-----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, H6VlwJkqXOOSKy8jhrrk6d8Rx+q2z90FPonFIjM4fdtbEkVRlVTSHlMm0nWhTfi4 MnKqBemc62pYDxWNO+Sgeg== 0000926236-06-000035.txt : 20060314 0000926236-06-000035.hdr.sgml : 20060314 20060314162109 ACCESSION NUMBER: 0000926236-06-000035 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20060308 ITEM INFORMATION: Entry into a Material Definitive Agreement ITEM INFORMATION: Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant ITEM INFORMATION: Unregistered Sales of Equity Securities ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20060314 DATE AS OF CHANGE: 20060314 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAPID LINK INC CENTRAL INDEX KEY: 0000913659 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 752461665 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22636 FILM NUMBER: 06685333 BUSINESS ADDRESS: STREET 1: 17383 SUNSET BOULEVARD STREET 2: SUITE 350 CITY: LOS ANGELES STATE: CA ZIP: 90272 BUSINESS PHONE: 310 566 1700 MAIL ADDRESS: STREET 1: 17383 SUNSET BOULEVARD STREET 2: SUITE 350 CITY: LOS ANGELES STATE: CA ZIP: 90272 FORMER COMPANY: FORMER CONFORMED NAME: DIAL THRU INTERNATIONAL CORP DATE OF NAME CHANGE: 20000120 FORMER COMPANY: FORMER CONFORMED NAME: ARDIS TELECOM & TECHNOLOGIES INC DATE OF NAME CHANGE: 19990301 FORMER COMPANY: FORMER CONFORMED NAME: CANMAX INC /WY/ DATE OF NAME CHANGE: 19941215 8-K 1 rli8k030806.txt FORM 8-K CURRENT REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): March 8, 2006 Rapid Link, Incorporated ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Delaware 0-22636 75-2461665 ---------------------------- --------------------- ------------------- (State or other jurisdiction (Commission File No.) I.R.S. Employer of incorporation) Identification No.) 17383 Sunset Boulevard, Suite 350 Los Angeles, California 90272 ------------------------------------------------------------ (Address of principal executive offices, including zip code) (310) 566-1700 (Registrant's telephone number, including area code) Not Applicable ------------------------------------------------------------- (Former name or former address, if changed since last report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 230.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Item 1.01 Entry into a Material Definitive Agreement On March 8, 2006 (the "Closing Date"), Rapid Link, Incorporated (the "Registrant") issued $1,000,000 aggregate principal amount of convertible debentures and warrants to Trident Growth Fund, LP ("Trident") and Charger Investments LLC, ("Charger") (the "Purchasers"), pursuant to Securities Purchase Agreements (the "Agreements") entered into on the Closing Date among the Registrant and the Purchasers, which are attached hereto as Exhibits 4.1 and 4.6. Neither of the Purchasers has any material relationship with the Registrant or its affiliates, other than in respect to the Agreements. Pursuant to the terms of the Agreements, each Purchaser purchased a 10% convertible debenture due, subject to the terms therein, one year from the Closing Date (the "Debentures"), attached hereto as Exhibits 4.2 and 4.7, and warrants to purchase 1,200,000 shares of common stock of the Registrant issued to Trident (600,000 warrants exercisable at $0.14 and 600,000 warrants exercisable at $0.25), and warrants to purchase 800,000 shares of common stock of the Registrant issued to Charger (400,000 warrants exercisable at $0.14 and 400,000 warrants exercisable at $0.25) (the "Warrants"). In addition, an additional 50,000 warrants (30,000 for Trident and 20,000 for Charger) will vest and become exercisable on the last day of each month prior to the Registrant's satisfaction in full of the Debentures, or the Purchaser's complete conversion thereof, as the case may be, such Warrant shares to have an exercise price equal to $0.25 per share. Other than as noted above, all Warrants are exercisable immediately and have a term of exercise equal to five years, which are attached hereto as Exhibits 4.3 and 4.8, respectively. The Debentures are convertible into common stock at $0.30; provided, however, that in the event that the Debentures are not repaid and satisfied in full on or by September 7, 2006, such conversion price shall automatically be reduced to $0.14. The Purchasers may request registration of all or any portion of the shares issuable on conversion of the Debentures and shares issued on exercise of the Warrants issued, on Form SB-1 or SB-2 or any similar form available. If the Company fails to file within agreed upon time periods, the Company is subject to a penalty equal to 0.1 % of its outstanding shares of Common Stock computed on a fully diluted basis per day until the shares are registered. On March 8, 2006, the Registrant amended its $550,000 6% Convertible Debenture with GCA Strategic Investment Fund Limited ("GCA Debenture") to extend the maturity date to November 26, 2006. The GCA Debenture originally matured on November 26, 2005. The amendment is attached hereto as Exhibit 10.1. Item 2.03. Creation of a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement of a Registrant. The disclosure set forth in Item 1.01 is incorporated by reference in this Item 2.03. Item 3.02. Unregistered Sales of Equity Securities. The Warrants and Debentures described in Item 1.01 were issued in a private placement transaction made in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933. Item 9.01. Financial Statements and Exhibits. (c) Exhibits. Exhibit Number Description of Document ------ 4.1 Securities Purchase Agreement dated March 8, 2006 between Rapid Link, Incorporated and Trident Growth Fund, LP 4.2 10% Convertible Debenture dated March 8, 2006 between Rapid Link, Incorporated and Trident Growth Fund, LP 4.3 Common Stock Purchase Warrant dated March 8, 2006 between Rapid Link, Incorporated and Trident Growth Fund, LP 4.4 Security Agreement dated March 8, 2006 between Rapid Link Incorporated and Trident Growth Fund, LP 4.5 Subordination Agreement dated March 8, 2006 between Rapid Link, Incorporated, Charger Investments LLC and Trident Growth Fund, LP 4.6 Securities Purchase Agreement dated March 8, 2006 between Rapid Link, Incorporated and Charger Investments, LLC 4.7 10% Convertible Debenture dated March 8, 2006 between Rapid Link, Incorporated and Charger Investments, LLC 4.8 Common Stock Purchase Warrant dated March 8, 2006 between Rapid Link, Incorporated and Charger Investments, LLC 4.9 Security Agreement dated March 8, 2006 between Rapid Link Incorporated and Charger Investments, LLC 10.1 Amendment Number 2 to Securities Purchase Agreement dated March 8, 2006, between Rapid Link, Incorporated and GCA Strategic Investment Fund 99.1 Press release dated March 8, 2006 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Rapid Link, Incorporated Date: March 14, 2006 By: /s/ Allen Sciarillo ----------------------------------------- Allen Sciarillo Chief Financial Officer, Secretary, (Principal Accounting Officer and Principal Financial Officer) and Director EX-4.1 2 exh4-1.txt SECURITIES PURCHASE AGREEMENT EXHIBIT 4.1 SECURITIES PURCHASE AGREEMENT This Securities Purchase Agreement (this "Agreement") is dated as of March 8, 2006, by and between RAPID LINK INCORPORATED, a Delaware corporation (the "Company"), and TRIDENT GROWTH FUND, L.P., a Delaware limited partnership, (the "Purchaser"). WITNESSETH: WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to an exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") and Rule 506 promulgated thereunder, the Company desires to issue and sell to Purchaser, and Purchaser desires to purchase from the Company, securities of the Company as more fully described in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and Purchaser agree as follows: ARTICLE I. DEFINITIONS 1.1 Definitions. In addition to the terms defined elsewhere in this Agreement: (a) capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Debenture(s) (as defined herein), and (b) the following terms have the meanings indicated in this Section 1.1: "Action" shall have the meaning ascribed to such term in Section 3.1(i). "Affiliate" means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 144 under the Securities Act. With respect to Purchaser, any investment fund or managed account that is managed on a discretionary basis by the same investment manager as Purchaser will be deemed to be an Affiliate of Purchaser. "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 Texas are authorized or required by law or other government action to close. "Change of Control Transaction" means the occurrence after the date hereof of any of (i) an acquisition after the date hereof by an individual or legal entity or "group" (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether through legal or beneficial ownership (as described in Rule 13d-3 of the Exchange Act) of capital stock of the Company, by contract or otherwise) of in excess of 40% of the voting securities of the Company, or (ii) a replacement at one time or within a one year period of more than one-half of the members of the Company's board of directors which is not approved by a majority of those individuals who are members of the board of directors on the date hereof (or by those individuals who are serving as members of the board of directors on any date whose nomination to the board of directors was approved by a majority of the members of the board of directors who are members on the date hereof), or (iii) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth above in (i) or (ii). "Closing" means the closing of the purchase and sale of the Securities pursuant to Section 2.1. "Closing Date" means the Business Day when all of the Transaction Documents have been executed and delivered by the applicable parties thereto, and all conditions precedent to (i) Purchaser's obligations to pay the Subscription Amount and (ii) the Company's obligations to deliver the Securities have been satisfied or waived. There may be multiple Closing Dates. "Commission" means the Securities and Exchange Commission. "Common Stock" means the common stock of the Company, par value $.001 per share, and any securities into which such common stock shall hereinafter have been reclassified into. "Common Stock Equivalents" means any securities of the Company which would entitle the holder thereof to acquire at any time Common Stock, including without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock. "Debenture" means, the 10% Secured Convertible Debenture, in the form of Exhibit A. "Disclosure Schedules" shall have the meaning ascribed to such term in Section 3.1 hereof. "Effective Date" means the date that the initial registration statement filed by the Company for the Registrable Securities or Common Stock is first declared effective by the Commission. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exempt Issuance" means the issuance of (a) shares of Common Stock or options to employees, officers or directors of the Company pursuant to any stock or option plan currently in place as of the date hereof which has been duly adopted by the Board of Directors and shareholders of the Company, (b) securities upon the exercise of or conversion of any securities issued hereunder, convertible securities, options or warrants issued and outstanding on the date of this Agreement, provided that such securities have not been amended since the date of this Agreement to increase the number of such underlying shares in connection therewith, (c) securities issued pursuant to acquisitions or strategic transactions, provided any such issuance shall only be to a Person which is, itself or through its subsidiaries, an operating company in a business synergistic with the business of the Company and in which the Company receives 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, and (d) shares of Common Stock or Common Stock Equivalents issued in with that certain transaction with Telenational Communications, Inc. as contemplated and set forth in that certain binding letter of intent entered into between the Company and Telenational Communications, Inc. on or about February 14, 2006. "Fully Diluted Basis" shall mean all Common Stock or Common Stock Equivalents of the Company including the exercise or conversion of all rights, options, derivative and convertible securities and further including the conversion (whether convertible or not) of all other common or preferred stock equivalents outstanding or required to be issued by the Company. "Fundamental Transaction" shall mean (A) the Company effects any merger or consolidation of the Company with or into another Person, (B) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (C) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (D) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property. "GAAP" shall mean generally accepted accounting principles, consistently applied. "Intellectual Property Rights" shall have the meaning ascribed to such term in Section 3.1(n). "Legend Removal Date" shall have the meaning ascribed to such term in Section 4.1(c). "Liens" means a lien, charge, security interest, encumbrance, right of first refusal, preemptive right, or other restriction. "Material Adverse Effect" shall have the meaning assigned to such term in Section 3.1(b) hereof. "Material Permits" shall have the meaning ascribed to such term in Section 3.1(l). "Maximum Rate" shall have the meaning ascribed to such term in Section 6.17. "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. "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. "Public Offering Date" the date that the Company first registers the Common Stock pursuant to Section 12 under the Exchange Act, or merges into a corporation (by or through one or a series of related transactions) already registered pursuant to Section 12 or becomes public under the Exchange Act in any other manner. "Purchaser Party" shall have the meaning ascribed to such term in Section 4.11. "Purchaser's Designee" shall have the meaning ascribed to such term in Section 4.14. "Qualifying Transaction" shall mean (i) an equity or debt/equity financing wherein the Company receives gross proceeds equal to at least $3,000,000 from the sale of Common Stock or Common Stock Equivalents issued by the Company to unaffiliated third parties or (ii) a Fundamental Transaction. "Registrable Securities" means (i) all Underlying Shares (exercised and unexercised); (ii) any securities issued or transferred to Purchaser in connection with or arising out of any Transaction Document; and (iii) any securities issued or issuable upon any stock split, dividend or other distribution recapitalization or similar event with respect to the foregoing. "Registration Statement" means a registration statement covering the sale or resale of the Registrable Securities. "Required Minimum" means, as of any date, the maximum aggregate number of shares of Common Stock then issued or potentially issuable in the future pursuant to the Transaction Documents, including any Underlying Shares issuable upon exercise of the Warrant or conversion of the Debenture, ignoring any exercise limits set forth therein. "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. "SBA" shall have the meaning ascribed to such term in Section 5.1. "SBA Documents" shall have the meaning ascribed to such term in Section 5.1(b). "SBIC" shall have the meaning ascribed to such term in Section 5.1. "SBIC Act" shall have the meaning ascribed to such term in Section 5.1(a). "Securities" means the Debenture, the Warrant, and the Underlying Shares. "Securities Act" means the Securities Act of 1933, as amended. "Security Agreement" means the Security Agreement, dated as of the date hereof, between the Company and Purchaser, in the form of Exhibit B attached hereto. "Security Documents" shall mean the Security Agreement and any other documents and filing required thereunder in order to grant Purchaser a first priority security interest in all of the assets of the Company, with the exception of the security interests previously granted to Global Capital Funding Group LP including all UCC-1 filing receipts. "Subordination Agreement" means that certain Subordination Agreement of even date herewith executed by John Jenkins in favor of the Purchaser in the form of Exhibit D attached hereto. "Subscription Amount" means, as to Purchaser, the aggregate amount to be paid for the Debenture and the Warrant purchased hereunder as specified in Section 2.1 herein, in United States Dollars and in immediately available funds. "Subsidiary" means any corporation or limited liability company of which at least 50% of the outstanding securities having ordinary voting powers for the election of Board of Directors (or similar governing body) are at the time owned by the Company. As used herein, the term "Company" shall be deemed to include all of the Company's Subsidiaries, if any. "Trading Market" means, as applicable, the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the American Stock Exchange, the New York Stock Exchange, the Nasdaq National Market, the Nasdaq SmallCap Market, the OTC Bulletin Board or the "Pink Sheets" published by the Pink Sheets LLC. "Transaction Documents" means this Agreement, the Debenture, the Security Agreement, the Warrant and any other documents or agreements executed in connection with the transactions contemplated hereunder. "Underlying Shares" means the shares of Common Stock issuable upon exercise of the Warrants or conversion of the Debenture, or any other shares of Common Stock acquired by Purchaser hereby. "Variable Rate Transaction" shall mean a transaction in which the Company issues or sells (i) any debt or equity securities that are convertible into, exchangeable or exercisable for, or include the right to receive additional shares of Common Stock (A) at a conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices of or quotations for the shares of Common Stock at any time after the initial issuance of such debt or equity securities, (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the Common Stock, or (C) whereby the number of underlying shares of Common Stock to be received upon exercise, conversion, or exchange thereof, is variable in any respect in which the number of such underlying shares could be increased. "Warrant" means the Common Stock Purchase Warrant, in the form of Exhibit C delivered to Purchaser at the Closing in accordance with Section 2.2 hereof, which Warrant shall be exercisable immediately and be exercisable until the close of business on the fifth anniversary following the Initial Exercise Date (as defined in the Warrant). The Company and Purchaser agree that the value of the Warrant as of the date hereof is less than $1,000. ARTICLE II. PURCHASE AND SALE 2.1 Closing. On the Closing Date, upon the terms and subject to the conditions set forth herein, concurrent with the execution and delivery of this Agreement by the parties hereto, the Company agrees to sell, and Purchaser agrees to purchase the Debenture and the Warrant for an aggregate amount of SIX HUNDRED THOUSAND DOLLARS ($600,000) (the "Subscription Amount"). On the Closing Date, Purchaser shall deliver to the Company via wire transfer of immediately available funds equal to the Subscription Amount (less all expenses and fees due hereunder), and the Company shall deliver to Purchaser the Debenture, the Warrant, and the other items set forth in Section 2.2 issuable at the Closing. On the Closing Date, contemporaneous with the funding of the purchase made the basis hereof, the Company shall promptly pay to the order of Purchaser a commitment fee and origination fee in the aggregate amount of 4% of the Subscription Amount, such amounts to be offset from the Subscription Amount wire transfer described above. Upon satisfaction of the conditions set forth in Section 2.2, the Closing shall occur at the offices of Purchaser, or such other location as the parties shall mutually agree. 2.2 Deliveries a) On the Closing Date, the Company shall execute and deliver or cause to be delivered to Purchaser the following, each fully executed by the appropriate authorized officer or officers of the Company: (i) this Agreement (along with all Disclosure Schedules); (ii) the Debenture; (iii) the Warrant; (iv) the Security Agreement along with all Security Documents; (v) the Subordination Agreement; (vi) SBA Form 480 (Size Status Declaration), SBA Form 652 (Assurance of Compliance) and SBA Form 1031 (Portfolio Finance Report), Parts A and B, in the forms of Exhibit D, Exhibit E and Exhibit F, respectively, attached hereto; (vii) Approval by the Board of Directors of the Company, done in conformance with all applicable law and the Bylaws of the Company, certified by the Secretary of the Company as of the Closing Date, approving or otherwise ratifying the transactions contemplated by this Agreement, and approving the form of this Agreement and the Transaction Documents, and authorizing execution, delivery, and performance thereof; (viii) A copy of the Certificate of Incorporation of the Company, as amended to date, certified by an official of the Company's jurisdiction of formation or incorporation and further certified by the Secretary of the Company not to have been altered or amended since certification by such official; a Certificate of Good Standing dated within 30 days of the date first written above from the Secretary of State of the Company's jurisdiction of formation or incorporation; and a copy of the Bylaws of the Company, certified as true and correct by the Secretary of the Company; (ix) Payment of the origination and commitment fees, if any, referenced in Section 2.1 hereof; and (x) Such other instruments, documents or items as Purchaser may reasonably request. b) On the Closing Date, Purchaser shall deliver or cause to be delivered to the Company the following: (i) this Agreement duly executed by Purchaser; (ii) Purchaser's Subscription Amount by wire transfer to the account as specified in writing by the Company; and (iii) the Security Agreement, duly executed by Purchaser. 2.3 Closing Conditions. a) The obligations of the Company hereunder in connection with the Closing are subject to the following conditions being met: (i) the accuracy in all material respects when made and on the Closing Date of the representations and warranties of the Purchaser contained herein; (ii) all obligations, covenants and agreements of Purchaser required to be performed at or prior to the Closing Date shall have been performed; and (iii) the delivery by Purchaser of the items set forth in Section 2.2(b) of this Agreement. b) The obligations of Purchaser hereunder in connection with the Closing are subject to the following conditions being met: (i) the accuracy in all material respects on the Closing Date of the representations and warranties of the Company contained herein; (ii) all obligations, covenants and agreements of the Company required to be performed at or prior to the Closing Date shall have been performed; (iii) the delivery by the Company of the items set forth in Section 2.2(a) of this Agreement; and (iv) there shall have been no Material Adverse Effect with respect to the Company since the date hereof. ARTICLE III. REPRESENTATIONS AND WARRANTIES 3.1 Representations and Warranties of the Company. Except as set forth under the corresponding section of the disclosure schedules delivered to Purchaser concurrently herewith (the "Disclosure Schedules") which Disclosure Schedules shall be deemed a part hereof, the Company makes the representations and warranties set forth below to Purchaser. a) Subsidiaries. The Company does not have any Subsidiaries. b) Organization and Qualification. The Company is an entity duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, 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 not in violation or default of any of the provisions of its certificate or articles of incorporation, bylaws, or other organizational or charter documents. The Company is duly qualified to conduct 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 have or reasonably be expected to result in (i) a material adverse effect on the legality, validity or enforceability of any Transaction Documents, (ii) a material adverse effect on the results of operations, assets, business, prospects or financial condition of the Company, or (iii) a material adverse effect on the Company's ability to perform in any material respect on a timely basis its obligations under any Transaction Documents (any of (i), (ii) or (iii), a "Material Adverse Effect") and no Proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification. c) Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents and otherwise to carry out its obligations 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. Each Transaction Documents has been (or upon delivery will have 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 except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. d) No Conflicts. The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the other 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 organizational or charter documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of the Company, 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 debt or otherwise) or other understanding to which the Company is a party or by which any property or asset of the Company is bound or affected, or (iii) conflict with or 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 is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company is bound or affected; except in the case of each of clauses (ii) and (iii), such as could not have or reasonably be expected to result in a Material Adverse Effect. e) Filings, Consents and Approvals. Other than as set forth on Schedule 3.1(e) and except for filing of a Form D and/or state "blue sky" securities filings, the Company is not 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. f) Issuance of the Securities. The Securities are duly authorized and, when issued and paid for in accordance with the applicable Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company other than restrictions on transfer provided for in the Transaction Documents. The Underlying Shares, when issued in accordance with the terms of the Transaction Documents, will be validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company or any third party. The Company has reserved from its duly authorized capital stock a number of shares of Common Stock for issuance of a number of Underlying Shares at least equal to the Required Minimum on the date hereof. The Company has not, and to the knowledge of the Company, no Affiliate of the Company has sold, offered for sale or solicited offers to buy or otherwise negotiated in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the sale of the Securities to Purchaser. g) Capitalization. The capitalization of the Company is as described in Schedule 3.1(g). The Company has not issued any capital stock other than as set forth on Schedule 3.1(g). No Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. Except as a result of the purchase and sale of the Securities or as set forth on Schedule 3.1(g), 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 the Company's capital stock, or contracts, commitments, understandings or arrangements by which the Company is or may become bound to issue additional shares of its capital stock, or securities or rights convertible or exchangeable into shares of its capital stock. The issuance and sale of the Securities will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than Purchaser) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price under such securities. All of the outstanding shares of capital stock of the Company are validly issued, fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, and none of such outstanding shares was issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale of the Securities. Except as disclosed in Schedule 3.1(g), there are no stockholders agreements, voting agreements or other similar agreements with respect to the Company's capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company's stockholders. A complete list of stockholders of the Company that are officers, directors and individuals holding 5% or more of the outstanding Common Stock is included in Schedule 3.1(g). h) SEC Documents. The Company has filed all required reports, schedules, forms, statements and other documents with the Commission. (the "SEC Documents"). As of their respective dates, the SEC Documents complied in all material respects with requirements of the Securities Act or the Exchange Act, as the case may be and the rules and regulations of the Commission promulgated thereunder applicable to such SEC Documents, and none of the SEC Documents 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, except to the extent that information contained in any SEC Document has been revised or superseded by a later filed SEC Document. The financial statements of the Company included in the SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission with respect thereto, have been prepared in accordance with GAAP (except, in the case of unaudited statements as permitted by Form 10-Q or Form 10-QSB) applied on a consistent basis during the periods involved (except as may be indicted in the notes thereto) and fairly present the consolidated financial position of the Company and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operation and cash flows for the period then ending in accordance with GAAP (subject, in the case of the unaudited statements, to normal year end audit adjustments). Except as set forth in the filed SEC Documents, neither the Company nor any Subsidiaries has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) required by GAAP to be set forth on a consolidated balance sheet of the Company and its consolidated subsidiaries or in the notes thereto and which could reasonably be expected to have a Material Adverse Effect. i) Litigation. Other than as set forth on Schedule 3.1(i), 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 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, have or reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. There has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the Commission involving the Company or any current or former director or officer of the Company. j) Labor Relations. No material labor dispute exists or, to the knowledge of the Company, is imminent with respect to any of the employees of the Company which could reasonably be expected to result in a Material Adverse Effect. k) Compliance. The Company (i) is not in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company), nor has the Company received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is not in violation of any order of any court, arbitrator or governmental body, or (iii) is not or has not been in violation of any statute, rule or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws applicable to its business except in each case as could not have a Material Adverse Effect. l) Regulatory Permits. The Company possesses all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct its business as described in Schedule 3.1(l), except where the failure to possess such permits could not have or reasonably be expected to result in a Material Adverse Effect ("Material Permits"), and the Company has not received any notice of Proceedings relating to the revocation or modification of any Material Permit. m) Title to Assets. Except as set forth on Schedule 3.1(m), the Company has good and marketable title in (or licenses or rights to use) all personal property that is material to the business of the Company, in each case free and clear of all Liens. The Company does not own any real property. Any real property and facilities held under lease by the Company are held by it under valid, subsisting and enforceable leases of which the Company is in compliance. The Company has not granted, and no third party has obtained in any manner, other than as contemplated by the Transaction Documents, any security interest in the assets of the Company. Schedule 3.1(m) sets forth and details which, if any, of such assets are owned by any Subsidiary. n) Intellectual Property. (i) Schedule 3.1(n) contains a list of the Company's Intellectual Property. For purposes hereof, "Intellectual Property" means any or all of the following and all rights and goodwill, arising out of or associated therewith: (A) all United States, international, and foreign patents and applications therefor (including provisional applications) and all reissues, reexaminations, divisions, renewals, extensions, provisionals, continuations and continuations-in-part thereof; (B) all inventions (whether patentable or not), invention disclosures, improvements, trade secrets, proprietary information, know-how, technology, technical data and customer lists, and all documentation relating to any of the foregoing throughout the world; (C) all international, U.S. and foreign registered trademarks, trade names, service marks, logos, slogans, and designs, applications to register trademarks, trade names, service marks, logos, slogans, and designs, intent-to-use applications, or other registrations or applications related to trademarks, service marks, common law trademarks, trade names, service marks, logos, slogans, and designs and all associated goodwill associated with all of the foregoing; (D) all copyrights, copyright registrations and applications therefor, and all other rights corresponding thereto throughout the world; (E) all industrial designs and any registrations and applications therefor throughout the world; (F) all URL's, domain names, trade names, logos, slogans, designs, common law trademarks and service marks, trademark and service mark registrations and applications therefor throughout the world; (G) all databases and data collections and all rights therein throughout the world; (H) all moral and economic rights of authors and inventors, however denominated, throughout the world; (I) any other intellectual property that is the subject of an application, certificate, filing, registration or other document issued, filed with, or recorded with any federal, state, local or foreign government or other public body; and (J) any similar or equivalent rights to any of the foregoing anywhere in the world. For purposes hereof, "Company Intellectual Property" means any Company Intellectual Property owned or licensed by the Company, and "Company Registered Intellectual Property" means any items of Intellectual Property described in subsections (A), (C) or (D) of this paragraph. (ii) No Company Intellectual Property or product or service of the Company's business related to the Company Intellectual Property is subject to any Proceeding or outstanding decree, order, judgment, agreement or stipulation restricting in any manner the use, transfer or licensing thereof by the Company, or which may affect the validity, use or enforceability of such Company Intellectual Property. Each item of Company Registered Intellectual Property is valid and subsisting. All necessary registration, maintenance and renewal fees currently due in connection with the Company Registered Intellectual Property have been made and all necessary documents, recordations and certifications in connection with such Company Registered Intellectual Property have been filed with the relevant patent, copyright, trademark or other authorities in the United States or foreign jurisdictions, as the case may be, for the purpose of maintaining such Company Registered Intellectual Property. (iii) The Company owns and has good and exclusive title to, or has licenses (any Intellectual Property subject to any license to be identified as such in Schedule 3.1(n)) (sufficient for the conduct of the Company's business as currently conducted) to use each item of the Company's Intellectual Property free and clear of any Lien; and the Company is the exclusive owner or exclusive licensee of all trademarks and service marks, trade names and domain names used in connection with and material to the operation or conduct of the Company's business, including the sale of any products or the provision of any services by same, free and clear of all Liens. The Company Intellectual Property, other than future improvements, derivations, and additions to be made by the Company or on behalf of the Company, constitutes all of the Intellectual Property used or contemplated for use in connection with the Company's current business and in the performance of any contract, proposal or letter of intent in connection with same. (iv) To the extent that any Company Intellectual Property has been developed or created by a third party for the Company, the Company has a written agreement with such third party with respect thereto and the Company thereby either (A) has obtained ownership of and is the exclusive owner of, or (b) has obtained a license (sufficient for the conduct of the Company's business as currently conducted) to all of such third party's Intellectual Property in such work, material or invention by operation of law or by valid assignment, to the fullest extent it is legally possible to do so, each such agreement being listed on Schedule 3.1(n). (v) The operation of the Company's business as it is currently conducted, including the Company's design, development, marketing and sale of the products or services of the Company (including with respect to products currently under development) has not, does not and will not infringe or misappropriate in any manner the Intellectual Property of any third party or, to the knowledge of the Company, constitute unfair competition or trade practices under the laws of any jurisdiction. (vi) The Company has no knowledge, and has not received written notice or any other overt threats from any third party, that the operation of the Company's business as it is currently conducted, or any act, product or service of the Company's business, infringes or misappropriates the Intellectual Property of any third party or constitutes unfair competition or trade practices under the laws of any jurisdiction. The Company's Intellectual Property is not the subject of any third party communications relating to validity or enforceability, cease and desist orders, demand letters, warnings or prior settlement agreements. The Company's Intellectual Property is not currently the subject of any pending or threatened re-examinations, oppositions, interferences, or infringement actions. (vii) To the knowledge of the Company, no Person has or is infringing or misappropriating any Company Intellectual Property. (viii) The Company has taken reasonable steps to protect the rights of the Company in the confidential information and trade secrets of the Company used in the Company's business or any trade secrets or confidential information of third parties used in same, and, without limiting the foregoing, the Company has enforced a policy requiring each employee and contractor to execute a proprietary information/confidentiality agreement, and except under confidentiality obligations or in the context of the attorney-client relationship, there has not been any disclosure by the Company of any such trade secrets or confidential information. o) Insurance. The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company is engaged, including directors and officers insurance at least equal to the aggregate principal amount of the Debenture. To the best of Company's knowledge, such insurance contracts and policies are accurate and complete. The Company has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant increase in cost. p) Transactions With Affiliates and Employees. None of the officers or directors of the Company and, to the knowledge of the Company, none of the employees of the Company is presently a party to any transaction with the Company (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, in each case in excess of $60,000 other than (i) for payment of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of the Company and (iii) for other employee benefits, including stock option agreements under any stock option plan of the Company. q) Internal Accounting Controls. The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. r) Certain Fees. Other than as set forth on Schedule 3.1(r), no brokerage or finder's fees or commissions are or will be payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by this Agreement. Purchaser 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. s) Private Placement. Assuming the accuracy of Purchaser's representations and warranties set forth in Section 3.2, no registration under the Securities Act is required for the offer and sale of the Securities by the Company to Purchaser as contemplated hereby. t) Investment Company. The Company is not, and is not an Affiliate of, and immediately after receipt of payment for the Securities, will not be or be an Affiliate of, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. The Company shall conduct its business in a manner so that it will not become subject to the Investment Company Act. u) Registration Rights. Other than as set forth on Schedule 3.1(u), no Person has any right to cause the Company to effect the registration under the Securities Act of any securities of the Company. v) 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 Purchaser as a result of Purchaser and the Company fulfilling their obligations or exercising their rights under the Transaction Documents, including without limitation as a result of the Company's issuance of the Securities and the Purchaser's ownership of the Securities. w) Disclosure. The Company confirms that neither it nor any other Person acting on its behalf has provided Purchaser or its agents or counsel with any information that constitutes or might constitute material, nonpublic information except for such information that will be publicly disclosed in documents filed with the Commission. The Company understands and confirms that Purchaser will rely on the foregoing representations and covenants in effecting transactions in securities of the Company. All written statements provided to Purchaser regarding the Company, its business and the transactions contemplated hereby, including the Disclosure Schedules to this Agreement, furnished by or on behalf of the Company with respect to the representations and warranties made herein are true and correct with respect to such representations and warranties and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. x) No Integrated Offering. Assuming the accuracy of Purchaser's representations and warranties set forth in Section 3.2, neither the Company, nor any of its Affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause this offering of the Securities to be integrated with prior offerings by the Company for purposes of the Securities Act or any applicable shareholder approval provisions. y) Solvency. Following the closing of the Telenational Communications, Inc transaction, based on the financial condition of the Company as of the Closing Date after giving effect to the receipt by the Company of the proceeds from the sale of the Securities hereunder, and anticipated future financing amounts used to fund the Telenational Communications, Inc and provide additional working capital into the company, (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 financing instruments, and debts and other liabilities (including known contingent liabilities) as they mature, with the exception of those liabilities that the company is able to negotiate payment terms, or does not reasonably expect to pay in full within the next 12 months, for those debts with maturity dates of less than 1 year; (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 expected cash flow of the Company, together with the future proceeds the Company would receive in a future funding transaction, would provide sufficient working capital for the Company to continue to operate its business, and pay all amounts on or in respect of its debt when such amounts are required to be paid, for debts with maturity dates of 1 year or less as of the closing date. 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). It is understood that the Company intends to pursue a plan to provide positive cash flow from operations shortly after the Telenational Communications, Inc. transaction, and to raise additional financing of not less than $5.0 million, sufficient to purchase Telenational, and to pay down its debts as described above, and to provide additional working capital. It is understood by both parties that the Company does not currently have in place the necessary financing to close the acquisition, and to meet the obligations as outlined above. z) Tax Status. Except for matters that would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect, the Company has filed all necessary federal, state and foreign income and franchise tax returns and has paid or accrued all taxes shown as due thereon, and the Company has no knowledge of a tax deficiency which has been asserted or threatened against the Company. aa) No General Solicitation. Neither the Company nor any person acting on behalf of the Company has offered or sold any of the Securities by any form of general solicitation or general advertising. The Company has offered the Securities for sale only to Purchaser and certain other "accredited investors" within the meaning of Rule 501 under the Securities Act. bb) Foreign Corrupt Practices. Neither the Company, nor to the knowledge of the Company, any agent or other person acting on behalf of the Company, has (i) directly or indirectly, used any corrupt funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company (or made by any person acting on its behalf of which the Company is aware) which is in violation of law, or (iv) violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended cc) Indebtedness. Other than as set forth on Schedule 3.1(cc), as of the Closing Date, the Company has no indebtedness. dd) No Disagreements with Accountants and Lawyers. There are no disagreements of any kind presently existing, or reasonably anticipated by the Company to arise, between the accountants and lawyers formerly or presently employed by the Company and the Company is current with respect to any fees owed to its accountants and lawyers. ee) Acknowledgment Regarding Purchaser's Purchase of Securities. The Company acknowledges and agrees that Purchaser is acting solely in the capacity of an arm's length purchaser with respect to the Transaction Documents and the transactions contemplated hereby as they relate to the Company. The Company further acknowledges that Purchaser is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any advice given by Purchaser or any of its respective representatives or agents to the Company in connection with this Agreement and the transactions contemplated hereby is merely incidental to the Purchaser's purchase of the Securities. ff) Material Liabilities. The sole outstanding material liabilities of the Company are set forth on Schedule 3.1(ff) . gg) Material Agreements. Except for those agreements set forth on Schedule 3.1(gg) hereof, there are no other material agreements to which the Company is a party. hh) Board of Directors. The Board of Directors of Company consists of those persons set forth on Schedule 3.1(hh). 3.2 Representations and Warranties of Purchaser. Purchaser hereby represents and warrants as of the date hereof and as of the Closing Date to the Company as follows: (a) Organization; Authority. Purchaser is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with full right, 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 execution, delivery and performance by Purchaser of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate or similar action on the part of Purchaser. Each of the Transaction Documents to which it is a party has been duly executed by Purchaser, and when delivered by Purchaser in accordance with the terms hereof, will constitute the valid and legally binding obligation of Purchaser, enforceable against it in accordance with its terms, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law. (b) Purchaser Representation. Purchaser understands that the Securities are "restricted securities" and have not been registered or qualified, as the case may be, under the Securities Act or any applicable state securities law by reason of a specific exemption from the registration or qualification provisions of the Securities Act or any applicable state securities laws, the availability of which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of Purchaser's representations as expressed herein. Purchaser represents that it is acquiring the Securities for investment as principal for its own account and not with a view to or for distribution or resale of such Securities or any part thereof, has no present intention of distributing any of such Securities and has no arrangement or understanding with any other persons regarding the distribution of such Securities (this representation and warranty not limiting Purchaser's right to sell the Securities pursuant to a Registration Statement or otherwise in compliance with applicable federal and state securities laws). Purchaser is acquiring the Securities hereunder in the ordinary course of its business. Purchaser does not have any agreement or understanding, directly or indirectly, with any Person to distribute any of the Securities. (c) Purchaser Status. At the time Purchaser was offered the Securities, it was, and at the date hereof it is, and on each date on which it exercises any Warrants it will be either: (i) an "accredited investor" as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8)) of Regulation D promulgated under the Securities Act or (ii) a "qualified institutional buyer" as defined in Rule 144A(a) under the Securities Act. (d) Experience of Purchaser. 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. Purchaser understands that the acquisition of the Securities hereunder is highly a speculative investment which involves a high degree of loss of Purchaser's investment therein. Purchaser is able to bear the economic risk of an investment in the Securities and, at the present time, is able to afford a complete loss of such investment. (e) Certain Fees. Purchaser has not entered into an agreement whereby brokerage or finder's fees or commissions are or will be payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by this Agreement. The Company acknowledges and agrees that Purchaser does not make or has not made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in this Section 3.2. ARTICLE IV. OTHER AGREEMENTS OF THE PARTIES 4.1 Transfer Restrictions. (a) The Securities may only be disposed of in compliance with state and federal securities laws. In connection with any transfer of Securities other than pursuant to an effective registration statement or Rule 144, to the Company or to an Affiliate of Purchaser or in connection with a pledge as contemplated in Section 4.1(b), the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Securities under the Securities Act or any applicable state securities laws. As a condition of transfer, any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights of Purchaser under this Agreement. (b) Purchaser agrees to the imprinting, so long as is required by this Section 4.1(b), of a legend on any of the Securities in substantially the following form: 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 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. The Company acknowledges and agrees that Purchaser may from time to time pledge pursuant to a bona fide margin agreement with a registered broker-dealer or grant a security interest in some or all of the Securities to a financial institution that is an "accredited investor" as defined in Rule 501(a) under the Securities Act and who agrees to be bound by the provisions of this Agreement and, if required under the terms of such arrangement, Purchaser may transfer pledged or secured Securities to the pledgees or secured parties. Such a pledge or transfer would not be subject to approval of the Company and no legal opinion of legal counsel of the pledgee, secured party or pledgor shall be required in connection therewith. Further, no notice shall be required of such pledge. At the Purchaser's expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Securities may reasonably request in connection with a pledge or transfer of the Securities. (c) Certificates evidencing Underlying Shares shall not contain any legend (including the legend set forth in Section 4.1(b) hereof): (i) while a Registration Statement covering the resale of such Underlying Shares is effective under the Securities Act, (ii) following any sale of such Underlying Shares pursuant to Rule 144, (iii) if such Underlying Shares are eligible for sale under Rule 144(k), or (iv) if such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission); provided, however, in connection with the issuance of the Underlying Shares, Purchaser hereby agrees to adhere to and abide by all prospectus delivery requirements under the Securities Act and rules and regulations of the Commission and all applicable state "blue sky" securities laws. The Company shall cause its counsel to issue a legal opinion to the Company's transfer agent promptly after the Effective Date if required by the Company's transfer agent to effect the removal of the legend hereunder. If all or any portion of a Warrant is exercised at a time when there is an effective Registration Statement to cover the resale of the Underlying Shares, or if such shares may be sold under Rule 144(k) or if such legend is not otherwise required under applicable requirements of the Securities Act (including judicial interpretations thereof) then such shares shall be issued free of all legends. The Company agrees that following the Effective Date or at such time as such legend is no longer required under this Section 4.1(c), it will, no later than two Business Days following the delivery by Purchaser to the Company or the Company's transfer agent of a certificate representing Underlying Shares, as applicable, issued with a restrictive legend (such second Business Day, the "Legend Removal Date"), deliver or cause to be delivered to Purchaser a certificate representing such shares that is free from all restrictive and other legends. The Company may not make any notation on its records or give instructions to any transfer agent of the Company that enlarge the restrictions on transfer set forth in this Section. (d) In addition to Purchaser's other available remedies, the Company shall pay to Purchaser, in cash, as partial liquidated damages and not as a penalty, the greater of (i) $500 for each Business Day after the Legend Removal Date, the Warrant Share Delivery Date, or other such date the Underlying Shares are to be delivered to the Purchaser, as the case may be, until such certificate is delivered with an appropriate legend or without a restrictive legend, as the case may be; and (ii) the difference in the Market Value of the Underlying Shares (based on the closing bid price of the Common Stock on the then principal Trading Market on the date such Securities are submitted to the Company's transfer agent) on the delivery date and the date such shares are actually received by the Holder in such form as required herein and in the Transaction Documents. Nothing herein shall limit Purchaser's right to pursue actual damages for the Company's failure to deliver certificates representing any Securities as required by the Transaction Documents, and Purchaser 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. (e) Purchaser agrees that the removal of the restrictive legend from certificates representing Securities as set forth in this Section 4.1 is predicated upon the Company's reliance that Purchaser will sell any Securities pursuant to either the registration requirements of the Securities Act, including any applicable prospectus delivery requirements, or an exemption therefrom. 4.2 Acknowledgment of Dilution. The Company acknowledges that the issuance of the Underlying Shares may result in dilution of the outstanding shares of Common Stock, which dilution may be substantial under certain market conditions. The Company further acknowledges that its obligations under the Transaction Documents, including without limitation its obligation to issue the Underlying Shares pursuant to the Transaction Documents, are unconditional and absolute and not subject to any right of set off, counterclaim, delay or reduction, regardless of the effect of any such dilution or any claim the Company may have against Purchaser and regardless of the dilutive effect that such issuance may have on the ownership of the other stockholders of the Company. 4.3 Furnishing of Information. As long as Purchaser owns restricted Securities, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act. As long as Purchaser owns Securities, if the Company is not required to file reports pursuant to the Exchange Act, it will prepare and furnish to Purchaser and make publicly available in accordance with Rule 144(c) such information as is required for Purchaser to sell the Underlying Shares under Rule 144. The Company further covenants that it will take such further action as any holder of Securities may reasonably request, all to the extent required from time to time to enable such Person to sell such Underlying Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144. 4.4 Integration. The Company shall not 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 Purchaser or, if then listed or quoted on a Trading Market, that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Trading Market. 4.5 Exercise Procedures. The form of Notice of Exercise and Conversion Notice included in the Warrant and Debenture, respectively, set forth the totality of the procedures required of Purchaser in order to exercise the Warrant or convert the Debenture. No additional legal opinion or other information or instructions shall be required of Purchaser to exercise its Warrants or convert the Debenture. The Company shall honor exercises of the Warrant and conversions of the Debenture and shall deliver Underlying Shares in accordance with the terms, conditions and time periods set forth in such Transaction Documents. 4.6 Intentionally Omitted. 4.7 Shareholders Rights Plan. No claim will be made or enforced by the Company or, to the knowledge of the Company, any other Person that 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 Purchaser could be deemed to trigger the provisions of any such plan or arrangement, by virtue of receiving Securities under the Transaction Documents or under any other agreement between the Company and Purchaser. 4.8 Non-Public Information. If at any time the Company becomes subject to the reporting provisions of the Exchange Act, the Company covenants and agrees that neither it nor any other Person acting on its behalf will provide Purchaser or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto Purchaser shall have executed a written agreement regarding the confidentiality and use of such information. The Company understands and confirms that Purchaser shall be relying on the foregoing representations in effecting transactions in securities of the Company. 4.9 Use of Proceeds. Except as set forth in Schedule 4.9, 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 Common Stock or Common Stock Equivalents or to settle any outstanding litigation. Schedule 4.9 shall detail the Company's expected use of proceeds received from the sale of the Securities hereunder. 4.10 Reimbursement. If Purchaser becomes involved in any capacity in any Proceeding by or against any Person who is a stockholder of the Company (except as a result of sales, pledges, margin sales or any similar transaction(s) by Purchaser to or with any current stockholder), solely as a result of Purchaser's acquisition of the Securities under this Agreement, and Purchaser is successful in the Proceeding the Company will reimburse 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 Purchaser 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 Purchaser 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, Purchaser and any such Affiliate and any such Person. The Company also agrees that neither Purchaser 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. 4.11 Indemnification of Purchaser. Subject to the provisions of this Section 4.11, the Company will indemnify and hold the Purchaser and its directors, officers, managers, shareholders, partners, employees and agents (each, a "Purchaser Party") harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys' fees and costs of investigation that any such Purchaser Party may suffer or incur as a result of or relating to (a) any breach of any of the representations, warranties, covenants or agreements made by the Company in this Agreement or in the other Transaction Documents or (b) any action instituted against Purchaser, or any of its Affiliates, by any stockholder of the Company who is not an Affiliate of Purchaser, with respect to any of the transactions contemplated by the Transaction Documents (unless such action is based upon a breach of Purchaser's representation, warranties or covenants under the Transaction Documents or any agreements or understandings Purchaser may have with any such stockholder or any violations by Purchaser of state or federal securities laws or any conduct by Purchaser which constitutes fraud, gross negligence, willful misconduct or malfeasance). If any action shall be brought against any Purchaser Party in respect of which indemnity may be sought pursuant to this Agreement, such Purchaser Party shall promptly notify the Company in writing, and the Company shall have the right to assume the defense thereof with counsel of its own choosing. Any Purchaser Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Purchaser Party except to the extent that (i) the employment thereof has been specifically authorized by the Company in writing, (ii) the Company has failed after a reasonable period of time to assume such defense and to employ counsel or (iii) in such action there is, in the reasonable opinion of such separate counsel, a material conflict on any material issue between the position of the Company and the position of such Purchaser Party. The Company will not be liable to any Purchaser Party under this Agreement (i) for any settlement by a Purchaser Party effected without the Company's prior written consent, which shall not be unreasonably withheld or delayed; or (ii) to the extent, but only to the extent that a loss, claim, damage or liability is attributable to any Purchaser Party's breach of any of the representations, warranties, covenants or agreements made by Purchaser in this Agreement or in the other Transaction Documents. 4.12 Reservation and Listing of Securities. (a) The Company shall maintain a reserve from its duly authorized shares of Common Stock for issuance pursuant to the Transaction Documents in such amount as may be required to fulfill its obligations in full under the Transaction Documents. (b) If, on any date, the number of authorized but unissued (and otherwise unreserved) shares of Common Stock is less than the Required Minimum on such date, then the Board of Directors of the Company shall use commercially reasonable efforts to amend the Company's certificate or articles of incorporation to increase the number of authorized but unissued shares of Common Stock to at least the Required Minimum at such time, as soon as possible and in any event not later than the 75th day after such date; and (c) The Company shall, if then applicable: (i) in the time and manner required by the Trading Market or if the Common Stock is listed on another Trading Market, promptly prepare and file with such Trading Market an additional shares listing application covering a number of shares of Common Stock at least equal to the Required Minimum on the date of such application, (ii) take all steps necessary to cause such shares of Common Stock to be approved for listing on the Trading Market as soon as possible thereafter, (iii) provide to Purchaser evidence of such listing, and (iv) maintain the listing of such Common Stock on any date at least equal to the Required Minimum on such date on such Trading Market. 4.14 Appointment of Board Member. At all such times from the Closing until such time as the Debenture remains outstanding in whole or in part, the Company shall have the right to appoint a member to the Board of Directors to (the "Purchaser's Designee"). If within 30 days of the Company's election to appoint it's Purchaser's Designee to the Board of Directors of the Company, such appointment of the Purchaser's Designee has not occurred other than by reason of legal prohibitions or restrictions, the number of Warrant Shares purchasable pursuant to the Warrant shall be increased by 10,000 per month (including such initial 30 day period) such appointment has not occurred. The Company must provide and keep in effect officers' and directors' liability insurance for the Purchaser's Designee which liability insurance shall be satisfactory to Purchaser, and such Purchaser's Designee shall be entitled to receive reasonable and customary director's fees and such other compensation as is ordinarily given to the Company's directors as well as the reimbursement of all out of pocket expenses. 4.15 Registration Rights. (a) Piggyback Registrations. A. At any time after the Closing Date, if the Company proposes to register any Common Stock for sale solely for cash, either for its own account or for the account of a stockholder or stockholders (a "Company Registration"), then the Company shall give Purchaser written notice of its intention to do so and of the intended method of sale (the "Registration Notice") not fewer than 30 days prior to the anticipated filing date of the Registration Statement effecting such Company Registration. Purchaser may request inclusion of any Registrable Securities in such Company Registration by delivering to the Company, within 20 days after receipt of the Registration Notice, a written notice (the "Piggyback Notice") stating the number of shares of Registrable Securities proposed to be included and that such shares are to be included in any underwriting only on the same terms and conditions as the shares of Common Stock otherwise being sold through underwriters under such Company Registration. The Company shall use its best efforts to cause all Registrable Securities specified in the Piggyback Notice to be included in the Company Registration and any related offering, all to the extent requisite to permit the sale by Purchaser of such Registrable Securities in accordance with the method of sale applicable to the other shares of Common Stock included in the Company Registration. If the Company fails to file the Registrable Securities in such Registration Statement, then, at the option of Purchaser, for each full calendar month that the Registrable Securities are not fully registered, Company shall issue to Purchaser 0.1% of its Common Stock then outstanding computed on a Fully Diluted Basis per day until the shares are registered. B. Limitations on Piggyback Registrations. The Company's obligation to include Registrable Securities in the Company Registration pursuant to Section 4.15(a) shall be subject to the following limitations: (i) The Company shall not be obligated to include any Registrable Securities in a registration statement (I) filed on Form S- 4 or Form S-8 or such other similar successor forms then in effect under the Securities Act, (II) pursuant to which the Company is offering to exchange its own securities, or (III) relating to dividend reinvestment plans. (ii) If the managing underwriter(s), if any, of an offering related to the Company Registration determines in its reasonable judgment that marketing factors require a limitation of the number of shares of Common Stock that can be included in such offering, the managing underwriter(s) may exclude the appropriate number of shares of Common Stock held by the stockholders of the Company, including Purchaser, from such registration. If the managing underwriter(s) determine(s) to exclude from such offering any Registrable Securities that Purchaser desires to include or any shares of Common Stock that other Company stockholders with applicable registration rights desire to include, Purchaser and such other Company stockholders (except for such Person or Persons, if any, upon whose demand such Company Registration is being made) shall share pro rata in the portion of such offering available to them (the "Available Portion"), with Purchaser and each such other Company stockholder entitled to include in such Company Registration and related offering a number of shares of Common Stock equal to the product of (I) the Available Portion and (II) a fraction, the numerator of which is the total number of Registrable Securities which Purchaser desires to include in such Company Registration (in the case of Purchaser) or the total number of shares of Common Stock which such other Company stockholder desires to include in such Company Registration (in the case of each such other Company stockholder) and the denominator of which is (x) the total of the number of Registrable Securities which Purchaser desires to include in such Company Registration plus (y) the total number of shares of Common Stock that such other Company stockholders desire to include in such Company Registration. (b) Demand Registrations. (i) Requests for Registration. The Purchasers (or any lawful transferee thereof) may, in accordance herewith, request registration under the Securities Act of all or any portion of its Registrable Securities on Form S-1 or any similar long-form registration (a "Long-Form Registrations"), or on Form S-2 or S-3 (including pursuant to Rule 415 under the Securities Act) or any similar short-form registration (each, a "Short-Form Registration"), if available. All registrations requested pursuant to this Section 4.15(b) are referred to herein as "Demand Registrations." Each request for a Demand Registration shall specify the approximate number of Registrable Securities requested to be registered and the anticipated per share price range for such offering. Upon the Purchaser's request, the Company will include the offer and sale of Registrable Securities in such registration statement. In the event that the Company fails to include the Registrable Securities in a statement as required herein, the Purchaser shall give notice demanding a registration and within 75 days after the notice the Company shall prepare and file a registration statement with the SEC with respect to such Registrable Securities. If the Company fails to file within said time period, then, at the option of such Purchaser, for each full calendar month following such 75 day period that the Registrable Securities are not fully registered, the Company shall issue 0.1 % of its outstanding shares of Common Stock computed on a fully diluted basis per day until the shares are registered. (ii) Long-Form Registrations. Purchaser shall be entitled to request one Long-Form Registration. A registration shall not count as one of the permitted Long-Form Registrations until it has become effective. If Purchaser is unable to register and sell at least 90% of the Registrable Securities it has requested to be included in the first Long-Form Registration requested by it, it shall be entitled to a second Long-Form Registration, provided that such second Long-Form Registration may not be requested within six months of the effectiveness of the most recent Long-Form Registration requested by it. (iii) Short-Form Registrations. In addition to the Long-Form Registrations, each Purchaser shall be entitled to request an unlimited number of Short-Form Registrations; provided that the aggregate gross proceeds to be received by the Purchasers or other securities exercising their "piggyback" rights granted by the Company either herein or elsewhere in any such requested Short-Form Registration must exceed $500,000. Demand Registrations shall be Short- Form Registrations whenever the Company is permitted to use any applicable short form. The Company shall use its best efforts to make Short-Form Registrations on Form S-3 available for the sale of the Registrable Securities. If the Company, pursuant to the request of Purchaser, is qualified to and has filed with the SEC a registration statement under the Securities Act on Form S-3 pursuant to Rule 415 under the Securities Act (the "Required Registration"), then the Company shall use its best efforts to cause the Required Registration to be declared effective under the Securities Act as soon as practicable after filing, and, once effective, the Company shall cause such Required Registration to remain effective for a period ending on the earlier of (i) the date on which all Registrable Securities have been sold pursuant to the Required Registration, or (ii) the date as of which the Purchaser is able to sell all of the Registrable Securities then held by it within a ninety-day period in compliance with Rule 144 under the Securities Act. (iv) Priority on Demand Registrations. The Company shall not include in any Demand Registration any securities which are not Registrable Securities or which are not subject to registration rights agreements outstanding on the date hereof and which are identified on Schedule 3.1(u) hereto without the prior written consent of the Purchaser. If a Demand Registration is an underwritten offering and the managing underwriters advise the Company in writing that, in their opinion, the number of Registrable Securities and, if permitted hereunder, other securities requested to be included in such offering exceeds the number of securities, which can be sold in an orderly manner in such offering within a price range acceptable to Purchaser, then the Company shall include in such registration, prior to the inclusion of any securities which are not Registrable Securities, (i) first, the Registrable Securities requested to be included in such registration by the Purchaser, and (ii) second, the other securities requested to be included in such registration. (v) Restrictions on Demand Registrations. The Company shall not be obligated to effect any Demand Registration within 180 days after the effective date of a previous Demand Registration or a previous registration in which the Purchaser was given piggyback rights pursuant to Section 4.15(a) above and in which the reduction, if any, in the number of Registrable Securities requested to be included therein was not greater than 25%. The Company may postpone for up to 180 days the filing or the effectiveness of a registration statement for a Demand Registration if the Company, in good faith, concludes that such Demand Registration would reasonably be expected to have a Material Adverse Effect generally, and specifically with respect to any proposal or plan by the Company or any of its Subsidiaries to acquire financing, engage in any acquisition of assets (other than in the ordinary course of business), or engage in any merger, consolidation, tender offer, reorganization, or similar transaction; provided that, in such event, the Purchaser shall be entitled to withdraw such request and the Company shall pay all Registration Expenses in connection with such registration. The Company may delay a Demand Registration hereunder only once in any calendar year. (c) Provisions Applying to All Registrations Under Section 4.15. (i) Selection of Underwriter. Any Company Registration and related offering shall be managed by the Company; the Company shall have the power to select the managing underwriter(s) for such offering, and shall in consultation with the managing underwriter(s) have the power to determine the offering price, the underwriting discounts and commissions, the terms of the underwriting agreement and, the timing of the registration and related offering. To the extent that Purchaser participates in a Company Registration and related offering pursuant to Section 4.13(b), Purchaser shall enter into, and sell its Registrable Securities only pursuant to, the underwriting arranged by the Company, and shall either commit to attend the closing of the offering and take such other actions as may be reasonably necessary to effect Purchaser's participation in the offering and to provide any assurances reasonably requested by the Company and the managing underwriter(s) in that regard, or shall deliver to the Company in custody certificates representing all Registrable Securities to be included in the registration and shall execute and deliver to the Company a custody agreement and a power of attorney, each in form and substance appropriate for the purpose of effecting Purchaser's participation in the Company Registration and related offering and otherwise reasonably satisfactory to the Company. If Purchaser disapproves of the features of the Company Registration and related offering, Purchaser may withdraw therefrom (in whole or part) by written notice to the Company and the managing underwriter(s) delivered no later than ten days prior to the effectiveness of the applicable registration statement and the Registrable Securities of Purchaser shall thereupon be withdrawn from such registration. (ii) The Company shall furnish Purchaser such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of the Registrable Securities owned by it that are included in such registration; (ii) Whenever required to include Registrable Securities in any registration or to effect the registration of any Registrable Securities pursuant to this Agreement, the Company shall, as expeditiously as reasonably possible, prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its absolute best lawful efforts to cause such registration statement to become effective, and use its absolute best efforts to keep such registration statement effective until all such Registrable Securities have been distributed. In addition, the Company shall use its best lawful efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Purchaser, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify as a broker- dealer in any states or jurisdictions or to do business or to file a general consent to service of process in any of such states or jurisdictions. (iii) All expenses, other than underwriting discounts and commissions incurred in connection the registrations contemplated herein, including, without limitation, all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of one counsel for the selling Purchaser, shall be borne by the Company. (d) Subject to the terms and conditions of this Agreement and the other Transaction Documents, the right to cause the Company to register Registrable Securities pursuant to this Agreement may be assigned by Purchaser to any transferee or assignee of such securities; provided that said transferee or assignee is a transferee or assignee of at least five percent (5%) of the such Purchaser's Registrable Securities. ARTICLE V. SMALL BUSINESS INVESTMENT COMPANY 5.1 Small Business Investment Company Provisions. The Company acknowledges that Purchaser, is a small business investment company ("SBIC") licensed by the United States Small Business Administration (the "SBA"), and makes the following representations, warranties and covenants to Purchaser for so long as the Debenture held by Purchaser is outstanding: (a) Small Business Concern. The Company represents and warrants that it, taken together with its "affiliates" (as that term is defined in 13 C.F.R. S121.103), is a "Small Business Concern" within the meaning of 15 U.S.C. S662(5), that is Section 103(5) of the Small Business Investment Act of 1958, as amended (the "SBIC Act"), and the regulations thereunder, including 13 C.F.R. S107, and meets the applicable size eligibility criteria set forth in 13 C.F.R. S121.301(c)(1) or the industry standard covering the industry in which the Company is primarily engaged as set forth in 13 C.F.R. S121.301(c)(2). Neither the Company nor any of its Subsidiaries presently engages in any activities for which a small business investment company is prohibited from providing funds by the SBIC Act, including 13 C.F.R. S107. (b) Small Business Administration Documentation. On or before the Closing Date, Purchaser shall have received SBA Form 480 (Size Status Declaration) and SBA Form 652 (Assurance of Compliance) which have been completed and executed by the Company, and SBA Form 1031 (Portfolio Finance Report), Parts A and B of which have been completed by the Company (the "SBA Documents"). (c) Inspection. The Company will permit Purchaser or its representatives, at the Company's expense, and examiners of the SBA to visit and inspect the properties and assets of the Company, to examine its books of account and records, and to discuss the Company's affairs, finances and accounts with the Company's officers, senior management and accountants, all at such reasonable times as may be requested by Purchaser or the SBA. (d) Informational Covenant. Within sixty (60) calendar days after the end of the Company's fiscal year, the Company will furnish or cause to be furnished to Purchaser information required by the SBA concerning the economic impact of Purchaser's investment, for (or as of the end of) each fiscal year, including but not limited to: (i) board minutes, (ii) information concerning full-time equivalent employees, (iii) federal, state and local income taxes paid, (iv) gross revenue, (v) source of revenue growth, (vi) after-tax profit and loss, and (vii) and federal, state and local income tax withholding. Such information shall be forwarded by the Company on a form provided by Purchaser. The Company also will furnish or cause to be furnished to Purchaser such other information regarding the business, affairs and condition of the Company as Purchaser may from time to time reasonably request. (e) Use of Proceeds. The Company will deliver to Purchaser from time to time promptly following Purchaser's request, a written report, certified as correct by an officer, verifying the purposes and amounts for which proceeds from the Debenture have been disbursed. The Company will supply to Purchaser such additional information and documents as Purchaser reasonably requests with respect to the Company's use of proceeds, and will permit Purchaser to have access to any and all the Company's records and information and personnel as Purchaser deems necessary to verify how such proceeds have been or are being used, and to assure that the proceeds have been used for the purposes specified on Schedule 4.9. (f) Activities and Proceeds. (i) Neither the Company nor any of its Affiliates will engage in any activities or use directly or indirectly the proceeds from the Debenture for any purpose for which a SBIC is prohibited from providing funds by the SBIC Act, including 13 C.F.R. S107. (ii) Without obtaining the prior written approval of Purchaser, the Company will not change, within one (1) year of the Closing Date, the Company's business activity from that described on Schedule 5.1(f) to a business activity which a SBIC is prohibited from providing funds by the SBIC Act. The Company agrees that any such changes in its business activity without such prior written consent of Purchaser will constitute a material breach of the obligations of the Company under the Transaction Documents (an "Activity Event of Default"). ARTICLE VI. MISCELLANEOUS 6.1 Intentionally Omitted. 6.2 Fees and Expenses. At the closing, the Company shall reimburse Purchaser for its legal fees and expenses up to a maximum amount of $20,000. Except as expressly set forth above and in the Transaction Documents to the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement and the other Transaction Documents. The Company shall pay all transfer agent fees, stamp taxes and other taxes and duties levied in connection with the issuance of any Securities. 6.3 Entire Agreement. The Transaction Documents, together with the exhibits and schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules. 6.4 Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth on the signature pages attached hereto prior to 5:30 p.m. (Dallas, Texas time) on a Business Day, (b) the next Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth on the signature pages attached hereto on a day that is not a Business Day or later than 5:30 p.m. (Dallas, Texas time) on any Business Day, (c) the second Business Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as set forth on the signature pages attached hereto. 6.5 Amendments; Waivers. No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by the Company and Purchaser or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right. 6.6 Construction. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. 6.7 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of Purchaser. Purchaser may assign any or all of its rights under this Agreement to any Person to whom Purchaser assigns or transfers any Securities, provided such transferee agrees in writing to be bound, with respect to the transferred Securities, by the provisions hereof that apply to the Purchaser. 6.8 No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except as otherwise set forth in Section 4.10. 6.9 Governing Law. All questions concerning the construction, validity, enforcement and interpretation of the Transaction Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of Texas, 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 this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of Dallas, Texas. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of Dallas, Texas for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or inconvenient venue for such proceeding. THE PARTIES HEREBY WAIVE ALL RIGHTS TO A TRIAL BY JURY. If either party shall commence an action or proceeding to enforce any provisions of the Transaction Documents, 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. 6.10 Survival. The representations and warranties contained herein shall survive the Closing and the delivery of the Securities until the later of the satisfaction, complete conversion, or exercise of the Debenture and/or the Warrant, as the case may be. 6.11 Execution. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile signature page were an original thereof. 6.12 Severability. If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. 6.13 Rescission and Withdrawal Right. Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) the Transaction Documents, whenever Purchaser exercises a right, election, demand or option under a Transaction Document and the Company does not timely perform its related obligations within the periods therein provided, then Purchaser may rescind or withdraw, in its sole discretion from time to time upon written notice to the Company, any relevant notice, demand or election in whole or in part without prejudice to its future actions and rights; provided, however, in the case of a rescission of an exercise of a Warrant, Purchaser shall be required to return any shares of Common Stock subject to any such rescinded exercise notice. 6.14 Replacement of Securities. If any certificate or instrument evidencing any Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity, if requested. The applicants for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs associated with the issuance of such replacement Securities. 6.15 Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, Purchaser and the Company will be entitled to specific performance under the Transaction Documents. The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate. 6.16 Payment Set Aside. To the extent that the Company makes a payment or payments to Purchaser pursuant to any Transaction Documents or Purchaser enforces or exercises its rights thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. 6.17 Usury. To the extent it may lawfully do so, the Company hereby agrees not to insist upon or plead or in any manner whatsoever claim, and will resist any and all efforts to be compelled to take the benefit or advantage of, usury laws wherever enacted, now or at any time hereafter in force, in connection with any claim, action or proceeding that may be brought by Purchaser in order to enforce any right or remedy under any Transaction Documents. Notwithstanding any provision to the contrary contained in any Transaction Documents, it is expressly agreed and provided that the total liability of the Company under the Transaction Documents for payments in the nature of interest shall not exceed the maximum lawful rate authorized under applicable law (the "Maximum Rate"), and, without limiting the foregoing, in no event shall any rate of interest or default interest, or both of them, when aggregated with any other sums in the nature of interest that the Company may be obligated to pay under the Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum contract rate of interest allowed by law and applicable to the Transaction Documents is increased or decreased by statute or any official governmental action subsequent to the date hereof, the new maximum contract rate of interest allowed by law will be the Maximum Rate applicable to the Transaction Documents from the effective date forward, unless such application is precluded by applicable law. If under any circumstances whatsoever, interest in excess of the Maximum Rate is paid by the Company to Purchaser with respect to indebtedness evidenced by the Transaction Documents, such excess shall be applied by Purchaser to the unpaid principal balance of any such indebtedness or be refunded to the Company, the manner of handling such excess to be at Purchaser's election. 6.18 Intentionally Omitted. 6.19 Liquidated Damages. The Company's obligations to pay any partial liquidated damages or other amounts owing under the Transaction Documents is a continuing obligation of the Company and shall not terminate until all unpaid partial liquidated damages and other amounts have been paid notwithstanding the fact that the instrument or security pursuant to which such partial liquidated damages or other amounts are due and payable shall have been canceled. (Signature Page Follows) IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above. COMPANY RAPID LINK INCORORATED Address for Notice and Delivery: 17383 Sunset Boulevard Suite 350 Pacific Palisades, California 90272 Telephone: (310) 566-1700 Facsimile: (310) 573-9435 Attn: John Jenkins, CEO By:____________________________________ Name: John Jenkins Title: Chief Executive Officer PURCHASER TRIDENT GROWTH FUND, L.P. Address for Notice and Delivery: By: TRIDENT MANAGEMENT, LLC, its 700 Gemini GENERAL PARTNER Houston, TX 77058 Telephone: (281) 488-8484 Facsimile: (281) 488-5353 Attn: Larry St. Martin By:____________________________________ Name: Title: Authorized Member ATTACHMENTS Exhibit A Form of Debenture Exhibit B Form of Security Agreement Exhibit C Form of Warrant Exhibit D Form of Subordination Agreement Exhibit E SBA Form 480 Exhibit F SBA Form 652 Exhibit G SBA Form 1031 Schedule 3.1(a) Subsidiaries Schedule 3.1(e) Filings, Consents and Approvals Schedule 3.1(g) Capitalization Schedule 3.1(h) Financial Statements Schedule 3.1(i) Litigation Schedule 3.1(l) Regulatory Permits Schedule 3.1(m) Title to Assets (Outstanding liens) Schedule 3.1(n) Intellectual Property Schedule 3.1(r) Certain Fees (Broker Fees) Schedule 3.1(u) Registration Rights Schedule 3.1(cc) Indebtedness Schedule 3.1(ff) Material Liabilities Schedule 3.1(gg) Material Agreements Schedule 3.1(hh) Board of Directors Schedule 4.9 Use of Proceeds Schedule 5.1(f) Business Activity EX-4.2 3 exh4-2.txt 10% CONVERTIBLE DEBENTURE EXHIBIT 4.2 THIS SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITY AS PERMITTED BY LAW AND THE SECURITIES PURCHASE AGREEMENT PURSUANT TO WHICH THE SECURITIES WERE ISSUED. Original Issue Date: March 8, 2006 No. 1 $600,000 10% SECURED CONVERTIBLE DEBENTURE --------------------------------- This 10% Secured Convertible Debenture (this "Debenture") is a duly authorized and issued 10% Secured Convertible Debenture of RAPID LINK INCORPORATED, a Delaware corporation, having its principal place of business located at the address set forth on the signature page hereto (the "Company"), for the principal amount of SIX HUNDRED THOUSAND DOLLARS ($600,000), issued in connection with that certain Purchase Agreement (as defined below) of even date herewith entered into by and among the Company and the Holder. FOR VALUE RECEIVED, the Company promises to pay to TRIDENT GROWTH FUND, L.P., a Delaware limited partnership, having its principal place of business located at 700 Gemini, Houston, Texas 77058, or its registered assigns (the "Holder"), the principal sum of SIX HUNDRED THOUSAND DOLLARS ($600,000) on the earlier of (a) March 8, 2007; or (b) the consummation of a Change of Control Transaction (the "Maturity Date"), and to pay interest to the Holder on the then outstanding principal amount of this Debenture in accordance with the provisions hereof. This Debenture is subject to the following additional provisions: Section 1. Definitions. For the purposes hereof, in addition to the terms defined below and elsewhere in this Debenture, capitalized terms contained herein shall have the meanings given to such terms in the Purchase Agreement, and (b) the following terms shall have the following meanings: "Bankruptcy Event" means any of the following events: (a) the Company or any Subsidiary (as such term is defined in Rule 1.02(s) of Regulation S-X of the Exchange Act) thereof commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to the Company or any Subsidiary thereof; (b) there is commenced against the Company or any Subsidiary thereof any such case or Proceeding that is not dismissed within 60 days after commencement; (c) 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; (d) the Company or any Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 days; (e) the Company or any Subsidiary thereof makes a general assignment for the benefit of creditors; (f) the Company or any Subsidiary thereof calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; (g) the Company or any Subsidiary thereof, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing; or (h) an application for the appointment of a receiver or liquidator for the Company or any of its material assets. "Capital Lease" means any lease of property (real, personal or mixed) which, in accordance with GAAP, should be capitalized on the lessee's balance sheet or for which the amount of the asset and liability thereunder as if so capitalized should be disclosed in a note to such balance sheet. "Cash Flow" means an amount equal to (i) the Company's Consolidated EBITDA, minus (ii) the Company's Consolidated non-financed Capital Expenditures. "Consolidated EBITDA" means, for any Person for any period: (i) the consolidated net income of such Person and its Consolidated Subsidiaries for such period (after Income Taxes), calculated in accordance with GAAP, but excluding: (A) any gain arising from the sale of capital assets, (B) any gain arising from any write-up of assets, (C) earnings of any other Person, substantially all of the assets of which have been acquired by such Person or its Consolidated Subsidiaries in any manner, to the extent that such earnings were realized by such other Person prior to the date of such acquisition. (D) earnings of any Person in which the Person or its Consolidated Subsidiaries has an ownership interest (other than wholly owned Subsidiaries of such Person ), unless such earnings have actually been received by the Person or its Consolidated Subsidiaries in the form of cash distributions, (E) earnings of any Person to which assets of the Person or its Consolidated Subsidiaries shall have been sold, transferred or disposed of, or into which the Person shall have merged, to the extent that such earnings arise prior to the date of such transaction, (F) any gain arising from the acquisition of any securities of such Person or any of its Consolidated Subsidiaries, and (G) any extraordinary gain realized by such Person or any of its Consolidated Subsidiaries during such period. (ii) plus the following, but only in each case to the extent incurred by the Company and its Consolidated Subsidiaries during such period and deducted in the calculation above for such period, (A) all income and franchise taxes, (B) all Interest Expense, (C) all depreciation expense, and (D) all amortization expense. "Current Assets" means, at any particular time, all amounts which, in conformity with GAAP, would be included as current assets on a consolidated balance sheet of the Company and its Subsidiaries; provided, however, there shall be excluded therefrom (a) all prepaid expenses of every type and nature, (b) all amounts due from directors, officers, stockholders or other Affiliates, and all loans due from employees, and (c) all deferred charges. "Current Liabilities" means, at any particular time, all amounts (including deferred taxes) which, in conformity with GAAP, would be included as current liabilities on a consolidated balance sheet of the Company and its Subsidiaries. "Current Ratio" means the ratio of Current Assets to Current Liabilities. "Dallas Courts" shall have the meaning set forth in Section 7(e). "Debenture Register" shall have the meaning set forth in Section 2(b). "Event of Default" shall have the meaning set forth in Section 6. "Interest Expense" means, with respect to any Person and for any period (without duplication), all interest on that Person's debt, whether paid in cash or accrued as a liability and payable in cash during any subsequent period (including, without limitation, the interest component of Capital Leases), as determined by GAAP. "Late Fees" shall have the meaning set forth in Section 2(c). "Liabilities" mean all liabilities, obligations and indebtedness of any and every kind and nature (including, without limitation, lease obligations, accrued interest, charges, expenses, attorneys' fees and other sums) chargeable to the Company and made to or for the benefit of the Company, whether arising under this Debenture or arising under the any of the Transaction Documents, whether heretofore, now or hereafter owing, arising, due or payable from Company to the Holder and however evidenced, credited, incurred, acquired or owing, whether primary, secondary, direct, contingent, fixed, or otherwise, including obligation of performance. "Net Income" or "Net Loss" means, with respect to any Person for any period, the net income or net loss of such Person determined in accordance with GAAP, after payment of income taxes but excluding any extraordinary or non-recurring items. "Original Issue Date" shall mean the date of the first issuance of this Debenture regardless of the number of transfers of this or any portion of this Debenture and regardless of the number of instruments which may be issued to evidence such Debenture or Debentures. "Purchase Agreement" means the Securities Purchase Agreement, of even date herewith, to which the Company and the Holder are parties, as amended, modified or supplemented from time to time in accordance with its terms. Section 2. Interest. a) Payment of Interest in Cash. The Company shall pay interest, in cash, to the Holder on the then outstanding principal amount of this Debenture at the rate of 10% per annum, payable in equal monthly installments of cash via wire transfer of immediately available funds, in arrears, on the last day of each month for the period beginning on the Initial Issuance Date and ending on the Maturity Date or such earlier or later time when this Debenture is paid or prepaid in full (except that, if any such date is not a Business Day, then such payment shall be due on the next succeeding Business Day) (each such date, an "Interest Payment Date"), subject to the conversion rights of Holder as stated herein. b) Interest Calculations. Interest shall be calculated on the basis of a 360-day year and shall accrue daily commencing on the Original Issue Date until payment in full of the principal sum, together with all accrued and unpaid interest and other amounts which may become due hereunder, has been made. Interest hereunder will be paid to the Person in whose name this Debenture is registered on the records of the Company regarding registration and transfers of Debentures (the "Debenture Register"). c) Late Fee. 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. d) Prepayment. The Company may prepay all or any portion of the then outstanding principal amount of this Debenture without any prepayment premium or discount by providing Holder not less than five days prior written notice, such outstanding principal balance remaining subject to Holder's conversion rights hereunder until the actual prepayment is made following such notice period. Section 3. Conversion Right; Adjustments. The Holder of this Debenture shall have the right, at Holder's option, at any time on or after the Original Issue Date of this Debenture, to convert all, or, in multiples of $50,000, any part of this Debenture into such number of fully paid and nonassessable shares of Common Stock as shall be provided herein. The Holder of this Debenture may exercise the conversion right by giving written notice (a "Conversion Notice") to the Company of the exercise of such right and stating the name or names in which the stock certificate or stock certificates for the shares of Common Stock are to be issued and the address to which such certificates shall be delivered. The Conversion Notice shall be accompanied by this Debenture. The number of shares of Common Stock that shall be issuable upon conversion of the Debenture shall equal the then outstanding principal amount of this Debenture plus all accrued and unpaid interest due and payable on the Debenture on the Conversion Date (defined below) or a portion thereof (in the discretion of the Holder) divided by the Conversion Price (as defined below) in effect on the date the Conversion Notice is given. Conversion shall be deemed to have been effected on the date the Conversion Notice is delivered to the Company (each, a "Conversion Date"). Within ten Business Days after a Conversion Date, the Company shall issue and deliver by hand against a signed receipt therefor or by reputable overnight delivery carrier to the address designated in the Conversion Notice, a stock certificate or stock certificates of the Company representing the number of shares of Common Stock to which Holder is entitled and a check or cash in payment of all interest accrued and unpaid under the Debenture being converted up to and including the Conversion Date. If a stock certificate or stock certificates are not delivered within 10 business days after a Conversion Date, the Company shall pay and/or grant to Holder 0.1% (on a Fully Diluted Basis) of the Company's Common Stock per day until such certificates are delivered. The conversion rights will be governed by the following provisions: a) Conversion Price. The Conversion Price, subject to adjustment as set forth herein, shall be equal to $.30; provided, however, that in the event that this Debenture is not repaid and satisfied in full on or by September 7, 2006, such Conversion Price shall automatically, without the necessity for any further action by any party hereto, be reduced to $.14. b) Adjustment for Issuance of Shares at less than the Conversion Price. (i) If and whenever any Additional Common Stock (as herein defined) shares shall be issued by the Company (the "Stock Issue Date") for a consideration per share less than the Conversion Price, then in each such case the initial Conversion Price shall be reduced to a new Conversion Price in an amount equal to the consideration per share received by the Company for the additional shares of Common Stock then issued,; and, in the case of shares issued without consideration, the initial Conversion Price shall be reduced in amount and the number of shares issued upon conversion shall be increased in an amount so as to maintain for the Holder the right to convert this Debenture into shares equal in amount to the same percentage interest in the Common Stock of the Company as existed for the Holder immediately preceding the Stock Issue Date. (ii) Consideration for Shares. In case of the issuance of Additional Common Stock for a consideration part or all of which shall be cash, the amount of the cash consideration therefor shall be deemed to be the amount of the cash received by Company for such shares. In case of the issuance of any shares of Additional Common Stock for a consideration part or all of which shall be other than cash, the amount of the consideration therefor, other than cash, shall be deemed to be the then fair market value of the property received as determined by an investment banking firm selected by Holder. (iii) Reclassification of Shares. In case of the reclassification of securities into shares of Common Stock, the shares of Common Stock issued in such reclassification shall be deemed to have been issued for a consideration other than cash. Shares of Additional Common Stock issued by way of dividend or other distribution on any class of stock of the Company shall be deemed to have been issued without consideration. (iv) Split up or Combination of Shares. In case issued and outstanding shares of Common Stock shall be subdivided or split up into a greater number of shares of the Common Stock, the Conversion Price shall be proportionately decreased, and in case issued and outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Price shall be proportionately increased, such increase or decrease, as the case may be, becoming effective at the time of record of the split-up or combination, as the case may be. (v) The term "Additional Common Stock" herein shall mean, other than with respect to an Exempt Issuance, in the most broadest sense all shares of Common Stock or Common Stock Equivalents hereafter issued by the Company (including, but not limited to Common Stock held in the treasury of the Company, except Common Stock issued upon the conversion or exercise of any security purchased in connection with the Purchase Agreement. c) Adjustment for Mergers, Consolidations, Etc.. (i) In the event of distribution to all Common Stock holders of any stock, indebtedness of the Company or assets (excluding cash dividends or distributions from retained earnings) or other rights to purchase securities or assets, then, after such event, this Debenture will be convertible into the kind and amount of securities, cash and other property which the holder of the Debenture would have been entitled to receive if the holder owned the Common Stock issuable upon conversion of the Debenture immediately prior to the occurrence of such event. (ii) In case of any capital reorganization, reclassification of the stock of the Company (other than a change in par value or as a result of a stock dividend, subdivision, split up or combination of shares), this Debenture shall be convertible into the kind and number of shares of stock or other securities or property of the Company to which the holder of the Debenture would have been entitled to receive if the holder owned the Common Stock issuable upon conversion of the Debenture immediately prior to the occurrence of such event. The provisions of the foregoing sentence shall similarly apply to successive reorganizations, reclassifications, consolidations, exchanges, leases, transfers or other dispositions or other share exchanges. d) Notice of Adjustment. In the event the Company shall propose to take any action which shall result in an adjustment in the Conversion Price, the Company shall give notice to the Holder, which notice shall specify the record date, if any, with respect to such action and the date on which such action is to take place. Such notice shall be given on or before the earlier of ten days before the record date or the date which such action shall be taken. Such notice shall also set forth all facts (to the extent known) material to the effect of such action on the Conversion Price and the number, kind or class of shares or other securities or property which shall be deliverable or purchasable upon the occurrence of such action or deliverable upon conversion of this Debenture. Additionally, following completion of an event wherein the Conversion Price shall be adjusted, the Company shall furnish to the holder of this Debenture a statement, signed by an authorized officer of the Company of the facts creating such adjustment and specifying the resultant adjusted Conversion Price then in effect. e) Reservation of Shares. The Company warrants and agrees that it shall at all times reserve and keep available, free from preemptive rights, sufficient authorized and unissued shares of Common Stock to effect conversion of this Debenture. f) Registration Rights. The Holder has certain rights with respect to the registration of shares of Common Stock issued upon the conversion of this Debenture, such rights being specifically set forth in the Purchase Agreement entered into by and between Holder and the Company on the date hereof. g) Exercise Limitations. The Holder shall not have the right to convert any portion of this Debenture, pursuant to Section 3 or otherwise, to the extent that after giving effect to such issuance after exercise, the Holder (together with the Holder's affiliates), as set forth on the applicable Conversion Notice, would beneficially own in excess of 4.99% (or as applicable, 9.99%) of the number of shares of the Common Stock outstanding immediately after giving effect to such issuance. For purposes of the foregoing determination, the number of shares of Common Stock beneficially owned by the Holder and its affiliates shall include the number of shares of Common Stock issuable upon such conversion of this Debenture less the number of shares of Common Stock which would be issuable upon (A) conversion of the remaining, unexercised portion of this Debenture and (B) exercise or conversion of the unexercised or unconverted portion of any other Securities (including, without limitation, any other Debentures or Warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder. Except as set forth in the preceding sentence, for purposes of this Section 3(g), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act. To the extent that the limitation contained in this Section 3(g) applies, the determination of whether this Debenture is convertible (in relation to other securities owned by the Holder) and of which a portion of this Debenture is convertible shall be in the sole discretion of Holder. For purposes of this Section 3(g), in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) Schedule 3.1(g) to the Purchase Agreement, (y) a more recent public announcement by the Company including the annual report or quarterly report on Form 10-KSB or Form 10-QSB, as the case may be, most recently filed with the Commission; or (z) any other notice by the Company or the Company's Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the Company shall within two Business Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. The provisions of this Section 3(g) may be waived by the Holder upon, at the election of the Holder, not less than 61 days' prior notice to the Company, and the provisions of this Section 3(g) shall continue to apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver). Section 4. Registration of Transfers and Exchanges. a) Different Denominations. 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. b) Investment Representations. This Debenture has been issued subject to certain investment representations of the original Holder set forth in the Purchase Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement and applicable federal and state securities laws and regulations. c) Reliance on Debenture Register. Prior to due presentment to the Company for transfer of this Debenture, the Company and any agent of the Company may treat the Person in whose name this Debenture is duly registered on the Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Debenture is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. Section 5. Negative Covenants. So long as any portion of this Debenture is outstanding, without the prior written consent of the Holder, which consent may be withheld in the sole discretion of the Holder, the Company will not and will not permit any of its Subsidiaries to directly or indirectly: a) Indebtedness. Other than equipment leases of up to $50,000 in the aggregate for any 12 month period, enter into, create, incur, assume or suffer to exist any indebtedness or Liens, 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 to, or pari passu with, in any respect, the Company's obligations under the Debentures; b) Repayment of Indebtedness. Repay any principal due and owing on any promissory notes, debentures, or other forms of indebtedness, other than (i) periodic interest payments due and owing thereunder; (ii) repayment due of any principal amount or interest due or becoming due under or under this Debenture; and (iii) repayment of the indebtedness set forth in Schedule 4.9 to the Purchase Agreement; provided, however, nothing contained in this section shall prohibit the Company from making any payments with respect to trade payables made in the ordinary course of the Company's business; c) Repayment of Shares. Repay, repurchase or offer to repay, repurchase or otherwise acquire more than a de minimus number of shares of its Common Stock or other equity securities or as otherwise permitted by the Transaction Documents; d) Governing Documents. Amend its certificate of incorporation, bylaws or other charter documents so as to adversely affect any rights of the Holder in its capacity as a holder of the Debentures; e) Loans and Investments. Lend or advance money, credit or property to any Person, or invest in (by capital contribution or otherwise), or purchase or repurchase the stock or indebtedness or assets or properties of any Person, or agree to do any of the foregoing, other than in the ordinary course of business; f) Guarantees. Assume, endorse or otherwise become or remain liable in connection with the obligations (including accounts payable) of any other Person, other than in the ordinary course of business. g) Sale of Assets, Dissolution, Etc. Transfer, sell, assign, lease or otherwise dispose of any of its properties or assets, or any assets or properties necessary or desirable for the proper conduct of its business, or transfer, sell, assign or otherwise dispose of any of its accounts, or contract rights to any Person, or change the nature of its business, wind-up, liquidate or dissolve, or agree to any of the foregoing, other than in the ordinary course of business; h) Acquisition of Assets. Agree to purchase, acquire, or lease of any assets of any Person, other than in the ordinary course of business; i) Compensation. Increase the compensation of any of its officers or consultants making more than $100,000 per year, hire any relative of any officer, director or shareholder of the Company, or pay a bonus to any such person. j) Subsidiaries. Establish or form a partially or wholly owned Subsidiary. Sell, transfer or assign any interest in the Company's existing Subsidiaries. k) No Further Issuance of Securities. Other than in accordance herewith or with respect to an Exempt Issuance, create, issue or permit the issuance of any additional securities of the Company or of any of its Subsidiaries (including with respect to any Qualifying Transaction), if any, or any rights, options or warrants to acquire any such securities; provided, however, that in the event that Company desires to issue securities with preferences or rights greater than that which the Common Stock has and the Holder consents to same, the Holder will then have the option of converting all or any part of this Debenture into such stock in lieu of the Common Stock; l) No Dividends; No Redemption. Declare any dividend, pay or set aside for payment any dividend or other distribution, in cash, stock, or other property, or make any payment to any related parties, including to any preferred stockholders, as a dividend, redemption, or otherwise, other than the payment of salaries in the ordinary course of business. m) Stock Splits. Undertake a reverse or forward stock split or reclassification of the Common Stock; or n) Agreement. Enter into any agreement obligating the Company to undertake any of the matters set forth in this Section 5. Section 6. Affirmative Covenants. So long as any portion of this Debenture is outstanding and unless the Holder otherwise consents in writing, which consent may be withheld in the sole discretion of the Holder, the Company will: a) Taxes and Liens. Promptly pay, or cause to be paid, all taxes, assessments and other governmental charges which may lawfully be levied or assessed upon the income or profits of the Company, or upon any property, real, personal or mixed, belonging to the Company, or upon any part thereof, and also any lawful claims for labor, material and supplies which if unpaid, might become a lien or charge against any such property; provided, however, the Company shall not be required to pay any such tax, assessment, charge, levy or claim so long as the validity thereof shall be actively contested in good faith by proper proceedings; but, provided further that any such tax, assessment, charge, levy or claim shall be paid or bonded in a manner satisfactory to the Holder upon the commencement of proceedings to foreclose any lien securing the same. b) Business and Existence. Do or cause to be done all things necessary to preserve and to keep in full force and effect any licenses necessary to the business of the Company, its corporate existence and rights of its franchises, trade names, trademarks, and permits which are reasonably necessary for the continuance of its business; and continue to engage principally in the business currently operated by the Company. c) Insurance and Properties. Keep its business and properties insured at all times with responsible insurance companies and carry such types and amounts of insurance as are required by all federal, state and local governments in the areas which the Company does business and as are usually carried by entities engaged in the same or similar business similarly situated. In addition, the Company shall maintain in full force and effect policies of liability insurance in amounts at least equal to that currently in effect. d) Maintain Property and Assets. Maintain its property and assets in good order and repair and, from time to time, make all needed and proper repairs, renewals, replacements, additions and improvements thereto, so that the business carried on may be properly and advantageously conducted at all times in accordance with prudent business management, and maintain annually adequate reserves for maintenance thereof. e) True Books. Keep true books of record and account in which full, true and correct entries will be made of all of its dealings and transactions, and set aside on its books such reserves as may be required by GAAP, consistently applied, with respect to all taxes, assessments, charges, levies and claims referred to in (a) above, and with respect to its business in general, and include such reserves in interim as well as year-end financial statements. f) Right of Inspection. Permit any person designated by the Holder, at the Holder's expense, to visit and inspect any of the properties, books and financial reports of the Company, all at such reasonable times upon three (3) Business Days prior notice to Company, and as often as the Holder may reasonably request, provided the Holder does not unreasonably interfere with the daily operations of the Company and Holder executes a confidentiality agreement. g) Observance of Laws. Conform to and duly observe all laws, regulations and other valid requirements of any regulatory authority with respect to the conduct of its business except those that would not cause a Material Adverse Effect, as determined in the reasonable discretion of the Holder. h) Company's Knowledge of Default. Upon an officer or director of the Company obtaining knowledge of, or threat of, an Event of Default hereunder, cause such officer to promptly, within no more than five Business Days, deliver to the Holder notice thereof specifying the nature thereof, the period of existence thereof, and what action the Company has taken and/or proposes to take with respect thereto. i) Notice of Proceedings. Upon an officer or director of the Company obtaining knowledge of any material litigation, dispute or proceedings being instituted or threatened against the Company, or any attachment, levy, execution or other process being instituted against any assets of the Company, cause such officer to promptly, within no more than five Business Days, give the Holder written notice of such litigation, dispute, proceeding, levy, execution or other process. j) Certificate of Covenant Compliance Within 30 days of the last day of each March, June, September and December, the Company will issue a Certificate of Covenant Compliance, executed by either the Chief Executive Officer or Chief Financial Officer in the form of Exhibit A attached hereto. If the Company is not in compliance with the covenants specified in this Section 5, the Company will modify the Certificate of Covenant Compliance by stating the exception and providing a detailed explanation of the non-compliance. k) Payment of Holder's Expenses. If at any time or times hereafter, Holder employs counsel to commence, defend or intervene, file a petition, complaint, answer, motion or other pleading, or to take any action in or with respect to any suit or proceeding (bankruptcy or otherwise) relating to this Debenture or any other Transaction Document, or any other agreement, guaranty, note, instrument or document heretofore, now or at any time or times hereafter executed by the Company and delivered to Holder, or to enforce any rights of Holder hereunder whether before or after the occurrence of any Event of Default, or to collect any of the Liabilities, then in any of such events, all of the reasonable attorneys' fees arising from such services, and any expenses, costs and charges relating thereto, shall be part of the Liabilities, payable on demand. l) Financial Covenants. As of the 75th date following the date of this Agreement and thereafter continuing until the Termination Date, the Company must maintain the following ratios: (i) Cash Interest Coverage. Until this Debenture is repaid in full, the Company shall maintain a Consolidated EBITDA and cash balance, including cash received from future financings, excluding cash required to pay down its debt instruments due within 1 year, based on any of the Company's quarterly financial statements (as determined on the last day of each fiscal quarter for the immediately preceding quarter), in an amount that will ensure payment of all interest due monthly after the closing date and after the closing of the Telenational transaction, until this debenture is paid in full. (ii) Current Ratio. The Company's current ratio, after the completion of the Telenational transaction, and future anticipated financings, will improve the Company's current ratio as compared to the Company's current ratio as of the Closing Date. . The Current Ratio shall be calculated and tested quarterly as of the last day of each fiscal quarter of the Company. (iii) Actual versus Budget. The Company shall on a quarterly basis achieve 75 percent of its budgeted revenue and income. Budget numbers shall be those delivered to Holder contemporaneously herewith and then on an annual calendar basis. It is understood by both parties that Trident Growth Fund has not received a budget from the Company, as such information is not provided by the Company in connection with any financing transactions. Notwithstanding the foregoing, the achievement of the above covenants as set forth in this Section 6(l) is contingent upon the closing of the Telenational Communications, Inc. transaction and the anticipated future financing of at least $5.0 million, required to close the transaction and provide the necessary cash flow to pay down the Company's debt financings as they come due within the next 12 months. It is understood that the Company may not achieve these covenants if the financing it obtains is less than $5.0 million. Section 7. 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 (A) the principal amount of any Debenture, or (B) interest (including Late Fees) on, or liquidated damages in respect of, any Debenture, in each case free of any claim of subordination, as and when the same shall become due and payable (whether on the Maturity Date or by acceleration or otherwise); ii. the Company shall fail to observe or perform any other covenant or agreement contained in this Debenture or any of the other Transaction Documents which failure is not cured, if possible to cure, within the earlier to occur of (A) 10 Business Days after notice of such default sent by the Holder or by any other holder and (B) 10 Business Days after the Company shall become or should have become aware of such failure; iii. a default or event of default (subject to any grace or cure period provided for in the applicable agreement, document or instrument) shall occur under (A) any of the Transaction Documents or (B) any other material agreement, lease, document or instrument to which the Company or any Subsidiary is bound and not cured; iv. any representation or warranty made herein, in any other Transaction Documents, in any written statement pursuant hereto or thereto, or in any other report, financial statement or certificate made or delivered to the Holder or any other holder of Debentures shall be untrue or incorrect in any material respect as of the date when made or deemed made; v. there shall have occurred a Bankruptcy Event; vi. the Company or any Subsidiary shall default in any of its obligations under 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. vii. the Company shall be a party to any Change of Control Transaction or Fundamental Transaction, shall agree to sell or dispose of 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 any its outstanding shares of Common Stock or Common Stock Equivalents; viii. the Company shall fail to have available a sufficient number of authorized and unreserved shares of Common Stock to issue to such Holder upon exercise of the Warrants in full and not remedied as permitted in the Transaction Documents; ix. the Company shall redeem any of the Common Stock Equivalents; x. upon the reasonable determination by the Holder that there has been a Material Adverse Effect; or xi. the occurrence of an Activity Event of Default (as defined in Section 5.1(f)(ii) of the Purchase Agreement); b) Remedies Upon Event of Default. If any Event of Default occurs, the full principal amount of this Debenture, together with interest and other amounts owing in respect thereof, to the date of acceleration shall become, at the Holder's election, immediately due and payable in cash. Commencing 30 days after the occurrence of any Event of Default, the interest rate on this Debenture shall, while such Event of Default is continuing, accrue at the rate of 18% per annum, or such lower maximum amount of interest permitted to be charged under applicable law. All Debentures for which the full principal amount 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 8. Miscellaneous. a) Notices. Any and all notices or other communications or deliveries to be provided by the Holder hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service, addressed to the Company, at the address or facsimile number set forth on the signature page hereto, or such other address or facsimile number as the Company may specify for such purposes by notice to the Holders delivered in accordance with this Section. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service addressed to the Holder at the facsimile number or address of the Holder appearing herein, or such other address or facsimile number as the Holder may specify in accordance with this Section. 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 on the signature page hereto prior to 5:30 p.m. (Dallas, Texas time), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified on the signature page hereto later than 5:30 p.m. (Dallas, Texas time) on any date and earlier than 11:59 p.m. (Dallas, Texas time) on such date, (iii) the second Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. b) Absolute Obligation. Except as expressly provided herein, no provision of this Debenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, interest and liquidated damages (if any) on, this Debenture at the time, place, and rate, and in the coin or currency, herein prescribed. This Debenture is a direct debt obligation of the Company. This Debenture ranks pari passu with all other Debentures now or hereafter issued under the terms set forth herein. c) Security Interest. This Debenture is a direct debt obligation of the Company and, pursuant to the Security Documents, is secured by a first priority security interest in all of the assets of the Company other than those assets not already pledged to the Global Capital Companies as security for prior loans made. d) Lost or Mutilated Debenture. 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. e) Governing Law. 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 Texas, 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 Dallas, Texas (the "Dallas Courts"). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the Dallas 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 Dallas 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. f) Waiver. 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. g) Severability. If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this Debenture shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates applicable laws governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum permitted rate of interest. h) Next Business Day. 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. i) Headings. The headings contained herein are for convenience only, do not constitute a part of this Debenture and shall not be deemed to limit or affect any of the provisions hereof. j) Usury. To the extent it may lawfully do so, the Company hereby waives and agrees not to insist upon or plead or in any manner whatsoever claim, and will resist any and all efforts to be compelled to take the benefit or advantage of, usury laws wherever enacted, now or at any time hereafter in force, in connection with any claim, action or proceeding that may be brought by any Purchaser in order to enforce any right or remedy under any Transaction Documents. Notwithstanding any provision to the contrary contained in any Transaction Documents, it is expressly agreed and provided that the total liability of the Company under the Transaction Documents for payments in the nature of interest shall not exceed the Maximum Rate, and, without limiting the foregoing, in no event shall any rate of interest or default interest, or both of them, when aggregated with any other sums in the nature of interest that the Company may be obligated to pay under the Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum contract rate of interest allowed by law and applicable to the Transaction Documents is increased or decreased by statute or any official governmental action subsequent to the date hereof, the new maximum contract rate of interest allowed by law will be the Maximum Rate applicable to the Transaction Documents from the effective date of such increase or decrease forward, unless such application is precluded by applicable law. If under any circumstances whatsoever, interest in excess of the Maximum Rate is paid by the Company to any Purchaser with respect to indebtedness, if any, evidenced by the Transaction Documents, such excess shall be applied by such Purchaser to the unpaid principal balance of any such indebtedness or be refunded to the Company, the manner of handling such excess to be at such Purchaser's election in the event any principal amount remains outstanding. (k) Amendment. This Agreement may not be amended, supplemented or modified, except by an agreement in writing signed by each of the parties hereto. [Signature Page Follows] IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed by a duly authorized officer as of the date first above indicated. COMPANY RAPID LINK INCORPORATED Address for Notice and Delivery: 17383 Sunset Boulevard Suite 350 Pacific Palisades, California 90272 Telephone: (310) 566-1700 Facsimile: (310) 573-9435 Attn: John Jenkins, CEO By:____________________________________ Name: John Jenkins Title: Chief Executive Officer EXHIBIT A I, the undersigned, hereby represent that Rapid Link Incorporated is in compliance with all of its covenants specified in Sections 5 and 6 of that certain 10% Secured Convertible Debenture originally dated as of March 8, 2006, executed by Rapid Link Incorporated, in favor of Trident Growth Fund, L.P. RAPID LINK INCORPORATED By:____________________________________ Name: Title: EX-4.3 4 exh4-3.txt COMMON STOCK PURCHASE WARRANT EXHIBIT 4.3 NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES AS PERMITTED BY LAW AND THE SECURITIES PURCHASE AGREEMENT PURSUANT TO WHICH THE SECURITIES WERE ISSUED. COMMON STOCK PURCHASE WARRANT NO. 1 To Purchase Shares of Common Stock of RAPID LINK INCORPORATED This COMMON STOCK PURCHASE WARRANT (this "Warrant") certifies that, for value received, TRIDENT GROWTH FUND, L.P., a Delaware limited partnership (the "Holder"), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof, March 8, 2006 (the "Initial Exercise Date"), and on or prior to the close of business on the fifth anniversary of the Initial Exercise Date (the "Termination Date"), to subscribe for and purchase from RAPID LINK INCORPORATED, a Delaware corporation (the "Company"), such number of shares of common stock, par value $001 per share, of the Company (the "Common Stock"), subject to adjustment herein (the "Warrant Shares") as follows: a) 600,000 at an Exercise Price equal to $.14; plus b) 600,000 at an Exercise Price equal to $.25 per share; plus c) an additional 30,000 to vest and become exercisable on the last day of each month prior to the Company's satisfaction in full of the Debenture, or the Holder's complete conversion thereof, as the case may be, such Warrant Shares to have an Exercise Price equal to $.25 per share. Section 1. Definitions. Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain Securities Purchase Agreement (the "Purchase Agreement"), of even date herewith, entered into by and among the Company and the Holder. Section 2. Exercise. a) Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date and on or before the Termination Date (each, an "Exercise Date") by delivery to the Company of a duly executed facsimile copy of the Notice of Exercise Form annexed hereto (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company); provided, however, within five Business Days of the date said Notice of Exercise is delivered to the Company, the Holder shall have surrendered this Warrant to the Company and the Company shall have received payment of the aggregate Exercise Price of the shares thereby purchased by wire transfer or cashier's check drawn on a United States bank. Exercise Price. The Exercise Price (so called herein) of each share of Common Stock under this Warrant shall be equal to the amount set forth above in the paragraph immediately preceding Section 1. Any reference to the Exercise Price herein shall relate to the Exercise Price relevant to such Warrant Shares as described above. b) Cashless Exercise. If at any time after one year from the date of issuance of this Warrant there is no effective Registration Statement registering the resale of the Warrant Shares by the Holder, then this Warrant may also be exercised at such time by means of a "cashless exercise" in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where: (A) = the price of said Common Stock determined by reference to the last reported sale price for the Common Stock on such day on the principal securities exchange on which the Common Stock is listed or admitted to trading or if no such sale takes place on such date, the average of the closing bid and asked prices thereof as officially reported, or, if not so listed or admitted to trading on any securities exchange, the last sale price for the Common Stock on the National Association of Securities Dealers national market system on such date, or, if there shall have been no trading on such date or if the Common Stock shall not be listed on such system, the average of the closing bid and asked prices in the over-the-counter market as furnished by any NASD member firm selected from time to time by the Company for such purpose or, if the Common Stock is not traded, then such price as is reasonably determined by the Company's Board of Directors (the "Market Value"); (B) = the Exercise Price of this Warrant, as adjusted; and (X) = the number of Warrant Shares issuable upon exercise of this Warrant in accordance with the terms of this Warrant by means of a cash exercise rather than a cashless exercise. Notwithstanding anything herein to the contrary, on the Termination Date, this Warrant shall be automatically exercised via cashless exercise pursuant to this Section 2(c). c) Exercise Limitations. The Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise, the Holder (together with the Holder's affiliates), as set forth on the applicable Notice of Exercise, would beneficially own in excess of 4.99% (or as applicable, 9.99%) of the number of shares of the Common Stock outstanding immediately after giving effect to such issuance. For purposes of the foregoing determination, the number of shares of Common Stock beneficially owned by the Holder and its affiliates shall include the number of shares of Common Stock issuable upon such exercise of this Warrant less the number of shares of Common Stock which would be issuable upon (A) exercise of the remaining, nonexercised portion of this Warrant and (B) exercise or conversion of the unexercised or unconverted portion of any other Securities (including, without limitation, any other Debentures or Warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder. Except as set forth in the preceding sentence, for purposes of this Section 2(c), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act. To the extent that the limitation contained in this Section 2(c) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder) and of which a portion of this Warrant is exercisable shall be in the sole discretion of such Holder. For purposes of this Section 2(c), in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) Schedule 3.1(g) to the Purchase Agreement, (y) a more recent public announcement by the Company, including the most recent annual or quarterly report of Form 10-KSB or 10-QSB filed with the Commission; or (z) any other notice by the Company or the Company's transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the Company shall within two Business Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. The provisions of this Section 2(c) may be waived by the Holder upon, at the election of the Holder, not less than 61 days' prior notice to the Company, and the provisions of this Section 2(c) shall continue to apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver). d) Mechanics of Exercise. i. Authorization of Warrant Shares. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issuance thereof (other than taxes in respect of any transfer occurring contemporaneously with such issuance). The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. ii. Delivery of Certificates Upon Exercise. Certificates for shares purchased hereunder shall be transmitted by the transfer agent of the Company to the Holder by crediting the account of the Holder's prime broker with the Depository Trust Company through its Deposit Withdrawal Agent Commission ("DWAC") system if the Company is a participant in such system and if the certificates may be issued without a restrictive legend in accordance with applicable federal securities laws, and otherwise by physical delivery to the address specified by the Holder in the Notice of Exercise within two (2) Business Days from the delivery to the Company of the Notice of Exercise Form, surrender of this Warrant and payment of the aggregate Exercise Price as set forth above ("Warrant Share Delivery Date"). This Warrant shall be deemed to have been exercised on the date the Exercise Price is received by the Company. The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised by payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 2(d)(vii) prior to the issuance of such shares, have been paid. iii. Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant. iv. Rescission Rights. If the Company fails to cause its transfer agent to transmit to the Holder a certificate or certificates representing the Warrant Shares pursuant to this Section 2(d)(iv) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise. v. Failure to Timely Deliver Certificates Upon Exercise. In addition to any other rights available to the Holder, if the Company or the Company's transfer agent fails to cause delivery to the Holder of a certificate or certificates representing the Warrant Shares or if the Company or its transfer agent fails to deliver such certificates without the restrictive legend (if applicable) on or before the Warrant Share Delivery Date, the Company shall pay to Purchaser, in cash, as partial liquidated damages and not as a penalty, the greater of (i) $500 for each Business Day after the Warrant Share Delivery Date until such certificate is delivered with an appropriate legend or without a restrictive legend, as the case may be; and (ii) the difference in the Market Value of the Warrant Shares on the Warrant Share Delivery Date and the date such shares are actually received by the Holder. Nothing herein shall limit Purchaser's right to pursue actual damages for the Company's failure to deliver certificates representing any Securities as required herein, and Purchaser 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. vi. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall round such fractional share up to the next whole number. vii. Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. viii. Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof. Section 3. Certain Adjustments. a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (A) pays a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company pursuant to this Warrant), (B) subdivides outstanding shares of Common Stock into a larger number of shares, (C) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (D) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case 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 outstanding after such event and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted. Any adjustment made pursuant to this Section 3(a) 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. b) Subsequent Equity Sales. If the Company 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 any Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock, at an effective price per share less than the then Exercise Price (such lower price, the "Base Share Price" and such issuances collectively, a "Dilutive Issuance"), as adjusted hereunder (if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which is issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share which is less than the Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price), then, the Exercise Price shall be reduced to equal the Base Share Price. 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 Equivalents subject to this section, indicating therein the applicable issuance price, or of applicable reset price, exchange price, conversion price and other pricing terms (such notice the "Dilutive Issuance Notice"). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 3(b), upon the occurrence of any Dilutive Issuance, after the date of such Dilutive Issuance the Holder is entitled to receive a number of Warrant Shares based upon the Base Share Price regardless of whether the Holder accurately refers to the Base Share Price in the Notice of Exercise. c) Pro Rata Distributions. If the Company, at any time prior to the Termination Date, shall distribute to all holders of Common Stock (and not to Holders of the Warrants) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security other than the Common Stock (which shall be subject to Section 3(b)), then in each such case the Exercise Price shall be adjusted 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 closing bid price of the Common Stock on the then principal Trading Market determined as of the record date mentioned above (if the closing bid price of the Common Stock on the then principal Trading Market shall then be determinable and otherwise the fair market value per share as determined by the Board of Directors in good faith, and of which the numerator shall be such closing bid price of the Common Stock on the then principal Trading Market on such record date less the then per share 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. d) Fundamental Transaction. If, at any time while this Warrant is outstanding, there occurs a Fundamental Transaction, then, upon any subsequent conversion of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise absent such Fundamental Transaction, at the option of the Holder, (a) upon exercise of this Warrant, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Alternate Consideration receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event or (b) if the Company is acquired in an all cash transaction, cash equal to the value of this Warrant as determined by the difference between the applicable Exercise Price and the amount of cash paid per share to the shareholders of the Company (the "Alternate Consideration"). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. To the extent necessary to effectuate the foregoing provisions, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new warrant consistent with the foregoing provisions and evidencing the Holder's right to exercise such warrant into Alternate Consideration. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this Section 3(d) and insuring that this Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction. e) Exempt Issuance. Notwithstanding the foregoing, no adjustments, Alternate Consideration, nor notices shall be made, paid, or issued under this Section 3 in respect of an Exempt Issuance. f) Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. The number of shares of Common Stock outstanding at any given time shall not includes shares of Common Stock owned or held by or for the account of the Company, and the description of any such shares of Common Stock shall be considered on issue or sale of Common Stock. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding. g) Voluntary Adjustment By Company. The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. h) Intentionally Omitted. i) Notice to Holders. i. Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to this Section 3, the Company shall promptly mail to each Holder a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. If the Company issues a variable rate security, the Company shall be deemed to have issued Common Stock or Common Stock Equivalents at the lowest possible conversion or exercise price at which such securities may be converted or exercised in the case of a Variable Rate Transaction (as defined in the Purchase Agreement), or the lowest possible adjustment price in the case of an MFN Transaction. The term "MFN Transaction" shall mean a transaction in which the Company issues or sells any securities in a capital raising transaction or series of related transactions which grants to an investor the right to receive additional shares based upon future transactions of the Company on terms more favorable than those granted to such investor in such offering. ii. Notice to Allow Exercise by Holder. 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 mailed to the Holder at its last address as it shall appear upon the Warrant Register 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, however 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. The Holder is entitled to exercise this Warrant during the 20-day period commencing the date of such notice to the effective date of the event triggering such notice. Section 4. Transfer of Warrant. a) Transferability. Subject to compliance with any applicable securities laws and the conditions set forth in Sections 5(a) and 4(d) hereof and to the provisions of Section 4.1 of the Purchase Agreement, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued. b) New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. c) Warrant Register. 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, absent actual notice to the contrary. d) Transfer Restrictions. If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such transfer (i) that the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an "accredited investor" as defined in Rule 501(a) of Regulation D promulgated under the Securities Act or a qualified institutional buyer as defined in Rule 144A(a) under the Securities Act. Section 5. Covenants. (a) Negative Covenants. So long as any portion of this Warrant is outstanding, without the prior written consent of the Holder, which consent may be withheld in the sole discretion of the Holder, the Company will not and will not permit any of its Subsidiaries to directly or indirectly: i. Sale of Assets, Dissolution, Etc. Transfer, sell, assign, lease or otherwise dispose of all or substantially all of its properties or assets, or any assets or properties necessary or desirable for the proper conduct of its business, or transfer, sell, assign or otherwise dispose of any of its accounts, or contract rights to any person or entity, or change the nature of its business, wind-up, liquidate or dissolve, or agree to any of the foregoing, other than in the ordinary course of business; ii. No Further Issuance of Securities. Other than in accordance herewith or with respect to an Exempt Issuance, create, issue or permit the issuance of any additional securities of the Company or of any of its Subsidiaries (including with respect to any Qualifying Transaction), if any, or any rights, options or warrants to acquire any such securities; provided, however, that in the event that Company desires to issue securities with preferences or rights greater than that which the Common Stock has and the Holder consents to same, the Holder will then have the option of converting all or any part of this Debenture into such stock in lieu of the Common Stock;; iii. Agreement. Enter into any agreement obligating the Company to undertake any of the matters set forth in this Section 5(a). (b) Affirmative Covenants. So long as any portion of this Warrant is outstanding and unless the Holder otherwise consents in writing, which consent may be withheld in the sole discretion of the Holder, the Company will: i. True Books. Keep true books of record and account in which full, true and correct entries will be made of all of its dealings and transactions, and set aside on its books such reserves as may be required by GAAP, consistently applied, with respect to all taxes, assessments, charges, levies and claims referred to in (a) above, and with respect to its business in general, and include such reserves in interim as well as year-end financial statements; and ii. Right of Inspection. Permit any person designated by the Holder, at the Holder's expense, to visit and inspect any of the properties, books and financial reports of the Company, all at such reasonable times upon three (3) Business Days prior notice to the Company, and as often as the Holder may reasonably request, provided the Holder does not unreasonably interfere with the daily operations of the Company and Holder executes a confidentiality agreement. Section 6. Miscellaneous. a) Title to Warrant. Prior to the Termination Date and subject to compliance with applicable laws and Section 4 of this Warrant, this Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the Holder in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. The transferee shall sign an investment letter in form and substance reasonably satisfactory to the Company. b) No Rights as Shareholder Until Exercise. This Warrant does not entitle the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof. Upon the surrender of this Warrant and the payment of the aggregate Exercise Price (or by means of a cashless exercise), the Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment. c) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate. d) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. e) Authorized Shares. The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. f) Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the provisions of the Purchase Agreement. g) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws. h) Expenses. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. i) Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Purchase Agreement. j) Limitation of Liability. No provision hereof, in the absence of any affirmative action by Holder to exercise this Warrant or purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. k) Remedies. Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. l) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares. m) Amendment and Waiver. This Warrant may be modified or amended only with the written consent of the Company and the Holder. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies, notwithstanding the fact that all rights hereunder terminate on the Termination Date. n) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant. o) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. p) Registration Rights. The Holder has certain rights with respect to the registration of the Warrant Shares upon exercise of this Warrant, such rights being specifically set forth in the Purchase Agreement entered into by and between Holder and the Company on the date hereof. [Signature Page Follows] IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first written above. RAPID LINK INCORPORATED. By:____________________________________ Name: John Jenkins Title: Chief Executive Officer NOTICE OF EXERCISE TO: BPK RESOURCES, INC. (1) The undersigned hereby elects to purchase ________ Warrant Shares of Rapid Link Incorporated pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any. (2) Payment shall take the form of (check applicable box): [ ] in lawful money of the United States; or [ ] the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c). (3) Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below: _______________________________ The Warrant Shares shall be delivered to the following: _______________________________ _______________________________ _______________________________ (4) Accredited Investor. The undersigned, and, if applicable, the person or entity identified in subsection 3 above, is an "accredited investor" as defined in Regulation D promulgated under the Securities Act of 1933, as amended. [SIGNATURE OF HOLDER] Name of Investing Entity: __________________________________________________ Signature of Authorized Signatory of Investing Entity:______________________ Name of Authorized Signatory: ______________________________________________ Title of Authorized Signatory: _____________________________________________ Date: ______________________________________________________________________ ASSIGNMENT FORM (To assign the foregoing warrant, execute this form and supply required information. Do not use this form to exercise the warrant.) FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to _______________________________________________ whose address is _______________________________________________________________. ________________________________________________________________ Dated: ______________, ________ Holder's Signature: _____________________________ Holder's Address: _____________________________ _____________________________ Signature Guaranteed: _________________________________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant. EX-4.4 5 exh4-4.txt SECURITY AGREEMENT EXHIBIT 4.4 SECURITY AGREEMENT This SECURITY AGREEMENT, dated as of March 8, 2006 (this "Agreement"), is entered into by and among RAPID LINK INCORPORATED a Delaware corporation (the "Debtor") and the TRIDENT GROWTH FUND, L.P. a California limited liability corporation, (the "Secured Party"), the Holder of that certain 10% Secured Convertible Debenture due March 8, 2007 (or such earlier contingent date as set forth therein) in the original aggregate principal amount of $600,000 (the "Debenture"), issued by Debtor to the Secured Party in connection with that certain Securities Purchase Agreement of even date herewith entered into by and between the Debtor and the Secured Party (the "Purchase Agreement"). W I T N E S S E T H: WHEREAS, pursuant to the Debenture, the Secured Party has agreed to extend certain loans described above to the Debtor as evidenced by the Debenture; and WHEREAS, in order to induce the Secured Party to extend the loans evidenced by the Debenture, the Debtor has agreed to execute and deliver to the Secured Party this Agreement and to grant the Secured Party a perfected first priority security interest in all property of the Debtor not pledged as security to the Global Capital Companies as of the date hereof (the "Global Capital Collateral") to secure the prompt payment, performance and discharge in full of all of the Debtor's obligations under the Debenture. NOW, THEREFORE, in consideration of the agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Certain Definitions. As used in this Agreement, the following terms shall have the meanings set forth in this Section 1. Terms used but not otherwise defined in this Agreement that are defined in Article 9 of the Uniform Commercial Code (the "UCC") shall have the respective meanings given such terms in Article 9 of the UCC, and capitalized terms not otherwise defined herein shall have the meaning given them in the Purchase Agreement. (a) "Collateral" means, other than with respect to the Global Capital Collateral, as such terms are defined in Section 9.102 of the UCC: all "collateral," "accounts," "chattel paper" (including, but not limited to tangible and electronic chattel paper), "commercial tort claims," "commodity contracts," "commodity accounts," "deposit accounts," "documents," "equipment," "farm products," "fixtures," "general intangibles" (including "payment intangibles" and "software"), "goods," "health care insurance receivables," "instruments," "inventory," "investment property," "letter of credit rights," "mortgages," and "records" of the Debtor, whether presently owned or existing or hereafter acquired or coming into existence, and all additions and accessions thereto and all substitutions and replacements thereof, and all "proceeds" (cash or noncash) (as defined in Article 9 of the UCC) thereof, including, without limitation, all proceeds from the sale or transfer of the Collateral and of insurance covering the same. Without in any way limiting the generality of the foregoing, if not already included in the Collateral described above, the term "Collateral" shall also include, as defined in plain English: All machinery, equipment, computers, computer programs, motor vehicles, trucks, tanks, boats, ships, appliances, furniture, special and general tools, fixtures, test and quality control devices and other equipment of every kind and nature and wherever situated, contract rights, partnership interests, stock or other securities, licenses, distribution and other agreements, computer software (whether "off-the- shelf", licensed from any third party or developed by Debtor) computer software development rights, leases, franchises, customer lists, quality control procedures, grants and rights, goodwill, trademarks, service marks, trade styles, trade names, patents, patent applications, copyrights, deposit and investment accounts and income tax refunds, insurance proceeds, and rights to refunds or indemnification whatsoever owing, together with all instruments, all documents of title representing any of the foregoing, all rights in any merchandising, goods, equipment, motor vehicles and trucks which any of the same may represent, and all right, title, security and guaranties with respect to same, including any right of stoppage in transit, business papers together with all documents of title and documents representing the same, all additions and accessions thereto, replacements therefor, all parts therefor, and all substitutes for any of the foregoing and all other items used and useful in connection with the Debtor's businesses and all improvements thereto. (b) "Obligations" means all of the Debtor's obligations under the Transaction Documents, in each case, whether now or hereafter existing, voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from the Secured Party as a preference, fraudulent transfer or otherwise as such obligations may be amended, supplemented, converted, extended or modified from time to time. 2. Grant of Perfected First Priority Security Interest. As an inducement for the Secured Party to extend the loan as evidenced by the Debenture and to secure the complete and timely payment, performance and discharge in full, as the case may be, of all of the Obligations, the Debtor hereby unconditionally and irrevocably pledges, grants and hypothecates to the Secured Party a continuing and perfected first priority security interest in and to, a lien upon and a right of set-off against all of their respective right, title and interest of whatsoever kind and nature in and to, the Collateral other than with respect to the Global Capital Collateral, (the "Security Interest"). 3. Representations, Warranties, Covenants and Agreements of the Debtor. The Debtor represents and warrants to, and covenants and agrees with, the Secured Party as follows: (a) The Debtor has the requisite corporate power and authority to enter into this Agreement and otherwise to carry out its obligations hereunder. The execution, delivery and performance by the Debtor of this Agreement and the filings contemplated therein have been duly authorized by all necessary action on the part of the Debtor and no further action is required by the Debtor. (b) The Debtor represents and warrants that they have no place of business or offices where their respective books of account and records are kept (other than temporarily at the offices of its attorneys or accountants) or places where Collateral is stored or located, except as set forth on Schedule A attached hereto. (c) The Debtor is the sole owner of the Collateral (except for non-exclusive licenses granted by the Debtor in the ordinary course of business), free and clear of any liens, security interests, encumbrances, rights or claims, and are fully authorized to grant the Security Interest in and to pledge the Collateral. There is not on file in any governmental or regulatory authority, agency or recording office an effective financing statement, security agreement, license or transfer or any notice of any of the foregoing (other than those that will be filed in favor of the Secured Party pursuant to this Agreement) covering or affecting any of the Collateral. So long as this Agreement shall be in effect, Debtor shall not execute and shall not knowingly permit to be on file in any such office or agency any such financing statement or other document or instrument (except to the extent filed or recorded in favor of the Secured Party pursuant to the terms of this Agreement). (d) No part of the Collateral has been judged invalid or unenforceable. No written claim has been received that any Collateral or Debtor's use of any Collateral violates the rights of any third party. There has been no adverse decision to Debtor's claim of ownership rights in or exclusive rights to use the Collateral in any jurisdiction or to Debtor's right to keep and maintain such Collateral in full force and effect, and there is no Proceeding involving said rights pending or, to the best knowledge of the Debtor, threatened before any court, judicial body, administrative or regulatory agency, arbitrator or other governmental authority. (e) The Debtor shall at all times maintain its books of account and records relating to the Collateral at its principal place of business and its Collateral at the locations set forth on Schedule A attached hereto and may not relocate such books of account and records or tangible Collateral unless it delivers to the Secured Party at least 30 days prior to such relocation (i) written notice of such relocation and the new location thereof (which must be within the United States) and (ii) evidence that appropriate financing statements under the UCC and other necessary documents have been filed and recorded and other steps have been taken to perfect the Security Interest to create in favor of the Secured Party a valid, perfected and continuing perfected first priority lien in the Collateral. (f) This Agreement creates in favor of the Secured Party a valid security interest in the Collateral securing the payment and performance of the Obligations and, upon making the filings described in the immediately following subsection, a perfected first priority security interest in such Collateral. (g) The Debtor hereby authorizes the Secured Party to file one or more financing statements under the UCC, with respect to the Security Interest with the proper filing and recording agencies in any jurisdiction deemed proper by them. (h) The execution, delivery and performance of this Agreement by the Debtor does not conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing Debtor's debt or otherwise) or other understanding to which Debtor is a party or by which any property or asset of the Debtor is bound or affected. No consent (including, without limitation, from stockholders or creditors of the Debtor) is required for the Debtor to enter into and perform its obligations hereunder. (i) The Debtor shall at all times maintain the liens and Security Interest provided for hereunder as valid and perfected first priority liens and security interests in the Collateral in favor of the Secured Party until this Agreement and the Security Interest hereunder shall be terminated pursuant to Section 11 hereof. The Debtor hereby agrees to defend the same against any and all persons. The Debtor shall safeguard and protect all Collateral for the account of the Secured Party. At the request of the Secured Party, the Debtor will sign and deliver to the Secured Party at any time or from time to time one or more financing statements pursuant to the UCC in form reasonably satisfactory to the Secured Party and will pay the cost of filing the same in all public offices wherever filing is, or is deemed by the Secured Party to be, necessary or desirable to effect the rights and obligations provided for herein. Without limiting the generality of the foregoing, the Debtor shall pay all fees, taxes and other amounts necessary to maintain the Collateral and the Security Interest hereunder, and the Debtor shall obtain and furnish to the Secured Party from time to time, upon demand, such releases and/or subordinations of claims and liens which may be required to maintain the priority of the Security Interest hereunder. (j) The Debtor will not transfer, pledge, hypothecate, encumber, license (except for non-exclusive licenses granted by a Debtor in its ordinary course of business and sales of "inventory"), sell or otherwise dispose of any of the Collateral not in the ordinary course of its business without the prior written consent of the Secured Party. (k) The Debtor shall keep and preserve its "equipment," "inventory" and other tangible Collateral in good condition, repair and order and shall not operate or locate any such Collateral (or cause to be operated or located) in any area excluded from insurance coverage. (l) The Debtor shall, within ten (10) days of obtaining knowledge thereof, advise the Secured Party promptly, in sufficient detail, of any substantial change in the Collateral, and of the occurrence of any event which would have a material adverse effect on the value of the Collateral or on the Secured Party's security interest therein. (m) The Debtor shall promptly execute and deliver to the Secured Party such further deeds, mortgages, assignments, security agreements, financing statements or other instruments, documents, certificates and assurances and take such further action as the Secured Party may from time to time request and may in its sole discretion deem necessary to perfect, protect or enforce its security interest in the Collateral including, without limitation, if applicable, the execution and delivery of a separate security agreement with respect to each Debtor's intellectual property ("Intellectual Property Security Agreement") in which the Secured Party has been granted a security interest hereunder, substantially in a form acceptable to the Secured Party, which Intellectual Property Security Agreement, other than as stated therein, shall be subject to all of the terms and conditions hereof. (n) The Debtor shall permit the Secured Party and its representatives and agents to inspect the Collateral at any time, and to make copies of records pertaining to the Collateral as may be requested by the Secured Party from time to time. (o) The Debtor shall take all steps reasonably necessary to diligently pursue and seek to preserve, enforce and collect any rights, claims, causes of action and accounts receivable in respect of the Collateral. (p) The Debtor shall promptly notify the Secured Party in sufficient detail upon becoming aware of any attachment, garnishment, execution or other legal process levied against any Collateral and of any other information received by the Debtor that may materially affect the value of the Collateral, the Security Interest or the rights and remedies of the Secured Party hereunder. (q) All information heretofore, herein or hereafter supplied to the Secured Party by or on behalf of the Debtor with respect to the Collateral is accurate and complete in all material respects as of the date furnished. (r) The Debtor shall at all times preserve and keep in full force and effect its valid existence and good standing and any rights and franchises material to its business. (s) The Debtor will not change its name, corporate structure, or identity, or add any new fictitious name unless it provides at least 30 days prior written notice to the Secured Party of such change and, at the time of such written notification, such Debtor provides any financing statements or fixture filings necessary to perfect and continue perfected the perfected first priority Security Interest granted and evidenced by this Agreement. (t) The Debtor may not consign any of its "inventory" or sell any of its "inventory" on bill and hold, sale or return, sale on approval, or other conditional terms of sale without the consent of the Secured Party which shall not be unreasonably withheld. (u) The Debtor may not relocate its chief executive office to a new location without providing 30 days prior written notification thereof to the Secured Party and so long as, at the time of such written notification, the Debtor provides any financing statements or fixture filings necessary to perfect and continue the Security Interest granted and evidenced by this Agreement. 4. Defaults. The following events shall be "Events of Default": (a) The occurrence of an Event of Default (as defined in the Debenture) under the Debenture; (b) Any representation or warranty of Debtor in this Agreement shall prove to have been incorrect in any material respect when made; (c) The failure by Debtor to observe or perform any of its obligations hereunder for five (5) days after delivery to Debtor of notice of such failure by or on behalf of a Secured Party; or (d) If any provision of this Agreement shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by Debtor, or a Proceeding shall be commenced by Debtor, or by any governmental authority having jurisdiction over Debtor, seeking to establish the invalidity or unenforceability thereof, or Debtor shall deny that Debtor has any liability or obligation purported to be created under this Agreement. 5. Duty To Hold In Trust. Upon the occurrence of any Event of Default and at any time thereafter, the Debtor shall, upon receipt of any revenue, income or other sums subject to the Security Interest, whether payable pursuant to the Debenture or otherwise, or of any check, draft, note, trade acceptance or other instrument evidencing an obligation to pay any such sum, hold the same in trust for the Secured Party and shall forthwith endorse and transfer any such sums or instruments, or both, to the Secured Party for application to the satisfaction of the Obligations. 6. Rights and Remedies Upon Default. Upon the occurrence of any Event of Default and at any time thereafter, the Secured Party shall have the right to exercise all of the remedies conferred hereunder and under the Debenture, and the Secured Party shall have all the rights and remedies of a secured party under the UCC. Without limitation, the Secured Party shall have the following rights and powers: (a) The Secured Party shall have the right to take possession of the Collateral and, for that purpose, enter, with the aid and assistance of any person, any premises where the Collateral, or any part thereof, is or may be placed and remove the same, and the Debtor shall assemble the Collateral and make it available to the Secured Party at places which the Secured Party shall reasonably select, whether at the Debtor's premises or elsewhere, and make available to the Secured Party, without rent, all of the Debtor's respective premises and facilities for the purpose of the Secured Party taking possession of, removing or putting the Collateral in saleable or disposable form. (b) The Secured Party shall have the right to operate the business of the Debtor using the Collateral and shall have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the Collateral, at public or private sale or otherwise, either with or without special conditions or stipulations, for cash or on credit or for future delivery, in such parcel or parcels and at such time or times and at such place or places, and upon such terms and conditions as the Secured Party may deem commercially reasonable, all without (except as shall be required by applicable statute and cannot be waived) advertisement or demand upon or notice to the Debtor or right of redemption of a Debtor, which are hereby expressly waived. Upon each such sale, lease, assignment or other transfer of Collateral, the Secured Party may, unless prohibited by applicable law which cannot be waived, purchase all or any part of the Collateral being sold, free from and discharged of all trusts, claims, right of redemption and equities of the Debtor, which are hereby waived and released. 7. Applications of Proceeds. The proceeds of any such sale, lease or other disposition of the Collateral hereunder shall be applied first, to the expenses of retaking, holding, storing, processing and preparing for sale, selling, and the like (including, without limitation, any taxes, fees and other costs incurred in connection therewith) of the Collateral, to the reasonable attorneys' fees and expenses incurred by the Secured Party in enforcing its rights hereunder and in connection with collecting, storing and disposing of the Collateral, and then to satisfaction of the Obligations to the Secured Party based on its then outstanding principal amount of the Debenture, and to the payment of any other amounts required by applicable law, after which the Secured Party shall pay to the applicable Debtor any surplus proceeds. If, upon the sale, license or other disposition of the Collateral, the proceeds thereof are insufficient to pay all amounts to which the Secured Party is legally entitled, the Debtor will be liable for the deficiency, together with interest thereon, at the rate of 18% per annum or the lesser amount permitted by applicable law (the "Default Rate"), and the reasonable fees of any attorneys employed by the Secured Party to collect such deficiency. To the extent permitted by applicable law, the Debtor waives all claims, damages and demands against the Secured Party arising out of the repossession, removal, retention or sale of the Collateral, unless due to the gross negligence or willful misconduct of the Secured Party. 8. Costs and Expenses. The Debtor agrees to pay all reasonable out-of-pocket fees, costs and expenses incurred in connection with any filing required hereunder, including without limitation, any financing statements pursuant to the UCC, continuation statements, partial releases and/or termination statements related thereto or any expenses of any searches reasonably required by the Secured Party. The Debtor shall also pay all other claims and charges which in the reasonable opinion of the Secured Party might prejudice, imperil or otherwise affect the Collateral or the Security Interest therein. The Debtor will also, upon demand, pay to the Secured Party the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Secured Party may incur in connection with (i) the enforcement of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, or (iii) the exercise or enforcement of any of the rights of the Secured Party under the Debenture. Until so paid, any fees payable hereunder shall be added to the principal amount of the Debenture and shall bear interest at the Default Rate. 9. Responsibility for Collateral. The Debtor assumes all liabilities and responsibility in connection with all Collateral, and the Obligations shall in no way be affected or diminished by reason of the loss, destruction, damage or theft of any of the Collateral or its unavailability for any reason. 10. Security Interest Absolute. All rights of the Secured Party and all Obligations of the Debtor hereunder, shall be absolute and unconditional, irrespective of: (a) any lack of validity or enforceability of this Agreement, the Debenture or any agreement entered into in connection with the foregoing, or any portion hereof or thereof; (b) any change in the time, manner or place of payment or performance of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Debenture or any other agreement entered into in connection with the foregoing; (c) any exchange, release or nonperfection of any of the Collateral, or any release or amendment or waiver of or consent to departure from any other collateral for, or any guaranty, or any other security, for all or any of the Obligations; (d) any action by the Secured Party to obtain, adjust, settle and cancel in its sole discretion any insurance claims or matters made or arising in connection with the Collateral; or (e) any other circumstance which might otherwise constitute any legal or equitable defense available to a Debtor, or a discharge of all or any part of the Security Interest granted hereby. Until the Obligations shall have been paid and performed in full, the rights of the Secured Party shall continue even if the Obligations are barred for any reason, including, without limitation, the running of the statute of limitations or bankruptcy. The Debtor expressly waives presentment, protest, notice of protest, demand, notice of nonpayment and demand for performance. In the event that at any time any transfer of any Collateral or any payment received by the Secured Party hereunder shall be deemed by final order of a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under the bankruptcy or insolvency laws of the United States, or shall be deemed to be otherwise due to any party other than the Secured Party, then, in any such event, the Debtor's obligations hereunder shall survive cancellation of this Agreement, and shall not be discharged or satisfied by any prior payment thereof and/or cancellation of this Agreement, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof. The Debtor waives all right to require the Secured Party to proceed against any other person or to apply any Collateral which the Secured Party may hold at any time, or to marshal assets, or to pursue any other remedy. The Debtor waives any defense arising by reason of the application of the statute of limitations to any obligation secured hereby. 11. Term of Agreement. This Agreement and the Security Interest shall terminate on the date on which all payments under the Debenture have been made in full or have been satisfied and all other Obligations have been paid or discharged. Upon such termination, the Secured Party, at the request and at the expense of the Debtor, will join in executing any termination statement with respect to any financing statement executed and filed pursuant to this Agreement. 12. Power of Attorney; Further Assurances. (a) The Debtor authorizes the Secured Party, and does hereby make, constitute and appoint the Secured Party and its respective officers, agents, successors or assigns with full power of substitution, as the Debtor's true and lawful attorney-in-fact, with power, in the name of the Secured Party or the Debtor, to, after the occurrence and during the continuance of an Event of Default, (i) endorse any note, checks, drafts, money orders or other instruments of payment (including payments payable under or in respect of any policy of insurance) in respect of the Collateral that may come into possession of the Secured Party; (ii) to sign and endorse any financing statement pursuant to the UCC or any invoice, freight or express bill, bill of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with accounts, and other documents relating to the Collateral; (iii) to pay or discharge taxes, liens, security interests or other encumbrances at any time levied or placed on or threatened against the Collateral; (iv) to demand, collect, receipt for, compromise, settle and sue for monies due in respect of the Collateral; and (v) generally, to do, at the option of the Secured Party, and at the expense of the Debtor, at any time, or from time to time, all acts and things which the Secured Party deem necessary to protect, preserve and realize upon the Collateral and the Security Interest granted therein in order to effect the intent of this Agreement and the Debenture all as fully and effectually as the Debtor might or could do; and the Debtor hereby ratifies all that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is coupled with an interest and shall be irrevocable for the term of this Agreement and thereafter as long as any of the Obligations shall be outstanding. (b) On a continuing basis, the Debtor will make, execute, acknowledge, deliver, file and record, as the case may be, with the proper filing and recording agencies in any jurisdiction, including, without limitation, the jurisdictions indicated on Schedule B attached hereto, all such instruments, and take all such action as may reasonably be deemed necessary or advisable, or as reasonably requested by the Secured Party, to perfect the Security Interest granted hereunder and otherwise to carry out the intent and purposes of this Agreement, or for assuring and confirming to the Secured Party the grant or perfection of a perfected security interest in all the Collateral under the UCC. (c) The Debtor hereby irrevocably appoints the Secured Party as the Debtor's attorney-in-fact, with full authority in the place and instead of the Debtor and in the name of the Debtor, from time to time in the Secured Party's discretion, to take any action and to execute any instrument which the Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including the filing, in its sole discretion, of one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of the Debtor where permitted by law. 13. Notices. All notices, requests, demands and other communications hereunder shall be subject to the notice provision of the Purchase Agreement. 14. Other Security. To the extent that the Obligations are now or hereafter secured by property other than the Collateral or by the guarantee, endorsement or property of any other Person, then the Secured Party shall have the right, in its sole discretion, to pursue, relinquish, subordinate, modify or take any other action with respect thereto, without in any way modifying or affecting any of the Secured Party's rights and remedies hereunder. 15. Best Efforts for Licensed Collateral. Notwithstanding any other provision contained herein or any of the Transaction Documents, upon the occurrence of an Event of Default, the Debtor hereby agrees that with respect to any part of the Collateral which may require the consent of any third party or third parties in order for Debtor to transfer and/or convey its interest in and to such Collateral to the Secured Party, as may be required in accordance herewith, Debtor agrees to and shall use its best efforts to obtain such consents or approvals in as expedient a manner as possible. 16. Miscellaneous. (a) No course of dealing between the Debtor and the Secured Party, nor any failure to exercise, nor any delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder or under the Debenture shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. (b) All of the rights and remedies of the Secured Party with respect to the Collateral, whether established hereby or by the Debenture or by any other agreements, instruments or documents or by law shall be cumulative and may be exercised singly or concurrently. (c) This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and is intended to supersede all prior negotiations, understandings and agreements with respect thereto. Except as specifically set forth in this Agreement, no provision of this Agreement may be modified or amended except by a written agreement specifically referring to this Agreement and signed by the parties hereto. (d) In the event any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction for any reason, unless such provision is narrowed by judicial construction, this Agreement shall, as to such jurisdiction, be construed as if such invalid, prohibited or unenforceable provision had been more narrowly drawn so as not to be invalid, prohibited or unenforceable. If, notwithstanding the foregoing, any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction, such provision, as to such jurisdiction, shall be ineffective to the extent of such invalidity, prohibition or unenforceability without invalidating the remaining portion of such provision or the other provisions of this Agreement and without affecting the validity or enforceability of such provision or the other provisions of this Agreement in any other jurisdiction. (e) No waiver of any breach or default or any right under this Agreement shall be considered valid unless in writing and signed by the party giving such waiver, and no such waiver shall be deemed a waiver of any subsequent breach or default or right, whether of the same or similar nature or otherwise. (f) This Agreement shall be binding upon and inure to the benefit of each party hereto and its successors and assigns. (g) Each party shall take such further action and execute and deliver such further documents as may be necessary or appropriate in order to carry out the provisions and purposes of this Agreement. (h) 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 Texas, without regard to the principles of conflicts of law thereof. Each party agrees that all Proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and the Debenture (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in Dallas, Texas. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in Dallas, Texas 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 Proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or that such Proceeding is improper. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such 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 a Proceeding to enforce any provisions of this Agreement, then the prevailing party in such Proceeding shall be reimbursed by the other party for its reasonable attorneys fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding. (i) 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. IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day and year first above written. DEBTOR RAPID LINK INCORPORATED Address for Notice and Delivery: 17383 Sunset Boulevard Suite 350 Pacific Palisades, California 90272 Telephone: (310) 566-1700 Facsimile: (310) 573-9435 Attn: John Jenkins, CEO By:____________________________________ Name: John Jenkins Title: Chief Executive Officer SECURED PARTY TRIDENT GROWTH FUND, L.P. Address for Notice and Delivery: By: 700 Gemini Houston, TX 77058 Telephone: (281) 488-8484 Facsimile: (281) 488-5353 By: By:____________________________________ Name: Title: SCHEDULE A ---------- Principal Place of Business of Debtor: ------------------------------------- 17383 Sunset Boulevard Suite 350 Pacific Palisades, California 90272 Locations Where Collateral is Located or Stored: ----------------------------------------------- 17383 Sunset Boulevard Suite 350 Pacific Palisades, California 90272 Internap C/O Rapidlinks 76 9th Ave 10th floor New York NY 10011 SCHEDULE B ---------- State of Delaware EX-4.5 6 exh4-5.txt SUBORDINATION AGREEMENT EXHIBIT 4.5 SUBORDINATION AGREEMENT This Subordination Agreement (the "Agreement") is entered into as of the 8th day of March 2006, by and between RAPID LINK INCORPORATED, a Delaware corporation (the "Company"), CHARGER INVESTMENTS, LLC, a California limited liability corporation, an individual resident of the State of California (the "Subordinate Lender") and TRIDENT GROWTH FUND, L.P., a Delaware limited partnership (the "Senior Lender"). RECITALS -------- WHEREAS, in connection with a loan transactions (the "Subordinate Lender Loan") between Subordinate Lender and the Company, the Company executed, among other documents, a 10% Secured Convertible Debenture in the amount of $400,000 of even date herewith, as such promissory note has been thereafter amended or modified in writing or otherwise (the "Subordinate Lender Note"). It is expressly understood and agreed that all amounts loaned to the Company by the Subordinate Lender at any time, whether described in the Subordinate Lender Note or the Subordinate Loan Documents (as defined below) shall be considered part of the Subordinate Lender Loan for purposes of this Agreement. The Subordinate Lender Note, the Security Agreement, if any, and any other documents, instruments or written or oral agreements evidencing or securing payment of the Subordinate Lender Loan are hereinafter collectively referred to as the "Subordinate Loan Documents"; and WHEREAS, in connection with a certain loan transaction (the "Senior Lender Loan") between Senior Lender and the Company, the Company shall execute, among other documents, a 10% Secured Convertible Debenture (the "Senior Lender Note") and Loan Agreement in the stated principal amount of $600,000.00, payable to the order of Senior Lender. The payment of the indebtedness evidenced by the Senior Lender Loan shall be secured by, among other things, a Security Agreement covering the Collateral. The Senior Lender Note, the Loan Agreement, and any other documents, instruments or written agreements evidencing or securing payment of the Senior Lender Loan are hereinafter collectively referred to as the "Senior Lender Loan Documents"; and WHEREAS, the Company and Senior Lender propose for the indebtedness evidenced by the Senior Lender Note to be secured by, among other things, a first lien on and priority security interest in and to the Collateral. Accordingly, Senior Lender has required, as a condition to making the Senior Lender Loan, that all obligations, liens, or rights to the property or assets of the Company, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent or now or hereafter existing, or due or to become due, including but not limited to those created in connection with the Subordinate Lender Loan, to the Subordinate Lender in connection with the Subordinate Lender Loan or otherwise (the "Junior Liabilities") be made subordinate to the liens, security interests, and rights of the Senior Lender and the Senior Lender Loan, as well as all obligations of Company, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent or now or hereafter existing, or due or to become due to the Senior Lender (the "Senior Liabilities"), it being expressly understood and agreed that the term Senior Liabilities, as used in this Agreement, shall include, without limitation, any and all interest, fees and penalties accruing on any of the Senior Liabilities after the commencement of any proceedings referred to in paragraph 4 of this Agreement, notwithstanding any provision or rule of law which might restrict the rights of the Senior Lender, as against Company or anyone else, to collect such interest; and WHEREAS, Senior Lender and Subordinate Lender desire to enter into this Agreement to evidence, as more particularly described herein, Subordinate Lender's subordination of the Subordinate Lender Liens and other rights to the Senior Lender Liens and rights; NOW, THEREFORE, for and in consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Subordination of the Subordinate Liabilities. Subordinate Lender hereby expressly subordinates the Junior Liabilities to the Senior Liabilities and acknowledges and agrees that the Senior Liabilities shall be superior and prior to the Junior Liabilities. Accordingly, except as expressly otherwise provided in this Agreement or as the Senior Lender may otherwise expressly consent in writing, the payment of any Junior Liability shall be postponed and subordinated to the payment in full of all Senior Liabilities, and no payments or other distributions whatsoever in respect of any Junior Liability shall be made, nor shall any property or assets of the Company be applied to the purchase or other acquisition or retirement of the Junior Liability. 2. Subject to the terms of this Agreement, Subordinate Lender hereby consents, without the necessity of any other documentation, to the Senior Lender Loan and acknowledges and agrees that the neither the Senior Lender Loan nor the Senior Liabilities created thereby constitute a default under the Subordinate Lender Loan and/or Loan Documents, and if either the Senior Lender Loan or the creation of the Senior Liabilities does in fact constitute a default thereunder, Subordinate Lender agrees to amend such Subordinate Loan Documents, as soon as reasonably practicable, to permit the Senior Lender Loan and Senior Liabilities. Subordinate Lender further, without the necessity of any other documentation, acknowledges and agrees to forebear from exercising its rights and remedies under the Subordinate Loan Documents on account of any existing or future default under the Subordinate Lender Loan until the termination of this Agreement. 3. The Subordinate Lender hereby subordinates all security interests created pursuant to any Security Agreement entered into with the Company and any other security interest created in connection with the Subordinate Lender Loan in any manner, to the security interests of the Senior Lender in all of the Collateral and all other property of the Company, now owned or hereafter acquired by same. 4. In the event of any dissolution, winding up, liquidation, readjustment, reorganization or other similar proceedings relating to the Company or to its creditors, as such, or to its property (whether voluntary or involuntary, partial or complete, and whether in bankruptcy, insolvency or receivership, or upon an assignment for the benefit of creditors, or any other marshalling of the assets and liabilities of the Company, or any sale of all or substantially all of the assets of the Company, or otherwise), the Senior Liabilities shall first be paid in full before the Subordinate Lender shall be entitled to receive and to retain any payment or distribution in respect of the Junior Liability. 5. The Subordinate Lender will mark the Subordinate Loan Documents, its books and records so as to clearly indicate that the Junior Liability is subordinated in accordance with the terms of this Agreement. Upon request by Senior Lender, Subordinate Lender agrees to execute and deliver such additional documents and instruments and to take such actions as may be reasonably necessary in order to further evidence and carry out the purposes, goals, and intents of this Agreement or to correct any error in this Agreement or any documents executed in connection herewith that was caused by any clerical mistake, computer malfunction, printing error or similar error. 6. The Subordinate Lender hereby waives all diligence in collection or protection of or realization upon the Senior Liabilities or any security for the Senior Liabilities. In exercising rights and remedies with respect to the Collateral, the Senior Lender may enforce the provisions of the Senior Loan Documents and exercise remedies thereunder and under any other Senior Loan Documents, all in such order and in such manner as it may determine in its sole and absolute discretion. Such exercise and enforcement shall include, without limitation, the rights to sell or otherwise dispose of Collateral, to incur expenses in connection with such sale or disposition and to exercise all the rights and remedies of a secured lender under the Uniform Commercial Code of any applicable jurisdiction and of a secured creditor under bankruptcy or similar laws of any applicable jurisdiction. 7. During the term hereof, the Subordinate Lender will not without the prior written consent of the Senior Lender: (a) attempt to enforce or collect the Junior Liability or any rights in respect of the Junior Liability; (b) take any Collateral or enforce any rights in respect of any Security Agreement; (c) sell, assign, transfer, pledge, or give a security interest in the Junior Liabilities; (d) commence, prosecute or participate in any administrative, legal or equitable action against the Company or in any administrative, legal, or in any administrative, legal or equitable action that might adversely affect the Company or its interest; (e) take any lien or security on any of the Company's property, real or personal; (f) incur any obligation to or receive any loan advances, or gifts from the Company; or (g) commence, or join with any other creditor in commencing, any bankruptcy, reorganization or insolvency proceedings with respect to the Company. 8. As an additional security for the Senior Liabilities, and to secure the performance of all of the Subordinate Lender's obligations hereunder, Subordinate Lender hereby transfers, grants a security interest in, and assigns to the Senior Lender all of Subordinate Lenders' rights to any payments or distributions which might otherwise be due to the Subordinate Lender from the Company. Senior Lender is hereby irrevocably constituted and appointed the attorney-in-fact of Subordinate Lender to file any and all proofs of claim (if Subordinate Lender has not demonstrated to the satisfaction of the Senior Lender, no later than 20 days prior to the applicable bar date, that such Subordinate Lender has filed an appropriate claim or proof of claim), financing statements, and any other documents and to take all other action, either in Senior Lender's name, or in the Subordinate Lender's name, whichever is necessary to enable Senior Lender to obtain all such payments. The Company hereby agrees to make such payments, if any, to the Senior Lender. 9. This Agreement and the obligations, rights and benefits of the parties hereto shall terminate upon the earlier to occur of (a) payment in full of the indebtedness evidenced by the Subordinate Lender Loan Documents and the Junior Liabilities as a whole, or (b) the payment in full of the indebtedness evidenced by the Senior Lender Loan Documents and the Senior Liabilities as a whole. 10. The Senior Lender may, from time to time, during the term of this Agreement, at its sole discretion and without notice to the Subordinate Lender, take any or all of the following actions: (a) retain or obtain a security interest in any property to secure any of the Senior Liabilities; (b) retain or obtain the primary or secondary obligation of any other obligor or obligors with respect to any of the Senior Liabilities; (c) extend or renew for one or more periods (whether or not longer than the original period), alter or exchange any of the Senior Liabilities, or release or compromise any obligation of any nature of any obligor with respect to any of the Senior Liabilities; and (d) release their security interest in, or surrender, release or permit any substitution or exchange for, all or any part of any property securing any of the Senior Liabilities, or extend or renew for one or more periods (whether or not longer than the original period) or release, compromise, alter or exchange any obligations of any nature of any obligor with respect to any such property. 11. The Senior Lender may, from time to time, during the term of this Agreement, without notice to the Subordinate Lender, assign or transfer any or all of the Senior Liabilities or any interest in the Senior Liabilities as well as this Agreement; and, notwithstanding any such assignment or transfer or any subsequent assignment or transfer of the Senior Liabilities, such Senior Liabilities shall be and remain Senior Liabilities for the purposes of this Agreement, and every immediate and successive assignee or transferee of any of the Senior Liabilities or of any interest in the Senior Liabilities shall, to the extent of the interest of such assignee or transferee in the Senior Liabilities, be entitled to the benefits of this Agreement to the same extent as if such assignee or transferee were the Senior Lender, as applicable; provided, however, that, unless the Senior Lender shall otherwise consent in writing, the Senior Lender shall have an unimpaired right, prior, and superior to that of any such assignee or transferee, to enforce this Agreement, for the benefit of the Senior Lender, as to those of the Senior Liabilities which the Senior Lender has not assigned or transferred. 12. The Senior Lender shall not be prejudiced in its rights under this Agreement by any act or failure to act of the Company or the Subordinate Lender, or any noncompliance by the Company or the Subordinate Lender with any agreement or obligation, regardless of any knowledge thereof which the Senior Lender may have or with which the Senior Lender may be charged; and no action of the Senior Lender permitted under this Agreement shall in any way affect or impair the rights of the Senior Lender and the obligations of the Subordinate Lender under this Agreement. 13. No delay on the part of the Senior Lender in the exercise of any right or remedy shall operate as a waiver of such right or remedy, and no single or partial exercise by the Senior Lender of any right or remedy shall preclude other or further exercise of such right or remedy or the exercise of any other right or remedy; nor shall any modification or waiver of any of the provisions of this Agreement be binding upon the Senior Lender except as expressly set forth in a writing duly signed and delivered on behalf of the Senior Lender. For the purposes of this Agreement, Senior Liabilities shall include all obligations of the Company to the Senior Lender, notwithstanding any right or power of the Company or anyone else to assert any claim or defense as to the invalidity or unenforceability of any such obligation, and no such claim or defense shall affect or impair the agreements and obligations of the Subordinate Lender under this Agreement. 14. Subordinate Lender further agrees that in case Subordinate Lender should take or receive any security interest in, or lien by way of attachment, execution, or otherwise on any of the property, real or personal, of the Company, or should take or join in any other measure or advantage contrary to this Agreement, at any time prior to the payment in full of all of the Senior Liabilities, Senior Lender shall be entitled to have the same vacated, dissolved and set aside by such proceedings or law, or otherwise, as the Senior Lender may deem appropriate, and this Agreement shall be and constitute full and sufficient grounds therefore and shall entitle the Senior Lender to become a party to any proceedings at law, or otherwise, initiated by the Senior Lender or by any other party, in or by which the Senior Lender deems it appropriate to protect its interests hereunder. Subordinate Lender agrees that if it violates this Agreement, it shall be liable to the Senior Lender for all losses and damages sustained by the Senior Lender by reason of such breach, including Senior Lender's attorney's fees and costs in any such legal action. 15. Except as otherwise expressly agreed to herein, if Subordinate Lender shall receive any payments, security interests, or other rights in any property of the Company in violation of this Agreement, such payment or property shall be received by Subordinate Lender in trust for the Senior Lender and shall subsequently be delivered and transferred to the Senior Lender immediately upon receipt thereof. 16. This Agreement shall be binding upon the Subordinate Lender and the Company as well as their respective successors and assigns, and shall inure to the benefit of Senior Lender and its successors and assigns. 17. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be sent by first class U.S. mail, or by cable, telex, telegram, facsimile transmission, or by other electronic means or delivered by hand or by overnight or similar delivery service, fees prepaid, to the party to whom it is to be given at the address of such party set forth below or to such other address for notice as such party shall provide in accordance with the terms of this section. Except as otherwise specifically provided in this Agreement, notice so given shall, in the case of notice given by certified mail (or by such comparable method) be deemed to be given and received on the date of certification (or comparable act) thereof, in the case of notice so given by overnight delivery service, on the date of actual delivery, and, in the case of notice so given by cable, telegram, facsimile transmission, telex or personal delivery, on the date of actual transmission or, as the case may be, personal delivery. If any communication is sent by e-mail or such other electronic means, such communication shall be effective upon confirmation (whether by return e-mail or otherwise) of receipt of such e-mail or electronic transmission. If to the Company: 17383 Sunset Boulevard Suite 350 Pacific Palisades, California 90272 Telephone: (310) 566-1700 Facsimile: (310) 573-9435 Attn: John Jenkins, CEO If to Subordinate Lender: If to Senior Lender: Trident Growth Fund, LP 700 Gemini Houston, Texas 77058 Phone: (281) 488-8484 Facsimile: (281) 488-8404 Attention: Larry St. Martin 18. This Agreement shall be construed in accordance with and governed by the laws of the State of Texas without regard to conflict of laws provisions. Venue for any action hereunder shall be brought in and shall be proper exclusively in Dallas County, Texas. 19. If any provision or provisions of this Agreement should be held to be invalid or ineffective, then all other provisions shall continue in full force and effect to the same extent and in the same manner as though such invalid or unenforceable provision had never been contained herein to the extent the remaining provisions further accomplish the goals and intents of this Agreement. [signature page follows] IN WITNESS WHEREOF, this Subordination Agreement has been made and delivered as of the first date written above. SUBORDINATE LENDER: _________________________________________ By: Charger Investments, LLC SENIOR LENDER: Trident Growth Fund, LP By: Trident Management, LLC, its General Partner By:_________________________ Its: Authorized Member The Company hereby acknowledges receipt of a copy of the foregoing Subordination Agreement, waives notice of acceptance of the Subordination Agreement by the Senior Lender, and agrees to be bound by the terms and provisions of the Subordination Agreement, to make no payments or distributions contrary to the terms and provisions of the Subordination Agreement, and to do every other act and thing necessary or appropriate to carry out such terms and provisions. Dated: As of the First Date Written Above COMPANY RAPID LINK INCORPORATED By: _______________________________ John Jenkins, CEO EX-4.6 7 exh4-6.txt SECURITIES PURCHASE AGREEMENT EXHIBIT 4.6 SECURITIES PURCHASE AGREEMENT This Securities Purchase Agreement (this "Agreement") is dated as of March 8, 2006, by and between RAPID LINK INCORPORATED, a Delaware corporation (the "Company"), and CHARGER INVESTMENT, LLP., a California limited liability corporation, (the "Purchaser"). WITNESSETH: WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to an exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") and Rule 506 promulgated thereunder, the Company desires to issue and sell to Purchaser, and Purchaser desires to purchase from the Company, securities of the Company as more fully described in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and Purchaser agree as follows: ARTICLE I. DEFINITIONS 1.1 Definitions. In addition to the terms defined elsewhere in this Agreement: (a) capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Debenture(s) (as defined herein), and (b) the following terms have the meanings indicated in this Section 1.1: "Action" shall have the meaning ascribed to such term in Section 3.1(i). "Affiliate" means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 144 under the Securities Act. With respect to Purchaser, any investment fund or managed account that is managed on a discretionary basis by the same investment manager as Purchaser will be deemed to be an Affiliate of Purchaser. "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 Texas are authorized or required by law or other government action to close. "Change of Control Transaction" means the occurrence after the date hereof of any of (i) an acquisition after the date hereof by an individual or legal entity or "group" (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether through legal or beneficial ownership (as described in Rule 13d-3 of the Exchange Act) of capital stock of the Company, by contract or otherwise) of in excess of 40% of the voting securities of the Company, or (ii) a replacement at one time or within a one year period of more than one-half of the members of the Company's board of directors which is not approved by a majority of those individuals who are members of the board of directors on the date hereof (or by those individuals who are serving as members of the board of directors on any date whose nomination to the board of directors was approved by a majority of the members of the board of directors who are members on the date hereof), or (iii) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth above in (i) or (ii). "Closing" means the closing of the purchase and sale of the Securities pursuant to Section 2.1. "Closing Date" means the Business Day when all of the Transaction Documents have been executed and delivered by the applicable parties thereto, and all conditions precedent to (i) Purchaser's obligations to pay the Subscription Amount and (ii) the Company's obligations to deliver the Securities have been satisfied or waived. There may be multiple Closing Dates. "Commission" means the Securities and Exchange Commission. "Common Stock" means the common stock of the Company, par value $.001 per share, and any securities into which such common stock shall hereinafter have been reclassified into. "Common Stock Equivalents" means any securities of the Company which would entitle the holder thereof to acquire at any time Common Stock, including without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock. "Debenture" means, the 10% Secured Convertible Debenture, in the form of Exhibit A. "Disclosure Schedules" shall have the meaning ascribed to such term in Section 3.1 hereof. "Effective Date" means the date that the initial registration statement filed by the Company for the Registrable Securities or Common Stock is first declared effective by the Commission. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exempt Issuance" means the issuance of (a) shares of Common Stock or options to employees, officers or directors of the Company pursuant to any stock or option plan currently in place as of the date hereof which has been duly adopted by the Board of Directors and shareholders of the Company, (b) securities upon the exercise of or conversion of any securities issued hereunder, convertible securities, options or warrants issued and outstanding on the date of this Agreement, provided that such securities have not been amended since the date of this Agreement to increase the number of such underlying shares in connection therewith, (c) securities issued pursuant to acquisitions or strategic transactions, provided any such issuance shall only be to a Person which is, itself or through its subsidiaries, an operating company in a business synergistic with the business of the Company and in which the Company receives 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, and (d) shares of Common Stock or Common Stock Equivalents issued in with that certain transaction with Telenational Communications, Inc. as contemplated and set forth in that certain binding letter of intent entered into between the Company and Telenational Communications, Inc. on or about February 14, 2006. "Fully Diluted Basis" shall mean all Common Stock or Common Stock Equivalents of the Company including the exercise or conversion of all rights, options, derivative and convertible securities and further including the conversion (whether convertible or not) of all other common or preferred stock equivalents outstanding or required to be issued by the Company. "Fundamental Transaction" shall mean (A) the Company effects any merger or consolidation of the Company with or into another Person, (B) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (C) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (D) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property. "GAAP" shall mean generally accepted accounting principles, consistently applied. "Intellectual Property Rights" shall have the meaning ascribed to such term in Section 3.1(n). "Legend Removal Date" shall have the meaning ascribed to such term in Section 4.1(c). "Liens" means a lien, charge, security interest, encumbrance, right of first refusal, preemptive right, or other restriction. "Material Adverse Effect" shall have the meaning assigned to such term in Section 3.1(b) hereof. "Material Permits" shall have the meaning ascribed to such term in Section 3.1(l). "Maximum Rate" shall have the meaning ascribed to such term in Section 6.17. "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. "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. "Public Offering Date" the date that the Company first registers the Common Stock pursuant to Section 12 under the Exchange Act, or merges into a corporation (by or through one or a series of related transactions) already registered pursuant to Section 12 or becomes public under the Exchange Act in any other manner. "Purchaser Party" shall have the meaning ascribed to such term in Section 4.11. "Purchaser's Designee" shall have the meaning ascribed to such term in Section 4.14. "Qualifying Transaction" shall mean (i) an equity or debt/equity financing wherein the Company receives gross proceeds equal to at least $3,000,000 from the sale of Common Stock or Common Stock Equivalents issued by the Company to unaffiliated third parties or (ii) a Fundamental Transaction. "Registrable Securities" means (i) all Underlying Shares (exercised and unexercised); (ii) any securities issued or transferred to Purchaser in connection with or arising out of any Transaction Document; and (iii) any securities issued or issuable upon any stock split, dividend or other distribution recapitalization or similar event with respect to the foregoing. "Registration Statement" means a registration statement covering the sale or resale of the Registrable Securities. "Required Minimum" means, as of any date, the maximum aggregate number of shares of Common Stock then issued or potentially issuable in the future pursuant to the Transaction Documents, including any Underlying Shares issuable upon exercise of the Warrant or conversion of the Debenture, ignoring any exercise limits set forth therein. "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. "SBA" shall have the meaning ascribed to such term in Section 5.1. "SBA Documents" shall have the meaning ascribed to such term in Section 5.1(b). "SBIC" shall have the meaning ascribed to such term in Section 5.1. "SBIC Act" shall have the meaning ascribed to such term in Section 5.1(a). "Securities" means the Debenture, the Warrant, and the Underlying Shares. "Securities Act" means the Securities Act of 1933, as amended. "Security Agreement" means the Security Agreement, dated as of the date hereof, between the Company and Purchaser, in the form of Exhibit B attached hereto. "Security Documents" shall mean the Security Agreement and any other documents and filing required thereunder in order to grant Purchaser a first priority security interest in all of the assets of the Company, with the exception of the security interests previously granted to Global Capital Funding Group LP including all UCC-1 filing receipts. "Subordination Agreement" means that certain Subordination Agreement of even date herewith executed by John Jenkins in favor of the Purchaser in the form of Exhibit D attached hereto. "Subscription Amount" means, as to Purchaser, the aggregate amount to be paid for the Debenture and the Warrant purchased hereunder as specified in Section 2.1 herein, in United States Dollars and in immediately available funds. "Subsidiary" means any corporation or limited liability company of which at least 50% of the outstanding securities having ordinary voting powers for the election of Board of Directors (or similar governing body) are at the time owned by the Company. As used herein, the term "Company" shall be deemed to include all of the Company's Subsidiaries, if any. "Trading Market" means, as applicable, the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the American Stock Exchange, the New York Stock Exchange, the Nasdaq National Market, the Nasdaq SmallCap Market, the OTC Bulletin Board or the "Pink Sheets" published by the Pink Sheets LLC. "Transaction Documents" means this Agreement, the Debenture, the Security Agreement, the Warrant and any other documents or agreements executed in connection with the transactions contemplated hereunder. "Underlying Shares" means the shares of Common Stock issuable upon exercise of the Warrants or conversion of the Debenture, or any other shares of Common Stock acquired by Purchaser hereby. "Variable Rate Transaction" shall mean a transaction in which the Company issues or sells (i) any debt or equity securities that are convertible into, exchangeable or exercisable for, or include the right to receive additional shares of Common Stock (A) at a conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices of or quotations for the shares of Common Stock at any time after the initial issuance of such debt or equity securities, (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the Common Stock, or (C) whereby the number of underlying shares of Common Stock to be received upon exercise, conversion, or exchange thereof, is variable in any respect in which the number of such underlying shares could be increased. "Warrant" means the Common Stock Purchase Warrant, in the form of Exhibit C delivered to Purchaser at the Closing in accordance with Section 2.2 hereof, which Warrant shall be exercisable immediately and be exercisable until the close of business on the fifth anniversary following the Initial Exercise Date (as defined in the Warrant). The Company and Purchaser agree that the value of the Warrant as of the date hereof is less than $1,000. ARTICLE II. PURCHASE AND SALE 2.1 Closing. On the Closing Date, upon the terms and subject to the conditions set forth herein, concurrent with the execution and delivery of this Agreement by the parties hereto, the Company agrees to sell, and Purchaser agrees to purchase the Debenture and the Warrant for an aggregate amount of FOUR HUNDERED THOUSAND DOLLARS ($400,000) (the "Subscription Amount"). On the Closing Date, Purchaser shall deliver to the Company via wire transfer of immediately available funds equal to the Subscription Amount (less all expenses and fees due hereunder), and the Company shall deliver to Purchaser the Debenture, the Warrant, and the other items set forth in Section 2.2 issuable at the Closing. 2.2 Deliveries a) On the Closing Date, the Company shall execute and deliver or cause to be delivered to Purchaser the following, each fully executed by the appropriate authorized officer or officers of the Company: (i) this Agreement (along with all Disclosure Schedules); (ii) the Debenture; (iii) the Warrant; (iv) the Security Agreement along with all Security Documents; (v) the Subordination Agreement; (vi) SBA Form 480 (Size Status Declaration), SBA Form 652 (Assurance of Compliance) and SBA Form 1031 (Portfolio Finance Report), Parts A and B, in the forms of Exhibit D, Exhibit E and Exhibit F, respectively, attached hereto; (vii) Approval by the Board of Directors of the Company, done in conformance with all applicable law and the Bylaws of the Company, certified by the Secretary of the Company as of the Closing Date, approving or otherwise ratifying the transactions contemplated by this Agreement, and approving the form of this Agreement and the Transaction Documents, and authorizing execution, delivery, and performance thereof; (viii) A copy of the Certificate of Incorporation of the Company, as amended to date, certified by an official of the Company's jurisdiction of formation or incorporation and further certified by the Secretary of the Company not to have been altered or amended since certification by such official; a Certificate of Good Standing dated within 30 days of the date first written above from the Secretary of State of the Company's jurisdiction of formation or incorporation; and a copy of the Bylaws of the Company, certified as true and correct by the Secretary of the Company; (ix) Payment of the origination and commitment fees, if any, referenced in Section 2.1 hereof; and (x) Such other instruments, documents or items as Purchaser may reasonably request. b) On the Closing Date, Purchaser shall deliver or cause to be delivered to the Company the following: (i) this Agreement duly executed by Purchaser; (ii) Purchaser's Subscription Amount by wire transfer to the account as specified in writing by the Company; and (iii) the Security Agreement, duly executed by Purchaser. 2.3 Closing Conditions. a) The obligations of the Company hereunder in connection with the Closing are subject to the following conditions being met: (i) the accuracy in all material respects when made and on the Closing Date of the representations and warranties of the Purchaser contained herein; (ii) all obligations, covenants and agreements of Purchaser required to be performed at or prior to the Closing Date shall have been performed; and (iii) the delivery by Purchaser of the items set forth in Section 2.2(b) of this Agreement. b) The obligations of Purchaser hereunder in connection with the Closing are subject to the following conditions being met: (i) the accuracy in all material respects on the Closing Date of the representations and warranties of the Company contained herein; (ii) all obligations, covenants and agreements of the Company required to be performed at or prior to the Closing Date shall have been performed; (iii) the delivery by the Company of the items set forth in Section 2.2(a) of this Agreement; and (iv) there shall have been no Material Adverse Effect with respect to the Company since the date hereof. ARTICLE III. REPRESENTATIONS AND WARRANTIES 3.1 Representations and Warranties of the Company. Except as set forth under the corresponding section of the disclosure schedules delivered to Purchaser concurrently herewith (the "Disclosure Schedules") which Disclosure Schedules shall be deemed a part hereof, the Company makes the representations and warranties set forth below to Purchaser. a) Subsidiaries. The Company does not have any Subsidiaries. b) Organization and Qualification. The Company is an entity duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, 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 not in violation or default of any of the provisions of its certificate or articles of incorporation, bylaws, or other organizational or charter documents. The Company is duly qualified to conduct 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 have or reasonably be expected to result in (i) a material adverse effect on the legality, validity or enforceability of any Transaction Documents, (ii) a material adverse effect on the results of operations, assets, business, prospects or financial condition of the Company, or (iii) a material adverse effect on the Company's ability to perform in any material respect on a timely basis its obligations under any Transaction Documents (any of (i), (ii) or (iii), a "Material Adverse Effect") and no Proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification. c) Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents and otherwise to carry out its obligations 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. Each Transaction Documents has been (or upon delivery will have 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 except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. d) No Conflicts. The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the other 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 organizational or charter documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of the Company, 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 debt or otherwise) or other understanding to which the Company is a party or by which any property or asset of the Company is bound or affected, or (iii) conflict with or 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 is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company is bound or affected; except in the case of each of clauses (ii) and (iii), such as could not have or reasonably be expected to result in a Material Adverse Effect. e) Filings, Consents and Approvals. Other than as set forth on Schedule 3.1(e) and except for filing of a Form D and/or state "blue sky" securities filings, the Company is not 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. f) Issuance of the Securities. The Securities are duly authorized and, when issued and paid for in accordance with the applicable Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company other than restrictions on transfer provided for in the Transaction Documents. The Underlying Shares, when issued in accordance with the terms of the Transaction Documents, will be validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company or any third party. The Company has reserved from its duly authorized capital stock a number of shares of Common Stock for issuance of a number of Underlying Shares at least equal to the Required Minimum on the date hereof. The Company has not, and to the knowledge of the Company, no Affiliate of the Company has sold, offered for sale or solicited offers to buy or otherwise negotiated in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the sale of the Securities to Purchaser. g) Capitalization. The capitalization of the Company is as described in Schedule 3.1(g). The Company has not issued any capital stock other than as set forth on Schedule 3.1(g). No Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. Except as a result of the purchase and sale of the Securities or as set forth on Schedule 3.1(g), 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 the Company's capital stock, or contracts, commitments, understandings or arrangements by which the Company is or may become bound to issue additional shares of its capital stock, or securities or rights convertible or exchangeable into shares of its capital stock. The issuance and sale of the Securities will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than Purchaser) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price under such securities. All of the outstanding shares of capital stock of the Company are validly issued, fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, and none of such outstanding shares was issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale of the Securities. Except as disclosed in Schedule 3.1(g), there are no stockholders agreements, voting agreements or other similar agreements with respect to the Company's capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company's stockholders. A complete list of stockholders of the Company that are officers, directors and individuals holding 5% or more of the outstanding Common Stock is included in Schedule 3.1(g). h) SEC Documents. The Company has filed all required reports, schedules, forms, statements and other documents with the Commission. (the "SEC Documents"). As of their respective dates, the SEC Documents complied in all material respects with requirements of the Securities Act or the Exchange Act, as the case may be and the rules and regulations of the Commission promulgated thereunder applicable to such SEC Documents, and none of the SEC Documents 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, except to the extent that information contained in any SEC Document has been revised or superseded by a later filed SEC Document. The financial statements of the Company included in the SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission with respect thereto, have been prepared in accordance with GAAP (except, in the case of unaudited statements as permitted by Form 10-Q or Form 10-QSB) applied on a consistent basis during the periods involved (except as may be indicted in the notes thereto) and fairly present the consolidated financial position of the Company and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operation and cash flows for the period then ending in accordance with GAAP (subject, in the case of the unaudited statements, to normal year end audit adjustments). Except as set forth in the filed SEC Documents, neither the Company nor any Subsidiaries has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) required by GAAP to be set forth on a consolidated balance sheet of the Company and its consolidated subsidiaries or in the notes thereto and which could reasonably be expected to have a Material Adverse Effect. i) Litigation. Other than as set forth on Schedule 3.1(i), 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 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, have or reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. There has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the Commission involving the Company or any current or former director or officer of the Company. j) Labor Relations. No material labor dispute exists or, to the knowledge of the Company, is imminent with respect to any of the employees of the Company which could reasonably be expected to result in a Material Adverse Effect. k) Compliance. The Company (i) is not in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company), nor has the Company received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is not in violation of any order of any court, arbitrator or governmental body, or (iii) is not or has not been in violation of any statute, rule or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws applicable to its business except in each case as could not have a Material Adverse Effect. l) Regulatory Permits. The Company possesses all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct its business as described in Schedule 3.1(l), except where the failure to possess such permits could not have or reasonably be expected to result in a Material Adverse Effect ("Material Permits"), and the Company has not received any notice of Proceedings relating to the revocation or modification of any Material Permit. m) Title to Assets. Except as set forth on Schedule 3.1(m), the Company has good and marketable title in (or licenses or rights to use) all personal property that is material to the business of the Company, in each case free and clear of all Liens. The Company does not own any real property. Any real property and facilities held under lease by the Company are held by it under valid, subsisting and enforceable leases of which the Company is in compliance. The Company has not granted, and no third party has obtained in any manner, other than as contemplated by the Transaction Documents, any security interest in the assets of the Company. Schedule 3.1(m) sets forth and details which, if any, of such assets are owned by any Subsidiary. n) Intellectual Property. (i) Schedule 3.1(n) contains a list of the Company's Intellectual Property. For purposes hereof, "Intellectual Property" means any or all of the following and all rights and goodwill, arising out of or associated therewith: (A) all United States, international, and foreign patents and applications therefor (including provisional applications) and all reissues, reexaminations, divisions, renewals, extensions, provisionals, continuations and continuations-in-part thereof; (B) all inventions (whether patentable or not), invention disclosures, improvements, trade secrets, proprietary information, know-how, technology, technical data and customer lists, and all documentation relating to any of the foregoing throughout the world; (C) all international, U.S. and foreign registered trademarks, trade names, service marks, logos, slogans, and designs, applications to register trademarks, trade names, service marks, logos, slogans, and designs, intent-to-use applications, or other registrations or applications related to trademarks, service marks, common law trademarks, trade names, service marks, logos, slogans, and designs and all associated goodwill associated with all of the foregoing; (D) all copyrights, copyright registrations and applications therefor, and all other rights corresponding thereto throughout the world; (E) all industrial designs and any registrations and applications therefor throughout the world; (F) all URL's, domain names, trade names, logos, slogans, designs, common law trademarks and service marks, trademark and service mark registrations and applications therefor throughout the world; (G) all databases and data collections and all rights therein throughout the world; (H) all moral and economic rights of authors and inventors, however denominated, throughout the world; (I) any other intellectual property that is the subject of an application, certificate, filing, registration or other document issued, filed with, or recorded with any federal, state, local or foreign government or other public body; and (J) any similar or equivalent rights to any of the foregoing anywhere in the world. For purposes hereof, "Company Intellectual Property" means any Company Intellectual Property owned or licensed by the Company, and "Company Registered Intellectual Property" means any items of Intellectual Property described in subsections (A), (C) or (D) of this paragraph. (ii) No Company Intellectual Property or product or service of the Company's business related to the Company Intellectual Property is subject to any Proceeding or outstanding decree, order, judgment, agreement or stipulation restricting in any manner the use, transfer or licensing thereof by the Company, or which may affect the validity, use or enforceability of such Company Intellectual Property. Each item of Company Registered Intellectual Property is valid and subsisting. All necessary registration, maintenance and renewal fees currently due in connection with the Company Registered Intellectual Property have been made and all necessary documents, recordations and certifications in connection with such Company Registered Intellectual Property have been filed with the relevant patent, copyright, trademark or other authorities in the United States or foreign jurisdictions, as the case may be, for the purpose of maintaining such Company Registered Intellectual Property. (iii) The Company owns and has good and exclusive title to, or has licenses (any Intellectual Property subject to any license to be identified as such in Schedule 3.1(n)) (sufficient for the conduct of the Company's business as currently conducted) to use each item of the Company's Intellectual Property free and clear of any Lien; and the Company is the exclusive owner or exclusive licensee of all trademarks and service marks, trade names and domain names used in connection with and material to the operation or conduct of the Company's business, including the sale of any products or the provision of any services by same, free and clear of all Liens. The Company Intellectual Property, other than future improvements, derivations, and additions to be made by the Company or on behalf of the Company, constitutes all of the Intellectual Property used or contemplated for use in connection with the Company's current business and in the performance of any contract, proposal or letter of intent in connection with same. (iv) To the extent that any Company Intellectual Property has been developed or created by a third party for the Company, the Company has a written agreement with such third party with respect thereto and the Company thereby either (A) has obtained ownership of and is the exclusive owner of, or (b) has obtained a license (sufficient for the conduct of the Company's business as currently conducted) to all of such third party's Intellectual Property in such work, material or invention by operation of law or by valid assignment, to the fullest extent it is legally possible to do so, each such agreement being listed on Schedule 3.1(n). (v) The operation of the Company's business as it is currently conducted, including the Company's design, development, marketing and sale of the products or services of the Company (including with respect to products currently under development) has not, does not and will not infringe or misappropriate in any manner the Intellectual Property of any third party or, to the knowledge of the Company, constitute unfair competition or trade practices under the laws of any jurisdiction. (vi) The Company has no knowledge, and has not received written notice or any other overt threats from any third party, that the operation of the Company's business as it is currently conducted, or any act, product or service of the Company's business, infringes or misappropriates the Intellectual Property of any third party or constitutes unfair competition or trade practices under the laws of any jurisdiction. The Company's Intellectual Property is not the subject of any third party communications relating to validity or enforceability, cease and desist orders, demand letters, warnings or prior settlement agreements. The Company's Intellectual Property is not currently the subject of any pending or threatened re-examinations, oppositions, interferences, or infringement actions. (vii) To the knowledge of the Company, no Person has or is infringing or misappropriating any Company Intellectual Property. (viii) The Company has taken reasonable steps to protect the rights of the Company in the confidential information and trade secrets of the Company used in the Company's business or any trade secrets or confidential information of third parties used in same, and, without limiting the foregoing, the Company has enforced a policy requiring each employee and contractor to execute a proprietary information/confidentiality agreement, and except under confidentiality obligations or in the context of the attorney-client relationship, there has not been any disclosure by the Company of any such trade secrets or confidential information. o) Insurance. The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company is engaged, including directors and officers insurance at least equal to the aggregate principal amount of the Debenture. To the best of Company's knowledge, such insurance contracts and policies are accurate and complete. The Company has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant increase in cost. p) Transactions With Affiliates and Employees. None of the officers or directors of the Company and, to the knowledge of the Company, none of the employees of the Company is presently a party to any transaction with the Company (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, in each case in excess of $60,000 other than (i) for payment of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of the Company and (iii) for other employee benefits, including stock option agreements under any stock option plan of the Company. q) Internal Accounting Controls. The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. r) Certain Fees. Other than as set forth on Schedule 3.1(r), no brokerage or finder's fees or commissions are or will be payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by this Agreement. Purchaser 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. s) Private Placement. Assuming the accuracy of Purchaser's representations and warranties set forth in Section 3.2, no registration under the Securities Act is required for the offer and sale of the Securities by the Company to Purchaser as contemplated hereby. t) Investment Company. The Company is not, and is not an Affiliate of, and immediately after receipt of payment for the Securities, will not be or be an Affiliate of, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. The Company shall conduct its business in a manner so that it will not become subject to the Investment Company Act. u) Registration Rights. Other than as set forth on Schedule 3.1(u), no Person has any right to cause the Company to effect the registration under the Securities Act of any securities of the Company. v) 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 Purchaser as a result of Purchaser and the Company fulfilling their obligations or exercising their rights under the Transaction Documents, including without limitation as a result of the Company's issuance of the Securities and the Purchaser's ownership of the Securities. w) Disclosure. The Company confirms that neither it nor any other Person acting on its behalf has provided Purchaser or its agents or counsel with any information that constitutes or might constitute material, nonpublic information except for such information that will be publicly disclosed in documents filed with the Commission. The Company understands and confirms that Purchaser will rely on the foregoing representations and covenants in effecting transactions in securities of the Company. All written statements provided to Purchaser regarding the Company, its business and the transactions contemplated hereby, including the Disclosure Schedules to this Agreement, furnished by or on behalf of the Company with respect to the representations and warranties made herein are true and correct with respect to such representations and warranties and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. x) No Integrated Offering. Assuming the accuracy of Purchaser's representations and warranties set forth in Section 3.2, neither the Company, nor any of its Affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause this offering of the Securities to be integrated with prior offerings by the Company for purposes of the Securities Act or any applicable shareholder approval provisions. y) Solvency. Following the closing of the Telenational Communications, Inc transaction, based on the financial condition of the Company as of the Closing Date after giving effect to the receipt by the Company of the proceeds from the sale of the Securities hereunder, and anticipated future financing amounts used to fund the Telenational Communications, Inc and provide additional working capital into the company, (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 financing instruments, and debts and other liabilities (including known contingent liabilities) as they mature, with the exception of those liabilities that the company is able to negotiate payment terms, or does not reasonably expect to pay in full within the next 12 months, for those debts with maturity dates of less than 1 year; (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 expected cash flow of the Company, together with the future proceeds the Company would receive in a future funding transaction, would provide sufficient working capital for the Company to continue to operate its business, and pay all amounts on or in respect of its debt when such amounts are required to be paid, for debts with maturity dates of 1 year or less as of the closing date. . 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). It is understood that the Company intends to pursue a plan to provide positive cash flow from operations shortly after the Telenational Communications, Inc. transaction, and to raise additional financing of not less than $5.0 million, sufficient to purchase Telenational, and to pay down its debts as described above, and to provide additional working capital. It is understood by both parties that the Company does not currently have in place the necessary financing to close the acquisition, and to meet the obligations as outlined above. z) Tax Status. Except for matters that would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect, the Company has filed all necessary federal, state and foreign income and franchise tax returns and has paid or accrued all taxes shown as due thereon, and the Company has no knowledge of a tax deficiency which has been asserted or threatened against the Company. aa) No General Solicitation. Neither the Company nor any person acting on behalf of the Company has offered or sold any of the Securities by any form of general solicitation or general advertising. The Company has offered the Securities for sale only to Purchaser and certain other "accredited investors" within the meaning of Rule 501 under the Securities Act. bb) Foreign Corrupt Practices. Neither the Company, nor to the knowledge of the Company, any agent or other person acting on behalf of the Company, has (i) directly or indirectly, used any corrupt funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company (or made by any person acting on its behalf of which the Company is aware) which is in violation of law, or (iv) violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended cc) Indebtedness. Other than as set forth on Schedule 3.1(cc), as of the Closing Date, the Company has no indebtedness. dd) No Disagreements with Accountants and Lawyers. There are no disagreements of any kind presently existing, or reasonably anticipated by the Company to arise, between the accountants and lawyers formerly or presently employed by the Company and the Company is current with respect to any fees owed to its accountants and lawyers. ee) Acknowledgment Regarding Purchaser's Purchase of Securities. The Company acknowledges and agrees that Purchaser is acting solely in the capacity of an arm's length purchaser with respect to the Transaction Documents and the transactions contemplated hereby as they relate to the Company. The Company further acknowledges that Purchaser is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any advice given by Purchaser or any of its respective representatives or agents to the Company in connection with this Agreement and the transactions contemplated hereby is merely incidental to the Purchaser's purchase of the Securities. ff) Material Liabilities. The sole outstanding material liabilities of the Company are set forth on Schedule 3.1(ff) . gg) Material Agreements. Except for those agreements set forth on Schedule 3.1(gg) hereof, there are no other material agreements to which the Company is a party. hh) Board of Directors. The Board of Directors of Company consists of those persons set forth on Schedule 3.1(hh). 3.2 Representations and Warranties of Purchaser. Purchaser hereby represents and warrants as of the date hereof and as of the Closing Date to the Company as follows: (a) Organization; Authority. Purchaser is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with full right, 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 execution, delivery and performance by Purchaser of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate or similar action on the part of Purchaser. Each of the Transaction Documents to which it is a party has been duly executed by Purchaser, and when delivered by Purchaser in accordance with the terms hereof, will constitute the valid and legally binding obligation of Purchaser, enforceable against it in accordance with its terms, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law. (b) Purchaser Representation. Purchaser understands that the Securities are "restricted securities" and have not been registered or qualified, as the case may be, under the Securities Act or any applicable state securities law by reason of a specific exemption from the registration or qualification provisions of the Securities Act or any applicable state securities laws, the availability of which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of Purchaser's representations as expressed herein. Purchaser represents that it is acquiring the Securities for investment as principal for its own account and not with a view to or for distribution or resale of such Securities or any part thereof, has no present intention of distributing any of such Securities and has no arrangement or understanding with any other persons regarding the distribution of such Securities (this representation and warranty not limiting Purchaser's right to sell the Securities pursuant to a Registration Statement or otherwise in compliance with applicable federal and state securities laws). Purchaser is acquiring the Securities hereunder in the ordinary course of its business. Purchaser does not have any agreement or understanding, directly or indirectly, with any Person to distribute any of the Securities. (c) Purchaser Status. At the time Purchaser was offered the Securities, it was, and at the date hereof it is, and on each date on which it exercises any Warrants it will be either: (i) an "accredited investor" as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8)) of Regulation D promulgated under the Securities Act or (ii) a "qualified institutional buyer" as defined in Rule 144A(a) under the Securities Act. (d) Experience of Purchaser. 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. Purchaser understands that the acquisition of the Securities hereunder is highly a speculative investment which involves a high degree of loss of Purchaser's investment therein. Purchaser is able to bear the economic risk of an investment in the Securities and, at the present time, is able to afford a complete loss of such investment. (e) Certain Fees. Purchaser has not entered into an agreement whereby brokerage or finder's fees or commissions are or will be payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by this Agreement. The Company acknowledges and agrees that Purchaser does not make or has not made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in this Section 3.2. ARTICLE IV. OTHER AGREEMENTS OF THE PARTIES 4.1 Transfer Restrictions. (a) The Securities may only be disposed of in compliance with state and federal securities laws. In connection with any transfer of Securities other than pursuant to an effective registration statement or Rule 144, to the Company or to an Affiliate of Purchaser or in connection with a pledge as contemplated in Section 4.1(b), the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Securities under the Securities Act or any applicable state securities laws. As a condition of transfer, any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights of Purchaser under this Agreement. (b) Purchaser agrees to the imprinting, so long as is required by this Section 4.1(b), of a legend on any of the Securities in substantially the following form: 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 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. The Company acknowledges and agrees that Purchaser may from time to time pledge pursuant to a bona fide margin agreement with a registered broker-dealer or grant a security interest in some or all of the Securities to a financial institution that is an "accredited investor" as defined in Rule 501(a) under the Securities Act and who agrees to be bound by the provisions of this Agreement and, if required under the terms of such arrangement, Purchaser may transfer pledged or secured Securities to the pledgees or secured parties. Such a pledge or transfer would not be subject to approval of the Company and no legal opinion of legal counsel of the pledgee, secured party or pledgor shall be required in connection therewith. Further, no notice shall be required of such pledge. At the Purchaser's expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Securities may reasonably request in connection with a pledge or transfer of the Securities. (c) Certificates evidencing Underlying Shares shall not contain any legend (including the legend set forth in Section 4.1(b) hereof): (i) while a Registration Statement covering the resale of such Underlying Shares is effective under the Securities Act, (ii) following any sale of such Underlying Shares pursuant to Rule 144, (iii) if such Underlying Shares are eligible for sale under Rule 144(k), or (iv) if such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission); provided, however, in connection with the issuance of the Underlying Shares, Purchaser hereby agrees to adhere to and abide by all prospectus delivery requirements under the Securities Act and rules and regulations of the Commission and all applicable state "blue sky" securities laws. The Company shall cause its counsel to issue a legal opinion to the Company's transfer agent promptly after the Effective Date if required by the Company's transfer agent to effect the removal of the legend hereunder. If all or any portion of a Warrant is exercised at a time when there is an effective Registration Statement to cover the resale of the Underlying Shares, or if such shares may be sold under Rule 144(k) or if such legend is not otherwise required under applicable requirements of the Securities Act (including judicial interpretations thereof) then such shares shall be issued free of all legends. The Company agrees that following the Effective Date or at such time as such legend is no longer required under this Section 4.1(c), it will, no later than two Business Days following the delivery by Purchaser to the Company or the Company's transfer agent of a certificate representing Underlying Shares, as applicable, issued with a restrictive legend (such second Business Day, the "Legend Removal Date"), deliver or cause to be delivered to Purchaser a certificate representing such shares that is free from all restrictive and other legends. The Company may not make any notation on its records or give instructions to any transfer agent of the Company that enlarge the restrictions on transfer set forth in this Section. (d) In addition to Purchaser's other available remedies, the Company shall pay to Purchaser, in cash, as partial liquidated damages and not as a penalty, the greater of (i) $500 for each Business Day after the Legend Removal Date, the Warrant Share Delivery Date, or other such date the Underlying Shares are to be delivered to the Purchaser, as the case may be, until such certificate is delivered with an appropriate legend or without a restrictive legend, as the case may be; and (ii) the difference in the Market Value of the Underlying Shares (based on the closing bid price of the Common Stock on the then principal Trading Market on the date such Securities are submitted to the Company's transfer agent) on the delivery date and the date such shares are actually received by the Holder in such form as required herein and in the Transaction Documents. Nothing herein shall limit Purchaser's right to pursue actual damages for the Company's failure to deliver certificates representing any Securities as required by the Transaction Documents, and Purchaser 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. (e) Purchaser agrees that the removal of the restrictive legend from certificates representing Securities as set forth in this Section 4.1 is predicated upon the Company's reliance that Purchaser will sell any Securities pursuant to either the registration requirements of the Securities Act, including any applicable prospectus delivery requirements, or an exemption therefrom. 4.2 Acknowledgment of Dilution. The Company acknowledges that the issuance of the Underlying Shares may result in dilution of the outstanding shares of Common Stock, which dilution may be substantial under certain market conditions. The Company further acknowledges that its obligations under the Transaction Documents, including without limitation its obligation to issue the Underlying Shares pursuant to the Transaction Documents, are unconditional and absolute and not subject to any right of set off, counterclaim, delay or reduction, regardless of the effect of any such dilution or any claim the Company may have against Purchaser and regardless of the dilutive effect that such issuance may have on the ownership of the other stockholders of the Company. 4.3 Furnishing of Information. As long as Purchaser owns restricted Securities, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act. As long as Purchaser owns Securities, if the Company is not required to file reports pursuant to the Exchange Act, it will prepare and furnish to Purchaser and make publicly available in accordance with Rule 144(c) such information as is required for Purchaser to sell the Underlying Shares under Rule 144. The Company further covenants that it will take such further action as any holder of Securities may reasonably request, all to the extent required from time to time to enable such Person to sell such Underlying Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144. 4.4 Integration. The Company shall not 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 Purchaser or, if then listed or quoted on a Trading Market, that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Trading Market. 4.5 Exercise Procedures. The form of Notice of Exercise and Conversion Notice included in the Warrant and Debenture, respectively, set forth the totality of the procedures required of Purchaser in order to exercise the Warrant or convert the Debenture. No additional legal opinion or other information or instructions shall be required of Purchaser to exercise its Warrants or convert the Debenture. The Company shall honor exercises of the Warrant and conversions of the Debenture and shall deliver Underlying Shares in accordance with the terms, conditions and time periods set forth in such Transaction Documents. 4.6 Intentionally Omitted. 4.7 Shareholders Rights Plan. No claim will be made or enforced by the Company or, to the knowledge of the Company, any other Person that 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 Purchaser could be deemed to trigger the provisions of any such plan or arrangement, by virtue of receiving Securities under the Transaction Documents or under any other agreement between the Company and Purchaser. 4.8 Non-Public Information. If at any time the Company becomes subject to the reporting provisions of the Exchange Act, the Company covenants and agrees that neither it nor any other Person acting on its behalf will provide Purchaser or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto Purchaser shall have executed a written agreement regarding the confidentiality and use of such information. The Company understands and confirms that Purchaser shall be relying on the foregoing representations in effecting transactions in securities of the Company. 4.9 Use of Proceeds. The Company shall use the net proceeds from the sale of the Securities hereunder for working capital purposes and 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 Common Stock or Common Stock Equivalents or to settle any outstanding litigation. 4.10 Reimbursement. If Purchaser becomes involved in any capacity in any Proceeding by or against any Person who is a stockholder of the Company (except as a result of sales, pledges, margin sales or any similar transaction(s) by Purchaser to or with any current stockholder), solely as a result of Purchaser's acquisition of the Securities under this Agreement, and Purchaser is successful in the Proceeding the Company will reimburse 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 Purchaser 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 Purchaser 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, Purchaser and any such Affiliate and any such Person. The Company also agrees that neither Purchaser 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. 4.11 Indemnification of Purchaser. Subject to the provisions of this Section 4.11, the Company will indemnify and hold the Purchaser and its directors, officers, managers, shareholders, partners, employees and agents (each, a "Purchaser Party") harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys' fees and costs of investigation that any such Purchaser Party may suffer or incur as a result of or relating to (a) any breach of any of the representations, warranties, covenants or agreements made by the Company in this Agreement or in the other Transaction Documents or (b) any action instituted against Purchaser, or any of its Affiliates, by any stockholder of the Company who is not an Affiliate of Purchaser, with respect to any of the transactions contemplated by the Transaction Documents (unless such action is based upon a breach of Purchaser's representation, warranties or covenants under the Transaction Documents or any agreements or understandings Purchaser may have with any such stockholder or any violations by Purchaser of state or federal securities laws or any conduct by Purchaser which constitutes fraud, gross negligence, willful misconduct or malfeasance). If any action shall be brought against any Purchaser Party in respect of which indemnity may be sought pursuant to this Agreement, such Purchaser Party shall promptly notify the Company in writing, and the Company shall have the right to assume the defense thereof with counsel of its own choosing. Any Purchaser Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Purchaser Party except to the extent that (i) the employment thereof has been specifically authorized by the Company in writing, (ii) the Company has failed after a reasonable period of time to assume such defense and to employ counsel or (iii) in such action there is, in the reasonable opinion of such separate counsel, a material conflict on any material issue between the position of the Company and the position of such Purchaser Party. The Company will not be liable to any Purchaser Party under this Agreement (i) for any settlement by a Purchaser Party effected without the Company's prior written consent, which shall not be unreasonably withheld or delayed; or (ii) to the extent, but only to the extent that a loss, claim, damage or liability is attributable to any Purchaser Party's breach of any of the representations, warranties, covenants or agreements made by Purchaser in this Agreement or in the other Transaction Documents. 4.12 Reservation and Listing of Securities. (a) The Company shall maintain a reserve from its duly authorized shares of Common Stock for issuance pursuant to the Transaction Documents in such amount as may be required to fulfill its obligations in full under the Transaction Documents. (b) If, on any date, the number of authorized but unissued (and otherwise unreserved) shares of Common Stock is less than the Required Minimum on such date, then the Board of Directors of the Company shall use commercially reasonable efforts to amend the Company's certificate or articles of incorporation to increase the number of authorized but unissued shares of Common Stock to at least the Required Minimum at such time, as soon as possible and in any event not later than the 75th day after such date; and (c) The Company shall, if then applicable: (i) in the time and manner required by the Trading Market or if the Common Stock is listed on another Trading Market, promptly prepare and file with such Trading Market an additional shares listing application covering a number of shares of Common Stock at least equal to the Required Minimum on the date of such application, (ii) take all steps necessary to cause such shares of Common Stock to be approved for listing on the Trading Market as soon as possible thereafter, (iii) provide to Purchaser evidence of such listing, and (iv) maintain the listing of such Common Stock on any date at least equal to the Required Minimum on such date on such Trading Market. 4.14 Appointment of Board Member. At all such times from the Closing until such time as the Debenture remains outstanding in whole or in part, the Company shall have the right to appoint a member to the Board of Directors to (the "Purchaser's Designee"). If within 30 days of the Company's election to appoint it's Purchaser's Designee to the Board of Directors of the Company, such appointment of the Purchaser's Designee has not occurred other than by reason of legal prohibitions or restrictions, the number of Warrant Shares purchasable pursuant to the Warrant shall be increased by 10,000 per month (including such initial 30 day period) such appointment has not occurred. The Company must provide and keep in effect officers' and directors' liability insurance for the Purchaser's Designee which liability insurance shall be satisfactory to Purchaser, and such Purchaser's Designee shall be entitled to receive reasonable and customary director's fees and such other compensation as is ordinarily given to the Company's directors as well as the reimbursement of all out of pocket expenses. 4.15 Registration Rights. (a) Piggyback Registrations. A. At any time after the Closing Date, if the Company proposes to register any Common Stock for sale solely for cash, either for its own account or for the account of a stockholder or stockholders (a "Company Registration"), then the Company shall give Purchaser written notice of its intention to do so and of the intended method of sale (the "Registration Notice") not fewer than 30 days prior to the anticipated filing date of the Registration Statement effecting such Company Registration. Purchaser may request inclusion of any Registrable Securities in such Company Registration by delivering to the Company, within 20 days after receipt of the Registration Notice, a written notice (the "Piggyback Notice") stating the number of shares of Registrable Securities proposed to be included and that such shares are to be included in any underwriting only on the same terms and conditions as the shares of Common Stock otherwise being sold through underwriters under such Company Registration. The Company shall use its best efforts to cause all Registrable Securities specified in the Piggyback Notice to be included in the Company Registration and any related offering, all to the extent requisite to permit the sale by Purchaser of such Registrable Securities in accordance with the method of sale applicable to the other shares of Common Stock included in the Company Registration. If the Company fails to file the Registrable Securities in such Registration Statement, then, at the option of Purchaser, for each full calendar month that the Registrable Securities are not fully registered, Company shall issue to Purchaser 0.1% of its Common Stock then outstanding computed on a Fully Diluted Basis per day until the shares are registered. B. Limitations on Piggyback Registrations. The Company's obligation to include Registrable Securities in the Company Registration pursuant to Section 4.15(a) shall be subject to the following limitations: (i) The Company shall not be obligated to include any Registrable Securities in a registration statement (I) filed on Form S- 4 or Form S-8 or such other similar successor forms then in effect under the Securities Act, (II) pursuant to which the Company is offering to exchange its own securities, or (III) relating to dividend reinvestment plans. (ii) If the managing underwriter(s), if any, of an offering related to the Company Registration determines in its reasonable judgment that marketing factors require a limitation of the number of shares of Common Stock that can be included in such offering, the managing underwriter(s) may exclude the appropriate number of shares of Common Stock held by the stockholders of the Company, including Purchaser, from such registration. If the managing underwriter(s) determine(s) to exclude from such offering any Registrable Securities that Purchaser desires to include or any shares of Common Stock that other Company stockholders with applicable registration rights desire to include, Purchaser and such other Company stockholders (except for such Person or Persons, if any, upon whose demand such Company Registration is being made) shall share pro rata in the portion of such offering available to them (the "Available Portion"), with Purchaser and each such other Company stockholder entitled to include in such Company Registration and related offering a number of shares of Common Stock equal to the product of (I) the Available Portion and (II) a fraction, the numerator of which is the total number of Registrable Securities which Purchaser desires to include in such Company Registration (in the case of Purchaser) or the total number of shares of Common Stock which such other Company stockholder desires to include in such Company Registration (in the case of each such other Company stockholder) and the denominator of which is (x) the total of the number of Registrable Securities which Purchaser desires to include in such Company Registration plus (y) the total number of shares of Common Stock that such other Company stockholders desire to include in such Company Registration. (b) Demand Registrations. (i) Requests for Registration. The Purchasers (or any lawful transferee thereof) may, in accordance herewith, request registration under the Securities Act of all or any portion of its Registrable Securities on Form S-1 or any similar long-form registration (a "Long-Form Registrations"), or on Form S-2 or S-3 (including pursuant to Rule 415 under the Securities Act) or any similar short-form registration (each, a "Short-Form Registration"), if available. All registrations requested pursuant to this Section 4.15(b) are referred to herein as "Demand Registrations." Each request for a Demand Registration shall specify the approximate number of Registrable Securities requested to be registered and the anticipated per share price range for such offering. Upon the Purchaser's request, the Company will include the offer and sale of Registrable Securities in such registration statement. In the event that the Company fails to include the Registrable Securities in a statement as required herein, the Purchaser shall give notice demanding a registration and within 75 days after the notice the Company shall prepare and file a registration statement with the SEC with respect to such Registrable Securities. If the Company fails to file within said time period, then, at the option of such Purchaser, for each full calendar month following such 75 day period that the Registrable Securities are not fully registered, the Company shall issue 0.1 % of its outstanding shares of Common Stock computed on a fully diluted basis per day until the shares are registered. (ii) Long-Form Registrations. Purchaser shall be entitled to request one Long-Form Registration. A registration shall not count as one of the permitted Long-Form Registrations until it has become effective. If Purchaser is unable to register and sell at least 90% of the Registrable Securities it has requested to be included in the first Long-Form Registration requested by it, it shall be entitled to a second Long-Form Registration, provided that such second Long-Form Registration may not be requested within six months of the effectiveness of the most recent Long-Form Registration requested by it. (iii) Short-Form Registrations. In addition to the Long-Form Registrations, each Purchaser shall be entitled to request an unlimited number of Short-Form Registrations; provided that the aggregate gross proceeds to be received by the Purchasers or other securities exercising their "piggyback" rights granted by the Company either herein or elsewhere in any such requested Short-Form Registration must exceed $500,000. Demand Registrations shall be Short- Form Registrations whenever the Company is permitted to use any applicable short form. The Company shall use its best efforts to make Short-Form Registrations on Form S-3 available for the sale of the Registrable Securities. If the Company, pursuant to the request of Purchaser, is qualified to and has filed with the SEC a registration statement under the Securities Act on Form S-3 pursuant to Rule 415 under the Securities Act (the "Required Registration"), then the Company shall use its best efforts to cause the Required Registration to be declared effective under the Securities Act as soon as practicable after filing, and, once effective, the Company shall cause such Required Registration to remain effective for a period ending on the earlier of (i) the date on which all Registrable Securities have been sold pursuant to the Required Registration, or (ii) the date as of which the Purchaser is able to sell all of the Registrable Securities then held by it within a ninety-day period in compliance with Rule 144 under the Securities Act. (iv) Priority on Demand Registrations. The Company shall not include in any Demand Registration any securities which are not Registrable Securities or which are not subject to registration rights agreements outstanding on the date hereof and which are identified on Schedule 3.1(u) hereto without the prior written consent of the Purchaser. If a Demand Registration is an underwritten offering and the managing underwriters advise the Company in writing that, in their opinion, the number of Registrable Securities and, if permitted hereunder, other securities requested to be included in such offering exceeds the number of securities, which can be sold in an orderly manner in such offering within a price range acceptable to Purchaser, then the Company shall include in such registration, prior to the inclusion of any securities which are not Registrable Securities, (i) first, the Registrable Securities requested to be included in such registration by the Purchaser, and (ii) second, the other securities requested to be included in such registration. (v) Restrictions on Demand Registrations. The Company shall not be obligated to effect any Demand Registration within 180 days after the effective date of a previous Demand Registration or a previous registration in which the Purchaser was given piggyback rights pursuant to Section 4.15(a) above and in which the reduction, if any, in the number of Registrable Securities requested to be included therein was not greater than 25%. The Company may postpone for up to 180 days the filing or the effectiveness of a registration statement for a Demand Registration if the Company, in good faith, concludes that such Demand Registration would reasonably be expected to have a Material Adverse Effect generally, and specifically with respect to any proposal or plan by the Company or any of its Subsidiaries to acquire financing, engage in any acquisition of assets (other than in the ordinary course of business), or engage in any merger, consolidation, tender offer, reorganization, or similar transaction; provided that, in such event, the Purchaser shall be entitled to withdraw such request and the Company shall pay all Registration Expenses in connection with such registration. The Company may delay a Demand Registration hereunder only once in any calendar year. (c) Provisions Applying to All Registrations Under Section 4.15. (i) Selection of Underwriter. Any Company Registration and related offering shall be managed by the Company; the Company shall have the power to select the managing underwriter(s) for such offering, and shall in consultation with the managing underwriter(s) have the power to determine the offering price, the underwriting discounts and commissions, the terms of the underwriting agreement and, the timing of the registration and related offering. To the extent that Purchaser participates in a Company Registration and related offering pursuant to Section 4.13(b), Purchaser shall enter into, and sell its Registrable Securities only pursuant to, the underwriting arranged by the Company, and shall either commit to attend the closing of the offering and take such other actions as may be reasonably necessary to effect Purchaser's participation in the offering and to provide any assurances reasonably requested by the Company and the managing underwriter(s) in that regard, or shall deliver to the Company in custody certificates representing all Registrable Securities to be included in the registration and shall execute and deliver to the Company a custody agreement and a power of attorney, each in form and substance appropriate for the purpose of effecting Purchaser's participation in the Company Registration and related offering and otherwise reasonably satisfactory to the Company. If Purchaser disapproves of the features of the Company Registration and related offering, Purchaser may withdraw therefrom (in whole or part) by written notice to the Company and the managing underwriter(s) delivered no later than ten days prior to the effectiveness of the applicable registration statement and the Registrable Securities of Purchaser shall thereupon be withdrawn from such registration. (ii) The Company shall furnish Purchaser such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of the Registrable Securities owned by it that are included in such registration; (ii) Whenever required to include Registrable Securities in any registration or to effect the registration of any Registrable Securities pursuant to this Agreement, the Company shall, as expeditiously as reasonably possible, prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its absolute best lawful efforts to cause such registration statement to become effective, and use its absolute best efforts to keep such registration statement effective until all such Registrable Securities have been distributed. In addition, the Company shall use its best lawful efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Purchaser, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify as a broker- dealer in any states or jurisdictions or to do business or to file a general consent to service of process in any of such states or jurisdictions. (iii) All expenses, other than underwriting discounts and commissions incurred in connection the registrations contemplated herein, including, without limitation, all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of one counsel for the selling Purchaser, shall be borne by the Company. (d) Subject to the terms and conditions of this Agreement and the other Transaction Documents, the right to cause the Company to register Registrable Securities pursuant to this Agreement may be assigned by Purchaser to any transferee or assignee of such securities; provided that said transferee or assignee is a transferee or assignee of at least five percent (5%) of the such Purchaser's Registrable Securities. ARTICLE V. SMALL BUSINESS INVESTMENT COMPANY 5.1 Small Business Investment Company Provisions. The Company acknowledges that Purchaser, is a small business investment company ("SBIC") licensed by the United States Small Business Administration (the "SBA"), and makes the following representations, warranties and covenants to Purchaser for so long as the Debenture held by Purchaser is outstanding: (a) Small Business Concern. The Company represents and warrants that it, taken together with its "affiliates" (as that term is defined in 13 C.F.R. S121.103), is a "Small Business Concern" within the meaning of 15 U.S.C. S662(5), that is Section 103(5) of the Small Business Investment Act of 1958, as amended (the "SBIC Act"), and the regulations thereunder, including 13 C.F.R. S107, and meets the applicable size eligibility criteria set forth in 13 C.F.R. S121.301(c)(1) or the industry standard covering the industry in which the Company is primarily engaged as set forth in 13 C.F.R. S121.301(c)(2). Neither the Company nor any of its Subsidiaries presently engages in any activities for which a small business investment company is prohibited from providing funds by the SBIC Act, including 13 C.F.R. S107. (b) Small Business Administration Documentation. On or before the Closing Date, Purchaser shall have received SBA Form 480 (Size Status Declaration) and SBA Form 652 (Assurance of Compliance) which have been completed and executed by the Company, and SBA Form 1031 (Portfolio Finance Report), Parts A and B of which have been completed by the Company (the "SBA Documents"). (c) Inspection. The Company will permit Purchaser or its representatives, at the Company's expense, and examiners of the SBA to visit and inspect the properties and assets of the Company, to examine its books of account and records, and to discuss the Company's affairs, finances and accounts with the Company's officers, senior management and accountants, all at such reasonable times as may be requested by Purchaser or the SBA. (d) Informational Covenant. Within sixty (60) calendar days after the end of the Company's fiscal year, the Company will furnish or cause to be furnished to Purchaser information required by the SBA concerning the economic impact of Purchaser's investment, for (or as of the end of) each fiscal year, including but not limited to: (i) board minutes, (ii) information concerning full-time equivalent employees, (iii) federal, state and local income taxes paid, (iv) gross revenue, (v) source of revenue growth, (vi) after-tax profit and loss, and (vii) and federal, state and local income tax withholding. Such information shall be forwarded by the Company on a form provided by Purchaser. The Company also will furnish or cause to be furnished to Purchaser such other information regarding the business, affairs and condition of the Company as Purchaser may from time to time reasonably request. (e) Use of Proceeds. The Company will deliver to Purchaser from time to time promptly following Purchaser's request, a written report, certified as correct by an officer, verifying the purposes and amounts for which proceeds from the Debenture have been disbursed. The Company will supply to Purchaser such additional information and documents as Purchaser reasonably requests with respect to the Company's use of proceeds, and will permit Purchaser to have access to any and all the Company's records and information and personnel as Purchaser deems necessary to verify how such proceeds have been or are being used, and to assure that the proceeds have been used for the purposes specified on Schedule 4.9. (f) Activities and Proceeds. (i) Neither the Company nor any of its Affiliates will engage in any activities or use directly or indirectly the proceeds from the Debenture for any purpose for which a SBIC is prohibited from providing funds by the SBIC Act, including 13 C.F.R. S107. (ii) Without obtaining the prior written approval of Purchaser, the Company will not change, within one (1) year of the Closing Date, the Company's business activity from that described on Schedule 5.1(f) to a business activity which a SBIC is prohibited from providing funds by the SBIC Act. The Company agrees that any such changes in its business activity without such prior written consent of Purchaser will constitute a material breach of the obligations of the Company under the Transaction Documents (an "Activity Event of Default"). ARTICLE VI. MISCELLANEOUS 6.1 Intentionally Omitted. 6.2 Fees and Expenses. At the closing, the Company shall reimburse Purchaser for its legal fees and expenses up to a maximum amount of $20,000. Except as expressly set forth above and in the Transaction Documents to the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement and the other Transaction Documents. The Company shall pay all transfer agent fees, stamp taxes and other taxes and duties levied in connection with the issuance of any Securities. 6.3 Entire Agreement. The Transaction Documents, together with the exhibits and schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules. 6.4 Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth on the signature pages attached hereto prior to 5:30 p.m. (Dallas, Texas time) on a Business Day, (b) the next Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth on the signature pages attached hereto on a day that is not a Business Day or later than 5:30 p.m. (Dallas, Texas time) on any Business Day, (c) the second Business Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as set forth on the signature pages attached hereto. 6.5 Amendments; Waivers. No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by the Company and Purchaser or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right. 6.6 Construction. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. 6.7 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of Purchaser. Purchaser may assign any or all of its rights under this Agreement to any Person to whom Purchaser assigns or transfers any Securities, provided such transferee agrees in writing to be bound, with respect to the transferred Securities, by the provisions hereof that apply to the Purchaser. 6.8 No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except as otherwise set forth in Section 4.10. 6.9 Governing Law. All questions concerning the construction, validity, enforcement and interpretation of the Transaction Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of Texas, 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 this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of Dallas, Texas. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of Dallas, Texas for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or inconvenient venue for such proceeding. THE PARTIES HEREBY WAIVE ALL RIGHTS TO A TRIAL BY JURY. If either party shall commence an action or proceeding to enforce any provisions of the Transaction Documents, 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. 6.10 Survival. The representations and warranties contained herein shall survive the Closing and the delivery of the Securities until the later of the satisfaction, complete conversion, or exercise of the Debenture and/or the Warrant, as the case may be. 6.11 Execution. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile signature page were an original thereof. 6.12 Severability. If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. 6.13 Rescission and Withdrawal Right. Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) the Transaction Documents, whenever Purchaser exercises a right, election, demand or option under a Transaction Document and the Company does not timely perform its related obligations within the periods therein provided, then Purchaser may rescind or withdraw, in its sole discretion from time to time upon written notice to the Company, any relevant notice, demand or election in whole or in part without prejudice to its future actions and rights; provided, however, in the case of a rescission of an exercise of a Warrant, Purchaser shall be required to return any shares of Common Stock subject to any such rescinded exercise notice. 6.14 Replacement of Securities. If any certificate or instrument evidencing any Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity, if requested. The applicants for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs associated with the issuance of such replacement Securities. 6.15 Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, Purchaser and the Company will be entitled to specific performance under the Transaction Documents. The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate. 6.16 Payment Set Aside. To the extent that the Company makes a payment or payments to Purchaser pursuant to any Transaction Documents or Purchaser enforces or exercises its rights thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. 6.17 Usury. To the extent it may lawfully do so, the Company hereby agrees not to insist upon or plead or in any manner whatsoever claim, and will resist any and all efforts to be compelled to take the benefit or advantage of, usury laws wherever enacted, now or at any time hereafter in force, in connection with any claim, action or proceeding that may be brought by Purchaser in order to enforce any right or remedy under any Transaction Documents. Notwithstanding any provision to the contrary contained in any Transaction Documents, it is expressly agreed and provided that the total liability of the Company under the Transaction Documents for payments in the nature of interest shall not exceed the maximum lawful rate authorized under applicable law (the "Maximum Rate"), and, without limiting the foregoing, in no event shall any rate of interest or default interest, or both of them, when aggregated with any other sums in the nature of interest that the Company may be obligated to pay under the Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum contract rate of interest allowed by law and applicable to the Transaction Documents is increased or decreased by statute or any official governmental action subsequent to the date hereof, the new maximum contract rate of interest allowed by law will be the Maximum Rate applicable to the Transaction Documents from the effective date forward, unless such application is precluded by applicable law. If under any circumstances whatsoever, interest in excess of the Maximum Rate is paid by the Company to Purchaser with respect to indebtedness evidenced by the Transaction Documents, such excess shall be applied by Purchaser to the unpaid principal balance of any such indebtedness or be refunded to the Company, the manner of handling such excess to be at Purchaser's election. 6.18 Intentionally Omitted. 6.19 Liquidated Damages. The Company's obligations to pay any partial liquidated damages or other amounts owing under the Transaction Documents is a continuing obligation of the Company and shall not terminate until all unpaid partial liquidated damages and other amounts have been paid notwithstanding the fact that the instrument or security pursuant to which such partial liquidated damages or other amounts are due and payable shall have been canceled. (Signature Page Follows) IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above. COMPANY RAPID LINK INCORORATED Address for Notice and Delivery: 17383 Sunset Boulevard Suite 350 Pacific Palisades, California 90272 Telephone: (310) 566-1700 Facsimile: (310) 573-9435 Attn: John Jenkins, CEO By:____________________________________ Name: John Jenkins Title: Chief Executive Officer PURCHASER CHARGER INVESTEMENTS, LLC Address for Notice and Delivery: By: By:____________________________________ Name: Title: Authorized Member ATTACHMENTS Exhibit A Form of Debenture Exhibit B Form of Security Agreement Exhibit C Form of Warrant Exhibit D Form of Subordination Agreement Schedule 3.1(a) Subsidiaries Schedule 3.1(e) Filings, Consents and Approvals Schedule 3.1(g) Capitalization Schedule 3.1(h) Financial Statements Schedule 3.1(i) Litigation Schedule 3.1(l) Regulatory Permits Schedule 3.1(m) Title to Assets (Outstanding liens) Schedule 3.1(n) Intellectual Property Schedule 3.1(r) Certain Fees (Broker Fees) Schedule 3.1(u) Registration Rights Schedule 3.1(cc) Indebtedness Schedule 3.1(ff) Material Liabilities Schedule 3.1(gg) Material Agreements Schedule 3.1(hh) Board of Directors Schedule 5.1(f) Business Activity EX-4.7 8 exh4-7.txt 10% CONVERTIBLE DEBENTURE EXHIBIT 4.7 THIS SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITY AS PERMITTED BY LAW AND THE SECURITIES PURCHASE AGREEMENT PURSUANT TO WHICH THE SECURITIES WERE ISSUED. Original Issue Date: March 8, 2006 No. 1 $400,000 10% SECURED CONVERTIBLE DEBENTURE This 10% Secured Convertible Debenture (this "Debenture") is a duly authorized and issued 10% Secured Convertible Debenture of RAPID LINK INCORPORATED, a Delaware corporation, having its principal place of business located at the address set forth on the signature page hereto (the "Company"), for the principal amount of FOUR HUNDRED THOUSAND DOLLARS ($400,000), issued in connection with that certain Purchase Agreement (as defined below) of even date herewith entered into by and among the Company and the Holder. FOR VALUE RECEIVED, the Company promises to pay to CHARGER INVESTEMENTS, LLC, a California limited liability corporation, having its principal place of business located at_____________________________________, or its registered assigns (the "Holder"), the principal sum of FOUR HUNDRED THOUSAND DOLLARS ($400,000) on the earlier of (a) March 8, 2007; or (b) the consummation of a Change of Control Transaction (the "Maturity Date"), and to pay interest to the Holder on the then outstanding principal amount of this Debenture in accordance with the provisions hereof. This Debenture is subject to the following additional provisions: Section 1. Definitions. For the purposes hereof, in addition to the terms defined below and elsewhere in this Debenture, capitalized terms contained herein shall have the meanings given to such terms in the Purchase Agreement, and (b) the following terms shall have the following meanings: "Bankruptcy Event" means any of the following events: (a) the Company or any Subsidiary (as such term is defined in Rule 1.02(s) of Regulation S-X of the Exchange Act) thereof commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to the Company or any Subsidiary thereof; (b) there is commenced against the Company or any Subsidiary thereof any such case or Proceeding that is not dismissed within 60 days after commencement; (c) 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; (d) the Company or any Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 days; (e) the Company or any Subsidiary thereof makes a general assignment for the benefit of creditors; (f) the Company or any Subsidiary thereof calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; (g) the Company or any Subsidiary thereof, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing; or (h) an application for the appointment of a receiver or liquidator for the Company or any of its material assets. "Capital Lease" means any lease of property (real, personal or mixed) which, in accordance with GAAP, should be capitalized on the lessee's balance sheet or for which the amount of the asset and liability thereunder as if so capitalized should be disclosed in a note to such balance sheet. "Cash Flow" means an amount equal to (i) the Company's Consolidated EBITDA, minus (ii) the Company's Consolidated non-financed Capital Expenditures. "Consolidated EBITDA" means, for any Person for any period: (i) the consolidated net income of such Person and its Consolidated Subsidiaries for such period (after Income Taxes), calculated in accordance with GAAP, but excluding: (A) any gain arising from the sale of capital assets, (B) any gain arising from any write-up of assets, (C) earnings of any other Person, substantially all of the assets of which have been acquired by such Person or its Consolidated Subsidiaries in any manner, to the extent that such earnings were realized by such other Person prior to the date of such acquisition. (D) earnings of any Person in which the Person or its Consolidated Subsidiaries has an ownership interest (other than wholly owned Subsidiaries of such Person ), unless such earnings have actually been received by the Person or its Consolidated Subsidiaries in the form of cash distributions, (E) earnings of any Person to which assets of the Person or its Consolidated Subsidiaries shall have been sold, transferred or disposed of, or into which the Person shall have merged, to the extent that such earnings arise prior to the date of such transaction, (F) any gain arising from the acquisition of any securities of such Person or any of its Consolidated Subsidiaries, and (G) any extraordinary gain realized by such Person or any of its Consolidated Subsidiaries during such period. (ii) plus the following, but only in each case to the extent incurred by the Company and its Consolidated Subsidiaries during such period and deducted in the calculation above for such period, (A) all income and franchise taxes, (B) all Interest Expense, (C) all depreciation expense, and (D) all amortization expense. "Current Assets" means, at any particular time, all amounts which, in conformity with GAAP, would be included as current assets on a consolidated balance sheet of the Company and its Subsidiaries; provided, however, there shall be excluded therefrom (a) all prepaid expenses of every type and nature, (b) all amounts due from directors, officers, stockholders or other Affiliates, and all loans due from employees, and (c) all deferred charges. "Current Liabilities" means, at any particular time, all amounts (including deferred taxes) which, in conformity with GAAP, would be included as current liabilities on a consolidated balance sheet of the Company and its Subsidiaries. "Current Ratio" means the ratio of Current Assets to Current Liabilities. "Dallas Courts" shall have the meaning set forth in Section 7(e). "Debenture Register" shall have the meaning set forth in Section 2(b). "Event of Default" shall have the meaning set forth in Section 6. "Interest Expense" means, with respect to any Person and for any period (without duplication), all interest on that Person's debt, whether paid in cash or accrued as a liability and payable in cash during any subsequent period (including, without limitation, the interest component of Capital Leases), as determined by GAAP. "Late Fees" shall have the meaning set forth in Section 2(c). "Liabilities" mean all liabilities, obligations and indebtedness of any and every kind and nature (including, without limitation, lease obligations, accrued interest, charges, expenses, attorneys' fees and other sums) chargeable to the Company and made to or for the benefit of the Company, whether arising under this Debenture or arising under the any of the Transaction Documents, whether heretofore, now or hereafter owing, arising, due or payable from Company to the Holder and however evidenced, credited, incurred, acquired or owing, whether primary, secondary, direct, contingent, fixed, or otherwise, including obligation of performance. "Net Income" or "Net Loss" means, with respect to any Person for any period, the net income or net loss of such Person determined in accordance with GAAP, after payment of income taxes but excluding any extraordinary or non-recurring items. "Original Issue Date" shall mean the date of the first issuance of this Debenture regardless of the number of transfers of this or any portion of this Debenture and regardless of the number of instruments which may be issued to evidence such Debenture or Debentures. "Purchase Agreement" means the Securities Purchase Agreement, of even date herewith, to which the Company and the Holder are parties, as amended, modified or supplemented from time to time in accordance with its terms. Section 2. Interest. a) Payment of Interest in Cash. The Company shall pay interest, in cash, to the Holder on the then outstanding principal amount of this Debenture at the rate of 10% per annum, payable in equal monthly installments of cash via wire transfer of immediately available funds, in arrears, on the last day of each month for the period beginning on the Initial Issuance Date and ending on the Maturity Date or such earlier or later time when this Debenture is paid or prepaid in full (except that, if any such date is not a Business Day, then such payment shall be due on the next succeeding Business Day) (each such date, an "Interest Payment Date"), subject to the conversion rights of Holder as stated herein. b) Interest Calculations. Interest shall be calculated on the basis of a 360-day year and shall accrue daily commencing on the Original Issue Date until payment in full of the principal sum, together with all accrued and unpaid interest and other amounts which may become due hereunder, has been made. Interest hereunder will be paid to the Person in whose name this Debenture is registered on the records of the Company regarding registration and transfers of Debentures (the "Debenture Register"). c) Late Fee. 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. d) Prepayment. The Company may prepay all or any portion of the then outstanding principal amount of this Debenture without any prepayment premium or discount by providing Holder not less than five days prior written notice, such outstanding principal balance remaining subject to Holder's conversion rights hereunder until the actual prepayment is made following such notice period. Section 3. Conversion Right; Adjustments. The Holder of this Debenture shall have the right, at Holder's option, at any time on or after the Original Issue Date of this Debenture, to convert all, or, in multiples of $50,000, any part of this Debenture into such number of fully paid and nonassessable shares of Common Stock as shall be provided herein. The Holder of this Debenture may exercise the conversion right by giving written notice (a "Conversion Notice") to the Company of the exercise of such right and stating the name or names in which the stock certificate or stock certificates for the shares of Common Stock are to be issued and the address to which such certificates shall be delivered. The Conversion Notice shall be accompanied by this Debenture. The number of shares of Common Stock that shall be issuable upon conversion of the Debenture shall equal the then outstanding principal amount of this Debenture plus all accrued and unpaid interest due and payable on the Debenture on the Conversion Date (defined below) or a portion thereof (in the discretion of the Holder) divided by the Conversion Price (as defined below) in effect on the date the Conversion Notice is given. Conversion shall be deemed to have been effected on the date the Conversion Notice is delivered to the Company (each, a "Conversion Date"). Within ten Business Days after a Conversion Date, the Company shall issue and deliver by hand against a signed receipt therefor or by reputable overnight delivery carrier to the address designated in the Conversion Notice, a stock certificate or stock certificates of the Company representing the number of shares of Common Stock to which Holder is entitled and a check or cash in payment of all interest accrued and unpaid under the Debenture being converted up to and including the Conversion Date. If a stock certificate or stock certificates are not delivered within 10 business days after a Conversion Date, the Company shall pay and/or grant to Holder 0.1% (on a Fully Diluted Basis) of the Company's Common Stock per day until such certificates are delivered. The conversion rights will be governed by the following provisions: a) Conversion Price. The Conversion Price, subject to adjustment as set forth herein, shall be equal to $.30; provided, however, that in the event that this Debenture is not repaid and satisfied in full on or by September 7, 2006, such Conversion Price shall automatically, without the necessity for any further action by any party hereto, be reduced to $.14. b) Adjustment for Issuance of Shares at less than the Conversion Price. (i) If and whenever any Additional Common Stock (as herein defined) shares shall be issued by the Company (the "Stock Issue Date") for a consideration per share less than the Conversion Price, then in each such case the initial Conversion Price shall be reduced to a new Conversion Price in an amount equal to the consideration per share received by the Company for the additional shares of Common Stock then issued,; and, in the case of shares issued without consideration, the initial Conversion Price shall be reduced in amount and the number of shares issued upon conversion shall be increased in an amount so as to maintain for the Holder the right to convert this Debenture into shares equal in amount to the same percentage interest in the Common Stock of the Company as existed for the Holder immediately preceding the Stock Issue Date. (ii) Consideration for Shares. In case of the issuance of Additional Common Stock for a consideration part or all of which shall be cash, the amount of the cash consideration therefor shall be deemed to be the amount of the cash received by Company for such shares. In case of the issuance of any shares of Additional Common Stock for a consideration part or all of which shall be other than cash, the amount of the consideration therefor, other than cash, shall be deemed to be the then fair market value of the property received as determined by an investment banking firm selected by Holder. (iii) Reclassification of Shares. In case of the reclassification of securities into shares of Common Stock, the shares of Common Stock issued in such reclassification shall be deemed to have been issued for a consideration other than cash. Shares of Additional Common Stock issued by way of dividend or other distribution on any class of stock of the Company shall be deemed to have been issued without consideration. (iv) Split up or Combination of Shares. In case issued and outstanding shares of Common Stock shall be subdivided or split up into a greater number of shares of the Common Stock, the Conversion Price shall be proportionately decreased, and in case issued and outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Price shall be proportionately increased, such increase or decrease, as the case may be, becoming effective at the time of record of the split-up or combination, as the case may be. (v) The term "Additional Common Stock" herein shall mean, other than with respect to an Exempt Issuance, in the most broadest sense all shares of Common Stock or Common Stock Equivalents hereafter issued by the Company (including, but not limited to Common Stock held in the treasury of the Company, except Common Stock issued upon the conversion or exercise of any security purchased in connection with the Purchase Agreement. c) Adjustment for Mergers, Consolidations, Etc.. (i) In the event of distribution to all Common Stock holders of any stock, indebtedness of the Company or assets (excluding cash dividends or distributions from retained earnings) or other rights to purchase securities or assets, then, after such event, this Debenture will be convertible into the kind and amount of securities, cash and other property which the holder of the Debenture would have been entitled to receive if the holder owned the Common Stock issuable upon conversion of the Debenture immediately prior to the occurrence of such event. (ii) In case of any capital reorganization, reclassification of the stock of the Company (other than a change in par value or as a result of a stock dividend, subdivision, split up or combination of shares), this Debenture shall be convertible into the kind and number of shares of stock or other securities or property of the Company to which the holder of the Debenture would have been entitled to receive if the holder owned the Common Stock issuable upon conversion of the Debenture immediately prior to the occurrence of such event. The provisions of the foregoing sentence shall similarly apply to successive reorganizations, reclassifications, consolidations, exchanges, leases, transfers or other dispositions or other share exchanges. d) Notice of Adjustment. In the event the Company shall propose to take any action which shall result in an adjustment in the Conversion Price, the Company shall give notice to the Holder, which notice shall specify the record date, if any, with respect to such action and the date on which such action is to take place. Such notice shall be given on or before the earlier of ten days before the record date or the date which such action shall be taken. Such notice shall also set forth all facts (to the extent known) material to the effect of such action on the Conversion Price and the number, kind or class of shares or other securities or property which shall be deliverable or purchasable upon the occurrence of such action or deliverable upon conversion of this Debenture. Additionally, following completion of an event wherein the Conversion Price shall be adjusted, the Company shall furnish to the holder of this Debenture a statement, signed by an authorized officer of the Company of the facts creating such adjustment and specifying the resultant adjusted Conversion Price then in effect. e) Reservation of Shares. The Company warrants and agrees that it shall at all times reserve and keep available, free from preemptive rights, sufficient authorized and unissued shares of Common Stock to effect conversion of this Debenture. f) Registration Rights. The Holder has certain rights with respect to the registration of shares of Common Stock issued upon the conversion of this Debenture, such rights being specifically set forth in the Purchase Agreement entered into by and between Holder and the Company on the date hereof. g) Exercise Limitations. The Holder shall not have the right to convert any portion of this Debenture, pursuant to Section 3 or otherwise, to the extent that after giving effect to such issuance after exercise, the Holder (together with the Holder's affiliates), as set forth on the applicable Conversion Notice, would beneficially own in excess of 4.99% (or as applicable, 9.99%) of the number of shares of the Common Stock outstanding immediately after giving effect to such issuance. For purposes of the foregoing determination, the number of shares of Common Stock beneficially owned by the Holder and its affiliates shall include the number of shares of Common Stock issuable upon such conversion of this Debenture less the number of shares of Common Stock which would be issuable upon (A) conversion of the remaining, unexercised portion of this Debenture and (B) exercise or conversion of the unexercised or unconverted portion of any other Securities (including, without limitation, any other Debentures or Warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder. Except as set forth in the preceding sentence, for purposes of this Section 3(g), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act. To the extent that the limitation contained in this Section 3(g) applies, the determination of whether this Debenture is convertible (in relation to other securities owned by the Holder) and of which a portion of this Debenture is convertible shall be in the sole discretion of Holder. For purposes of this Section 3(g), in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) Schedule 3.1(g) to the Purchase Agreement, (y) a more recent public announcement by the Company including the annual report or quarterly report on Form 10-KSB or Form 10-QSB, as the case may be, most recently filed with the Commission; or (z) any other notice by the Company or the Company's Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the Company shall within two Business Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. The provisions of this Section 3(g) may be waived by the Holder upon, at the election of the Holder, not less than 61 days' prior notice to the Company, and the provisions of this Section 3(g) shall continue to apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver). Section 4. Registration of Transfers and Exchanges. a) Different Denominations. 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. b) Investment Representations. This Debenture has been issued subject to certain investment representations of the original Holder set forth in the Purchase Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement and applicable federal and state securities laws and regulations. c) Reliance on Debenture Register. Prior to due presentment to the Company for transfer of this Debenture, the Company and any agent of the Company may treat the Person in whose name this Debenture is duly registered on the Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Debenture is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. Section 5. Negative Covenants. So long as any portion of this Debenture is outstanding, without the prior written consent of the Holder, which consent may be withheld in the sole discretion of the Holder, the Company will not and will not permit any of its Subsidiaries to directly or indirectly: a) Indebtedness. Other than equipment leases of up to $50,000 in the aggregate for any 12 month period, enter into, create, incur, assume or suffer to exist any indebtedness or Liens, 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 to, or pari passu with, in any respect, the Company's obligations under the Debentures; b) Repayment of Indebtedness. Repay any principal due and owing on any promissory notes, debentures, or other forms of indebtedness, other than (i) periodic interest payments due and owing thereunder; (ii) repayment due of any principal amount or interest due or becoming due under or under this Debenture; and (iii) repayment of the indebtedness set forth in Schedule 4.9 to the Purchase Agreement; provided, however, nothing contained in this section shall prohibit the Company from making any payments with respect to trade payables made in the ordinary course of the Company's business; c) Repayment of Shares. Repay, repurchase or offer to repay, repurchase or otherwise acquire more than a de minimus number of shares of its Common Stock or other equity securities or as otherwise permitted by the Transaction Documents; d) Governing Documents. Amend its certificate of incorporation, bylaws or other charter documents so as to adversely affect any rights of the Holder in its capacity as a holder of the Debentures; e) Loans and Investments. Lend or advance money, credit or property to any Person, or invest in (by capital contribution or otherwise), or purchase or repurchase the stock or indebtedness or assets or properties of any Person, or agree to do any of the foregoing, other than in the ordinary course of business; f) Guarantees. Assume, endorse or otherwise become or remain liable in connection with the obligations (including accounts payable) of any other Person, other than in the ordinary course of business. g) Sale of Assets, Dissolution, Etc. Transfer, sell, assign, lease or otherwise dispose of any of its properties or assets, or any assets or properties necessary or desirable for the proper conduct of its business, or transfer, sell, assign or otherwise dispose of any of its accounts, or contract rights to any Person, or change the nature of its business, wind-up, liquidate or dissolve, or agree to any of the foregoing, other than in the ordinary course of business; h) Acquisition of Assets. Agree to purchase, acquire, or lease of any assets of any Person, other than in the ordinary course of business; i) Compensation. Increase the compensation of any of its officers or consultants making more than $100,000 per year, hire any relative of any officer, director or shareholder of the Company, or pay a bonus to any such person. j) Subsidiaries. Establish or form a partially or wholly owned Subsidiary. Sell, transfer or assign any interest in the Company's existing Subsidiaries. k) No Further Issuance of Securities. Other than in accordance herewith or with respect to an Exempt Issuance, create, issue or permit the issuance of any additional securities of the Company or of any of its Subsidiaries (including with respect to any Qualifying Transaction), if any, or any rights, options or warrants to acquire any such securities; provided, however, that in the event that Company desires to issue securities with preferences or rights greater than that which the Common Stock has and the Holder consents to same, the Holder will then have the option of converting all or any part of this Debenture into such stock in lieu of the Common Stock; l) No Dividends; No Redemption. Declare any dividend, pay or set aside for payment any dividend or other distribution, in cash, stock, or other property, or make any payment to any related parties, including to any preferred stockholders, as a dividend, redemption, or otherwise, other than the payment of salaries in the ordinary course of business. m) Stock Splits. Undertake a reverse or forward stock split or reclassification of the Common Stock; or n) Agreement. Enter into any agreement obligating the Company to undertake any of the matters set forth in this Section 5. Section 6. Affirmative Covenants. So long as any portion of this Debenture is outstanding and unless the Holder otherwise consents in writing, which consent may be withheld in the sole discretion of the Holder, the Company will: a) Taxes and Liens. Promptly pay, or cause to be paid, all taxes, assessments and other governmental charges which may lawfully be levied or assessed upon the income or profits of the Company, or upon any property, real, personal or mixed, belonging to the Company, or upon any part thereof, and also any lawful claims for labor, material and supplies which if unpaid, might become a lien or charge against any such property; provided, however, the Company shall not be required to pay any such tax, assessment, charge, levy or claim so long as the validity thereof shall be actively contested in good faith by proper proceedings; but, provided further that any such tax, assessment, charge, levy or claim shall be paid or bonded in a manner satisfactory to the Holder upon the commencement of proceedings to foreclose any lien securing the same. b) Business and Existence. Do or cause to be done all things necessary to preserve and to keep in full force and effect any licenses necessary to the business of the Company, its corporate existence and rights of its franchises, trade names, trademarks, and permits which are reasonably necessary for the continuance of its business; and continue to engage principally in the business currently operated by the Company. c) Insurance and Properties. Keep its business and properties insured at all times with responsible insurance companies and carry such types and amounts of insurance as are required by all federal, state and local governments in the areas which the Company does business and as are usually carried by entities engaged in the same or similar business similarly situated. In addition, the Company shall maintain in full force and effect policies of liability insurance in amounts at least equal to that currently in effect. d) Maintain Property and Assets. Maintain its property and assets in good order and repair and, from time to time, make all needed and proper repairs, renewals, replacements, additions and improvements thereto, so that the business carried on may be properly and advantageously conducted at all times in accordance with prudent business management, and maintain annually adequate reserves for maintenance thereof. e) True Books. Keep true books of record and account in which full, true and correct entries will be made of all of its dealings and transactions, and set aside on its books such reserves as may be required by GAAP, consistently applied, with respect to all taxes, assessments, charges, levies and claims referred to in (a) above, and with respect to its business in general, and include such reserves in interim as well as year-end financial statements. f) Right of Inspection. Permit any person designated by the Holder, at the Holder's expense, to visit and inspect any of the properties, books and financial reports of the Company, all at such reasonable times upon three (3) Business Days prior notice to Company, and as often as the Holder may reasonably request, provided the Holder does not unreasonably interfere with the daily operations of the Company and Holder executes a confidentiality agreement. g) Observance of Laws. Conform to and duly observe all laws, regulations and other valid requirements of any regulatory authority with respect to the conduct of its business except those that would not cause a Material Adverse Effect, as determined in the reasonable discretion of the Holder. h) Company's Knowledge of Default. Upon an officer or director of the Company obtaining knowledge of, or threat of, an Event of Default hereunder, cause such officer to promptly, within no more than five Business Days, deliver to the Holder notice thereof specifying the nature thereof, the period of existence thereof, and what action the Company has taken and/or proposes to take with respect thereto. i) Notice of Proceedings. Upon an officer or director of the Company obtaining knowledge of any material litigation, dispute or proceedings being instituted or threatened against the Company, or any attachment, levy, execution or other process being instituted against any assets of the Company, cause such officer to promptly, within no more than five Business Days, give the Holder written notice of such litigation, dispute, proceeding, levy, execution or other process. j) Certificate of Covenant Compliance Within 30 days of the last day of each March, June, September and December, the Company will issue a Certificate of Covenant Compliance, executed by either the Chief Executive Officer or Chief Financial Officer in the form of Exhibit A attached hereto. If the Company is not in compliance with the covenants specified in this Section 5, the Company will modify the Certificate of Covenant Compliance by stating the exception and providing a detailed explanation of the non-compliance. k) Payment of Holder's Expenses. If at any time or times hereafter, Holder employs counsel to commence, defend or intervene, file a petition, complaint, answer, motion or other pleading, or to take any action in or with respect to any suit or proceeding (bankruptcy or otherwise) relating to this Debenture or any other Transaction Document, or any other agreement, guaranty, note, instrument or document heretofore, now or at any time or times hereafter executed by the Company and delivered to Holder, or to enforce any rights of Holder hereunder whether before or after the occurrence of any Event of Default, or to collect any of the Liabilities, then in any of such events, all of the reasonable attorneys' fees arising from such services, and any expenses, costs and charges relating thereto, shall be part of the Liabilities, payable on demand. l) Financial Covenants. As of the 75th date following the date of this Agreement and thereafter continuing until the Termination Date, the Company must maintain the following ratios: (i) Cash Interest Coverage. Until this Debenture is repaid in full, the Company shall maintain a Consolidated EBITDA and cash balance, including cash received from future financings, excluding cash required to pay down its debt instruments due within 1 year, based on any of the Company's quarterly financial statements (as determined on the last day of each fiscal quarter for the immediately preceding quarter), in an amount that will ensure payment of all interest due monthly after the closing date and after the closing of the Telenational transaction, until this debenture is paid in full. (ii) Current Ratio. The Company's current ratio, after the completion of the Telenational transaction, and future anticipated financings, will improve the Company's current ratio as compared to the Company's current ratio as of the Closing Date. . The Current Ratio shall be calculated and tested quarterly as of the last day of each fiscal quarter of the Company. (iii) Actual versus Budget. The Company shall on a quarterly basis achieve 75 percent of its budgeted revenue and income. Budget numbers shall be those delivered to Holder contemporaneously herewith and then on an annual calendar basis. It is understood by both parties that Trident Growth Fund has not received a budget from the Company, as such information is not provided by the Company in connection with any financing transactions. Notwithstanding the foregoing, the achievement of the above covenants as set forth in this Section 6(l) is contingent upon the closing of the Telenational Communications, Inc. transaction and the anticipated future financing of at least $5.0 million, required to close the transaction and provide the necessary cash flow to pay down the Company's debt financings as they come due within the next 12 months. It is understood that the Company may not achieve these covenants if the financing it obtains is less than $5.0 million. Section 7. 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 (A) the principal amount of any Debenture, or (B) interest (including Late Fees) on, or liquidated damages in respect of, any Debenture, in each case free of any claim of subordination, as and when the same shall become due and payable (whether on the Maturity Date or by acceleration or otherwise); ii. the Company shall fail to observe or perform any other covenant or agreement contained in this Debenture or any of the other Transaction Documents which failure is not cured, if possible to cure, within the earlier to occur of (A) 10 Business Days after notice of such default sent by the Holder or by any other holder and (B) 10 Business Days after the Company shall become or should have become aware of such failure; iii. a default or event of default (subject to any grace or cure period provided for in the applicable agreement, document or instrument) shall occur under (A) any of the Transaction Documents or (B) any other material agreement, lease, document or instrument to which the Company or any Subsidiary is bound and not cured; iv. any representation or warranty made herein, in any other Transaction Documents, in any written statement pursuant hereto or thereto, or in any other report, financial statement or certificate made or delivered to the Holder or any other holder of Debentures shall be untrue or incorrect in any material respect as of the date when made or deemed made; v. there shall have occurred a Bankruptcy Event; vi. the Company or any Subsidiary shall default in any of its obligations under 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. vii. the Company shall be a party to any Change of Control Transaction or Fundamental Transaction, shall agree to sell or dispose of 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 any its outstanding shares of Common Stock or Common Stock Equivalents; viii. the Company shall fail to have available a sufficient number of authorized and unreserved shares of Common Stock to issue to such Holder upon exercise of the Warrants in full and not remedied as permitted in the Transaction Documents; ix. the Company shall redeem any of the Common Stock Equivalents; x. upon the reasonable determination by the Holder that there has been a Material Adverse Effect; or xi. the occurrence of an Activity Event of Default (as defined in Section 5.1(f)(ii) of the Purchase Agreement); b) Remedies Upon Event of Default. If any Event of Default occurs, the full principal amount of this Debenture, together with interest and other amounts owing in respect thereof, to the date of acceleration shall become, at the Holder's election, immediately due and payable in cash. Commencing 30 days after the occurrence of any Event of Default, the interest rate on this Debenture shall, while such Event of Default is continuing, accrue at the rate of 18% per annum, or such lower maximum amount of interest permitted to be charged under applicable law. All Debentures for which the full principal amount 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 8. Miscellaneous. a) Notices. Any and all notices or other communications or deliveries to be provided by the Holder hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service, addressed to the Company, at the address or facsimile number set forth on the signature page hereto, or such other address or facsimile number as the Company may specify for such purposes by notice to the Holders delivered in accordance with this Section. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service addressed to the Holder at the facsimile number or address of the Holder appearing herein, or such other address or facsimile number as the Holder may specify in accordance with this Section. 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 on the signature page hereto prior to 5:30 p.m. (Dallas, Texas time), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified on the signature page hereto later than 5:30 p.m. (Dallas, Texas time) on any date and earlier than 11:59 p.m. (Dallas, Texas time) on such date, (iii) the second Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. b) Absolute Obligation. Except as expressly provided herein, no provision of this Debenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, interest and liquidated damages (if any) on, this Debenture at the time, place, and rate, and in the coin or currency, herein prescribed. This Debenture is a direct debt obligation of the Company. This Debenture ranks pari passu with all other Debentures now or hereafter issued under the terms set forth herein. c) Security Interest. This Debenture is a direct debt obligation of the Company and, pursuant to the Security Documents, is secured by a first priority security interest in all of the assets of the Company other than those assets not already pledged to the Global Capital Companies as security for prior loans made. d) Lost or Mutilated Debenture. 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. e) Governing Law. 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 Texas, 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 Dallas, Texas (the "Dallas Courts"). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the Dallas 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 Dallas 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. f) Waiver. 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. g) Severability. If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this Debenture shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates applicable laws governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum permitted rate of interest. h) Next Business Day. 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. i) Headings. The headings contained herein are for convenience only, do not constitute a part of this Debenture and shall not be deemed to limit or affect any of the provisions hereof. j) Usury. To the extent it may lawfully do so, the Company hereby waives and agrees not to insist upon or plead or in any manner whatsoever claim, and will resist any and all efforts to be compelled to take the benefit or advantage of, usury laws wherever enacted, now or at any time hereafter in force, in connection with any claim, action or proceeding that may be brought by any Purchaser in order to enforce any right or remedy under any Transaction Documents. Notwithstanding any provision to the contrary contained in any Transaction Documents, it is expressly agreed and provided that the total liability of the Company under the Transaction Documents for payments in the nature of interest shall not exceed the Maximum Rate, and, without limiting the foregoing, in no event shall any rate of interest or default interest, or both of them, when aggregated with any other sums in the nature of interest that the Company may be obligated to pay under the Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum contract rate of interest allowed by law and applicable to the Transaction Documents is increased or decreased by statute or any official governmental action subsequent to the date hereof, the new maximum contract rate of interest allowed by law will be the Maximum Rate applicable to the Transaction Documents from the effective date of such increase or decrease forward, unless such application is precluded by applicable law. If under any circumstances whatsoever, interest in excess of the Maximum Rate is paid by the Company to any Purchaser with respect to indebtedness, if any, evidenced by the Transaction Documents, such excess shall be applied by such Purchaser to the unpaid principal balance of any such indebtedness or be refunded to the Company, the manner of handling such excess to be at such Purchaser's election in the event any principal amount remains outstanding. (k) Amendment. This Agreement may not be amended, supplemented or modified, except by an agreement in writing signed by each of the parties hereto. [Signature Page Follows] IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed by a duly authorized officer as of the date first above indicated. COMPANY RAPID LINK INCORPORATED Address for Notice and Delivery: 17383 Sunset Boulevard Suite 350 Pacific Palisades, California 90272 Telephone: (310) 566-1700 Facsimile: (310) 573-9435 Attn: John Jenkins, CEO By:____________________________________ Name: John Jenkins Title: Chief Executive Officer EXHIBIT A I, the undersigned, hereby represent that Rapid Link Incorporated is in compliance with all of its covenants specified in Sections 5 and 6 of that certain 10% Secured Convertible Debenture originally dated as of March 8, 2006, executed by Rapid Link Incorporated, in favor of CHARGER INVESTEMENTS, LLC RAPID LINK INCORPORATED By:____________________________________ Name: Title: EX-4.8 9 exh4-8.txt COMMON STOCK PURCHASE WARRANT EXHIBIT 4.8 NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES AS PERMITTED BY LAW AND THE SECURITIES PURCHASE AGREEMENT PURSUANT TO WHICH THE SECURITIES WERE ISSUED. COMMON STOCK PURCHASE WARRANT NO. 1 To Purchase Shares of Common Stock of RAPID LINK INCORPORATED This COMMON STOCK PURCHASE WARRANT (this "Warrant") certifies that, for value received, CHARGER INVESTEMENTS, LLC, a California limited liability corporation (the "Holder"), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof, March 8, 2006 (the "Initial Exercise Date"), and on or prior to the close of business on the fifth anniversary of the Initial Exercise Date (the "Termination Date"), to subscribe for and purchase from RAPID LINK INCORPORATED, a Delaware corporation (the "Company"), such number of shares of common stock, par value $001 per share, of the Company (the "Common Stock"), subject to adjustment herein (the "Warrant Shares") as follows: a) 400,000 at an Exercise Price equal to $.14; plus b) 400,000 at an Exercise Price equal to $.25 per share; plus c) an additional 20,000 to vest and become exercisable on the last day of each month prior to the Company's satisfaction in full of the Debenture, or the Holder's complete conversion thereof, as the case may be, such Warrant Shares to have an Exercise Price equal to $.25 per share. Section 1. Definitions. Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain Securities Purchase Agreement (the "Purchase Agreement"), of even date herewith, entered into by and among the Company and the Holder. Section 2. Exercise. a) Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date and on or before the Termination Date (each, an "Exercise Date") by delivery to the Company of a duly executed facsimile copy of the Notice of Exercise Form annexed hereto (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company); provided, however, within five Business Days of the date said Notice of Exercise is delivered to the Company, the Holder shall have surrendered this Warrant to the Company and the Company shall have received payment of the aggregate Exercise Price of the shares thereby purchased by wire transfer or cashier's check drawn on a United States bank. Exercise Price. The Exercise Price (so called herein) of each share of Common Stock under this Warrant shall be equal to the amount set forth above in the paragraph immediately preceding Section 1. Any reference to the Exercise Price herein shall relate to the Exercise Price relevant to such Warrant Shares as described above. b) Cashless Exercise. If at any time after one year from the date of issuance of this Warrant there is no effective Registration Statement registering the resale of the Warrant Shares by the Holder, then this Warrant may also be exercised at such time by means of a "cashless exercise" in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where: (A) = the price of said Common Stock determined by reference to the last reported sale price for the Common Stock on such day on the principal securities exchange on which the Common Stock is listed or admitted to trading or if no such sale takes place on such date, the average of the closing bid and asked prices thereof as officially reported, or, if not so listed or admitted to trading on any securities exchange, the last sale price for the Common Stock on the National Association of Securities Dealers national market system on such date, or, if there shall have been no trading on such date or if the Common Stock shall not be listed on such system, the average of the closing bid and asked prices in the over-the-counter market as furnished by any NASD member firm selected from time to time by the Company for such purpose or, if the Common Stock is not traded, then such price as is reasonably determined by the Company's Board of Directors (the "Market Value"); (B) = the Exercise Price of this Warrant, as adjusted; and (X) = the number of Warrant Shares issuable upon exercise of this Warrant in accordance with the terms of this Warrant by means of a cash exercise rather than a cashless exercise. Notwithstanding anything herein to the contrary, on the Termination Date, this Warrant shall be automatically exercised via cashless exercise pursuant to this Section 2(c). c) Exercise Limitations. The Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise, the Holder (together with the Holder's affiliates), as set forth on the applicable Notice of Exercise, would beneficially own in excess of 4.99% (or as applicable, 9.99%) of the number of shares of the Common Stock outstanding immediately after giving effect to such issuance. For purposes of the foregoing determination, the number of shares of Common Stock beneficially owned by the Holder and its affiliates shall include the number of shares of Common Stock issuable upon such exercise of this Warrant less the number of shares of Common Stock which would be issuable upon (A) exercise of the remaining, nonexercised portion of this Warrant and (B) exercise or conversion of the unexercised or unconverted portion of any other Securities (including, without limitation, any other Debentures or Warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder. Except as set forth in the preceding sentence, for purposes of this Section 2(c), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act. To the extent that the limitation contained in this Section 2(c) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder) and of which a portion of this Warrant is exercisable shall be in the sole discretion of such Holder. For purposes of this Section 2(c), in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) Schedule 3.1(g) to the Purchase Agreement, (y) a more recent public announcement by the Company, including the most recent annual or quarterly report of Form 10-KSB or 10-QSB filed with the Commission; or (z) any other notice by the Company or the Company's transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the Company shall within two Business Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. The provisions of this Section 2(c) may be waived by the Holder upon, at the election of the Holder, not less than 61 days' prior notice to the Company, and the provisions of this Section 2(c) shall continue to apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver). d) Mechanics of Exercise. i. Authorization of Warrant Shares. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issuance thereof (other than taxes in respect of any transfer occurring contemporaneously with such issuance). The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. ii. Delivery of Certificates Upon Exercise. Certificates for shares purchased hereunder shall be transmitted by the transfer agent of the Company to the Holder by crediting the account of the Holder's prime broker with the Depository Trust Company through its Deposit Withdrawal Agent Commission ("DWAC") system if the Company is a participant in such system and if the certificates may be issued without a restrictive legend in accordance with applicable federal securities laws, and otherwise by physical delivery to the address specified by the Holder in the Notice of Exercise within two (2) Business Days from the delivery to the Company of the Notice of Exercise Form, surrender of this Warrant and payment of the aggregate Exercise Price as set forth above ("Warrant Share Delivery Date"). This Warrant shall be deemed to have been exercised on the date the Exercise Price is received by the Company. The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised by payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 2(d)(vii) prior to the issuance of such shares, have been paid. iii. Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant. iv. Rescission Rights. If the Company fails to cause its transfer agent to transmit to the Holder a certificate or certificates representing the Warrant Shares pursuant to this Section 2(d)(iv) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise. v. Failure to Timely Deliver Certificates Upon Exercise. In addition to any other rights available to the Holder, if the Company or the Company's transfer agent fails to cause delivery to the Holder of a certificate or certificates representing the Warrant Shares or if the Company or its transfer agent fails to deliver such certificates without the restrictive legend (if applicable) on or before the Warrant Share Delivery Date, the Company shall pay to Purchaser, in cash, as partial liquidated damages and not as a penalty, the greater of (i) $500 for each Business Day after the Warrant Share Delivery Date until such certificate is delivered with an appropriate legend or without a restrictive legend, as the case may be; and (ii) the difference in the Market Value of the Warrant Shares on the Warrant Share Delivery Date and the date such shares are actually received by the Holder. Nothing herein shall limit Purchaser's right to pursue actual damages for the Company's failure to deliver certificates representing any Securities as required herein, and Purchaser 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. vi. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall round such fractional share up to the next whole number. vii. Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. viii. Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof. Section 3. Certain Adjustments. a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (A) pays a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company pursuant to this Warrant), (B) subdivides outstanding shares of Common Stock into a larger number of shares, (C) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (D) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case 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 outstanding after such event and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted. Any adjustment made pursuant to this Section 3(a) 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. b) Subsequent Equity Sales. If the Company 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 any Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock, at an effective price per share less than the then Exercise Price (such lower price, the "Base Share Price" and such issuances collectively, a "Dilutive Issuance"), as adjusted hereunder (if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which is issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share which is less than the Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price), then, the Exercise Price shall be reduced to equal the Base Share Price. 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 Equivalents subject to this section, indicating therein the applicable issuance price, or of applicable reset price, exchange price, conversion price and other pricing terms (such notice the "Dilutive Issuance Notice"). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 3(b), upon the occurrence of any Dilutive Issuance, after the date of such Dilutive Issuance the Holder is entitled to receive a number of Warrant Shares based upon the Base Share Price regardless of whether the Holder accurately refers to the Base Share Price in the Notice of Exercise. c) Pro Rata Distributions. If the Company, at any time prior to the Termination Date, shall distribute to all holders of Common Stock (and not to Holders of the Warrants) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security other than the Common Stock (which shall be subject to Section 3(b)), then in each such case the Exercise Price shall be adjusted 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 closing bid price of the Common Stock on the then principal Trading Market determined as of the record date mentioned above (if the closing bid price of the Common Stock on the then principal Trading Market shall then be determinable and otherwise the fair market value per share as determined by the Board of Directors in good faith, and of which the numerator shall be such closing bid price of the Common Stock on the then principal Trading Market on such record date less the then per share 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. d) Fundamental Transaction. If, at any time while this Warrant is outstanding, there occurs a Fundamental Transaction, then, upon any subsequent conversion of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise absent such Fundamental Transaction, at the option of the Holder, (a) upon exercise of this Warrant, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Alternate Consideration receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event or (b) if the Company is acquired in an all cash transaction, cash equal to the value of this Warrant as determined by the difference between the applicable Exercise Price and the amount of cash paid per share to the shareholders of the Company (the "Alternate Consideration"). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. To the extent necessary to effectuate the foregoing provisions, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new warrant consistent with the foregoing provisions and evidencing the Holder's right to exercise such warrant into Alternate Consideration. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this Section 3(d) and insuring that this Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction. e) Exempt Issuance. Notwithstanding the foregoing, no adjustments, Alternate Consideration, nor notices shall be made, paid, or issued under this Section 3 in respect of an Exempt Issuance. f) Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. The number of shares of Common Stock outstanding at any given time shall not includes shares of Common Stock owned or held by or for the account of the Company, and the description of any such shares of Common Stock shall be considered on issue or sale of Common Stock. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding. g) Voluntary Adjustment By Company. The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. h) Intentionally Omitted. i) Notice to Holders. i. Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to this Section 3, the Company shall promptly mail to each Holder a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. If the Company issues a variable rate security, the Company shall be deemed to have issued Common Stock or Common Stock Equivalents at the lowest possible conversion or exercise price at which such securities may be converted or exercised in the case of a Variable Rate Transaction (as defined in the Purchase Agreement), or the lowest possible adjustment price in the case of an MFN Transaction. The term "MFN Transaction" shall mean a transaction in which the Company issues or sells any securities in a capital raising transaction or series of related transactions which grants to an investor the right to receive additional shares based upon future transactions of the Company on terms more favorable than those granted to such investor in such offering. ii. Notice to Allow Exercise by Holder. 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 mailed to the Holder at its last address as it shall appear upon the Warrant Register 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, however 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. The Holder is entitled to exercise this Warrant during the 20-day period commencing the date of such notice to the effective date of the event triggering such notice. Section 4. Transfer of Warrant. a) Transferability. Subject to compliance with any applicable securities laws and the conditions set forth in Sections 5(a) and 4(d) hereof and to the provisions of Section 4.1 of the Purchase Agreement, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued. b) New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. c) Warrant Register. 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, absent actual notice to the contrary. d) Transfer Restrictions. If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such transfer (i) that the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an "accredited investor" as defined in Rule 501(a) of Regulation D promulgated under the Securities Act or a qualified institutional buyer as defined in Rule 144A(a) under the Securities Act. Section 5. Covenants. (a) Negative Covenants. So long as any portion of this Warrant is outstanding, without the prior written consent of the Holder, which consent may be withheld in the sole discretion of the Holder, the Company will not and will not permit any of its Subsidiaries to directly or indirectly: i. Sale of Assets, Dissolution, Etc. Transfer, sell, assign, lease or otherwise dispose of all or substantially all of its properties or assets, or any assets or properties necessary or desirable for the proper conduct of its business, or transfer, sell, assign or otherwise dispose of any of its accounts, or contract rights to any person or entity, or change the nature of its business, wind-up, liquidate or dissolve, or agree to any of the foregoing, other than in the ordinary course of business; ii. No Further Issuance of Securities. Other than in accordance herewith or with respect to an Exempt Issuance, create, issue or permit the issuance of any additional securities of the Company or of any of its Subsidiaries (including with respect to any Qualifying Transaction), if any, or any rights, options or warrants to acquire any such securities; provided, however, that in the event that Company desires to issue securities with preferences or rights greater than that which the Common Stock has and the Holder consents to same, the Holder will then have the option of converting all or any part of this Debenture into such stock in lieu of the Common Stock;; iii. Agreement. Enter into any agreement obligating the Company to undertake any of the matters set forth in this Section 5(a). (b) Affirmative Covenants. So long as any portion of this Warrant is outstanding and unless the Holder otherwise consents in writing, which consent may be withheld in the sole discretion of the Holder, the Company will: i. True Books. Keep true books of record and account in which full, true and correct entries will be made of all of its dealings and transactions, and set aside on its books such reserves as may be required by GAAP, consistently applied, with respect to all taxes, assessments, charges, levies and claims referred to in (a) above, and with respect to its business in general, and include such reserves in interim as well as year-end financial statements; and ii. Right of Inspection. Permit any person designated by the Holder, at the Holder's expense, to visit and inspect any of the properties, books and financial reports of the Company, all at such reasonable times upon three (3) Business Days prior notice to the Company, and as often as the Holder may reasonably request, provided the Holder does not unreasonably interfere with the daily operations of the Company and Holder executes a confidentiality agreement. Section 6. Miscellaneous. a) Title to Warrant. Prior to the Termination Date and subject to compliance with applicable laws and Section 4 of this Warrant, this Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the Holder in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. The transferee shall sign an investment letter in form and substance reasonably satisfactory to the Company. b) No Rights as Shareholder Until Exercise. This Warrant does not entitle the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof. Upon the surrender of this Warrant and the payment of the aggregate Exercise Price (or by means of a cashless exercise), the Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment. c) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate. d) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. e) Authorized Shares. The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. f) Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the provisions of the Purchase Agreement. g) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws. h) Expenses. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. i) Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Purchase Agreement. j) Limitation of Liability. No provision hereof, in the absence of any affirmative action by Holder to exercise this Warrant or purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. k) Remedies. Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. l) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares. m) Amendment and Waiver. This Warrant may be modified or amended only with the written consent of the Company and the Holder. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies, notwithstanding the fact that all rights hereunder terminate on the Termination Date. n) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant. o) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. p) Registration Rights. The Holder has certain rights with respect to the registration of the Warrant Shares upon exercise of this Warrant, such rights being specifically set forth in the Purchase Agreement entered into by and between Holder and the Company on the date hereof. [Signature Page Follows] IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first written above. RAPID LINK INCORPORATED. By:____________________________________ Name: John Jenkins Title: Chief Executive Officer NOTICE OF EXERCISE TO: BPK RESOURCES, INC. (1) The undersigned hereby elects to purchase ________ Warrant Shares of Rapid Link Incorporated pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any. (2) Payment shall take the form of (check applicable box): [ ] in lawful money of the United States; or [ ] the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c). (3) Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below: _______________________________ The Warrant Shares shall be delivered to the following: _______________________________ _______________________________ _______________________________ (4) Accredited Investor. The undersigned, and, if applicable, the person or entity identified in subsection 3 above, is an "accredited investor" as defined in Regulation D promulgated under the Securities Act of 1933, as amended. [SIGNATURE OF HOLDER] Name of Investing Entity: __________________________________________________ Signature of Authorized Signatory of Investing Entity: _____________________ Name of Authorized Signatory: ______________________________________________ Title of Authorized Signatory: _____________________________________________ Date: ______________________________________________________________________ ASSIGNMENT FORM (To assign the foregoing warrant, execute this form and supply required information. Do not use this form to exercise the warrant.) FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to _______________________________________________ whose address is _______________________________________________________________. ________________________________________________________________ Dated: ______________, _______ Holder's Signature: _____________________________ Holder's Address: _____________________________ _____________________________ Signature Guaranteed: _________________________________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant. EX-4.9 10 exh4-9.txt SECURITY AGREEMENT EXHIBIT 4.9 SECURITY AGREEMENT This SECURITY AGREEMENT, dated as of March 8, 2006 (this "Agreement"), is entered into by and among RAPID LINK INCORPORATED a Delaware corporation (the "Debtor") and the CHARGER INVESTMENTS, LLC, a California limited liability corporation, (the "Secured Party"), the Holder of that certain 10% Secured Convertible Debenture due March 8, 2007 (or such earlier contingent date as set forth therein) in the original aggregate principal amount of $400,000 (the "Debenture"), issued by Debtor to the Secured Party in connection with that certain Securities Purchase Agreement of even date herewith entered into by and between the Debtor and the Secured Party (the "Purchase Agreement"). W I T N E S S E T H: WHEREAS, pursuant to the Debenture, the Secured Party has agreed to extend certain loans described above to the Debtor as evidenced by the Debenture; and WHEREAS, in order to induce the Secured Party to extend the loans evidenced by the Debenture, the Debtor has agreed to execute and deliver to the Secured Party this Agreement and to grant the Secured Party a perfected first priority security interest in all property of the Debtor not pledged as security to the Global Capital Companies as of the date hereof (the "Global Capital Collateral") to secure the prompt payment, performance and discharge in full of all of the Debtor's obligations under the Debenture. NOW, THEREFORE, in consideration of the agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Certain Definitions. As used in this Agreement, the following terms shall have the meanings set forth in this Section 1. Terms used but not otherwise defined in this Agreement that are defined in Article 9 of the Uniform Commercial Code (the "UCC") shall have the respective meanings given such terms in Article 9 of the UCC, and capitalized terms not otherwise defined herein shall have the meaning given them in the Purchase Agreement. (a) "Collateral" means, other than with respect to the Global Capital Collateral, as such terms are defined in Section 9.102 of the UCC: all "collateral," "accounts," "chattel paper" (including, but not limited to tangible and electronic chattel paper), "commercial tort claims," "commodity contracts," "commodity accounts," "deposit accounts," "documents," "equipment," "farm products," "fixtures," "general intangibles" (including "payment intangibles" and "software"), "goods," "health care insurance receivables," "instruments," "inventory," "investment property," "letter of credit rights," "mortgages," and "records" of the Debtor, whether presently owned or existing or hereafter acquired or coming into existence, and all additions and accessions thereto and all substitutions and replacements thereof, and all "proceeds" (cash or noncash) (as defined in Article 9 of the UCC) thereof, including, without limitation, all proceeds from the sale or transfer of the Collateral and of insurance covering the same. Without in any way limiting the generality of the foregoing, if not already included in the Collateral described above, the term "Collateral" shall also include, as defined in plain English: All machinery, equipment, computers, computer programs, motor vehicles, trucks, tanks, boats, ships, appliances, furniture, special and general tools, fixtures, test and quality control devices and other equipment of every kind and nature and wherever situated, contract rights, partnership interests, stock or other securities, licenses, distribution and other agreements, computer software (whether "off-the- shelf", licensed from any third party or developed by Debtor) computer software development rights, leases, franchises, customer lists, quality control procedures, grants and rights, goodwill, trademarks, service marks, trade styles, trade names, patents, patent applications, copyrights, deposit and investment accounts and income tax refunds, insurance proceeds, and rights to refunds or indemnification whatsoever owing, together with all instruments, all documents of title representing any of the foregoing, all rights in any merchandising, goods, equipment, motor vehicles and trucks which any of the same may represent, and all right, title, security and guaranties with respect to same, including any right of stoppage in transit, business papers together with all documents of title and documents representing the same, all additions and accessions thereto, replacements therefor, all parts therefor, and all substitutes for any of the foregoing and all other items used and useful in connection with the Debtor's businesses and all improvements thereto. (b) "Obligations" means all of the Debtor's obligations under the Transaction Documents, in each case, whether now or hereafter existing, voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from the Secured Party as a preference, fraudulent transfer or otherwise as such obligations may be amended, supplemented, converted, extended or modified from time to time. 2. Grant of Perfected First Priority Security Interest. As an inducement for the Secured Party to extend the loan as evidenced by the Debenture and to secure the complete and timely payment, performance and discharge in full, as the case may be, of all of the Obligations, the Debtor hereby unconditionally and irrevocably pledges, grants and hypothecates to the Secured Party a continuing and perfected first priority security interest in and to, a lien upon and a right of set-off against all of their respective right, title and interest of whatsoever kind and nature in and to, the Collateral other than with respect to the Global Capital Collateral, and the collateral previously granted to Trident Investment Group, L.P., (the "Security Interest"). 3. Representations, Warranties, Covenants and Agreements of the Debtor. The Debtor represents and warrants to, and covenants and agrees with, the Secured Party as follows: (a) The Debtor has the requisite corporate power and authority to enter into this Agreement and otherwise to carry out its obligations hereunder. The execution, delivery and performance by the Debtor of this Agreement and the filings contemplated therein have been duly authorized by all necessary action on the part of the Debtor and no further action is required by the Debtor. (b) The Debtor represents and warrants that they have no place of business or offices where their respective books of account and records are kept (other than temporarily at the offices of its attorneys or accountants) or places where Collateral is stored or located, except as set forth on Schedule A attached hereto. (c) The Debtor is the sole owner of the Collateral (except for non-exclusive licenses granted by the Debtor in the ordinary course of business), free and clear of any liens, security interests, encumbrances, rights or claims, and are fully authorized to grant the Security Interest in and to pledge the Collateral. There is not on file in any governmental or regulatory authority, agency or recording office an effective financing statement, security agreement, license or transfer or any notice of any of the foregoing (other than those that will be filed in favor of the Secured Party pursuant to this Agreement) covering or affecting any of the Collateral. So long as this Agreement shall be in effect, Debtor shall not execute and shall not knowingly permit to be on file in any such office or agency any such financing statement or other document or instrument (except to the extent filed or recorded in favor of the Secured Party pursuant to the terms of this Agreement). (d) No part of the Collateral has been judged invalid or unenforceable. No written claim has been received that any Collateral or Debtor's use of any Collateral violates the rights of any third party. There has been no adverse decision to Debtor's claim of ownership rights in or exclusive rights to use the Collateral in any jurisdiction or to Debtor's right to keep and maintain such Collateral in full force and effect, and there is no Proceeding involving said rights pending or, to the best knowledge of the Debtor, threatened before any court, judicial body, administrative or regulatory agency, arbitrator or other governmental authority. (e) The Debtor shall at all times maintain its books of account and records relating to the Collateral at its principal place of business and its Collateral at the locations set forth on Schedule A attached hereto and may not relocate such books of account and records or tangible Collateral unless it delivers to the Secured Party at least 30 days prior to such relocation (i) written notice of such relocation and the new location thereof (which must be within the United States) and (ii) evidence that appropriate financing statements under the UCC and other necessary documents have been filed and recorded and other steps have been taken to perfect the Security Interest to create in favor of the Secured Party a valid, perfected and continuing perfected first priority lien in the Collateral. (f) This Agreement creates in favor of the Secured Party a valid security interest in the Collateral securing the payment and performance of the Obligations and, upon making the filings described in the immediately following subsection, a perfected first priority security interest in such Collateral. (g) The Debtor hereby authorizes the Secured Party to file one or more financing statements under the UCC, with respect to the Security Interest with the proper filing and recording agencies in any jurisdiction deemed proper by them. (h) The execution, delivery and performance of this Agreement by the Debtor does not conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing Debtor's debt or otherwise) or other understanding to which Debtor is a party or by which any property or asset of the Debtor is bound or affected. No consent (including, without limitation, from stockholders or creditors of the Debtor) is required for the Debtor to enter into and perform its obligations hereunder. (i) The Debtor shall at all times maintain the liens and Security Interest provided for hereunder as valid and perfected first priority liens and security interests in the Collateral in favor of the Secured Party until this Agreement and the Security Interest hereunder shall be terminated pursuant to Section 11 hereof. The Debtor hereby agrees to defend the same against any and all persons. The Debtor shall safeguard and protect all Collateral for the account of the Secured Party. At the request of the Secured Party, the Debtor will sign and deliver to the Secured Party at any time or from time to time one or more financing statements pursuant to the UCC in form reasonably satisfactory to the Secured Party and will pay the cost of filing the same in all public offices wherever filing is, or is deemed by the Secured Party to be, necessary or desirable to effect the rights and obligations provided for herein. Without limiting the generality of the foregoing, the Debtor shall pay all fees, taxes and other amounts necessary to maintain the Collateral and the Security Interest hereunder, and the Debtor shall obtain and furnish to the Secured Party from time to time, upon demand, such releases and/or subordinations of claims and liens which may be required to maintain the priority of the Security Interest hereunder. (j) The Debtor will not transfer, pledge, hypothecate, encumber, license (except for non-exclusive licenses granted by a Debtor in its ordinary course of business and sales of "inventory"), sell or otherwise dispose of any of the Collateral not in the ordinary course of its business without the prior written consent of the Secured Party. (k) The Debtor shall keep and preserve its "equipment," "inventory" and other tangible Collateral in good condition, repair and order and shall not operate or locate any such Collateral (or cause to be operated or located) in any area excluded from insurance coverage. (l) The Debtor shall, within ten (10) days of obtaining knowledge thereof, advise the Secured Party promptly, in sufficient detail, of any substantial change in the Collateral, and of the occurrence of any event which would have a material adverse effect on the value of the Collateral or on the Secured Party's security interest therein. (m) The Debtor shall promptly execute and deliver to the Secured Party such further deeds, mortgages, assignments, security agreements, financing statements or other instruments, documents, certificates and assurances and take such further action as the Secured Party may from time to time request and may in its sole discretion deem necessary to perfect, protect or enforce its security interest in the Collateral including, without limitation, if applicable, the execution and delivery of a separate security agreement with respect to each Debtor's intellectual property ("Intellectual Property Security Agreement") in which the Secured Party has been granted a security interest hereunder, substantially in a form acceptable to the Secured Party, which Intellectual Property Security Agreement, other than as stated therein, shall be subject to all of the terms and conditions hereof. (n) The Debtor shall permit the Secured Party and its representatives and agents to inspect the Collateral at any time, and to make copies of records pertaining to the Collateral as may be requested by the Secured Party from time to time. (o) The Debtor shall take all steps reasonably necessary to diligently pursue and seek to preserve, enforce and collect any rights, claims, causes of action and accounts receivable in respect of the Collateral. (p) The Debtor shall promptly notify the Secured Party in sufficient detail upon becoming aware of any attachment, garnishment, execution or other legal process levied against any Collateral and of any other information received by the Debtor that may materially affect the value of the Collateral, the Security Interest or the rights and remedies of the Secured Party hereunder. (q) All information heretofore, herein or hereafter supplied to the Secured Party by or on behalf of the Debtor with respect to the Collateral is accurate and complete in all material respects as of the date furnished. (r) The Debtor shall at all times preserve and keep in full force and effect its valid existence and good standing and any rights and franchises material to its business. (s) The Debtor will not change its name, corporate structure, or identity, or add any new fictitious name unless it provides at least 30 days prior written notice to the Secured Party of such change and, at the time of such written notification, such Debtor provides any financing statements or fixture filings necessary to perfect and continue perfected the perfected first priority Security Interest granted and evidenced by this Agreement. (t) The Debtor may not consign any of its "inventory" or sell any of its "inventory" on bill and hold, sale or return, sale on approval, or other conditional terms of sale without the consent of the Secured Party which shall not be unreasonably withheld. (u) The Debtor may not relocate its chief executive office to a new location without providing 30 days prior written notification thereof to the Secured Party and so long as, at the time of such written notification, the Debtor provides any financing statements or fixture filings necessary to perfect and continue the Security Interest granted and evidenced by this Agreement. 4. Defaults. The following events shall be "Events of Default": (a) The occurrence of an Event of Default (as defined in the Debenture) under the Debenture; (b) Any representation or warranty of Debtor in this Agreement shall prove to have been incorrect in any material respect when made; (c) The failure by Debtor to observe or perform any of its obligations hereunder for five (5) days after delivery to Debtor of notice of such failure by or on behalf of a Secured Party; or (d) If any provision of this Agreement shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by Debtor, or a Proceeding shall be commenced by Debtor, or by any governmental authority having jurisdiction over Debtor, seeking to establish the invalidity or unenforceability thereof, or Debtor shall deny that Debtor has any liability or obligation purported to be created under this Agreement. 5. Duty To Hold In Trust. Upon the occurrence of any Event of Default and at any time thereafter, the Debtor shall, upon receipt of any revenue, income or other sums subject to the Security Interest, whether payable pursuant to the Debenture or otherwise, or of any check, draft, note, trade acceptance or other instrument evidencing an obligation to pay any such sum, hold the same in trust for the Secured Party and shall forthwith endorse and transfer any such sums or instruments, or both, to the Secured Party for application to the satisfaction of the Obligations. 6. Rights and Remedies Upon Default. Upon the occurrence of any Event of Default and at any time thereafter, the Secured Party shall have the right to exercise all of the remedies conferred hereunder and under the Debenture, and the Secured Party shall have all the rights and remedies of a secured party under the UCC. Without limitation, the Secured Party shall have the following rights and powers: (a) The Secured Party shall have the right to take possession of the Collateral and, for that purpose, enter, with the aid and assistance of any person, any premises where the Collateral, or any part thereof, is or may be placed and remove the same, and the Debtor shall assemble the Collateral and make it available to the Secured Party at places which the Secured Party shall reasonably select, whether at the Debtor's premises or elsewhere, and make available to the Secured Party, without rent, all of the Debtor's respective premises and facilities for the purpose of the Secured Party taking possession of, removing or putting the Collateral in saleable or disposable form. (b) The Secured Party shall have the right to operate the business of the Debtor using the Collateral and shall have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the Collateral, at public or private sale or otherwise, either with or without special conditions or stipulations, for cash or on credit or for future delivery, in such parcel or parcels and at such time or times and at such place or places, and upon such terms and conditions as the Secured Party may deem commercially reasonable, all without (except as shall be required by applicable statute and cannot be waived) advertisement or demand upon or notice to the Debtor or right of redemption of a Debtor, which are hereby expressly waived. Upon each such sale, lease, assignment or other transfer of Collateral, the Secured Party may, unless prohibited by applicable law which cannot be waived, purchase all or any part of the Collateral being sold, free from and discharged of all trusts, claims, right of redemption and equities of the Debtor, which are hereby waived and released. 7. Applications of Proceeds. The proceeds of any such sale, lease or other disposition of the Collateral hereunder shall be applied first, to the expenses of retaking, holding, storing, processing and preparing for sale, selling, and the like (including, without limitation, any taxes, fees and other costs incurred in connection therewith) of the Collateral, to the reasonable attorneys' fees and expenses incurred by the Secured Party in enforcing its rights hereunder and in connection with collecting, storing and disposing of the Collateral, and then to satisfaction of the Obligations to the Secured Party based on its then outstanding principal amount of the Debenture, and to the payment of any other amounts required by applicable law, after which the Secured Party shall pay to the applicable Debtor any surplus proceeds. If, upon the sale, license or other disposition of the Collateral, the proceeds thereof are insufficient to pay all amounts to which the Secured Party is legally entitled, the Debtor will be liable for the deficiency, together with interest thereon, at the rate of 18% per annum or the lesser amount permitted by applicable law (the "Default Rate"), and the reasonable fees of any attorneys employed by the Secured Party to collect such deficiency. To the extent permitted by applicable law, the Debtor waives all claims, damages and demands against the Secured Party arising out of the repossession, removal, retention or sale of the Collateral, unless due to the gross negligence or willful misconduct of the Secured Party. 8. Costs and Expenses. The Debtor agrees to pay all reasonable out-of-pocket fees, costs and expenses incurred in connection with any filing required hereunder, including without limitation, any financing statements pursuant to the UCC, continuation statements, partial releases and/or termination statements related thereto or any expenses of any searches reasonably required by the Secured Party. The Debtor shall also pay all other claims and charges which in the reasonable opinion of the Secured Party might prejudice, imperil or otherwise affect the Collateral or the Security Interest therein. The Debtor will also, upon demand, pay to the Secured Party the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Secured Party may incur in connection with (i) the enforcement of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, or (iii) the exercise or enforcement of any of the rights of the Secured Party under the Debenture. Until so paid, any fees payable hereunder shall be added to the principal amount of the Debenture and shall bear interest at the Default Rate. 9. Responsibility for Collateral. The Debtor assumes all liabilities and responsibility in connection with all Collateral, and the Obligations shall in no way be affected or diminished by reason of the loss, destruction, damage or theft of any of the Collateral or its unavailability for any reason. 10. Security Interest Absolute. All rights of the Secured Party and all Obligations of the Debtor hereunder, shall be absolute and unconditional, irrespective of: (a) any lack of validity or enforceability of this Agreement, the Debenture or any agreement entered into in connection with the foregoing, or any portion hereof or thereof; (b) any change in the time, manner or place of payment or performance of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Debenture or any other agreement entered into in connection with the foregoing; (c) any exchange, release or nonperfection of any of the Collateral, or any release or amendment or waiver of or consent to departure from any other collateral for, or any guaranty, or any other security, for all or any of the Obligations; (d) any action by the Secured Party to obtain, adjust, settle and cancel in its sole discretion any insurance claims or matters made or arising in connection with the Collateral; or (e) any other circumstance which might otherwise constitute any legal or equitable defense available to a Debtor, or a discharge of all or any part of the Security Interest granted hereby. Until the Obligations shall have been paid and performed in full, the rights of the Secured Party shall continue even if the Obligations are barred for any reason, including, without limitation, the running of the statute of limitations or bankruptcy. The Debtor expressly waives presentment, protest, notice of protest, demand, notice of nonpayment and demand for performance. In the event that at any time any transfer of any Collateral or any payment received by the Secured Party hereunder shall be deemed by final order of a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under the bankruptcy or insolvency laws of the United States, or shall be deemed to be otherwise due to any party other than the Secured Party, then, in any such event, the Debtor's obligations hereunder shall survive cancellation of this Agreement, and shall not be discharged or satisfied by any prior payment thereof and/or cancellation of this Agreement, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof. The Debtor waives all right to require the Secured Party to proceed against any other person or to apply any Collateral which the Secured Party may hold at any time, or to marshal assets, or to pursue any other remedy. The Debtor waives any defense arising by reason of the application of the statute of limitations to any obligation secured hereby. 11. Term of Agreement. This Agreement and the Security Interest shall terminate on the date on which all payments under the Debenture have been made in full or have been satisfied and all other Obligations have been paid or discharged. Upon such termination, the Secured Party, at the request and at the expense of the Debtor, will join in executing any termination statement with respect to any financing statement executed and filed pursuant to this Agreement. 12. Power of Attorney; Further Assurances. (a) The Debtor authorizes the Secured Party, and does hereby make, constitute and appoint the Secured Party and its respective officers, agents, successors or assigns with full power of substitution, as the Debtor's true and lawful attorney-in-fact, with power, in the name of the Secured Party or the Debtor, to, after the occurrence and during the continuance of an Event of Default, (i) endorse any note, checks, drafts, money orders or other instruments of payment (including payments payable under or in respect of any policy of insurance) in respect of the Collateral that may come into possession of the Secured Party; (ii) to sign and endorse any financing statement pursuant to the UCC or any invoice, freight or express bill, bill of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with accounts, and other documents relating to the Collateral; (iii) to pay or discharge taxes, liens, security interests or other encumbrances at any time levied or placed on or threatened against the Collateral; (iv) to demand, collect, receipt for, compromise, settle and sue for monies due in respect of the Collateral; and (v) generally, to do, at the option of the Secured Party, and at the expense of the Debtor, at any time, or from time to time, all acts and things which the Secured Party deem necessary to protect, preserve and realize upon the Collateral and the Security Interest granted therein in order to effect the intent of this Agreement and the Debenture all as fully and effectually as the Debtor might or could do; and the Debtor hereby ratifies all that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is coupled with an interest and shall be irrevocable for the term of this Agreement and thereafter as long as any of the Obligations shall be outstanding. (b) On a continuing basis, the Debtor will make, execute, acknowledge, deliver, file and record, as the case may be, with the proper filing and recording agencies in any jurisdiction, including, without limitation, the jurisdictions indicated on Schedule B attached hereto, all such instruments, and take all such action as may reasonably be deemed necessary or advisable, or as reasonably requested by the Secured Party, to perfect the Security Interest granted hereunder and otherwise to carry out the intent and purposes of this Agreement, or for assuring and confirming to the Secured Party the grant or perfection of a perfected security interest in all the Collateral under the UCC. (c) The Debtor hereby irrevocably appoints the Secured Party as the Debtor's attorney-in-fact, with full authority in the place and instead of the Debtor and in the name of the Debtor, from time to time in the Secured Party's discretion, to take any action and to execute any instrument which the Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including the filing, in its sole discretion, of one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of the Debtor where permitted by law. 13. Notices. All notices, requests, demands and other communications hereunder shall be subject to the notice provision of the Purchase Agreement. 14. Other Security. To the extent that the Obligations are now or hereafter secured by property other than the Collateral or by the guarantee, endorsement or property of any other Person, then the Secured Party shall have the right, in its sole discretion, to pursue, relinquish, subordinate, modify or take any other action with respect thereto, without in any way modifying or affecting any of the Secured Party's rights and remedies hereunder. 15. Best Efforts for Licensed Collateral. Notwithstanding any other provision contained herein or any of the Transaction Documents, upon the occurrence of an Event of Default, the Debtor hereby agrees that with respect to any part of the Collateral which may require the consent of any third party or third parties in order for Debtor to transfer and/or convey its interest in and to such Collateral to the Secured Party, as may be required in accordance herewith, Debtor agrees to and shall use its best efforts to obtain such consents or approvals in as expedient a manner as possible. 16. Miscellaneous. (a) No course of dealing between the Debtor and the Secured Party, nor any failure to exercise, nor any delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder or under the Debenture shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. (b) All of the rights and remedies of the Secured Party with respect to the Collateral, whether established hereby or by the Debenture or by any other agreements, instruments or documents or by law shall be cumulative and may be exercised singly or concurrently. (c) This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and is intended to supersede all prior negotiations, understandings and agreements with respect thereto. Except as specifically set forth in this Agreement, no provision of this Agreement may be modified or amended except by a written agreement specifically referring to this Agreement and signed by the parties hereto. (d) In the event any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction for any reason, unless such provision is narrowed by judicial construction, this Agreement shall, as to such jurisdiction, be construed as if such invalid, prohibited or unenforceable provision had been more narrowly drawn so as not to be invalid, prohibited or unenforceable. If, notwithstanding the foregoing, any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction, such provision, as to such jurisdiction, shall be ineffective to the extent of such invalidity, prohibition or unenforceability without invalidating the remaining portion of such provision or the other provisions of this Agreement and without affecting the validity or enforceability of such provision or the other provisions of this Agreement in any other jurisdiction. (e) No waiver of any breach or default or any right under this Agreement shall be considered valid unless in writing and signed by the party giving such waiver, and no such waiver shall be deemed a waiver of any subsequent breach or default or right, whether of the same or similar nature or otherwise. (f) This Agreement shall be binding upon and inure to the benefit of each party hereto and its successors and assigns. (g) Each party shall take such further action and execute and deliver such further documents as may be necessary or appropriate in order to carry out the provisions and purposes of this Agreement. (h) 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 Texas, without regard to the principles of conflicts of law thereof. Each party agrees that all Proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and the Debenture (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in Dallas, Texas. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in Dallas, Texas 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 Proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or that such Proceeding is improper. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such 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 a Proceeding to enforce any provisions of this Agreement, then the prevailing party in such Proceeding shall be reimbursed by the other party for its reasonable attorneys fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding. (i) 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. IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day and year first above written. DEBTOR RAPID LINK INCORPORATED Address for Notice and Delivery: 17383 Sunset Boulevard Suite 350 Pacific Palisades, California 90272 Telephone: (310) 566-1700 Facsimile: (310) 573-9435 Attn: John Jenkins, CEO By:____________________________________ Name: John Jenkins Title: Chief Executive Officer SECURED PARTY CHARGER INVESTMENT, LLC. Address for Notice and Delivery: By: By:____________________________________ Name: Title: SCHEDULE A ---------- Principal Place of Business of Debtor: ------------------------------------- 17383 Sunset Boulevard Suite 350 Pacific Palisades, California 90272 Locations Where Collateral is Located or Stored: ----------------------------------------------- 17383 Sunset Boulevard Suite 350 Pacific Palisades, California 90272 Internap C/O Rapidlinks 76 9th Ave 10th floor New York NY 10011 SCHEDULE B ---------- State of Delaware EX-10.1 11 exh10-1.txt AMENDMENT NUMBER 2 TO SECURITIES PURCHASE AGREEMENT EXHIBIT 10.1 AMENDMENT NUMBER 2 TO SECURITIES PURCHASE AGREEMENT ----------------------------- THIS IS AMENDMENT NUMBER 2 (the "Amendment") being executed and delivered by and between Rapid Link, Incorporated, a Delaware corporation ("Rapid Link"), and GCA Strategic Investment Fund Limited, a Bermuda corporation ("GCASIF"), and dated as of November 26, 2005 in order to amend that certain Securities Purchase Agreement by and between Rapid Link and the GCASIF dated as of January 23, 2002 as amended by Amendment Number 1 dated June 1, 2005 (the "Securities Purchase Agreement"). RECITALS The parties to this Amendment wish to amend certain terms of that certain secured promissory note dated as of January 23, 2002 in the principal amount of $550,000 issued pursuant to the Securities Purchase Agreement (the "Primary Note"), to extend the Maturity Date. AGREEMENT NOW THEREFORE, in consideration of the mutual promises contained in this Amendment and other good and valuable consideration, the sufficiency, mutuality and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Amendment of the Primary Note. The Primary Note shall be amended such that the Maturity Date shall be changed to November 26, 2006. 2. No Other Effect on the Securities Purchase Agreement or 6% Convertible Debenture. Except as amended by this Amendment, the Securities Purchase Agreement and 6% Convertible Debenture remains in full force and effect. 3. Effective Date. This Amendment shall be effective as of November 26, 2005 (the "Effective Date"). 4. Miscellaneous. (a) Captions; Certain Definitions. Titles and captions of or in this Amendment are inserted only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Amendment or the intent of any of its provisions. All capitalized terms not otherwise defined herein shall have the meaning therefor, as set forth in the Securities Purchase Agreement. (b) Controlling Law. This Amendment is governed by, and shall be construed and enforced in accordance with the laws of the State of Delaware (except the laws of that jurisdiction that would render such choice of laws ineffective). (c) Counterpart. This Amendment may be executed in one or more counterparts (one counterpart reflecting the signatures of all parties), each of which shall be deemed to be an original, and it shall not be necessary in making proof of this Amendment or its terms to account for more than one of such counterparts. This Amendment may be executed by each party upon a separate copy, and one or more execution pages may be detached from a copy of this Amendment and attached to another copy in order to form one or more counterparts. IN WITNESS WHEREOF, this Amendment has been executed and delivered by Rapid Link and GCASIF as of the date first set forth above. Rapid Link Rapid Link, Incorporated By: Name: _____________________________ Title: ____________________________ GCASIF: GCA STRATEGIC INVESTMENT FUND LIMITED By: Name: _____________________________ Title: ____________________________ * * * * * EX-99.1 12 exh99-1.txt PRESS RELEASE DATED MARCH 8, 2006 EXHIBIT 99.1 RAPID LINK COMPLETES $1 MILLION PRIVATE PLACEMENT AND EXTENDS MATURITY DATE ON AN EXISTING DEBENTURE Los Angeles, CA - March 9th, 2006 - Rapid Link, Inc. (RPID) announced today that it has raised gross proceeds of $1 million through the completion of a private placement of two one year convertible debentures and warrants with two investors, including Trident Growth Fund, L.P. , a fund managed by Scott Cook, a former investor in the company. In addition, the company announced an extension of one of its 6% convertible debentures with GCA Strategic Investment Fund Limited. "I am very excited about the future of Rapid Link. I believe today is further evidence that we are heading in the right direction, with our goal of ultimately becoming a formidable player in the Internet phone services market" stated Mr. Jenkins. "Having previously invested in Rapid Link, formerly Dial Thru International, I was very familiar with the company and in light of their new direction and new management team we felt this is a great time to invest again in the company", stated Mr. Cook. "I am very pleased with the support we are getting from previous investors. This says a lot about our business today, where we have come and where we are going. I believe it's a powerful statement for the company", commented David Hess, President & COO of Rapid Link. About Rapid Link, Inc. Founded in 1997 as Dial Thru International Corporation, Rapid Link provides value-added Voice over Internet Protocol (VoIP) communication services to customers, both domestically and internationally. Rapid Link is a leading niche market provider that has focused on the US military and other key niche markets through its proven, high-quality Internet telephony products, services and infrastructure for service providers, businesses and individuals worldwide. The Company's VoIP offerings include multiple service plan options which reside on Rapid Link's state of the art IP network. The company offers PC- to-PC, PC-to-phone, phone-to-phone calling on their unique set of IAD's - Internet Access Device's - that provide a new low cost phone service that is delivered through a broadband connection. Rapid Link's back office provides, billing, operations management, marketing support, inventory management, accounts payable, accounts receivable, sales force automation, commission management, trouble ticket reporting. Customers can manage their telecommunications services in a real-time environment through the company's tested back office support structure. Rapid Link's network spans more than 15 countries on five continents. For more information, please visit www.rapidlink.com Except for historical matters contained herein, the matters discussed in this press release are forward-looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that these forward-looking statements reflect numerous assumptions and involve risks and uncertainties that may affect Rapid Link's business and prospects and cause actual results to differ materially from these forward-looking statements. Among the factors that could cause actual results to differ are the inherent uncertainty of financial estimates and projections, the competitive environment for Internet telephony, Rapid Link's limited operating history, changes of rates of all related telecommunications services, the level and rate of customer acceptance of new products and services, legislation that may affect the Internet telephony industry, rapid technological changes, and other risk factors contained in Rapid Link's (formerly Dial Thru International, Corporation) periodic reports on Form 10-K and Forms 10-QSB on file with the SEC and available through http://www.sec.gov. Contacts: David Hess, President and COO Rapid Link, Inc. Tel. 310-566-1701 Website: www.rapidlink.com Friedland Corporate Investor Services, LLC Jesse Blum Tel. (303) 468-1287 -----END PRIVACY-ENHANCED MESSAGE-----