19, 1999 4,000,000 4,000 Issuance of convertible preferred A stock for the acquisition of 100% of the common stock of Kampen and Associates, Inc. on April 14, 1999 428,572 1,511,086 Issuance of common stock for the acquisition of Composite Industries, Inc. on April 28, 1999 6,514,270 6,514 -------- ---------- -------- --------- ---------- --------- Subtotal 428,572 $1,511,086 - $ - 16,764,270 $16,764 ======== ========== ======== ========= ========== ========= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-9 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (F/K/A World Homes, Inc./Affordable Homes of America, Inc.) (a development stage company) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1999 AND CUMULATIVE FROM FEBRUARY 10, 1997 (INCEPTION)
Deficit Accumulated Additional During the Total Paid-in Development Stockholders' Capital Stage Equity ----------- ------------- ------------ Initial issuance of common stock as restated to account for the 2 for 1 stock split dated March 19, 1999 $ $ $ 2,000 Net (loss) during the development stage through June 30, 1998 ( 17,000) ( 17,000) Issuance of common stock in exchange for 100% of the common stock of Affordable- Nevada on March 17, 1999 ( 4,000) - Issuance of common stock to founders on March 18, 1999 ( 250) - Common stock split on a 2 for 1 basis on March 19, 1999 ( 4,000) - Issuance of convertible preferred A stock for the acquisition of 100% of the common stock of Kampen and Associates, Inc. on April 14, 1999 1,511,086 Issuance of common stock for the acquisition of Composite Industries, Inc. on April 28, 1999 11,792,399 11,798,913 ----------- ------------- ------------ Subtotal 11,784,149 $ ( 17,000) $ 13,294,999 =========== ============= ============ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-10 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (F/K/A World Homes, Inc./Affordable Homes of America, Inc.) (a development stage company) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued) FOR THE YEARS ENDED JUNE 30, 1999 AND CUMULATIVE FROM FEBRUARY 10, 1997 (INCEPTION)
Convertible Convertible Common Preferred Preferred Stock Stock A Stock B .001 Par Value Shares Amount Shares Amount Shares Amount -------- ---------- -------- --------- ---------- --------- Balance carried forward 428,572 1,511,086 - - 16,764,270 16,764 Issuance of Preferred B convertible stock in the acquisition of M.P. Hall Enterprises, Inc. on April 27, 1999 100,000 550,000 Issuance of restricted common stock in the acquisition of Big Mountain Construction Company, Inc. on June 28, 1999 215,983 216 Issuance of preferred A stock in the acquisition of 100% of the common stock of Realty Center, Inc. and a 25% interest in the Heartland Homes Joint Venture on June 28, 1999 228,572 800,000 Issuance of common stock for services rendered and other consulting services 569,149 569 Net (loss) for the year ended June 30, 1999 -------- ---------- -------- --------- ---------- --------- Closing balance - June 30, 1999 657,144 $2,311,086 100,000 $550,000 17,549,402 $17,549 ======== ========== ======== ========= ========== ========= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-11 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (F/K/A World Homes, Inc./Affordable Homes of America, Inc.) (a development stage company) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued) FOR THE YEARS ENDED JUNE 30, 1999 AND CUMULATIVE FROM FEBRUARY 10, 1997 (INCEPTION)
Deficit Accumulated Additional During the Total Paid-in Development Stockholders' Capital Stage Equity ----------- ------------- ------------ Balance carried forward 11,784,149 ( 17,000) 13,294,999 Issuance of Preferred B convertible stock in the acquisition of M.P. Hall Enterprises, Inc. on April 27, 1999 550,000 Issuance of restricted common stock in the acquisition of Big Mountain Construction Company, Inc. on June 28, 1999 524,904 525,120 Issuance of preferred A stock in the acquisition of 100% of the common stock of Realty Center, Inc. and a 25% interest in the Heartland Homes Joint Venture on June 28, 1999 800,000 Issuance of common stock for services rendered and other consulting services 1,338,462 1,339,031 Net (loss) for the year ended June 30, 1999 ( 1,190,329) (1,190,329) ----------- ------------- ------------ Closing balance - June 30, 1999 $ 13,647,515 $ ( 1,207,329) $ 15,318,821 =========== ============= ============ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-12 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (F/K/A World Homes, Inc./Affordable Homes of America, Inc.) (a development stage company) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2001 AND 2000 AND CUMULATIVE FROM FEBRUARY 10, 1997 (Inception)
Cumulative from inception to 2001 2000 June 30, 2001 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) $( 2,740,898) $( 3,105,360) $( 7,053,587) ADJUSTMENTS TO RECONCILE NET (LOSS) TO CASH (USED) IN OPERATING ACTIVITIES Depreciation and amortization 1,092,591 1,096,145 2,338,372 Deferred tax benefit ( 473,547) ( 2,112,219) ( 3,140,104} Stock issued for services and equipment 954,104 2,041,365 4,334,500 Officer loans converted to compensation 191,749 - 191,749 Net loss on disposition of subsidiaries 386,708 1,604,166 1,954,680 (Gain) on sale of automobile ( 2,092) - ( 2,092) (Increase) decrease in assets: Employee advances - ( 21,823) ( 67,423) Other receivables - 9,000 - Capitalized interest - 442,982 311,899 Land and development costs ( 65,991} - ( 65,991} Increase (decrease) in liabilities: Accounts payable ( 51,494} 12,348 3,530 Accrued expenses ( 175,360} 35,757 20,000 Accrued interest 22,313 ( 206,667} 22,313 ----------- ----------- ----------- Total Adjustments 1,878,981 2,901,054 5,901,433 ----------- ----------- ----------- Net cash (used) by operating activities ( 861,917} ( 204,306} ( 1,152,154) CASH FLOWS FROM INVESTING ACTIVITIES: Machinery and equipment acquisitions ( 62,337) ( 723} ( 84,925} Disposition of automobile 16,870 - 16,870 ----------- ----------- ----------- Net cash (used) by investing activities ( 45,467) ( 723} ( 68,055} ----------- ----------- ----------- Subtotal ( 907,384} ( 205,029} ( 1,220,209) CASH FLOWS FROM FINANCING ACTIVITIES: Common stock - - 2,000 Notes payable 125,000 - 125,000 Advances from (to) related parties 325,301 46,147 679,642 Issuance of convertible debenture 910,000 - 910,000 Issuance of Common Stock through exercise of stock options 200,000 - 200,000 Payments towards loans and notes payable ( 4,291) - ( 4,291) Payments towards land purchase option - ( 15,000} ( 25,000} ----------- ----------- ----------- Net cash provided by financing activities 1,556,010 31,147 1,887,351 ----------- ----------- ----------- Net increase (decrease) in cash 648,626 ( 173,882} 667,142 ----------- ----------- ----------- Cash - beginning of period 18,516 192,398 - ----------- ----------- ----------- Cash - end of period $ 667,142 $ 18,516 $ 667,142 =========== =========== =========== Supplemental Disclosure of cash flow information: Cash Paid During the Year for: Interest expense $ 31,429 $ 33,886 $ 65,315 =========== =========== =========== Income taxes $ - $ - $ - =========== =========== =========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
F-13 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (F/K/A World Homes, Inc./Affordable Homes of America, Inc.) (a development stage company) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2001 AND 2000 AND CUMULATIVE FROM FEBRUARY 10, 1997 (Inception) NON-CASH INVESTING AND FINANCING TRANSACTIONS On May 25, 2000, Composite issued 135,008 shares of common stock valued at $80,060 to purchase certain construction equipment. During the year ended June 30, 2000, Composite issued 2,105,458 shares of common stock valued at $1,961,305 to various individuals for legal and consulting services performed. Composite issued 327,511 shares of common stock issued to an officer valued at $191,749 for which payment was not received by June 30, 2000. Accordingly the officer loan was reflected as an offset to stockholders' equity in the accompanying financial statements as of June 30, 2000. During the year ended June 30, 2001, $163,000 was repaid. The balance of $28,749 was converted to compensation. In addition, $96,100 was advanced and charged to compensation during the year ended June 30, 2001. During the year ended June 30, 2001, Composite issued 90,000 shares of common stock valued at $45,000 to various individuals for legal and consulting services performed. During the year ended June 30, 2001, Composite issued 1,975,000 shares of common stock valued at $789,325. On January 30, 2001, a consultant was granted an option to purchase 375,000 shares of common stock of Composite at $0.00125 per cent per share for a total price of $469. The value of the common stock on the date of issue was $120,469 or $0.32125 per share resulting in compensation of $120,000. The stock option agreement is for a term of five years. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-14 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (F/K/A World Homes, Inc./Affordable Homes of America, Inc.) (a development stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 and 2000 NOTE 1 - General and Summary of Significant Accounting Policies (A) - Nature of Business Composite Industries of America, Inc. ("Composite"- formerly known as World Homes, Inc./ Affordable Homes of America, Inc.), is a development stage company primarily in the business of land development and the construction of residential houses. Composite owns the patent rights to a compound to be used in the construction process referred to as Z-MIX. The process is more fully described in Note 2. Composite's operations include its wholly owned subsidiary Big Mountain Construction Company, Inc., which is a general building contractor. During the fiscal quarter ended March 31, 2001, operations of Big Mountain terminated. Composite Industries' corporate headquarters are located in Las Vegas, Nevada. During the 2001 fiscal year, the Company underwent a name change to World Homes, Inc. The Company changed its name again to Composite Industries of America, Inc. in August 2001. (B) - Consolidated Net (Loss) per Common Share Consolidated net (loss) per common share is computed on the basis of the weighted average number of common shares outstanding during the period. Only the weighted average number of shares of common stock outstanding was used to compute basic loss per share for the period from inception, to June 30, 2001 and 2000 as the inclusion of stock options are anti-dilutive. There were no stock warrants, or other common stock equivalents outstanding during this period. (C) - Income Taxes Income taxes are provided or a benefit is accrued on all revenue and expense items included in the consolidated statements of operations, regardless of the period in which such items are recognized for income tax purposes, except for items representing a permanent difference between pretax accounting income and taxable income. (D) - Depreciation Composite depreciates equipment, vehicles, furniture and fixtures, and machinery on a straight-line basis over five to seven years for financial reporting purposes. F-15 (E) - Patents Composite amortizes its patent rights from the date of acquisition on a straight-line basis over its remaining life of 16 years and 3 months. (F) - Use of Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (G) - Basis of Presentation The accompanying consolidated balance sheets and related consolidated statements of operations, stockholders' equity and cash flows during the development stage, includes the accounts of Composite Industries of America, Inc. and Big Mountain Construction Company, Inc. as of June 30, 2001. For the year ended June 30, 2000, the operations included Composite Industries of America, Inc., Kampen and Associates, Inc., and Big Mountain Construction Company, Inc. Significant inter-company transactions or balances as of and for the periods ended June 30, 2001 and 2000 have been eliminated. (H) - Reclassification Certain reclassifications have been made to the year 2000 balances to conform them to the current year's presentation. These had no effect on the year 2000 results of operations. Note 2 - Patent Acquisition On April 28, 1999, Composite Industries of America, Inc. acquired 100% of the common stock of Composite Industries, Inc. for 6,514,270 shares of Common Stock of Composite valued at $2.73 per share or $17,769,200. Composite Industries, Inc.'s most significant asset was a patent covering the construction material "Z-MIX". Z-MIX is a cementitious building material that can be used in a two-step construction method instead of cement, drywall or lumber. Composite believes Z-MIX will enable it to build a better quality home at a lower price than if other building products were used. Management assigned a net value of $17,198,099 to the patent based upon the fair market value (the average of the closing stock prices of Composite's common stock two days prior to and two days after the acquisition date) of Composite common stock issued to acquire Composite Industries, Inc. The gross value resulting from the application of the average fair market value less the value of all other assets acquired was discounted by 25% in recognition of the restricted nature of the stock issued as well as the fact that the common stock was thinly traded during the period encompassing the acquisition date. F-16 On June 12, 2000, Composite signed a joint venture agreement with a major construction contractor to build homes in third world countries utilizing Z- MIX. Management believes that it is appropriate to continue to carry the cost of the patent at June 30, 2001 because the signing of the long-term contract demonstrates the patent's immediate commercial viability. Furthermore, management believes that the expected future profits and cash flows will support the carrying value of the patent. The patent is being amortized on a straight-line basis over the remaining life of the patent (195 months as of the acquisition date). Patent amortization expense amounted to $1,042,500 in each of the years ended June 30, 2001 and 2000. Note 3 - Acquisition of Subsidiaries Kampen and Associates, Inc. - Effective April 14, 1999, Composite purchased 100% of the common stock of Kampen and Associates, Inc. for 428,572 convertible Class A preferred shares of Composite valued at $3.53 per share for a total purchase price of $1,511,086. The cost basis of the net assets acquired was increased by $1,511,086 to reflect the purchase price of the company. The acquisition was treated as a purchase for financial reporting purposes. No goodwill was recognized in the transaction. The inability of Composite to maintain current payments for the land purchase options caused Composite to abandon its entire investment in Kampen during the fiscal year ended June 30, 2000. Abandonment of Land Purchase and Options The assets acquired thru the purchase of Kampen, were primarily comprised of an agreement to purchase land and improvements that was financed through an option payment agreement. On May 21, 1999, Kampen was served with a notice of foreclosure as a consequence of its default on the related obligation. As a result of this action by the creditors, Kampen filed for protection under the provisions of Chapter 11 of U.S. Bankruptcy Code on June 24, 1999. On January 14, 2000, The U.S. Bankruptcy Court required a foreclosure on the property and caused Composite to abandon its investment and the related debts. The total cost of the land, land improvements and capitalized interest amounted to $6,793,107. Total debt, including the loan from Cascade Land Depository, accrued interest and the options, amounted to $5,188,941. As a result, a net loss was incurred amounting to $1,604,166 and is included as other expense for the year ended June 30, 2000. Composite Industries, Inc. - Composite Industries, Inc. was acquired by Composite under an agreement dated on April 28, 1999 and immediately merged into Composite. The agreement called for the conversion of 100% of the issued and outstanding shares of Composite Industries, Inc. in exchange for Composite's common stock at the rate of two shares of Composite Industries, Inc. for each share of Composite. As of the effective date, there were 13,028,539 common shares of Composite Industries, Inc. outstanding. The acquisition was treated as a purchase for financial reporting purposes. M.P. Hall Enterprises, Inc. - On April 27, 1999, Composite acquired 100% of M.P. Hall's common stock in exchange for 100,000 shares of preferred B stock for a total purchase price of $550,000. M.P. Hall's assets consisted of land and development costs incurred to build a motel in Washington State. The acquisition was treated as a purchase for financial reporting purposes. No goodwill was recognized in the transaction. Composite rescinded the transaction during the year ended June 30, 2000. Big Mountain Construction Company, Inc. - Effective June 28, 1999, Composite purchased 100% of the common and preferred stock of Big Mountain Construction Company, Inc. for 215,983 restrictive common shares of Composite valued at $2.43 per share for a total purchase price of $525,120. The acquisition was treated as a purchase for financial reporting purposes. Goodwill in the amount of $408,197 was recognized in the transaction. Goodwill is amortized on the straight-line basis over twenty years commencing July 1, 1999. The inability of Composite to maintain the operations of Big Mountain caused Composite to abandon its entire investment in Big Mountain in March, 2001. The abandonment of the entire investment in Big Mountain includes a loss on the sale of land in the amount of $197,650, a loss on disposal of equipment in the amount of $34,663, a loss on disposition of goodwill in the amount of $377, 579, and a gain on forgiveness of debt in the amount of $223,184. As a result, a net loss was incurred amounting to $386,708, and is included as other income and expense for the year ended on June 30, 2001. Realty Center, Inc. - Effective June 28, 1999, Composite purchased 100% of the common stock of Realty Center, Inc. for 114,286 convertible Class A preferred shares of Composite valued at $3.50 per share for a total purchase price of $400,000. Realty Center's assets consisted of a 25% joint venture interest in a real estate development project known as Heartland Homes. Further, Composite acquired an additional 25% interest in Heartland Homes directly by issuing an additional 114,286 shares of convertible Class A preferred stock. Immediately after Composite's acquisition of Realty Center, Composite transferred it's 25% interest in Heartland into Realty Center. The acquisition was treated as a purchase for financial reporting purposes. No goodwill was recognized in the transaction. When the anticipated financing from Euro Federal Bank, NV failed to materialize, (see Note 15) Composite decided that it was in the best interest of all parties to rescind the transaction during the year ended June 30, 2000. Allocation of the purchase price for each of the transactions follows: F-17
Kampen and Composite M.P. Hall Big Mountain Realty Total Associates, Industries Enterprises Construction Center all Inc. Inc. Inc. Company, Inc. Inc. Companies ----------- ---------- -------- --------- -------- ----------- Assets Cash $ - $ 296,662 $ - $ 9,858 $ - $ 306,520 Employee and other advances - 234,133 - 54,600 - 288,733 Land, development and capitalized interest costs 6,668,676 885,252 516,703 - 8,070,631 Equipment (net) - 40,306 - 57,720 - 98,026 Patent 17,198,099 - - - 17,198,099 Investment in Joint Venture - - - 800,000 800,000 Goodwill - - 408,197 - 408,197 ----------- ---------- -------- --------- -------- ----------- Total $ 6,668,676 $17,769,200 $ 885,252 $1,047,078 $ 800,000 $ 27,170,206 =========== ========== ======== ========= ======== =========== Kampen and Composite M.P. Hall Big Mountain Realty Total Associates, Industries Enterprises Construction Center all Inc. Inc. Inc. Company, Inc. Inc. Companies ----------- ---------- -------- --------- -------- ----------- Liabilities Assumed and Equity Liabilities assumed $ 5,157,590 $ 5,970,287 $ 335,252 $ 521,958 $ - $ 11,985,087 Convertible Preferred stock 1,511,086 - 550,000 - 800,000 2,861,086 Common stock - 6,514 - 216 - 6,730 Additional paid- in capital - 11,792,399 - 524,904 - 12,317,303 ----------- ---------- -------- --------- -------- ----------- Total $ 6,668,676 $17,769,200 $ 885,252 $1,047,078 $ 800,000 $ 27,170,206 =========== ========== ======== ========= ======== ===========
Note 4 - Advances to Omega International, Inc. Composite had from time to time advanced funds to Omega International, Inc., an unrelated company, in the business of developing products for the construction industry. Composite advanced funds totaling $224,140 through June 30, 1999 in an effort to assist Omega in further developing its products. The notes were unsecured, due upon demand, and bore interest at 8% per annum. Interest income was recorded by Composite from April 28, 1999 to June 30, 1999 in the amount of $3,436. During the fiscal year ended June 30, 2000, Omega filed for bankruptcy protection under Chapter 7 of the U.S. Bankruptcy Code and accordingly, management concluded that the advances were not collectible and were written off. For financial statement purposes, the expense is included as a component under the caption bad debt expense. F-18 Note 5 - Machinery and Equipment Machinery and equipment consists of the following as of June 30: 2001 2000 ------- ------- Equipment and tools not placed in service $ 80,060 $ 80,060 Machinery and equipment 90,244 84,640 Office equipment 5,094 17,982 Furniture and fixtures 3,032 3,032 Vehicles 26,607 63,540 ------- ------- 205,037 249,254 Less: accumulated depreciation (40,232) (73,226) ------- ------- Total $ 164,805 $ 176,028 ======= ======= Depreciation expense was incurred in the amount of $28,424 and $33,235 for the years ended June 30, 2001 and 2000, respectively, and is included in operating expenses. NOTE 6 - Income Taxes Composite accounts for income taxes on the liability method, as provided by Statement of Financial Accounting Standards 109, Accounting for Income Taxes (SFAS 109). For the years ended June 30, 2001 and 2000 the income tax (benefit) was comprised of the following components: 2001 2000 Cumulative -------- --------- ---------- Current - Federal $ - - - State - - - -------- --------- ---------- Total current - - - Deferred-Federal (473,547) (2,112,219) (3,140,104) State - - - -------- --------- ---------- Total deferred (473,547) (2,112,219) (3,140,104) Total $ (473,547) $(2,112,219) $(3,140,104) ======== ========= ========== F-19 The only differing method of reporting income for tax purposes as compared to financial reporting purposes was in nnection with the deferred tax liability resulting from the acquisition of patent rights described in Note 2. In addition, there is a deferred tax asset relating to the benefit provided by the net operating loss carry forward. As there are no state income taxes to be considered, the income tax provision is computed at the federal statutory rate of 34%. Deferred tax assets and liabilities consist of the following: 2001 2000 Deferred tax assets- ------------- ------------- Tax benefit of net operating loss carryovers $ 2,390,000 $ 2,262,655 Valuation allowance - - ------------- ------------- $ 2,390,000 $ 2,262,655 ============= ============= Deferred tax liabilities- Patent rights acquired $ 4,963,183 $ 5,309,385 ============= ============= No valuation allowance was required for the deferred tax asset for each of the years presented because management determined that there is a strong likelihood of realization of the deferred tax asset. The deferred tax asset relates to the net operating loss carry forward. Composite incurred net operating losses for financial reporting purposes totaling $2,740,898 during 2001 available to offset future income for financial reporting purposes expiring in 2020. F-20 NOTE 7 - Loans and Notes Payable The following schedule summarizes loans and notes payable as of June 30, 2001 and 2000:
2001 2000 -------- -------- Note payable to Joseph Vozka dated January 30, 2001 secured by forms built by Precise Forms, Inc. due on demand including interest at 15% per annum $ 125,000 $ - Automobile loan dated April 11, 2000 payable at $412 per month including interest at 5.12% per annum with the final installment due on April 11, 2005 8,429 12,720 Equipment loan dated May 20, 1999 related to Big Mountain Construction Company, Inc., secured by excavating equipment payable at $1,664 per month including interest at 20.9% per annum with the final installment due on May 20, 2001 - 15,159 Construction loan dated August 11, 1998 secured by land and property with monthly payments on an interest only basis and principal due October 1, 2000 including extension at prime + 2%, currently 11.5% at June 30, 2000 - 295,615 -------- -------- Total $ 133,429 $ 323,494 Less: current maturities $ 129,627 $ 315,065 -------- -------- Long-term portion $ 3,802 $ 8,429 ======== ========
The loans payable for the construction loan and to B ig Mountain Construction Company were written off during the year ended June 30, 2001 due to the disposition of Big Mountain Construction Company, Inc. and amounts were included under the caption net loss on disposition of subsidiaries. Interest expense for the years ended June 30, 2001 and 2000 amounted to $31,429 and $33,886, respectively. The carrying value of the Company's borrowings approximate their fair values. F-21 NOTE 8 - Related Party Transactions Composite has entered into consulting agreements with certain members of the Company's Board of Directors and stockholders to provide services on various strategic and business issues. The agreements are renewable at the discretion of management. Total fees paid for such services by the Company either in stock or cash during the years ended June 30, 2001 and 2000 were $1,154,325 (including $200,000 cash) and $1,168,375 respectively and are included in operating expenses in the consolidated statements of operations. Management believes the transactions were at arm's length. The President and Chief Executive Officer has from time to time advanced funds to Composite or one of its subsidiaries to assist with working capital requirements. These transactions are short-term in nature. Such funds advanced to the Company amounted to $325,301 and $281,434 as of June 30, 2001 and 2000, respectively, and are carried in loans and advances from related parties. Interest related to these advances during the year ended June 30, 2000 at 8% amounted to $20,809. No interest was charged for the year ended June 30, 2001. NOTE 9 - Officer loans On May 25, 2000, Composite issued 327,511 shares of common stock in connection with its Regulation S-8 filing valued at $191,749 to an officer of the company as nominee for the purpose of selling the shares on the open market and using the proceeds to pay specific company expenses. Since the common stock was issued in the officer's name, the officer has a liability to the company for the value of the shares at the date of issuance. Accordingly, an officer loan was recorded for $191,749 and was reflected as a reduction of stockholders' equity at June 30, 2000. During the fiscal year 2001, the officer's loan in this amount was converted to compensation and expensed in the accompanying financial statements. $163,000 was repaid and the balance was expensed as officer compensation. An additional $96,100 was advanced and charged to officer compensation NOTE 10 - Concentration of Credit Risk - Cash Composite maintains its cash balances at financial institutions located in Nevada. At times, the balance may exceed federally insured limits of $100,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash on deposit. The fair market value of this financial instrument approximates cost. NOTE 11 - Industry Segment Information Composite's operations fall under one segment. NOTE 12 - Stockholders' Equity The Company is authorized to issue two classes of convertible preferred stock; Class A and Class B. Each share of Class A preferred is convertible to common stock at $3.50 per share. Class B preferred stock is convertible to common stock at $5.50 per share. Each class of preferred stock is authorized at 5,000,000 shares. At June 30, 2000, 428,572 shares of Class A convertible preferred stock and no shares of Class B convertible preferred stock were issued and outstanding. During 2001, 228,572 shares of class A and 100,000 shares of class B were rescinded and the acquisitions they related to were terminated. F-22 NOTE 13 - Stock Options Composite established a stock option plan during the 2001 fiscal year. In prior years, an incentive stock option plan was authorized but was cancelled on June 8, 2000 by the Board of Directors. Below is summarized the option activity for the years ended June 30, 2001 and 2000.
2001 Weighted 2000 Weighted Options Average Options Average ------- -------- --------- ------- Securities outstanding - beginning of year - 7,000,000 $0.38 Securities granted 875,000 $0.23 - Securities exercised 500,000 $0.40 - Securities cancelled - 7,000,000 $0.38 ------- -------- --------- ------- Securities outstanding - end of year 375,000 NIL - ======= ======== ========= =======
Composite issued stock options to a public relations firm in connection with an agreement signed on June 8, 2000. The stock options issued as part of the agreement expire after three years. The agreement calls for vesting of options as follows: 15,000 shares @ $1.50 per share when the stock price reaches $1.50 15,000 shares @ $2.50 per share when the stock price reaches $2.50 25,000 shares @ $3.50 per share when the stock price reaches $3.50 25,000 shares @ $4.50 per share when the stock price reaches $4.50 These options were cancelled during the fiscal year ended June 30, 2001. On January 30, 2001, a consultant was granted an option to purchase 375,000 shares of common stock at $0.00125 cent per share for a total price of $469. The value of the common stock on the date of issue was $120,469 or $0.32125 per share resulting in compensation of $120,000. The stock option agreement is for a term of five years. An officer was granted an option to purchase 500,000 shares of restricted common stock of Composite at an exercise price of $.40 per share and on June 4, 2001, he exercised the stock options and the Company received $200,000. NOTE 14 - Stock Issued For Services During the fiscal year ended June 30, 2001, the Company issued stock for services rendered by outside professionals and officers of the Company. A total of 2,065,000 shares of stock were issued and valued at $834,325. These costs are included in operating expenses in the accompanying consolidated statements of operations. F-23 NOTE 15 - Commitments and contingencies During the year ended June 30, 2000, Composite issued 45,000,000 shares of common stock to Euro Federal Bank, NV as collateral for an anticipated loan and financing agreement. No loans or financings were extended to Composite and the stock certificates were stopped. Euro Federal Bank has returned the shares to Composite Industries. Accordingly, these shares were not considered outstanding in the earnings per share calculation. Composite rents office space for its Las Vegas, Nevada headquarters on a month to month basis. Rent expense amounted to $7,680 for each of the fiscal years ended June 30, 2001 and 2000. NOTE 16 - Fair Value of Financial Instruments Estimated fair value of Composite financial instruments are as follows:
2001 2000 --------------------- -------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------------------- -------------------- Cash $ 667,142 $ 667,142 $ 18,516 $ 18,516 Notes payable 125,000 125,000 310,774 310,774 Loans and advances from related parties 325,301 325,301 281,434 281,434 Automobile loan 8,429 8,429 12,720 12,720 Convertible debenture $ 931,750 $ 931,750 - - --------------------- --------------------
The fair value of the financial instruments related to debt is based on current rates at which Composite could borrow funds with similar remaining maturities. NOTE 17 - Violations of the Securities Act of 1934 On June 8, 2001, the SEC filed a complaint with the United States District Court, District of Nevada, alleging that certain press releases issued by Composite Industries, and corporate officers Merle Ferguson and Susan Donohue contained misrepresentations of material information in connection with contracted revenues and projected gross profits, operational facilities and the securing of financing. Also, the Company was cited in the complaint for issuing common stock to officers who in turn sold those shares into the market to finance Composite's current operations prior to having a registration statement in effect. The defendants, without admitting or denying the allegations set forth in the Complaint, have agreed to consent judgments permanently restraining them from committing the violations alleged in the Complaint in the future. The penalty in the amount of $120,000 was assessed personally to Ferguson which has agreed to pay and is not an obligation payable by Composite. The proposed final judgments have been submitted to the SEC's Washington office for approval and are pending. F-24 NOTE 18 - Going Concern Considerations Composite Industries has operated as a development stage enterprise since February 10, 1997, its inception and therefore has operated for over four years without generating revenues. Funds have been generated primarily by the extension of loans and advances from officers and directors and the issuance of common and preferred stock and debentures. The failure to generate revenues from operations has caused Composite to experience liquidity shortfalls from time to time. The Chairman, Merle Ferguson has pledged to continue to contribute money to keep Composite solvent during the next twelve months. Further, the Company has contracts with joint venture partners and expects to commence construction operations during fiscal year 2002. It is for these reasons that management believes that substantial doubt about Composite's ability to continue as a going concern is alleviated. NOTE 19 - Convertible Debentures On April 5, 2001, Composite issued $1,000,000 of 6% convertible debentures due April 5, 2002. The Company received proceeds of $910,000, net of a bond discount of $90,000. The bond discount is being amortized over the life of the debentures and $21,750 was amortized during 2001. The debentures are required or permitted to be repaid at the "Maturity Date" as provided thereunder and to pay interest to the holder on the aggregate unconverted and then outstanding principal amount of the debentures at the rate of 6% per annum, payable on each conversion date (date that a conversion notice is provided) and on the maturity date in cash or shares of common stock. No debentures were converted as of June 30, 2001. Interest of $14,500 was accrued on the debentures during the year ended June 30, 2001. The effective rate of interest on the debentures was 15.4% through June 30, 2001. The debenture restricts a holder from converting the debenture or receiving common stock as payment of interest to the extent such conversion or receipt of such interest payment would result in the holder beneficially owning in excess of 9.999% of the then issued and outstanding shares of common stock, including shares issuable upon conversion of, and payment of interest on, the debentures held by such holder. NOTE 20 -Subsequent Events Acquisitions: Composite acquired 100% of the common stock of MJB Towers, Inc. a California corporation in the business of acquiring and leasing telecommunication towers, in exchange for 1,000,000 shares of preferred stock. In addition, the terms of the agreement specify a bonus payment first, beginning with the first month of operations, and there is a provision for an additional bonus based on future performance. F-25 Stock Transactions: Financial Consulting Agreement On July 2, 2001, the Company issued 150,000 shares of common stock to a financial consulting firm as a "commencement bonus" under an agreement wherein the financial consultant will perform certain evaluations and analyses for the Company. Additionally, the financial consultant will be paid $3,000 (or 4,000 shares of common stock) per month for such services. The agreement term is for six months starting on May 23, 2001. These shares related to the commencement bonus have been valued at $.44 per share for a total valuation of $66,000. This will be recognized as consulting expenses over six months commencing July, 2001. Restricted Stock Issued For Consulting Services On July 11, 2001, a total of 149,385 shares of the Company's common stock were issued to two individuals for consulting services. These shares are restricted as to transferability under SEC Rule 144 for a period of one year. The shares have been valued at $.53 per share for a total valuation of $79,174. This will be recognized as consulting expense over twelve months commencing July, 2001. Corporate Officers The Company issued 17,000,000 shares of common stock to senior corporate officers on August 23, 2001. The shares were issued for future services to be rendered to the Company related to capital raising efforts, building alliances, and overall corporate strategy development. These shares are restricted as to transferability under SEC Rule 144. The trading restrictions run for a two-year period. The shares have been valued at $.33 per share for a total valuation of $5,525,000. This value reflects a discount for the two-year trading restriction as well as a discount related to the volume of shares in this transaction compared to the number of shares outstanding. Therefore, the unearned compensation of $5,525,000 related to this transaction will be amortized to compensation expense ratably over a two year period. INDEX TO FINANCIAL STATEMENTS PAGE Consolidated Balance Sheets as of June 30, 2001 and 2000 ................. F-26 Consolidated Statements of Operations During the Development Stage for the Years Ended June 30, 2001 and 2000 and Cumulative from February 10, 1997 (Inception) .......................... F-27 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended June 30, 2001 and 2000 and Cumulative from February 10, 1997 (Inception) to June 30, 1999 .................... F-28 Consolidated Statements of Cash Flows During the Development Stage for the Years Ended June 30, 2001 and 2000 and Cumulative from February 10, 1997 (Inception) .......................... F-30 Notes to the Consolidated Financial Statements ........................... F-33 F-26 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2001 and JUNE 30, 2001
(Unaudited) ASSETS September June 2001 2001 ---------- ----------- Cash $ 189,752 $ 667,142 Land development costs 69,435 65,991 Prepaid consulting fees 33,000 - Other receivables 18,089 - Deferred tax asset 2,760,000 2,390,000 Machinery & equipment - net of accumulated depreciation of $44,308 and $40,232 as of September 30, 2001 and June 30, 2001, respectively 166,547 164,805 Patent - net of accumulated amortization of $2,519,375 and $2,258,750 as of September 30, 2001 and June 30, 2001, respectively 14,678,724 14,939,349 ---------- ----------- TOTAL ASSETS $17,915,547 $18,227,287 ========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED BALANCE SHEETS (continued) SEPTEMBER 30, 2001 and JUNE 30, 2001
(Unaudited) September June LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2001 ------------ ----------- LIABILITIES Accounts payable $ 24,683 $ 3,530 Accrued expenses 31,357 20,000 Accrued interest 42,438 22,313 Loans and notes payable 132,294 133,429 Loans and advances from related parties 125,301 325,301 Convertible debenture - net of unamortized discount of $45,250 and $68,250 as of September 30, 2001 and June 30, 2001, respectively 954,750 931,750 Deferred tax liability 4,876,633 4,963,183 ------------ ----------- TOTAL LIABILITIES 6,187,456 6,399,506 ------------ ----------- COMMITMENTS AND CONTINGENCIES (NOTE 15) STOCKHOLDERS' EQUITY Convertible preferred stock class A, (5,000,000 shares authorized; 428,572 shares issued and outstanding at September 30, 2001 and June 30, 2001) 1,511,086 1,511,086 Convertible preferred stock class B (5,000,000 shares authorized: 0 shares issued and outstanding at September 30, 2001 and June 30, 2001) - - Common stock ($.001 par value, 100,000,000 shares authorized, 40,065,281 shares issued and outstanding as of September 30, 2001; 22,761,396 shares issued and outstanding as of June 30, 2001) 40,065 22,761 Additional paid-in capital 22,959,598 17,347,521 Prepaid officers' compensation ( 4,834,375) - (Deficit) accumulated during the development stage ( 7,948,283) (7,053,587) ------------ ----------- Total Stockholders' Equity 11,728,091 11,827,781 ------------ ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,915,547 $ 18,227,287 ============ ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-27 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 and 2000 2001 2000 ------------ ----------- Operating expenses: General and administrative expenses $ 75,525 $ 101,127 Depreciation and amortization 264,701 274,044 Officers' compensation 816,242 - Consulting fees 153,685 142,904 ------------ ----------- Total operating expenses 1,310,153 518,075 ------------ ----------- (Loss) from operations ( 1,310,153) ( 518,075) ------------ ----------- Other income and (expense): Interest and other income 2,648 1,024 (Loss) on sale of land - ( 197,650) Interest (expense) ( 43,741) ( 5,202) ------------ ----------- Total other (expense) - net ( 41,093) ( 201,828) ------------ ----------- Net (loss) before income taxes ( 1,351,246) ( 719,903) ------------ ----------- Benefit for income taxes 456,550 240,000 ------------ ----------- Net (loss) $ ( 894,696) $ ( 479,903) ============ =========== Net (loss) per common share $ ( .03) $ ( .02) ============ =========== Weighted average number of common shares outstanding 30,250,755 20,823,698 ============ =========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-28 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
Convertible Common Preferred Stock Additional Stock A .001 Par Value Paid-in Shares Amount Shares Amount Capital ------- --------- ---------- ---------- ----------- Opening balance - July 1, 2001 428,572 $1,511,086 22,761,396 $ 22,761 $17,347,521 Issuance of common stock to officers in lieu of cash compensation 17,000,000 17,000 5,508,000 Amortization of officers' compensation Issuance of common stock for consulting services 150,000 150 65,850 Issuance of common stock 149,385 149 37,197 Adjustment 4,500 5 1,030 Net (loss) for the three months ended September 30, 2001 ------- --------- ---------- ---------- ----------- Closing balance - September 30, 2001 428,572 $1,511,086 40,065,281 $ 40,065 $ 22,959,598 ======= ========= ========== ========== ===========
(Deficit) Accumulated Prepaid During the Total Officers' Development Stockholders' Compensation Stage Equity ------------- --------------- ------------ Opening balance - July 1, 2001 $ - $( 7,053,587) $ 11,827,781 Issuance of common stock to officers in lieu of cash compensation ( 5,525,000) - Amortization of officers' compensation 690,625 690,625 Issuance of common stock for consulting services 66,000 Issuance of common stock 37,346 Adjustment 1,035 Net (loss) for the three months ended September 30, 2001 ( 894,696) ( 894,696) ------------- --------------- ------------ Closing balance - September 30, 2001 $ ( 4,834,375) $ ( 7,948,283) $ 11,728,091 ============= =============== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-29 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued) FOR THE YEAR ENDED JUNE 30, 2001
Convertible Common Preferred Stock Additional Stock A .001 Par Value Paid-in Shares Amount Shares Amount Capital ------- --------- ---------- ---------- ----------- Opening balance - July 1, 2000 428,572 $1,511,086 20,417,379 $ 20,417 $16,195,761 Issuance of common stock for officer's compensation 1,975,000 1,975 787,350 Issuance of common stock for legal and for consulting services rendered 90,000 90 44,910 Issuance of Common Stock through exercise of stock options 500,000 500 199,500 Issuance of stock option to consultant 120,000 120,000 Cancellation of restricted stock issued in the acquisition of Big Mountain Construction Company, Inc. ( 215,983) ( 216) Adjustment ( 5,000) ( 5) Officer loans converted to compensation Net (loss) for the year ended June 30, 2001 ------- --------- ---------- ---------- ----------- Closing balance - June 30, 2001 428,572 $1,511,086 22,761,396 $ 22,761 $ 17,347,521 ======= ========= ========== ========== ===========
(Deficit) Accumulated During the Total Officers' Development Stockholders' Loans Stage Equity ------------- --------------- -------------- Opening balance - July 1, 2000 $ (191,749) $ ( 4,312,689) $ 13,222,826 Issuance of common stock for officer's compensation 789,325 Issuance of common stock for legal and for consulting services rendered 45,000 Issuance of Common Stock through exercise of stock options 200,000 Issuance of stock option to consultant Cancellation of restricted stock issued in the acquisition of Big Mountain Construction Company, Inc. ( 216) Adjustment ( 5) Officer loans converted to compensation 191,749 191,749 Net (loss) for the year ended June 30, 2001 ( 2,740,898) ( 2,740,898) ------------- --------------- -------------- Closing balance - June 30, 2001 $ - $ ( 7,053,587) $ 11,827,781 ============= =============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-30 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
2001 2000 ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) $( 894,696) $( 479,903) ADJUSTMENTS TO RECONCILE NET (LOSS) TO CASH (USED) IN OPERATING ACTIVITIES Depreciation and amortization 264,701 274,044 Deferred tax benefit ( 456,550) ( 240,000) Loss on sale of land - 197,650 Stock issued for services 724,660 185,725 Reduction of officer loans as repayment for services - 31,000 (Increase) decrease in assets: Employee advances - ( 788) Capitalized interest - ( 48,142) Land development costs ( 3,444) - Other assets - ( 45,000) Increase (decrease) in liabilities: Accounts payable 21,153 ( 9,212) Accrued expenses 11,356 ( 84,798) Accrued interest 43,125 - ---------- ----------- Total Adjustments 605,001 260,479 ---------- ----------- Net cash (used) by operating activities ( 289,695) ( 219,424) CASH FLOWS FROM INVESTING ACTIVITIES: Machinery and equipment acquisitions ( 5,818) - ---------- ----------- Net cash (used) by investing activities ( 5,818) - ---------- ----------- Subtotal ( 295,513) ( 219,424) ========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-31 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
2001 2000 ---------- ----------- Subtotal $( 295,513) $( 219,424) CASH FLOWS FROM FINANCING ACTIVITIES: Loans and advances from (to) related parties ( 200,000) 71,240 Repayment of officer loans - 163,000 Issuance of common stock 19,258 - Loans and notes payable - (repayments) ( 1,135) ( 1,237) ---------- ----------- Net cash (used) provided by financing activities ( 181,877) 233,003 ---------- ----------- Net (decrease) increase in cash ( 477,390) 13,579 ---------- ----------- Cash - beginning of period 667,142 18,516 ---------- ----------- Cash - end of period $ 189,752 $ 32,095 ========== =========== Supplemental Disclosure of cash flow information: Cash Paid During the Year for: Interest expense $ 91 $ 5,202 ========== =========== Income taxes $ - $ - ========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-32 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 NON-CASH INVESTING AND FINANCING TRANSACTIONS On May 25, 2000, Composite issued 327,511 shares of common stock valued at $191,749 to an officer of the Company to pay specific company expenses. Accordingly, an officer loan receivable was recorded for $191,749 and was reflected as a reduction of stockholders' equity at June 30, 2000. An additional 300,000 shares valued at $131,000 were issued to the officer during the quarter ended September 30, 2000. During this quarter, the $163,000 was repaid to the Company. The loan was also reduced by an additional $31,000 in exchange for services. During the three months ended September 30, 2000, Composite issued 425,000 shares of common stock valued at $185,725 for legal and consulting services performed. On July 2, 2001, the Company issued 150,000 shares of common stock to a financial consulting firm as a "commencement bonus" under an agreement wherein the financial consultant will perform certain evaluations and analyses for the Company. The agreement term is for six months effective July 1, 2001. These shares related to the commencement bonus have been valued at $.44 per share for a total valuation of $66,000. This will be recognized as consulting expenses over six months commencing July, 2001. For the three months ended September 30, 2001, consulting expense amounted to 33,000. The Company recorded the remaining $33,000 as prepaid consulting fees as a current asset. On July 11, 2001, a total of 149,385 shares of the Company's common stock were issued to two individuals for $37,346 to be paid at a future date. These shares are restricted as to transferability under SEC Rule 144 for a period of one year. The shares have been valued at $.25 per share for a total valuation of $37,346. The portion that remained unpaid as of September 30, 2001 amounted to $18,089. This was recorded as other receivables and is shown as a current asset. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS NON-CASH INVESTING AND FINANCING TRANSACTIONS (continued) Composite issued 17,000,000 shares of common stock to senior corporate officers on August 23, 2001. The shares were issued for future services to be rendered to the Company related to capital raising efforts, building alliances, and overall corporate strategy development. These shares are restricted as to transferability under SEC Rule 144. The trading restrictions run for a two-year period. The shares have been valued at $.33 per share for a total valuation of $5,525,000. This value reflects a discount of 50% for the two-year trading restriction as well as a discount related to the volume of shares in this transaction compared to the number of shares outstanding. Therefore, the unearned compensation of $5,525,000 related to this transaction will be amortized to compensation expense ratably over a two-year period. For the three months ended September 30, 2001, compensation expense amounted to $690,625. The remaining compensation of $4,834,375 was recorded as prepaid officers' compensation as a reduction of stockholders' equity. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F-33 COMPOSITE INDUSTRIES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 and 2000 NOTE 1 - General and Summary of Significant Accounting Policies (A) - Nature of Business Composite Industries of America, Inc. ("Composite"- formerly known as World Homes, Inc./ Affordable Homes of America, Inc.), is a development stage company primarily in the business of land development and the construction of residential houses. Composite owns the patent rights to a compound to be used in the construction process referred to as Z-MIX. The process is more fully described in Note 2. Composite's operations include its wholly owned subsidiary Big Mountain Construction Company, Inc., which is a general building contractor. During the fiscal quarter ended March 31, 2001, operations of Big Mountain terminated. Composite Industries' corporate headquarters are located in Las Vegas, Nevada. During the 2001 fiscal year, the Company underwent a name change to World Homes, Inc. The Company changed its name again to Composite Industries of America, Inc. in August 2001. (B) - Consolidated Net (Loss) per Common Share Consolidated net (loss) per common share is computed on the basis of the weighted average number of common shares outstanding during the period. Only the weighted average number of shares of common stock outstanding was used to compute basic loss per share for the three months ended September 30, 2001 and 2000 as the inclusion of stock options are anti-dilutive. There were no stock warrants, or other common stock equivalents outstanding during this period. (C) - Income Taxes Income taxes are provided or a benefit is accrued on all revenue and expense items included in the consolidated statements of operations, regardless of the period in which such items are recognized for income tax purposes, except for items representing a permanent difference between pretax accounting income and taxable income. F-34 (D) - Depreciation Composite depreciates equipment, vehicles, furniture and fixtures, and machinery on a straight-line basis over five to ten years for financial reporting purposes. (E) - Patents Composite amortizes its patent rights from the date of acquisition on a straight-line basis over its remaining life at acquisition of 16 years and 3 months. (F) - Use of Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (G) - Basis of Presentation The accompanying consolidated balance sheets and related consolidated statements of operations, stockholders' equity and cash flows during the development stage, includes the accounts of Composite Industries of America, Inc. and Big Mountain Construction Company, Inc. as of September 30, 2000 and for the three months then ended. Significant inter-company transactions or balances have been eliminated. The financial statements include only the operations of Composite Industries of America, Inc. for the three months ended September 30, 2001 since Big Mountain was terminated in March, 2001. F-35 Note 2 - Patent Composite believes that it is appropriate to continue to carry the cost of its Z-MIX patent at September 30, 2001 because the signing of these long-term contracts demonstrates the patent's immediate commercial viability. Furthermore, management believes that the expected future profits and cash flows will support the carrying value of the patent. The patent is being amortized on a straight-line basis over the remaining life of the patent (195 months as of the acquisition date). Patent amortization expense amounted to $260,625 for the three months ended September 30, 2001 and 2000. Note 3 - Machinery and Equipment Machinery and equipment consists of the following as of September 30, 2001 and June 30, 2001: (Unaudited) September June 2001 2001 ---------- ---------- Equipment and tools not placed in service $ 80,060 $ 80,060 Machinery and equipment 96,062 90,244 Office equipment 5,094 5,094 Furniture and fixtures 3,032 3,032 Vehicles 26,607 26,607 210,855 205,037 Less: accumulated depreciation ( 44,308) ( 40,232) ---------- ---------- Total $ 166,547 $ 164,805 ========== ========== Depreciation expense was incurred in the amount of $4,076 and $8,316 for the three months ended September 30, 2001 and 2000, respectively, and is included in operating expenses. F-36 NOTE 4 - Income Taxes Composite accounts for income taxes on the liability method, as provided by Statement of Financial Accounting Standards 109, Accounting for Income Taxes (SFAS 109). For the three months ended September 30, 2001 and 2000, the income tax (benefit) was comprised of the following components: 2001 2000 ---------- ---------- Current - Federal $ - - State - - ---------- ---------- Total current - - Deferred - Federal ( 456,550) ( 240,000) State - - ---------- ---------- Total deferred ( 456,550) ( 240,000) Total $( 456,550) $ ( 240,000) ========== ========== The only differing method of reporting income for tax purposes as compared to financial reporting purposes was in connection with the deferred tax liability resulting from the acquisition of patent rights described in Note 2. In addition, there is a deferred tax asset relating to the benefit provided by the net operating loss carry forward. As there are no state income taxes to be considered, the income tax provision is computed at the federal statutory rate of 34%. Deferred tax assets and liabilities consist of the following: (Unaudited) September June 2001 2001 ---------- ---------- Deferred tax assets- Tax benefit of net operating loss carryovers $ 2,760,000 $ 2,390,000 Valuation allowance - - ---------- ---------- $ 2,760,000 $ 2,390,000 ---------- ---------- Deferred tax liabilities- Patent rights acquired $ 4,876,633 $ 4,963,183 ========== ========== F-37 NOTE 4 - Income Taxes (continued) No valuation allowance was required for the deferred tax asset for each of the periods presented because management determined that there is a strong likelihood of realization of the deferred tax asset. The deferred tax asset relates to the net operating loss carry forward. Composite incurred net operating losses for financial reporting purposes totaling $894,696 during the three months ended September 30, 2001 available to offset future income for financial reporting purposes expiring in 2020. NOTE 5 - Loans and Notes Payable The following schedule summarizes loans and notes payable as of September 30, 2001 and June 30, 2001:
(Unaudited) September June 2001 2001 ---------- ---------- Note payable to Joseph Vozka dated January 30, 2001 secured by forms built by Precise Forms, Inc. due on demand including interest at 15% per annum 125,000 125,000 Automobile loan dated April 11, 2000 payable at $412 per month including interest at 5.12% per annum with the final installment due on April 11, 2005 7,294 8,429 ---------- ---------- Total 132,294 133,429 Less: current maturities 129,685 129,627 ---------- ---------- Long-term portion $ 2,609 $ 3,802 ========== ==========
Interest expense related to these loans for the three months ended September 30, 2001 and 2000 amounted to $5,408 and $5,202, respectively. The carrying value of the Company's borrowings approximate their fair values. Additionally, included in interest expense for the three months ended September 30, 2001 is interest on the convertible debenture and the amortization of the related discount which total $38,333. F-38 NOTE 6 - Related Party Transactions Composite has entered into consulting agreements with certain members of the Company's Board of Directors and stockholders to provide services on various strategic and business issues. The agreements are renewable at the discretion of management. Total fees paid for such services by the Company either in stock or cash during the three months ended September 30, 2001 and 2000 were $816,242 (including $125,617 cash) and $77,500 respectively and are included in operating expenses in the consolidated statements of operations. Management believes the transactions were at arm's length. The President and Chief Executive Officer has from time to time advanced funds to Composite or one of its subsidiaries to assist with working capital requirements. These transactions are short-term in nature. The joint venture construction project known as Heartland Homes advanced $53,101 to Big Mountain Construction Company, Inc. These advances are non-interest bearing and are short-term in nature. Funds advanced to the Company as of September 30, 2001 and June 30, 2001 amounted to $125,301 and $325,301, respectively, and are carried in loans and advances from related parties. No interest was charged for the three months ended September 30, 2001 and 2000. NOTE 7 - Concentration of Credit Risk - Cash Composite maintains its cash balances at financial institutions located in Nevada. At times, the balance may exceed federally insured limits of $100,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash on deposit. The fair market value of this financial instrument approximates cost. F-39 NOTE 8 - Industry Segment Information Composite's operations are conducted in one industry segment. NOTE 9 - Other Receivables On July 11, 2001, 149,385 restricted shares of the Company's common stock were issued to two individuals for cash to be paid at a future date. The shares are valued at $37,346 or $.25 per share. As of September 30, 2001, $18,089 remained unpaid. NOTE 10 - Stock Issued For Services During the three months ended September 30, 2000, Composite issued 425,000 shares of common stock valued at $185,725 for legal and consulting services performed. NOTE 11 - Rent Composite rents office space for its Las Vegas, Nevada headquarters on a month-to- month basis. Rent expense amounted to $1,920 for each of the three months ended September 30, 2001 and 2000. NOTE 12 - Prepaid Consulting Fees On July 2, 2001, the Company issued 150,000 shares of common stock to a financial consulting firm as a "commencement bonus" under an agreement wherein the financial consultant will perform certain evaluations and analyses for the Company. The agreement term is for six months starting on May 23, 2001. These shares related to the commencement bonus have been valued at $66,000 or $.44 per share. This will be recognized as consulting expenses ratably over six months commencing July, 2001. For the three months ended September 30, 2001, consulting expense amounted to $33,000 with $33,000 remaining as prepaid consulting fees. NOTE 13 - Prepaid Officers' Compensation On August 23, 2001 Composite issued 17,000,000 shares of common stock to senior corporate officers. The shares were issued for future services to be rendered to the Company related to capital raising efforts, building alliances, and overall corporate strategy development for the period from July 1, 2001 to June 30, 2003 and are restricted as to transferability under SEC Rule 144 for two years. The shares have been valued at $5,525,000 or $.33 per share. This value reflects a discount for the restriction as well as the volume of shares. Therefore, the unearned compensation of $5,525,000 related to this transaction will be amortized ratably over a two-year period. For the three months ended September 30, 2001, compensation expense amounted to $690,625. The remaining compensation of $4,834,375 was recorded as prepaid officers' compensation as a reduction of stockholders' equity. NOTE 14 - Going Concern Considerations Composite Industries has operated as a development stage enterprise since February 10, 1997, its inception and therefore has operated for over four years without generating revenues. Funds have been generated primarily by the extension of loans and advances from officers and directors and the issuance of common and preferred stock and debentures. The failure to generate revenues from operations has caused Composite to experience liquidity shortfalls from time to time. The Chairman, Merle Ferguson has pledged to continue to contribute money to keep Composite solvent during the next twelve months. Further, the Company has contracts with joint venture partners and expects to commence construction operations during fiscal year 2002. It is for these reasons that management believes that substantial doubt about Composite's ability to continue as a going concern is alleviated. F-40 NOTE 15 - Subsequent Events Acquisitions: On October 1, 2001, Composite acquired 100% of the common stock of MJB Towers, Inc. a California corporation in the business of acquiring and leasing telecommunication towers, in exchange for 1,000,000 shares of preferred stock. In addition, the terms of the agreement specify a bonus payment first, beginning with the first month of operations, and there is a provision for an additional bonus based on future performance. Stock Exchange Agreement: On October 5, 2001, Composite has entered into a stock exchange agreement with Tribal Electric Association-2000, a California corporation, ("TEA") in the business of developing, constructing and operating power plants in the United States and throughout the World, in exchange for 1,000,000 shares of Class C convertible preferred non-voting shares at a strike price of $150 per share. All of the shares owned by ("TEA") constitute 100% of all the issued and outstanding capital stock of the Company. COMPOSITE INDUSTRIES OF AMERICA, INC. 72,205,722 Shares Common Stock PROSPECTUS You should rely only on the information contained in this document or that we have referred you to. We have not authorized anyone to provide you with information that is different. This prospectus is not an offer to sell common stock and is not soliciting an offer to buy common stock in any state where the offer or sale is not permitted. _______________, 2001 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. Under Nevada Revised Statutes Section 78.7502 and 78.751, our articles of incorporation and bylaws provide us with the power to indemnify any of our directors, officers, employees or agents. The director, officer, employ or agent must have conducted himself in good faith and reasonably believe that his conduct was in, or not opposed to our best interests. In a criminal action the director, officer, employee or agent must not have had a reasonable cause to believe his conduct was unlawful. Advances for expenses may be made if the director affirms in writing that he believes he has met the standards and that he will personally repay the expense if it is determined he did not meet the standards. We will not indemnify a director or officer adjudged liable due to his negligence or willful misconduct toward us, adjudged liable to us, or if he improperly received personal benefit. Indemnification in a derivative action is limited to reasonable expenses incurred in connection with the proceeding. Article Tenth of the registrant's Certificate of Incorporation provides that the registrant shall indemnify any and all persons whom it shall have power to indemnify to the maximum extent permitted by Nevada law. Article VII of the registrant's by-laws provides that the registrant shall indemnify authorized representatives of the registrant to the fullest extent permitted by Nevada law. The registrant's by-laws also permit the registrant to purchase insurance on behalf of any such person against any liability asserted against such person and incurred by such person in any capacity, or out of such person's status as such, whether or not the registrant would have the power to indemnify such person against such liability under the foregoing provision of the by-laws or under the provisions of Nevada law. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses in connection with the issuance and distribution of the securities being registered for resale hereby. All such expenses will be borne by the registrant; none shall be borne by any selling stockholders. Securities and Exchange Commission registration fee $ 7,214 Legal fees and expenses (1) $ 50,000 Accounting fees and expenses (1) $ 15,000 Miscellaneous (1) $ 1,000 Total $ 73,214 _______________________________ (1) Estimated. ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. In April 2001, we issued a convertible Debenture in the amount of $1,000,000. See "The April 2001 Financing." The Debenture and warrant issued in April 2001 were issued in reliance on the exemptions from registration provided by Rule 506 of Regulation D and Section 4(2) of the Securities Act. In June 2001 we issued warrants to purchase 65,000 and 35,000 shares of our common stock, respectively, to Hyperion Holdings, LLC and vFinance.com, Inc. as payment for consulting services. The warrants were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D, promulgated thereunder We believe that the exemption afforded by Section 4(2) is applicable to the issuances described above because each was a transaction by an issuer not involving a public offering, and we believe that the exemption provided by Rule 506 was available because we sold our securities only to accredited investors, as defined in Rule 501 of Regulation D, in transactions not involving a general solicitation and in accordance with the general requirements set forth in Rule 502 of Regulation D. On October 22, 2001, we issued a convertible Debenture in the amount of $750,000. See "The October 2001 Financing." The Debenture and warrants issued in October 2001 were issued in reliance on the exemptions from registration provided by Rule 506 of Regulation D and Section 4(2) of the Securities Act. On December, 2001 we entered into an Equity Line Purchase Agreement with Burlington Street LLC. Pursuant to this agreement, we have the right, subject to certain conditions, to sell up to $10,000,000 of our shares of common stock over the next two years to Burlington. See "The Equity Line Financing." Additionally, we issued two warrants to Burlington to purchase, respectively, up to 521,739 shares of our common stock at an exercise price of $0.575 and up to 2,173,913 shares of our common stock at an exercise price equal to $.01 per share. The shares issuable pursuant to the Equity Line Purchase Agreement and the warrant were sold in reliance on the exemptions from registration provided by Rule 506 of Regulation D and Section 4(2) of the Securities Act. ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits: The following exhibits are filed as part of this registration statement: Exhibit Description 3.1 (1) Articles of Incorporation of Composite Industries of America, Inc. (incorporated by reference) 3.2 (1) Articles of Merger (incorporated by reference) 3.31 (1) Articles of Amendment to the Articles of Incorporation of Composite Industries of America, Inc. (incorporated by reference) 3.32 (2) Articles of Amendment to the Articles of Incorporation of Composite Industries of America, dated August 23, 2001 (incorporated by reference) 3.4 (1) By-laws of Composite Industries of America, Inc., as amended (incorporated by reference) 5.1 (4) Opinion of Jenkens & Gilchrist Parker Chapin LLP (incorporated by reference) 10.1 (4) Convertible Debenture Purchase agreement entered into by Composite Industries of America and the subscriber dated as of April 5, 2001 10.2 (4) 6% Convertible Debenture issued by Composite Industries of America, Inc. to Lenore Avenue LLC., dated April 5, 2001. 10.3 (4) Warrant issued by Composite Industries of America, Inc. to Lenore Avenue LLC., dated April 5, 2001. 10.4 (4) Registration Rights Agreement entered into by Composite Industries of America and Lenore Avenue LLC dated as of April 5, 2001. 10.5 (3) Joint Venture Agreement between Composite Industries of America and Tristar USA of LA, Inc. dated as of June 22, 2000 (incorporated by reference) 10.6 (3) Joint Venture Agreement between Composite Industries of America and AL NASR Trading & Industrial Corporation LLC dated as of August 17, 2000 (incorporated by reference) 10.7 (3) Consulting Agreement between Composite Industries of America and CS&S Enterprises, Inc. (incorporated by reference) 10.8 (4) Convertible Debenture Purchase agreement entered into by Composite Industries of America and the subscriber dated as of October 22, 2001 10.9 (4) Form of 6% Convertible Debenture issued by Composite Industries of America to Lenore Avenue LLC. 10.10 (4) Warrant issued by Composite Industries of America to Lenore Avenue LLC. 10.11 (4) Registration Rights Agreement entered into by Composite Industries of America and Lenore Avenue LLC, dated as of October 22, 2001. 10.12 (4) Form of warrant issued by Composite Industries of America to Lenore Avenue LLC. 10.13 (4) Equity Line Purchase Agreement entered into by Composite Industries of America and Burlington Street LLC, dated as of December 3, 2001. 10.14 (4) Warrant issued by Composite Industries of America to Burlington Street LLC, dated as of December 3, 2001. 10.15 (4) Callable Warrant issued by Composite Industries of America to Burlington Street LLC. Dated as of December 3, 2001. 10.16 (4) Registration Rights Agreement entered into by Composite Industries of America and Burlington Street LLC, dated as of December 3, 2001. 23.1 (4) Consent of Pascale, Razzino, Alexanderson & Co PLLC. 23.2 (4) Consent of Jenkens & Gilchrist Parker Chapin LLP (included in exhibit 5.1 hereto) 24.1 (4) Power of Attorney (included on signature page) (1) Filed as an exhibit with the Company's annual report on Form 10-KSB filed with the Commission on October 4, 2000, and incorporated herein by reference. (2) Filed as an exhibit with the Company's current report on Form 8-K filed with the Commission on August 31, 2001. (3) Filed as an exhibit with the Company's annual report on Form 10-KSB filed with the Commission on October 12, 2001, and incorporated herein by reference. (4) Filed herewith. ITEM 28. UNDERTAKINGS. (A) The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information set forth in the registration statement; and (iii) Include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (B) Undertaking Required by Regulation S-B, Item 512(e). Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or controlling persons pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel that the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Las Vegas, State of Nevada, on the 6th day of December, 2001. Composite Industries of America, Inc. By: /s/ Merle Ferguson Merle Ferguson Chief Executive Officer, President and Chairman Exhibit 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Merle Ferguson and William Morris and each of them with power of substitution, as his attorney-in-fact, in all capacities, to sign amendments to this registration statement (including post-effective amendments) and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney- in-facts or their substitutes may do or cause to be done by virtue hereof Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date -------------- ------------------------ ---------------- /s/ Merle Ferguson Chief Executive Officer, December 6, 2001 Merle Ferguson President and Director /s/ William Morris Executive Vice President December 6, 2001 William Morris of Finance, Chief Financial Officer and Director /s/ Susan Donohue Director and Secretary December 6, 2001 Susan Donohue EXHIBIT INDEX Exhibit Description 3.1 (1) Articles of Incorporation of Composite Industries of America, Inc. (incorporated by reference) 3.2 (1) Articles of Merger (incorporated by reference) 3.31 (1) Articles of Amendment to the Articles of Incorporation of Composite Industries of America, Inc. (incorporated by reference) 3.32 (2) Articles of Amendment to the Articles of Incorporation of Composite Industries of America, dated August 23, 2001 (incorporated by reference) 3.4 (1) By-laws of Composite Industries of America, Inc., as amended (incorporated by reference) 5.1 (4) Opinion of Jenkens & Gilchrist Parker Chapin LLP (incorporated by reference) 10.1 (4) Convertible Debenture Purchase agreement entered into by Composite Industries of America and the subscriber dated as of April 5, 2001 10.2 (4) 6% Convertible Debenture issued by Composite Industries of America, Inc. to Lenore Avenue LLC., dated April 5, 2001. 10.3 (4) Warrant issued by Composite Industries of America, Inc. to Lenore Avenue LLC., dated April 5, 2001. 10.4 (4) Registration Rights Agreement entered into by Composite Industries of America and Lenore Avenue LLC dated as of April 5, 2001. 10.5 (3) Joint Venture Agreement between Composite Industries of America and Tristar USA of LA, Inc. dated as of June 22, 2000 (incorporated by reference) 10.6 (3) Joint Venture Agreement between Composite Industries of America and AL NASR Trading & Industrial Corporation LLC dated as of August 17, 2000 (incorporated by reference) 10.7 (3) Consulting Agreement between Composite Industries of America and CS&S Enterprises, Inc. (incorporated by reference) 10.8 (4) Convertible Debenture Purchase agreement entered into by Composite Industries of America and the subscriber dated as of October 22, 2001 10.9 (4) Form of 6% Convertible Debenture issued by Composite Industries of America to Lenore Avenue LLC. 10.10 (4) Warrant issued by Composite Industries of America to Lenore Avenue LLC. 10.11 (4) Registration Rights Agreement entered into by Composite Industries of America and Lenore Avenue LLC, dated as of October 22, 2001. 10.12 (4) Form of warrant issued by Composite Industries of America to Lenore Avenue LLC. 10.13 (4) Equity Line Purchase Agreement entered into by Composite Industries of America and Burlington Street LLC, dated as of December 3, 2001. 10.14 (4) Warrant issued by Composite Industries of America to Burlington Street LLC, dated as of December 3, 2001. 10.15 (4) Callable Warrant issued by Composite Industries of America to Burlington Street LLC. Dated as of December 3, 2001. 10.16 (4) Registration Rights Agreement entered into by Composite Industries of America and Burlington Street LLC, dated as of December 3, 2001. 23.1 (4) Consent of Pascale, Razzino, Alexanderson & Co PLLC. 23.2 (4) Consent of Jenkens & Gilchrist Parker Chapin LLP (included in exhibit 5.1 hereto) 24.1 (4) Power of Attorney (included on signature page) (1) Filed as an exhibit with the Company's annual report on Form 10-KSB filed with the Commission on October 4, 2000, and incorporated herein by reference. (2) Filed as an exhibit with the Company's current report on Form 8-K filed with the Commission on August 31, 2001. (3) Filed as an exhibit with the Company's annual report on Form 10-KSB filed with the Commission on October 12, 2001, and incorporated herein by reference. (4) Filed herewith. EX-5.1 3 ex5-1.txt FORM OF OPINION Exhibit 5.1 FORM OF OPINION December __, 2001 Composite Industries of America, Inc. 4505 West Hacienda Avenue, Unit I-1 Las Vegas, Nevada 89118 Dear Sir or Madam: We have acted as special counsel to Composite Industries of America, Inc., a Nevada corporation (the "Company"), in connection with its filing of its registration statement on Form SB-2 (the "Registration Statement"), being filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), relating to an offering of an aggregate of 72,205,722 shares of common stock, par value $.001 per share (the "Common Stock"), of the Company. In our capacity as counsel to the Company, we have examined originals or copies, satisfactory to us, of the Company's (i) Certificate of Incorporation, as amended, (ii) By-laws, as amended, and (iii) resolutions of the Company's board of directors. We have also reviewed such other matters of law and examined and relied upon such other corporate records, agreements, certificates and other documents as we have deemed relevant and necessary as a basis for the opinion hereinafter expressed. In such examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity with the original documents of all documents submitted to us as copies or facsimiles. As to any facts material to such opinion, we have, to the extent that relevant facts were not independently established by us, relied on certificates of public officials and certificates of officers or other representatives of the Company. Based upon and subject to the foregoing, we are of the opinion that: the 6,943,832 shares of Common Stock issuable upon conversion of the debenture and exercise of the warrant issued in accordance with the terms of the Convertible Debenture Purchase Agreement, dated as of April 5, 2001 between the Company and Lenore Avenue LLC, when issued in accordance with the terms of such debenture and warrant as the case may be, will be legally issued, fully paid and non-assessable; the 5,285,387 shares of Common Stock issuable upon conversion of the debenture and exercise of the warrant issued in accordance with the terms of the Convertible Debenture Purchase Agreement, dated as of October 22, 2001 between the Company and Lenore Avenue LLC, when issued in accordance with the terms of such debenture and warrant as the case may be, will be legally issued, fully paid and non-assessable; the 59,876,503 shares of Common Stock issuable in accordance with the terms of the Equity Line Purchase Agreement between the Company and Burlington Street LLC, dated as of December 3, 2001, and upon the exercise of warrants issued in accordance with the terms of such Equity Line Purchase Agreement, when issued in accordance with the terms of such Purchase Agreement and warrants as the case may be, will be legally issued, fully paid and non- assessable; and the 100,000 shares of Common Stock issuable upon the exercise of warrants issued in accordance with the terms of an engagement letter between the Company and Hyperion Holdings, LLC, when issued in accordance with the terms of such warrants, shall be legally issued, fully paid and non- assessable. We hereby consent to the use of our name under the caption "Legal Matters" in the prospectus constituting a part of the Registration Statement and to the filing of this opinion as an exhibit to the Registration Statement. In giving this consent, we do not thereby admit that we are within the category of persons whose consent is required under Section 7 of the Act, the rules and regulations of the Securities and Exchange Commission promulgated thereunder or Item 509 of Regulation S-K promulgated under the Act. Very truly yours, JENKENS & GILCHRIST PARKER CHAPIN LLP EX-10.1 4 ex10-1.txt CONVERTIBLE DEBENTURE 04-05-2001 Exhibit 10.1 CONVERTIBLE DEBENTURE PURCHASE AGREEMENT (this "Agreement"), dated as of April 5, 2001, among World Homes, Inc., a Nevada corporation (the "Company"), and the investors signatory hereto (each such investor is a "Purchaser" and all such investors are, collectively, the "Purchasers"). WHEREAS, subject to the terms and conditions set forth in this Agreement and in accordance with Sec.4(2) under the Securities Act of 1933, as amended (the "Securities Act"), and Rule 506 promulgated thereunder, the Company desires to issue and sell to the Purchasers and the Purchasers, severally and not jointly, desire to purchase from the Company: (i) an aggregate principal amount of $1,000,000 of the Company's 6% Convertible Debentures, due twelve months from issuance, which shall be in the form of Exhibit A (the "Debentures"), and which are convertible into shares of the Company's common stock, $.001 par value per share (the "Common Stock"), and (ii) certain Warrants (as defined herein). 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 the Purchasers agree as follows: ARTICLE I PURCHASE AND SALE 1.1 The Closing (a) (i) The Closing. Subject to the terms and conditions set forth in this Agreement the Company shall issue and sell to the Purchasers and the Purchasers shall severally purchase from the Company the Debentures and Warrants for an aggregate purchase price of $1,000,000. The closing of the purchase and sale of the Debentures (the "Closing") shall take place at the offices of Robinson Silverman Pearce Aronsohn & Berman LLP ("Robinson Silverman"), 1290 Avenue of the Americas, New York, New York 10104, immediately following the execution hereof or such later date as the parties shall agree. The date of the Closing is hereinafter referred to as the "Closing Date." (ii) At the Closing, the parties shall deliver or shall cause to be delivered the following: (A) the Company shall deliver to each Purchaser: (1) Debentures registered in the name of such Purchaser in the aggregate principal amount indicated below such Purchaser's name on the signature page to this Agreement, (2) the legal opinion of James E. Pratt, Esq., outside counsel to the Company, in the form of Exhibit B, (3) an executed Registration Rights Agreement, dated the date hereof, among the Company and the Purchasers, in the form of Exhibit C (the "Registration Rights Agreement"), (4) Transfer Agent Instructions, in the form of Exhibit D, delivered to and acknowledged by the Company's transfer agent (the "Transfer Agent Instructions"), (5) a Common Stock purchase warrant, in the form of Exhibit E, registered in the name of such Purchaser, pursuant to which such Purchaser shall have the right at any time and from time to time thereafter through the fifth anniversary of the Closing Date to acquire the number of shares of Common Stock indicated below such Purchaser's name on the signature page to this Agreement (the "Warrants"), (6) an executed Guaranty and Stock Pledge Agreement, dated the date hereof, in the Form of Exhibit F, (the "Pledge Agreement"); and (B) each Purchaser will deliver to the Company: (1) the purchase price indicated below such Purchaser's name on the signature page to this Agreement in United States dollars in immediately available funds by wire transfer to an account designated in writing by the Company for such purpose, and (2) executed originals of this Agreement, the Registration Rights Agreement and the Pledge Agreement. 1.2 Certain Defined Terms. For purposes of this Agreement, "Conversion Price," "Original Issue Date," "Trading Day" and "Per Share Market Value" shall have the meanings set forth in the Debentures; "Business Day" shall mean 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 or Nevada are authorized or required by law or other governmental action to close; A "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. ARTICLE II REPRESENTATIONS AND WARRANTIES 2.1 Representations and Warranties of the Company. The Company hereby makes the following representations and warranties to the Purchasers: (a) Organization and Qualification. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Nevada with the requisite corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. The Company has no subsidiaries other than as set forth in Schedule 2.1(a) (collectively the "Subsidiaries"). Each of 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. 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, (x) adversely affect the legality, validity or enforceability of the Securities (as defined below) or any of this Agreement, the Registration Rights Agreement, the Transfer Agent Instructions, the Pledge Agreement or the Warrants (collectively, the "Transaction Documents"), (y) have or result in a material adverse effect on the results of operations, assets, prospects, or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (z) adversely impair the Company's ability to perform fully on a timely basis its obligations under any of the Transaction Documents (any of (x), (y) or (z), a "Material Adverse Effect"). (b) 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 thereunder. The execution and delivery of each of the Transaction Documents by the Company and the consummation by it of the transactions contemplated thereby have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company. Each of the Transaction Documents has been 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. Neither the Company nor any 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. (c) Capitalization. The number of authorized, issued and outstanding capital stock of the Company is set forth in Schedule 2.1(c). Except as disclosed in Schedule 2.1(c), the Company owns all of the Capital Stock of each Subsidiary. No shares of Common Stock are entitled to preemptive or similar rights, nor is any holder of the securities of the Company entitled to preemptive or similar rights arising out of any agreement or understanding with the Company by virtue of any of the Transaction Documents. Except as a result of the purchase and sale of the Debentures and Warrants and except as disclosed in Schedule 2.1(c), 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 Warrants or Underlying Shares (as hereinafter defined) will not obligate the Company to issue shares of Common Stock or other securities to any Person other than the Purchaser and will not result in a right of any holder of Company securities to adjust the exercise or conversion or reset price under such securities. (d) Issuance of the Debentures and the Warrants. The Debentures will be duly and validly issued, free and clear of all liens, encumbrances and rights of first refusal of any kind (collectively, "Liens"). On the date hereof, the Company will have (and will, at all times while Debentures are outstanding, maintain) an adequate reserve of duly authorized shares of Common Stock, reserved for issuance to the holders of such Debentures and Warrants, to enable it to perform its conversion, exercise and other obligations under this Agreement. Such number of reserved and available shares of Common Stock shall not be less than the sum of 200% of the number of shares of Common Stock which would be issuable upon (i) conversion in full of the Debentures assuming such conversion occurred on the Original Issue Date, and the Debentures remain outstanding for one year and all interest is paid in shares of Common Stock and (ii) exercise in full of the Warrants (the "Initial Minimum"). All such authorized shares of Common Stock shall be duly reserved for issuance to the holders of the Debentures and Warrants. The shares of Common Stock issuable upon conversion of the Debentures and upon exercise of the Warrants are collectively referred to herein as the "Underlying Shares." The Debentures, Warrants and the Underlying Shares are collectively referred to herein as, the "Securities." When issued to the Purchasers in accordance with the Debentures and the Warrants, the Underlying Shares will be duly authorized, validly issued, fully paid and nonassessable, free and clear of all Liens. (e) 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 charter documents (each as amended through the date hereof), or (ii) subject to obtaining the Required Approvals (as defined below), conflict with, or constitute a default (or an event which 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; except in the case of each of clauses (ii) and (iii), as could not, individually or in the aggregate, have or result in a Material Adverse Effect. The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental authority, except for violations which, individually or in the aggregate, could not have or result in a Material Adverse Effect. (f) 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 pursuant to Section 3.10, (ii) the filing with the Commission of a registration statement meeting the requirements set forth in the Registration Rights Agreement and covering the resale of the Underlying Shares by the Purchasers (the "Underlying Shares Registration Statement"), (iii) applicable Blue Sky filings, and (iv) in all other cases where the failure to obtain such consent, waiver, authorization or order, or to give such notice or make such filing or registration could not have or result in, individually or in the aggregate, a Material Adverse Effect (collectively, the "Required Approvals"). (g) Litigation; Proceedings. 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 or any of its Subsidiaries 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 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) a claim of violation of or liability under federal or state securities laws or (B) a claim of breach of fiduciary duty; (iii) the Company does not have pending before the Commission any request for confidential treatment of information and the Company has no knowledge of any expected such request that would be made prior to the Effectiveness Date (as defined in the Registration Rights Agreement); and (iv) there has not been, and to the best of the Company's knowledge 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. (h) No Default or Violation. Neither the Company nor any Subsidiary (i) is in default under or in violation of (and no event has occurred which has not been waived which, 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, (ii) is in violation of any order of any court, arbitrator or governmental body, or (iii) is in violation of any statute, rule or regulation of any governmental authority, in each case of clauses (i), (ii) or (iii) above, except as could not individually or in the aggregate, have or result in a Material Adverse Effect. (i) Private Offering. Assuming the accuracy of the representations and warranties of the Purchasers set forth in Sections 2.2(b)-(g), the offer, issuance and sale of the Securities to the Purchasers as contemplated hereby are exempt from the registration requirements of the Securities Act. Neither the Company nor any Person acting on its behalf has taken or is, to the knowledge of the Company, contemplating taking any action which could subject the offering, issuance or sale of the Securities to the registration requirements of the Securities Act including soliciting any offer to buy or sell the Securities by means of any form of general solicitation or advertising. (j) SEC Reports; Financial Statements. The Company has filed all reports required to be filed by it under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including, without limitation, all filings required pursuant to Sections 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" and, together with the Schedules to this Agreement, the "Disclosure Materials") 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. All material agreements to which the Company is a party or to which the property or assets of the Company are subject have been filed as exhibits to the SEC Reports as required under the Exchange Act. 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. Since January 1, 2000, except as specifically disclosed in the SEC Reports, (a) there has been no event, occurrence or development that has or that could result in a Material Adverse Effect, (b) the Company has not incurred any liabilities (contingent or otherwise) other than (x) liabilities incurred in the ordinary course of business consistent with past practice and (y) liabilities not required to be reflected in the Company's financial statements pursuant to GAAP or required to be disclosed in filings made with the Commission, (c) the Company has not altered its method of accounting or the identity of its auditors and (d) the Company has not declared or made any payment or distribution of cash or other property to its stockholders or officers or directors (other than in compliance with existing Company stock option plans or employee benefit plans (as defined n Rule 405 of Regulation C)) with respect to its capital stock, or purchased, redeemed (or made any agreements to purchase or redeem) any shares of its capital stock. (k) Investment Company. The Company is not, and is not an Affiliate (as defined in Rule 405 under the Securities Act) of, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (l) Certain Fees. Except for certain fees payable to Union Atlantic Capital, L.C., no fees or commissions 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. The Purchasers shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by this Agreement. The Company shall indemnify and hold harmless the Purchasers, their employees, officers, directors, agents, and partners, and their respective Affiliates, from and against all claims, losses, damages, costs (including the costs of preparation and attorney's fees) and expenses suffered in respect of any such claimed or existing fees, as such fees and expenses are incurred. (m) Seniority. 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. (n) Listing and Maintenance Requirements. Except as set forth in the SEC Reports, the Company has not, in the two years preceding the date hereof, received notice (written or oral) from any stock exchange, market or trading facility on which the Common Stock is or has been listed (or on which it has been quoted) to the effect that the Company is not in compliance with the listing or maintenance requirements of such exchange, market or trading facility. The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with the listing and maintenance requirements for continued trading of the Common Stock on the OTC Bulletin Board. (o) Patents and Trademarks. The Company and its Subsidiaries have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and rights which are necessary or material for use in connection with their respective businesses as described in the SEC Reports and which the failure to so have would 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 its Subsidiaries violates or infringes upon the rights of any Person. To the best 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) Registration Rights; Rights of Participation. Except as set forth on Schedule 6(b) to the Registration Rights Agreement, 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 which has not been satisfied. Except as set forth on Schedule 6(b) to the Registration Rights Agreement, 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. (q) Regulatory Permits. The Company and its Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state 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 result in a Material Adverse Effect ("Material Permits"), and neither the Company nor any such Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit. (r) Title. The Company and the Subsidiaries have good and marketable title in fee simple to all real property owned by them which is material to the business of the Company and its Subsidiaries and good and marketable title in all personal property owned by them which is material to the business of the Company and its 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 interfere with the use made and proposed to be made of such property by the Company and its Subsidiaries. Any real property and facilities held under lease by the Company and its Subsidiaries are held by them under valid, subsisting and enforceable leases of which the Company and its Subsidiaries are in compliance and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its Subsidiaries. (u) Labor Relations. No material labor problem exists or, to the knowledge of the Company, is imminent with respect to any of the employees of the Company. (v) Disclosure. The Company confirms that neither it nor any other Person acting on its behalf has provided any of the Purchasers or its agents or counsel with any information that constitutes or might constitute material non-public information. The Company understands and confirms that the Purchasers shall be relying 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 are true and correct 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. (w) Solvency. Based on the financial condition of the Company as of the Closing Date, (i) the Company's fair saleable value of its 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). (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 the Company's issuance of the Securities and the Purchasers' ownership of the Securities. 2.2 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 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, the Registration Rights Agreement, and the Warrants, 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 the Securities. (c) Purchaser Status. At the time such Purchaser was offered the Securities, it was, and at the date hereof it is an "accredited investor" as defined in Rule 501(a) under the Securities 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. (e) Ability of such Purchaser to Bear Risk of 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. (f) Access to Information. Such Purchaser acknowledges that it has reviewed the Disclosure Materials and has been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities and the merits and risks of investing in the Securities; (ii) access to information about the Company and the Company's financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment; and (iii) the opportunity to obtain such additional information which the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment and to verify the accuracy and completeness of the information contained in the Disclosure Materials. Neither such inquiries nor any other investigation conducted by or on behalf of such Purchaser or its representatives or counsel shall modify, amend or affect such Purchaser's right to rely on the truth, accuracy and completeness of the Disclosure Materials and the Company's representations and warranties contained in the Transaction Documents. (g) General Solicitation. Such Purchaser is not purchasing the Securities as a result of or subsequent to 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. (h) Reliance. Such Purchaser understands and acknowledges that (i) the Securities are being offered and sold to it without registration under the Securities Act in a private placement that is exempt from the registration provisions of the Securities Act and (ii) the availability of such exemption, depends in part on, and the Company will rely upon the accuracy and truthfulness of, the foregoing representations and such Purchaser hereby consents to such reliance. 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 this Section 2.2 and Section 4(a)(ii) of the Debentures. ARTICLE III OTHER AGREEMENTS OF THE PARTIES 3.1 Transfer Restrictions. (a) Securities may only be disposed of pursuant to an effective registration statement under the Securities Act, to the Company or pursuant to an available exemption from or in a transaction not subject to the registration requirements of the Securities Act, and in compliance with any applicable federal and state securities laws. In connection with any transfer of Securities other than pursuant to an effective registration statement or to the Company, except as otherwise set forth herein, the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor, 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. 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) The Purchasers agree to the imprinting, so long as is required by this Section 3.1(b), of the following legend on the Securities: NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE] OR [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. Underlying Shares shall contain the legend set forth above nor any other legend if the conversion of Debentures or the exercise of the Warrants, as the case may be, occurs at any time while an Underlying Shares Registration Statement is effective under the Securities Act or the holder is relying on Rule 144 promulgated under the Securities Act ("Rule 144") in connection with the resale of such Underlying Shares, or in the event there is not an effective Underlying Shares Registration Statement, and Rule 144 is not then available for resale of the Underlying Shares, at such time as such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). The Company shall cause its counsel to issue the legal opinion included in the Transfer Agent Instructions to the Company's transfer agent on the date that an Underlying Shares Registration Statement is declared effective by the Commission (such date, the "Effective Date"). The Company agrees that following the Effective Date, it will, no later than three (3) Trading Days following the delivery by a Purchaser to the Company of a certificate or certificates representing such Underlying Shares issued with a restrictive legend, deliver to such Purchaser certificates representing such Shares which shall be 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 which enlarge the restrictions of transfer set forth in this Section. 3.2 Acknowledgment of Dilution. The Company acknowledges that the issuance of Underlying Shares upon the conversion of the Debentures or exercise of the Warrants will 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 obligation to issue Underlying Shares upon conversion of the Debentures or exercise of the Warrants is unconditional and absolute, subject to the limitations set forth in the Debentures and Warrants, regardless of the effect of any such dilution. 3.3 Furnishing of Information. As long as the Purchasers own 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 Section 13(a) or 15(d) of the Exchange Act. As long as the Purchasers own Securities, if the Company is not required to file reports pursuant to such sections, it will prepare and furnish to the Purchasers and make publicly available in accordance with Rule 144(c) promulgated under the Securities Act such information as is required for the Purchasers to sell the Securities under Rule 144 promulgated under the Securities Act. 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 Underlying Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 promulgated under the Securities Act, including causing its attorneys to render and deliver any legal opinion required in order to permit a Purchaser to receive Underlying Shares free of all restrictive legends and to subsequently sell Underlying Shares under Rule 144 upon receipt of a notice of an intention to sell or other form of notice having a similar effect. Upon the request of any such Person, the Company shall deliver to such Person a written certification of a duly authorized officer as to whether it has complied with such requirements. 3.4 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. 3.5 Increase in Authorized Shares. If on any date the Company would be, if a notice of conversion or exercise (as the case may be) were to be delivered on such date, precluded from issuing the sum of (i) 200% of the number of Underlying Shares as would then be issuable upon a conversion in full of the Debentures and (ii) the number of Underlying Shares issuable upon exercise in full of the Warrants (the "Current Required Minimum"), in either case, due to the unavailability of a sufficient number of authorized but unissued or reserved shares of Common Stock, then the Board of Directors of the Company shall promptly prepare and mail to the stockholders of the Company proxy materials requesting authorization to amend the Company's certificate or articles of incorporation to increase the number of shares of Common Stock which the Company is authorized to issue to at least such number of shares as reasonably requested by the Purchasers in order to provide for such number of authorized and unissued shares of Common Stock to enable the Company to comply with its issuance, conversion, exercise and reservation of shares obligations as set forth in this Agreement, the Debentures and the Warrants (the sum of (x) the number of shares of Common Stock then outstanding plus all shares of Common Stock issuable upon exercise of all outstanding options, warrants and convertible instruments other than the Warrants and (y) the Current Required Minimum, shall be a reasonable number). In connection therewith, the Board of Directors shall (a) adopt proper resolutions authorizing such increase, (b) recommend to and otherwise use its best efforts to promptly and duly obtain stockholder approval to carry out such resolutions (and hold a special meeting of the stockholders no later than the earlier to occur of the 60th day after delivery of the proxy materials relating to such meeting and the 90th day after request by a holder of Securities to issue the number of Underlying Shares in accordance with the terms hereof) and (c) within five (5) Business Days of obtaining such stockholder authorization, file an appropriate amendment to the Company's certificate or articles of incorporation to evidence such increase. 3.6 Reservation and Listing of Underlying Shares. (a)The Company shall (i) in the time and manner required by any national securities exchange, market, trading or quotation facility on which the Common Stock is then traded, prepare and file with such national securities exchange, market, trading or quotation facility on which the Common Stock is then traded an additional shares listing application covering a number of shares of Common Stock which is not less than the Initial Minimum, (ii) take all steps necessary to cause such shares of Common Stock to be approved for listing on any such national securities exchange, market or trading or quotation facility on which the Common Stock is then listed as soon as possible thereafter, and (iii) provide to the Purchasers evidence of such listing, and the Company shall maintain the listing of its Common Stock thereon. (b) The Company shall maintain a reserve of shares of Common Stock for issuance upon conversion of the Debentures in full and upon exercise in full of the Warrants in accordance with this Agreement, in such amount as may be required to fulfill its obligations in full under the Transaction Documents, which reserve shall equal no less than the then Current Required Minimum. 3.7 Conversion and Exercise Procedures. The Transfer Agent Instructions, the Conversion Notice (as defined in the Debentures) and the Form of Election to Purchase (as defined in the Warrants) sets forth the totality of the procedures with respect to the conversion of the Debentures or exercise of the Warrants, including the form of legal opinion, if necessary, that shall be rendered to the Company's transfer agent and such other information and instructions as may be reasonably necessary to enable the Purchasers to convert their Debentures or exercise their Warrants. 3.8 Conversion and Exercise Obligations of the Company. The Company shall honor conversions of the Debentures and exercises of the Warrants and shall deliver Underlying Shares in accordance with the respective terms, conditions and time periods set forth in the Debentures and Warrants. 3.9 Subsequent Financing; Limitation on Registrations. (a) Other than to the Purchasers, prior to the 90th Trading Day after the Effective Date, the Company shall not 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 any equity or equity equivalent securities (including any equity, debt or other instrument that is at any time over the life thereof convertible into or exchangeable for Common Stock), and the Company will cause its Subsidiaries not to offer, sell or issue during such period any of such Subsidiary's securities which provide the holder thereof the right to receive any Common Stock (collectively, "Common Stock Equivalents"), unless otherwise agreed to in writing by the Company and the Purchasers. (b) From the date of this Agreement through the 270th Trading Day following the Effective Date, the Company shall not, directly or indirectly, offer, sell, grant any option to purchase, or otherwise dispose of (or announce any offer, sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock Equivalents (collectively, a "Subsequent Placement") unless (A) the Company delivers to each of the Purchasers a written notice (the "Subsequent Placement Notice") of its intention to effect such Subsequent Placement, which Subsequent Placement Notice shall describe in reasonable detail the proposed terms of such Subsequent Placement, the amount of proceeds intended to be raised thereunder, the Person with whom such Subsequent Placement shall be effected, and attached to which shall be a term sheet or similar document relating thereto and (B) such Purchaser shall not have notified the Company by 6:30 p.m. (New York City time) on the tenth Trading Day after its receipt of the Subsequent Placement Notice of its willingness to provide (or to cause its sole designee to provide), subject to completion of mutually acceptable documentation, financing to the Company on the same terms set forth in the Subsequent Placement Notice. If the Purchasers shall fail to notify the Company of their intention to enter into such negotiations within such time period, the Company may effect the Subsequent Placement substantially upon the terms and to the Persons (or Affiliates of such Persons) set forth in the Subsequent Placement Notice; provided, that the Company shall provide the Purchasers with a second Subsequent Placement Notice, and the Purchasers shall again have the right of first refusal set forth above in this paragraph (a), if the Subsequent Placement subject to the initial Subsequent Placement Notice shall not have been consummated for any reason on the terms set forth in such Subsequent Placement Notice within 30 Trading Days after the date of the initial Subsequent Placement Notice with the Person (or an Affiliate of such Person) identified in the Subsequent Placement Notice. If the Purchasers shall indicate a willingness to provide financing in excess of the amount set forth in the Subsequent Placement Notice, then each Purchaser shall be entitled to provide financing pursuant to such Subsequent Placement Notice up to an amount equal to such Purchaser's pro-rata portion of the aggregate number of Shares purchased by such Purchaser under this Agreement, but the Company shall not be required to accept financing from the Purchasers in an amount in excess of the amount set forth in the Subsequent Placement Notice. In furtherance of this restriction, other than to the Purchasers or Affiliates thereof, prior to the 180th Trading Day following the Effective Date, the Company may not enter into any equity line or similar financing arrangement or issue or agree to issue any shares of its Common Stock or any Common Stock Equivalents pursuant to any equity line or similar type of financing, unless otherwise agreed to in writing by the Company and the Purchasers. (c) Except to register (x) the Registrable Securities (as defined in the Registration Rights Agreement), (y) securities of the Company permitted pursuant to Section 6(c) of the Registration Rights Agreement to be registered in the Underlying Shares Registration Statement, and (z) Common Stock permitted to be issued pursuant to Section 3.9(e), the Company may not until the 180th day after the Effective Date file a registration statement to register any of its securities. (d) The restrictive periods set forth in Sections 3.9 (a)-(c) shall be extended for the number of days during such periods (A) in which trading in the Common Stock is suspended by any securities exchange or market or quotation system on which the Common Stock is then listed, or (B) following the Effective Date that the Registration Statement is not effective, or (C) following the Effective Date, that the prospectus included in the Registration Statement may not be used by the holders thereof for the resale of Registrable Securities. (e) The restrictions contained in Section 3.9 (a)-(c) shall not apply to (i)the granting of options or warrants to employees, officers and directors of the Company, and the issuance of Common Stock upon exercise of such options or warrants granted under any stock option plan or employee benefit plan (as defined in Rule 405 of Regulation C) heretofore or hereinafter duly adopted by the Company and (ii) shares of Common Stock issuable upon exercise of any currently outstanding warrants and other outstanding convertible securities of the Company, in each case as and to the extent disclosed in Schedule 2.1(c) (but not as to any amendments or modifications of the terms of such securities after the date of this Agreement, including "back-dated" agreements). 3.10 Certain Securities Laws Disclosures; Publicity. The Company shall: (i) on the Closing Date, issue a press release reasonably acceptable to the Purchasers disclosing the transactions contemplated hereby, (ii) file with the Commission a Report on Form 8-K disclosing the transactions contemplated hereby within ten Business Days after the Closing Date, and (iii) timely file with the Commission a Form D promulgated under the Securities Act. The Company shall, no less than two Business Days prior to the filing of any disclosure required by clauses (ii) and (iii) above, provide a copy thereof to the Purchasers for their review. The Company and the Purchasers shall consult with each other in issuing any other press releases or otherwise making public statements or filings and other communications with the Commission or any regulatory agency or stock market or trading facility with respect to the transactions contemplated hereby and neither party shall issue any such press release or otherwise make any such public statement, filings or other communications without the prior written consent of the other, except that if such disclosure is required by law or stock market regulation, in which such case the disclosing party shall promptly provide the other party with prior notice of such public statement, filing or other communication. Notwithstanding the foregoing, the Company shall not publicly disclose the names of the Purchasers, or include the names of the Purchasers in any filing with the Commission, or any regulatory agency, trading facility or stock market without the prior written consent of the Purchasers, except to the extent such disclosure (but not any disclosure as to the controlling Persons thereof) is required by law or stock market regulations, in which case the Company shall provide the Purchasers with prior notice of such disclosure. 3.11 Transfer of Intellectual Property Rights. Except in connection with the sale of all or substantially all of the assets of the Company or licensing arrangements in the ordinary course of the Company's business, the Company shall not transfer, sell or otherwise dispose of any Intellectual Property Rights, or allow any of the Intellectual Property Rights to become subject to any Liens, or fail to renew such Intellectual Property Rights (if renewable and it would otherwise lapse if not renewed), without the prior written consent of the Purchasers. 3.12 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 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. 3.13 Reimbursement. If any Purchaser becomes involved in any capacity in any action, proceeding or investigation brought by or against any Person, including stockholders of the Company, solely as a result of acquiring the Securities under this Agreement and the Warrants, the Company will reimburse such Purchaser 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 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 and the Warrants. 3.14 Non-Disclosure of Non-Public Information. The Company shall not disclose non-public information to the Purchasers or their advisors or representatives unless prior to disclosure of such information the Company identifies such information as being non-public information and the Purchasers enter into a non-disclosure agreement in form mutually acceptable to the Company and the Purchasers. 3.15 Shareholder Rights Plan. No claim will be made or enforced by the Company or any other Person that any Purchaser is an "Acquiring Person" under any shareholders rights plan or similar plan or arrangement in effect or hereafter adopted by the Company, or that any Purchaser could be deemed to trigger the provisions of any such plan or arrangement, by virtue of receiving Securities or shares of Common Stock under the Transaction Documents. ARTICLE IV MISCELLANEOUS 4.1 Fees and Expenses. At the Closing, the Company shall reimburse the Purchasers for their legal fees and expenses incurred in connection with the preparation and negotiation of the Transaction Documents by paying to Robinson Silverman $0,000 for the preparation and negotiation of the Transaction Documents. The amount contemplated by the immediately preceding sentence shall be retained by the Purchasers and shall not be delivered to the Company at the Closing. Other than the amount contemplated herein, and except as otherwise specified in the Registration Rights Agreement, 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 stamp and other taxes and duties levied in connection with the issuance of the Securities. 4.2 Entire Agreement; Amendments. The Transaction Documents, together with the Exhibits and Schedules thereto and Transfer Agent Instructions, 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. 4.3 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 (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) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Agreement 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 Business Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows: If to the Company: World Homes, Inc. 4505 W. Hacienda Ave, Unit I-1 Las Vegas, Nevada 89118 Facsimile No.: (702) 579- 4833 Attn: Merle Ferguson With copies to: James E. Pratt, Esq. 195 Kildare Road Garden City, New York 11530 Facsimile No.: (516) 873-1140 If to a Purchaser: To the address set forth under such Purchaser's name on the signature pages hereto or such other address as may be designated in writing hereafter, in the same manner, by such Person. 4.4 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 both 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 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 accruing to it thereafter. 4.5 Headings. 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. 4.6 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. The Purchasers may not assign this Agreement or any of the rights or obligations hereunder without the consent of the Company; however, this provision shall not limit any Purchaser's right to transfer Securities acquired hereunder or transfer or assign rights under the Registration Rights Agreement. 4.7 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. 4.8 Governing Law. All other 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 the 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. 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. Each party 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 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. 4.9 Survival. The representations, warranties, agreements and covenants contained herein shall survive the Closing and the delivery and conversion of the Debentures and exercise of the Warrants. 4.10 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) the same with the same force and effect as if such facsimile signature page were an original thereof. 4.11 Severability. In case any one or more of the provisions of this Agreement shall 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 and enforceable provision which shall be a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. 4.12 Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each of the Purchasers will be entitled to specific performance of the obligations of the Company under the Transaction Documents. The parties hereto agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of its 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. 4.13 Independent Nature of Purchasers' Obligations and Rights. The obligations of each Purchaser under any Transaction Document is 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 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. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGES FOLLOWS] IN WITNESS WHEREOF, the parties hereto have caused this Convertible Debenture Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above. WORLD HOMES, INC. By:_____________________________________ Name: John Nicoliasen Title: President [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOR PURCHASER FOLLOWS] LENORE AVENUE LLC By:_____________________________________ Name: Title: Purchase Price for Debentures: $1,000,000 Address for Notice: Lenore Avenue LLC c/o Citco Trustees (Cayman) Limited Commercial Centre P.O. Box 31106 SMB Grand Cayman Cayman Islands British West Indies Facsimile No.: (345) 945-7568 With copies to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, NY 10104 Facsimile No.: (212) 541-4630 and (212) 541-1432 Attn: Eric L. Cohen, Esq. EX-10.2 5 ex10-2.txt 6% CONVERTIBLE DEBENTURE 04-05-2001 Exhibit 10.2 NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS 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. $1,000,000 Date of Issuance: April 5, 2001 WORLD HOMES, INC. 6% CONVERTIBLE DEBENTURE DUE APRIL 5, 2002 THIS DEBENTURE is one of a series of duly authorized and issued debentures of World Homes, Inc., a Nevada corporation, having a principal place of business at 4505 W. Hacienda Ave, Unit I-1, Las Vegas, Nevada 89118 (the "Company"), designated as its 6% Convertible Debentures, due April 5, 2002, in the aggregate principal amount of One Million Dollars ($1,000,000) (the "Debentures"). FOR VALUE RECEIVED, the Company promises to pay to Lenore Avenue LLC or its registered assigns (the "Holder"), the principal sum of $1,000,000 on April 5, 2002 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 on each Conversion Date (as defined herein) and on the Maturity Date in cash or shares of Common Stock (as defined in Section 6). 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 ten Trading Days (as defined in Section 6) prior to each Conversion Date or the Maturity Date, the Company shall provide the Holder with written notice of its election to pay interest hereunder in cash or in shares of Common Stock pursuant to the terms of Section4(a)(iii) (the Company may indicate in such notice that the election contained in such notice shall continue for later periods until revised). Failure to timely provide such written notice shall be deemed an election by the Company to pay the interest on such Conversion Date or Maturity Date in shares of Common Stock pursuant to the terms of Section 4(a)(iii). Interest shall be calculated on the basis on a 360-day year and shall accrue daily commencing on the Original Issue Date (as defined in Section 6) 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. Interest hereunder will be paid to the Person (as defined in Section 6) in whose name this Debenture is registered on the records of the Company regarding registration and transfers of Debentures (the "Debenture Register"). All overdue accrued and unpaid interest to be paid hereunder shall entail a late fee at the rate of 18% 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. 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 (as defined in Section 6) and may be transferred or exchanged only in compliance with the Purchase Agreement. Prior to due presentment to the Company for transfer of this Debenture, the Company and any agent of the Company may treat the Person (as defined in Section 6) 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 (including any Late Fees) 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); (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 (as defined in Section 6), and such failure or breach shall not have been remedied within five days after the date on which notice of such failure or breach shall have been given; (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 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 $100,000, 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; (v) the Common Stock shall not be eligible for quotation on or quoted for trading on the OTC Bulletin Board ("OTC') or listed for trading on the Nasdaq SmallCap Market, New York Stock Exchange, American Stock Exchange or the Nasdaq National Market (each, a "Subsequent Market") and shall not again be eligible for and quoted or listed for trading thereon within five Trading Days; (vi) the Company shall be a party to any Change of Control Transaction (as defined in Section 6), shall agree to sell or dispose all or in excess of 33% 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 shares of Common Stock or other equity securities of the Company (other than redemptions of Underlying Shares (as defined in Section 6)); (vii) an Underlying Shares Registration Statement (as defined in Section6) shall not have been declared effective by the Commission (as defined in Section 6) on or prior to the 120th day after the Original Issue Date; (viii) if, during the Effectiveness Period (as defined in the Registration Rights Agreement (as defined in Section 6)), 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 ten consecutive Trading Days; (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 120th day after the Original Issue Date, 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 fifth 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 (and, at the Holder's option, all other Debentures then held by such Holder), 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 sum of: (i) the Mandatory Prepayment Amount (as defined in Section 6) plus (ii) the product of (A) the number of Underlying Shares issued in respect of conversions hereunder within thirty days of the date of a declaration of an Event of Default and then held by the Holder and (B) the Closing Price (as defined in Section 6) on the date prepayment is due or the date the full prepayment price is paid, whichever is greater. Interest shall accrue on the prepayment amount hereunder from the seventh 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 and Underlying Shares 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 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) Commencing on the 31st day after the Closing Date, 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 Section4(a)(ii) hereof). The Holder shall effect conversions by delivering to the Company the form of conversion notice attached hereto as Exhibit A (a "Conversion Notice"), specifying therein the principal amount of Debentures to be converted and the date on which such conversion is to be effected (a "Conversion Date") and shall contain a completed schedule in the form of Schedule 1 to the Conversion Notice (as amended on each Conversion Date, the "Conversion Schedule") reflecting the remaining principal amount of this Debenture and all accrued and unpaid interest thereon subsequent to the conversion at issue. If no Conversion Date is specified in a Conversion Notice, the Conversion Date shall be the date that such Conversion Notice 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 has been so converted. Conversions hereunder shall have the effect of lowering the outstanding principal amount of this Debenture plus all accrued and unpaid interest thereon in an amount equal to the applicable conversion, which shall be evidenced by entries set forth in the Conversion Schedule. The Holder and the Company shall maintain records showing the principal amount converted and the date of such conversions. 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) Certain Conversion Restrictions. A Holder may not convert Debentures or receive shares of Common Stock as payment of interest hereunder to the extent such conversion or receipt of such interest payment would result in the Holder, together with its affiliates, beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules promulgated thereunder) in excess of 9.999% of the then issued and outstanding shares of Common Stock, including shares issuable upon conversion of, and payment of interest on, the Debentures held by such Holder after application of this Section. To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time it delivers a Conversion Notice that such Conversion Notice has not violated the restrictions set forth in this paragraph. If the Holder has delivered a Conversion Notice for a principal amount of Debentures that, without regard to any other shares that the Holder or its affiliates may beneficially own, would result in the issuance in excess of the permitted amount hereunder, the Company shall notify the Holder of this fact and shall honor the conversion for the maximum principal amount permitted to be converted on such Conversion Date in accordance with the periods described in Section 4(b) and, at the option of the Holder, either retain any principal amount tendered for conversion in excess of the permitted amount hereunder for future conversions or return such excess principal amount to the Holder. In the event of a merger or consolidation of the Company with or into another Person, this paragraph shall not apply with respect to a determination of the number of shares of common stock issuable upon conversion in full of the Debentures if such determination is necessary to establish the Securities or other assets which the holder of Common Stock shall be entitled to receive upon the effectiveness of such merger or consolidation. (iii) Underlying Shares Issuable Upon Conversion and Pursuant to Interest. (A) The number of shares of Common Stock issuable upon a conversion hereunder shall be determined by adding the sum of: (i) the quotient obtained by dividing (x) the outstanding principal amount of this Debenture to be converted and (y) the Conversion Price, and (ii) the amount equal to (I) the product of (x) the outstanding principal amount of this Debenture to be converted and (y) the product of (1) the quotient obtained by dividing .06 by 360 and (2) the number of days for which such principal amount was outstanding, divided by (II) the Conversion Price on the Conversion Date, provided, that if the Company shall have elected to pay the interest due on a Conversion Date in cash pursuant to the terms hereof, subsection (ii) shall not be used in the calculation of the number of shares of Common Stock issuable upon a conversion hereunder. (B) Notwithstanding anything to the contrary contained herein, if on any Conversion Date: (1) the number of shares of Common Stock at the time authorized, unissued and unreserved for all purposes, or held as treasury stock, is insufficient to pay interest hereunder in shares of Common Stock; (2) such shares of Common Stock: (x) are not registered for resale pursuant to an effective Underlying Shares Registration Statement and (y) may not be sold without volume restrictions pursuant to Rule 144(k) promulgated under the Securities Act; (3) the Common Stock shall fail to be listed or quoted for trading on the OTC or a Subsequent Market; (4) the Company has failed to timely satisfy its conversion obligations hereunder; or (5) the issuance of such shares of Common Stock would result in a violation of Sections 4(a)(ii), then, at the option of the Holder, the Company, in lieu of delivering shares of Common Stock pursuant to Section 4(a)(iii)(A) (ii), shall deliver, within three Trading Days of each applicable Conversion Date, an amount in cash equal to the product of: (a) the outstanding principal amount of the Debentures to be converted on such Conversion Date and (b) the product of (x) the quotient obtained by dividing .06 by 360 and (y) the number of days for which such principal amount was outstanding. (b) (i) Not later than three Trading Days after any Conversion Date, the Company will deliver to the Holder (i) a certificate or certificates 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 and (ii) a bank check in the amount of accrued and unpaid interest (if the Company has timely elected or is required to pay accrued interest in cash). The Company shall, upon request of the Holder, if available, 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 Conversion Notice such certificate or certificates are not delivered to or as directed by the applicable Holder by the third 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 third Trading Day after the Conversion Date, the Company shall pay to such Holder, in cash, as liquidated damages and not as a penalty, $5,000 for each Trading Day after such third Trading Day until such certificates are delivered. 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 certificates representing shares of Common Stock upon conversion 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 purchases (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 market price of the Common Stock at the time of the sale 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 market price of the Underlying Shares on the date of conversion 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. (c) (i) The conversion price (the "Conversion Price") in effect on any Conversion Date shall be the lesser of (1) $1.5375 (the "Initial Conversion Price"), and (2) 77.5% of the average of the lowest three Per Share Market Values (which need not occur on consecutive Trading Days) during the twenty Trading Days immediately preceding the applicable Conversion Date (which may include Trading Days prior to the date on which the Holder is first entitled to tender a Conversion Notice), provided, that such twenty Trading Day period shall be extended for the number of Trading Days during such period in which: (A) trading in the Common Stock is suspended by, or not traded on, the OTC or a Subsequent Market on which the Common Stock is then listed, or (B) after the date declared effective by the Commission, the Underlying Shares Registration Statement is either not effective or the Prospectus included in the Underlying Shares Registration Statement may not be used by the Holder for the resale of Underlying Shares. (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, (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 Initial Conversion 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 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 at a price per share less than the Per Share Market Value at the record date mentioned below, then the Conversion Price shall be multiplied 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 such Per Share Market Value. Such adjustment shall be made whenever such rights 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. However, upon the expiration of any such right, option or warrant to purchase shares of the Common Stock the issuance of which resulted in an adjustment in the Conversion Price pursuant to this Section, if any such right, option or warrant shall expire and shall not have been exercised, the Conversion Price shall immediately upon such expiration be recomputed and effective immediately upon such expiration be increased to the price which it would have been (but reflecting any other adjustments in the Conversion Price made pursuant to the provisions of this Section after the issuance of such rights or warrants) had the adjustment of the Conversion Price made upon the issuance of such rights, options or warrants been made on the basis of offering for subscription or purchase only that number of shares of the Common Stock actually purchased upon the exercise of such rights, options or warrants actually exercised. (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 any equity or equity equivalent securities (including any equity, debt or other instrument that is at any time over the life thereof convertible into or exchangeable for Common Stock) (collectively, "Common Stock Equivalents") entitling any Person to acquire shares of Common Stock, at a price per share less than the Conversion Price (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 a price per share which is less than the Conversion Price, such issuance shall be deemed to have occurred for less than the Conversion Price), then, at the sole option of the Holder, the Conversion Price shall be adjusted for such conversions as Holders shall indicate in its Conversion Notices to equal the 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 business day following the issuance of any Common Stock or Common Stock Equivalent subject to this section, indicating therein the applicable issuance price, or of applicable reset price, exchange price, conversion price and other pricing terms. No adjustments under this paragraph shall be made as a result of (i)the granting of options or warrants to employees, officers and directors of the Company, and the issuance of Common Stock upon exercise of such options or warrants granted under any stock option plan or employee benefit plan (as defined in Rule 405 of Regulation C) heretofore or hereinafter duly adopted by the Company and (ii) shares of Common Stock issuable upon exercise of any currently outstanding warrants and other outstanding convertible securities of the Company, in each case as and to the extent disclosed in Schedule 2.1(c) to the Purchase Agreement (but not as to any amendments or modifications of the terms of such securities after the date of this Agreement, including "back-dated" agreements). (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 Conversion Price at which Debentures shall thereafter be convertible shall be determined by multiplying the Conversion 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 Per Share Market Value determined as of the record date mentioned above, and of which the numerator shall be such Per Share Market Value 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) In case of any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, the Holders shall have the right thereafter to, at their option, (A) convert the then outstanding principal amount, together with all accrued but unpaid interest and any other amounts then owing hereunder in respect of this Debenture only into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of the Common Stock following such reclassification or share exchange, and the Holders of the Debentures shall be entitled upon such event to receive such amount of securities, cash or property as the shares of the Common Stock of the Company into which the then outstanding principal amount, together with all accrued but unpaid interest and any other amounts then owing hereunder in respect of this Debenture could have been converted immediately prior to such reclassification or share exchange would have been entitled or (B) require the Company to prepay the aggregate of its outstanding principal amount of Debentures, plus all interest and other amounts due and payable thereon, at a price determined in accordance with Section 3(b). The entire prepayment price shall be paid in cash. This provision shall similarly apply to successive reclassifications or share exchanges. (vii) 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. No adjustments in either the Conversion Price or the Initial Conversion Price shall be required if such adjustment is less than $0.01; provided, however, that any adjustments which by reason of this Section are not required to be made shall be carried forward and taken into account in any subsequent adjustment. (viii) Whenever either the Initial Conversion Price or the Conversion 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 Initial Conversion Price or Conversion Price (as applicable) after such adjustment and setting forth a brief statement of the facts requiring such adjustment. (ix) 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 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. (x) In case of any (1) merger or consolidation of the Company with or into another Person, or (2) sale by the Company of more than one-half of the assets of the Company in one or a series of related transactions, a Holder shall have the right to (A) exercise any rights under Section 3(b), (B) convert its aggregate principal amount of Debentures then outstanding into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger, consolidation or sale, and such Holder shall be entitled upon such event or series of related events to receive such amount of securities, cash and property as the shares of Common Stock into which such aggregate principal amount of Debentures could have been converted immediately prior to such merger, consolidation or sales would have been entitled, or (C) in the case of a merger or consolidation, require the surviving entity to issue to the Holder convertible debentures with a principal amount equal to the aggregate principal amount of Debentures then held by such Holder, plus all accrued and unpaid interest and other amounts owing thereon, which newly issued convertible debentures shall have terms identical (including with respect to conversion) to the terms of this Debenture, and shall be entitled to all of the rights and privileges of a Holder of Debentures set forth herein and the agreements pursuant to which the Debentures were issued. In the case of clause (C), the conversion price applicable for the newly issued shares of convertible preferred stock or convertible debentures shall be based upon the amount of securities, cash and property that each share of Common Stock would receive in such transaction and the Conversion Price in effect immediately prior to the effectiveness or closing date for such transaction. The terms of any such merger, sale or consolidation shall include such terms so as to continue to give the Holders the right to receive the securities, cash and property set forth in this Section upon any conversion or redemption following such event. This provision shall similarly apply to successive such events. (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 and payment of interest on 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 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 Conversion Notice, shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to the Company, at 4505 W. Hacienda Avenue, Unit I-1, Las Vegas, Nevada 89118, Facsimile No.: (702) 579-4833, Attn: John Nicoliasen, 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 or sent by certified or registered mail, postage prepaid, 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) four days after deposit in the United States mail, (iv) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (v) upon actual receipt by the party to whom such notice is required to be given. Section 5. Optional Prepayment. (a) The Company shall have the right, exercisable at any time and from time to time after the Original Issue Date and upon seven Trading Days' prior written notice to the affected Holders (an "Optional Prepayment Notice"), to prepay all or any portion of the outstanding principal amount of the Debentures for which Conversion Notices have not previously been delivered or for which an Event of Default shall not have been declared. The prepayment price applicable to prepayments under this Section 5(a) shall equal the Optional Prepayment Amount and shall be paid in cash on the seventh Trading Day following the date that the Company first delivered the Optional Prepayment Notice (the "Optional Prepayment Date"). Any such prepayment shall be free of any claim of subordination. The Holders shall have the right to tender, and the Company shall honor, Conversion Notices delivered prior to the expiration of the fifth Trading Day after delivery of an Optional Prepayment Notice for such Debentures. (b) If any portion of the Optional Prepayment Amount shall not be paid by the Company by the expiration of the Optional Prepayment Date, the Company may not again exercise any right of prepayment under this Section. In addition, the Optional Prepayment Amount shall be increased by an amount equal to the Late Fee, to accrue daily from the date such interest is due hereunder through and including the date of payment (which amount shall be paid as liquidated damages and not as a penalty). In addition, if any portion of the Optional Prepayment Amount remains unpaid through the expiration of the Optional Prepayment Date, the Holder subject to such prepayment may elect by written notice to the Company to either (x) demand conversion in accordance with the formula and the time period therefor set forth in Section 4 of any portion of the principal amount of Debentures for which the Optional Prepayment Amount, plus accrued liquidated damages and accrued interest thereon, has not been paid in full (the "Unpaid Prepayment Principal Amount"), in which event the applicable Per Share Market Value shall be the lower of the Per Share Market Value calculated on the Optional Prepayment Date and the Per Share Market Value as of the Holder's written demand for conversion, or (y) invalidate ab initio such optional prepayment, notwithstanding anything herein contained to the contrary. If the Holder elects option (x)above, the Company shall, within three Trading Days after such election is deemed delivered hereunder, deliver to the Holder the shares of Common Stock issuable upon conversion of the Unpaid Prepayment Principal Amount subject to such conversion demand and otherwise perform its obligations hereunder with respect thereto. Section 6. Definitions. For the purposes hereof, the following terms shall have the following meanings: "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 or the State of Nevada are authorized or required by law or other government action to close. "Change of Control Transaction" means the occurrence 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 33% of the voting securities of the Company, (ii) a replacement at one time or over time 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), (iii) the merger of the Company with or into another entity that is not wholly-owned by the Company, consolidation or sale of 50% or more of the assets of the Company in one or a series of related transactions, or (iv) 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), (ii) or (iii). "Closing Price" means on any particular date (a)the closing sales price per share of Common Stock on such date on the Subsequent Market on which the shares of Common Stock are then listed or quoted (as reported by Bloomberg L.P. at 4:15 PM (New York time) for the closing sales price for regular session trading on such day), or if there is no such price on such date, then the closing sales price on the Subsequent Market on the date nearest preceding such date (as reported by Bloomberg L.P. at 4:15 PM (New York time) for the closing sales price for regular session trading on such day), or (b)if the shares of Common Stock are not then listed or quoted on a Subsequent Market, the closing sales price for a share of Common Stock in the OTC, as reported by the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of business on such date, or (c)if the shares of Common Stock are not then reported by the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the "Pink Sheet" quotes for the relevant conversion period, as determined in good faith by the Holder, 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 an Appraiser selected in good faith by the Holders of a majority in interest of the principal amount of Debentures then outstanding. "Commission" means the Securities and Exchange Commission. "Common Stock" means the common stock, $.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. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "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, plus all other accrued and unpaid amounts due hereunder, and (B) the principal amount of Debentures to be prepaid, plus all accrued and unpaid interest thereon, plus all other accrued and unpaid amounts due hereunder, divided by the Conversion 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 less, multiplied by the Per Share Market Value 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. "Optional Prepayment Amount" for any Debentures shall equal the sum of (i) the greater of (A) 100% of the principal amount of Debentures to be prepaid, plus all accrued and unpaid interest thereon, and (B) the principal amount of Debentures to be prepaid, plus all accrued and unpaid interest thereon, divided by the Conversion Price on (x) the date the Optional Prepayment Amount is due or (y) the date the Optional Prepayment Amount is paid in full, whichever is less, multiplied by the Per Share Market Value on (x) the date the Optional Prepayment Amount is due or (y) the date the Optional 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. "Per Share Market Value" means on any particular date (a)the closing bid price per share of Common Stock on such date on the Subsequent Market on which the shares of Common Stock are then listed or quoted (as reported by Bloomberg L.P. at 4:15 PM (New York time) for the closing sales price for regular session trading on such day), or if there is no such price on such date, then the closing bid price on the Subsequent Market on the date nearest preceding such date (as reported by Bloomberg L.P. at 4:15 PM (New York time) for the closing sales price for regular session trading on such day), or (b)if the shares of Common Stock are not then listed or quoted on a Subsequent Market, the closing bid price for a share of Common Stock in the OTC, as reported by the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of business on such date, or (c)if the shares of Common Stock are not then reported by the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the "Pink Sheet" quotes for the relevant conversion period, as determined in good faith by the Holder, 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 an Appraiser selected in good faith by the Holders of a majority in interest of the principal amount of Debentures then outstanding. "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 Convertible Debenture Purchase Agreement, dated as of the Original Issue Date, 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 Original Issue Date, 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. "Trading Day" means (a)a day on which the shares of Common Stock are traded on the OTC or on such Subsequent Market on which the shares of Common Stock are then listed or quoted, or (b)if the shares of Common Stock are not listed on a Subsequent Market, a day on which the shares of Common Stock are traded in the over-the-counter market, as reported by the OTC, or (c)if the shares of Common Stock are not quoted on the OTC, 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 any day except 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. "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 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 there are Debentures outstanding, the Company shall not and shall cause it subsidiaries not to, without the consent of the Holders, (i) amend its certificate of incorporation, bylaws or other charter documents so as to adversely affect any rights of the Holders; (ii) 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 (iii) enter into any agreement with respect to any of the foregoing. The Company may only voluntarily prepay the outstanding principal amount on the Debentures in accordance with Section 5 hereof. Section 8. This Debenture shall not entitle the Holder to any of the rights of a stockholder of the Company, including without limitation, the right to vote, to receive dividends and other distributions, or to receive any notice of, or to attend, meetings of stockholders or any other proceedings of the Company, unless and to the extent converted into shares of Common Stock in accordance with the terms hereof. Section 9. 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 10. No indebtedness of the Company is senior to this Debenture in right of payment, whether with respect to interest, damages or upon liquidation or dissolution or otherwise. 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. Section 11. This Debenture shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to conflicts of laws thereof. The Company and the Holder 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, or that such suit, action or proceeding is improper. Each of the Company and the Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by receiving a copy thereof sent to the Company at the address in effect for notices to it under this instrument 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. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party 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 an action or proceeding to enforce any provisions of a Transaction Document, 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. Section 12. 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 13. 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 shall violate applicable laws governing usury, the applicable rate of interest due hereunder 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 14. 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. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOLLOWS] 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. WORLD HOMES, INC. By:_____________________________________ Name: John Nicoliasen Title: President EXHIBIT A NOTICE OF CONVERSION The undersigned hereby elects to convert principal and, if specified, interest under the 6% Convertible Debenture of World Homes, Inc., (the "Company") due twelve months from issuance into shares of common stock, $.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. Conversion calculations: Date to Effect Conversion Principal Amount of Debentures tobeConverted Payment of Interest in Kind * Yes * No If yes, $ _______ of Interest Accrued on Account of Conversion at Issue Number of shares of Common Stock tobeIssued Applicable Conversion Price Signature Name Address Schedule 1 CONVERSION SCHEDULE World Homes, Inc. 6% Convertible Debentures due twelve months from issuance, in the aggregate principal amount of $1,000,000 issued by World Homes, Inc. This Conversion Schedule reflects conversions made under Section 4(a)(i) of the above referenced Debentures. Dated: - -------------- ----------------- ----------------- ----------------- Date of Amount of Aggregate Company Conversion Conversion Principal Attest (or for first Amount entry, Original Remaining Issue Date) Subsequent to Conversion (or original Principal Amount) - -------------- ----------------- ----------------- ----------------- - -------------- ----------------- ----------------- ----------------- - -------------- ----------------- ----------------- ----------------- - -------------- ----------------- ----------------- ----------------- EX-10.3 6 ex10-3.txt WARRANT 04-05-2001 Exhibit 10.3 NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE 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 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 THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY 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. WORLD HOMES, INC. WARRANT Dated: April 5, 2001 World Homes, Inc., a Nevada corporation (the "Company"), hereby certifies that, for value received, Lenore Avenue LLC or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company up to a total of 213,675 shares of common stock, $.001 par value per share (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price per share equal to $1.5375 (as such exercise price may adjusted from time to time as provided in Section8, the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including April 5, 2006 (the "Expiration Date"), and subject to the following terms and conditions: 1. Registration of Warrant. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. Registration of Transfers and Exchanges. (a) The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Transfer Agent or to the Company at its address for notice set forth in Section 12. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a holder of a Warrant. (b) This Warrant is exchangeable, upon the surrender hereof by the Holder to the office of the Company at its address for notice set forth in Section 12 for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. Any such New Warrant will be dated the date of such exchange. 3. Duration and Exercise of Warrants. (a) This Warrant shall be exercisable by the registered Holder on any business day before 5:30 P.M., New York City time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:30 P.M., New York City time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. Prior to the Expiration Date, the Company may not call or otherwise redeem this Warrant. (b) Upon delivery of an executed Form of Election to Purchase, together with the grid attached hereto as Annex A duly completed and signed, to the Company at its address for notice set forth in Section 12 and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in the manner provided hereunder, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than 3 business days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends except: (i) in the event that a registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder is not then effective or the Warrant Shares are not freely transferable without volume restrictions pursuant to Rule 144(k) promulgated under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) if this Warrant shall have been issued pursuant to a written agreement between the original Holder and the Company, as required by such agreement. Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. The Company shall, upon request of the Holder, if available, use its best efforts to deliver Warrant Shares hereunder electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. To effect an exercise hereunder, the Holder shall not be required to physically surrender this Warrant to the Company unless all the Warrant Shares have been exercised. Exercises hereunder shall have the effect of lowering the number of Warrant Shares in an amount equal to the applicable exercise, which shall be evidenced by entries set forth on the attached Annex A. The Holder and the Company shall maintain records showing the number of Warrant Shares exercised and the date of such exercises. 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 Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following exercise of a portion of this Warrant, the number of shares issuable upon exercise of this Warrant may be less than the amount stated on the face hereof. A "Date of Exercise" means the date on which the Company shall have received the Form of Election to Purchase completed and duly signed. (c) This Warrant shall be exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares. 4. Piggyback Registration Rights. This Warrant is subject to the piggyback registration rights granted under the Registration Rights Agreement and such piggyback registration rights shall continue until all of the Holder's Warrant Shares have been sold in accordance with an effective registration statement or upon the Expiration Date. The Company will pay all registration expenses in connection therewith. 5. Payment of Taxes. The Company will pay all documentary stamp taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 6. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if requested, satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe. 7. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 8). The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. 8. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 8. Upon each such adjustment of the Exercise Price pursuant to this Section 8, the Holder shall thereafter prior to the Expiration Date be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (a) If the Company, at any time while this Warrant is outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on outstanding preferred stock as of the date hereof which contain a stated dividend rate) or otherwise make a distribution or distributions on shares of its Common Stock or on any other class of capital stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, the Exercise 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 (excluding treasury shares, if any) outstanding after such event. In such event, the number of Warrant shares issuable under this Warrant shall be equitably adjusted to reflect such event (e.g. in the event of a 2:1 stock split of the Common Stock, the number of Warrant shares shall be increased to twice the number available for purchase prior to the record date for such stock split). Any 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 or combination, and shall apply to successive subdivisions and combinations. (b) In case of any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification or share exchange, and the Holder shall be entitled upon such event to receive such amount of securities or property equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification or share exchange. The terms of any such reclassification or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 8(b) upon any exercise following any such reclassification or share exchange. (c) If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to holders of this Warrant) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 8(a), (b) and (d)), then in each such case the Exercise Price shall be determined by multiplying the Exercise 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 Exercise Price determined as of the record date mentioned above, and of which the numerator shall be such Exercise 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 Common Stock as determined by the Company's independent certified public accountants that regularly examines the financial statements of the Company (an "Appraiser"). (d) If the Company or any subsidiary thereof, as applicable, at any time while this Warrant is 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 any equity or equity equivalent securities (including any equity, debt or other instrument that is at any time over the life thereof convertible into or exchangeable for Common Stock) (collectively, "Common Stock Equivalents") entitling any Person to acquire shares of Common Stock, at a price per share less than the Exercise Price (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 issued in connection with such issuance, be entitled to receive shares of Common Stock at a price less than the Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price), then, at the option of the Holder, the Exercise Price shall be adjusted to equal the 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 business day following the issuance of any Common Stock or Common Stock Equivalent subject to this section, indicating therein the applicable issuance price, or of applicable reset price, exchange price, conversion price and other pricing terms. The provisions of this paragraph shall not apply to (i)the granting of options or warrants to employees, officers and directors of the Company, and the issuance of Common Stock upon exercise of such options or warrants granted under any stock option plan or employee benefit plan (as defined in Rule 405 of Regulation C) heretofore or hereinafter duly adopted by the Company and (ii) shares of Common Stock issuable upon exercise of any currently outstanding warrants and other outstanding convertible securities of the Company, in each case as and to the extent disclosed in Schedule 2.1(c) to the Purchase Agreement (but not as to any amendments or modifications of the terms of such securities after the date of this Agreement, including "back-dated" agreements). (e) In case of any (1) merger or consolidation of the Company with or into another Person, or (2) sale by the Company of more than one-half of the assets of the Company (on a book value basis) in one or a series of related transactions, the Holder shall have the right thereafter to (A) exercise this Warrant for the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger, consolidation or sale, and the Holder shall be entitled upon such event or series of related events to receive such amount of securities, cash and property as the Common Stock for which this Warrant could have been exercised immediately prior to such merger, consolidation or sales would have been entitled or (B) in the case of a merger or consolidation, (x) require the surviving entity to issue common stock purchase warrants equal to the number Warrant Shares to which this Warrant then permits, which newly warrant shall be identical to this Warrant, and (y) simultaneously with the issuance of such warrant, the Holder of such warrant shall have the right to exercise such warrant only into shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger or consolidation or (C) require the surviving entity from such merger, acquisition or business combination to pay to the Holder, in cash, the Black Scholes value of this Warrant. In the case of clause (B), the exercise price for such new warrant shall be based upon the amount of securities, cash and property that each share of Common Stock would receive in such transaction and the Exercise Price of this Warrant immediately prior to the effectiveness or closing date for such transaction. The terms of any such merger, sale or consolidation shall include such terms so as continue to give the Holder the right to receive the securities, cash and property set forth in this Section upon any conversion or redemption following such event. This provision shall similarly apply to successive such events. (f) For the purposes of this Section 8, the following clauses shall also be applicable: (i) Record Date. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock or in securities convertible or exchangeable into shares of Common Stock, or (B) to subscribe for or purchase Common Stock or securities convertible or exchangeable into shares of Common Stock, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (ii) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (g) All calculations under this Section 8 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (h) Whenever the Exercise Price is adjusted pursuant to Section 8(c) above, the Holder, after receipt of the determination by the Appraiser, shall have the right to select an additional appraiser (which shall be a nationally recognized accounting firm), in which case the adjustment shall be equal to the average of the adjustments recommended by each of the Appraiser and such appraiser. The Holder shall promptly mail or cause to be mailed to the Company, a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such adjustment shall become effective immediately after the record date mentioned above. (i) If: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or (iii) 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; or (iv) 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, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to each Holder at their last addresses as they shall appear upon the Warrant Register, 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 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 Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up, 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. 9. Payment of Exercise Price. The Holder shall pay the Exercise Price in one of the following manners: (a) Cash Exercise. The Holder may deliver immediately available funds; or (b) Cashless Exercise. The Holder may surrender this Warrant to the Company together with a notice of cashless exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows: X = Y [(A-B)/A] where: X = the number of Warrant Shares to be issued to the Holder. Y = the number of Warrant Shares with respect to which this Warrant is being exercised. A = the average of the closing sale prices of the Common Stock for the five (5) trading days immediately prior to (but not including) the Date of Exercise. B = the Exercise Price. For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have been commenced, on the issue date. 10. Certain Exercise Restrictions. A Holder may not exercise this Warrant to the extent such exercise would result in the Holder, together with its affiliate, beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules promulgated thereunder) in excess of 9.999% of the then issued and outstanding shares of Common Stock, including shares issuable upon such exercise and held by such Holder after application of this Section. To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time that it delivers a Form of Election to Purchase, that such Form of Election to Purchase has not violated the restrictions set forth in this paragraph. If the Holder has delivered a Form of Election to Purchase for a number of Warrant Shares that, without regard to any other shares that the Holder or its affiliates may beneficially own, would result in the issuance in excess of the permitted amount hereunder, the Company shall notify the Holder of this fact and shall honor the exercise for the maximum portion of this Warrant permitted to be exercised on such Date of Exercise in accordance with the periods described herein and, at the option of the Holder, either keep the portion of the Warrant tendered for exercise in excess of the permitted amount hereunder for future exercises or return such excess portion of the Warrant to the Holder. In the event of a merger or consolidation of the Company with or into another Person, this paragraph shall not apply with respect to a determination of the number of shares of common stock issuable upon exercise in full of the Warrants if such determination is necessary to establish the securities or other assets which the holders of Common Stock shall be entitled to receive upon the effectiveness of such merger or consolidation. 11. Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section, be issuable on the exercise of this Warrant, the Company shall pay an amount in cash equal to the Exercise Price multiplied by such fraction. 12. Notices. Any and all notices or other communications or deliveries hereunder shall be in writing and 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) on a business day, (ii) the business day 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 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. The addresses for such communications shall be: (i) if to the Company, to 4505 W. Hacienda Avenue, Unit I-1, Las Vegas, Nevada 89118, facsimile: (702) 579-4833 attention: John Nicoliasen, or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section. 13. Warrant Agent. The Company shall serve as warrant agent under this Warrant. Upon thirty (30) days' notice to the Holder, the Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 14. Miscellaneous. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and assigns. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. (b) Subject to Section 14(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant. This Warrant shall inure to the sole and exclusive benefit of the Company and the Holder. (c) The corporate laws of the State of Nevada shall govern all issues concerning the relative rights of the Company and its stockholders. All other questions concerning the construction, validity, enforcement and interpretation of this Warrant 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. The Company and the Holder hereby irrevocably submit 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, or that such suit, action or proceeding is improper. Each of the Company and the Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by receiving a copy thereof sent to the Company at the address in effect for notices to it under this instrument 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 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 an action or proceeding to enforce any provisions of this Warrant, 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. (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK, SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. WORLD HOMES, INC. By:_____________________________________ Name: John Nicoliasen Title: President FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the Warrant to which this form applies, issued by World Homes, Inc. (the "Company")) To World Homes, Inc.: The undersigned hereby irrevocably elects to purchase _____________ shares of common stock, $.001 value, of the Company (the "Common Stock") and, if such Holder is not utilizing the cashless exercise provisions set forth in this Warrant, encloses herewith $ [ ] in cash, certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER (Please print name and address) Dated: , Name of Holder: (Print) (By:) (Name:) (Title:) (Signature must conform in all respects to name of holder as specified on the face of the Warrant) FORM OF ASSIGNMENT [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the within Warrant to purchase ____________ shares of Common Stock of World Homes, Inc. to which the within Warrant relates and appoints ________________ attorney to transfer said right on the books of World Homes, Inc. with full power of substitution in the premises. Dated: _______________, ____ _____________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) _____________________________________ Address of Transferee _____________________________________ _____________________________________ In the presence of: __________________________ - ----------------------------------------------------------------------------- Annex A - ----------------------------------------------------------------------------- Date Number of Warrant Number of Warrant Number of Warrant Shares Available Shares Exercised Shares Remaining to be Exercised to be Exercised - -------------- ----------------- ----------------- ----------------- - -------------- ----------------- ----------------- ----------------- - -------------- ----------------- ----------------- ----------------- - -------------- ----------------- ----------------- ----------------- EX-10.4 7 ex10-4.txt REGISTRATION RIGHTS AGREEMENT 04-05-2001 Exhibit 10.4 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of April 5, 2001, among World Homes, Inc., a Nevada corporation (the "Company"), and the investors signatory hereto (each such investor is a "Purchaser" and all such investors are, collectively, the "Purchasers"). This Agreement is made pursuant to the Convertible Debenture 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: "Affiliate" means, with respect to any Person, any other Person that directly or indirectly controls or is controlled by or under common control with such Person. For the purposes of this definition, "control," when used with respect to any Person, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms of "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. "Business Day" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York or the State of Nevada generally are authorized or required by law or other government actions to close. "Closing Date" shall have the meaning set forth in the Purchase Agreement. "Commission" means the Securities and Exchange Commission. "Common Stock" means the Company's common stock, no par value, or such securities in to which that such stock shall hereafter be reclassified. "Debentures" means the Convertible Debentures issuable to the Purchasers in accordance with the Purchase Agreement. "Effectiveness Date" means with respect to the initial Registration Statement required to be filed hereunder, the 90th day following the Closing Date and, with respect to any additional Registration Statements which may be required pursuant to Section 3(c), the ninetieth (90th) day following the date that such additional Registration Statement is required to be filed. "Effectiveness Period" shall have the meaning set forth in Section 2(a). "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Filing Date" means the 30th day following the Closing Date and, with respect to any additional Registration Statements which may be required pursuant to Section 3(c), the 30th day following the date that such additional Registration Statement is required to be filed. "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). "Indemnifying Party" shall have the meaning set forth in Section 5(c). "Losses" shall have the meaning set forth in Section 5(a). "Person" means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Proceeding" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "Prospectus" means the prospectus included in the 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 the 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 the shares of Common Stock issuable upon conversion in full of the Debentures and exercise in full of the Warrants. "Registration Statement" means the registration statement 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 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. "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 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 effect as such Rule. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Special Counsel" means one special counsel to the Holders, for which the Holders will be reimbursed by the Company pursuant to Section4. "Warrants" means the common stock purchase warrants issuable to the Purchasers in accordance with the Purchase Agreement. 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 all Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form S-3 (except if 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 and shall contain (except if otherwise directed by the Holders) the "Plan of Distribution" attached hereto as Annex A. 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 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) (the "Effectiveness Period"). (b) The initial Registration Statement to be filed hereunder shall include (but not be limited to) a number of shares of Common Stock equal to no less than the sum of: (i) 200% of the number of shares of Common Stock issuable upon conversion in full of the principal amount of Debentures on the Closing Date assuming: (1) one full year of interest has accrued on the Debentures and all such interest is paid in shares of Common Stock and (2) the conversion occurred on the Closing Date, the Filing Date or the Business Day preceding the date the Company files an acceleration request with the Commission relating to the Registration Statement, whichever yields the lowest Conversion Price (as defined in the Debentures) and (ii) the number of shares of Common Stock issuable upon exercise in full of the Warrants issuable pursuant to the Purchase Agreement. (c) If: (a) a Registration Statement is not filed on or prior to its Filing Date (if the Company files such Registration Statement without affording the Holder the opportunity to review and comment on the same as required by Section 3(a) hereof, the Company shall not be deemed to have satisfied this clause (a)), or (b) the Company fails to file with the Commission a request for acceleration in accordance with Rule 461 promulgated under the Securities Act, within five 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 (c) a Registration Statement filed hereunder is not declared effective by the Commission on or prior to its Effectiveness Date, or (d) after a Registration Statement is filed with and declared effective by the Commission, such Registration Statement ceases to be effective as to all Registrable Securities to which it is required to relate at any time prior to the expiration of the Effectiveness Period without being succeeded within ten Business Days by an amendment to such Registration Statement or by a subsequent Registration Statement filed with and declared effective by the Commission, or (e) the Common Stock shall not be quoted on the OTC Bulletin Board or shall be delisted or suspended from trading on the New York Stock Exchange, American Stock Exchange, the Nasdaq National Market or the Nasdaq Smallcap Market (each, a "Subsequent Market") for more than three Trading Days (which need not be consecutive Trading Days), or (f) the conversion rights of the Holders pursuant to the Debentures are suspended for any reason, or (g) an amendment to a Registration Statement is not filed by the Company with the Commission within ten Business Days of the Commission's notifying the Company that such amendment is required in order for such Registration Statement to be declared effective (any such failure or breach being referred to as an "Event," and for purposes of clauses (a), (c), (f) the date on which such Event occurs, or for purposes of clause (b) the date on which such five day period is exceeded, or for purposes of clauses (d) and (g) the date which such ten Business Day-period is exceeded, or for purposes of clause (e) the date on which such three Trading Day-period 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% of the purchase price paid by such Holder pursuant to the Purchase Agreement. 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. Upon the occurrence of any of the Events in clauses (a) and/or (c) hereunder, the Holder, at its option, may exercise its rights under the Guaranty and Stock Pledge Agreement of even date, with respect to the Collateral (as defined in the Pledge Agreement). 3. Registration Procedures In connection with the Company's registration obligations hereunder, the Company shall: (a) Not less than five Business 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 the Holders and their Special Counsel 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 their Special Counsel, 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 and their Special Counsel shall reasonably object, provided, the Company is notified of such objection no later than 3 Business Days after the Holders have been so furnished copies of such documents. (b) (i) Prepare and file with the Commission such amendments, including post-effective amendments, to the Registration Statement and the Prospectus used in connection therewith as may be necessary to keep the Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible, and in any event within ten Business Days, to any comments received from the Commission with respect to the 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 the 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 the Registration Statement during the applicable period in accordance with the intended methods of disposition by the Holders thereof set forth in the Registration Statement as so amended or in such Prospectus as so supplemented. (c) File additional Registration Statements if the number of Registrable Securities at any time exceeds 85% of the number of shares of Common Stock then registered in all their existing Registration Statements hereunder. (d) Notify the Holders of Registrable Securities to be sold and their Special Counsel as promptly as reasonably possible (and, in the case of (i)(A) below, not less than five Business Days prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one Business Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to the 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 the 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 the Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) if at any time any of the representations and warranties of the Company contained in any agreement contemplated hereby ceases to be true and correct in all material respects; (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (vi) of the occurrence of any event or passage of time that makes the financial statements included in the Registration Statement ineligible for inclusion therein or any statement made in the 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 the Registration Statement, Prospectus or other documents so that, in the case of the 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. (e) Promptly deliver to each Holder and their Special Counsel, 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. 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) Prior to any public offering of Registrable Securities, use its best efforts to register or qualify or cooperate with the selling Holders and their Special Counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder requests in writing, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by a Registration Statement; 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 Section 3(d)(vi), as promptly as reasonably possible, prepare a supplement or amendment, including a post-effective amendment, to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the 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. (i) Comply with all applicable rules and regulations of the Commission. 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 any Subsequent Market on which the Common Stock is then listed for trading, and (B) in compliance with applicable state securities or Blue Sky laws (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 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 Special Counsel for the Holders 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. 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 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 the 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 are based solely 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 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). The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement. (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 solely out of or based solely 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 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, that 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 solely 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 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 it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party. An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (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 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 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 such counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding. All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten Business 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. 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 the Holders of at least two-thirds 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 at least a majority of the Registrable Securities to which such waiver or consent relates, provided, 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 and to the extent specified in Schedule 6(b) hereto, 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. (c) No Piggyback on Registrations. Except as and to the extent specified in Schedule 6(b) 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. (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), 3(d)(iii), 3(d)(iv), 3(d)(v) or 3(d)(vi), such Holder will forthwith discontinue disposition of such Registrable Securities under the Registration Statement until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement contemplated by Section 3(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. (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. (g) 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 (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) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Agreement 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 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. The address for such notices and communications shall be as follows: If to the Company: World Homes, Inc. 4505 W. Hacienda Ave, Unit I-1 Las Vegas, Nevada 89118 Facsimile No.: (702) 579-4833 Attn: John Nicoliasen With copies to: James E. Pratt, Esq. 195 Kildare Road Garden City, New York 11530 Facsimile No.: (516) 873-1140 If to a Purchaser: To the address set forth under such Purchaser's name on the signature pages hereto. If to any other Person who is then the registered Holder: To the address of such Holder as it appears in the stock transfer books of the Company or such other address as may be designated in writing hereafter, in the same manner, by such Person. (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 each Holder. Each Holder may assign their respective rights hereunder in the manner and to the Persons as permitted under the Purchase Agreement. (i) Execution and 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 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 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. (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. (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. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGES TO FOLLOW] IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. WORLD HOMES, INC. By:_____________________________________ Name: John Nicoliasen Title: President [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGES OF PURCHASER TO FOLLOW] LENORE AVENUE LLC By:_____________________________________ Name: Title: Address for Notice: Lenore Avenue LLC c/o Citco Trustees (Cayman) Limited Commercial Centre P.O. Box 31106 SMB Grand Cayman Cayman Islands British West Indies With copies to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, NY 10104 Facsimile No.: (212) 541-4630 and (212) 541-1432 Attn: Eric L. Cohen, Esq. Annex A 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: - - ordinary brokerage transactions and transactions in which the broker- dealer solicits purchasers; - - 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; - - purchases by a broker-dealer as principal and resale by the broker- dealer for its account; - - an exchange distribution in accordance with the rules of the applicable exchange; - - privately negotiated transactions; - - short sales; - - broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share; - - a combination of any such methods of sale; and - - 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. The Selling Stockholders may also engage in short sales against the box, puts and calls and other transactions in securities of the Company or derivatives of Company securities and may sell or deliver shares in connection with these trades. The Selling Stockholders may pledge their shares to their brokers under the margin provisions of customer agreements. If a Selling Stockholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares. The Selling Stockholders have advised the Company that they have not entered into any agreements, understandings or arrangements with any underwriters or broker-dealers regarding the sale of their shares other than ordinary course brokerage arrangements, nor is there an underwriter or coordinating broker acting in connection with the proposed sale of shares by the Selling Stockholders. 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 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 Company is required to pay all fees and expenses incident to the registration of the shares, including fees and disbursements of counsel to the Selling Stockholders. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act. EX-10.8 8 ex10-8.txt CONVERTIBLE DEBENTURE 10-22-2001 Exhibit 10.8 CONVERTIBLE DEBENTURE PURCHASE AGREEMENT (this "Agreement"), dated as of October 22, 2001, among Composite Industries of America, Inc., a Nevada corporation (formerly known as World Homes, Inc.) (the "Company") and the investors signatory hereto (each such investor is a "Purchaser" and all such investors are, collectively, the "Purchasers"). WHEREAS, subject to the terms and conditions set forth in this Agreement and in accordance with Sec.4(2) under the Securities Act of 1933, as amended (the "Securities Act"), and Rule 506 promulgated thereunder, the Company desires to issue and sell to the Purchasers and the Purchasers, severally and not jointly, desire to purchase from the Company: (i) an aggregate principal amount of $750,000 of the Company's 6% Convertible Debentures due November 13, 2002, which shall be in the form of Exhibit A (the "Debentures"), and which are convertible into shares of the Company's common stock, $.001 par value per share (the "Common Stock"), and (ii) certain Warrants (as defined herein). All references in this Agreement to $ (dollars) shall be to US$ (United States Dollars) unless otherwise specified. 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 the Purchasers agree as follows: ARTICLE I PURCHASE AND SALE 1.1 The Closing (a) (i) The Closing. Subject to the terms and conditions set forth in this Agreement the Company shall issue and sell to the Purchasers and the Purchasers shall severally purchase from the Company the Debentures and Warrants for an aggregate purchase price of $750,000. The closing of the purchase and sale of the Debentures (the "Closing") shall take place at the offices of Robinson Silverman Pearce Aronsohn & Berman LLP ("Robinson Silverman"), 1290 Avenue of the Americas, New York, New York 10104, immediately following the execution hereof or such later date as the parties shall agree. The date of the Closing is hereinafter referred to as the "Closing Date." (ii) At the Closing, the parties shall deliver or shall cause to be delivered the following: (A) the Company shall deliver to each Purchaser: (1) Debentures registered in the name of such Purchaser in the aggregate principal amount equal to 66 2/3% of the principal amount indicated below such Purchaser's name on the signature page to this Agreement, (2) the legal opinion of James E. Pratt, Esq., outside counsel to the Company, in the form of Exhibit B, (3) an executed Registration Rights Agreement, dated the date hereof, among the Company and the Purchasers, in the form of Exhibit C (the "Registration Rights Agreement"), (4) Transfer Agent Instructions, in the form of Exhibit D, delivered to and acknowledged by the Company's transfer agent (the "Transfer Agent Instructions"), (5) a Common Stock purchase warrant, in the form of Exhibit E, registered in the name of such Purchaser, pursuant to which such Purchaser shall have the right to acquire a number of shares of Common Stock equal to 15% of the principal amount of Debentures to be acquired by such Purchaser on the Closing Date (the "Closing Warrant"), (6) a Common Stock purchase warrant, in the form of Exhibit G, registered in the name of such Purchaser, pursuant to which the Purchaser shall have the right to acquire shares of Common Stock upon the terms set forth therein (the "Callable Warrant"), (7) an executed Guaranty and Stock Pledge Agreement, dated the date hereof, in the Form of Exhibit F, (the "Pledge Agreement"); and (B) each Purchaser will deliver to the Company: (1) 66 2/3% of the purchase price indicated below such Purchaser's name on the signature page to this Agreement in United States dollars in immediately available funds by wire transfer to an account designated in writing by the Company for such purpose, and (2) executed originals of this Agreement, the Registration Rights Agreement and the Pledge Agreement. 1.2 Settlement Date; Subsequent Debentures and Warrants. On the Business Day following the day the Registration Statement (as defined in the Registration Rights Agreement) is filed in accordance with the terms and conditions of the Registration Rights Agreement ("Settlement Date"), the Company will issue and deliver to each Purchaser: (a) Debentures in the principal amount equal to 33 1/3% of the principal amount set forth below such Purchaser's name on the signature page to this Agreement and (b) a Common Stock purchase warrant, in the form of Exhibit E, registered in the name of such Purchaser (such warrant, together with the Closing Warrant and Callable Warrant, the "Warrants"), pursuant to which such Purchaser shall have the right to acquire a number of shares of Common Stock equal to 15% of the principal amount of Debentures to be acquired by such Purchaser on the Settlement Date. The Purchaser's obligation to pay for and acquire shares under this Section 1.2 is conditioned upon the Company filing the Registration Statement meeting the requirements of the Registration Rights Agreement on or prior to the Filing Date (as defined in the Registration Rights Agreement). 1.3 Certain Defined Terms. For purposes of this Agreement, "Conversion Price," "Original Issue Date," "Trading Day" and "Per Share Market Value" shall have the meanings set forth in the Debentures; "Business Day" shall mean 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 or State of Nevada are authorized or required by law or other governmental action to close; A "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. ARTICLE II REPRESENTATIONS AND WARRANTIES 2.1 Representations and Warranties of the Company. The Company hereby makes the following representations and warranties to the Purchasers: (a) Organization and Qualification. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Nevada with the requisite corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. The Company has no subsidiaries other than as set forth in Schedule 2.1(a) (collectively the "Subsidiaries"). Each of 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. 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, (x) adversely affect the legality, validity or enforceability of the Securities (as defined below) or any of this Agreement, the Registration Rights Agreement, the Transfer Agent Instructions, the Pledge Agreement or the Warrants (collectively, the "Transaction Documents"), (y) have or result in a material adverse effect on the results of operations, assets, prospects, or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (z) adversely impair the Company's ability to perform fully on a timely basis its obligations under any of the Transaction Documents (any of (x), (y) or (z), a "Material Adverse Effect"). (b) 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 thereunder. The execution and delivery of each of the Transaction Documents by the Company and the consummation by it of the transactions contemplated thereby have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company. Each of the Transaction Documents has been 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. Neither the Company nor any 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. (c) Capitalization. The number of authorized, issued and outstanding capital stock of the Company is set forth in Schedule 2.1(c). Except as disclosed in Schedule 2.1(c), the Company owns all of the Capital Stock of each Subsidiary. No shares of Common Stock are entitled to preemptive or similar rights, nor is any holder of the securities of the Company entitled to preemptive or similar rights arising out of any agreement or understanding with the Company by virtue of any of the Transaction Documents. Except as a result of the purchase and sale of the Debentures and Warrants and except as disclosed in Schedule 2.1(c), 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 Warrants or Underlying Shares (as hereinafter defined) will not obligate the Company to issue shares of Common Stock or other securities to any Person other than the Purchaser and will not result in a right of any holder of Company securities to adjust the exercise or conversion or reset price under such securities. (d) Issuance of the Debentures and the Warrants. The Debentures will be duly and validly issued, free and clear of all liens, encumbrances and rights of first refusal of any kind (collectively, "Liens"). On the date hereof, the Company will have (and will, at all times while Debentures are outstanding, maintain) an adequate reserve of duly authorized shares of Common Stock, reserved for issuance to the holders of such Debentures and Warrants, to enable it to perform its conversion, exercise and other obligations under this Agreement. Such number of reserved and available shares of Common Stock shall not be less than the sum of 200% of the number of shares of Common Stock which would be issuable upon (i) conversion in full of the Debentures assuming such conversion occurred on the Original Issue Date, and the Debentures remain outstanding for one year and all interest is paid in shares of Common Stock and (ii) exercise in full of the Warrants (the "Initial Minimum"). All such authorized shares of Common Stock shall be duly reserved for issuance to the holders of the Debentures and Warrants. The shares of Common Stock issuable upon conversion of the Debentures and upon exercise of the Warrants are collectively referred to herein as the "Underlying Shares." The Debentures, Warrants and the Underlying Shares are collectively referred to herein as, the "Securities." When issued to the Purchasers in accordance with the Debentures and the Warrants, the Underlying Shares will be duly authorized, validly issued, fully paid and nonassessable, free and clear of all Liens. (e) 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 charter documents (each as amended through the date hereof), or (ii) subject to obtaining the Required Approvals (as defined below), conflict with, or constitute a default (or an event which 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; except in the case of each of clauses (ii) and (iii), as could not, individually or in the aggregate, have or result in a Material Adverse Effect. The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental authority, except for violations which, individually or in the aggregate, could not have or result in a Material Adverse Effect. (f) 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 pursuant to Section 3.10, (ii) the filing with the Commission of a registration statement meeting the requirements set forth in the Registration Rights Agreement and covering the resale of the Underlying Shares by the Purchasers (the "Underlying Shares Registration Statement"), (iii) applicable Blue Sky filings, and (iv) in all other cases where the failure to obtain such consent, waiver, authorization or order, or to give such notice or make such filing or registration could not have or result in, individually or in the aggregate, a Material Adverse Effect (collectively, the "Required Approvals"). (g) Litigation; Proceedings. 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 or any of its Subsidiaries 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 result in a Material Adverse Effect. Except as set forth in Schedule 2.1(g), neither the Company nor any Subsidiary, nor any director or officer thereof, is or has been the subject of any Action involving (A) a claim of violation of or liability under federal or state securities laws or (B) a claim of breach of fiduciary duty; (iii) the Company does not have pending before the Commission any request for confidential treatment of information and the Company has no knowledge of any expected such request that would be made prior to the Effectiveness Date (as defined in the Registration Rights Agreement); and (iv) there has not been, and to the best of the Company's knowledge 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. (h) No Default or Violation. Neither the Company nor any Subsidiary (i) is in default under or in violation of (and no event has occurred which has not been waived which, 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, (ii) is in violation of any order of any court, arbitrator or governmental body, or (iii) is in violation of any statute, rule or regulation of any governmental authority, in each case of clauses (i), (ii) or (iii) above, except as could not individually or in the aggregate, have or result in a Material Adverse Effect. (i) Private Offering. Assuming the accuracy of the representations and warranties of the Purchasers set forth in Sections 2.2(b)-(g), the offer, issuance and sale of the Securities to the Purchasers as contemplated hereby are exempt from the registration requirements of the Securities Act. Neither the Company nor any Person acting on its behalf has taken or is, to the knowledge of the Company, contemplating taking any action which could subject the offering, issuance or sale of the Securities to the registration requirements of the Securities Act including soliciting any offer to buy or sell the Securities by means of any form of general solicitation or advertising. (j) SEC Reports; Financial Statements. The Company has filed all reports required to be filed by it under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including, without limitation, all filings required pursuant to Sections 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" and, together with the Schedules to this Agreement, the "Disclosure Materials") 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. All material agreements to which the Company is a party or to which the property or assets of the Company are subject have been filed as exhibits to the SEC Reports as required under the Exchange Act. 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. Since January 1, 2000, except as specifically disclosed in the SEC Reports, (a) there has been no event, occurrence or development that has or that could result in a Material Adverse Effect, (b) the Company has not incurred any liabilities (contingent or otherwise) other than (x) liabilities incurred in the ordinary course of business consistent with past practice and (y) liabilities not required to be reflected in the Company's financial statements pursuant to GAAP or required to be disclosed in filings made with the Commission, (c) the Company has not altered its method of accounting or the identity of its auditors and (d) the Company has not declared or made any payment or distribution of cash or other property to its stockholders or officers or directors (other than in compliance with existing Company stock option plans or employee benefit plans (as defined n Rule 405 of Regulation C)) with respect to its capital stock, or purchased, redeemed (or made any agreements to purchase or redeem) any shares of its capital stock. (k) Investment Company. The Company is not, and is not an Affiliate (as defined in Rule 405 under the Securities Act) of, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (l) Certain Fees. Except for certain fees payable to Hyperion Partners Corp., no fees or commissions 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. The Purchasers shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by this Agreement. The Company shall indemnify and hold harmless the Purchasers, their employees, officers, directors, agents, and partners, and their respective Affiliates, from and against all claims, losses, damages, costs (including the costs of preparation and attorney's fees) and expenses suffered in respect of any such claimed or existing fees, as such fees and expenses are incurred. (m) Seniority. 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. (n) Listing and Maintenance Requirements. Except as set forth in the SEC Reports, the Company has not, in the two years preceding the date hereof, received notice (written or oral) from any stock exchange, market or trading facility on which the Common Stock is or has been listed (or on which it has been quoted) to the effect that the Company is not in compliance with the listing or maintenance requirements of such exchange, market or trading facility. The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with the listing and maintenance requirements for continued trading of the Common Stock on the OTC Bulletin Board. (o) Patents and Trademarks. The Company and its Subsidiaries have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and rights which are necessary or material for use in connection with their respective businesses as described in the SEC Reports and which the failure to so have would 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 its Subsidiaries violates or infringes upon the rights of any Person. To the best 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) Registration Rights; Rights of Participation. Except as set forth on Schedule 6(b) to the Registration Rights Agreement, 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 which has not been satisfied. Except as set forth on Schedule 6(b) to the Registration Rights Agreement, 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. (q) Regulatory Permits. The Company and its Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state 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 result in a Material Adverse Effect ("Material Permits"), and neither the Company nor any such Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit. (r) Title. The Company and the Subsidiaries have good and marketable title in fee simple to all real property owned by them which is material to the business of the Company and its Subsidiaries and good and marketable title in all personal property owned by them which is material to the business of the Company and its 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 interfere with the use made and proposed to be made of such property by the Company and its Subsidiaries. Any real property and facilities held under lease by the Company and its Subsidiaries are held by them under valid, subsisting and enforceable leases of which the Company and its Subsidiaries are in compliance and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its Subsidiaries. (u) Labor Relations. No material labor problem exists or, to the knowledge of the Company, is imminent with respect to any of the employees of the Company. (v) Disclosure. The Company confirms that neither it nor any other Person acting on its behalf has provided any of the Purchasers or its agents or counsel with any information that constitutes or might constitute material non-public information. The Company understands and confirms that the Purchasers shall be relying 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 are true and correct 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. (w) Solvency. Based on the financial condition of the Company as of the Closing Date, (i) the Company's fair saleable value of its 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). (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 the Company's issuance of the Securities and the Purchasers' ownership of the Securities. 2.2 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 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, the Registration Rights Agreement, and the Warrants, 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 the Securities. (c) Purchaser Status. At the time such Purchaser was offered the Securities, it was, and at the date hereof it is an "accredited investor" as defined in Rule 501(a) under the Securities Act. Such Purchaser is not a registered broker-dealer under the Exchange Act nor is such Purchaser an Affiliate of a registered broker-dealer. (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. (e) Ability of such Purchaser to Bear Risk of 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. (f) Access to Information. Such Purchaser acknowledges that it has reviewed the Disclosure Materials and has been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities and the merits and risks of investing in the Securities; (ii) access to information about the Company and the Company's financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment; and (iii) the opportunity to obtain such additional information which the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment and to verify the accuracy and completeness of the information contained in the Disclosure Materials. Neither such inquiries nor any other investigation conducted by or on behalf of such Purchaser or its representatives or counsel shall modify, amend or affect such Purchaser's right to rely on the truth, accuracy and completeness of the Disclosure Materials and the Company's representations and warranties contained in the Transaction Documents. (g) General Solicitation. Such Purchaser is not purchasing the Securities as a result of or subsequent to 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. (h) Reliance. Such Purchaser understands and acknowledges that (i) the Securities are being offered and sold to it without registration under the Securities Act in a private placement that is exempt from the registration provisions of the Securities Act and (ii) the availability of such exemption, depends in part on, and the Company will rely upon the accuracy and truthfulness of, the foregoing representations and such Purchaser hereby consents to such reliance. 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 this Section 2.2 and Section 4(a)(ii) of the Debentures. ARTICLE III OTHER AGREEMENTS OF THE PARTIES 3.1 Transfer Restrictions. (a) Securities may only be disposed of pursuant to an effective registration statement under the Securities Act, to the Company or pursuant to an available exemption from or in a transaction not subject to the registration requirements of the Securities Act, and in compliance with any applicable federal and state securities laws. In connection with any transfer of Securities other than pursuant to an effective registration statement or to the Company, except as otherwise set forth herein, the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor, the 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. 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) The Purchasers agree to the imprinting, so long as is required by this Section 3.1(b), of the following legend on the Securities: NEITHER THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE] OR [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. Underlying Shares shall not contain the legend set forth above nor any other legend if the conversion of Debentures or the exercise of the Warrants, as the case may be, occurs at any time while an Underlying Shares Registration Statement is effective under the Securities Act or the holder is relying on Rule 144 promulgated under the Securities Act ("Rule 144") in connection with the resale of such Underlying Shares, or in the event there is not an effective Underlying Shares Registration Statement, and Rule 144 is not then available for resale of the Underlying Shares, at such time as such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). Concurrently with the Closing, the Company will deliver the Transfer Agent Instructions to the Purchasers and to the transfer agent for its Common Stock, and shall redeliver such opinions and instructions to each new transfer agent for the Common Stock, including the transfer agent contemplated in section 3.17, and shall instruct its counsel to deliver to such transfer agent the legal opinions included in the Transfer Agent Instructions. The Company understands that such deliveries are conditions precedent to the Purchasers obligations to perform any action at the Closing. In addition, on each of (x) the date that an Underlying Shares Registration Statement is declared effective by the Commission (such date, the "Effective Date"), (y) any date on which a Purchaser shall declare an event of default under the Pledge Agreement ("Default Date"), notifying the Company and Pledgors thereunder of its intentions to use pledge shares thereunder to satisfy Obligations (as defined therein), and (z) each date of conversion or exercise under the Debentures and Warrants following the Effective Date; the Company will instruct the transfer agent and cause to be promptly provided such opinions as requested by the transfer agent in order to have issued and delivered Underlying Shares and pledged shares (as the case may be), registered in such Purchasers names free of all restrictive legends. The Company agrees that following the Effective Date and Default Date (as the case may be), it will, no later than three Trading Days following the delivery by a Purchaser to the Company of a certificate or certificates representing such Underlying Shares issued with a restrictive legend, or pledged shares (as the case may be), deliver to such Purchaser certificates representing such securities which shall be 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 which enlarge the restrictions of transfer set forth in this Section. 3.2 Acknowledgment of Dilution. The Company acknowledges that the issuance of Underlying Shares upon the conversion of the Debentures or exercise of the Warrants will 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 obligation to issue Underlying Shares upon conversion of the Debentures or exercise of the Warrants is unconditional and absolute, subject to the limitations set forth in the Debentures and Warrants, regardless of the effect of any such dilution. 3.3 Furnishing of Information. As long as the Purchasers own 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 Section 13(a) or 15(d) of the Exchange Act. As long as the Purchasers own Securities, if the Company is not required to file reports pursuant to such sections, it will prepare and furnish to the Purchasers and make publicly available in accordance with Rule 144(c) promulgated under the Securities Act such information as is required for the Purchasers to sell the Securities under Rule 144 promulgated under the Securities Act. 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 Underlying Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 promulgated under the Securities Act, including causing its attorneys to render and deliver any legal opinion required in order to permit a Purchaser to receive Underlying Shares free of all restrictive legends and to subsequently sell Underlying Shares under Rule 144 upon receipt of a notice of an intention to sell or other form of notice having a similar effect. Upon the request of any such Person, the Company shall deliver to such Person a written certification of a duly authorized officer as to whether it has complied with such requirements. 3.4 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. 3.5 Increase in Authorized Shares. If on any date the Company would be, if a notice of conversion or exercise (as the case may be) were to be delivered on such date, precluded from issuing the sum of (i) 200% of the number of Underlying Shares as would then be issuable upon a conversion in full of the Debentures and (ii) the number of Underlying Shares issuable upon exercise in full of the Warrants (the "Current Required Minimum"), in either case, due to the unavailability of a sufficient number of authorized but unissued or reserved shares of Common Stock, then the Board of Directors of the Company shall promptly prepare and mail to the stockholders of the Company proxy materials requesting authorization to amend the Company's certificate or articles of incorporation to increase the number of shares of Common Stock which the Company is authorized to issue to at least such number of shares as reasonably requested by the Purchasers in order to provide for such number of authorized and unissued shares of Common Stock to enable the Company to comply with its issuance, conversion, exercise and reservation of shares obligations as set forth in this Agreement, the Debentures and the Warrants (the sum of (x) the number of shares of Common Stock then outstanding plus all shares of Common Stock issuable upon exercise of all outstanding options, warrants and convertible instruments other than the Warrants and (y) the Current Required Minimum, shall be a reasonable number). In connection therewith, the Board of Directors shall (a) adopt proper resolutions authorizing such increase, (b) recommend to and otherwise use its best efforts to promptly and duly obtain stockholder approval to carry out such resolutions (and hold a special meeting of the stockholders no later than the earlier to occur of the 60th day after delivery of the proxy materials relating to such meeting and the 90th day after request by a holder of Securities to issue the number of Underlying Shares in accordance with the terms hereof) and (c) within five (5) Business Days of obtaining such stockholder authorization, file an appropriate amendment to the Company's certificate or articles of incorporation to evidence such increase. 3.6 Reservation and Listing of Underlying Shares. (a) The Company shall (i) in the time and manner required by any national securities exchange, market, trading or quotation facility on which the Common Stock is then traded, prepare and file with such national securities exchange, market, trading or quotation facility on which the Common Stock is then traded an additional shares listing application covering a number of shares of Common Stock which is not less than the Initial Minimum, (ii) take all steps necessary to cause such shares of Common Stock to be approved for listing on any such national securities exchange, market or trading or quotation facility on which the Common Stock is then listed as soon as possible thereafter, and (iii) provide to the Purchasers evidence of such listing, and the Company shall maintain the listing of its Common Stock thereon. (b) The Company shall maintain a reserve of shares of Common Stock for issuance upon conversion of the Debentures in full and upon exercise in full of the Warrants in accordance with this Agreement, in such amount as may be required to fulfill its obligations in full under the Transaction Documents, which reserve shall equal no less than the then Current Required Minimum. 3.7 Conversion and Exercise Procedures. The Transfer Agent Instructions, the Conversion Notice (as defined in the Debentures) and the Form of Election to Purchase (as defined in the Warrants) sets forth the totality of the procedures with respect to the conversion of the Debentures or exercise of the Warrants, including the form of legal opinion, if necessary, that shall be rendered to the Company's transfer agent and such other information and instructions as may be reasonably necessary to enable the Purchasers to convert their Debentures or exercise their Warrants. 3.8 Conversion and Exercise Obligations of the Company. The Company shall honor conversions of the Debentures and exercises of the Warrants and shall deliver Underlying Shares in accordance with the respective terms, conditions and time periods set forth in the Debentures and Warrants. 3.9 Subsequent Financing; Limitation on Registrations. (a) Other than to the Purchasers, prior to the 90th Trading Day after the Effective Date, the Company shall not 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 any equity or equity equivalent securities (including any equity, debt or other instrument that is at any time over the life thereof convertible into or exchangeable for Common Stock), and the Company will cause its Subsidiaries not to offer, sell or issue during such period any of such Subsidiary's securities which provide the holder thereof the right to receive any Common Stock (collectively, "Common Stock Equivalents"), unless otherwise agreed to in writing by the Company and the Purchasers. (b) From the date of this Agreement through the 270th Trading Day following the Effective Date, the Company shall not, directly or indirectly, offer, sell, grant any option to purchase, or otherwise dispose of (or announce any offer, sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock Equivalents (collectively, a "Subsequent Placement") unless (A) the Company delivers to each of the Purchasers a written notice (the "Subsequent Placement Notice") of its intention to effect such Subsequent Placement, which Subsequent Placement Notice shall describe in reasonable detail the proposed terms of such Subsequent Placement, the amount of proceeds intended to be raised thereunder, the Person with whom such Subsequent Placement shall be effected, and attached to which shall be a term sheet or similar document relating thereto and (B) such Purchaser shall not have notified the Company by 6:30 p.m. (New York City time) on the tenth Trading Day after its receipt of the Subsequent Placement Notice of its willingness to provide (or to cause its sole designee to provide), subject to completion of mutually acceptable documentation, financing to the Company on the same terms set forth in the Subsequent Placement Notice. If the Purchasers shall fail to notify the Company of their intention to enter into such negotiations within such time period, the Company may effect the Subsequent Placement substantially upon the terms and to the Persons (or Affiliates of such Persons) set forth in the Subsequent Placement Notice; provided, that the Company shall provide the Purchasers with a second Subsequent Placement Notice, and the Purchasers shall again have the right of first refusal set forth above in this paragraph (a), if the Subsequent Placement subject to the initial Subsequent Placement Notice shall not have been consummated for any reason on the terms set forth in such Subsequent Placement Notice within 30 Trading Days after the date of the initial Subsequent Placement Notice with the Person (or an Affiliate of such Person) identified in the Subsequent Placement Notice. If the Purchasers shall indicate a willingness to provide financing in excess of the amount set forth in the Subsequent Placement Notice, then each Purchaser shall be entitled to provide financing pursuant to such Subsequent Placement Notice up to an amount equal to such Purchaser's pro-rata portion of the aggregate number of Shares purchased by such Purchaser under this Agreement, but the Company shall not be required to accept financing from the Purchasers in an amount in excess of the amount set forth in the Subsequent Placement Notice. In furtherance of this restriction, other than to the Purchasers or Affiliates thereof, prior to the 180th Trading Day following the Effective Date, the Company may not enter into any equity line or similar financing arrangement or issue or agree to issue any shares of its Common Stock or any Common Stock Equivalents pursuant to any equity line or similar type of financing, unless otherwise agreed to in writing by the Company and the Purchasers. (c) Except to register (x) the Registrable Securities (as defined in the Registration Rights Agreement), (y) securities of the Company permitted pursuant to Section 6(c) of the Registration Rights Agreement to be registered in the Underlying Shares Registration Statement, and (z) Common Stock permitted to be issued pursuant to Section 3.9(e), the Company may not until the 180th day after the Effective Date file a registration statement to register any of its securities. (d) The restrictive periods set forth in Sections 3.9 (a)-(c) shall be extended for the number of days during such periods (A) in which trading in the Common Stock is suspended by any securities exchange or market or quotation system on which the Common Stock is then listed, or (B) following the Effective Date that the Registration Statement is not effective, or (C) following the Effective Date, that the prospectus included in the Registration Statement may not be used by the holders thereof for the resale of Registrable Securities. (e) The restrictions contained in Section 3.9 (a)-(c) shall not apply to: (i) the issuance of Common Stock to a bona fide bank, landlord, or other lending institution whose primary business is lending money or leasing real property and not the trading or investment of securities under the terms of any loan, credit or lease facility, (ii) the issuance of any Common Stock or Common Stock Equivalents to a merger partner as consideration in connection with a merger and/or acquisition or consolidation with another entity in which the Company is the surviving entity, (iii) a bona fide underwritten public offering of the Common Stock that is not at any actual or implied discount (other than the customary underwriter's discount) to the then market price of the Common Stock resulting in net proceeds to the Company in excess of $10,000,000 (it being understood that equity line transactions, including any on-going warrant financing, or any similar arrangements shall not constitute a bona fide underwritten public offering of the Common Stock for the purposes hereof), (iv)the granting of options or warrants to employees, officers and directors of the Company, and the issuance of Common Stock upon exercise of such options or warrants granted under any stock option plan or employee benefit plan (as defined in Rule 405 of Regulation C) heretofore or hereinafter duly adopted by the Company, (v) the issuance of shares of Common Stock issuable upon exercise of any currently outstanding warrants and other outstanding convertible securities of the Company, in each case as and to the extent disclosed in Schedule 2.1(c) (but not as to any amendments or modifications of the terms of such securities after the date of this Agreement, including "back-dated" agreements) and (vi) shares of Common Stock issuable in connection with a Strategic Transaction (as defined below). For purposes of this Section 3.9, a "Strategic Transaction" shall mean a transaction or relationship in which the Company issues shares of Common Stock to an entity which is, itself or through its subsidiaries, an operating company in a business related to the business of the Company and in which the Company receives material benefits in addition to the investment of funds, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities. 3.10 Certain Securities Laws Disclosures; Publicity. The Company shall: (i) on the Closing Date, issue a press release reasonably acceptable to the Purchasers disclosing the transactions contemplated hereby, (ii) file with the Commission a Report on Form 8-K disclosing the transactions contemplated hereby within ten Business Days after the Closing Date, and (iii) timely file with the Commission a Form D promulgated under the Securities Act. The Company shall, no less than two Business Days prior to the filing of any disclosure required by clauses (ii) and (iii) above, provide a copy thereof to the Purchasers for their review. The Company and the Purchasers shall consult with each other in issuing any other press releases or otherwise making public statements or filings and other communications with the Commission or any regulatory agency or stock market or trading facility with respect to the transactions contemplated hereby and neither party shall issue any such press release or otherwise make any such public statement, filings or other communications without the prior written consent of the other, except that if such disclosure is required by law or stock market regulation, in which such case the disclosing party shall promptly provide the other party with prior notice of such public statement, filing or other communication. Notwithstanding the foregoing, the Company shall not publicly disclose the names of the Purchasers, or include the names of the Purchasers in any filing with the Commission, or any regulatory agency, trading facility or stock market without the prior written consent of the Purchasers, except to the extent such disclosure (but not any disclosure as to the controlling Persons thereof) is required by law or stock market regulations, in which case the Company shall provide the Purchasers with prior notice of such disclosure. 3.11 Transfer of Intellectual Property Rights. Except in connection with the sale of all or substantially all of the assets of the Company or licensing arrangements in the ordinary course of the Company's business, the Company shall not transfer, sell or otherwise dispose of any Intellectual Property Rights, or allow any of the Intellectual Property Rights to become subject to any Liens, or fail to renew such Intellectual Property Rights (if renewable and it would otherwise lapse if not renewed), without the prior written consent of the Purchasers. 3.12 Use of Proceeds. The Company will use the net proceeds from the sale of the Securities for working capital purposes; however, the Company will not use any of the proceeds from the sale of Securities to fund the businesses or finances of M.J.B. Towers or Tribal Electric Association - 2000, both of which the Company represents as "self-funded" as of the date of this Agreement. The Company may not use any of the proceeds from the sale of Securities hereunder to repay or otherwise satisfy any portion of the Company's debt, except the payment of trade payables in the ordinary course of the Company's business and prior practices. In furtherance of the foregoing, the Company agrees that it will not use any proceeds from the sale of Securities hereunder to repay amounts owed by the Company to any management member of the Company. The Company may not use any of the proceeds from the sale of Securities hereunder to redeem any securities of the Company, other than securities held by the Investor, or to settle any outstanding litigation. 3.13 Indemnification. (a) (1) The Company agrees to indemnify and hold harmless each Purchaser, its shareholders, partners, officers, directors, employees, agents and representatives and their respective Affiliates against any and all damages, claims, losses, liabilities, costs and expenses (including reasonable counsel fees and expenses) which may be suffered or incurred by any of them as a result of or relating to any misrepresentation, breach or inaccuracy, or any allegation by a third party that, if true, would constitute a breach or inaccuracy, of any of the representations, warranties or covenants made by the Company in this Agreement or any other Transaction Document. (2) Each Purchaser severally and not jointly, agrees to indemnify the Company, its shareholders, partners, officers, directors, employees, agents and representatives and their respective Affiliates against any and all damages, claims, losses, liabilities, costs and expenses (including reasonable counsel fees and expenses) which may be suffered or incurred by any of them as a result of or relating to any misrepresentation, breach or inaccuracy, or any allegation by a third party that, if true, would constitute a breach or inaccuracy, of any of the representations, warranties or covenants made by such Purchaser in this Agreement or any other Transaction Document. (3) In case any action, litigation, proceeding or investigation (a "Proceeding"), shall be instituted involving any Person in respect of which indemnity may be sought pursuant to this Section, such Person (the "indemnified party") shall promptly notify the Person against whom such indemnity may be sought (the "indemnifying party") in writing of the occurrence of the facts and circumstances giving rise to such claim. The failure of any Person to deliver the notice required by this Section3.13 shall not in any way affect the indemnifying party's indemnification obligation hereunder except and only to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the indemnifying party. In case any such Proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party and shall pay as incurred the fees and expenses of such counsel related to such proceeding. In any such Proceeding, any indemnified party shall have the right to retain its own counsel or pay its own expenses. Notwithstanding the foregoing, the indemnifying party shall pay as incurred the fees and expenses of the counsel retained by the indemnified party in the event (i)the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii)the named parties to any such proceedings (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The indemnifying party shall not be liable for any settlement of any Proceeding effected without its written consent (which consent may not be unreasonably withheld) but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment and the indemnifying party shall obtain a full release of the indemnified party. (b) If (i) a Purchaser becomes involved in any capacity in any Proceeding brought by any stockholder of the Company in connection with or as a result of the consummation of the transactions contemplated by any Transaction Document (including any Proceeding in which it is alleged that such Purchaser or others on behalf of or in concert with such Purchaser improperly traded any of the Company's securities or manipulated the price of any of the Company's securities), or if a Purchaser is impleaded in any such Proceeding by any Person, or (ii) a Purchaser becomes involved in any capacity in any Proceeding brought by the Commission or any stock market, trading facility, any other self-regulatory organization or other body having jurisdiction, against or involving the Company or in connection with or as a result of the consummation of the transactions contemplated by any Transaction Document, or if a Purchaser is impleaded in any such Proceeding by any Person, then in any and each such case, the Company agrees to indemnify, defend and hold harmless such Purchaser from and against and in respect of all losses, claims, liabilities, damages and expenses (including the cost of any investigation and preparation and all reasonable legal fees and expenses) resulting from, imposed upon or incurred by such Purchaser, directly or indirectly, in connection therewith, as such expenses are incurred. The indemnification and reimbursement obligations of the Company under this paragraph shall be in addition to any liability which the Company may otherwise have (other than matters specifically addressed in the Registration Rights Agreement, which shall be governed solely by that agreement), shall extend upon the same terms and conditions to any Affiliates of the Purchaser who are actually named in such Proceeding and the partners, directors, agents, employees and representatives and controlling persons (if any), as the case may be, of the Purchaser and any such Affiliates, and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, the Purchasers, any such Affiliate and any such Persons. The Company also agrees that neither any Purchaser nor any such Affiliate, partner, director, agent, representative, employee or controlling person shall have any liability to the Company or any other Person asserting claims on behalf of or in right of the Company in connection with or as a result of the consummation of any Transaction Document, except as provided in or contemplated by the Transaction Documents. If, in connection with a Proceeding in which it is alleged that a Purchaser or others on behalf of or in concert with such Purchaser improperly traded any of the Company's securities or manipulated the price of any of the Company's securities, a court of competent jurisdiction determines in a final judgment, not subject to appeal or review, that a Purchaser who has been, or is seeking to be, indemnified or reimbursed under this Section is liable for any manipulation, then the indemnity and reimbursement obligations of the Company under this Section 3.13(b) will not be available to the Purchaser and the other indemnitees hereunder with respect to such Proceeding. 3.14 Non-Disclosure of Non-Public Information. The Company shall not disclose non-public information to the Purchasers or their advisors or representatives unless prior to disclosure of such information the Company identifies such information as being non-public information and the Purchasers enter into a non-disclosure agreement in form mutually acceptable to the Company and the Purchasers. 3.15 Shareholder Rights Plan. No claim will be made or enforced by the Company or any other Person that any Purchaser is an "Acquiring Person" under any shareholders rights plan or similar plan or arrangement in effect or hereafter adopted by the Company, or that any Purchaser could be deemed to trigger the provisions of any such plan or arrangement, by virtue of receiving Securities or shares of Common Stock under the Transaction Documents. 3.16 Release. Effective as of and from the Closing and based on the good and valuable consideration exchanged between the Company and Purchasers, each of the Company and the Purchasers (as such, a "Releasor") hereby releases and discharges the other and its predecessors, successors, and affiliates, employees, officers, directors, agents, advisors, shareholders, representatives, and assigns (collectively, "Releasees"), from all claims, actions, causes of action, suits, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, executions, obligations, duties, claims, matters, liabilities, violations of law, fines, penalties, responsibilities, attorneys' fees, maintenance charges, and demands whatsoever, in law, admiralty or equity, which against the Releasees (or any of them) the Releasors, Releasor's successors or assigns ever had, now have or hereafter can shall or may have, for, upon or by reason of any matter, cause or thing whatsoever from the beginning of time to the Closing Date, provided, however, that the release set forth in this Section 3.16 shall have no effect upon and shall not impair the Company's or any other parties obligations to the Purchasers under the Convertible Debenture Purchase Agreement dated as of April 5, 2001 and the "Transaction Documents" entered into in accordance therewith to the Closing Date or any matter pertaining thereto which such party may have from and after April 5, 2001. 3.17 Transfer Agent. By December 7, 2001 the Company shall have retained American Stock Transfer or another mutually acceptable nationally recognized transfer agent, as the transfer agent for the Common Stock. ARTICLE IV MISCELLANEOUS 4.1 Fees and Expenses. At the Closing, the Company shall reimburse the Purchasers for their legal fees and expenses incurred in connection with the preparation and negotiation of the Transaction Documents by paying to Robinson Silverman $,000 for the preparation and negotiation of the Transaction Documents. The amount contemplated by the immediately preceding sentence shall be retained by the Purchasers and shall not be delivered to the Company at the Closing. Other than the amount contemplated herein, and except as otherwise specified in the Registration Rights Agreement, 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 stamp and other taxes and duties levied in connection with the issuance of the Securities. 4.2 Entire Agreement; Amendments. The Transaction Documents, together with the Exhibits and Schedules thereto and Transfer Agent Instructions, 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. 4.3 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 (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) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Agreement 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 Business Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows: If to the Company: Composite Industries of America, Inc. 4505 W. Hacienda Ave, Unit I-1 Las Vegas, Nevada 89118 Facsimile No.: (702) 579- 4833 Attn: Merle Ferguson With copies to: James E. Pratt, Esq. 195 Kildare Road Garden City, New York 11530 Facsimile No.: (516) 873-1140 If to a Purchaser: To the address set forth under such Purchaser's name on the signature pages hereto or such other address as may be designated in writing hereafter, in the same manner, by such Person. 4.4 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 both 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 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 accruing to it thereafter. 4.5 Headings. 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. 4.6 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. The Purchasers may not assign this Agreement or any of the rights or obligations hereunder without the consent of the Company; however, this provision shall not limit any Purchaser's right to transfer Securities acquired hereunder or transfer or assign rights under the Registration Rights Agreement. 4.7 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. 4.8 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 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 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 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. 4.9 Survival. The representations, warranties, agreements and covenants contained herein shall survive the Closing and the delivery and conversion of the Debentures and exercise of the Warrants. 4.10 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) the same with the same force and effect as if such facsimile signature page were an original thereof. 4.11 Severability. In case any one or more of the provisions of this Agreement shall 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 and enforceable provision which shall be a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. 4.12 Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each of the Purchasers will be entitled to specific performance of the obligations of the Company under the Transaction Documents. The parties hereto agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of its 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. 4.13 Independent Nature of Purchasers' Obligations and Rights. The obligations of each Purchaser under any Transaction Document is 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 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. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGES FOLLOWS] IN WITNESS WHEREOF, the parties hereto have caused this Convertible Debenture Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above. COMPOSITE INDUSTRIES OF AMERICA, INC. By:_____________________________________ Name: Merle Ferguson Title: President [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOR PURCHASER FOLLOWS] LENORE AVENUE LLC By:_____________________________________ Name: Title: Purchase Price for Debentures: $750,000 Address for Notice: Lenore Avenue LLC c/o Citco Trustees (Cayman) Limited Commercial Centre P.O. Box 31106 SMB Grand Cayman Cayman Islands British West Indies Facsimile No.: (345) 945-7568 With copies to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, NY 10104 Facsimile No.: (212) 541-4630 and (212) 541-1432 Attn: Eric L. Cohen, Esq. EX-10.9 9 ex10-9.txt FORM OF 6% CONVERTIBLE DEBENTURE Exhibit 10.9 NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS 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. No. [ ] Original Date of Issuance: December [ ], 2001 $250,000 COMPOSITE INDUSTRIES OF AMERICA, INC. 6% CONVERTIBLE DEBENTURE DUE [ ], 2002 THIS DEBENTURE is one of a series of duly authorized and issued debentures of Composite Industries of America, Inc. (formerly known as World Homes, Inc.), a Nevada corporation, having a principal place of business at 4505 W. Hacienda Ave, Unit I-1, Las Vegas, Nevada 89118 (the "Company"), designated as its 6% Convertible Debentures, due [ ], 2002, in the aggregate principal amount of Seven Hundred and Fifty Thousand Dollars ($750,000) (the "Debentures"). FOR VALUE RECEIVED, the Company promises to pay to [ ] or its registered assigns (the "Holder"), the principal sum of $250,000 on [ ], 2002 or such earlier date as the Debentures are required or permitted to be repaid as provided hereunder (the "Maturity Date") (provided that, by notice delivered to the Company at least thirty days prior to [ ], 2002, the Holder may extend the Maturity Date by up to twelve months) 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 on each Conversion Date (as defined herein) and on the Maturity Date in cash or shares of Common Stock (as defined in Section 6). 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 ten Trading Days (as defined in Section 6) prior to each Conversion Date or the Maturity Date, the Company shall provide the Holder with written notice of its election to pay interest hereunder in cash or in shares of Common Stock pursuant to the terms of Section4(a)(iii) (the Company may indicate in such notice that the election contained in such notice shall continue for later periods until revised). Failure to timely provide such written notice shall be deemed an election by the Company to pay the interest on such Conversion Date or Maturity Date in shares of Common Stock pursuant to the terms of Section 4(a) (iii). Interest shall be calculated on the basis on a 360-day year and shall accrue daily commencing on the Original Issue Date (as defined in Section 6) 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. Interest hereunder will be paid to the Person (as defined in Section 6) in whose name this Debenture is registered on the records of the Company regarding registration and transfers of Debentures (the "Debenture Register"). All overdue accrued and unpaid interest to be paid hereunder shall entail a late fee at the rate of 18% 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. 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 (as defined in Section 6) and may be transferred or exchanged only in compliance with the Purchase Agreement. Prior to due presentment to the Company for transfer of this Debenture, the Company and any agent of the Company may treat the Person (as defined in Section 6) 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 (including any Late Fees) 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); (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 (as defined in Section 6), and such failure or breach shall not have been remedied within five days after the date on which notice of such failure or breach shall have been given; (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 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 $100,000, 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; (v) the Common Stock shall not be eligible for quotation on or quoted for trading on the OTC Bulletin Board ("OTC') or listed for trading on the Nasdaq SmallCap Market, New York Stock Exchange, American Stock Exchange or the Nasdaq National Market (each, a "Subsequent Market") and shall not again be eligible for and quoted or listed for trading thereon within five Trading Days; (vi) the Company shall be a party to any Change of Control Transaction (as defined in Section 6), shall agree to sell or dispose all or in excess of 33% 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 shares of Common Stock or other equity securities of the Company (other than redemptions of Underlying Shares (as defined in Section 6)); (vii) an Underlying Shares Registration Statement (as defined in Section6) shall not have been declared effective by the Commission (as defined in Section 6) on or prior to the 145th day after the Original Issue Date; (viii) if, during the Effectiveness Period (as defined in the Registration Rights Agreement (as defined in Section 6)), 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 ten consecutive Trading Days; (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 145th day after the Original Issue Date, 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 fifth 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; (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; or (xii) the Pledgee shall have declared an Event of Default under the Guaranty and Stock Pledge Agreement of even date herewith, between the Holders and the Company. (b) If any Event of Default occurs and is continuing, the full principal amount of this Debenture (and, at the Holder's option, all other Debentures then held by such Holder), 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 sum of: (i) the Mandatory Prepayment Amount (as defined in Section 6) plus (ii) the product of (A) the number of Underlying Shares issued in respect of conversions hereunder within thirty days of the date of a declaration of an Event of Default and then held by the Holder and (B) the Closing Price (as defined in Section 6) on the date prepayment is due or the date the full prepayment price is paid, whichever is greater. Interest shall accrue on the prepayment amount hereunder from the seventh 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 and Underlying Shares 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 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) Commencing on the 31st day after the Closing Date, 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 Section4(a)(ii) hereof). The Holder shall effect conversions by delivering to the Company the form of conversion notice attached hereto as Exhibit A (a "Conversion Notice"), specifying therein the principal amount of Debentures to be converted and the date on which such conversion is to be effected (a "Conversion Date") and shall contain a completed schedule in the form of Schedule 1 to the Conversion Notice (as amended on each Conversion Date, the "Conversion Schedule") reflecting the remaining principal amount of this Debenture and all accrued and unpaid interest thereon subsequent to the conversion at issue. If no Conversion Date is specified in a Conversion Notice, the Conversion Date shall be the date that such Conversion Notice 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 has been so converted. Conversions hereunder shall have the effect of lowering the outstanding principal amount of this Debenture plus all accrued and unpaid interest thereon in an amount equal to the applicable conversion, which shall be evidenced by entries set forth in the Conversion Schedule. The Holder and the Company shall maintain records showing the principal amount converted and the date of such conversions. 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) Certain Conversion Restrictions. A Holder may not convert Debentures or receive shares of Common Stock as payment of interest hereunder to the extent such conversion or receipt of such interest payment would result in the Holder, together with its affiliates, beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules promulgated thereunder) in excess of 9.999% of the then issued and outstanding shares of Common Stock, including shares issuable upon conversion of, and payment of interest on, the Debentures held by such Holder after application of this Section. To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time it delivers a Conversion Notice that such Conversion Notice has not violated the restrictions set forth in this paragraph. If the Holder has delivered a Conversion Notice for a principal amount of Debentures that, without regard to any other shares that the Holder or its affiliates may beneficially own, would result in the issuance in excess of the permitted amount hereunder, the Company shall notify the Holder of this fact and shall honor the conversion for the maximum principal amount permitted to be converted on such Conversion Date in accordance with the periods described in Section 4(b) and, at the option of the Holder, either retain any principal amount tendered for conversion in excess of the permitted amount hereunder for future conversions or return such excess principal amount to the Holder. In the event of a merger or consolidation of the Company with or into another Person, this paragraph shall not apply with respect to a determination of the number of shares of common stock issuable upon conversion in full of the Debentures if such determination is necessary to establish the Securities or other assets which the holder of Common Stock shall be entitled to receive upon the effectiveness of such merger or consolidation. (iii) Underlying Shares Issuable Upon Conversion and Pursuant to Interest. (A) The number of shares of Common Stock issuable upon a conversion hereunder shall be determined by adding the sum of: (i) the quotient obtained by dividing (x) the outstanding principal amount of this Debenture to be converted and (y) the Conversion Price, and (ii) the amount equal to (I) the product of (x) the outstanding principal amount of this Debenture to be converted and (y) the product of (1) the quotient obtained by dividing .06 by 360 and (2) the number of days for which such principal amount was outstanding, divided by (II) the Conversion Price on the Conversion Date, provided, that if the Company shall have elected to pay the interest due on a Conversion Date in cash pursuant to the terms hereof, subsection (ii) shall not be used in the calculation of the number of shares of Common Stock issuable upon a conversion hereunder. (B) Notwithstanding anything to the contrary contained herein, if on any Conversion Date: (1) the number of shares of Common Stock at the time authorized, unissued and unreserved for all purposes, or held as treasury stock, is insufficient to pay interest hereunder in shares of Common Stock; (2) such shares of Common Stock: (x) are not registered for resale pursuant to an effective Underlying Shares Registration Statement and (y) may not be sold without volume restrictions pursuant to Rule 144(k) promulgated under the Securities Act; (3) the Common Stock shall fail to be listed or quoted for trading on the OTC or a Subsequent Market; (4) the Company has failed to timely satisfy its conversion obligations hereunder; or (5) the issuance of such shares of Common Stock would result in a violation of Sections 4(a)(ii), then, at the option of the Holder, the Company, in lieu of delivering shares of Common Stock pursuant to Section 4(a)(iii)(A) (ii), shall deliver, within three Trading Days of each applicable Conversion Date, an amount in cash equal to the product of: (a) the outstanding principal amount of the Debentures to be converted on such Conversion Date and (b) the product of (x) the quotient obtained by dividing .06 by 360 and (y) the number of days for which such principal amount was outstanding. (b) (i) Not later than three Trading Days after any Conversion Date, the Company will deliver to the Holder (i) a certificate or certificates 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 and (ii) a bank check in the amount of accrued and unpaid interest (if the Company has timely elected or is required to pay accrued interest in cash). The Company shall, upon request of the Holder, if available, 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 Conversion Notice such certificate or certificates are not delivered to or as directed by the applicable Holder by the third 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 third Trading Day after the Conversion Date, the Company shall pay to such Holder, in cash, as liquidated damages and not as a penalty, $3,500 for each Trading Day after such fifth Trading Day until such certificates are delivered. 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 certificates representing shares of Common Stock upon conversion 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 purchases (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 market price of the Common Stock at the time of the sale 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 market price of the Underlying Shares on the date of conversion 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. (c) (i) The conversion price (the "Conversion Price") in effect on any Conversion Date shall be the lesser of (1) $[ ] (the "Initial Conversion Price"), and (2) 77.5% of the average of the lowest three Per Share Market Values (which need not occur on consecutive Trading Days) during the twenty Trading Days immediately preceding the applicable Conversion Date (which may include Trading Days prior to the date on which the Holder is first entitled to tender a Conversion Notice), provided, that such twenty Trading Day period shall be extended for the number of Trading Days during such period in which: (A) trading in the Common Stock is suspended by, or not traded on, the OTC or a Subsequent Market on which the Common Stock is then listed, or (B) after the date declared effective by the Commission, the Underlying Shares Registration Statement is either not effective or the Prospectus included in the Underlying Shares Registration Statement may not be used by the Holder for the resale of Underlying Shares. (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, (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 Initial Conversion 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 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 at a price per share less than the Per Share Market Value at the record date mentioned below, then the Conversion Price shall be multiplied 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 such Per Share Market Value. Such adjustment shall be made whenever such rights 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. However, upon the expiration of any such right, option or warrant to purchase shares of the Common Stock the issuance of which resulted in an adjustment in the Conversion Price pursuant to this Section, if any such right, option or warrant shall expire and shall not have been exercised, the Conversion Price shall immediately upon such expiration be recomputed and effective immediately upon such expiration be increased to the price which it would have been (but reflecting any other adjustments in the Conversion Price made pursuant to the provisions of this Section after the issuance of such rights or warrants) had the adjustment of the Conversion Price made upon the issuance of such rights, options or warrants been made on the basis of offering for subscription or purchase only that number of shares of the Common Stock actually purchased upon the exercise of such rights, options or warrants actually exercised. (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 any equity or equity equivalent securities (including any equity, debt or other instrument that is at any time over the life thereof convertible into or exchangeable for Common Stock) (collectively, "Common Stock Equivalents") entitling any Person to acquire shares of Common Stock, at a price per share less than the Conversion Price (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 a price per share which is less than the Conversion Price, such issuance shall be deemed to have occurred for less than the Conversion Price), then, at the sole option of the Holder, the Conversion Price shall be adjusted for such conversions as Holders shall indicate in its Conversion Notices to equal the 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 business day following the issuance of any Common Stock or Common Stock Equivalent subject to this section, indicating therein the applicable issuance price, or of applicable reset price, exchange price, conversion price and other pricing terms. No adjustments under this paragraph shall be made as a result of (i)the granting of options or warrants to employees, officers and directors of the Company, and the issuance of Common Stock upon exercise of such options or warrants granted under any stock option plan or employee benefit plan (as defined in Rule 405 of Regulation C) heretofore or hereinafter duly adopted by the Company and (ii) shares of Common Stock issuable upon exercise of any currently outstanding warrants and other outstanding convertible securities of the Company, in each case as and to the extent disclosed in Schedule 2.1(c) to the Purchase Agreement (but not as to any amendments or modifications of the terms of such securities after the date of this Agreement, including "back-dated" agreements). (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 Conversion Price at which Debentures shall thereafter be convertible shall be determined by multiplying the Conversion 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 Per Share Market Value determined as of the record date mentioned above, and of which the numerator shall be such Per Share Market Value 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) In case of any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, the Holders shall have the right thereafter to, at their option, (A) convert the then outstanding principal amount, together with all accrued but unpaid interest and any other amounts then owing hereunder in respect of this Debenture only into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of the Common Stock following such reclassification or share exchange, and the Holders of the Debentures shall be entitled upon such event to receive such amount of securities, cash or property as the shares of the Common Stock of the Company into which the then outstanding principal amount, together with all accrued but unpaid interest and any other amounts then owing hereunder in respect of this Debenture could have been converted immediately prior to such reclassification or share exchange would have been entitled or (B) require the Company to prepay the aggregate of its outstanding principal amount of Debentures, plus all interest and other amounts due and payable thereon, at a price determined in accordance with Section 3(b). The entire prepayment price shall be paid in cash. This provision shall similarly apply to successive reclassifications or share exchanges. (vii) 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. No adjustments in either the Conversion Price or the Initial Conversion Price shall be required if such adjustment is less than $0.01; provided, however, that any adjustments which by reason of this Section are not required to be made shall be carried forward and taken into account in any subsequent adjustment. (viii) Whenever either the Initial Conversion Price or the Conversion 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 Initial Conversion Price or Conversion Price (as applicable) after such adjustment and setting forth a brief statement of the facts requiring such adjustment. (ix) 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 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. (x) In case of any (1) merger or consolidation of the Company with or into another Person, or (2) sale by the Company of more than one-half of the assets of the Company in one or a series of related transactions, a Holder shall have the right to (A) exercise any rights under Section 3(b), (B) convert its aggregate principal amount of Debentures then outstanding into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger, consolidation or sale, and such Holder shall be entitled upon such event or series of related events to receive such amount of securities, cash and property as the shares of Common Stock into which such aggregate principal amount of Debentures could have been converted immediately prior to such merger, consolidation or sales would have been entitled, or (C) in the case of a merger or consolidation, require the surviving entity to issue to the Holder convertible debentures with a principal amount equal to the aggregate principal amount of Debentures then held by such Holder, plus all accrued and unpaid interest and other amounts owing thereon, which newly issued convertible debentures shall have terms identical (including with respect to conversion) to the terms of this Debenture, and shall be entitled to all of the rights and privileges of a Holder of Debentures set forth herein and the agreements pursuant to which the Debentures were issued. In the case of clause (C), the conversion price applicable for the newly issued shares of convertible preferred stock or convertible debentures shall be based upon the amount of securities, cash and property that each share of Common Stock would receive in such transaction and the Conversion Price in effect immediately prior to the effectiveness or closing date for such transaction. The terms of any such merger, sale or consolidation shall include such terms so as to continue to give the Holders the right to receive the securities, cash and property set forth in this Section upon any conversion or redemption following such event. This provision shall similarly apply to successive such events. (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 and payment of interest on 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 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 Conversion Notice, shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to the Company, at 4505 W. Hacienda Avenue, Unit I-1, Las Vegas, Nevada 89118, Facsimile No.: (702) 579-4833, Attn: Merle Ferguson, 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 or sent by certified or registered mail, postage prepaid, 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) four days after deposit in the United States mail, (iv) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (v) upon actual receipt by the party to whom such notice is required to be given. Section 5. Optional Prepayment. (a) The Company shall have the right, exercisable at any time and from time to time after the Original Issue Date and upon seven Trading Days' prior written notice to the affected Holders (an "Optional Prepayment Notice"), to prepay all or any portion of the outstanding principal amount of the Debentures for which Conversion Notices have not previously been delivered or for which an Event of Default shall not have been declared. The prepayment price applicable to prepayments under this Section 5(a) shall equal the Optional Prepayment Amount and shall be paid in cash on the seventh Trading Day following the date that the Company first delivered the Optional Prepayment Notice (the "Optional Prepayment Date"). Any such prepayment shall be free of any claim of subordination. The Holders shall have the right to tender, and the Company shall honor, Conversion Notices delivered prior to the expiration of the fifth Trading Day after delivery of an Optional Prepayment Notice for such Debentures. (b) If any portion of the Optional Prepayment Amount shall not be paid by the Company by the expiration of the Optional Prepayment Date, the Company may not again exercise any right of prepayment under this Section. In addition, the Optional Prepayment Amount shall be increased by an amount equal to the Late Fee, to accrue daily from the date such interest is due hereunder through and including the date of payment (which amount shall be paid as liquidated damages and not as a penalty). In addition, if any portion of the Optional Prepayment Amount remains unpaid through the expiration of the Optional Prepayment Date, the Holder subject to such prepayment may elect by written notice to the Company to either (x) demand conversion in accordance with the formula and the time period therefor set forth in Section 4 of any portion of the principal amount of Debentures for which the Optional Prepayment Amount, plus accrued liquidated damages and accrued interest thereon, has not been paid in full (the "Unpaid Prepayment Principal Amount"), in which event the applicable Per Share Market Value shall be the lower of the Per Share Market Value calculated on the Optional Prepayment Date and the Per Share Market Value as of the Holder's written demand for conversion, or (y) invalidate ab initio such optional prepayment, notwithstanding anything herein contained to the contrary. If the Holder elects option (x)above, the Company shall, within three Trading Days after such election is deemed delivered hereunder, deliver to the Holder the shares of Common Stock issuable upon conversion of the Unpaid Prepayment Principal Amount subject to such conversion demand and otherwise perform its obligations hereunder with respect thereto. Section 6. Definitions. For the purposes hereof, the following terms shall have the following meanings: "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 or the State of Nevada are authorized or required by law or other government action to close. "Change of Control Transaction" means the occurrence 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 33% of the voting securities of the Company, (ii) a replacement at one time or over time 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), (iii) the merger of the Company with or into another entity that is not wholly-owned by the Company, consolidation or sale of 50% or more of the assets of the Company in one or a series of related transactions, or (iv) 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), (ii) or (iii). "Closing Price" means on any particular date (a)the closing sales price per share of Common Stock on such date on the Subsequent Market on which the shares of Common Stock are then listed or quoted (as reported by Bloomberg L.P. at 4:15 PM (New York time) for the closing sales price for regular session trading on such day), or if there is no such price on such date, then the closing sales price on the Subsequent Market on the date nearest preceding such date (as reported by Bloomberg L.P. at 4:15 PM (New York time) for the closing sales price for regular session trading on such day), or (b)if the shares of Common Stock are not then listed or quoted on a Subsequent Market, the closing sales price for a share of Common Stock in the OTC, as reported by the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of business on such date, or (c)if the shares of Common Stock are not then reported by the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the "Pink Sheet" quotes for the relevant conversion period, as determined in good faith by the Holder, 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 an Appraiser selected in good faith by the Holders of a majority in interest of the principal amount of Debentures then outstanding. "Commission" means the Securities and Exchange Commission. "Common Stock" means the common stock, $.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. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "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, plus all other accrued and unpaid amounts due hereunder, and (B) the principal amount of Debentures to be prepaid, plus all accrued and unpaid interest thereon, plus all other accrued and unpaid amounts due hereunder, divided by the Conversion 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 less, multiplied by the Per Share Market Value 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. "Optional Prepayment Amount" for any Debentures shall equal the sum of (i) the greater of (A) 100% of the principal amount of Debentures to be prepaid, plus all accrued and unpaid interest thereon, and (B) the principal amount of Debentures to be prepaid, plus all accrued and unpaid interest thereon, divided by the Conversion Price on (x) the date the Optional Prepayment Amount is due or (y) the date the Optional Prepayment Amount is paid in full, whichever is less, multiplied by the Per Share Market Value on (x) the date the Optional Prepayment Amount is due or (y) the date the Optional 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. "Per Share Market Value" means on any particular date (a)the closing bid price per share of Common Stock on such date on the Subsequent Market on which the shares of Common Stock are then listed or quoted (as reported by Bloomberg L.P. at 4:15 PM (New York time) for the closing sales price for regular session trading on such day), or if there is no such price on such date, then the closing bid price on the Subsequent Market on the date nearest preceding such date (as reported by Bloomberg L.P. at 4:15 PM (New York time) for the closing sales price for regular session trading on such day), or (b)if the shares of Common Stock are not then listed or quoted on a Subsequent Market, the closing bid price for a share of Common Stock in the OTC, as reported by the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of business on such date, or (c)if the shares of Common Stock are not then reported by the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the "Pink Sheet" quotes for the relevant conversion period, as determined in good faith by the Holder, 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 an Appraiser selected in good faith by the Holders of a majority in interest of the principal amount of Debentures then outstanding. "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 Convertible Debenture Purchase Agreement, dated as of the Original Issue Date, 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 Original Issue Date, 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. "Trading Day" means (a)a day on which the shares of Common Stock are traded on the OTC or on such Subsequent Market on which the shares of Common Stock are then listed or quoted, or (b)if the shares of Common Stock are not listed on a Subsequent Market, a day on which the shares of Common Stock are traded in the over-the-counter market, as reported by the OTC, or (c)if the shares of Common Stock are not quoted on the OTC, 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. "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 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 there are Debentures outstanding, the Company shall not and shall cause it subsidiaries not to, without the consent of the Holders, (i) amend its certificate of incorporation, bylaws or other charter documents so as to adversely affect any rights of the Holders; (ii) 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 (iii) enter into any agreement with respect to any of the foregoing. The Company may only voluntarily prepay the outstanding principal amount on the Debentures in accordance with Section 5 hereof. Section 8. This Debenture shall not entitle the Holder to any of the rights of a stockholder of the Company, including without limitation, the right to vote, to receive dividends and other distributions, or to receive any notice of, or to attend, meetings of stockholders or any other proceedings of the Company, unless and to the extent converted into shares of Common Stock in accordance with the terms hereof. Section 9. 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 10. No indebtedness of the Company is senior to this Debenture in right of payment, whether with respect to interest, damages or upon liquidation or dissolution or otherwise. 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. Section 11. 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 attorneys fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding. Section 12. 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 13. 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 shall violate applicable laws governing usury, the applicable rate of interest due hereunder 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 14. 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. Section 15. The performance of the obligations of the Company under this Debenture have been secured by a Guaranty and Stock Pledge Agreement, dated as of the Original Issue Date. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOLLOWS] 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. COMPOSITE INDUSTRIES OF AMERICA, INC. By:_____________________________________ Name: Merle Ferguson Title: President EXHIBIT A NOTICE OF CONVERSION The undersigned hereby elects to convert principal and, if specified, interest under the 6% Convertible Debenture of Composite Industries of America, Inc. (the "Company"), due on November 13, 2002, into shares of common stock, $.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(a)(ii) of this Debenture. Conversion calculations: Date to Effect Conversion Principal Amount of Debentures tobeConverted Payment of Interest in Kind * Yes * No If yes, $ _______ of Interest Accrued on Account of Conversion at Issue Number of shares of Common Stock tobeIssued Applicable Conversion Price Signature Name Address Schedule 1 CONVERSION SCHEDULE Composite Industries of America, Inc. 6% Convertible Debentures due on [ ], 2002, in the aggregate principal amount of $250,000 issued by Composite Industries of America, Inc. This Conversion Schedule reflects conversions made under Section 4(a)(i) of the above referenced Debentures. Dated: - -------------- ----------------- ----------------- ----------------- Date of Amount of Aggregate Company Conversion Conversion Principal Attest (or for first Amount entry, Original Remaining Issue Date) Subsequent to Conversion (or original Principal Amount) - -------------- ----------------- ----------------- ----------------- - -------------- ----------------- ----------------- ----------------- - -------------- ----------------- ----------------- ----------------- - -------------- ----------------- ----------------- ----------------- EX-10.10 10 ex10-10.txt WARRANT ISSUED TO LENORE AVENUE LLC Exhibit 10.10 NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE 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 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 THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY 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. COMPOSITE INDUSTRIES OF AMERICA, INC. WARRANT Date of Original Issuance: November 13, 2001 Composite Industries of America, Inc. (formerly known as World Homes, Inc), a Nevada corporation (the "Company"), hereby certifies that, for value received, Lenore Avenue LLC or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company up to a total of 200,267 shares of common stock, $.001 par value per share (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price per share equal to $.575 (as such exercise price may adjusted from time to time as provided in Section8, the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including November 13, 2006 (the "Expiration Date"), and subject to the following terms and conditions: 1. Registration of Warrant. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. Registration of Transfers and Exchanges. (a) The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Transfer Agent or to the Company at its address for notice set forth in Section 12. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a holder of a Warrant. (b) This Warrant is exchangeable, upon the surrender hereof by the Holder to the office of the Company at its address for notice set forth in Section 12 for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. Any such New Warrant will be dated the date of such exchange. 3. Duration and Exercise of Warrants. (a) This Warrant shall be exercisable by the registered Holder on any business day before 5:30 P.M., New York City time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:30 P.M., New York City time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. Prior to the Expiration Date, the Company may not call or otherwise redeem this Warrant. (b) Upon delivery of an executed Form of Election to Purchase, together with the grid attached hereto as Annex A duly completed and signed, to the Company at its address for notice set forth in Section 12 and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in the manner provided hereunder, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than 3 business days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends except as required by Section 3.1(b) of the Purchase Agreement. Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. The Company shall, upon request of the Holder, if available, use its best efforts to deliver Warrant Shares hereunder electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. To effect an exercise hereunder, the Holder shall not be required to physically surrender this Warrant to the Company unless all the Warrant Shares have been exercised. Exercises hereunder shall have the effect of lowering the number of Warrant Shares in an amount equal to the applicable exercise, which shall be evidenced by entries set forth on the attached Annex A. The Holder and the Company shall maintain records showing the number of Warrant Shares exercised and the date of such exercises. 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 Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following exercise of a portion of this Warrant, the number of shares issuable upon exercise of this Warrant may be less than the amount stated on the face hereof. A "Date of Exercise" means the date on which the Company shall have received the Form of Election to Purchase completed and duly signed. (c) If the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares issuable upon an exercise by the third Trading Day after the Date of Exercise, then the Holder will have the right to rescind such exercise. In addition, if the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to an exercise by the third Trading Day after the Date of Exercise, and if after such third Trading Day the Holder purchases (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 by (B) the closing bid price of the Common Stock at the time of the obligation giving rise to such purchase obligation 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 a market price on the date of exercise totaled $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. (d) This Warrant shall be exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares. 4. Piggyback Registration Rights. This Warrant is subject to the piggyback registration rights granted under the Registration Rights Agreement and such piggyback registration rights shall continue until all of the Holder's Warrant Shares have been sold in accordance with an effective registration statement or upon the Expiration Date. The Company will pay all registration expenses in connection therewith. 5. Payment of Taxes. The Company will pay all documentary stamp taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 6. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if requested, satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe. 7. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 8). The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. 8. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 8. Upon each such adjustment of the Exercise Price pursuant to this Section 8, the Holder shall thereafter prior to the Expiration Date be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (a) If the Company, at any time while this Warrant is outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on outstanding preferred stock as of the date hereof which contain a stated dividend rate) or otherwise make a distribution or distributions on shares of its Common Stock or on any other class of capital stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, the Exercise 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 (excluding treasury shares, if any) outstanding after such event. In such event, the number of Warrant shares issuable under this Warrant shall be equitably adjusted to reflect such event (e.g. in the event of a 2:1 stock split of the Common Stock, the number of Warrant shares shall be increased to twice the number available for purchase prior to the record date for such stock split). Any 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 or combination, and shall apply to successive subdivisions and combinations. (b) In case of any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification or share exchange, and the Holder shall be entitled upon such event to receive such amount of securities or property equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification or share exchange. The terms of any such reclassification or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 8(b) upon any exercise following any such reclassification or share exchange. (c) If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to holders of this Warrant) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 8(a), (b) and (d)), then in each such case the Exercise Price shall be determined by multiplying the Exercise 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 Exercise Price determined as of the record date mentioned above, and of which the numerator shall be such Exercise 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 Common Stock as determined by the Company's independent certified public accountants that regularly examines the financial statements of the Company (an "Appraiser"). (d) If the Company or any subsidiary thereof, as applicable, at any time while this Warrant is 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 any equity or equity equivalent securities (including any equity, debt or other instrument that is at any time over the life thereof convertible into or exchangeable for Common Stock) (collectively, "Common Stock Equivalents") entitling any Person to acquire shares of Common Stock, at a price per share less than the Exercise Price (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 issued in connection with such issuance, be entitled to receive shares of Common Stock at a price less than the Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price), then, at the option of the Holder, the Exercise Price shall be adjusted to equal the 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 business day following the issuance of any Common Stock or Common Stock Equivalent subject to this section, indicating therein the applicable issuance price, or of applicable reset price, exchange price, conversion price and other pricing terms. The provisions of this paragraph shall not apply to (i)the granting of options or warrants to employees, officers and directors of the Company, and the issuance of Common Stock upon exercise of such options or warrants granted under any stock option plan or employee benefit plan (as defined in Rule 405 of Regulation C) heretofore or hereinafter duly adopted by the Company and (ii) shares of Common Stock issuable upon exercise of any currently outstanding warrants and other outstanding convertible securities of the Company, in each case as and to the extent disclosed in Schedule 2.1(c) to the Purchase Agreement (but not as to any amendments or modifications of the terms of such securities after the date of this Agreement, including "back-dated" agreements). (e) In case of any (1) merger or consolidation of the Company with or into another Person, or (2) sale by the Company of more than one-half of the assets of the Company (on a book value basis) in one or a series of related transactions, the Holder shall have the right thereafter to (A) exercise this Warrant for the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger, consolidation or sale, and the Holder shall be entitled upon such event or series of related events to receive such amount of securities, cash and property as the Common Stock for which this Warrant could have been exercised immediately prior to such merger, consolidation or sales would have been entitled or (B) in the case of a merger or consolidation, (x) require the surviving entity to issue common stock purchase warrants equal to the number Warrant Shares to which this Warrant then permits, which newly warrant shall be identical to this Warrant, and (y) simultaneously with the issuance of such warrant, the Holder of such warrant shall have the right to exercise such warrant only into shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger or consolidation or (C) require the surviving entity from such merger, acquisition or business combination to pay to the Holder, in cash, the Black Scholes value of this Warrant. In the case of clause (B), the exercise price for such new warrant shall be based upon the amount of securities, cash and property that each share of Common Stock would receive in such transaction and the Exercise Price of this Warrant immediately prior to the effectiveness or closing date for such transaction. The terms of any such merger, sale or consolidation shall include such terms so as continue to give the Holder the right to receive the securities, cash and property set forth in this Section upon any conversion or redemption following such event. This provision shall similarly apply to successive such events. (f) For the purposes of this Section 8, the following clauses shall also be applicable: (i) Record Date. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock or in securities convertible or exchangeable into shares of Common Stock, or (B) to subscribe for or purchase Common Stock or securities convertible or exchangeable into shares of Common Stock, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (ii) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (g) All calculations under this Section 8 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (h) Whenever the Exercise Price is adjusted pursuant to Section 8(c) above, the Holder, after receipt of the determination by the Appraiser, shall have the right to select an additional appraiser (which shall be a nationally recognized accounting firm), in which case the adjustment shall be equal to the average of the adjustments recommended by each of the Appraiser and such appraiser. The Holder shall promptly mail or cause to be mailed to the Company, a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such adjustment shall become effective immediately after the record date mentioned above. (i) If: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or (iii) 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; or (iv) 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, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to each Holder at their last addresses as they shall appear upon the Warrant Register, 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 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 Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up, 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. 9. Payment of Exercise Price. The Holder shall pay the Exercise Price in one of the following manners: (a) Cash Exercise. The Holder may deliver immediately available funds; or (b) Cashless Exercise. Commencing the earlier to occur of the Effectiveness Date as defined in the Registration Rights Agreement and the date the registration statement required to be filed pursuant to the Registration Rights Agreement is declared effective by the Securities and Exchange Commission, when a registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder is not then effective, the Holder may satisfy its obligation to pay the Exercise Price through a "net" or "cashless" exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows: X = Y [(A-B)/A] where: X = the number of Warrant Shares to be issued to the Holder. Y = the number of Warrant Shares with respect to which this Warrant is being exercised. A = the average of the closing sale prices of the Common Stock for the five (5) trading days immediately prior to (but not including) the Date of Exercise. B = the Exercise Price. For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have been commenced, on the issue date. 10. Certain Exercise Restrictions. A Holder may not exercise this Warrant to the extent such exercise would result in the Holder, together with its affiliate, beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules promulgated thereunder) in excess of 9.999% of the then issued and outstanding shares of Common Stock, including shares issuable upon such exercise and held by such Holder after application of this Section. To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time that it delivers a Form of Election to Purchase, that such Form of Election to Purchase has not violated the restrictions set forth in this paragraph. If the Holder has delivered a Form of Election to Purchase for a number of Warrant Shares that, without regard to any other shares that the Holder or its affiliates may beneficially own, would result in the issuance in excess of the permitted amount hereunder, the Company shall notify the Holder of this fact and shall honor the exercise for the maximum portion of this Warrant permitted to be exercised on such Date of Exercise in accordance with the periods described herein and, at the option of the Holder, either keep the portion of the Warrant tendered for exercise in excess of the permitted amount hereunder for future exercises or return such excess portion of the Warrant to the Holder. In the event of a merger or consolidation of the Company with or into another Person, this paragraph shall not apply with respect to a determination of the number of shares of common stock issuable upon exercise in full of the Warrants if such determination is necessary to establish the securities or other assets which the holders of Common Stock shall be entitled to receive upon the effectiveness of such merger or consolidation. 11. Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section, be issuable on the exercise of this Warrant, the Company shall pay an amount in cash equal to the Exercise Price multiplied by such fraction. 12. Notices. Any and all notices or other communications or deliveries hereunder shall be in writing and 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) on a business day, (ii) the business day 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 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. The addresses for such communications shall be: (i) if to the Company, to 4505 W. Hacienda Avenue, Unit I-1, Las Vegas, Nevada 89118, facsimile: (702) 579-4833 attention: Merle Ferguson, or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section. 13. Warrant Agent. The Company shall serve as warrant agent under this Warrant. Upon thirty (30) days' notice to the Holder, the Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 14. Miscellaneous. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and assigns. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. (b) Subject to Section 14(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant. This Warrant shall inure to the sole and exclusive benefit of the Company and the Holder. (c) All questions concerning the construction, validity, enforcement and interpretation of this Warrant 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 Warrant 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 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 Warrant or the transactions contemplated hereby. If either party shall commence an action or proceeding to enforce any provisions of this Warrant, 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. (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK, SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. COMPOSITE INDUSTRIES OF AMERICA, INC. By:_____________________________________ Name: Merle Ferguson Title: President FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the Warrant to which this form applies, issued by Composite Industries of America, Inc. (the "Company")) To Composite Industries of America, Inc.: The undersigned hereby irrevocably elects to purchase _____________ shares of common stock, $.001 value, of the Company (the "Common Stock") and, if such Holder is not utilizing the cashless exercise provisions set forth in this Warrant, encloses herewith $ [ ] in cash, certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. By the delivery of this Form of Election to Purchase the undersigned represents and warrants to the Company that it is an accredited investor under Rule 501(a) of the Securities Act of 1933, as amended, and that its share ownership of the Company's Common Stock will not exceed the percentage ownership set forth in Section 10 of the Warrant. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER (Please print name and address) Dated: , Name of Holder: (Print) (By:) (Name:) (Title:) (Signature must conform in all respects to name of holder as specified on the face of the Warrant) FORM OF ASSIGNMENT [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the within Warrant to purchase ____________ shares of Common Stock of Composite Industries of America, Inc. to which the within Warrant relates and appoints ________________ attorney to transfer said right on the books of Composite Industries of America, Inc. with full power of substitution in the premises. Dated: _______________, ____ _______________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) _______________________________________ Address of Transferee _______________________________________ _______________________________________ In the presence of: __________________________ Annex A Date Number of Warrant Shares Available to be Exercised Number of Warrant Shares Exercised Number of Warrant Shares Remaining to be Exercised EX-10.11 11 ex10-11.txt REGISTRATION RIGHTS AGREEMENT 10-22-2001 Exhibit 10.11 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of October 22, 2001, among Composite Industries of America, Inc., a Nevada corporation (formerly known as World Homes, Inc.) (the "Company") and the investors signatory hereto (each such investor is a "Purchaser" and all such investors are, collectively, the "Purchasers"). This Agreement is made pursuant to the Convertible Debenture 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: "Affiliate" means, with respect to any Person, any other Person that directly or indirectly controls or is controlled by or under common control with such Person. For the purposes of this definition, "control," when used with respect to any Person, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms of "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. "Business Day" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York or the State of Nevada generally are authorized or required by law or other government actions to close. "Closing Date" shall have the meaning set forth in the Purchase Agreement. "Commission" means the Securities and Exchange Commission. "Common Stock" means the Company's common stock, $.001 par value, or such securities in to which that such stock shall hereafter be reclassified. "Debentures" means the Convertible Debentures issued and issuable to the Purchasers in accordance with the Purchase Agreement. "Effectiveness Date" means with respect to the initial Registration Statement required to be filed hereunder, the 115th day following the Closing Date and, with respect to any additional Registration Statements which may be required pursuant to Section 3(c), the ninetieth (90th) day following the date that such additional Registration Statement is required to be filed. "Effectiveness Period" shall have the meaning set forth in Section 2(a). "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Filing Date" means November 18, 2001 and, with respect to any additional Registration Statements which may be required pursuant to Section 3(c), the 45th day following the date that such additional Registration Statement is required to be filed. "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). "Indemnifying Party" shall have the meaning set forth in Section 5(c). "Losses" shall have the meaning set forth in Section 5(a). "Person" means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Proceeding" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "Prospectus" means the prospectus included in the 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 the 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 the shares of Common Stock issuable upon conversion in full of the Debentures and exercise in full of the Warrants. "Registration Statement" means the registration statement 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 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. "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 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 effect as such Rule. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Special Counsel" means one special counsel to the Holders, for which the Holders will be reimbursed by the Company pursuant to Section4. "Warrants" means the common stock purchase warrants issuable to the Purchasers in accordance with the Purchase Agreement. 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 all Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form S-3 (except if 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 and shall contain (except if otherwise directed by the Holders) the "Plan of Distribution" attached hereto as Annex A. 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 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) (the "Effectiveness Period"). (b) The initial Registration Statement to be filed hereunder shall include (but not be limited to) a number of shares of Common Stock equal to no less than the sum of: (i) 200% of the number of shares of Common Stock issuable upon conversion in full of the principal amount of Debentures on the Closing Date assuming: (1) one full year of interest has accrued on the Debentures and all such interest is paid in shares of Common Stock and (2) the conversion occurred on the Closing Date, the Filing Date or the Business Day preceding the date the Company files an acceleration request with the Commission relating to the Registration Statement, whichever yields the lowest Conversion Price (as defined in the Debentures) and (ii) the number of shares of Common Stock issuable upon exercise in full of the Warrants. (c) If: (a) a Registration Statement is not filed on or prior to its Filing Date (if the Company files such Registration Statement without affording the Holder the opportunity to review and comment on the same as required by Section 3(a) hereof, the Company shall not be deemed to have satisfied this clause (a)), or (b) the Company fails to file with the Commission a request for acceleration in accordance with Rule 461 promulgated under the Securities Act, within five 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 (c) a Registration Statement filed hereunder is not declared effective by the Commission on or prior to its Effectiveness Date, or (d) after a Registration Statement is filed with and declared effective by the Commission, such Registration Statement ceases to be effective as to all Registrable Securities to which it is required to relate at any time prior to the expiration of the Effectiveness Period without being succeeded within ten Business Days by an amendment to such Registration Statement or by a subsequent Registration Statement filed with and declared effective by the Commission, or (e) the Common Stock shall not be quoted on the OTC Bulletin Board or shall be delisted or suspended from trading on the New York Stock Exchange, American Stock Exchange, the Nasdaq National Market or the Nasdaq Smallcap Market (each, a "Subsequent Market") for more than three Trading Days (which need not be consecutive Trading Days), or (f) the conversion rights of the Holders pursuant to the Debentures are suspended for any reason, or (g) an amendment to a Registration Statement is not filed by the Company with the Commission within ten Business Days of the Commission's notifying the Company that such amendment is required in order for such Registration Statement to be declared effective (any such failure or breach being referred to as an "Event," and for purposes of clauses (a), (c), (f) the date on which such Event occurs, or for purposes of clause (b) the date on which such five day period is exceeded, or for purposes of clauses (d) and (g) the date which such ten Business Day-period is exceeded, or for purposes of clause (e) the date on which such three Trading Day-period 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% of the purchase price paid by such Holder pursuant to the Purchase Agreement. 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. Upon the occurrence of any of the Events in clauses (a) and/or (c) hereunder, the Holder, at its option, may exercise its rights under the Guaranty and Stock Pledge Agreement of even date, with respect to the Collateral (as defined in the Pledge Agreement). 3. Registration Procedures In connection with the Company's registration obligations hereunder, the Company shall: (a) Not less than five Business 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 the Holders and their Special Counsel 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 their Special Counsel, 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 and their Special Counsel shall reasonably object, provided, the Company is notified of such objection no later than 3 Business Days after the Holders have been so furnished copies of such documents. (b) (i) Prepare and file with the Commission such amendments, including post-effective amendments, to the Registration Statement and the Prospectus used in connection therewith as may be necessary to keep the Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible, and in any event within ten Business Days, to any comments received from the Commission with respect to the 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 the 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 the Registration Statement during the applicable period in accordance with the intended methods of disposition by the Holders thereof set forth in the Registration Statement as so amended or in such Prospectus as so supplemented. (c) File additional Registration Statements if the number of Registrable Securities at any time exceeds 85% of the number of shares of Common Stock then registered in all their existing Registration Statements hereunder. (d) Notify the Holders of Registrable Securities to be sold and their Special Counsel as promptly as reasonably possible (and, in the case of (i)(A) below, not less than five Business Days prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one Business Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to the 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 the 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 the Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) if at any time any of the representations and warranties of the Company contained in any agreement contemplated hereby ceases to be true and correct in all material respects; (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (vi) of the occurrence of any event or passage of time that makes the financial statements included in the Registration Statement ineligible for inclusion therein or any statement made in the 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 the Registration Statement, Prospectus or other documents so that, in the case of the 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. (e) Promptly deliver to each Holder and their Special Counsel, 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. 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) Prior to any public offering of Registrable Securities, use its best efforts to register or qualify or cooperate with the selling Holders and their Special Counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder requests in writing, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by a Registration Statement; 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 Section 3(d)(vi), as promptly as reasonably possible, prepare a supplement or amendment, including a post-effective amendment, to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the 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. (i) Comply with all applicable rules and regulations of the Commission. 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 any Subsequent Market on which the Common Stock is then listed for trading, and (B) in compliance with applicable state securities or Blue Sky laws (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 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 Special Counsel for the Holders 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. 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 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 the 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 are based solely 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 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). The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement. (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 solely out of or based solely 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 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, that 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 solely 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 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 it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party. An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (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 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 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 such counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding. All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten Business 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. 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 the Holders of at least two-thirds 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 at least a majority of the Registrable Securities to which such waiver or consent relates, provided, 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 and to the extent specified in Schedule 6(b) hereto, 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. (c) No Piggyback on Registrations. Except as and to the extent specified in Schedule 6(b) 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. (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), 3(d)(iii), 3(d)(iv), 3(d)(v) or 3(d)(vi), such Holder will forthwith discontinue disposition of such Registrable Securities under the Registration Statement until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement contemplated by Section 3(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. (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. (g) 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 (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) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Agreement 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 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. The address for such notices and communications shall be as follows: If to the Company: Composite Industries of America, Inc. 4505 W. Hacienda Ave, Unit I-1 Las Vegas, Nevada 89118 Facsimile No.: (702) 579- 4833 Attn: Merle Ferguson With copies to: James E. Pratt, Esq. 195 Kildare Road Garden City, New York 11530 Facsimile No.: (516) 873-1140 If to a Purchaser: To the address set forth under such Purchaser's name on the signature pages hereto. If to any other Person who is then the registered Holder: To the address of such Holder as it appears in the stock transfer books of the Company or such other address as may be designated in writing hereafter, in the same manner, by such Person. (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 each Holder. Each Holder may assign their respective rights hereunder in the manner and to the Persons as permitted under the Purchase Agreement. (i) Execution and 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 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 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 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. (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. (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. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGES TO FOLLOW] IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. COMPOSITE INDUSTRIES OF AMERICA, INC. By:_____________________________________ Name: Merle Ferguson Title: President [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGES OF PURCHASER TO FOLLOW] LENORE AVENUE LLC By:_____________________________________ Name: Title: Address for Notice: Lenore Avenue LLC c/o Citco Trustees (Cayman) Limited Commercial Centre P.O. Box 31106 SMB Grand Cayman Cayman Islands British West Indies With copies to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, NY 10104 Facsimile No.: (212) 541-4630 and (212) 541-1432 Attn: Eric L. Cohen, Esq. Annex A 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: - - ordinary brokerage transactions and transactions in which the broker- dealer solicits purchasers; - - 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; - - purchases by a broker-dealer as principal and resale by the broker- dealer for its account; - - an exchange distribution in accordance with the rules of the applicable exchange; - - privately negotiated transactions; - - short sales; - - broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share; - - a combination of any such methods of sale; and - - 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. The Selling Stockholders may also engage in short sales against the box, puts and calls and other transactions in securities of the Company or derivatives of Company securities and may sell or deliver shares in connection with these trades. The Selling Stockholders have advised the Company that they have not entered into any agreements, understandings or arrangements with any underwriters or broker-dealers regarding the sale of their shares other than ordinary course brokerage arrangements, nor is there an underwriter or coordinating broker acting in connection with the proposed sale of shares by the Selling Stockholders. 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 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 Company is required to pay all fees and expenses incident to the registration of the shares, including fees and disbursements of counsel to the Selling Stockholders. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act. EX-10.12 12 ex10-12.txt FORM OF WARRANT Exhibit 10.12 NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE 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 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 THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY 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. COMPOSITE INDUSTRIES OF AMERICA, INC. WARRANT Date of Original Issuance: [ ], 2001 Composite Industries of America, Inc. (formerly known as World Homes, Inc), a Nevada corporation (the "Company"), hereby certifies that, for value received, Lenore Avenue LLC or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company up to a total of 37,500 shares of common stock, $.001 par value per share (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price per share equal to $.475 (as such exercise price may adjusted from time to time as provided in Section8, the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including [ ], 2006 (the "Expiration Date"), and subject to the following terms and conditions: 1. Registration of Warrant. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. Registration of Transfers and Exchanges. (a) The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Transfer Agent or to the Company at its address for notice set forth in Section 12. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a holder of a Warrant. (b) This Warrant is exchangeable, upon the surrender hereof by the Holder to the office of the Company at its address for notice set forth in Section 12 for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. Any such New Warrant will be dated the date of such exchange. 3. Duration and Exercise of Warrants. (a) This Warrant shall be exercisable by the registered Holder on any business day before 5:30 P.M., New York City time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:30 P.M., New York City time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. Prior to the Expiration Date, the Company may not call or otherwise redeem this Warrant. (b) Upon delivery of an executed Form of Election to Purchase, together with the grid attached hereto as Annex A duly completed and signed, to the Company at its address for notice set forth in Section 12 and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in the manner provided hereunder, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than 3 business days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends except as required by Section 3.1(b) of the Purchase Agreement. Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. The Company shall, upon request of the Holder, if available, use its best efforts to deliver Warrant Shares hereunder electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. To effect an exercise hereunder, the Holder shall not be required to physically surrender this Warrant to the Company unless all the Warrant Shares have been exercised. Exercises hereunder shall have the effect of lowering the number of Warrant Shares in an amount equal to the applicable exercise, which shall be evidenced by entries set forth on the attached Annex A. The Holder and the Company shall maintain records showing the number of Warrant Shares exercised and the date of such exercises. 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 Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following exercise of a portion of this Warrant, the number of shares issuable upon exercise of this Warrant may be less than the amount stated on the face hereof. A "Date of Exercise" means the date on which the Company shall have received the Form of Election to Purchase completed and duly signed. (c) If the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares issuable upon an exercise by the third Trading Day after the Date of Exercise, then the Holder will have the right to rescind such exercise. In addition, if the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to an exercise by the third Trading Day after the Date of Exercise, and if after such third Trading Day the Holder purchases (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 by (B) the closing bid price of the Common Stock at the time of the obligation giving rise to such purchase obligation 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 a market price on the date of exercise totaled $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. (d) This Warrant shall be exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares. 4. Piggyback Registration Rights. This Warrant is subject to the piggyback registration rights granted under the Registration Rights Agreement and such piggyback registration rights shall continue until all of the Holder's Warrant Shares have been sold in accordance with an effective registration statement or upon the Expiration Date. The Company will pay all registration expenses in connection therewith. 5. Payment of Taxes. The Company will pay all documentary stamp taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 6. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if requested, satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe. 7. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 8). The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. 8. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 8. Upon each such adjustment of the Exercise Price pursuant to this Section 8, the Holder shall thereafter prior to the Expiration Date be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (a) If the Company, at any time while this Warrant is outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on outstanding preferred stock as of the date hereof which contain a stated dividend rate) or otherwise make a distribution or distributions on shares of its Common Stock or on any other class of capital stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, the Exercise 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 (excluding treasury shares, if any) outstanding after such event. In such event, the number of Warrant shares issuable under this Warrant shall be equitably adjusted to reflect such event (e.g. in the event of a 2:1 stock split of the Common Stock, the number of Warrant shares shall be increased to twice the number available for purchase prior to the record date for such stock split). Any 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 or combination, and shall apply to successive subdivisions and combinations. (b) In case of any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification or share exchange, and the Holder shall be entitled upon such event to receive such amount of securities or property equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification or share exchange. The terms of any such reclassification or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 8(b) upon any exercise following any such reclassification or share exchange. (c) If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to holders of this Warrant) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 8(a), (b) and (d)), then in each such case the Exercise Price shall be determined by multiplying the Exercise 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 Exercise Price determined as of the record date mentioned above, and of which the numerator shall be such Exercise 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 Common Stock as determined by the Company's independent certified public accountants that regularly examines the financial statements of the Company (an "Appraiser"). (d) If the Company or any subsidiary thereof, as applicable, at any time while this Warrant is 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 any equity or equity equivalent securities (including any equity, debt or other instrument that is at any time over the life thereof convertible into or exchangeable for Common Stock) (collectively, "Common Stock Equivalents") entitling any Person to acquire shares of Common Stock, at a price per share less than the Exercise Price (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 issued in connection with such issuance, be entitled to receive shares of Common Stock at a price less than the Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price), then, at the option of the Holder, the Exercise Price shall be adjusted to equal the 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 business day following the issuance of any Common Stock or Common Stock Equivalent subject to this section, indicating therein the applicable issuance price, or of applicable reset price, exchange price, conversion price and other pricing terms. The provisions of this paragraph shall not apply to (i)the granting of options or warrants to employees, officers and directors of the Company, and the issuance of Common Stock upon exercise of such options or warrants granted under any stock option plan or employee benefit plan (as defined in Rule 405 of Regulation C) heretofore or hereinafter duly adopted by the Company and (ii) shares of Common Stock issuable upon exercise of any currently outstanding warrants and other outstanding convertible securities of the Company, in each case as and to the extent disclosed in Schedule 2.1(c) to the Purchase Agreement (but not as to any amendments or modifications of the terms of such securities after the date of this Agreement, including "back-dated" agreements). (e) In case of any (1) merger or consolidation of the Company with or into another Person, or (2) sale by the Company of more than one-half of the assets of the Company (on a book value basis) in one or a series of related transactions, the Holder shall have the right thereafter to (A) exercise this Warrant for the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger, consolidation or sale, and the Holder shall be entitled upon such event or series of related events to receive such amount of securities, cash and property as the Common Stock for which this Warrant could have been exercised immediately prior to such merger, consolidation or sales would have been entitled or (B) in the case of a merger or consolidation, (x) require the surviving entity to issue common stock purchase warrants equal to the number Warrant Shares to which this Warrant then permits, which newly warrant shall be identical to this Warrant, and (y) simultaneously with the issuance of such warrant, the Holder of such warrant shall have the right to exercise such warrant only into shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger or consolidation or (C) require the surviving entity from such merger, acquisition or business combination to pay to the Holder, in cash, the Black Scholes value of this Warrant. In the case of clause (B), the exercise price for such new warrant shall be based upon the amount of securities, cash and property that each share of Common Stock would receive in such transaction and the Exercise Price of this Warrant immediately prior to the effectiveness or closing date for such transaction. The terms of any such merger, sale or consolidation shall include such terms so as continue to give the Holder the right to receive the securities, cash and property set forth in this Section upon any conversion or redemption following such event. This provision shall similarly apply to successive such events. (f) For the purposes of this Section 8, the following clauses shall also be applicable: (i) Record Date. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock or in securities convertible or exchangeable into shares of Common Stock, or (B) to subscribe for or purchase Common Stock or securities convertible or exchangeable into shares of Common Stock, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (ii) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (g) All calculations under this Section 8 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (h) Whenever the Exercise Price is adjusted pursuant to Section 8(c) above, the Holder, after receipt of the determination by the Appraiser, shall have the right to select an additional appraiser (which shall be a nationally recognized accounting firm), in which case the adjustment shall be equal to the average of the adjustments recommended by each of the Appraiser and such appraiser. The Holder shall promptly mail or cause to be mailed to the Company, a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such adjustment shall become effective immediately after the record date mentioned above. (i) If: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or (iii) 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; or (iv) 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, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to each Holder at their last addresses as they shall appear upon the Warrant Register, 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 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 Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up, 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. 9. Payment of Exercise Price. The Holder shall pay the Exercise Price in one of the following manners: (a) Cash Exercise. The Holder may deliver immediately available funds; or (b) Cashless Exercise. Commencing the earlier to occur of the Effectiveness Date as defined in the Registration Rights Agreement and the date the registration statement required to be filed pursuant to the Registration Rights Agreement is declared effective by the Securities and Exchange Commission, when a registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder is not then effective, the Holder may satisfy its obligation to pay the Exercise Price through a "net" or "cashless" exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows: X = Y [(A-B)/A] where: X = the number of Warrant Shares to be issued to the Holder. Y = the number of Warrant Shares with respect to which this Warrant is being exercised. A = the average of the closing sale prices of the Common Stock for the five (5) trading days immediately prior to (but not including) the Date of Exercise. B = the Exercise Price. For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have been commenced, on the issue date. 10. Certain Exercise Restrictions. A Holder may not exercise this Warrant to the extent such exercise would result in the Holder, together with its affiliate, beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules promulgated thereunder) in excess of 9.999% of the then issued and outstanding shares of Common Stock, including shares issuable upon such exercise and held by such Holder after application of this Section. To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time that it delivers a Form of Election to Purchase, that such Form of Election to Purchase has not violated the restrictions set forth in this paragraph. If the Holder has delivered a Form of Election to Purchase for a number of Warrant Shares that, without regard to any other shares that the Holder or its affiliates may beneficially own, would result in the issuance in excess of the permitted amount hereunder, the Company shall notify the Holder of this fact and shall honor the exercise for the maximum portion of this Warrant permitted to be exercised on such Date of Exercise in accordance with the periods described herein and, at the option of the Holder, either keep the portion of the Warrant tendered for exercise in excess of the permitted amount hereunder for future exercises or return such excess portion of the Warrant to the Holder. In the event of a merger or consolidation of the Company with or into another Person, this paragraph shall not apply with respect to a determination of the number of shares of common stock issuable upon exercise in full of the Warrants if such determination is necessary to establish the securities or other assets which the holders of Common Stock shall be entitled to receive upon the effectiveness of such merger or consolidation. 11. Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section, be issuable on the exercise of this Warrant, the Company shall pay an amount in cash equal to the Exercise Price multiplied by such fraction. 12. Notices. Any and all notices or other communications or deliveries hereunder shall be in writing and 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) on a business day, (ii) the business day 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 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. The addresses for such communications shall be: (i) if to the Company, to 4505 W. Hacienda Avenue, Unit I-1, Las Vegas, Nevada 89118, facsimile: (702) 579-4833 attention: Merle Ferguson, or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section. 13. Warrant Agent. The Company shall serve as warrant agent under this Warrant. Upon thirty (30) days' notice to the Holder, the Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 14. Miscellaneous. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and assigns. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. (b) Subject to Section 14(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant. This Warrant shall inure to the sole and exclusive benefit of the Company and the Holder. (c) All questions concerning the construction, validity, enforcement and interpretation of this Warrant 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 Warrant 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 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 Warrant or the transactions contemplated hereby. If either party shall commence an action or proceeding to enforce any provisions of this Warrant, 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. (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK, SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. COMPOSITE INDUSTRIES OF AMERICA, INC. By:_____________________________________ Name: Merle Ferguson Title: President FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the Warrant to which this form applies, issued by Composite Industries of America, Inc. (the "Company")) To Composite Industries of America, Inc.: The undersigned hereby irrevocably elects to purchase _____________ shares of common stock, $.001 value, of the Company (the "Common Stock") and, if such Holder is not utilizing the cashless exercise provisions set forth in this Warrant, encloses herewith $ [ ] in cash, certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. By the delivery of this Form of Election to Purchase the undersigned represents and warrants to the Company that it is an accredited investor under Rule 501(a) of the Securities Act of 1933, as amended, and that its share ownership of the Company's Common Stock will not exceed the percentage ownership set forth in Section 10 of the Warrant. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER (Please print name and address) Dated: , Name of Holder: (Print) (By:) (Name:) (Title:) (Signature must conform in all respects to name of holder as specified on the face of the Warrant) FORM OF ASSIGNMENT [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the within Warrant to purchase ____________ shares of Common Stock of Composite Industries of America, Inc. to which the within Warrant relates and appoints ________________ attorney to transfer said right on the books of Composite Industries of America, Inc. with full power of substitution in the premises. Dated: _______________, ____ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) _______________________________________ Address of Transferee _______________________________________ _______________________________________ In the presence of: __________________________ Annex A Date Number of Warrant Shares Available to be Exercised Number of Warrant Shares Exercised Number of Warrant Shares Remaining to be Exercised EX-10.13 13 ex10-13.txt EQUITY LINE PURCHASE AGREEMENT 12-03-2001 Exhibit 10.13 EQUITY LINE PURCHASE AGREEMENT Between COMPOSITE INDUSTRIES OF AMERICA, INC. and BURLINGTON STREET LLC EQUITY LINE PURCHASE AGREEMENT dated as of December 3, 2001 (this "Agreement"), by and between Burlington Street LLC, a British Virgin Islands company (the "Investor"), and Composite Industries of America, Inc., a Nevada corporation (formerly known as World Homes, Inc.) (the "Company"). WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company may issue and sell to Investor from time to time as provided herein and pursuant to Rule 506 promulgated under the Securities Act of 1933, as amended (the "Securities Act"), and Section 4(2) thereunder, shares of its Common Stock (as defined below) for an aggregate purchase of up to $10,000,000. All references in this Agreement to $ (dollars) shall be to US$ (United States Dollars) unless otherwise specified. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Investor agree as follows: ARTICLE I Certain Definitions "Affiliate" means, with respect to any Person, any other Person that directly or indirectly controls or is controlled by or under common control with such Person. For the purposes of this definition, "control," when used with respect to any Person, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms of "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. "Bid Price" means the closing bid price of the Common Stock as reported on the Principal Market for its regular trading session on the date in question, or if there is no such price on such date, then the closing bid price as reported on the date nearest preceding such date. "Blackout Payments" shall have the meaning set forth in Section 2.4. "Business Day" shall mean 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 or Nevada are authorized or required by law or other governmental action to close. "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 directly or indirectly convertible into or exchangeable for or give any right to subscribe for or otherwise receive Capital Shares of the Company or any warrants, options or other rights to subscribe for or purchase Capital Shares. "Closing" has the meaning ascribed to it in Section 2.2(a). "Closing Date" has the meaning ascribed to it in Section 2.2(a). "Commission" means the Securities and Exchange Commission. "Commitment Period" means the period commencing on the date of this agreement and expiring on the earliest to occur of: (x) the date on which the Investor shall have paid an aggregate of $10,000,000 in Investment Amounts pursuant to this Agreement, (y) the date this Agreement is terminated in accordance with the terms hereof, or (z) the date occurring 24 months after the date of this agreement. "Common Stock" means the Company's common stock, par value $.001 per share, or such securities into which such stock shall hereafter be reclassified. "Company Required Items" has the meaning ascribed to it in Section 2.2(a). "Effective Date" means the date on which the Commission first declares effective a Registration Statement meeting the requirements of the Registration Rights Agreement and registering the resale by the Investor of the Put Shares and Warrant Shares. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Investment Amount" means the dollar amount to be invested by the Investor to purchase Put Shares as specified in a Put Notice. "Investor Warrants" means the Common Stock purchase warrants, in the form of Exhibit C-1 and Exhibit C-2 hereto, each to be delivered to the Investor, concurrently with the execution of this Agreement entitling the Investor to purchase from time to time in accordance with the terms of each warrant, shares of Common Stock. "Market Price" on any date means the average of the three lowest Bid Prices during the Valuation Period relating to such date, subject to equitable adjustment in the event of a Valuation Event during such Valuation Period. "Outstanding" when used with reference to shares of Common Stock or Capital Shares, means, at any date as of which the number of such Shares is to be determined, all issued and outstanding shares of Common Stock or Capital Shares, and shall include all such shares issuable in respect of outstanding scrip or any certificates representing fractional interests in such shares; provided, that "Outstanding" shall not mean any shares of Common Stock or Capital Shares directly or indirectly owned or held by or for the account of the Company. "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 whichever of the Nasdaq National Market, Nasdaq SmallCap Market, American Stock Exchange, New York Stock Exchange or Over-The-Counter Bulletin Board that is then the principal trading exchange, market or quotation system for the Common Stock. "Purchase Price" means with respect to Put Shares, an amount equal to 92.5% of the Market Price for the Valuation Period for a Put. "Put" means the exercise by the Company of its right to require the Investor to purchase Put Shares pursuant to the terms of this Agreement. "Put Date"means the date that a Put Notice is deemed delivered in accordance with Section 2.1(a). "Put Notice" means the written notice from the Company, in the form of Exhibit A, to the Investor, specifying the Investment Amount that the Company intends to sell to the Investor. "Put Shares" means the number of shares of Common Stock intended to be issued and sold to the Investor pursuant to a Put. "Registrable Securities" has the meaning set forth in the Registration Rights Agreement. "Registration Rights Agreement" means the Registration Rights Agreement between the Company and the Investor, dated the date hereof, in the form of Exhibit B. "Registration Statement" shall have the meaning set forth in the Registration Rights Agreement. "Securities" means, collectively, the Put Shares, Warrants and Warrant Shares. "SEC Documents" has the meaning set forth in Section 4.7. "Subsidiary" has the meaning set forth in Section 4.1. "Trading Day" means a day on which the Common Stock is traded on the Principal Market on which the Common Stock is then listed or quoted; provided, that in the event that the Common Stock is not listed or quoted as set forth above, then Trading Day shall mean any Business Day. "Transaction Documents" has the meaning set forth in Section 4.1. "Transfer Agent Instructions" has the meaning set forth in Section 2.2. "Valuation Event" means an action by the Company during the Commitment Period to: (a) subdivide or combine the Common Stock; (b) pay a dividend on its Capital Shares or make any other distribution of its Capital Shares; or (c) issue any additional Capital Shares ("Additional Capital Shares") at a price per share less, or for other consideration lower, than the Bid Price in effect immediately prior to such issuance, or without consideration (other than pursuant to this Agreement); (d) issue any warrant, option, right or other security to subscribe for or purchase Additional Capital Shares at a price per share at any time over the life of such security (whether by reset, adjustment or otherwise) that is less than the Bid Price in effect immediately prior to such issuance of such warrant, option, right or other security; (e) issue any securities convertible into or exchangeable for Capital Shares at a price per Additional Capital Share that is at any time over the life of such security (whether by reset, adjustment or otherwise) less than the Bid Price on the date of issuance of such convertible or exchangeable security; (f) make a distribution of its assets or evidences of its indebtedness to the holders of its Capital Shares as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of the Company's assets (other than under the circumstances provided for in the foregoing subsections (a) through (e)); or (g) take any other action affecting the number of Outstanding Capital Shares, which in the opinion of the Company's Board of Directors, determined in good faith, would have a Material Adverse Effect upon the rights of the Investor at the time of a Put. "Valuation Period" means the period of ten Trading Days commencing on the Put Date. "Warrants" means the Investor Warrants. "Warrant Shares" means the shares of Common Stock issuable upon exercise of the Warrants. ARTICLE II Purchase and Sale of Common Stock Section 2.1 Investments. (a) Puts. Subject to the conditions and limitations set forth herein, the Company may make a Put at any time during the Commitment Period by the delivery of a duly completed Put Notice. The number of Put Shares shall be determined by dividing the Investment Amount specified in the Put Notice by the Purchase Price for the Valuation Period for such Put. A Put Notice shall be deemed delivered on: (i) the Trading Day it is received by facsimile or otherwise by the Investor if such notice is received prior to 12:00 noon (New York time), or (ii) the immediately succeeding Trading Day if it is received by facsimile or otherwise after 12:00 noon (New York time) on a Trading Day or at any time on a day which is not a Trading Day. (b) Limitations on Puts and Common Stock Issuable. (i) The number of Put Shares that the Company may issue and sell to the Investor under a Put Notice may not result in the Investor and its Affiliates beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act) in excess of 4.999% of the shares of Common Stock that will be outstanding upon the Closing of such Put. By the second Trading Day following the Put Date, the Investor will notify the Company to what extent, if any, that the cap contained in this subsection would otherwise be exceeded as a result of the Put Notice. In such case, the number of Put Shares subject to such Put Notice shall be deemed automatically revised to a number that would not exceed such cap. (ii) The maximum Investment Amounts for all Puts is an aggregate of $10,000,000. (iii) The Investment Amount for each Put shall be neither less than $50,000 nor more than the lesser of (x) $500,000 and (y)125% of the weighted average daily price for the twenty Trading Day period prior to the applicable Put Date multiplied by the weighted average daily trading volume for such twenty Trading Day period. (iv) The Company may not deliver a Put Notice during the continuation of any of the events specified in Section 5.4. (v) For the ten Trading Days immediately preceding the applicable Put Date, the average Bid Price shall be greater than $0.50 (as equitably adjusted for stock splits, recombinations and similar events). (vi) At least 15 Trading Days shall have elapsed since the immediately preceding Closing Date. (vii) The Company's right to deliver a Put Notice is subject to the satisfaction or waiver by the Investor, of the conditions set forth in Section 6.1. Section 2.2 Closings. (a) Subject to the satisfaction of the conditions set forth in Section 6.1 hereof, the closing of the purchase by the Investor of Put Shares following a Put (a "Closing") shall occur on the first Business Day following the end of the Valuation Period for such Put (a "Closing Date"). On each Closing Date, the Company shall deliver (or cause to be delivered) to the Investor: (1) the certificate contemplated by Section 6.1(c); (2) the legal opinion contemplated by Section 6.1(e); (3) the calculation notice in the form of Exhibit E (which shall be countersigned by the Investor) setting forth: (x) the calculation of the total number of Put Shares that are to be issued and sold at such Closing and (y) the calculation of the Investment Amount for the Put Shares issuable at such Closing, (4) a copy of a supplement to the Registration Statement stating the applicable Purchase Price and the amount of Put Shares sold on such Closing Date, in the form to be filed with the Commission and (5) all other documents, instruments and writings required to be delivered by it pursuant to the Transaction Documents in order to effect a Closing hereunder (the items contemplated by clauses (1) through (5) above are collectively referred to as the "Company Required Items"). At least one Business Day prior to each Closing Date, the Company shall deliver to the Investor's account through the Depository Trust Company DWAC system, per written account instructions delivered by the Investor to the Company (the "Investor's Account"), the Put Shares to be issued and sold to the Investor at such Closing and meeting the requirements of Section 5.3 which Put Shares shall be held in escrow pending delivery to the Company of the Investment Amount for the Put Shares to be issued and sold at such Closing pursuant to the terms hereof. (b) Upon receipt of the Company Required Items and subject to the satisfaction or waiver of the conditions to the Investor's obligation to purchase Put Shares at such Closing as provided in Section 6.1, on each Closing Date the Investor shall deliver (or cause to be delivered) to the Company, the agreed Investment Amount for the Put Shares to be issued and sold at such Closing, less (1) any cash fee owed to any broker or finder engaged by the Company in connection with the transactions contemplated by this Agreement (a "Broker") plus (2) the amount of any Blackout Payments, together with all accrued interest thereon, then owed and for which full payment shall not have previously been made. In the event that: (i) any Company Required Item shall not have been delivered, (ii) the Investor's Account shall not have been credited with the Put Shares to be issued and sold to the Investor at such Closing or (iii) any condition set forth in Section 6.1 shall not have been fulfilled by the Company or waived by the Investor or (iv) the Investor shall for any reason fail to make payment of the Investment Amount to the Company, such Closing shall be canceled and any Company Required Items delivered to the Investor and any Put Shares credited to the Investor's Account, in both cases, in connection with such Closing, shall be returned to or as directed by the Company. Section 2.3 Termination of Obligation. (a) Notwithstanding anything to the contrary contained herein, the obligation of the Investor to purchase Put Shares shall terminate permanently if the Company breaches in any material respect its obligations under the Transaction Documents and such breach is not cured by the 15th day following notice thereof. The Company agrees that it may not deliver a Put Notice between the time of Investor's delivery of a notice of such default and the date of cure of such default. In addition, notwithstanding anything to the contrary contained herein, if (A) after the Effective Date, the Registration Statement ceases to be effective (or the prospectus thereunder is not available for use by the Investor) for the resale of all Put Shares then held by the Investor or Warrant Shares issuable to the Investor for more than ten consecutive Trading Days or an aggregate of 30 Trading Days, and (B) the Company shall fail to cure the event described in clause (A) of this sentence by the tenth Trading Day following delivery by the Investor of a written demand to cure such event, then the obligation of the Investor to purchase Put Shares shall terminate permanently. (b) The obligation of the Company to sell Put Shares to the Investor following delivery of a Put Notice shall terminate if the Investor fails to honor such Put Notice under circumstances where the conditions to the Closing of such Put have been satisfied within two Trading Days following the Closing Date scheduled for such Put, and the Company notifies Investor of such termination. Notwithstanding any such termination, the Company shall maintain the Registration Statement in effect (and shall permit the Investor to use the prospectus thereunder to sell Registrable Securities) for not less than 45 Trading Days following the date of any such termination. Section 2.4 Blackout Payments. If for any reason an Investor is not permitted for more than an aggregate of ten consecutive days during the period commencing on the Effective Date and ending on the 30th Trading Day following the expiration of the Commitment Period to use the prospectus under the Registration Statement to dispose of all Registrable Securities issued to it hereunder or if such Registration Statement shall not be effective, then the Company shall pay to such Investor on the following Business Day and on the Business Day following each such additional ten day period in excess of the initial ten day period, as liquidated damages and not as a penalty, cash in an amount equal to 2% of the Purchase Price of the Put Shares issued to and then held by such Investor. The amounts that may become due and payable pursuant to this Section are sometimes referred to herein as "Blackout Payments." Late interest on any unpaid Blackout Payments shall accrue from and after the date due at the rate of 12% per annum (or such lesser maximum amount as shall be permitted under applicable law) until all Blackout Payments, plus all accrued interest thereon, shall have been paid in full. Section 2.5 Delisting; Suspension. If at any time prior to the 30th Trading Day following the expiration of the Commitment Period the Common Stock shall fail to be listed or quoted for trading on a Principal Market or shall have been suspended from trading thereon (excluding suspensions of not more than one Trading Day as a result of material announcements by the Company) (a "Repurchase Event"), the Investor shall have the right, exercisable within 30 days of a Repurchase Event, to put to the Company, and the Company shall purchase, all or such portion of the Put Shares issued to and then held by the Investor. The purchase price for such shares shall equal the higher of (x) the Purchase Price paid for such shares and (y) the product of (1) the number of such shares and (2) the higher of the closing sales price of the Common Stock on the date of the demand by the Investor of such put and the closing sales price of the Common Stock (as reported by Bloomberg L.P. or any successor to its function of reporting bid prices) on the date of payment (if there shall no longer be a reported closing sales price for the Common Stock, the amount under this clause (y) shall equal the last reported closing sale price of the Common Stock on the Principal Market). The purchase price under this Section shall be paid in cash and shall be due in full by the 10th Business Day following the demand therefor. Late interest on any unpaid portion of the amounts that are due from the Company under this Section shall accrue from and after the date due at the rate of 12% per annum (or such lesser maximum amount as shall be permitted under applicable law) until all such amounts, plus all accrued interest thereon, shall have been paid in full. The Investor shall have the right to rescind ab initio any demand for a put hereunder at any time prior to the payment in full of the applicable purchase price by the Company. Section 2.6 Deliveries on the Date of Execution. Concurrently with their execution and delivery of this Agreement, the parties shall deliver or cause to be delivered the following: (1) the Company shall deliver to (i) the Investor, executed original copies of this Agreement, the Registration Rights Agreement, the Investor Warrants, and the legal opinion of James E. Pratt, Esq., outside counsel to the Company in agreed form, and (ii) Robinson Silverman Pearce Aronsohn & Berman LLP, $25,000 for reimbursement of the Investor's legal expenses in connection with the preparation of the Transaction Documents, and (2) the Investor shall deliver to the Company executed original copies of this Agreement and the Registration Rights Agreement. ARTICLE III Representations and Warranties of Investor The Investor represents and warrants to the Company as follows: Section 3.1 Intent. The Investor is entering into this Agreement for its own account and has no present arrangement at any time to sell or distribute the Put Shares or Warrant Shares to or through any Person or entity; provided, however, that by making the representations herein, the Investor does not agree to hold Securities for any minimum or other specific term and reserves the right to dispose of Put Shares and Warrant Shares at any time in accordance with federal and state securities laws applicable to such disposition and the terms and conditions, if any, relating thereto as set forth in this Agreement and the Registration Rights Agreement. Section 3.2 Status. The Investor is a sophisticated investor (as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited investor (as defined in Rule 501(a) of Regulation D), and Investor has such experience in business and financial matters that it has the capacity to protect its own interests in connection with this transaction and is capable of evaluating the merits and risks of an investment in the Securities. The Investor acknowledges that an investment in the Securities is speculative and involves a high degree of risk. The Investor is not a registered broker-dealer under the Exchange Act nor is such Investor an Affiliate of a registered broker- dealer. Section 3.3 Authority. The Investor has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by this Agreement and the Registration Rights Agreement and otherwise to carry out its obligations thereunder. The execution and delivery of each of this Agreement and the Registration Rights Agreement by the Investor and the consummation by it of the transactions contemplated thereby have been duly authorized by all necessary corporate action on the part of the Investor. Each of this Agreement and the Registration Rights Agreement has been duly executed by the Investor and, when delivered in accordance with the terms hereof, will constitute the valid and binding obligation of the Investor enforceable against the Investor in accordance with its terms. Section 3.4 Organization and Standing. The Investor validly exists, and is in good standing under the laws of the jurisdiction of its organization. Section 3.5 Manner of Sale. The Investor is not purchasing the Securities as a result of or subsequent to 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. Section 3.6 Financial Capacity. The Investor currently has the financial capacity to meet its obligations to the Company hereunder, and the Investor has no present knowledge of any circumstances which could cause it to become unable to meet such obligations in the future. Section 3.7 Underwriter Liability. The Investor understands that it is the position of the Commission that with respect to any disposition of Put Shares and Warrant Shares through a Registration Statement the Investor will be treated as an underwriter within the meaning of Section 2(11) of the Securities Act. The Investor agrees to be identified as an underwriter of the Registrable Securities sold by it in the Registration Statement. Section 3.8 Access to Information. The Investor acknowledges that it has reviewed the SEC Documents and has been afforded: (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities and the merits and risks of investing in the Securities; (ii) access to information about the Company and the Company's financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment; and (iii) the opportunity to obtain such additional information which the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment and to verify the accuracy and completeness of the information contained in the SEC Documents. Neither such inquiries nor any other investigation conducted by or on behalf of the Investor or its representatives or counsel shall modify, amend or affect Investor's right to rely on the truth, accuracy and completeness of the SEC Documents and the Company's representations and warranties contained in the Transaction Documents. The Company acknowledges and agrees that the Investor has not made and does not make any representations or warranties with respect to the transactions contemplated hereby other than as specifically set forth in this Article III. ARTICLE IV Representations and Warranties of the Company The Company represents and warrants to the Investor on the date of this Agreement, on each Put Date and on each Closing Date as follows: Section 4.1 Organization and Qualification. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Nevada, with the requisite corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. The Company has no subsidiaries other than as set forth in Schedule 4.1 (the "Subsidiary"). The Subsidiary 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. The Company 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, individually or in the aggregate, (x) adversely affect the legality, validity or enforceability of the Securities or any of this Agreement, the Registration Rights Agreement or the Warrants (collectively, the "Transaction Documents"), (y) have or result in a material adverse effect on the results of operations, assets, prospects, or condition (financial or otherwise) of the Company and the Subsidiary, or (z) adversely impair the Company's ability to perform fully on a timely basis its obligations under any of the Transaction Documents (any of (x), (y) or (z), a "Material Adverse Effect"). Section 4.2 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 thereunder. The execution and delivery of each of the Transaction Documents by the Company and the consummation by it of the transactions contemplated thereby have been duly authorized by all necessary corporate action on the part of the Company. Each of the Transaction Documents has been duly executed by the Company and, when delivered (or filed, as the case may be) 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. The Company is not in violation of any of the provisions of its respective certificate or articles of incorporation, by-laws or other organizational or charter documents. Section 4.3 Capitalization. As of October 3, 2001, the Company had 200,000,000 shares of Common Stock authorized and 40,065,281 shares of Common Stock issued and outstanding. As of October 22, 2001, the Company had options to purchase 775,000 shares of Common Stock and warrants outstanding to purchase 213,675 shares of Common Stock. The Company owns all of the capital stock of its Subsidiary. No shares of Common Stock are entitled to preemptive or similar rights, nor is any holder of securities of the Company or any Subsidiary entitled to preemptive or similar rights arising out of any agreement or understanding with the Company or any Subsidiary by virtue of any of the Transaction Documents. Except as a result of the purchase and sale of the Securities and except as disclosed in the SEC Documents or as set forth in Schedule 4.3, there are no outstanding options, warrants, scrip 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 issue and sale of the Securities hereunder will not obligate the Company to issue shares of Common Stock or other securities to any Person other than to the Investor and the Brokers and will not result in a right of any holder of the Company's securities to adjust the exercise or conversion or reset price under such securities. Section 4.4 Issuance of the shares of Common Stock. When issued and paid for in accordance with the terms hereof and the Warrants (as applicable), the Put Shares and Warrant Shares will be duly and validly issued, fully paid and nonassessable, free and clear of all liens, encumbrances and rights of first refusal of any kind (collectively, "Liens"). The Company has on the date hereof and will, at all times during the Commitment Period and while the Warrants are outstanding, maintain an adequate reserve of duly authorized shares of Common Stock, reserved for issuance to the Investor and the holders of the Warrants, to enable it to perform its exercise and other obligations under this Agreement and the Warrants. Section 4.5 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 filing of the Registration Statement with the Commission, (ii) filings as may be required under state securities laws, and (iii) in all other cases where the failure to obtain such consent, waiver, authorization or order, or to give such notice or make such filing or registration would not reasonably be expected to have or result in, individually or in the aggregate, a Material Adverse Effect (collectively, the "Required Approvals"). Section 4.6 No Default or Violation. Except as described in the SEC Documents, neither the Company nor any Subsidiary (i) is in default under or in violation of (and no event has occurred which has not been waived which, 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, (ii) is in violation of any order of any court, arbitrator or governmental body, or (iii) is in violation of any statute, rule or regulation of any governmental authority, in each case of clauses (i), (ii) or (iii) above, except as would not reasonably be expected to individually or in the aggregate, have or result in a Material Adverse Effect. Section 4.7 SEC Reports; Financial Statements. The Company has filed all reports required to be filed by it under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including, without limitation, all filings required 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" and, together with the Schedules to this Agreement, the "Disclosure Materials") 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. All material agreements to which the Company is a party or to which the property or assets of the Company are subject have been filed as exhibits to the SEC Reports as required under the Exchange Act. The financial statements of the Company included in the SEC Documents 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. Since January 1, 2000, except as specifically disclosed in the SEC Documents, (a) there has been no event, occurrence or development that has resulted or that could result in a Material Adverse Effect, (b) the Company has not incurred any liabilities (contingent or otherwise) other than (x) liabilities incurred in the ordinary course of business consistent with past practice and (y) liabilities not required to be reflected in the Company's financial statements pursuant to GAAP or required to be disclosed in filings made with the Commission, (c) the Company has not altered its method of accounting or the identity of its auditors and (d) the Company has not declared or made any payment or distribution of cash or other property to its stockholders or officers or directors (other than in compliance with existing Company stock option plans or employee benefit plans (as defined in Rule 405 of Regulation C)) with respect to its capital stock, or purchased, redeemed (or made any agreements to purchase or redeem) any shares of its capital stock. Section 4.8 Investment Company. The Company is not, and is not an Affiliate of, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 4.9 Certain Fees. Other than fees payable to the Broker, no fees or commissions 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. The Investor shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by this Agreement. The Company shall indemnify and hold harmless the Investor, its employees, officers, directors, agents, and partners, and their respective Affiliates, from and against all claims, losses, damages, costs (including the costs of preparation and attorney's fees) and expenses suffered in respect of any such claimed or existing fees, as such fees and expenses are incurred. Section 4.10 Private Offering. Assuming the accuracy of the representations and warranties of the Investors set forth in Sections 3.1-3.8, the offer, issuance and sale of the Securities to the Investors as contemplated hereby are exempt from the registration requirements of the Securities Act. Neither the Company nor any Person acting on its behalf has taken or is contemplating taking any action which could subject the offering, issuance or sale of the Securities to the registration requirements of the Securities Act including soliciting any offer to buy or sell the Securities by means of any form of general solicitation or advertising. Section 4.11 Listing and Maintenance Requirements Compliance. Except as set forth in the SEC Reports, the Company has not, in the two years preceding the date hereof, received notice (written or oral) from any stock exchange, market or trading facility on which the Common Stock is or has been listed (or on which it has been quoted) to the effect that the Company is not in compliance with the listing or maintenance requirements of such exchange, market or trading facility. The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with the listing and maintenance requirements for continued trading of the Common Stock on the OTC Bulletin Board. Section 4.12 Patents and Trademarks. The Company and its Subsidiary have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and rights which are necessary or material for use in connection with their respective business as described in the SEC Documents and which the failure to so have would have a Material Adverse Effect (collectively, the "Intellectual Property Rights"). Neither the Company nor the Subsidiary has received a written notice that the Intellectual Property Rights used by the Company or its Subsidiary violates or infringes upon the rights of any Person. To the best 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. Section 4.13 Registration Rights; Rights of Participation. Except as set forth on Schedule 6(b) to the Registration Rights Agreement, 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 which has not been satisfied. Except as set forth on Schedule 6(b) to the Registration Rights Agreement, 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. Section 4.14 Regulatory Permits. The Company and its Subsidiary possess all certificates, authorizations and permits issued by the appropriate Federal, state 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 result in a Material Adverse Effect ("Material Permits"), and neither the Company nor the Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit. Section 4.15 Title. The Company and the Subsidiary have good and marketable title in fee simple to all real property owned by them which is material to the business of the Company and the Subsidiary and good and marketable title in all personal property owned by them which is material to the business of the Company and its Subsidiary, 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 interfere with the use made and proposed to be made of such property by the Company and its Subsidiary. Any real property and facilities held under lease by the Company and its Subsidiaries are held by them under valid, subsisting and enforceable leases of which the Company and its Subsidiary are in compliance and do not interfere with the use made and proposed to be made of such property and buildings by the Company and the Subsidiary. Section 4.16 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 or the 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 result in a Material Adverse Effect. Section 4.17 Taxes. Except as set forth on Schedule 4.17, all Federal, state, local and foreign tax returns, information returns, reports and estimated Tax returns have been timely filed on behalf of the Company and all Taxes shown on any such return or report have been paid on a timely basis. There is no action, suit, proceeding, investigation, audit or claim now proposed or pending with respect to any Tax of the Company and the Company is not aware of any threatened claim for Tax deficiencies. There are no outstanding agreements or waivers for the extension of time for assessment of any Tax payable by the Company, nor has any such waiver or agreement been requested by the Internal Revenue Service or any other taxing authority. The Company has not filed or been included in a consolidated, unitary or combined Tax return with another person. The Company has collected or withheld all material amounts required to be collected or withheld by it for any Taxes, and all such material amounts have been paid to the appropriate governmental agencies or set aside in appropriate accounts for future payment when due. The Company is in material compliance with, and its records contain all material information and documents necessary to comply with, all applicable information reporting and Tax withholding requirements. As used herein, the terms "Tax" and "Taxes" shall mean (i) any income, alternative or add-on minimum tax, gross income, gross receipts, franchise, profits, including estimated taxes relating to any of the foregoing, or other similar tax or other like assessment or charge of similar kind whatsoever, (ii) any sales, use, ad valorem, business license, withholding, payroll, employment, excise, stamp, transfer, recording, occupation, premium, property, value added, custom duty, severance, windfall profit tax, license, or other tax, governmental fee or other similar assessment or charge, and (iii) any interest and any penalty, addition to tax or additional amount imposed by any federal, state, local or foreign governmental authority responsible for the imposition of any such tax (domestic or foreign). Section 4.18 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 certificate or articles of incorporation, bylaws or other charter documents (each as amended through the date hereof), or (ii) subject to obtaining the Required Approvals (as defined below), conflict with, or constitute a default (or an event which 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 and foreign securities laws and regulations), or by which any property or asset of the Company or a subsidiary thereof is bound or affected; except in the case of each of clauses (ii) and (iii), as could not, individually or in the aggregate, have or result in a Material Adverse Effect. The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental authority, except for violations which, individually or in the aggregate, could not have or result in a Material Adverse Effect. Section 4.19 Disclosure. The Company confirms that neither it nor any other Person acting on its behalf has provided the Investor or its agents or counsel with any information that constitutes or might constitute material non-public information. The Company understands and confirms that the Investor shall be relying on the foregoing representations in effecting transactions in securities of the Company. All disclosure provided to the Investor regarding the Company, its business and the transactions contemplated hereby, including the Schedules to this Agreement, furnished by or on behalf of the Company are true and correct in all material respects 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. Section 4.20 Absence of Certain Proceedings. Except as specified in Schedule 4.20, none of the following has occurred to the Company (or any predecessor entity), the Subsidiary, or any of executive officer, director or control person of the Company: (a) A filing by or against the Company, the Subsidiary or such other Person of a petition under federal bankruptcy or state insolvency laws, or the appointment by a governmental authority (with or without consent) of a receiver, trustee, fiscal agent or similar Person for the business or property of the Company, such Subsidiary or such other Person, or any partnership in which it was a general partner or corporation or business association in which it was an executive officer or director either at the time of such petition or appointment or during the two years prior to that time. (b) A conviction in a criminal Action or being named a subject of a pending criminal Action (excluding traffic violations and other minor offenses). (c) Being found or otherwise judged by a court of competent jurisdiction in a non-criminal Action or by the Commission, a stock market or another self-regulatory organization, to have violated any securities law or to have breached a fiduciary duty, where such finding or judgment has not been subsequently reversed, suspended, or vacated. (d) Being subject to any order, judgment or decree (not subsequently reversed, suspended or vacated) of any court of competent jurisdiction, stock market authority or other self-regulatory organization, permanently or temporarily enjoining, barring, suspending or otherwise limiting, any of the following activities: (i) Engaging in any type of business practice; or (ii) Engaging in any activity in connection with the purchase, sale, investment management or underwriting of securities or commodities. (e) Being subject of a pending Action involving a claim or investigation of a breach of fiduciary duty or violation of securities laws (including any investigation by or on behalf of the Commission). (f) The pendency before the Commission of a request for confidential treatment of information. Section 4.21 Solvency. Based on the financial condition of the Company as of the Closing Date, (i) the Company's fair saleable value of its 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). Section 4.22 Labor Relations. No material labor problem exists or, to the knowledge of the Company, is imminent with respect to any of the employees of the Company. Section 4.23 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 Investors as a result of the Investors and the Company fulfilling their obligations or exercising their rights under the Transaction Documents, including without limitation the Company's issuance of the Securities and the Investors ownership of the Securities. ARTICLE V Other Agreements of the Parties Section 5.1 Listing of Common Stock. The Company shall maintain the listing of the Common Stock on a Principal Market, and as soon as practicable (but in any event prior to the commencement of the Commitment Period) shall list on such Principal Market all of the Put Shares and all potentially issuable Warrant Shares. The Company further agrees, if the Company applies to have the Common Stock traded on any other Principal Market, it will include in such application the issued and issuable Put Shares and Warrant Shares. The Company will take all action to continue the listing and trading of its Common Stock on the Principal Market and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the Principal Market. Section 5.2 Exchange Act Registration; Rule 144 Compliance. The Company will cause its Common Stock to continue to be registered under Section 12(g) or 12(b) of the Exchange Act, will use its best efforts to timely comply in all respects with its reporting and filing obligations under the Exchange Act, and will not take any action or file any document (whether or not permitted by Exchange Act or the rules thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations thereunder. During the Commitment Period, the Company will notify the Investor immediately following each filing by the Company under the Exchange Act. As long as the Investor own Securities, if the Company is not required to file reports pursuant to such sections, it will prepare and furnish to the Investor and make publicly available in accordance with Rule 144(c) promulgated under the Securities Act such information as is required for the Investor to sell the Securities under Rule 144 promulgated under the Securities Act. 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 promulgated under the Securities Act, including causing its attorneys to render and deliver any legal opinion required in order to permit such Person to sell its Securities under Rule 144 upon notice of an intention to sell on Form 144 or other form of notice having a similar effect. Upon the request of any such Person, the Company shall deliver to such Person a written certification of a duly authorized officer as to whether it has complied with such requirements. Section 5.3 Legends. The certificates evidencing the Common Stock to be sold or otherwise issued to the Investor hereunder (including the Warrant Shares) at any time while a Registration Statement is then effective shall be issued and delivered to the Investor free of restrictive legends of any kind and no instructions or "stop transfer orders," so called, "stock transfer restrictions," or other restrictions have been or shall be given to the Company's transfer agent with respect thereto. Prior to the first Closing, the Company will issue to the transfer agent for its Common Stock (and to any substitute or replacement transfer agent for its Common Stock upon the Company's appointment of any such substitute or replacement transfer agent) instructions to deliver the Put Shares and Warrant Shares without restrictive legends as required by this Section and shall cause its counsel to deliver to such transfer agent any legal opinion required in order for the transfer agent to deliver shares in such manner. Unless such instructions cover Securities issuable at future Closings, the Company must deliver new such instructions prior to each Closing. Section 5.4 Notice of Certain Events Affecting Registration; Suspension of Right to Make a Put. The Company will immediately notify the Investor upon the occurrence of any of the following events in respect of a Registration Statement or related prospectus in respect of an offering of Registrable Securities; (i) receipt of any request for additional information from the Commission or any other federal or state governmental authority during the period of effectiveness of the Registration Statement the response to which would require any amendments or supplements to the registration statement or related prospectus; (ii) the issuance by the Commission or any other federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt 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; (iv) the happening of any event that makes any statement made in the Registration Statement or related prospectus or any document incorporated by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, related prospectus or documents so that, in the case of the Registration Statement, 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 not misleading, and that in the case of the related prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (v) the Company's reasonable determination that a post-effective amendment to the prospectus or Registration Statement, as the case may be, would be appropriate; and the Company will promptly make available to the Investor any such supplement or amendment to the related prospectus or Registration Statement. Section 5.5 Subsequent Financing; Limitation on Registrations. (a) From the date of this Agreement through the 360th day following the first Closing Date, other than to the Investor pursuant to this Agreement and the Warrants, the Company will not offer, sell, grant any option to purchase or any right to reprice securities, or otherwise dispose of (or announce any offer, sale, grant or any option to purchase or other disposition) any Common Stock or Capital Shares Equivalents, and the Company will cause each of its Subsidiaries not to offer, sell or issue during such period any Capital Shares Equivalents. The restriction contained in this Section 5.5(a) shall not limit the right of the Company to offer and sell shares of Common Stock or Capital Shares Equivalents at a price per share that is not less than the Bid Price on the date of such offer or sale (the "Threshold Price"), provided, that, (i) such securities are not at any time entitled to any reset, repricing, or other purchase price adjustment or other purchase price protection (including, in the case of Capital Shares Equivalents, variable or reset rate conversion or exchange pricing), whether contractually or through one or more ancillary securities such as a repricing warrant or purchase right that could result in the issuance of Common Stock following the initial issuance of such shares or Capital Shares Equivalents at less than the Threshold Price. (b) In furtherance of the restriction contained in Section 5.5(a) above, other than to the Investors or Affiliates thereof, prior to the expiration of the Commitment Period the Company may not enter into any equity line or similar financing arrangement or issue or agree to issue any shares of its Common Stock or any Capital Shares Equivalents pursuant to any equity line or similar type of financing, unless otherwise agreed to in writing by the Company and the Investors. (c) Except for (x) Registrable Securities, (y) securities of the Company permitted pursuant to Section 6(c) of the Registration Rights Agreement to be registered in the Registration Statement, and (z) Common Stock permitted to be issued pursuant to Section 5.5(e), the Company may not until the 90th day after the Effective Date file a registration statement to register any of its securities other than the Registration Statement. (d) With respect to Section 5.5(a), (b) and (c) the restrictive periods shall be extended for the number of Trading Days during such period (A) in which trading in the Common Stock is suspended by any securities exchange or market or quotation system on which the Common Stock is then listed, or (B) that the Registration Statement is not effective following the Effective Date, or (C) that the prospectus included in the Registration Statement may not be used by the holders thereof for the resale of Registrable Securities following the Effective Date. (e) The restrictions contained in Section 5.5 (a)-(c) shall not apply to: (i) the issuance of Common Stock to a bona fide bank, landlord, or other lending institution whose primary business is lending money or leasing real property and not the trading or investment of securities under the terms of any loan, credit or lease facility, (ii) the issuance of any Common Stock or Common Stock Equivalents to a merger partner as consideration in connection with a merger and/or acquisition or consolidation with another entity in which the Company is the surviving entity, (iii) a bona fide underwritten public offering of the Common Stock that is not at any actual or implied discount (other than the customary underwriter's discount) to the then market price of the Common Stock resulting in net proceeds to the Company in excess of $10,000,000 (it being understood that equity line transactions, including any on-going warrant financing, or any similar arrangements shall not constitute a bona fide underwritten public offering of the Common Stock for the purposes hereof), (iv)the granting of options or warrants to employees, officers and directors of the Company, and the issuance of Common Stock upon exercise of such options or warrants granted under any stock option plan or employee benefit plan (as defined in Rule 405 of Regulation C) heretofore or hereinafter duly adopted by the Company, (v) the issuance of shares of Common Stock issuable upon exercise of any currently outstanding warrants and other outstanding convertible securities of the Company, in each case as and to the extent disclosed in Schedule 4.3 (but not as to any amendments or modifications of the terms of such securities after the date of this Agreement, including "back-dated" agreements), (vi) shares of Common Stock issuable in connection with a Strategic Transaction (as defined below), and (vii) any issuances of Common Stock or Common Stock Equivalents from and after the Closing Date, if any, on which the Purchase Price paid for Put Shares, when aggregated with the Purchase Price paid at all other prior Closings, shall equal or exceed $1,000,000. For purposes of this Section 5.5(e), a "Strategic Transaction" shall mean a transaction or relationship in which the Company issues shares of Common Stock to an entity which is, itself or through its subsidiaries, an operating company in a business related to the business of the Company and in which the Company receives material benefits in addition to the investment of funds, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities. Section 5.6 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 hereunder to the Investor. Section 5.7 Certain Securities Laws Disclosures; Publicity. The Company shall: (i) within 10 days of the date of this Agreement, issue a press release acceptable to the Investor disclosing the transactions contemplated hereby, (ii) file with the Commission a Report on Form 8-K disclosing the transactions contemplated hereby within ten Business Days after the date of this Agreement, and (iii) timely file with the Commission a Form D promulgated under the Securities Act. The Company shall, no less than two Business Days prior to the filing of any disclosure required by clauses (ii) and (iii) above, provide a copy thereof to the Investor for its review. The Company and the Investor shall consult with each other in issuing any other press releases or otherwise making public statements or filings and other communications with the Commission or any regulatory agency or stock market or trading facility with respect to the transactions contemplated hereby and neither party shall issue any such press release or otherwise make any such public statement, filings or other communications without the prior written consent of the other, except that if such disclosure is required by law or stock market regulation, in which such case the disclosing party shall promptly provide the other party with prior notice of such public statement, filing or other communication. Notwithstanding the foregoing, the Company shall not publicly disclose the name of the Investor, or include the names of the Investor in any filing with the Commission, or any regulatory agency, trading facility or stock market without the prior written consent of the Investor, except to the extent such disclosure (but not any disclosure as to the controlling Persons thereof) is required by law or stock market regulations, in which case the Company shall provide the Investor with prior notice of such disclosure. Section 5.8 Use of Proceeds. The Company will use the net proceeds from the sale of the Securities for working capital purposes; however, the Company will not use any of the proceeds from the sale of Securities to fund the businesses or finances of M.J.B. Towers or Tribal Electric Association - 2000, both of which the Company represents as "self- funded" as of the date of this Agreement. The Company may not use any of the proceeds from the sale of Securities hereunder to repay or otherwise satisfy any portion of the Company's debt, except the payment of trade payables in the ordinary course of the Company's business and prior practices and except for the repayment of the Company's 6% Convertible Debenture Due November 13, 2002, in the original principal amount of $750,000, issued to the Investor. In furtherance of the foregoing, the Company agrees that it will not use any proceeds from the sale of Securities hereunder to repay amounts owed by the Company to any management member of the Company. The Company may not use any of the proceeds from the sale of Securities hereunder to redeem any securities of the Company other than securities held by the Investor. Section 5.9 Indemnification. (a)(1) The Company agrees to indemnify and hold harmless the Investor, its shareholders, partners, officers, directors, employees, agents and representatives and their respective Affiliates against any and all damages, claims, losses, liabilities, costs and expenses (including reasonable counsel fees and expenses) which may be suffered or incurred by any of them as a result of or relating to any misrepresentation, breach or inaccuracy, or any allegation by a third party that, if true, would constitute a breach or inaccuracy, of any of the representations, warranties or covenants made by the Company in this Agreement or any other Transaction Document. (2) The Investor, agrees to indemnify the Company, its shareholders, partners, officers, directors, employees, agents and representatives and their respective Affiliates against any and all damages, claims, losses, liabilities, costs and expenses (including reasonable counsel fees and expenses) which may be suffered or incurred by any of them as a result of or relating to any misrepresentation, breach or inaccuracy, or any allegation by a third party that, if true, would constitute a breach or inaccuracy, of any of the representations, warranties or covenants made by the Investor in this Agreement or any other Transaction Document. (3) In case any action, litigation, proceeding or investigation (a "Proceeding") shall be instituted involving any Person in respect of which indemnity may be sought pursuant to this Section, such Person (the "indemnified party" shall promptly notify the Person against whom such indemnity may be sought (the "indemnifying party") in writing of the occurrence of the facts and circumstances giving rise to such claim. The failure of any Person to deliver the notice required by this Section5.9 shall not in any way affect the indemnifying party's indemnification obligation hereunder except and only to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the indemnifying party. In case any such Proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party and shall pay as incurred the fees and expenses of such counsel related to such proceeding. In any such Proceeding, any indemnified party shall have the right to retain its own counsel or pay its own expenses. Notwithstanding the foregoing, the indemnifying party shall pay as incurred the fees and expenses of the counsel retained by the indemnified party in the event (i)the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii)the named parties to any such proceedings (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The indemnifying party shall not be liable for any settlement of any Proceeding effected without its written consent (which consent may not be unreasonably withheld) but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment and the indemnifying party shall obtain a full release of the indemnified party. (b) If (i) the Investor becomes involved in any capacity in any Proceeding brought by any stockholder of the Company in connection with or as a result of the consummation of the transactions contemplated by any Transaction Document (including any action in which it is alleged that the Investor or others on behalf of or in concert with the Investor improperly traded any of the Company's securities or manipulated the price of any of the Company's securities), or if the Investor is impleaded in any such Proceeding by any Person, or (ii) the Investor becomes involved in any capacity in any Proceeding brought by the Commission or any stock market, trading facility, any other self-regulatory organization or other body having jurisdiction, against or involving the Company or in connection with or as a result of the consummation of the transactions contemplated by any Transaction Document, or if the Investor is impleaded in any such Proceeding by any Person, then in any and each such case, the Company agrees to indemnify, defend and hold harmless the Investor from and against and in respect of all losses, claims, liabilities, damages and expenses (including the cost of any investigation and preparation and all reasonable legal fees and expenses) resulting from, imposed upon or incurred by the Investor directly or indirectly, in connection therewith, as such expenses are incurred. The indemnification and reimbursement obligations of the Company under this paragraph shall be in addition to any liability which the Company may otherwise have (other than matters specifically addressed in the Registration Rights Agreement, which shall be governed solely by that agreement), shall extend upon the same terms and conditions to any Affiliates of the Investor who are actually named in such Proceeding and the partners, directors, agents, employees and representatives and controlling persons (if any), as the case may be, of the Investor and any such Affiliates, and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, the Investor, any such Affiliate and any such Persons. The Company also agrees that neither the Investor nor any such Affiliate, partner, director, agent, representative, employee or controlling person shall have any liability to the Company or any other Person asserting claims on behalf of or in right of the Company in connection with or as a result of the consummation of any Transaction Document, except as provided in or contemplated by the Transaction Documents. If, in connection with a Proceeding in which it is alleged that a Purchaser or others on behalf of or in concert with such Purchaser improperly traded any of the Company's securities or manipulated the price of any of the Company's securities, a court of competent jurisdiction determines in a final judgment, not subject to appeal or review, that a Purchaser who has been, or is seeking to be, indemnified or reimbursed under this Section is liable for any manipulation, then the indemnity and reimbursement obligations of the Company under this Section 5.9(b) will not be available to the Purchaser and the other indemnitees hereunder with respect to such Proceeding. Section 5.10 Expectations Regarding Put Notices. Within ten days after the commencement of each calendar quarter following the Effective Date, the Company must notify the Investor, in writing, as to its reasonable expectations as to the dollar amount it intends to raise during such calendar quarter, if any, through the issuance of Put Notices. Such notification shall constitute only the Company's good faith estimate and shall in no way obligate the Company to raise such amount, or any amount, or otherwise limit its ability to deliver Put Notices. The failure by the Company to comply with this provision can be cured by the Company's notifying the Investor, in writing, at any time as to its reasonable expectations with respect to the current calendar quarter. Section 5.11 Purchase Price Adjustment If at any time during the Commitment Period the Company or any Subsidiary (with respect to Capital Shares Equivalents) shall offer, sell, grant any option to purchase, or otherwise dispose of (or announce any offer, sale, grant or any option to purchase or other disposition) any of shares of Common Stock or Capital Shares Equivalents at a price that is, at the issuance thereof, or at any later time due to adjustment, reset, additional issuances or otherwise, less than the Purchase Price for any Put Shares (assuming for the purposes hereof that a Put Notice is delivered on the date of the issuance at issue), then, at the option of the Investor for such subsequent Closings as the Investor shall indicate, the Purchase Price shall be adjusted to mirror the conversion, exchange or purchase price for such Common Stock or Capital Shares Equivalents (including any reset provisions thereof) at issue. Such adjustment shall be made whenever such Common Stock or Capital Shares Equivalents are issued. 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 issued in connection with such issuance, be entitled to receive shares of Common Stock at a price less than the Purchase Price (assuming for the purposes hereof that a Put Notice is delivered on the date of the issuance at issue), such issuance shall be deemed to have occurred for less than the Purchase Price. The Company shall notify the Investor in writing, no later than the Trading Day following the issuance of any Common Stock or Common Stock Equivalent subject to this section, indicating therein the applicable issuance price, or of applicable reset price, exchange price, conversion price and other pricing terms. The purchase price adjustment discussed in this Section 5.11 shall not apply to any issuances of Common Stock or Capital Shares Equivalents as discussed in Section 5.5(e). Section 5.12 Transfer Agent. By December 7, 2001 the Company shall have retained American Stock Transfer or another mutually acceptable nationally recognized transfer agent, as the transfer agent for the Common Stock. ARTICLE VI Conditions Precedent to the Right of the Company to Deliver a Put Notice and the Obligation of the Investor to Close Section 6.1 Conditions Precedent to the Right of the Company to Deliver a Put Notice and the Obligation of the Investor to Close. In addition to the conditions contained in Section2.1(b), the right of the Company to deliver a Put Notice and the obligation of Investor hereunder to perform its obligations at any Closing hereunder is subject to the satisfaction, on both: (i) the applicable Put Date and (ii) the applicable Closing Date (each a "Condition Satisfaction Date"), of each of the following conditions, or the waiver by the Investor of such conditions (other than the condition contained in Section 6.1(c), which only need be satisfied on the applicable Closing Date): (a) Representations and Warranties. The representations and warranties of the Company in the Transaction Documents shall be true and correct as of the date when made and as of the applicable Condition Satisfaction Date as though first made at that time (except for representations and warranties that speak of a specific date, which need only be true and correct as of such date). (b) Performance by the Company. The Company shall have performed, satisfied and complied in all material respects with all covenants and agreements required by the Transaction Documents to be performed, satisfied or complied with by the Company at or prior to each Condition Satisfaction Date. (c) Compliance Certificate. The Company shall have delivered to or as directed by the Investor an Officer's Certificate signed by its Chief Executive Officer, dated as of the applicable Condition Satisfaction Date, certifying that the Company has satisfied the conditions set forth in paragraphs (a), (g)(ii) - (iv), and (i) of this Section. (d) Delivery of Closing Items. The Company shall have transmitted the Put Shares and the Company Required Items required to be delivered pursuant to Section 2.2. (e) Opinion of Counsel. The Investor shall have received (or receipt shall have been confirmed by its agent on its behalf) an opinion of counsel to the Company, in the form of Exhibit D hereto. (f) Transfer Agent. The Investor shall have received satisfactory evidence of the Company's delivery to its transfer agent for the Common Stock of instructions and legal opinion meeting the requirements of this Agreement and acceptable to such transfer agent. (g) Registration Statement. (i) The Registration Statement shall have been declared effective by the Commission and the prospectus thereunder shall be available to the Investor to resell all of the Registrable Securities thereunder. (ii) Neither the Company nor the Investor shall have received notice that the Commission has issued or intends to issue a stop order with respect to the Registration Statement or that the Commission otherwise has suspended or withdrawn the effectiveness of the Registration Statement, either temporarily or permanently. (iii) The Registration Statement (including the information or documents incorporated by reference therein) and any amendments or supplements thereto shall not contain any untrue statement of material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (h) Adverse Changes. Since the earlier to occur of: (i) with respect to the first Put Date, since the date of this Agreement and (ii) with respect to subsequent Put Dates, the last Closing hereunder, no occurrence or event shall have occurred that has had or would result in a material adverse effect on the results of operations, assets or financial condition of the Company and the Subsidiaries, taken as a whole. (i) No Suspension of Trading In or Delisting of Common Stock. The Common Stock and the Put Shares issuable at the Closing at issue shall be authorized for trading or quotation on the Principal Market and trading in the Common Stock shall not have been suspended by the Commission or the Principal Market at any time from the Put Date through the Closing Date. The Company shall not have received any notice from the Principal Market threatening to delist the Common Stock from the Principal Market. (j) Illegality. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction, by the Commission or by the Principal Market that prohibits or materially impairs the transactions contemplated by this Agreement. ARTICLE VII Due Diligence Review; Non-Disclosure of Non-Public Information. Section 7.1 Due Diligence Review. The Company shall make available for inspection and review by the Investor, and its advisors and representatives of the Investor, any underwriter participating in any disposition of the Registrable Securities on behalf of the Investor all SEC Documents and other filings with the Commission, and all other publicly available corporate documents and properties of the Company as may be reasonably necessary for the purpose of such review. In connection therewith, the Company shall cause its officers, directors and employees to supply all such publicly available information reasonably requested by the Investor or any such Person (including, without limitation, in response to all questions and other inquiries reasonably made or submitted by any of them), prior to and from time to time after the filing and effectiveness of the Registration Statement. Section 7.2 Non-Disclosure of Non-Public Information. The Company shall not disclose non-public information to the Investor or its advisors or representatives unless prior to disclosure of such information the Company identifies such information as being non-public information and the Investor enter into a non-disclosure agreement in form mutually acceptable to the Company and the Investor. ARTICLE VIII Miscellaneous Section 8.1 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 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 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 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. Section 8.2 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 (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) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Agreement 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 Business Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows: If to the Company: Composite Industries of America, Inc. 4505 W. Hacienda Ave, Unit I-1 Las Vegas, Nevada 89118 Facsimile No.: (702) 579- 4833 Attn: Merle Ferguson With copies to: James E. Pratt, Esq. 195 Kildare Road Garden City, New York 11530 Facsimile No.: (516) 873-1140 If to the Investor: To the address set forth under the Investor's name on the signature page hereto or such other address as may be designated in writing hereafter, in the same manner, by such Person. Section 8.3 Reporting Entity for the Common Stock. The reporting entity relied upon for the determination of the trading price or trading volume of the Common Stock on any given Trading Day for the purposes of this Agreement shall be Bloomberg, L.P. or any successor to its function of reporting share prices. The written mutual consent of the Investor and the Company shall be required to employ any other reporting entity. Section 8.4 Replacement of Certificates. Upon (i) receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of a certificate representing any Securities and (ii) in the case of any such loss, theft or destruction of such certificate, upon delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company (which shall not exceed that required by the Company's transfer agent in the ordinary course) or (iii) in the case of any such mutilation, on surrender and cancellation of such certificate, the Company at its expense will execute and deliver, in lieu thereof, a new certificate. Section 8.5 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) the same with the same force and effect as if such facsimile signature page were an original thereof. Section 8.6 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. Section 8.7 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 both the Company and the Investor 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 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 accruing to it thereafter. Section 8.8 Survival. The representations, warranties, agreements and covenants contained herein shall survive the Closing and the delivery and exercise of all Securities issuable hereunder. Section 8.9 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 Investor. The Investor may not assign this Agreement or any of the rights or obligations hereunder without the consent of the Company; however, this provision shall not limit the Investor's right to transfer Securities acquired hereunder or transfer or assign rights under the Registration Rights Agreement. Section 8.10 Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, the Investor will be entitled to specific performance of the obligations of the Company under the Transaction Documents. The parties hereto agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of its obligations described in the foregoing sentence and hereby agree to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate. Section 8.11 Severability. In case any one or more of the provisions of this Agreement shall 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 and enforceable provision which shall be a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. Section 8.12 Headings. 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. Section 8.13 Fees and Expenses. Other than the amounts to be delivered to or as directed by the Investor under Section 2.6 and except as otherwise set forth in the Registration Rights Agreement, 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 stamp and other taxes and duties levied in connection with the issuance of the Securities issuable hereunder. Section 8.14 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. [REMAINDER OF PAGE INTENTIONALLY BLANK SIGNATURE PAGES FOLLOW] IN WITNESS WHEREOF, the parties hereto have caused this Equity Line Purchase Agreement to be duly executed by their respective authorized signatories as of the date first set forth above. COMPOSITE INDUSTRIES OF AMERICA, INC. By:_____________________________________ Name: Merle Ferguson Title: President [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOR INVESTOR FOLLOWS] BURLINGTON STREET LLC By:_____________________________________ Name: Title: Address for Notice: Burlington Street LLC Harbour House, 2nd Floor Waterfront Drive P.O. Box 972 Road Town, Tortola British Virgin Islands Facsimile No.: (284) 494-4771 With copies to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, NY 10104 Facsimile No.: (212) 541-4630 and (212) 541-1432 Attn: Eric L. Cohen, Esq. EXHIBIT A PUT NOTICE Composite Industries of America, Inc. (formerly known as World Homes, Inc.), a Nevada corporation (the "Company"), hereby irrevocably elects to exercise its right pursuant to the Equity Line Purchase Agreement dated as of October 22, 2001 (the "Agreement") to require the Investor thereunder to purchase Put Shares pursuant to terms of the Agreement. Terms used and not defined herein shall have the meaning ascribed to them in the Agreement The Company hereby certifies that: 1. The Investment Amount is: $_______________ ("IA") 2. The Valuation Period runs from _________ to __________. By its delivery of this Put Notice, the Company hereby certifies that as of the date of this Put Notice, it has satisfied all of the conditions set forth in paragraphs 6.1(a), (b), (g), (h), (i) and (j) of the Agreement and that, to the best of its knowledge, no statute, rule, regulation, executive order, decree, ruling or injunction has been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction or by the Principal Market that prohibits or materially impairs the transactions contemplated hereby. The undersigned has executed this Put Notice as of this _____ day of ______, _______. COMPOSITE INDUSTRIES OF AMERICA, INC. By: __________________________________ Name: Title: EXHIBIT E CALCULATION NOTICE In connection with the Put Notice delivered on ___________ by Composite Industries of America, Inc. (formerly known as World Homes, Inc.), a Nevada corporation (the "Company") pursuant to the Equity Line Purchase Agreement dated as of October 22, 2001 (the "Agreement"), the Company hereby certifies that: 1. The Investment Amount is: $_______________ ("IA") 2. The Valuation Period runs from _________ to __________. 3. 92.5% of the average of the three lowest Bid Prices (subject to adjustment) during the Valuation Period is: $________ ("PP") 4. The number of Put Shares (IA/PP) issuable hereunder is:_______________ The undersigned has executed this Calculation Notice as of this _____ day of ______, _______. COMPOSITE INDUSTRIES OF AMERICA, INC. By: __________________________________ Name: Title: Agreed and accepted: [ ] By: __________________________________ Name: Title: EX-10.14 14 ex10-14.txt WARRANT 12-03-2001 Exhibit 10.14 NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE 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 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 THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY 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. COMPOSITE INDUSTRIES OF AMERICA, INC. WARRANT Date of Original Issuance: December 3, 2001 Composite Industries of America, Inc. (formerly known as World Homes, Inc), a Nevada corporation (the "Company"), hereby certifies that, for value received, Burlington Street LLC or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company up to a total of 521,739 shares of common stock, $.001 par value per share (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price per share equal to $.575 (as such exercise price may adjusted from time to time as provided in Section8, the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including December 3, 2006 (the "Expiration Date"), and subject to the following terms and conditions: 1. Registration of Warrant. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. Registration of Transfers and Exchanges. (a) The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Transfer Agent or to the Company at its address for notice set forth in Section 12. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a holder of a Warrant. (b) This Warrant is exchangeable, upon the surrender hereof by the Holder to the office of the Company at its address for notice set forth in Section 12 for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. Any such New Warrant will be dated the date of such exchange. 3. Duration and Exercise of Warrants. (a) This Warrant shall be exercisable by the registered Holder on any business day before 5:30 P.M., New York City time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:30 P.M., New York City time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. Prior to the Expiration Date, the Company may not call or otherwise redeem this Warrant. (b) Upon delivery of an executed Form of Election to Purchase, together with the grid attached hereto as Annex A duly completed and signed, to the Company at its address for notice set forth in Section 12 and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in the manner provided hereunder, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than 3 business days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends except in the event that a registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder is not then effective and the Warrant Shares are not freely transferable without volume restrictions pursuant to Rule 144(k) promulgated under the Securities Act of 1933, as amended (the "Securities Act"). Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. The Company shall, upon request of the Holder, if available, use its best efforts to deliver Warrant Shares hereunder electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. To effect an exercise hereunder, the Holder shall not be required to physically surrender this Warrant to the Company unless all the Warrant Shares have been exercised. Exercises hereunder shall have the effect of lowering the number of Warrant Shares in an amount equal to the applicable exercise, which shall be evidenced by entries set forth on the attached Annex A. The Holder and the Company shall maintain records showing the number of Warrant Shares exercised and the date of such exercises. 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 Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following exercise of a portion of this Warrant, the number of shares issuable upon exercise of this Warrant may be less than the amount stated on the face hereof. A "Date of Exercise" means the date on which the Company shall have received the Form of Election to Purchase completed and duly signed. (b) If the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares issuable upon an exercise by the third Trading Day after the Date of Exercise, then the Holder will have the right to rescind such exercise. In addition, if the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to an exercise by the third Trading Day after the Date of Exercise, and if after such third Trading Day the Holder purchases (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 by (B) the closing bid price of the Common Stock at the time of the obligation giving rise to such purchase obligation 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 a market price on the date of exercise totaled $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. (c) This Warrant shall be exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares. 4. Piggyback Registration Rights. This Warrant is subject to the piggyback registration rights granted under the Registration Rights Agreement and such piggyback registration rights shall continue until all of the Holder's Warrant Shares have been sold in accordance with an effective registration statement or upon the Expiration Date. The Company will pay all registration expenses in connection therewith. 5. Payment of Taxes. The Company will pay all documentary stamp taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 6. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if requested, satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe. 7. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 8). The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. 8. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 8. Upon each such adjustment of the Exercise Price pursuant to this Section 8, the Holder shall thereafter prior to the Expiration Date be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (a) If the Company, at any time while this Warrant is outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on outstanding preferred stock as of the date hereof which contain a stated dividend rate) or otherwise make a distribution or distributions on shares of its Common Stock or on any other class of capital stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, the Exercise 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 (excluding treasury shares, if any) outstanding after such event. In such event, the number of Warrant shares issuable under this Warrant shall be equitably adjusted to reflect such event (e.g. in the event of a 2:1 stock split of the Common Stock, the number of Warrant shares shall be increased to twice the number available for purchase prior to the record date for such stock split). Any 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 or combination, and shall apply to successive subdivisions and combinations. (b) In case of any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification or share exchange, and the Holder shall be entitled upon such event to receive such amount of securities or property equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification or share exchange. The terms of any such reclassification or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 8(b) upon any exercise following any such reclassification or share exchange. (c) If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to holders of this Warrant) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 8(a), (b) and (d)), then in each such case the Exercise Price shall be determined by multiplying the Exercise 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 Exercise Price determined as of the record date mentioned above, and of which the numerator shall be such Exercise 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 Common Stock as determined by the Company's independent certified public accountants that regularly examines the financial statements of the Company (an "Appraiser"). (d) If the Company or any subsidiary thereof, as applicable, at any time while this Warrant is 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 any equity or equity equivalent securities (including any equity, debt or other instrument that is at any time over the life thereof convertible into or exchangeable for Common Stock) (collectively, "Common Stock Equivalents") entitling any Person to acquire shares of Common Stock, at a price per share less than the Exercise Price (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 issued in connection with such issuance, be entitled to receive shares of Common Stock at a price less than the Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price), then, at the option of the Holder, the Exercise Price shall be adjusted to equal the 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 business day following the issuance of any Common Stock or Common Stock Equivalent subject to this section, indicating therein the applicable issuance price, or of applicable reset price, exchange price, conversion price and other pricing terms. The provisions of this paragraph shall not apply to (i)the granting of options or warrants to employees, officers and directors of the Company, and the issuance of Common Stock upon exercise of such options or warrants granted under any stock option plan or employee benefit plan (as defined in Rule 405 of Regulation C) heretofore or hereinafter duly adopted by the Company and (ii) shares of Common Stock issuable upon exercise of any currently outstanding warrants and other outstanding convertible securities of the Company, in each case as and to the extent disclosed in Schedule 2.1(c) to the Purchase Agreement (but not as to any amendments or modifications of the terms of such securities after the date of this Agreement, including "back-dated" agreements). (e) In case of any (1) merger or consolidation of the Company with or into another Person, or (2) sale by the Company of more than one-half of the assets of the Company (on a book value basis) in one or a series of related transactions, the Holder shall have the right thereafter to (A) exercise this Warrant for the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger, consolidation or sale, and the Holder shall be entitled upon such event or series of related events to receive such amount of securities, cash and property as the Common Stock for which this Warrant could have been exercised immediately prior to such merger, consolidation or sales would have been entitled or (B) in the case of a merger or consolidation, (x) require the surviving entity to issue common stock purchase warrants equal to the number Warrant Shares to which this Warrant then permits, which newly warrant shall be identical to this Warrant, and (y) simultaneously with the issuance of such warrant, the Holder of such warrant shall have the right to exercise such warrant only into shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger or consolidation or (C) require the surviving entity from such merger, acquisition or business combination to pay to the Holder, in cash, the Black Scholes value of this Warrant. In the case of clause (B), the exercise price for such new warrant shall be based upon the amount of securities, cash and property that each share of Common Stock would receive in such transaction and the Exercise Price of this Warrant immediately prior to the effectiveness or closing date for such transaction. The terms of any such merger, sale or consolidation shall include such terms so as continue to give the Holder the right to receive the securities, cash and property set forth in this Section upon any conversion or redemption following such event. This provision shall similarly apply to successive such events. (f) For the purposes of this Section 8, the following clauses shall also be applicable: (i) Record Date. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock or in securities convertible or exchangeable into shares of Common Stock, or (B) to subscribe for or purchase Common Stock or securities convertible or exchangeable into shares of Common Stock, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (ii) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (g) All calculations under this Section 8 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (h) Whenever the Exercise Price is adjusted pursuant to Section 8(c) above, the Holder, after receipt of the determination by the Appraiser, shall have the right to select an additional appraiser (which shall be a nationally recognized accounting firm), in which case the adjustment shall be equal to the average of the adjustments recommended by each of the Appraiser and such appraiser. The Holder shall promptly mail or cause to be mailed to the Company, a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such adjustment shall become effective immediately after the record date mentioned above. (i) If: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or (iii) 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; or (iv) 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, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to each Holder at their last addresses as they shall appear upon the Warrant Register, 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 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 Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up, 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. 9. Payment of Exercise Price. The Holder shall pay the Exercise Price in one of the following manners: (a) Cash Exercise. The Holder may deliver immediately available funds; or (b) Cashless Exercise. The Holder may surrender this Warrant to the Company together with a notice of cashless exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows: X = Y [(A-B)/A] where: X = the number of Warrant Shares to be issued to the Holder. Y = the number of Warrant Shares with respect to which this Warrant is being exercised. A = the average of the closing sale prices of the Common Stock for the five (5) trading days immediately prior to (but not including) the Date of Exercise. B = the Exercise Price. For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have been commenced, on the issue date. 10. Certain Exercise Restrictions. A Holder may not exercise this Warrant to the extent such exercise would result in the Holder, together with its affiliate, beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules promulgated thereunder) in excess of 9.999% of the then issued and outstanding shares of Common Stock, including shares issuable upon such exercise and held by such Holder after application of this Section. To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time that it delivers a Form of Election to Purchase, that such Form of Election to Purchase has not violated the restrictions set forth in this paragraph. If the Holder has delivered a Form of Election to Purchase for a number of Warrant Shares that, without regard to any other shares that the Holder or its affiliates may beneficially own, would result in the issuance in excess of the permitted amount hereunder, the Company shall notify the Holder of this fact and shall honor the exercise for the maximum portion of this Warrant permitted to be exercised on such Date of Exercise in accordance with the periods described herein and, at the option of the Holder, either keep the portion of the Warrant tendered for exercise in excess of the permitted amount hereunder for future exercises or return such excess portion of the Warrant to the Holder. In the event of a merger or consolidation of the Company with or into another Person, this paragraph shall not apply with respect to a determination of the number of shares of common stock issuable upon exercise in full of the Warrants if such determination is necessary to establish the securities or other assets which the holders of Common Stock shall be entitled to receive upon the effectiveness of such merger or consolidation. 11. Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section, be issuable on the exercise of this Warrant, the Company shall pay an amount in cash equal to the Exercise Price multiplied by such fraction. 12. Notices. Any and all notices or other communications or deliveries hereunder shall be in writing and 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) on a business day, (ii) the business day 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 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. The addresses for such communications shall be: (i) if to the Company, to 4505 W. Hacienda Avenue, Unit I-1, Las Vegas, Nevada 89118, facsimile: (702) 579-4833 attention: Merle Ferguson, or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section. 13. Warrant Agent. The Company shall serve as warrant agent under this Warrant. Upon thirty (30) days' notice to the Holder, the Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 14. Miscellaneous. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and assigns. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. (b) Subject to Section 14(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant. This Warrant shall inure to the sole and exclusive benefit of the Company and the Holder. (c) All questions concerning the construction, validity, enforcement and interpretation of this Warrant 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 Warrant 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 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 Warrant or the transactions contemplated hereby. If either party shall commence an action or proceeding to enforce any provisions of this Warrant, 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. (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK, SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. COMPOSITE INDUSTRIES OF AMERICA, INC. By:_____________________________________ Name: Merle Ferguson Title: President FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the Warrant to which this form applies, issued by Composite Industries of America, Inc. (the "Company")) To Composite Industries of America, Inc.: The undersigned hereby irrevocably elects to purchase _____________ shares of common stock, $.001 value, of the Company (the "Common Stock") and, if such Holder is not utilizing the cashless exercise provisions set forth in this Warrant, encloses herewith $ [ ] in cash, certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. By the delivery of this Form of Election to Purchase the undersigned represents and warrants to the Company that it is an accredited investor under Rule 501(a) of the Securities Act of 1933, as amended, and that its share ownership of the Company's Common Stock will not exceed the percentage ownership set forth in Section 10 of the Warrant. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER (Please print name and address) Dated: , Name of Holder: (Print) (By:) (Name:) (Title:) (Signature must conform in all respects to name of holder as specified on the face of the Warrant) FORM OF ASSIGNMENT [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the within Warrant to purchase ____________ shares of Common Stock of Composite Industries of America, Inc. to which the within Warrant relates and appoints ________________ attorney to transfer said right on the books of Composite Industries of America, Inc. with full power of substitution in the premises. Dated: _______________, ____ _______________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) _______________________________________ Address of Transferee _______________________________________ _______________________________________ In the presence of: __________________________ Annex A Date Number of Warrant Shares Available to be Exercised Number of Warrant Shares Exercised Number of Warrant Shares Remaining to be Exercised EX-10.15 15 ex10-15.txt CALLABLE WARRANT 12-03-2001 Exhibit 10.15 NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE 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 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 THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY 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. COMPOSITE INDUSTRIES OF AMERICA, INC. CALLABLE WARRANT Date of Original Issuance: December 3, 2001 Composite Industries of America, Inc. (formerly known as World Homes, Inc), a Nevada corporation (the "Company"), hereby certifies that, for value received, Burlington Street LLC or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company up to a total of 2,173,913 shares of common stock, $.001 par value per share (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price per share equal to $0.01 (the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including December 3, 2006 (the "Expiration Date"), and subject to the following terms and conditions. Certain terms used herein are defined in Exhibit A attached hereto. 1. Registration of Warrant. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. Registration of Transfers and Exchanges. (a) The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Transfer Agent or to the Company at its address for notice set forth in Section 12. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a holder of a Warrant. (b) This Warrant is exchangeable, upon the surrender hereof by the Holder to the office of the Company at its address for notice set forth in Section 12 for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. Any such New Warrant will be dated the date of such exchange. 3. Duration, Exercise and Redemption of Warrants. (a) Exercise By Holder At any time between the date on which the Commitment Period expires and 5:30 p.m.(New York City time) on the Expiration Date, the Holder shall be entitled to exercise this Warrant to purchase all or a portion of the Warrant Shares which have not been previously issued and with respect to which this Warrant has not been previously redeemed or canceled in accordance with the terms hereof. At 5:30 P.M., New York City time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. (b) Company Call Option (i) Subject to the terms and conditions set forth herein, prior to 5:30 p.m. (New York City time) on any Trading Day during the period between November 13, 2001 and the Trading Day immediately preceding the expiration of the Commitment Period (the "Call Expiration Date"), the Company may deliver written notices to the Holder (each, a "Call Notice" and the Trading Day a Call Notice is delivered, a "Delivery Date"), of the Company's election to call, for a price of $.001 per Warrant Share, up to a number of Warrant Shares equal to the quotient obtained by dividing (x) $1,000,000 (not including any Investment Amount paid to the Company by the Holder), by (y) the closing bid price of the Common Stock for the Trading Day immediately preceding November 13, 2001. The portion of this Warrant subject to a Call Notice will be canceled and of no further effect from and after 5:30 p.m. (New York City time) on the third Trading Day following Delivery Date (the "Call Expiration Time"). (ii) No new Call Notice may be delivered: (i) until the expiration of the Call Expiration Time for the immediately preceding Call Notice and (ii) unless the conditions set forth in Section 3(c) have been either satisfied by the Company or waived by the Holder. (c) Conditions Precedent to Delivery of Call Notice by Company The right of the Company to deliver a Call Notice is subject to the satisfaction or waiver by the Holder, at or before the applicable Call Expiration Time, of each of the following conditions (and, if after delivery thereof any of the following conditions shall cease to be met, such Call Notice shall be null and void ab initio): (1) The representations and warranties of the Company contained in the Purchase Agreement shall be true and correct as of each of the applicable Delivery Dates and Call Expiration Times, as though first made on and as of such Delivery Date and Call Expiration Time (other than representations and warranties which relate to a specific date (which shall not include representations and warranties relating to the "date hereof"), which representations and warranties shall be true as of such specific date); (2) The Company shall have performed, satisfied and complied in all material respects with all covenants (including timely delivery of Warrant Shares in accordance with Section 3(d)), and agreements in the Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the applicable Delivery Date and Call Expiration Time; (3) The Registration Statement shall be effective on the Delivery Date and as at the Call Expiration Time, not subject to any stop order or suspension, and the Registration Statement shall cover all of the Warrant Shares subject to such Call Notice; (4) No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction and in force on the Delivery Date which prohibits the consummation of any of the transactions contemplated by the Transaction Documents; (5) Since the date hereof, no event or series of events which reasonably would be expected to have or result in a Material Adverse Effect (as defined in the Purchase Agreement) and no Change of Control Transaction shall have occurred; (6) On the Delivery Date, the Common Stock shall be trading on the OTC Bulletin Board ("OTC"), Nasdaq National Market, Nasdaq Smallcap Market, New York Stock Exchange or American Stock Exchange (each, a "Subsequent Market"); (7) No approval of the shareholders of the Company shall be required under the rules of the Nasdaq Stock Market or any other Subsequent Market on which the Common Stock is traded or listed for trading in order to issue the number of Warrant Shares indicated in the applicable Call Notice; and (8) The Company shall have sold to the Holder, Put Shares, for which Holder paid a purchase price of $1,000,000 pursuant to the Purchase Agreement. (d) Delivery of Warrant Shares to Holder Upon delivery of an executed Form of Election to Purchase, together with the grid attached hereto as Annex A duly completed and signed, to the Company at its address for notice set forth in Section 12 and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in the manner provided hereunder, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than 3 Business Days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends except in the event that a registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder is not then effective and the Warrant Shares are not freely transferable without volume restrictions pursuant to Rule 144(k) promulgated under the Securities Act of 1933, as amended (the "Securities Act"). Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. The Company shall, upon request of the Holder, if available, use its best efforts to deliver Warrant Shares hereunder electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. To effect an exercise hereunder, the Holder shall not be required to physically surrender this Warrant to the Company unless all the Warrant Shares have been exercised. Exercises hereunder shall have the effect of lowering the number of Warrant Shares in an amount equal to the applicable exercise, which shall be evidenced by entries set forth on the attached Annex A. The Holder and the Company shall maintain records showing the number of Warrant Shares exercised and the date of such exercises. 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 Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following exercise of a portion of this Warrant, the number of shares issuable upon exercise of this Warrant may be less than the amount stated on the face hereof. A "Date of Exercise" means the date on which the Company shall have received the Form of Election to Purchase completed and duly signed. This Warrant shall be exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares. (e) Rescission and Buy-In. If the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares issuable upon an exercise by the third Trading Day after the Date of Exercise, then the Holder will have the right to rescind such exercise. In addition, if the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to an exercise by the third Trading Day after the Date of Exercise, and if after such third Trading Day the Holder purchases (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 by (B) the closing bid price of the Common Stock at the time of the obligation giving rise to such purchase obligation 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 a market price on the date of exercise totaled $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. 4. Piggyback Registration Rights. This Warrant is subject to the piggyback registration rights granted under the Registration Rights Agreement and such piggyback registration rights shall continue until all of the Holder's Warrant Shares have been sold in accordance with an effective registration statement or upon the Expiration Date. The Company will pay all registration expenses in connection therewith. 5. Payment of Taxes. The Company will pay all documentary stamp taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 6. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if requested, satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe. 7. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 8). The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. 8. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 8. Upon each such adjustment of the Exercise Price pursuant to this Section 8, the Holder shall thereafter prior to the Expiration Date be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (a) If the Company, at any time while this Warrant is outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on outstanding preferred stock as of the date hereof which contain a stated dividend rate) or otherwise make a distribution or distributions on shares of its Common Stock or on any other class of capital stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, the Exercise 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 (excluding treasury shares, if any) outstanding after such event. In such event, the number of Warrant shares issuable under this Warrant shall be equitably adjusted to reflect such event (e.g. in the event of a 2:1 stock split of the Common Stock, the number of Warrant shares shall be increased to twice the number available for purchase prior to the record date for such stock split). Any 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 or combination, and shall apply to successive subdivisions and combinations. (b) In case of any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification or share exchange, and the Holder shall be entitled upon such event to receive such amount of securities or property equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification or share exchange. The terms of any such reclassification or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 8(b) upon any exercise following any such reclassification or share exchange. (c) If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to holders of this Warrant) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 8(a), (b) and (d)), then in each such case the Exercise Price shall be determined by multiplying the Exercise 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 Exercise Price determined as of the record date mentioned above, and of which the numerator shall be such Exercise 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 Common Stock as determined by the Company's independent certified public accountants that regularly examines the financial statements of the Company (an "Appraiser"). (d) In case of any (1) merger or consolidation of the Company with or into another Person, or (2) sale by the Company of more than one-half of the assets of the Company (on a book value basis) in one or a series of related transactions, the Holder shall have the right thereafter to (A) exercise this Warrant for the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger, consolidation or sale, and the Holder shall be entitled upon such event or series of related events to receive such amount of securities, cash and property as the Common Stock for which this Warrant could have been exercised immediately prior to such merger, consolidation or sales would have been entitled or (B) in the case of a merger or consolidation, (x) require the surviving entity to issue common stock purchase warrants equal to the number Warrant Shares to which this Warrant then permits, which newly warrant shall be identical to this Warrant, and (y) simultaneously with the issuance of such warrant, the Holder of such warrant shall have the right to exercise such warrant only into shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger or consolidation or (C) require the surviving entity from such merger, acquisition or business combination to pay to the Holder, in cash, the Black Scholes value of this Warrant. In the case of clause (B), the exercise price for such new warrant shall be based upon the amount of securities, cash and property that each share of Common Stock would receive in such transaction and the Exercise Price of this Warrant immediately prior to the effectiveness or closing date for such transaction. The terms of any such merger, sale or consolidation shall include such terms so as continue to give the Holder the right to receive the securities, cash and property set forth in this Section upon any conversion or redemption following such event. This provision shall similarly apply to successive such events. (e) For the purposes of this Section 8, the following clauses shall also be applicable: (i) Record Date. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock or in securities convertible or exchangeable into shares of Common Stock, or (B) to subscribe for or purchase Common Stock or securities convertible or exchangeable into shares of Common Stock, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (ii) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (f) All calculations under this Section 8 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (g) Whenever the Exercise Price is adjusted pursuant to Section 8(c) above, the Holder, after receipt of the determination by the Appraiser, shall have the right to select an additional appraiser (which shall be a nationally recognized accounting firm), in which case the adjustment shall be equal to the average of the adjustments recommended by each of the Appraiser and such appraiser. The Holder shall promptly mail or cause to be mailed to the Company, a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such adjustment shall become effective immediately after the record date mentioned above. (h) If: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or (iii) 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; or (iv) 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, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to each Holder at their last addresses as they shall appear upon the Warrant Register, 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 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 Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up, 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. 9. Payment of Exercise Price. The Holder shall pay the Exercise Price in one of the following manners: (a) Cash Exercise. The Holder may deliver immediately available funds; or (b) Cashless Exercise. Commencing the earlier to occur of the Effectiveness Date as defined in the Registration Rights Agreement and the date the registration statement required to be filed pursuant to the Registration Rights Agreement is declared effective by the Securities and Exchange Commission, when a registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder is not then effective, the Holder may satisfy its obligation to pay the Exercise Price through a "net" or "cashless" exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows: X = Y [(A-B)/A] where: X = the number of Warrant Shares to be issued to the Holder. Y = the number of Warrant Shares with respect to which this Warrant is being exercised. A = the average of the closing sale prices of the Common Stock for the five (5) trading days immediately prior to (but not including) the Date of Exercise. B = the Exercise Price. For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have been commenced, on the issue date. 10. Certain Exercise Restrictions. A Holder may not exercise this Warrant to the extent such exercise would result in the Holder, together with its affiliate, beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules promulgated thereunder) in excess of 9.999% of the then issued and outstanding shares of Common Stock, including shares issuable upon such exercise and held by such Holder after application of this Section. To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time that it delivers a Form of Election to Purchase, that such Form of Election to Purchase has not violated the restrictions set forth in this paragraph. If the Holder has delivered a Form of Election to Purchase for a number of Warrant Shares that, without regard to any other shares that the Holder or its affiliates may beneficially own, would result in the issuance in excess of the permitted amount hereunder, the Company shall notify the Holder of this fact and shall honor the exercise for the maximum portion of this Warrant permitted to be exercised on such Date of Exercise in accordance with the periods described herein and, at the option of the Holder, either keep the portion of the Warrant tendered for exercise in excess of the permitted amount hereunder for future exercises or return such excess portion of the Warrant to the Holder. In the event of a merger or consolidation of the Company with or into another Person, this paragraph shall not apply with respect to a determination of the number of shares of common stock issuable upon exercise in full of the Warrants if such determination is necessary to establish the securities or other assets which the holders of Common Stock shall be entitled to receive upon the effectiveness of such merger or consolidation. 11. Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section, be issuable on the exercise of this Warrant, the Company shall pay an amount in cash equal to the Exercise Price multiplied by such fraction. 12. Notices. Any and all notices or other communications or deliveries hereunder shall be in writing and 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) on a business day, (ii) the business day 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 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. The addresses for such communications shall be: (i) if to the Company, to 4505 W. Hacienda Avenue, Unit I-1, Las Vegas, Nevada 89118, facsimile: (702) 579-4833 attention: Merle Ferguson, or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section. 13. Warrant Agent. The Company shall serve as warrant agent under this Warrant. Upon thirty (30) days' notice to the Holder, the Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 14. Miscellaneous. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and assigns. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. (b) Subject to Section 14(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant. This Warrant shall inure to the sole and exclusive benefit of the Company and the Holder. (c) All questions concerning the construction, validity, enforcement and interpretation of this Warrant 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 Warrant 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 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 Warrant or the transactions contemplated hereby. If either party shall commence an action or proceeding to enforce any provisions of this Warrant, 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. (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK, SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. COMPOSITE INDUSTRIES OF AMERICA, INC. By:_____________________________________ Name: Merle Ferguson Title: President Exhibit A "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 or the State of Nevada are authorized or required by law or other government action to close. "Change of Control Transaction" means the occurrence 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 33% of the voting securities of the Company, (ii) a replacement at one time or over time 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), (iii) the merger or consolidation of the Company with or into another entity that is not wholly- owned by the Company upon the completion of which the stockholders of the Company immediately before such merger or consolidation own or control less than 2/3 of the voting securities of the surviving entity or sale of 50% or more of the assets of the Company in one or a series of related transactions, or (i) 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), (ii) or (iii). "Commission" means the Securities and Exchange Commission. "Commitment Period" means the period commencing on the Effective Date and expiring on the earliest to occur of: (x) the date on which the Holder shall have paid an aggregate of $10,000,000 in Investment Amounts for Put Shares pursuant to the Purchase Agreement, (y) the date the Purchase Agreement is terminated in accordance with the terms hereof, or (z) the date occurring 18 months after the Effective Date. "Effective Date" means the date on which the Commission first declares effective a Registration Statement meeting the requirements of the Registration Rights Agreement and registering the resale by the Investor of the Put Shares and Warrant Shares. "Investment Amount" means the dollar amount to be invested by the Holder to purchase Put Shares as specified in a Put Notice. "Purchase Agreement" means the Equity Line Purchase Agreement, dated as of the date hereof, to which the Company and the original Holder are parties, as amended, modified or supplemented from time to time in accordance with its terms. "Put" means the exercise by the Company of its right to require the Holder to purchase Put Shares pursuant to the terms of the Purchase Agreement. "Put Notice" means the written notice of the Company, in the form of Exhibit A to the Purchase Agreement, which is delivered to the Holder, specifying the Investment Amount that the Company intends to sell to the Holder. "Put Shares" means the number of shares of Common Stock that will be issued and sold to the Holder pursuant to a Put. "Registration Rights Agreement" means the Equity Line Registration Rights Agreement between the Company and the Holder, dated the date hereof. "Registration Statement" shall have the meaning set forth in the Registration Rights Agreement. "Trading Day" means (a)a day on which the shares of Common Stock are traded on the OTC Bulletin Board ("OTC") or on such Subsequent Market on which the shares of Common Stock are then listed or quoted, or (b)if the shares of Common Stock are not listed on a Subsequent Market, a day on which the shares of Common Stock are traded in the over-the-counter market, as reported by the OTC, or (c)if the shares of Common Stock are not quoted on the OTC, 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. FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the Warrant to which this form applies, issued by Composite Industries of America, Inc. (the "Company")(formerly World Homes Inc.). To Composite Industries of America, Inc.: The undersigned hereby irrevocably elects to purchase _____________ shares of common stock, $.001 value, of the Company (the "Common Stock") and, if such Holder is not utilizing the cashless exercise provisions set forth in this Warrant, encloses herewith $ [ ] in cash, certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. By its delivery of this Form of Election To Purchase, the Holder represents and warrants to the Company that in giving effect to the exercise evidenced hereby the Holder will not beneficially own in excess of the number of shares of Common Stock (determined in accordance with Section 13(d) of the Securities Exchange Act of 1934) permitted to be owned under Section 10 of this Warrant to which this notice relates. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER (Please print name and address) Dated: , Name of Holder: (Print) (By:) (Name:) (Title:) (Signature must conform in all respects to name of holder as specified on the face of the Warrant) FORM OF ASSIGNMENT [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the within Warrant to purchase ____________ shares of Common Stock of Composite Industries of America, Inc. to which the within Warrant relates and appoints ________________ attorney to transfer said right on the books of Composite Industries of America, Inc. with full power of substitution in the premises. Dated: _______________, ____ _______________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) _______________________________________ Address of Transferee _______________________________________ _______________________________________ In the presence of: __________________________ Annex A Date Number of Warrant Shares Available to be Exercised Number of Warrant Shares Exercised Number of Warrant Shares Remaining to be Exercised EX-10.16 16 ex10-16.txt REGISTRATION RIGHTS AGREEMENT 12-03-2001 Exhibit 10.16 EQUITY LINE REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of December 3, 2001, among Composite Industries of America, Inc., a Nevada corporation (formerly known as World Homes, Inc.) (the "Company") and Burlington Street LLC ("Purchaser"). This Agreement is made pursuant to the Equity Line Purchase Agreement, dated as of the date hereof among the Company and the Purchaser (the "Purchase Agreement"). The Company and the Purchaser 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: "Affiliate" means, with respect to any Person, any other Person that directly or indirectly controls or is controlled by or under common control with such Person. For the purposes of this definition, "control," when used with respect to any Person, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms of "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. "Business Day" shall have the meaning set forth in the Purchase Agreement. "Commission" means the Securities and Exchange Commission. "Common Stock" shall have the meaning set forth in the Purchase Agreement. "Effectiveness Date" means, with respect to the initial Registration Statement required to be filed hereunder, the 115th day following the date of this Agreement and, with respect to any additional Registration Statements which may be required pursuant to Section 3(c), the 90th day following the date that notice of the requirement to file such additional Registration Statement is provided. "Effectiveness Period" shall have the meaning set forth in Section 2(a). "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Filing Date" means the 6th day following the Closing Date and, with respect to any additional Registration Statements which may be required pursuant to Section 3(c), the 45th day following the date that notice of the requirement to file such additional Registration Statement is provided. "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). "Indemnifying Party" shall have the meaning set forth in Section 5(c). "Losses" shall have the meaning set forth in Section 5(a). "Person" means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Proceeding" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "Prospectus" means the prospectus included in the 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 the 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. "Put" has the meaning set forth in the Purchase Agreement. "Put Shares" has the meaning set forth in the Purchase Agreement. "Registrable Securities" means all Put Shares and Warrant Shares. "Registration Statement" means the registration statement 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 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. "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 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 effect as such Rule. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Special Counsel" means one special counsel to the Holders, for which the Holders will be reimbursed by the Company pursuant to Section4. "Warrants" means the Common Stock purchase warrants issued to the Purchaser pursuant to the Purchase Agreement. "Warrant Shares" means the shares of Common Stock issuable upon exercise in full of the Warrants. 2. Registration (a) On or prior to each Filing Date, the Company shall prepare and file with the Commission a Registration Statement covering the sale of all Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on such form under which the Company may sell securities to the public or on a primary basis and shall contain (except if otherwise directed by the Holders) the "Plan of Distribution" attached hereto as Annex A. 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 Effectiveness Date, and shall use its best efforts to keep such Registration Statement continuously effective under the Securities Act until the date which is twenty seven months after the date that such Registration Statement is declared effective by the Commission (the "Effectiveness Period"). (b) The initial Registration Statement required to be filed hereunder shall include a number of shares of Common Stock which shall not be less than the sum of (i) 215% of the total amount of Put Shares that would be issuable under the Purchase Agreement assuming all such Put Shares are issued on the date hereof, the Filing Date or the Business Day preceding the date the Company files an acceleration request with the Commission relating to the Registration Statement (whichever yields more shares of Common Stock) and (ii) the number of shares of Common Stock issuable upon exercise in full of the Warrants. 3. Registration Procedures In connection with the Company's registration obligations hereunder, the Company shall: (a) Not less than five Business 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 the Holders and their Special Counsel 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 their Special Counsel which will provide the Company with any comments thereto in a reasonably prompt manner, 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 and their Special Counsel shall reasonably object. (b) (i) Prepare and file with the Commission such amendments, including post-effective amendments, to each Registration Statement and the Prospectus used in connection therewith as may be necessary to keep the Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible, and in any event within ten days, to any comments received from the Commission with respect to the 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 the 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 the Registration Statement during the applicable period in accordance with the intended methods of disposition by the Holders thereof set forth in the Registration Statement as so amended or in such Prospectus as so supplemented. (c) File additional Registration Statements if the number of Registrable Securities at any time exceeds 85% of the number of shares of Common Stock then registered in a Registration Statement. Any additional Registration Statements required to be filed under this Section shall cover 115% of the full number of Registrable Securities issuable at the prevailing market price of the Common Stock as if all remaining Put Shares had been issued. (d) Notify the Holders of Registrable Securities to be sold and their Special Counsel as promptly as reasonably possible (and, in the case of (i)(A) below, not less than five Business Days prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one Business Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to the 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 the 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 the Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) if at any time any of the representations and warranties of the Company contained in any Transaction Document (as defined in the Purchase Agreement) or other agreement contemplated hereby ceases to be true and correct in all material respects; (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (vi) of the occurrence of any event or passage of time that makes the financial statements included in the Registration Statement ineligible for inclusion therein or any statement made in the 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 the Registration Statement, Prospectus or other documents so that, in the case of the 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. (e) Furnish to each Holder and their Special Counsel, without charge, at least one conformed copy of each Registration Statement and each amendment thereto, including financial statements and schedules, all documents incorporated or deemed to be incorporated therein by reference, and all exhibits to the extent requested by such Person (including those previously furnished or incorporated by reference) promptly after the filing of such documents with the Commission. (f) Promptly deliver to each Holder and their Special Counsel, 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. 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. (g) Prior to any public offering of Registrable Securities, use its best efforts to register or qualify or cooperate with the selling Holders and their Special Counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder requests in writing, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by a Registration Statement; 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. (h) Upon the occurrence of any event contemplated by Section 3(d)(vi), as promptly as reasonably possible, prepare a supplement or amendment, including a post-effective amendment, to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the 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. (i) Comply with all applicable rules and regulations of the Commission. 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 any Subsequent Market on which the Common Stock is then listed for trading, and (B) in compliance with applicable state securities or Blue Sky laws (including, without limitation, fees and disbursements of counsel for the Holders 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 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 Special Counsel for the Holders, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. 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. 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 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 the 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 are based solely 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 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). The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement. (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 solely out of or based solely 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 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, that 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 solely 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 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 it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party. An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (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 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 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 such counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding. All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten Business 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. 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) Remedies. In the event of a breach by the Company or by a Holder, of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. (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 and to the extent specified in Schedule 6(b) hereto, 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. (c) No Piggyback on Registrations. Except for shares of Common Stock issuable upon conversion or exercise of the Company's 6% Convertible Debentures Due November 13, 2002 and Warrants issued to the Purchasers, 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. (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), 3(d)(iii), 3(d)(iv), 3(d)(v) or 3(d)(vi), such Holder will forthwith discontinue disposition of such Registrable Securities under the Registration Statement until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement contemplated by Section 3(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. (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. (g) 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 the Holder. (h) 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 (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 6:30 p.m. (New York City time) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Agreement later than 6:30 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 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. The address for such notices and communications shall be as follows: If to the Company: Composite Industries of America, Inc. 4505 W. Hacienda Ave, Unit I-1 Las Vegas, Nevada 89118 Facsimile No.: (702) 579- 4833 Attn: Merle Ferguson With copies to: James E. Pratt, Esq. 195 Kildare Road Garden City, New York 11530 Facsimile No.: (516) 873-1140 If to a Purchaser: To the address set forth under such Purchaser's name on the signature pages hereto. If to any other Person who is then the registered Holder: To the address of such Holder as it appears in the stock transfer books of the Company or such other address as may be designated in writing hereafter, in the same manner, by such Person. (i) 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 each Holder. Each Holder may assign their respective rights hereunder in the manner and to the Persons as permitted under the Purchase Agreement. (j) Execution and 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. (k) 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 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 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 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. (l) Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. (m) 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. (n) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (o) Independent Nature of Holders' Obligations and Rights. The obligations of each Holder hereunder is several and not joint with the obligations of any other Holder hereunder, and no Holder shall be responsible in any way for the performance of the obligations of any other Holder hereunder. Nothing contained herein or in any other agreement or document delivered at any closing, and no action taken by any Holder pursuant hereto or thereto, shall be deemed to constitute the Holder as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Holder is in any way acting in concert with respect to such obligations or the transactions contemplated by this Agreement. Each Holder 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. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGES TO FOLLOW] IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. COMPOSITE INDUSTRIES OF AMERICA, INC. By:_____________________________________ Name: Merle Ferguson Title: President [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGES OF PURCHASER TO FOLLOW] BURLINGTON STREET LLC By:_____________________________________ Name: Title: Address for Notice: Burlington Street LLC Harbour House, 2nd Floor Waterfront Drive P.O. Box 972 Road Town, Tortola British Virgin Islands Facsimile No.: (284) 494-4771 With copies to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, NY 10104 Facsimile No.: (212) 541-4630 and (212) 541-1432 Attn: Eric L. Cohen, Esq. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOR PURCHASER FOLLOWS] Annex A 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 stockholder may use any one or more of the following methods when selling shares: - - ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; - - 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; - - purchases by a broker-dealer as principal and resale by the broker-dealer for its account; - - an exchange distribution in accordance with the rules of the applicable exchange; - - privately negotiated transactions; - - short sales; - - broker-dealers may agree with the selling stockholder to sell a specified number of such shares at a stipulated price per share; - - a combination of any such methods of sale; and - - 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. The selling stockholders may pledge its shares to their brokers under the margin provisions of customer agreements. If the selling stockholders default on a margin loan, the broker may, from time to time, offer and sell the pledged shares. The term "short sales" means any sale of a security that the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller. 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 stockholders and any broker-dealers or agents that are involved in selling the shares acquired by selling stockholders under the securities purchase agreement and warrants issued in connection with the equity line financing will be considered "underwriters" by the Securities and Exchange Commission within the meaning of the Securities Act in connection with sales under this registration statement. Accordingly, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them will be deemed underwriting commissions or discounts under the Securities Act. The Company is required to pay all fees and expenses incident to the registration of the shares, including fees and disbursements of counsel to the selling stockholders. The Company has agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act. EX-23.1 17 ex23-1.txt WARRANT Exhibit 23.1. Consent of Independent Auditors We hereby consent to the use in this Form SB-2 Registration Statement filed under the Securities Act of 1933 of our report dated September 14, 2001 (except as to Note 20 which is as of October 3, 2001) for Composite Industries of America, Inc. and Subsidiaries (f/k/a World Homes, Inc./Affordable Homes of America, Inc. and Subsidiaries). Pascale, Razzino, Alexanderson & Co., PLLC North Bellmore, NY 11710-1855 November 26, 2001 -----END PRIVACY-ENHANCED MESSAGE-----